UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~September~~June 30, ~~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: 000-21344

FIRST KEYSTONE CORPORATION

(Exact name of registrant as specified in its charter)


Pennsylvania		23-2249083
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


111 West Front Street, Berwick, PA		18603
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (570) 752-3671

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes ☒ No ☐

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


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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) 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 ☒

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



Title of each class	Trading symbol	Name of each exchange on which registered
Common stock	FKYS	OTC: Pink

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

Common Stock, $2 Par Value, ~~5,865,907~~5,914,949 shares as of ~~November 13, 2020.~~August 4, 2021.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

September 30,

December 31,


2020

2019

ASSETS





Cash and due from banks

$
9,627

$
10,251

Interest-bearing deposits in other banks

36,349

473

Total cash and cash equivalents

45,976

10,724

Time deposits with other banks

247

247

Debt securities available-for-sale, at fair value

316,521

277,928

Marketable equity securities, at fair value

1,393

1,933

Restricted investment in bank stocks, at cost

2,247

4,224





Loans

691,766

645,440

Loans held for sale

12,274

2,292

Allowance for loan losses

(7,579)

(7,005)

Net loans

696,461

640,727

Premises and equipment, net

18,875

19,387

Operating lease right-of-use assets

1,125

1,470

Accrued interest receivable

4,730

3,405

Cash surrender value of bank owned life insurance

24,041

23,583

Investments in low-income housing partnerships

1,556

1,828

Goodwill

19,133

19,133

Foreclosed assets held for resale

88

119

Other assets

2,342

2,518

TOTAL ASSETS

$
1,134,735

$
1,007,226





LIABILITIES





Deposits:





Non-interest bearing

$
201,896

$
134,648

Interest bearing

717,323

626,980

Total deposits

919,219

761,628

Short-term borrowings

23,123

54,663

Long-term borrowings

45,000

55,000

Operating lease liabilities

1,535

1,663

Accrued interest payable

398

606

Deferred income taxes

1,690

438

Other liabilities

3,301

4,476

TOTAL LIABILITIES

994,266

878,474





STOCKHOLDERS’ EQUITY





Preferred stock, par value $2.00 per share; authorized 1,000,000 shares as of September 30, 2020 and December 31, 2019; issued 0 as of September 30, 2020 and December 31, 2019

0

0

Common stock, par value $2.00 per share; authorized 20,000,000 shares as of September 30, 2020 and December 31, 2019; issued 6,097,519 as of September 30, 2020 and 6,048,506 as of December 31, 2019; outstanding 5,865,907 as of September 30, 2020 and 5,816,894 as of December 31, 2019

12,195

12,097

Surplus

39,243

38,365

Retained earnings

83,625

79,778

Accumulated other comprehensive income

11,115

4,221

Treasury stock, at cost, 231,612 shares as of September 30, 2020 and December 31, 2019

(5,709)

(5,709)



TOTAL STOCKHOLDERS’ EQUITY

140,469

128,752

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
1,134,735

$
1,007,226


	(Unaudited)
(Dollars in thousands, except share and per share data)	June 30,		December 31,
	2021		2020
ASSETS
Cash and due from banks	$	8,787	$	8,833
Interest-bearing deposits in other banks		87,837		15,347
Total cash and cash equivalents		96,624		24,180
Time deposits with other banks		247		247
Debt securities available-for-sale, at fair value		403,415		366,711
Marketable equity securities, at fair value		1,789		1,646
Restricted investment in bank stocks, at cost		2,606		2,247

Loans		725,532		703,310
Loans held for sale		16,373		17,300
Allowance for loan losses		(8,124)		(7,933)
Net loans		733,781		712,677
Premises and equipment, net		18,313		18,678
Operating lease right-of-use assets		1,074		1,061
Accrued interest receivable		4,374		4,544
Cash surrender value of bank owned life insurance		24,493		24,194
Investments in low-income housing partnerships		1,281		1,466
Goodwill		19,133		19,133
Foreclosed assets held for resale		—		28
Other assets		3,336		2,235
TOTAL ASSETS	$	1,310,466	$	1,179,047

LIABILITIES
Deposits:
Non-interest bearing	$	217,615	$	198,499
Interest bearing		845,732		738,989
Total deposits		1,063,347		937,488
Short-term borrowings		26,499		19,494
Long-term borrowings		35,000		45,000
Subordinated debentures		25,000		25,000
Operating lease liabilities		1,537		1,513
Accrued interest payable		284		405
Deferred income taxes		1,539		2,146
Other liabilities		9,758		3,759
TOTAL LIABILITIES		1,162,964		1,034,805

STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares as of June 30, 2021 and December 31, 2020; issued 0 as of June 30, 2021 and December 31, 2020		0		0
Common stock, par value $2.00 per share; authorized 20,000,000 shares as of June 30, 2021 and December 31, 2020; issued 6,146,561 as of June 30, 2021 and 6,115,281 as of December 31, 2020; outstanding 5,914,949 as of June 30, 2021 and 5,883,669 as of December 31, 2020		12,293		12,231
Surplus		40,223		39,543
Retained earnings		89,550		85,307
Accumulated other comprehensive income		11,145		12,870
Treasury stock, at cost, 231,612 shares as of June 30, 2021 and December 31, 2020		(5,709)		(5,709)

TOTAL STOCKHOLDERS’ EQUITY		147,502		144,242
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,310,466	$	1,179,047

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2020~~2021 AND ~~2019~~2020

(Unaudited)

(Dollars in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019

2020

2019


Interest and fees on loans

$
7,948

$
7,520

$
23,302

$
21,790

Interest and dividend income on securities:





Taxable

1,059

1,379

3,509

3,900

Tax-exempt

793

696

2,220

2,543

Dividends

11

12

34

34

Dividend income on restricted investment in bank stocks

39

112

180

421

Interest on interest-bearing deposits in other banks

2

9

6

33

Total interest income

9,852

9,728

29,251

28,721

INTEREST EXPENSE





Interest on deposits

967

1,786

4,038

4,760

Interest on short-term borrowings

30

551

340

2,460

Interest on long-term borrowings

234

252

758

659

Total interest expense

1,231

2,589

5,136

7,879

Net interest income

8,621

7,139

24,115

20,842

Provision for loan losses

294

175

682

313

Net interest income after provision for loan losses

8,327

6,964

23,433

20,529

NON-INTEREST INCOME





Trust department

222

221

677

746

Service charges and fees

409

629

1,250

1,676

Bank owned life insurance income

152

156

458

465

ATM fees and debit card income

501

427

1,364

1,223

Gains on sales of mortgage loans

174

87

471

202

Net securities (losses) gains

(9)

642

(312)

837

Other

66

64

211

200

Total non-interest income

1,515

2,226

4,119

5,349

NON-INTEREST EXPENSE









Salaries and employee benefits

3,554

3,287

9,732

9,372

Occupancy, net

512

432

1,534

1,328

Furniture and equipment expense

147

145

435

435

Computer expense

248

272

753

851

Professional services

220

218

685

696

Pennsylvania shares tax

231

227

680

611

FDIC insurance, net

73

(75)

94

62

ATM and debit card fees

253

232

676

664

Data processing fees

283

274

884

846

Foreclosed assets held for resale expense, net

30

3

44

46

Advertising

82

163

245

476

Other

623

681

2,064

1,982

Total non-interest expense

6,256

5,859

17,826

17,369

Income before income tax expense

3,586

3,331

9,726

8,509

Income tax expense

449

408

1,155

813

NET INCOME

$
3,137

$
2,923

$
8,571

$
7,696

PER SHARE DATA









Net income per share:









Basic

$
0.54

$
0.50

$
1.47

$
1.33

Diluted

0.54

0.50

1.47

1.33

Dividends per share

0.27

0.27

0.81

0.81


(Dollars in thousands, except per share data)	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020

Interest and fees on loans	$	7,989	$	7,596	$	16,143	$	15,354
Interest and dividend income on securities:
Taxable		1,360		1,174		2,600		2,450
Tax-exempt		862		797		1,702		1,427
Dividends		12		11		24		23
Dividend income on restricted investment in bank stocks		27		51		53		141
Interest on interest-bearing deposits in other banks		9		2		12		4
Total interest income		10,259		9,631		20,534		19,399
INTEREST EXPENSE
Interest on deposits		783		1,187		1,578		3,071
Interest on short-term borrowings		20		68		40		310
Interest on long-term borrowings		211		258		428		524
Interest on subordinated debt		274		—		547		—
Total interest expense		1,288		1,513		2,593		3,905
Net interest income		8,971		8,118		17,941		15,494
Provision for loan losses		135		194		270		388
Net interest income after provision for loan losses		8,836		7,924		17,671		15,106
NON-INTEREST INCOME
Trust department		265		234		518		455
Service charges and fees		481		342		856		841
Increase in cash surrender value of life insurance		150		152		299		306
ATM fees and debit card income		568		464		1,084		863
Gains on sales of mortgage loans		308		204		662		297
Net securities gains (losses)		28		164		143		(303)
Other		65		61		178		145
Total non-interest income		1,865		1,621		3,740		2,604
NON-INTEREST EXPENSE
Salaries and employee benefits		3,461		2,959		6,761		6,178
Occupancy, net		483		504		980		1,022
Furniture and equipment expense		142		154		280		288
Computer expense		315		245		585		505
Professional services		273		223		532		465
Pennsylvania shares tax		313		225		626		449
FDIC insurance, net		120		21		207		21
ATM and debit card fees		283		214		483		423
Data processing fees		323		307		617		601
Foreclosed assets held for resale expense, net		—		5		3		14
Advertising		109		72		181		163
Other		725		726		1,489		1,441
Total non-interest expense		6,547		5,655		12,744		11,570
Income before income tax expense		4,154		3,890		8,667		6,140
Income tax expense		549		509		1,184		706
NET INCOME	$	3,605	$	3,381	$	7,483	$	5,434
PER SHARE DATA
Net income per share:
Basic	$	0.61	$	0.58	$	1.27	$	0.93
Diluted		0.61		0.58		1.27		0.93
Dividends per share		0.27		0.27		0.55		0.54

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2020~~2021 AND ~~2019~~2020

(Unaudited)

(Dollars in thousands)

Three Months Ended

September 30,


2020

2019

Net Income

$
3,137

$
2,923




Other comprehensive income:




Unrealized net holding gains on debt securities available-for-sale arising during the period, net of income taxes of $290 and $291, respectively

1,092

1,095

Less reclassification adjustment for net gains included in net income, net of income taxes of $(13) and $(141), respectively (a) (b)

(48)

(530)

Total other comprehensive income

1,044

565

Total Comprehensive Income

$
4,181

$
3,488

(Dollars in thousands)

Nine Months Ended

September 30,


2020

2019

Net Income

$
8,571

$
7,696




Other comprehensive income:




Unrealized net holding gains on debt securities available-for-sale arising during the period, net of income taxes of $1,880 and $2,089, respectively

7,074

7,861

Less reclassification adjustment for net gains included in net income, net of income taxes of $(48) and $(159), respectively (a) (b)

(180)

(597)

Total other comprehensive income

6,894

7,264

Total Comprehensive Income

$
15,465

$
14,960


(Dollars in thousands)	Three Months Ended
	June 30,
	2021		2020

Net Income	$	3,605	$	3,381

Other comprehensive income:
Unrealized net holding gains on debt securities available-for-sale arising during the period, net of income taxes of $583 and $1,414, respectively		2,198		5,321

Less reclassification adjustment for net gains included in net income, net of income taxes of $(0) and $(20), respectively (a) (b)		—		(76)

Total other comprehensive income		2,198		5,245

Total Comprehensive Income	$	5,803	$	8,626


(Dollars in thousands)	Six Months Ended
	June 30,
	2021		2020

Net Income	$	7,483	$	5,434

Other comprehensive (loss) income:
Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $(459) and $1,590, respectively		(1,725)		5,982

Less reclassification adjustment for net gains included in net income, net of income taxes of $(0) and $(35), respectively (a) (b)		—		(132)

Total other comprehensive (loss) income		(1,725)		5,850

Total Comprehensive Income	$	5,758	$	11,284

(a)	Gross amounts are included in net securities gains (losses) ~~gains~~ on the consolidated statements of income in non-interest income.

(b)	Income tax amounts are included in income tax expense on the consolidated statements of income.

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2020~~2021 AND ~~2019~~2020

(Unaudited)

Accumulated

(Dollars in thousands, except per share data)

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders’


Shares

Amount

Surplus

Earnings

Income

Stock

Equity
Balance at January 1, 2020

6,048,506

$
12,097

$
38,365

$
79,778

$
4,221

$
(5,709)

$
128,752
Net Income







2,053





2,053
Other comprehensive income, net of taxes









605



605
Issuance of common stock under dividend reinvestment plan

15,213

30

280







310
Dividends - $0.27 per share







(1,570)





(1,570)
Balance at March 31, 2020

6,063,719

12,127

38,645

80,261

4,826

(5,709)

130,150
Net Income







3,381





3,381
Other comprehensive income, net of taxes









5,245



5,245
Issuance of common stock under dividend reinvestment plan

16,135

33

298







331
Dividends - $0.27 per share







(1,575)





(1,575)
Balance at June 30, 2020

6,079,854

12,160

38,943

82,067

10,071

(5,709)

137,532
Net Income







3,137





3,137
Other comprehensive income, net of taxes









1,044



1,044
Issuance of common stock under dividend reinvestment plan

17,665

35

300







335
Dividends - $0.27 per share







(1,579)





(1,579)
Balance at September 30, 2020

6,097,519

$
12,195

$
39,243

$
83,625

$
11,115

$
(5,709)

$
140,469


								Accumulated
(Dollars in thousands, except								Other				Total
per share data)	Common Stock					Retained		Comprehensive		Treasury		Stockholders’
	Shares	Amount		Surplus		Earnings		Income		Stock		Equity
Balance at January 1, 2021	6,115,281	$	12,231	$	39,543	$	85,307	$	12,870	$	(5,709)	$	144,242
Net Income							3,878						3,878
Other comprehensive loss, net of taxes									(3,923)				(3,923)
Issuance of common stock under dividend reinvestment plan	16,304		32		351								383
Dividends - $0.28 per share							(1,647)						(1,647)
Balance at March 31, 2021	6,131,585		12,263		39,894		87,538		8,947		(5,709)		142,933
Net Income							3,605						3,605
Other comprehensive income, net of taxes									2,198				2,198
Issuance of common stock under dividend reinvestment plan	14,976		30		329								359
Dividends - $0.27 per share							(1,593)						(1,593)
Balance at June 30, 2021	6,146,561	$	12,293	$	40,223	$	89,550	$	11,145	$	(5,709)	$	147,502


								Accumulated													Comprehensive				Stockholders’
(Dollars in thousands, except per share data)								Other				Total
	Common Stock					Retained		Comprehensive		Treasury		Stockholders’
	Shares	Amount		Surplus		Earnings		(Loss) Income		Stock		Equity
Balance at January 1, 2019	5,996,322	$	11,993	$	37,255	$	75,798	$	(2,581)	$	(5,709)	$	116,756
Balance at January 1, 2020														6,048,506	$	12,097	$	38,365	$	79,778	$	4,221	$	(5,709)	$	128,752
Net Income							2,243						2,243							2,053						2,053
Other comprehensive income, net of taxes									3,642				3,642									605				605
Issuance of common stock under dividend reinvestment plan	12,312		24		254								278	15,213		30		280								310
Dividends - $0.27 per share							(1,557)						(1,557)							(1,570)						(1,570)
Balance at March 31, 2019	6,008,634		12,017		37,509		76,484		1,061		(5,709)		121,362
Balance at March 31, 2020														6,063,719		12,127		38,645		80,261		4,826		(5,709)	$	130,150
Net Income							2,530						2,530							3,381						3,381
Other comprehensive income, net of taxes									3,057				3,057									5,245				5,245
Issuance of common stock under dividend reinvestment plan	12,821		26		292								318	16,135		33		298								331
Dividends - $0.27 per share							(1,560)						(1,560)							(1,575)						(1,575)
Balance at June 30, 2019	6,021,455		12,043		37,801		77,454		4,118		(5,709)		125,707
Net Income							2,923						2,923
Other comprehensive income, net of taxes									565				565
Issuance of common stock under dividend reinvestment plan	13,663		27		281								308
Dividends - $0.27 per share							(1,563)						(1,563)
Balance at September 30, 2019	6,035,118	$	12,070	$	38,082	$	78,814	$	4,683	$	(5,709)	$	127,940
Balance at June 30, 2020														6,079,854	$	12,160	$	38,943	$	82,067	$	10,071	$	(5,709)	$	137,532

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2020~~2021 AND ~~2019~~2020

(Unaudited)

(Dollars in thousands)

2020

2019
CASH FLOWS FROM OPERATING ACTIVITIES:




Net income

$
8,571

$
7,696
Adjustments to reconcile net income to net cash provided by operating activities:


Provision for loan losses

682

313
Depreciation and amortization

868

780
Net premium amortization on securities

1,484

2,054
Deferred income tax (benefit) expense

(581)

161
Gains on sales of mortgage loans

(471)

(202)
Proceeds from sales of mortgage loans originated for sale

12,433

7,251
Originations of mortgage loans originated for sale

(22,147)

(8,356)
Net securities losses (gains)

312

(837)
Net losses on sales of foreclosed real estate held for resale, including write-downs

21

20
(Increase) decrease in accrued interest receivable

(1,325)

566
Earnings on investment in bank owned life insurance

(458)

(465)
Net losses on disposals of premises and equipment

1

4
Decrease (increase) in other assets

388

(1,964)
Amortization of investment in low-income housing partnerships

272

265
Decrease in accrued interest payable

(208)

(86)
(Decrease) increase in other liabilities

(1,310)

1,097
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

(1,468)

8,297
CASH FLOWS FROM INVESTING ACTIVITIES:




Proceeds from sales of debt securities available-for-sale

21,692

72,025
Proceeds from maturities and redemptions of debt securities available-for-sale

30,354

15,405
Purchases of debt securities available-for-sale

(83,168)

(60,418)
Net change in restricted investment in bank stocks

1,977

3,107
Net increase in loans

(46,218)

(23,560)
Purchase of premises and equipment

(264)

(454)
Purchase of investment in real estate venture

0

(85)
Proceeds from sales of foreclosed assets held for resale

60

248
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

(75,567)

6,268
CASH FLOWS FROM FINANCING ACTIVITIES:




Net increase in deposits

157,591

69,425
Net decrease in short-term borrowings

(31,540)

(84,257)
Proceeds from long-term borrowings

0

30,000
Repayment of long-term borrowings

(10,000)

(20,000)
Common stock issued

960

897
Dividends paid

(4,724)

(4,680)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

112,287

(8,615)
INCREASE IN CASH AND CASH EQUIVALENTS

35,252

5,950
CASH AND CASH EQUIVALENTS, BEGINNING

10,724

10,950
CASH AND CASH EQUIVALENTS, ENDING

$
45,976

$
16,900
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION




Interest paid

$
5,344

$
7,965
Income taxes paid

161

660
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES




Loans transferred to foreclosed assets held for resale

50

0
Loans transferred from held for sale portfolio

(149)

0
Common stock subscription receivable

16

7
Right-of-use assets obtained in exchange for lease liabilities

0

1,465


(Dollars in thousands)	2021		2020

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,483	$	5,434
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		270		388
Depreciation and amortization		514		621
Net premium amortization on securities		1,366		982
Deferred income tax benefit		(150)		(411)
Gains on sales of mortgage loans		(662)		(297)
Proceeds from sales of mortgage loans originated for sale		21,427		8,625
Originations of mortgage loans originated for sale		(20,490)		(10,033)
Net securities (gains) losses		(143)		303
Decrease (increase) in accrued interest receivable		170		(1,175)
Increase in cash surrender value of bank owned life insurance		(299)		(306)
Net losses on disposals of premises and equipment		1		—
(Increase) decrease in other assets		(1,116)		715
Amortization of investment in low-income housing partnerships		185		181
Decrease in accrued interest payable		(121)		(153)
Increase (decrease) in other liabilities		241		(28)
NET CASH PROVIDED BY OPERATING ACTIVITIES		8,676		4,846
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of debt securities available-for-sale		—		13,552
Proceeds from maturities and redemptions of debt securities available-for-sale		30,836		21,962
Purchases of debt securities available-for-sale		(65,305)		(63,685)
Net change in restricted investment in bank stocks		(359)		808
Net increase in loans		(21,649)		(27,544)
Purchase of premises and equipment		(131)		(143)
Proceeds from sales of foreclosed assets held for resale		28		—
NET CASH USED IN INVESTING ACTIVITIES		(56,580)		(55,050)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		125,859		83,098
Net increase (decrease) in short-term borrowings		7,005		(21,348)
Repayment of finance lease obligations		(5)		—
Repayment of long-term borrowings		(10,000)		(10,000)
Common stock issued		729		625
Dividends paid		(3,240)		(3,145)
NET CASH PROVIDED BY FINANCING ACTIVITIES		120,348		49,230

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		72,444		(974)
CASH AND CASH EQUIVALENTS, BEGINNING		24,180		10,724
CASH AND CASH EQUIVALENTS, ENDING	$	96,624	$	9,750

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	2,714	$	4,058
Income taxes paid		1,401		—
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Purchased securities settling after quarter end		5,783		—
Loans transferred to foreclosed assets held for resale		—		50
Loans transferred from held for sale portfolio		—		(149)
Common stock subscription receivable		13		16
Right-of-use assets obtained in exchange for lease liabilities		33		—

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 ― BASIS OF PRESENTATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS

The consolidated financial statements include the accounts of First Keystone Corporation (the “Corporation”) and its wholly owned subsidiary First Keystone Community Bank (the “Bank”) (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, are not necessarily indicative of the results for the year ending December 31, ~~2020.~~2021. For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of ~~September~~June 30, ~~2020~~2021 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

NOTE 2 ― RECENT ACCOUNTING STANDARDS UPDATES (“ASU”)

Recently adopted ASUs:

In January ~~2017,~~2021, the Financial Accounting Standards Board (“FASB”) issued ASU ~~2017-04,~~ ~~Intangibles – Goodwill and Other (Topic 350)~~: ~~Simplifying the Test for Goodwill Impairment.~~ The ASU simplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under the amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The update also eliminated the requirements for zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments were effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this update on January 1, 2020 did not have a material impact on the Company’s consolidated financial position or results of operations.

~~In August 2018, the FASB issued ASU 2018-13,~~ ~~Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to Disclosure Requirements for Fair Value Measurement~~. The amendments in this update removed required disclosures regarding: 1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2. The policy for timing of transfers between levels, 3. The valuation processes for Level 3 fair value measurements, and 4. The update modified the disclosure requirements on fair value measurements in Topic 820: a) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and b) The range and weighted average significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update were effective for all entities for fiscal years, and interim periods within those fiscal years beginning after December 15,

~~2019. The adoption of this update on January 1, 2020 did not have a material impact on the Company's consolidated financial statements and related disclosures.~~

~~In March 2020, the FASB issued ASU 2020-04,~~2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of Topic 848,Reference Rate Reform, and clarifies some of its guidance as part of the FASB’s ongoing monitoring of global reference rate reform activities. The ASU provides certain optional expedients and exceptions ~~for~~when applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate ~~("LIBOR"~~(“LIBOR”), or by another reference rate that is expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Company has evaluated the ~~impact of the~~ provisions of ASU ~~2020-04~~2021-01 on our financial condition, results of operations and cash flows, and determined that there is no material impact on the consolidated financial statements and related disclosures.

Pending ASUs:

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. While the Company (a smaller reporting company) is currently evaluating the provisions of ASU 2016-13 to determine the potential impact of the new standard will have on the Company's consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such

as: forming an internal committee, gathering pertinent data, consulting with outside professionals, subscribing to a new software system, and running existing and new methodologies concurrently through the period of implementation.

NOTE 3 — SECURITIES

The Company classifies its securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase. Securities are accounted for on a trade date basis. Debt securities are classified as Held-to-Maturity when the Company has the ability and positive intent to hold the securities to maturity. Securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

Debt securities not classified as Held-to-Maturity are included in the Available-for-Sale category and are carried at fair value. The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive income (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity. Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions, controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Equity securities without readily determinable fair values are recorded at cost less impairment, if any.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums to the earliest call date and accretion of discounts to expected maturity. Such amortization and accretion, as well as interest and dividends, are included in interest and dividend income from ~~investment~~ securities. Realized gains and losses are included in net securities gains and losses. The cost of securities sold, redeemed or matured is based on the specific identification method.

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at June 30, 2021 and December 31, 2020:

Debt Securities Available-for-Sale

(Dollars in thousands)

Gross

Amortized

Unrealized

Fair

June 30, 2021:

Cost

Gains

Losses

Value

Obligations of U.S. Government Agencies and Sponsored Agencies:

Mortgage-backed

92,791

1,194

(526)

93,459

Other

9,161

(68)

9,098

Other mortgage backed securities

39,971

280

(137)

40,114

Obligations of state and political subdivisions

169,585

13,036

(247)

182,374

Asset backed securities

40,229

273

(73)

40,429

Corporate debt securities

37,571

493

(123)

37,941

Total

389,308

15,281

(1,174)

403,415

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at September 30, 2020 and December 31, 2019:

Debt Securities Available-for-Sale
(Dollars in thousands)



Gross

Gross


Amortized

Unrealized

Unrealized

Fair
September 30, 2020:

Cost

Gains

Losses

Value
U.S. Treasury securities

$
0

$
0

$
0

$
0
Obligations of U.S. Government Agencies and Sponsored Agencies:

Mortgage-backed

58,012

1,851

(74)

59,789
Other

11,221

3

(117)

11,107
Other mortgage backed securities

35,102

102

(93)

35,111
Obligations of state and political subdivisions

134,558

12,320

0

146,878
Asset backed securities

41,717

79

(420)

41,376
Corporate debt securities

21,842

473

(55)

22,260
Total

$
302,452

$
14,828

$
(759)

$
316,521

Debt Securities Available-for-Sale
(Dollars in thousands)



Gross

Gross


Amortized

Unrealized

Unrealized

Fair
December 31, 2019:

Cost

Gains

Losses

Value
U.S. Treasury securities

$
2,852

$
3

$
0

$
2,855
Obligations of U.S. Government Agencies and Sponsored Agencies:








Mortgage-backed

77,131

539

(387)

77,283
Other

10,381

4

(88)

10,297
Other mortgage backed securities

11,145

3

(10)

11,138
Obligations of state and political subdivisions

114,934

5,490

(48)

120,376
Asset backed securities

37,596

115

(175)

37,536
Corporate debt securities

18,546

182

(285)

18,443
Total

$
272,585

$
6,336

$
(993)

$
277,928

Securities Available-for-Sale with an aggregate fair value of $281,172,000 at September 30, 2020 and $201,468,000 at December 31, 2019, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $223,543,000 at September 30, 2020 and $143,546,000 at December 31, 2019.


	Debt Securities Available-for-Sale
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2020:	Cost		Gains		Losses		Value
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgage-backed	$	76,270	$	1,628	$	(325)	$	77,573
Other		10,534		2		(106)		10,430
Other mortgage backed securities		39,420		470		(46)		39,844
Obligations of state and political subdivisions		150,922		14,193		(14)		165,101
Asset backed securities		44,751		158		(88)		44,821
Corporate debt securities		28,523		481		(62)		28,942
Total	$	350,420	$	16,932	$	(641)	$	366,711

Securities Available-for-Sale with an aggregate fair value of $335,549,000 at June 30, 2021 and $315,146,000 at December 31, 2020, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $253,679,000 at June 30, 2021 and $231,750,000 at December 31, 2020.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at ~~September~~June 30, ~~2020.~~2021. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2020												June 30, 2021
	Debt Securities Available-For-Sale												Debt Securities Available-For-Sale
(Dollars in thousands)			U.S. Government		Other		Obligations							U.S. Government		Other		Obligations
			Agency &		Mortgage		of State		Asset		Corporate			Agency &		Mortgage		of State		Asset		Corporate
	U.S. Treasury		Sponsored Agency		Backed Debt		& Political		Backed		Debt			Sponsored Agency		Backed Debt		& Political		Backed		Debt
	Securities		Obligations¹		Securities¹		Subdivisions		Securities		Securities			Obligations¹		Securities¹		Subdivisions		Securities		Securities
Within 1 Year:
Amortized cost	$	0	$	0	$	0	$	2,892	$	0	$	2,640		$	—	$	—	$	4,338	$	—	$	—
Fair value		0		0		0		2,913		0		2,646			—		—		4,412		—		—

1 - 5 Years:
Amortized cost		0		569		2,657		21,809		1,619		15,702			383		8,802		18,820		1,714		15,521
Fair value		0		579		2,657		22,909		1,612		16,114			387		8,815		19,866		1,729		15,871

5 - 10 Years:
Amortized cost		0		22,816		2,836		17,511		3,119		3,500			19,080		3,530		20,558		—		22,050
Fair value		0		22,726		2,844		18,832		3,181		3,500			19,074		3,526		22,285		—		22,070

After 10 Years:
Amortized cost		0		45,848		29,609		92,346		36,979		0			82,489		27,639		125,869		38,515		—
Fair value		0		47,591		29,610		102,224		36,583		0			83,096		27,773		135,811		38,700		—

Total:
Amortized cost	$	0	$	69,233	$	35,102	$	134,558	$	41,717	$	21,842		$	101,952	$	39,971	$	169,585	$	40,229	$	37,571
Fair value		0		70,896		35,111		146,878		41,376		22,260			102,557		40,114		182,374		40,429		37,941

¹	Mortgage-backed securities are allocated for maturity reporting at their original maturity date.

There were no aggregate securities with a single issuer (excluding the U.S. Government and U.S. Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at ~~September~~June 30, ~~2020.~~2021. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch. The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended ~~September~~June 30, 2021 and 2020 were $0 and ~~2019 were $8,140,000 and $39,651,000,~~$2,370,000, respectively. Gross gains realized on these sales were ~~$142,000~~$0 and ~~$718,000,~~$96,000, respectively. ~~Gross~~There were 0 gross losses realized on these sales ~~were $81,000 and $47,000, respectively.~~for the three months ended June 30, 2021 or 2020. There were 0 impairment losses realized on Debt Securities Available-For-Sale during the three months ended ~~September~~June 30, ~~2020~~2021 or ~~2019.~~2020.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 were $0 and ~~2019 were $21,692,000 and $72,025,000,~~$13,552,000, respectively. Gross gains realized on these sales were ~~$414,000~~$0 and ~~$905,000,~~$272,000, respectively. Gross losses realized on these sales were ~~$186,000~~$0 and ~~$149,000,~~$105,000, respectively. There were 0 impairment losses realized on Debt Securities Available-For-Sale during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 or ~~2019.~~2020.

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had ~~$1,393,000~~$1,789,000 and ~~$1,933,000,~~$1,646,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


(Dollars in thousands)	Nine months ended		Nine months ended		Six months ended		Six months ended
	September 30, 2020		September 30, 2019		June 30, 2021		June 30, 2020
Net (losses) and gains recognized during the period on equity securities	$	(540)	$	81
Net gains and (losses) recognized during the period on equity securities					$	143	$	(470)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		0		0		—		—
Net (losses) and gains recognized during the reporting period on equity securities still held at the reporting date	$	(540)	$	81
Net gains and (losses) recognized during the reporting period on equity securities still held at the reporting date					$	143	$	(470)

There were 0 proceeds from sales of investments in Held-to-Maturity debt securities during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 or ~~2019.~~2020. Therefore, there were 0 gains or losses realized during these periods.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under FASB ASC 320, Investments - Debt and Equity Securities. In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs on debt securities, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements of income. The amount of the total OTTI related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The Company and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

1210

The summary below shows the gross unrealized losses and fair value of the Company’s debt securities. Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

~~September~~June 30, ~~2020~~2021

(Dollars in thousands)

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

Available-for-Sale:

Value

Loss

Value

Loss

Value

Loss

Value

Loss

Value

Loss

Value

Loss

U.S. Treasury securities

Obligations of U.S. Government Agencies and Sponsored Agencies:

Mortgage-backed

7,492

(55)

3,105

(19)

10,597

(74)

26,269

(457)

3,793

(69)

30,062

(526)

Other

2,588

(37)

7,187

(80)

9,775

(117)

—

7,800

(68)

7,800

(68)

Other mortgage backed debt securities

19,367

(93)

19,367

(93)

12,669

(137)

—

12,669

(137)

Obligations of state and political subdivisions

16,808

(247)

—

16,808

(247)

Asset backed securities

24,278

(287)

9,005

(133)

33,283

(420)

9,484

(68)

4,060

(5)

13,544

(73)

Corporate debt securities

1,496

(4)

1,949

(51)

3,445

(55)

7,982

(68)

3,445

(55)

11,427

(123)

Total

55,221

(476)

21,246

(283)

76,467

(759)

73,212

(977)

19,098

(197)

92,310

(1,174)

December 31, ~~2019~~2020


(Dollars in thousands)	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
Available-for-Sale:	Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss

U.S. Treasury securities	$	0	$	0	$	0	$	0	$	0	$	0
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgage-backed		39,085		(221)		12,650		(166)		51,735		(387)	$	13,859	$	(302)	$	5,729	$	(23)	$	19,588	$	(325)
Other		4,382		(24)		4,594		(64)		8,976		(88)		2,497		(32)		6,709		(74)		9,206		(106)
Other mortgage backed debt securities		4,056		(10)		0		0		4,056		(10)		8,290		(46)		—		—		8,290		(46)
Obligations of state and political subdivisions		1,993		(15)		1,081		(33)		3,074		(48)		4,122		(14)		—		—		4,122		(14)
Asset backed securities		19,236		(175)		0		0		19,236		(175)		6,827		(8)		11,018		(80)		17,845		(88)
Corporate debt securities		3,484		(16)		7,231		(269)		10,715		(285)		5,489		(11)		1,949		(51)		7,438		(62)
Total	$	72,236	$	(461)	$	25,556	$	(532)	$	97,792	$	(993)	$	41,084	$	(413)	$	25,405	$	(228)	$	66,489	$	(641)

The Company invests in various forms of agency debt including residential and commercial mortgage-backed securities and callable debt. The mortgage-backed agency securities are issued by Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) or, Government National Mortgage Association (“GNMA”) or Small Business Administration (“SBA”). The other mortgage-backed securities consist of private (non-agency) residential and commercial mortgage backed securities. The municipal securities consist of general obligations and revenue bonds. Asset backed securities consist of bonds backed by consumer loans. Corporate debt securities consist of senior debt and subordinated debt holdings.

The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the market place and credit premiums for various types of agency debt. These factors change continuously and therefore the market value of these securities may be higher or lower than the Company’s carrying value at any measurement date. Management does not believe any of their 1826 debt securities with a less than one year unrealized loss position, or any of their 15 debt securities with a one year or greater unrealized loss position as of ~~September~~June 30, ~~2020,~~2021, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Company expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of ~~September~~June 30, ~~2020.~~2021.

1311

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses. Interest on loans is recognized as income over the term of each loan, generally, by the accrual method. Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $12,274,000 and $2,292,000 at September 30, 2020 and December 31, 2019, respectively.

As an addition to the commercial loans receivable portfolio, the Company may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the U.S. Small Business Administration (“SBA”), United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”). Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S. Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan. As of September 30, 2020, the Company's balance of GGLs amounted to $5,215,000, compared to $6,150,000 at December 31, 2019.

An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as troubled debt restructurings (“TDRs”), as long as specific criteria are met. To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of December 31, 2020 or the 60th day after the end of the COVID-19 pandemic is declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019. In compliance with Section 4013 of the CARES Act, the Company has granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments. Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there were 189 loan modifications still actively on deferral carrying an aggregate balance of $74,935,000 as of September 30, 2020. See page 26 for additional information regarding the Section 4013 CARES Act modifications.

The loans receivable portfolio is segmented into commercial, residential and consumer loans. Commercial loans consist of the following classes: Commercial and Industrial, and Commercial Real Estate.

Commercial and Industrial Lending

The Company originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable. Generally, the maximum term for

loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and are reviewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum thresholds have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals or internal evaluations, etc. Commercial and industrial loans are typically supported by personal guarantees of the borrower.

In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Company’s analysis of the borrower’s ability to repay.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions. Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the borrower’s primary business activities. As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

As an addition to the commercial loans receivable portfolio, the Company may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the U.S. Small Business Administration (“SBA”), United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”). Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S. Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan. As of June 30, 2021, the Company's balance of GGLs amounted to $4,949,000, compared to $5,128,000 at December 31, 2020.

Commercial Real Estate Lending

The Company engages in commercial real estate lending in its primary market area and surrounding areas. The Company’s commercial real estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels. Generally, commercial real estate loans have terms that do not exceed twenty

years, have loan-to-value ratios of up to eighty percent of the value of the collateral property, and are typically supported by personal guarantees of the borrowers.

In underwriting these loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The value of the property is determined by either independent appraisers or internal evaluations performed by Bank officers.

Commercial real estate loans generally present a higher level of risk than residential real estate secured loans. Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

Residential Real Estate Lending (Including Home Equity)

The Company’s residential real estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit. These loans are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within or with customers from the Company’s market area.

The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The Company offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction. Loans with terms of thirty years are normally held for sale and sold without recourse; most of the residential mortgages held in the Company’s residential real estate portfolio have maximum terms of twenty years. Generally, the majority of the Company’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at NaN percent or less. Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years. In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

In underwriting one-to-four family residential mortgage loans, the Company evaluates the borrower’s ability to make monthly payments, the borrower’s prior loan repayment history and the value of the property securing the loan. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background. A majority of the properties securing residential real estate loans made by the Company are appraised by independent appraisers. The Company generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Company is in a subordinate position, especially to another lender, for the loan collateral.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $16,373,000 and $17,300,000 at June 30, 2021 and December 31, 2020, respectively.

Consumer Lending

The Company offers a variety of secured and unsecured consumer loans, including vehicle loans, stock loans and loans secured by financial institution deposits. These loans originate primarily within or with customers from the Company’s market area.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability

to repay the loan as agreed. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial condition and credit background.

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Coronavirus Pandemic Impact on the Loan Portfolio

As a result of the economic impact of the COVID-19 coronavirus pandemic, the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) was enacted in the United States on March 27, 2020. The Company is approved by the SBA to fund loans under the SBA’s Paycheck Protection Program (“PPP”) created as part of the CARES Act. The PPP loans have 1.00% interest rates, lender fees, two or five-year terms (depending on date of origination), and may qualify for forgiveness. These loans funded by the Company are subject to the terms and conditions applicable to all loans made pursuant to the PPP, as administered by the SBA under the CARES Act. The PPP calls for these loans to be fully guaranteed by the SBA. PPP loan origination fees and certain loan origination costs have been deferred with the net amount accreted using the straight line method over the contractual life of the related loans as an interest yield adjustment. If a loan is forgiven pursuant to the terms and conditions applicable to the PPP, the remaining origination fees and costs are recognized at the time of forgiveness. All PPP loans are carried in the Company’s Commercial and Industrial loan portfolio. As of June 30, 2021, the Company held 433 PPP loans in its Commercial and Industrial portfolio which carried a balance of $21,338,000, of which 135 loans carrying a balance of $5,216,000 were granted during the first round of PPP issuance and 298 loans carrying a balance of $16,122,000 were granted during the second round of PPP issuance. At December 31, 2020, the Company held 441 PPP loans in its Commercial and Industrial portfolio which carried a balance of $22,976,000, all of which were granted during the first round of PPP issuance.

An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as troubled debt restructurings (“TDRs”), as long as specific criteria are met. To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of June 30, 2021 or the termination date of the national emergency related to the COVID-19 pandemic as declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019. In compliance with Section 4013 of the CARES Act, the Company has granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments. Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there were 8 loan modifications still actively on deferral carrying an aggregate balance of $10,568,000 as of June 30, 2021, compared to December 31, 2020 when there were 44 loan modifications still actively on deferral carrying an aggregate balance of $16,541,000. See page 24 for additional information regarding the Section 4013 CARES Act modifications.

Delinquent Loans

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 10 days or more. Delinquent notices are generated automatically when a loan is 10 or 15 days past-due, depending on loan type. Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the ~~Bank~~Company estimates the impairment based on its analysis of the cash flows or collateral estimated at

fair value less cost to sell. Should a ~~Government Guaranteed Loan~~GGL default, demand is made to the originating bank for repurchase of the loan. If the originating bank does not repurchase the loan, demand for repurchase is then made to the appropriate government agency which has provided the guarantee for the loan.

Residential Real Estate and Consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected. At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full. Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg. reaffirmation by the borrower with demonstrated repayment ability). Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or ~~interest, even though the loan may currently be performing.~~interest. A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in the process of collection. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against interest income. Certain non-accrual loans may continue to perform; that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management's judgment regarding the collectability of principal.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level estimated by management to be adequate to absorb potential loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are individually classified as impaired. Select loans are not aggregated for collective impairment evaluation, as such; all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. ~~Troubled debt restructurings~~TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s ~~effective~~contractual rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan may be reported ~~net,~~ at the ~~fair~~net realizable value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers all other loans not identified as impaired (aside from ~~Government Guaranteed Loans,~~GGLs, which do not require an allowance) and is based on historical losses and qualitative factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over an eight quarter lookback period that management has determined best represents the current credit cycle. Qualitative factors impacting each portfolio segment may include: delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.

In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors related to the local/regional economy were increased by 2 basis points across all loan segments ~~were increased by two basis points~~ during the first quarter of 2020 and ~~again~~increased by an additional basis point across all loan segments during the second quarter of 2020. The qualitative factor relating to the impact of external factors/conditions for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of ~~2020,~~2020. The qualitative factors relating to the impact of external factors/conditions were increased by 2 additional basis points across all loan segments during the fourth quarter of 2020. Qualitative factors remained unchanged during the first quarter of 2021. During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by 1 basis point across all loan segments, as the economy and job growth in the Company’s market areas have shown marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by 1 basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to increasing market values in the real estate sector. Modifications granted in compliance with Section 4013 of the CARES Act were highest in the Commercial Real Estate portfiolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio. ~~Modifications granted in compliance with Section 4013 of the CARES Act are highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear.~~

~~Government Guaranteed Loans~~GGLs do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S. Government. Should a GGL default, the loan will be repurchased by the originating bank or the appropriate government agency that has provided the guarantee for the loan.

Although ~~Paycheck Protection Program~~PPP loans do not require an associated allowance for loan losses due to the program’s call for a full guarantee by the SBA, the Company has taken the conservative approach and has calculated a qualitative allocation for the PPP loans under the general component of the allowance for the Commercial and Industrial portfolio.

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

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the amount of the reserve for unfunded lending commitments was ~~$138,000~~$116,000 and ~~$117,000,~~$129,000, respectively.

The Company is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the existing loan agreement. Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s ~~effective~~contractual interest rate at inception or the ~~fair~~net realizable value of the collateral for certain collateral dependent loans.

From time to time, the Bank may agree to modify/restructure the contractual terms of a borrower's loan. The restructuring of a loan is considered a ~~“troubled debt restructuring”~~TDR if both the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the Company has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan. A less common concession is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months. Any loan modifications made in response to the COVID-19 pandemic are not considered ~~troubled debt restructurings~~TDRs as long as the criteria set forth in Section 4013 of the CARES Act are met. See page 2624 for further discussion of the Section 4013 CARES Act modifications.

The Company utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings. An asset quality rating is assigned using the guidance provided in the Company’s loan policy. Primary responsibility for assigning the asset quality rating rests with the credit department. The asset quality rating is validated periodically by both an internal and external loan review process.

The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on financial condition and trends. The grade also reflects current economic and industry conditions; as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

The loan grading system for Residential Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio.

Risk grade characteristics are as follows:

Risk Grade 1 – MINIMAL RISK through Risk Grade 6 – MANAGEMENT ATTENTION (Pass Grade Categories)

Risk is evaluated via examination of several attributes including but not limited to financial trends, strengths and weaknesses, likelihood of repayment when considering both cash flow and collateral, sources of repayment, leverage position, management expertise, and repayment history.

At the low-risk end of the rating scale, a risk grade of 1 – Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss. Loan grades then progress through escalating ratings of 2 through 6 based upon risk. Risk Grade 2 – Modest Risk are loans with sufficient cash flows; Risk Grade 3 – Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers; Risk Grade 4 – Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher; and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets. Risk Grade 6 – Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained. Loans in this category are performing according to terms, but present some type of potential concern.

Risk Grade 7 − SPECIAL MENTION (Non-Pass Category)

~~Generally, these loans are currently protected, but are “potentially weak.” They constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard.~~

Assets in this category are ~~protected~~adequately collateralized but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. The loans may constitute increased credit risk, but not to the point of justifying a classification of substandard. No loss of principal or interest is ~~envisioned; however, they constitute an undue credit~~envisioned, but risk ~~that may be minor but is unwarranted in light of the circumstances surrounding a specific asset. Risk~~ is increasing beyond that at which the loan originally would have been granted. Historically, cash flows are inconsistent; financial trends show some deterioration. Liquidity and leverage are above industry averages. Financial information could be incomplete or inadequate. A Special Mention asset has potential weaknesses that deserve management’s close attention.

Risk Grade 8 − SUBSTANDARD (Non-Pass Category)

Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct possibility that the Company will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default and require more intensive supervision by Company management.

Risk Grade 9 − DOUBTFUL (Non-Pass Category)

Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

2018

The following table presents the classes of the loan portfolio summarized by risk rating as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


	Commercial and								Commercial and
(Dollars in thousands)	Industrial				Commercial Real Estate				Industrial				Commercial Real Estate
	September 30,		December 31,		September 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2020		2019		2020		2019		2021		2020		2021		2020
Grade:
1-6 Pass	$	99,534	$	84,999	$	418,965	$	382,510	$	103,371	$	90,906	$	463,400	$	444,119
7 Special Mention		66		2		11,543		944		—		—		782		814
8 Substandard		917		1,068		9,827		11,590		835		919		21,958		20,975
9 Doubtful		0		0		0		0		—		—		—		—
Add (deduct): Unearned discount and		0		0		0		0		—		—		—		—
Net deferred loan fees and costs		(220)		643		760		757		(312)		50		685		820
Total loans	$	100,297	$	86,712	$	441,095	$	395,801	$	103,894	$	91,875	$	486,825	$	466,728


	Residential Real Estate								Residential Real Estate
	Including Home Equity				Consumer				Including Home Equity				Consumer
	September 30,		December 31,		September 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2020		2019		2020		2019		2021		2020		2021		2020
Grade:
1-6 Pass	$	156,286	$	158,301	$	5,015	$	5,662	$	144,661	$	155,698	$	5,136	$	4,934
7 Special Mention		153		117		12		83		146		225		—		—
8 Substandard		1,203		1,048		7		35		1,294		1,186		21		18
9 Doubtful		0		0		0		0		—		—		—		—
Add (deduct): Unearned discount and		0		0		0		0		—		—		—		—
Net deferred loan fees and costs		(103)		(116)		75		89		(136)		(126)		64		72
Total loans	$	157,539	$	159,350	$	5,109	$	5,869	$	145,965	$	156,983	$	5,221	$	5,024


	Total Loans				Total Loans
	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Grade:
1-6 Pass	$	679,800	$	631,472	$	716,568	$	695,657
7 Special Mention		11,774		1,146		928		1,039
8 Substandard		11,954		13,741		24,108		23,098
9 Doubtful		0		0		0		0
Add (deduct): Unearned discount and		0		0		0		0
Net deferred loan fees and costs		512		1,373		301		816
Total loans	$	704,040	$	647,732	$	741,905	$	720,610

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of ~~$7,322,000~~$25,629,000 and ~~$1,885,000~~$1,758,000 at ~~September~~June 30, ~~2020~~2021 and ~~$17,848,000~~$9,337,000 and ~~$2,007,000~~$1,843,000 at December 31, ~~2019.~~2020. Commercial and Industrial loans also included ~~$5,215,000~~$4,949,000 and ~~$6,150,000~~$5,128,000 of Government Guaranteed Loans and ~~$31,729,000~~$21,338,000 and $0$22,976,000 of Paycheck Protection Program loans as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Loans held for sale amounted to ~~$12,274,000~~$16,373,000 at ~~September~~June 30, ~~2020~~2021 and ~~$2,292,000~~$17,300,000 at December 31, ~~2019.~~2020.

2119

The activity in the allowance for loan losses, by loan class, is summarized below for the periods indicated.


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three months ended June 30, 2021:
Allowance for Loan Losses:
Beginning balance	$	790	$	4,786	$	1,606	$	93	$	772	$	8,047
Charge-offs		—		(29)		(55)		(10)		—		(94)
Recoveries		—		30		1		5		—		36
Provision (credit)		61		143		(13)		7		(63)		135
Ending Balance	$	851	$	4,930	$	1,539	$	95	$	709	$	8,124


(Dollars in thousands)	Commercial		Commercial		Residential								Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total		and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended September 30, 2020:
As of and for the six months ended June 30, 2021:
Allowance for Loan Losses:
Beginning balance	$	823	$	4,215	$	1,608	$	106	$	582	$	7,334	$	787	$	4,762	$	1,643	$	94	$	647	$	7,933
Charge-offs		(15)		(16)		(13)		(13)		0		(57)		(13)		(29)		(55)		(20)		—		(117)
Recoveries		4		0		0		4		0		8		—		30		1		7		—		38
Provision (credit)		22		266		37		4		(35)		294		77		167		(50)		14		62		270
Ending Balance	$	834	$	4,465	$	1,632	$	101	$	547	$	7,579	$	851	$	4,930	$	1,539	$	95	$	709	$	8,124
Ending balance: individually
evaluated for impairment													$	—	$	1	$	—	$	—	$	—	$	1
Ending balance: collectively
evaluated for impairment													$	851	$	4,929	$	1,539	$	95	$	709	$	8,123

Loans Receivable:
Ending Balance													$	103,894	$	486,825	$	145,965	$	5,221	$	—	$	741,905
Ending balance: individually
evaluated for impairment													$	1,047	$	13,861	$	1,185	$	—	$	—	$	16,093
Ending balance: collectively
evaluated for impairment													$	102,847	$	472,964	$	144,780	$	5,221	$	—	$	725,812


(Dollars in thousands)	Commercial		Commercial		Residential								Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total		and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the nine months ended September 30, 2020:
As of and for the three months ended June 30, 2020:
Allowance for Loan Losses:
Beginning balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005	$	663	$	4,328	$	1,643	$	113	$	432	$	7,179
Charge-offs		(39)		(31)		(13)		(35)		0		(118)		(20)		(15)		—		(6)		—		(41)
Recoveries		4		0		0		6		0		10		—		—		—		2		—		2
Provision (credit)		235		380		(20)		16		71		682		180		(98)		(35)		(3)		150		194
Ending Balance	$	834	$	4,465	$	1,632	$	101	$	547	$	7,579	$	823	$	4,215	$	1,608	$	106	$	582	$	7,334
Ending balance: individually
evaluated for impairment	$	0	$	1	$	1	$	0	$	0	$	2
Ending balance: collectively
evaluated for impairment	$	834	$	4,464	$	1,631	$	101	$	547	$	7,577

Loans Receivable:
Ending Balance	$	100,297	$	441,095	$	157,539	$	5,109	$	0	$	704,040
Ending balance: individually
evaluated for impairment	$	1,101	$	11,775	$	1,096	$	0	$	0	$	13,972
Ending balance: collectively
evaluated for impairment	$	99,196	$	429,320	$	156,443	$	5,109	$	0	$	690,068

(Dollars in thousands)

Commercial

Commercial

Residential






and Industrial

Real Estate

Real Estate

Consumer

Unallocated

Total
As of and for the three month period ended September 30, 2019:

Allowance for Loan Losses:












Beginning balance

$
643

$
3,899

$
1,641

$
111

$
478

$
6,772
Charge-offs

0

0

(16)

(18)

0

(34)
Recoveries

5

0

0

2

0

7
Provision (credit)

(18)

150

16

15

12

175
Ending Balance

$
630

$
4,049

$
1,641

$
110

$
490

$
6,920

2220

(Dollars in thousands)

Commercial

Commercial

Residential






and Industrial

Real Estate

Real Estate

Consumer

Unallocated

Total
As of and for the nine months ended September 30, 2019:

Allowance for Loan Losses:












Beginning balance

$
724

$
3,700

$
1,650

$
117

$
554

$
6,745
Charge-offs

0

(64)

(44)

(43)

0

(151)
Recoveries

6

0

2

5

0

13
Provision (credit)

(100)

413

33

31

(64)

313
Ending Balance

$
630

$
4,049

$
1,641

$
110

$
490

$
6,920
Ending balance: individually












evaluated for impairment

$
0

$
1

$
0

$
0

$
0

$
1
Ending balance: collectively












evaluated for impairment

$
630

$
4,048

$
1,641

$
110

$
490

$
6,919

Loans Receivable:












Ending Balance

$
85,738

$
379,665

$
159,897

$
5,885

$
0

$
631,185
Ending balance: individually












evaluated for impairment

$
1,095

$
11,264

$
805

$
0

$
0

$
13,164
Ending balance: collectively












evaluated for impairment

$
84,643

$
368,401

$
159,092

$
5,885

$
0

$
618,021

(Dollars in thousands)

Commercial

Commercial

Residential






and Industrial

Real Estate

Real Estate

Consumer

Unallocated

Total
As of and for the year ended December 31, 2019

Allowance for Loan Losses:












Beginning balance

$
724

$
3,700

$
1,650

$
117

$
554

$
6,745
Charge-offs

0

(64)

(69)

(71)

0

(204)
Recoveries

6

0

2

6

0

14
Provision (credit)

(96)

480

82

62

(78)

450
Ending Balance

$
634

$
4,116

$
1,665

$
114

$
476

$
7,005
Ending balance: individually












evaluated for impairment

$
0

$
1

$
0

$
0

$
0

$
1
Ending balance: collectively












evaluated for impairment

$
634

$
4,115

$
1,665

$
114

$
476

$
7,004

Loans Receivable:












Ending Balance

$
86,712

$
395,801

$
159,350

$
5,869

$
0

$
647,732
Ending balance: individually












evaluated for impairment

$
1,084

$
11,158

$
712

$
0

$
0

$
12,954
Ending balance: collectively












evaluated for impairment

$
85,628

$
384,643

$
158,638

$
5,869

$
0

$
634,778

Of the $88,000 in foreclosed assets held for resale at September 30, 2020, $38,000 was represented by land and $50,000 was represented by residential real estate. Of the $119,000 in foreclosed assets held for resale at December 31, 2019, $38,000 was represented by land and $81,000 was represented by commercial real estate. At September 30, 2020 and December 31, 2019, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $971,000 at September 30, 2020 and $617,000 at December 31, 2019. These balances were not included in foreclosed assets held for resale at September 30, 2020 or December 31, 2019.


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the six months ended June 30, 2020:
Allowance for Loan Losses:
Beginning balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Charge-offs		(24)		(15)		—		(22)		—		(61)
Recoveries		—		—		—		2		—		2
Provision (credit)		213		114		(57)		12		106		388
Ending Balance	$	823	$	4,215	$	1,608	$	106	$	582	$	7,334
Ending balance: individually
evaluated for impairment	$	—	$	3	$	1	$	—	$	—	$	4
Ending balance: collectively
evaluated for impairment	$	823	$	4,212	$	1,607	$	106	$	582	$	7,330

Loans Receivable:
Ending Balance	$	100,293	$	416,480	$	154,794	$	5,347	$	—	$	676,914
Ending balance: individually
evaluated for impairment	$	1,062	$	11,531	$	1,107	$	—	$	—	$	13,700
Ending balance: collectively
evaluated for impairment	$	99,231	$	404,949	$	153,687	$	5,347	$	—	$	663,214


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the year ended December 31, 2020:
Allowance for Loan Losses:
Beginning balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Charge-offs		(90)		(141)		(33)		(37)		0		(301)
Recoveries		14		0		8		7		0		29
Provision (credit)		229		787		3		10		171		1,200
Ending Balance	$	787	$	4,762	$	1,643	$	94	$	647	$	7,933
Ending balance: individually
evaluated for impairment	$	0	$	8	$	0	$	0	$	0	$	8
Ending balance: collectively
evaluated for impairment	$	787	$	4,754	$	1,643	$	94	$	647	$	7,925

Loans Receivable:
Ending Balance	$	91,875	$	466,728	$	156,983	$	5,024	$	0	$	720,610
Ending balance: individually
evaluated for impairment	$	1,095	$	12,923	$	1,036	$	0	$	0	$	15,054
Ending balance: collectively
evaluated for impairment	$	90,780	$	453,805	$	155,947	$	5,024	$	0	$	705,556

During the ~~three~~six months ended ~~September~~June 30, ~~2020, 4~~2021, 3 loans with a combined post modification balance of ~~$366,000~~$301,000 were modified as TDRs. NaN loans were modified as TDRs during the three months ended ~~September~~June 30, ~~2019. The loan modifications for~~2021. During the three months ended ~~September~~June 30, 2020, ~~consisted of 1 term modification and~~ 3 ~~payment modifications.~~

~~During the nine months ended September 30, 2020, 7~~ loans with a combined post modification balance of ~~$525,000~~$159,000 were modified as TDRs. NaN loans were modified as TDRs during the ~~nine~~first three months ~~ended September 30, 2019.~~of 2020. The loan modifications for the ~~nine~~six months ~~ended September 30, 2020 consisted of 1 term modification and 6 payment modifications.~~

~~The following table presents the outstanding recorded investment of TDRs at the dates indicated:~~

(Dollars in thousands)

September 30,

December 31,

2020

2019
Non-accrual TDRs

$
1,675

$
112
Accruing TDRs

7,132

8,566
Total

$
8,807

$
8,678

At September 30, 2020, 9 Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,288,000 and 3 Commercial and Industrial loans classified as TDRs with a combined recorded investment of $751,000 were not in compliance with the terms of their restructure, compared to September 30, 2019 when 9 Commercial Real Estate loans classified as TDRs with a combined recorded investment of $661,000 and 1 Commercial and Industrial loan classified as a TDR with a recorded investment of $3,000 were not in compliance with the terms of their restructure.

NaN loans that were modified as TDRs during the twelve months preceding September 30, 2020 experienced payment defaults during the three months ended September 30, 2020. Of the loans that were modified as TDRs during the twelve months preceding September 30, 2020, 2 Commercial Real Estate loans totaling $62,000 experienced payment defaults during the nine months ended September 30, 2020. NaN loans that were modified as TDRs during the twelve months preceding September 30, 2019 experienced payment defaults during the three or nine months ended September 30, 2019.

The following table presents information regarding the loan modifications categorized as TDRs during the three and nine months ended September 30, 2020. NaN loans were modified as TDRs during the three and nine months ended September 30, 2019.

(Dollars in thousands)

For the Three Months Ended September 30, 2020

Pre-Modification

Post-Modification

Outstanding

Outstanding

Number of

Recorded

Recorded

Recorded

Contracts

Investment

Investment

Investment
Commercial and Industrial

2

$
42

$
42

$
42
Commercial Real Estate

2

324

324

324
Total

4

$
366

$
366

$
366

2421

(Dollars in thousands)

For the Nine Months Ended September 30, 2020

Pre-Modification

Post-Modification

Outstanding

Outstanding

Number of

Recorded

Recorded

Recorded

Contracts

Investment

Investment

Investment
Commercial and Industrial

2

$
42

$
42

$
42
Commercial Real Estate

5

483

483

483
Total

7

$
525

$
525

$
525

ended June 30, 2021 consisted of 2 term modifications and 1 payment modification, compared to the loan modifications for the six months ended June 30, 2020 which consisted of 3 payment modifications.

The following table presents the outstanding recorded investment of TDRs at the dates indicated:


(Dollars in thousands)	June 30,		December 31,
	2021		2020
Non-accrual TDRs	$	1,479	$	1,587
Accruing TDRs		8,036		7,976
Total	$	9,515	$	9,563

At June 30, 2021, 7 Commercial Real Estate loans classified as TDRs with a combined recorded investment of $479,000, 3 Commercial and Industrial loans classified as TDRs with a combined recorded investment of $736,000, and 1 Residential Real Estate loan classified as a TDR with a recorded investment of $17,000 were not in compliance with the terms of their restructure, compared to June 30, 2020 when 8 Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,108,000 and 3 Commercial and Industrial loans classified as TDRs with a combined recorded investment of $752,000 were not in compliance with the terms of their restructure.

NaN Commercial Real Estate loans totaling $300,000 that were modified as a TDRs within the twelve months preceding June 30, 2021 experienced a payment defaults during the three months ended June 30, 2021. NaN loans that were modified as TDRs during the twelve months preceding June 20, 2021 experienced payment defaults during the first three months of 2021. Of the loans that were modified as TDRs during the twelve months preceding June 30, 2020, 2 Commercial Real Estate loans totaling $62,000 experienced payment defaults during the three months ended June 30, 2020. NaN loans that were modified as TDRs during the twelve months preceding June 30, 2020 experienced payment defaults during the first three months of 2020.

The following table presents information regarding the loan modifications categorized as TDRs during the six months ended June 30, 2021 and the three and six months ended June 30, 2020. NaN loans were modified as TDRs during the three months ended June 30, 2021.


(Dollars in thousands)	For the Six Months Ended June 30, 2021
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial Real Estate	3	$	301	$	301	$	301
Total	3	$	301	$	301	$	301


(Dollars in thousands)	For the Three Months Ended June 30, 2020
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial Real Estate	3	$	159	$	159	$	159
Total	3	$	159	$	159	$	159

(Dollars in thousands)	For the Six Months Ended June 30, 2020
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial Real Estate	3	$	159	$	159	$	159
Total	3	$	159	$	159	$	159

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the six months ended June 30, 2021 and the three and ~~nine~~six months ended ~~September~~June 30, 2020 with the total number of each type of modification performed. NaN loans were modified as TDRs during the three ~~or the nine~~ months ended ~~September~~June 30, ~~2020.~~2021.


	For the Six Months Ended June 30, 2021
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial Real Estate	—	2	1	3
Total	—	2	1	3


	For the Three Months Ended June 30, 2020
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial Real Estate	—	—	3	3
Total	—	—	3	3


	For the Six Months Ended June 30, 2020
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial Real Estate	—	—	3	3
Total	—	—	3	3

For the Three Months Ended September 30, 2020

Rate

Term

Payment

Number

Modification

Modification

Modification

Modified
Commercial and Industrial

0

1

1

2
Commercial Real Estate

0

0

2

2
Total

0

1

3

4

For the Nine Months Ended September 30, 2020

Rate

Term

Payment

Number

Modification

Modification

Modification

Modified
Commercial and Industrial

0

1

1

2
Commercial Real Estate

0

0

5

5
Total

0

1

6

7

2523

In the wake of the COVID-19 pandemic, during the second quarter of 2020, the Company began granting loan modification requests to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met. The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the six months ended June 30, 2021.


(Dollars in thousands)	Commercial and			Commercial			Residential
	Industrial			Real Estate			Real Estate			Consumer			Total
		Recorded			Recorded			Recorded			Recorded			Recorded
	Count	Investment		Count	Investment		Count	Investment		Count	Investment		Count	Investment
Balance at December 31, 2020	7	$	1,012	35	$	15,260	2	$	269	—	$	—	44	$	16,541
Additional modifications granted for the three months ended March 31, 2021	2		190	2		10,414	1		16	1		2	6		10,622
Section 4013 CARES Act modifications returned to normal payment status during the three months ended March 31, 2021 (a)	(2)		(612)	(29)		(12,780)	(2)		(130)	—		—	(33)		(13,522)
Principal payments net of draws on active deferred loans for the three months ended March 31, 2021 (b)	N/A		—	N/A		—	N/A		—	N/A		—	N/A		—
Balance at March 31, 2021	7	$	590	8	$	12,894	1	$	155	1	$	2	17	$	13,641
Additional modifications granted for the three months ended June 30, 2021	—		—	—		—	—		—	—		—	—		—
Section 4013 CARES Act modifications returned to normal payment status during the three months ended June 30, 2021 (a)	(1)		(143)	(6)		(2,480)	(1)		(155)	(1)		(2)	(9)		(2,780)
Principal payments net of draws on active deferred loans for the three months ended June 30, 2021 (b)	N/A		—	N/A		(293)	N/A		—	N/A		—	N/A		(293)
Balance at June 30, 2021	6	$	447	2	$	10,121	—	$	—	—	$	—	8	$	10,568

Percent of Total Section 4013 CARES Act Modifications as of June 30, 2021			4.23%			95.77%			0.00%			0.00%			100.00%
Percent of Total Section 4013 CARES Act Modifications to Total Loans as of June 30, 2021			0.06%			1.36%			0.00%			0.00%			1.42%
Subsequent modifications granted during the three months ended June 30, 2021 for active deferred loans outstanding as of June 30, 2021	6	$	447	2	$	10,121	—	$	—	—	$	—	8	$	10,568

(a) Includes payments made prior to return to normal payment status during the quarter ended June 30, 2021.

(b) Draws include those made on lines of credit and other loans contractually allowing draws of principal. No construction loans have experienced a Section 4013 CARES Act modification at the dates indicated.

In the wake of the COVID-19 pandemic, loan modification requests have been granted to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met. The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the three month period ended September 30, 2020:

(Dollars in thousands)

Commercial and

Commercial

Residential

Industrial

Real Estate

Real Estate

Consumer

Total

Recorded

Recorded

Recorded

Recorded

Recorded


Count

Investment

Count

Investment

Count

Investment

Count

Investment

Count

Investment
Balance at June 30, 2020

66

$
11,540

325

$
143,886

81

$
8,143

18

$
126

490

$
163,695
Additional modifications granted for the three months ended September 30,2020

3

654

9

2,130

2

641

-

-

14

3,425
Section 4013 CARES Act modifications returned to normal payment status (a)

(28)

(4,943)

(192)

(79,525)

(77)

(7,291)

(18)

(126)

(315)

(91,885)
Principal payments net of draws on active deferred loans for the three months ended September 30, 2020 (b)

N/A

-

N/A

(299)

N/A

(1)

N/A

-

N/A

(300)
Balance at September 30, 2020

41

$
7,251

142

$
66,192

6

$
1,492

0

$
0

189

$
74,935

Percent of Total Section 4013 CARES Act modifications



9.68%



88.33%



1.99%



0.00%

100.00%
Percent of Total Section 4013 CARES Act modifications to Total Loans



1.03%



9.40%



0.21%



0.00%

10.64%

Subsequent modifications granted for active deferred loans

2

$
170

24

$
17,220

-

$
-

-

$
-

26

$
17,390

(~~a) Includes payments made prior to return to normal payment status during the quarter ended September 30, 2020~~

The recorded investment, unpaid principal balance, and the related allowance of the Company’s impaired loans are summarized below at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	September 30, 2020						December 31, 2019						June 30, 2021						December 31, 2020
			Unpaid						Unpaid						Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	1,101	$	1,101	$	0	$	1,084	$	1,084	$	0	$	1,047	$	1,047	$	0	$	1,095	$	1,095	$	0
Commercial Real Estate		11,747		15,947		0		11,130		14,147		0		13,378		16,311		0		12,438		15,400		0
Residential Real Estate		1,071		1,289		0		712		822		0		1,185		1,252		0		1,036		1,120		0

With an allowance recorded:
Commercial and Industrial		0		0		0		0		0		0		0		0		0		0		0		0
Commercial Real Estate		28		50		1		28		28		1		483		483		1		485		485		8
Residential Real Estate		25		60		1		0		0		0		0		0		0		0		0		0
Total	$	13,972	$	18,447	$	2	$	12,954	$	16,081	$	1	$	16,093	$	19,093	$	1	$	15,054	$	18,100	$	8

Total consists of:
Commercial and Industrial	$	1,101	$	1,101	$	0	$	1,084	$	1,084	$	0	$	1,047	$	1,047	$	0	$	1,095	$	1,095	$	0
Commercial Real Estate	$	11,775	$	15,997	$	1	$	11,158	$	14,175	$	1	$	13,861	$	16,794	$	1	$	12,923	$	15,885	$	8
Residential Real Estate	$	1,096	$	1,349	$	1	$	712	$	822	$	0	$	1,185	$	1,252	$	—	$	1,036	$	1,120	$	0

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, $8,807,000~~2020, $9,515,000 and ~~$8,678,000~~$9,563,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $0 at both June 30, 2021 and ~~$1,000, respectively.~~December 31, 2020. The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs. The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Company’s impaired loans are summarized below for the three and six months ended June 30, 2021 and 2020.


(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	June 30, 2021				June 30, 2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,057	$	13	$	1,068	$	2
Commercial Real Estate		12,750		147		11,300		75
Residential Real Estate		1,233		0		1,088		0

With an allowance recorded:
Commercial and Industrial		0		0		0		0
Commercial Real Estate		483		0		217		3
Residential Real Estate		0		0		20		1
Total	$	15,523	$	160	$	13,693	$	81

Total consists of:
Commercial and Industrial	$	1,057	$	13	$	1,068	$	2
Commercial Real Estate	$	13,233	$	147	$	11,517	$	78
Residential Real Estate	$	1,233	$	0	$	1,108	$	1

Of the $160,000 and $81,000 in interest income recognized on impaired loans for the three months ended June 30, 2021 and 2020 respectively, $3,000 and $0 in interest income was recognized with respect to non-accrual loans for each respective period.


(Dollars in thousands)	For the Six Months Ended				For the Six Months Ended
	June 30, 2021				June 30, 2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,071	$	15	$	1,074	$	8
Commercial Real Estate		12,564		240		11,217		151
Residential Real Estate		1,142		1		984		—

With an allowance recorded:
Commercial and Industrial		—		—		—		—
Commercial Real Estate		484		—		166		4
Residential Real Estate		—		—		21		2
Total	$	15,261	$	256	$	13,462	$	165

Total consists of:
Commercial and Industrial	$	1,071	$	15	$	1,074	$	8
Commercial Real Estate	$	13,048	$	240	$	11,383	$	155
Residential Real Estate	$	1,142	$	1	$	1,005	$	2

Of the $256,000 and $165,000 in interest income recognized on impaired loans for the six months ended June 30, 2021 and 2020 respectively, $3,000 and $5,000 in interest income was recognized with respect to non-accrual loans for each respective period.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of June 30, 2021 and December 31, 2020 were as follows:


(Dollars in thousands)	June 30,		December 31,
	2021		2020
Commercial and Industrial	$	736	$	745
Commercial Real Estate		6,152		5,315
Residential Real Estate		1,169		1,018
Total non-accrual loans		8,057		7,078
Foreclosed assets held for resale		—		28
Loans past-due 90 days or more and still accruing interest		—		13
Total non-performing assets	$	8,057	$	7,119

There were 0 foreclosed assets held for resale at June 30, 2021. The $28,000 in foreclosed assets held for resale at December 31, 2020 was represented by land. At December 31, 2020, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Company has entered into formal foreclosure proceedings but for which physical possession has yet to be obtained amounted to $41,000 at both June 30, 2021 and December 31, 2020. These balances were not included in foreclosed assets held for resale at June 30, 2021 or December 31, 2020.

The following tables present the classes of the loan portfolio summarized by past-due status at June 30, 2021 and December 31, 2020:

(Dollars in thousands)

90 Days

Or Greater

Past Due

90 Days

Current-

and Still

30-59 Days

60-89 Days

or Greater

Total

29 Days

Total

Accruing

Past Due

Loans

Interest

June 30, 2021:

Commercial and Industrial

—

704

103,190

103,894

Commercial Real Estate

836

5,488

6,374

480,451

486,825

Residential Real Estate

511

1,102

1,659

144,306

145,965

Consumer

—

5,221

Total

1,347

7,294

8,737

733,168

741,905


(Dollars in thousands)													90 Days
													Or Greater
													Past Due
					90 Days					Current-			and Still
	30-59 Days		60-89 Days		or Greater		Total			29 Days	Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
December 31, 2020:
Commercial and Industrial	$	—	$	0	$	745	$	745	$	91,130	$	91,875	$	—
Commercial Real Estate		1,879		968		4,552		7,399		459,329		466,728		—
Residential Real Estate		628		74		1,031		1,733		155,250		156,983		13
Consumer		19		6		0		25		4,999		5,024		—
Total	$	2,526	$	1,048	$	6,328	$	9,902	$	710,708	$	720,610	$	13

At this time, there have been no material fluctuations in past-due loans as a result of the COVID-19 pandemic.

At June 30, 2021 and December 31, 2020, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $1,249,000 that was associated with a loan to a developer of a residential sub-division.

~~The average recorded investment~~NOTE 5 — DEPOSITS

Major classifications of deposits at June 30, 2021 and ~~interest income recognized for the Company’s impaired loans are summarized below for the three and nine months ended September 30,~~December 31, 2020 ~~and 2019.~~consisted of:

(Dollars in thousands)

For the Three Months Ended

For the Three Months Ended

September 30, 2020

September 30, 2019


Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized
With no related allowance recorded:








Commercial and Industrial

$
1,080

$
4

$
1,101

$
13
Commercial Real Estate

11,640

93

11,167

91
Residential Real Estate

1,076

0

826

2




With an allowance recorded:




Commercial and Industrial

0

0

0

0
Commercial Real Estate

29

0

131

2
Residential Real Estate

25

0

0

0
Total

$
13,850

$
97

$
13,225

$
108




Total consists of:




Commercial and Industrial

$
1,080

$
4

$
1,101

$
13
Commercial Real Estate

$
11,669

$
93

$
11,298

$
93
Residential Real Estate

$
1,101

$
0

$
826

$
2


(Dollars in thousands)	June 30,		December 31,
	2021		2020
Non-interest bearing demand	$	217,615	$	198,499
Interest bearing demand		416,433		330,253
Savings		248,234		214,908
Time certificates of deposits less than $250,000		164,427		177,652
Time certificates of deposits $250,000 or greater		15,033		15,029
Other time		1,605		1,147
Total deposits	$	1,063,347	$	937,488

OfTotal deposits increased $125,859,000 to $1,063,347,000 as of June 30, 2021 due to increases in non-interest bearing, interest bearing demand and savings deposits. The increase in deposits was the ~~$97,000~~result of government stimulus funds, PPP loan proceeds, a $75,356,000 increase in highly rate sensitive deposits and ~~$108,000~~other normal fluctuations in ~~interest income recognized on impaired loans for~~deposits during the ~~three~~six months ended ~~September~~June 30, ~~2020 and 2019, respectively, $0 in interest income was recognized with respect to non-accrual loans for each respective period.~~

(Dollars in thousands)

For the Nine Months Ended

For the Nine Months Ended

September 30, 2020

September 30, 2019


Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized
With no related allowance recorded:








Commercial and Industrial

$
1,076

$
12

$
1,111

$
40
Commercial Real Estate

11,361

243

12,842

343
Residential Real Estate

1,015

1

573

7




With an allowance recorded:




Commercial and Industrial

0

0

0

0
Commercial Real Estate

119

5

83

3
Residential Real Estate

22

1

18

0
Total

$
13,593

$
262

$
14,627

$
393




Total consists of:




Commercial and Industrial

$
1,076

$
12

$
1,111

$
40
Commercial Real Estate

$
11,480

$
248

$
12,925

$
346
Residential Real Estate

$
1,037

$
2

$
591

$
7

Of the $262,000 and $393,000 in interest income recognized on impaired loans for the nine months ended September 30, 2020 and 2019, $5,000 in interest income was recognized with respect to non-accrual loans for each respective period.

2021.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of September 30, 2020 and December 31, 2019 were as follows:

(Dollars in thousands)

September 30,

December 31,

2020

2019
Commercial and Industrial

$
751

$
0
Commercial Real Estate

5,012

3,697
Residential Real Estate

1,077

691
Total non-accrual loans

6,840

4,388
Foreclosed assets held for resale

88

119
Loans past-due 90 days or more and still accruing interest

542

100
Total non-performing assets

$
7,470

$
4,607

~~The following tables present the classes of the loan portfolio summarized by past-due status at September 30, 2020 and December 31, 2019:~~

(Dollars in thousands)













90 Days

Or Greater

Past Due

90 Days

Current-

and Still

30-59 Days

60-89 Days

or Greater

Total

29 Days

Total

Accruing

Past Due

Past Due

Past Due

Past Due

Past Due

Loans

Interest
September 30, 2020:














Commercial and Industrial

$
60

$
0

$
716

$
776

$
99,521

$
100,297

$
0
Commercial Real Estate

2,490

242

5,365

8,097

432,998

441,095

542
Residential Real Estate

806

376

1,064

2,246

155,293

157,539

0
Consumer

16

6

0

22

5,087

5,109

0
Total

$
3,372

$
624

$
7,145

$
11,141

$
692,899

$
704,040

$
542

(Dollars in thousands)













90 Days

Or Greater

Past Due

90 Days

Current-

and Still

30-59 Days

60-89 Days

or Greater

Total

29 Days

Total

Accruing

Past Due

Past Due

Past Due

Past Due

Past Due

Loans

Interest
December 31, 2019:














Commercial and Industrial

$
0

$
26

$
0

$
26

$
86,686

$
86,712

$
0
Commercial Real Estate

880

957

3,502

5,339

390,462

395,801

0
Residential Real Estate

1,118

506

613

2,237

157,113

159,350

100
Consumer

24

5

0

29

5,840

5,869

0
Total

$
2,022

$
1,494

$
4,115

$
7,631

$
640,101

$
647,732

$
100

~~At this time, there have been no material fluctuations in past-due loans as a result of the COVID-19 pandemic.~~

At September 30, 2020 and December 31, 2019, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $1,249,000 that was associated with a loan to a developer of a residential sub-division.

~~NOTE 5 — DEPOSITS~~

~~Major classifications of deposits at September 30, 2020 and December 31, 2019 consisted of:~~

(Dollars in thousands)

September 30,

December 31,

2020

2019
Non-interest bearing demand

$
201,896

$
134,648
Interest bearing demand

313,563

218,847
Savings

204,093

173,069
Time certificates of deposits less than $250,000

181,364

210,916
Time certificates of deposits $250,000 or greater

16,525

23,006
Other time

1,778

1,142
Total deposits

$
919,219

$
761,628

Total deposits increased $157,591,000 to $919,219,000 as of September 30, 2020 due to increases in non-interest bearing, interest bearing and savings deposits. The increase in deposits was the result of many different factors including the deposit of at least $19,000,000 in stimulus funds, via check or ACH, $31,729,000 in PPP loan proceeds, higher levels of saving, a $58,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during the nine months ended September 30, 2020.

NOTE 6 — BORROWINGS

Short-Term Borrowings

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, the Federal Discount Window, and Federal Home Loan Bank of Pittsburgh (“FHLB”) advances, which generally represent overnight or less than 30-day borrowings. Short-term borrowings and weighted–average interest rates at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:


(Dollars in thousands)	September 30, 2020				December 31, 2019				June 30, 2021				December 31, 2020
			Average				Average				Average				Average
	Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate
Federal funds purchased	$	0	0	%	$	0	2.01	%	$	0	0	%	$	0	0.37	%
Securities sold under agreements to repurchase		23,123	0.68	%		14,042	1.03	%		26,499	0.34	%		19,494	0.58	%
Federal Discount Window		0	0.37	%		0	2.92	%		0	0	%		0	0.37	%
Federal Home Loan Bank of Pittsburgh		0	1.00	%		40,621	2.59	%		0	0.34	%		0	1.00	%
	$	23,123	0.89	%	$	54,663	2.37	%
Total									$	26,499	0.34	%	$	19,494	0.82	%

~~The decrease in short-term borrowings was funded by increased deposit balances.~~

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.

As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability on the Company’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is not offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a correspondent bank in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities.

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)			Gross		Net Amounts										Gross		Net Amounts
			Amounts		of Liabilities										Amounts		of Liabilities
			Offset		Presented										Offset		Presented
	Gross		in the		in the								Gross		in the		in the
	Amounts of		Consolidated		Consolidated				Cash				Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral		Net		Recognized		Balance		Balance		Financial		Collateral		Net
	Liabilities		Sheet		Sheet		Instruments		Pledge		Amount		Liabilities		Sheet		Sheet		Instruments		Pledge		Amount
September 30, 2020
June 30, 2021
Repurchase agreements (a)	$	23,123	$	0	$	23,123	$	(23,123)	$	0	$	0	$	26,499	$	0	$	26,499	$	(26,499)	$	0	$	0

December 31, 2019
December 31, 2020
Repurchase agreements (a)	$	14,042	$	0	$	14,042	$	(14,042)	$	0	$	0	$	19,494	$	0	$	19,494	$	(19,494)	$	0	$	0

(a)	As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the fair value of securities pledged in connection with repurchase agreements was ~~$25,750,000~~$30,780,000 and ~~$22,413,000,~~$23,695,000, respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of ~~September~~June 30, ~~2020:~~2021:


(Dollars in thousands)	Remaining Contractual Maturity of the Agreements										Remaining Contractual Maturity of the Agreements
	Overnight				Greater						Overnight				Greater		Greater
	and		Up to		30 -90		than				and		Up to		30 -90		than
	Continuous		30 days		Days		90 Days		Total		Continuous		30 days		Days		90 Days		Total
September 30, 2020:
June 30, 2021:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	23,123	$	0	$	0	$	0	$	23,123	$	26,499	$	0	$	0	$	0	$	26,499
Total	$	23,123	$	0	$	0	$	0	$	23,123	$	26,499	$	0	$	0	$	0	$	26,499

Long-Term Borrowings and Letters of Credit

Long-term borrowings are comprised of advances from the FHLB.

Irrevocable standby letters of credit may be issued to a customer/beneficiary by the FHLB on the Company’s behalf in order to secure public/municipal unit deposits, provide credit enhancement to certain transaction types, or to support payment obligations to third parties. These irrevocable standby letters of credit are supported by an irrevocable and independent guarantee by the FHLB for the Company’s pledging obligation to secure public/municipal unit deposits which eliminates the need to for the Company to pledge collateral in the amount necessary to secure these funds. The Company began utilizing this service offered by the FHLB during the second quarter of 2021. FHLB has issued an active irrevocable standby letter of credit for $65,000,000 which could be drawn on through FHLB’s close of business on June 30, 2021 and will be renewed as necessary in an amount appropriate to secure specific public/municipal unit deposits.

Under terms of a blanket agreement, collateral for the FHLB loans isand letters of credit consists of certain qualifying assets of the Corporation’s banking subsidiary. ~~The principal~~Principal qualifying assets are certain real estate mortgages and investment securities. As of June 30, 2021, loans of $577,576,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $413,373,000. As of June 30, 2021, 0 investment securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

NOTE 7 — SUBORDINATED DEBT

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. The Company intends to use the net proceeds it received from the sale of the 2020 Notes to support organic growth and for general corporate purposes.

The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and then float based on a benchmark rate (as defined). Interest will be payable semi-annually in arrears on June 30 and December 31 of each year, beginning on June 30, 2021, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 31, June 30, September 30 and December 31. The 2020 Notes will mature on December 31, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 31, 2025 and prior to December 31, 2030. Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 capital, the Corporation may redeem, in whole and not in part, at any time upon giving not less than ten days’ notice, an amount equal to one hundred percent (100%) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.

Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar law of the Corporation or the Bank.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are various pending legal actions and proceedings that are not reflected in the consolidated financial statements. Management does not believe the outcome of these actions and proceedings will have a material effect on the consolidated financial position or results of operations of the Company.

The Bank currently leases 3 branch banking facilities and 1 parcel of land under operating leases. At ~~September~~June 30, ~~2020,~~2021, right-of-use assets and lease liabilities were recorded related to these operating leases totaling ~~$1,125,000~~$1,074,000 and ~~$1,535,000,~~$1,537,000, respectively. At December 31, ~~2019,~~2020, right-of-use assets and lease liabilities stood at ~~$1,470,000~~$1,061,000 and ~~$1,663,000,~~$1,513,000, respectively. Further options to extend or terminate the lease are not applicable for any of the 4 leases. No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components. None of the leases contained an implicit rate; therefore, our incremental borrowing rate was used for each of the leases.

The Bank recognized total operating lease costs for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 of $89,000 and ~~2019 of $332,000 and $144,000,~~$221,000, respectively. Cash payments totaled ~~$116,000~~$77,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

The Bank currently has 21 finance ~~leases~~lease for equipment. At ~~September~~June 30, ~~2020,~~2021, right-of-use assets and lease liabilities were recorded related to ~~these~~the finance ~~leases~~lease totaling ~~$54,000~~$34,000 and ~~$48,000,~~$21,000, respectively. At December 31, 2020, right-of-use assets and lease liabilities stood at $94,000 and $84,000, respectively. Amounts recognized as right-of-use assets and lease liabilities related to finance leases are included in Premises and equipment, net and Other liabilities, respectively, in the accompanying balance sheet. Further options to extend or terminate the lease are not applicable for ~~any of~~ the ~~2 leases.~~lease. No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components. ~~Neither of the leases contained~~The lease did not contain an implicit rate; therefore, our incremental borrowing rate was ~~used for each of the leases.~~used.

Total finance lease costs that were recognized by the Bank for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 were immaterial. ~~NaN cash~~Cash payments ~~were made~~ as of ~~September~~June 30, ~~2020.~~2021 totaled $5,000.

The following table displays the weighted-average term and discount rates for operating and finance leases outstanding as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


	September 30,		December 31,		September 30,		December 31,		June 30,	December 31,	June 30,	December 31,
	2020		2019		2020		2019		2021	2020	2021	2020
	Operating		Operating		Finance		Finance		Operating	Operating	Finance	Finance
Weighted-average term (years)	25.45		25.63		4.55		—		24.98	25.09	2.17	5.55
Weighted-average discount rate	3.89	%	3.85	%	0.80	%	0	%	3.90%	3.86%	0.68%	0.88%

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


(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2020		2019		2020		2019
	Operating		Operating		Finance		Finance		2021		2020		2021		2020
Minimum Lease Payments due:									Operating		Operating		Finance		Finance
Within one year	$	118	$	148	$	13	$	0	$	119	$	140	$	10	$	19
After one but within two years		94		106		13		0		68		86		10		19
After two but within three years		68		86		12		0		68		68		1		15
After three but within four years		68		68		3		0		68		68		—		9
After four but within five years		68		68		3		0		68		68		—		9
After five years		2,275		2,326		6		0		2,224		2,258		—		16
Total undiscounted cash flows		2,691		2,802		50		0		2,615		2,688		21		87
Discount on cash flows		(1,156)		(1,139)		(2)		0		(1,078)		(1,175)		—		(3)
Total lease liability	$	1,535	$	1,663	$	48	$	0	$	1,537	$	1,513	$	21	$	84

NOTE 89 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company does not engage in trading activities with respect to any of its financial instruments with off-balance sheet risk.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.

The contract or notional amounts at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


(Dollars in thousands)
	September 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	126,706	$	122,082	$	116,150	$	114,836
Financial standby letters of credit	$	1,325	$	335	$	129	$	1,175
Performance standby letters of credit	$	3,293	$	3,230	$	3,748	$	3,448

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 that may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied income-producing commercial properties, and residential real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee payment to a third party when a customer either fails to repay an obligation or fails to perform some non-financial obligation. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company may hold collateral (similar to the items held as collateral for commitments to extend credit) to support standby letters of credit for which collateral is deemed necessary.

Financial Instruments with Concentrations of Credit Risk

The Company originates primarily commercial and residential real estate loans to customers in northeastern Pennsylvania. The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area. At ~~September~~June 30, ~~2020,~~2021, the Company had ~~$598,634,000~~$632,790,000 in loans secured by real estate, which represented ~~85.0%~~85.3% of total loans. The real estate loan portfolio is largely secured by lessors of residential buildings and dwellings, lessors of non-residential buildings, and lessors of hotels/motels. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, management is of the opinion that there were no concentrations exceeding 10%

of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.

As all financial instruments are subject to some level of credit risk, the Company requires collateral and/or guarantees for all loans. Collateral may include, but is not limited to property, plant, and equipment, commercial and/or residential real estate property, land, and pledge of securities. In the event of a borrower’s default, the collateral supporting the loan may be seized in order to recoup losses associated with the loan. The Company also establishes an allowance for loan losses that constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.

NOTE 910 — FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Inputs: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.

3332

Financial Assets Measured at Fair Value on a Recurring Basis

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, securities measured at fair value on a recurring basis and the valuation methods used are as follows:


(Dollars in thousands)

September 30, 2020	Level 1		Level 2		Level 3		Total
June 30, 2021									Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	0	$	0	$	0	$	0
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed		0		59,789		0		59,789	$	0	$	93,459	$	0	$	93,459
Other		0		11,107		0		11,107		0		9,098		0		9,098
Other mortgage backed debt securities		0		35,111		0		35,111		0		40,114		0		40,114
Obligations of state and political subdivisions		0		146,878		0		146,878		0		182,374		0		182,374
Asset backed securities		0		41,376		0		41,376		0		40,429		0		40,429
Corporate debt securities		0		22,260		0		22,260		0		37,941		0		37,941
Total debt securities available-for-sale		0		316,521		0		316,521		0		403,415		0		403,415
Marketable equity securities		1,393		0		0		1,393		1,789		0		0		1,789
Total recurring fair value measurements	$	1,393	$	316,521	$	0	$	317,914	$	1,789	$	403,415	$	0	$	405,204


(Dollars in thousands)

December 31, 2019	Level 1		Level 2		Level 3		Total
December 31, 2020									Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	0	$	2,855	$	0	$	2,855
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed		0		77,283		0		77,283	$	0	$	77,573	$	0	$	77,573
Other		0		10,297		0		10,297		0		10,430		0		10,430
Other mortgage backed debt securities		0		11,138		0		11,138		0		39,844		0		39,844
Obligations of state and political subdivisions		0		120,376		0		120,376		0		165,101		0		165,101
Asset backed securities		0		37,536		0		37,536		0		44,821		0		44,821
Corporate debt securities		0		18,443		0		18,443		0		28,942		0		28,942
Total debt securities available-for-sale		0		277,928		0		277,928		0		366,711		0		366,711
Marketable equity securities		1,933		0		0		1,933		1,646		0		0		1,646
Total recurring fair value measurements	$	1,933	$	277,928	$	0	$	279,861	$	1,646	$	366,711	$	0	$	368,357

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets; these assets consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Company (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The Company does not have any Level 3 inputs for securities. There were 0 transfers between Level 1 and Level 2 during ~~2020~~2021 or ~~2019.~~2020.

3433

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, impaired loans measured at fair value on a nonrecurring basis are as follows:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets at September 30, 2020
Assets at June 30, 2021
Impaired loans:
Commercial Real Estate	$	0	$	0	$	6,163	$	6,163	$	0	$	0	$	6,469	$	6,469
Residential Real Estate		0		0		151		151		0		0		55		55
Total impaired loans	$	0	$	0	$	6,314	$	6,314	$	0	$	0	$	6,524	$	6,524


(Dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Assets at December 31, 2020
Impaired loans:
Commercial Real Estate	$	0	$	0	$	6,218	$	6,218	$	0	$	0	$	6,497	$	6,497
Residential Real Estate		0		0		221		221		0		0		111		111
Total impaired loans	$	0	$	0	$	6,439	$	6,439	$	0	$	0	$	6,608	$	6,608

~~These~~The Company’s impaired loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Company. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values. For impaired loans less than $250,000 upon classification and annually at year end, the Company completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were 0 transfers between valuation levels in ~~2020~~2021 and ~~2019.~~2020.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, foreclosed assets held for resale measured at fair value on a nonrecurring basis are as follows:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets at September 30, 2020
Assets at June 30, 2021
Foreclosed assets held for resale:
Commercial Real Estate	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Total foreclosed assets held for resale	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0


(Dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Assets at December 31, 2020
Foreclosed assets held for resale:
Commercial Real Estate	$	0	$	0	$	81	$	81	$	0	$	0	$	28	$	28
Total foreclosed assets held for resale	$	0	$	0	$	81	$	81	$	0	$	0	$	28	$	28

The Company’s foreclosed asset valuation procedure requires an appraisal or a Certificate of Inspection, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases in which the Bank has obtained a sales agreement. These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were 0 transfers between valuation levels in ~~2020~~2021 and ~~2019.~~2020.

3534

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

(Dollars in thousands)

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Weighted

Fair Value

Weighted

September 30, 2020

Estimate

Valuation Technique

Unobservable Input

Range

Average

June 30, 2021

Estimate

Valuation Technique

Unobservable Input

Range

Average

Impaired loans - collateral dependent

3,346

Appraisal of collateral^1,3

Appraisal adjustments²

(15%) – (87%)

(18%)

3,627

Appraisal of collateral^1,3
Certificate of Inspection^1,3

Appraisal adjustments²
Qualitative Adjustments⁴

(5%) – (73%)

(8%)

Impaired loans - other

2,968

Discounted cash flow

Discount rate

(7%) – (8%)

(7%)

2,897

Discounted cash flow

Discount rate

(7%) – (7%)

(7%)

Foreclosed assets held for resale

Appraisal of collateral^1,3

Appraisal adjustments²

(0%) –(0%)

(0%)

—

Appraisal of collateral^1,3
Certificate of Inspection^1,3

Appraisal adjustments²
Qualitative Adjustments⁴

(0%) –(0%)

(0%)

December 31, 2019

December 31, 2020

Impaired loans - collateral dependent

3,419

Appraisal of collateral^1,3

Appraisal adjustments²

(10%) – (77%)

(17%)

3,679

Appraisal of collateral^1,3
Certificate of Inspection^1,3

Appraisal adjustments²
Qualitative Adjustments⁴

(15%) – (73%)

(17%)

Impaired loans - other

3,020

Discounted cash flow

Discount rate

(7%) – (8%)

(7%)

2,929

Discounted cash flow

Discount rate

(7%) – (7%)

(7%)

Foreclosed assets held for resale

Appraisal of collateral^1,3

Appraisal adjustments²

(35%) – (35%)

(35%)

Appraisal of collateral^1,3
Certificate of Inspection^1,3

Appraisal adjustments²
Qualitative Adjustments⁴

(28%) – (28%)

(28%)

1. Fair value is generally determined through independent appraisals or Certificates of Inspection of the underlying collateral, as defined by Bank regulators.

2. Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

3. Includes qualitative adjustments by management and estimated liquidation expenses.

4. Collateral values may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses.

²	Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

³	~~Includes qualitative adjustments by management and estimated liquidation expenses.~~

Fair Value of Financial Instruments Measured on a Nonrecurring Basis

(Dollars in thousands)

Carrying

Fair Value Measurements at September 30, 2020

Carrying

Fair Value Measurements at June 30, 2021

Amount

Level 1

Level 2

Level 3

Total

Amount

Level 1

Level 2

Level 3

Total

FINANCIAL ASSETS:

Cash and due from banks

9,627

8,787

Interest-bearing deposits in other banks

36,349

87,837

Time deposits with other banks

247

254

247

250

Restricted investment in bank stocks

2,247

2,606

Net loans

696,461

726,242

733,781

758,895

Mortgage servicing rights

277

354

Accrued interest receivable

4,730

4,374

FINANCIAL LIABILITIES:

Demand, savings and other deposits

719,553

882,282

Time deposits

199,666

202,469

181,065

182,280

Short-term borrowings

23,123

23,128

26,499

26,505

Long-term borrowings

45,000

47,502

35,000

36,610

Subordinated debentures

25,000

24,730

Accrued interest payable

398

284

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

3635

(Dollars in thousands)

Carrying

Fair Value Measurements at December 31, 2019


Amount

Level 1

Level 2

Level 3

Total
FINANCIAL ASSETS:










Cash and due from banks

$
10,251

$
10,251

$
0

$
0

$
10,251
Interest-bearing deposits in other banks

473

0

473

0

473
Time deposits with other banks

247

0

250

0

250
Restricted investment in bank stocks

4,224

0

4,224

0

4,224
Net loans

640,727

0

0

655,301

655,301
Mortgage servicing rights

283

0

0

283

283
Accrued interest receivable

3,405

0

3,405

0

3,405

FINANCIAL LIABILITIES:










Demand, savings and other deposits

526,564

0

526,564

0

526,564
Time deposits

235,064

0

235,134

0

235,134
Short-term borrowings

54,663

0

54,655

0

54,655
Long-term borrowings

55,000

0

55,809

0

55,809
Accrued interest payable

606

0

606

0

606

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

0

0

0

0

0


(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2020
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,833	$	8,833	$	0	$	0	$	8,833
Interest-bearing deposits in other banks		15,347		0		15,347		0		15,347
Time deposits with other banks		247		0		253		0		253
Restricted investment in bank stocks		2,247		0		2,247		0		2,247
Net loans		712,677		0		0		741,934		741,934
Mortgage servicing rights		262		0		0		262		262
Accrued interest receivable		4,544		0		4,544		0		4,544

FINANCIAL LIABILITIES:
Demand, savings and other deposits		743,660		0		743,660		0		743,660
Time deposits		193,828		0		196,200		0		196,200
Short-term borrowings		19,494		0		19,498		0		19,498
Long-term borrowings		45,000		0		47,237		0		47,237
Subordinated debentures		25,000		0		25,378		0		25,378
Accrued interest payable		405		0		405		0		405

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		0		0		0		0		0

NOTE 1011 — REVENUE RECOGNITION

In accordance with ASU 2014-09 Revenue from Contracts with Customers – Topic 606, and all subsequent ASUs that modified ASC 606, the main types of revenue contracts included in non-interest income within the consolidated statements of income are as follows:

Deposits related fees and service charges

Service charges and fees on deposits, which are included as liabilities in the consolidated balance sheets, consist of fees related to monthly fees for various retail and business checking accounts, automated teller machine (“ATM”) fees (charged for withdrawals by our deposit customers from other bank ATMs) and insufficient funds fees (“NSF”) (which are charged when customers overdraw their accounts beyond available funds). All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. The Company elected to adopt practical expedient related to incremental costs of obtaining deposit contracts. As such, any costs associated with acquiring the deposits, except for time deposits with maturities in excess of one year, are recognized as an expense within non-interest expense in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would have been recognized is one year or less.

Wealth/Asset/Trust Management Fees

Wealth management services are delivered to individuals, corporations and retirement funds located primarily within our geographic markets. The Trust Department of the Company conducts the wealth management operations, which provides a broad range of personal and corporate fiduciary services, including the administration of estates.

Assets held in a fiduciary capacity by the Trust Department are not assets of the Company and, therefore, are not included in our consolidated financial statements. Wealth management fees, which are contractually agreed with each customer, are earned each month and recognized on a cash basis based on average fair value of the trust assets under management. The services provided under such a contract are considered a single performance obligation under ASC 606 because they embody a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Wealth management fees charged by the Trust Department follow a tiered structure based on the type and size of the assets under management. Wealth management fees are included within non-interest income in the consolidated statements of income. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the fair value of trust

assets under management was ~~$111,381,000~~$106,527,000 and ~~$111,160,000,~~$107,336,000, respectively. The costs of acquiring asset

management customers are incremental and recognized within non-interest expense in the consolidated statements of income.

Interchange Fees and Surcharges

Interchange fees are related to the acceptance and settlement of debit card transactions, both point-of-sale and ATM, to cover operating costs and risks associated with the approval and settlement of the transactions. Interchange fees vary by type of transaction and each merchant sector. Net income recognized from interchange fees is included in non-interest income on the consolidated statements of income. A surcharge is assessed for use of the Company’s ATMs by non-customers. All interchange fees and surcharges are recognized as received on a daily basis for the prior business day’s transactions. All expenses related to the settlement of debit card transactions (both point-of-sale and ATM) are recognized on a monthly basis and included in non-interest expense on the consolidated statements of income.

NOTE 1112 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. At ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, there were 0 potential common shares outstanding. The following table sets forth the computation of basic and diluted earnings per share.


(In thousands, except earnings per share)	Three Months Ended				Three Months Ended
	September 30,				June 30,
	2020		2019		2021		2020
Net income	$	3,137	$	2,923	$	3,605	$	3,381
Weighted-average common shares outstanding		5,848		5,790		5,905		5,832
Basic and diluted earnings per share	$	0.54	$	0.50	$	0.61	$	0.58


(In thousands, except earnings per share)	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2020		2019		2021		2020
Net income	$	8,571	$	7,696	$	7,483	$	5,434
Weighted-average common shares outstanding		5,833		5,778		5,894		5,825
Basic and diluted earnings per share	$	1.47	$	1.33	$	1.27	$	0.93

NOTE 13 — GOODWILL

Goodwill resulted from the acquisition of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed of the branch of another financial institution in Danville, Pennsylvania, in January 2004. Such goodwill represents the excess cost of the acquired assets relative to the assets’ fairvalue at the dates of acquisition. In accordance with current accounting standards, goodwill is not amortized. Goodwill totaled $19,133,000 at June 30, 2021 and December 31, 2020.

~~NOTE 12 — GOODWILL~~

~~Management notes that the emergence of COVID-19 as~~Impairment testing is performed on an annual basis, using either a global pandemic during the first nine months of 2020 has resulted in significant deterioration in general economic conditions and has caused a deterioration in the environment in which the Corporation operates. This uncertainty has resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Corporation. Based on the totality of the circumstances and the impact of the economic conditions on the stock price, the events more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. As such, aqualitative or quantitative ~~analysis of the fair value of the Corporation as of September 30, 2020 was performed.~~

We utilized an independent third party in our analysis which considered both income and market approaches. The income approach used a discounted cash flow analysis based on a five-year forecast of results, including potential cost synergies a buyer would consider. The market approaches took into account the fair value of comparable companies (public guideline companies) as well as the Corporation’s current stock price adjusted for a control premium. We assigned weightings of 40% to the income approach, 10% to the public guideline companies’ result and 50% to the Corporation’s stock price with control premium result. The results indicated the Corporation’s fair value exceeded its carrying value by approximately 2% and no ~~impairment was recognized.~~

approach. The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price. Any change in the assumptions ~~which we utilize~~utilized to determine the carrying value of goodwill could adversely ~~impact~~affect our results of operations. Management notes that the emergence of COVID-19 as a global pandemic in 2020 resulted in significant deterioration in general economic conditions and the environment in which the Company operates. This uncertainty in 2020 resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered through the end of 2020 and into 2021.

no triggering events or negative factors affecting goodwill since the previous test that would indicate goodwill was impaired as of June 30, 2021.

3938

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

This quarterly report contains certain forward-looking statements, which are included pursuant to the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, and reflect management’s beliefs and expectations based on information currently available. These forward-looking statements are inherently subject to significant risks and uncertainties, including changes in general economic and financial market conditions, the Company’s ability to effectively carry out its business plans and changes in regulatory or legislative requirements. Other factors that could cause or contribute to such differences are changes in competitive conditions, and pending or threatened litigation. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially.

CRITICAL ACCOUNTING ESTIMATES

The Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the consolidated financial statements included in the ~~2019~~2020 Annual Report on Form 10-K. There have been no changes to the Critical Accounting Estimates since the Company filed its Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

RESULTS OF OPERATIONS

Quarter ended ~~September~~June 30, ~~2020~~2021 compared to quarter ended ~~September~~June 30, ~~2019~~2020

First Keystone Corporation realized earnings for the ~~third~~second quarter of ~~2020~~2021 of ~~$3,137,000,~~$3,605,000, an increase of ~~$214,000,~~$224,000, or ~~7.3%~~6.6% from the ~~third~~second quarter of ~~2019.~~2020. The increase in net income for the three months ended ~~September~~June 30, ~~2020~~2021 was primarily due to ~~a decrease~~increases in net interest ~~expense on deposits~~income, ATM and ~~short-term borrowings, plus an increase in interest~~debit card fees, and ~~fee income on loans.~~service charges and fees.

On a per share basis, for the three months ended ~~September~~June 30, ~~2020,~~2021, net income was ~~$0.54~~$0.61 versus ~~$0.50~~$0.58 for the ~~third quarter~~same three month period of ~~2019.~~2020. Cash dividends amounted to $0.27 per share for the ~~the~~ three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~

~~NET INTEREST INCOME~~

The major source of operating income for the Company is net interest income, defined as interest income less interest expense. In the three months ended September 30, 2020, interest income amounted to $9,852,000, an increase of $124,000 or 1.3% from the three months ended September 30, 2019, while interest expense amounted to $1,231,000 in the three months ended September 30, 2020, a decrease of $1,358,000 or 52.5% from the three months ended September 30, 2019. As a result, net interest income increased $1,482,000 or 20.8% to $8,621,000 from $7,139,000 for the same period in 2019.

The Company’s net interest margin for the three months ended September 30, 2020 was 3.59% compared to 3.26% for same period in 2019. The increase in net interest margin was primarily a result of a decrease in yield on short-term borrowings as a result of deposit growth and the continuing low interest rate environment.

~~PROVISION FOR LOAN LOSSES~~

The provision for loan losses for the three months ended September 30, 2020 and 2019 was $294,000 and $175,000, respectively. The increase in the provision for loan losses resulted from the Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. The provision for loan losses for the three months ended September 30, 2020 is also reflective of management’s assessment of the increased credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic. Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $49,000

~~and $27,000 for the the three months ended September 30, 2020 and 2019, respectively. See Allowance for Loan Losses on page 47 for further discussion.~~

~~NON-INTEREST INCOME~~

Total non-interest income was $1,515,000 for the three months ended September 30, 2020, as compared to $2,226,000 for the same period in 2019, a decrease of $711,000, or 31.9%. The decrease was mainly due to decreased gains on securities and lower service charge and fee income.

Net securities gains decreased $651,000 to $(9,000) for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. This decrease was due to the Bank taking $671,000 in net gains on sold securities in the third quarter of 2019 as compared to taking $61,000 in net gains on sold securities in the third quarter of 2020. Trust department income increased $1,000 or 0.5% to $222,000 for the three months ended September 30, 2020 as compared to the same period in 2019.

Service charges and fee income decreased $220,000 or 35.0%. The decrease was mainly due to lower fees earned on deposit accounts as there have been fewer customers in overdraft status during the third quarter of 2020 as compared to 2019. In addition, there were larger prepayment penalties earned on commercial loan payoffs in the third quarter of 2019. ATM fees and debit card income increased $74,000 or 17.3% to $501,000 for the three months ended September 30, 2020 as a result of increased transaction volume. Gains on sales of mortgage loans increased $87,000 or 100.0% to $174,000 due to higher average gains on individual sold loans in the third quarter of 2020 as compared to 2019.

~~NON-INTEREST EXPENSE~~

Total non-interest expense was $6,256,000 for the three months ended September 30, 2020, as compared to $5,859,000 for the three months ended September 30, 2019, an increase of $397,000 or 6.8%. The increase was mainly due to increased salaries and employee benefits and higher FDIC insurance expense.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $3,554,000 or 56.8% of total non-interest expense for the three months ended September 30, 2020, as compared to $3,287,000 or 56.1% for the three months ended September 30, 2019. The increase was due to increased commissions associated with loan growth and bonuses paid to all employees for working through the COVID-19 pandemic.

Net occupancy, furniture and equipment, and computer expense amounted to $907,000 for the three months ended September 30, 2020, an increase of $58,000 or 6.8%. The increase is mainly the result of increased rent expense associated with the new leasing standard. Professional services increased $2,000 or 0.9% to $220,000 as of September 30, 2020. Pennsylvania shares tax expense amounted to $231,000 for the three months ended September 30, 2020, an increase of $4,000 or 1.8% as compared to the three months ended September 30, 2019. The increase was the result of an increase in total equity.

FDIC insurance expense increased $148,000 or 197.3% for the three months ended September 30, 2020. This increase was due to small bank assessment credits received from the FDIC for the third quarter of 2019 effectively reducing the expense for the third quarter of 2019. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to $253,000 for the three months ended September 30, 2020, an increase of $21,000 or 9.1% as compared to the three months ended September 30, 2019. Data processing expenses amounted to $283,000 for the three months ended September 30, 2020, an increase of $9,000 or 3.3% as compared to the three months ended September 30, 2019.

Foreclosed assets held for resale expense increased $27,000 to $30,000 for the three months ended September 30, 2020. This increase was due to a loss incurred on the sale of a foreclosed property during the third quarter

of 2020. Advertising expense decreased $81,000 or 49.7% during the three months ended September 30, 2020. This decrease was due to a less aggressive advertising approach in 2020 due to the COVID-19 pandemic, as the third quarter of 2020 saw less newspaper advertising and civic advertising. Civic advertising was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor were canceled.

Other non-interest expense amounted to $623,000 for the three months ended September 30, 2020, a decrease of $58,000 or 8.5% as compared to the three months ended September 30, 2019. The decrease was due to a decrease in the provision for unfunded commitments due to increased utilization of commercial and industrial lines of credit and a decrease in commercial real estate commitments in the third quarter of 2020.

~~INCOME TAXES~~

Income tax expense amounted to $449,000 for the three months ended September 30, 2020, as compared to $408,000 for the three months ended September 30, 2019, an increase of $41,000. The effective total income tax rate was 12.5% for the three months ended September 30, 2020 as compared to 12.2% for the three months ended September 30, 2019. The increase in the effective tax rate was mainly due to a net decrease in tax-exempt income from investments in and loans to state and local units of government. The Company recognized $101,000 of tax credits from low-income housing partnerships in the three months ended September 30, 2020.

~~Nine months ended September 30, 2020 compared to nine months ended September 30, 2019~~

First Keystone Corporation realized earnings for the nine months ended September 30, 2020 of $8,571,000, an increase of $875,000, or 11.4% from the same period in 2019. The increase in net income for the nine months ended September 30, 2020 was primarily due to an increase in net interest income, offset by a decrease in net securities gains.

On a per share basis, net income was $1.47 for the nine months ended September 30, 2020 versus $1.33 for the same period in 2019. Cash dividends amounted to $0.81 per share for the nine months ended September 30, 2020 and 2019.

NET INTEREST INCOME

The major source of operating income for the Company is net interest income, defined as interest income less interest expense. ~~For~~In the ~~nine~~three months ended ~~September~~June 30, ~~2020,~~2021, interest income amounted to ~~$29,251,000,~~$10,259,000, an increase of ~~$530,000~~$628,000 or ~~1.8%~~6.5% from the ~~nine~~three months ended ~~September~~June 30, ~~2019,~~2020, while interest expense amounted to ~~$5,136,000~~$1,288,000 in the ~~nine~~three months ended ~~September~~June 30, ~~2020,~~2021, a decrease of ~~$2,743,000~~$225,000 or ~~34.8%~~14.9% from the ~~nine~~three months ended ~~September~~June 30, ~~2019.~~2020. As a result, net interest income increased ~~$3,273,000~~$853,000 or ~~15.7%~~10.5% to ~~$24,115,000~~$8,971,000 from ~~$20,842,000~~$8,118,000 for the same period in ~~2019.~~

2020.

The Company’s net interest margin for the ~~nine~~three months ended ~~September~~June 30, ~~2020~~2021 was ~~3.45%~~3.23% compared to ~~3.19%~~3.48% for same period in ~~2019.~~2020. The ~~increase~~decrease in net interest margin was primarily a result of ~~a decrease~~decreases in ~~yield~~yields earned on ~~short-term borrowings as a result of deposit growth~~loans and ~~the continuing low interest rate environment.~~securities.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the ~~nine~~three months ended ~~September~~June 30, 2021 and 2020 was $135,000 and ~~2019 was $682,000 and $313,000,~~$194,000, respectively. The ~~increase~~decrease in the provision for loan losses resulted from the Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. The provision for loan losses for the ~~nine~~three months ended ~~September~~June 30, 2021 is also reflective of management’s assessment of the credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic. Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $58,000 and

$39,000 for the the three months ended June 30, 2021 and 2020, respectively. See Allowance for Loan Losses on page 45 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $1,865,000 for the three months ended June 30, 2021, as compared to $1,621,000 for the same period in 2020, an increase of $244,000, or 15.1%. The increase was due to increased service charges and fee income, increased ATM fees and debit card income and an increase in gains on the sales of mortgage loans.

Net securities gains decreased $136,000 to $28,000 for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. This decrease was mainly due to the Company taking $96,000 in gains on sold debt securities in the second quarter of 2020 as compared to $0 in the second quarter of 2021. Trust department income increased $31,000 or 13.2% to $265,000 for the three months ended June 30, 2021 as compared to the same period in 2020 due to increased income on IRA accounts.

Service charges and fee income increased $139,000 or 40.6%. The increase was due to an increase in prepayment penalties earned on commercial loan payoffs, an increase in service charges on DDA accounts and an increase in fees on sold mortgages. ATM fees and debit card income increased $104,000 or 22.4% to $568,000 for the three months ended June 30, 2021 due to increased debit card interchange fees as the result of increased transaction volume in the second quarter of 2021. Gains on sales of mortgage loans increased $104,000 or 51.0% to $308,000 due to a higher volume of sold loans in the second quarter of 2021 as compared to the second quarter of 2020.

NON-INTEREST EXPENSE

Total non-interest expense was $6,547,000 for the three months ended June 30, 2021, as compared to $5,655,000 for the three months ended June 30, 2020.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $3,461,000 or 52.9% of total non-interest expense for the three months ended June 30, 2021, as compared to $2,959,000 or 52.3% for the three months ended June 30, 2020. The increase was due to normal merit increases, new position hires and the filling of vacant positions.

Net occupancy, furniture and equipment, and computer expense amounted to $940,000 for the three months ended June 30, 2021, an increase of $37,000 or 4.1% which was due to the implementation of several new software programs. Professional services increased $50,000 or 22.4% to $273,000 as of June 30, 2021. The increase was due to normal increases in audit and tax servives expenses along with an increase in consulting expense due to broker fees resulting from the Company’s subordinated debt issuance. Pennsylvania shares tax expense amounted to $313,000 for the three months ended June 30, 2021, an increase of $88,000 or 39.1% as compared to the three months ended June 30, 2020. The increase was the result of increases in total equity.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased $99,000 for the three months ended June 30, 2021. This increase was mainly due to small bank assessment credits received from the FDIC for the second quarter of 2020 effectively reducing the expense for the second quarter of 2020. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to $283,000 for the three months ended June 30, 2021, an increase of $69,000 or 32.2% as compared to the three months ended June 30, 2020. The increase was due to increased electronic funds transfer fees as the result of increased customer transaction volume. Data processing expenses amounted to $323,000 for the six months ended June 30, 2021 as compared to $307,000 for the same period of 2020, an increase of $16,000 or 5.2%.

Foreclosed assets held for resale expense decreased $5,000 for the three months ended June 30, 2021. As of June 30, 2021 the Company did not own any foreclosed properties. Advertising expense increased $37,000 or 51.4%

during the three months ended June 30, 2021. This increase was mainly due to an increase in civic and digital and social media advertising as compared to the same period in 2020. In 2020, civic advertising was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor were canceled. In addition, newspaper advertising is down due to utilizing more digitally focused advertising mediums.

Other non-interest expense amounted to $725,000 for the three months ended June 30, 2021, a decrease of $1,000 or 0.1% as compared to the three months ended June 30, 2020.

INCOME TAXES

Income tax expense amounted to $549,000 for the three months ended June 30, 2021, as compared to $509,000 for the three months ended June 30, 2020, an increase of $40,000. The effective total income tax rate was 13.2% for the three months ended June 30, 2021 as compared to 13.1% for the three months ended June 30, 2020. The increase in the effective tax rate was mainly due to higher overall operating income. The Company recognized $101,000 of tax credits from low-income housing partnerships in the three months ended June 30, 2021 and 2020.

Six months ended June 30, 2021 compared to six months ended June 30, 2020

First Keystone Corporation realized earnings for the six months ended June 30, 2021 of $7,483,000, an increase of $2,049,000, or 37.7% from the same period in 2020. The increase in net income for the six months ended June 30, 2021 was primarily due to an increase in net interest income, net securities gains, and gains on sales of mortgage loans.

On a per share basis, net income was $1.27 for the six months ended June 30, 2021 versus $0.93 for the same period in 2020. Cash dividends amounted to $0.55 and $0.54 per share for the six months ended June 30, 2021 and 2020, respectively.

NET INTEREST INCOME

The major source of operating income for the Company is net interest income, defined as interest income less interest expense. For the six months ended June 30, 2021, interest income amounted to $20,534,000, an increase of $1,135,000 or 5.9% from the six months ended June 30, 2020, while interest expense amounted to $2,593,000 in the six months ended June 30, 2021, a decrease of $1,312,000 or 33.6% from the six months ended June 30, 2020. As a result, net interest income increased $2,447,000 or 15.8% to $17,941,000 from $15,494,000 for the same period in 2020.

The Company’s net interest margin for the six months ended June 30, 2021 was 3.30% compared to 3.39% for same period in 2020. The decrease in net interest margin was a result of decreases in yields earned on loans and securities.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the six months ended June 30, 2021 and 2020 was $270,000 and $388,000, respectively. The decrease in the provision for loan losses resulted from the Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. The provision for loan losses for the six months ended June 30, 2021 is also reflective of management’s assessment of the increased credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic. Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of ~~$108,000~~$79,000 and ~~$138,000~~$59,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. See Allowance for Loan Losses on page 4745 for further discussion.

NON-INTEREST INCOME

Total non-interest income was ~~$4,119,000~~$3,740,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, as compared to ~~$5,349,000~~$2,604,000 for the same period in ~~2019, a decrease~~2020, an increase of ~~$1,230,000,~~$1,136,000, or ~~23.0%~~43.6%. The ~~decrease~~increase was ~~mainly the result of a decrease~~due to an increase in net gains on ~~the sales of~~

securities, ~~and net losses on held equity securities in the nine months ended September, 30 2020, plus a decrease in service charges and fees offset by~~ an increase in gains on sold loans and an increase in ATM fees and debit card income during the ~~sales of mortgage loans.~~six months ended June 30, 2021.

ATM fees and debit card income increased ~~$141,000~~$221,000 or ~~11.5%~~25.6% to ~~$1,364,000~~$1,084,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 due to ~~an increase~~increased debit card interchange fees as the result of increased transaction volume in ~~transaction volume.~~2021. Service charges and fee income ~~decreased $426,000~~increased $15,000 for the ~~nine~~six months ended ~~September~~June 30, 2020. The decrease was mainly due to lower fees earned on deposit accounts as overdraft fees and several other deposit account service charges were waived during the second quarter of 2020 due to the COVID-19 pandemic. In addition, there were fewer prepayment penalties earned on commercial loan payoffs during the nine months ended September 30, 2020.2021. Gains on sales of mortgage loans increased ~~$269,000~~$365,000 or ~~133.2%~~122.9% due to a higher ~~average gains on individual~~volume of sold loans in ~~2020~~2021 as compared to ~~2019.~~2020.

Trust department income ~~decreased $69,000~~increased $63,000 or ~~9.2%~~13.8% to ~~$677,000~~$518,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 as compared to the same period in ~~2019.~~2020. The ~~decrease~~increase was ~~mainly~~ the result of higher income earned from estate fees and IRA accounts in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2021. Net securities gains ~~decreased $1,149,000~~increased $446,000 or ~~137.3%~~147.2% to ~~$(312,000)~~$143,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The ~~decrease~~increase was mainly due to the Company recognizing ~~$540,000~~$470,000 in net losses on held equity securities in the ~~nine~~six months ended ~~September~~June 30, 2020 ~~and the Company recognizing $528,000 less~~as compared to realizing $143,000 in net gains on ~~the sales of~~held equity securities ~~during~~in the same period in ~~2020 as compared to the same period in 2019.~~2021.

NON-INTEREST EXPENSE

Total non-interest expense was ~~$17,826,000~~$12,744,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, as compared to ~~$17,369,000~~$11,570,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Non-interest expense increased ~~$457,000~~$1,174,000 or ~~2.6%~~10.1%.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to ~~$9,732,000~~$6,761,000 or ~~54.6%~~53.1% of total non-interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, as compared to ~~$9,372,000~~$6,178,000 or ~~54.0%~~53.4% for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The increase was due to ~~increased commissions associated with loan growth~~normal merit increases, new position hires, the filling of vacant positions and ~~bonuses paid to all employees for working through the COVID-19 pandemic.~~an increase in profit sharing expense.

Net occupancy, furniture and equipment, and computer expense amounted to ~~$2,722,000~~$1,845,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$108,000~~$30,000 or ~~4.1%~~1.7%. The increase is ~~mainly~~ the result of ~~increased rent expense associated with~~ the implementation of several new ~~leasing standard.~~software programs. Professional services ~~decreased $11,000~~increased $67,000 or ~~1.6%~~14.4% to ~~$685,000~~$532,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This increase was due to normal increases in audit and tax services expenses along with an increase in consulting expense due to goodwill impairment testing and broker fees resulting from the Company’s subordinated debt issuance. Pennsylvania shares tax expense amounted to ~~$680,000~~$626,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$69,000~~$177,000 or ~~11.3%~~39.4% as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The increase was the result of ~~an increase~~increases in total equity.

FDIC insurance expense increased ~~$32,000~~$186,000 or ~~51.6%~~885.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This increase was mainly due to small bank assessment credits received from the FDIC effectively reducing the expense in ~~2019.~~the first half of 2020. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to ~~$676,000~~$483,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$12,000~~$60,000 or ~~1.8%~~14.2% as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The increase was due to increased electronic funds transfer fees as the result of increased customer transaction volume. Data processing expenses amounted to ~~$884,000~~$617,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$38,000~~$16,000 or ~~4.5%~~2.7% as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2019. The increase was the result of annual contracted pricing increases from our main third-party data processor.~~2020.

Foreclosed assets held for resale expense decreased ~~$2,000~~$11,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. As of June 30, 2021 the Company did not own any foreclosed properties. Advertising expense ~~decreased $231,000~~increased $18,000 or ~~48.5%~~11.0% during the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase was

mainly due to ~~a less aggressive~~an increase in digital and social media, radio, billboard and television advertising ~~approach in the first nine months of 2020~~as compared to 2020. In addition, newspaper advertising is down due to ~~the COVID-19 pandemic, as this period in 2020 saw less newspaper, billboard, digital and civic advertising. Civic~~utilizing more digitally focused advertising ~~was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor were canceled.~~mediums.

Other non-interest expense amounted to ~~$2,064,000~~$1,489,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$82,000~~$48,000 or ~~4.1%~~3.3% as compared to the ~~nine~~six months ended ~~September~~June 30, 2019. The increase was due to several factors. There was an increase in the provision for unfunded commitments due to higher commitment balances requiring a reserve, an increase in loan collections expense resulting from a right of setoff taken from a customer’s account in the prior year to cover various expenses paid by the Bank and higher promotional expenses for free appraisals given by the Bank. This was offset by lower travel and entertainment expenses in 2020 as the result of the COVID-19 pandemic.2020.

INCOME TAXES

Income tax expense amounted to ~~$1,155,000~~$1,184,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, as compared to ~~$813,000~~$706,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, an increase of ~~$342,000.~~$478,000. The effective total income tax rate was ~~11.9%~~13.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 as compared to ~~9.6%~~11.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The increase in the effective tax rate was mainly due to ~~a net decrease in tax-exempt income from investments in and loans to state and local units of government.~~higher overall operating income. The Company recognized ~~$303,000~~$202,000 of tax credits from low-income housing partnerships in the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020.

FINANCIAL CONDITION

SUMMARY

Total assets increased to ~~$1,134,735,000~~$1,310,466,000 as of ~~September~~June 30, ~~2020,~~2021, an increase of ~~$127,509,000~~$131,419,000 from year-end ~~2019.~~2020. Total assets as of December 31, ~~2019~~2020 amounted to ~~$1,007,226,000.~~$1,179,047,000.

Total debt securities available-for-sale increased ~~$38,593,000~~$36,704,000 or ~~13.9%~~10.0% to ~~$316,521,000~~$403,415,000 as of ~~September~~June 30, ~~2020~~2021 from December 31, ~~2019. In the third quarter of 2020, the Company purchased $3,500,000 in subordinated debt from other financial institutions.~~2020.

Total loans increased ~~$56,308,000~~$21,295,000 or ~~8.7%~~3.0% to ~~$704,040,000~~$741,905,000 as of ~~September~~June 30, ~~2020~~2021 from December 31, ~~2019.~~2020. Loan demand grew in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 as the Bank has realized an increase in loan originations, primarily in the commercial real estate ~~and commercial and industrial portfolios. The increase was mainly due the origination of $31,729,000 in PPP loans.~~

Interest receivable increased $1,325,000 or 38.9% to $4,730,000 as of September 30, 2020 from December 31, 2019. The increase was mainly due to the full payment deferrals of several loans that were modified in response to the COVID-19 pandemic under Section 4013 of the CARES Act.portfolio.

Total deposits increased ~~$157,591,000~~$125,859,000 or ~~20.7%~~13.4% to ~~$919,219,000~~$1,063,347,000 as of ~~September~~June 30, ~~2020~~2021 from December 31, ~~2019.~~2020. The increase was mainly due to the deposit of ~~customer~~government stimulus funds, ~~issued in accordance with the CARES Act, the deposit of~~ PPP loan proceeds, ~~higher levels of saving and an~~a $75,356,000 increase in highly rate sensitive deposits ~~associated with municipal customers.~~and other normal fluctuations.

The Company continues to maintain and manage its asset growth. The Company’s strong equity capital position provides an opportunity to further leverage its asset growth. Total borrowings decreased in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 by ~~$41,540,000~~$2,995,000 to ~~$68,123,000~~$61,499,000 from ~~$109,663,000~~$64,494,000 as of December 31, ~~2019.~~2020. Borrowings decreased mainly due to ~~increased deposit balances.~~the maturity of two long-term notes offset by an increase in the balance of repurchase agreements.

Total stockholders’ equity increased to ~~$140,469,000~~$147,502,000 at ~~September~~June 30, ~~2020,~~2021, an increase of ~~$11,717,000~~$3,260,000 or ~~9.1%~~2.3% from December 31, ~~2019 primarily~~2020 due to an increase in retained earnings offset by a decrease in accumulated other comprehensive ~~income and retained earnings.~~income.

SEGMENT REPORTING

Currently, management measures the performance and allocates the resources of the Company as a single segment.

EARNING ASSETS

Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Company maximizes income. The earning asset ratio (average interest earning assets divided by average total assets) equaled ~~93.0%~~94.0% at ~~September~~June 30, ~~2020~~2021 and ~~92.4%~~92.9% at ~~September~~June 30, ~~2019.~~2020. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and ~~investment~~ securities.

Our primary earning asset, total loans, increased to ~~$704,040,000~~$741,905,000 as of ~~September~~June 30, ~~2020,~~2021, up ~~$56,308,000,~~$21,295,000, or ~~8.7%~~3.0% since year-end ~~2019.~~2020. The loan portfolio continues to be well diversified. Non-performing assets increased since year-end ~~2019,~~2020, but overall asset quality has remained consistent. Total non-performing assets were ~~$7,470,000~~$8,057,000 as of ~~September~~

June 30, ~~2020,~~2021, an increase of ~~$2,863,000,~~$938,000, or ~~62.1%~~13.2% from ~~$4,607,000~~$7,119,000 reported in non-performing assets as of December 31, ~~2019.~~2020. The increase in non-performing assets during the six months ended June 30, 2021 was mainly due to one loan that was moved to non-accrual status during the three months ended June 30, 2021. Total allowance for loan losses to total non-performing assets was ~~101.46%~~100.83% as of ~~September~~June 30, ~~2020~~2021 and ~~152.05%~~111.43% at December 31, ~~2019. The increase in non-performing assets during the third quarter of 2020 was mainly due to several loans that were moved to non-accrual status during the first quarter of~~ 2020. See the Non-Performing Assets section on page 4847 for more information.

In addition to loans, another primary earning asset is our overall ~~investment~~securities portfolio, which increased in size from December 31, ~~2019~~2020 to ~~September~~June 30, ~~2020.~~2021. Debt securities available-for-sale amounted to ~~$316,521,000~~$403,415,000 as of ~~September~~June 30, ~~2020,~~2021, an increase of ~~$38,593,000~~$36,704,000 from year-end ~~2019.~~2020.

Interest-bearing deposits in other banks increased as of ~~September~~June 30, ~~2020,~~2021, to ~~$36,349,000~~$87,837,000 from ~~$473,000~~$15,347,000 at year-end ~~2019~~2020 due to increased cash held at the Federal Reserve Bank. Time deposits with other banks were $247,000 at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

LOANS

Total loans increased to ~~$704,040,000~~$741,905,000 as of ~~September~~June 30, ~~2020~~2021 as compared to ~~$647,732,000~~$720,610,000 as of December 31, ~~2019.~~2020. The table on page 2119 provides data relating to the composition of the Company’s loan portfolio on the dates indicated. Total loans increased by ~~$56,308,000~~$21,295,000 or ~~8.7%~~3.0%.

Steady demand for borrowing by businesses ~~(including loans issued through the Bank’s participation in the SBA’s Paycheck Protection Program)~~ accounted for the ~~8.7%~~3.0% increase in the loan portfolio from December 31, ~~2019~~2020 to ~~September~~June 30, ~~2020.~~2021. Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased ~~$13,585,000~~$12,019,000 or 13.1% to ~~$100,297,000~~$103,894,000 at ~~September~~June 30, ~~2020~~2021 compared to ~~$86,712,000~~$91,875,000 at December 31, ~~2019.~~2020. The increase in the Commercial and Industrial portfolio ~~was~~resulted mainly ~~attributable to originations of PPP loans which amounted to $31,729,000. The~~from the portion of the Commercial and Industrial portfolio not attributable to the Paycheck Protection Program loans ~~decreased $18,144,000~~which increased $13,657,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase was mainly ~~attributable~~due to ~~$4,975,000~~$18,931,000 in new loan originations ~~offset by a $3,566,000 decrease~~and an increase in utilization of existing Commercial and Industrial lines of credit ~~and~~of $1,212,000, offset with loan payoffs of ~~$15,673,000,~~$3,737,000, as well as regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio. The portion of the Commercial and Industrial portfolio attributable to the PPP loans decreased by $1,638,000 during the six months ended June 30, 2021 as a result of $16,834,000 in new PPP loans originated during the six months ended June 30, 2021 which were offset by $18,472,000 in PPP loans paid off/forgiven during the same six-month period. The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased ~~$45,294,000~~$20,097,000 or 4.3% to ~~$441,095,000~~$486,825,000 at ~~September~~June 30, ~~2020~~2021 compared to ~~$395,801,000~~$466,728,000 at December 31, ~~2019.~~2020. The increase was mainly the result of ~~$78,368,000~~$59,978,000 in new loan originations ~~net against~~and a ~~$742,000 decrease~~$9,004,000 increase in utilization of existing Commercial Real Estate lines of credit, ~~and $27,538,000~~offset by $29,878,000 in loan payoffs, in addition to regular principal payments and other typical amortization in the Commercial Real Estate portfolio. Residential Real Estate loans decreased ~~$1,811,000~~$11,018,000 or 7.0% to ~~$157,539,000~~$145,965,000 at ~~September~~June 30, ~~2020~~2021 compared to ~~$159,350,000~~$156,983,000 at December 31, ~~2019.~~2020. The decrease was the result of ~~$22,949,000~~$15,249,000 in new loan originations offset by a ~~$1,262,000~~ decrease in utilization of existing Residential Real Estate (Home Equity) lines of credit of $186,000, loan

payoffs of ~~$16,182,000,~~$15,770,000, net loans sold of ~~$4,855,000~~$10,037,000, and regular principal payments and other typical amortization in the Residential Real Estate portfolio. Net loans sold infor the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 consisted of total loans sold during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 of ~~$11,962,000,~~$20,765,000, offset with loans opened and sold in the same quarter during the first ~~three~~two quarters of ~~2020~~2021 which amounted to ~~$7,107,000.~~$10,728,000. The Company continues to originate and sell certain long-term fixed rate residential mortgage loans which conform to secondary market requirements. The Company derives ongoing income from the servicing of mortgages sold in the secondary market. The Company continues its efforts to lend to creditworthy borrowers.

Management believes that the loan portfolio is well diversified. The total commercial portfolio was ~~$541,392,000~~$590,719,000 at ~~September~~June 30, ~~2020.~~2021. Of total loans, ~~$441,095,000~~$486,825,000 or ~~62.7%~~65.6% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings. The Company continues to monitor these portfolios.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as ~~$679,800,000~~$716,568,000 or 96.6% of gross loans are graded Pass; ~~$11,774,000~~$928,000 or ~~1.7%~~0.1% are graded Special Mention; ~~$11,954,000~~$24,108,000 or ~~1.7%~~3.3% are graded Substandard; and $0 are graded Doubtful. The rating is intended to represent the best assessment of risk available at a

given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower. See Note 4 — Loans and Allowance for Loan Losses for risk grading tables.

Overall, non-pass grades increased to ~~$23,728,000~~$25,036,000 at ~~September~~June 30, ~~2020,~~2021, as compared to ~~$14,887,000~~$24,137,000 at December 31, ~~2019.~~2020. Commercial and Industrial non-pass grades decreased to ~~$983,000~~$835,000 as of ~~September~~June 30, ~~2020~~2021 as compared to ~~$1,070,000~~$919,000 as of December 31, ~~2019.~~2020. Commercial Real Estate non-pass grades increased to ~~$21,370,000~~$22,740,000 as of ~~September~~June 30, ~~2020~~2021 as compared to ~~$12,534,000~~$21,789,000 as of December 31, ~~2019.~~2020. The Residential Real Estate and Consumer loan non-pass grades increased to ~~$1,375,000~~$1,461,000 as of ~~September~~June 30, ~~2020~~2021 as compared to ~~$1,283,000~~$1,429,000 as of December 31, ~~2019.~~2020.

The increase in Commercial Real Estate non-pass grades ~~at September~~during the six months ended June 30, ~~2020 as compared to December 31, 2019~~2021 is mainly due to ~~various large loans/loan relationships that were downgraded to Special Mention status during~~ the ~~three months ended September 30, 2020. One Commercial Real Estate~~downgrade of one loan to a contractor specializing in modular construction in the ~~owner/operator~~amount of ~~a hotel that carried a balance of $9,423,000~~$1,000,000. The loan was downgraded to Special Mention during the three months ended September 30, 2020, as occupancy levels have been adversely impacted by the COVID-19 coronavirus pandemic, but the business remains operational. One Commercial Real Estate loan to a real estate developer that carried a balance of $1,328,000 was downgraded to Special Mention during the three months ended September 30, 2020, as the borrower was unable to pay off the loan or refinance through another institution at maturity; the Bank has agreed to extend the maturity date of the loan for one year in conjunction with a principal paydown financed by partial release of the mortgaged premises. Four Commercial Real Estate loans to the owners/operators of an indoor family entertainment complex that carried a balance of $792,000 were downgraded to Special Mention during the three months ended September 30, 2020, as the business was adversely impacted by the COVID-19 coronavirus pandemicsubstandard and ~~has ceased operations. Net against the large additions to Special Mention~~placed on non-accrual status ~~there was also one Commercial Real Estate loan to the owner of a recreation facility that was classified as Substandard and carried a balance of $2,640,000 as of December 31, 2019 which was paid off~~ during the second quarter of ~~2020.~~2021 as a result of the borrower’s inability to make payments as scheduled, as the business has ceased operations and has entered into bankruptcy proceedings.

The Company continues to internally underwrite each of its loans to comply with prescribed policies and approval levels established by its Board of Directors.

Total Loans


(Dollars in thousands)	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Commercial and Industrial	$	100,297	$	86,712	$	103,894	$	91,875
Commercial Real Estate		441,095		395,801		486,825		466,728
Residential Real Estate		157,539		159,350		145,965		156,983
Consumer		5,109		5,869		5,221		5,024
Total Loans	$	704,040	$	647,732	$	741,905	$	720,610

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of ~~September~~June 30, ~~2020,~~2021, the allowance for loan losses was ~~$7,579,000~~$8,124,000 as compared to ~~$7,005,000~~$7,933,000 as of December 31, ~~2019.~~2020. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Management performs a quarterly analysis to determine the adequacy of the allowance for loan losses. The methodology in determining adequacy incorporates specific and general allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process. This assessment results in an allocated allowance. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority.

Management considers, based upon its methodology, that the allowance for loan losses is adequate to cover foreseeable future losses. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future. In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors ~~across all loan segments~~related to the local/regional economy were increased by two basis points across all loan segments during the first quarter of 2020 and ~~again~~increased by an additional basis point across all loan segments during the second quarter of 2020. The qualitative factor relating to the impact of external factors/conditions for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of ~~2020,~~2020. The qualitative factors relating to the impact of external factors/conditions were increased by two additional basis

points across all loan segments during the fourth quarter of 2020. Qualitative factors remained unchanged during the first quarter of 2021. During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Company’s market areas have shown marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to increasing market values in the real estate sector. Modifications granted in compliance with Section 4013 of the CARES Act were highest in the Commercial Real Estate portfiolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio. See Allowance for Loan Losses on page 1715 for further discussion.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. For the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, net charge-offs as a percentage of average loans was ~~0.02%~~0.01% for each respective period. Net charge-offs amounted to ~~$108,000 for~~$79,000 the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 as compared to ~~$138,000~~$59,000 for the ~~the nine~~six months ended ~~September~~June 30, 2019. The decrease in net charge-offs during the nine months ended September 30, 2020 as compared to the the nine months ended September 30, 2019 is mainly due to one charge-off that was completed during the first quarter of 2019 on a Commercial Real Estate loan to a landscaping company in the amount of $51,000.2020.

For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the provision for loan losses was ~~$682,000~~$270,000 as compared to ~~$313,000~~$388,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for loan losses of ~~$7,579,000~~$8,124,000 of which ~~11.0%~~10.5% was attributed to the Commercial and Industrial component; ~~58.9%~~60.7% attributed to the Commercial Real Estate component; ~~21.5%~~18.9% attributed to the Residential Real Estate component; ~~1.4%~~1.2% attributed to the Consumer component; and ~~7.2%~~8.7% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page ~~14)~~15). The Company determined that the provision for loan losses made during the current quarter was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of ~~September~~June 30, ~~2020.~~2021.

Analysis of Allowance for Loan Losses


(Dollars in thousands)	September 30,			September 30,			June 30,			June 30,
	2020			2019			2021			2020
Balance at beginning of period	$	7,005		$	6,745		$	7,933		$	7,005
Charge-offs:
Commercial and Industrial		39			—			13			24
Commercial Real Estate		31			64			29			15
Residential Real Estate		13			44			55			—
Consumer		35			43			20			22
		118			151			117			61
Recoveries:
Commercial and Industrial		4			6			—			—
Commercial Real Estate		—			—			30			—
Residential Real Estate		—			2			1			—
Consumer		6			5			7			2
		10			13			38			2

Net charge-offs		108			138			79			59
Additions charged to operations		682			313			270			388
Balance at end of period	$	7,579		$	6,920		$	8,124		$	7,334

Ratio of net charge-offs during the period to average loans outstanding during the period		0.02	%		0.02	%		0.01	%		0.01	%
Allowance for loan losses to average loans outstanding during the period		1.13	%		1.12	%		1.12	%		1.10	%

It is the policy of management and the Company’s Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio. A provision for loan losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio. This evaluation takes into account such factors as portfolio

concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.

The loan review process, which is conducted quarterly, is an integral part of the Bank’s evaluation of the loan portfolio. A detailed quarterly analysis to determine the adequacy of the Company’s allowance for loan losses is reviewed by the Board of Directors.

With the Bank’s manageable level of net charge-offs and the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to ~~1.13% at September 30, 2020 and~~ 1.12% at ~~September~~June 30, ~~2019, respectively.~~2021 and 1.10% at June 30, 2020.

NON-PERFORMING ASSETS

The table on page 5149 details the Company’s non-performing assets and impaired loans as of the dates indicated. Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or ~~interest, even though the loan currently is performing.~~interest. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period income. A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession that the Company would not otherwise consider. Modifications to loans classified as TDRs generally include reductions in contractual interest rates, principal deferments and extensions of maturity dates at a stated interest rate lower than the current market for a new loan with similar risk characteristics. While unusual, there may be instances of loan principal forgiveness. Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in

Section 4013 of the CARES Act are met. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

Total non-performing assets amounted to ~~$7,470,000~~$8,057,000 as of ~~September~~June 30, ~~2020,~~2021, as compared to ~~$4,607,000~~$7,119,000 as of December 31, ~~2019.~~2020. The economy, although showing much improvement, is still in ~~particular,~~flux. Businesses have reopened to find customers wanting to return, but employees, in many cases, wanting to continue to work from home or remain unemployed. The work force has dwindled, inflationary pressures have caused prices to increase, the ~~political unrest both domestic~~vaccination debate continues, and ~~abroad, the looming presidential election, the partial~~some government spending, subsidies, and ~~full shutdowns of various government offices, the recession resulting from the COVID-19 pandemic, the large unemployment totals, and the continued slowness~~moratoriums are still in ~~the housing industries in our market areas has~~place. These forces have had a direct effect on the Company’s non-performing assets. The Company is closely monitoring its Commercial Real Estate portfolio because of the current uncertain economic environment. Non-accrual loans totaled ~~$6,840,000~~$8,057,000 as of ~~September~~June 30, ~~2020,~~2021, as compared to ~~$4,388,000~~$7,078,000 as of December 31, ~~2019. Foreclosed~~2020. The increase in non-accrual loans at June 30, 2021 compared to December 31, 2020 is maily due to one loan in the amount of $1,000,000 to a contractor specializing in modular construction that was moved to non-accrual status during the second quarter of 2021 due to the borrower’s inability to make payments as scheduled, as the business has ceased operations and has entered into bankruptcy proceedings. There were no foreclosed assets held for resale ~~decreased to $88,000~~ as of ~~September~~June 30, ~~2020,~~2021, compared to ~~$119,000~~$28,000 in foreclosed assets held for resale as of December 31, ~~2019. Loans past-due 90 days or more and still accruing interest amounted to $542,000 at September 30, 2020, as compared to $100,000 as of December 31, 2019. At September 30, 2020,~~2020. There were no loans past-due 90 days or more and still accruing interest ~~consisted of two Commercial Real Estate loans which were both well secured and in the process of collection.~~

~~The increase in non-accrual loans~~ at ~~September~~June 30, ~~2020,~~2021, as compared to $13,000 in loans past-due 90 days or more and still accruing interest as of December 31, ~~2019 is mainly due to the addition of several large loans/loan relationships to non-accrual status during the first quarter of~~ 2020. Five loans to a plastic processing company focused on non-post-consumer recycling totaling $1,275,000 were moved to non-accrual status during the first quarter of 2020 due to strained liquidity and the borrower’s inability to make required payments, as the owner has decreased the level of operations and is exploring options to obtain an additional investor or liquidate the business. A loan in the amount of $829,000 to a golf course and catering venue was moved to non-accrual status during the first quarter of 2020 due to the borrower’s inability to make monthly payments due to cash flow challenges exacerbated by the seasonality of the industry. A residential mortgage in the amount of $356,000 to the owner of a manufacturing company was also moved to non-accrual status during the first quarter of 2020, as poor payment performance has led to foreclosure proceedings related to the associated property.

Non-performing assets to total loans was ~~1.06%~~1.09% at ~~September~~June 30, ~~2020~~2021 and ~~0.71%~~0.99% at December 31, ~~2019.~~2020. Non-performing assets to total assets was ~~0.66%~~0.62% at ~~September~~June 30, ~~2020~~2021 and ~~0.46% at~~ December 31, ~~2019.~~2020. The allowance for loan losses to total non-performing assets was ~~101.46%~~100.83% as of ~~September~~June 30, ~~2020~~2021 as compared to ~~152.05%~~111.43% as of December 31, ~~2019.~~2020. Additional detail can be found on page 5149 in the Non-Performing Assets and Impaired Loans table and page 2826 in the Non-Performing Assets table. Asset quality is a priority and the Company retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation efforts.

~~Potential problem loans are defined as performing~~Performing substandard loans which are not deemed to be ~~impaired. These loans~~impaired have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may

result in reporting these loans as non-performing loans in the future. ~~Potential problem~~Performing substandard loans not deemed to be impaired amounted to ~~$645,000~~$10,209,000 at ~~September~~June 30, ~~2020,~~2021, compared to ~~$4,074,000~~$9,992,000 at December 31, ~~2019.~~2020.

Impaired loans were ~~$13,972,000~~$16,093,000 at ~~September~~June 30, ~~2020~~2021 and ~~$12,954,000~~$15,054,000 at December 31, ~~2019.~~2020. The largest impaired loan relationship at ~~September~~June 30, 2021 and December 31, 2020 consisted of a non-performing loan to a student housing holding company which was secured by commercial real estate. At ~~September~~June 30, ~~2020,~~2021, the loan carried a balance of ~~$3,176,000,~~$3,090,000, net of ~~$1,904,000~~$1,989,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date. The second largest impaired loan relationship at ~~September~~June 30, 2021 and December 31, 2020 consisted of one performing loan to a student housing holding company, which was classified as a TDR. The loan was secured by commercial real estate and carried a balance of ~~$2,946,000~~$2,897,000 as of ~~September~~June 30, 2021, net of $943,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $2,929,000, net of $943,000 that had been charged off to date. The third largest impaired loan relationship at ~~September~~June 30, 2021 and December 31, 2020 consisted of a substandard performing loan to a developer of a residential ~~sub-division in the amount of $1,432,000, which~~sub-division. The loan was secured by commercial real estate and classified as a TDR. The loan carried a balance of $1,263,000 at June 30, 2021 compared to $1,326,000 at December 31, 2020.

The Company estimates impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the ~~$13,972,000~~$16,093,000 in impaired loans at ~~September~~June 30, ~~2020,~~2021, none were located outside of the Company’s primary market area.

The outstanding recorded investment of TDRs as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 was ~~$8,807,000~~$9,515,000 and ~~$8,678,000,~~$9,563,000, respectively. The ~~increase~~decrease in TDRs at ~~September~~June 30, ~~2020~~2021 as compared to December 31, ~~2019~~2020 is mainly attributable to ~~seven loans that were modified as~~principal payments made on existing TDRs during the ~~nine~~six months ended ~~September~~June 30, ~~2020, net against payments, payoffs, and charge-offs on existing TDRs that were completed during the nine months ended September 30, 2020.~~2021. Of the ~~thirty-three~~thirty-two restructured loans at ~~September~~June 30, ~~2020, eight~~2021, six loans were classified in the Commercial and Industrial portfolio, ~~twenty-four~~twenty-five loans were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio. Troubled debt restructurings at ~~September~~June 30, ~~2020~~2021 consisted of ~~twelve~~thirteen term modifications beyond the original stated term, three rate modifications, and ~~seventeen~~fifteen payment modifications. There was also one troubled debt restructuring that experienced all three types of modifications—payment, rate, and term. TDRs are separately evaluated for payment disclosures, and if necessary, a specific allocation is established. There were no specific allocations attributable to the TDRs at ~~September~~June 30, ~~2020, compared to~~2021 or December 31, ~~2019 when there were specific allocations of $1,000 attributable to the TDRs.~~2020. There were no unfunded commitments attributable to the TDRs at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

At ~~September~~June 30, ~~2020, nine~~2021, seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of ~~$1,288,000~~$479,000, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $736,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $17,000 were not in compliance with the terms of their restructure, compared to June 30, 2020 when eight Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,108,000 and three Commercial and Industrial loans classified as TDRs with a combined recorded investment of ~~$751,000~~$752,000 were not in compliance with the terms of their ~~restructure, compared to September 30, 2019 when nine~~restructure.

Three Commercial Real Estate loans ~~classified~~totaling $300,000 that were modified as TDRs ~~with a combined recorded investment of $661,000 and one Commercial and Industrial loan classified as a TDR with a recorded investment of $3,000 were not in compliance with~~within the ~~terms of their restructure.~~

twelve months preceding June 30, 2021 experienced payment defaults during the three months ended June 30, 2021. No loans that were modified as TDRs during the twelve months preceding ~~September~~June 30, ~~2020~~2021 experienced payment defaults during the first three months ~~ended September 30, 2020.~~of 2021. Of the loans that were modified as TDRs during the twelve months preceding ~~September~~June 30, 2020, two Commercial Real Estate loans totaling $62,000 experienced payment defaults during the ~~nine~~three months ended ~~September~~June 30, 2020. No loans that were modified as TDRs during the twelve months preceding ~~September~~June 30, ~~2019~~2020 experienced payment defaults during the first three ~~or nine~~ months ~~ended September 30, 2019.~~of 2020.

The Company’s non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year ~~end.~~end, unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead. A quarterly collateral evaluation is performed which may

include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.

For non-accrual loans less than $250,000 upon classification and typically at year end, the Company completes a Certificate of Inspection, which includes the results of an onsite inspection, and may consider value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.

Improving loan quality is a priority. The Company actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in ~~2020.~~2021. Excluding the assets disclosed in the Non-Performing Assets and Impaired Loans tables ~~on page 51~~below and the Troubled Debt Restructurings section in Note 4 — Loans and Allowance for Loan Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination.

The economic climate is ~~unclear~~in flux at this time. The COVID-19 pandemic has caused much upheaval and uncertainty in the national and state economy. Experts at all levels are ~~uncertain as~~attempting to calculate the intermediate or long term affects that may arise. The Company may experience difficulties collecting ~~monthly~~ payments on time from its borrowers, property values may decline, and certain types of loans may need to be modified, which could cause a rise in the level of impaired loans, non-performing assets, charge-offs, and delinquencies. Should ~~increases occur in these areas,~~such metrics increase, additions to the balance of the Company’s allowance for loan losses could be required. The extent of the impact of the

COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments including inflationary pressures, the ~~duration~~labor force, and the effectiveness in controlling the spread of the ~~outbreak.~~outbreak, etc.

A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans. As of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Non-Performing Assets and Impaired Loans


(Dollars in thousands)	June 30,			December 31,
	2021			2020
Non-performing assets
Non-accrual loans	$	8,057		$	7,078
Foreclosed assets held for resale		—			28
Loans past-due 90 days or more and still accruing interest		—			13
Total non-performing assets	$	8,057		$	7,119

Impaired loans
Non-accrual loans	$	8,057		$	7,078
Accruing TDRs		8,036			7,976
Total impaired loans		16,093			15,054
Allocated allowance for loan losses		(1)			(8)
Net investment in impaired loans	$	16,092		$	15,046

Impaired loans with a valuation allowance	$	483		$	486
Impaired loans without a valuation allowance		15,610			14,568
Total impaired loans	$	16,093		$	15,054

Allocated valuation allowance as a percent of impaired loans		0.01	%		0.05	%
Impaired loans to total loans		2.17	%		2.09	%
Non-performing assets to total loans		1.09	%		0.99	%

(Dollars in thousands)

September 30,

December 31,


2020

2019

Non-performing assets






Non-accrual loans

$
6,840

$
4,388

Foreclosed assets held for resale

88

119

Loans past-due 90 days or more and still accruing interest

542

100

Total non-performing assets

$
7,470

$
4,607

Impaired loans





Non-accrual loans

$
6,840

$
4,388

Accruing TDRs

7,132

8,566

Total impaired loans

13,972

12,954

Allocated allowance for loan losses

(2)

(1)

Net investment in impaired loans

$
13,970

$
12,953

Impaired loans with a valuation allowance

$
53

$
28

Impaired loans without a valuation allowance

13,919

12,926

Total impaired loans

$
13,972

$
12,954

Allocated valuation allowance as a percent of impaired loans

0.01
%

0.01
%
Impaired loans to total loans

1.98
%

2.00
%
Non-performing assets to total loans

1.06
%

0.71
%
Non-performing assets to total assets

0.66
%

0.46
%
Allowance for loan losses to impaired loans

54.24
%

54.08
%
Allowance for loan losses to total non-performing assets

101.46
%

152.05
%

Non-performing assets to total assets	0.62	%	0.60	%
Allowance for loan losses to impaired loans	50.48	%	52.70	%
Allowance for loan losses to total non-performing assets	100.83	%	111.43	%

Real estate mortgages comprise ~~85.0%~~85.3% of the loan portfolio as of ~~September~~June 30, ~~2020,~~2021, as compared to ~~85.7%~~86.6% as of December 31, ~~2019.~~2020. Real estate mortgages consist of both residential and commercial real estate loans. The real estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities. Also, the residential real estate loan portfolio is largely comprised of fixed rate mortgages. The real estate loans are concentrated primarily in the Company’s market area and are subject to risks associated with the local economy. The commercial real estate loans typically reprice approximately every three to five years and are also concentrated in the Company’s market area. The Company’s loss exposure on its impaired loans continues to be mitigated by collateral positions on these loans. The allocated allowance for loan losses associated with impaired loans is generally computed based upon the related collateral value of the loans. The collateral values are determined by recent appraisals or Certificates of Inspection, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management’s expertise and knowledge of the borrower and the borrower’s business.

GOODWILL

The ~~Corporation~~Company performs ~~its~~an annual goodwill assessment each December. However, management notes that the emergence of COVID-19 as a global pandemic during the first nine months of 2020 has resulted in significant deterioration in the general economic conditions and has caused a deterioration in the environment in which the Corporation operates. The reduction in interest rates and the resultant impact to margin, the impact of full and partial

~~closures on business clients leading to loss of jobs~~evaluation for consumers and reduced cash flow for businesses, the execution of Paycheck Protection Program (“PPP”) loans and modifications, and the inflow of deposits as customers flock to safety are all signs indicative of the economic and industry stress. While the Corporation’s core income has remained strong year to date due to PPP fees, mortgage banking and steady net interest income, the provision expense has increased as the risk inherent in the loan portfolio has been recognized through changing qualitative factors. The full impact to earnings in the banking industry and to the Corporation specifically, remains uncertain as there have been a multitude of government plans implemented during the second quarter of 2020 aimed at providing financial assistance to businesses. However, the stock price for the Corporation has been negatively impacted, as has been the case with stock prices of the Corporation’s peers. Based on the totality of the circumstances and the impact of the economic conditions on the stock price, management concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and engaged an independent third party to perform the quantitative analysis of comparing the fair value of the Corporation to its carrying value, including goodwill.

~~The quantitative assessment~~impairment. Any impairment of goodwill was performed utilizing a discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approach”). The income approach measures the fair value of an interestresults in a ~~business by discounting expected future cash flows~~charge to present value. One market approach takes into consideration the fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives. The second market approach considered the Corporation’s current stock price adjusted for a control premium. The results of the income approach were weighted at 40% while the results of the market approaches were weighted 10% and 50%, respectively. The results of the quantitative impairment analysis indicated that the Corporation’s fair value exceeded the carrying value by approximately 2%.

income. The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price. Any change in the assumptions which we utilize to determine the carrying value of goodwill could adversely impact our results of operations.

The Company periodically assesses whether events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. Management notes that the emergence of COVID-19 as a global pandemic during 2020 resulted in significant deterioration in general economic conditions and the environment in which the Company operates. This uncertainty in 2020 resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered through the end of 2020 and into 2021, and the Company’s core income has remained strong due to SBA lender fees, lending activity and steady net interest income.

Goodwill was evaluated for impairment at December 31, 2020, and it was determined that goodwill was not impaired. Management evaluated the need for an interim goodwill impairment analysis and determined that there were no triggering events or negative factors affecting goodwill since the previous test that would indicate goodwill was impaired as of June 30, 2021.

DEPOSITS, ~~AND~~ OTHER BORROWED FUNDS AND SUBORDINATED DEBT

Consumer and commercial retail deposits are attracted primarily by the Bank’s eighteen full service office locations, one loan production office and through its internet banking presence. The Bank offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products. The Bank regularly reviews competing financial institutions’ interest rates, especially when establishing interest rates on certificates of deposit.

Total deposits increased ~~$157,591,000~~$125,859,000 to ~~$919,219,000~~$1,063,347,000 as of ~~September~~June 30, ~~2020~~2021 as non-interest bearing deposits increased by ~~$67,248,000~~$19,116,000 and interest bearing deposits increased by ~~$90,343,000~~$106,743,000 from year-end ~~2019.~~2020. The increase in deposits was the result of ~~many different factors including the deposit of at least $19,000,000 in~~government stimulus funds, ~~via check or ACH, $31,729,000 in~~ PPP loan proceeds, ~~less consumer spending,~~ a ~~$58,000,000~~$75,356,000 increase in highly rate sensitive deposits and other normal ~~fluctuations in deposits during the nine months ended September 30, 2020.~~fluctuations. Total short-term and long-term borrowings decreased to ~~$68,123,000~~$61,499,000 as of ~~September~~June 30, ~~2020,~~2021, from ~~$109,663,000~~$64,494,000 at year-end ~~2019,~~2020, a decrease of ~~$41,540,000~~$2,995,000 or ~~37.9%~~4.6%. The decrease in total borrowings was mainly the result of ~~increasing deposit balances~~the maturity of two long-term notes offset by an increase in ~~2020.~~the balance of repurchase agreements.

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the “2020 Notes”). The 2020 Notes are intended to be treated as Tier 2 capital for regulatory

capital purposes. The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and then float based on a benchmark rate (as defined).

CAPITAL STRENGTH

Normal increases in capital are generated by net income, less dividends paid out. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, net income less dividends paid increased capital by ~~$3,847,000.~~$4,243,000. Accumulated other comprehensive income ~~(loss)~~ derived from net unrealized gains on debt securities available-for-sale also impacts capital. At December 31, ~~2019~~2020 accumulated other comprehensive income was ~~$4,221,000.~~$12,870,000. Accumulated other comprehensive income stood at ~~$11,115,000~~$11,145,000 at ~~September~~June 30, ~~2020, an increase~~2021, a decrease of ~~$6,894,000.~~$1,725,000. Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank’s ~~investment~~securities portfolio, as well as its decision to sell securities at a gain or loss. In order to protect the Bank from market risk in the event of further interest rate increases, the Bank chose to sell a portion of its securities during the nine months ended September 30, 2020 at an overall net gain of $228,000.

The fluctuations from net unrealized gains on debt securities available-for-sale do not affect regulatory capital, as the Bank elected to opt-out of the inclusion of this item with the filing of the March 31, 2015 Call Report.

The Company held 231,612 shares of common stock as treasury stock at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. This had an effect of reducing our total stockholders’ equity by $5,709,000 as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020.

Total stockholders’ equity was ~~$140,469,000~~$147,502,000 as of ~~September~~June 30, ~~2020,~~2021, and ~~$128,752,000~~$144,242,000 as of December 31, ~~2019.~~2020.

At ~~September~~June 30, ~~2020~~2021 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III. The following table presents the Bank’s capital ratios as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:



					To Be Well						To Be Well
					Capitalized						Capitalized
					Under Prompt						Under Prompt
	September 30,		December 31,		Corrective Action		June 30,		December 31,		Corrective Action
	2020		2019		Regulations		2021		2020		Regulations
Tier 1 leverage ratio (to average assets)	9.31	%	9.42	%	5.00	%	10.64	%	10.81	%	5.00	%
Common Equity Tier 1 capital ratio (to risk-weighted assets)	13.36	%	13.50	%	6.50	%	15.74	%	15.99	%	6.50	%
Tier 1 risk-based capital ratio (to risk-weighted assets)	13.36	%	13.50	%	8.00	%	15.74	%	15.99	%	8.00	%
Total risk-based capital ratio	14.42	%	14.53	%	10.00	%	16.77	%	17.05	%	10.00	%

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis as of January 1, 2019. As of ~~September~~June 30, ~~2020,~~2021, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

The Corporation’s capital ratios are not materially different than those of the Bank.

LIQUIDITY

The Company’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and to provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity is needed to provide the funding requirements of depositors’ withdrawals, loan growth, and other operational needs.

Sources of liquidity are as follows:

●

Growth in the core deposit base;

●

Proceeds from sales or maturities of ~~investment~~ securities;

●

Payments received on loans and mortgage-backed securities;

●

Overnight correspondent bank borrowings on various credit lines, notes, etc., with various levels of capacity;

●

Securities sold under agreements to repurchase; and

●

Brokered CDs.

At ~~September~~June 30, ~~2020,~~2021, the Company had ~~$382,155,000~~$413,373,000 in ~~available~~maximum borrowing capacity at FHLB ~~(which takes into account~~(inclusive of the outstanding balances of FHLB long-term notes, ~~and~~ FHLB short-term ~~borrowings)~~borrowings, and irrevocable standby letters of credit issued by FHLB); the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was ~~$4,449,000.~~$3,582,000.

The Company enters into “Repurchase Agreements” in which it agrees to sell securities subject to an obligation to repurchase the same or similar securities. Because the agreement both entitles and obligates the Company to repurchase the assets, the Company may transfer legal control of the securities while still retaining effective control. As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and act as an additional source of liquidity. Securities sold under agreements to repurchase were ~~$23,123,000~~$26,499,000 at ~~September~~June 30, ~~2020.~~2021.

Asset liquidity is provided by ~~investment~~ securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks. The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities. Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing deposits. Also, short-term borrowings provide funds to meet liquidity needs.

Net cash flows ~~used in operating activities were $1,468,000 as of September 30, 2020, compared to net cash flows~~ provided by operating activities ~~of $8,297,000~~were $8,676,000 as of ~~September~~June 30, ~~2019.~~2021, compared $4,846,000 as of June 30, 2020. Net income amounted to ~~$8,571,000~~$7,483,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~$7,696,000~~$5,434,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. During the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, net premium amortization on investment securities amounted to ~~$1,484,000~~$1,366,000 and ~~$2,054,000,~~$982,000, respectively. ~~Originations~~Gains on sales of mortgage loans were $662,000 as of June 30, 2021, compared to $297,000 as of June 30, 2020. Proceeds (including gains) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $937,000 during the six months ended June 30, 2021 and originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by ~~$9,714,000 and $1,105,000~~$1,408,000 during the six months ended June 30, 2020. Net securities gains were $143,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020 and 2019, respectively. Net securities losses were $312,000 for the nine months ended September 30, 2020,~~2021, compared to net securities ~~gains~~losses of ~~$837,000~~$303,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2019. Accrued interest receivable~~2020. Other assets increased by ~~$1,325,000~~$1,116,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and decreased by ~~$566,000~~$715,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Other ~~assets~~liabilities increased by $241,000 during the six months ended June 30, 2021 and decreased by ~~$388,000~~$28,000 during the ~~nine~~six months ended ~~September~~June 30, 2020 and increased by $1,964,000 during the nine months ended September 30, 2019. Other liabilities decreased by $1,310,000 during the nine months ended September 30, 2020, compared to an increase of $1,097,000 during the nine months ended September 30, 2019.2020.

Investing activities used cash of ~~$75,567,000~~$56,580,000 and $55,050,000 during the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and provided cash of $6,268,000 during the nine months ended September 30, 2019.~~respectively. Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions net against purchases) used cash of ~~$31,122,000~~$34,469,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2020 and provided cash of $27,012,000~~2021, compared to $28,171,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Net cash used to originate loans amounted to ~~$46,218,000~~$21,649,000 and ~~$23,560,000~~$27,544,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Financing activities provided cash of ~~$112,287,000~~$120,348,000 and $49,230,000 during the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and used cash of $8,615,000 during the nine months ended September 30, 2019.~~respectively. Deposits increased by ~~$157,591,000~~$125,859,000 and ~~$69,425,000~~$83,098,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~ 2021

and ~~2019,~~2020, respectively. Short-term borrowings increased by $7,005,000 during the six months ended June 30, 2021 and decreased by ~~$31,540,000 and $84,257,000~~$21,348,000 during the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, respectively. There were no proceeds from long-term borrowings during the nine months ended September 30, 2020, compared to proceeds from long-term borrowings of $30,000,000 for the nine months ended September 30, 2019.2020. Repayment of long-term borrowings amounted to $10,000,000 for both the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and $20,000,000 for the nine months ended September 30, 2019.~~respectively. Dividends paid amounted to ~~$4,724,000~~$3,240,000 and ~~$4,680,000 during~~$3,145,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Managing liquidity remains an important segment of asset/liability management. The overall liquidity position of the Company is maintained by an active asset/liability management committee. The Company believes that its core deposit base is stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and are measured on a monthly basis. These measurements indicate that liquidity generally remains stable and exceeds the Company’s minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that

are reasonably likely to result in, liquidity increasing or decreasing in any material way. Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly utilizing new options, such as the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company’s market risk is composed primarily of interest rate risk. The Company’s interest rate risk results from timing differences in the repricing of assets, liabilities, off-balance sheet instruments, and changes in relationships between rate indices and the potential exercise of explicit or embedded options.

Increases in the level of interest rates also may adversely affect the fair value of the Company’s securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company’s interest-earning assets, which could adversely affect the Company’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Company’s stockholders’ equity, if retained. Under FASB ASC 320-10, Investments – Debt Securities, changes in the unrealized gains and losses, net of taxes, on debt securities classified as available-for-sale are reflected in the Company’s stockholders’ equity. The Company does not own any trading assets.

Asset/Liability Management

The principal objective of asset/liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Company actively manages the interest rate sensitivity of its assets and liabilities. Several techniques are used for measuring interest rate sensitivity. Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a given time period, referred to as a rate sensitivity gap. If more assets than liabilities mature or reprice within the time frame, the Company is asset sensitive. This position would contribute positively to net interest income in a rising rate environment. Conversely, if more liabilities mature or reprice, the Company is liability sensitive. This position would contribute positively to net interest income in a falling rate environment. The Company’s cumulative gap at one year indicates the Company is liability sensitive at ~~September~~June 30, ~~2020.~~2021.

Earnings at Risk

The Bank’s Asset/Liability Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Company’s Board of Directors. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet beyond interest rate sensitivity gap. Although the Company continues to measure its interest rate sensitivity gap, the Company utilizes additional modeling for interest rate risk in the overall balance sheet. Earnings at risk and economic values at risk are analyzed.

Earnings simulation modeling addresses earnings at risk and net present value estimation addresses economic value at risk. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk to the Company.

Earnings Simulation Modeling

The Company’s net income is affected by changes in the level of interest rates. Net income is also subject to changes in the shape of the yield curve. For example, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and increased liability rates, while a steepening would result in increased earnings as earning asset yields widen.

Earnings simulation modeling is the primary mechanism used in assessing the impact of changes in interest rates on net interest income. The model reflects management’s assumptions related to asset yields and rates paid on liabilities, deposit sensitivity, size and composition of the balance sheet. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Earnings at risk is the change in net interest income from a base case scenario under various scenarios of rate shock increases and decreases in the interest rate earnings simulation model.

The table on the next page presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates. The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors. The earnings simulation model projects net interest income would decrease ~~2.86%~~4.49%, ~~6.10%~~8.75% and ~~9.03%~~12.57% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would decrease ~~2.27%~~1.67% and ~~7.77%~~7.63% in the 100 and 200 basis point decreasing rate scenarios presented. All of these forecasts are within the Company’s one year policy guidelines.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current unprecedented low interest rate environment with federal funds trading in the 0 – 25 basis point range. Results of the decreasing basis point declining scenarios are affected by the fact that many of the Company’s interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points. However, the Company’s interest-sensitive assets are able to decline by these amounts. For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the cost of interest-bearing liabilities averaged ~~0.93%~~0.61%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged ~~4.14%~~3.75%.

Net Present Value Estimation

The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. At ~~September~~June 30, ~~2020,~~2021, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with decreases of ~~98.80%~~32.64% and ~~242.28%~~91.53%, respectively. Additionally, net present value is projected to increase ~~63.73%~~15.62%, ~~102.81%~~21.64%, and ~~123.45%~~20.98% in the 100, 200, and 300 basis point immediate increase scenarios, respectively. These scenarios presented are within the Company’s policy limits, aside from the 100 basis point immediate decrease scenario at ~~(98.80)~~(32.64)% vs. a policy limit of (20)% and the 200 basis point immediate decrease scenario at ~~(242.28)~~(91.53)% vs. a policy limit of (30.0)%.

The computation of the effects of hypothetical interest rate changes are based on many assumptions. They should not be relied upon solely as being indicative of actual results, since the computations do not account for actions management could undertake in response to changes in interest rates.

5654

Effect of Change in Interest Rates


	Projected Change
Effect on Net Interest Income
1-Year Net Income Simulation Projection
+300 bp Shock vs. Stable Rate	~~(9.03)~~(12.57)	%
+200 bp Shock vs. Stable Rate	~~(6.10)~~(8.75)	%
+100 bp Shock vs. Stable Rate	~~(2.86)~~(4.49)	%
Flat rate
‒100 bp Shock vs. Stable Rate	~~(2.27)~~(1.67)	%
‒200 bp Shock vs. Stable Rate	~~(7.77)~~(7.63)	%

Effect on Net Present Value of Balance Sheet
Static Net Present Value Change
+300 bp Shock vs. Stable Rate	~~123.45~~20.98	%
+200 bp Shock vs. Stable Rate	~~102.81~~21.64	%
+100 bp Shock vs. Stable Rate	~~63.73~~15.62	%
Flat rate
‒100 bp Shock vs. Stable Rate	~~(98.80)~~(32.64)	%
‒200 bp Shock vs. Stable Rate	~~(242.28)~~(91.53)	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information with respect to quantitative and qualitative disclosures about market risk is included in the information under Management’s Discussion and Analysis in Item 2.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. First Keystone Corporation maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those disclosure controls and procedures performed as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures were effective as of ~~September~~June 30, ~~2020.~~2021.

Changes in internal control over financial reporting. There were no other changes in the Company’s internal control over financial reporting during the fiscal quarter ended ~~September~~June 30, ~~2020,~~2021, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Although the Company is subject to various claims and legal actions that occur from time to time in the ordinary course of business, the Company is not party to any pending legal proceedings that management believes could have a material adverse effect on its business, results of operations, financial condition or cash flows.

Item 1A. Risk Factors

~~The COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, liquidity, and financial condition.~~

The World Health Organization has declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate. The COVID-19 pandemic and similar issues in the future could have a material adverse effect on our ability to operate, results of operations, liquidity, and financial condition. Several public health organizations have recommended, and some local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances. Such preventive measures, or others we may voluntarily put in place, may have a material adverse effect on our business for an indefinite period, such as the limitation of hours at branch locations, decreased employee availability, disruptions to the businesses of our vendors, and others. Our customers may also face these and other challenges, which could lead to a disruption in demand for our services. Although these disruptions may continue to occur, the long-term economic impact and near-term financial impacts of the COVID-19 pandemic, including but not limited to, possible impairment and other charges, cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.

~~Other than the item listed above, there~~There have been no material changes to the risk factors disclosed in Item 1A “Risk Factors” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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


Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
~~July~~April 1 — ~~July 31, 2020~~April 30, 2021	―	―	―	120,000
~~August~~May 1 — ~~August~~May 31, ~~2020~~2021	―	―	―	120,000
~~September~~June 1 — ~~September~~June 30, ~~2020~~2021	―	―	―	120,000
Total	―	―	―	120,000

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

5856

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits required by Item 601 Regulation S-K


Exhibit Number		Description of Exhibit
3.1		Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to the Registrant’s Report on Form 8-K dated August 28, 2018).

3.2		By-Laws, as amended and restated (Incorporated by reference to Exhibit 3.2 to the Registrant’s Report on Form 8-K dated August 28, 2018).

10.1(a)		Supplemental Employee Retirement Plan – J. Gerald Bazewicz (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.1(b)		Supplemental Employee Retirement Plan – David R. Saracino (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.1(d)		Supplemental Employee Retirement Plan – Elaine Woodland (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.2		Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018).*

~~10.4~~		~~First Keystone Corporation 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2006)~~.*

14		First Keystone Corporation Directors and Senior Management Code of Ethics (Incorporated by reference to Exhibit 99.1 to Registrant’s Report on Form 8-K dated August 27, 2013).

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.**

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.**

32.1		Section 1350 Certification of Chief Executive Officer.**

32.2		Section 1350 Certification of Chief Financial Officer.**

101.INS		Inline XBRL Instance Document.**

101.SCH		Inline XBRL Taxonomy Extension Schema Document.**

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.**

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.**

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.**

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.**

104		Cover Page Interactive Data File (Formatted as Inline XBRL and Contained in Exhibit 101)

* Denotes a compensatory plan.

** Filed herewith.

The Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Company’s principal executive offices.

5957

FIRST KEYSTONE CORPORATION

SIGNATURES

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


	FIRST KEYSTONE CORPORATION
	Registrant


~~November 16, 2020~~August 6, 2021	/s/ Elaine A. Woodland
	Elaine A. Woodland
	President and Chief Executive Officer
	(Principal Executive Officer)



~~November 16, 2020~~August 6, 2021	/s/ Diane C.A. Rosler
	Diane C.A. Rosler
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

6058


(Dollars in thousands)	For the Three Months Ended September 30, 2020
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial and Industrial	2	$	42	$	42	$	42
Commercial Real Estate	2		324		324		324
Total	4	$	366	$	366	$	366


	For the Three Months Ended September 30, 2020
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial and Industrial	0	1	1	2
Commercial Real Estate	0	0	2	2
Total	0	1	3	4


(Dollars in thousands)	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2020				September 30, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,076	$	12	$	1,111	$	40
Commercial Real Estate		11,361		243		12,842		343
Residential Real Estate		1,015		1		573		7

With an allowance recorded:
Commercial and Industrial		0		0		0		0
Commercial Real Estate		119		5		83		3
Residential Real Estate		22		1		18		0
Total	$	13,593	$	262	$	14,627	$	393

Total consists of:
Commercial and Industrial	$	1,076	$	12	$	1,111	$	40
Commercial Real Estate	$	11,480	$	248	$	12,925	$	346
Residential Real Estate	$	1,037	$	2	$	591	$	7