UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 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: 001-38229

FIDELITY D & D BANCORP, INC.

STATE OF INCORPORATION: IRS EMPLOYER IDENTIFICATION NO:

Pennsylvania 23-3017653

Address of principal executive offices:

Blakely & Drinker St.

Dunmore, Pennsylvania 18512

TELEPHONE: 570-342-8281

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


Title of each class	Trading Symbols(s)	Name of each exchange on which registered
Common stock, without par value	FDBC	The NASDAQ Stock Market, LLC

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 subjected to such filing requirements for the past 90 days. [X] YES [ ] NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Non-accelerated filer ox	Accelerated filer xo		Smaller reporting company x	Emerging growth company o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] NO

The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on October ~~30, 2020,~~31, 2021, the latest practicable date, was ~~4,977,750~~5,645,687 shares.

Table Of Contents

FIDELITY D & D BANCORP, INC.

Form 10-Q September 30, ~~2020~~2021

Index


Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020	3
	Consolidated Statements of Income for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	8
	Notes to Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	6364
Item 4.	Controls and Procedures	69

Part II. Other Information
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7170
Item 3.	Defaults upon Senior Securities	7170
Item 4.	Mine Safety Disclosures	7170
Item 5.	Other Information	7170
Item 6.	Exhibits	7271
Signatures		7473

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Table Of Contents

PART I – Financial Information

Item 1: Financial Statements


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020
Assets:
Cash and due from banks	$	14,233	$	14,583	$	51,466	$	19,408
Interest-bearing deposits with financial institutions		117,545		1,080		115,920		49,938
Total cash and cash equivalents		131,778		15,663		167,386		69,346
Available-for-sale securities		340,310		185,117		686,926		392,420
Restricted investments in bank stock		2,766		4,383		3,321		2,813
Loans and leases, net (allowance for loan losses of
$12,884 in 2020; $9,747 in 2019)		1,124,819		743,663
Loans held-for-sale (fair value $13,840 in 2020, $1,660 in 2019)		13,307		1,643
$15,601 in 2021; $14,202 in 2020)						1,373,237		1,105,450
Loans held-for-sale (fair value $48,227 in 2021, $30,858 in 2020)						47,159		29,786
Foreclosed assets held-for-sale		376		369		803		256
Bank premises and equipment, net		28,411		21,557		29,406		27,626
Leased property under finance leases, net		306		280		1,365		283
Right-of-use assets		7,164		6,023		7,977		7,082
Cash surrender value of bank owned life insurance		33,068		23,261		52,417		44,285
Accrued interest receivable		5,703		3,281		7,178		5,712
Goodwill		7,053		209		19,628		7,053
Core deposit intangible, net		1,824		-		2,050		1,734
Other assets		14,158		4,478		12,946		5,664
Total assets	$	1,711,043	$	1,009,927	$	2,411,799	$	1,699,510
Liabilities:
Deposits:
Interest-bearing	$	1,108,283	$	643,714	$	1,576,498	$	1,102,009
Non-interest-bearing		408,840		192,023		586,952		407,496
Total deposits		1,517,123		835,737		2,163,450		1,509,505
Accrued interest payable and other liabilities		19,277		7,674		15,955		10,400
Finance lease obligation		314		286		1,375		291
Operating lease liabilities		7,718		6,556		8,565		7,644
Short-term borrowings		-		37,839
Secured borrowings						16,885		-
FHLB advances		5,000		15,000		-		5,000
Total liabilities		1,549,432		903,092		2,206,230		1,532,840
Shareholders' equity:
Preferred stock authorized 5,000,000 shares with no par value; NaN issued		-		-		-		-
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 4,977,750 in 2020; and 3,781,500 in 2019)		77,419		30,848
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 5,645,687 at September 30, 2021; and 4,977,750 at December 31, 2020)						113,862		77,676
Retained earnings		76,372		72,385		91,533		80,042
Accumulated other comprehensive income		7,820		3,602		174		8,952
Total shareholders' equity		161,611		106,835		205,569		166,670
Total liabilities and shareholders' equity	$	1,711,043	$	1,009,927	$	2,411,799	$	1,699,510

See notes to unaudited consolidated financial statements

‎

Table Of Contents

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three months ended
Nine months ended
(dollars in thousands except per share data)
September 30, 2020
September 30, 2019
September 30, 2020
September 30, 2019
Interest income:
Loans and leases:
Taxable
$
11,655
$
8,229
$
30,212
$
24,065
Nontaxable
339
270
914
785
Interest-bearing deposits with financial institutions
46
12
96
40
Restricted investments in bank stock
37
157
124
342
Investment securities:
U.S. government agency and corporations
832
908
2,543
2,789
States and political subdivisions (nontaxable)
644
432
1,568
1,299
States and political subdivisions (taxable)
146
-
200
-
Other securities
-
-
3
-
Total interest income
13,699
10,008
35,660
29,320
Interest expense:
Deposits
1,070
1,683
3,781
4,489
Other short-term borrowings and other
53
210
248
742
FHLB advances
40
115
268
385
Total interest expense
1,163
2,008
4,297
5,616
Net interest income
12,536
8,000
31,363
23,704
Provision for loan losses
1,500
320
3,700
830
Net interest income after provision for loan losses
11,036
7,680
27,663
22,874
Other income:
Service charges on deposit accounts
548
586
1,521
1,688
Interchange fees
871
555
2,114
1,600
Service charges on loans
451
317
1,219
804
Fees from trust fiduciary activities
480
342
1,334
1,012
Fees from financial services
221
262
534
727
Fees and other revenue
234
183
595
675
Earnings on bank-owned life insurance
216
168
577
480
Gain (loss) on write-down, sale or disposal of:
Loans
1,346
224
1,998
602
Available-for-sale debt securities
-
(2)
-
(6)
Premises and equipment
3
(3)
(59)
(4)
Total other income
4,370
2,632
9,833
7,578
Other expenses:
Salaries and employee benefits
5,431
3,699
14,492
10,988
Premises and equipment
1,503
1,007
4,032
3,117
Data processing and communication
513
469
1,820
1,360
Advertising and marketing
204
233
885
923
Professional services
620
404
1,696
927
Merger-related expenses
221
32
2,439
51
Automated transaction processing
278
220
769
659
Office supplies and postage
171
114
448
316
PA shares tax
373
217
741
474
Loan collection
16
28
61
211
Other real estate owned
1
62
(13)
78
FDIC assessment
95
2
175
131
FHLB prepayment fee
(1)
-
481
-
Other
49
156
63
613
Total other expenses
9,474
6,643
28,089
19,848
Income before income taxes
5,932
3,669
9,407
10,604
Provision for income taxes
955
611
1,545
1,742
Net income
$
4,977
$
3,058
$
7,862
$
8,862
Per share data:
Net income - basic
$
1.00
$
0.82
$
1.76
$
2.35
Net income - diluted
$
0.99
$
0.80
$
1.75
$
2.32
Dividends
$
0.28
$
0.26
$
0.84
$
0.78
See notes to unaudited consolidated financial statements


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)	Three months ended				Nine months ended
(dollars in thousands except per share data)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Interest income:
Loans and leases:
Taxable	$	14,950	$	11,655	$	38,759	$	30,212
Nontaxable		409		339		1,058		914
Interest-bearing deposits with financial institutions		54		46		114		96
Restricted investments in bank stock		28		37		96		124
Investment securities:
U.S. government agency and corporations		1,177		832		2,731		2,543
States and political subdivisions (nontaxable)		1,178		644		3,065		1,568
States and political subdivisions (taxable)		377		146		857		200
Other securities		-		-		-		3
Total interest income		18,173		13,699		46,680		35,660
Interest expense:
Deposits		878		1,070		2,583		3,781
Secured borrowings		121		-		121		-
Other short-term borrowings		-		53		-		248
FHLB advances		-		40		26		268
Total interest expense		999		1,163		2,730		4,297
Net interest income		17,174		12,536		43,950		31,363
Provision for loan losses		450		1,500		1,550		3,700
Net interest income after provision for loan losses		16,724		11,036		42,400		27,663
Other income:
Service charges on deposit accounts		705		548		1,835		1,521
Interchange fees		1,089		871		3,192		2,114
Service charges on loans		517		451		1,546		1,219
Fees from trust fiduciary activities		598		480		1,634		1,334
Fees from financial services		273		221		665		534
Fees and other revenue		239		234		592		595
Earnings on bank-owned life insurance		326		216		899		577
Gain (loss) on write-down, sale or disposal of:
Loans		188		1,346		3,671		1,998
Available-for-sale debt securities		40		-		40		-
Premises and equipment		34		3		28		(59)
Total other income		4,009		4,370		14,102		9,833
Other expenses:
Salaries and employee benefits		7,007		5,431		18,693		14,492
Premises and equipment		1,916		1,503		5,146		4,032
Data processing and communication		745		513		1,987		1,820
Advertising and marketing		668		204		1,825		885
Professional services		796		620		2,563		1,696
Merger-related expenses		2,201		221		3,143		2,439
Automated transaction processing		396		278		1,065		769
Office supplies and postage		164		171		438		448
PA shares tax		365		373		780		741
Loan collection		31		16		112		61
Other real estate owned		6		1		25		(13)
FDIC assessment		169		95		404		175
FHLB prepayment fee		-		(1)		369		481
Other		721		49		942		63
Total other expenses		15,185		9,474		37,492		28,089
Income before income taxes		5,548		5,932		19,010		9,407
Provision for income taxes		689		955		2,788		1,545
Net income	$	4,859	$	4,977	$	16,222	$	7,862
Per share data:
Net income - basic	$	0.86	$	1.00	$	3.11	$	1.76
Net income - diluted	$	0.85	$	0.99	$	3.09	$	1.75
Dividends	$	0.30	$	0.28	$	0.90	$	0.84

See notes to unaudited consolidated financial statements

Table Of Contents



Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income	Three months ended				Nine months ended				Three months ended				Nine months ended
(Unaudited)	September 30,				September 30,				September 30,				September 30,
(dollars in thousands)	2020		2019		2020		2019		2021		2020		2021		2020

Net income	$	4,977	$	3,058	$	7,862	$	8,862	$	4,859	$	4,977	$	16,222	$	7,862

Other comprehensive income, before tax:
Unrealized holding gain on available-for-sale debt securities		783		1,366		5,339		5,728
Reclassification adjustment for net losses realized in income		-		2		-		6
Net unrealized gain		783		1,368		5,339		5,734
Other comprehensive (loss) income, before tax:
Unrealized holding (loss) gain on available-for-sale debt securities										(6,488)		783		(11,071)		5,339
Reclassification adjustment for net gains realized in income										(40)		-		(40)		-
Net unrealized (loss) gain										(6,528)		783		(11,111)		5,339
Tax effect		(164)		(287)		(1,121)		(1,204)		1,371		(164)		2,333		(1,121)
Unrealized gain, net of tax		619		1,081		4,218		4,530
Other comprehensive income, net of tax		619		1,081		4,218		4,530
Total comprehensive income, net of tax	$	5,596	$	4,139	$	12,080	$	13,392
Unrealized (loss) gain, net of tax										(5,157)		619		(8,778)		4,218
Other comprehensive (loss) gain, net of tax										(5,157)		619		(8,778)		4,218
Total comprehensive income (loss), net of tax									$	(298)	$	5,596	$	7,444	$	12,080

See notes to unaudited consolidated financial statements

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Table Of Contents



Fidelity D & D Bancorp, Inc. and Subsidiary	Fidelity D & D Bancorp, Inc. and Subsidiary										Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity	Consolidated Statements of Changes in Shareholders' Equity										Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2020 and 2019
For the nine months ended September 30, 2021 and 2020											For the nine months ended September 30, 2021 and 2020
							Accumulated										Accumulated
							other										other
	Capital stock				Retained		comprehensive				Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income (loss)		Total		Shares		Amount		earnings		income (loss)		Total

Balance, December 31, 2018		3,759,426	$	29,715	$	64,937	$	(1,095)	$	93,557
Net income						8,862				8,862
Other comprehensive income								4,530		4,530
Effect of adopting ASU 2016-02						(107)				(107)
Issuance of common stock through Employee Stock Purchase Plan		4,535		175						175
Issuance of common stock from vested restricted share grants through stock compensation plans		15,574
Issuance of common stock through exercise of SSARs		1,965								-
Stock-based compensation expense				743						743
Cash dividends declared						(2,971)				(2,971)
Balance, September 30, 2019		3,781,500	$	30,633	$	70,721	$	3,435	$	104,789

Balance, December 31, 2019		3,781,500	$	30,848	$	72,385	$	3,602	$	106,835		3,781,500	$	30,848	$	72,385	$	3,602	$	106,835
Net income						7,862				7,862						7,862				7,862
Other comprehensive income								4,218		4,218								4,218		4,218
Issuance of common stock through Employee Stock Purchase Plan		3,885		219						219		3,885		219						219
Issuance of common stock from vested restricted share grants through stock compensation plans		15,395										15,395		-						-
Stock-based compensation expense				944						944				944						944
Issuance of common stock for acquisition		1,176,970		45,408						45,408		1,176,970		45,408						45,408
Cash dividends declared						(3,875)				(3,875)						(3,875)				(3,875)
Balance, September 30, 2020		4,977,750	$	77,419	$	76,372	$	7,820	$	161,611		4,977,750	$	77,419	$	76,372	$	7,820	$	161,611

Balance, December 31, 2020												4,977,750	$	77,676	$	80,042	$	8,952	$	166,670
Net income																16,222				16,222
Other comprehensive loss																		(8,778)		(8,778)
Issuance of common stock through Employee Stock Purchase Plan												4,738		270						270
Issuance of common stock from vested restricted share grants through stock compensation plans												13,209		-						-
Issuance of common stock through exercise of SSARs												2,000		-						-
Stock-based compensation expense														860						860
Issuance of common stock for acquisition												647,990		35,056						35,056
Cash dividends declared																(4,731)				(4,731)
Balance, September 30, 2021												5,645,687	$	113,862	$	91,533	$	174	$	205,569

See notes to unaudited consolidated financial statements	See notes to unaudited consolidated financial statements										See notes to unaudited consolidated financial statements

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Table Of Contents


Fidelity D & D Bancorp, Inc. and Subsidiary	Fidelity D & D Bancorp, Inc. and Subsidiary										Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity	Consolidated Statements of Changes in Shareholders' Equity										Consolidated Statements of Changes in Shareholders' Equity
For the three months ended September 30, 2020 and 2019
For the three months ended September 30, 2021 and 2020
(Unaudited)							Accumulated										Accumulated
							other										other
	Capital stock				Retained		comprehensive				Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income (loss)		Total		Shares		Amount		earnings		income (loss)		Total
Balance, June 30, 2019		3,781,500	$	30,419	$	68,653	$	2,354	$	101,426
Net income						3,058				3,058
Other comprehensive income								1,081		1,081
Stock-based compensation expense				214						214
Cash dividends declared						(990)				(990)
Balance, September 30, 2019		3,781,500	$	30,633	$	70,721	$	3,435	$	104,789

Balance, June 30, 2020		4,977,750	$	77,162	$	72,797	$	7,201	$	157,160		4,977,750	$	77,162	$	72,797	$	7,201	$	157,160
Net income						4,977				4,977						4,977				4,977
Other comprehensive income								619		619								619		619
Stock-based compensation expense				257						257				257						257
Cash dividends declared						(1,402)				(1,402)						(1,402)				(1,402)
Balance, September 30, 2020		4,977,750	$	77,419	$	76,372	$	7,820	$	161,611		4,977,750	$	77,419	$	76,372	$	7,820	$	161,611

Balance, June 30, 2021												4,995,713	$	78,473	$	88,381	$	5,331	$	172,185
Net income																4,859				4,859
Other comprehensive loss																		(5,157)		(5,157)
Issuance of common stock from vested restricted share grants through stock compensation plans												1,984		-						-
Issuance of common stock for acquisition												647,990		35,056						35,056
Stock-based compensation expense														333						333
Cash dividends declared																(1,707)				(1,707)
Balance, September 30, 2021												5,645,687	$	113,862	$	91,533	$	174	$	205,569

See notes to unaudited consolidated financial statements	See notes to unaudited consolidated financial statements										See notes to unaudited consolidated financial statements

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Table Of Contents



Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Nine months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2020		2019		2021		2020

Cash flows from operating activities:
Net income	$	7,862	$	8,862	$	16,222	$	7,862
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		3,062		2,407		4,246		3,062
Provision for loan losses		3,700		830		1,550		3,700
Deferred income tax (benefit) expense		(1,057)		254
Deferred income tax expense (benefit)						137		(1,057)
Stock-based compensation expense		851		638		850		851
Excess tax benefit from exercise of SSARs		-		23		26		-
Proceeds from sale of loans held-for-sale		107,747		36,688		143,159		107,747
Originations of loans held-for-sale		(112,553)		(26,882)		(149,614)		(112,553)
Earnings from bank-owned life insurance		(577)		(480)		(899)		(577)
Net gain from sales of loans		(1,998)		(602)		(3,671)		(1,998)
Net loss from sales of investment securities		-		6
Net (gain) loss from sale and write-down of foreclosed assets held-for-sale		(43)		16
Net loss from write-down and disposal of bank premises and equipment		59		4
Net gain from sales of investment securities						(40)		-
Net gain from sale and write-down of foreclosed assets held-for-sale						(34)		(43)
Net (gain) loss from write-down and disposal of bank premises and equipment						(28)		59
Operating lease payments		22		42		26		22
Change in:
Accrued interest receivable		(976)		(165)		(552)		(976)
Other assets		928		(207)		1,005		928
Accrued interest payable and other liabilities		1,041		147		1,514		1,041
Net cash provided by operating activities		8,068		21,581		13,897		8,068

Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		115,234		8,408		40,616		115,234
Proceeds from maturities, calls and principal pay-downs		48,167		28,010		41,939		48,167
Purchases		(191,070)		(37,880)		(341,890)		(191,070)
Decrease in restricted investments in bank stock		2,196		2,521
Net increase in loans and leases		(148,026)		(30,004)
Increase in restricted investments in bank stock						678		2,196
Net decrease (increase) in loans and leases						18,712		(148,026)
Principal portion of lease payments received under direct finance leases		2,420		1,681		3,689		2,420
Purchase of life insurance policies		-		(2,000)
Purchases of bank premises and equipment		(1,401)		(2,313)		(1,803)		(1,401)
Net cash acquired in acquisition		53,004		240
Net cash (used in) provided by acquisition						(3,746)		53,004
Proceeds from sale of bank premises and equipment		12		-		299		12
Proceeds from sale of foreclosed assets held-for-sale		879		384		302		879
Net cash used in investing activities		(118,585)		(30,953)		(241,204)		(118,585)

Cash flows from financing activities:
Net increase in deposits		285,818		82,139		345,477		285,818
Net decrease in short-term borrowings		(37,839)		(52,011)
Net decrease in other borrowings						(5,958)		(37,839)
Proceeds from Paycheck Protection Program Liquidity Facility (PPPLF)		152,791		-		-		152,791
Repayment of PPPLF		(152,791)		-		-		(152,791)
Repayment of FHLB advances		(17,627)		(16,704)		(9,602)		(17,627)
Repayment of finance lease obligation		(60)		(54)		(103)		(60)
Proceeds from employee stock purchase plan participants		219		175		270		219
Dividends paid		(3,875)		(2,971)		(4,731)		(3,875)
Cash paid in lieu of fractional shares		(4)		-		(6)		(4)
Net cash provided by financing activities		226,632		10,574		325,347		226,632
Net increase in cash and cash equivalents		116,115		1,202		98,040		116,115
Cash and cash equivalents, beginning		15,663		17,485		69,346		15,663

Cash and cash equivalents, ending	$	131,778	$	18,687	$	167,386	$	131,778

See notes to unaudited consolidated financial statements

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Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
(Unaudited)	Nine months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2020		2019		2021		2020
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	4,494	$	5,593	$	2,922	$	4,696
Income tax		2,150		1,350		1,900		2,150
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized gains on available-for-sale securities		5,339		5,734		(11,111)		5,339
Transfers from loans to foreclosed assets held-for-sale		842		894		327		842
Transfers from loans to loans held-for-sale		5,129		5,653
Transfers from loans to loans held-for-sale, net						9,158		5,129
Transfers from premises and equipment to other assets held-for-sale						1,495		-
Security settlement pending		9,299		-		1,419		9,299
Right-of-use asset		-		5,634		389		-
Lease liability		-		6,133		389		-

Transactions related to acquisition
Increase in assets and liabilities:
Securities	$	123,420			$	49,430	$	123,420
Loans		245,283				298,860		245,283
Restricted investments in bank stocks		692				1,186		692
Premises and equipment		6,907				3,405		6,907
Investment in bank-owned life insurance		9,230				7,233		9,230
Goodwill		6,843				12,575		6,843
Core deposit intangible asset		1,973				597		1,973
Leased property under finance leases						1,188		-
Right-of-use assets		1,354				756		1,354
Other assets		2,680				4,128		2,680
Non-interest-bearing deposits		(118,822)				(100,472)		(118,822)
Interest-bearing deposits		(276,816)				(208,057)		(276,816)
Short-term borrowings						(2,224)		-
FHLB advances		(7,627)				(4,602)		(7,627)
Lease liabilities		(1,354)
Secured borrowings						(20,619)		-
Finance lease obligation						(1,188)		-
Operating lease liabilities						(756)		(1,354)
Other liabilities		(1,356)				(2,631)		(1,356)
Common shares issued		(45,408)
Fair value of common shares issued						(35,056)		(45,408)


See notes to unaudited consolidated financial statements

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FIDELITY D & D BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of operations and critical accounting policies

Nature of operations

Fidelity D & D Bancorp, Inc. (the Company) is a bank holding company and the parent of The Fidelity Deposit and Discount Bank (the Bank). The Bank is a commercial bank and trust company chartered under the ~~law~~laws of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of the Company. Having commenced operations in 1903, the Bank is committed to provide superior customer service, while offering a full range of banking products and financial and trust services to both our consumer and commercial customers from our main office located in Dunmore and other branches located throughout Lackawanna, Northampton and Luzerne Counties and Wealth Management offices in Schuylkill and Lebanon Counties.

On July 1, 2021, the Company completed its acquisition of Landmark Bancorp, Inc. (Landmark) and its wholly-owned subsidiary, Landmark Community Bank (Landmark Bank). At the time of the acquisition, Landmark merged with and into the Company with the Company surviving the merger. In addition, Landmark Bank merged with and into the Bank with the Bank as the surviving bank.

On May 1, 2020, the Company completed its acquisition of MNB Corporation (MNB) and its wholly-owned subsidiary, Merchants Bank of Bangor. At the time of the acquisition, MNB merged with and into the Company with the Company surviving the merger. In addition, Merchants Bank of Bangor merged with and into the Bank with the Bank as the surviving bank.

Further discussion of the acquisition of ~~MNB~~Landmark can be found in Footnote 9, “Acquisition”.

Principles of consolidation

The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America ~~(GAAP)~~(U.S. GAAP) for interim financial information and with the instructions to this Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included. All significant inter-company balances and transactions have been eliminated in consolidation.

For additional information and disclosures required under U.S. GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report. Management prepared the unaudited financial statements in accordance with U.S. GAAP. In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls. These systems and controls are designed to provide reasonable but not absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company.

In the opinion of management, the consolidated balance sheets as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 and the related consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of changes in shareholders’ equity for the three and nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, and consolidated statements of cash flows for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 present fairly the financial condition and results of operations of the Company. All material adjustments required for a fair presentation have been made. These adjustments are of a normal recurring nature. Certain reclassifications have been made to the ~~2019~~2020 financial statements to conform to the ~~2020~~2021 presentation.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, ~~2020~~2021 through the date these consolidated financial statements were issued.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, ~~2019,~~2020, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

Critical accounting policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses at September 30, ~~2020~~2021 is adequate and reasonable to cover incurred losses. Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount. While management uses available information to

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recognize losses on loans, changes in economic conditions may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.

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~~1. Nature of operations and critical accounting policies (continued)~~

Another material estimate is the calculation of fair values of the Company’s investment securities. Fair values of investment securities are determined by pricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services. Accordingly, when selling investment securities, price quotes may be obtained from more than one source. All of the Company’s debt securities are classified as available-for-sale (AFS). AFS debt securities are carried at fair value on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI).

The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB). Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained. On occasion, the Company may transfer loans from the loan portfolio to loans HFS. Under these circumstances, pricing may be obtained from other entities and the residential mortgage loans are transferred at the lower of cost or market value and simultaneously sold. For other loans transferred to HFS, pricing may be obtained from other entities or modeled and the other loans are transferred at the lower of cost or market value and then sold. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, loans classified as HFS consisted of residential mortgage loans.

Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases. Interest income on automobile direct finance leasing is determined using the interest method to arrive at a level effective yield over the life of the lease. The lease residual and the lease receivable, net of unearned lease income, are recorded within loans and leases on the balance sheet.

Foreclosed assets held-for-sale includes other real estate acquired through foreclosure (ORE) and may, from time-to-time, include repossessed assets such as automobiles. ORE is carried at the lower of cost (principal balance at date of foreclosure) or fair value less estimated cost to sell. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses incurred to maintain ORE properties, subsequent write downs to the asset’s fair value, any rental income received and gains or losses on disposal are included as components of other real estate owned expense in the consolidated statements of income.

We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that management believes to be reasonable.

Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date. Goodwill is recorded at its net carrying value which represents estimated fair value. The goodwill is deductible for tax purposes over a 15-year period. Goodwill is tested for impairment on at least an annual basis. There was 0 goodwill impairment as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Other acquired intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing.

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The Company accounts for certain participation interests in commercial loans receivable (loan participation agreements) sold as a sale of financial assets pursuant to ASC 860, Transfers and Servicing. Loan participation agreements that meet the sale criteria under ASC 860 are derecognized from the Consolidated Balance Sheets at the time of transfer. If the transfer of loans does not meet the sale criteria or participating interest criteria under ASC 860, the transfer is accounted for as a secured borrowing and the loan is not de-recognized and a participating liability is recorded in the Consolidated Balance Sheets.

The Company holds separate supplemental executive retirement (SERP) agreements for certain officers and an amount is credited to each participant’s SERP account monthly while they are actively employed by the bank until retirement. A deferred tax asset is provided for the non-deductible SERP expense. The Company also entered into separate split dollar life insurance arrangements with 4 executives providing post-retirement benefits and accrues monthly expense for this benefit. The split dollar life insurance expense is not deductible for tax purposes. Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on the consolidated statements of income.

For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions.

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2. New accounting pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (CECL). The amendments in this update require financial assets measured at amortized cost basis 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. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. 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. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. As it relates to CECL, this guidance amends certain provisions contained in ASU 2016-13, particularly in regards to the

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inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses.

The amendments in this update are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 for public companies. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption (modified-retrospective approach). Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company to record loan losses more rapidly. The Company has engaged the services of a qualified third-party service provider to assist management in estimating credit allowances under this standard and is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. On October 16, 2019, the FASB decided to move forward with finalizing its proposal to defer the effective date for ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Since the Company currently meets the SEC definition of a smaller reporting company, the delay will be applicable to the Company.

In August 2018, the FASB issued ASU ~~2018-13,~~ ~~Fair Value Measurement (Topic 820) – Changes to the Disclosure Requirements for Fair Value Measurement~~. The amendments in this ASU remove certain disclosures from Topic 820, modify disclosures and/or require additional disclosures. We adopted this ASU on January 1, 2020 and the amendments in this update did not have a material impact on the Company’s consolidated financial position or results of operations. Footnote 8, “Fair Value Measurements” provides disclosures regarding fair value measurements of the Company’s financial instruments.

~~In August 2018, the FASB issued ASU~~ 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). The amendments in this update change the disclosure requirements for defined benefit plans. The amendments in this update are effective for fiscal years ending after December 15, 2020 for the Company. ~~Early adoption is permitted.~~ An entity should apply the amendments in this update on a retrospective basis to all periods presented. ~~We do not expect~~The update was adopted by the Company on January 1, 2021 and the amendments in this update todid not have a material impact on the Company’s disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in this update are elective and apply to all entities that have contracts that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. An optional expedient simplifies accounting for contract modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. The Company expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04.

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3. Accumulated other comprehensive income

The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated:



As of and for the nine months ended September 30, ~~2020~~2021
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	debt securities
Beginning balance	$	8,952

Other comprehensive loss before reclassifications, net of tax		(8,747)
Amounts reclassified from accumulated other comprehensive income, net of tax		(31)
Net current-period other comprehensive loss		(8,778)
Ending balance	$	174


As of and for the three months ended September 30, 2021
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	debt securities
Beginning balance	$	5,331

Other comprehensive loss before reclassifications, net of tax		(5,126)
Amounts reclassified from accumulated other comprehensive income, net of tax		(31)
Net current-period other comprehensive loss		(5,157)
Ending balance	$	174


As of and for the nine months ended September 30, 2020
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities
Beginning balance	$	3,602

Other comprehensive income before reclassifications, net of tax		4,218
Amounts reclassified from accumulated other comprehensive income, net of tax		-
Net current-period other comprehensive income		4,218
Ending balance	$	7,820

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As of and for the three months ended September 30, 2020
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	~~debt~~ securities
Beginning balance	$	7,201

Other comprehensive income before reclassifications, net of tax		619
Amounts reclassified from accumulated other comprehensive income, net of tax		-
Net current-period other comprehensive income		619
Ending balance	$	7,820

13
~~As of and for the nine months ended September 30, 2019~~
	~~Unrealized gains~~
	~~(losses) on~~
	~~available-for-sale~~
~~(dollars in thousands)~~	~~securities~~
~~Beginning balance~~	$	~~(1,095)~~

~~Other comprehensive income before reclassifications, net of tax~~		~~4,525~~
~~Amounts reclassified from accumulated other comprehensive income, net of tax~~		5
~~Net current-period other comprehensive income~~		~~4,530~~
~~Ending balance~~	$	~~3,435~~

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~~As of and for the three months ended September 30, 2019~~
	~~Unrealized gains~~
	~~(losses) on~~
	~~available-for-sale~~
~~(dollars in thousands)~~	~~securities~~
~~Beginning balance~~	$	~~2,354~~

~~Other comprehensive income before reclassifications, net of tax~~		~~1,079~~
~~Amounts reclassified from accumulated other comprehensive income, net of tax~~		2
~~Net current-period other comprehensive income~~		~~1,081~~
~~Ending balance~~	$	~~3,435~~



Details about accumulated other
comprehensive income components	Amount reclassified from accumulated								Affected line item in the statement
(dollars in thousands)	other comprehensive income								where net income is presented
	For the three months				For the nine months
	ended September 30,				ended September 30,
	2021		2020		2021		2020

Unrealized gains (losses) on AFS debt securities	$	40	$	-	$	40	$	-	Gain (loss) on sale of investment securities
Income tax effect		(9)		-		(9)		-	Provision for income taxes
Total reclassifications for the period	$	31	$	-	$	31	$	-	Net income

~~The following table describes amounts reclassified from accumulated other comprehensive income:~~

Details about accumulated other
comprehensive income components
Amount reclassified from accumulated
Affected line item in the statement
(dollars in thousands)
other comprehensive income
where net income is presented
For the three months
For the nine months
ended September 30,
ended September 30,
2020
2019
2020
2019
Unrealized gains (losses) on AFS debt securities
$
-
$
(2)
$
-
$
(6)
Gain (loss) on sale of investment securities
Income tax effect
-
-
-
1
Provision for income taxes
Total reclassifications for the period
$
-
$
(2)
$
-
$
(5)
Net income

4. Investment securities

Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates

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that are fixed and adjustable, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions (municipal)

The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

The amortized cost and fair value of investment securities at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized as follows:



			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value		cost		gains		losses		value
September 30, 2020
September 30, 2021
Available-for-sale debt securities:
Agency - GSE	$	18,453	$	435	$	(14)	$	18,874	$	112,949	$	386	$	(1,820)	$	111,515
Obligations of states and political subdivisions		159,679		5,604		(341)		164,942		335,011		5,527		(4,073)		336,465
MBS - GSE residential		152,279		4,215		-		156,494		238,745		2,402		(2,201)		238,946

Total available-for-sale debt securities	$	330,411	$	10,254	$	(355)	$	340,310	$	686,705	$	8,315	$	(8,094)	$	686,926



			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value		cost		gains		losses		value
December 31, 2019
December 31, 2020
Available-for-sale debt securities:
Agency - GSE	$	5,941	$	218	$	-	$	6,159	$	45,146	$	392	$	(91)	$	45,447
Obligations of states and political subdivisions		51,857		2,871		(10)		54,718		192,385		7,480		(152)		199,713
MBS - GSE residential		122,759		1,609		(128)		124,240		143,557		3,881		(178)		147,260

Total available-for-sale debt securities	$	180,557	$	4,698	$	(138)	$	185,117	$	381,088	$	11,753	$	(421)	$	392,420

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The amortized cost and fair value of debt securities at September 30, ~~2020~~2021 by contractual maturity are summarized below:



	Amortized		Fair		Amortized		Fair
(dollars in thousands)	cost		value		cost		value
Available-for-sale securities:
Debt securities:
Due in one year or less	$	3,000	$	3,000	$	985	$	1,008
Due after one year through five years		6,898		7,371		9,207		9,452
Due after five years through ten years		26,438		26,697		109,420		107,939
Due after ten years		141,796		146,748		328,348		329,581

MBS - GSE residential		152,279		156,494		238,745		238,946

Total available-for-sale debt securities	$	330,411	$	340,310	$	686,705	$	686,926

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

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The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:



	Less than 12 months				More than 12 months				Total				Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		losses		value		losses		value		losses		value		losses		value		losses		value		losses

September 30, 2020
September 30, 2021
Agency - GSE	$	2,486	$	(14)	$	-	$	-	$	2,486	$	(14)	$	87,844	$	(1,820)	$	-	$	-	$	87,844	$	(1,820)
Obligations of states and political subdivisions		39,985		(341)		-		-		39,985		(341)
Total	$	42,471	$	(355)	$	-	$	-	$	42,471	$	(355)
Number of securities		26				-				26

December 31, 2019
Obligations of states and political subdivisions	$	2,867	$	(10)	$	-	$	-	$	2,867	$	(10)		204,710		(3,882)		4,498		(191)		209,208		(4,073)
MBS - GSE residential		5,084		(19)		16,518		(109)		21,602		(128)		160,399		(2,201)		-		-		160,399		(2,201)
Total	$	7,951	$	(29)	$	16,518	$	(109)	$	24,469	$	(138)	$	452,953	$	(7,903)	$	4,498	$	(191)	$	457,451	$	(8,094)
Number of securities		5				12				17				220				5				225

December 31, 2020
Agency - GSE													$	27,602	$	(91)	$	-	$	-	$	27,602	$	(91)
Obligations of states and political subdivisions														15,256		(152)		-		-		15,256		(152)
MBS - GSE residential														14,753		(178)		-		-		14,753		(178)
Total													$	57,611	$	(421)	$	-	$	-	$	57,611	$	(421)
Number of securities														30				-				30

The Company had 26225 debt securities in an unrealized loss position at September 30, ~~2020,~~2021, including ~~1 agency security~~35 agency-GSE securities, 47 MBS – GSE residential securities and 25143 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at September 30, ~~2020: 0.54%~~2021: 2.03% for ~~agencies~~agency - GSE, 1.35% for total MBS-GSE residential; and ~~0.85%~~1.91% for municipals. OfNaN of these securities ~~NaN~~ had been in an unrealized loss position in excess of 12 months. Management has no intent to sell any securities in an unrealized loss position as of September 30, ~~2020.~~2021.

Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (OCI). Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.

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The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt securities.

For all debt securities, as of September 30, ~~2020,~~2021, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.

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5. Loans and leases

The classifications of loans and leases at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized as follows:



(dollars in thousands)	September 30, 2020						December 31, 2019		September 30, 2021		December 31, 2020
	Originated		Acquired		Total
Commercial and industrial	$	278,172	$	22,771	$	300,943	$	122,594	$	264,170	$	280,757
Commercial real estate:
Non-owner occupied		99,503		92,291		191,794		99,801		306,537		192,143
Owner occupied		128,651		46,670		175,321		130,558		247,563		179,923
Construction		3,866		6,347		10,213		4,654		12,081		10,231
Consumer:
Home equity installment		34,475		6,254		40,729		36,631		47,331		40,147
Home equity line of credit		47,071		5,698		52,769		47,282		53,747		49,725
Auto loans		98,892		197		99,089		105,870		121,080		98,386
Direct finance leases		18,795		-		18,795		16,355		23,661		20,095
Other		9,101		378		9,479		5,634		7,701		7,602
Residential:
Real estate		178,524		42,651		221,175		167,164		271,760		218,445
Construction		18,056		432		18,488		17,770		34,519		23,357
Total		915,106		223,689		1,138,795		754,313		1,390,150		1,120,811
Less:
Allowance for loan losses		(12,884)		-		(12,884)		(9,747)		(15,601)		(14,202)
Unearned lease revenue		(1,092)		-		(1,092)		(903)		(1,312)		(1,159)
Loans and leases, net	$	901,130	$	223,689	$	1,124,819	$	743,663	$	1,373,237	$	1,105,450

As of September 30, ~~2020,~~2021, total loans of ~~$1.1~~$1.4 billion were reflected net of deferred ~~fee income~~loan costs of ~~$37 thousand,~~$1.9 million, including ~~$3.5~~$2.1 million in deferred fee income from Paycheck Protection Program (PPP) loans ~~which was offset by~~and $4.0 million in deferred loan ~~costs on other loans.~~costs. Net deferred loan costs of ~~$3.0~~$1.7 million, including $2.2 million in deferred fee income from PPP loans and $3.9 million in deferred loan costs, have been included in the carrying values of loans at December 31, ~~2019.~~2020.

Commercial and industrial (C&I) loan balances were ~~$300.9~~$264.2 million at September 30, ~~2020~~2021 and ~~$122.6~~$280.8 million onat December 31, ~~2019. The $178.3 million increase reflected $155.6~~2020. As of September 30, 2021, the commercial and industrial loan balance included $64.7 million in PPP loans (net of ~~unearned~~ deferred fees) ~~and $22.8~~, including $13.4 million in PPP loans ~~stated~~acquired from Landmark, compared to $129.9 million as of December 31, 2020. Excluding PPP loans, the balance of C&I loans at ~~fair value~~September 30, 2021 increased $48.7 million primarily from loans acquired infrom Landmark during the ~~Merchants Bank merger.~~third quarter of 2021.

Direct finance leases include the lease receivable and the guaranteed lease residual. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced for others amounted to ~~$344.0~~$433.3 million as of September 30, ~~2020~~2021 and ~~$302.3~~$366.5 million as of December 31, ~~2019.~~2020. Mortgage servicing rights amounted to ~~$1.1~~$1.8 million and ~~$1.0~~$1.3 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are

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assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

The global pandemic referred to as COVID-19 has created many barriers to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and the Company’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag timewise behind. Businesses and governments injected resources to help lessen the impact of the pandemic and the ultimate effect is uncertain until the government stimulus is fully utilized. Despite efforts to lessen the impact, it is the Company’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.

Paycheck Protection Program Loans

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

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. ~~An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs, or (2) $10.0 million. PPP loans will have: (a) an interest~~

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rate of 1.0%, (b) a two-year loan term to maturity for loans originated before June 5th and a five-year maturity for loans originated beginning on June 5th; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted, extending the authority to make PPP ~~so long as~~loans through May 31, 2021, revising certain PPP requirements, and permitting second draw PPP loans. On March 11, 2021, the ~~employer maintains or quickly rehires employees~~American Rescue Plan Act of 2021 (American Rescue Plan Act) was enacted expanding eligibility for first and ~~maintains salary levels~~second draw PPP loans and ~~60%~~revising the exclusions from payroll costs for purposes of ~~the~~ loan ~~proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.~~forgiveness.

As of September 30, ~~2020,~~2021, the Company had ~~originated 1,551~~840 PPP loans outstanding totaling $66.8 million, including 148 loans totaling ~~$159.1~~$13.4 million ~~under~~acquired from the ~~Paycheck Protection Program. As~~Landmark merger, which represents a ~~PPP lender,~~$65.3 million, or 49%, decrease from the 1,246 loans totaling $132.1 million as of December 31, 2020. From the beginning of the program through September 30, 2021, the Company received ~~fee income~~forgiveness or paydowns of ~~approximately $5.6~~$182.9 million, ~~year-to-date. The~~or 77%, of the original PPP loan balances of $236.3 million (excludes Landmark-acquired PPP loans) with $155.9 million occurring during the nine months ended September 30, 2021. During the three and nine months ended September 30, 2021, the Company recognized $1.4 million and $4.2 million in SBA fees from PPP loans, net of origination expenses, compared to $1.0 million and $1.8 million ~~of PPP fee income during~~for the ~~second~~three and ~~third quarters of 2020 with the remaining amount to be recognized in future quarters.~~nine months ended September 30, 2020. Unearned fees attributed to PPP loans, net of $0.2 million in fees paid to referral sources as prescribed by the SBA under the PPP program, were ~~$3.5~~$2.1 million as of September 30, ~~2020.~~2021.

Acquired loans

Acquired loans are marked to fair value on the date of acquisition. For detailed information on calculating the fair value of acquired loans, see Footnote 9, “Acquisition.”

The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no longer expected to be collected.

The Company reported provisional fair value adjustments regarding the acquired ~~MNB Corporation~~Landmark loan portfolio. Therefore, wethe Company did not record an allowance on the acquired non-purchased credit impaired ~~(PCI)~~ loans. ~~We are in the process of developing a plan to evaluate acquired non-PCI loans for additional reserve in the subsequent interim period.~~ In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the calculation of the allowance for loan losses after the initial valuation and provide reserves accordingly.

Upon acquisition, in accordance with U.S. GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC ~~310-30.~~310-30 deemed as purchased credit impaired (PCI). As part of this process, the Company’s senior management and other relevant individuals reviewed the seller’s loan portfolio on a ~~loan by loan~~loan-by-loan basis to determine if any loans met the two-part definition of an impaired loan as defined by ASC 310-30: 1) Credit deterioration on the loan from its inception until the acquisition date, and 2) It is probable that not all ~~of the~~ contractual cash flows will be collected on the loan.

With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value

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result in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan's acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.

Over the life of the acquired ASC 310-30 loan, the Company continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized ~~subsequent to~~after acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life.

Acquired ASC 310-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Company does not consider acquired contractually delinquent loans to be non-accruing and continues to recognize accretable yield on these loans which is recognized as interest income on a level yield method over the life of the loan.

Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Company used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, and environment factors to estimate the expected cash flow for each loan pool.

Within the ASC 310-20 loans, the Company identified certain loans that have higher ~~risk due to the COVID-19 pandemic.~~risk. Although performing at the time of acquisition and likely will continue making payments in accordance with contractual terms, management elected a higher credit adjustment on these loans to reflect the greater inherent risk that the borrower will default on payments. ~~These higher risk~~Risk factors ~~include~~used to identify these loans included: loans that ~~requested~~received COVID-19 related forbearance consistent with ~~FIL-17-2020~~ ~~FDIC Statement on Financial Institutions Working with Customers Affected by~~ the ~~Coronavirus and Regulatory and Supervisory Assistance~~,regulatory guidance, loans that were in industries

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determined to be at greater risk to economic disruption due to COVID-19, ~~and~~ loans that had a prior history of delinquency greater than 60 days at any point in the ~~life-time~~lifetime of the ~~loan.~~loan; loans with a Special Mention or Substandard risk rating; and/or loans borrowers in the Gasoline Station industry due to the environmental risk potential of these loans.

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.



	~~For the nine months ended~~
~~(dollars in thousands)~~	~~September 30, 2020~~
~~Balance at beginning of period~~	$	-
~~Accretable yield on acquired loans~~		~~248~~
~~Reclassification from non-accretable difference~~		~~192~~
~~Accretion of accretable yield~~		~~(53)~~
~~Balance at end of period~~	$	~~387~~



	For the nine months ended
(dollars in thousands)	September 30, 2021		September 30, 2020
Balance at beginning of period	$	563	$	-
Accretable yield on acquired loans		589		248
Reclassification from non-accretable difference		197		192
Accretion of accretable yield		(350)		(53)
Balance at end of period	$	999	$	387

The above table excludes the $275 thousand in non-accretable yield accreted to interest income for the nine months ended September 30, 2021 and $3 thousand in non-accretable yield accreted to interest income for the nine months ended September 30, 2020.

During the ~~third quarter of 2020,~~nine months ended September 30, 2021, management performed an analysis of all loans ~~accounted for under~~acquired from mergers, consistent with and applicable to ASC ~~310-30. NaN~~310-30 (Purchased Credit Impaired loans ~~had an improvement~~– PCI). The accretable yield balance increased from $563 thousand at December 31, 2020 to $999 thousand at September 30, 2021. The $436 thousand increase resulted from $589 thousand in ~~collateral value and 2~~accretable yield on loans ~~had actual payments exceed estimates resulting in a $192~~acquired from the Landmark merger during the third quarter of 2021; $197 thousand ~~reclassification~~reclassified from non-accretable ~~discount~~yield to accretable ~~discount.~~yield including $129 thousand from improved collateral values and $68 thousand from payments received on PCI in excess of estimates; and $350 thousand in accretable yield accreted to interest income due to contractual payments received during the nine months ended September 30, 2021.

~~Cash~~Expected cash flows ~~expected to be collected~~ on acquired loans are estimated quarterly by incorporating several key assumptions. These key assumptions include probability of default and the number of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured.

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Non-accrual loans

Non-accrual loans, segregated by class, at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, were as follows:



(dollars in thousands)	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020
Commercial and industrial	$	418	$	336	$	259	$	590
Commercial real estate:
Non-owner occupied		1,160		510		601		846
Owner occupied		1,133		1,447		1,020		1,123
Consumer:
Home equity installment		33		65		27		61
Home equity line of credit		430		294		97		395
Auto loans		20		16		49		27
Residential:
Real estate		747		1,006		694		727
Total	$	3,941	$	3,674	$	2,747	$	3,769

The table above excludes $4.4 million and $1.3 million in purchased credit impaired loans, net of unamortized fair value ~~adjustments.~~adjustments as of September 30, 2021 and December 31, 2020, respectively.

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at ~~120~~90 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

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Troubled Debt Restructuring (TDR)

~~Loan Modifications/COVID-19~~A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company typically considers the following concessions when modifying a loan, which may include lowering interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when granting a TDR modification.

The table below provides a summary by loan type of the COVID-19 accommodations based on the number and outstanding balance at September 30, 2020 along with the percentage of these accommodations relative to the loan portfolio and tier 1 capital:

(dollars in thousands)
Number of Loans
Total Modification Balance
Total Loan Balance
Percentage of Total Loan Balance
Percentage of Tier 1 Capital
Commercial and industrial
34
$
2,317
$
300,943
0.8%
1.6%
Commercial real estate:
Non-owner occupied
51
9,753
191,794
5.1%
6.7%
Owner occupied
34
6,835
175,321
3.9%
4.7%
Construction
-
-
10,213
0.0%
0.0%
Total Commercial
119
18,905
678,271
2.8%
13.1%
Consumer:
Home equity installment
10
633
40,729
1.6%
0.4%
Home equity line of credit
11
615
52,769
1.2%
0.4%
Auto loans
40
757
99,089
0.8%
0.5%
Direct finance leases
-
-
18,795
0.0%
0.0%
Other
10
56
9,479
0.6%
0.0%
Total Consumer
71
2,061
220,861
0.9%
1.4%
Residential:
Real estate
21
4,073
221,175
1.8%
2.8%
Construction
1
102
18,488
0.6%
0.1%
Total Residential
22
4,175
239,663
1.7%
2.9%
Total
212
$
25,141
$
1,138,795
2.2%
17.4%

The following table provides information with respect to the Company’s commercial COVID-19 accommodations by sector at September 30, 2020. Only the 5 sectors with the highest amount of accommodations on a dollar basis are shown in this table. All other sectors are classified in the “Other” category.

(dollars in thousands)
Count
Balance
Percentage of Tier 1 Capital
Real Estate Rental and Leasing
55
$
10,254
7.1%
Construction
15
1,380
1.0%
Manufacturing
1
1,198
0.8%
Retail Trade
7
1,081
0.7%
Accommodation and Food Services
7
1,034
0.7%
Other
34
3,958
2.7%
Total commercial accommodations
119
$
18,905
13.1%

Consistent with Section 4013 and the Revised Statement of Section 4013 of the CARES Act, specifically “Temporary Relief From Troubled Debt Restructurings”, the Company approved requests by borrowers to modify loan terms and defer principal and/or interest payment for loans. U.S. GAAP permits the suspension of TDR determination defined under ASC 310-40 provided that such modifications are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief. This includes short-term (i.e. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current for purposes of Section 4013 are those that are less than 30 days past due on their contractual payments at the time the modification program is implemented.

Beginning the week of March 16, 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. ~~The modifications are grouped into deferred payments of no more than six months,~~Modification terms included interest only ~~lines of credit only and other.~~or full payment deferral for up to 6 months. As of September 30, ~~2020,~~2021, the Company had ~~212~~0 temporary modifications outstanding compared to 10 temporary modifications with principal balances totaling ~~$25.1~~$2.2 million ~~which is down $176.7 million, or 88%, from the $201.8 million temporary modifications that were outstanding~~ as of ~~June 30,~~December 31, 2020.

The global pandemic referred to as COVID-19 has created many barriers to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and the Company’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag timewise behind while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is the Company’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.

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~~Troubled Debt Restructuring (TDR)~~

A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company typically considers the following concessions when modifying a loan, which may include lowering interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when granting a TDR modification.

The following presents by class, information related to loans modified in a TDR:


	Loans modified as TDRs for the three months ended:											Loans modified as TDRs for the three months ended:
(dollars in thousands)	September 30, 2020						September 30, 2019					September 30, 2021						September 30, 2020

			Recorded		Increase in			Recorded		Increase in				Recorded		Increase in			Recorded		Increase in
		Number	investment		allowance		Number	investment		allowance			Number	investment		allowance		Number	investment		allowance
		of	(as of		(as of		of	(as of		(as of			of	(as of		(as of		of	(as of		(as of
		contracts	period end)		period end)		contracts	period end)		period end)			contracts	period end)		period end)		contracts	period end)		period end)
Commercial real estate - non-owner occupied		2	$	1,600	$	475	-	$	-	$	-		-	$	-	$	-	2	$	1,600	$	475
Total		2	$	1,600	$	475	-	$	-	$	-		-	$	-	$	-	2	$	1,600	$	475

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	Loans modified as TDRs for the nine months ended:											Loans modified as TDRs for the nine months ended:
(dollars in thousands)	September 30, 2020						September 30, 2019					September 30, 2021						September 30, 2020

			Recorded		Increase in			Recorded		Increase in				Recorded		Increase in			Recorded		Increase in
		Number	investment		allowance		Number	investment		allowance			Number	investment		allowance		Number	investment		allowance
		of	(as of		(as of		of	(as of		(as of			of	(as of		(as of		of	(as of		(as of
		contracts	period end)		period end)		contracts	period end)		period end)			contracts	period end)		period end)		contracts	period end)		period end)
Commercial real estate - non-owner occupied		2	$	1,600	$	475	-	$	-	$	-		-	$	-	$	-	2	$	1,600	$	475
Total		2	$	1,600	$	475	-	$	-	$	-		-	$	-	$	-	2	$	1,600	$	475

In the above tables, the period end balance is inclusive of all partial pay downs and charge-offs since the modification date. For all loans modified in a TDR, the pre-modification recorded investment was the same as the post-modification recorded investment.

Of the TDRs outstanding as of September 30, ~~2020~~2021 and ~~December 31, 2019,~~2020, when modified, the concessions granted consisted of temporary interest-only payments, extensions of maturity date, or a reduction in the rate of interest to a below-market rate for a contractual period of time. Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms.

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. There were 0 loans modified as a TDR within the previous twelve months that subsequently defaulted (i.e. 90 days or more past due following a modification) during the three and nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.

The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance.

As of September 30, 2021 and 2020, the balance of outstanding TDRs was $3.0 million. As of September 30, 2021 and ~~2019, respectively,~~2020, the allowance for impaired loans that have been modified in a TDR was ~~$0.6~~$0.5 million and ~~$0.2~~$0.6 million, respectively.

Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date. For loans reported 30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears for two payments or billing cycles. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):

‎

~~Table Of Contents~~



														Recorded															Recorded
					Past due									investment past						Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days		30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
September 30, 2020	past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing
Originated Loans
Commercial and industrial	$	-	$	-	$	418	$	418	$	277,754	$	278,172		$	-
Commercial real estate:
Non-owner occupied		142		41		1,160		1,343		98,160		99,503			-
Owner occupied		-		-		1,133		1,133		127,518		128,651			-
Construction		-		-		-		-		3,866		3,866			-
Consumer:
Home equity installment		77		20		33		130		34,345		34,475			-
Home equity line of credit		41		-		430		471		46,600		47,071			-
Auto loans		234		34		20		288		98,604		98,892			-
Direct finance leases		239		28		81		348		17,355		17,703	⁽²⁾		81
Other		8		-		-		8		9,093		9,101			-
Residential:
Real estate		-		-		747		747		177,777		178,524			-
Construction		-		-		-		-		18,056		18,056			-
Total originated loans		741		123		4,022		4,886		909,128		914,014			81
Acquired Loans
Commercial and industrial		-		-		-		-		22,771		22,771			-
Commercial real estate:
Non-owner occupied		131		-		-		131		92,160		92,291			-
Owner occupied		258		-		-		258		46,412		46,670			-
Construction		-		-		-		-		6,347		6,347			-
Consumer:
Home equity installment		-		-		-		-		6,254		6,254			-
Home equity line of credit		-		-		-		-		5,698		5,698			-
Auto loans		-		-		-		-		197		197			-
Other		1		-		-		1		377		378			-
Residential:
Real estate		-		-		-		-		42,651		42,651			-
Construction		-		-		-		-		432		432			-
Total acquired loans		390		-		-		390		223,299		223,689			-
Total Loans and Leases
September 30, 2021																past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing

Commercial and industrial		-		-		418		418		300,525		300,943			-	$	19	$	-	$	259	$	278	$	263,892	$	264,170		$	-
Commercial real estate:
Non-owner occupied		273		41		1,160		1,474		190,320		191,794			-		-		61		601		662		305,875		306,537			-
Owner occupied		258		-		1,133		1,391		173,930		175,321			-		224		-		1,020		1,244		246,319		247,563			-
Construction		-		-		-		-		10,213		10,213			-		-		-		-		-		12,081		12,081			-
Consumer:
Home equity installment		77		20		33		130		40,599		40,729			-		70		-		27		97		47,234		47,331			-
Home equity line of credit		41		-		430		471		52,298		52,769			-		74		-		97		171		53,576		53,747			-
Auto loans		234		34		20		288		98,801		99,089			-		458		54		160		672		120,408		121,080			111
Direct finance leases		239		28		81		348		17,355		17,703	⁽²⁾		81		110		7		-		117		22,232		22,349	⁽²⁾		-
Other		9		-		-		9		9,470		9,479			-		9		-		1		10		7,691		7,701			1
Residential:
Real estate		-		-		747		747		220,428		221,175			-		-		-		694		694		271,066		271,760			-
Construction		-		-		-		-		18,488		18,488			-		-		-		-		-		34,519		34,519			-
Total	$	1,131	$	123	$	4,022	$	5,276	$	1,132,427	$	1,137,703		$	81	$	964	$	122	$	2,859	$	3,945	$	1,384,893	$	1,388,838		$	112

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of ~~$1.1~~$1.3 million. ⁽³⁾ Includes net deferred loan ~~fees~~costs of ~~($37 thousand).~~$1.9 million.

‎

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														Recorded															Recorded
					Past due									investment past						Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days		30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2019	past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing
December 31, 2020																past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing

Commercial and industrial	$	33	$	171	$	336	$	540	$	122,054	$	122,594		$	-	$	288		505		590		1,383		279,374		280,757			-
Commercial real estate:
Non-owner occupied		-		70		510		580		99,221		99,801			-		79		-		846		925		191,218		192,143			-
Owner occupied		180		89		1,447		1,716		128,842		130,558			-		1		-		1,123		1,124		178,799		179,923			-
Construction		-		-		-		-		4,654		4,654			-		-		-		-		-		10,231		10,231			-
Consumer:
Home equity installment		-		5		65		70		36,561		36,631			-		102		-		61		163		39,984		40,147			-
Home equity line of credit		49		-		294		343		46,939		47,282			-		24		-		395		419		49,306		49,725			-
Auto loans		316		46		16		378		105,492		105,870			-		197		25		27		249		98,137		98,386			-
Direct finance leases		59		79		-		138		15,314		15,452	⁽²⁾		-		294		-		61		355		18,581		18,936	⁽²⁾		61
Other		15		1		-		16		5,618		5,634			-		9		-		-		9		7,593		7,602			-
Residential:
Real estate		29		224		1,006		1,259		165,905		167,164			-		-		74		727		801		217,644		218,445			-
Construction		-		-		-		-		17,770		17,770			-		-		-		-		-		23,357		23,357			-
Total	$	681	$	685	$	3,674	$	5,040	$	748,370	$	753,410		$	-	$	994	$	604	$	3,830	$	5,428	$	1,114,224	$	1,119,652		$	61

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of ~~$0.9~~$1.2 million. ⁽³⁾ Includes net deferred loan costs of ~~$3.0~~$1.7 million.

Impaired loans

Impaired loans, segregated by class, as of the period indicated are detailed below:



			Recorded		Recorded								Recorded		Recorded
	Unpaid		investment		investment		Total				Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related		principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance		balance		allowance		allowance		investment		allowance
September 30, 2020
September 30, 2021
Commercial and industrial	$	516	$	305	$	113	$	418	$	128	$	422	$	19	$	240	$	259	$	19
Commercial real estate:
Non-owner occupied		3,279		2,090		1,077		3,167		503		2,595		1,676		920		2,596		470
Owner occupied		2,017		1,570		135		1,705		276		1,904		1,438		66		1,504		387
Consumer:
Home equity installment		78		-		33		33		-		60		-		27		27		-
Home equity line of credit		479		166		264		430		61		137		-		97		97		-
Auto loans		36		8		12		20		1		66		11		38		49		5
Residential:										-
Real estate		828		593		154		747		156		741		550		144		694		89
Total	$	7,233	$	4,732	$	1,788	$	6,520	$	1,125	$	5,925	$	3,694	$	1,532	$	5,226	$	970

Recorded
Recorded
Unpaid
investment
investment
Total
principal
with
with no
recorded
Related
(dollars in thousands)
balance
allowance
allowance
investment
allowance
December 31, 2019
Commercial and industrial
$
336
$
336
$
-
$
336
$
221
Commercial real estate:
Non-owner occupied
1,047
333
591
924
232
Owner occupied
2,336
1,052
972
2,024
194
Consumer:
Home equity installment
106
-
65
65
-
Home equity line of credit
362
88
206
294
87
Auto loans
32
-
16
16
-
Residential:
-
Real estate
1,053
678
328
1,006
174
Total
$
5,272
$
2,487
$
2,178
$
4,665
$
908

2221

Table Of Contents



			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2020
Commercial and industrial	$	688	$	549	$	41	$	590	$	213
Commercial real estate:
Non-owner occupied		2,960		1,677		1,171		2,848		481
Owner occupied		2,058		1,219		473		1,692		309
Consumer:
Home equity installment		106		-		61		61		-
Home equity line of credit		443		105		290		395		48
Auto loans		50		27		-		27		4
Residential:
Real estate		774		559		168		727		151
Total	$	7,079	$	4,136	$	2,204	$	6,340	$	1,206

At September 30, ~~2020,~~2021, impaired loans totaled ~~$6.5~~$5.2 million consisting of ~~$2.6~~$2.5 million in accruing TDRs and ~~$3.9~~$2.7 million in non-accrual loans. At December 31, ~~2019,~~2020, impaired loans totaled ~~$4.7~~$6.3 million consisting of ~~$1.0~~$2.5 million in accruing TDRs and ~~$3.7~~$3.8 million in non-accrual loans. As of September 30, ~~2020,~~2021, the non-accrual loans included ~~2 TDRs to 2 unrelated borrowers totaling $0.5 million compared with 2~~3 TDRs to 2 unrelated borrowers totaling $0.6 million compared with 4 TDRs to 3 unrelated borrowers totaling $0.7 million as of December 31, ~~2019.~~2020.

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.


	For the nine months ended												For the nine months ended
	September 30, 2020						September 30, 2019						September 30, 2021						September 30, 2020
					Cash basis						Cash basis						Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest		Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income		recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	327	$	1	$	-	$	198	$	1	$	-	$	433	$	3	$	-	$	327	$	1	$	-
Commercial real estate:
Non-owner occupied		1,531		18		-		1,168		21		-		2,838		133		-		1,531		18		-
Owner occupied		1,984		42		-		2,589		32		-		1,711		27		-		1,984		42		-
Construction		-		-		-		9		-		-		-		-		-		-		-		-
Consumer:
Home equity installment		50		-		-		209		1		-		35		4		-		50		-		-
Home equity line of credit		341		-		-		134		-		-		268		20		-		341		-		-
Auto Loans		60		2		-		48		-		-
Auto loans														30		-		-		60		2		-
Direct finance leases														-		-		-		-		-		-
Other		-		-		-		-		-		-		-		-		-		-		-		-
Residential:
Real estate		886		-		-		1,319		19		-		717		-		-		886		-		-
Construction														-		-		-		-		-		-
Total	$	5,179	$	63	$	-	$	5,674	$	74	$	-	$	6,032	$	187	$	-	$	5,179	$	63	$	-

‎

For the three months ended
September 30, 2020
September 30, 2019
Cash basis
Cash basis
Average
Interest
interest
Average
Interest
interest
recorded
income
income
recorded
income
income
(dollars in thousands)
investment
recognized
recognized
investment
recognized
recognized
Commercial and industrial
$
392
$
1
$
-
$
218
$
-
$
-
Commercial real estate:
Non-owner occupied
2,545
6
-
849
6
-
Owner occupied
1,742
9
-
2,512
11
-
Construction
-
-
-
-
-
-
Consumer:
Home equity installment
40
-
-
32
-
-
Home equity line of credit
405
-
-
260
-
-
Auto loans
60
2
-
65
-
-
Direct finance leases
-
-
-
-
-
Other
-
-
-
-
-
-
Residential:
Real estate
699
-
-
1,170
10
-
Construction
-
-
-
-
-
-
Total
$
5,883
$
18
$
-
$
5,106
$
27
$
-

2322

Table Of Contents


	For the three months ended
	September 30, 2021						September 30, 2020
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	325	$	-	$	-	$	392	$	1	$	-
Commercial real estate:
Non-owner occupied		2,676		73		-		2,545		6		-
Owner occupied		1,555		7		-		1,742		9		-
Construction		-		-		-		-		-		-
Consumer:
Home equity installment		27		-		-		40		-		-
Home equity line of credit		114		-		-		405		-		-
Auto loans		44		-		-		60		2		-
Direct finance leases		-		-				-		-		-
Other		-		-		-		-		-		-
Residential:
Real estate		699		-		-		699		-		-
Construction		-		-		-		-		-		-
Total	$	5,440	$	80	$	-	$	5,883	$	18	$	-

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.

The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:

Pass

Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements.

Substandard

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard.

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is considered to be uncollectible and charged-off.

‎

Table Of Contents

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity and history in assessing performance. Non-performing loans are comprised of non-accrual loans and loans past due 90 days or more and accruing. All loans not classified as non-performing are considered performing.

The following table presents loans including ~~($37 thousand)~~$1.9 million and ~~$3.0~~$1.7 million of deferred ~~(fees)/~~costs, segregated by class, categorized into the appropriate credit quality indicator category as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively:

‎

~~Table Of Contents~~

Commercial credit exposure

Credit risk profile by creditworthiness category



	September 30, 2020										September 30, 2021
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total		Pass		Special mention		Substandard		Doubtful		Total
Originated Loans
Commercial and industrial	$	270,363	$	2,301	$	5,508	$	-	$	278,172
Commercial real estate - non-owner occupied		87,259		5,343		6,901		-		99,503
Commercial real estate - owner occupied		118,036		4,312		6,303		-		128,651
Commercial real estate - construction		3,014		254		598		-		3,866
Total originated loans		478,672		12,210		19,310		-		510,192
Acquired Loans
Commercial and industrial		22,728		-		43		-		22,771
Commercial real estate - non-owner occupied		88,264		2,953		1,074		-		92,291
Commercial real estate - owner occupied		45,603		-		1,067		-		46,670
Commercial real estate - construction		5,976		-		371		-		6,347
Total acquired loans		162,571		2,953		2,555		-		168,079
Total Loans

Commercial and industrial		293,091		2,301		5,551		-		300,943	$	260,216	$	767	$	3,187	$	-	$	264,170
Commercial real estate - non-owner occupied		175,523		8,296		7,975		-		191,794		285,455		14,939		6,143		-		306,537
Commercial real estate - owner occupied		163,639		4,312		7,370		-		175,321		224,147		7,223		16,193		-		247,563
Commercial real estate - construction		8,990		254		969		-		10,213		12,081		-		-		-		12,081
Total commercial	$	641,243	$	15,163	$	21,865	$	-	$	678,271	$	781,899	$	22,929	$	25,523	$	-	$	830,351

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity



	September 30, 2020						September 30, 2021
(dollars in thousands)	Performing		Non-performing		Total		Performing		Non-performing		Total
Consumer
Originated Loans
Home equity installment	$	34,442	$	33	$	34,475
Home equity line of credit		46,641		430		47,071
Auto loans		98,872		20		98,892
Direct finance leases ⁽¹⁾		17,622		81		17,703
Other		9,101		-		9,101
Total originated loans		206,678		564		207,242
Acquired Loans
Home equity installment		6,254		-		6,254
Home equity line of credit		5,698		-		5,698
Auto loans		197		-		197
Other		378		-		378
Total acquired loans		12,527		-		12,527
Total Loans and Leases
Home equity installment		40,696		33		40,729	$	47,304	$	27	$	47,331
Home equity line of credit		52,339		430		52,769		53,650		97		53,747
Auto loans		99,069		20		99,089		120,920		160		121,080
Direct finance leases ⁽¹⁾		17,622		81		17,703		22,349		-		22,349
Other		9,479		-		9,479		7,700		1		7,701
Total consumer		219,205		564		219,769		251,923		285		252,208
Residential
Originated Loans
Real estate		177,777		747		178,524
Construction		18,056		-		18,056
Total originated loans		195,833		747		196,580
Acquired Loans
Real estate		42,651		-		42,651
Construction		432		-		432
Total acquired loans		43,083		-		43,083
Total Loans
Real estate		220,428		747		221,175		271,066		694		271,760
Construction		18,488		-		18,488		34,519		-		34,519
Total residential		238,916		747		239,663		305,585		694		306,279
Total consumer & residential	$	458,121	$	1,311	$	459,432	$	557,508	$	979	$	558,487

⁽¹⁾Net of unearned lease revenue of ~~$1.1~~$1.3 million.

~~Table Of Contents~~

Commercial credit exposure

Credit risk profile by creditworthiness category


	December 31, 2019										December 31, 2020
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total		Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	115,585	$	2,061	$	4,948	$	-	$	122,594	$	272,889	$	4,162	$	3,706	$	-	$	280,757
Commercial real estate - non-owner occupied		92,016		1,360		6,425		-		99,801		179,311		6,445		6,387		-		192,143
Commercial real estate - owner occupied		121,887		2,065		6,606		-		130,558		167,873		3,241		8,809		-		179,923
Commercial real estate - construction		3,687		17		950		-		4,654		8,635		1,233		363		-		10,231
Total commercial	$	333,175	$	5,503	$	18,929	$	-	$	357,607	$	628,708	$	15,081	$	19,265	$	-	$	663,054

‎

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Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity


	December 31, 2019						December 31, 2020
(dollars in thousands)	Performing		Non-performing		Total		Performing		Non-performing		Total

Consumer
Home equity installment	$	36,566	$	65	$	36,631	$	40,086	$	61	$	40,147
Home equity line of credit		46,988		294		47,282		49,330		395		49,725
Auto loans		105,854		16		105,870		98,359		27		98,386
Direct finance leases⁽²⁾		15,452		-		15,452		18,875		61		18,936
Other		5,634		-		5,634		7,602		-		7,602
Total consumer		210,494		375		210,869		214,252		544		214,796
Residential
Real estate		166,158		1,006		167,164		217,718		727		218,445
Construction		17,770		-		17,770		23,357		-		23,357
Total residential		183,928		1,006		184,934		241,075		727		241,802
Total consumer & residential	$	394,422	$	1,381	$	395,803	$	455,327	$	1,271	$	456,598

⁽²⁾Net of unearned lease revenue of ~~$0.9~~$1.2 million.

Allowance for loan losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows:

identification of specific impaired loans by loan category;

identification of specific loans that are not impaired, but have an identified potential for loss;

calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;

application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.

Qualitative factor adjustments include:

olevels of and trends in delinquencies and non-accrual loans;

olevels of and trends in charge-offs and recoveries;

otrends in volume and terms of loans;

ochanges in risk selection and underwriting standards;

ochanges in lending policies and legal and regulatory requirements;

oexperience, ability and depth of lending management;

onational and local economic trends and conditions; and

ochanges in credit concentrations.

~~Table Of Contents~~

Allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans. C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The credit risk grades for the C&I and CRE loan portfolios are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. An unallocated component 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.

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Each quarter, management performs an assessment of the allowance. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

Information related to the change in the allowance and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows:



As of and for the nine months ended September 30, 2020
As of and for the nine months ended September 30, 2021														As of and for the nine months ended September 30, 2021
	Commercial &		Commercial					Residential						Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total		industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,484	$	3,933	$	2,013		$	2,278	$	39	$	9,747	$	2,407	$	6,383	$	2,552		$	2,781	$	79	$	14,202
Charge-offs		(265)		(410)		(184)			(35)		-		(894)		(120)		(209)		(110)			(43)		-		(482)
Recoveries		24		22		93			192		-		331		20		241		70			-		-		331
Provision		605		2,298		350			435		12		3,700		134		870		(66)			275		337		1,550
Ending balance	$	1,848	$	5,843	$	2,272		$	2,870	$	51	$	12,884	$	2,441	$	7,285	$	2,446		$	3,013	$	416	$	15,601
Ending balance: individually evaluated for impairment	$	128	$	779	$	62		$	156	$	-	$	1,125	$	19	$	857	$	5		$	89	$	-	$	970
Ending balance: collectively evaluated for impairment	$	1,720	$	5,064	$	2,210		$	2,714	$	51	$	11,759	$	2,422	$	6,428	$	2,441		$	2,924	$	416	$	14,631
Loans Receivables:
Ending balance ⁽²⁾	$	300,943	$	377,328	$	219,769	⁽¹⁾	$	239,663	$	-	$	1,137,703	$	264,170	$	566,181	$	252,208	⁽¹⁾	$	306,279	$	-	$	1,388,838
Ending balance: individually evaluated for impairment	$	418	$	4,872	$	483		$	747	$	-	$	6,520	$	259	$	4,100	$	173		$	694	$	-	$	5,226
Ending balance: collectively evaluated for impairment	$	300,525	$	372,456	$	219,286		$	238,916	$	-	$	1,131,183	$	263,911	$	562,081	$	252,035		$	305,585	$	-	$	1,383,612

⁽¹⁾ Net of unearned lease revenue of ~~$1.1~~$1.3 million. ⁽²⁾ Includes ~~($37 thousand)~~$1.9 million of net deferred loan ~~fees.~~costs.



As of and for the three months ended September 30, 2020
As of and for the three months ended September 30, 2021													As of and for the three months ended September 30, 2021
	Commercial &		Commercial				Residential						Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total		industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,467	$	5,346	$	2,146	$	2,688	$	24	$	11,671	$	2,324	$	7,228	$	2,497	$	3,070	$	126	$	15,245
Charge-offs		(5)		(246)		(69)		(4)		-		(324)		(14)		(77)		(28)		-		-		(119)
Recoveries		6		19		12		-		-		37		5		6		14		-		-		25
Provision		380		724		183		186		27		1,500		126		128		(37)		(57)		290		450
Ending balance	$	1,848	$	5,843	$	2,272	$	2,870	$	51	$	12,884	$	2,441	$	7,285	$	2,446	$	3,013	$	416	$	15,601

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As of and for the year ended December 31, 2019
As of and for the year ended December 31, 2020
	Commercial &		Commercial					Residential						Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total		industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,432	$	3,901	$	2,548		$	1,844	$	22	$	9,747	$	1,484	$	3,933	$	2,013		$	2,278	$	39	$	9,747
Charge-offs		(184)		(597)		(398)			(330)		-		(1,509)		(372)		(465)		(296)			(35)		-		(1,168)
Recoveries		32		317		67			8		-		424		26		30		120			197		-		373
Provision		204		312		(204)			756		17		1,085		1,269		2,885		715			341		40		5,250
Ending balance	$	1,484	$	3,933	$	2,013		$	2,278	$	39	$	9,747	$	2,407	$	6,383	$	2,552		$	2,781	$	79	$	14,202
Ending balance: individually evaluated for impairment	$	221	$	426	$	87		$	174	$	-	$	908	$	213	$	790	$	52		$	151	$	-	$	1,206
Ending balance: collectively evaluated for impairment	$	1,263	$	3,507	$	1,926		$	2,104	$	39	$	8,839	$	2,194	$	5,593	$	2,500		$	2,630	$	79	$	12,996
Loans Receivables:
Ending balance⁽²⁾	$	122,594	$	235,013	$	210,869	⁽¹⁾	$	184,934	$	-	$	753,410	$	280,757	$	382,297	$	214,796	⁽¹⁾	$	241,802	$	-	$	1,119,652
Ending balance: individually evaluated for impairment	$	336	$	2,948	$	375		$	1,006	$	-	$	4,665	$	590	$	4,540	$	483		$	727	$	-	$	6,340
Ending balance: collectively evaluated for impairment	$	122,258	$	232,065	$	210,494		$	183,928	$	-	$	748,745	$	280,167	$	377,757	$	214,313		$	241,075	$	-	$	1,113,312

⁽¹⁾ Net of unearned lease revenue of ~~$0.9~~$1.2 million. ⁽²⁾ Includes ~~$3.0~~$1.7 million of net deferred loan costs.



As of and for the nine months ended September 30, 2019
As of and for the nine months ended September 30, 2020													As of and for the nine months ended September 30, 2020
	Commercial &		Commercial				Residential						Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total		industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,432	$	3,901	$	2,548	$	1,844	$	22	$	9,747	$	1,484	$	3,933	$	2,013	$	2,278	$	39	$	9,747
Charge-offs		(131)		(531)		(255)		(330)		-		(1,247)		(265)		(410)		(184)		(35)		-		(894)
Recoveries		17		28		58		8		-		111		24		22		93		192		-		331
Provision		(42)		377		(268)		716		47		830		605		2,298		350		435		12		3,700
Ending balance	$	1,276	$	3,775	$	2,083	$	2,238	$	69	$	9,441	$	1,848	$	5,843	$	2,272	$	2,870	$	51	$	12,884



As of and for the three months ended September 30, 2019
As of and for the three months ended September 30, 2020													As of and for the three months ended September 30, 2020
	Commercial &		Commercial				Residential						Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total		industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,409	$	3,980	$	2,088	$	2,007	$	11	$	9,495	$	1,467	$	5,346	$	2,146	$	2,688	$	24	$	11,671
Charge-offs		(2)		(62)		(79)		(277)		-		(420)		(5)		(246)		(69)		(4)		-		(324)
Recoveries		3		24		19		-		-		46		6		19		12		-		-		37
Provision		(134)		(167)		55		508		58		320		380		724		183		186		27		1,500
Ending balance	$	1,276	$	3,775	$	2,083	$	2,238	$	69	$	9,441	$	1,848	$	5,843	$	2,272	$	2,870	$	51	$	12,884

Direct finance leases

On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and subsequent related updates to revise the accounting for leases. Lessor accounting was largely unchanged as a result of the standard. Additional disclosures required under the standard are included in this section and in Footnote 12, “Leases”.

The Company originates direct finance leases through 2 automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was ~~$5.8~~$7.2 million and ~~$4.7~~$6.0 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to ~~$11.9~~$15.1 million and ~~$10.8~~$12.9 million at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, and are included in the carrying value of direct finance leases.

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The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:



(dollars in thousands)	Amount		Amount

2020	$	1,684
2021		7,094	$	1,656
2022		4,522		7,136
2023		3,839		5,933
2024		1,566		7,725
2025 and thereafter		90
2025				1,117
2026 and thereafter				94
Total future minimum lease payments receivable		18,795		23,661
Less: Unearned income		(1,092)		(1,312)
Undiscounted cash flows to be received	$	17,703	$	22,349

6. Earnings per share

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards. The Company maintains 2 active share-based compensation plans that may generate additional potentially dilutive common shares. For granted and unexercised stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued SSARs were exercised and converted into common stock. As of the three and nine months ended September 30, ~~2020,~~2021, there were ~~23,638~~26,346 and ~~23,637~~29,378 potentially dilutive shares related to issued and unexercised SSARs compared to ~~32,589~~23,638 and ~~30,805~~23,637 for the same ~~2019~~2020 periods, respectively. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were ~~4,981~~12,515 and ~~3,435~~11,345 potentially dilutive shares related to unvested restricted share grants as of the three and nine months ended September 30, ~~2020~~2021 compared to ~~10,412~~4,981 and ~~9,766~~3,435 for the same ~~2019~~2020 periods, respectively.

In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock. Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock. Proceeds include amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings. The Company does not consider awards from share-based grants in the computation of basic EPS.

The following table illustrates the data used in computing basic and diluted EPS for the periods indicated:



	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders	$	4,977	$	3,058	$	7,862	$	8,862	$	4,859	$	4,977	$	16,222	$	7,862
Weighted-average common shares outstanding		4,977,750		3,781,500		4,454,762		3,778,936		5,643,897		4,977,750		5,212,500		4,454,762
Basic EPS	$	1.00	$	0.82	$	1.76	$	2.35	$	0.86	$	1.00	$	3.11	$	1.76

Diluted EPS:
Net income available to common shareholders	$	4,977	$	3,058	$	7,862	$	8,862	$	4,859	$	4,977	$	16,222	$	7,862
Weighted-average common shares outstanding		4,977,750		3,781,500		4,454,762		3,778,936		5,643,897		4,977,750		5,212,500		4,454,762
Potentially dilutive common shares		28,619		43,001		27,072		40,571		38,861		28,619		40,723		27,072
Weighted-average common and potentially dilutive shares outstanding		5,006,369		3,824,501		4,481,834		3,819,507		5,682,758		5,006,369		5,253,223		4,481,834
Diluted EPS	$	0.99	$	0.80	$	1.75	$	2.32	$	0.85	$	0.99	$	3.09	$	1.75

7. Stock plans

The Company has 2 stock-based compensation plans (the stock compensation plans) from which it can grant stock-based compensation awards and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance. The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. The Company’s stock compensation plans were shareholder-approved and permit the grant of share-based compensation awards to its employees and directors. The Company believes that the stock-based compensation plans will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock. In return, the Company hopes to secure, retain and

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motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders. In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.

At the 2012 annual shareholders’ meeting, the Company’s shareholders approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans). Unless terminated by the Company’s board of directors, the 2012 stock incentive plans will expire on and no stock-based awards shall be granted after the year ~~2022.~~2022.

In each of the 2012 stock incentive plans, the Company has reserved 750,000 shares of its no~~-par~~no-par common stock for future issuance. The Company recognizes share-based compensation expense over the requisite service or vesting period. During 2015, the Company created a Long-Term Incentive Plan (LTIP) that awarded restricted stock and stock-settled stock appreciation rights (SSARs) to senior officers based on the attainment of performance goals. The service requirement was the participant’s continued employment throughout the LTIP with a three year vesting period. ~~Prior to the 2020 grants,~~Under this plan, the restricted stock had a two year post vesting holding period requirement. The SSAR awards have a ten year term from the date of each grant.

During the first quarter of ~~2019,~~2021, the Company approved a ~~1 year~~1-year LTIP and awarded restricted stock ~~and SSARs~~ to senior officers and managers in February ~~2019~~and March 2021 based on ~~2018~~2020 performance.

During the first quarter of 2020, the Company approved a ~~1 year~~1-year LTIP and awarded restricted stock to senior officers and managers in February and March 2020 based on 2019 performance. ~~During the second quarter of 2020, 500 shares of restricted stock were granted to 1 new employee after the merger.~~

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended September 30, ~~2020~~2021 and ~~2019~~2020 under the 2012 stock incentive plans:



	September 30, 2020				September 30, 2019				September 30, 2021				September 30, 2020
			Weighted-				Weighted-				Weighted-				Weighted-
	Shares		average grant		Shares		average grant		Shares		average grant		Shares		average grant
	granted		date fair value		granted		date fair value		granted		date fair value		granted		date fair value

Director plan	6,000	⁽³⁾	$	56.63	5,600	⁽²⁾	$	54.69	12,500	⁽²⁾	$	52.00	6,000	⁽²⁾	$	56.63
Omnibus plan	11,761	⁽³⁾		55.06	7,251	⁽²⁾		54.69	13,552	⁽³⁾		52.00	11,761	⁽³⁾		55.06
Omnibus plan	50	⁽¹⁾		57.62	50	⁽¹⁾		58.08	50	⁽¹⁾		58.17	50	⁽¹⁾		57.62
Omnibus plan	500	⁽²⁾		34.02	-			-	36	⁽³⁾		58.17	500	⁽²⁾		34.02
Omnibus plan									476	⁽²⁾		52.62	-			-
Total	18,311		$	55.00	12,901		$	54.70	26,614		$	52.03	18,311		$	55.00

⁽¹⁾ Vest after 1 year ⁽²⁾Vest after 3 years – 33% each year ⁽³⁾ Vest fully after 3 years

The fair value of the shares granted in ~~2020~~2021 was calculated using the grant date stock price.

A summary of the status of the Company’s non-vested restricted stock as of and changes during the period indicated are presented in the following table:



	2012 Stock incentive plans					2012 Stock incentive plans
	Director	Omnibus	Total		Weighted- average grant date fair value	Director	Omnibus	Total		Weighted- average grant date fair value
Non-vested balance at December 31, 2019	11,200	15,961	27,161	$	49.48
Non-vested balance at December 31, 2020						9,402	20,675	30,077	$	53.36
Granted	6,000	12,311	18,311		55.00	12,500	14,114	26,614		52.03
Forfeited						-	(439)	(439)		52.66
Vested	(7,798)	(7,597)	(15,395)		48.47	(6,982)	(6,227)	(13,209)		51.23
Non-vested balance at September 30, 2020	9,402	20,675	30,077	$	53.36
Non-vested balance at September 30, 2021						14,920	28,123	43,043	$	53.20

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A summary of the status of the Company’s SSARs as of and changes during the period indicated are presented in the following table:



	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)
Outstanding December 31, 2019	97,264	$	9.47	7.5
Outstanding December 31, 2020					97,264	$	9.47	6.5
Granted	-		-	-	-
Exercised	-		-	-	(2,932)		3.48
Forfeited	-		-	-	-
Outstanding September 30, 2020	97,264	$	9.47	6.7
Outstanding September 30, 2021					94,332	$	9.66	5.8

Of the SSARs outstanding at September 30, ~~2020, 76,897~~2021, 90,639 vested and were exercisable. SSARs vest over a three year period – 33% per year.

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During ~~2019,~~the first quarter of 2021, there were ~~3,059~~2,932 SSARs exercised. The intrinsic value recorded for these SSARs was ~~$10,631.~~$10,190. The tax deduction realized from the exercise of these SSARs was ~~$108,134~~$125,810 resulting in a tax benefit of ~~$22,708.~~$26,420. There were 0 SSARs exercised during 2020.

Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 and the unrecognized stock-based compensation expense as of September 30, ~~2020:~~2021:



		Three months ended September 30,			Nine months ended September 30,					Three months ended September 30,			Nine months ended September 30,
(dollars in thousands)	2020		2019		2020			2019	2021		2020		2021			2020
Stock-based compensation expense:
Director stock incentive plan	$	66	$	60	$	367	$	179	$	170	$	66	$	339	$	367
Omnibus stock incentive plan		191		154		550		457		163		191		477		550
Employee stock purchase plan		-		-		27		107		-		-		44		27
Total stock-based compensation expense	$	257	$	214	$	944	$	743	$	333	$	257	$	860	$	944

In addition, during the nine months ended September 30, 2021, the Company reversed accruals of ($10 thousand) in stock-based compensation expense for restricted stock and SSARs awarded under the Omnibus Plan. During the three and nine months ended September 30, 2020, the Company reversed accruals of ($30 thousand) and ($93 thousand) in stock-based compensation expense for restricted stock and SSARs awarded under the Omnibus Plan. ~~During the three and nine months ended September 30, 2019, the Company reversed accruals of ($36 thousand) and ($106 thousand) in stock-based compensation expense.~~


	As of
(dollars in thousands)	September 30, ~~2020~~2021
Unrecognized stock-based compensation expense:
Director plan	$	~~337~~581
Omnibus plan		~~900~~944
Total unrecognized stock-based compensation expense	$	~~1,237~~1,525

The unrecognized stock-based compensation expense as of September 30, ~~2020~~2021 will be recognized ratably over the periods ended ~~January 2023~~February 2024 and ~~April 2023~~July 2024 for the Director Plan and the Omnibus Plan, respectively.

In addition to the 2012 stock incentive plans, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 165,000 shares of its un-issued capital stock for issuance under the plan. The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company. Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined. As of September 30, ~~2020, 84,904~~2021, 89,642 shares have been issued under the ESPP. The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance. The Company recognizes compensation expense on its ESPP on the date the shares are purchased, and it is included as a component of salaries and employee benefits in the consolidated statements of income.

8. Fair value measurements

The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements. The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value.

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Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting. Thus, the Company uses fair value for AFS securities. Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, other real estate owned (ORE) and other repossessed assets.

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The following table represents the carrying amount and estimated fair value of the Company’s financial instruments as of the periods indicated:


September 30, 2020
September 30, 2021											September 30, 2021
					Quoted prices		Significant		Significant						Quoted prices		Significant		Significant
					in active		other		other						in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs		Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)		amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	131,778	$	131,778	$	131,778	$	-	$	-	$	167,386	$	167,386	$	167,386	$	-	$	-
Available-for-sale debt securities		340,310		340,310		-		340,310		-		686,926		686,926		-		686,926		-
Restricted investments in bank stock		2,766		2,766		-		2,766		-		3,321		3,321		-		3,321		-
Loans and leases, net		1,124,819		1,135,195		-		-		1,135,195		1,373,237		1,392,879		-		-		1,392,879
Loans held-for-sale		13,307		13,840		-		13,840		-		47,159		48,227		-		48,227		-
Accrued interest receivable		5,703		5,703		-		5,703		-		7,178		7,178		-		7,178		-
Financial liabilities:
Deposits with no stated maturities		1,374,606		1,374,606		-		1,374,606		-		2,014,501		2,014,501		-		2,014,501		-
Time deposits		142,517		143,172		-		143,172		-		148,949		148,872		-		148,872		-
FHLB advances		5,000		5,374		-		5,374		-
Secured borrowings												16,885		16,885		-		-		16,885
Accrued interest payable		447		447		-		447		-		175		175		-		175		-


December 31, 2019
December 31, 2020											December 31, 2020
					Quoted prices		Significant		Significant						Quoted prices		Significant		Significant
					in active		other		other						in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs		Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)		amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	15,663	$	15,663	$	15,663	$	-	$	-	$	69,346	$	69,346	$	69,346	$	-	$	-
Available-for-sale debt securities		185,117		185,117		-		185,117		-		392,420		392,420		-		392,420		-
FHLB stock		4,383		4,383		-		4,383		-
Restricted investments in bank stock												2,813		2,813		-		2,813		-
Loans and leases, net		743,663		735,657		-		-		735,657		1,105,450		1,116,711		-		-		1,116,711
Loans held-for-sale		1,643		1,660		-		1,660		-		29,786		30,858		-		30,858		-
Accrued interest receivable		3,281		3,281		-		3,281		-		5,712		5,712		-		5,712		-
Financial liabilities:
Deposits with no stated maturities		719,526		719,526		-		719,526		-		1,381,722		1,381,722		-		1,381,722		-
Time deposits		116,211		115,993		-		115,993		-		127,783		128,200		-		128,200		-
Short-term borrowings		37,839		37,839		-		37,839		-
FHLB advances		15,000		15,430		-		15,430		-		5,000		5,348		-		5,348		-
Accrued interest payable		644		644		-		644		-		337		337		-		337		-

The carrying value of short-term financial instruments, as listed below, approximates their fair value. These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand:

Cash and cash equivalents;

Non-interest bearing deposit accounts;

Savings, interest-bearing checking and money market accounts and

Short-term borrowings.

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Securities: Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

Originated loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected cash flows discounted using the exit price notion. The discount rate is based upon current offering rates, with an additional discount for expected potential charge-offs. Additionally, an environmental general credit risk adjustment is subtracted from the net present value to arrive at the total estimated fair value of the accruing loan portfolio.

The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment

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included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

Non-accrual loans: Loans which the Company has measured as non-accruing are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. These loans are classified within Level 3 of the fair value hierarchy. The fair value consists of loan balances less the valuation allowance.

Acquired loans: Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. For more information on the calculation of the fair value of acquired loans, see Footnote 9, “Acquisition.”

Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).

Certificates of deposit: The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities.

FHLB advances: Fair value is estimated using the rates currently offered for similar borrowings.

The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:



			Quoted prices								Quoted prices
			in active		Significant other		Significant other				in active		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs		Total carrying value		markets		observable inputs		unobservable inputs
(dollars in thousands)	September 30, 2020		(Level 1)		(Level 2)		(Level 3)		September 30, 2021		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	18,874	$	-	$	18,874	$	-	$	111,515	$	-	$	111,515	$	-
Obligations of states and political subdivisions		164,942		-		164,942		-		336,465		-		336,465		-
MBS - GSE residential		156,494		-		156,494		-		238,946		-		238,946		-
Total available-for-sale debt securities	$	340,310	$	-	$	340,310	$	-	$	686,926	$	-	$	686,926	$	-



			Quoted prices								Quoted prices
			in active		Significant other		Significant other				in active		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs		Total carrying value		markets		observable inputs		unobservable inputs
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)		December 31, 2020		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	6,159	$	-	$	6,159	$	-	$	45,447	$	-	$	45,447	$	-
Obligations of states and political subdivisions		54,718		-		54,718		-		199,713		-		199,713		-
MBS - GSE residential		124,240		-		124,240		-		147,260		-		147,260		-
Total available-for-sale debt securities	$	185,117	$	-	$	185,117	$	-	$	392,420	$	-	$	392,420	$	-

Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.

There were 0 changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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The following table illustrates the financial instruments newly measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:



			Quoted prices in		Significant other		Significant other				Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs		Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at September 30, 2020		(Level 1)		(Level 2)		(Level 3)		at September 30, 2021		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	3,607	$	-	$	-	$	3,607	$	2,724	$	-	$	-	$	2,724
Other real estate owned		249		-		-		249		567		-		-		567
Other repossessed assets		11		-		-		11
Total	$	3,867	$	-	$	-	$	3,867	$	3,291	$	-	$	-	$	3,291

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			Quoted prices in		Significant other		Significant other				Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs		Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2019		(Level 1)		(Level 2)		(Level 3)		at December 31, 2020		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	1,579	$	-	$	-	$	1,579	$	2,930	$	-	$	-	$	2,930
Other real estate owned		350		-		-		350		182		-		-		182
Other repossessed assets		20		-		-		20
Total	$	1,949	$	-	$	-	$	1,949	$	3,112	$	-	$	-	$	3,112

From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets. The fair value of impaired loans was calculated using the value of the impaired loans with an allowance less the related allowance.

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.

Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows. Both techniques include various Level 3 inputs which are not identifiable. The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value.

At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from ~~-24.61%~~-23.24% and ~~-72.48%~~-47.66% and from ~~-21.56%~~-27.04% to ~~-84.98%~~-70.66%, respectively. The weighted average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to ~~-42.68%~~-40.75% as of September 30, ~~2020~~2021 and ~~-29.11%~~-44.49% as of December 31, ~~2019,~~2020, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed. Accordingly, fair value estimates for impaired loans are classified as Level 3.

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the discounts applied to the appraised values of ORE ranged from ~~-8.00%~~-24.88% and -77.60% and from ~~-26.94%~~-21.47% and ~~-89.48%~~-77.60%, respectively. As of September 30, ~~2020,~~2021 and December 31, ~~2019,~~2020, the weighted average of discount to the appraisal values of ORE amounted to ~~-33.61%~~-25.97% and ~~-48.65%~~-31.30%, respectively.

At September 30, 2021 and December 31, 2020, there were 0 other repossessed ~~assets consisted of 2 automobiles, totaling $11 thousand. At December 31, 2019, other repossessed assets consisted of 2 automobiles, totaling $20 thousand.~~assets. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.

9. Acquisition

On ~~May~~July 1, ~~2020, Fidelity D&D Bancorp, Inc. (the “Company”)~~2021, the Company completed its previously announced acquisition of ~~MNB Corporation (“MNB”) of Bangor, Pennsylvania. MNB~~Landmark. Landmark was a 1-bank holding company organized under the laws of the Commonwealth of Pennsylvania and was headquartered in ~~Bangor,~~Pittston, PA. Its wholly owned subsidiary, ~~founded in 1890, Merchants~~Landmark Community Bank, ~~of Bangor,~~ was an independent community bank chartered under the laws of the Commonwealth of

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Pennsylvania. ~~Merchants~~Landmark Community Bank conducted full-service commercial banking services through 95 bank centers located in ~~Northampton County,~~Lackawanna and Luzerne Counties, Pennsylvania. The acquisition expanded Fidelity Deposit and Discount Bank’s full-service footprint ~~into Northampton~~in Luzerne County, ~~Pennsylvania, and the Lehigh Valley.~~Pennsylvania. The Company transacted the merger to complement the Company’s existing operations, while consistent with the Company’s strategic plan of enhancing long-term shareholder value. The fair value of total assets acquired as a result of the merger totaled ~~$451.4~~$375.5 million, loans totaled ~~$245.3~~$298.9 million and deposits totaled ~~$395.6~~$308.5 million. Goodwill recorded in the merger was ~~$6.8~~$12.6 million.

In accordance with the terms of the Reorganization Agreement, on ~~May~~July 1, ~~2020~~2021 each share of ~~MNB~~Landmark common stock was converted into the right to receive ~~1.039~~0.272 shares of the Company’s common ~~stock.~~stock and $3.26 in cash. As a result of the merger, the Company issued ~~1,176,970~~647,990 shares of its common stock, valued at ~~$45.4~~$35.1 million, and ~~cash~~$7.8 million in ~~exchange for fractional shares~~cash based upon ~~$43.77,~~$54.10, the determined market price

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of the Company’s common stock in accordance with the Reorganization Agreement. The results of the combined entity’s operations are included in the Company’s Consolidated Financial Statements from the date of acquisition. The acquisition of ~~MNB is being~~Landmark was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the acquisition date. ~~Fair values~~The deferred taxes are preliminary and subject to refinement for up to one year after the closing date of the acquisition.

Effective July 1, 2021, in connection with the merger and pursuant to the terms of the Reorganization Agreement, Paul C. Woelkers was appointed as a Class C Director of Fidelity’s Board of Directors. Mr. Woelkers was also appointed as a Director of Fidelity Bank’s Board of Directors.

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The following table summarizes the consideration paid for ~~MNB~~Landmark and the fair value of assets acquired, and liabilities assumed as of the acquisition date:


Purchase Price Consideration in Common Stock
~~MNB~~Landmark shares ~~outstanding~~settled for stock			~~1,132,873~~2,382,695
Exchange ratio			~~1.039~~0.272
Total FDBC shares issued			~~1,177,055~~647,990
Value assigned to FDBC common share (06/30/2021 closing price)		$	54.10

~~Shares paid in~~Purchase price assigned to Landmark common shares exchanged for FDBC common shares		$	35,056,259

Purchase Price Consideration - Cash for Common Stock
Landmark shares exchanged for cash, ~~for~~excluding fractional shares			~~84.71~~2,382,695
Cash consideration (per ~~MNB~~Landmark share)		$	~~43.77~~3.26
Cash portion of purchase price		$	7,767,586

Cash portion of purchase price (cash ~~in lieu of~~paid fractional shares)		$	~~3,708~~5,559

Cash for outstanding Landmark stock options		$	69,250

Total ~~FDBC shares issued~~			~~1,176,970~~
~~FDBC’s share price for purposes of calculation~~		$	~~38.58~~
~~Equity portion of purchase price~~		$	~~45,407,503~~
~~Total~~ consideration paid		$	~~45,411,210~~42,898,654

Allocation of Purchase Price	In thousands
Total Purchase Price		$	~~45,411~~42,899

Estimated Fair Value of Assets Acquired
Cash and cash equivalents	~~53,004~~4,090
Investment securities	~~123,420~~
~~Loans held for sale~~	~~604~~49,430
Loans	~~244,679~~298,860
Restricted investments in bank stock	~~692~~1,186
Premises and equipment	~~6,907~~3,405
Lease property under finance leases	1,188
Core deposit intangible asset	~~1,973~~597
Other real estate owned	488
Other assets	~~13,264~~11,629
Total assets acquired	~~444,543~~370,873

Estimated Fair Value of Liabilities Assumed
Non-interest bearing deposits	~~118,822~~100,472
Interest bearing deposits	~~276,816~~208,057
Short-term borrowings	2,224
FHLB borrowings	~~7,627~~4,602
Secured borrowings	20,619
Finance lease obligation	1,188
Other liabilities	~~2,710~~3,387
Total liabilities assumed	~~405,975~~340,549

Net Assets Acquired			~~38,568~~30,324
Goodwill Recorded in Acquisition		$	~~6,843~~12,575

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Pursuant to the accounting requirements, the ~~Corporation~~Company assigned a fair value to the assets acquired and liabilities assumed of ~~MNB.~~Landmark. ASC 820 defines fair value as “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.”

The assets acquired and liabilities assumed in the acquisition of ~~MNB~~Landmark were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year

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after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, any material adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition. The items most susceptible to adjustment are the fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition. Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Investment securities available-for-sale

The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using Level 1 and Level 2 inputs in the fair value hierarchy. The fair values were determined using executable market bids or independent pricing services. The ~~Corporation’s~~Company’s independent pricing service utilized matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather relying on the security’s relationship to other benchmark quoted prices. Management reviewed the data and assumptions used in pricing the securities. ~~A fair value premium of $3.9 million was recorded and will be amortized over the estimated life of the investments using the interest rate method.~~

Loans

Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the ~~Corporation~~Company has prepared 3 separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820-10 for the acquired loan portfolio. The 3-separate fair valuation methodology employed are: 1) an interest rate loan fair value adjustment, 2) a general credit fair value adjustment, and 3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures. The acquired loans were recorded at fair value at the acquisition date without carryover of ~~MNB’s~~Landmark’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of ~~$250.3~~$309.8 million.

The table below illustrates the fair value adjustments made to the amortized cost basis in order to present the fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the ~~Corporation’s~~Company’s expectations of future cash flows for each respective loan.


Dollars in thousands
Gross amortized cost basis at ~~April~~June 30, ~~2020~~2021	$	~~250,347~~309,767
Interest rate fair value adjustment on pools of homogeneous loans		~~3,335~~(1,855)
Credit fair value adjustment on pools of homogeneous loans		~~(6,863)~~(7,915)
Credit fair value adjustment on purchased credit impaired loans		~~(1,536)~~(1,137)
Fair value of acquired loans at ~~April~~June 30, ~~2020~~2021	$	~~245,283~~298,860

For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral, and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value ~~premium~~discount of ~~$3.3~~$1.9 million. Additionally, for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed by the Company, ~~MNB~~Landmark and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents the potential discount which may arise due to general credit and economic factors. A credit fair value discount of ~~$6.9~~$7.9 million was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.

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The following table presents the acquired purchased credit impaired loans receivable at the acquisition date:


Dollars in thousands
Contractual principal and interest at acquisition	$	~~3,778~~5,306
~~Nonaccretable~~Non-accretable difference		~~(2,214)~~(1,691)
Expected cash flows at acquisition		~~1,564~~3,615
Accretable yield		~~(248)~~(588)
Fair value of purchased impaired loans	$	~~1,316~~3,027

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Premises and Equipment

The Company assumed leases on 42 branch facilities of ~~MNB.~~Landmark. The Company ~~prepared an internal analysis to compare~~compared the lease contract obligations to comparable market rental ~~rates.~~rates determined by third-party licensed appraisers. The Company believed that the leased contract rates were in a reasonable range of market rental rates and concluded that no fair market value adjustment related to leasehold interest was necessary. The fair value of ~~MNB’s~~Landmark’s premises, including land, buildings and improvements, was determined based upon independent third-party appraisals performed by ~~the Company that the book value will be used as a proxy for fair value therefore no fair value adjustment is warranted.~~licensed appraisers or sales agreements.

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a discounted cash flow (present value) analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the higher cost of alternative funding sources available through national brokered CD offering rates and FHLB advance rates. The projected cash flows were developed using projected deposit attrition rates based on the average rate experienced by both institutions. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.

Time Deposits

The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit premium is being amortized into income on a level yield amortization method over the contractual life of the deposits.

Secured Borrowings

The Company identified 19 sold participations acquired from Landmark that did not meet the criteria for sales treatment under ASC 860-10-40 and should be recorded as obligations from secured borrowing arrangements. The Company has estimated the fair value of these obligations using an income approach based on the expected cash flows method on a pooled basis using Level 3 assumptions.

FHLB Borrowings

The Company assumed FHLB borrowings in connection with the merger. The fair value of FHLB Borrowings was determined by using FHLB prepayment penalty as a proxy for the fair value adjustment. The Company decided to pay off the borrowing post acquisition date therefore no amortization is warranted.

Supplemental Pro Forma Financial Information

The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the three and nine months ended September 30, 2021 and 2020, respectively, as if Landmark had been acquired on January 1, 2020. This unaudited pro forma information combines the historical results of Landmark with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision expense resulting from recording loan assets at fair value, cost savings or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.


	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Net interest income	$	17,174	$	15,902	$	51,174	$	40,920
Other income		4,009		4,619		14,774		10,876
Total net interest income and other income	$	21,183	$	20,521	$	65,948	$	51,796

Net income		6,598		5,839		21,446		12,170

Basic earnings per common share	$	1.17	$	1.04	$	3.80	$	2.39
Diluted earnings per common share	$	1.16	$	1.03	$	3.77	$	2.37

Merger-related expenses

For the three and nine months ended September 30, 2021, the Company incurred $2.2 million and $3.1 million in merger-related expenses related to the merger with Landmark, primarily consisting of data processing, salaries and employee benefits, and professional fee expenses. The Company expects to incur another $0.6 million in non-recurring costs to integrate systems and dispose of premises and equipment in the last quarter of 2021. For the three and nine months ended September 30, 2020, the Company incurred merger-related expenses related to the merger with MNB totaling $0.2 million and $2.4 million, primarily consisting of professional fees, salaries and employee benefits and data processing fees.

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10. Employee Benefits

Bank-Owned Life Insurance (BOLI)

The Company has purchased single premium BOLI policies on certain officers. The policies are recorded at their cash surrender values. Increases in cash surrender values are included in non-interest income in the consolidated statements of income. ~~In March 2019,~~As a result of the acquisition of MNB, the Company added BOLI with a value of $9.3 million during 2020. During the fourth quarter of 2020, the Company purchased an additional ~~$2.0~~$11.0 million of BOLI. As a result of the acquisition of Landmark, the Company added BOLI with a value of ~~$9.3 million.~~$7.2 million during 2021. The policies’ cash surrender value totaled ~~$33.1~~$52.4 million and ~~$23.3~~$44.3 million, respectively, as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 and is reflected as an asset on the consolidated balance sheets. For the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the Company has recorded income of ~~$577~~$899 thousand and ~~$480~~$577 thousand, respectively.

Officer Life Insurance

In 2017, the Bank entered into separate split dollar life insurance arrangements (Split Dollar Agreements) with 11 officers. This plan provides each officer a specified death benefit should the officer die while in the Bank’s employ. The Bank paid the insurance premiums in March 2017 and the arrangements were effective in March 2017. In March 2019, the Bank entered into a new Split Dollar Agreement with 1 officer. In January 2021, the Bank entered into Split Dollar Agreements with 15 officers. The Bank owns the policies and all cash values thereunder. Upon death of the covered employee, the agreed-upon amount of death proceeds from the policies will be paid directly to the insured’s beneficiary. As of September 30, ~~2020,~~2021, the policies had total death benefits of ~~$33.1~~$52.4 million of which $4.4 million would have been paid to the officer’s beneficiaries and the remaining ~~$28.7~~$48.0 million would have been paid to the Bank. In addition, 4 executive officers have the opportunity to retain a split dollar benefit equal to two times their highest base salary after separation from service if the vesting requirements are met. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company accrued expenses of ~~$142~~$188 thousand and ~~$107~~$154 thousand for the split dollar benefit.

Supplemental Executive Retirement plan (SERP)

On March 29, 2017, the Bank entered into separate supplemental executive retirement agreements (individually the “SERP

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Agreement”) with 5 officers, pursuant to which the Bank will credit an amount to a SERP account established on each participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2017 until retirement. On March 20, 2019, the Bank entered into a SERP Agreement with 1 officer, pursuant to which the Bank will credit an amount to a SERP account established for the participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2019 until normal retirement age. As a result of the acquisition of Landmark, the Company added $1.0 million in accrued SERP expenses to the consolidated balance sheets. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company accrued expenses of ~~$1.8~~$3.4 million and ~~$1.4~~$2.0 million in connection with the SERP.

11. Revenue Recognition

As of January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The Company has elected to use the modified retrospective approach with prior period financial statements unadjusted and presented with historical revenue recognition methods. The implementation of the new standard had no material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

The majority of the Company’s revenues are generated through interest earned on securities and loans, which is explicitly excluded from the scope of the guidance. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, loan service charges, life insurance earnings, rental income and gains/losses on the sale of loans and securities are not in the scope of the new guidance. The main types of contracts with customers that are in the scope of the new guidance are:

Service charges on deposit accounts – Deposit service charges represent fees charged by the Company for the performance obligation of providing services to a customer’s deposit account. The transaction price for deposit services includes both fixed and variable amounts based on the Company’s fee schedules. Revenue is recognized and payment is received either at a point in time for transactional fees or on a monthly basis for non-transactional fees.

Interchange fees – Interchange fees represent fees charged by the Company for customers using debit cards. The contract is between the Company and the processor and the performance obligation is the ability of customers to use debit cards to make purchases at a point in time. The transaction price is a percentage of debit card usage and the processor pays the Company and revenue is recorded throughout the month as the performance obligations are being met.

Fees from trust fiduciary activities – Trust fees represent fees charged by the Company for the management, custody and/or administration of trusts. These are mostly monthly fees based on the market value of assets in the trust account at the prior month end. Payment is generally received a few weeks after month end through a direct charge to customers’ accounts. Estate fees are recognized and charged as the Company reaches each of six different stages of the estate administration process.

Fees from financial services – Financial service fees represent fees charged by the Company for the performance obligation of providing various services for an investment account. Revenue is recognized twice monthly for fees on sales transactions and on a monthly basis for advisory fees and quarterly for trail fees.

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Gain/loss on ORE sales – Gain/loss on the sale of ORE is recognized at the closing date when the sales proceeds are received. In seller-financed ORE transactions, the contract is made subject to our normal underwriting standards and pricing. The Company does not have any obligation or right to repurchase any sales of ORE.

Contract balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before the payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company typically does not enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company did 0t have any significant contract balances.

Remaining performance obligations

The Company’s performance obligations have an original expected duration of less than one year and follow the relevant guidance for recognizing revenue over time. There is no variable consideration subject to constraint that is not included in information about transaction price.

Contract acquisition costs

~~In connection with the adoption of Topic 606, an~~An entity is required to capitalize and subsequently amortize into expense, certain incremental costs of obtaining a contract if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. ~~Upon adoption of Topic 606, the Company did 0t capitalize any contract acquisition costs.~~

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12. Leases

ASU 2016-02 Leases (Topic 842) became effective for the Company on January 1, 2019. For all operating lease contracts where the Company is lessee, a right-of-use (ROU) asset and lease liability was recorded as of the effective date. The Company assumed all renewal terms will be exercised when calculating the ROU assets and lease liabilities. For leases existing at the transition date, any prepaid or deferred rent was added to the ROU asset to calculate the lease liability. The discount rate used to calculate the present value of future payments at the transition date was the Company’s incremental borrowing rate. The Company used the FHLB fixed rate borrowing rates on December 29, 2018 as the discount rate at transition. For all classes of underlying assets, the Company has elected not to record short-term leases (leases with a term of 12 months or less) on the balance sheet when the Company is lessee. Instead, the Company will recognize the lease payment on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. For all asset classes, the Company has elected, as a lessee, not to separate nonlease components from lease components and instead to account for each separate lease component and nonlease components associated with that lease component as a single lease component.

Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contains a lease, the Company recognizes a ROU asset and a lease liability when the asset is placed in service.

The Company’s operating leases, where the Company is lessee, include property, land and equipment. As of September 30, ~~2020, 10~~2021, 11 of the Company’s branch properties and one other property were leased under operating leases. In 4 of the branch leases, the Company leases the land from an unrelated third party, and the buildings are the Company’s own capital improvement. The Company also leases 3 standalone ATMs under operating leases. Additionally, the Company has 1 property lease and 4 equipment leases classified as finance leases.

The following is an analysis of the leased property under finance leases:



		Asset Balance at
(dollars in thousands)	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020

Equipment	$	485	$	397
Property and equipment					$	1,673	$	485
Less accumulated depreciation and amortization		(179)		(117)		(308)		(202)
Leased property under finance leases, net	$	306	$	280	$	1,365	$	283

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The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of September 30, ~~2020:~~2021:


(dollars in thousands)	Amount		Amount

2020	$	25
2021		101	$	62
2022		101		247
2023		74		220
2024		17		164
2025 and thereafter		8
2025				158
2026 and thereafter				613
Total minimum lease payments ^(a)		326		1,464
Less amount representing interest ^(b)		(12)		(89)
Present value of net minimum lease payments	$	314	$	1,375

(a)The future minimum lease payments have not been reduced by estimated executory costs (such as taxes and maintenance) since this amount was deemed immaterial by management.

(b)Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate upon lease inception.

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As of September 30, ~~2020,~~2021, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem, ~~and~~ Martins Creek and Wyoming branches under the terms of operating leases. Common area maintenance is included in variable lease payments in the table below. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest and are expensed as incurred. The Bethlehem and Easton branches have variable lease payments that increase annually and are expensed as incurred.


(dollars in thousands)	September 30, 2020		September 30, 2019		September 30, 2021		September 30, 2020
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	61	$	56	$	105	$	61
Interest on lease liabilities		6		7		10		6
Operating lease cost		392		290		452		392
Short-term lease cost		14		14		30		14
Variable lease cost		(4)		33		3		(4)
Total lease cost	$	469	$	400	$	600	$	469

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	6	$	7	$	10	$	6
Operating cash flows from operating leases (Fixed payments)	$	370	$	218	$	413	$	370
Operating cash flows from operating leases (Liability reduction)	$	175	$	78	$	224	$	175
Financing cash flows from finance leases	$	60	$	54	$	103	$	60
Right-of-use assets obtained in exchange for new finance lease liabilities	$	88	$	17	$	1,188	$	88
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,338	$	5,634	$	1,644	$	1,338
Weighted-average remaining lease term - finance leases		3.36 yrs		3.92 yrs		7.39 yrs		3.36 yrs
Weighted average remaining lease term - operating leases		21.47 yrs		24.80 yrs		19.70 yrs		21.47 yrs
Weighted-average discount rate - finance leases		2.53%		3.07%		1.81%		2.53%
Weighted-average discount rate - operating leases		3.56%		3.78%		3.41%		3.56%

During the first nine months of ~~2020, $443~~2021, $547 thousand of the total lease cost is included in premises and equipment expense and $26 thousand is included in other expenses on the consolidated statements of income. Operating lease expense is recognized on a straight-line basis over the lease term. We recognized both the interest expense and amortization expense for finance leases in premises and equipment expense since the interest expense portion was immaterial.

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The future minimum lease payments for the Company’s branch network and equipment under operating leases that have lease terms in excess of one year as of September 30, ~~2020~~2021 are as follows:


(dollars in thousands)	Amount		Amount

2020	$	137
2021		526	$	157
2022		504		619
2023		508		606
2024		510		602
2025 and thereafter		8,893
2025				610
2026 and thereafter				9,192
Total future minimum lease payments		11,078		11,786
Plus variable payment adjustment		276		328
Less amount representing interest		(3,636)		(3,549)
Present value of net future minimum lease payments	$	7,718	$	8,565

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The Company leases 8several properties, where the Company is lessor, under operating leases to unrelated parties. ~~NaN~~Some of these properties are residential properties surrounding the Main Branch that the Company leases on a month-to-month basis and are considered short-term leases. ~~NaN property is under a lease that ends on November 30, 2020 and is considered a short-term lease.~~ The undiscounted cash flows to be received on an annual basis for the remaining 3three properties under long-term operating leases are as follows:


(dollars in thousands)	Amount		Amount

2020	$	50
2021		211	$	50
2022		68		104
2023		48		48
2024		51		51
2025 and thereafter		135
2025				54
2026 and thereafter				81
Total lease payments to be received	$	563	$	388

The Company also indirectly originates automobile leases classified as direct finance leases. See Footnote 5, “Loans and leases”, for more information about the Company’s direct finance leases.

Lease income recognized from direct finance leases was included in interest income from loans and leases on the consolidated statements of income. Lease income related to operating leases is included in fees and other revenue on the consolidated statements of income. The Company only receives a variable payment for taxes from one of its lessees, but the amount is immaterial and excluded from rental income. The amount of lease income recognized on the consolidated statements of income was as follows for the periods indicated:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended September 30,				For the nine months ended September 30,
(dollars in thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Lease income - direct finance leases
Interest income on lease receivables	$	181	$	168	$	526	$	519	$	201	$	181	$	596	$	526

Lease income - operating leases		60		58		171		177		60		60		188		171
Total lease income	$	241	$	226	$	697	$	696	$	261	$	241	$	784	$	697

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

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of September 30, ~~2020~~2021 compared to December 31, ~~2019~~2020 and a comparison of the results of operations for the three and nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s ~~2019~~2020 Annual Report filed on Form 10-K.

Forward-looking statements

Certain of the matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.

The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

the effects of economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of Coronavirus Disease 2019 (COVID-19) and responses thereto on current customers and the operations of the Company, specifically the effect of the economy on loan customers’ ability to repay loans;

acquisitions and integration of acquired businesses, including but not limited to, the recent ~~acquisition~~acquisitions of MNB ~~Corporation;~~Corporation (“MNB”) and its wholly-owned bank subsidiary and Landmark Bancorp Inc. (“Landmark”) and its wholly-owned bank subsidiary;

the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;

the impact of new or changes in existing laws and regulations, including the Tax Cuts and Jobs Act and Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations promulgated there under;

impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules;

governmental monetary and fiscal policies, as well as legislative and regulatory changes;

effects of short- and long-term federal budget and tax negotiations and their effect on economic and business conditions;

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;

the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;

the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;

technological changes;

the interruption or breach in security of our information systems and other technological risks and attacks resulting in failures or disruptions in customer account management, general ledger processing and loan or deposit updates and potential impacts resulting therefrom including additional costs, reputational damage, regulatory penalties, and financial losses;

acquisitions and integration of acquired businesses;

the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities;

volatilities in the securities markets;

acts of war or terrorism;

disruption of credit and equity markets; and

the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

The Company cautions readers not to place undue reliance on forward-looking statements, which reflect analyses only as of the date of this document. The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

Readers should review the risk factors described in other documents that we file or furnish, from time to time, with the Securities and Exchange Commission, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and other current reports filed or furnished on Form 8-K.

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Executive Summary

The Company is a Pennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank and trust company is The Fidelity Deposit and Discount Bank. The Company is headquartered in Dunmore, Pennsylvania. We consider Lackawanna, Northampton and Luzerne Counties our primary marketplace.

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As a leading Northeastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses. We continue to implement strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase low cost core deposits (see “Funds Provided” section of this management’s discussion and analysis). These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new business prospects. The Bank has a personal and corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand our franchise footprint, consisting presently of our ~~20-branch~~23-branch network. ~~The Company remains committed to selectively expanding branch banking and wealth management locations in Northeastern and Eastern Pennsylvania as opportunities arrive going forward.~~

On March 11, 2020, the World Health Organization declared a coronavirus, identified as COVID-19, a global pandemic. The Company began proactive initiatives in March 2020 to assist clients, Fidelity Bankers and communities impacted by the effects of the novel coronavirus pandemic. Management activated its established pandemic contingency plan response in March 2020 to ensure business continuity while assuring the health, safety and well-being of bankers, clients and the community. Special measures included:

~~Installing proper social distancing signs and markers, to include safety barriers for both bankers and clients that encourage proper separation as recommended by the CDC.~~

~~Encouraging use of online, mobile, telephone banking, night drop and ATMs to meet clients’ banking needs.~~

~~Adding resources to the Customer Care Center to manage increased call and chat volume.~~

~~Activating telecommunications capabilities to enable Fidelity Bankers to work-from-home, as appropriate.~~

~~Providing Fidelity Bankers personal protective equipment and disinfectant supplies when working on-site.~~

~~Scheduling in-person meetings by appointment only, observing the guidelines of social distancing and personal safety as recommended by health and safety officials.~~

~~Enhancing EPA approved cleaning and disinfecting protocols implemented at all locations, including utilizing ionization machines when required.~~

~~Increasing the fresh air intake and using anti-viral filters in all HVAC units, above OSHA regulations.~~

~~Conducting meetings virtually.~~

The Company incurred approximately $0.2 million in non-interest expenses during the first nine months of 2020 to implement programs and provide supplies and services in order to respond to the pandemic.

We are impacted by both national and regional economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, primarily in Lackawanna and Luzerne counties, and Eastern Pennsylvania, primarily Northampton County. ~~The U.S. economy may fall into a recession~~Rate cuts of 50 and ~~our local market area remains challenging due to~~100 basis points during the ~~impact~~first quarter of 2020 at the start of the ~~pandemic. The~~pandemic completely reversed the increase initiated by the Federal Open Market Committee (FOMC) ~~had been adjusting~~at the ~~short-term federal funds rate up for over three years ending in the first half~~end of ~~2019. The FOMC lowered the federal funds rate 75 basis points during the second half of 2019 followed by 150 basis point drop in the first quarter of 2020.~~2015. According to the U.S. Bureau of Labor Statistics, the national unemployment rate for September ~~2020~~2021 was ~~7.9%~~4.8%, ~~up 4.4~~down 1.9 percentage points from December ~~2019. The~~2020. However, the unemployment ~~rate~~rates in the Scranton - Wilkes-Barre – Hazleton (market area north) and the ~~Allentown-Bethlehem-Easton~~Allentown – Bethlehem – Easton (market area south) Metropolitan Statistical Areas (local) ~~increased during~~remained at a higher level than the ~~first nine months of 2020 as well and continued to lag behind the~~national unemployment ~~rates of the state and nation.~~rate. The local unemployment rates at September 30, ~~2020~~2021 were ~~8.8%~~6.4% in market area north and ~~7.4%,~~5.5% in market area south, respectively, ~~an increase~~a decrease of ~~3.2~~1.6 percentage points and ~~2.9~~1.1 percentage points from the ~~5.6%~~8.0% and ~~4.5%~~6.6%, respectively, at December 31, ~~2019.~~2020. The ~~national and~~ local unemployment rates have ~~risen~~fluctuated as a result of the effects of the ~~COVID-19~~ pandemic. The ~~increase in unemployment and~~pandemic-related business restrictions ~~has had an effect on spending~~have been lifted in our ~~market~~local area ~~and high~~but unemployment is expected to ~~continue~~remain above the pre-pandemic levels for athe next few months. Stimulus payments and enhanced unemployment benefits have supported the economy throughout 2020 and 2021 and the government could continue to provide this support throughout the remainder of 2021. The median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro increased 22.5% and 19.6%, respectively, from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets. Values in the markets are expected to grow 17.7% and 15.8% in the next year. In light of these expectations, we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

On May 1, 2020, the Company completed its ~~previously announced~~ acquisition of MNB Corporation (“MNB”). and its wholly-owned bank subsidiary. The merger ~~expands~~expanded the Company’s full-service footprint into Northampton County, PA and the Lehigh Valley. Non-recurring costs to facilitate the merger and integrate systems of ~~$2.4~~$2.5 million were incurred during 2020.

On July 1, 2021, the Company completed its acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned bank subsidiary. The Company expects non-recurring costs to facilitate the anticipated merger and integrate systems in 2021 incurred by the Company to be $3.8 million, of which $3.1 million was recognized in the first nine months of ~~2020.~~2021. The Company remains committed to selectively expanding branch banking and wealth management locations in Northeastern and Eastern Pennsylvania markets as opportunities arrive going forward.

For the nine months ended September 30, 2021, net income was $16.2 million, or $3.09 diluted earnings per share, compared to $7.9 million, or $1.75 diluted earnings per share, for the nine months ended September 30, 2020. Non-recurring merger-related costs and ~~a FHLB~~Federal Home Loan Bank (FHLB) prepayment ~~penalty~~penalties incurred ~~during the first nine months of 2020~~ are not a part of the Company’s normal operations. If these expenses had not occurred, adjusted net income (non-GAAP) for the ~~three and~~ nine months ended September 30, 2021 and 2020 would have been ~~$5.1~~$19.1 million and $10.3 million, respectively. Adjusted diluted EPS (non-GAAP) would have been ~~$1.03~~$3.64 and $2.29 for the ~~three and~~ nine months ended September 30, ~~2020. For the same time periods, adjusted ROA (non-GAAP) would have been 1.19%~~2021 and ~~0.96%, respectively, and adjusted ROE (non-GAAP) would have been 12.79% and 9.99%,~~2020, respectively.

~~For the quarters ended~~As of September 30, ~~2020~~2021 and ~~2019,~~2020, tangible common book value per share (non-GAAP) was ~~$30.68~~$32.57 and ~~$27.66,~~$30.68, respectively. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located below within this management’s discussion and analysis.

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~~Our efforts~~Branch managers, relationship bankers, mortgage originators and ~~focus continue~~our business service partners are all focused on ~~building relationships concentrating on loans, deposits, wealth management, business~~developing a mutually profitable full banking relationship. We understand our markets, offer products and services ~~and retail opportunities~~along with financial advice that is appropriate for our community, clients and ~~prospects with~~prospects. The Company continues to focus on the ~~goal to exceed expectations~~“trusted financial advisor” model by ~~providing a valued service.~~utilizing the team approach of experienced bankers that are fully engaged and dedicated towards maintaining and growing profitable relationships.

In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years. As described more fully in Part II, Item 1A, “Risk Factors” below, as well as Part I, Item 1A, “Risk Factors,” and in the “Supervisory and Regulation” section of management’s discussion and analysis of financial condition and results

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of operations in our ~~2019~~2020 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us. In addition, final rules to implement Basel III regulatory capital reform, approved by the federal bank regulatory agencies in 2013, subject many banks including the Company, to capital requirements which became effective for the Company on January 1, 2015 and were fully phased in on January 1, 2019. The rules also revise the minimum risk-based and leverage capital ratio requirements applicable to the Company and revise the calculation of risk-weighted assets to enhance their risk sensitivity. We will continue to prepare for the impacts of the continuing implementation of the Dodd-Frank Act and the Basel III capital standards, and related rulemaking will have on our business, financial condition and results of operations.

Non-GAAP Financial Measures

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare the Company’s financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company’s tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% at September 30, ~~2020~~2021 and ~~2019.~~2020.

The following table reconciles the non-GAAP financial measures of FTE net interest income:


	Three months ended				Nine months ended				Three months ended				Nine months ended
(dollars in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Interest income (GAAP)	$	13,699	$	10,008	$	35,660	$	29,320	$	18,173	$	13,699	$	46,680	$	35,660
Adjustment to FTE		295		186		704		558		577		295		1,480		704
Interest income adjusted to FTE (non-GAAP)		13,994		10,194		36,364		29,878		18,750		13,994		48,160		36,364
Interest expense		1,163		2,008		4,297		5,616
Interest expense (GAAP)										999		1,163		2,730		4,297
Net interest income adjusted to FTE (non-GAAP)	$	12,831	$	8,186	$	32,067	$	24,262	$	17,751	$	12,831	$	45,430	$	32,067

The efficiency ratio is non-interest expenses as a percentage of FTE net interest income plus non-interest income. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP:



	Three months ended				Nine months ended				Three months ended				Nine months ended
(dollars in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Efficiency Ratio (non-GAAP)
Non-interest expenses (GAAP)	$	9,474	$	6,643	$	28,089	$	19,848	$	15,185	$	9,474	$	37,492	$	28,089

Net interest income (GAAP)		12,536		8,000		31,363		23,704		17,174		12,536		43,950		31,363
Plus: taxable equivalent adjustment		295		186		704		558		577		295		1,480		704
Non-interest income (GAAP)		4,370		2,632		9,833		7,578		4,009		4,370		14,102		9,833
Net interest income (FTE) plus non-interest income (non-GAAP)	$	17,201	$	10,818	$	41,900	$	31,840	$	21,760	$	17,201	$	59,532	$	41,900
Efficiency ratio (non-GAAP)		55.08%		61.41%		67.04%		62.34%		69.79%		55.08%		62.98%		67.04%

The following table provides a reconciliation of the tangible common equity (non-GAAP) and the calculation of tangible book value per share:


(dollars in thousands)	September 30, 2020		September 30, 2019		September 30, 2021		September 30, 2020
Tangible Book Value per Share (non-GAAP)
Total assets	$	1,711,043	$	1,011,424
Total assets (GAAP)					$	2,411,799	$	1,711,043
Less: Intangible assets, primarily goodwill		(8,876)		(209)		(21,678)		(8,876)
Tangible assets		1,702,166		1,011,215		2,390,121		1,702,167
Total shareholders' equity		161,611		104,789
Total shareholders' equity (GAAP)						205,569		161,611
Less: Intangible assets, primarily goodwill		(8,876)		(209)		(21,678)		(8,876)
Tangible common equity	$	152,734	$	104,580	$	183,891	$	152,735

Common shares outstanding, end of period		4,977,750		3,781,500		5,645,687		4,977,750
Tangible Common Book Value per Share	$	30.68	$	27.66	$	32.57	$	30.68

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The following table provides a reconciliation of the Company’s earnings results under GAAP to comparative non-GAAP results excluding merger-related expenses:


	Nine months ended																Nine months ended
	September 30, 2020								September 30, 2019								September 30, 2021								September 30, 2020
(dollars in thousands except per share data)	Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share
Results of operations (GAAP)	$	9,407	$	1,545	$	7,862	$	1.75	$	10,604	$	1,742	$	8,862	$	2.32	$	19,010	$	2,788	$	16,222	$	3.09	$	9,407	$	1,545	$	7,862	$	1.75
Add: Merger-related expenses		2,439		428		2,011		0.45		51		11		40		0.01		3,143		514		2,629		0.50		2,439		428		2,011		0.45
Add: FHLB prepayment penalty		481		101		380		0.09		-		-		-		-		369		78		291		0.05		481		101		380		0.09
Adjusted earnings (non-GAAP)	$	12,327	$	2,074	$	10,253	$	2.29	$	10,655	$	1,753	$	8,902	$	2.33	$	22,522	$	3,380	$	19,142	$	3.64	$	12,327	$	2,074	$	10,253	$	2.29


	Three months ended																Three months ended
	September 30, 2020								September 30, 2019								September 30, 2021								September 30, 2020
(dollars in thousands except per share data)	Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share

Results of operations (GAAP)	$	5,932	$	955	$	4,977	$	0.99	$	3,669	$	611	$	3,058	$	0.80	$	5,548	$	689	$	4,859	$	0.85	$	5,932	$	955	$	4,977	$	0.99
Add: Merger-related expenses		221		49		172		0.04		32		7		25		0.01		2,201		462		1,739		0.31		221		49		172		0.04
Add: FHLB prepayment penalty		(1)		-		(1)		-		-		-		-		-		-		-		-		-		(1)		-		(1)		-
Adjusted earnings (non-GAAP)	$	6,152	$	1,004	$	5,147	$	1.03	$	3,701	$	618	$	3,083	$	0.81	$	7,749	$	1,151	$	6,598	$	1.16	$	6,152	$	1,004	$	5,148	$	1.03

General

The Company’s earnings depend primarily on net interest income. Net interest income is the difference between interest income and interest expense. Interest income is generated from yields earned on interest-earning assets, which consist principally of loans and investment securities. Interest expense is incurred from rates paid on interest-bearing liabilities, which consist of deposits and borrowings. Net interest income is determined by the Company’s interest rate spread (the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Interest rate spread is significantly impacted by: changes in interest rates and market yield curves and their related impact on cash flows; the composition and characteristics of interest-earning assets and interest-bearing liabilities; differences in the maturity and re-pricing characteristics of assets compared to the maturity and re-pricing characteristics of the liabilities that fund them and by the competition in the marketplace.

The Company’s earnings are also affected by the level of its non-interest income and expenses and by the provisions for loan losses and income taxes. Non-interest income mainly consists of: service charges on the Company’s loan and deposit products; interchange fees; trust and asset management service fees; increases in the cash surrender value of the bank owned life insurance and from net gains or losses from sales of loans and securities. Non-interest expense consists of: compensation and related employee benefit costs; occupancy; equipment; data processing; advertising and marketing; FDIC insurance premiums; professional fees; loan collection; net other real estate owned (ORE) expenses; supplies and other operating overhead.

Net interest income, net interest rate margin, net interest rate spread and the efficiency ratio are presented in the MD&A on a fully-taxable equivalent (FTE) basis. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.

Comparison of the results of operations

Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020

Overview

For the third quarter of ~~2020,~~2021, the Company generated net income of ~~$5.0~~$4.9 million, or ~~$0.99~~$0.85 per diluted share, compared to ~~$3.1~~$5.0 million, or ~~$0.80~~$0.99 per diluted share, for the third quarter of ~~2019.~~2020. The ~~$1.9~~$0.1 million ~~or 63%, increase~~decrease in net income was primarily the result of ~~$4.5~~$5.7 million higher non-interest expenses supplemented by $0.4 million less in non-interest income. These decreases were partially offset by $4.7 million higher net interest income and ~~$1.7~~$1.1 million ~~more non-interest income partially offset by a $2.8 million rise in non-interest expenses and $1.2 million increase in the~~lower provision for loan losses. Non-interest expenses increased quarter over-quarter due to the majority of merger-related expenses from the acquisition of Landmark being recognized during the third quarter of 2021 while the majority of merger-related expenses from the acquisition of MNB were recognized during the second quarter of 2020. In the year-to-date comparison, net income ~~declined~~increased by ~~$1.0~~$8.4 million to ~~$7.9~~$16.2 million, or $3.09 per diluted share, from $7.8 million, or $1.75 per diluted ~~share, for the first nine months of 2020 from $8.9 million, or $2.32 per diluted share, for the first nine months of 2019.~~share. Higher ~~non-interest expenses~~revenue and ~~an increase in the~~a lower provision for loan losses ~~were partially~~ offset by higher ~~net interest income and additional non-interest income. In the quarterly and year-to-date comparison, the increase in~~ non-interest expenses ~~was driven by merger-related expenses incurred in connection with the acquisition of MNB along with the impact of adding the operations of MNB.~~

Return on average assets (ROA) was 1.15% and 1.22% for the third quarters of 2020 and 2019, respectively, and 0.74% and 1.21% for the nine months ended September 30, 2020 and 2019, respectively. During the same time periods, return on average shareholders’ equity (ROE) was 12.36% and 11.77%, respectively, and 7.66% and 11.96%, respectively. ROA decreased quarter-over-quarter due to the higher average assets while ROE increased quarter-over-quarter due to higher net income. For the year-to-date periods, both ROA and ROE decreased due primarily to the decline in net income while average assets and shareholders’ equity grew.year-over-year.

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Return on average assets (ROA) was 0.82% and 1.15% for the third quarters of 2021 and 2020, respectively, and 1.08% and 0.74% for the nine months ended September 30, 2021 and 2020, respectively. During the same time periods, return on average shareholders’ equity (ROE) was 9.07% and 12.36%, respectively, and 11.88% and 7.66%, respectively. ROA and ROE both decreased quarter-over-quarter due to the lower net income with increases in average assets and equity due to the Landmark merger. ROA and ROE both increased in the year-to-date period due to the growth in net income relative to the increase in average assets and equity.

Net interest income and interest sensitive assets / liabilities

For the third quarter of ~~2020,~~2021, net interest income increased ~~$4.5~~$4.7 million, or ~~57%~~37%, to ~~$12.5~~$17.2 million from ~~$8.0~~$12.5 million for the third quarter of ~~2019.~~2020. The ~~$3.7~~$4.5 million growth in interest income was produced by the addition of ~~$665.2~~$594.3 million in average interest-earning assets partially offset by the effect of ~~an 86~~a nine basis point decline in FTE yield earned on those assets. The loan portfolio ~~drove this~~contributed the most by providing $3.4 million more in interest income ~~growth~~ due to ~~$406.5~~$286.6 million more in average loans, primarily from loans acquired from Landmark. In the ~~MNB acquisition and PPP lending.~~investment portfolio, an increase in the average balances of municipal securities was the biggest driver of interest income growth. The average balance of total securities grew $319.5 million producing $1.4 million in additional FTE interest income despite a decrease of 32 basis points in yields earned on investments. On the liability side, total interest-bearing liabilities grew ~~$458.3~~$404.2 million, on average, with a 7615 basis point decrease in rates paid thereon. A 6617 basis point decrease in rates paid on deposits offset the effect of ~~$424.4~~$467.0 million higher average interest-bearing deposits resulting in ~~$0.6~~$0.2 million less interest expense from deposits for the third quarter of ~~2020~~2021 compared to the ~~2019~~2020 like period. There was also $0.2 million less in interest expense on borrowings due to lower rates paid on Paycheck Protection Program Liquidity Facility (PPPLF) borrowings which were paid off during the third quarter of 2020 and a lower balance of FHLB advances.

Net interest income increased ~~$7.7~~$12.6 million, or ~~32%~~40%, from ~~$23.7 million for the nine months ended September 30, 2019 to~~ $31.4 million for the nine months ended September 30, 2020 to $44.0 million for the nine months ended September 30, 2021, due to $11.0 million higher interest income and $1.6 million lower interest expense. Total average interest-earning assets increased ~~$378.7~~$587.2 million while FTE yields on these assets declined 6134 basis points resulting in ~~$6.5~~$11.8 million of growth in FTE interest income. In the loan portfolio, the Company experienced average balance growth of ~~$251.3~~$273.2 million which had the effect of producing ~~$6.3~~$8.7 million more interest ~~income.~~income, including $2.4 million in additional fees earned under the Paycheck Protection Program (PPP) during the first nine months of 2021. The average balance of the investment portfolio grew $263.9 million which resulted in $3.1 million in additional FTE interest income despite a 55 basis point reduction in yields. On the liability side, total interest-bearing liabilities grew ~~$284.9~~$365.6 million on average with a 5232 basis point decrease in rates paid on these interest-bearing liabilities. Growth in average interest-bearing deposits of ~~$263.8~~$434.7 million was offset by a 4031 basis point decrease in the rates paid on deposits reducing interest expense by ~~$0.7~~$1.2 million. In addition, the Company utilized ~~$21.1~~$69.1 million ~~more~~less in average borrowings during the first nine months of ~~2020 but replaced overnight borrowings with PPPLF funding at lower rates and had a lower balance of FHLB advances~~2021 which resulted in ~~$0.6~~$0.4 million less interest expense from borrowings.

The FTE net interest rate spread ~~decreased by 10 and 9 basis points~~ and margin ~~decreased~~increased by 29six and 24two basis points, respectively, for the three months ended September 30, 2021 compared to the same 2020 period. The spread and margin increased quarter-over-quarter due to the reduction in rates paid on interest-bearing liabilities which outpaced the lower yield earned on interest-earning assets. The spread and margin decreased by two and eight basis points, respectively, for the nine months ended September 30, ~~2020~~2021 compared to the same ~~2019 periods.~~2020 period. The yields earned on interest-earning assets declined faster than the rates paid on interest-bearing liabilities causing the ~~decline~~reduction in net interest rate spread. The decrease in net interest rate margin was due to the higher average balance of interest-bearing cash. The overall 19 and 20 basis point cost of funds, which includes the impact of non-interest bearing deposits, decreased 6111 and 4225 basis points for the three and nine months ended September 30, ~~2020~~2021 compared to the same ~~2019~~2020 periods. The primary reason for the decline was the reduction in rates paid on deposits ~~and borrowings~~coupled with the increased average balances of non-interest bearing deposits compared to the same ~~2019~~2020 periods.

For the ~~remainder~~last quarter of ~~2020,~~2021, the Company expects to operate in a relatively low interest rate environment. A rate environment with ~~falling~~market interest rates continuing to remain lower than portfolio yields positions the Company to reduce its interest income performance from new and maturing earning assets. Until there is a sustained period of yield curve steepening, with rates rising more sharply at the long end of the curve, the interest rate margin ~~may~~is likely to experience ~~further~~ compression. The FOMC began easing the federal funds rate during the second half of 2019 and continued through the first quarter of 2020 which reduced rates paid on interest-bearing liabilities. On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans was cut 75 basis points in the second half of 2019 and another 150 basis points in the first quarter of 2020. Consensus economic forecasts are predicting gradual increases in long-term rates. The 2021 focus ~~for 2020~~ is to manage net interest income through a relatively low range-bound forecasted rate ~~environment~~cycle by ~~managing interest-bearing~~controlling loan and deposit ~~costs~~pricing to maintain a reasonable spread. ~~For~~Interest income is projected to increase from investing low earning cash balances in securities and the higher balances of interest-earning assets from the Landmark acquisition for the remainder of 2020, interest income growth is anticipated from new loans acquired from the MNB merger and a portion of the $3.5 million of remaining fees recognized, net of origination and agent fees, from Paycheck Protection Program (PPP) loans which will mitigate less interest income from lower yielding assets.2021 into 2022. Management expects to actively reduce the cost of funds to partially mitigate spread compression throughout this ~~low~~ rate cycle. Continued growth in the loan portfolios complemented with investment security purchases to maintain prudent cash balances is expected to boost interest income, and when coupled with a proactive relationship approach to loan rate/deposit cost setting strategies should help mitigate spread compression and contain the interest rate margin at acceptable levels.

The Company’s cost of interest-bearing liabilities was ~~0.41%~~0.26% and ~~0.60%~~0.28% for the three and nine months ended September 30, ~~2020,~~2021, or 7615 and 5232 basis points lower than the cost for the same ~~2019~~2020 periods. The decrease ~~resulted from a decline~~ in ~~the rate~~interest paid on both deposits and ~~borrowings.~~borrowings contributed to the lower cost of interest-bearing liabilities. The FOMC is not expected to cut the federal funds rate further in the immediate future, but the Company has the opportunity to reduce rates paid on deposits as higher-priced promotional rates and negotiated rates reprice into products with lower rates. To help mitigate the impact of the imminent change to the economic

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landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships, generate new loan volumes, and retain and generate higher levels of average non-interest bearing deposit balances. Strategically deploying no- and low-cost deposits into interest earning-assets is an effective margin-preserving strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin.

The Company’s Asset Liability Management (ALM) team meets regularly to discuss among other things, interest rate risk and when deemed necessary adjusts interest rates. ALM is actively addressing the Company's sensitivity to a ~~declining~~changing rate environment to ensure interest rate risks are contained within acceptable levels. ALM also discusses revenue enhancing strategies to help combat the potential for a decline in net interest income. The Company’s marketing department, together with ALM, lenders and deposit gatherers, continue to develop prudent strategies that will grow the loan portfolio and accumulate low-cost deposits to improve net interest income performance.

The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% for September 30, ~~2020~~2021 and ~~2019~~2020 to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. See “Non-GAAP Financial Measures” within this management’s discussion and analysis for the FTE adjustments. This treatment

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allows a uniform comparison among yields on interest-earning assets. Loans include loans held-for-sale (HFS) and non-accrual loans but exclude the allowance for loan losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan ~~fee/(cost) amortization~~fee accretion of ~~$700 thousand~~$1.0 million and ~~($179 thousand)~~$0.7 million during the third quarters of ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$1.1~~$3.2 million and ~~($0.5 million)~~$1.1 million for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively, are included in interest income from loans. MNB and Landmark loan fair value purchase accounting adjustments of $900 thousand and $249 thousand are included in interest income from loans and $25 thousand and $88 thousand reduced interest expense on deposits for the three months ended September 30, 2021 and 2020. MNB and Landmark loan fair value purchase accounting adjustments of $1.8 million and $411 thousand are included in interest income from loans and ~~$88~~$61 thousand and $159 thousand reduced interest expense on deposits for the ~~three and~~ nine months ended September 30, ~~2020. Fair value purchase accounting adjustments are preliminary~~2021 and ~~subject to refinement.~~2020. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans. Net interest margin is calculated by dividing net interest income-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source:

‎

Three months ended
(dollars in thousands)
September 30, 2020
September 30, 2019
Average
Yield /
Average
Yield /
Assets
balance
Interest
rate
balance
Interest
rate
Interest-earning assets
Interest-bearing deposits
$
135,909
$
46
0.14
%
$
2,355
$
12
2.12
%
Restricted investments in bank stock
2,763
37
5.34
4,038
157
15.41
Investments:
Agency - GSE
26,983
103
1.52
5,935
40
2.69
MBS - GSE residential
159,524
729
1.82
130,180
868
2.64
State and municipal (nontaxable)
98,290
856
3.46
50,276
546
4.31
State and municipal (taxable)
28,014
146
2.07
-
-
-
Total investments
312,811
1,834
2.33
186,391
1,454
3.10
Loans and leases:
C&I and CRE (taxable)
626,255
7,094
4.51
318,332
4,163
5.19
C&I and CRE (nontaxable)
42,359
422
3.96
34,156
342
3.97
Consumer
166,607
1,688
4.03
162,681
1,582
3.86
Residential real estate
308,369
2,873
3.71
221,929
2,484
4.44
Total loans and leases
1,143,590
12,077
4.20
737,098
8,571
4.61
Total interest-earning assets
1,595,073
13,994
3.49
%
929,882
10,194
4.35
%
Non-interest earning assets
130,459
65,337
Total assets
$
1,725,532
$
995,219
Liabilities and shareholders' equity
Interest-bearing liabilities
Deposits:
Interest-bearing checking
$
421,719
$
332
0.31
%
$
239,471
$
474
0.79
%
Savings and clubs
169,219
31
0.07
108,714
36
0.13
MMDA
316,417
325
0.41
162,518
616
1.50
Certificates of deposit
147,829
382
1.03
120,107
557
1.84
Total interest-bearing deposits
1,055,184
1,070
0.40
630,810
1,683
1.06
Short-term borrowings
78,056
53
0.27
34,096
210
2.44
FHLB advances
5,000
40
3.19
15,000
115
3.05
Total interest-bearing liabilities
1,138,240
1,163
0.41
%
679,906
2,008
1.17
%
Non-interest bearing deposits
407,604
198,188
Non-interest bearing liabilities
19,462
14,008
Total liabilities
1,565,306
892,102
Shareholders' equity
160,226
103,117
Total liabilities and shareholders' equity
$
1,725,532
$
995,219
Net interest income - FTE
$
12,831
$
8,186
Net interest spread
3.08
%
3.18
%
Net interest margin
3.20
%
3.49
%
Cost of funds
0.30
%
0.91
%

Table Of Contents



	Three months ended
(dollars in thousands)	September 30, 2021						September 30, 2020
	Average				Yield /		Average				Yield /
Assets	balance		Interest		rate		balance		Interest		rate

Interest-earning assets
Interest-bearing deposits	$	123,561	$	54	0.17	%	$	135,909	$	46	0.14	%
Restricted investments in bank stock		3,430		28	3.25			2,763		37	5.34
Investments:
Agency - GSE		110,131		382	1.37			26,983		103	1.52
MBS - GSE residential		219,391		795	1.44			159,524		729	1.82
State and municipal (nontaxable)		223,571		1,651	2.93			98,290		856	3.46
State and municipal (taxable)		79,084		377	1.89			28,014		146	2.07
Other		108		-	0.40			-		-	-
Total investments		632,285		3,205	2.01			312,811		1,834	2.33
Loans and leases:
C&I and CRE (taxable)		795,821		9,692	4.83			626,255		7,094	4.51
C&I and CRE (nontaxable)		53,632		513	3.79			42,359		422	3.96
Consumer		199,540		2,004	3.98			166,607		1,688	4.03
Residential real estate		381,149		3,254	3.39			308,369		2,873	3.71
Total loans and leases		1,430,142		15,463	4.29			1,143,590		12,077	4.20
Total interest-earning assets		2,189,417		18,750	3.40	%		1,595,073		13,994	3.49	%
Non-interest earning assets		168,838						130,459
Total assets	$	2,358,256					$	1,725,532

Liabilities and shareholders' equity

Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	674,146	$	464	0.27	%	$	421,719	$	332	0.31	%
Savings and clubs		222,077		25	0.04			169,219		31	0.07
MMDA		467,269		221	0.19			316,417		325	0.41
Certificates of deposit		158,657		168	0.42			147,829		382	1.03
Total interest-bearing deposits		1,522,149		878	0.23			1,055,184		1,070	0.40
Secured borrowings		20,140		121	2.37			-		-	-
Short-term borrowings		68		-	0.14			78,056		53	0.27
FHLB advances		49		-	0.06			5,000		40	3.19
Total interest-bearing liabilities		1,542,406		999	0.26	%		1,138,240		1,163	0.41	%
Non-interest bearing deposits		579,629						407,604
Non-interest bearing liabilities		23,798						19,462
Total liabilities		2,145,833						1,565,306
Shareholders' equity		212,423						160,226
Total liabilities and shareholders' equity	$	2,358,256					$	1,725,532
Net interest income - FTE			$	17,751					$	12,831

Net interest spread					3.14	%					3.08	%
Net interest margin					3.22	%					3.20	%
Cost of funds					0.19	%					0.30	%

‎

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	Nine months ended												Nine months ended
(dollars in thousands)	September 30, 2020						September 30, 2019						September 30, 2021						September 30, 2020
	Average				Yield /		Average				Yield /		Average				Yield /		Average				Yield /
Assets	balance		Interest		rate		balance		Interest		rate		balance		Interest		rate		balance		Interest		rate

Interest-earning assets
Interest-bearing deposits	$	69,712	$	96	0.18	%	$	2,437	$	40	2.23	%	$	119,827	$	114	0.13	%	$	69,712	$	96	0.18	%
Restricted investments in bank stock		3,117		124	5.30			4,366		342	10.48			3,160		96	4.08			3,117		124	5.30
Investments:
Agency - GSE		16,020		209	1.74			5,931		120	2.70			80,147		820	1.37			16,020		209	1.74
MBS - GSE residential		144,792		2,334	2.15			128,216		2,669	2.78			178,355		1,911	1.43			144,792		2,334	2.15
State and municipal (nontaxable)		72,084		2,038	3.78			49,462		1,648	4.46			188,955		4,271	3.02			72,084		2,038	3.78
State and municipal (taxable)		11,963		200	2.23			-		-	-			61,371		857	1.87			11,963		200	2.23
Other		118		3	3.42			-		-	-			36		0	0.40			118		3	3.42
Total investments		244,977		4,784	2.61			183,609		4,437	3.23			508,864		7,859	2.06			244,977		4,784	2.61
Loans and leases:
C&I and CRE (taxable)		492,440		17,156	4.65			315,293		12,225	5.18			694,274		24,873	4.79			492,440		17,156	4.65
C&I and CRE (nontaxable)		39,986		1,148	3.84			33,298		994	3.99			46,185		1,331	3.85			39,986		1,148	3.84
Consumer		166,735		5,002	4.01			158,712		4,604	3.88			174,869		5,126	3.92			166,735		5,002	4.01
Residential real estate		276,133		8,054	3.90			216,655		7,236	4.47			333,167		8,761	3.52			276,133		8,054	3.90
Total loans and leases		975,294		31,360	4.30			723,958		25,059	4.63			1,248,495		40,091	4.29			975,294		31,360	4.30
Total interest-earning assets		1,293,100		36,364	3.76	%		914,370		29,878	4.37	%		1,880,346		48,160	3.42	%		1,293,100		36,364	3.76	%
Non-interest earning assets		131,215						61,232						134,633						131,215
Total assets	$	1,424,315					$	975,602					$	2,014,979					$	1,424,315

Liabilities and shareholders' equity

Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	339,361	$	1,032	0.41	%	$	228,281	$	1,161	0.68	%	$	569,947	$	1,258	0.30	%	$	339,361	$	1,032	0.41	%
Savings and clubs		139,326		84	0.08			114,185		109	0.13			203,109		88	0.06			139,326		84	0.08
MMDA		260,098		1,290	0.66			148,661		1,669	1.50			407,106		738	0.24			260,098		1,290	0.66
Certificates of deposit		135,662		1,375	1.35			119,509		1,550	1.73			128,978		499	0.52			135,662		1,375	1.35
Total interest-bearing deposits		874,447		3,781	0.58			610,636		4,489	0.98			1,309,140		2,583	0.26			874,447		3,781	0.58
Secured borrowings														6,787		121	2.37			-		-	-
Short-term borrowings		65,673		248	0.50			37,968		742	2.61			129		-	0.33			64,673		248	0.50
FHLB advances		12,491		268	2.87			19,109		385	2.70			1,134		26	3.07			12,491		268	2.87
Total interest-bearing liabilities		952,611		4,297	0.60	%		667,713		5,616	1.12	%		1,317,190		2,730	0.28	%		951,611		4,297	0.60	%
Non-interest bearing deposits		317,240						195,757						494,582						317,240
Non-interest bearing liabilities		17,333						13,094						20,607						17,333
Total liabilities		1,287,184						876,564						1,832,379						1,286,184
Shareholders' equity		137,131						99,038						182,600						137,131
Total liabilities and shareholders' equity	$	1,424,315					$	975,602					$	2,014,979					$	1,423,315
Net interest income - FTE			$	32,067					$	24,262					$	45,430					$	32,067

Net interest spread					3.16	%					3.25	%					3.14	%					3.16	%
Net interest margin					3.31	%					3.55	%					3.23	%					3.31	%
Cost of funds					0.45	%					0.87	%					0.20	%					0.45	%

Changes in net interest income are a function of both changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which changes in interest rates and changes in volumes of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by the prior period rate), (2) the changes attributable to changes in interest rates (changes in rates multiplied by prior period volume) and (3) the net change. The combined effect of changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Tax-exempt income was not converted to a ~~tax-equivalent basis on the rate/volume analysis:~~tax-

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equivalent basis on the rate/volume analysis:


	Nine months ended September 30,												Nine months ended September 30,
(dollars in thousands)	2020 compared to 2019						2019 compared to 2018						2021 compared to 2020						2020 compared to 2019
	Increase (decrease) due to												Increase (decrease) due to
	Volume		Rate		Total		Volume		Rate		Total		Volume		Rate		Total		Volume		Rate		Total
Interest income:
Interest-bearing deposits	$	126	$	(70)	$	56	$	(78)	$	24	$	(54)	$	54	$	(36)	$	18	$	126	$	(70)	$	56
Restricted investments in bank stock		(80)		(138)		(218)		55		165		220		1		(29)		(28)		(80)		(138)		(218)
Investments:
Agency - GSE		143		(55)		88		(5)		15		10		665		(53)		612		143		(55)		88
MBS - GSE residential		318		(652)		(334)		266		136		402		466		(890)		(424)		318		(652)		(334)
State and municipal		769		(300)		469		137		-		137		2,705		(551)		2,154		769		(300)		469
Other		3		-		3		(11)		-		(11)		(1)		(2)		(3)		3		-		3
Total investments		1,233		(1,007)		226		387		151		538		3,835		(1,496)		2,339		1,233		(1,007)		226
Loans and leases:
Residential real estate		1,820		(1,002)		818		285		272		557		1,547		(840)		707		1,820		(1,002)		818
C&I and CRE		6,342		(1,283)		5,059		811		831		1,642		7,251		609		7,860		6,342		(1,283)		5,059
Consumer		240		159		399		506		205		711		237		(113)		124		240		159		399
Total loans and leases		8,402		(2,126)		6,276		1,602		1,308		2,910		9,035		(344)		8,691		8,402		(2,126)		6,276
Total interest income		9,681		(3,341)		6,340		1,966		1,648		3,614		12,925		(1,905)		11,020		9,681		(3,341)		6,340

Interest expense:
Deposits:
Interest-bearing checking		441		(571)		(130)		91		248		339		563		(337)		226		441		(571)		(130)
Savings and clubs		21		(47)		(26)		(24)		(47)		(71)		32		(28)		4		21		(47)		(26)
Money market		852		(1,230)		(378)		289		695		984		510		(1,062)		(552)		852		(1,230)		(378)
Certificates of deposit		193		(367)		(174)		94		472		566		(65)		(811)		(876)		193		(367)		(174)
Total deposits		1,507		(2,215)		(708)		450		1,368		1,818		1,040		(2,238)		(1,198)		1,507		(2,215)		(708)
Repurchase agreements		-		-		-		(13)		-		(13)		121		-		121		-		-		-
Overnight borrowings		335		(829)		(494)		353		65		418		(185)		(63)		(248)		335		(829)		(494)
FHLB advances		(140)		23		(117)		2		178		180		(260)		18		(242)		(140)		23		(117)
Total interest expense		1,702		(3,021)		(1,319)		792		1,611		2,403		716		(2,283)		(1,567)		1,702		(3,021)		(1,319)
Net interest income	$	7,979	$	(320)	$	7,659	$	1,174	$	37	$	1,211	$	12,209	$	378	$	12,587	$	7,979	$	(320)	$	7,659

Provision for loan losses

The provision for loan losses represents the necessary amount to charge against current earnings, the purpose of which is to increase the allowance for loan losses (the allowance) to a level that represents management’s best estimate of known and inherent losses in the Company’s loan portfolio. Loans determined to be uncollectible are charged off against the allowance. The required amount of the provision for loan losses, based upon the adequate level of the allowance, is subject to the ongoing analysis of the loan portfolio. The Company’s Special Assets Committee meets periodically to review problem loans. The committee is comprised of management, including credit administration officers, loan officers, loan workout officers and collection personnel. The committee reports quarterly to the Credit Administration Committee of the board of directors.

Management continuously reviews the risks inherent in the loan portfolio. Specific factors used to evaluate the adequacy of the loan loss provision during the formal process include:

•specific loans that could have loss potential;

•levels of and trends in delinquencies and non-accrual loans;

•levels of and trends in charge-offs and recoveries;

•trends in volume and terms of loans;

•changes in risk selection and underwriting standards;

•changes in lending policies and legal and regulatory requirements;

•experience, ability and depth of lending management;

•national and local economic trends and conditions; and

•changes in credit concentrations.

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For the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the Company recorded a provision for loan losses of ~~$3.7~~$1.6 million and ~~$0.8~~$3.7 million, respectively, a ~~$2.9~~$2.1 million, or ~~346%~~58%, ~~increase. Management increased the provision by $1.6 million and $1.2 million during the second and third quarters of 2020, respectively.~~

decrease. The ~~increase~~decrease in the provision for loan losses from the year earlier period was primarily attributed to ~~higher credit losses inherent within~~ the ~~loan portfolio as an initial result of~~COVID-related provisioning that occurred during the ~~COVID-19 crisis.~~ nine months ended September 30, 2020, which was not similarly warranted during the nine months ended September 30, 2021 due to the improvement in the Company’s economic environment compared to the year earlier period.

See the discussion of the qualitative factors within the “Allowance for loan losses” section of this management’s discussion and analysis. Although uncertainty over COVID’s duration and severity complicates management’s ability to render a more precise estimate of credit losses, management currently believes the level of provisioning ~~through~~for the ~~third quarter~~nine months ended September 30, 2021 was adequate based on the information that was available as of the reporting date and subsequent period up to the filing date.

The provision for loan losses derives from the reserve required from the allowance for loan losses calculation. The Company continued provisioning for the nine months ended September 30, ~~2020~~2021 to maintain an allowance level that management deemed adequate.

For a discussion on the allowance for loan losses, see “Allowance for loan losses,” located in the comparison of financial condition section of management’s discussion and analysis contained herein.

Other income

For the third quarter of ~~2020,~~2021, non-interest income amounted to ~~$4.3~~$4.0 million, ~~an increase~~a decrease of ~~$1.7~~$0.4 million, or ~~66%~~8%, compared to ~~$2.6~~$4.4 million recorded for the same ~~2019~~2020 period. ~~Heightened mortgage activity caused gains on loan sales~~The decrease was due to ~~increase $1.1 million and service charges on loans~~managements’ decision to ~~increase $0.1 million. Interchange fees were $0.3 million higher than~~hold mortgages to earn interest income during the third quarter of ~~2019.~~2021 which caused $1.2 million lower gains on loan sales. Partially offsetting this decrease was $0.2 million higher interchange fees from increased debit card usage. Additionally, there were increases in deposit service charges of $0.2 million and wealth management fees (fees from trust fiduciary activities and financial services) of $0.2 million.

Non-interest income totaled ~~$9.8~~$14.1 million for the nine months ended September 30, ~~2020,~~2021, an increase of ~~$2.2~~$4.3 million, or ~~30%~~43%, from the ~~$7.6~~$9.8 million recorded ~~for the same 2019 period. Gains on loan sales contributed the most to the increase with $1.4 million more recognized~~ for the nine months ended September 30, ~~2020 than in the year earlier period. Service charges on loans were up $0.4 million~~2020. The increase was primarily due to $1.7 million higher gains on loan sales due to the high volume of mortgage sales during the first half of 2021 and $1.1 million in additional interchange fees from a higher number of transactions. Also contributing to the increase was $0.3 million in additional loan service charges, $0.3 million higher earnings on bank-owned life insurance, $0.4 million more in wealth management fees and $0.3 million higher service charges on mortgage loans. There were also increases in debit card interchange fees of $0.5 million and fees from trust fiduciary activities of $0.3 million. These increases were partially offset by $0.2 million less financial service fees, $0.1 million higher mortgage servicing right amortization and $0.2 million lower deposit service charges.deposits.

Operating expenses

For the quarter ended September 30, ~~2020,~~2021, total non-interest ~~operating~~ expenses were ~~$9.5~~$15.2 million, an increase of ~~$2.8~~$5.7 million, or ~~43%~~60%, compared to ~~$6.7~~$9.5 million for the same ~~2019~~2020 quarter. The higher non-interest expenses resulted from $2.0 million more in merger-related expenses from the timing of the Landmark merger compared to the MNB merger. Salary and employee benefits rose ~~$1.7~~$1.6 million, or ~~47%~~29%, to $7.0 million for the third quarter of 2021 from $5.4 million for the third quarter of ~~2020 from $3.7 million for the third quarter of 2019.~~2020. The increase was primarily due to salaries and benefits from additional employees resulting from the ~~merger.~~merger and performance-based incentive compensation. Advertising and marketing expenses increased $0.5 million due to higher marketing costs and a $0.2 million donation to Fidelity D & D Charitable Foundation. Premises and equipment expenses increased ~~$0.5~~$0.4 million, or ~~49%~~27%, primarily due to property and equipment acquired from the merger. Data processing and communications expenses increased $0.2 million due to additional systems and equipment added from the merger. Professional fees increased $0.2 million due to higher state banking, correspondent bank services, legal, audit, cross armored and other professional service expenses ~~related to~~required for the ~~pandemic and additional expenses post-merger. Merger-related expenses during~~larger bank after the ~~third quarter of 2020 were $0.2 million higher than in the third quarter of 2019.~~two mergers.

For the nine months ended September 30, ~~2020,~~2021, non-interest expenses increased ~~$8.3~~$9.4 million, or ~~42%~~33%, compared to the nine months ended September 30, ~~2019,~~2020, from ~~$19.8~~$28.1 million to ~~$28.1~~$37.5 million. ~~Merger-related expenses were $2.4 million higher for the first nine months of 2020 compared to the same 2019 period, consisting mostly of professional fees,~~The largest increase was salaries ~~and employee benefits and data processing expenses. Salaries~~ and employee benefit expenses which grew ~~$3.5~~$4.2 million, or ~~32%~~29%. The increase stemmed from staff additions from new hires and employees ~~as a result of~~from the ~~acquisition.~~MNB and Landmark acquisitions and higher performance-based incentives. Premises and equipment expenses increased ~~$0.9~~$1.1 million, or ~~29%~~28%, due to higher expenses for pandemic response, depreciation and other expenses related to premises and equipment acquired from the ~~merger.~~mergers. Advertising and marketing expenses increased $0.9 million from additional advertising and donations. Professional services increased ~~$0.8~~$0.9 million primarily due to ~~pandemic related~~higher audit, legal, pandemic-related service expenses and other professional fees resulting from the mergers. Merger-related expenses were $0.7 million higher ~~audit expenses. The Company incurred a $0.5 million FHLB prepayment penalty during~~for the first nine months ~~ended September 30, 2020. Data processing and communications expense also increased $0.5 million. Partially offsetting these increases was a $0.7 million reduction in other expenses due~~of 2021 compared to ~~higher loan origination cost deferrals from PPP lending.~~the same 2020 period.

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were ~~1.71%~~1.55% and ~~1.68%~~1.71% for the nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020. The expense ratio ~~increased~~decreased because of ~~higher expenses during the nine months ended September 30, 2020 compared to the same 2019 period.~~increased levels of average assets. The efficiency ratio (non-GAAP) ~~increased~~decreased from ~~62.34% at September 30, 2019 to~~ 67.04% at September 30, 2020 to 62.98% at September 30, 2021 due to ~~the increase in non-interest~~revenue increasing faster than expenses. For more information on the calculation of the efficiency ratio, see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.

Merger related expenses expected to be incurred by the Company of $0.6 million are anticipated over the last quarter of 2021 primarily for the closings and disposal of premises and equipment related to the merger with Landmark Bancorp, Inc.

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Provision for income taxes

The provision for income taxes ~~decreased $0.2~~increased $1.2 million for ~~the~~ nine months ended September 30, ~~2020~~2021 compared to the same ~~2019~~2020 period due to ~~increased expenses, including non-deductible merger-related expenses, reducing~~higher pre-tax income. The Company's effective tax rate was ~~16.4%~~14.7% at September 30, ~~2020~~2021 compared to 16.4% at September 30, ~~2019.~~2020. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The decrease in the effective tax rate was primarily due to higher tax-exempt interest income. Due to challenges relating to current market conditions, the Company may not have the ability to make a reliable estimate of all or part of its ordinary ~~income. The Coronavirus Aid, Relief, and Economic Security (CARES) Act may have an effect on~~income which could cause volatility in the effective tax rate. If the federal corporate tax rate is increased, the Company’s ~~effective~~net deferred tax liabilities will be re-valued upon adoption of the new tax rate. A federal tax rate ~~in future periods.~~

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increase will increase net deferred tax liabilities with a corresponding increase to provision for income taxes.

Comparison of financial condition at

September 30, ~~2020~~2021 and December 31, ~~2019~~2020

Overview

Consolidated assets increased ~~$701.1~~$712.3 million, or ~~69%~~42%, to ~~$1.7~~$2.4 billion as of September 30, ~~2020~~2021 from ~~$1.0~~$1.7 billion atas of December 31, ~~2019.~~2020. As a result of the merger with Landmark, the Company acquired $375.6 million in total assets, $298.9 million in total loans and $308.5 million in total deposits. The remaining increase in assets occurred primarily in cash and cash equivalents ~~the loan portfolio~~ and the investment portfolio ~~primarily from assets acquired~~funded by growth in deposits. As explained in greater detail below, growth in deposits occurred because of business activity, government relief due to the ~~merger with MNB.~~pandemic and increases in personal account balances. Cash inflow from growth in deposits ~~of $681.4 million~~ was used to ~~fund loan growth~~purchase investment securities and pay down borrowings.

Funds Deployed:

Investment securities

At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. All of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Debt securities AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity.

As of September 30, ~~2020,~~2021, the carrying value of investment securities amounted to ~~$340.3~~$686.9 million, or ~~20%~~28% of total assets, compared to ~~$185.1~~$392.4 million, or ~~18%~~23% of total assets, at December 31, ~~2019.~~2020. As of September 30, ~~2020, 46%~~2021, 35% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations.

Investment securities were comprised of AFS securities as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. The AFS securities were recorded with a net unrealized gain of ~~$9.9~~$0.2 million as of September 30, ~~2020~~2021 and a net unrealized gain of ~~$4.6~~$11.3 million as of December 31, ~~2019.~~2020. Of the net ~~improvement~~decline in the unrealized gain position of ~~$5.3~~$11.1 million, ~~$2.7~~$5.9 million was ~~net unrealized gains on~~attributable to municipal securities, $3.5 million was attributable to mortgage-backed securities ~~$2.4~~and $1.7 million was ~~net unrealized gains on municipal securities and $0.2 million was net unrealized gains on~~attributable to agency securities. The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve ~~decline,~~rise, especially at the intermediate and long end, the values of debt securities tend to ~~rise.~~decline. Whether or not the value of the Company’s investment portfolio will continue to ~~rise~~change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. ~~When~~Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates ~~rise,~~decline, the market values of the Company’s debt securities portfolio could be subject to market value ~~declines.~~increases.

As of September 30, ~~2020,~~2021, the Company had ~~$299.5~~$446.0 million in public deposits, or ~~20%~~21% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on these public deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. As of September 30, ~~2020,~~2021, the balance of pledged securities required for ~~deposit accounts~~public and trust deposits was ~~$230.7~~$418.4 million, or ~~68%~~61% of total securities.

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether impairment exists and whether the impairment is temporary or other-than-temporary. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest

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rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security is other-than-temporarily impaired. If a decline in value is deemed to be other-than-temporary, the amortized cost of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized. During the ~~quarter~~six months ended September 30, ~~2020,~~2021, the Company did not incur other-than-temporary impairment charges from its investment securities portfolio.

During the nine months ended September 30, ~~2020,~~2021, the carrying value of total investments increased ~~$155.2~~$294.5 million, or ~~84%~~75%. The growth in the investment portfolio was due to the increase in low earning cash that was used to purchase higher yielding securities. As a result of the acquisition of Landmark, the Company acquired $49.4 million in securities of which $16.5 million was retained and the remaining securities were liquidated and reinvested. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile. During the second quarter of 2020, the Company implemented an investment strategy to redeploy the acquired portfolio that was liquidated on May 1, 2020. The re-investment strategy was completed in the third quarter of 2020.

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A comparison of investment securities at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 is as follows:



	September 30, 2020				December 31, 2019				September 30, 2021				December 31, 2020
(dollars in thousands)	Amount		%		Amount		%		Amount		%		Amount		%

MBS - GSE residential	$	156,494	46.0	%	$	124,240	67.1	%	$	238,946	34.8	%	$	147,260	37.5	%
State & municipal subdivisions		164,942	48.5			54,718	29.6
Obligations of states & political subdivisions										336,465	49.0			199,713	50.9
Agency - GSE		18,874	5.5			6,159	3.3			111,515	16.2			45,447	11.6
Total	$	340,310	100.0	%	$	185,117	100.0	%	$	686,926	100.0	%	$	392,420	100.0	%

As of September 30, ~~2020,~~2021, there were no investments from any one issuer with an aggregate book value that exceeded 10% of the Company’s shareholders’ equity.

The distribution of debt securities by stated maturity and tax-equivalent yield at September 30, ~~2020~~2021 are as follows:



					More than				More than				More than												More than				More than				More than
	One year or less				one year to five years				five years to ten years				ten years				Total				One year or less				one year to five years				five years to ten years				ten years				Total
(dollars in thousands)	$		%		$		%		$		%		$		%		$		%		$		%		$		%		$		%		$		%		$		%

MBS - GSE residential	$	-	-	%	$	240	4.24	%	$	5,612	3.44	%	$	150,642	2.87	%	$	156,494	2.90	%	$	-	-	%	$	128	3.85	%	$	5,726	2.09	%	$	233,092	1.54	%	$	238,946	1.55	%
State & municipal subdivisions		500	5.40			1,002	6.02			16,692	1.82			146,748	3.58			164,942	3.42
Obligations of states & political subdivisions																						1,212	4.61			-	-			27,360	1.59			307,893	2.37			336,465	2.32
Agency - GSE		2,500	1.18			6,369	2.70			10,005	1.15			-	-			18,874	1.65			-	-			9,452	2.06			80,579	1.26			21,484	1.65			111,515	1.40
Total debt securities	$	3,000	1.88	%	$	7,611	3.19	%	$	32,309	1.89	%	$	297,390	3.22	%	$	340,310	3.08	%	$	1,212	4.61	%	$	9,580	2.08	%	$	113,665	1.38	%	$	562,469	1.99	%	$	686,926	1.89	%

In the above table, the book yields on state & municipal subdivisions were adjusted to a tax-equivalent basis using the corporate federal tax rate of 21%. In addition, average yields on securities AFS are based on amortized cost and do not reflect unrealized gains or losses.

Restricted investments in bank stock

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings ~~declined~~decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaling $37 thousand was acquired from the merger with Landmark in 2021. The dividends received from the FHLB totaled ~~$165~~$104 thousand and ~~$267~~$165 thousand for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The balance in FHLB and ACBB stock was ~~$2.8~~$3.3 million and ~~$4.4~~$2.8 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Loans held-for-sale (HFS)

Upon origination, most residential mortgages and certain Small Business Administration (SBA) guaranteed loans may be classified as held-for-sale (HFS). In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market. In declining interest rate environments, the Company would be exposed to prepayment risk as rates on fixed-rate loans decrease, and customers look to refinance loans. Consideration is given to the Company’s current liquidity position and projected future liquidity needs. To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS. Occasionally, residential mortgage and/or other nonmortgage loans may be transferred from the loan portfolio to HFS. The carrying value of loans HFS is based on the lower of cost or estimated fair value. If the fair

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values of these loans decline below their original cost, the difference is written down and charged to current earnings. Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs.

As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, loans HFS consisted of residential mortgages with carrying amounts of ~~$13.3~~$47.2 million and ~~$1.6~~$29.8 million, respectively, which approximated their fair values. During the nine months ended September 30, ~~2020,~~2021, residential mortgage loans with principal balances of ~~$106.5~~$140.7 million were sold into the secondary market and the Company recognized net gains of ~~$2.0~~$3.6 million, compared to ~~$36.5~~$106.5 million and ~~$0.6~~$2.0 million, respectively, during the nine months ended September 30, ~~2019.~~2020. During the nine months ended September 30, 2021, the Company also sold one SBA guaranteed loan with a principal balance of $0.2 million and recognized a net gain on the sale of $24 thousand. During the third quarter of 2021, management decided to hold mortgages HFS longer to earn interest income. The majority of the mortgages HFS at September 30, 2021 will be transferred to loans held for investment and the remaining loans will be sold during the fourth quarter of 2021.

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster personal relationships. At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the servicing portfolio balance of sold residential mortgage loans was ~~$344.0~~$433.3 million and ~~$302.3~~$366.5 million, respectively, with mortgage servicing rights of ~~$1.1~~$1.8 million and ~~$1.0~~$1.3 million for the same periods, respectively.

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Loans and leases

As of September 30, 2021, the Company had gross loans and leases, including originated and acquired loans and leases, totaling $1.39 billion compared to $1.12 billion at December 31, 2020, an increase of $270 million, or 24%.

Growth in the portfolio was attributed to a $39 million, or 4%, increase in the originated portfolio and a $231 million, or 110%, increase in the acquired portfolio. Growth in the originated portfolio was primarily attributed to the commercial real estate portfolio, resulting from the origination of several large commercial real estate loans during 2021, and the residential portfolio, stemming from the strength of the housing market in the Company’s service area and the low interest rate environment. Growth in the acquired portfolio was attributed to the $299 million in loans added to the Company’s balance sheet from the Landmark merger, which closed in the third quarter of 2021.

The composition of the loan portfolio at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 is summarized as follows:


	September 30, 2020												December 31, 2019				September 30, 2021				December 31, 2020
(dollars in thousands)	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
	Originated				Acquired				Total
Commercial and industrial	$	278,172	30.4	%	$	22,771	10.2	%	$	300,943	26.4	%	$	122,594	16.2	%	$	264,170	19.0	%	$	280,757	25.0	%
Commercial real estate:
Non-owner occupied		99,503	10.9			92,291	41.2			191,794	16.9			99,801	13.2			306,537	22.0			192,143	17.1
Owner occupied		128,651	14.0			46,670	20.9			175,321	15.4			130,558	17.3			247,563	17.8			179,923	16.1
Construction		3,866	0.4			6,347	2.8			10,213	0.9			4,654	0.6			12,081	0.9			10,231	0.9
Consumer:
Home equity installment		34,475	3.8			6,254	2.8			40,729	3.6			36,631	4.9			47,331	3.4			40,147	3.6
Home equity line of credit		47,071	5.1			5,698	2.5			52,769	4.6			47,282	6.3			53,747	3.9			49,725	4.4
Auto		98,892	10.8			197	0.1			99,089	8.7			105,870	14.0			121,080	8.7			98,386	8.8
Direct finance leases		18,795	2.1			-	-			18,795	1.7			16,355	2.2			23,661	1.7			20,095	1.8
Other		9,101	1.0			378	0.2			9,479	0.8			5,634	0.7			7,701	0.6			7,602	0.7
Residential:
Real estate		178,524	19.5			42,651	19.1			221,175	19.4			167,164	22.2			271,760	19.5			218,445	19.5
Construction		18,056	2.0			432	0.2			18,488	1.6			17,770	2.4			34,519	2.5			23,357	2.1
Gross loans		915,106	100.0	%		223,689	100.0	%		1,138,795	100.0	%		754,313	100.0	%		1,390,150	100.0	%		1,120,811	100.0	%
Less:
Allowance for loan losses		(12,884)				-				(12,884)				(9,747)				(15,601)				(14,202)
Unearned lease revenue		(1,092)				-				(1,092)				(903)				(1,312)				(1,159)
Net loans	$	901,130			$	223,689			$	1,124,819			$	743,663			$	1,373,237			$	1,105,450

Loans held-for-sale	$	13,307			$	-			$	13,307			$	1,643			$	47,159			$	29,786

~~As of September 30, 2020, the Company had gross loans and leases totaling $1.1 billion compared to $754 million at December 31, 2019, an increase of $384 million, or 51%.~~

The increase resulted primarily from $224 million in loans acquired from the merger with MNB and $156 million in loans, net of deferred fees, originated under the Paycheck Protection Program (PPP) primarily during the second quarter 2020.

As of September 30, 2020, Company-originated loans, excluding the PPP loans, totaled $759 million compared with $754 million as of December 31, 2019, an increase of $5 million, or less than 1%, primarily in the residential real estate loan held-for-investment portfolio, resulting from loan modifications to refinance existing loans at market rates to qualified customers.

Commercial & industrial and commercial real estate

As of September 30, ~~2020,~~2021, the commercial loan portfolio ~~totaled $678~~increased by $167 million, ~~and consisted of commercial and industrial (C&I) and commercial real estate (CRE) loans. Company-originated loans totaled $510~~or 25%, to $830 million ~~and acquired loans from MNB totaled $168 million. As of~~over the December 31, ~~2019,~~2020 balance of $663 million as $170 million in growth in the acquired portfolio related to the Landmark merger was offset by $3 million in contraction in the originated portfolio. Excluding the $51 million reduction in PPP loans during the nine months ended

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September 30, 2021, the originated commercial portfolio grew $48 million due to the origination of several large CRE loans during the year.

The commercial loan portfolio ~~totaled $358~~consisted of $499 million ~~and therefore~~in originated loans, ~~originated by the Company experienced a $152 million, or 42%, year-to-date increase.~~

~~Company-originated loans, net of fees, excluding $156~~including $51 million in PPP loans, ~~which were recorded as C&I~~and $331 million in loans ~~decreased~~acquired from ~~$358 million as of December 31, 2019 to $354 million~~MNB and Landmark as of September 30, ~~2020, a $4 million decrease, or 1%.~~

~~This reduction resulted primarily from the payoff of two tax-free commercial loans to one customer and the payoff of a few commercial real estate loans.~~2021.

Paycheck Protection Program Loans

As a qualified SBA lender, the Company was automatically authorized to originate PPP ~~loans. An eligible business can apply for a PPP loan up to~~loans, and during the ~~greater of: (1) 2.5 times its average monthly payroll costs, or (2) $10.0 million. PPP~~second and third quarter of 2020, the Company originated 1,551 loans will have: (a) an interest rate of 1.0%; (b) a two-year loan term to maturity for loans originated before June 5th and a five-year maturity for loans originated beginning on June 5th; and (c) principal and interest payments deferred for six months fromtotaling $159 million under the ~~date of disbursement. The SBA will~~Paycheck Protection Program.

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~~guarantee 100% of~~Under the PPP, ~~loans made to eligible borrowers. The~~the entire principal amount of the ~~borrowers’ PPP~~borrower’s loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount, ~~under the PPP,~~ so long as the employer maintains or quickly rehires employees and maintains salary levels and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. ~~The Company expects most of these loans will be forgiven before year end.~~

As part of the Economic Relief Act, which became law on December 27, 2020, an additional $284 billion of federal resources was allocated to a reauthorized and revised PPP. On January 19, 2021, the Company began processing and originating PPP loans for this second round, which subsequently ended on May 31, 2021, and during this round, the Company originated 1,022 loans totaling $77 million.

Beginning in the fourth quarter of 2020 and continuing during 2021, the Company submitted PPP forgiveness applications to the SBA, and through September 30, ~~2020,~~2021, the Company ~~had originated 1,551 loans totaling $159~~received forgiveness or paydowns of $183 million, ~~under~~or 77%, of the ~~Paycheck Protection Program.~~ original PPP loan balances of $236 million with $156 million occurring during the nine months ended September 30, 2021.

As a PPP lender, the Company received fee income of approximately ~~$5.6 million. The Company~~$9.9 million with $7.7 million recognized ~~$1.8~~to date, including $3.3 million of PPP fee income recognized during 2020 and $4.4 million recognized during the ~~second and third quarters of 2020 with the remaining amount to be recognized in future quarters.~~nine months ended September 30, 2021. Unearned fees attributed to PPP loans, net of $0.1 million in fees paid to referral sources as prescribed by the SBA under the PPP, ~~program, was $3.5~~were $2.1 million as of September 30, ~~2020.~~2021.

The PPP loans originated by size were as follows as of September 30, ~~2020:~~2021:



(dollars in thousands)	Balance originated		Total SBA fee		Balance originated		Current balance		Total SBA fee		SBA fee recognized

$150,000 or less	$	46,516	$	2,326	$	76,594	$	19,237	$	4,866	$	3,578
Greater than $150,000 but less than $2,000,000		80,931		2,970		128,082		34,225		4,765		3,799
$2,000,000 or higher		31,656		316		31,656		-		316		316
Total PPP loans originated	$	159,103	$	5,612	$	236,332	$	53,462	$	9,947	$	7,693

~~Consumer~~

The table above does not include the $20.3 million in PPP loans acquired as a result of the merger with Landmark during the third quarter of 2021. As of September 30, ~~2020,~~2021, the balance of outstanding acquired PPP loans was $13.4 million.

Consumer

The consumer loan portfolio ~~totaled $221 million and~~ consisted of home equity installment, home equity line of credit, auto, direct finance leases and other consumer loans. ~~Company-originated loans totaled $208 million and acquired loans from MNB totaled $13 million.~~

As of ~~December 31, 2019,~~September 30, 2021, the consumer loan portfolio ~~totaled $212 million. The $9~~increased by $38 million, or 4%17%, ~~increase~~to $254 million compared to the December 31, 2020 balance of $216 million, due to $31 million in growth in the ~~consumer loan~~acquired portfolio ~~was due~~related to the ~~MNB acquisition.~~

~~Net of MNB-acquired loans, company-originated loans decreased by $4~~Landmark merger and $7 million ~~or 2%. This reduction~~ in ~~company-originated consumer loans was primarily the result of net runoff~~growth in the ~~auto loan~~originated portfolio, specifically from the ~~result~~home equity line of ~~COVID-19’s impact on car sales during the second~~credit and ~~third quarters of 2020.~~direct finance lease portfolios.

Residential

As of September 30, ~~2020,~~2021, the residential loan portfolio ~~totaled $240~~increased by $64 million, or 27%, to $306 million compared to the December 31, 2020 balance of $242 million due to $30 million in growth in the acquired portfolio related to the Landmark merger and $34 million in growth in the originated portfolio due to the strength of the housing market in the Company’s service area and the low interest rate environment.

The residential loan portfolio consisted primarily of held-for-investment residential loans for primary residences. ~~Company-originated~~Originated loans totaled ~~$197~~$238 million and acquired loans ~~from MNB~~ totaled ~~$43 million. As~~$68 million as of September 30, 2021 compared to originated loans of $204 million and acquired loans of $38 million as of December 31, ~~2019, the residential loan portfolio totaled $185 million. The $55 million, or 30%, increase in the residential loan portfolio was primarily due to the MNB acquisition.~~

Net of MNB-acquired loans, Company-originated loans increased by $12 million, or 6%, mainly due to $24 million in 121 mortgage modifications year-to date-to refinance existing loans at market rates to qualified customers. Management expects continued growth in residential loans for the remainder of 2020.

The Company’s service team is experienced, knowledgeable, and dedicated to servicing the community and its clients. The Company will continue to provide products and services that benefit our clients as well as the community which is very important to our success.

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There is much uncertainty regarding the effects COVID-19 may have on demand for loans and leases. The Company has been proactively trying to reach out to customers to understand their needs during this crisis.

Allowance for loan losses

Management evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (allowance) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. The provision for loan losses represents the amount necessary to maintain an appropriate allowance. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.

identification of specific impaired loans by loan category;

calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

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determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation; and

application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio, regulations, and/or current economic conditions.

A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial loans. Commercial loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management determines an upgrade or downgrade may be warranted. The credit risk grades for the commercial loan portfolio are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what management believes to be best practices and within common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.

Acquired loans are initially recorded at their acquisition date fair values with no carryover of the existing related allowance for loan losses. Fair values are based on a discounted cash flow methodology that involves assumptions and judgements as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Upon acquisition, in accordance with GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30. These loans are deemed purchased credit impaired loans and the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount.

Acquired ASC 310-20 loans, which are loans that did not meet the criteria of ASC 310-30, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. These loans are initially recorded at fair value and include credit and interest rate marks associated with purchase accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans after acquisition. As of September 30, 2021, no allowance was recorded for credit deterioration in acquired loans.

Each quarter, management performs an assessment of the allowance for loan losses. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due. The assessment process also includes the review of all loans on non-accrual status as well as a review of certain loans to which the lenders or the Credit Administration function have assigned a criticized or classified risk rating.

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The following tables set forth the activity in the allowance for loan losses and certain key ratios for the period indicated:


	As of and for the			As of and for the						As of and for the			As of and for the
	nine months ended			twelve months ended			nine months ended			nine months ended			twelve months ended			nine months ended
(dollars in thousands)	September 30, 2020			December 31, 2019			September 30, 2019			September 30, 2021			December 31, 2020			September 30, 2020

Balance at beginning of period	$	9,747		$	9,747		$	9,747		$	14,202		$	9,747		$	9,747

Charge-offs:
Commercial and industrial		(265)			(184)			(131)			(120)			(372)			(265)
Commercial real estate		(410)			(597)			(531)			(209)			(465)			(410)
Consumer		(184)			(398)			(255)			(110)			(296)			(184)
Residential		(35)			(330)			(330)			(43)			(35)			(35)
Total		(894)			(1,509)			(1,247)			(482)			(1,168)			(894)

Recoveries:
Commercial and industrial		24			32			17			20			26			24
Commercial real estate		22			317			28			241			30			22
Consumer		93			67			58			70			120			93
Residential		192			8			8			-			197			192
Total		331			424			111			331			373			331
Net charge-offs		(563)			(1,085)			(1,136)			(151)			(795)			(563)
Provision for loan losses		3,700			1,085			830			1,550			5,250			3,700
Balance at end of period	$	12,884		$	9,747		$	9,441		$	15,601		$	14,202		$	12,884

Allowance for loan losses to total loans		1.13	%		1.29	%		1.26	%		1.12	%		1.27	%		1.13	%
Net charge-offs to average total loans outstanding		0.08	%		0.15	%		0.21	%		0.02	%		0.08	%		0.08	%
Average total loans	$	975,294		$	732,152		$	723,958		$	1,248,495		$	1,019,373		$	975,294
Loans 30 - 89 days past due and accruing	$	1,254		$	1,366		$	2,478		$	1,086		$	1,598		$	1,254
Loans 90 days or more past due and accruing	$	81		$	-		$	7		$	112		$	61		$	81
Non-accrual loans	$	3,941		$	3,674		$	3,858		$	2,747		$	3,769		$	3,941
Allowance for loan losses to non-accrual loans		3.27	x		2.65	x		2.45	x		5.68	x		3.77	x		3.27	x
Allowance for loan losses to non-performing loans		3.20	x		2.65	x		2.44	x		5.46	x		3.71	x		3.20	x

For the nine months ended September 30, ~~2020,~~2021, the allowance increased ~~$3.1~~$1.4 million, or ~~32%~~10%, to ~~$12.9~~$15.6 million ~~compared to $9.8~~

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from $14.2 million at December 31, ~~2019~~2020 due to provisioning of ~~$3.7~~$1.6 million partially offset by ~~$0.6~~$0.2 million in net charge-offs.

~~For the nine months ended September 30, 2020,~~ The allowance for loan and lease losses decreased as a percentage of total loans ~~which represent gross loans less unearned lease revenue, increased $384 million, or 51%,~~ to ~~$1.1 billion compared to $753 million~~1.12% from 1.27% at December 31, ~~2019.~~

~~The increase~~2020 as the growth in the loan portfolio ~~resulted primarily from $224 million in loans, net of deferred costs, acquired~~(24%) outpaced the growth in the ~~merger with MNB and $156 million in loans originated under the PPP, net of deferred fees, primarily~~allowance for loan losses (10%) during the ~~second quarter 2020.~~same period.

Loans acquired from the MNB ~~merger~~and Landmark mergers (performing and non-performing) were initially recorded at their acquisition-date fair values. ~~Because~~Since there is no initial credit valuation allowance recorded under this method, the Company establishes a post-acquisition allowance of loan losses to record losses which may subsequently arise on the acquired loans. Since no deterioration was noted for any such loans following acquisition, no allowance for loan and lease losses was ~~recorded for them.~~provided at this time.

PPP loans made to eligible borrowers have a 100% SBA guarantee. Given this guarantee, no allowance for loan and lease losses was recorded for ~~them.~~

Through September 30, 2020, the loan portfolio increased by 51% year to date while the allowance for loan losses increased by 32% during the same period. This caused the allowance for loan and lease losses to decrease as a percentage of total loans to 1.13% from 1.29% at December 31, 2019. Loan growth exceeded allowance for loan and lease losses growth because $384 million in loans, or 33% of the loan portfolio, included loans acquired via the MNB merger and PPPthese loans.

~~As of September 30, 2020, the loan portfolio, net of PPP loans and MNB acquired loans, totaled $753 million, unchanged from $753 million as of December 31, 2019.~~

Management believes that the current balance in the allowance for loan losses is sufficient to meet the identified potential credit quality issues that may arise and other issues unidentified but inherent to the portfolio. Potential problem loans are those where there is known information that leads management to believe repayment of principal and/or interest is in jeopardy and the loans are currently neither on non-accrual status nor past due 90 days or more.

During the first quarter of ~~2020,~~2021, management increased the qualitative factors associated with its commercial, consumer, and residential portfolios related to ~~potential~~the rise in rates that occurred during the quarter, and the adverse changes in both the volume and severity of past due and non-accrual loans along with national and local economic conditions as a result of the COVID-19 pandemic. A statewide shutdown of non-essential business activity was orderedimpact that these increased rates are anticipated to have on March 16th in Pennsylvania. General economic reports and data indicate a recession with elevated unemployment and sustained low inflation. The duration and severity of the recession or the ultimate path of the recovery was not known at that point.estimated credit losses.

During the second quarter of ~~2020,~~2021, management increased the qualitative factors associated with its ~~loan~~commercial & industrial portfolio ~~despite the decrease in the Company-originated loan portfolio, to recognize higher inherent risk characteristics for loans that were deemed to have greater exposure~~related to the ~~economic impact of the COVID-19 pandemic. These characteristics included loans that received forbearance of any kind (see COVID-19 Accommodations), loans that were in high risk industries,~~rising delinquency observed during this period, which was on a worsening trend on both a quarter-over-quarter and loans that had prior delinquency of over 60 days. High risk industries include hotel accommodations, food service, energy, recreation, certain parts of the transportation segment, and other service industries. The duration and severity of the recession or the ultimate path of the recovery remains uncertain. Going forward, management will increase the allowance for loan losses consistent with increased exposure to inherent loss in the loan portfolio as economic impacts worsen due to COVID-19.year-over-year basis.

During the third quarter of ~~2020,~~2021, management ~~increased~~reduced the qualitative factors associated with its loan portfolio by estimating higher inherent risk characteristics for loans that received second, COVID-related deferrals. Management further modeled the potential impact on the existing loan portfolio given the potential negative impactcommercial, consumer, and

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residential portfolios related to the ~~local economy given a lack of further COVID-related fiscal stimulus.~~improvement in the economic environment compared to the prior period, which was attributed to the improving key risk indicators used in the analysis including: national unemployment rate, personal consumer expenditures, industrial production and consumer sentiment.

Management will continue to monitor the potential for increased risk exposure due to the adverse economic impact of a prolonged COVID-19 pandemic. Should the duration and/or severity of the pandemic’s economic impact increase, management will take measures commensurate with the then observed risk to increase the provision for loan losses and, by extension, the allowance for loan and lease losses as appropriate.

The allocation of net charge-offs among major categories of loans are as follows for the periods indicated:

For the nine
% of Total
For the nine
% of Total
months ended
Net
months ended
Net
(dollars in thousands)
September 30, 2020
Charge-offs
September 30, 2019
Charge-offs
Net charge-offs
Commercial and industrial
$
(241)
43
%
$
(113)
10
%
Commercial real estate
(388)
69
(503)
44
Consumer
(91)
16
(198)
18
Residential
157
(28)
(322)
28
Total net charge-offs
$
(563)
100
%
$
(1,136)
100
%

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	For the nine		% of Total		For the nine		% of Total
	months ended		Net		months ended		Net
(dollars in thousands)	September 30, 2021		Charge-offs		September 30, 2020		Charge-offs
Net charge-offs
Commercial and industrial	$	(100)	66	%	$	(241)	43	%
Commercial real estate		33	(22)			(388)	69
Consumer		(40)	27			(91)	16
Residential		(43)	29			157	(28)
Total net charge-offs	$	(150)	100	%	$	(563)	100	%

For the nine months ended September 30, ~~2020,~~2021, net charge-offs against the allowance totaled ~~$0.6 million~~$150 thousand compared with ~~$1.1 million for the nine months ended September 30, 2019, representing a $0.5 million, or 45%, decrease. The sharp decrease was attributed to a $0.2 million recovery during the first quarter~~net charge-offs of 2020 in the form of a reimbursement from the Federal National Mortgage Association (“FNMA”) for previously sold mortgages charged-off during the third quarter of 2019. Excluding this recovery, net charge-offs$563 thousand for the nine months ended September 30, 2020, ~~would have shown an~~representing a $413 thousand, or 74%, decrease. This decrease was attributed to general economic improvement ~~decreasing by $0.3 million, or 27%, over~~and continued high levels of liquidity for the ~~prior year.~~Company’s customers.

For a discussion on the provision for loan losses, see the “Provision for loan losses,” located in the results of operations section of management’s discussion and analysis contained herein.

The allowance for loan losses can generally absorb losses throughout the loan portfolio. However, in some instances an allocation is made for specific loans or groups of loans. Allocation of the allowance for loan losses for different categories of loans is based on the methodology used by the Company, as previously explained. The changes in the allocations from period-to-period are based upon quarter-end reviews of the loan portfolio.

Allocation of the allowance among major categories of loans for the periods indicated, as well as the percentage of loans in each category to total loans, is summarized in the following table. This table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. When present, the portion of the allowance designated as unallocated is within the Company’s guidelines:



	September 30, 2020				December 31, 2019				September 30, 2019				September 30, 2021				December 31, 2020				September 30, 2020
			Category				Category				Category				Category				Category				Category
			% of				% of				% of				% of				% of				% of
(dollars in thousands)	Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans
Category
Commercial real estate	$	5,843	33	%	$	3,933	31	%	$	3,775	32	%	$	7,285	41	%	$	6,383	34	%	$	5,843	33	%
Commercial and industrial		1,848	27			1,484	16			1,276	16			2,441	19			2,407	25			1,848	27
Consumer		2,272	19			2,013	28			2,083	28			2,446	18			2,552	19			2,272	19
Residential real estate		2,870	21			2,278	25			2,238	24			3,013	22			2,781	22			2,870	21
Unallocated		51	-			39	-			69	-			416	-			79	-			51	-
Total	$	12,884	100	%	$	9,747	100	%	$	9,441	100	%	$	15,601	100	%	$	14,202	100	%	$	12,884	100	%

~~The allocation~~As of ~~the allowance for~~September 30, 2021, the commercial loan portfolio, ~~which is comprised~~consisting of CRE and C&I loans, ~~accounted for approximately 60%~~comprised 62% of the total allowance for loan losses atcompared with 62% on December 31, 2020 and 60% on September 30, ~~2020, which represents a four percentage point~~2020. The 2% year-over-year increase in the commercial loan allowance allocation resulted from ~~56%~~increased risk in the commercial portfolio due residual economic impact due to the COVID-19 pandemic.

As of September 30, 2021, the consumer loan portfolio comprised 16% of the total allowance for loan losses atcompared with 18% on December 31, ~~2019~~2020 and ~~a six percentage point increase from the 54% of the total allowance for loan and lease losses at~~ September 30, ~~2019.~~

2020. The ~~increase~~2% decrease in the consumer loan allowance ~~allocated to~~allocation was the result of relatively higher allocation in the commercial portfolio ~~was attributed to the recognition of~~combined with improving household financial status from increased ~~inherent risk due to the economic impact of the COVID-19 pandemic.~~liquidity and strengthening employment prospects.

~~The allocation~~As of September 30, 2021, the ~~allowance for the consumer~~residential loan portfolio ~~accounted for approximately 18%~~comprised 19% of the total allowance for loan losses atcompared with 20% on December 31, 2020 and 22% on September 30, ~~2020, which is down from 21%~~2020. The 1% and 3% decrease, respectively, was the result of the ~~total allowance for loan losses at December 31, 2019~~relatively higher

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allocation in the commercial portfolio combined with improving household financial status from increased liquidity and ~~22%~~strengthening employment prospects.

As of ~~the total allowance for loan losses at~~ September 30, ~~2019.~~

~~The decrease in~~2021, the ~~allowance allocated to the consumer loan portfolio was attributed to the relative decrease in the percentage of consumer loans in the portfolio.~~

The allocation of the allowance for the residential real estate portfolio, accounted for approximately 22% of the total allowance for loan losses at September 30, 2020, which represents a one percentage point decrease from 23% of the total allowance for loan losses at December 31, 2019 and a two percentage point decrease from 24% of the total allowance for loan losses at September 30, 2019.

~~The decrease in the allowance allocated to the residential real estate portfolio was attributed to the relative decrease in the percentage of residential loans in the portfolio.~~

~~The~~ unallocated ~~amount represents~~reserve, representing the portion of the allowance not specifically identified with a loan or groups of ~~loans. The unallocated reserve was~~loans, comprised 3% of the total allowance for loan losses compared with less than 1% of the total allowance for loan losses ~~at September 30, 2020, unchanged from less than 1% of the total allowance for loan losses at~~on December 31, ~~2019~~2020 and September 30, ~~2019.~~2020. Management elected to retain a higher unallocated reserve due to increasing uncertainty over Federal Reserve response to persistently high inflation and uncertainty over the impact on consumer demand due to continued supply chain problems heading into the critical holiday season.

Non-performing assets

The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, ~~TDRs,~~troubled debt restructurings (TDRs), other real estate owned (ORE) and repossessed assets.

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The following table sets forth non-performing assets data as of the period indicated:



(dollars in thousands)	September 30, 2020		December 31, 2019		September 30, 2019		September 30, 2021		December 31, 2020		September 30, 2020

Loans past due 90 days or more and accruing	$	81	$	-	$	7	$	112	$	61	$	81
Non-accrual loans *		3,941		3,674		3,858		2,747		3,769		3,941
Total non-performing loans		4,022		3,674		3,865		2,859		3,830		4,022
Troubled debt restructurings		2,579		991		964		2,479		2,571		2,579
Other real estate owned and repossessed assets		376		369		685		803		256		376
Total non-performing assets	$	6,977	$	5,034	$	5,514	$	6,141	$	6,657	$	6,977

Total loans, including loans held-for-sale	$	1,151,010	$	755,053	$	750,470	$	1,435,997	$	1,149,438	$	1,151,010
Total assets	$	1,711,043	$	1,009,927	$	1,011,424	$	2,411,799	$	1,699,510	$	1,711,043
Non-accrual loans to total loans		0.34%		0.49%		0.51%		0.19%		0.33%		0.34%
Non-performing loans to total loans		0.35%		0.49%		0.52%		0.20%		0.33%		0.35%
Non-performing assets to total assets		0.41%		0.50%		0.55%		0.25%		0.39%		0.41%

* In the table above, the amount includes non-accrual TDRs of $0.6 million as of September 30, 2021, $0.7 million as of December 31, 2020 and $0.5 million as of September 30, ~~2020, $0.6 million as of December 31, 2019 and $0.8 million as of September 30, 2019.~~2020.

InManagement routinely reviews the ~~review of loans for both delinquency and collateral sufficiency, management concluded that there were several~~loan portfolio to identify loans that ~~lacked the ability~~are either delinquent or are otherwise deemed by management unable to repay in accordance with contractual terms. ~~The decision to place~~Generally, loans ~~on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. Generally, commercial loans~~of all types are placed on non-accrual status ~~when management has determined that payment~~if a loan of ~~all contractual~~any type is past due 90 or more days or if collection of principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by residential real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest, anddoubt. Further, unsecured consumer loans are charged-off when the ~~loan~~principal and/or interest is 90 days or more past ~~due as to principal and interest.~~due. Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income.

Non-performing assets represented ~~0.41%~~0.25% of total assets at September 30, ~~2020~~2021 compared with ~~0.50%~~0.39% at December 31, ~~2019~~2020 and ~~0.55%~~0.41% at September 30, ~~2019.~~2020. The year-to-date improvement in the non-performing assets ratio was the result of the ~~$701~~$0.5 million, or ~~69%~~8%, decrease in non-performing assets, specifically non-accrual loans, coupled with the $713 million, or 42%, increase in total assets to ~~$1.7~~$2.4 billion at September 30, ~~2020 and the year-over-year improvement in the non-performing assets ratio was the result of the $700 million, or 69%, increase in total assets.~~

As of September 30, 2020, non-performing assets increased to $7.0 million from $5.0 million at December 31, 2019 and $5.5 million at September 30, 2019. The $2.0 million year-to-date increase resulted from a $1.6 million increase in accruing TDRs, a $0.2 million increase in non-accrual loans, and a $0.1 million increase in loans over 90 days past due and accruing. The $1.5 million year-over-year increase in non-performing assets was due to a $1.6 million increase in accruing TDRs, a $0.1 million increase in loans over 90 days past due and accruing, and a $0.1 million increase in non-accrual loans, which was partially offset by a $0.3 million reduction in other real estate owned and repossessed assets.2021.

From December 31, ~~2019~~2020 to September 30, ~~2020,~~2021, non-accrual loans ~~increased $0.2~~declined $1.0 million, or 7%27%, from ~~$3.7~~$3.8 million to ~~$3.9~~$2.8 million. The $1.0 million decline in non-accrual loans was the result of $1.3 million in payments, $0.3 million in charge-offs, and $0.1 million in moves to ORE offset by $0.7 million in additions. At September 30, ~~2020,~~2021, there were a total of 4134 loans to 3730 unrelated borrowers with balances that ranged from less than $1 thousand to $0.5 million. At December 31, ~~2019,~~2020, there were a total of 4446 loans to 3438 unrelated borrowers with balances that ranged from less than $1 thousand to $0.5 million. The $0.2 million increase in non-accrual loans was the result of $2.4 million in new non-accruals, $0.2 million in expenses added to balances, $1.1 million in payments, $0.7 million in charge-offs and $0.6 million in transfers to ORE.

There were ~~four direct finance leases~~two full recourse auto loans and one consumer other loan totaling ~~$81~~$112 thousand that were over 90 days past due as of September 30, ~~2020~~2021 compared to ~~no loans~~two direct finance leases totaling $61 thousand that were over 90 days past due as of December 31, ~~2019 and one loan totaling $7 thousand as of September 30, 2019 .~~2020. The Company seeks payments from all past due customers through an aggressive customer communication process. A past due loan will be placed on non-accrual at the 90-day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts.

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The composition of non-performing loans as of September 30, ~~2020~~2021 is as follows:




			Past due									Past due
	Gross		90 days or		Non-		Total non-		% of	Gross		90 days or		Non-		Total non-		% of
	loan		more and		accrual		performing		gross	loan		more and		accrual		performing		gross
(dollars in thousands)	balances		still accruing		loans		loans		loans	balances		still accruing		loans		loans		loans
Commercial and industrial	$	300,943	$	-	$	418	$	418	0.14%	$	264,170	$	-	$	259	$	259	0.10%
Commercial real estate:
Non-owner occupied		191,794		-		1,160		1,160	0.60%		306,537		-		601		601	0.20%
Owner occupied		175,321		-		1,133		1,133	0.65%		247,563		-		1,020		1,020	0.41%
Construction		10,213		-		-		-	-		12,081		-		-		-	-
Consumer:
Home equity installment		40,729		-		33		33	0.08%		47,331		-		27		27	0.06%
Home equity line of credit		52,769		-		430		430	0.81%		53,747		-		97		97	0.18%
Auto loans		99,089		-		20		20	0.02%		121,080		111		49		160	0.13%
Direct finance leases *		17,703		81		-		81	0.46%		22,349		-		-		-	-
Other		9,479		-		-		-	-		7,701		1		-		1	0.01%
Residential:
Real estate		221,175		-		747		747	0.34%		271,760		-		694		694	0.26%
Construction		18,488		-		-		-	-		34,519		-		-		-	-
Loans held-for-sale		13,307		-		-		-	-		47,159		-		-		-	-
Total	$	1,151,010	$	81	$	3,941	$	4,022	0.35%	$	1,435,997	$	112	$	2,747	$	2,859	0.20%

*Net of unearned lease revenue of ~~$1.1~~$1.3 million.

Payments received from non-accrual loans are recognized on a cost recovery method. Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. If the non-accrual loans that were outstanding as of September 30, ~~2020~~2021 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of ~~$140~~$144 thousand.

The following tables set forth the activity in TDRs for the periods indicated:



As of and for the nine months ended September 30, 2020
As of and for the nine months ended September 30, 2021													As of and for the nine months ended September 30, 2021
	Accruing				Non-accruing								Accruing		Non-accruing
	Commercial		Commercial		Commercial		Residential		Consumer				Commercial		Commercial		Commercial
(dollars in thousands)	& industrial		real estate		real estate		real estate		installment		Total		real estate		real estate		& industrial		Total

Troubled Debt Restructures:
Beginning balance	$	-	$	991	$	561	$	-	$	-	$	1,552	$	2,571	$	456	$	206	$	3,233
Additions		-		1,600		2		-		-		1,602		2		-		-		2
Pay downs / payoffs		-		(12)		(5)		-		-		(17)		(94)		(37)		(6)		(137)
Charge offs		-		-		(99)		-		-		(99)		-		-		(65)		(65)
Ending balance	$	-	$	2,579	$	459	$	-	$	-	$	3,038	$	2,479	$	419	$	135	$	3,033
Number of loans		-		8		2		-		-		10		7		1		2		10

‎



As of and for the year ended December 31, 2020
	Accruing		Non-accruing
	Commercial		Commercial		Commercial
(dollars in thousands)	real estate		real estate		& industrial		Total
Troubled Debt Restructures:
Beginning balance	$	991	$	561	$	-	$	1,552
Additions		1,600		2		206		1,808
Pay downs / payoffs		(20)		(8)		-		(28)
Charge offs		-		(99)		-		(99)
Ending balance	$	2,571	$	456	$	206	$	3,233
Number of loans		8		2		2		12

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As of and for the year ended December 31, 2019
Accruing
Non-accruing
Commercial
Commercial
Commercial
Residential
Consumer
(dollars in thousands)
& industrial
real estate
real estate
real estate
installment
Total
Troubled Debt Restructures:
Beginning balance
$
24
$
1,806
$
520
$
764
$
413
$
3,527
Additions
-
32
57
-
-
89
Transfers
-
(645)
421
(430)
-
(654)
Pay downs / payoffs
(24)
(202)
(76)
(316)
(413)
(1,031)
Charge offs
-
-
(361)
(18)
-
(379)
Ending balance
$
-
$
991
$
561
$
-
$
-
$
1,552
Number of loans
-
6
2
-
-
8

The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a TDR. TDRs arise when a borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards in order to maximize the Company’s recovery.

Consistent with Section 4013 and the Revised Statement of Section 4013 of the CARES Act, specifically “Temporary Relief From Troubled Debt Restructurings”, the Company approved requests by borrowers to modify loan terms and defer principal and/or interest payment for loans. U.S. GAAP permits the temporary suspension of TDR determination defined under ASC 310-40 provided that such modifications are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief. This includes short-term (i.e. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current for purposes of Section 4013 are those that are less than 30 days past due on their contractual payments at the time the modification program is implemented.

From December 31, ~~2019~~2020 to September 30, ~~2020,~~2021, TDRs ~~increased $1.5 million,~~decreased $200 thousand, or ~~96%~~6%, primarily due to the payoff of a $78 thousand accruing commercial real estate TDR and charge-offs totaling $65 thousand for two ~~loans~~non-accrual commercial real estate TDRs to a single ~~commercial borrower modified during the third quarter being designated as TDRs.~~borrower. At December 31, ~~2019,~~2020, there were a total of 812 TDRs by 9 unrelated borrowers with balances that ranged from $1 thousand to $1.3 million, and at September 30, 2021, there were a total of 10 TDRs by 7 unrelated borrowers with balances that ranged from ~~$80 thousand to $0.5 million. At September 30, 2020, there were a total of 10 TDRs by 8 unrelated borrowers with balances that ranged from $5~~$50 thousand to $1.3 million.

Loans modified in a TDR may or may not be placed on non-accrual status. At September 30, ~~2020,~~2021, there were ~~two~~three TDRs totaling ~~$0.5~~$0.6 million that were on non-accrual status compared to ~~two~~four TDRs totaling ~~$0.6~~$0.7 million at December 31, ~~2019.~~2020.

Beginning the week of March 16, 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. Modification terms included interest only or full payment deferral for up to 6 months. As of September 30, ~~2020,~~2021, the Company had ~~212 temporary~~no COVID-related modifications with principal balances totaling $25.1 million outstanding, which included 95 second requests for temporary forbearance modifications totaling $11.8 million, 84 temporary forbearance modifications still in their original forbearance totaling $9.4 million and 33 first requests for temporary forbearance modifications totaling $3.9 million.

~~Details with respect~~outstanding. Although contractual payments have returned to ~~the actual loan modifications are as follows:~~

Types of Loans
Number of Loans
Deferral Period
Balance
Percentage of Tier 1 Capital
Commercial Purpose
119
Up to 6 months
$
18,905
13.1%
Consumer Purpose
93
Up to 6 months
6,236
4.3%
212
$
25,141
17.4%

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The following table provides information with respect to the Company’s commercial COVID-19 accommodations by sector at September 30, 2020. Only the five sectors with the highest amount of accommodationsnormal, residual impacts on ~~a dollar basis are shown in this table. All other sectors are classified in the “Other” category.~~

(dollars in thousands)
Count
Balance
Percentage of Total Loan Balance
Percentage of Tier 1 Capital
Real Estate Rental and Leasing
55
$
10,254
0.9%
7.1%
Accommodation and Food Services
15
1,380
0.1%
1.0%
Management of Companies and Enterprises
1
1,198
0.1%
0.8%
Health Care and Social Assistance
7
1,081
0.1%
0.7%
Transportation and Warehousing
7
1,034
0.1%
0.7%
Other
34
3,958
0.3%
2.7%
Total commercial accommodations
119
$
18,905
1.7%
13.1%

The global pandemic referred to as COVID-19 has created many impediments to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and the Company’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is the Company’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’sborrowers’ ability to repay ~~loans and comply with terms.~~due to the COVID-19 pandemic may persist.

Foreclosed assets held-for-sale

From December 31, ~~2019~~2020 to September 30, ~~2020,~~2021, foreclosed assets held-for-sale (ORE) ~~rose~~increased from ~~$349~~$256 thousand to ~~$365~~$803 thousand, a ~~$16~~$547 thousand ~~or 4%, increase. Two properties~~increase, which was primarily attributed to ~~two unrelated borrowers for $338~~one $488 thousand ~~were added during the second quarter and nine properties to four unrelated borrowers for $475 thousand were added~~ORE property that was acquired from Landmark during the third ~~quarter. Two properties were sold for $250 thousand during the first~~ quarter two properties were sold for $281 thousand during the second quarter, and one property securing one loan was sold for $14 thousand during the third quarter. Also in the third quarter, the Company sold one of three properties securing one loan for $142 thousand and sold two of four properties securing another loan relationship for $82 thousand. Further, one foreclosed asset was written down by $14 thousand to fair market value in the third quarter.2021.

The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale:



	September 30, 2020			December 31, 2019			September 30, 2021			December 31, 2020
(dollars in thousands)	Amount		#	Amount		#	Amount		#	Amount		#

Balance at beginning of period	$	349	7	$	190	6	$	256	6	$	349	7

Additions		813	10		1,229	6		814	5		770	10
Pay downs		-			(18)			-			(1)
Write downs		(14)			(82)			(14)			(36)
Sold		(783)	(8)		(970)	(5)		(253)	(6)		(826)	(11)
Balance at end of period	$	365	9	$	349	7	$	803	5	$	256	6

As of September 30, ~~2020,~~2021, ORE consisted of ~~nine~~five properties securing loans to ~~eight~~five unrelated borrowers totaling ~~$365~~$803 thousand. ~~Six~~Four properties ($~~318~~802 thousand) to ~~five~~four unrelated borrowers were added in ~~2020;~~2021 and one property ($321 thousand) was added in ~~2019; one property (less than $1 thousand) was added in 2017; and one property ($14 thousand) was added in 2014.~~2017. Of the ~~nine~~five properties, ~~four~~two properties are under agreement of sale and three properties are listed for ~~sale, and two properties are in the process of being sold.~~sale.

As of September 30, 2021 and December 31, 2020, the Company had ~~two~~no other repossessed assets ~~held-for-sale, with a balance of $11 thousand compared to two other repossessed assets held-for-sale, with a balance of $20 thousand as of December 31, 2019.~~held-for-sale.

Cash surrender value of bank owned life insurance

The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies. BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as components of non-interest income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company. This profitability is used to offset a portion of current and future employee benefit costs. In March 2019, the Company invested $2.0 million in additional BOLI as a source of funding for additional life insurance benefits that provides for payments upon death for officers and employee

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benefit expenses related to the Company’s non-qualified SERP implemented for certain executive officers. In December 2020, the Company invested $6 million in BOLI and $5 million in BOLI with taxable annuity rider investments. As a result of the Landmark acquisition, the Company acquired $7.2 million in BOLI during the third quarter of 2021. The BOLI cash surrender value build-up can be liquidated if necessary, with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that enhances the Company’s capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value.

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Premises and equipment

Net of depreciation, premises and equipment increased ~~$6.9~~$1.8 million during the first nine months of ~~2020.~~2021. The Company ~~acquired $6.9~~added $3.4 million in fixed assets ~~as a result of~~from the Landmark merger and purchased ~~$1.4~~$1.8 million in ~~additions to~~ fixed assets throughout 2021. These increases were partially offset by ~~$1.4~~$1.6 million in depreciation expense ~~recorded.~~and $1.5 million in transfers to other assets held-for-sale. The Company ~~is expected~~expects to begin ~~the renovation of its main office first floor~~ branch ~~in 2020~~remodeling and corporate center planning which ~~will~~may increase construction in process ~~by approximately $2.3~~and is evaluating its branch network looking for consolidation that makes sense for more efficient operations. On December 23, 2020, the Commonwealth of Pennsylvania authorized the release of $2.0 million ~~with completion expected by~~in Redevelopment Assistance Capital Program (RACP) funding for the ~~middle of 2022.~~Company’s headquarters project in Lackawanna County. Although the Company was awarded the grant, funds will not be available until a final project is selected and certain requirements are met.

Other assets

During the first nine months of ~~2020,~~2021, the ~~$9.7~~$7.3 million increase in other assets was due mostly to ~~$9.3~~a $4.2 million increase in deferred tax assets, $1.4 million of ~~municipal~~ security settlements ~~pending.~~pending, $1.4 million transferred to other assets held-for-sale and $0.4 million increase in mortgage servicing rights.

Funds Provided:

Deposits

The Company is a community based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 2023 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law. Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market and non-interest bearing checking (DDA). The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years. Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.

The following table represents the components of deposits as of the date indicated:



	September 30, 2020				December 31, 2019				September 30, 2021				December 31, 2020
(dollars in thousands)	Amount		%		Amount		%		Amount		%		Amount		%

Interest-bearing checking	$	455,601	30.0	%	$	242,171	29.0	%	$	723,282	33.4	%	$	453,896	30.0	%
Savings and clubs		172,904	11.4			104,854	12.5			228,285	10.6			179,676	11.9
Money market		337,261	22.3			180,478	21.6			475,982	22.0			340,654	22.6
Certificates of deposit		142,517	9.4			116,211	13.9			148,949	6.9			127,783	8.5
Total interest-bearing		1,108,283	73.1			643,714	77.0			1,576,498	72.9			1,102,009	73.0
Non-interest bearing		408,840	26.9			192,023	23.0			586,952	27.1			407,496	27.0
Total deposits	$	1,517,123	100.0	%	$	835,737	100.0	%	$	2,163,450	100.0	%	$	1,509,505	100.0	%

Total deposits increased ~~$681.4~~$653.9 million, or ~~82%~~43%, from ~~$835.7 million~~$1.5 billion at December 31, ~~2019~~2020 to ~~$1.5~~$2.2 billion at September 30, ~~2020.~~2021. Non-interest bearing and interest-bearing checking accounts contributed the most to the deposit growth with increases of ~~$216.8~~$179.5 million and ~~$213.4~~$269.4 million, respectively. ~~The Company~~Non-interest bearing checking growth included $101.0 million acquired ~~checking accounts~~ from the Landmark merger ~~with MNB and also added accounts in~~during the ~~Lehigh Valley after the merger. Of the growth in non-interest bearing checking accounts, $119.6 million was new accounts in the Lehigh Valley.~~third quarter of 2021. The remaining growth ~~of over $97 million~~ was primarily due to an increase in business ~~deposit~~ account balances ~~from relief~~supplemented by an increase in personal account balances. Interest-bearing checking account growth included $56.2 million in balances acquired from the ~~CARES Act~~Landmark merger and ~~customers’ preference~~a $43.5 million deposit from one public customer related to ~~keep money in their checking accounts during this uncertain economic climate.~~federal pandemic relief. The remaining increase in interest-bearing checking accounts ~~included $108.3 million in new deposits from the Lehigh Valley. The remaining increase of over $105 million~~ was primarily due to business activity, government relief due to the pandemic, seasonal tuition and tax deposits and ~~college tuition cycles and relief~~shifts from ~~the CARES Act.~~maturing CDs. Money market accounts also increased ~~$156.8~~$135.3 million, ~~$94.0~~including $86.5 million ~~of which was added in the Lehigh Valley, and the remainder was mostly~~acquired from Landmark, due to higher balances of personal and business accounts and shifts from other types of deposit accounts. The Company focuses on obtaining a full-banking relationship with existing checking account customers as well as forming new customer relationships. Savings accounts increased ~~$68.0~~$48.6 million, including $14.5 million from the Landmark merger, due primarily to ~~$51.0 million in accounts added in the Lehigh Valley and also~~ an increase in personal account balances. The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop creative programs for its customers. ~~Growth~~For the last quarter of 2021, the Company expects deposit growth to fund asset growth with expansion in ~~deposits from~~the new ~~markets is expected from a full year with the Mountain Top branch~~Lehigh Valley market and the ~~merger with MNB Corporation.~~acquisition of Landmark during the third quarter. With pandemic-related restrictions fully lifted, the Company anticipates personal and business spending to increase and therefore average deposit balances to decline. Seasonal public deposit fluctuations are ~~expected to remain volatile~~usual, and at times may partially offset ~~this~~future deposit growth.

~~Additionally,~~During the first nine months of 2021, CDs ~~also~~ increased ~~$26.3~~$21.2 million due to ~~$50.0~~the $65.0 million in ~~accounts added in~~CDs acquired from the ~~Lehigh Valley.~~merger with

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Landmark. Otherwise, ~~the~~ CD ~~portfolio declined~~balances continue to decline as rates dropped during 2020 and ~~CD promos~~2021 and previous years' promotional CDs reached maturity. Of the balance of outstanding CDs at September 30, 2021, $78.6 million, or 53%, had a balance at December 31, 2020 and $60.4 million, or 41%, were acquired from the merger with Landmark. The majority of the remaining maturing CD balances were transferred to transactional accounts primarily interest-bearing checking and money market accounts. During the third quarter of 2021, $12.0 million in CDs from one public customer was transferred to an interest-bearing checking account. The Company will continue to pursue strategies to grow and retain retail and business customers with an emphasis on deepening and broadening existing and creating new relationships.

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The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program and Insured Cash Sweep (ICS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum insured amount of $250,000. In the CDARS program, deposits with varying terms and interest rates, originated in the Company’s own markets, are exchanged for deposits of other financial institutions that are members in the CDARS network. By placing the deposits in other participating institutions, the deposits of our customers are fully insured by the FDIC. In return for deposits placed with network institutions, the Company receives from network institutions deposits that are approximately equal in amount and are comprised of terms similar to those placed for our customers. Deposits the Company receives from other institutions are considered reciprocal deposits by regulatory definitions. The Company did not have any CDARs as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, ICS reciprocal deposits represented ~~$64.1~~$32.8 million and ~~$19.7~~$46.2 million, or 4%2% and 2%3%, of total deposits which are included in interest-bearing checking accounts in the table above. The ~~$44.4~~$13.3 million ~~increase~~decrease in ICS deposits is primarily due to public funds deposit transfers from ICS accounts to other interest-bearing checking ~~accounts to ICS~~ accounts.

The maturity distribution of certificates of deposit at September 30, ~~2020~~2021 is as follows:


			More than		More than		More						More than		More than		More
	Three months		three months		six months to		than twelve				Three months		three months		six months to		than twelve
(dollars in thousands)	or less		to six months		twelve months		months		Total		or less		to six months		twelve months		months		Total
CDs of $100,000 or more	$	17,966	$	21,114	$	24,928	$	13,196	$	77,204	$	18,100	$	17,594	$	11,400	$	14,787	$	61,881
CDs of less than $100,000		14,773		10,753		14,736		24,955		65,217		20,667		17,027		25,831		23,466		86,991
Total CDs	$	32,739	$	31,867	$	39,664	$	38,151	$	142,421	$	38,767	$	34,621	$	37,231	$	38,253	$	148,872

There is a remaining time deposit premium of ~~$96~~$77 thousand that will be amortized into income on a level yield amortization method over the contractual life of the deposits.

Certificates of deposit of $250,000 or more amounted to ~~$44.7~~$23.5 million and ~~$44.5~~$41.1 million as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Approximately ~~23%~~26% of the CDs, with a weighted-average interest rate of ~~1.48%~~0.37%, are scheduled to mature during the last quarter of ~~2020~~2021 and an additional ~~55%~~56%, with a weighted-average interest rate of ~~1.02%~~0.39%, are scheduled to mature during ~~2021.~~2022. Renewing CDs are currently expected to re-price to lower market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. The Company plans to address repricing CDs in the ordinary course of business on a relationship basis and is prepared to match rates when prudent to maintain relationships. Growth in CD accounts is challenged by the current and expected rate environment and clients’ preference for short-term rates, as well as aggressive competitor rates. The Company is not currently offering any CD promotions but may resume promotions in the future. The Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company.

Borrowings

Borrowings are used as a complement to deposit generation as an alternative funding source whereby the Company will borrow under advances from the FHLB of Pittsburgh and other correspondent banks for asset growth and liquidity ~~needs~~needs.

Short-term borrowings may include overnight balances with FHLB line of credit and/or correspondent bank’s federal funds lines which the Company may require to fund daily liquidity needs such as deposit outflow, loan demand and operations. ~~Short-term~~There were no short-term borrowings ~~decreased $37.8 million during the first nine months~~as of September 30, 2021 and December 31, 2020 as growth in deposits ~~replaced overnight borrowings.~~funded asset growth.

As of September 30, 2021, the Company had 18 secured borrowing agreements with third parties based on 9 loans totaling $16.9 million that were acquired during the third quarter of 2021. The Company will work to resolve these loan participations classified as secured borrowings over the next year.

During the first ~~nine months~~quarter of ~~2020,~~2021, the Company paid off ~~$10~~$5 million in FHLB advances with a weighted average interest rate of ~~2.97%~~3.07%. The Company had no FHLB advances as of September 30, 2021. During the ~~second~~third quarter of ~~2020,~~2021, the Company acquired ~~$7.6~~$4.5 million ofin FHLB advances from the Landmark merger that was subsequently paid off. As of September 30, ~~2020,~~2021, the Company had the ability to borrow an additional ~~$421.1~~$452.6 million from the FHLB.

~~The following table represents the components of borrowings as of the date indicated:~~

September 30, 2020
December 31, 2019
(dollars in thousands)
Amount
%
Amount
%
Overnight borrowings
$
-
-
%
$
37,839
71.6
%
FHLB advances
5,000
100.0
15,000
28.4
Total
$
5,000
100.0
%
$
52,839
100.0
%

‎

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~~The original maturity dates of FHLB advances as of September 30, 2020 are as follows:~~

(dollars in thousands)
Amount
Weighted average rate
Maturity date 1 year or less
$
-
-
%
After 1 but within 2
-
-
After 2 but within 3
5,000
3.07
After 3 but within 4
-
-
After 4 years
-
-
Total
$
5,000
3.07
%

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Management of interest rate risk and market risk analysis.

The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its exposures are critical factors in the regulatory evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy. Management believes the Company’s interest rate risk measurement framework is sound and provides an effective means to measure, monitor, analyze, identify and control interest rate risk in the balance sheet.

The Company is subject to the interest rate risks inherent in its lending, investing and financing activities. Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning assets and interest-bearing liabilities, except for those assets or liabilities with a short term remaining to maturity. Interest rate risk management is an integral part of the asset/liability management process. The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position. Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations. The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.

Asset/Liability Management. One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO), which is comprised of senior management and members of the board of directors. ALCO meets quarterly to monitor the relationship of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk is a regular part of managing the Company. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of non-contractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the board of directors which includes limits on the impact to earnings from shifts in interest rates.

Interest Rate Risk Measurement. Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings at risk simulation and economic value at risk simulation. While each of the interest rate risk measurements has limitations, collectively, they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company and the distribution of risk along the yield curve, the level of risk through time and the amount of exposure to changes in certain interest rate relationships.

Static Gap. The ratio between assets and liabilities re-pricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.

To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals. A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) indicates the opposite effect. The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread. At September 30, ~~2020,~~2021, the Company maintained a one-year cumulative gap of positive (asset sensitive) ~~$294.9~~$110.3 million, or ~~17%~~5%, of total assets. The effect of this positive gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of falling interest rates. Conversely, in an increasing interest rate environment, net interest income could be positively impacted because more assets than liabilities will re-price upward during the one-year period.

Certain shortcomings are inherent in the method of analysis discussed above and presented in the next table. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest

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rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table amounts. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

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The following table illustrates the Company’s interest sensitivity gap position at September 30, ~~2020:~~2021:



			More than three		More than								More than three		More than
	Three months		months to		one year		More than				Three months		months to		one year		More than
(dollars in thousands)	or less		twelve months		to three years		three years		Total		or less		twelve months		to three years		three years		Total

Cash and cash equivalents	$	117,545	$	-	$	-	$	14,233	$	131,778	$	115,920	$	-	$	-	$	51,466	$	167,386
Investment securities ⁽¹⁾⁽²⁾		24,220		48,583		58,661		211,612		343,076		12,326		44,552		128,771		504,597		690,246
Loans and leases⁽²⁾		394,147		202,776		321,968		219,235		1,138,126		419,191		246,561		398,118		356,527		1,420,397
Fixed and other assets		-		33,068		-		64,995		98,063		-		52,417		-		81,353		133,770
Total assets	$	535,912	$	284,427	$	380,629	$	510,075	$	1,711,043	$	547,437	$	343,530	$	526,889	$	993,943	$	2,411,799
Total cumulative assets	$	535,912	$	820,339	$	1,200,968	$	1,711,043			$	547,437	$	890,967	$	1,417,856	$	2,411,799

Non-interest-bearing transaction deposits ⁽³⁾	$	-	$	40,925	$	112,349	$	255,566	$	408,840	$	-	$	58,754	$	161,295	$	366,903	$	586,952
Interest-bearing transaction deposits ⁽³⁾		380,198		-		234,227		351,341		965,766		598,504		-		331,618		497,427		1,427,549
Certificates of deposit		32,739		71,531		31,318		6,929		142,517		38,768		71,855		29,837		8,489		148,949
Short-term borrowings		-		-		-		-		-
FHLB advances		-		-		5,000		-		5,000
Secured borrowings												11,493		1,257		2,688		1,447		16,885
Other liabilities		-		-		-		27,309		27,309		-		-		-		25,895		25,895
Total liabilities	$	412,937	$	112,456	$	382,894	$	641,145	$	1,549,432	$	648,765	$	131,866	$	525,438	$	900,161	$	2,206,230
Total cumulative liabilities	$	412,937	$	525,393	$	908,287	$	1,549,432			$	648,765	$	780,631	$	1,306,069	$	2,206,230

Interest sensitivity gap	$	122,975	$	171,971	$	(2,265)	$	(131,070)			$	(101,328)	$	211,664	$	1,451	$	93,782
Cumulative gap	$	122,975	$	294,946	$	292,681	$	161,611			$	(101,328)	$	110,336	$	111,787	$	205,569

Cumulative gap to total assets		7.2%		17.2%		17.1%		9.4%				-4.2%		4.6%		4.6%		8.5%

(1) Includes restricted investments in bank stock and the net unrealized gains/losses on available-for-sale securities.

(2) Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due. In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization. For amortizing loans and MBS – GSE residential, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products.

(3) The Company’s demand and savings accounts were generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments. The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies.

Earnings at Risk and Economic Value at Risk Simulations. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet that extend beyond static re-pricing gap analysis. Although it will continue to measure its re-pricing gap position, the Company utilizes additional modeling for identifying and measuring the interest rate risk in the overall balance sheet. The ALCO is responsible for focusing on “earnings at risk” and “economic value at risk”, and how both relate to the risk-based capital position when analyzing the interest rate risk.

Earnings at Risk. An earnings at risk simulation measures the change in net interest income and net income should interest rates rise and fall. The simulation recognizes that not all assets and liabilities re-price one-for-one with market rates (e.g., savings rate). The ALCO looks at “earnings at risk” to determine income changes from a base case scenario under an increase and decrease of 200 basis points in interest rate simulation models.

Economic Value at Risk. An earnings at risk simulation measures the short-term risk in the balance sheet. Economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets and liabilities. The ALCO examines this ratio quarterly utilizing an increase and decrease of 200 basis points in interest rate simulation models. The ALCO recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.

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The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity). This analysis assumed that the adjusted interest-earning asset and interest-bearing liability levels at September 30, ~~2020~~2021 remained constant. The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the September 30, ~~2020~~2021 levels:



	% change				% change
	Rates +200		Rates -200		Rates +200		Rates -200
Earnings at risk:
Net interest income	1.8	%	(0.6)	%	(1.5)	%	(3.7)	%
Net income	5.1		(1.5)		(1.6)		(6.9)
Economic value at risk:
Economic value of equity	12.0		(20.4)		-		(32.1)
Economic value of equity as a percent of total assets	1.4		(2.3)		-		(4.5)

Economic value has the most meaning when viewed within the context of risk-based capital. Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%. At September 30, ~~2020,~~2021, the Company’s risk-based capital ratio was ~~16.39%~~14.52%.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning October 1, ~~2020,~~2021, under alternate interest rate scenarios using the income simulation model described above:



	Net interest		$		%		Net interest		$		%
(dollars in thousands)	income		variance		variance		income		variance		variance
Simulated change in interest rates
+200 basis points	$	52,209	$	942	1.8	%	$	66,227	$	(990)	(1.5)	%
+100 basis points		51,857		590	1.2			66,370		(847)	(1.3)
Flat rate		51,267		-	-			67,217		-	-
-100 basis points		51,325		58	0.1			66,367		(850)	(1.3)
-200 basis points		50,953		(314)	(0.6)			64,746		(2,471)	(3.7)

Simulation models require assumptions about certain categories of assets and liabilities. The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date or earliest re-pricing opportunity. MBS – GSE residential securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments. For investment securities, the Company uses a third-party service to provide cash flow estimates in the various rate environments. Savings, money market and interest-bearing checking accounts do not have stated maturities or re-pricing terms and can be withdrawn or re-price at any time. This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff. Management projects the re-pricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity. The model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term at current product interest rates. As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant.

Liquidity

Liquidity management ensures that adequate funds will be available to meet customers’ needs for borrowings, deposit withdrawals and maturities, facility expansion and normal operating expenses. Sources of liquidity are cash and cash equivalents, asset maturities and pay-downs within one year, loans HFS, investments AFS, growth of core deposits, utilization of borrowing capacities from the FHLB, correspondent banks, ICS and CDARs, the Discount Window of the Federal Reserve Bank of Philadelphia (FRB), Atlantic Community Bankers Bank (ACBB) and proceeds from the issuance of capital stock. Though regularly scheduled investment and loan payments are dependable sources of daily liquidity, sales of both loans HFS and investments AFS, deposit activity and investment and loan prepayments are significantly influenced by general economic conditions including the interest rate environment. During low and declining interest rate environments, prepayments from interest-sensitive assets tend to accelerate and provide significant liquidity that can be used to invest in other interest-earning assets but at lower market rates. Conversely, in periods of high or rising interest rates, prepayments from interest-sensitive assets tend to decelerate causing prepayment cash flows from mortgage loans and mortgage-backed securities to decrease. Rising interest rates may also cause deposit inflow but priced at higher market interest rates or could also cause deposit outflow due to higher rates offered by the Company’s competition for similar products. The Company closely monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities.

The Company’s contingency funding plan (CFP) sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal. The Company established guidelines for identifying, measuring, monitoring and managing the resolution of potentially serious liquidity crises. The CFP outlines required monitoring tools, acceptable alternative

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funding sources and required actions during various liquidity scenarios. Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity conditions. At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s Asset/Liability Committee. As of September 30, ~~2020,~~2021, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.

During the nine months ended September 30, ~~2020,~~2021, the Company generated ~~$116.1~~$98.0 million of cash. During the period, the Company’s operations provided approximately ~~$8.1~~$13.9 million mostly from ~~$29.8~~$44.8 million of net cash inflow from the components of net interest income, partially offset by ~~$4.8~~net non-interest expense/income related payments of $22.7 million, $6.5 million of originations of loans held for sale over proceeds ~~net non-interest expense/income related payments of $14.8~~and $1.9 million ~~and $2.2 million~~ in ~~quarterly~~ estimated tax payments. Cash inflow from interest-earning assets, ~~assets acquired,~~ deposits, loan payments and the sale of securities were used to purchase investment securities and replace maturing and cash runoff of securities, fund the loan portfolio, pay down borrowings, invest in bank premises and equipment and make net dividend payments. The Company received a large amount of public deposits over the past ~~four~~five years. The seasonal nature of deposits from municipalities and other public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of cash outflow from this customer base, including maintaining the requirements to pledge investment securities. Starting in 2019, the Company made an effort to open new public accounts as ICS accounts and transfer some existing public accounts to ICS accounts in order to provide the customer with FDIC insurance and to free up the Company’s unencumbered securities to improve liquidity. Accordingly, the use of short-term overnight borrowings could be used to fulfill funding gap needs. The CFP is a tool to help the Company ensure that alternative funding sources are available to meet its liquidity needs.

During 2020 and 2021, the Company also experienced deposit inflow resulting from businesses and municipalities that received relief from the CARES Act and less consumer spending along with the third round of economic impact payments. There is uncertainty about the length of time that these deposits will remain which could require the Company to maintain elevated cash balances. The Company will continue to monitor deposit fluctuation for significant changes.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy. These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments.

Lending commitments include commitments to originate loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

During the third quarter of 2020, there was an inflow of public deposits from normal seasonal activity that is expected to runoff during the fourth quarter of 2020. During the second and third quarters of 2020, the Company also experienced deposit inflow resulting from businesses and municipalities that received relief from the CARES Act. The Company is uncertain how long these deposits will stay and will continue to monitor deposit fluctuations for significant changes.

As of September 30, ~~2020,~~2021, the Company maintained ~~$131.8~~$167.4 million in cash and cash equivalents and ~~$353.6~~$734.1 million of investments AFS and loans HFS. Also as of September 30, ~~2020,~~2021, the Company had approximately ~~$421.1~~$452.6 million available to borrow from the FHLB, $31.0 million from correspondent banks, ~~$89.5~~$87.5 million from the FRB and ~~$267.4~~$291.6 million from the Promontory One-Way Buy program. The combined total of ~~$1.3~~$1.8 billion represented ~~76%~~73% of total assets at September 30, ~~2020.~~2021. Management believes this level of liquidity to be strong and adequate to support current operations.

Capital

During the nine months ended September 30, ~~2020,~~2021, total shareholders' equity increased ~~$54.8~~$38.9 million, or ~~51%~~23%, due principally to the ~~$45.4~~$35.1 million in common stock issued as a result of the acquisition of ~~MNB~~Landmark (See Footnote 9 “Acquisition” for more information)~~, $7.9~~ and $16.2 million in net income added into retained ~~earnings and the $4.2 million after tax improvement in the net unrealized gain position in the Company’s investment portfolio.~~earnings. Capital was ~~further~~ enhanced by ~~$0.2~~$0.3 million from investments in the Company’s common stock via the Employee Stock Purchase Plan (ESPP) and $0.9 million from stock-based compensation expense from the ESPP and restricted stock and SSARs. These items were ~~partially~~ offset by ~~$3.9~~an $8.8 million after tax reduction in the net unrealized gain position in the Company’s investment portfolio and $4.7 million of cash dividends declared on the Company’s common stock. The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was ~~49.3%~~29.2% for the nine months ended September 30, ~~2020.~~2021. The balance of earnings is retained to further strengthen the Company’s capital position.

As of September 30, ~~2020,~~2021, the Company reported a net unrealized gain position of ~~$7.8~~$0.2 million, net of tax, from the securities AFS portfolio compared to a net unrealized gain of ~~$3.6~~$9.0 million as of December 31, ~~2019.~~2020. The ~~improvement~~reduction during ~~2020~~the first nine months of 2021 was from ~~$4.2~~the $8.8 million reduction in net unrealized gains on AFS securities, net of tax. ~~Higher~~Lower net unrealized gains on ~~all types of~~municipal and mortgage-backed securities and net unrealized losses on agency securities contributed to the lower total net unrealized gains in investment portfolio. Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and not in the creditworthiness of the issuers. Generally, when U.S. Treasury rates rise, investment securities’ pricing declines and fair values of investment securities also decline. While volatility has existed in the yield curve within the past twelve months, ~~a declining~~an improving rate environment is expected and during the period of ~~declining~~increasing rates, the Company expects pricing in the bond portfolio to ~~improve.~~decline. There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of investment securities. To help maintain a healthy capital position, the Company can issue stock to participants in the DRP and ESPP plans. The DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants. During the first nine months of ~~2020,~~2021, the Company acquired shares in the open market to

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fulfill the needs of the DRP. Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal

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employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet.

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. A capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements of 2.50%. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company and the Bank exceeded all capital adequacy requirements to which it was subject.

The Company continues to closely monitor and evaluate alternatives to enhance its capital ratios as the regulatory and economic environments change. The following table depicts the capital amounts and ratios of the Company, on a consolidated basis, and the Bank as of September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:



										For capital adequacy				To be well capitalized														For capital adequacy				To be well capitalized
				For capital						purposes with capital				under prompt corrective								For capital						purposes with capital				under prompt corrective
	Actual			adequacy purposes						conservation buffer*				action provisions					Actual			adequacy purposes						conservation buffer				action provisions
(dollars in thousands)	Amount		Ratio	Amount			Ratio			Amount		Ratio		Amount			Ratio		Amount		Ratio	Amount			Ratio			Amount		Ratio		Amount			Ratio
As of September 30, 2020:
As of September 30, 2021:

Total capital (to risk-weighted assets)
Consolidated	$	156,888	16.4%	≥	$	76,556		8.0%	≥	$	100,480		10.5%			N/A		N/A	$	199,387	14.5%	≥	$	109,873		8.0%	≥	$	144,209		10.5%			N/A		N/A
Bank	$	156,597	16.4%	≥	$	76,545		8.0%	≥	$	100,465		10.5%	≥	$	95,681		10.0%	$	199,628	14.5%	≥	$	109,859		8.0%	≥	$	144,189		10.5%	≥	$	137,323		10.0%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	144,914	15.1%	≥	$	43,063		4.5%	≥	$	66,987		7.0%			N/A		N/A	$	183,717	13.4%	≥	$	61,804		4.5%	≥	$	96,139		7.0%			N/A		N/A
Bank	$	144,624	15.1%	≥	$	43,056		4.5%	≥	$	66,977		7.0%	≥	$	62,193		6.5%	$	183,958	13.4%	≥	$	61,795		4.5%	≥	$	96,126		7.0%	≥	$	89,260		6.5%

Tier I capital (to risk-weighted assets)
Consolidated	$	144,914	15.1%	≥	$	57,417		6.0%	≥	$	81,341		8.5%			N/A		N/A	$	183,717	13.4%	≥	$	82,405		6.0%	≥	$	116,740		8.5%			N/A		N/A
Bank	$	144,624	15.1%	≥	$	57,409		6.0%	≥	$	81,329		8.5%	≥	$	76,545		8.0%	$	183,958	13.4%	≥	$	82,394		6.0%	≥	$	116,725		8.5%	≥	$	109,859		8.0%

Tier I capital (to average assets)
Consolidated	$	144,914	8.9%	≥	$	65,141		4.0%	≥	$	65,141		4.0%			N/A		N/A	$	183,717	7.9%	≥	$	93,126		4.0%	≥	$	93,126		4.0%			N/A		N/A
Bank	$	144,624	8.9%	≥	$	65,136		4.0%	≥	$	65,136		4.0%	≥	$	81,420		5.0%	$	183,958	7.9%	≥	$	92,757		4.0%	≥	$	92,757		4.0%	≥	$	115,946		5.0%

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As of December 31, 2019:
As of December 31, 2020:

Total capital (to risk-weighted assets)
Consolidated	$	111,910	15.8%	≥	$	56,796	8.0%	≥	$	74,545	10.5%			N/A	N/A	$	161,199	16.5%	≥	$	78,356	8.0%	≥	$	102,842	10.5%			N/A	N/A
Bank	$	112,188	15.8%	≥	$	56,791	8.0%	≥	$	74,538	10.5%	≥	$	70,989	10.0%	$	161,145	16.5%	≥	$	78,342	8.0%	≥	$	102,823	10.5%	≥	$	97,927	10.0%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	103,024	14.5%	≥	$	31,948	4.5%	≥	$	49,696	7.0%			N/A	N/A	$	148,931	15.2%	≥	$	44,075	4.5%	≥	$	68,562	7.0%			N/A	N/A
Bank	$	103,303	14.6%	≥	$	31,945	4.5%	≥	$	49,692	7.0%	≥	$	46,143	6.5%	$	148,879	15.2%	≥	$	44,067	4.5%	≥	$	68,549	7.0%	≥	$	63,653	6.5%

Tier I capital (to risk-weighted assets)
Consolidated	$	103,024	14.5%	≥	$	42,597	6.0%	≥	$	60,346	8.5%			N/A	N/A	$	148,931	15.2%	≥	$	58,767	6.0%	≥	$	83,253	8.5%			N/A	N/A
Bank	$	103,303	14.6%	≥	$	42,593	6.0%	≥	$	60,340	8.5%	≥	$	56,791	8.0%	$	148,879	15.2%	≥	$	58,756	6.0%	≥	$	83,238	8.5%	≥	$	78,342	8.0%

Tier I capital (to average assets)
Consolidated	$	103,024	10.4%	≥	$	39,650	4.0%	≥	$	39,650	4.0%			N/A	N/A	$	148,931	8.8%	≥	$	67,584	4.0%	≥	$	67,584	4.0%			N/A	N/A
Bank	$	103,303	10.3%	≥	$	40,265	4.0%	≥	$	40,265	4.0%	≥	$	50,331	5.0%	$	148,879	8.8%	≥	$	67,584	4.0%	≥	$	67,584	4.0%	≥	$	84,479	5.0%

* The minimums under Basel III increased by 0.625% (the capital conservation buffer) annually until 2019.

The Company advises readers to refer to the Supervision and Regulation section of Management’s Discussion and Analysis of Financial Condition and Results of Operation, of its ~~2019~~2020 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective. The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended September 30, ~~2020.~~2021.

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PART II - Other Information

Item 1. Legal Proceedings

The nature of the Company’s business generates a certain amount of litigation involving matters arising in the ordinary course of business. However, in the opinion of the Company after consultation with legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material adverse effect on the Company’s undivided profits or financial condition, operations or the results of such operations. No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank. In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal or regulatory actions against the Company or the Bank.

Item 1A. Risk Factors

The COVID-19 Pandemic Has Adversely Impacted Our Business And Financial Results, And The Ultimate Impact Will Depend On Future Developments, Which Are Highly Uncertain And Cannot Be Predicted, Including The Scope And Duration Of The Pandemic And Actions Taken By Governmental Authorities In Response To The Pandemic.

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

We continue to closely monitor the COVID-19 pandemic and related risks as they evolve. The magnitude, duration and likelihood of the current outbreak of COVID-19, further outbreaks of COVID-19, future actions taken by governmental authorities and/or other third parties in response to the COVID-19 pandemic, and its future direct and indirect effects on the global, national and local economy generally and our business and results of operation specifically are highly uncertain. The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition.

Due to the Company’s participation in the U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP"), the Company is subject to additional risks of litigation from its clients or other parties regarding the processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders. The Company participated as a lender in the PPP. Because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the PPP along with the continually evolving nature of SBA the rules, interpretations and guidelines concerning this program, which exposes us to risks relating to noncompliance with the PPP. Since the launch of the PPP, several large banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. As such, we may be exposed to the risk of litigation, from both clients and non-clients that approached the Company regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

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

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Management of the Company does not believe there have been any ~~other~~ material changes to the risk factors that were disclosed in the ~~2019~~2020 Form 10-K filed with the Securities and Exchange Commission on March ~~13, 2020.~~19, 2021.

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

None

Item 3. Default Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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Item 6. Exhibits

The following exhibits are filed herewith or incorporated by reference as a part of this Form 10-Q:

3(i) Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Annex B of the Proxy Statement/Prospectus included in Registrant’s Amendment 4 to its Registration Statement No. 333-90273 on Form S-4, filed with the SEC on April 6, 2000.

3(ii) Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the SEC on April 16, 2020.

2.1 Agreement and Plan of Reorganization by and among Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank, MNB Corporation and Merchants Bank of Bangor dated as of December 9, 2019. Incorporated by reference to Annex A of the Registrant’s Registration Statement No. 333-236453 on Form S-4, filed with the Commission on February 14, 2020. (Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request.)

2.2 Agreement and Plan of Reorganization by and among Fidelity D & D Bancorp, Inc., NEPA Acquisition Subsidiary, LLC, The Fidelity Deposit and Discount Bank, Landmark Bancorp, Inc. and Landmark Community Bank dated as of February 25, 2021. Incorporated by reference to Annex A of the Registrant’s Registration No. 333-255479 on Form S-4, filed with the Commission on April 23, 2021. (Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request.)

*10.1 Registrant’s 2012 Dividend Reinvestment and Stock Repurchase Plan. Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement No. 333-183216 on Form S-3 filed with the SEC on August 10, 2012 as amended February 3, 2014.

*10.2 Registrant’s 2002 Employee Stock Purchase Plan. Incorporated by reference to Appendix A to Definitive proxy Statement filed with the SEC on March 28, 2002.

*10.3 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Daniel J. Santaniello, dated March 23, 2011. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*10.4 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bankand Timothy P. O’Brien, dated March 23, 2011. Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*10.5 2012 Omnibus Stock Incentive Plan. Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

*10.6 2012 Director Stock Incentive Plan. Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

*10.7Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Salvatore R. DeFrancesco, Jr. dated as of March 17, 2016. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 18, 2016.

*10.8 Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Eugene J. Walsh dated as of March 29, 2017. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.9 Form of Supplemental Executive Retirement Plan – Applicable to Daniel J. Santaniello and Salvatore R. DeFrancesco, Jr. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.10 Form of Supplemental Executive Retirement Plan – Applicable to Eugene J. Walsh and Timothy P O’Brien. Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.11 Form of Split Dollar Life Insurance Agreement – Applicable to Daniel J. Santaniello, Salvatore R. DeFrancesco, Jr. and Eugene J. Walsh. Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.12 Form of Split Dollar Life Insurance Agreement – Applicable to Timothy P O’Brien. Incorporated by reference to Exhibit 99.4 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.13 Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Michael J. Pacyna dated as of March 20, 2019. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 21, 2019.

*10.14 Form of Supplemental Executive Retirement Plan for Michael J. Pacyna. Incorporated by reference to Exhibit 99.2

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to Registrant’s Current Report on Form 8-K filed with the SEC on March 21, 2019.

*10.15 Form of Split Dollar Life Insurance Agreement for Michael J. Pacyna. Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the SEC on March 21, 2019.

31.1 Rule 13a-14(a) Certification of Principal Executive Officer, filed herewith.
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31.2 Rule 13a-14(a) Certification of Principal Financial Officer, filed herewith.

32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

101 Interactive data files: The following, from Fidelity D&D Bancorp, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2020,~~2021, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of September 30, ~~2020~~2021 and December 31, ~~2019;~~2020; Consolidated Statements of Income for the three and nine months ended September 30, ~~2020~~2021 and ~~2019;~~2020; Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2020~~2021 and ~~2019;~~2020; Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, ~~2020~~2021 and ~~2019;~~2020; Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 and the Notes to the Consolidated Financial Statements. **

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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* Management contract or compensatory plan or arrangement.

** Pursuant to Rule 406T of Regulation S-T, the interactive data files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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Signatures

FIDELITY D & D BANCORP, INC.

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


	Fidelity D & D Bancorp, Inc.

Date: November ~~6, 2020~~12, 2021	/s/Daniel J. Santaniello
	Daniel J. Santaniello, President and Chief Executive Officer

	Fidelity D & D Bancorp, Inc.

Date: November ~~6, 2020~~12, 2021	/s/Salvatore R. DeFrancesco, Jr.
	Salvatore R. DeFrancesco, Jr., Treasurer and Chief Financial Officer

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(dollars in thousands)	Number of Loans		Total Modification Balance		Total Loan Balance	Percentage of Total Loan Balance	Percentage of Tier 1 Capital
Commercial and industrial	34	$	2,317	$	300,943	0.8%	1.6%
Commercial real estate:
Non-owner occupied	51		9,753		191,794	5.1%	6.7%
Owner occupied	34		6,835		175,321	3.9%	4.7%
Construction	-		-		10,213	0.0%	0.0%
Total Commercial	119		18,905		678,271	2.8%	13.1%
Consumer:
Home equity installment	10		633		40,729	1.6%	0.4%
Home equity line of credit	11		615		52,769	1.2%	0.4%
Auto loans	40		757		99,089	0.8%	0.5%
Direct finance leases	-		-		18,795	0.0%	0.0%
Other	10		56		9,479	0.6%	0.0%
Total Consumer	71		2,061		220,861	0.9%	1.4%
Residential:
Real estate	21		4,073		221,175	1.8%	2.8%
Construction	1		102		18,488	0.6%	0.1%
Total Residential	22		4,175		239,663	1.7%	2.9%
Total	212	$	25,141	$	1,138,795	2.2%	17.4%


(dollars in thousands)	Count		Balance	Percentage of Tier 1 Capital

Real Estate Rental and Leasing	55	$	10,254	7.1%
Construction	15		1,380	1.0%
Manufacturing	1		1,198	0.8%
Retail Trade	7		1,081	0.7%
Accommodation and Food Services	7		1,034	0.7%
Other	34		3,958	2.7%
Total commercial accommodations	119	$	18,905	13.1%



Types of Loans	Number of Loans	Deferral Period		Balance	Percentage of Tier 1 Capital
Commercial Purpose	119	Up to 6 months	$	18,905	13.1%
Consumer Purpose	93	Up to 6 months		6,236	4.3%
	212		$	25,141	17.4%



(dollars in thousands)	Amount		Weighted average rate

Maturity date 1 year or less	$	-	-	%
After 1 but within 2		-	-
After 2 but within 3		5,000	3.07
After 3 but within 4		-	-
After 4 years		-	-
Total	$	5,000	3.07	%