UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, ~~2020~~2021

¨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 001-38884

FRANKLIN FINANCIAL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)


Pennsylvania	25-1440803
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)


20 South Main Street, Chambersburg, PA	17201-0819
(Address of principal executive offices)	(Zip Code)

(717) 264-6116

(Registrant's telephone number, including area code)

Not Applicable

(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 class	Symbol	Name of exchange on which registered
Common stock	FRAF	Nasdaq Capital Market

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

There were ~~4,340,837~~4,419,107 outstanding shares of the Registrant’s common stock as of April 30, ~~2020.~~2021.

‎

INDEX


Part I - FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 (unaudited)	12
	Consolidated Statements of Income for the Three Months ended March 31, ~~2020~~2021	2
	and ~~2019~~2020 (unaudited)
	Consolidated Statements of Comprehensive Income for the Three Months ended	32
	March 31, ~~2020~~2021 and ~~2019~~2020 (unaudited)
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months	32
	ended March 31, ~~2020~~2021 and ~~2019~~2020 (unaudited)
	Consolidated Statements of Cash Flows for the Three Months ended March 31, ~~2020~~ 2021	42
	and ~~2019~~2020 (unaudited)
	Notes to Consolidated Financial Statements (unaudited)	52

Item 2	Management’s Discussion and Analysis ofResults of Operations and Financial Condition	242
Item 3	Quantitative and Qualitative Disclosures about Market Risk	412
Item 4	Controls and Procedures	412

Part II - OTHER INFORMATION

Item 1	Legal Proceedings	432
Item 1A	Risk Factors	432
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	442
Item 3	Defaults Upon Senior Securities	442
Item 4	Mine Safety Disclosures	442
Item 5	Other Information	452
Item 6	Exhibits	452
SIGNATURE PAGE		462

Part I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets



(Dollars in thousands, except share and per share data) (unaudited)	March 31,		December 31,
(Dollars in thousands, except share and per share data)					(unaudited)
					March 31,		December 31,
	2020		2019		2021		2020
Assets
Cash and due from banks	$	12,848	$	15,336	$	17,117	$	17,059
Short-term interest-bearing deposits in other banks		40,502		68,492		90,505		40,087
Total cash and cash equivalents		53,350		83,828		107,622		57,146
Long-term interest-bearing deposits in other banks		10,738		8,746		10,995		12,741
Debt securities available for sale, at fair value		208,040		187,433		422,178		396,940
Equity securities		313		440		444		391
Restricted stock		465		465		468		468
Loans held for sale		2,751		2,040		4,699		9,446
Loans		936,386		934,575		1,000,933		1,009,704
Allowance for loan losses		(14,730)		(11,966)		(16,136)		(16,789)
Net Loans		921,656		922,609		984,797		992,915
Premises and equipment, net		13,717		13,851		12,971		13,105
Right of use asset		5,118		5,126		5,153		5,272
Bank owned life insurance		20,955		23,748		22,403		22,288
Goodwill		9,016		9,016		9,016		9,016
Deferred tax asset, net		3,570		4,003		6,135		2,401
Other assets		12,437		7,852		10,678		12,909
Total assets	$	1,262,126	$	1,269,157	$	1,597,559	$	1,535,038

Liabilities
Deposits
Noninterest-bearing checking	$	198,384	$	192,108	$	290,015	$	259,060
Money management, savings, and interest checking		835,208		843,936		1,057,678		1,019,348
Time		83,841		89,348		73,349		76,165
Total deposits		1,117,433		1,125,392		1,421,042		1,354,573
Subordinate notes						19,564		19,555
Lease liability		5,159		5,161		5,225		5,332
Other liabilities		10,529		11,076		11,029		10,402
Total liabilities		1,133,121		1,141,629		1,456,860		1,389,862

Commitments and contingent liabilities

Shareholders' equity
Common stock, $1 par value per share,15,000,000 shares authorized with
4,710,822 shares issued and 4,337,520 shares outstanding at March 31, 2020 and
4,709,849 shares issued and 4,352,753 shares outstanding at December 31, 2019		4,711		4,710
Capital stock without par value, 5,000,000 shares authorized with 0
4,710,872 shares issued and 4,407,583 shares outstanding at March 31, 2021 and
4,710,872 shares issued and 4,389,355 shares outstanding at December 31, 2020						4,711		4,711
Capital stock 0 par value, 5,000,000 shares authorized with 0
shares issued and outstanding		—		—		—		—
Additional paid-in capital		42,390		42,268		42,513		42,589
Retained earnings		95,359		94,946		106,032		102,520
Accumulated other comprehensive loss		(4,360)		(5,986)
Treasury stock, 373,302 shares at March 31, 2020 and 357,096 shares at
December 31, 2019, at cost		(9,095)		(8,410)
Accumulated other comprehensive (loss) income						(5,166)		3,190
Treasury stock, 303,289 shares at March 31, 2021 and 321,517 shares at
December 31, 2020, at cost						(7,391)		(7,834)
Total shareholders' equity		129,005		127,528		140,699		145,176
Total liabilities and shareholders' equity	$	1,262,126	$	1,269,157	$	1,597,559	$	1,535,038

The accompanying notes are an integral part of these unaudited financial statements.

Consolidated Statements of Income


	For the Three Months Ended				For the Three Months Ended
(Dollars in thousands, except per share data) (unaudited)	March 31,				March 31,
	2020		2019		2021		2020
Interest income
Loans, including fees	$	10,168	$	11,009	$	9,381	$	10,168
Interest and dividends on investments:
Taxable interest		1,062		540		1,623		1,062
Tax exempt interest		171		338		532		171
Dividend income		6		5		3		6
Deposits and obligations of other banks		258		97
Interesting-bearing deposits in other banks						53		258
Total interest income		11,665		11,989		11,592		11,665
Interest expense
Deposits		1,413		1,624		485		1,413
Short-term borrowings		—		36
Subordinate notes						263		—
Total interest expense		1,413		1,660		748		1,413
Net interest income		10,252		10,329		10,844		10,252
Provision for loan losses		3,000		399
(Recovery of) provision for loan losses						(800)		3,000
Net interest income after provision for loan losses		7,252		9,930		11,644		7,252
Noninterest income
Investment and trust services fees		1,445		1,452		1,636		1,445
Loan service charges		285		203		196		141
Gain on sale of loans						782		144
Deposit service charges and fees		565		545		468		565
Other service charges and fees		347		353		396		347
Debit card income		418		402		517		418
Increase in cash surrender value of life insurance		124		127
Life insurance gain		812		—
Net (losses)/gains on sales of debt securities		(10)		24
Increase in cash surrender value of Bank owned life insurance						115		124
Bank owned life insurance gain						—		812
Net losses on sales of debt securities						—		(10)
Change in fair value of equity securities		(127)		3		54		(127)
Other		30		56		63		30
Total noninterest income		3,889		3,165		4,227		3,889
Noninterest Expense
Salaries and employee benefits		5,535		5,442		5,658		5,535
Net occupancy		830		856		910		830
Marketing and advertising		455		402		345		455
Legal and professional		395		430		475		395
Data processing		806		705		929		806
Pennsylvania bank shares tax		175		243		92		175
FDIC Insurance		60		65		202		60
ATM/debit card processing		264		258		296		264
Telecommunications		105		105		129		105
Nonservice pension						205		88
Other		903		906		924		815
Total noninterest expense		9,528		9,412		10,165		9,528
Income before federal income taxes		1,613		3,683		5,706		1,613
Federal income tax (benefit) expense		(106)		446
Federal income tax expense (benefit)						876		(106)
Net income	$	1,719	$	3,237	$	4,830	$	1,719
Per share
Basic earnings per share	$	0.40	$	0.73	$	1.10	$	0.40
Diluted earnings per share	$	0.39	$	0.73	$	1.09	$	0.39

The accompanying notes are an integral part of these unaudited financial statements.

Consolidated Statements of Comprehensive Income


	For the Three Months Ended				For the Three Months Ended
	March 31,				March 31,
(Dollars in thousands) (unaudited)	2020		2019		2021		2020
Net Income	$	1,719	$	3,237	$	4,830	$	1,719

Debt Securities:
Unrealized gains arising during the period		2,048		1,414
Reclassification adjustment for losses (gains) included in net income (1) (2)		10		(24)
Net unrealized gains		2,058		1,390
Unrealized (losses) gains arising during the period						(10,577)		2,048
Reclassification adjustment for losses included in net income (1)						—		10
Net unrealized (losses) gains						(10,577)		2,058
Tax effect		(432)		(291)		2,221		(432)
Net of tax amount		1,626		1,099		(8,356)		1,626

Total other comprehensive income		1,626		1,099
Total other comprehensive (loss) income						(8,356)		1,626

Total Comprehensive Income	$	3,345	$	4,336
Total Comprehensive (Loss) Income					$	(3,526)	$	3,345

(1) Reclassified to net gains on sales of debt securities
(2) Net of the reclassification of $(2) and $5 to Federal income tax (benefit) expense

The accompanying notes are an integral part of these unaudited financial statements.

ConsolidatedConsolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, ~~2020~~2021 and ~~2019~~2020


							Accumulated													Accumulated
			Additional				Other									Additional				Other
	Common		Paid-in		Retained		Comprehensive		Treasury				Number	Common		Paid-in		Retained		Comprehensive		Treasury
(Dollars in thousands, except per share data) (unaudited)	Stock		Capital		Earnings		Loss		Stock		Total		of Shares	Stock		Capital		Earnings		(Loss) Income		Stock		Total
Balance at January 1, 2020	$	4,710	$	42,268	$	94,946	$	(5,986)	$	(8,410)	$	127,528
Balance at January 1, 2021													4,389,355	$	4,711	$	42,589	$	102,520	$	3,190	$	(7,834)	$	145,176
Net income		—		—		1,719		—		—		1,719			—		—		4,830		—		—		4,830
Other comprehensive income		—		—		—		1,626		—		1,626			—		—		—		(8,356)		—		(8,356)
Cash dividends declared, $0.30 per share		—		—		(1,306)		—		—		(1,306)			—		—		(1,318)		—		—		(1,318)
Acquisition of 36,401 shares of treasury stock		—		—		—		—		(1,172)		(1,172)
Treasury shares issued under dividend reinvestment plan, 20,124 shares		—		75		—		—		485		560
Acquisition of treasury stock													(474)		—		—		—		—		(13)		(13)
Treasury shares issued under dividend reinvestment plan													11,682		—		40		—		—		285		325
Stock Compensation Plans:
Treasury shares issued (71 shares)		—		1		—		—		2		3
Common shares issued (973 shares)		1		15		—		—		—		16
Treasury shares issued													7,020		—		(164)		—		—		171		7
Compensation expense		—		31		—		—		—		31			—		48		—		—		—		48
Balance at March 31, 2020	$	4,711	$	42,390	$	95,359	$	(4,360)	$	(9,095)	$	129,005
Balance at March 31, 2021													4,407,583	$	4,711	$	42,513	$	106,032	$	(5,166)	$	(7,391)	$	140,699

Balance at January 1, 2019
$
4,701
$
41,530
$
83,946
$
(6,380)
$
(5,401)
$
118,396
Net income
—
—
3,237
—
—
3,237
Other comprehensive
—
—
—
1,099
—
1,099
Cash dividends declared, $0.27 per share
—
—
(1,192)
—
—
(1,192)
Acquisition of 15,163 shares of treasury stock
—
—
—
—
(560)
(560)
Treasury shares issued under dividend reinvestment plan, 10,150 shares
—
2
—
—
3
5
Stock Compensation Plans:
Treasury shares issued (10,150 shares)
—
161
—
—
190
351
Common shares issued (6,982 shares)
7
148
—
—
—
155
Balance at March 31, 2019
$
4,708
$
41,841
$
85,991
$
(5,281)
$
(5,768)
$
121,491


Balance at January 1, 2020	4,352,753	$	4,710	$	42,268	$	94,946	$	(5,986)	$	(8,410)	$	127,528
Net income			—		—		1,719		—		—		1,719
Other comprehensive income			—		—		—		1,626		—		1,626
Cash dividends declared, $0.30 per share			—		—		(1,306)		—		—		(1,306)
Acquisition of treasury stock	(36,401)		—		—		—		—		(1,172)		(1,172)
Treasury shares issued under dividend reinvestment plan	20,124		—		75		—		—		485		560
Stock Compensation Plans:
Treasury shares issued	71		—		1		—		—		2		3
Common shares issued	973		1		15		—		—		—		16
Compensation expense			—		31		—		—		—		31
Balance at March 31, 2020	4,337,520	$	4,711	$	42,390	$	95,359	$	(4,360)	$	(9,095)	$	129,005

The accompanying notes are an integral part of these unaudited financial statements.

Consolidated Statements of Cash Flows


	Three Months Ended ‎March 31,				Three Months Ended ‎March 31,
	2020		2019		2021		2020
(Dollars in thousands) (unaudited)
Cash flows from operating activities
Net income	$	1,719	$	3,237	$	4,830	$	1,719
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		331		338		324		331
Net amortization of loans and investment securities		340		409		124		340
Provision for loan losses		3,000		399
Decrease (increase) in fair value of equity securities		127		(3)
Debt securities losses (gains), net		10		(24)
Amortization of subordinate debt issuance costs						10		—
(Recovery of) provision for loan losses						(800)		3,000
(Increase) decrease in fair value of equity securities						(54)		127
Debt securities losses, net						—		10
Loans originated for sale		(9,223)		(6,467)		(28,992)		(9,223)
Proceeds from sale of loans		8,512		6,390		34,521		8,656
Increase in cash surrender value of life insurance		(124)		(127)
Gains from claim on life insurance policy		(812)		—
Gain on sale of loans						(782)		(144)
Increase in cash surrender value of bank owned life insurance						(115)		(124)
Gains from surrender of life insurance policies						—		(812)
Stock option compensation		31		—		48		31
Increase in other assets		(1,139)		(50)
(Decrease) increase in other liabilities		(281)		118
Decrease (increase) in other assets						668		(1,139)
Increase (decrease) in other liabilities						667		(281)
Net cash provided by operating activities		2,491		4,220		10,449		2,491
Cash flows from investing activities
Net increase in long-term interest-bearing deposits in other banks		(1,992)		—
Net decrease (increase) in long-term interest-bearing deposits in other banks						1,746		(1,992)
Proceeds from sales and calls of investment securities available for sale		165		3,876		—		165
Proceeds from maturities and pay-downs of securities available for sale		10,941		6,084		9,367		10,941
Purchase of investment securities available for sale		(29,974)		(5,344)		(45,827)		(29,974)
Net increase in loans		(2,077)		(7,245)
Net decrease (increase) in loans						9,439		(2,077)
Capital expenditures		(174)		(136)		(168)		(174)
Net cash used in investing activities		(23,111)		(2,765)		(25,443)		(23,111)
Cash flows from financing activities
Net decrease in demand deposits, interest-bearing checking, and savings accounts		(2,452)		(33,621)
Net (decrease) increase in time deposits		(5,507)		27,483
Net increase (decrease) in demand deposits, interest-bearing checking, and savings accounts						69,285		(2,452)
Net decrease in time deposits						(2,816)		(5,507)
Dividends paid		(1,306)		(1,192)		(1,318)		(1,306)
Purchase of Treasury shares		(1,172)		(560)		(13)		(1,172)
Cash received from option exercises		19		160		7		19
Treasury shares issued under dividend reinvestment plan		560		351		325		560
Net cash used in financing activities		(9,858)		(7,379)
Decrease in cash and cash equivalents		(30,478)		(5,924)
Net cash provided by (used in) financing activities						65,470		(9,858)
Increase (decrease) in cash and cash equivalents						50,476		(30,478)
Cash and cash equivalents at the beginning of the period		83,828		52,957		57,146		83,828
Cash and cash equivalents at the end of the period	$	53,350	$	47,033	$	107,622	$	53,350
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits and other borrowed funds	$	1,547	$	1,562	$	513	$	1,547
Income taxes					$	—	$	—
Noncash Activities
Lease liabilities arising from obtaining right-of-use assets	$	105	$	22	$	—	$	105
Life insurance claim receivable	$	3,613	$	—	$	—	$	3,613

The accompanying notes are an integral part of these unaudited financial statements.

FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly owned subsidiaries, Farmers and Merchants Trust Company of Chambersburg (the Bank) and Franklin Future Fund Inc. Farmers and Merchants Trust Company of Chambersburg is a commercial bank that has one wholly owned subsidiary, Franklin Financial Properties Corp. Franklin Financial Properties Corp. holds real estate assets that are leased by the Bank. Franklin Future Fund Inc. is a non-bank investment company. The activities of the non-bank ~~entities~~subsidiary are not significant to the consolidated totals. All significant intercompany transactions and account balances have been eliminated.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows as of March 31, ~~2020,~~2021, and for all other periods presented have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s ~~2019~~2020 Annual Report on Form 10-K. The consolidated results of operations for the three-month period ended March 31, ~~2020~~2021 are not necessarily indicative of the operating results for the full year. Management has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

The consolidated balance sheet at December 31, ~~2019~~2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks and cash items with original maturities less than 90 days.

Earnings per share are computed based on the weighted average number of shares outstanding during each period end. A reconciliation of the weighted average shares outstanding used to calculate basic earnings per share and diluted earnings per share follows:


	For the Three Months Ended				For the Three Months Ended
	March 31,				March 31,
(Dollars and shares in thousands, except per share data)	2020		2019		2021		2020
Weighted average shares outstanding (basic)		4,347		4,412		4,396		4,347
Impact of common stock equivalents		14		21		19		14
Weighted average shares outstanding (diluted)		4,361		4,433		4,415		4,361
Anti-dilutive options excluded from calculation		50		—		61		50
Net income	$	1,719	$	3,237	$	4,830	$	1,719
Basic earnings per share	$	0.40	$	0.73	$	1.10	$	0.40
Diluted earnings per share	$	0.39	$	0.73	$	1.09	$	0.39

‎

Note 2. Recent Accounting Pronouncements


~~ASU 2017-04, Goodwill (Topic 350)~~
~~Description~~		This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this standard, goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under the current guidance. Early adoption is permitted for any impairment tests performed after January 1, 2017, applied prospectively.
~~Effective Date~~		~~January 1, 2020~~
~~Effect on the Consolidated Financial Statements~~		The Corporation early adopted the ASU in the fourth quarter of 2018 with the completion of the 2018 impairment analysis. The ASU did not have a material effect on the consolidated financial statements.

~~ASU 2018-14, Disclosure Framework (Topic 715): Changes to the Disclosure Requirements for Defined Benefit Plans~~
~~Description~~		This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020; early adoption is permitted.
~~Effective Date~~		~~January 1, 2020~~
~~Effect on the Consolidated Financial Statements~~		~~The Corporation adopted the provisions of the ASU on January 1, 2020. As the ASU only revised disclosure requirements, it did not have a material effect on the consolidated financial statements.~~

Recently issued but not yet effective accounting standards

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Description		This standard requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. The ASU replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.
Effective Date		January 1, 2023
Effect on the Consolidated Financial Statements		We have formed an implementation team led by the Corporation's Risk Management function. The team is reviewing the requirements of the ASU and evaluating methods and models for implementation. ~~The~~As of the beginning of the first reporting period in which the new standard is adopted, the Corporation expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses, which will flow through retained earnings. After adoption, the new standard will result in earlier recognition of additions to the allowance for loan losses and possibly a larger allowance for loan loss balance with a corresponding increase in the provision for loan losses in results of operations; however, the Corporation is continuing to evaluate the impact of the pending adoption of the new standard on its consolidated financial statements. A third-party vendor has been selected to assist with the CECL calculations and the implementation process has started. The Corporation expects to be able to run the CECL model in test mode in ~~2020.~~2021.

ASU 2019-05, Financial Instruments - Credit Losses (Topic 326):Targeted Transition Relief
Description		This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 has the same effective date as ASU 2016-13. On October 16,2019, FASB approved its August 2019 proposal to grant certain small public companies a delay in the effective date of ASU 2016-13. For the Corporation, the delay makes the ASU effective January 2023. Since the Corporation currently meets the SEC definition of a small reporting company, the delay will be ~~application~~applied to the Corporation. Early adoption is permitted.
Effective Date		January 1, 2023
Effect on the Consolidated Financial Statements		The Corporation will continue to review the ASU as part of its adoption of ASU 2016-13.

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Description		This ASU provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: (1) a change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debts, leases, and other arrangements that meet specific criteria, and (2) when updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship.
Effective Date		March 12, 2020 through December 31, 2022
Effect on the Consolidated Financial Statements		The Corporation will continue to review the ASU as part of its adoption but does not expect it to have a material effect on the consolidated financial statements.

Note 3. Accumulated Other Comprehensive ~~Loss~~Income (Loss)

The components of accumulated other comprehensive ~~losses,~~income (loss), net of income tax effects, included in shareholders' equity are as follows:

Unrealized
Gains and Losses on
Available-for-sale
Defined Benefit
(Dollars in thousands)
Securities
Pension Items
Total
March 31, 2020
Beginning Balance
$
185
$
(6,171)
$
(5,986)
Other comprehensive income before reclassification
1,618
—
1,618
Amounts reclassified from accumulated other comprehensive income
8
—
8
Current period other comprehensive income
1,626
—
1,626
Ending balance
$
1,811
$
(6,171)
$
(4,360)
March 31, 2019
Beginning Balance
$
(870)
$
(5,510)
$
(6,380)
Other comprehensive income before reclassification
1,117
—
1,117
Amounts reclassified from accumulated other comprehensive income
(18)
—
(18)
Current period other comprehensive income
1,099
—
1,099
Ending balance
$
229
$
(5,510)
$
(5,281)



	March 31,		December 31,
(Dollars in thousands)	2021		2020

Net unrealized gains on debt securities	$	1,994	$	12,571
Tax effect		(419)		(2,640)
Net of tax amount	$	1,575	$	9,931

Accumulated pension adjustment	$	(8,533)	$	(8,533)
Tax effect		1,792		1,792
Net of tax amount	$	(6,741)	$	(6,741)

Total accumulated other comprehensive (loss)/income	$	(5,166)	$	3,190

Note 4. Investments

Available for Sale (AFS) Securities

The amortized cost and estimated fair value of AFS securities as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:



(Dollars in thousands)			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
March 31, 2020	cost		gains		losses		value
March 31, 2021									cost		gains		losses		value
U.S. Government and Agency securities	$	13,602	$	57	$	(34)	$	13,625	$	21,070	$	16	$	(170)	$	20,916
Municipal securities		94,560		2,892		(242)		97,210		235,808		5,582		(4,132)		237,258
Trust preferred securities		4,102		—		(556)		3,546
Corporate securities										22,268		153		(264)		22,157
Agency mortgage-backed securities		68,970		1,638		(461)		70,147		85,429		1,360		(815)		85,974
Private-label mortgage-backed securities		316		11		(4)		323		11,966		45		(62)		11,949
Asset-backed securities		24,197		28		(1,036)		23,189		43,643		390		(109)		43,924
	$	205,747	$	4,626	$	(2,333)	$	208,040	$	420,184	$	7,546	$	(5,552)	$	422,178



(Dollars in thousands)			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
December 31, 2019	cost		gains		losses		value
December 31, 2020									cost		gains		losses		value
U.S. Government and Agency securities	$	8,418	$	30	$	(20)	$	8,428	$	12,594	$	20	$	(40)	$	12,574
Municipal securities		90,865		1,418		(997)		91,286		236,253		11,020		(219)		247,054
Trust preferred securities		4,097		—		(130)		3,967
Corporate securities										20,421		22		(155)		20,288
Agency mortgage-backed securities		58,503		435		(234)		58,704		70,443		1,905		(107)		72,241
Private-label mortgage-backed securities		398		31		—		429		8,412		56		(15)		8,453
Asset-backed securities		24,918		6		(305)		24,619		36,246		249		(165)		36,330
	$	187,199	$	1,920	$	(1,686)	$	187,433	$	384,369	$	13,272	$	(701)	$	396,940

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the fair value of ~~AFS~~debt securities pledged to secure public funds and trust deposits totaled ~~$98.0~~$129.1 million and ~~$107.1~~$137.4 million, respectively. The Bank has no investment in a single issuer that exceeds 10% of shareholders’ equity.

The amortized cost and estimated fair value of debt securities at March 31, ~~2020,~~2021, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities. Securities not due at a single maturity date are presented separately.

(Dollars in thousands)
Amortized
‎cost
Fair
‎value
Due in one year or less
$
12,900
$
12,978
Due after one year through five years
31,461
31,369
Due after five years through ten years
76,697
77,637
Due after ten years
15,403
15,586
136,461
137,570
Mortgage-backed securities
69,286
70,470
$
205,747
$
208,040

(Dollars in thousands)	Amortized ‎cost		Fair ‎value
Due in one year or less	$	2,361	$	2,367
Due after one year through five years		21,738		22,274
Due after five years through ten years		174,745		178,862
Due after ten years		80,302		76,828
		279,146		280,331
Mortgage-backed and asset-backed securities		141,038		141,847
	$	420,184	$	422,178

The composition of the net realized gains (losses) on ~~AFS~~debt securities for the three months ended are as follows:


	For the Three Months Ended				For the Three Months Ended
	March 31,				March 31,
(Dollars in thousands)	2020		2019		2021		2020
Proceeds	$	165	$	3,876	$	—	$	165

Gross gains realized		—		33		—		—
Gross losses realized		(10)		(9)		—		(10)
Net gains (losses) realized	$	(10)	$	24
Net (losses) gains realized					$	—	$	(10)

Tax benefit (provision) on net (losses) gains realized	$	2	$	(5)	$	—	$	2

Impairment:

The ~~AFS~~debt securities portfolio contained ~~105~~205 securities with ~~$76.5~~$178.6 million of temporarily impaired fair value and ~~$2.3~~$5.6 million in unrealized losses at March 31, ~~2020.~~2021. The total unrealized loss position has increased ~~$647 thousand~~$4.9 million since year-end ~~2019.~~2020.

For securities with an unrealized loss, Management applies a systematic methodology in order to perform an assessment of the potential for other-than-temporary impairment. In the case of debt securities, investments considered for other-than-temporary impairment: (1) had a specified maturity or repricing date; (2) were generally expected to be redeemed at ~~par,~~par; and (3) were expected to achieve a recovery in market value within a reasonable period of time. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. The impairment identified on debt securities and subject to assessment at March 31, ~~2020,~~2021, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted.

‎

The following table reflects temporary impairment in the AFS portfolio, aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:



	March 31, 2020															March 31, 2021
	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

U.S. Government and Agency ‎ securities	$	6,681	$	(27)	8	$	1,284	$	(7)	7	$	7,965	$	(34)	15	$	9,832	$	(134)	7	$	7,629	$	(36)	15	$	17,461	$	(170)	22
Municipal securities		19,666		(235)	21		796		(7)	1		20,462		(242)	22		97,958		(4,132)	107		—		—	—		97,958		(4,132)	107
Trust preferred securities		840		(119)	1		2,706		(437)	4		3,546		(556)	5
Corporate securities																	9,677		(173)	19		2,806		(91)	3		12,483		(264)	22
Agency mortgage-backed securities		22,506		(459)	35		312		(2)	1		22,818		(461)	36		31,182		(809)	32		1,504		(6)	3		32,686		(815)	35
Private-label mortgage-backed securities		123		(4)	1		—		—	—		123		(4)	1		6,828		(62)	5		—		—	—		6,828		(62)	5
Asset-backed securities		15,252		(554)	16		6,300		(482)	10		21,552		(1,036)	26		3,236		(29)	3		7,983		(80)	11		11,219		(109)	14
Total temporarily impaired ‎ securities	$	65,068	$	(1,398)	82	$	11,398	$	(935)	23	$	76,466	$	(2,333)	105	$	158,713	$	(5,339)	173	$	19,922	$	(213)	32	$	178,635	$	(5,552)	205



	December 31, 2019															December 31, 2020
	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

U.S. Government and Agency ‎ securities	$	2,559	$	(12)	6	$	1,335	$	(8)	7	$	3,894	$	(20)	13	$	3,966	$	(21)	5	$	4,185	$	(19)	11	$	8,151	$	(40)	16
Municipal securities		38,874		(966)	40		2,655		(31)	4		41,529		(997)	44		27,022		(219)	28		—		—	—		27,022		(219)	28
Trust preferred securities		—		—	—		3,967		(130)	5		3,967		(130)	5
Corporate securities																	7,576		(37)	13		3,040		(118)	4		10,616		(155)	17
Agency mortgage-backed securities		21,185		(185)	32		6,555		(49)	22		27,740		(234)	54		18,390		(101)	17		3,355		(6)	5		21,745		(107)	22
Private-label mortgage-backed securities																	2,506		(15)	2		—		—	—		2,506		(15)	2
Asset-backed securities		17,644		(128)	19		5,669		(177)	9		23,313		(305)	28		1,458		(12)	2		11,452		(153)	15		12,910		(165)	17
Total temporarily impaired ‎ securities	$	80,262	$	(1,291)	97	$	20,181	$	(395)	47	$	100,443	$	(1,686)	144	$	60,918	$	(405)	67	$	22,032	$	(296)	35	$	82,950	$	(701)	102

The following table represents the cumulative credit losses on ~~AFS~~debt securities recognized in earnings for:

Three Months Ended
(Dollars in thousands)
March 31,
2020
2019
Balance of cumulative credit-related OTTI at January 1
$
272
$
272
Additions for credit-related OTTI not previously recognized
—
—
Additional increases for credit-related OTTI previously recognized when there is
no intent to sell and no requirement to sell before recovery of amortized cost basis
—
—
Decreases for previously recognized credit-related OTTI because there was an intent to sell
—
—
Reduction for increases in cash flows expected to be collected
—
—
Balance of credit-related OTTI at March 31
$
272
$
272



	Three Months Ended
(Dollars in thousands)	March 31,
	2021		2020
Balance of cumulative credit-related OTTI at January 1	$	272	$	272
Decreases for previously recognized credit losses on securities that paid off		(15)		—
Balance of credit-related OTTI at March 31	$	257	$	272

Equity Securities at Fair Value

The Corporation owns 1one equity ~~investment.~~investment with a readily determinable fair value. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, this investment was reported at fair value of ~~$313~~$444 thousand and ~~$440~~$391 thousand, respectively, with changes in value reported through income.

Note 5. Loans

The Bank reports its loan portfolio based on the primary collateral of the loan. It further classifies these loans by the primary purpose, either consumer or commercial. The Bank’s residential real estate loans include long-term loans to individuals and businesses secured by mortgages on the borrower’s real property and include home equity loans. Construction loans are made to finance the purchase of land and the construction of residential and commercial buildings thereon and are secured by mortgages on real estate. Commercial real estate loans include construction, owner and non-owner occupied properties and farm real estate. Commercial loans are made to businesses of various sizes for a variety of purposes including property, plant and equipment, working capital and loans to government municipalities. Commercial lending is concentrated in the Bank’s primary market, but also includes purchased loan participations. Consumer loans are comprised of installment loans and unsecured personal lines of credit.

Each class of loans involves a different kind of risk. However, risk factors such as changes in interest rates, general economic conditions and changes in collateral values are common across all classes. The risk of each loan class is presented below.

Residential Real Estate 1-4 ~~family~~Family

The largest risk in residential real estate loans to retail customers is the borrower’s inability to repay the loan due to the loss of the primary source of income. The Bank attempts to mitigate this risk through prudent underwriting standards including employment history, current financial condition and credit history. These loans are generally owner occupied and serve as the borrower’s primary residence. Commercial purpose loans, secured by residential real estate, are usually dependent upon repayment from the rental income or other business purposes. These loans are generally non-owner occupied. In addition to the real estate collateral, these loans may have personal guarantees or UCC filings on other business assets. If a payment default occurs on a 1-4 family residential real estate loan, the collateral serves as a source of repayment, but may be subject to a change in value due to economic conditions.

Residential Real Estate Construction

This class includes loans to individuals for construction of a primary residence and tocontractors and developers to improve real estate and construct residential properties. Construction loans to individuals generally bear the same risk as 1-4 family residential loans. Additional risks may include cost overruns, delays in construction or contractor problems.

Loans to contractors and developers are primarily dependent on the sale of improved lots or finished homes for repayment. Risks associated with these loans include the borrower’s character and capacity to complete a development, the effect of economic conditions on the valuation of lots or homes, cost overruns, delays in construction or contractor problems. In addition to real estate collateral, these loans may have personal guarantees or UCC filings on other business assets, depending on the financial strength and experience of the developer. Real estate construction loans are monitored on a regular basis by either an independent third party or the responsible loan officer, depending on the size and complexity of the project. This monitoring process includes at a minimum, the submission of invoices or ~~AIA~~American Institute of Architects (AIA) documents detailing the cost incurred by the borrower, on-site inspections, and an authorizing signature for disbursement of funds.

Commercial Real Estate

Commercial real estate loans may be secured by various types of commercial property including retail space, office buildings, warehouses, hotels and motel, manufacturing facilities, and agricultural land.

Commercial real estate loans present a higher level of risk than residential real estate loans. Repayment of these loans is normally dependent on cash-flow generated by the operation of a business that utilizes the real estate. The successful operation of the business, and therefore repayment ability, may be affected by general economic conditions outside of the control of the operator. On most commercial real estate loans ongoing monitoring of cash flow and other financial performance indictors is completed annually through financial statement analysis. In addition, the value of the collateral may be negatively affected by economic conditions and may be insufficient to repay the loan in the event of default. In the event of foreclosure, commercial real estate may be more difficult to liquidate than residential real estate.

Commercial

Commercial loans are made for various business purposes to finance equipment, inventory, accounts receivables, and operating liquidity. These loans are generally secured by business assets or equipment, non-real estate collateral and/or personal guarantees.

Commercial loans present a higher level of credit risk than other loans because repayment ability is usually dependent on cash-flow from a business operation that can be affected by general economic conditions. On most Commercial loans ongoing monitoring of cash flow and other financial performance indictors at least annually through financial statement analysis. In the event of a default, collateral for these loans may be more difficult to liquidate, and the valuation of the collateral may decline more quickly than loans secured by other types of collateral.

Loans to governmental municipalities are also included in the Commercial class. These loans generally have less risk than ~~C&I~~Commercial & Industrial (C&I) loans due to the taxing authority of the municipality and its ability to assess fees on services.

This class also includes loans made as part of the Paycheck Protection Program (PPP). The PPP is a small business loan program designed to assist in allowing small businesses to keep workers on the payroll during the COVID-19 pandemic. When workers are kept on the payroll for the qualifying period, the loan could be forgiven if the small business incurs eligible expenses. The PPP loans are 100 percent guaranteed by the SBA and have a maturity of two years or five years with a fixed interest rate of 1% for the life of the loan. Because the PPP loans are 100% guaranteed by the SBA, they present no credit risk to the Bank once the SBA guarantee is fulfilled, if necessary. However, if the SBA does not grant loan forgiveness, the PPP loan would present the same risk factors as any other commercial loan. The PPP loan is only designed to cover short-term operating needs of the borrower. If the economy does not recover quickly from the pandemic and the borrower experiences long-term operational problems beyond the PPP funding, the performance of other loans to these customers could begin to deteriorate.

Consumer

These loans are made for a variety of reasons to consumers and include term loans and personal lines-of credit. The loans may be secured or unsecured. Repayment is primarily dependent on the income of the borrower and to a lesser extent the sale of collateral. The underwriting of these loans is based on the consumer’s ability and willingness to repay and is determined by the borrower’s employment history, current financial condition and credit background. Collateral for these loans, if any, usually depreciates quickly and therefore, may not be adequate to repay the loan if it is repossessed. Therefore, the overall health of the economy, including unemployment rates and wages, will have an effect on the credit quality in this loan class.

‎

1011

A summary of loans outstanding, by class, at the end of the reporting periods is as follows:



	March 31,		December 31,			March 31,		December 31,
(Dollars in thousands)	2020		2019			2021		2020
Residential Real Estate 1-4 Family
Consumer first liens	$	82,719	$	85,319		$	73,991	$	77,373
Commercial first lien		60,587		57,627			58,018		59,851
Total first liens		143,306		142,946			132,009		137,224

Consumer junior liens and lines of credit		45,269		42,715			61,707		60,935
Commercial junior liens and lines of credit		5,397		4,882			4,244		4,425
Total junior liens and lines of credit		50,666		47,597			65,951		65,360
Total residential real estate 1-4 family		193,972		190,543			197,960		202,584

Residential real estate - construction
Consumer		4,523		4,107			7,804		6,751
Commercial		10,959		9,216			10,814		9,558
Total residential real estate construction		15,482		13,323			18,618		16,309

Commercial real estate		494,143		494,262			493,544		503,977
Commercial		226,128		230,007			283,705		281,257
Total commercial		720,271		724,269			777,249		785,234

Consumer		6,661		6,440			7,106		5,577
		936,386		934,575			1,000,933		1,009,704
Less: Allowance for loan losses		(14,730)		(11,966)			(16,136)		(16,789)
Net Loans	$	921,656	$	922,609		$	984,797	$	992,915

Included in the loan balances are the following:
Net unamortized deferred loan (fees) costs	$	397	$	178		$	(374)	$	8

Paycheck Protection Program (PPP) loans (included in Commercial loans above)					Paycheck Protection Program (PPP) loans (included in Commercial loans above)
Two-year loans						$	3,455	$	5,378
Five-year loans							52,418		46,912
Total Paycheck Protection Program loans						$	55,873	$	52,290

Net unamortized deferred PPP loan fees (included in Net unamortized deferred loan fees above)
Two-year loans						$	(63)	$	(165)
Five-year loans							(1,617)		(1,178)
Total net unamortized deferred PPP loan fees						$	(1,680)	$	(1,343)

Loans pledged as collateral for borrowings and commitments from:
FHLB	$	764,056	$	764,340		$	695,190	$	840,850
Federal Reserve Bank		49,636		32,155			50,682		50,605
	$	813,692	$	796,495		$	745,872	$	891,455

Note 6. Loan Quality and Allowance for Loan Losses

The following table presents, by class, the activity in the Allowance for Loan Losses (ALL) for the periods shown:


	Residential Real Estate 1-4 Family																Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial										First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total		Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total

ALL at December 31, 2020																	$	555	$	226	$	294	$	9,163	$	5,679	$	97	$	775	$	16,789
Charge-offs																		—		—		—		(13)		(5)		(18)		—		(36)
Recoveries																		—		169		—		—		7		7		—		183
Provision																		(108)		(184)		24		(365)		(208)		27		14		(800)
ALL at March 31, 2021																	$	447	$	211	$	318	$	8,785	$	5,473	$	113	$	789	$	16,136

ALL at December 31, 2019	$	416	$	119	$	184	$	6,022	$	3,815	$	84	$	1,326	$	11,966	$	416	$	119	$	186	$	6,607	$	4,022	$	84	$	532	$	11,966
Charge-offs		—		—		—		—		(220)		(30)		—		(250)		-		—		—		—		(220)		(30)		—		(250)
Recoveries		3		—		—		—		5		6		—		14		3		—		—		—		5		6		—		14
Provision		144		59		82		1,582		886		38		209		3,000		144		59		82		1,660		889		38		128		3,000
ALL at March 31, 2020	$	563	$	178	$	266	$	7,604	$	4,486	$	98	$	1,535	$	14,730	$	563	$	178	$	268	$	8,267	$	4,696	$	98	$	660	$	14,730

ALL at December 31, 2018	$	491	$	133	$	108	$	5,698	$	4,511	$	70	$	1,404	$	12,415
Charge-offs		(33)		(1)		(3)		(63)		(61)		(26)		—		(187)
Recoveries		1		—		—		1		42		10		—		54
Provision		28		—		47		270		70		18		(34)		399
ALL at March 31, 2019	$	487	$	132	$	152	$	5,906	$	4,562	$	72	$	1,370	$	12,681

The following table presents, by class, loans that were evaluated for the ALL under the specific reserve (individually) and those that were evaluated under the general reserve (collectively) and the amount of the ALL established in each class as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:



	Residential Real Estate 1-4 Family																Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial										First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total		Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total

March 31, 2020
March 31, 2021
Loans evaluated for ALL:
Individually	$	653	$	—	$	521	$	10,795	$	—	$	—	$	—	$	11,969	$	631	$	—	$	511	$	16,000	$	—	$	—	$	—	$	17,142
Collectively		142,653		50,666		14,961		483,348		226,128		6,661		—		924,417		131,378		65,951		18,107		477,544		283,705		7,106		—		983,791
Total	$	143,306	$	50,666	$	15,482	$	494,143	$	226,128	$	6,661	$	—	$	936,386	$	132,009	$	65,951	$	18,618	$	493,544	$	283,705	$	7,106	$	—	$	1,000,933

ALL established for ‎ loans evaluated:
Individually	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	228	$	—	$	—	$	—	$	228
Collectively		563		178		266		7,604		4,486		98		1,535		14,730		447		211		318		8,557		5,473		113		789		15,908
ALL at March 31, 2020	$	563	$	178	$	266	$	7,604	$	4,486	$	98	$	1,535	$	14,730
ALL at March 31, 2021																	$	447	$	211	$	318	$	8,785	$	5,473	$	113	$	789	$	16,136

December 31, 2019
December 31, 2020
Loans evaluated for ALL:
Individually	$	659	$	—	$	523	$	10,994	$	—	$	—	$	—	$	12,176	$	637	$	—	$	512	$	16,104	$	—	$	—	$	—	$	17,253
Collectively		142,287		47,597		12,800		483,268		230,007		6,440		—		922,399		136,587		65,360		15,797		487,873		281,257		5,577		—		992,451
Total	$	142,946	$	47,597	$	13,323	$	494,262	$	230,007	$	6,440	$	—	$	934,575	$	137,224	$	65,360	$	16,309	$	503,977	$	281,257	$	5,577	$	—	$	1,009,704

ALL established for ‎ loans evaluated:
Individually	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	228	$	—	$	—	$	—	$	228
Collectively		416		119		184		6,022		3,815		84		1,326		11,966		555		226		294		8,935		5,679		97		775		16,561
ALL at December 31, 2019	$	416	$	119	$	184	$	6,022	$	3,815	$	84	$	1,326	$	11,966
ALL at December 31, 2020																	$	555	$	226	$	294	$	9,163	$	5,679	$	97	$	775	$	16,789

‎

1213

The following table shows additional information about those loans considered to be impaired at March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:


	Impaired Loans										Impaired Loans
	With No Allowance				With Allowance						With No Allowance				With Allowance
(Dollars in thousands)			Unpaid				Unpaid						Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal		Related		Recorded		Principal		Recorded		Principal		Related
March 31, 2020	Investment		Balance		Investment		Balance		Allowance
March 31, 2021											Investment		Balance		Investment		Balance		Allowance
Residential Real Estate 1-4 Family
First liens	$	653	$	653	$	—	$	—	$	—	$	631	$	631	$	—	$	—	$	—
Junior liens and lines of credit		—		—		—		—		—		—		—		—		—		—
Total		653		653		—		—		—		631		631		—		—		—
Residential real estate - construction		521		729		—		—		—		511		729		—		—		—
Commercial real estate		10,795		11,909		—		—		—		10,259		10,987		5,741		5,741		228
Commercial		—		—		—		—		—		—		—		—		—		—
Total	$	11,969	$	13,291	$	—	$	—	$	—	$	11,401	$	12,347	$	5,741	$	5,741	$	228


December 31, 2019
December 31, 2020
Residential Real Estate 1-4 Family
First liens	$	659	$	659	$	—	$	—	$	—	$	637	$	637	$	—	$	—	$	—
Junior liens and lines of credit		—		—		—		—		—		—		—		—		—		—
Total		659		659		—		—		—		637		637		—		—		—
Residential real estate - construction		523		729		—		—		—		512		729		—		—		—
Commercial real estate		10,994		12,096		—		—		—		10,402		11,107		5,702		5,702		228
Commercial		—		—		—		—		—		—		—		—		—		—
Total	$	12,176	$	13,484	$	—	$	—	$	—	$	11,551	$	12,473	$	5,702	$	5,702	$	228

The following table shows the average of impaired loans and related interest income for the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


	Three Months Ended				Three Months Ended
	March 31, 2020				March 31, 2021
	Average		Interest		Average		Interest
(Dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Residential Real Estate 1-4 Family
First liens	$	656	$	10	$	634	$	8
Junior liens and lines of credit		—		—		—		—
Total		656		10		634		8
Residential real estate - construction		521		—		512		—
Commercial real estate		10,899		94		16,043		91
Commercial		—		—		—		—
Total	$	12,076	$	104	$	17,189	$	99

	Three Months Ended				Three Months Ended
	March 31, 2019				March 31, 2020
	Average		Interest		Average		Interest
(Dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Residential Real Estate 1-4 Family
First liens	$	893	$	11	$	656	$	10
Junior liens and lines of credit		44		—		—		—
Total		937		11		656		10
Residential real estate - construction		653		—		521		—
Commercial real estate		13,494		102		10,899		94
Commercial		129		—		—		—
Total	$	15,213	$	113	$	12,076	$	104

‎

1314

The following table presents the aging of payments of the loan portfolio:



(Dollars in thousands)			Loans Past Due and Still Accruing										Total				Loans Past Due and Still Accruing										Total
	Current		30-59 Days		60-89 Days		90 Days+		Total		Non-Accrual		Loans		Current		30-59 Days		60-89 Days		90 Days+		Total		Non-Accrual		Loans
March 31, 2020
March 31, 2021
Residential Real Estate 1-4 Family
First liens	$	142,621	$	588	$	55	$	1	$	644	$	41	$	143,306	$	131,794	$	174	$	—	$	—	$	174	$	41	$	132,009
Junior liens and lines of credit		50,581		40		—		31		71		14		50,666		65,768		136		38		—		174		9		65,951
Total		193,202		628		55		32		715		55		193,972		197,562		310		38		—		348		50		197,960
Residential real estate - construction		14,961		—		—		—		—		521		15,482		18,107		—		—		—		—		511		18,618
Commercial real estate		490,468		110		643		—		753		2,922		494,143		485,377		—		—		—		—		8,167		493,544
Commercial		225,310		288		355		—		643		175		226,128		283,548		50		—		—		50		107		283,705
Consumer		6,625		30		6		—		36		—		6,661		7,091		12		2		1		15		—		7,106
Total	$	930,566	$	1,056	$	1,059	$	32	$	2,147	$	3,673	$	936,386	$	991,685	$	372	$	40	$	1	$	413	$	8,835	$	1,000,933



December 31, 2019
December 31, 2020
Residential Real Estate 1-4 Family
First liens	$	141,843	$	646	$	358	$	31	$	1,035	$	68	$	142,946	$	137,056	$	43	$	58	$	26	$	127	$	41	$	137,224
Junior liens and lines of credit		47,420		70		30		46		146		31		47,597		65,212		115		23		—		138		10		65,360
Total		189,263		716		388		77		1,181		99		190,543		202,268		158		81		26		265		51		202,584
Residential real estate - construction		12,800		—		—		—		—		523		13,323		15,797		—		—		—		—		512		16,309
Commercial real estate		490,114		813		326		—		1,139		3,009		494,262		495,609		74		261		—		335		8,033		503,977
Commercial		229,659		31		120		—		151		197		230,007		280,930		219		—		—		219		108		281,257
Consumer		6,397		25		18		—		43		—		6,440		5,525		38		2		12		52		—		5,577
Total	$	928,233	$	1,585	$	852	$	77	$	2,514	$	3,828	$	934,575	$	1,000,129	$	489	$	344	$	38	$	871	$	8,704	$	1,009,704

‎

The following table reports the risk rating for those loans in the portfolio that are assigned an individual risk rating. Consumer purpose loans are assigned a rating of either pass or substandard based on the performance status of the loans. Substandard consumer loans are comprised of loans 90 days or more past due and still accruing, and nonaccrual loans. Commercial purpose loans may be assigned any rating in accordance with the Bank’s internal risk rating system.



	Pass		OAEM		Substandard		Doubtful				Pass		OAEM		Substandard		Doubtful
(Dollars in thousands)	(1-5)		(6)		(7)		(8)		Total		(1-5)		(6)		(7)		(8)		Total

March 31, 2020
March 31, 2021
Residential Real Estate 1-4 Family
First liens	$	143,264	$	—	$	42	$	—	$	143,306	$	131,968	$	—	$	41	$	—	$	132,009
Junior liens and lines of credit		50,621		—		45		—		50,666		65,942		—		9		—		65,951
Total		193,885		—		87		—		193,972		197,910		—		50		—		197,960
Residential real estate - construction		14,961		—		521		—		15,482		18,107		—		511		—		18,618
Commercial real estate		484,031		5,951		4,161		—		494,143		438,443		36,607		18,494		—		493,544
Commercial		225,737		—		391		—		226,128		273,579		9,841		285		—		283,705
Consumer		6,661		—		—		—		6,661		7,105		—		1		—		7,106
Total	$	925,275	$	5,951	$	5,160	$	—	$	936,386	$	935,144	$	46,448	$	19,341	$	—	$	1,000,933



December 31, 2019
December 31, 2020
Residential Real Estate 1-4 Family
First liens	$	142,847	$	—	$	99	$	—	$	142,946	$	137,156	$	—	$	68	$	—	$	137,224
Junior liens and lines of credit		47,520		—		77		—		47,597		65,350		—		10		—		65,360
Total		190,367		—		176		—		190,543		202,506		—		78		—		202,584
Residential real estate - construction		12,800		—		523		—		13,323		15,797		—		512		—		16,309
Commercial real estate		483,878		5,875		4,509		—		494,262		449,478		35,947		18,552		—		503,977
Commercial		229,465		4		538		—		230,007		270,272		10,698		287		—		281,257
Consumer		6,440		—		—		—		6,440		5,565		—		12		—		5,577
Total	$	922,950	$	5,879	$	5,746	$	—	$	934,575	$	943,618	$	46,645	$	19,441	$	—	$	1,009,704

The following table presents information on the Bank’s Troubled Debt Restructuring (TDR) loans as of:


								Troubled Debt Restructurings										Troubled Debt Restructurings
								Within the Last 12 Months										Within the Last 12 Months
								That Have Defaulted										That Have Defaulted
(Dollars in thousands)	Troubled Debt Restructurings							On Modified Terms			Troubled Debt Restructurings							On Modified Terms
	Number of	Recorded						Number of	Recorded		Number of	Recorded						Number of	Recorded
	Contracts	Investment		Performing*		Nonperforming*		Contracts	Investment		Contracts	Investment		Performing*		Nonperforming*		Contracts	Investment
March 31, 2020
March 31, 2021
Residential real estate - construction	1		443	$	443	$	—	—	$	—	1	$	433	$	433	$	—	—	$	—
Residential real estate	4		652		652		—	—		—	4		631		631		—	—		—
Commercial real estate - owner occupied											4		1,213		1,213		—	—		—
Commercial real estate - farm land											6		2,224		1,542		682	—		—
Commercial real estate - construction and land development											2		6,038		6,038		—	—		—
Commercial real estate	11		9,220		8,244		976	—		—	2		322		117		205	—		—
Total	16	$	10,315	$	9,339	$	976	—	$	—	19	$	10,861	$	9,974	$	887	—	$	—


December 31, 2019
December 31, 2020
Residential real estate - construction	1	$	444	$	444	$	—	—	$	—	1	$	434	$	434	$	—	—	$	—
Residential real estate	4		659		659		—	—		—	4		637		637		—	—		—
Commercial real estate - owner occupied											4		1,224		1,224		—	—		—
Commercial real estate - farm land											6		2,257		2,257		—	—		—
Commercial real estate - construction and land development											2		6,129		6,129		—	—		—
Commercial real estate	11		9,343		9,343		—	—		—	2		330		122		208	—		—
Total	16	$	10,446	$	10,446	$	—	—	$	—	19	$	11,011	$	10,803	$	208	—	$	—

*The performing status is determined by the loan’s compliance with the modified terms.

‎

There were 0no new TDR loans during the first quarter of 2021.

The following table reports new TDR loans during 2020, ~~or 2019.~~ concession granted and the recorded investment as of March 31, 2021:


	New During Period
Twelve Months Ended	Number of		Pre-TDR		After-TDR		Recorded
December 31, 2020	Contracts		Modification		Modification		Investment	Concession
Commercial real estate - farm land	1	$	650	$	650	$	682	multiple
Commercial real estate - owner occupied	2		426		426		425	maturity
	3	$	1,076	$	1,076	$	1,107

Loans that have been modified on a good-faith basis in response to COVID-19 to borrowers who were classified as current prior to any relief are not TDRs as outlined in the March 22, 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.or Section 4013 of the CARES Act. Such short-term modifications (e.g., six months) may include payment deferrals, fee waivers, extension of payment terms or other delays in payment that are insignificant. Loans may be modified under Section 4013 until the earlier of January 1, 2022 or the 60th day after the end of the COVID-19 national emergency declared by the President. As of March 31, ~~2020,~~2021, the Bank has granted ~~approximately $30~~$68.1 million loan deferrals or modifications (approximately 3%7% of gross loans). outstanding.

Note 7. Leases

The Corporation leases various assets in the course of its operations that are subject to recognition on the balance sheet. The Corporation considers all of its leases to be operating leases and it has no finance leases. The leased assets are comprised of equipment, and buildings and land (collectively real estate). The equipment leases are shorter-term than the real estate leases, and generally have a fixed payment over a defined term without renewal options. Certain equipment leases have purchase options and it was determined the option was not reasonably certain to be exercised. The real estate leases are longer-term and may contain renewal options after the initial term, but none of the real estate leases contain a purchase option. The renewal options on real estate leases were reviewed and if it was determined the option was reasonably certain to be renewed, the option term was considered in the determination of the lease liability. There is only one real estate lease with a variable payment based on an index included in the lease liability. None of the leases contain any restrictive covenants and there are no significant leases that have not yet commenced. The discount rate used to determine the lease liability is based on the Bank’s fully secured borrowing rate from the Federal Home Loan Bank for a term similar to the lease term. Operating lease expense is included in net occupancy expense in the consolidated statements of income.

Lease costs:

The components of total lease cost were as follows:


	Three Months Ended		Three Months Ended		Three Months Ended ‎March 31,
(Dollars in thousands)	March 31, 2020		March 31, 2019		2021		2020
Operating lease cost	$	158	$	188	$	174	$	158
Short-term lease cost		2		6		—		2
Variable lease cost		14		11		24		14
Total lease cost	$	174	$	205	$	198	$	174

‎

1517

Supplemental Lease Information:


	Three Months Ended		Three Months Ended		Three Months Ended ‎March 31,
(Dollars in thousands)	March 31, 2020		March 31, 2019		2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	152		123	$	162	$	152

Weighted-average remaining lease term (years)		12.8		13.7		11.5		12.8
Weighted-average discount rate		3.53%		3.54%		3.34%		3.53%

Lease Obligations:

Future undiscounted lease payments for operating leases with initial terms of one year or more as of March 31, ~~2020~~2021 are as follows:


(Dollars in thousands)

2020	$	577
2021		556	$	494
2022		546		640
2023		552		650
2024		508		628
2025 and beyond		3,756
2025				588
2026 and beyond				3,395
Undiscounted cash flow		6,495		6,395
Imputed Interest		(1,336)		(1,170)
Total lease liability	$	5,159	$	5,225

Note 8. Other Real Estate Owned

~~Changes in~~The Bank had 0 other real estate owned ~~were as follows:~~at March 31, 2021 and December 31, 2020.

Three Months Ended
March 31,
(Dollars in thousands)
2020
2019
Balance at beginning of the period
$
—
$
2,684
Additions
—
—
Proceeds from dispositions
—
—
Gains on sales, net
—
—
Valuation adjustment
—
—
Balance at the end of the period
$
—
$
2,684

Note 9. Derivatives

The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.

The Corporation’s existing credit derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation ~~arrangements, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities.~~arrangements. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain lenders which participate in loans.

‎

1618

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the Balance Sheet.


	Fair Value of Derivative Instruments								Fair Value of Derivative Instruments
	Derivative Liabilities								Derivative Liabilities
(Dollars in thousands)	March 31, 2020				March 31, 2019				March 31, 2021				December 31, 2020
	Notional amount	Balance Sheet Location		Fair Value	Notional amount	Balance Sheet Location		Fair Value	Notional amount	Balance Sheet Location		Fair Value	Notional amount	Balance Sheet Location		Fair Value
Derivatives not designated as hedging instruments
Other Contracts	6,967	Other Liabilities	$	55	—	Other Liabilities	$	—	6,790	Other Liabilities	$	17	6,836	Other Liabilities	$	40
Total derivatives not designated as hedging instruments			$	55			$	—			$	17			$	40

The table below presents the effect of the Corporation’s derivative financial instruments that are not designated as hedging instruments on the Income Statement.


~~Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance~~
~~Derivatives Not Designated as Hedging Instruments under Subtopic 815-20~~	~~Location of Gain or (Loss) Recognized in Income on Derivative~~	~~Amount of Gain or (Loss) Recognized in Income on Derivatives~~
~~(Dollars in thousands)~~		~~Three Months Ended~~
		~~March 31, 2020~~		~~March 31, 2019~~
~~Other Contracts~~	~~Other income/(expense)~~	$	~~(36)~~	$	-


Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivatives
(Dollars in thousands)		Three Months Ended
		March 31, 2021		March 31, 2020
Other Contracts	Other income	$	23	$	(36)

As of March 31, ~~2020,~~2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was ~~$55~~$17 thousand.

Note 10. Pension

The components of pension expense for the periods presented are as follows:


	Three Months Ended				Three Months Ended
	March 31,				March 31,
(Dollars in thousands)	2020		2019		2021		2020
Components of net periodic cost:
Service cost	$	83	$	80	$	99	$	83
Interest cost		131		158		87		131
Expected return on plan assets		(269)		(270)		(274)		(269)
Settlement expense						108		—
Recognized net actuarial loss		226		152		285		226
Total pension expense	$	171	$	120	$	305	$	171

~~The Bank expects its pension expense to increase to approximately $680 thousand in 2020 compared to $421 thousand in 2019, due primarily to increases in recognized net actuarial losses.~~ The service cost component of pension expense is recorded in the salaries and employee benefits line ~~on the income statement. All~~and all other cost components are recorded in the ~~other expense~~nonservice pension line onof the ~~income statement.~~Consolidated Statements of Income.

Note 11. Fair Value Measurements and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates maybe different than the amounts reported at each year-end. The Corporation uses the exit price notion to measure the fair value of financial instruments.

FASB ASC Topic 820, “Financial Instruments”, requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring and

nonrecurring basis. The Corporation does not report any nonfinancial assets at fair value. FASB ASC Topic 820

establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1: Valuation is based on unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. There may be substantial differences in the assumptions used for securities within the same level. For example, prices for U.S. Agency securities have fewer assumptions and are closer to level 1 valuations than the private label ~~mortgage backed~~mortgage-backed securities that require more assumptions and are closer to level 3 valuations.

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Corporation’s assumptions regarding what market participants would assume when pricing a financial instrument.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following information regarding the fair value of the Corporation’s financial instruments should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’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 Corporation’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 Corporation’s financial instruments measured at fair value on a recurring and nonrecurring basis.

Equity Securities: Equity securities are valued using quoted market prices from nationally recognized markets (Level 1). Equity securities are measured at fair value on a recurring basis.

Investment securities: Fair values of investment securities available-for-sale were primarily measured using information from a third-party pricing service. This service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications. Level 2 investment securities are primarily comprised of debt securities issued by states and municipalities, corporations, mortgage-backed securities issued by government agencies, and government-sponsored enterprises. Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. Investment securities are measured at fair value on a recurring basis.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals conducted by an independent, licensed appraiser, less cost to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach (Level 2). If the appraiser makes an adjustment to account for differences between the comparable sales and income data available for similar loans, or if management adjusts the appraised value, then the fair value is considered Level 3. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy. NaN partial charge-offs on impaired loans were taken in the first quarter of ~~2020.~~2021. Impaired loans are measured at fair value on a nonrecurring basis.

‎

1820

Recurring Fair Value Measurements

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:



(Dollars in thousands)	Fair Value at March 31, 2020								Fair Value at March 31, 2021
Asset Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Equity securities, at fair value	$	313	$	—	$	—	$	313	$	444	$	—	$	—	$	444

Available for sale:
U.S. Government and Agency securities		—		13,625		—		13,625		9,832		11,084		—		20,916
Municipal securities		—		97,210		—		97,210		—		237,258		—		237,258
Trust preferred securities		—		3,546		—		3,546
Corporate securities										—		22,157		—		22,157
Agency mortgage-backed securities		—		70,147		—		70,147		—		85,974		—		85,974
Private-label mortgage-backed securities		—		323		—		323		—		11,949		—		11,949
Asset-backed securities		—		23,189		—		23,189		—		43,924		—		43,924
Total assets	$	313	$	208,040	$	—	$	208,353	$	10,276	$	412,346	$	—	$	422,622



(Dollars in thousands)	Fair Value at December 31, 2019								Fair Value at December 31, 2020
Asset Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Equity securities, at fair value	$	440	$	—	$	—	$	440	$	391	$	—	$	—	$	391

Available for sale:
U.S. Government and Agency securities		—		8,428		—		8,428		—		12,574		—		12,574
Municipal securities		—		91,286		—		91,286		—		247,054		—		247,054
Trust preferred securities		—		3,967		—		3,967
Corporate securities										—		20,288		—		20,288
Agency mortgage-backed securities		—		58,704		—		58,704		—		72,241		—		72,241
Private-label mortgage-backed securities		—		429		—		429		—		8,453		—		8,453
Asset-backed securities		—		24,619		—		24,619		—		36,330		—		36,330
Total assets	$	440	$	187,433	$	—	$	187,873	$	391	$	396,940	$	—	$	397,331

The fair value of derivative liabilities measured at fair value at March 31, 2021 and December 31, 2020 was $17 thousand and $40 thousand, respectively, and was considered immaterial.

Nonrecurring Fair Value Measurements

There were no assets measured at fair value on a nonrecurring basis as of March 31, ~~2020~~2021 and the following table presents the fair value measurement by level within the fair value hierarchy used at December 31, ~~2019:~~2020:



(Dollars in Thousands)	Fair Value at December 31, 2019								Fair Value at December 31, 2020
Asset Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Impaired loans (1)	$	—	$	—	$	1,080	$	1,080	$	—	$	—	$	5,474	$	5,474
Total assets	$	—	$	—	$	1,080	$	1,080	$	—	$	—	$	5,474	$	5,474

(1)Includes assets directly charged-down to fair value during the year-to-date period.

The Corporation did 0t record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at March 31, ~~2020.~~2021. For financial assets and liabilities measured at fair value on a recurring basis, there were 0 transfers of financial assets or liabilities between Level 1 and Level 2 during the period ending March 31, ~~2020.~~2021.

‎

There were 0 assets measured at fair value on a nonrecurring basis at March 31, ~~2020~~2021 and the following table presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis at December 31, ~~2019:~~2020:



(Dollars in thousands)					Range
December 31, ~~2019~~2020		Fair Value	Valuation Technique	Unobservable Input	Weighted Average
Impaired loans	$	~~1,080~~5,474	Appraisal	Appraisal ~~Adjustments~~Adjustment on	0% ~~- 100% (48%~~-100% (66%)
				Non-real estate assets

				Cost to sell	8%
(1) Includes assets directly charged-down to fair value during the year-to-date period.

The carrying amounts and estimated fair value of financial instruments not carried at fair value are as follows:



	March 31, 2020										March 31, 2021
	Carrying		Fair								Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets, carried at cost:
Cash and cash equivalents	$	53,350	$	53,350	$	53,350	$	—	$	—	$	107,622	$	107,622	$	107,622	$	—	$	—
Long-term interest-bearing deposits in other banks		10,738		10,738		10,738		—		—		10,995		10,995		10,995		—		—
Loans held for sale		2,751		2,751		—		2,751		—		4,699		4,799		—		4,799		—
Net loans		921,656		921,269		—		—		921,269		984,797		1,013,427		—		—		1,013,427
Accrued interest receivable		3,789		3,789		—		—		3,789		6,045		6,045		—		—		6,045

Financial liabilities:
Deposits	$	1,117,433	$	1,118,307	$	—	$	1,118,307	$	—	$	1,421,042	$	1,433,518	$	—	$	1,433,518	$	—
Subordinate notes												19,564		20,086		—		20,086		—
Accrued interest payable		302		302		—		302		—		415		415		—		415		—

	December 31, 2019										December 31, 2020
	Carrying		Fair								Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets, carried at cost:
Cash and cash equivalents	$	83,828	$	83,828	$	83,828	$	—	$	—	$	57,146	$	57,146	$	57,146	$	—	$	—
Long-term interest-bearing deposits in other banks		8,746		8,746		8,746		—		—		12,741		12,741		12,741		—		—
Loans held for sale		2,040		2,040		—		2,040		—		9,446		9,446		—	9,446	9,446		—
Net loans		922,609		918,640		—		—		918,640		992,915		990,867		—		—		990,867
Accrued interest receivable		3,845		3,845		—		—		3,845		6,410		6,410		—		—		6,410

Financial liabilities:
Deposits	$	1,125,392	$	1,125,877	$	—	$	1,125,877	$	—	$	1,354,573	$	1,355,086	$	—	$	1,355,086	$	—
Subordinate notes												19,555		19,750		—		19,750		—
Accrued interest payable		436		436		—		436		—		180		180		—		180		—

Note 12. Subordinated Notes

At March 31, 2021, the Corporation had $20.0 million of unsecured subordinated debt notes payable, $15.0 million which mature on September 1, 2030 and $5.0 million which mature on September 1, 2035. The notes are recorded on the consolidated balance sheet net of remaining debt issuance costs totaling $435.7 thousand at March 31, 2021, which is being amortized on a pro-rata basis over a 5-year and 10-year period, based on the call dates of the notes, on an effective interest method. The subordinated notes totaling $15.0 million have a fixed interest rate of 5.00% through September 1, 2025, then convert to a variable rate of 90-day Secured Overnight Financing Rate (SOFR) plus 4.93% for the applicable interest periods through maturity. The subordinated notes totaling $5.0 million have a fixed interest rate of 5.25% through September 1, 2030, then convert to a variable rate of 90-day SOFR plus 4.92% for the applicable interest periods through maturity. The Corporation may, at its option, redeem the notes, in whole or in part, at any time 5-years prior to the maturity. The notes are structured to qualify as Tier 2 Capital for the Corporation and there are no debt covenants on the notes.

Note 13. Capital Ratios

Capital adequacy for the Bank is currently defined by regulatory agencies through the use of several minimum required ratios. The capital ratios to be considered “well capitalized” are: (1) Common Equity Tier 1 (CET1) of 6.5%, (2) Tier 1 Leverage of 5%, (3) Tier 1 Risk-Based Capital of 8%, and (4) Total Risk-Based Capital of 10%. In addition, a capital conservation buffer of 2.50% is applicable to all of the capital ratios except for the Tier 1 Leverage ratio. The capital conservation buffer is equal to the lowest value of the three applicable capital ratios less the regulatory minimum for each respective capital measurement. The Bank’s capital conservation buffer at March 31, ~~2020~~2021 was ~~7.78% (total risk-based capital 15.78% less 8.00%)~~7.89% compared to the ~~2020~~ regulatory buffer of 2.50%. Compliance with the capital conservation buffer is required in order to avoid limitations to certain capital distributions and is in addition to the minimum required capital requirements. As of March 31, ~~2020,~~2021, the Bank was “well capitalized”.

In 2019, the Community Bank Leverage Ratio (CBLR) was approved by federal banking agencies as an optional capital measure available to Qualifying Community Banking Organizations (QCBO). If a bank qualifies as a QCBR and maintains a CBLR of 9% or greater, the bank would be considered “well-capitalized” for regulatory capital purposes and exempt from complying with the risk-based capital rule described above. The CBLR rule took effect January 1, 2020 and banks ~~desiring to~~could opt-in ~~can do so~~ through an election in the first quarter 2020 regulatory filing. The Bank ~~meets~~met the criteria of a QCBR but did not opt-in to the CBLR.

The Bank is participating in the ~~Paycheck Protection Program (PPP)~~PPP and the Paycheck Protection Program Liquidity Facility (PPPLF) to fund PPP Loans. In accordance with regulatory guidance, PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios. PPP loans will also carry a 0% risk-weight for risk-based capital rules.

The consolidated asset limit on small bank holding companies is $3$3.0 billion and a company with assets under that limit is not subject to the consolidated capital rules but may file reports that include capital amounts and ratios. The Corporation has elected to file those reports.

The following table summarizes the regulatory capital requirements and results as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 for the Corporation and the Bank:


				Regulatory Ratios					Regulatory Ratios
				Adequately	Well				Adequately	Well
		March 31,	December 31,	Capitalized	Capitalized		March 31,	December 31,	Capitalized	Capitalized
(Dollars in thousands)		2020	2019	Minimum	Minimum		2021	2020	Minimum	Minimum

Common Equity Tier 1 Risk-based Capital Ratio (1)
Franklin Financial Services Corporation		14.73%	14.82%	N/A	N/A		14.80%	14.32%	N/A	N/A
Farmers & Merchants Trust Company		14.52%	14.62%	4.500%	6.50%		14.63%	14.07%	4.50%	6.50%

Tier 1 Risk-based Capital Ratio (2)
Franklin Financial Services Corporation		14.73%	14.82%	N/A	N/A		14.80%	14.32%	N/A	N/A
Farmers & Merchants Trust Company		14.52%	14.62%	6.000%	8.00%		14.63%	14.07%	6.00%	8.00%

Total Risk-based Capital Ratio (3)
Franklin Financial Services Corporation		15.99%	16.08%	N/A	N/A		18.18%	17.69%	N/A	N/A
Farmers & Merchants Trust Company		15.78%	15.87%	8.000%	10.00%		15.89%	15.33%	8.00%	10.00%

Tier 1 Leverage Ratio (4)
Franklin Financial Services Corporation		9.85%	9.72%	N/A	N/A		8.76%	8.69%	N/A	N/A
Farmers & Merchants Trust Company		9.71%	9.59%	4.000%	5.00%		8.65%	8.54%	4.00%	5.00%

(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets	(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets					(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets
(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets	(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets					(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets

‎

Note ~~13.~~14. Revenue Recognition

All of the Corporation’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income as presented in ~~our~~its consolidated statements of income. Revenue generating activities that fall within the scope of ASC 606 are described as follows:

Investment and Trust Service Fees -– these represent fees from wealth management (assets under management), fees from the management and settlement of estates and commissions from the sale of investment and insurance products.

Asset management fees are generally assessed based on a tiered fee schedule, based on the value of assets under management, and are recognized monthly when the service obligation is completed. Fees recognized were $1.5 million for the first quarter of 2021 and $1.3 million for the first quarter of ~~2020 and 2019.~~2020.

Fees for estate management services are based on the estimated fair value of the estate. These fees are generally recognized monthly over an 18-month period that Management has determined to represent the average time to fulfill the performance obligations of the contract. Management has the discretion to adjust this time period as needed based upon the nature and complexity of an individual estate. Fees recognized were $84 thousand for the first quarter of 2021, compared to $33 thousand for the first quarter of ~~2020, compared to $70 thousand for the first quarter of 2019.~~2020.

Commissions from the sale of investment and insurance products are recognized upon the completion of the transaction. Commissions recognized were $37 thousand for the first quarter of 2021, compared to $74 thousand for the first quarter ~~of 2020 and $68 thousand for 2019.~~2020.

Loan Service Charges – these represent fees on loans for services or charges that occur after the loan has been booked, for example, late payment fees. These also include fees for mortgages settled for third-party mortgage companies. All of these fees are transactional in nature and are recognized upon completion of the transaction which represents the performance obligation.

Deposit Service Charges and Fees – these represent fees from deposit customers for transaction based, account maintenance, and overdraft services. Transaction based fees include, but are not limited to, stop payment fees and overdraft fees. These fees are recognized at the time of the transaction when the performance obligation has been fulfilled. Account maintenance fees and account analysis ~~fee~~fees are earned over the course of a month, representing the period of the performance obligation, and are recognized monthly.

Debit Card Income – this represents interchange fees from cardholder transactions conducted through the card payment network. Cardholders use the debit card to conduct point-of-sale transactions that produce interchange fees. The

fees are transaction based and the fee is recognized with the processing of the transaction. These fees are reported net of cardholder rewards.

Other Service Charges and Fees – these are comprised primarily of merchant card fees, credit card fees, ATM surcharges and interchange fees and wire transfer fees. Merchant card fees represent fees the Bank earns from a third party for enrolling a customer in the processor’s program. Credit card fees represent a fee earned by the Bank for a successful referral to a card-issuing company. ATM surcharges and interchange fees are the result of Bank customers conducting ATM transactions that generate fee income and are processed through multiple card networks. All of these fees are transaction based and are recognized at the time of the transaction.

Gains/Losses on the Sale of Other Real Estate – these are recognized when control of the property transfers to the buyer.

~~Increases in the cash surrender value of life insurance and security transactions are not within the scope of ASC 606.~~

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into longer-term revenue contracts with customers, and therefore, does not experience significant contract balances.

Contract Acquisition Costs

The Corporation expenses all contract acquisition costs as costs are incurred.

‎

1Note ~~14.~~15. Commitments and Contingencies

In the normal course of business, the Bank is a party to financial instruments that are not reflected in the accompanying financial statements and are commonly referred to as off-balance-sheet instruments. These financial instruments are entered into primarily to meet the financing needs of the Bank’s customers and include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated balance sheet.

The Corporation’s exposure to credit loss in the event of nonperformance by other parties to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contract or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.

The Bank had the following outstanding commitments for the periods presented:


	March 31,		December 31,		March 31,		December 31,
(Dollars in thousands)	2020		2019		2021		2020
Financial instruments whose contract amounts represent credit risk
Commercial commitments to extend credit	$	241,341	$	248,251	$	280,806	$	280,939
Consumer commitments to extend credit (secured)		58,712		56,898		74,989		71,761
Consumer commitments to extend credit (unsecured)		5,146		5,088		5,456		5,224
	$	305,199	$	310,237	$	361,251	$	357,924
Standby letters of credit	$	24,199	$	26,382	$	21,260	$	22,334

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 with the exception of home equity lines and personal lines of credit and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, is based on Management’s credit evaluation of the counterparty. Collateral for most commercial commitments varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. Collateral for secured consumer commitments consists of liens on residential real estate.

Standby letters of credit are instruments issued by the Bank, which guarantee the beneficiary payment by the Bank in the event of default by the Bank’s customer in the nonperformance of an obligation or service. Most standby letters of credit are extended for one-year periods. Generally, the credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supporting those commitments for which collateral is deemed necessary primarily in the form of certificates of deposit and liens on real estate. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. AsIn the second quarter of ~~June 30,~~ 2018, the Bank established a $2.4 million allowance against letters of credit issued in connection with a commercial borrower that declared bankruptcy. In the first quarter of 2020, the Bank reversed $250 thousand of this reserve as one letter of credit was cancelled. At March 31, ~~2020~~2021 this reserve was $2.1 million. Except for the liability recorded for standby letters of credit, liabilities for credit loss associated with off-balance sheet commitments were not material at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Most of the Bank’s business activity is with customers located within its primary market and does not involve any significant concentrations of credit to any one entity or industry.

‎

Legal Proceedings

The nature of the Corporation’s business generates a certain amount of litigation.

~~We establish~~The Corporation establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable, and the amount of the loss can be reasonably estimated. When ~~we are~~the Corporation is able to do so, weit also ~~determine~~determines estimates of possible losses, whether in excess of any accrued liability or where there is no accrued liability.

These assessments are based on ~~our~~the analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained, wethe Corporation may change ~~our~~its assessments and, as a result, take or adjust the amounts of ~~our~~its accruals and change ~~our~~its estimates of possible losses or ranges of possible losses. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts that may be accrued or included in estimates of possible losses or ranges of possible losses may not represent the actual loss to the Corporation from any legal proceeding. ~~Our~~Its exposure and ultimate losses may be higher, possibly significantly higher, than amounts weit may accrue or amounts weit may estimate.

In management’s opinion, ~~we do~~the Corporation does not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of all litigation to which the Corporation is a party at this time will have a material adverse effect on ~~our~~its financial position. WeThe Corporation cannot now determine, however, whether or not any claim asserted against usit will have a material adverse effect on ~~our~~its results of operations in any future reporting period, which will depend on, ~~amount~~among other things, the amount of loss resulting from the claim and the amount of income otherwise reported for the reporting period. Thus, at March 31, ~~2020, we are~~2021, the Corporation is unable to provide an evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss with respect to such other matters and, accordingly, have not yet established any specific accrual for such other matters.

~~No material proceedings are pending or are known to be threatened or contemplated against us by governmental authorities.~~

~~Note 15. Risk Factors~~

In December 2019, a novel strain of coronavirus surfaced in Wuhan, China, and has spread around the world, with resulting business and social disruption. The coronavirus was declared a Pandemic by the World Health Organization on March 11, 2020. The operations and business results of the Corporation could be materially adversely affected. The ability of our customers to make payments on loans could be adversely impacted, resulting in elevated loan losses and an increase in the Corporation’s allowance for loan losses. Additionally, it is reasonably possible future evaluations of the carrying amount of goodwill could result in a conclusion that goodwill is impaired. The extent to which the coronavirus may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others.

Note 16. Reclassification

Certain prior period amounts may have been reclassified to conform to the current year presentation. Such reclassifications did not affect ~~reported~~prior year net income or shareholders’ equity.

‎

2326

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

Management’s Discussion and Analysis of Results of Operations and Financial Condition

For the Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020

Forward Looking Statements

Certain statements appearing herein which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements refer to a future period or periods, reflecting management’s current views as to likely future developments, and use words such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” or similar terms. Because forward-looking statements involve certain risks, uncertainties and other factors over which the Corporation has no direct control, actual results could differ materially from those contemplated in such statements. These factors include (but are not limited to) the following: general economic conditions, particularly with regard to the negative impact of severe, wide-ranging and ~~wide-ranging~~continuing disruptions caused by, and resulting from, the spread of the coronavirus COVID-19 pandemic and affects thereof, including governmental responses thereto, changes in interest rates, changes in the Corporation’s cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, changes in the rate of inflation, changes in technology, the intensification of competition within the Corporation’s market area, and other similar factors. We caution readers not to place undue reliance on these forward-looking statements. They only reflect management’s analysis as of this date. The Corporation does not revise or update these forward-looking statements to reflect events or changed circumstances.

Critical Accounting Policies

Management has identified critical accounting policies for the Corporation. These policies are particularly sensitive, requiring significant judgements, estimates and assumptions to be made by Management. There were no changes to the critical accounting policies disclosed in the ~~2019~~2020 Annual Report on Form 10-K in regards to application or related judgments and estimates used. Please refer to Item 7 of the Corporation’s ~~2019~~2020 Annual Report on Form 10-K for a more detailed disclosure of the critical accounting policies.

Results of Operations

Summary

~~The~~Franklin Financial Services Corporation reported ~~net income~~consolidated earnings of $4.8 million ($1.09 per diluted share) for the first quarter of 2021 compared with $1.7 million ($.39 per diluted share) for the ~~first~~same period in 2020, and $4.6 million ($1.04 per diluted share) for the fourth quarter of ~~March 31, 2020, compared to $.73 per share in the first quarter of 2019.~~2020.

Net interest income ~~remained unchanged year over year at~~was $10.8 million, inclusive of $765 thousand of interest and fees from Paycheck Protection Program (PPP) loans, for the first quarter of 2021 compared to $10.3 ~~million. However,~~million for the first quarter of 2020. The net interest margin for the first quarter fell from ~~3.86% in 2019 to~~ 3.53% in ~~2020.~~2020 to 3.03% in 2021. The year-to-date yield on earning assets fell by 0.77% from 4.00% in 2020 to 3.23% in 2021 as all asset classes had lower yields as market rates decreased over the year. The cost of interest-bearing deposits fell from 0.61% in 2020 to 0.18% in 2021 as the Bank reduced deposit rates to offset lower asset yields. The cost of total deposits fell from 0.51% in 2020 to 0.14% in 2021.

Earning assets for the first quarter of 2021 averaged ~~$1.2~~$1.5 billion compared to ~~$1.1~~$1.2 billion for the same period in ~~2019.~~ 2020. The average ~~first quarter~~balance of the investment portfolio increased $212.3 million over the same comparative period, primarily in the municipal bond portfolio. The average balance of the loan portfolio ~~declined~~increased from ~~$978.5 million to~~ $934.5 million ~~from 2019~~in the first quarter of 2020 to ~~2020.~~$1.0 billion in 2021. The average balance of the commercial loan portfolio ~~decreased $44.8~~increased $65.3 million ~~from the comparable quarter in 2019~~ due to a decrease in purchased loan participations and slower loan demand that began in the second half of 2019. This decline was more than offset by an increase in the average balance of the investment portfolio of $62.7 million. The yield on earning assets fell by .45% from 4.45% in the first quarter of 2019 to 4.00% in 2020. The decrease in the yield was the primary reason for the decline in interest income. Average interest-bearing deposits increased $55.0 million from the first quarter of 2019 toover the first quarter of 2020. The ~~cost~~increase is primarily due to the addition of ~~these~~PPP loans which totaled $55.9 million at March 31, 2021 and averaged $54.6 million for the quarter. The average balance of deposits ~~fell from .75%~~for the first quarter of 2021 increased $268.0 million over the same quarter in ~~2019 to .61% in 2020. As a result, interest expense on deposits declined $211 thousand helping to stabilize net interest income quarter to quarter.~~2020 with every deposit category increasing except for time deposits.

~~For the first quarter of 2020, a~~The provision for loan loss expense for the first quarter of 2021 was ($800 thousand), representing a reversal of previously recorded provision for loan loss expense. This expense reversal compares to a provision for loan loss

expense of $3.0 million in the first quarter of 2020. The 2020 provision expense was ~~recorded as~~ the ~~economic effects~~result of ~~the COVID-19 pandemic caused~~an increase in several qualitative factors in the allowance for loan loss calculation due to ~~increase from moderate~~the economic effects and impact of the COVID-19 pandemic. As of March 31, several qualitative factors were reduced reflecting a potential lower risk of loss in the loan portfolio, thereby, resulting in a reversal of the provision for loan loss expense. The allowance for loan loss ratio was 1.61% of gross loans as of March 31, 2021, compared to ~~very high risk. With this provision expense,~~1.66% at December 31, 2020. Excluding the PPP loans, the allowance for loan loss ratio was ~~1.57%. The provision expense for~~1.71% at the ~~same~~end of the first quarter ~~in 2019 was $399 thousand with an allowance ratio~~ of 1.29%. The provision expense for the fourth quarter 2019 was $0 resulting in an allowance for loan loss ratio of 1.28% at December 31, 2019. See the Allowance for Loan Loss discussion for more information.2021.

‎

Noninterest income ~~increased $724 thousand over~~totaled $4.2 million for the first quarter of ~~2019.~~2021, an increase of $338 thousand over the comparable quarter of 2020. The ~~factor driving this increase was an~~largest increases comparable quarter-over-quarter were increases in Investment and Trust Service fees ($191 thousand), gain on the sale of mortgages ($638 thousand) and the fair value of equity securities ($181 thousand). These increases were partially offset by a decrease of $812 thousand from a gain on a bank owned life insurance ~~policy.~~policy recorded in 2020.

Noninterest expense for the first quarter of ~~2020~~2021 was $10.2 million compared to $9.5 million in 2020. Salaries and benefits, and data processing expense each increased ~~$116~~$123 thousand ~~over the same quarter of 2019. There were no significant increases in any expense category year over year.~~quarter-over-quarter, while FDIC insurance increased $142 thousand.

The effective tax rate for the first quarter of 2021 was 15.4% compared to -6.6% for the first quarter of 2020. The increase in the effective tax rate was due primarily to higher pre-tax income drive by the large change in the provision for loan loss expense quarter over quarter. The benefit of tax-exempt income increased only slightly quarter over quarter.

Total assets at March 31, ~~2020~~2021 were ~~$1.262~~$1.598 billion compared ~~$1.269~~$1.535 billion at December 31, ~~2019.~~2020. Significant balance sheet changes since December 31, 2020 include:

Short-term interest-bearing deposits in other banks ~~decreased $28.0~~increased $50.4 million ~~since year-end as cash was put into~~and the investment portfolio ~~which~~ increased ~~$20.6~~$25.2 million.
‎

The net loan portfolio decreased $8.1 million during 2021 over the year-end 2020 balance. The reduction occurred primarily in the commercial loan portfolio, with a decrease in commercial real estate loans partially offset by an increase in PPP loans. The Bank held $55.9 million in PPP loans at March 31, 2021 with $1.7 million of net deferred PPP fees remaining to be recognized. The Bank is recognizing the PPP fees over the contractual life of the PPP loans (two years or five years). As PPP loans are granted forgiveness by the SBA, fee recognition will accelerate.

At March 31, 2020, the Bank had $68.1 million of modified loans compared to $67.6 million at year-end 2020 and $196.5 million at June 30, 2020. The current balance is comprised primarily of 20 unrelated loans to hotels for $46.5 million, three unrelated loans in the entertainment sector for $14.1 million and one loan ~~portfolio increased $1.8~~for $4.7 million in rental real estate. The majority of these loans are making some form of payment and will come out of the modified terms during the ~~first~~second quarter of ~~2020 over year-end 2019. The portfolio increased in residential real estate and construction loans but was partially offset by a decline in commercial loans.~~2021.

‎

Deposits ~~decreased $8.0~~increased $66.5 million ~~primarily~~(4.9%) over year-end 2020, with all deposit products showing an increase except time deposits. Based on current information known to Management, the increases seem to stem from government stimulus payments to consumers, businesses and municipalities, lower spending as economic activity slowed during the pandemic and a sense of security offered by bank deposits in ~~interest-bearing checking accounts.~~uncertain economic times.

‎

Shareholders’ equity ~~increased $1.5~~decreased $4.5 million from the end of 2020, due primarily to ~~an increase~~a decrease of $8.4 million in accumulated other comprehensive ~~income.~~income (AOCI) as the value of the investment portfolio declined during the quarter. Retained earnings increased ~~only $413 thousand due to~~$3.5 million from year-end 2020. At March 31, 2021, the ~~lower quarterly earnings. The~~ book value of the Corporation’s common stock ~~increased from $29.40 to $29.74~~was $31.92 per share ~~since year-end. The Corporation suspended activity in its stock~~and the tangible book value was $29.87 per share. In December 2020, an open market repurchase plan onwas approved to repurchase 150,000 shares over a one-year period and no shares have been repurchased under the plan as of March ~~19, 2020.~~31, 2021.

Management believes current asset quality is stable with a nonperforming loan ratio of .40% of total gross loans and the allowance for loan loss ratio has been increased to 1.57% higher than at any time during the great recession. As the Corporation faces the unprecedented circumstances of the COVID-19 pandemic, it believes its current balance sheet and capital position will allow it to meet the challenge. As of April 30, 2020, the Bank funded 512 loans for $50.1 million (5.4% of gross loans as of March 31, 2020) through the Paycheck Protection Program administered by the Small Business Administration which started April 3, 2020. The Bank expects to earn approximately $2.0 million of processing fees recognized over the second and third quarter of 2020.The Bank began processing loans for round two of PPP on April 27, 2020. Liquidity has been strengthened by the Paycheck Protection Program Liquidity Facility and the Bank has no borrowings outstanding. The Corporation’s capital position is strong with total risk-based capital ratio of 15.99% and a leverage ratio of 9.85%.

‎

2528

Key performance ratios as of, or for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 and the year ended December 31, ~~2019~~2020 are listed below:


	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
(Dollars in thousands, except per share)	2020		2019		2019		2021		2020		2020

Balance Sheet Highlights
Total assets	$	1,262,126	$	1,269,157	$	1,212,960	$	1,597,559	$	1,535,038	$	1,262,126
Investment and equity securities		208,353		187,873		128,258		422,622		397,331		208,353
Loans, net		921,656		922,609		967,785		984,797		992,915		921,656
Deposits		1,117,433		1,125,392		1,076,491		1,421,042		1,354,573		1,117,433
Shareholders' equity		129,005		127,528		121,491		140,699		145,176		129,005

Summary of Operations
Interest income	$	11,665	$	49,235	$	11,989	$	11,592	$	45,939	$	11,665
Interest expense		1,413		7,113		1,660		748		3,978		1,413
Net interest income		10,252		42,122		10,329		10,844		41,961		10,252
Provision for loan losses		3,000		237		399
(Recovery of) provision for loan losses								(800)		4,625		3,000
Net interest income after provision for loan losses		7,252		41,885		9,930		11,644		37,336		7,252
Noninterest income		3,889		15,424		3,165		4,227		15,084		3,889
Noninterest expense		9,528		38,314		9,412		10,165		39,362		9,528
Income before income taxes		1,613		18,995		3,683		5,706		13,058		1,613
Federal income tax (benefit) expense		(106)		2,880		446
Federal income tax expense (benefit)								876		258		(106)
Net income	$	1,719	$	16,115	$	3,237	$	4,830	$	12,800	$	1,719

Performance Measurements
Return on average assets*		0.54%		1.29%		1.08%		1.23%		0.91%		0.54%
Return on average equity*		5.31%		13.17%		10.90%		13.47%		9.56%		5.31%
Return on average tangible equity (1)*		5.70%		14.22%		11.79%		14.37%		10.24%		5.70%
Efficiency ratio (1)		65.36%		65.36%		67.93%		66.06%		67.32%		65.36%
Net interest margin*		3.53%		3.68%		3.86%		3.03%		3.21%		3.53%

Shareholders' Value (per common share)
Diluted earnings per share	$	0.39	$	3.67	$	0.73	$	1.09	$	2.93	$	0.39
Basic earnings per share		0.40		3.68		0.73		1.10		2.94		0.40
Regular cash dividends declared		0.30		1.17		0.27		0.30		1.20		0.30
Book value		29.74		29.30		27.54		31.92		33.07		29.74
Tangible book value (1)		27.66		27.23		25.50		29.87		31.02		27.66
Market value ~~(2)~~		27.45		38.69		36.00		31.18		27.03		27.45
Market value/book value ratio		92.30%		132.05%		130.72%		97.68%		81.74%		92.30%
Market value/tangible book value ratio		99.24%		142.11%		141.18%		104.37%		87.13%		99.24%
Price/earnings multiple*		17.60		10.54		12.33		7.15		9.23		17.60
Current quarter dividend yield		4.37%		3.10%		3.00%
Current quarter dividend yield*								3.85%		4.44%		4.37%
Dividend payout ratio year-to-date		75.97%		31.74%		36.82%		27.29%		40.83%		75.97%

Safety and Soundness
Average equity/average assets		10.24%		9.78%		9.94%		9.16%		9.48%		10.24%
Risk-based capital ratio (Total)		15.99%		16.08%		14.85%		18.18%		17.69%		15.99%
Leverage ratio (Tier 1)		9.85%		9.72%		9.57%		8.76%		8.69%		9.85%
Common equity ratio (Tier 1)		14.73%		14.82%		13.60%		14.80%		14.32%		14.73%
Nonperforming loans/gross loans		0.40%		0.42%		0.60%		0.88%		0.87%		0.40%
Nonperforming assets/total assets		0.29%		0.31%		0.70%		0.55%		0.57%		0.29%
Allowance for loan losses as a % of loans		1.57%		1.28%		1.29%		1.61%		1.66%		1.57%
Net loans charged-off/average loans*		0.10%		0.07%		0.05%
Net loans (recovered) charged-off/average loans*								-0.06%		-0.02%		0.10%

Assets under Management
Trust assets under management (fair value)	$	674,189	$	790,949	$	753,086	$	860,794	$	836,381	$	674,189
Held at third-party brokers (fair value)		109,145		127,976		127,515		118,180		112,624		109,145

*Year-to-date annualized

(1) See the section titled “GAAP versus Non-GAAP Presentation” that follows.

~~(2) As quoted on the OTCQX for March 31, 2019 and the Nasdaq Capital Market for all other periods.~~

2629

GAAP versus non-GAAP Presentations – The Corporation supplements its traditional GAAP measurements with certain non-GAAP measurements to evaluate its performance and to eliminate the effect of intangible assets. By eliminating intangible assets (Goodwill), the Corporation believes it presents a measurement that is comparable to companies that have no intangible assets or to companies that have eliminated intangible assets in similar calculations. However, not all companies may use the same calculation method for each measurement. The non-GAAP measurements are not intended to be used as a substitute for the related GAAP measurements. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. In the event of such a disclosure or release, the Securities and Exchange Commission’s Regulation G requires: (i) the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a reconciliation of the differences between the non-GAAP financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP. The following table shows the calculation of the non-GAAP measurements.


(Dollars in thousands, except per share)	Three Months Ended		Twelve Months Ended		Three Months Ended		Three Months Ended		Twelve Months Ended		Three Months Ended
	March 31, 2020		December 31, 2019		March 31, 2019		March 31, 2021		December 31, 2020		March 31, 2020
Return on Tangible Equity (non-GAAP)
Net income	$	1,719	$	16,115	$	3,237	$	4,830	$	12,800	$	1,719

Average shareholders' equity		129,613		122,377		118,793		143,439		133,958		129,613
Less average intangible assets		(9,016)		(9,016)		(9,016)		(9,016)		(9,016)		(9,016)
Average tangible equity (non-GAAP)		120,597		113,361		109,777		134,423		124,942		120,597

Return on average tangible equity (non-GAAP)*		5.70%		14.22%		11.79%		14.37%		10.24%		5.70%

Tangible Book Value (per share) (non-GAAP)
Shareholders' equity	$	129,005	$	127,528	$	121,491	$	140,699	$	145,176	$	129,005
Less intangible assets		(9,016)		(9,016)		(9,016)		(9,016)		(9,016)		(9,016)
Tangible book value (non-GAAP)		119,989		118,512		112,475		131,683		136,160		119,989

Shares outstanding (in thousands)		4,338		4,353		4,411		4,408		4,389		4,338

Tangible book value per share (non-GAAP)		27.66		27.23		25.50		29.87		31.02		27.66

Efficiency Ratio
Noninterest expense	$	9,528	$	38,314	$	9,412	$	10,165	$	39,362	$	9,528

Net interest income		10,252		42,122		10,329		10,844		41,961		10,252
Plus tax equivalent adjustment to net interest income		300		1,393		388		370		1,407		300
Plus noninterest income, net of securities transactions		4,026		15,102		3,138		4,173		15,104		4,026
Total revenue		14,578		58,617		13,855		15,387		58,472		14,578

Efficiency ratio (Noninterest expense/total revenue)		65.36%		65.36%		67.93%		66.06%		67.32%		65.36%

* Year-to-date annualized

Net Interest Income

The largest source of the Corporation’s earnings is net interest income, which is defined as the difference between income on interest-earning assets and the expense of interest-bearing liabilities supporting those assets. Principal categories of interest-earning assets are loans and securities, while deposits, short-term borrowings and long-term debt are the principal categories of interest-bearing liabilities. Demand deposits enhance net interest income because they are noninterest-bearing deposits. For the purpose of this discussion, balance sheet items refer to the average balance for the year and net interest income is adjusted to a fully taxable-equivalent basis. This tax-equivalent adjustment facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Corporation’s 21% Federal statutory rate.

2730

Comparison of the three months ended March 31, 20202021 to the three months ended March 31, 2019:2020:

Tax equivalent net interest income ~~decreased $165~~increased $662 thousand to ~~$10.6~~$11.2 million in the first quarter of ~~2020~~2021 compared to ~~$10.7~~$10.6 million for the same period in ~~2019.~~2020. Balance sheet volume contributed ~~$77 thousand~~$1.7 million to tax equivalent net interest but was ~~more than~~ offset by a ~~$242 thousand~~$1.0 million reduction due to rates.

The following table presents average balances, tax-equivalent (T/E) interest income, and yields earned or rates paid on the assets or liabilities. Nonaccrual loans are included in the average loan balance used to calculate the yield. All nontaxable interest income has been adjusted to a tax-equivalent basis using a tax rate of 21%.


	For the Three Months Ended March 31,										For the Three Months Ended March 31,
	2020					2019					2021					2020

	Average		Income or		Average	Average		Income or		Average	Average		Income or		Average	Average		Income or		Average
(Dollars in thousands)	balance		expense		yield/rate	balance		expense		yield/rate	balance		expense		yield/rate	balance		expense		yield/rate

Interest-earning assets:
Interest-bearing obligations of other
banks and federal funds sold	$	68,975	$	258	1.50%	$	15,112	$	97	2.60%
Interest-bearing obligations in other banks											$	78,930	$	53	0.27%	$	68,975	$	258	1.50%
Investment securities:
Taxable		172,319		1,068	2.49%		82,297		545	2.69%		315,673		1,626	2.09%		172,319		1,068	2.49%
Tax Exempt		23,861		216	3.62%		51,167		425	3.33%		92,773		668	2.88%		23,861		216	3.62%
Investments		196,180		1,284	2.63%		133,464		970	2.95%		408,446		2,294	2.28%		196,180		1,284	2.63%
Loans:
Commercial, industrial and agricultural		793,085		8,890	4.45%		837,906		9,644	4.60%		858,360		8,372	3.90%		793,085		8,890	4.45%
Residential mortgage		68,346		728	4.27%		69,466		752	4.32%		67,886		603	3.58%		68,346		728	4.27%
Home equity loans and lines		66,599		724	4.36%		65,981		832	5.11%		81,920		525	2.60%		67,179		680	4.07%
Consumer		6,509		81	4.99%		5,124		82	6.49%		6,714		115	6.95%		5,929		125	8.48%
Loans		934,539		10,423	4.43%		978,477		11,310	4.63%		1,014,880		9,615	3.80%		934,539		10,423	4.43%
Total interest-earning assets		1,199,694	$	11,965	4.00%		1,127,053	$	12,377	4.45%		1,502,256	$	11,962	3.23%		1,199,694	$	11,965	4.00%
Other assets		65,814					67,718					62,905					65,814
Total assets	$	1,265,508				$	1,194,771				$	1,565,161				$	1,265,508

Interest-bearing liabilities:
Deposits:
Interest-bearing checking	$	325,300	$	274	0.34%	$	295,786	$	263	0.36%	$	426,410	$	113	0.11%	$	325,300	$	274	0.34%
Money Management		432,270		740	0.69%		424,969		1,046	1.00%		513,083		199	0.16%		432,270		740	0.69%
Savings		84,059		58	0.28%		81,156		107	0.54%		106,046		15	0.06%		84,059		58	0.28%
Time		87,774		341	1.56%		72,481		208	1.16%		74,146		158	0.86%		87,774		341	1.56%
Total interest-bearing deposits		929,403		1,413	0.61%		874,392		1,624	0.75%		1,119,685		485	0.18%		929,403		1,413	0.61%

Other borrowings		—		—	—		5,386		36	2.61%
Subordinated Notes												19,558		263	5.37%		—		—	—
Total interest-bearing liabilities		929,403		1,413	0.61%		879,778		1,660	0.77%		1,139,243		748	0.27%		929,403		1,413	0.61%
Noninterest-bearing deposits		188,735					183,809					266,491					188,735
Other liabilities		17,757					12,391					15,988					17,757
Shareholders' equity		129,613					118,793					143,439					129,613
Total liabilities and shareholders' equity	$	1,265,508				$	1,194,771				$	1,565,161				$	1,265,508
T/E net interest income/Net interest margin				10,552	3.53%				10,717	3.86%				11,214	3.03%				10,552	3.53%
Tax equivalent adjustment				(300)					(388)					(370)					(300)
Net interest income			$	10,252				$	10,329				$	10,844				$	10,252

Net Interest Spread					3.39%					3.68%					2.96%					3.39%
Cost of Funds					0.51%					0.63%					0.22%					0.51%
Cost of Deposits															0.14%					0.51%

Provision for Loan Losses

~~Following its first quarter assessment and analysis,~~The Bank recorded a reversal of $800 thousand in the ~~Bank expensed $3.0 million of its~~ provision for loan loss ~~expense~~ for the first quarter, ~~as the economic effects~~compared to an expense of ~~the COVID-19 pandemic caused several qualitative factors in the allowance for loan loss calculation to increase from moderate risk to very high risk. The provision expense was $399 thousand~~$3.0 million in the first quarter of ~~2019.~~2020. For more information refer to the Loan Quality and Allowance for Loan Losses discussion in the Financial Condition section.

‎

Noninterest Income

For the first quarter of ~~2020,~~2021, noninterest income increased ~~$724~~$338 thousand from the same period in ~~2019. Loan service charges~~2020. Gain on sale of loans increased as mortgage production was higher in 2021 compared to 2020. Deposit fees and service charges decreased primarily in lower overdraft protection fees. Other income was higher in 2020 due to ~~increased mortgage originator staff. Debit card income was higher due to an increase in transaction volume on commercial accounts. The life insurance gain was from a~~

~~bank-owned life insurance policy. The change~~improvement in the ~~fair~~market value of ~~equity investments recorded through income was~~ a ~~loss of $127 thousand compared to a gain of $3 thousand in the same period in 2019.~~swap.

The following table presents a comparison of noninterest income for the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


	For the Three Months Ended							For the Three Months Ended
	March 31,				Change			March 31,				Change
(Dollars in thousands)	2020		2019		Amount		%	2021		2020		Amount		%
Noninterest Income
Investment and trust services fees	$	1,445	$	1,452	$	(7)	(0.5)	$	1,636	$	1,445	$	191	13.2
Loan service charges		285		203		82	40.4		196		141		55	39.0
Gain on sale of loans									782		144		638	443.1
Deposit service charges and fees		565		545		20	3.7		468		565		(97)	(17.2)
Other service charges and fees		347		353		(6)	(1.7)		396		347		49	14.1
Debit card income		418		402		16	4.0		517		418		99	23.7
Increase in cash surrender value of life insurance		124		127		(3)	(2.4)		115		124		(9)	(7.3)
Life insurance gain		812		—		812	NA
Net (losses)/gains on sales of debt securities		(10)		24		(34)	(141.7)
Bank owned life insurance gain									—		812		(812)	(100.0)
Net losses on sales of debt securities									—		(10)		10	100.0
Change in fair value of equity securities		(127)		3		(130)	(4,333.3)		54		(127)		181	142.5
Other		30		56		(26)	(46.4)		63		30		33	110.0
Total noninterest income	$	3,889	$	3,165	$	724	22.9	$	4,227	$	3,889	$	338	8.7

Noninterest Expense

Noninterest expense for the first quarter of ~~2020~~2021 increased ~~$116~~$637 thousand compared to the same period in ~~2019. The increase~~2020. Due to the continuation of lockdowns from the pandemic, many expense items were held in ~~salaries~~check, such as business travel, education and ~~benefits was~~community activities. Salary expense increased primarily due to ~~an increase in salary expense ($355 thousand)~~higher mortgage commissions from ~~merit increases, net of a decrease in~~increased mortgage production and health insurance ~~($210 thousand), compared~~costs. Data processing increased due to ~~the same period in 2019. Pennsylvania shares tax decreased as the Bank received certain tax credits associated with a portion~~higher usage of mobile banking. FDIC insurance expense increased primarily due to growth of the ~~increase in charitable donations (in other expenses) related~~Bank’s balance sheet. Nonservice pension increased due to ~~Pennsylvania’s Educational Improvement Tax Credit program, which allowed the Bank to reduce its expense.~~pension settlement expenses.

The following table presents a comparison of noninterest expense for the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


	For the Three Months Ended							For the Three Months Ended
(Dollars in thousands)	March 31,				Change			March 31,				Change
Noninterest Expense	2020		2019		Amount		%	2021		2020		Amount		%
Salaries and benefits	$	5,535	$	5,442	$	93	1.7	$	5,658	$	5,535	$	123	2.2
Net occupancy		830		856		(26)	(3.0)		910		830		80	9.6
Marketing and advertising		455		402		53	13.2		345		455		(110)	(24.2)
Legal and professional		395		430		(35)	(8.1)		475		395		80	20.3
Data processing		806		705		101	14.3		929		806		123	15.3
Pennsylvania bank shares tax		175		243		(68)	(28.0)		92		175		(83)	(47.4)
FDIC insurance		60		65		(5)	(7.7)		202		60		142	(236.7)
ATM/debit card processing		264		258		6	2.3		296		264		32	12.1
Telecommunications		105		105		—	—		129		105		24	22.9
Nonservice pension									205		88		117	133.0
Other		903		906		(3)	(0.3)		924		815		109	13.4
Total noninterest expense	$	9,528	$	9,412	$	116	1.2	$	10,165	$	9,528	$	637	6.7

Provision for Income Taxes

For the first quarter of 2021, the Corporation recorded a Federal income tax benefitexpense of $106$876 thousand compared to a tax expensebenefit of $446$106 thousand for the same quarter in 2019.2020. The effective tax rate for the first quarter of 20202021 was (6.5)%,15.4% compared to 12.1%-6.6% for the samefirst quarter in 2019.of 2020. The decreaseincrease in the effective tax rate was due primarily to lowerhigher pre-tax income offsetdriven by tax-free income.the large change in the provision for loan loss expense quarter-over-quarter. The benefit of tax-exempt income increased only slightly quarter-over-quarter. The federal statutory tax rate is 21% for 20202021 and 2019.2020.

‎

2932

Financial Condition

Cash and Cash Equivalents:

Cash and cash equivalents totaled ~~$53.4~~$107.6 million at March 31, ~~2020, a decrease~~2021, an increase of ~~$30.5~~$50.5 million from the prior year-end balance of ~~$83.8~~$57.1 million. ~~The decrease was mainly due to lower interest-bearing balances at the Federal Reserve from purchases in the investment portfolio.~~ Interest-bearing deposits are held primarily at the Federal Reserve ($~~36.9 million) and in short-term bank-owned certificates of deposit ($3.5~~90.2 million).

Investment Securities:

AFS Securities: The AFS securities portfolio has increased ~~$18.5~~$35.8 million on a cost basis since year-end ~~2019.~~2020. The ~~composition of the~~ portfolio ~~has remained consistent with~~is comprised primarily municipal securities and U.S. Agency mortgage-backed securities ~~comprising the greatest portion of the portfolio~~ at approximately ~~47%~~56% and ~~34%~~20% of the portfolio fair value, respectively. The average life of the portfolio was ~~5.9~~7.18 years.

The AFS securities portfolio had a net unrealized gain of ~~$2.3~~$2.0 million at March 31, ~~2020~~2021 compared to a net unrealized gain of ~~$234 thousand~~$12.6 million at the prior year-end. The portfolio averaged $408.4 million with a yield of 2.28% for the first three months of 2021. This compares to an average of $196.2 million ~~with~~and a yield of 2.63% for the ~~first three months of 2020. This compares to an average of $133.5 million and a yield of 2.95% for the~~ same period in ~~2019.~~2020.

The municipal bond portfolio is well diversified geographically ~~(108~~(228 issuers) and is comprised primarily of general obligation bonds ~~(61%~~(64%). Many municipal bonds have credit enhancements in the form of private bond insurance or other credit support. The largest geographic municipal bond exposure is in the states of Texas ~~(13%~~(16%), California ~~(13%~~(12%), Michigan (10%), and ~~Michigan (6%~~Pennsylvania (10%). The average rating of the municipal portfolio from Moody’s is AA. No municipal bonds are rated below investment grade.

~~The unrealized loss~~Temporary impairment in the ~~municipal bond~~investment portfolio, ~~decreased~~measured by gross unrealized losses, was $5.6 million, compared to ~~$242 thousand from $997~~$701 thousand at December 31, ~~2019.~~2020. The municipal bond portfolio had the largest unrealized loss of $4.1 million, 74.4% of the total unrealized loss ($5.6 million). There are ~~twenty-two~~one hundred and seven securities in this portfolio with an unrealized loss and the loss in this portfolio is deemed to be non-credit related and no other-than-temporary impairment charges have been recorded.

The corporate portfolio is comprised of 5 variable rate bank issued trust preferred ~~portfolio contains five~~ securities with a fair value of ~~$3.5~~$4.1 million and 39 fixed rate bank issued subordinated notes with a fair value of $18.1 million. This portfolio has an unrealized loss of ~~$556 thousand.~~$264 thousand on twenty-two securities with a fair value of $12.5 million. The trust-preferred securities held by the Bank are single entity issues, not pooled trust preferred securities. Therefore, the impairment review of these securities is based only on the issuer and the security cannot be impaired by the performance of other issuers as if it was a pooled trust-preferred bond. All of the Bank’s trust preferred securities are single issue, variable rate notes with long maturities (2027–2028). None of these issuers have suspended or missed a dividend or interest payment. At March 31, ~~2020,~~2021, the Bank believes it will be able to collect all interest and principal due on these bondsand no other-than-temporary-impairment charges were recorded.

The unrealized loss in the ~~Asset-backed~~asset-backed securities portfolio ~~increased $731~~decreased $56 thousand from December 31, ~~2019. This sector had the largest unrealized loss of $1.0 million, 44.4% of the total unrealized losses ($2.3 million).~~2020. FFELP (Federal Family Education Loan Program) bonds make up the majority of this sector and have a 97% guarantee from the USU.S. Department of Education. The FFELP bonds are all rated AAA. Management fully expects to be paid back at par and no other-than-temporary impairment charges have been recorded.

~~Equity securities at Fair Value:~~ The Corporation owns one equity investment. At March 31, 2020 and December 31, 2019, this investment was reported at fair value of $313 thousand and $440 thousand, respectively, with changes in value reported through income.

Restricted Stock at Cost: The Bank held ~~$465~~$468 thousand of restricted stock at March 31, ~~2020.~~2021. Except for $30 thousand, this investment represents stock in FHLB Pittsburgh. The Bank is required to hold this stock to be a member of FHLB and it is carried at cost of $100 per share. The level of FHLB stock held is determined by FHLB and is comprised of a minimum membership amount plus a variable activity amount. FHLB stock is evaluated for impairment primarily based on an assessment of the ultimate recoverability of its cost. As a government sponsored entity, FHLB has the ability to raise funding through the U.S. Treasury that can be used to support its operations. There is not a public market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and low-cost funding) add value to the stock beyond purely financial measures. Management intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.

See Note 4 of the accompanying financial statements for additional information on Investment Securities.

Loans:

Residential real estate: This category is comprised of consumer purpose loans secured by residential real estate and to a lesser extent, commercial purpose loans secured by residential real estate. The consumer purpose category represents traditional residential mortgage loans and home equity products (primarily junior liens and lines of credit). Commercial purpose loans in this category represent loans made for various business needs but are secured with residential real estate. In addition to the real estate collateral, it is possible that additional security is provided by personal guarantees or UCC filings. These loans are underwritten as commercial loans and are not originated to be sold.

Total residential real estate loans ~~increased $3.4~~decreased $4.6 million over year-end ~~2019,~~2020, as paydowns exceeded originations in the ~~Bank retained a higher percentage of its originations.~~Bank’s mortgage portfolio. For the first three months of ~~2020,~~2021, the Bank originated ~~$9.2~~$29.0 million and sold ~~$8.5~~$34.5 million in mortgages ~~for a fee~~ through third party brokerage agreements. The Bank does not originate or hold any loans that would be considered sub-prime or Alt-A and does not generally originate mortgages outside of its primary market area.

Residential real estate construction: This category contains loans for the vertical construction of 1-4 family residential properties. The largest component of this category represents loans to residential real estate developers ($~~11.0~~10.8 million),

while loans for individuals to construct personal residences totaled ~~$4.5~~$7.8 million at March 31, ~~2020.~~2021. The Bank’s exposure to residential construction loans is concentrated primarily in south central Pennsylvania. Real estate construction loans, including residential real estate and land development loans, occasionally provide an interest reserve in order to assist the developer during the development stage when minimal cash flow is generated. All real estate construction loans are underwritten in the same manner, regardless of the use of an interest reserve.

Commercial real estate (CRE): This category includes commercial, industrial, farm and agricultural loans and land development loans, where real estate serves as the primary collateral for the loans. Total commercial real estate loans decreased to $493.5 million from $504.0 million at the end of 2020, as originations did not keep pace with pay-downs. The largest sectors (by collateral) in the commercial real estate category are: hotels and motels ($71.9 million), office building ($51.9 million), land development ($51.8 million), manufacturing facility ($37.7 million) and shopping centers ($34.9 million). The majority of the Bank’s hotel exposure is located along the Interstate 81 (I-81) corridor through south-central Pennsylvania. The portfolio is comprised of properties operating under 17 flagged brands and 3 independent operators.

Also included in CRE are real estate construction loans totaling $81.7 million. At March 31, ~~2020,~~2021, the Bank had ~~$17.1~~$31.1 million in real estate construction loans funded with an interest reserve and capitalized ~~$222~~$140 thousand of interest in ~~2020~~2021 from these reserves on active projects for commercial construction. Real estate construction loans are monitored on a regular basis by either an independent third-party inspector or the assigned loan officer depending on loan amount or complexity of the project. This monitoring process includes at a minimum, the submission of invoices and ~~AIA~~American Institute of Architects (AIA) documents (depending on the complexity of the project) detailing costs incurred by the borrower, on-site inspections, and a signature by the assigned loan officer for disbursement of funds.

~~Commercial real estate (CRE):~~ This category includes commercial, industrial, farm and agricultural loans and land development loans, where real estate serves as the primary collateral for the loans. Total commercial real estate loans remained flat at $494.1 million from $494.2 million at the end of 2019, as originations kept pace with pay-downs. The largest sectors (by collateral) in the commercial real estate category are: hotels and motels ($69.1 million), land development ($65.3 million), office buildings ($55.2 million), warehouse facilities ($31.9 million) and manufacturing facility ($31.7 million). The majority of the Bank’s hotel exposure is located along the Interstate 81 (I-81) corridor through south-central Pennsylvania. The portfolio is comprised of properties operating under 16 flagged brands, representing 10 hotel chains. Independent hotels represent only 4% of the hotel portfolio.

Commercial: This category includes commercial, industrial, farm, agricultural, and municipal loans. Commercial loans ~~decreased $3.9~~increased $2.4 million to ~~$226.1~~$283.7 million at March 31, ~~2020,~~2021, compared to ~~$230.0~~$281.3 million at the end of ~~2019,~~2020, primarily due to ~~paydowns.~~PPP originations. At March 31, ~~2020,~~2021, the Bank had approximately ~~$138~~$145 million in tax-free loans in the commercial portfolio. The largest sectors (by industry) in the commercial category are: public administration ($~~69.9~~62.5 million), utilities ($~~33.5~~55.0 million), educational services ($~~22.8~~18.4 million), real estate rental and leasing ($~~13.0~~17.5 million) and ~~finance and insurance~~manufacturing ($~~12.2~~10.3 million). ~~The Bank expects~~This category also includes $55.9 million of PPP loans that ~~commercial lending will continue to be~~are 100% guaranteed by the ~~primary area of loan growth in the future via in-market lending.~~SBA.

Participations: The Bank may supplement its own commercial loan production by purchasing loan participations. These participations are primarily located in south-central Pennsylvania. At March 31, ~~2020,~~2021, the outstanding commercial participations accounted for ~~6.4%~~7.1%, or ~~$60.3~~$70.9 million, of total gross loans compared to ~~9.4%~~6.8% and ~~$67.7~~$68.7 million at December 31, ~~2019.~~2020. The Bank’s total exposure (including outstanding balances and unfunded commitments) to purchased participations is ~~$75.7~~$83.1 million, compared to $84.0 million at December 31, ~~2019.~~2020. The commercial loan participations are comprised of ~~$14.9~~$17.1 million of Commercial loans and ~~$45.4~~$53.8 million of CRE loans, reported in the respective loan class.

Consumer loans: This category increased by ~~$221 thousand~~$1.5 million to ~~$6.7~~$7.1 million at March 31, ~~2020,~~2021, compared to ~~$6.5~~$5.6 million at prior year-end and is mainly comprised of unsecured personal lines of credit.

‎

3134

The following table presents a summary of loans outstanding, by class as of:



	March 31,		December 31,			Change		March 31,		December 31,			Change
(Dollars in thousands)	2020		2019			Amount	%	2021		2020			Amount	%
Residential Real Estate 1-4 Family
Consumer first liens	$	82,719	$	85,319	$	(2,600)	(3.0)	$	73,991	$	77,373	$	(3,382)	(4.4)
Commercial first lien		60,587		57,627		2,960	5.1		58,018		59,851		(1,833)	(3.1)
Total first liens		143,306		142,946		360	0.3		132,009		137,224		(5,215)	(3.8)

Consumer junior liens and lines of credit		45,269		42,715		2,554	6.0		61,707		60,935		772	1.3
Commercial junior liens and lines of credit		5,397		4,882		515	10.5		4,244		4,425		(181)	(4.1)
Total junior liens and lines of credit		50,666		47,597		3,069	6.4		65,951		65,360		591	0.9
Total residential real estate 1-4 family		193,972		190,543		3,429	1.8		197,960		202,584		(4,624)	(2.3)

Residential real estate - construction
Consumer		4,523		4,107		416	10.1		7,804		6,751		1,053	15.6
Commercial		10,959		9,216		1,743	18.9		10,814		9,558		1,256	13.1
Total residential real estate construction		15,482		13,323		2,159	16.2		18,618		16,309		2,309	14.2

Commercial real estate		494,143		494,262		(119)	(0.0)		493,544		503,977		(10,433)	(2.1)
Commercial		226,128		230,007		(3,879)	(1.7)		283,705		281,257		2,448	0.9
Total commercial		720,271		724,269		(3,998)	(0.6)		777,249		785,234		(7,985)	(1.0)

Consumer		6,661		6,440		221	3.4		7,106		5,577		1,529	27.4
		936,386		934,575		1,811	0.2		1,000,933		1,009,704		(8,771)	(0.9)
Less: Allowance for loan losses		(14,730)		(11,966)		(2,764)	23.1		(16,136)		(16,789)		653	(3.9)
Net Loans	$	921,656	$	922,609	$	(953)	(0.1)	$	984,797	$	992,915	$	(8,118)	(0.8)


Paycheck Protection Program (PPP) loans (included in Commercial loans above)
Two-year loans	$	3,455	$	5,378
Five-year loans		52,418		46,912
Total Paycheck Protection Program loans	$	55,873	$	52,290	$	3,583	6.9

Loan Quality:

Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans are identified as either a pass or substandard rating based on the performance status of the loans. Substandard consumer loans are loans that are 90 days or more past due and still accruing. Loans rated 1 – 4 are considered pass credits. Loans rated 5 are pass credits but have been identified as credits that are likely to warrant additional attention and monitoring. Loans rated 6-Other Asset Especially Mentioned (OAEM) or worse begin to receive enhanced monitoring and reporting by the Bank. Loans rated 7-Substandard or 8-Doubtful exhibit the greatest financial weakness and present the greatest possible risk of loss to the Bank. Nonaccrual loans are rated no better than 7-Substandard. The following factors represent some of the factors used in determining the risk rating of a borrower: cash flow, debt coverage, liquidity, management, and collateral. Risk ratings, for pass credits, are generally reviewed annually for term debt and at renewal for revolving or renewing debt. The Bank monitors loan quality by reviewing three primary measurements: (1) loans rated 6-OAEM or worse (collectively “watch list”), (2) delinquent loans, and (3) net-charge-offs.,

Watch list loans exhibit financial weaknesses that increase the potential risk of default or loss to the Bank. However, inclusion on the watch list, does not by itself, mean a loss is certain. The watch list totaled ~~$11.1~~$65.8 million at quarter end compared to ~~$11.6~~$66.1 million at December 31, ~~2019.~~2020. The composition of the loans in the watch list as of March 31, 2021 is essentially unchanged from the prior year-end. The watch list includes both performing and nonperforming loans. Included in the ~~substandard~~watchlist total are ~~$3.7~~$8.8 million of nonaccrual loans. The credit composition of the watch list (loans rated 6, 7, or 8), by primary collateral is shown in Note 6 of the accompanying financial statements.

Delinquent loans are a result of borrowers’ cash flow and/or alternative sources of cash being insufficient to repay loans. The Bank’s likelihood of collateral liquidation to repay the loans becomes more probable the further behind a borrower falls, particularly when loans reach 90 days or more past due. Management monitors the performance status of loans by the use of an aging report. The aging report can provide an early indicator of loans that may become severely

delinquent and possibly result in a loss to the Bank. See Note 6 in the accompanying financial statements for a table that presents the aging of payments in the loan portfolio.

Nonaccruing loans generally represent Management’s determination that the borrower will be unable to repay the loan in accordance with its contractual terms and that collateral liquidation may or may not fully repay both interest and principal. It is the Bank’s policy to evaluate the probable collectability of principal and interest due under terms of loan contracts for all loans 90-days or more past due, nonaccrual loans, or impaired loans. Further, it is the Bank’s policy to discontinue accruing interest on loans that are not adequately secured and in the process of collection. Upon determination of nonaccrual status, the Bank subtracts any current year accrued and unpaid interest from its income, and any prior year

accrued and unpaid interest from the allowance for loan losses. Management continually monitors the status of nonperforming loans, the value of any collateral and potential of risk of loss. Nonaccrual loans are rated no better than 7-Substandard.

The Bank’s Loan Management Committee reviews these loans and risk ratings on a quarterly basis in order to proactively identify and manage problem loans. In addition, a committee meets monthly to discuss possible workout strategies for ~~and~~ all credits rated 7-Substandard or worse. Management also tracks other commercial loan risk measurements including high loan to value loans, concentrations, participations and policy exceptions and reports these to the ~~Credit~~Board Enterprise Risk ~~Oversight~~Management Committee of the Board of Directors. The Bank also uses ~~a third-party~~an external loan review consultant to assist with internal loan review with a goal of reviewing ~~60%~~80% of commercial loans each year. The FDIC defines certain supervisory loan-to-value lending limits. The Bank’s internal loan–to-value limits are all equal to or have a lower loan-to-value limit than the supervisory limits. However, in certain instances, the Bank may make a loan that exceeds the supervisory loan-to-value limit. At March 31, ~~2020~~2021, the Bank had loans of ~~$22~~$21.8 million ~~(2.4%~~(2.2% of gross loans) that exceeded the supervisory limit, compared to ~~2.69%~~2.3% at year-end ~~2019.~~

~~Loan quality, overall, has remained stable during the first quarter of~~ 2020. ~~Both nonaccrual loans, and loans past due 90 days or more and still accruing have declined slightly since year-end 2019.~~ Potential problem loans, defined as watch list loans less loans on nonaccrual or past due more than 90 days ~~declined to $6.3~~totaled $57.0 million at ~~March 31, 2020~~quarter end compared to ~~$7.7~~$53.2 million at December 31, ~~2019~~2020.

Loan quality, as measured by nonperforming loans is nearly unchanged during the first quarter of 2021 with $8.8 million of nonperforming loans and a ~~result~~nonperforming loan ratio of ~~the commercial real estate loan moving to nonaccrual.~~ .88%

The following table presents a summary of nonperforming assets as of:


	March 31,		December 31,		March 31,		December 31,
(Dollars in thousands)	2020		2019		2021		2020

Nonaccrual loans
Residential Real Estate 1-4 Family
First liens	$	41	$	68	$	41	$	41
Junior liens and lines of credit		14		31		9		10
Total		55		99		50		51
Residential real estate - construction		521		523		511		512
Commercial real estate		2,922		3,009		8,167		8,033
Commercial		175		197		107		108
Total nonaccrual loans		3,673		3,828		8,835		8,704

Loans past due 90 days or more and still accruing
Residential Real Estate 1-4 Family
First liens		1		31		—		26
Junior liens and lines of credit		31		46		—		—
Total		32		77		—		26
Commercial real estate						—		—
Consumer						1		12
Total loans past due 90 days or more and still accruing		32		77		1		38

Total nonperforming loans		3,705		3,905		8,836		8,742

Other real estate owned		—		—		—		—
Total nonperforming assets	$	3,705	$	3,905	$	8,836	$	8,742

Nonperforming loans to total gross loans		0.40%		0.42%		0.88%		0.87%
Nonperforming assets to total assets		0.29%		0.31%		0.55%		0.57%
Allowance for loan losses to nonperforming loans		397.57%		306.43%		182.62%		192.05%

‎

3336

The following table identifies the most significant loans in nonaccrual status. These two nonaccrual loans account for ~~63%~~79% of the total nonaccrual balance.

(Dollars in thousands)

ALL

Nonaccrual

TDR

Collateral

ALL

Nonaccrual

TDR

Collateral

Balance

Reserve

Date

Status

Collateral

Location

Value (1)

Balance

Reserve

Date

Status

Collateral

Location

Value (1)

Credit 1

1,319

—

Mar-12

1st and 2nd liens on commercial real estate, residential real estate and business assets

3,064

1,245

—

Mar-12

1st and 2nd liens on commercial real estate, residential real estate and business assets

2,820

Credit 2

1,004

—

Mar-19

land for residential development, residential and commercial real estate

1,517

5,741

228

Sep-20

1st and 2nd liens on commercial real estate (hotel) and all related business assets

5,474

2,323

—

6,986

228

(1) Includes any estimated discount on appraised value and cost to sell.

In addition to monitoring nonaccrual loans, the Bank also closely monitors impaired loans and troubled debt restructurings (TDR). A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement. Nonaccrual loans (excluding consumer purpose loans) and TDR loans are considered impaired.

A loan is considered a troubled debt restructuring if the creditor (the Bank), for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. These concessions may include lowering the rate, extending the maturity, re-amortization of the payment, or a combination of multiple concessions. The Bank reviews all loans rated 6-OAEM or worse when it is providing a loan restructure, modification or new credit facility to determine if the action is a TDR. If a TDR loan is placed on nonaccrual status, it remains on nonaccrual status for at least six months to ensure performance.

Loans that have been modified on a good-faith basis in response to COVID-19 to borrowers who were classified as current prior to any relief are not TDRs as outlined in the March 22, 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus orSection 4013 of the CARES Act. Loans may be modified under Section 4013 until the earlier of January 1, 2022 or the 60^th day after the end of the COVID-19 national emergency declared by the President. Consequently, loan delinquencies and nonaccrual loans could continue to increase during the remainder of 2021 if modified loans are not able to return to a performing status.

In accordance with financial accounting standards, TDR loans are always considered impaired until they are paid off or in certain circumstances, refinanced. However, an impaired TDR loan can be a performing loan. Impaired loans ~~decreased to $12.0~~totaled $17.1 million ~~at quarter-end~~ compared to ~~$12.2~~$17.3 million at year-end ~~2019.~~2020.

~~Pandemic Effect on Loan Quality~~ The credit quality of the Bank’s loan portfolio as of March 31, 2020 is stable. The ratio of nonperforming loans to total gross loans is .40%. However, the pandemic outbreak has the potential to affect the credit quality of the loan portfolio in future periods. The pandemic has resulted in certain federal, state and local governmental authorities taking action to stop the spread of the pandemic. These actions have included stay-at-home orders, restrictions on business activity, and proclamations and/or directives aimed at minimizing the spread of the pandemic by restricting the movement of people, products and services in the economy. As a result of these actions, the economic activity of the Bank’s market area has been curtailed, businesses have been shut down and unemployment has dramatically increased. The repayment of every loan is dependent, in some way, on an efficiently functioning economy. Any action that has the effect of restricting economic activity has the potential to reduce cash flow available to repay loans. At this time, the length of this economic downturn is uncertain, as is the effect on the Bank’s loan portfolio.

As addressed below in the Allowance for Loan Losses (ALL) section, the ALL was increased by $3.0 million in the first quarter of 2020 based on higher risk factors in the qualitative allowance. In evaluating the loan portfolio, the most significant things considered were; loan deferrals or modifications, the Paycheck Protection Program, and composition of the portfolio by industry segments.

Loan Deferrals. As the economy quickly contracted in ~~March~~ 2020 as the result of the pandemic, the Bank began to receive requests for payment modifications. Unlike past economic downturns, bank regulators provided favorable guidance for banks allowing them wide latitude to make modifications. ~~This~~Under guidance ~~allowed~~provided by the CARES Act and a joint regulatory agency statement issued by banking agencies, banks could, under certain circumstances, ~~banks to~~ avoid reporting loan modifications as delinquent, nonperforming or as a trouble debt restructuring. As of ~~April 30, 2020,~~March 31, 2021, the Bank has granted approximately ~~$154~~$68 million in loan deferrals or modifications (approximately ~~16%~~7% of gross loans)., unchanged from year-end 2020, but down significantly from 19% of gross loans at June 30, 2020. These modifications include the deferral of principal and interest payments, deferral of interest payments for interest only lines of credit or providing for an interest only payment. Any interest that is deferred is due and payable at the end of the deferral period. Principal that is deferred will be added to the end of the loan as an extension of the maturity date or as a balloon payment, depending on the loan structure. The Bank will continue to accrue interest during the deferral period. The majority of deferrals were for an initial period of 3 ~~months.~~months with the potential for additional deferrals after review. If a borrower requested an additional deferral, the Bank required a review of updated financial reports and forecast prior to granting it.

‎

3437

The following tables show ~~the~~ loan deferrals made as of ~~April 30, 2020~~March 31, 2021 by North American Industry Classification System (NAICS) code and type of collateral.


					Percent of	Collateral
(Dollars in thousands)	Number of			Percent of	Risk-based	Real Estate		Non-Real Estate
Industry Description	Loans		Balance	Gross Loans	Capital (1)	secured		secured
Hotels	19	$	45,597	5%	34%	$	45,591	$	6
Arts, Entertainment, and Recreation	2		13,613	1%	10%		13,613		—
Real Estate, Rental & Leasing	2		7,122	< 1%	5%		7,122		—
Food Service	1		871	< 1%	1%		871		—
Other Services (except Public Administration)	2		926	< 1%	< 1%		926		—
Total	26	$	68,129	7%	50%	$	68,123	$	6
(1) Based on Bank's Risk-based Capital

The following tables show the type of modifications by industry as of March 31, 2021, and the same sectors one quarter earlier at December 31, 2020.

(Dollars in thousands)
Percent of
Collateral
Industry Description
Balance
Gross Loans
Real Estate
Non Real Estate
Accommodation and Food Services
$
68,796
7%
$
68,668
$
128
Retail Trade
36,826
4%
36,115
711
Real Estate and Rental and Leasing
26,433
3%
26,382
51
Health Care and Social Assistance
6,133
1%
4,531
1,602
Construction
4,613
< 1%
2,514
2,099
Arts, Entertainment, and Recreation
3,408
< 1%
3,077
331
Other Services (except Public Administration)
3,260
< 1%
2,963
297
Agriculture, Forestry, Fishing and Hunting
1,798
< 1%
1,715
83
Transportation and Warehousing
1,280
< 1%
439
841
Administrative/Support & Waste Mgt Services
496
< 1%
238
258
Public Administration
396
< 1%
396
—
Manufacturing
321
< 1%
120
201
Professional, Scientific, and Technical Services
170
< 1%
—
170
Total
$
153,930
16%
$
147,158
$
6,772


March 31, 2021	Type of Modification
(Dollars in thousands)	Principal Deferred		Interest Only Loans		Principal & Interest
Industry Description	Interest Only Payments		Payments Deferred		Payments Deferred			Total
Hotels	$	39,417	$	—	$	6,180	$	45,597
Arts, Entertainment & Recreation		13,613		—		—		13,613
Real Estate, Rental & Leasing		2,403		4,719		—		7,122
Food Service		—		871		—		871
Other Services		—		—		926		926
Total	$	55,433	$	5,590	$	7,106	$	68,129


December 31, 2020	Type of Modification
(Dollars in thousands)	Principal Deferred		Interest Only Loans		Principal & Interest
Industry Description	Interest Only Payments		Payments Deferred		Payments Deferred			Total
Hotels	$	40,304	$	—	$	6,183	$	46,487
Arts, Entertainment & Recreation		13,613		—		462		14,075
Real Estate, Rental & Leasing		—		4,718		—		4,718
Food Service		—		882		724		1,606
Other Services		—		—		671		671
Total	$	53,917	$	5,600	$	8,040	$	67,557

The performance of these loans as they come out of the deferral period will be critical in predicting the credit quality of the loans in the future.

‎

Industry Exposure. The Bank ~~expects~~believes its greatest risk exposure to modified loans is in the ~~balance~~hotel sector. The following table presents additional information on the modified hotel loans.


March 31, 2021
(Dollars in thousands, except average daily rate)

Modified Balance	$	45,597
Loans with principal payment deferred, paying interest	$	39,417
Loans with deferred principal and interest	$	6,180
Expected modification expiration
1-3 months	$	38,755
4-6 months	$	6,842
Number of Loans Modified		19
Average Balance	$	2,400
Average Loan-to-Value		59%
Risk Rated: 5 - Pass	$	1,623
Risk Rated: 6 - Other Asset Especially Mentioned	$	30,191
Risk Rated: 7 - Substandard	$	13,783
March 2021 Daily Occupancy*		45%
March 2020 Daily Occupancy*		35%
March 2021 Average Daily Rate*	$	66
March 2020 Average Daily Rate*	$	67
Hotel Flags		12

*Daily occupancy and average daily rate represent data reported for the primary markets in which the hotels operate and may or may not represent the experience of ~~modifications and deferrals to increase during~~any specific property in the ~~second quarter.~~portfolio.

Paycheck Protection Program. ~~The Bank participated~~In March 2020, Congress passed the CARES Act to provide economic relief to small business and consumers affect by the COVID-19 pandemic. Included in this Act was the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The PPP is a small business loan program designed to assist in allowing small businesses to keep workers on the payroll during the COVID-19 pandemic. When workers are kept on the payroll for the qualifying period, the loan could be forgiven if the small business incurs eligible expenses. The PPP loans are 100 percent guaranteed by the SBA and have a maturity of two-years ~~and have~~or five-years with a fixed interest rate of 1% for the life of the loan. Borrowers of PPP loans do not have to make payments on the loan for the first six months, ~~then it is~~and the loans will fully ~~amortizing~~amortize for the remainder of the ~~two-year term.~~ two- or five-year terms.

In December 2020, Congress passed a second stimulus package that provided for a second round of funding for small business, that meet certain eligibility requirements, through the PPP. PPP loans under the second round of funding are for a 5-year term with a fixed interest rate of 1% and initial principal payments deferred for up to 10 months under certain circumstances.

The SBA ~~pays~~paid originating banks a processing fee ranging from 3%1% to 5% of the loan, depending on the loan ~~balance.~~balance for round 1 of PPP funding. The SBA will pay processing fees to originating banks for round 2 of PPP funding at levels similar to those paid in round 1. The Bank ~~focused its efforts for~~will recognize these fees in interest income over the ~~first round~~contractual life (two or five years) of the loan. As PPP ~~on its current customers and funded 90%~~loans are granted forgiveness by the SBA, fee recognition will accelerate. At March 31, 2021, the Bank had $1.9 million of ~~all approved applications it received for approximately $50.1 million.~~PPP fees remaining to be recognized.

At March 31, 2021 the Bank held $55.9 million in PPP loans, $52.4 million with a 5-year maturity $3.5 million with a 2-year maturity. The Bank ~~expects to receive fee income of approximately $2 million of processing fees from~~began accepting round 2 PPP ~~loans recognized over the second and third quarter of 2020.~~ applications in January 2021.

The PPP loans are 100% guaranteed by the SBA, thereby presenting no credit risk to the Bank once the SBA guarantee is fulfilled, if necessary. However, the PPP loan is only designed to cover short-term operating needs of the borrower. If the economy does not recover quickly from the pandemic and the borrower experiences long-term operational problems beyond the PPP funding, the performance of other loans to these customers could begin to deteriorate.

~~Industry Exposure~~. With the pandemic shut down of non-essential businesses and stay at home orders, nearly every business and industry has been affected. Certain businesses have had a complete stoppage of operations, while many others have seen their business significantly reduced. Some businesses have requested loan modifications and others have taken PPP loans to continue operations.

~~To better understand the risk in the portfolio from the pandemic, the Bank has segregated its portfolio by industry and the perceived exposure to be economically affected by the pandemic.~~

~~The following table shows the loan portfolio by perceived pandemic risk at March 31, 2020.~~

(Dollars in thousands)
Low
$
448,945
Medium
359,362
High
128,079
Total
$
936,386

‎

~~The following tables show the medium and high perceived pandemic risk by industry and collateral at March 31, 2020.~~

(Dollars in thousands)
Percent of
Medium Risk
Gross Loans
Real Estate Secured
Non-Real Estate Secured
Retail - Consumer Loans - Non Real Estate
$
5,744
1%
$
—
$
5,744
Construction
71,260
8%
61,228
10,031
Real Estate and Rental and Leasing
282,358
30%
265,772
16,587
Total
$
359,362
38%
$
327,000
$
32,362
High Risk
Arts, Entertainment, and Recreation
$
15,393
2%
$
14,903
$
490
Retail Trade - Non Operating Sectors
34,447
4%
32,006
2,442
Accommodation and Food Services
78,239
8%
76,697
1,543
Total
$
128,079
14%
$
123,606
$
4,475

Allowance for Loan Losses:

Management monitors loan performance on a monthly basis and performs a quarterly evaluation of the adequacy of the allowance for loan ~~losses (ALL).~~losses. The ALL is determined by segmenting the loan portfolio based on the loan’s collateral. When calculating the ALL, consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, historical charge-offs, the adequacy of the underlying collateral (if collateral dependent) and other relevant factors. The Bank begins enhanced monitoring of all loans rated 6-OAEM, or worse, and obtains a new appraisal or asset

valuation for any placed on nonaccrual and rated 7-Substandard or worse. Management, at its discretion, may determine that additional adjustments to the appraisal or valuation are required. Valuation adjustments will be made as necessary based on factors, including, but not limited to; the economy, deferred maintenance, industry, type of property/equipment, age of the appraisal, etc. and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated and deducted from the valuation in order to determine the net realizable value to the Bank. When determining the allowance for loan losses, certain factors involved in the evaluation are inherently subjective and require material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. Management monitors the adequacy of the allowance for loan losses on an ongoing basis and reports its adequacy quarterly to the ~~Credit~~Board Enterprise Risk ~~Oversight~~Management Committee of the Board of Directors. Management believes that the allowance for loan losses at March 31, ~~2020~~2021 is adequate.

The analysis for determining the ALL is consistent with guidance set forth in generally accepted accounting principles (GAAP) and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The analysis has three components; specific, general and unallocated. The specific component addresses specific reserves established for impaired loans. A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement. Collateral values discounted for market conditions and selling costs are used to establish specific allocations for impaired loans. However, it is possible that as a result of the credit analysis, a specific reserve is not required for an impaired loan. Commercial loans with a balance less than $250 thousand, and all consumer purpose loans are not included in the specific reserve analysis as impaired loans but are added to the general allocation pool. These loans totaled ~~$412~~$262 thousand at March 31, ~~2020~~2021 and are comprised primarily of loans secured by residential real estate. Management does not believe that excluding these loans from the specific reserve analysis presents any additional risk. Loans that are evaluated for a specific reserve, but not needing a specific reserve are not added back to the general allocation pool. There was noa $228 thousand specific reserve established for ~~any of the~~one impaired ~~loans. Note 6 of the accompanying financial statements provides additional information about the ALL established for impaired loans.~~loan at March 31, 2021 unchanged from year-end 2020.

The general allocation component addresses the reserves established for pools of homogenous loans. The general component includes a quantitative and qualitative analysis. When calculating the general allocation, the Bank segregates its loan portfolio into the following segments based primarily on the type of supporting collateral: residential real estate, commercial, industrial or agricultural real estate; commercial and industrial (C&I non-real estate), and consumer. Each segment may be further segregated by type of collateral, lien position, or owner/nonowner occupied properties. The quantitative analysis uses the Bank’s twenty quarter rolling historical loan loss experience as determined for each loan segment to determine a loss factor applicable to each loan segment. PPP loans, because of the SBA guarantee, are excluded from the quantitative analysis. The allowance established as a result of the quantitative analysis was ~~$2.9~~$3.7 million compared to $3.6 million at ~~March 31, 2020, unchanged from~~ year-end ~~2019.~~2020.

The qualitative analysis utilizes a risk matrix that incorporates four primary risk factors: economic conditions, delinquency, classified loans, and level of risk, and assigns a risk score (as measured in basis points) to each factor. The

economic condition factor is primarily based on unemployment rates. The delinquency factor considers the level of past due loans and charge-offs. The classified loan factor considers the internal credit risk score of the portfolio. The level of risk factor considers operational factors such as: loan volume, management, loan review process, credit concentrations, competition, and legal and regulatory issues. The risk score (as measured in basis points) for each of the four risk factors is minimal, low, moderate, high and very high and is determined independently for commercial loans, residential mortgage loans and consumer loans. ~~At March 31,~~During 2020, as a result of the negative effects of the pandemic on the economy, the Bank increased the basis point risk factor for certain qualitative components. In addition, the Bank carved out the portfolio of modified loans for a qualitative assessment separate from the overall commercial loan portfolio. This allowed for assignment of an increased qualitative risk score ~~for economic conditions~~on this portfolio. As of March 31, several qualitative factors were reduced reflecting a lower risk of loss in the loan portfolio. This is the second consecutive quarter of a reduction in certain qualitative factors and ~~level of risk~~the qualitative allowance declined to $11.5 million at March 31, 2021 down from $12.1 million at year-end 2020 and from a ~~moderate range to a very~~ high ~~range for all loan portfolios to reflect increased risk presented by~~of $12.6 million at September 30, 2020. PPP loans, because of the pandemic. The risk score for delinquency and classified loan factors remained unchanged but could increase depending loan performance in the future. These changes resulted in a $2.6 million increase inSBA guarantee, were excluded from the qualitative ~~component of the ALL to $10.3 million March 31, 2020.~~analysis.

The unallocated component is maintained to cover uncertainties that could affect Management’s estimate of probable loss. The unallocated component of the ALL reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The ~~following table shows, by loan segment, the activity in the ALL, the amount of~~unallocated allowance ~~established in each category and the loans that were evaluated for the ALL under a specific reserve (individually) and those that were evaluated under a general reserve (collectively) as of~~was $789 thousand at March 31, ~~2020.~~

Residential Real Estate 1-4 Family
First
Junior Liens &
Commercial
(Dollars in thousands)
Liens
Lines of Credit
Construction
Real Estate
Commercial
Consumer
Unallocated
Total
ALL at December 31, 2019
$
416
$
119
$
184
$
6,022
$
3,815
$
84
$
1,326
$
11,966
Charge-offs
—
—
—
—
(220)
(30)
—
(250)
Recoveries
3
—
—
—
5
6
—
14
Provision
144
59
82
1,582
886
38
209
3,000
ALL at March 31, 2020
$
563
$
178
$
266
$
7,604
$
4,486
$
98
$
1,535
$
14,730

Residential Real Estate 1-4 Family
First
Junior Liens &
Commercial
(Dollars in thousands)
Liens
Lines of Credit
Construction
Real Estate
Commercial
Consumer
Unallocated
Total
March 31, 2020
Loans evaluated for ALL:
Individually
$
653
$
—
$
521
$
10,795
$
—
$
—
$
—
$
11,969
Collectively
142,653
50,666
14,961
483,348
226,128
6,661
—
924,417
Total
$
143,306
$
50,666
$
15,482
$
494,143
$
226,128
$
6,661
$
—
$
936,386
ALL established for
‎ loans evaluated:
Individually
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Collectively
563
178
266
7,604
4,486
98
1,535
14,730
ALL at March 31, 2020
$
563
$
178
$
266
$
7,604
$
4,486
$
98
$
1,535
$
14,730

2021.

Real estate appraisals and collateral valuations are an important part of the Bank’s process for determining potential loss on collateral dependent loans and thereby have a direct effect on the determination of loan reserves, charge-offs and the calculation of the allowance for loan losses. As long as the loan remains a performing loan, no further updates to appraisals are required. If a loan or relationship migrates to nonaccrual and a risk rating of 7-Substandard or worse, an

evaluation for impairment status is made based on the current information available at the time of downgrade and a new appraisal or collateral valuation is obtained. We believe this practice complies with the regulatory guidance.

In determining the allowance for loan losses, Management, at its discretion, may determine that additional adjustments to the fair value obtained from an appraisal or collateral valuation are required. Adjustments will be made as necessary based on factors, including, but not limited to the economy, deferred maintenance, industry, type of property or equipment etc., and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated and deducted from the valuation in order to determine the net realizable value to the Bank. If an appraisal is not available, Management may make its best estimate of the real value of the collateral or use last

known market value and apply appropriate discounts. If an adjustment is made to the collateral valuation, this will be documented with appropriate support and reported to the Loan Management Committee.

The following table shows, by loan segment, the activity in the ALL, the amount of allowance established in each category and the loans that were evaluated for the ALL under a specific reserve (individually) and those that were evaluated under a general reserve (collectively) as of March 31, 2021.


	Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total
ALL at December 31, 2020	$	555	$	226	$	294	$	9,163	$	5,679	$	97	$	775	$	16,789
Charge-offs		—		—		—		(13)		(5)		(18)		—		(36)
Recoveries		—		169		—		—		7		7		—		183
Provision		(108)		(184)		24		(365)		(208)		27		14		(800)
ALL at March 31, 2021	$	447	$	211	$	318	$	8,785	$	5,473	$	113	$	789	$	16,136

ALL at December 31, 2019	$	416	$	119	$	186	$	6,607	$	4,022	$	84	$	532	$	11,966
Charge-offs		-		—		—		—		(220)		(30)		—		(250)
Recoveries		3		—		—		—		5		6		—		14
Provision		144		59		82		1,660		889		38		128		3,000
ALL at March 31, 2020	$	563	$	178	$	268	$	8,267	$	4,696	$	98	$	660	$	14,730


	Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total
March 31, 2021
Loans evaluated for ALL:
Individually	$	631	$	—	$	511	$	16,000	$	—	$	—	$	—	$	17,142
Collectively		131,378		65,951		18,107		477,544		283,705		7,106		—		983,791
Total	$	132,009	$	65,951	$	18,618	$	493,544	$	283,705	$	7,106	$	—	$	1,000,933

ALL established for ‎ loans evaluated:
Individually	$	—	$	—	$	—	$	228	$	—	$	—	$	—	$	228
Collectively		447		211		318		8,557		5,473		113		789		15,908
ALL at March 31, 2021	$	447	$	211	$	318	$	8,785	$	5,473	$	113	$	789	$	16,136

December 31, 2020
Loans evaluated for ALL:
Individually	$	637	$	—	$	512	$	16,104	$	—	$	—	$	—	$	17,253
Collectively		136,587		65,360		15,797		487,873		281,257		5,577		—		992,451
Total	$	137,224	$	65,360	$	16,309	$	503,977	$	281,257	$	5,577	$	—	$	1,009,704

ALL established for ‎ loans evaluated:
Individually	$	—	$	—	$	—	$	228	$	—	$	—	$	—	$	228
Collectively		555		226		294		8,935		5,679		97		775		16,561
ALL at December 31, 2020	$	555	$	226	$	294	$	9,163	$	5,679	$	97	$	775	$	16,789

The allocation of the allowance for loan losses is based on estimates and is not intended to imply limitations on the usage of the allowance. The entire allowance is available to absorb any losses without regard to the category in which the loan is classified.

The following table shows the ALL and charge-off ratios for the periods ended:


	Three Months Ended		Year ended			Three Months Ended		Three Months Ended		Year Ended			Three Months Ended
	March 31, 2020			December 31, 2019		March 31, 2019		March 31, 2021			December 31, 2020		March 31, 2020
Net charge-offs (recoveries)/average loans*		0.10%			0.07%		0.05%		-0.06%			-0.02%		0.10%
Net loan charge-offs (recoveries) as a percentage of the provision for loan losses		7.87%			289.54%		33.33%		-18.38%			-4.28%		7.87%
Allowance for loan losses as a % of loans		1.57%			1.28%		1.29%		1.61%			1.66%		1.57%
Net charge-offs (recoveries)	$	236		$	686	$	133
Net (recoveries) charge-offs								$	(147)		$	(198)	$	236
* Annualized

Deposits:

Total deposits ~~decreased $8.0~~increased $66.5 million during the first three months of ~~2020~~2021 to ~~$1.117~~$1.421 billion. Noninterest-bearing deposits increased ~~$6.3~~$31.0 million (primarily in small business and retail checking deposits) and interest-bearing checking and savings deposits ~~decreased $8.7~~increased $38.3 million, while time deposits decreased ~~$5.5~~$2.8 million. Interest-bearing checking ~~decreased~~increased by ~~$12.0~~$19.5 million ~~primarily~~ in ~~commercial~~retail and ~~municipal~~commercial deposits, while the Bank’s Money Management increased $18.0 million. Based on current information known to Management, the increases seem to stem from government stimulus payments to consumers, businesses and ~~remained flat~~municipalities, lower spending as economic activity slowed during the pandemic and ~~Savings products increased $2.3 million compared to year-end 2019. Time~~a sense of security offered by bank deposits ~~also decreased since year-end and~~in uncertain economic times. The decrease in time deposits is primarily in retail accounts.

As of March 31, ~~2020,~~2021, the Bank had ~~$158.1~~$187.0 million placed in the ~~ICS reciprocal~~IntraFi Network deposit program ($~~106.3~~135.8 million in ~~interesting-bearing~~interest-bearing checking and ~~$48.5~~$51.2 million in money management) and ~~$3.2~~$4.4 million in reciprocal time deposits in the CDARS program included in time deposits. These programs allow the Bank to offer full FDIC coverage to large depositors, but with the convenience to the customer of only having to deal with one bank. The Bank solicits these deposits from within its market and it believes they present no greater risk than any other local deposit. Only reciprocal deposits that exceed 20% of liabilities are considered brokered deposits. At March 31, ~~2020~~2021, the Bank’s reciprocal deposits were ~~14.7%~~13.2% of total liabilities compared to ~~14.2%~~12.9% at year-end ~~2019.~~2020.

The following table presents a summary of deposits for the periods ended:


	March 31,		December 31,			Change		March 31,		December 31,			Change
(Dollars in thousands)	2020		2019			Amount	%	2021		2020			Amount	%
Noninterest-bearing checking	$	198,384	$	192,108	$	6,276	3.3	$	290,015	$	259,060	$	30,955	11.9

Interest-bearing checking		319,928		331,886		(11,958)	(3.6)		428,679		409,178		19,501	4.8
Money management		430,138		429,199		939	0.2		519,035		501,017		18,018	3.6
Savings		85,142		82,851		2,291	2.8		109,964		109,153		811	0.7
Total interest-bearing checking and savings		835,208		843,936		(8,728)	(1.0)		1,057,678		1,019,348		38,330	3.8

Time deposits		83,841		89,348		(5,507)	(6.2)		73,349		76,165		(2,816)	(3.7)

Total deposits	$	1,117,433	$	1,125,392	$	(7,959)	(0.7)	$	1,421,042	$	1,354,573	$	66,469	4.9

Overdrawn deposit accounts reclassified as loans	$	227	$	153				$	90	$	86

‎

Borrowings:

On August 4, 2020 the Corporation completed the sale of a subordinated debt note offering. The Corporation ~~had no borrowings~~sold $15.0 million of subordinated debt notes with a maturity date of September 1, 2030. These notes are noncallable for 5 years and carry a fixed interest rate of 5% per year for 5 years and then convert to floating rate of SOFR plus 4.93% per year for the remainder of the term. The notes can be redeemed at ~~March 31, 2020~~par beginning 5 years prior to maturity. The Corporation also sold $5.0 million of subordinated debt notes with a maturity date of September 1, 2035. These notes are noncallable for 10 years and ~~December 31, 2019.~~carry a fixed interest rate of 5.25% per year for 10 years and then convert to floating rate of SOFR plus 4.92% per year for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. The Corporation paid an issuance fee of 2% of the total issue that will be amortized to the call date of each issue on a pro-rata basis. The proceeds are intended to be used for general corporate purposes.

Shareholders’ Equity:

Total shareholders’ equity ~~increased $1.5~~decreased $4.5 million to ~~$129.0~~$140.7 million at March 31, ~~2020,~~2021, from ~~$127.5~~$145.2 million at the end of ~~2019.~~2020, due primarily to a decrease of $8.4 million in accumulated other comprehensive income (AOCI) as the fair value of the investment portfolio declined during the quarter. The Corporation’s net earnings of ~~$1.7~~$4.8 million were partially offset by the cash dividend of $1.3 million. The Corporation’s Dividend Reinvestment Plan (DRIP) added ~~$349~~$100 thousand in new capital from optional cash contributions and ~~$211~~$225 thousand from the reinvestment of quarterly dividends. The Corporation’s dividend payout ratio was ~~75.97%~~27.29% for the first three months of ~~2020.~~2021.

As part of its quarterly dividend decision, the Corporation considers current and future income projections, dividend yield, payout ratio, and current and future capital ratios. For the first quarter of ~~2020,~~2021, the Corporation paid a $0.30 per share dividend, compared to ~~$0.27~~$0.30 paid in the ~~first~~fourth quarter of ~~2019.~~2020. On April ~~16, 2020~~8, 2021 the Board of Directors declared a ~~$0.30~~$0.31 per share regular quarterly dividend for the second quarter of ~~2020,~~2021, which will be paid on May ~~27, 2020.~~26, 2021.

On ~~September 12, 2019,~~December 17, 2020, the Board of Directors authorized the ~~2019~~2020 Repurchase Plan for the repurchase of up to 150,000 shares of the Corporation’s $1.00 par value common stock at market prices in open market or privately

negotiated transactions beginning ~~September 13, 2019~~December 18, 2020 and ~~continuing through September 12, 2020. During~~expiring on December 18, 2021. No shares were repurchased during the first quarter of ~~2020, 36,401 shares were repurchased, under the 2019 plan.~~2021. The Corporation ~~suspended activity~~is monitoring the market and intends to repurchase shares when and if the opportunity arises in ~~the stock repurchase~~accordance with applicable law, regulations and plan ~~on March 19, 2020.~~authorizations.

Capital adequacy for the Bank is currently defined by regulatory agencies through the use of several minimum required ratios. The capital ratios to be considered “well capitalized” are: (1) Common Equity Tier 1 (CET1) of 6.5%, (2) Tier 1 Leverage of 5%, (3) Tier 1 Risk-Based Capital of 8%, and (4) Total Risk-Based Capital of 10%. In addition, a capital conservation buffer of 2.50% is applicable to all of the capital ratios except for the Tier 1 Leverage ratio. The capital conservation buffer is equal to the lowest value of the three applicable capital ratios less the regulatory minimum for each respective capital measurement. The Bank’s capital conservation buffer at March 31, ~~2020~~2021 was ~~7.78% (total risk-based capital 15.78% less 8.00%)~~7.89% compared to the 2020 regulatory buffer of 2.50%. Compliance with the capital conservation buffer is required in order to avoid limitations to certain capital distributions and is in addition to the minimum required capital requirements. As of March 31, ~~2020,~~2021, the Bank was “well capitalized”.

The Bank is participating in the Paycheck Protection Program (PPP) and the Paycheck Protection Program Liquidity Facility (PPPLF) to fund PPP Loans. In accordance with regulatory guidance, PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios. PPP loans will also carry a 0% risk-weight for risk-based capital rules.

The consolidated asset limit on small bank holding companies is $3 billion and a company with assets under that limit is not subject to the consolidated capital rules but may file reports that include capital amounts and ratios. The Corporation has elected to file those reports.

The following table summarizes the regulatory capital requirements and results as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 for the Corporation and the Bank:


				Regulatory Ratios					Regulatory Ratios
				Adequately	Well				Adequately	Well
		March 31,	December 31,	Capitalized	Capitalized		March 31,	December 31,	Capitalized	Capitalized
(Dollars in thousands)		2020	2019	Minimum	Minimum		2021	2020	Minimum	Minimum

Common Equity Tier 1 Risk-based Capital Ratio (1)
Franklin Financial Services Corporation		14.73%	14.82%	N/A	N/A		14.80%	14.32%	N/A	N/A
Farmers & Merchants Trust Company		14.52%	14.62%	4.500%	6.50%		14.63%	14.07%	4.50%	6.50%

Tier 1 Risk-based Capital Ratio (2)
Franklin Financial Services Corporation		14.73%	14.82%	N/A	N/A		14.80%	14.32%	N/A	N/A
Farmers & Merchants Trust Company		14.52%	14.62%	6.000%	8.00%		14.63%	14.07%	6.00%	8.00%

Total Risk-based Capital Ratio (3)
Franklin Financial Services Corporation		15.99%	16.08%	N/A	N/A		18.18%	17.69%	N/A	N/A
Farmers & Merchants Trust Company		15.78%	15.87%	8.000%	10.00%		15.89%	15.33%	8.00%	10.00%

Tier 1 Leverage Ratio (4)
Franklin Financial Services Corporation		9.85%	9.72%	N/A	N/A		8.76%	8.69%	N/A	N/A
Farmers & Merchants Trust Company		9.71%	9.59%	4.000%	5.00%		8.65%	8.54%	4.00%	5.00%

(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets	(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets					(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets
(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets	(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets					(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets

Economy

The Corporation’s primary market area includes Franklin, Fulton, Cumberland and Huntingdon Counties, Pennsylvania. This area is diverse in demographic and economic makeup. County populations range from a low of approximately 15,000 in Fulton County to over ~~249,000~~250,000 in Cumberland County. Unemployment in the Bank’s market area ~~has remained virtually unchanged over the past year and ranges~~ranged from ~~a low of 3.5%~~5.7% in Cumberland County to ~~5.3%~~10.5% in

Huntingdon ~~County.~~County, as of the end of February. The market area has a diverse economic base and local industries include warehousing, truck & rail shipping centers, light and heavy manufacturers, ~~health-care,~~healthcare, higher education institutions, farming and agriculture, and a varied service sector. The Corporation’s primary market area is located in South Central PA and provides easy access to the major metropolitan markets on the east coast via trucking and rail transportation. Because of this, warehousing and distribution companies continue to find the area attractive. The local economy is not overly dependent on any one industry or business and Management believes that the Bank’s primary market area continues to be well suited for growth.

~~In early~~As of March ~~2020, the economic outlook changed dramatically driven primarily by the~~31, 2021, COVID-19 pandemic. The pandemic has resulted in certain federal, state and local governmental authorities taking action to stop the spread of the pandemic. These actions have included stay-at-home orders, restrictions on business activity, and proclamations and/or directives aimed at minimizing the spread of the pandemic by restricting the movement of people, products and services in the economy. As a result of these actions, the economic activity of the Bank’s market area has been curtailed, businessescases have been ~~shut down~~declining, vaccinations have increased, and ~~unemployment has dramatically increased. The repayment~~lockdowns and restrictions have eased. With these, it appears the economy is set to begin a recovery, but the extent of ~~every loan~~any such recovery is dependent, in some way, on an efficiently functioning economy. Any action that has the effect of restricting economic activity has the potential to reduce cash flow available to repay loans. At this time, the length of this economic downturn and its effect on the Corporation isstill uncertain.

Impact of Inflation

The impact of inflation upon financial institutions such as the Corporation differs from its effect upon other commercial enterprises. Unlike many companies, the assets and liabilities of the Corporation are financial in nature. As such, interest rates and changes in interest rates may have a more significant effect on the Corporation’s financial results than on other types of industries. Because of this, the Corporation watches the actions of the Federal Reserve Open Market Committee (FOMC) as it makes decisions about interest rate changes and how such changes affect market rates and the Corporation. Although inflation (and inflation expectations) may affect the interest rate environment, it is not possible to measure with any precision the ~~affect~~effect of inflation on the Corporation.

Liquidity

The Corporation must meet the financial needs of the customers that it serves, while providing a satisfactory return on the shareholders’ investment. In order to accomplish this, the Corporation must maintain sufficient liquidity in order to respond quickly to the changing level of funds required for both loan and deposit activity. The goal of liquidity management is to meet the ongoing cash flow requirements of depositors who want to withdraw funds and of borrowers who request loan disbursements. The Bank regularly reviews it liquidity position by measuring its projected net cash

flows (in and out) at a 30 and 90-day interval. The Bank stresses the measurements by assuming a level of deposit out-flows that have not historically been realized. In addition to this forecast, other funding sources are reviewed as a method to provide emergency funding if necessary. The objective of this measurement is to identify the amount of cash that could be raised quickly without the need to liquidate assets. The Bank also stresses its liquidity position utilizing different longer-term scenarios. The varying degrees of stress create pressure on deposit flows in its local market, reduce access to wholesale funding and limit access of funds available through brokered deposit channels. In addition to stressing cash flow, specific liquidity risk indicators are monitored to help identify risk areas. This analysis helps identify and quantify the potential cash surplus/deficit over a variety of time horizons to ensure the Bank has adequate funding resources. Assumptions used for liquidity stress testing are subjective. Should an evolving liquidity situation or business cycle present new data, potential assumption changes will be considered. The Bank believes it can meet all anticipated liquidity demands.

Historically, the Corporation has satisfied its liquidity needs from earnings, repayment of loans and amortizing investment securities, maturing investment securities, loan` sales, deposit growth and its ability to access existing lines of credit. All investment securities are classified as available for sale; therefore, securities that are unencumbered (approximately ~~$125.7~~$302.2 million fair value) as collateral for borrowings are an additional source of readily available liquidity, either by selling the security or, more preferably, to provide collateral for additional borrowing. The Bank also has access to other wholesale funding via the brokered CD market.

The FHLB system has always been a major funding source for the Bank. There are no current indicators that lead the Bank to believe the FHLB would discontinue its lending function or restrict the Bank’s ability to borrow. If either of these events would occur, it would have a negative effect on the Bank, and it is unlikely that the Bank could replace the level of FHLB funding in a short time. The Bank has established credit at the Federal Reserve Discount Window and at correspondent banks.

‎

The following table shows the Bank’s available liquidity at March 31, ~~2020.~~2021.


(Dollars in thousands)

Liquidity Source		Capacity		Outstanding		Available		Capacity		Outstanding		Available
Federal Home Loan Bank	$	377,600	$	—	$	377,600	$	366,092	$	—	$	366,092
Federal Reserve Bank Discount Window		21,000		—		21,000		23,920		—		23,920
Correspondent Banks		21,000		—		21,000		21,000		—		21,000
Paycheck Protection Program Liquidity Facility								55,873		—		55,873
Total	$	419,600	$	—	$	419,600	$	466,885	$	—	$	466,885

Pandemic Effect on ~~Liquidity -~~Liquidity: The Bank is closely monitoring itits liquidity needs as loans are modified and delinquencies are expected to increase. The Bank expects to see a reduction in monthly cash flow from loan deferrals, as discussed in the Loan Quality section. The Bank expects to be able to absorb this reduction through its current liquidity resources. To support its liquidity position, the Bank is participating in the Paycheck Protection Program Liquidity Facility (PPPLF) established by the Federal Reserve to fund loans made through the Paycheck Protection Program sponsored by the Small Business Administration. The PPPLF is a term financing facility with a fixed interest rate of ~~.35%~~0.35% and a maturity equal to the maturity date of ~~no more than 2~~the PPP loans (2 years ~~for each loan.~~or 5 years). Loans made through the PPP are used as collateral for PPPLF funding. The PPPLF will allow the Bank to fully fund its PPP loans at a low fixed rate without having to access its normal liquidity sources described above. The Bank also expects to see a temporary increase in funding as the stimulus checks provided by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) are issued and deposited to the bank. However, the Bank expects these funds to be quickly withdrawn. The Bank believes it can meet all anticipated liquidity demands of the pandemic through its current liquidity sources and the government sponsored programs.

The CARES Act also granted the FDIC authority to reinstitute the liquidity guarantee program to offer unlimited FDIC insurance on noninterest bearing deposit. If this is approved by the FDIC, it would provide less incentive for customers to withdraw deposits and possibly strain bank liquidity

Off Balance Sheet Commitments

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation. Unused commitments and standby letters of credit totaled ~~$329.4~~$382.5 million and ~~$336.6~~$380.3 million, respectively, at March 31, ~~2020~~2021 and December 31, ~~2019. As~~2020. In the second quarter of ~~June 30,~~ 2018, the Bank established a $2.4 million allowance against letters of credit issued in connection with a commercial borrower that declared bankruptcy. In the first quarter of 2020, the Bank reversed $250 thousand of this reserve as one letter of credit was cancelled. At March 31, ~~2020~~2021, this reserve was $2.1 million.

The Corporation has entered into various contractual obligations to make future payments. These obligations include time deposits, long-term debt, operating leases, deferred compensation and pension payments. These amounts have not changed materially from those reported in the Corporation’s ~~2019~~2020 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the Corporation’s exposure to market risk during the three months ended March 31, ~~2020.~~2021. For more information on market risk refer to the Corporation’s ~~2019~~2020 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, ~~2020,~~2021, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Corporation’s internal control

over financial reporting during the quarterly period ended March 31, ~~2020,~~2021, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

‎

4246

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

The nature of the Corporation’s business generates a certain amount of litigation.

We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable, and the amount of the loss can be reasonably estimated. When we are able to do so, we also determine estimates of possible losses, whether in excess of any accrued liability or where there is no accrued liability.

These assessments are based on our analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained, we may change our assessments and, as a result, take or adjust the amounts of our accruals and change our estimates of possible losses or ranges of possible losses. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts that may be accrued or included in estimates of possible losses or ranges of possible losses may not represent the actual loss to the Corporation from any legal proceeding. Our exposure and ultimate losses may be higher, possibly significantly higher, than amounts we may accrue or amounts we may estimate.

In management’s opinion, we do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of all litigation to which the Corporation is a party will have a material adverse effect on our financial position. We cannot now determine, however, whether or not any claim asserted against us will have a material adverse effect on our results of operations in any future reporting period, which will depend on, amount other things, the amount of loss resulting from the claim and the amount of income otherwise reported for the reporting period. Thus, at March 31, 2020, we are unable to provide an evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss with respect to such other matters and, accordingly, have not yet established any specific accrual for such other matters.

~~No material proceedings are pending or are known to be threatened or contemplated against us by governmental authorities.~~

In management’s opinion, there are no other proceedings pending to which the Corporation is a party or to which its property is subject which, if determined adversely to the Corporation, would be material. No material proceedings are pending or are known to be threatened or contemplated against us by any governmental authorities.

Item 1A. Risk Factors

~~During~~There were no material changes in the Corporation’s risk factors during the three months ended March 31, 2020 the Corporation has determined the following risk associated with its business, financial condition, results of operations and common stock. This risk factor supplements the risk factors described in2021. For more information, refer to the Corporation’s ~~2019~~2020 Annual Report on Form 10-K.

~~Public health crisis such as epidemics or pandemics could materially and adversely impact our business~~
‎.

The COVID-19 pandemic has negatively impacted the global, national and local economies, disrupted global and national supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increase in our allowance for credit losses, particularly if businesses remain closed, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial conditions, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

We continue to closely monitor the COVID-19 pandemic and related risks as they evolve. The magnitude, duration and likelihood of the current outbreak of COVID-19, further outbreaks of COVID-19, future actions taken by governmental authorities and/or other third parties in response to the COVID-19 pandemic, and its future direct and

4347

indirect effects on the global, national and local economy and our business and results of operation are highly uncertain. The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition.

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

(Dollars in thousands, except per share)
Period
Number of
‎Shares Purchased as Part of Publicly Announced Program
Weighted
‎Average
‎Price Paid
‎per Share
Dollar Amount of
‎Shares Purchased
‎as Part of Publicly
‎Announced Program

‎Shares Yet
‎To Be Purchased
‎Under Program
March 2020
36,401
32.19
1,172
113,499
36,401
$
1,172

On December ~~20, 2018,~~17, 2020, the Board of Directors authorized the 2018 Repurchase Plan for the repurchase of up to 100,000 shares of the Corporation’s $1.00 par value common stock at market prices in open market or privately negotiated transactions beginning December 21, 2018 and continuing through December 21, 2019. The 2018 Repurchase plan was completed in the third quarter of 2019. On September 12, 2019, the Board of Directors authorized the 20192020 Repurchase Plan for the repurchase of up to 150,000 shares of the Corporation’s $1.00 par value common stock at market prices in open market or privately negotiated transactions beginning ~~September 13, 2019~~December 18, 2020 and ~~continuing through September 13, 2020.~~expiring on December 18, 2021. No shares were repurchased during the first quarter of 2021. The Corporation ~~suspended activity~~is monitoring the market and intends to repurchase shares when and if the opportunity arises in ~~the stock repurchase~~accordance with applicable law, regulations and plan ~~on March 19, 2020.~~authorities.

Item 3. Defaults by the Company on its Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

‎

4448

Item 5. Other Information

None

Item 6. Exhibits

Exhibits


3.1	Amended and Restated Articles of Incorporation of the ~~Corporation.~~Corporation (Filed as Exhibit 3.1 to ~~Annual~~Quarterly Report on Form ~~10-K~~10-Q for the ~~year~~quarter ended ~~December 31, 2014~~June 30, 2020 and incorporated herein by ~~reference.)~~reference).

3.2	Bylaws of the Corporation. (Filed as Exhibit 3.2 to Current Report on Form 8-K, as filed with the commission on December 21, 2018 and incorporated herein by reference.)

31.1	Rule 13a – 14(a)/15d-14(a) Certifications – Principal Executive Officer

31.2	Rule 13a – 14(a)/15d-14(a) Certifications – Principal Financial Officer

32.1	Section 1350 Certifications – Principal Executive Officer

32.2	Section 1350 Certifications – Principal Financial Officer

101	Interactive Data File (XBRL)

104	Cover Page Interactive Data File (the cover page XBRL tags are imbedded in the XBRL document)

‎

4549

FRANKLIN FINANCIAL SERVICES CORPORATION

and SUBSIDIARIES

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.

Franklin Financial Services Corporation



May ~~11, 2020~~10, 2021		/s/ Timothy G. Henry
		Timothy G. Henry
		Chief Executive Office and President
		(Principal Executive Officer)

May ~~11, 2020~~10, 2021		/s/ Mark R. Hollar
		Mark R. Hollar
		Treasurer and Chief Financial Officer
		(Principal Financial and Accounting Officer)

4650


Balance at January 1, 2019	$	4,701	$	41,530	$	83,946	$	(6,380)	$	(5,401)	$	118,396
Net income		—		—		3,237		—		—		3,237
Other comprehensive		—		—		—		1,099		—		1,099
Cash dividends declared, $0.27 per share		—		—		(1,192)		—		—		(1,192)
Acquisition of 15,163 shares of treasury stock		—		—		—		—		(560)		(560)
Treasury shares issued under dividend reinvestment plan, 10,150 shares		—		2		—		—		3		5
Stock Compensation Plans:
Treasury shares issued (10,150 shares)		—		161		—		—		190		351
Common shares issued (6,982 shares)		7		148		—		—		—		155
Balance at March 31, 2019	$	4,708	$	41,841	$	85,991	$	(5,281)	$	(5,768)	$	121,491


		Unrealized
		Gains and Losses on
		Available-for-sale		Defined Benefit
(Dollars in thousands)		Securities		Pension Items		Total
March 31, 2020
Beginning Balance	$	185	$	(6,171)	$	(5,986)
Other comprehensive income before reclassification		1,618		—		1,618
Amounts reclassified from accumulated other comprehensive income		8		—		8
Current period other comprehensive income		1,626		—		1,626
Ending balance	$	1,811	$	(6,171)	$	(4,360)

March 31, 2019
Beginning Balance	$	(870)	$	(5,510)	$	(6,380)
Other comprehensive income before reclassification		1,117		—		1,117
Amounts reclassified from accumulated other comprehensive income		(18)		—		(18)
Current period other comprehensive income		1,099		—		1,099
Ending balance	$	229	$	(5,510)	$	(5,281)


(Dollars in thousands)

Low	$	448,945
Medium		359,362
High		128,079
Total	$	936,386


(Dollars in thousands)
			Percent of
Medium Risk			Gross Loans	Real Estate Secured		Non-Real Estate Secured
Retail - Consumer Loans - Non Real Estate	$	5,744	1%	$	—	$	5,744
Construction		71,260	8%		61,228		10,031
Real Estate and Rental and Leasing		282,358	30%		265,772		16,587
Total	$	359,362	38%	$	327,000	$	32,362


High Risk
Arts, Entertainment, and Recreation	$	15,393	2%	$	14,903	$	490
Retail Trade - Non Operating Sectors		34,447	4%		32,006		2,442
Accommodation and Food Services		78,239	8%		76,697		1,543
Total	$	128,079	14%	$	123,606	$	4,475


(Dollars in thousands, except per share)
Period	Number of ‎Shares Purchased as Part of Publicly Announced Program	Weighted ‎Average ‎Price Paid ‎per Share		Dollar Amount of ‎Shares Purchased ‎as Part of Publicly ‎Announced Program	‎Shares Yet ‎To Be Purchased ‎Under Program
March 2020	36,401	32.19		1,172	113,499
	36,401		$	1,172