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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 September 30, 2022

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 November 1, 2022
Common stock, par value $0.10 per share |  | 8,136,687

NORWOOD FINANCIAL CORP

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2022

|  | 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 | 30
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 44
Item 4. | Controls and Procedures | 46
PART II - | OTHER INFORMATION | 47
Item 1. | Legal Proceedings | 47
Item 1A. | Risk Factors | 47
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 47
Item 3. | Defaults Upon Senior Securities | 47
Item 4. | Mine Safety Disclosures | 47
Item 5. | Other Information | 47
Item 6. | Exhibits | 48
Signatures |  | 49

‎

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)

| September 30, |  | December 31,
| 2022 |  | 2021
ASSETS |  |  |  |  |
Cash and due from banks | $ | 23,092 |  | $ | 21,073
Interest-bearing deposits with banks |  | 17,785 |  |  | 185,608
Cash and cash equivalents |  | 40,877 |  |  | 206,681
Securities available for sale, at fair value |  | 427,287 |  |  | 406,782
Loans receivable |  | 1,432,288 |  |  | 1,354,931
Less: Allowance for loan losses |  | 16,931 |  |  | 16,442
Net loans receivable |  | 1,415,357 |  |  | 1,338,489
Regulatory stock, at cost |  | 2,220 |  |  | 3,927
Bank premises and equipment, net |  | 17,427 |  |  | 17,289
Bank owned life insurance |  | 43,169 |  |  | 40,038
Accrued interest receivable |  | 6,303 |  |  | 5,889
Foreclosed real estate owned |  | 346 |  |  | 1,742
Goodwill |  | 29,266 |  |  | 29,266
Other intangibles |  | 329 |  |  | 407
Other assets |  | 36,289 |  |  | 17,994
TOTAL ASSETS | $ | 2,018,870 |  | $ | 2,068,504
LIABILITIES |  |  |  |  |
Deposits: |  |  |  |  |
Non-interest bearing demand | $ | 453,560 |  | $ | 440,652
Interest-bearing |  | 1,315,236 |  |  | 1,316,141
Total deposits |  | 1,768,796 |  |  | 1,756,793
Short-term borrowings |  | 71,754 |  |  | 60,822
Other borrowings |  | — |  |  | 29,998
Accrued interest payable |  | 1,425 |  |  | 1,203
Other liabilities |  | 18,046 |  |  | 14,426
TOTAL LIABILITIES |  | 1,860,021 |  |  | 1,863,242
STOCKHOLDERS’ EQUITY |  |  |  |  |
Preferred stock, no par value per share, |  |  |  |  |
authorized: 5,000,000 shares; issued: none |  | — |  |  | —
Common stock, $0.10 par value per share, |  |  |  |  |
authorized: 20,000,000 shares, |  |  |  |  |
issued: 2022: 8,275,901 shares, 2021: 8,266,751 shares |  | 828 |  |  | 827
Surplus |  | 96,785 |  |  | 96,443
Retained earnings |  | 125,243 |  |  | 110,015
Treasury stock at cost: 2022: 130,046 shares; 2021: 65,328 shares |  | (3,442) |  |  | (1,767)
Accumulated other comprehensive loss |  | (60,565) |  |  | (256)
TOTAL STOCKHOLDERS’ EQUITY |  | 158,849 |  |  | 205,262
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,018,870 |  | $ | 2,068,504

See accompanying notes to the unaudited consolidated financial statements.
‎

3

NORWOOD FINANCIAL CORP

Consolidated Statements of Income (unaudited)

(dollars in thousan ds, except per share data)

| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
INTEREST INCOME |  |  |  |  |  |  |  |  |  |  |
Loans receivable, including fees | $ | 17,114 |  | $ | 16,859 |  | $ | 48,203 |  | $ | 49,107
Securities |  | 2,473 |  |  | 1,468 |  |  | 6,564 |  |  | 3,936
Other |  | 245 |  |  | 72 |  |  | 504 |  |  | 174
Total interest income |  | 19,832 |  |  | 18,399 |  |  | 55,271 |  |  | 53,217
INTEREST EXPENSE |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 1,557 |  |  | 1,167 |  |  | 3,699 |  |  | 3,627
Short-term borrowings |  | 88 |  |  | 71 |  |  | 196 |  |  | 214
Other borrowings |  | 17 |  |  | 172 |  |  | 212 |  |  | 559
Total interest expense |  | 1,662 |  |  | 1,410 |  |  | 4,107 |  |  | 4,400
NET INTEREST INCOME |  | 18,170 |  |  | 16,989 |  |  | 51,164 |  |  | 48,817
PROVISION FOR LOAN LOSSES |  | — |  |  | 750 |  |  | 600 |  |  | 3,750
NET INTEREST INCOME AFTER |  |  |  |  |  |  |  |  |  |  |
PROVISION FOR LOAN LOSSES |  | 18,170 |  |  | 16,239 |  |  | 50,564 |  |  | 45,067
OTHER INCOME |  |  |  |  |  |  |  |  |  |  |
Service charges and fees |  | 1,346 |  |  | 1,485 |  |  | 4,292 |  |  | 4,268
Income from fiduciary activities |  | 219 |  |  | 209 |  |  | 634 |  |  | 550
Net realized gains on sales of securities |  | — |  |  | 35 |  |  | — |  |  | 56
Gain on sale of loans, net |  | 1 |  |  | 39 |  |  | 1 |  |  | 177
Gain on sales of foreclosed real estate owned |  | — |  |  | 31 |  |  | 427 |  |  | 31
Earnings and proceeds on bank owned life insurance |  | 267 |  |  | 200 |  |  | 892 |  |  | 767
Other |  | 345 |  |  | 160 |  |  | 1,760 |  |  | 486
Total other income |  | 2,178 |  |  | 2,159 |  |  | 8,006 |  |  | 6,335
OTHER EXPENSES |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  | 5,553 |  |  | 5,491 |  |  | 16,824 |  |  | 15,616
Occupancy, furniture & equipment, net |  | 1,191 |  |  | 1,163 |  |  | 3,704 |  |  | 3,568
Data processing and related operations |  | 736 |  |  | 594 |  |  | 2,031 |  |  | 1,760
Taxes, other than income |  | 240 |  |  | 229 |  |  | 773 |  |  | 763
Professional fees |  | 354 |  |  | 189 |  |  | 1,336 |  |  | 1,072
Federal Deposit Insurance Corporation insurance |  | 143 |  |  | 177 |  |  | 468 |  |  | 512
Foreclosed real estate |  | 4 |  |  | 16 |  |  | 66 |  |  | 58
Amortization of intangibles |  | 24 |  |  | 28 |  |  | 78 |  |  | 96
Other |  | 1,894 |  |  | 1,736 |  |  | 5,488 |  |  | 5,122
Total other expenses |  | 10,139 |  |  | 9,623 |  |  | 30,768 |  |  | 28,567
INCOME BEFORE INCOME TAXES |  | 10,209 |  |  | 8,775 |  |  | 27,802 |  |  | 22,835
INCOME TAX EXPENSE |  | 2,100 |  |  | 1,794 |  |  | 5,709 |  |  | 4,558
NET INCOME | $ | 8,109 |  | $ | 6,981 |  | $ | 22,093 |  | $ | 18,277
BASIC EARNINGS PER SHARE | $ | 1.00 |  | $ | 0.85 |  | $ | 2.71 |  | $ | 2.23
DILUTED EARNINGS PER SHARE | $ | 1.00 |  | $ | 0.85 |  | $ | 2.71 |  | $ | 2.23

See accompanying notes to the unaudited consolidated financial statements.

‎

4

NORWOOD FINANCIAL CORP

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(dollars in thousands)

| Three Months Ended
| September 30,
| 2022 |  | 2021
Net income | $ | 8,109 |  | $ | 6,981
Other comprehensive (loss) income |  |  |  |  |
Investment securities available for sale: |  |  |  |  |
Unrealized holding loss |  | (25,739) |  |  | (2,652)
Tax effect |  | 5,404 |  |  | 557
Reclassification of investment securities gains |  |  |  |  |
recognized in net income |  | — |  |  | (35)
Tax effect |  | — |  |  | 7
Other comprehensive (loss) |  | (20,335) |  |  | (2,123)
Comprehensive (Loss) Income | $ | (12,226) |  | $ | 4,858

| Nine Months Ended
| September 30,
| 2022 |  | 2021
Net income | $ | 22,093 |  | $ | 18,277
Other comprehensive (loss) income |  |  |  |  |
Investment securities available for sale: |  |  |  |  |
Unrealized holding (loss) gain |  | (76,340) |  |  | (4,604)
Tax effect |  | 16,031 |  |  | 967
Reclassification of investment securities gains |  |  |  |  |
recognized in net income |  | — |  |  | (56)
Tax effect |  | — |  |  | 12
Other comprehensive (loss) |  | (60,309) |  |  | (3,681)
Comprehensive (Loss) Income | $ | (38,216) |  | $ | 14,596

See accompanying notes to the unaudited consolidated financial statements.

‎

5

NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Nine Months Ended September 30, 2022 and 2021

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

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |
|  | Common Stock |  |  |  |  | Retained |  | Treasury Stock |  | Comprehensive |  |  |
|  | Shares |  | Amount |  | Surplus |  | Earnings |  | Shares |  | Amount |  | Income (Loss) |  | Total
Balance, December 31, 2021 |  |  | 8,266,751 |  | $ | 827 |  | $ | 96,443 |  | $ | 110,015 |  |  | 65,328 |  | $ | (1,767) |  | $ | (256) |  | $ | 205,262
Net Income |  |  | - |  |  | - |  |  | - |  |  | 22,093 |  |  | - |  |  | - |  |  | - |  |  | 22,093
Other comprehensive loss |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (60,309) |  |  | (60,309)
Cash dividends declared ($0.84 per share) |  |  | - |  |  | - |  |  | - |  |  | (6,865) |  |  | - |  |  | - |  |  | - |  |  | (6,865)
Acquisition of treasury stock |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 84,668 |  |  | (2,204) |  |  | - |  |  | (2,204)
Compensation expense related to restricted stock |  |  | 7,500 |  |  | 1 |  |  | 271 |  |  | - |  |  |  |  |  |  |  |  | - |  |  | 272
Stock options exercised |  |  | 1,650 |  |  | - |  |  | (130) |  |  | - |  |  | (19,950) |  |  | 529 |  |  | - |  |  | 399
Compensation expense related to stock options |  |  | - |  |  | - |  |  | 201 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 201
Balance, September 30, 2022 |  |  | 8,275,901 |  | $ | 828 |  | $ | 96,785 |  | $ | 125,243 |  |  | 130,046 |  | $ | (3,442) |  | $ | (60,565) |  | $ | 158,849
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |
|  | Common Stock |  |  |  |  | Retained |  | Treasury Stock |  | Comprehensive |  |  |
|  | Shares |  | Amount |  | Surplus |  | Earnings |  | Shares |  | Amount |  | Income (Loss) |  | Total
Balance, December 31, 2020 |  |  | 8,236,331 |  | $ | 824 |  | $ | 95,388 |  | $ | 93,796 |  |  | 10,263 |  | $ | (342) |  | $ | 5,119 |  | $ | 194,785
Net Income |  |  | - |  |  | - |  |  | - |  |  | 18,277 |  |  | - |  |  | - |  |  | - |  |  | 18,277
Other comprehensive loss |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (3,681) |  |  | (3,681)
Cash dividends declared ($0.78 per share) |  |  | - |  |  | - |  |  | - |  |  | (6,405) |  |  | - |  |  | - |  |  | - |  |  | (6,405)
Acquisition of treasury stock |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 37,405 |  |  | (961) |  |  | - |  |  | (961)
Compensation expense related to restricted stock |  |  | - |  |  | - |  |  | 371 |  |  | - |  |  | 3,900 |  |  | (120) |  |  | - |  |  | 251
Stock options exercised |  |  | 9,620 |  |  | 1 |  |  | 181 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 182
Compensation expense related to stock options |  |  | - |  |  | - |  |  | 160 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 160
Balance, September 30, 2021 |  |  | 8,245,951 |  | $ | 825 |  | $ | 96,100 |  | $ | 105,668 |  |  | 51,568 |  | $ | (1,423) |  | $ | 1,438 |  | $ | 202,608

6

NORWOOD FINANCIAL CORP

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

Three Months Ended September 30, 2022 and 2021

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

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |
|  | Common Stock |  |  |  |  | Retained |  | Treasury Stock |  | Comprehensive |  |  |
|  | Shares |  | Amount |  | Surplus |  | Earnings |  | Shares |  | Amount |  | Income (Loss) |  | Total
Balance, June 30, 2022 |  |  | 8,275,901 |  | $ | 828 |  | $ | 96,752 |  | $ | 119,414 |  |  | 110,084 |  | $ | (2,933) |  | $ | (40,230) |  | $ | 173,831
Net Income |  |  | - |  |  | - |  |  | - |  |  | 8,109 |  |  | - |  |  | - |  |  | - |  |  | 8,109
Other comprehensive loss |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (20,335) |  |  | (20,335)
Cash dividends declared ($0.28 per share) |  |  | - |  |  | - |  |  | - |  |  | (2,280) |  |  | - |  |  | - |  |  | - |  |  | (2,280)
Acquisition of treasury stock |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 36,687 |  |  | (952) |  |  | - |  |  | (952)
Compensation expense related to restricted stock |  |  | - |  |  | - |  |  | 101 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 101
Stock options exercised |  |  | - |  |  | - |  |  | (135) |  |  | - |  |  | (16,725) |  |  | 443 |  |  | - |  |  | 308
Compensation expense related to stock options |  |  | - |  |  | - |  |  | 67 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 67
Balance, September 30, 2022 |  |  | 8,275,901 |  | $ | 828 |  | $ | 96,785 |  | $ | 125,243 |  |  | 130,046 |  | $ | (3,442) |  | $ | (60,565) |  | $ | 158,849
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Other |  |  |
|  | Common Stock |  |  |  |  | Retained |  | Treasury Stock |  | Comprehensive |  |  |
|  | Shares |  | Amount |  | Surplus |  | Earnings |  | Shares |  | Amount |  | Income |  | Total
Balance, June 30, 2021 |  |  | 8,245,301 |  | $ | 825 |  | $ | 95,951 |  | $ | 100,818 |  |  | 21,568 |  | $ | (656) |  | $ | 3,561 |  | $ | 200,499
Net Income |  |  | - |  |  | - |  |  | - |  |  | 6,981 |  |  | - |  |  | - |  |  | - |  |  | 6,981
Other comprehensive loss |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | (2,123) |  |  | (2,123)
Cash dividends declared ($0.26 per share) |  |  | - |  |  | - |  |  | - |  |  | (2,131) |  |  | - |  |  | - |  |  | - |  |  | (2,131)
Acquisition of treasury stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 30,000 |  |  | (767) |  |  |  |  |  | (767)
Compensation expense related to restricted stock |  |  | - |  |  | - |  |  | 84 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 84
Stock options exercised |  |  | 650 |  |  | - |  |  | 12 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 12
Compensation expense related to stock options |  |  | - |  |  | - |  |  | 53 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 53
Balance, September 30, 2021 |  |  | 8,245,951 |  | $ | 825 |  | $ | 96,100 |  | $ | 105,668 |  |  | 51,568 |  | $ | (1,423) |  | $ | 1,438 |  | $ | 202,608

See accompanying notes to the unaudited consolidated financial statements.
‎

7

NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands) |  |  |  |  |
| Nine Months Ended September 30,
| 2022 |  | 2021
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |  |  |
Net Income | $ | 22,093 |  | $ | 18,277
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Provision for loan losses |  | 600 |  |  | 3,750
Depreciation |  | 1,109 |  |  | 1,117
Amortization of intangible assets |  | 78 |  |  | 96
Deferred income taxes |  | 417 |  |  | 497
Net amortization of securities premiums and discounts |  | 1,038 |  |  | 1,133
Net realized gain on sales of securities |  | — |  |  | (56)
Earnings and proceeds on life insurance policies |  | (892) |  |  | (767)
Gain on sales and write-downs of fixed assets and foreclosed real estate owned, net |  | (379) |  |  | (52)
Net amortization of loan fees |  | (281) |  |  | (2,734)
Net gain on sale of loans |  | (1) |  |  | (177)
Loans originated for sale |  | (435) |  |  | (8,616)
Proceeds from sale of loans originated for sale |  | 437 |  |  | 8,793
Compensation expense related to stock options |  | 201 |  |  | 160
Compensation expense related to restricted stock |  | 272 |  |  | 251
(Increase) decrease in accrued interest receivable |  | (414) |  |  | 183
Increase (decrease) in accrued interest payable |  | 222 |  |  | (260)
Other, net |  | 319 |  |  | 1,407
Net cash provided by operating activities |  | 24,384 |  |  | 23,002
CASH FLOWS FROM INVESTING ACTIVITIES |  |  |  |  |
Securities available for sale: |  |  |  |  |
Proceeds from sales |  | — |  |  | 3,841
Proceeds from maturities and principal reductions on mortgage-backed securities |  | 32,945 |  |  | 52,770
Purchases |  | (130,828) |  |  | (197,750)
Purchase of regulatory stock |  | (1,019) |  |  | (3,327)
Redemption of regulatory stock |  | 2,726 |  |  | 3,410
Net (increase) decrease in loans |  | (76,553) |  |  | 40,969
Proceeds from bank-owned life insurance policies |  | 761 |  |  | 511
Purchase of bank-owned life insurance |  | (3,000) |  |  | —
Purchase of premises and equipment |  | (1,295) |  |  | (809)
Proceeds from sales of bank premises and fixed assets |  | — |  |  | 157
Proceeds from sales of foreclosed real estate owned |  | 1,823 |  |  | 158
Net cash used in investing activities |  | (174,440) |  |  | (100,070)
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |  |  |
Net increase in deposits |  | 12,003 |  |  | 186,880
Net increase in short-term borrowings |  | 10,932 |  |  | 14,943
Repayments of other borrowings |  | (29,998) |  |  | (9,323)
Stock options exercised |  | 399 |  |  | 182
Purchase of treasury stock |  | (2,204) |  |  | (961)
Cash dividends paid |  | (6,880) |  |  | (6,413)
Net cash (used in) provided by financing activities |  | (15,748) |  |  | 185,308
(Decrease) increase in cash and cash equivalents |  | (165,804) |  |  | 108,240
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |  | 206,681 |  |  | 111,693
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 40,877 |  | $ | 219,933

‎

8

NORWOOD FINANCIAL CORP

Consolidated Statements of Cash Flows (Unaudited) (continued)

(dollars in thousands) |  |  |  |  |
| Nine Months Ended September 30,
| 2022 |  | 2021
Supplemental Disclosures of Cash Flow Information |  |  |  |  |
Cash payments for: |  |  |  |  |
Interest on deposits and borrowings | $ | 3,885 |  | $ | 4,660
Income taxes paid, net of refunds | $ | 5,372 |  | $ | 4,214
Supplemental Schedule of Noncash Investing Activities: |  |  |  |  |
Transfers of loans to foreclosed real estate and repossession of other assets | $ | 161 |  | $ | 1,638
Dividends payable | $ | 2,281 |  | $ | 2,131

See accompanying notes to the unaudited consolidated financial statements.

‎

9

Notes to the Unaudited Consolidated Financial Statements

1. Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the consolidated financial position and results of operations of the Company. The operating results for the three-month and nine-month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any other future interim period.

2. Revenue Recognition

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

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

| Three months ended
| September 30,
(dollars in thousands) |  |  |  |  |
Noninterest Income | 2022 |  | 2021
In-scope of Topic 606: |  |  |  |  |
Service charges on deposit accounts | $ | 107 |  | $ | 99
ATM fees |  | 127 |  |  | 125
Overdraft fees |  | 305 |  |  | 275
Safe deposit box rental |  | 24 |  |  | 24
Loan related service fees |  | 104 |  |  | 314
Debit card fees |  | 624 |  |  | 584
Fiduciary activities |  | 219 |  |  | 209
Commissions on mutual funds and annuities |  | 31 |  |  | 34
Gains on sales of other real estate owned |  | — |  |  | 31
Other income |  | 345 |  |  | 160
Noninterest Income (in-scope of Topic 606) |  | 1,886 |  |  | 1,855
Out-of-scope of Topic 606: |  |  |  |  |
Net realized gains on sales of securities |  | — |  |  | 35
Loan servicing fees |  | 24 |  |  | 30
Gains on sales of loans |  | 1 |  |  | 39
Earnings on and proceeds from bank-owned life insurance |  | 267 |  |  | 200
Noninterest Income (out-of-scope of Topic 606) |  | 292 |  |  | 304
Total Noninterest Income | $ | 2,178 |  | $ | 2,159

10

| Nine months ended
| September 30,
(dollars in thousands) |  |  |  |  |
Noninterest Income | 2022 |  | 2021
In-scope of Topic 606: |  |  |  |  |
Service charges on deposit accounts | $ | 312 |  | $ | 294
ATM fees |  | 340 |  |  | 333
Overdraft fees |  | 909 |  |  | 733
Safe deposit box rental |  | 70 |  |  | 77
Loan related service fees |  | 626 |  |  | 963
Debit card fees |  | 1,879 |  |  | 1,661
Fiduciary activities |  | 634 |  |  | 550
Commissions on mutual funds and annuities |  | 98 |  |  | 98
Gains on sales of other real estate owned |  | 427 |  |  | 31
Other income |  | 1,760 |  |  | 486
Noninterest Income (in-scope of Topic 606) |  | 7,055 |  |  | 5,226
Out-of-scope of Topic 606: |  |  |  |  |
Net realized gains on sales of securities |  | — |  |  | 56
Loan servicing fees |  | 58 |  |  | 109
Gains on sales of loans |  | 1 |  |  | 177
Earnings on and proceeds from bank-owned life insurance |  | 892 |  |  | 767
Noninterest Income (out-of-scope of Topic 606) |  | 951 |  |  | 1,109
Total Noninterest Income | $ | 8,006 |  | $ | 6,335

3. Earnings Per Share

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

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

(in thousands) | Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Weighted average shares outstanding | 8,158 |  | 8,223 |  | 8,187 |  | 8,223
Less: Unvested restricted shares | (40) |  | (35) |  | (38) |  | (36)
Basic EPS weighted average shares outstanding | 8,118 |  | 8,188 |  | 8,149 |  | 8,187
Basic EPS weighted average shares outstanding | 8,118 |  | 8,188 |  | 8,149 |  | 8,187
Add: Dilutive effect of stock options and restricted shares | 16 |  | 19 |  | 17 |  | 19
Diluted EPS weighted average shares outstanding | 8,134 |  | 8,207 |  | 8,166 |  | 8,206

For the three and nine month periods ended September 30, 2022, there were 108,100 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of the Company’s common stock of $26.58 per share as of September 30, 2022.

For the three and nine month periods ended September 30, 2021, there were 110,100 stock options that were anti-dilutive and thereby excluded from the earnings per share calculations based upon the closing price of Norwood common stock of $25.50 per share as of September 30, 2021.

11

4. Stock-Based Compensation

During the nine-month period ended September 30, 2022, no stock options were granted. As of September 30, 2022, there was $67,000 of total unrecognized compensation cost related to non-vested options granted in 2021 under the 2014 Equity Incentive Plan, which will be fully amortized by December 31, 2022. Compensation costs related to stock options amounted to $201,000 and $160,000 during the nine-month periods ended September 30, 2022 and 2021, respectively.

A summary of the Company’s stock option activity for the nine-month period ended September 30, 2022 is as follows:

|  |  | Weighted |  |  |  |  |
|  |  | Average Exercise |  | Weighted Average |  | Aggregate
|  |  | Price |  | Remaining |  | Intrinsic Value
| Options |  | Per Share |  | Contractual Term |  | ($000)
Outstanding at January 1, 2022 | 226,075 |  | $ | 26.37 |  | 6.4 | Yrs. |  | $ | 520
Granted | — |  |  | - |  | - |  |  |  |
Exercised | (21,600) |  |  | 18.49 |  | 1.0 |  |  |  |
Forfeited | — |  |  | - |  | - |  |  |  |
Outstanding at September 30, 2022 | 204,475 |  | $ | 27.20 |  | 6.1 | Yrs. |  | $ | 380
Exercisable at September 30, 2022 | 162,975 |  | $ | 27.56 |  | 5.3 | Yrs. |  | $ | 380

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option. The market price was $26.58 per share as of September 30, 2022 and $25.99 per share as of December 31, 2021.

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

| 2022 |  | 2021
|  |  | Weighted-Average |  |  |  |  | Weighted-Average
| Number of |  | Grant Date |  | Number of |  | Grant Date
| Restricted Stock |  | Fair Value |  | Restricted Stock |  | Fair Value
Non-vested, January 1, | 32,030 |  | $ | 29.76 |  | 39,135 |  | $ | 30.72
Granted | 7,500 |  |  | 25.71 |  | — |  |  | —
Vested | — |  |  | — |  | — |  |  | —
Forfeited | — |  |  | — |  | (3,900) |  |  | 30.86
Non-vested, September 30, | 39,530 |  | $ | 28.99 |  | 35,235 |  | $ | 30.71

The expected future compensation expense relating to the 39,530 shares of non-vested restricted stock outstanding as of September 30, 2022 is $875,000. This cost will be recognized over the remaining vesting period of 4.25 years. Compensation costs related to restricted stock amounted to $272,000 and $251,000 during the nine-month periods ended September 30, 2022 and 2021, respectively.

12

5. Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) (in thousands) by component net of tax for the three and nine months ended September 30, 2022 and 2021:

| Unrealized gains (losses) on
| available for sale
| securities (a)
Balance as of December 31, 2021 | $ | (256)
Other comprehensive loss before reclassification |  | (60,309)
Amount reclassified from accumulated other comprehensive loss |  | —
Total other comprehensive loss |  | (60,309)
Balance as of September 30, 2022 | $ | (60,565)
| Unrealized gains (losses) on
| available for sale
| securities (a)
Balance as of December 31, 2020 | $ | 5,119
Other comprehensive loss before reclassification |  | (3,637)
Amount reclassified from accumulated other comprehensive income |  | (44)
Total other comprehensive loss |  | (3,681)
Balance as of September 30, 2021 | $ | 1,438

| Unrealized gains (losses) on
| available for sale
| securities (a)
Balance as of June 30, 2022 | $ | (40,230)
Other comprehensive loss before reclassification |  | (20,335)
Amount reclassified from accumulated other comprehensive loss |  | -
Total other comprehensive loss |  | (20,335)
Balance as of September 30, 2022 | $ | (60,565)
| Unrealized gains (losses) on
| available for sale
| securities (a)
Balance as of June 30, 2021 | $ | 3,561
Other comprehensive income before reclassification |  | (2,095)
Amount reclassified from accumulated other comprehensive loss |  | (28)
Total other comprehensive income |  | (2,123)
Balance as of September 30, 2021 | $ | 1,438

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

13

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) (in thousands) for the three and nine months ended September 30, 2022 and 2021:

|  | Amount Reclassified |  |
|  | From Accumulated |  |
|  | Other |  |
|  | Comprehensive |  |
|  | Income (Loss) (a) |  | Affected Line Item in
|  | Three months ended |  | Consolidated
|  | September 30, |  | Statements
Details about other comprehensive income |  | 2022 |  |  | 2021 |  | of Income
Unrealized gains on available for sale securities |  | $ | — |  |  | $ | 35 |  | Net realized gains on sales of securities
Tax effect |  |  | — |  |  |  | (7) |  | Income tax expense
|  | $ | — |  |  | $ | 28 |  |
|  | Nine months ended |  |
|  | September 30, |  |
|  | 2022 |  |  | 2021 |  |
Unrealized gains on available for sale securities |  | $ | — |  |  | $ | 56 |  | Net realized gains on sales of securities
Tax effect |  |  | — |  |  |  | (12) |  | Income tax expense
|  | $ | — |  |  | $ | 44 |  |

(a) Amounts in parentheses indicate debits to net income

6. Off-Balance Sheet Financial Instruments and Guarantees

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

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

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

(in thousands) | September 30,
| 2022 |  | 2021
Commitments to grant loans | $ | 101,466 |  | $ | 91,186
Unfunded commitments under lines of credit |  | 145,636 |  |  | 136,168
Standby letters of credit |  | 12,934 |  |  | 8,335
| $ | 260,036 |  | $ | 235,689

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

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

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required under the corresponding guarantees. The current amount of the liability as of September 30, 2022 for guarantees under standby letters of credit issued is not material.

7. Securities

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

| September 30, 2022
|  |  |  | Gross |  | Gross |  |  |
| Amortized |  | Unrealized |  | Unrealized |  | Fair
| Cost |  | Gains |  | Losses |  | Value
| (In Thousands)
Available for Sale: |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 45,026 |  | $ | - |  | $ | (3,382) |  | $ | 41,644
U.S. Government agencies |  | 21,236 |  |  | - |  |  | (3,059) |  |  | 18,177
States and political subdivisions |  | 163,416 |  |  | 18 |  |  | (32,962) |  |  | 130,472
Mortgage-backed securities- |  |  |  |  |  |  |  |  |  |  |
government sponsored entities |  | 275,788 |  |  | — |  |  | (38,794) |  |  | 236,994
Total debt securities | $ | 505,466 |  | $ | 18 |  | $ | (78,197) |  | $ | 427,287

| December 31, 2021
|  |  |  | Gross |  | Gross |  |  |
| Amortized |  | Unrealized |  | Unrealized |  | Fair
| Cost |  | Gains |  | Losses |  | Value
| (In Thousands)
Available for Sale: |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies | $ | 19,550 |  | $ | 6 |  | $ | (205) |  | $ | 19,351
States and political subdivisions |  | 16,251 |  |  | 24 |  |  | (264) |  |  | 16,011
Corporate obligations |  | 145,107 |  |  | 2,155 |  |  | (1,395) |  |  | 145,867
Mortgage-backed securities-government |  |  |  |  |  |  |  |  |  |  |
sponsored entities |  | 227,712 |  |  | 766 |  |  | (2,925) |  |  | 225,553
Total debt securities | $ | 408,620 |  | $ | 2,951 |  | $ | (4,789) |  | $ | 406,782

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

| September 30, 2022
| Less than 12 Months |  | 12 Months or More |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
U.S. Treasury securities | $ | 30,007 |  | $ | (1,450) |  | $ | 11,637 |  | $ | (1,932) |  | $ | 41,644 |  | $ | (3,382)
U.S. Government agencies |  | 12,463 |  |  | (1,722) |  |  | 5,714 |  |  | (1,337) |  |  | 18,177 |  |  | (3,059)
States and political subdivisions |  | 93,501 |  |  | (21,935) |  |  | 32,126 |  |  | (11,027) |  |  | 125,627 |  |  | (32,962)
Mortgage-backed securities-government sponsored entities |  | 155,314 |  |  | (20,224) |  |  | 81,680 |  |  | (18,570) |  |  | 236,994 |  |  | (38,794)
| $ | 291,285 |  | $ | (45,331) |  | $ | 131,157 |  | $ | (32,866) |  | $ | 422,442 |  | $ | (78,197)

| December 31, 2021
| Less than 12 Months |  | 12 Months or More |  | Total
| Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
U.S. Treasury securities | $ | 18,361 |  | $ | (205) |  | $ | - |  | $ | - |  | $ | 18,361 |  | $ | (205)
U.S. Government agencies |  | 7,912 |  |  | (109) |  |  | 3,843 |  |  | (155) |  |  | 11,755 |  |  | (264)
States and political subdivisions |  | 74,658 |  |  | (1,395) |  |  | - |  |  | - |  |  | 74,658 |  |  | (1,395)
Mortgage-backed securities-government sponsored entities |  | 170,647 |  |  | (2,856) |  |  | 2,919 |  |  | (69) |  |  | 173,566 |  |  | (2,925)
| $ | 271,578 |  | $ | (4,565) |  | $ | 6,762 |  | $ | (224) |  | $ | 278,340 |  | $ | (4,789)

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At September 30, 2022, the Company had 270 debt securities in an unrealized loss position in the less than twelve months category and 86 debt securities in the twelve months or more category. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. No other-than-temporary-impairment charges were recorded in 2022. Management believes that all unrealized losses represent temporary impairment of the securities as the Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.

The amortized cost and fair value of debt securities as of September 30, 2022 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

| Available for Sale
| Amortized Cost |  | Fair Value
|  | (In Thousands)
Due in one year or less | $ | 4,814 |  | $ | 4,802
Due after one year through five years |  | 43,088 |  |  | 41,170
Due after five years through ten years |  | 57,805 |  |  | 47,887
Due after ten years |  | 123,971 |  |  | 96,434
|  | 229,678 |  |  | 190,293
Mortgage-backed securities-government sponsored entities |  | 275,788 |  |  | 236,994
| $ | 505,466 |  | $ | 427,287

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

| Three Months |  | Nine Months
| Ended September 30, |  | Ended September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Gross realized gains | $ | — |  | $ | 35 |  | $ | — |  | $ | 56
Gross realized losses |  | — |  |  | — |  |  | — |  |  | —
Net realized gain | $ | — |  | $ | 35 |  | $ | — |  | $ | 56
Proceeds from sales of securities | $ | — |  | $ | 2,714 |  | $ | — |  | $ | 3,841

Securities with a carrying value of $365,210,000 and $339,769,000 at September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

8. Loans Receivable and Allowance for Loan Losses

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

| September 30, 2022 |  |  | December 31, 2021 |
Real Estate Loans: |  |  |  |  |  |  |  |  |  |  |
Residential | $ | 295,125 |  | 20.6 | % |  | $ | 273,040 |  | 20.1 | %
Commercial |  | 644,607 |  | 45.0 |  |  |  | 628,724 |  | 46.4 |
Agricultural |  | 69,356 |  | 4.8 |  |  |  | 61,925 |  | 4.6 |
Construction |  | 26,637 |  | 1.9 |  |  |  | 21,990 |  | 1.6 |
Commercial loans |  | 184,729 |  | 12.9 |  |  |  | 186,031 |  | 13.7 |
Other agricultural loans |  | 35,733 |  | 2.5 |  |  |  | 37,930 |  | 2.8 |
Consumer loans to individuals |  | 176,680 |  | 12.3 |  |  |  | 146,400 |  | 10.8 |
Total loans |  | 1,432,867 |  | 100.0 | % |  |  | 1,356,040 |  | 100.0 | %
Deferred fees, net |  | (579) |  |  |  |  |  | (1,109) |  |  |
Total loans receivable |  | 1,432,288 |  |  |  |  |  | 1,354,931 |  |  |
Allowance for loan losses |  | (16,931) |  |  |  |  |  | (16,442) |  |  |
Net loans receivable | $ | 1,415,357 |  |  |  |  | $ | 1,338,489 |  |  |

During 2020 and 2021 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the United States Small Business Administration (“SBA”). The PPP provides loans to small businesses who were affected by economic

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conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of September 30, 2022 and December 31, 2021, the Company had outstanding principal balances of $755,000 and $15.2 million, respectively, in PPP loans. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $5.1 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2. As of September 30, 2022, the carrying value of these unamortized loan fees was $20,000.

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

| September 30, 2022 |  | December 31, 2021
Outstanding Balance | $ | 9,272 |  | $ | 12,862
Carrying Amount | $ | 6,614 |  | $ | 8,304

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

Changes in the accretable yield for purchased credit impaired loans for the nine-months ended September 30, 2022 and 2021, were as follows (in thousands):

| 2022 |  | 2021
Balance at beginning of period | $ | 1,884 |  | $ | 1,365
Additions |  | — |  |  | —
Accretion |  | (558) |  |  | (523)
Reclassification and other |  | 523 |  |  | 993
Balance at end of period | $ | 1,849 |  | $ | 1,835

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

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

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

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

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, foreclosed real estate owned totaled $346,000 and $1,742,000, respectively. During the nine months ended September 30, 2022, there were no additions to the foreclosed real estate category. The Co mpany disposed of a parcel of one property that was previously transferred to foreclosed real estate owned with a carrying value of $364,000, and disposed of another property with a carrying value of $1,032,000 through the sale of the property. As of September 30, 2022, the Company has initiated formal foreclosure proceedings on four properties classified as consumer residential mortgages with an aggregate carrying value of $160,000.

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

| Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  | Commercial |  |  | Other |  | Consumer |  |  |
| Residential |  | Commercial |  |  | Agricultural |  | Construction |  | Loans |  |  | Agricultural |  | Loans |  | Total
September 30, 2022 | (In thousands)
Individually evaluated for impairment | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 12 |  | $ | — |  | $ | — |  | $ | 12
Loans acquired with deteriorated credit quality |  | 571 |  |  | 2,284 |  |  | 2,336 |  |  | — |  |  | — |  |  | 1,423 |  |  | — |  |  | 6,614
Collectively evaluated for impairment |  | 294,554 |  |  | 642,323 |  |  | 67,020 |  |  | 26,637 |  |  | 184,717 |  |  | 34,310 |  |  | 176,680 |  |  | 1,426,241
Total Loans | $ | 295,125 |  | $ | 644,607 |  | $ | 69,356 |  | $ | 26,637 |  | $ | 184,729 |  | $ | 35,733 |  | $ | 176,680 |  | $ | 1,432,867

| Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  | Commercial |  |  | Other |  | Consumer |  |  |
| Residential |  | Commercial |  |  | Agricultural |  | Construction |  | Loans |  |  | Agricultural |  | Loans |  | Total
| (In thousands)
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | - |  | $ | 1,658 |  | $ | — |  | $ | - |  | $ | 16 |  | $ | — |  | $ | - |  | $ | 1,674
Loans acquired with deteriorated credit quality |  | 784 |  |  | 3,285 |  |  | 1,918 |  |  | - |  |  | 198 |  |  | 2,119 |  |  | - |  |  | 8,304
Collectively evaluated for impairment |  | 272,256 |  |  | 623,781 |  |  | 60,007 |  |  | 21,990 |  |  | 185,817 |  |  | 35,811 |  |  | 146,400 |  |  | 1,346,062
Total Loans | $ | 273,040 |  | $ | 628,724 |  | $ | 61,925 |  | $ | 21,990 |  | $ | 186,031 |  | $ | 37,930 |  | $ | 146,400 |  | $ | 1,356,040

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

|  |  |  | Unpaid |  |  |
| Recorded |  | Principal |  | Associated
| Investment |  | Balance |  | Allowance
September 30, 2022 |  |  |  |  | (in thousands) |  |
With no related allowance recorded: |  |  |  |  |  |  |  |
Commercial Loans | $ | 12 |  | $ | 12 |  |  | —
Subtotal | $ | 12 |  | $ | 12 |  | $ | —
Total: |  |  |  |  |  |  |  |
Commercial Loans | $ | 12 |  | $ | 12 |  |  | —
Total Impaired Loans | $ | 12 |  | $ | 12 |  | $ | —

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|  |  |  | Unpaid |  |  |
| Recorded |  | Principal |  | Associated
| Investment |  | Balance |  | Allowance
December 31, 2021 |  |  |  |  | (in thousands) |  |
With no related allowance recorded: |  |  |  |  |  |  |  |
Real Estate Loans: |  |  |  |  |  |  |  |
Commercial | $ | 141 |  | $ | 141 |  | $ | —
Commercial Loans |  | 16 |  |  | 16 |  |  | —
Subtotal |  | 157 |  |  | 157 |  |  | —
With an allowance recorded: |  |  |  |  |  |  |  |
Real Estate Loans |  |  |  |  |  |  |  |
Commercial |  | 1,517 |  |  | 1,517 |  |  | 272
Subtotal |  | 1,517 |  |  | 1,517 |  |  | 272
Total: |  |  |  |  |  |  |  |
Real Estate Loans: |  |  |  |  |  |  |  |
Commercial |  | 1,658 |  |  | 1,658 |  |  | 272
Commercial Loans |  | 16 |  |  | 16 |  |  | —
Total Impaired Loans | $ | 1,674 |  | $ | 1,674 |  | $ | 272

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

| Average Recorded |  | Interest Income
| Investment |  | Recognized
| 2022 |  | 2021 |  | 2022 |  | 2021
Real Estate Loans: |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | — |  | $ | 1,405 |  | $ | 18 |  | $ | 55
Agriculture |  | — |  |  | 858 |  |  | — |  |  | —
Commercial Loans |  | 13 |  |  | 19 |  |  | — |  |  | —
Other agricultural loans |  | — |  |  | 125 |  |  | — |  |  | —
Total | $ | 13 |  | $ | 2,407 |  | $ | 18 |  | $ | 55

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

| Average Recorded |  | Interest Income
| Investment |  | Recognized
| 2022 |  | 2021 |  | 2022 |  | 2021
Real Estate Loans: |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 825 |  | $ | 1,560 |  | $ | 55 |  | $ | 56
Agriculture |  | — |  |  | 858 |  |  | — |  |  | —
Commercial Loans |  | 14 |  |  | 19 |  |  | 3 |  |  | —
Other agricultural loans |  | — |  |  | 114 |  |  | — |  |  | —
Total | $ | 839 |  | $ | 2,551 |  | $ | 58 |  | $ | 56

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of September 30, 2022 and December 31, 2021, the Company had no troubled debt restructured loans to report. For the nine-month period ended September 30, 2022 and 2021, there were no new loans identified as troubled debt restructurings.

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a

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distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

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

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of September 30, 2022 and December 31, 2021 (in thousands):

|  |  |  | Special |  |  |  |  | Doubtful |  |  |
| Pass |  | Mention |  | Substandard |  | or Loss |  | Total
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate loans | $ | 639,609 |  | $ | 1,284 |  | $ | 3,714 |  | $ | — |  | $ | 644,607
Real estate - agricultural |  | 66,813 |  |  | 2,543 |  |  | — |  |  | — |  |  | 69,356
Commercial loans |  | 184,474 |  |  | 187 |  |  | 68 |  |  | — |  |  | 184,729
Other agricultural loans |  | 34,433 |  |  | 708 |  |  | 592 |  |  | — |  |  | 35,733
Total | $ | 925,329 |  | $ | 4,722 |  | $ | 4,374 |  | $ | — |  | $ | 934,425

|  |  |  | Special |  |  |  |  | Doubtful |  |  |
| Pass |  | Mention |  | Substandard |  | or Loss |  | Total
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate loans | $ | 618,541 |  | $ | 5,146 |  | $ | 4,765 |  | $ | 272 |  | $ | 628,724
Real estate - agricultural |  | 60,193 |  |  | — |  |  | 1,732 |  |  | — |  |  | 61,925
Commercial loans |  | 185,729 |  |  | 199 |  |  | 103 |  |  | — |  |  | 186,031
Other agricultural loans |  | 35,573 |  |  | 210 |  |  | 2,147 |  |  | — |  |  | 37,930
Total | $ | 900,036 |  | $ | 5,555 |  | $ | 8,747 |  | $ | 272 |  | $ | 914,610

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2022 and December 31, 2021 (in thousands):

| Performing |  | Nonperforming |  | Total
September 30, 2022 |  |  |  |  |  |  |  |
Residential real estate loans | $ | 294,684 |  | $ | 441 |  | $ | 295,125
Construction |  | 26,637 |  |  | — |  |  | 26,637
Consumer loans to individuals |  | 176,515 |  |  | 165 |  |  | 176,680
Total | $ | 497,836 |  | $ | 606 |  | $ | 498,442

| Performing |  | Nonperforming |  | Total
December 31, 2021 |  |  |  |  |  |  |  |
Residential real estate loans | $ | 272,571 |  | $ | 469 |  | $ | 273,040
Construction |  | 21,990 |  |  | — |  |  | 21,990
Consumer loans to individuals |  | 146,345 |  |  | 55 |  |  | 146,400
Total | $ | 440,906 |  | $ | 524 |  | $ | 441,430

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

| Current |  | 31-60 Days Past Due |  | 61-90 Days Past Due |  | Greater than 90 Days Past Due and still accruing |  | Nonaccrual |  | Total Past Due and Non-Accrual |  | Purchased Credit-Impaired |  | Total Loans
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real Estate loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential | $ | 293,400 |  | $ | 649 |  | $ | 64 |  | $ | - |  | $ | 441 |  | $ | 1,154 |  | $ | 571 |  | $ | 295,125
Commercial |  | 641,958 |  |  | 365 |  |  | - |  |  | - |  |  | - |  |  | 365 |  |  | 2,284 |  |  | 644,607
Agricultural |  | 67,020 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 2,336 |  |  | 69,356
Construction |  | 26,611 |  |  | - |  |  | 26 |  |  | - |  |  | - |  |  | 26 |  |  | - |  |  | 26,637
Commercial loans |  | 184,716 |  |  | 1 |  |  | - |  |  | - |  |  | 12 |  |  | 13 |  |  | - |  |  | 184,729
Other agricultural loans |  | 34,310 |  |  | - |  |  |  |  |  | - |  |  | - |  |  | - |  |  | 1,423 |  |  | 35,733
Consumer loans |  | 175,722 |  |  | 663 |  |  | 130 |  |  | - |  |  | 165 |  |  | 958 |  |  | - |  |  | 176,680
Total | $ | 1,423,737 |  | $ | 1,678 |  | $ | 220 |  | $ | - |  | $ | 618 |  | $ | 2,516 |  | $ | 6,614 |  | $ | 1,432,867

| Current |  | 31-60 Days Past Due |  | 61-90 Days Past Due |  | Greater than 90 Days Past Due and still accruing |  | Nonaccrual |  | Total Past Due and Non-Accrual |  | Purchased Credit-Impaired |  | Total Loans
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real Estate loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential | $ | 271,622 |  | $ | 155 |  | $ | 10 |  | $ | - |  | $ | 469 |  | $ | 634 | - | $ | 784 |  | $ | 273,040
Commercial |  | 625,336 |  |  | - |  |  | - |  |  | - |  |  | 103 |  |  | 103 | - |  | 3,285 |  |  | 628,724
Agricultural |  | 59,982 |  |  | 25 |  |  | - |  |  |  |  |  | - |  |  | 25 |  |  | 1,918 |  |  | 61,925
Construction |  | 21,990 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - | - |  | - |  |  | 21,990
Commercial loans |  | 185,801 |  |  | 3 |  |  | 13 |  |  | 91 |  |  | 16 |  |  | 32 | - |  | 198 |  |  | 186,031
Other agricultural loans |  | 35,811 |  |  | - |  |  | - |  |  |  |  |  | - |  |  | - |  |  | 2,119 |  |  | 37,930
Consumer loans |  | 145,986 |  |  | 248 |  |  | 111 |  |  | - |  |  | 55 |  |  | 414 | - |  | - |  |  | 146,400
Total | $ | 1,346,528 |  | $ | 431 |  | $ | 134 |  | $ | 91 |  | $ | 643 |  | $ | 1,208 | - | $ | 8,304 |  | $ | 1,356,040

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

As of September 30, 2022, the allocation of the allowance includes an allocation for loans secured by farmland and other agricultural loans. As of September 30 2022, the Company has also continued to incorporate qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries, although the factor has been reduced from the December 31, 2021 level. The qualitative factor related to the deferral of payments due to COVID-19 has been eliminated. At September 30, 2022, the allowance for loan losses includes $583,000 of COVID related factors, compared to $2.3 million at December 31, 2021. The 2022 allowance for loan losses excludes Paycheck Protection Program loans which are fully guaranteed by the Small Business Association as well as loans acquired from UpState which were recorded at fair value.

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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 |  |  | Agricultural |  |  | Construction |  | Commercial |  |  | Other Agricultural |  | Consumer |  | Total
Beginning balance, December 31, 2021 | $ | 2,175 |  | $ | 10,878 |  | $ | - |  | $ | 133 |  | $ | 1,490 |  | $ | - |  | $ | 1,766 |  | $ | 16,442
Charge Offs |  | (120) |  |  | (1) |  |  | - |  |  | - |  |  | (16) |  |  | - |  |  | (249) |  |  | (386)
Recoveries |  | 122 |  |  | 80 |  |  | - |  |  | - |  |  | 36 |  |  | - |  |  | 37 |  |  | 275
Provision for loan losses |  | 736 |  |  | (2,354) |  |  | 220 |  |  | 186 |  |  | 910 |  |  | 123 |  |  | 779 |  |  | 600
Ending balance, September 30, 2022 | $ | 2,913 |  | $ | 8,603 |  | $ | 220 |  | $ | 319 |  | $ | 2,420 |  | $ | 123 |  | $ | 2,333 |  | $ | 16,931
Ending balance individually evaluated ‎for impairment | $ | - |  | $ | — |  | $ | - |  | $ | - |  | $ | — |  | $ | - |  | $ | - |  | $ | —
Ending balance collectively evaluated ‎for impairment | $ | 2,913 |  | $ | 8,603 |  | $ | 220 |  | $ | 319 |  | $ | 2,420 |  | $ | 123 |  | $ | 2,333 |  | $ | 16,931

(In thousands) | Residential Real Estate |  | Commercial Real Estate |  |  | Farmland |  |  | Construction |  | Commercial |  |  | Other Agricultural |  | Consumer |  | Total
Beginning balance, June 30, 2022 | $ | 2,740 |  | $ | 9,155 |  | $ | 218 |  | $ | 242 |  | $ | 2,504 |  | $ | 112 |  | $ | 2,046 |  | $ | 17,017
Charge Offs |  | - |  |  | (1) |  |  | - |  |  | - |  |  | (1) |  |  | - |  |  | (115) |  |  | (117)
Recoveries |  | 4 |  |  | - |  |  | - |  |  | - |  |  | 13 |  |  | - |  |  | 14 |  |  | 31
Provision for loan losses |  | 169 |  |  | (551) |  |  | 2 |  |  | 77 |  |  | (96) |  |  | 11 |  |  | 388 |  |  | —
Ending balance, September 30, 2022 | $ | 2,913 |  | $ | 8,603 |  | $ | 220 |  | $ | 319 |  | $ | 2,420 |  | $ | 123 |  | $ | 2,333 |  | $ | 16,931

(In thousands) | Residential Real Estate |  | Commercial Real Estate |  |  | Agricultural |  |  | Construction |  | Commercial |  |  | Other Agricultural |  | Consumer |  | Total
Beginning balance, December 31, 2020 | $ | 1,960 |  | $ | 8,004 |  | $ | - |  | $ | 150 |  | $ | 1,360 |  | $ | - |  | $ | 1,676 |  | $ | 13,150
Charge Offs |  | (5) |  |  | (452) |  |  | - |  |  | - |  |  | (174) |  |  | - |  |  | (368) |  |  | (999)
Recoveries |  | 64 |  |  | 15 |  |  | - |  |  | - |  |  | 33 |  |  | - |  |  | 90 |  |  | 202
Provision for loan losses |  | 424 |  |  | 2,324 |  |  | - |  |  | 13 |  |  | 386 |  |  | - |  |  | 603 |  |  | 3,750
Ending balance, September 30, 2021 | $ | 2,443 |  | $ | 9,891 |  | $ | — |  | $ | 163 |  | $ | 1,605 |  | $ | — |  | $ | 2,001 |  | $ | 16,103
Ending balance individually evaluated ‎for impairment | $ | - |  | $ | 275 |  | $ | - |  | $ | - |  | $ | — |  | $ | - |  | $ | — |  | $ | 275
Ending balance collectively evaluated ‎for impairment | $ | 2,443 |  | $ | 9,616 |  | $ | — |  | $ | 163 |  | $ | 1,605 |  | $ | — |  | $ | 2,001 |  | $ | 15,828

(In thousands) | Residential Real Estate |  | Commercial Real Estate |  |  | Farmland |  |  | Construction |  | Commercial |  |  | Other Agricultural |  | Consumer |  | Total
Beginning balance, June 30, 2021 | $ | 2,233 |  | $ | 9,580 |  | $ | - |  | $ | 137 |  | $ | 1,503 |  | $ | - |  | $ | 1,887 |  | $ | 15,340
Charge Offs |  | — |  |  | (13) |  |  | - |  |  | — |  |  | — |  |  | - |  |  | (107) |  |  | (120)
Recoveries |  | 59 |  |  | 5 |  |  | - |  |  | — |  |  | 9 |  |  | - |  |  | 60 |  |  | 133
Provision for loan losses |  | 151 |  |  | 319 |  |  | - |  |  | 26 |  |  | 93 |  |  | - |  |  | 161 |  |  | 750
Ending balance, September 30, 2021 | $ | 2,443 |  | $ | 9,891 |  | $ | — |  | $ | 163 |  | $ | 1,605 |  | $ | — |  | $ | 2,001 |  | $ | 16,103

The Company’s primary business activity as of September 30, 2022 was with customers located in northeastern Pennsylvania and the New York counties of Delaware, Sullivan, Ontario, Otsego and Yates. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to repay their loans is influenced by the region’s economy.

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As of September 30, 2022, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $152.4 million of loans outstanding, or 10.6 % of total loans outstanding, and residential rentals with loans outstanding of $121.4 million, or 8.5% of loans outstanding. For the nine months ended September 30, 2022, the Company did not recognize any charge offs on loans in the named concentrations.

9. Operating Leases

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

The Company has elected to account for the variable nonlease components, such as common area maintenance charges, utilities, real estate taxes, and insurance, separately from the lease component. Such variable nonlease components are reported in net occupancy expense on the Consolidated Statements of Income when paid. These variable nonlease components were excluded from the calculation of the present value of the remaining lease payments, therefore, they are not included in other assets and other liabilities on the Consolidated Balance Sheets. The lease cost associated with the operating leases for the nine-month periods ended September 30, 2022 and 2021, amounted to $454,000 and $441,000 respectively.

Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal option, it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease. The following table presents the weighted-average remaining lease term and discount rate for the leases outstanding at September 30, 2022.

| Operating
Weighted-average remaining term |  | 10.8 years
Weighted-average discount rate |  | 2.78%

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

Undiscounted cash flows due (in thousands) |  | Operating
2022 | $ | 147
2023 |  | 557
2024 |  | 544
2025 |  | 561
2026 |  | 504
2027 and thereafter |  | 2,815
Total undiscounted cash flows |  | 5,128
Discount on cash flows |  | (820)
Total lease liabilities | $ | 4,308

10. Fair Value of Assets and Liabilities

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

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

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

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

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 16 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2022 and December 31, 2021 are as follows:

|  | Fair Value Measurement Using
|  | Reporting Date
Description |  | Total |  | Level 1 |  | Level 2 |  | Level 3
September 30, 2022 |  | (In thousands)
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 41,644 |  | $ | - |  | $ | 41,644 |  | $ | -
U.S. Government agencies |  |  | 18,177 |  |  |  |  |  | 18,177 |  |  |
States and political subdivisions |  |  | 130,472 |  |  | - |  |  | 130,472 |  |  | -
Mortgage-backed securities-government |  |  |  |  |  |  |  |  |  |  |  |
sponsored entities |  |  | 236,994 |  |  | - |  |  | 236,994 |  |  | -
Interest rate derivatives |  |  | 1,548 |  |  | - |  |  | 1,548 |  |  | -
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | 1,548 |  |  | - |  |  | 1,548 |  |  | -
Description |  | Total |  | Level 1 |  | Level 2 |  | Level 3
December 31, 2021 |  | (In thousands)
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Available for Sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities |  | $ | 19,351 |  | $ |  |  | $ | 19,351 |  | $ |
U.S. Government agencies |  |  | 16,011 |  |  | - |  |  | 16,011 |  |  | -
States and political subdivisions |  |  | 145,867 |  |  |  |  |  | 145,867 |  |  |
Corporate obligations |  |  | - |  |  | - |  |  | - |  |  | -
Mortgage-backed securities-government |  |  |  |  |  |  |  |  |  |  |  |
sponsored entities |  |  | 225,553 |  |  | - |  |  | 225,553 |  |  | -
Interest rate derivatives |  |  | 235 |  |  | - |  |  | 235 |  |  | -
LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives |  |  | 235 |  |  | - |  |  | 235 |  |  | -

Securities:

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

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Interest Rate Swaps:

The fair value of interest rate swaps is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable.

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

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2022 and December 31, 2021 are as follows:

|  |  |  |  | Fair Value Measurement Using Reporting Date
(In thousands) |  |  |  |  |  |  |  |  |  |  |  |
Description |  | Total |  | Level 1 |  | Level 2 |  | Level 3
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 12 |  | $ | - |  | $ | - |  | $ | 12
Foreclosed Real Estate Owned |  |  | 346 |  |  | - |  |  | - |  |  | 346
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |
Impaired Loans |  | $ | 1,402 |  | $ | - |  | $ | - |  | $ | 1,402
Foreclosed Real Estate Owned |  |  | 1,742 |  |  | - |  |  | - |  |  | 1,742

Impaired loans (generally carried at fair value):

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

As of September 30, 2022, the fair value investment in impaired loans was $12,000 which included one loan relationship that did not require a valuation allowance since the estimated realizable value of the collateral exceeded the recorded investment in the loan. As of September 30, 2022, the Company has not recognized charge-offs against the allowance for loan losses on any of these impaired loans.

As of December 31, 2021, the fair value investment in impaired loans totaled $1,402,000 which included three loan relationships with a carrying value of $157,000 that did not require a valuation allowance since either the estimated realizable value of the collateral or the discounted cash flows exceeded the recorded investment in the loan. As of December 31, 2021, the Company has recognized charge-offs against the allowance for loan losses on these impaired loans in the amount of $0 over the life of the loans. As of December 31, 2021, the fair value investment in impaired loans included one loan relationships with a carrying value of $1,517,000 that required a valuation allowance of $272,000 since the estimated realizable value of the collateral did not support the recorded investment in the loan. As of December 31, 2021, the Company has recognized charge-offs against the allowance for loan losses on this impaired loan in the amount of $0 over the life of the loan.

Foreclosed real estate owned (carried at fair value):

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

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

| Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands) | Fair Value Estimate |  | Valuation Techniques | Unobservable Input |  | Range (Weighted Average)
September 30, 2022 |  |  |  |  |  |  |
Impaired loans | $ | 12 |  | Appraisal of collateral(1) | Appraisal adjustments(2) |  | 10.00% (10.00%)
Foreclosed real estate owned | $ | 346 |  | Appraisal of collateral(1) | Liquidation Expenses(2) |  | 7.00% (7.00%)

| Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands) | Fair Value Estimate |  | Valuation Techniques | Unobservable Input |  | Range (Weighted Average)
December 31, 2021 |  |  |  |  |  |  |
Impaired loans | $ | 1,402 |  | Appraisal of collateral(1) | Appraisal adjustments(2) |  | 0%-10.0% (1.12%)
Foreclosed real estate owned | $ | 1,742 |  | Appraisal of collateral(1) | Liquidation Expenses(2) |  | 7.00% (7.00%)

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

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

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

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2022 and December 31, 2021.

Loans receivable (carried at cost):

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

Mortgage servicing rights (generally carried at cost)

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

Deposit liabilities (carried at cost):

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

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Other borrowings (carried at cost):

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

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

| Fair Value Measurements at September 30, 2022
| Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents (1) | $ | 40,877 |  | $ | 40,877 |  | $ | 40,877 |  | $ | - |  | $ | -
Loans receivable, net |  | 1,415,357 |  |  | 1,375,138 |  |  | - |  |  | - |  |  | 1,375,138
Mortgage servicing rights |  | 229 |  |  | 500 |  |  | - |  |  | - |  |  | 500
Regulatory stock (1) |  | 2,220 |  |  | 2,220 |  |  | 2,220 |  |  | - |  |  | -
Bank owned life insurance (1) |  | 43,169 |  |  | 43,169 |  |  | 43,169 |  |  | - |  |  | -
Accrued interest receivable (1) |  | 6,303 |  |  | 6,303 |  |  | 6,303 |  |  | - |  |  | -
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 1,768,796 |  |  | 1,767,180 |  |  | 1,301,333 |  |  | - |  |  | 465,847
Short-term borrowings (1) |  | 71,754 |  |  | 71,754 |  |  | 71,754 |  |  | - |  |  | -
Other borrowings |  | - |  |  | - |  |  | - |  |  | - |  |  | -
Accrued interest payable (1) |  | 1,425 |  |  | 1,425 |  |  | 1,425 |  |  | - |  |  | -
Off-balance sheet financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit and ‎outstanding letters of credit |  | - |  |  | - |  |  | - |  |  | - |  |  | -

| Fair Value Measurements at December 31, 2021
| Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents (1) | $ | 206,681 |  | $ | 206,681 |  | $ | 206,681 |  | $ | - |  | $ | -
Loans receivable, net |  | 1,338,489 |  |  | 1,389,870 |  |  | - |  |  | - |  |  | 1,389,870
Mortgage servicing rights |  | 289 |  |  | 500 |  |  | - |  |  | - |  |  | 500
Regulatory stock (1) |  | 3,927 |  |  | 3,927 |  |  | 3,927 |  |  | - |  |  | -
Bank owned life insurance (1) |  | 40,038 |  |  | 40,038 |  |  | 40,038 |  |  | - |  |  | -
Accrued interest receivable (1) |  | 5,889 |  |  | 5,889 |  |  | 5,889 |  |  | - |  |  | -
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 1,756,793 |  |  | 1,759,722 |  |  | 1,228,091 |  |  | - |  |  | 531,631
Short-term borrowings (1) |  | 60,822 |  |  | 60,822 |  |  | 60,822 |  |  | - |  |  | -
Other borrowings |  | 29,998 |  |  | 30,221 |  |  | - |  |  | - |  |  | 30,221
Accrued interest payable (1) |  | 1,203 |  |  | 1,203 |  |  | 1,203 |  |  | - |  |  | -
Off-balance sheet financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit and ‎outstanding letters of credit |  | - |  |  | - |  |  | - |  |  | - |  |  | -

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

11. Interest Rate Swaps

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

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At September 30, 2022 and December 31, 2021, based upon the swap contract values, the company pledged cash in the amount of $350,000 as collateral for its interest rate swaps with a third-party financial institution. The fair value of the swaps as of September 30, 2022 and December 31, 2021 was $1,548,000 and $235,000, respectively.

Summary information regarding these derivatives is presented below

(Amounts in thousands)
|  | Notional Amount |  |  |  |  |  | Fair Value
|  |  | September 30, 2022 |  |  | December 31, 2021 |  | Interest Rate Paid |  | Interest Rate Received |  |  | September 30, 2022 |  |  | December 31, 2021
Customer interest rate swap |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Maturing November, 2030 | $ | 6,604 |  | $ | 6,873 | Term SOFR + Margin | Fixed |  | $ | 940 |  | $ | 144
Maturing December, 2030 |  | 4,362 |  |  | 4,553 | Term SOFR + Margin | Fixed |  |  | 608 |  |  | 91
Total |  | $ | 10,966 |  | $ | 11,426 |  |  |  |  |  | $ | 1,548 |  | $ | 235
Third party interest rate swap |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Maturing November, 2030 | $ | 6,604 |  | $ | 6,873 |  | Fixed | Term SOFR + Margin | $ | 940 |  | $ | 144
Maturing December, 2030 |  | 4,362 |  |  | 4,553 |  | Fixed | Term SOFR + Margin |  | 608 |  |  | 91
Total |  | $ | 10,966 |  | $ | 11,426 |  |  |  |  |  | $ | 1,548 |  | $ | 235

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

|  | (Amounts in thousands)
|  | Assets |  | Liabilities
|  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
September 30, 2022 |  |  |  |  |  |  |  |
Interest rate derivatives |  | Other assets | $ | 1,548 |  | Other liabilities | $ | 1,548
December 31, 2021 |  |  |  |  |  |  |  |
Interest rate derivatives |  | Other assets |  | 235 |  | Other liabilities |  | 235

12. New and Recently Adopted Accounting Pronouncements

New Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning

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of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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

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

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

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

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

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are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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

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

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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

Forward-Looking Statements

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

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operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.

In addition, the COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to be controlled and abated. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.

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

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

# Critical Accounting Policies

Note 2 to the Company’s consolidated financial statements for the fiscal year ended December 31, 2021 (included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2021) 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-temporary impairment on securities and the determination of goodwill impairment. Please refer to the discussion of the allowance for loan losses calculation under “Changes in Financial Condition - Loans” below.

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.

Decreases 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

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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 September 30, 2022 and December 31, 2021 represent temporary impairment of the securities, related to changes in interest rates.

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

Changes in Financial Condition

General

Total assets as of September 30, 2022 were $2.019 billion compared to $2.069 billion as of December 31, 2021. The decrease was due primarily to a $167.8 million decrease in interest-bearing deposits with banks. Interest-bearing balances with banks decreased as overnight liquidity was utilized to fund growth in loans and securities, and to pay off long-term borrowings. The decrease was partially offset by a $77.4 million increase in loans receivable, and a $20.5 million increase in securities available for sale.

Securities

The fair value of securities available for sale as of September 30, 2022 was $427.3 million compared to $406.8 million as of December 31, 2021. The increase in the securities portfolio is the result of purchases executed to invest excess liquidity and to provide pledging for public deposits.

The Company has securities in an unrealized loss position. 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 $1.432 billion at September 30, 2022 compared to $1.355 billion as of December 31, 2021. The $77.4 million increase in loans receivable during the nine months ended September 30, 2022, was due to a $15.9 million increase in commercial real estate loans, a $22.1 million increase in residential mortgage loans, and a $30.3 million increase in consumer loans.

The allowance for loan losses totaled $16,931,000 as of September 30, 2022, and represented 1.18% of total loans outstanding, compared to $16,442,000, or 1.21% of total loans outstanding, at December 31, 2021. The Company had net charge-offs for the nine months ended September 30, 2022 of $111,000, compared to $797,000 in the corresponding period in 2021. 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 2022 which are specifically related to the economic impact of the COVID-19 pandemic. Management considers the allowance for loan losses adequate at September 30, 2022 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 September 30, 2022, non-performing loans totaled $618,000 or 0.04% of total loans compared to $734,000, or 0.05%, of total loans at December 31, 2021. At September 30, 2022, non-performing assets totaled $964,000, or 0.05%, of total assets, compared to $2,476,000, or 0.12%, of total assets at December 31, 2021. The decrease in non-performing assets during the nine month period ended September 30, 2022, was due to sales of properties included in foreclosed real estate.

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

(dollars in thousands) | September 30, 2022 |  |  | December 31, 2021 |
Loans accounted for on a non-accrual basis: |  |  |  |  |  |  |
Real Estate |  |  |  |  |  |  |
Residential | $ | 441 |  |  | $ | 469 |
Commercial |  | — |  |  |  | 103 |
Agricultural |  | — |  |  |  | — |
Construction |  | — |  |  |  | — |
Commercial and financial loans |  | 12 |  |  |  | 16 |
Other agricultural loans |  | — |  |  |  | — |
Consumer loans to individuals |  | 165 |  |  |  | 55 |
Total non-accrual loans |  | 618 |  |  |  | 643 |
Accruing loans which are contractually |  |  |  |  |  |  |
past due 90 days or more |  | — |  |  |  | 91 |
Total non-performing loans |  | 618 |  |  |  | 734 |
Foreclosed real estate |  | 346 |  |  |  | 1,742 |
Total non-performing assets | $ | 964 |  |  | $ | 2,476 |
Purchased credit impaired loans (a) | $ | 6,614 |  |  | $ | 8,304 |
Allowance for loans losses | $ | 16,931 |  |  | $ | 16,442 |
Coverage of non-performing loans (a) (b) |  | 2,740% | % |  |  | 2,240% | %
Non-performing loans to total loans(a) |  | 0.04 | % |  |  | 0.05 | %
Non-performing loans to total assets(a) |  | 0.03 | % |  |  | 0.03 | %
Non-performing assets to total assets(a) |  | 0.05 | % |  |  | 0.12 | %

(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.

Deposits

During the nine-months ended September 30, 2022, total deposits increased $12.0 million due primarily to growth in interest-bearing demand deposits.

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

(dollars in thousands) | September 30, 2022 |  | December 31, 2021
Non-interest bearing demand | $ | 453,560 |  | $ | 440,652
Interest-bearing demand |  | 259,697 |  |  | 196,786
Money market deposit accounts |  | 295,791 |  |  | 309,439
Savings |  | 292,285 |  |  | 281,214
Time deposits <$250,000 |  | 276,000 |  |  | 271,464
Time deposits >$250,000 |  | 191,463 |  |  | 257,238
Total | $ | 1,768,796 |  | $ | 1,756,793

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Borrowings

Short-term borrowings increased $10.9 million to $71.7 million at September 30, 2022, compared to $60.8 million at December 31, 2021, due primarily to an increase in cash management account balances.

Other borrowings as of September 30, 2022, were $0 compared to $30.0 million as of December 31, 2021. The decrease reflects the early payoff of $25.5 million Federal Home Loan Bank term borrowings. A prepayment fee of $3,000 was recognized in other expense during the nine months ended September 30, 2022. Short-term borrowings, which consist of securities sold under agreements to repurchase and overnight borrowings from the FHLB, increased $10.9 million due to growth in repurchase agreements.

Other borrowings consisted of the following:

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

Stockholders’ Equity and Capital Ratios

As of September 30, 2022, total stockholders’ equity was $158.8 million, compared to $205.3 million as of December 31, 2021. Total stockholders’ equity decreased $60.3 million due to a decrease in the fair value of securities in the available-for-sale portfolio, net of tax, and $6.9 million of dividends declared. The decrease in fair value is the result of a change in interest rates and spreads, which may impact the value of the securities. The decrease in total stockholders’ equity was partially offset by $22.1 million of net income. 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:

| September 30, 2022 |  | December 31, 2021
Tier 1 Capital |  |  |
(To average assets) | 9.13% |  | 8.51%
Tier 1 Capital |  |  |
(To risk-weighted assets) | 12.47% |  | 12.49%
Common Equity Tier 1 Capital |  |  |
(To risk-weighted assets) | 12.47% |  | 12.49%
Total Capital |  |  |
(To risk-weighted assets) | 13.58% |  | 13.66%

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

34

requirement became effective. The Company and the Bank are in compliance with their respective new capital requirements, including the capital conservation buffer, as of September 30, 2022.

Liquidity

As of September 30, 2022, the Company had cash and cash equivalents of $40.9 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 $427.3 million which could be used for liquidity needs. Total liquidity of $468.2 million as of September 30, 2022, represents 23.2% of total assets compared to $613.5 million and 29.7% of total assets as of December 31, 2021. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of September 30, 2022 and December 31, 2021. Based upon these measures, the Company believes its liquidity is adequate.

Capital Resources

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

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 September 30, 2022 and December 31, 2021.

The Company has a line of credit commitment available which has no stated expiration date from Zions Bank for $17,000,000. There were no borrowings under this line as of September 30, 2022 and December 31, 2021.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $642,371,000 as of September 30, 2022, of which $0 was outstanding in the form of borrowings as of September 30, 2022. As of December 31, 2021, the maximum borrowing capacity was $607,092,000, of which $29,998,000 of borrowings was outstanding as of December 31, 2021.

Additionally, as of September 30, 2022, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $101,400,000 as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. As of December 31, 2021, there was $127,850,000 outstanding in the form of Letters of Credit. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

Non-GAAP Financial Measures

This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on page 36. Fully taxable equivalent interest income and net interest income is also reflected in the table on page 37. 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.

‎

35

Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis, | Three Months Ended September 30,
dollars in thousands) | 2022 |  | 2021
| Average |  |  |  | Average |  | Average |  |  |  | Average
| Balance |  | Interest |  | Rate |  | Balance |  | Interest |  | Rate
| (2) |  | (1) |  | (3) |  | (2) |  | (1) |  | (3)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing deposits with banks | $ | 47,114 |  | $ | 245 |  |  | 2.08% |  | $ | 182,259 |  | $ | 72 |  |  | 0.16%
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | 426,861 |  |  | 2,016 |  |  | 1.89 |  |  | 286,413 |  |  | 1,096 |  |  | 1.53
Tax-exempt (1) |  | 79,727 |  |  | 577 |  |  | 2.89 |  |  | 62,473 |  |  | 471 |  |  | 3.02
Total securities available for sale (1) |  | 506,588 |  |  | 2,593 |  |  | 2.05 |  |  | 348,886 |  |  | 1,567 |  |  | 1.80
Loans receivable (1) (4) (5) |  | 1,412,232 |  |  | 17,193 |  |  | 4.87 |  |  | 1,375,748 |  |  | 16,957 |  |  | 4.93
Total interest-earning assets |  | 1,965,934 |  |  | 20,031 |  |  | 4.08 |  |  | 1,906,893 |  |  | 18,596 |  |  | 3.90
Non-interest earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | 25,576 |  |  |  |  |  |  |  |  | 26,622 |  |  |  |  |  |
Allowance for loan losses |  | (16,996) |  |  |  |  |  |  |  |  | (15,714) |  |  |  |  |  |
Other assets |  | 74,583 |  |  |  |  |  |  |  |  | 115,229 |  |  |  |  |  |
Total non-interest earning assets |  | 83,163 |  |  |  |  |  |  |  |  | 126,137 |  |  |  |  |  |
Total Assets | $ | 2,049,097 |  |  |  |  |  |  |  | $ | 2,033,030 |  |  |  |  |  |
Liabilities and Stockholders' Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand and money market | $ | 555,596 |  | $ | 351 |  |  | 0.25 |  | $ | 492,464 |  | $ | 237 |  |  | 0.19
Savings |  | 294,512 |  |  | 52 |  |  | 0.07 |  |  | 270,172 |  |  | 45 |  |  | 0.07
Time |  | 481,640 |  |  | 1,154 |  |  | 0.96 |  |  | 494,459 |  |  | 885 |  |  | 0.72
Total interest-bearing deposits |  | 1,331,748 |  |  | 1,557 |  |  | 0.47 |  |  | 1,257,095 |  |  | 1,167 |  |  | 0.37
Short-term borrowings |  | 68,510 |  |  | 88 |  |  | 0.51 |  |  | 77,799 |  |  | 71 |  |  | 0.37
Other borrowings |  | 2,074 |  |  | 17 |  |  | 3.28 |  |  | 34,683 |  |  | 172 |  |  | 1.98
Total interest-bearing liabilities |  | 1,402,332 |  |  | 1,662 |  |  | 0.47 |  |  | 1,369,577 |  |  | 1,410 |  |  | 0.41
Non-interest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  | 450,737 |  |  |  |  |  |  |  |  | 443,303 |  |  |  |  |  |
Other liabilities |  | 16,630 |  |  |  |  |  |  |  |  | 14,966 |  |  |  |  |  |
Total non-interest bearing liabilities |  | 467,367 |  |  |  |  |  |  |  |  | 458,269 |  |  |  |  |  |
Stockholders' equity |  | 179,398 |  |  |  |  |  |  |  |  | 205,184 |  |  |  |  |  |
Total Liabilities and Stockholders' Equity | $ | 2,049,097 |  |  |  |  |  |  |  | $ | 2,033,030 |  |  |  |  |  |
Net interest income/spread (tax equivalent basis) |  |  |  |  | 18,369 |  |  | 3.61% |  |  |  |  |  | 17,186 |  |  | 3.49%
Tax-equivalent basis adjustment |  |  |  |  | (199) |  |  |  |  |  |  |  |  | (197) |  |  |
Net interest income |  |  |  | $ | 18,170 |  |  |  |  |  |  |  | $ | 16,989 |  |  |
Net interest margin (tax equivalent basis) |  |  |  |  |  |  |  | 3.74% |  |  |  |  |  |  |  |  | 3.61%

(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.

‎

36

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 September 30, 2022 Compared to
| Three months ended September 30, 2021
| Variance due to
| Volume |  | Rate |  | Net
| (dollars in thousands)
Interest-earning assets: |  |  |  |  |  |  |  |
Interest-bearing deposits with banks | $ | (202) |  | $ | 375 |  | $ | 173
Securities available for sale: |  |  |  |  |  |  |  |
Taxable |  | 583 |  |  | 337 |  |  | 920
Tax-exempt securities |  | 131 |  |  | (25) |  |  | 106
Total securities |  | 714 |  |  | 312 |  |  | 1,026
Loans receivable |  | 447 |  |  | (211) |  |  | 236
Total interest-earning assets |  | 959 |  |  | 476 |  |  | 1,435
Interest-bearing liabilities: |  |  |  |  |  |  |  |
Interest-bearing demand and money market |  | 37 |  |  | 77 |  |  | 114
Savings |  | 7 |  |  | — |  |  | 7
Time |  | (30) |  |  | 299 |  |  | 269
Total interest-bearing deposits |  | 14 |  |  | 376 |  |  | 390
Short-term borrowings |  | (10) |  |  | 27 |  |  | 17
Other borrowings |  | (165) |  |  | 10 |  |  | (155)
Total interest-bearing liabilities |  | (161) |  |  | 413 |  |  | 252
Net interest income (tax-equivalent basis) | $ | 1,120 |  | $ | 63 |  | $ | 1,183

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.

‎

37

Comparison of Operating Results for the Three Months Ended September 30, 2022 to September 30, 2021

General

For the three months ended September 30, 2022, net income totaled $8,109,000 compared to $6,981,000 earned in the same period in 2021. The increase in net income for the three months ended September 30, 2022 was due primarily to a $1,181,000 increase in net interest income and a $750,000 decrease in the provision for loan losses. Earnings per share for the three-months ended September 30, 2022 were $1.00 per share for basic shares and fully diluted shares, compared to $0.85 per share for basic shares and for fully diluted shares for the three months ended September 30, 2021. The resulting annualized return on average assets and annualized return on average equity for the three months ended September 30, 2022 were 1.57% and 17.93%, respectively, compared to 1.36% and 13.50%, respectively, for the same period in 2021.

The following table sets forth changes in net income:

(dollars in thousands) | Three months ended
| September 30, 2022 to September 30, 2021
Net income three months ended September 30, 2021 | $ | 6,981
Change due to: |  |
Net interest income |  | 1,181
Provision for loan losses |  | 750
Net gains on sales of securities and loans |  | (73)
Service charges and fees |  | (139)
Earnings and proceeds on bank-owned life insurance |  | 67
Other income |  | 164
Salaries and employee benefits |  | (62)
Occupancy, furniture and equipment |  | (28)
All other expenses |  | (426)
Income tax expense |  | (306)
Net income three months ended September 30, 2022 | $ | 8,109

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended September 30, 2022 totaled $18,369,000 which was $1,183,000 higher than the comparable period in 2021. The increase in net interest income was due primarily to a $1,026,000 increase in interest income (fte) on securities due to purchases of securities. The fte net interest spread and net interest margin were 3.61% and 3.74%, respectively, for the three months ended September 30, 2022 compared to 3.49% and 3.61%, respectively, for the same period in 2021. See “Non-GAAP Financial Measures” described above on page 35.

For the three-months ended September 30, 2022, interest income (fte) totaled $20,031,000 with a yield on average earning assets of 4.08% compared to $18,596,000 and 3.90% for the 2021 period. Average loans increased $36.5 million during the three-months ended September 30, 2022, over the comparable period of 2021, while average securities increased $157.7 million. Average earning assets totaled $1.966 billion for the three months ended September 30, 2022, an increase of $59.0 million over the average for the same period in 2021. See “Non-GAAP Financial Measures” described above on page 35.

Interest expense for the three months ended September 30, 2022 totaled $1,662,000 at an average cost of 0.47% compared to $1,410,000 and 0.41%, respectively, for the same period in 2021. The increase in interest expense during the three-months ended September 30, 2022 reflects the overall higher level of market interest rates. The average cost of time deposits, which is the most significant component of funding costs, increased 0.24% compared to the same three-month period of last year.

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended September 30, 2022 was $0, compared to $750,000 for the three months ended September 30, 2021. The decreased provision reflects a reduction in certain qualitative factors related to 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. The Company recorded a net charge-off of $86,000 for the quarter ended September 30, 2022, compared to a net recovery of $13,000 for the similar period in 2021. At September 30, 2022, the allowance for loan losses represented 1.18% of loans receivable. Additionally, the allowance for loan losses represented 2,740% of non-performing loans, excluding loans acquired with credit quality deterioration.

38

Other Income

Other income totaled $2,178,000 for the three months ended September 30, 2022, compared to $2,159,000 for the same period in 2021. The increase was due primarily to a $67,000 increase in earnings and proceeds on bank-owned life insurance policies, and a $185,000 increase in other income. Gains on sales of assets decreased $104,000, while all other categories of other income decreased $129,000, net.

Other Expense

Other expense for the three months ended September 30, 2022 totaled $10,139,000 which was $516,000, or 5.4%, higher than the same period of 2021, due primarily to a $142,000 increase in data processing costs, and a $165,000 increase in professional fees. All other categories of other expense increased $209,000, net.

Income Tax Expense

Income tax expense totaled $2,100,000 for an effective tax rate of 20.6% for the three months ended September 30, 2022 compared to $1,794,000 for an effective tax rate of 20.5% for the three months ended September 30, 2021. The increase in the effective tax rate in the 2022 period reflects the increased level of taxable income.

39

Results of Operations

NORWOOD FINANCIAL CORP

Consolidated Average Balance Sheets with Resultant Interest and Rates

(Tax-Equivalent Basis, | Nine Months Ended September 30,
dollars in thousands) | 2022 |  | 2021
| Average |  |  |  | Average |  | Average |  |  |  | Average
| Balance |  | Interest |  | Rate |  | Balance |  | Interest |  | Rate
| (2) |  | (1) |  | (3) |  | (2) |  | (1) |  | (3)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest bearing deposits with banks | $ | 100,195 |  | $ | 504 |  |  | 0.67% |  | $ | 158,600 |  | $ | 174 |  |  | 0.15%
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | 398,686 |  |  | 5,221 |  |  | 1.75 |  |  | 242,253 |  |  | 2,831 |  |  | 1.56
Tax-exempt (1) |  | 78,287 |  |  | 1,700 |  |  | 2.90 |  |  | 60,126 |  |  | 1,399 |  |  | 3.10
Total securities available for sale (1) |  | 476,973 |  |  | 6,921 |  |  | 1.93 |  |  | 302,379 |  |  | 4,230 |  |  | 1.87
Loans receivable (1) (4) (5) |  | 1,384,586 |  |  | 48,416 |  |  | 4.66 |  |  | 1,398,563 |  |  | 49,425 |  |  | 4.71
Total interest-earning assets |  | 1,961,754 |  |  | 55,841 |  |  | 3.80 |  |  | 1,859,542 |  |  | 53,829 |  |  | 3.86
Non-interest earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | 24,532 |  |  |  |  |  |  |  |  | 23,357 |  |  |  |  |  |
Allowance for loan losses |  | (16,792) |  |  |  |  |  |  |  |  | (14,915) |  |  |  |  |  |
Other assets |  | 85,488 |  |  |  |  |  |  |  |  | 115,048 |  |  |  |  |  |
Total non-interest earning assets |  | 93,228 |  |  |  |  |  |  |  |  | 123,490 |  |  |  |  |  |
Total Assets | $ | 2,054,982 |  |  |  |  |  |  |  | $ | 1,983,032 |  |  |  |  |  |
Liabilities and Stockholders' Equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand and money market | $ | 538,925 |  | $ | 779 |  |  | 0.19 |  | $ | 459,405 |  | $ | 671 |  |  | 0.19
Savings |  | 302,938 |  |  | 167 |  |  | 0.07 |  |  | 261,308 |  |  | 121 |  |  | 0.06
Time |  | 487,898 |  |  | 2,753 |  |  | 0.75 |  |  | 520,057 |  |  | 2,835 |  |  | 0.73
Total interest-bearing deposits |  | 1,329,761 |  |  | 3,699 |  |  | 0.37 |  |  | 1,240,770 |  |  | 3,627 |  |  | 0.39
Short-term borrowings |  | 66,663 |  |  | 196 |  |  | 0.39 |  |  | 73,272 |  |  | 214 |  |  | 0.39
Other borrowings |  | 13,009 |  |  | 212 |  |  | 2.17 |  |  | 37,764 |  |  | 559 |  |  | 1.97
Total interest-bearing liabilities |  | 1,409,433 |  |  | 4,107 |  |  | 0.39 |  |  | 1,351,806 |  |  | 4,400 |  |  | 0.43
Non-interest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  | 441,914 |  |  |  |  |  |  |  |  | 415,935 |  |  |  |  |  |
Other liabilities |  | 15,822 |  |  |  |  |  |  |  |  | 14,746 |  |  |  |  |  |
Total non-interest bearing liabilities |  | 457,736 |  |  |  |  |  |  |  |  | 430,681 |  |  |  |  |  |
Stockholders' equity |  | 187,813 |  |  |  |  |  |  |  |  | 200,545 |  |  |  |  |  |
Total Liabilities and Stockholders' Equity | $ | 2,054,982 |  |  |  |  |  |  |  | $ | 1,983,032 |  |  |  |  |  |
Net interest income/spread (tax equivalent basis) |  |  |  |  | 51,734 |  |  | 3.41% |  |  |  |  |  | 49,429 |  |  | 3.43%
Tax-equivalent basis adjustment |  |  |  |  | (570) |  |  |  |  |  |  |  |  | (612) |  |  |
Net interest income |  |  |  | $ | 51,164 |  |  |  |  |  |  |  | $ | 48,817 |  |  |
Net interest margin (tax equivalent basis) |  |  |  |  |  |  |  | 3.52% |  |  |  |  |  |  |  |  | 3.54%

(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.

40

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)
| Nine months ended September 30, 2022 Compared to
| Nine months ended September 30, 2021
| Variance due to
| Volume |  | Rate |  | Net
| (dollars in thousands)
Interest-earning assets: |  |  |  |  |  |  |  |
Interest-bearing deposits with banks | $ | (197) |  | $ | 527 |  | $ | 330
Securities available for sale: |  |  |  |  |  |  |  |
Taxable |  | 1,872 |  |  | 518 |  |  | 2,390
Tax-exempt securities |  | 352 |  |  | (51) |  |  | 301
Total securities |  | 2,224 |  |  | 467 |  |  | 2,691
Loans receivable |  | (489) |  |  | (520) |  |  | (1,009)
Total interest-earning assets |  | 1,538 |  |  | 474 |  |  | 2,012
Interest-bearing liabilities: |  |  |  |  |  |  |  |
Interest-bearing demand and money market |  | 108 |  |  | — |  |  | 108
Savings |  | 22 |  |  | 24 |  |  | 46
Time |  | (162) |  |  | 80 |  |  | (82)
Total interest-bearing deposits |  | (32) |  |  | 104 |  |  | 72
Short-term borrowings |  | (18) |  |  | — |  |  | (18)
Other borrowings |  | (369) |  |  | 22 |  |  | (347)
Total interest-bearing liabilities |  | (419) |  |  | 126 |  |  | (293)
Net interest income (tax-equivalent basis) | $ | 1,957 |  | $ | 348 |  | $ | 2,305

41

Comparison of Operating Results for the Nine Months Ended September 30, 2022 to September 30, 2021

General

For the nine months ended September 30, 2022, net income totaled $22,093,000 compared to $18,277,000 earned in the similar period in 2021. The increase in net income for the nine months ended September 30, 2022 was due primarily to a $2,347,000 increase in net interest income, a $1,671,000 increase in other income, and a $3,150,000 decrease in the provision for loan losses. Earnings per share for the nine-months ended September 30, 2022 were $2.71 per share for basic shares and fully diluted shares, compared to $2.23 per share for basic shares and for fully diluted shares for the nine months ended September 30, 2021. The resulting annualized return on average assets and annualized return on average equity for the nine months ended September 30, 2022 were 1.44% and 15.73%, respectively, compared to 1.23% and 12.19%, respectively, for the same period in 2021.

The following table sets forth changes in net income:

(dollars in thousands) | Nine months ended
| September 30, 2022 to September 30, 2021
Net income nine months ended September 30, 2021 | $ | 18,277
Change due to: |  |
Net interest income |  | 2,347
Provision for loan losses |  | 3,150
Service charges and fees |  | 24
Net gains on sales of securities and loans |  | (232)
Net gains on sales of foreclosed real estate owned |  | 396
Earnings and proceeds on bank-owned life insurance |  | 125
Other income |  | 1,358
Salaries and employee benefits |  | (1,208)
Occupancy, furniture and equipment |  | (136)
Data processing related |  | (271)
Professional fees |  | (264)
All other expenses |  | (322)
Income tax expense |  | (1,151)
Net income nine months ended September 30, 2022 | $ | 22,093

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the nine months ended September 30, 2022 totaled $51,734,000 which was $2,305,000 higher than the comparable period in 2021. The increase in net interest income was due primarily to a $2,691,000 increase in interest income (fte) on securities due to purchases of securities. The fte net interest spread and net interest margin were 3.41% and 3.52%, respectively, for the nine months ended September 30, 2022 compared to 3.43% and 3.54%, respectively, for the same period in 2021. See “Non-GAAP Financial Measures” described above on page 35.

For the nine-months ended September 30, 2022, interest income (fte) totaled $55,841,000 with a yield on average earning assets of 3.80% compared to $53,829,000 and 3.86% for the 2021 period. Average loans decreased $14.0 million during the nine-months ended September 30, 2022, over the comparable period of 2021, while average securities increased $174.6 million. Average earning assets totaled $1.962 billion for the nine months ended September 30, 2022, an increase of $102.2 million over the average for the same period in 2021. See “Non-GAAP Financial Measures” described above on page 35.

Interest expense for the nine months ended September 30, 2022 totaled $4,107,000 at an average cost of 0.39% compared to $4,400,000 and 0.43%, respectively, for the same period in 2021. The decrease in interest expense during the nine-months ended September 30, 2022 reflects a higher level of average demand deposits and lower costing non-maturity interest-bearing deposits. The average cost of time deposits, which is the most significant component of funding costs, increased .02% compared to the same nine-month period of last year.

Provision for Loan Losses

The Company’s provision for loan losses for the nine months ended September 30, 2022 was $600,000, compared to $3,750,000 for the nine months ended September 30, 2021. The decreased provision reflects a reduction in certain qualitative factors

42

related to 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. The Company recorded a net charge-off of $111,000 for the nine months ended September 30, 2022, compared to a net charge-off of $797,000 for the same period in 2021. At September 30, 2022, the allowance for loan losses represented 1.18% of loans receivable. Additionally, the allowance for loan losses represented 2,740% of non-performing loans, excluding loans acquired with credit quality deterioration.

Other Income

Other income totaled $8,006,000 for the nine months ended September 30, 2022, compared to $6,335,000 for the same period in 2021. The increase was due primarily to $1,104,000 of income recognized on previously acquired purchased impaired loans that were carried at a discount, and a $427,000 gain on the sale of a property carried in foreclosed real estate owned. All other categories of other income increased $171,000, net.

Other Expense

Other expense for the nine months ended September 30, 2022 totaled $30,768,000, which was $2,201,000, or 7.7%, higher than the same period of 2021, due primarily to a $1,208,000 increase in salaries and employee benefits costs.

Income Tax Expense

Income tax expense totaled $5,709,000 for an effective tax rate of 20.5% for the nine months ended September 30, 2022 compared to $4,558,000 for an effective tax rate of 20.0% for the nine months ended September 30, 2021. The increase in the effective tax rate in the 2022 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 September 30, 2022, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decrease of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.

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

As of September 30, 2022, the Company had a negative 90-day interest sensitivity gap of $2.3 million or 0.1% of total assets, compared to the $175.1 million interest sensitivity gap, or 8.5% of total assets, as of December 31, 2021. At September 30, 2022, rate-sensitive assets repricing within 90 days decreased $168.4 million since December 31, 2021 due to a $167.6 million decrease in interest-bearing deposits. Rate-sensitive liabilities repricing within 90 days increased $9.0 million since year end due primarily to a $9.7 million increase in deposits repricing. A negative gap means that rate-sensitive liabilities are greater than rate-sensitive assets at the time interval. This would indicate that in a rising rate environment, the cost of interest-bearing liabilities in the 90-day time frame could increase faster than the yield on interest-earning assets. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

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

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September 30, 2022

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 | $ | 17,537 |  | $ | 248 |  | $ | — |  | $ | — |  | $ | 17,785
Securities |  | 10,392 |  |  | 33,572 |  |  | 93,077 |  |  | 290,246 |  |  | 427,287
Loans Receivable |  | 227,197 |  |  | 211,706 |  |  | 411,491 |  |  | 581,894 |  |  | 1,432,288
Total RSA | $ | 255,126 |  | $ | 245,526 |  | $ | 504,568 |  | $ | 872,140 |  | $ | 1,877,360
Non-maturity interest-bearing deposits | $ | 133,991 |  | $ | 128,478 |  | $ | 342,045 |  | $ | 243,259 |  | $ | 847,773
Time Deposits |  | 107,987 |  |  | 222,233 |  |  | 119,355 |  |  | 17,888 |  |  | 467,463
Borrowings |  | 15,483 |  |  | 24,120 |  |  | 32,151 |  |  | — |  |  | 71,754
Total RSL | $ | 257,461 |  | $ | 374,831 |  | $ | 493,551 |  | $ | 261,147 |  | $ | 1,386,990
Interest Sensitivity Gap | $ | (2,335) |  | $ | (129,305) |  | $ | 11,017 |  | $ | 610,993 |  | $ | 490,370
Cumulative Gap |  | (2,335) |  |  | (131,640) |  |  | (120,623) |  |  | 490,370 |  |  |
RSA/RSL-cumulative |  | 99.09% |  |  | 79.18% |  |  | 89.29% |  |  | 135.35% |  |  |
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest Sensitivity Gap | $ | 175,100 |  | $ | (170,159) |  | $ | 11,040 |  | $ | 524,379 |  | $ | 540,360
Cumulative Gap |  | 175,100 |  |  | 4,941 |  |  | 15,981 |  |  | 540,360 |  |  |
RSA/RSL-cumulative |  | 170.5% |  |  | 100.7% |  |  | 101.4% |  |  | 138.4% |  |  |

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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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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 September 30, 2022.

| 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
July 1 – 31, 2022 |  | 537 |  | $ | 25.00 |  |  | 537 |  |  | 429,707
August 1 – 31, 2022 |  | 17,947 |  |  | 25.61 |  |  | 17,947 |  |  | 411,760
September 1 – 30, 2022 |  | 18,203 |  |  | 26.24 |  |  | 18,203 |  |  | 393,557
Total |  | 36,687 |  | $ | 25.91 |  |  | 36,687 |  |  | 393,557

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

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

‎

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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)
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 September 30, 2022, 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.

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Signatures

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

|  |  | NORWOOD FINANCIAL CORP
Date: November 10, 2022 |  | By: | /s/ James O. Donnelly
|  |  | James O. Donnelly
|  |  | President and Chief Executive Officer
|  |  | (Principal Executive Officer)
Date: November 10, 2022 |  |  | /s/ William S. Lance
|  |  | William S. Lance
|  |  | Executive Vice President and
|  |  | Chief Financial Officer
|  |  | (Principal Financial Officer)

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