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Item 8. Financial Statements and Supplementary Data

2021-03-15 compared with 2020-03-13 · 1035 added, 1645 removed, 432 unchanged (86% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public

Accounting Firm

Stockholders and Board of Directors

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

First Keystone Corporation

Opinions on the Financial Statements and Internal Control

over Financial Reporting

We have audited the accompanying consolidated

balance sheets of First Keystone Corporation and Subsidiary (collectively the "Corporation") as of December 31, 2019

and 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and

cash flows, for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements").

We also have audited the Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria

established in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations

of the Treadway Commission (“COSO”).

In our opinion, the consolidated financial

statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2019 and 2018,

and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally

accepted in the United States of America.

Also in our opinion, the Corporation maintained, in all material respects, effective

internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control –

Integrated Framework:

(2013) issued by COSO.

Basis for Opinions

The Corporation’s management is responsible

for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its

assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s

Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Corporation's consolidated

financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

the consolidated financial statements are free of material misstatement, whether due to error or fraud and whether effective internal

control over financial reporting was maintained in all material respects.

Our audits of the financial statements included

performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error

or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting

principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated

financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control

over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating

effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we

considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal

Control Over Financial Reporting

A company's internal control over financial

reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation

of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal

control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in

reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally

accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations

of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized

acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal

control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness

to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree

of compliance with the policies or procedures may deteriorate.

/s/ Baker Tilly Virchow Krause, LLP

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Keystone Corporation and Subsidiary (collectively the "Corporation") as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for the years then ended, and the related notes (collectively, the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Corporation’s management.

Our responsibility is to express an opinion on the Corporation’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses – Qualitative Factor Adjustments – Refer to Notes 1 and 4 to the consolidated financial statements

Critical Audit Matter Description

As disclosed in Note 4 to the Corporation's consolidated financial statements, the Corporation's loan portfolio totaled $721M as of December 31, 2020, and the related allowance for loan losses was $7.9M.

As described in Note 1, the allowance for loan losses consists of specific and general reserve components in order to estimate losses that have been incurred as of the consolidated balance sheet date.

In calculating the general reserve component, management considers historical loss experience based on loan type and qualitative factor adjustments for changes not reflected in the historical loss experience.

The determination of the qualitative factor adjustments involves significant estimates based on subjective assumptions that require a high degree of management judgment about the following internal or external factors:

changes in lending policies and procedures;

changes in macroeconomic conditions;

changes in the nature and volume of the loan portfolio;

changes in the experience and ability of lending management;

changes in the volume of past due, nonaccrual, and adversely-classified loans;

changes in the loan review system;

changes in the value of underlying collateral;

existence of any concentrations of credit;

and effect of other external factors, such as competition or the regulatory environment.

Changes in these assumptions could have a material effect on the allowance for loan losses.

The allowance for loan losses is an accounting estimate with significant measurement uncertainty and involves the application of significant judgment by management.

Therefore, a high degree of auditor judgment and significant auditor effort was required in evaluating the audit evidence obtained related to the qualitative factor adjustments used by management in the calculation.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

● Testing the design and operating effectiveness of internal controls relating to the evaluation of the assumptions and inputs used to evaluate the qualitative factors, including controls addressing:

o Management's review of the underlying data inputs used in the determination of qualitative factor adjustments for completeness and accuracy.

o Management’s determination of impaired loans that have been excluded from the general reserve component of the allowance for loan losses.

o Management’s review of the conclusions reached related to the qualitative and quantitative loss factors and the resulting allocation to the allowance for loan losses.

● Substantively testing the appropriateness of the judgments and assumptions used in management’s estimation process for developing the qualitative factor adjustments, including:

o Assessing whether all relevant factors have been considered that affect the collectability of the loan portfolio.

o Testing the risk grade factor based on the risk rating assigned to each

o Evaluating the completeness, accuracy, and relevance of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroborating these inputs by comparing to the Corporation’s lending practices, historical loan portfolio performance, and third-party macroeconomic data.

o Evaluating the propriety of impaired loans excluded from the general reserve component of the allowance for loan losses.

o Testing the mathematical accuracy of the calculation and allocation of qualitative factors to the appropriate loan categories.

Goodwill Impairment Evaluation – Refer to Notes 1 and 19 to the consolidated financial statements

Critical Audit Matter Description

As discussed in Note 1 and Note 19 to the consolidated financial statements, goodwill is tested for impairment on the basis of the community banking reporting unit at least annually, or more frequently as events occur or circumstances change.

In the fourth quarter of fiscal year 2020, the Corporation assessed relevant events and circumstances and determined it was appropriate to perform an impairment test.

In performing the test, management used both income and market approaches to determine the estimated fair value of the community banking reporting unit.

The income approach was weighted 40% while the market approach was weighted at 60%.

Goodwill was determined to not be impaired as of December 31, 2020.

Auditing management's goodwill impairment test was complex and relatively judgmental due to the significant estimation required to determine the estimated fair value of the community banking reporting unit.

In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the Corporation's financial forecast, the discount rate, cost synergies and terminal growth rate, which are affected by expectations about future market or economic conditions, including uncertainty resulting from the COVID-19 pandemic.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

● Testing the design and operating effectiveness of internal controls relating to the evaluation of the assumptions and inputs used to estimate the fair value of the Corporation's community banking reporting unit, including controls addressing:

o Management’s review of the accuracy and reasonableness of the prospective financial information used in the discounted cash flow analysis.

o Management's evaluation of the key assumptions and inputs used by a third-party valuation specialist, including discount rate, cost synergies, terminal growth rate, control premium, and market comparable entities, as well as the weighting assigned to each of the valuation methodologies used to determine fair value.

● Substantively testing, with the support of auditor employed valuation specialists, the appropriateness of the judgments and assumptions used in management’s estimation process for determining the fair value of the Corporation's community banking reporting unit including:

o Testing the mathematical accuracy of the calculations performed.

o Assessing the historical accuracy of management’s financial forecasts by comparing prior budgets to actual results.

o Evaluating the appropriateness of the valuation methodologies used as well as the weightings assigned to each, discount rate, cost synergies, terminal growth rate, control premium, market comparable entities and overall reasonableness of the fair value calculation.

o Comparing the significant assumptions used by management to current industry and economic trends, current and historical performance of the community banking reporting unit, and other relevant factors.

o Performing sensitivity analyses to evaluate the impact that changes in the significant assumptions used by management would have on the fair value of the reporting unit.

o Testing management's reconciliation of the fair value of the community banking reporting unit to the market capitalization of the Corporation.

/s/ Baker Tilly US, LLP

We have served as the Corporation's auditor since 2018.

Williamsport, Pennsylvania

Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)

Iselin, New Jersey

March 15, 2021

3 unchanged sentences

Cash and due from banks

Interest-bearing deposits in other

Interest-bearing deposits in other banks

Total cash and cash equivalents

11 unchanged sentences

Foreclosed assets held for resale

Deferred income taxes

Non-interest bearing

Interest bearing

Total deposits

1 unchanged sentence

Long-term borrowings

Subordinated debentures

Operating lease liabilities

2 unchanged sentences

Other liabilities

STOCKHOLDERS’

Preferred stock, par value

$2.00 per share;

authorized 1,000,000 shares as of December 31, 2019 and 2018;

issued 0 in 2019 and 2018

Common stock, par value

$2.00 per share;

authorized 20,000,000 shares as of December 31, 2019 and 2018;

issued 6,048,506 as of December 31, 2019 and

5,996,322 as of December 31, 2018;

TOTAL LIABILITIES

STOCKHOLDERS’ EQUITY

Preferred stock, par value $ 2.00 per share;

authorized 1,000,000 shares as of December 31, 2020 and December 31, 2019;

issued 0 as of December 31, 2020 and December 31, 2019

Common stock, par value $ 2.00 per share;

authorized 20,000,000 shares as of December 31, 2020 and December 31, 2019;

issued 6,115,281 as of December 31, 2020 and 6,048,506 as of December 31, 2019;

outstanding 5,883,669 as of December 31, 2020 and 5,816,894 as of December 31, 2019

Retained earnings

Accumulated other comprehensive income (loss)

Treasury stock, at cost, 231,612

shares at December 31, 2019 and 2018

STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS’

The accompanying notes are an integral part of these consolidated

financial statements.

Accumulated other comprehensive income

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

TOTAL STOCKHOLDERS’ EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

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

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

1 unchanged sentence

(Dollars in thousands, except per share data)

Ended December 31,

INTEREST INCOME

Years Ended December 31,

Interest and fees on loans

1 unchanged sentence

Dividend income on restricted investment in bank stocks

Interest on interest-bearing deposits

in other banks

interest income

Interest on interest-bearing deposits in other banks

Total interest income

INTEREST EXPENSE

2 unchanged sentences

Interest on long-term borrowings

interest expense

Interest on subordinated debt

Total interest expense

Net interest income

Provision for loan losses

interest income after provision for loan losses

Net interest income after provision for loan losses

NON-INTEREST INCOME

1 unchanged sentence

Service charges and fees

Bank owned life insurance income

Increase in cash surrender value of life insurance

ATM fees and debit card income

Gains on sales of mortgage loans

Net securities gains (losses)

non-interest income

Net securities (losses) gains

Total non-interest income

NON-INTEREST EXPENSE

1 unchanged sentence

Occupancy, net

Furniture and equipment

Furniture and equipment expense

Computer expense

1 unchanged sentence

Pennsylvania shares tax

FDIC insurance

FDIC insurance, net

ATM and debit card fees

Data processing fees

Foreclosed assets held for resale

non-interest expense

Foreclosed assets held for resale expense, net

Total non-interest expense

Income before income tax expense

3 unchanged sentences

Dividends per share

The accompanying notes are an integral part of these consolidated

financial statements.

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

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

1 unchanged sentence

(Dollars in thousands)

Ended December 31,

Years Ended December 31,

Other comprehensive income:

net holding gains (losses) on debt securities available-for-sale arising during the period, net of income taxes of $1,921

and $(1,097), respectively

reclassification adjustment for net gains included in net income, net of income taxes of $(112) and $(1), respectively

other comprehensive income (loss)

Comprehensive Income

(a) Gross amounts are included in net securities gains (losses)

on the consolidated statements of income in non-interest income.

(b) Income tax amounts are included in income tax expense on

the consolidated statements of income.

The accompanying notes are an integral part of these consolidated

financial statements.

Unrealized net holding gains on debt securities available-for-sale arising during the period, net of income taxes of $ 2,347 and $ 1,921 , respectively

Less reclassification adjustment for net gains included in net income, net of income taxes of $( 49 ) and $( 112 ), respectively (a) (b)

Total other comprehensive income

Total Comprehensive Income

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

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

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

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS

OF CHANGES IN STOCKHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

Comprehensive

Stockholders’

at January 1, 2018

comprehensive loss, net of taxes

of common stock under dividend reinvestment plan

of adoption of accounting standards 1

- $1.08 per share

at December 31, 2018

comprehensive income, net of taxes

of common stock under dividend reinvestment plan

- $1.08 per share

at December 31, 2019

1 Represents the impact

of adopting Accounting Standard Updates (“ASU”) 2018-02 and ASU 2016-01 effective January 1, 2018.

The accompanying notes are an integral part of these consolidated

financial statements.

Stockholders’

(Loss) Income

Balance at January 1, 2019

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 1.08 per share

Balance at December 31, 2019

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 1.08 per share

Balance at December 31, 2020

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

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS

OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Ended December 31,

CASH FLOWS FROM

OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash provided

by operating activities:

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

Depreciation and amortization

Net premium amortization on

Deferred income tax expense

Net premium amortization on securities

Deferred income tax (benefit) expense

Gains on sales of mortgage loans

Proceeds from sales of mortgage

loans originated for resale

Originations of mortgage loans

originated for resale

Net securities (gains) losses

Net losses on sales of foreclosed

real estate held for resale, including write-downs

Decrease in accrued interest

Earnings on investment in bank

owned life insurance

Net losses (gains) on disposals

of premises and equipment

Increase in other assets

Amortization of investment in

low-income housing partnerships

(Decrease) increase in accrued

interest payable

(decrease) in other liabilities

PROVIDED BY OPERATING ACTIVITIES

Proceeds from sales of mortgage loans originated for sale

Originations of mortgage loans originated for sale

Net securities losses (gains)

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

(Increase) decrease in accrued interest receivable

Increase in cash surrender value of bank owned life insurance

Net losses on disposals of premises and equipment

Decrease (increase) in other assets

Amortization of investment in low-income housing partnerships

Decrease in accrued interest payable

(Decrease) increase in other liabilities

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sales of debt securities available-for-sale

Proceeds from maturities and redemptions of debt securities

available-for-sale

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

Purchases of debt securities available-for-sale

3 unchanged sentences

Purchase of premises and equipment

Purchase of investment in low-income housing partnerships

Proceeds from sales of foreclosed

assets held for resale

PROVIDED BY (USED IN) INVESTING ACTIVITIES

Purchase of investment in real estate venture

Proceeds from sales of foreclosed assets held for resale

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase (decrease) in deposits

Net (decrease) increase in short-term borrowings

Net increase in deposits

Net decrease in short-term borrowings

Repayment of finance lease obligations

Proceeds from long-term borrowings

Repayment of long-term borrowings

Proceeds from issuance of subordinated debentures

Common stock issued

Dividends paid

(USED IN) PROVIDED BY FINANCING ACTIVITIES

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

8 unchanged sentences

Common stock subscription receivable

Right-of-use assets obtained in exchange for lease

The accompanying notes are

an integral part of these consolidated financial statements.

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

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

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

Notes to Consolidated Financial Statements

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of First Keystone

Corporation and Subsidiary (the “Corporation”) are in accordance with accounting principles generally accepted in

the United States of America (“GAAP”) and conform to common practices within the banking industry.

The more significant

accounting policies follow:

The accounting policies of First Keystone Corporation and Subsidiary (the “Corporation”) are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to common practices within the banking industry.

The more significant accounting policies follow:

Principles of Consolidation

The consolidated financial statements include

the accounts of First Keystone Corporation and its wholly-owned subsidiary, First Keystone Community Bank (the “Bank”).

The consolidated financial statements include the accounts of First Keystone Corporation and its wholly-owned subsidiary, First Keystone Community Bank (the “Bank”).

All significant inter-company balances and transactions have been eliminated in consolidation.

Nature of Operations

The Corporation, headquartered in Berwick,

Pennsylvania, provides a full range of banking, trust and related services through its wholly-owned Bank subsidiary and is subject

to competition from other financial institutions in connection with these services.

The Bank serves a customer base which includes

individuals, businesses, governments, and public and institutional customers primarily located in the Northeast Region of Pennsylvania.

The Bank has 18 full service offices, one loan production office, and 20 Automated Teller Machines (“ATM”) located

in Columbia, Luzerne, Montour, Monroe, and Northampton counties.

The Corporation and its subsidiary must also adhere to certain

federal and state banking laws and regulations and are subject to periodic examinations made by various state and federal agencies.

The Corporation, headquartered in Berwick, Pennsylvania, provides a full range of banking, trust and related services through its wholly-owned Bank subsidiary and is subject to competition from other financial institutions in connection with these services.

The Bank serves a customer base which includes individuals, businesses, governments, and public and institutional customers primarily located in the Northeast Region of Pennsylvania.

The Bank has 18 full service offices, one loan production office, and 20 Automated Teller Machines (“ATM”) located in Columbia, Luzerne, Montour, Monroe, and Northampton counties.

The Corporation must also adhere to certain federal and state banking laws and regulations and are subject to periodic examinations made by various state and federal agencies.

Segment Reporting

The Corporation’s subsidiary acts

as an independent community financial services provider, and offers traditional banking and related financial services to individual,

business, government, and public and institutional customers.

Through its branch and ATM network, the Bank offers a full array

of commercial and retail financial services, including the taking of time, savings and demand deposits;

the making of commercial,

consumer and mortgage loans;

The Bank acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business, government, and public and institutional customers.

Through its branch and ATM network, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits;

the making of commercial, consumer and mortgage loans;

and the providing of other financial services.

The Bank also performs personal, corporate, pension

and fiduciary services through its Trust Department.

Management does not separately allocate

expenses, including the cost of funding loan demand, between the commercial, retail, trust and mortgage banking operations of

the Corporation.

The Bank also performs personal, corporate, pension and fiduciary services through its Trust Department.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, trust and mortgage banking operations of the Corporation.

As such, discrete financial information is not available and segment reporting would not be meaningful.

Significant Concentrations of Credit Risk

The majority of the Corporation’s

activities involve customers located primarily in Columbia, Luzerne, Montour, Monroe, Northampton, and Lehigh counties in Pennsylvania.

The majority of the Corporation’s activities involve customers located primarily in Columbia, Luzerne, Montour, Monroe, Northampton, and Lehigh counties in Pennsylvania.

The types of securities in which the Corporation invests are presented in Note 3 – Securities.

Credit risk as it relates

to investment activities is moderated through the monitoring of ratings and geographic concentrations residing in the portfolio

and the observance of minimum rating levels in the investment policy.

Note 4 – Loans and Allowance for Loan Losses summarizes

the types of lending in which the Corporation engages.

The inherent risks associated with lending activities are mitigated by

adhering to conservative underwriting practices and policies, as well as portfolio diversification and thorough monitoring of

the loan portfolio.

It is management’s opinion that the investment and loan portfolios were well balanced at December 31,

2019, to the extent necessary to avoid any significant concentrations of credit risk.

Credit risk as it relates to investment activities is moderated through the monitoring of ratings and geographic concentrations residing in the portfolio and the observance of minimum rating levels in the investment policy.

Note 4 – Loans and Allowance for Loan Losses summarizes the types of lending in which the Corporation engages.

The inherent risks associated with lending activities are mitigated by adhering to conservative underwriting practices and policies, as well as portfolio diversification and thorough monitoring of the loan portfolio.

It is management’s opinion that the investment and loan portfolios were well balanced at December 31, 2020, to the extent necessary to avoid any significant concentrations of credit risk.

Use of Estimates

The preparation of these consolidated financial

statements, in conformity with accounting principles generally accepted in the United States of America, 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 these consolidated financial statements and the reported amounts of revenue and expenses during

the reporting periods.

The preparation of these consolidated 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 these consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.

Actual results could differ from those estimates.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

Material estimates that are particularly

susceptible to significant changes include the determination of other-than-temporary impairment on securities and the determination

of the allowance for loan losses.

Material estimates that are particularly susceptible to significant changes include the determination of other-than-temporary impairment on securities, the determination of the allowance for loan losses, and the assessment of goodwill for possible impairment.

Subsequent Events

The Corporation has evaluated events and

transactions occurring subsequent to the consolidated balance sheet date of December 31, 2019, for items that should potentially

be recognized or disclosed in the consolidated financial statements.

The evaluation was conducted through the date these consolidated

financial statements were issued.

On February 25, 2020, the Board of Directors declared a dividend of $0.27 per share for the

first quarter of 2020.

The Corporation has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of December 31, 2020, for items that should potentially be recognized or disclosed in the consolidated financial statements.

The evaluation was conducted through the date these consolidated financial statements were issued.

On February 23, 2021, the Board of Directors declared a dividend of $ 0.27 per share for the first quarter of 2021.

The dividend is payable on March 31, 2021 to shareholders of record as of March 11, 2021.

In addition, on February 23, 2021, the Board of Directors declared a special dividend of $ 0.01 per share for the first quarter of 2021.

The special dividend is also payable on March 31, 2021 to shareholders of record as of March 11, 2021.

Cash and Cash Equivalents

For purposes of reporting consolidated

cash flows, cash and cash equivalents include cash on hand and due from banks, interest-bearing deposits in other banks, and federal

The Corporation considers cash classified as interest-bearing deposits with other banks as a cash equivalent since

they are represented by cash accounts essentially on a demand basis and mature within one year.

Federal funds are also included

as a cash equivalent because they are generally purchased and sold for one-day periods.

For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and due from banks, interest-bearing deposits in other banks, and federal funds sold.

The Corporation considers cash classified as interest-bearing deposits with other banks as a cash equivalent since they are represented by cash accounts essentially on a demand basis and mature within one year.

Federal funds are also included as a cash equivalent because they are generally purchased and sold for one-day periods.

Time Deposits with Other Banks

Time deposits with other banks consist

of fully insured certificates of deposit in other banks with maturity dates between one and five years.

The Corporation classifies its securities

as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase.

Securities are accounted

for on a trade date basis.

Debt securities are classified as Held-to-Maturity when the Corporation has the ability and positive

intent to hold the securities to maturity.

Securities classified as Held-to-Maturity are carried at cost adjusted for amortization

of premium and accretion of discount to maturity.

Debt securities not classified as Held-to-Maturity

are included in the Available-for-Sale category and are carried at fair value.

The amount of any unrealized gain or loss, net

of the effect of deferred income taxes, is reported as accumulated other comprehensive income (AOCI) in the consolidated balance

sheets and consolidated statements of changes in stockholders’ equity.

Management’s decision to sell Available-for-Sale

securities is based on changes in economic conditions controlling the sources and applications of funds, terms, availability of

and yield of alternative investments, interest rate risk and the need for liquidity.

The cost of debt securities classified

as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums to the earliest call date and accretion of

discounts to expected maturity.

Such amortization and accretion, as well as interest and dividends, are included in interest and

dividend income on investment securities.

Time deposits with other banks consist of fully insured certificates of deposit in other banks with maturity dates between one and five years.

The Corporation classifies its securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase.

Securities are accounted for on a trade date basis.

Debt securities are classified as Held-to-Maturity when the Corporation has the ability and positive intent to hold the securities to maturity.

Securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

Debt securities not classified as Held-to-Maturity are included in the Available-for-Sale category and are carried at fair value.

The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive income (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity.

Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums to the earliest call date and accretion of discounts to expected maturity.

Such amortization and accretion, as well as interest and dividends, are included in interest and dividend income on investment securities.

Realized gains and losses are included in net investment securities gains and losses.

The cost of investment securities sold, redeemed or matured is based on the specific identification method.

Beginning January 1, 2018, upon adoption

of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized

gains and losses reported in income.

For periods prior to January 1, 2018, equity securities were classified as Available-for-Sale

and stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax.

Equity securities

without readily determinable fair values are recorded at cost less impairment, if any.

Management evaluates securities for other-than-temporary

impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant

such an evaluation.

Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under FASB

ASC 320, Investments - Debt and Equity Securities .

In determining OTTI under the FASB ASC 320 model, management considers

many factors, including (1) the length of time and the extent to which the fair value has been less

than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected

by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will

be required to sell the debt security before its anticipated recovery.

The assessment of whether an other-than-temporary decline

exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

When other-than-temporary impairment occurs

on debt securities, the amount of the other-than-temporary impairment recognized in earnings depends on whether an entity intends

to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis

less any current-period credit loss.

If an entity intends to sell or more likely than not will be required to sell the security

before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be

recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at

the balance sheet date.

If an entity does not intend to sell the security and it is not more likely than not that the entity will

be required to sell the security before recovery of its amortized cost basis less any current-period loss, the other-than-temporary

impairment shall be separated into the amount representing the credit loss and the amount related to all other factors.

of the total other-than-temporary impairment related to the credit loss is determined based on the present value of cash flows

expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements

The amount of the total other-than-temporary impairment related to the other factors shall be recognized in other comprehensive

income (loss), net of applicable taxes.

The previous amortized cost basis less the other-than-temporary impairment recognized

in earnings becomes the new amortized cost basis of the investment.

The fair market value of the equity securities

tends to fluctuate with the overall equity markets as well as the trends specific to each institution.

The equity securities portfolio

is reviewed in a similar manner as that of the debt securities with greater emphasis placed on the length of time the market value

has been less than the carrying value and the financial sector outlook.

The Corporation also reviews dividend payment activities,

levels of non-performing assets and loan loss reserves.

The starting point for the equity analysis is the length and severity

of market value decline.

The realized loss is recognized as impairment charges on securities on the consolidated statements of

The previous cost basis less the other-than-temporary impairment recognized in earnings becomes the new cost basis of

the investment.

The cost of securities sold, redeemed or matured is based on the specific identification method.

Beginning January 1, 2018, upon adoption of Accounting Standard Update 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income.

For periods prior to January 1, 2018, equity securities were classified as Available-for-Sale and stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax.

Equity securities without readily determinable fair values are recorded at cost less impairment, if any.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under FASB ASC 320, Investments - Debt and Equity Securities .

In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.

The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs on debt securities, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.

If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date.

If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors.

The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements of income.

The amount of the total OTTI related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes.

The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security.

The fair market value of the equity securities tends to fluctuate with the overall equity markets as well as the trends specific to each institution.

The equity securities portfolio is reviewed in a similar manner as that of the debt securities with greater emphasis placed on the length of time the market value has been less than the carrying value and the financial sector outlook.

The Corporation also reviews dividend payment activities, levels of non-performing assets and loan loss reserves.

The starting point for the equity analysis is the length and severity of market value decline.

The realized loss is recognized as impairment charges on securities on the consolidated statements of income.

The previous cost basis less the OTTI recognized in earnings becomes the new cost basis of the investment.

Restricted Investment in Bank Stocks

The Bank owns restricted stock investments

in the Federal Home Loan Bank of Pittsburgh (“FHLB-Pittsburgh”) and Atlantic Community Bankers Bank (“ACBB”).

These investments do not have a readily determinable fair value because their ownership is restricted and they can be sold back

only to the FHLB-Pittsburgh, ACBB or to another member institution.

The Bank owns restricted stock investments in the Federal Home Loan Bank of Pittsburgh (“FHLB-Pittsburgh”) and Atlantic Community Bankers Bank (“ACBB”).

These investments do not have a readily determinable fair value because their ownership is restricted and they can be sold back only to the FHLB-Pittsburgh, ACBB or to another member institution.

Therefore, these investments are carried at cost.

31, 2019, the Corporation held $4,189,000 in stock of FHLB-Pittsburgh and $35,000 in stock of ACBB.

At December 31, 2018, the

Corporation held $8,646,000 in stock of FHLB-Pittsburgh and $35,000 in stock of ACBB.

Management evaluates the restricted investment

in bank stocks for impairment on an annual basis.

Management’s determination of whether these investments are impaired is

based on management’s assessment of the ultimate recoverability of the cost of these investments rather than by recognizing

temporary declines in value.

The following factors were evaluated to determine the ultimate recoverability of the cost of the

Corporation’s restricted investment in bank stocks;

(i) the significance of the decline in net assets of the correspondent

bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted;

commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation

to the operating performance of the correspondent bank;

(iii) the impact of legislative and regulatory changes on the institutions

and, accordingly, on the customer base of the correspondent bank;

At December 31, 2020, the Corporation held $ 2,212,000 in stock of FHLB-Pittsburgh and $ 35,000 in stock of ACBB.

At December 31, 2019, the Corporation held $ 4,189,000 in stock of FHLB-Pittsburgh and $ 35,000 in stock of ACBB.

Management evaluates the restricted investment in bank stocks for impairment on a quarterly basis.

Management’s determination of whether these investments are impaired is based on management’s assessment of the ultimate recoverability of the cost of these investments rather than by recognizing temporary declines in value.

The following factors were evaluated to determine the ultimate recoverability of the cost of the Corporation’s restricted investment in bank stocks;

(i) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted;

(ii) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the correspondent bank;

(iii) the impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the correspondent bank;

and (iv) the liquidity position of the correspondent bank.

on the analysis of these factors, management determined that no impairment charge was necessary related to the restricted investment

in bank stocks during 2019 or 2018.

Net loans are stated at their outstanding

recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses.

Interest on loans is recognized

as income over the term of each loan, generally, by the accrual method.

Loan origination fees and certain direct loan origination

costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual

life of the related loans as an interest yield adjustment.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

Residential mortgage loans held for sale

are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or

state agency investors.

These loans are sold without recourse.

Loans held for sale amounted to $2,292,000 at December 31, 2019

and $365,000 at December 31, 2018.

As an addition to the commercial loans

receivable portfolio, the Corporation may purchase the guaranteed portion of loans secured by the U.S.

The originating

bank retains the unguaranteed portion of the loan.

The loans are sponsored by one of the various government agencies including

Small Business Administration (SBA), United States Department of Agriculture (USDA), and the Farm Service Agency (FSA).

Government Guaranteed Loans (“GGLs”) carry no credit risk due to an unconditional and irrevocable guarantee on all

principal and accrued interest, which is supported by the full faith and credit of the U.S.

As of December 31, 2019,

the Corporation’s balance of GGLs amounted to $6,150,000, compared to December 31, 2018, when the Corporation did not hold

any GGLs in its loans receivable portfolio.

The loans receivable portfolio is segmented

into commercial, residential and consumer loans.

Based on the analysis of these factors, management determined that no impairment charge was necessary related to the restricted investment in bank stocks during 2020 or 2019.

Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses.

Interest on loans is recognized as income over the term of each loan, generally, by the accrual method.

Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.

The loans receivable portfolio is segmented into commercial, residential and consumer loans.

Commercial loans consist of the following classes:

Commercial and Industrial

and Commercial Real Estate.

Commercial and Industrial and Commercial Real Estate.

Commercial and Industrial Lending

The Corporation originates commercial and

industrial loans primarily to businesses located in its primary market area and surrounding areas.

These loans are used for various

business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts

Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of

such machinery and equipment.

The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas.

These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable.

Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment.

Most business lines of credit are written on demand and are reviewed annually.

Commercial and industrial loans are generally

secured with short-term assets;

however, in many cases, additional collateral such as real estate is provided as additional security

for the loan.

Commercial and industrial loans are generally secured with short-term assets;

however, in many cases, additional collateral such as real estate is provided as additional security for the loan.

Loan-to-value maximum thresholds have been established by the Corporation and are specific to the type of collateral.

Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements,

collateral appraisals, etc.

Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals or internal evaluations, etc.

Commercial and industrial loans are typically supported by personal guarantees of the borrower.

In underwriting commercial and industrial

loans, an analysis is performed to evaluate the borrower's character and capacity to repay the loan, the adequacy of the borrower's

capital and collateral, as well as the conditions affecting the borrower.

Evaluation of the borrower's past, present and future

cash flows is also an important aspect of the Corporation's analysis of the borrower’s ability to repay.

Commercial and industrial loans generally

present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the

borrower’s primary business activities.

As a result, the availability of funds for the repayment of commercial and industrial

loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower.

Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis of the borrower’s ability to repay.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the borrower’s primary business activities.

As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

As an addition to the commercial loans receivable portfolio, the Corporation may purchase the guaranteed portion of loans secured by the U.S.

The originating bank retains the unguaranteed portion of the loan.

The loans are sponsored by one of the various government agencies including the U.S.

Small Business Administration, United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”).

Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full

faith and credit of the U.S.

Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan.

As of December 31, 2020, the Corporation's balance of GGLs amounted to $ 5,128,000 , compared to $ 6,150,000 at December 31, 2019.

Commercial Real Estate Lending

The Corporation engages in commercial real

estate lending in its primary market area and surrounding areas.

The Corporation’s commercial real estate portfolio is secured

primarily by commercial retail space, commercial office buildings, residential housing and hotels.

Generally, commercial real

estate loans have terms that do not exceed twenty years, have loan-to-value ratios of up to eighty percent of the value of the

collateral property, and are typically supported by personal guarantees of the borrowers.

In underwriting these loans, the Corporation

performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability

and predictability of the cash flow generated by the property securing the loan.

The value of the property is determined by either

independent appraisers or internal evaluations by Bank officers.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

Commercial real estate loans generally

present a higher level of risk than residential real estate secured loans.

Repayment of loans secured by commercial real estate

is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic

conditions on income producing properties.

The Corporation engages in commercial real estate lending in its primary market area and surrounding areas.

The Corporation’s commercial real estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels.

Generally, commercial real estate loans have terms that do not exceed twenty years , have loan-to-value ratios of up to eighty percent of the value of the collateral property, and are typically supported by personal guarantees of the borrowers.

In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan.

The value of the property is determined by either independent appraisers or internal evaluations performed by Bank officers.

Commercial real estate loans generally present a higher level of risk than residential real estate secured loans.

Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

Residential Real Estate Lending (Including Home Equity)

The Corporation’s residential real

estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity

lines of credit.

These loans are generated by the Corporation’s marketing efforts, its present customers, walk-in customers

and referrals.

The Corporation’s residential real estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit.

These loans are generated by the Corporation’s marketing efforts, its present customers, walk-in customers and referrals.

These loans originate primarily within or with customers from the Corporation’s market area.

The Corporation’s one-to-four family

residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.

The Corporation offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and

those under construction.

The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas.

The Corporation offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction.

Loans with terms of thirty years are normally held for sale and sold without recourse;

most of the residential

mortgages held in the Corporation’s residential real estate portfolio have maximum terms of twenty years.

Generally, the

majority of the Corporation’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those

with primary mortgage insurance at ninety-five percent or less.

Home equity term loans are secured by the borrower’s primary

residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years.

In general, home equity

lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum

term of twenty years.

In underwriting one-to-four family residential

mortgage loans, the Corporation evaluates the borrower’s ability to make monthly payments, the borrower’s repayment

history and the value of the property securing the loan.

The ability and willingness to repay is assessed based upon the borrower’s

employment history, current financial conditions and credit background.

A majority of the properties securing residential real

estate loans made by the Corporation are appraised by independent appraisers.

The Corporation generally requires mortgage loan

borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance,

if applicable.

Residential mortgage loans, home equity

term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured

by the borrower’s primary residence.

Risk is increased when the Corporation is in a subordinate position, especially to

another lender, for the loan collateral.

most of the residential mortgages held in the Corporation’s residential real estate portfolio have maximum terms of twenty years .

Generally, the majority of the Corporation’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at ninety-five percent or less.

Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years .

In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years .

In underwriting one-to-four family residential mortgage loans, the Corporation evaluates the borrower’s ability to make monthly payments, the borrower’s prior loan repayment history and the value of the property securing the loan.

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

A majority of the properties securing residential real estate loans made by the Corporation are appraised by independent appraisers.

The Corporation generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence.

Risk is increased when the Corporation is in a subordinate position, especially to another lender, for the loan collateral.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors.

These loans are sold without recourse.

Loans held for sale amounted to $ 17,300,000 at December 31, 2020 and $ 2,292,000 at December 31, 2019.

Consumer Lending

The Corporation offers a variety of secured

and unsecured consumer loans, including vehicle loans, stock loans and loans secured by financial institution deposits.

loans originate primarily within or with customers from the market area.

Consumer loan terms vary according to the

type and value of collateral and creditworthiness of the borrower.

In underwriting personal loans, a thorough analysis is performed

regarding the borrower’s willingness and financial ability to repay the loan as agreed.

The ability and willingness to repay

is assessed based upon the borrower’s employment history, current financial condition and credit background.

Consumer loans may entail greater credit

risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly

depreciable assets, such as automobiles or recreational equipment.

In such cases, repossessed collateral for a defaulted personal

loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of

damage, loss or depreciation.

In addition, personal loan collections are dependent on the borrower’s continuing financial

stability and therefore, are more likely to be affected by adverse personal circumstances.

Furthermore, the application of various

federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The Corporation offers a variety of secured and unsecured consumer loans, including vehicle loans, stock loans and loans secured by financial institution deposits.

These loans originate primarily within or with customers from the Corporation’s market area.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower.

In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability to repay the loan as agreed.

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

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.

In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.

In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances.

Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Coronavirus Pandemic Impact on the Loan Portfolio

As a result of the economic impact of the COVID-19 coronavirus pandemic, the Coronavirus Aid Relief, and Economic Security (“CARES”) Act was enacted in the United States on March 27, 2020.

The Corporation is approved by the SBA to fund loans under the SBA’s Paycheck Protection Program (“PPP”) created as part of the CARES Act.

The PPP loans have 1.00% interest rates, lender fees, two or five-year terms (depending on date of origination), and may qualify for forgiveness.

These loans funded by the Corporation are subject to the terms and conditions applicable to all loans made pursuant to the PPP, as administered by the SBA under the CARES Act.

The Paycheck Protection Program calls for these loans to be fully guaranteed by the SBA.

PPP loan origination fees and certain loan origination costs have been deferred with the net amount accreted using the straight line method over the contractual life of the related loans as an interest yield adjustment.

If a loan is forgiven pursuant to the terms and conditions applicable to the PPP, the remaining origination fees and costs are recognized at the time of forgiveness.

All PPP loans are carried in the Corporation’s Commercial and Industrial loan portfolio.

As of December 31, 2020, the Corporation held 441 PPP loans in its Commercial and Industrial portfolio, which carried a balance of $ 22,976,000 .

An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as troubled debt restructurings, as long as specific criteria are met.

To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of June 30, 2021 or the termination date of the national emergency related to the COVID-19 pandemic as declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019.

In compliance with Section 4013 of the CARES Act, the Corporation has granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments.

Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there were 44 loan modifications still actively on deferral carrying an aggregate balance of $ 16,541,000 as of December 31, 2020.

See page 78 for additional information regarding the Section 4013 CARES Act modifications.

Delinquent Loans

Generally, a loan is considered to be past-due

when scheduled loan payments are in arrears 10 days or more.

Delinquent notices are generated automatically when a loan is 10

or 15 days past-due, depending on loan type.

Collection efforts continue on past-due loans that have not been brought current,

when it is believed that some chance exists for improvement in the status of the loan.

Past-due loans are continually evaluated

with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial

Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying

loan contract and when a collateral deficiency exists.

Because all or part of the contractual cash flows are not expected to be

collected, the loan is considered to be impaired, and the Bank estimates the impairment based on its analysis of the cash flows

or collateral estimated at fair value less cost to sell.

Should a Government Guaranteed Loan default, demand is made to the originating

bank for repurchase of the loan.

If the originating bank does not repurchase the loan, demand for repurchase is then made to the

appropriate government agency which has provided the guarantee for the loan.

Residential Real Estate and Consumer loans

are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value

of the underlying collateral is not sufficient to support the loan balance and a loss is expected.

At that time, the amount of

estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in

Loans with collateral are charged down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has

declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg.

reaffirmation

by the borrower with demonstrated repayment ability).

Otherwise, loans are charged off in full or written down to the estimated

fair value of collateral less cost to sell.

Generally, a loan is classified as non-accrual

and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90

days past due or management has serious doubts about further collectability of principal or interest, even though the loan may

currently be performing.

A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in

the process of collection.

When a loan is placed on non-accrual status, unpaid interest credited to income in the current year

is reversed and unpaid interest accrued in prior years is charged against interest income.

Certain non-accrual loans may continue

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 10 days or more.

Delinquent notices are generated automatically when a loan is 10 or 15 days past-due, depending on loan type.

Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan.

Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists.

Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Corporation estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell.

Should a Government Guaranteed Loan default, demand is made to the originating bank for repurchase of the loan.

If the originating bank does not repurchase the loan, demand for repurchase is then made to the appropriate government agency which has provided the guarantee for the loan.

Residential Real Estate and Consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected.

At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full.

Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg.

reaffirmation by the borrower with demonstrated repayment ability).

Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may currently be performing.

A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in the process of collection.

When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against interest income.

Certain non-accrual loans may continue to perform;

that is, payments are still being received.

Generally, the payments are applied to principal.

These loans remain under

constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management's judgment

as to collectability of principal.

These loans remain under constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management’s judgment regarding the collectability of principal.

Allowance for Loan Losses

The allowance for loan losses is established

through provisions for loan losses charged against income.

Loans deemed to be uncollectible are charged against the allowance

for loan losses and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained

at a level estimated by management to be adequate to absorb potential loan losses.

Management’s periodic evaluation of the

adequacy of the allowance for loan losses is based on the Corporation’s past loan loss experience, known and inherent risks

in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments),

the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant

This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future

cash flows expected to be received on impaired loans that may be susceptible to significant change.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The allowance consists of specific, general

and unallocated components.

The allowance for loan losses is established through provisions for loan losses charged against income.

Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level estimated by management to be adequate to absorb potential loan losses.

Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors.

This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

The allowance consists of specific, general and unallocated components.

The specific component relates to loans that are individually classified as impaired.

are not aggregated for collective impairment evaluation, as such;

all loans are subject to individual impairment evaluation should

the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary.

Factors considered by management

in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when

Select loans are not aggregated for collective impairment evaluation, as such;

all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary.

Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of

the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s

prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is impaired, a

portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows

using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral.

debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future

cash flows using the loan’s effective rate at inception.

If a troubled debt restructuring is considered to be a collateral

dependent loan, the loan may be reported, net, at the fair value of the collateral.

For troubled debt restructurings that subsequently

default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan

The general component covers all other

loans not identified as impaired (aside from Government Guaranteed Loans, which do not require an allowance) and is based on historical

losses and qualitative factors.

The historical loss component of the allowance is determined by losses recognized by portfolio

segment over a time period that management has determined represents the current credit cycle.

Qualitative factors impacting each

portfolio segment may include:

delinquency trends, loan volume trends, Bank policy changes, management processes and oversight,

economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other

conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions,

and external factors including regulatory issues and competition.

Government Guaranteed Loans do not require

an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the

full faith and credit of the U.S.

Should a GGL default, the loan will be repurchased by the originating bank or the

appropriate government agency that has provided the guarantee for the loan.

The unallocated component of the allowance

is maintained to cover uncertainties that could affect management’s estimate of probable losses.

The unallocated component

of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating

specific and general losses in the portfolio.

A reserve for unfunded lending commitments

is provided for possible credit losses on off-balance sheet credit exposures.

The reserve for unfunded lending commitments represents

management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities

on the consolidated balance sheets.

As of December 31, 2019 and 2018 the amount of the reserve for unfunded lending commitments

was $125,000 and $117,000, respectively.

The Corporation is subject to periodic

examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance

for loan losses based on their assessment of credit information available to them at the time of their examinations.

A loan is considered impaired when, based

on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to

the contractual terms of the original loan agreement.

Under current accounting standards, the allowance for loan losses related

to impaired loans is based on discounted cash flows using the loan’s effective interest rate at inception or the fair value

of the collateral for certain collateral dependent loans.

The restructuring of a loan is considered

a “troubled debt restructuring” if both the following conditions are met:

(i) the borrower is experiencing financial

difficulties, and (ii) the Corporation has granted a concession.

The most common concessions granted include one or more modifications

to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of

the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period

of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the

present value of estimated future cash flows using the loan’s effective rate at inception.

If a troubled debt restructuring is considered to be a collateral dependent loan, the loan may be reported, net, at the fair value of the collateral.

For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers all other loans not identified as impaired (aside from GGLs, which do not require an allowance) and is based on historical losses and qualitative factors.

The historical loss component of the allowance is determined by losses recognized by portfolio segment over a time period that management has determined represents the current credit cycle.

Qualitative factors impacting each portfolio segment may include:

delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.

In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors related to the local/regional economy were increased by two basis points across all loan segments during the first quarter of 2020, and increased by an additional basis point across all loan segments during the second quarter of 2020.

The qualitative factor relating to the impact of external factors/conditions for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of 2020.

The qualitative factors relating to the impact of external factors/conditions were increased by two additional basis points across all loan segments during the fourth quarter of 2020.

Modifications granted in compliance with Section 4013 of the CARES Act are highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Corporation’s loan portfolio.

Government Guaranteed Loans do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S.

Should a GGL default, the loan will be repurchased by the originating bank or the appropriate government agency that has provided the guarantee for the loan.

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

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses.

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures.

The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets.

As of December 31, 2020 and 2019 the amount of the reserve for unfunded lending commitments was $ 129,000 and $ 125,000 , respectively.

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

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the original loan agreement.

Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s effective interest rate at inception or the fair value of the collateral for certain collateral dependent loans.

From time to time, the Corporation may agree to modify/restructure the contractual terms of a borrower's loan.

The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both the following conditions are met:

(i) the borrower is experiencing financial difficulties, and (ii) the Corporation has granted a concession.

The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan.

A less common concession is the forgiveness of a portion of the principal.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The determination of whether a borrower

is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the

potential financial condition of the borrower were a concession not granted.

Similarly, the determination of whether a concession

has been granted is very subjective in nature.

For example, simply extending the term of a loan at its original interest rate

or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit

terms from a different lender.

Loans modified in a troubled debt restructuring

are considered impaired and may or may not be placed on non-accrual status until the Corporation determines the future collection

of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance

according to the restructured terms of six months.

The Corporation utilizes a risk grading

matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial

and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings.

An asset quality rating is assigned using

the guidance provided in the Corporation’s loan policy.

Primary responsibility for assigning the asset quality rating rests

with the credit department.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted.

Similarly, the determination of whether a concession has been granted is subjective in nature.

For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Corporation determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months.

Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in Section 4013 of the CARES Act are met.

See page 78 for further discussion of the Section 4013 CARES Act modifications.

The Corporation utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings.

An asset quality rating is assigned using the guidance provided in the Corporation’s loan policy.

Primary responsibility for assigning the asset quality rating rests with the credit department.

The asset quality rating is validated periodically by both an internal and external loan review process.

The commercial loan grading system focuses

on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of

repayment, the nature of the business and the outlook for the particular industry.

Primary emphasis is placed on financial condition

The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry.

Primary emphasis is placed on financial condition and trends.

The grade also reflects current economic and industry conditions;

as well as other variables such as liquidity, cash

flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

The loan grading system for Residential

Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income

sources, collateral position and loan-to-value ratio.

as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

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

Risk grade characteristics are as follows:

Risk Grade 1 – MINIMAL RISK through Risk Grade

6 – MANAGEMENT ATTENTION (Pass Grade Categories)

Risk is evaluated via examination of several

attributes including but not limited to financial trends, strengths and weaknesses, likelihood of repayment when considering both

cash flow and collateral, sources of repayment, leverage position, management expertise, and repayment history.

At the low-risk end of the rating scale,

a risk grade of 1 - Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of

default or loss.

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

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

At the low-risk end of the rating scale, a risk grade of 1 - Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss.

Loan grades then progress through escalating ratings of 2 through 6 based upon risk.

Risk Grade 2 - Modest Risk

are loans with sufficient cash flows;

Risk Grade 3 - Average Risk are loans with key balance sheet ratios slightly above the borrower’s

Risk Grade 4 - Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one

or more ratios may be higher;

and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage

and/or weakening markets.

Risk Grade 6 - Management Attention are loans with weaknesses resulting from declining performance trends

and the borrower’s cash flows may be temporarily strained.

Loans in this category are performing according to terms, but

present some type of potential concern.

Risk Grade 2 - Modest Risk are loans with sufficient cash flows;

Risk Grade 3 - Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers;

Risk Grade 4 - Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher;

and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets.

Risk Grade 6 - Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained.

Loans in this category are performing according to terms, but present some type of potential concern.

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

Generally, these loans or assets are currently

protected, but are “potentially weak.” They constitute an undue and unwarranted credit risk but not to the point of

justifying a classification of substandard.

Assets in this category are currently protected

but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Corporation’s

credit position at some future date.

No loss of principal or interest is envisioned;

however, they constitute an undue credit

risk that may be minor but is unwarranted in light of the circumstances surrounding a specific asset.

Risk is increasing beyond

that at which the loan originally would have been granted.

Assets in this category are currently adequately collateralized but have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Corporation’s credit position at some future date.

The loans may constitute increased credit risk but not to the point of justifying a classification of substandard.

No loss of principal or interest is envisioned, but risk is increasing beyond that at which the loan originally would have been granted.

Historically, cash flows are inconsistent;

financial trends show some

deterioration.

Liquidity and leverage are above industry averages.

financial trends show some deterioration.

Liquidity and leverage ratios are above industry averages.

Financial information could be incomplete or inadequate.

Special Mention asset has potential weaknesses that deserve management’s close attention.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

A Special Mention asset has potential weaknesses that deserve management’s close attention.

Risk Grade 8 − SUBSTANDARD (Non-Pass Category)

Generally, these assets are inadequately

protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Assets so classified

must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct

possibility that the Corporation will sustain some loss if the aggregate amount of substandard assets is not fully covered by

the liquidation of the collateral used as security.

Substandard loans have a high probability of payment default and require more

intensive supervision by Corporation management.

Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct possibility that the Corporation will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security.

Substandard loans have a high probability of payment default and require more intensive supervision by Corporation management.

Risk Grade 9 − DOUBTFUL (Non-Pass Category)

Generally, loans graded doubtful have all

the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the

basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable.

possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work

to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure,

capital injection, perfection of liens on additional collateral and/or refinancing plan is completed.

Loans are graded doubtful

if they contain weaknesses so serious that collection or liquidation in full is questionable.

Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable.

The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed.

Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

Premises and Equipment

Premises, improvements, and equipment are

stated at cost less accumulated depreciation computed principally utilizing the straight-line method over the estimated useful

lives of the assets.

Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate

that the carrying value may not be recovered.

Premises and equipment are stated at cost less accumulated depreciation computed principally utilizing the straight-line method over the estimated useful lives of the assets.

Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying value may not be recovered.

Maintenance and minor repairs are charged to operations as incurred.

accumulated depreciation of the premises and equipment retired or sold are eliminated from the property accounts at the time of

retirement or sale, and the resulting gain or loss is reflected in current operations.

The cost and accumulated depreciation of the premises and equipment retired or sold are eliminated from the property accounts at the time of retirement or sale, and the resulting gain or loss is reflected in current operations.

Mortgage Servicing Rights

The Corporation originates and sells real

estate loans to investors in the secondary mortgage market.

After the sale, the Corporation may retain the right to service these

The Corporation originates and sells real estate loans to investors in the secondary mortgage market.

After the sale, the Corporation may retain the right to service these loans.

The mortgage loans sold and serviced for others are not included in the consolidated balance sheets.

The unpaid principal

balances of mortgage loans serviced for others were $94,998,000 and $97,201,000 at December 31, 2019 and 2018, respectively.

originated mortgage loans are sold and servicing is retained, a servicing asset is capitalized based on relative fair value at

the date of the sale.

Servicing assets are amortized as an offset to other fees in proportion to, and over the period of, estimated

net servicing income.

The servicing asset is included in other assets in the consolidated balance sheets and amounted to $283,000

at December 31, 2019 and $316,000 at December 31, 2018.

The amount of servicing income earned was $241,000 and $247,000 at December

31, 2019 and 2018, respectively.

Amortization recognized in relation to mortgage servicing rights was $112,000 and $129,000 at

December 31, 2019 and 2018, respectively.

Both income and amortization are included in service charges and fees on the consolidated

statements of income.

Gains or losses on sales of mortgage loans are recognized based on the differences between the selling price

and the carrying value of the related mortgage loans sold.

The unpaid principal balances of mortgage loans serviced for others were $ 86,981,000 and $ 94,998,000 at December 31, 2020 and 2019, respectively.

When originated mortgage loans are sold and servicing is retained, a servicing asset is capitalized based on relative fair value at the date of the sale.

Servicing assets are amortized as an offset to other fees in proportion to, and over the period of, estimated net servicing income.

The servicing asset is included in other assets in the consolidated balance sheets and amounted to $ 282,000 at December 31, 2020 and $ 283,000 at December 31, 2019.

The amount of servicing income earned was $ 231,000 and $ 241,000 at December 31, 2020 and 2019, respectively.

Amortization recognized in relation to mortgage servicing rights was $ 130,000 and $ 112,000 at December 31, 2020 and 2019, respectively.

Both income and amortization are included in service charges and fees on the consolidated statements of income.

Gains or losses on sales of mortgage loans are recognized based on the differences between the selling price and the carrying value of the related mortgage loans sold.

Bank Owned Life Insurance

The cash surrender value of bank owned

life insurance is carried as an asset, and changes in cash surrender value are recorded as non-interest income.

The Corporation entered into agreements

to provide post-retirement benefits to two retired employees in the form of life insurance payable to the employee’s beneficiaries

upon their death through endorsement split dollar life insurance arrangements.

The Corporation’s accrued liabilities for

this benefit agreement as of December 31, 2019 and 2018 was $38,000 and $40,000, respectively.

The related expense for this benefit

agreement amounted to $(2,000) and $(1,000) for the years ended December 31, 2019 and 2018, respectively.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The cash surrender value of bank owned life insurance is carried as an asset, and changes in cash surrender value are recorded as non-interest income.

The Corporation entered into agreements to provide post-retirement benefits to two retired employees in the form of life insurance payable to the employee’s beneficiaries upon their death through endorsement split dollar life insurance arrangements.

The Corporation’s accrued liabilities for this benefit agreement as of December 31, 2020 and 2019 was $ 36,000 and $ 38,000 , respectively.

The related income for this benefit agreement amounted to $ 2,000 for the years ended December 31, 2020 and 2019.

Investments in Low-Income Housing Partnerships

The Corporation is a limited partner in

real estate ventures that own and operate affordable residential low-income housing apartment buildings for elderly and mentally

challenged adult residents.

The Corporation is a limited partner in real estate ventures that own and operate affordable residential low-income housing apartment buildings for elderly and mentally challenged adult residents.

The investments are accounted for under the cost method.

Under the cost method, the Corporation recognizes

tax credits as they are allocated and amortizes the initial cost of the investment over the period that the tax credits are allocated

to the Corporation.

The amount of tax credits allocated to the Corporation were $405,000 in 2019 and 2018, and the amortization

of the investments in the limited partnerships were $353,000 and $530,000 in 2019 and 2018, respectively.

During 2015, the Corporation

became a limited partner in a real estate venture with an initial investment of $590,000, additional capital contributions of

$1,430,000 made in 2016 and 2017 and a final capital contribution of $85,000 made in 2019.

The construction was completed and

the property was occupied in 2017.

Goodwill resulted from the acquisition

of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed

of the branch of another financial institution in Danville, Pennsylvania, in January 2004.

Such goodwill represents the excess

cost of the acquired assets relative to the assets fair value at the dates of acquisition.

During the first quarter of 2008, $152,000

of liabilities related to the Pocono acquisition were recorded as a purchase accounting adjustment resulting in an increase in

the excess purchase price.

The amount was comprised of the finalization of severance agreements and contract terminations related

to the acquisition.

Under the cost method, the Corporation recognizes tax credits as they are allocated and amortizes the initial cost of the investment over the period that the tax credits are allocated to the Corporation.

The amount of tax credits allocated to the Corporation were $ 405,000 in 2020 and 2019, and the amortization of the investments in the limited partnerships were $ 362,000 and $ 353,000 in 2020 and 2019, respectively.

During 2015, the Corporation became a limited partner in a real estate venture with an initial investment of $ 590,000 , additional capital contributions of $ 1,430,000 made in 2016 and 2017 and a final capital contribution of $ 85,000 made in 2019.

The construction was completed and the property was occupied in 2017.

Goodwill resulted from the acquisition of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed of the branch of another financial institution in Danville, Pennsylvania, in January 2004.

Such goodwill represents the excess cost of the acquired assets relative to the assets fair value at the dates of acquisition.

During the first quarter of 2008, $ 152,000 of liabilities related to the Pocono acquisition were recorded as a purchase accounting adjustment resulting in an increase in the excess purchase price.

The amount was comprised of the finalization of severance agreements and contract terminations related to the acquisition.

In accordance with current accounting standards, goodwill is not amortized.

Management performs an annual

evaluation for impairment.

Management performs an annual evaluation for impairment.

Any impairment of goodwill results in a charge to income.

The Corporation periodically assesses whether

events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired.

Goodwill is evaluated for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying

amount of goodwill exceeds its implied fair value.

The Corporation has evaluated the goodwill included in its consolidated balance

sheet at December 31, 2019, and has determined there was no impairment as of that date.

In addition, the Corporation did not identify

any impairment in 2018.

The Corporation periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired.

Goodwill is evaluated for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

Management notes that the emergence of COVID-19 as a global pandemic during 2020 has resulted in significant deterioration in general economic conditions, and has caused a deterioration in the environment in which the Corporation operates.

The full impact to earnings in the banking industry and to the Corporation specifically, remains uncertain.

Based on the totality of the circumstances, and the impact of economic conditions, management concluded that it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

Management engaged an independent third party to perform the quantitative analysis of comparing the fair value of the Corporation to its carrying value, including goodwill.

The results of the quantitative goodwill impairment analysis concluded that there was no impairment as of December 31, 2020.

In addition, the Corporation did not identify any impairment in 2019.

No assurance can be given that future impairment tests will not result in a charge to earnings.

Foreclosed Assets Held for Resale

Real estate properties acquired through,

or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell on the date of foreclosure,

establishing a new cost basis.

After foreclosure, valuations are periodically performed and if fair value less cost to sell declines

subsequent to foreclosure, a valuation allowance is recorded through expense.

Revenues derived from and costs to maintain the

assets and subsequent gains and losses on sales are included in non-interest expense on the consolidated statements of income.

The Corporation accounts for income taxes

in accordance with income tax accounting guidance FASB ASC Topic 740, Income Taxes.

Current income tax accounting guidance

results in two components of income tax expense:

Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell on the date of foreclosure, establishing a new cost basis.

After foreclosure, valuations are periodically performed and if fair value less cost to sell declines subsequent to foreclosure, a valuation allowance is recorded through expense.

Revenues derived from and costs to maintain the assets and subsequent gains and losses on sales are included in non-interest expense on the consolidated statements of income.

The Corporation accounts for income taxes in accordance with income tax accounting guidance FASB ASC Topic 740, Income Taxes.

Current income tax accounting guidance results in two components of income tax expense:

current and deferred.

Current income tax expense reflects taxes to be paid or

refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions

over revenues.

Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.

The Corporation determines deferred income taxes using the liability (or balance sheet) method.

Under this method,

the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets

and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense

results from changes in deferred tax assets and liabilities between periods.

Deferred tax assets are reduced by a valuation allowance

if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset

will not be realized.

The Corporation accounts for uncertain

tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained

upon examination.

Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Corporation accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.

The term more-likely-than-not means a likelihood of more than 50%;

the terms examined and upon examination also

include resolution of the related appeals or litigation processes, if any.

A tax position that meets the

more-likely-than-not recognition threshold is initially and

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

subsequently measured as the largest amount of tax benefit that

has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all

relevant information.

The determination of whether or not a tax position has met the more-likely-than-not recognition

threshold considers the facts, circumstances, and information available at the reporting date and is subject to

management’s judgment.

The Corporation recognizes interest and

penalties on income taxes, if any, as a component of income tax expense.

the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.

A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.

The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.

The Corporation recognizes interest and penalties on income taxes, if any, as a component of income tax expense.

Earnings Per Share

Basic earnings per share (“EPS”)

is computed by dividing net income by the weighted average number of common shares outstanding for the period.

Diluted EPS reflects

the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into

common stock or resulted in the issuance of common stock that then shared in the earnings of the Corporation.

At December 31,

2019 and 2018, there were no potential common shares outstanding.

The following table sets forth the computation of basic and

diluted earnings per share.

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period.

Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Corporation.

At December 31, 2020 and 2019, there were no potential common shares outstanding.

The following table sets forth the computation of basic and diluted earnings per share.

(In thousands, except earnings per share)

Ended December 31,

Weighted-average common shares

and diluted earnings per share

Year Ended December 31,

Weighted-average common shares outstanding

Basic and diluted earnings per share

Treasury Stock

The purchase of the Corporation’s

common stock is recorded at cost.

At the date of subsequent reissue, the treasury stock account is reduced by the cost of such

stock on a first-in-first-out basis.

The purchase of the Corporation’s common stock is recorded at cost.

At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a first-in-first-out basis.

Trust Assets and Revenues

Property held by the Corporation in a fiduciary

or agency capacity for its customers is not included in the accompanying consolidated financial statements since such items are

not assets of the Corporation.

Property held by the Corporation in a fiduciary or agency capacity for its customers is not included in the accompanying consolidated financial statements since such items are not assets of the Corporation.

Assets held in trust were $ 107,336,000 and $ 111,160,000 at December 31, 2020 and 2019, respectively.

Trust Department income is generally recognized on a cash basis and is not materially different than if it were reported on an

accrual basis.

Trust Department income is

generally recognized on a cash basis and is not materially different than if it were reported on an accrual basis (see Table 4 – Non-Interest Income for details).

Comprehensive Income (Loss)

The Corporation is required to present

accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented.

Accumulated other comprehensive income (loss) is comprised of net unrealized holding gains (losses) on the debt securities available-for-sale

The Corporation is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented.

Accumulated other comprehensive income (loss) is comprised of net unrealized holding gains (losses) on the debt securities available-for-sale portfolio.

The Corporation has elected to report these effects on the consolidated statements of comprehensive income.

Advertising Costs

It is the Corporation’s policy to

expense advertising costs in the period in which they are incurred.

Recent Accounting Standards Updates (“ASU”)

Except as disclosed below, there were no

new accounting pronouncements affecting the Corporation during the year ended December 31, 2019 that were not already adopted

by the Corporation in previous periods.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

It is the Corporation’s policy to expense advertising costs in the period in which they are incurred.

Recent Accounting Standards Updates (“ASU”) – Adopted:

Except as disclosed below, there were no new accounting pronouncements affecting the Corporation during the year ended December 31, 2020 that were not already adopted by the Corporation in previous periods.

Recently adopted ASUs:

On January 1, 2019, the Corporation adopted

ASU 2016-02, Leases (Topic 842), and all subsequent amendments to the ASU, which required that lease assets and liabilities

arising from operating leases be recognized on the balance sheet.

As part of the adoption of ASU 2016-02, the Corporation elected

to adopt a practical expedient for all underlying assets not to separate nonlease components from lease components and instead

to account for each separate component as a single lease component.

The Corporation also elected to adopt the transition relief

provisions from ASU 2018-11, Leases (Topic 842) –Targeted Improvements , and recorded the impact of adoption as of

January 1, 2019, without restating any prior-year amounts or disclosures.

Adoption of ASU 2016-02 resulted in the recognition

of right-of-use assets and lease liabilities for operating leases of $1,465,000 and $1,556,000, respectively, on its consolidated

balance sheet as of January 1, 2019, with no adjustment to stockholders’ equity and no material impact to its consolidated

statements of income.

As of December 31, 2019, the Corporation has recorded right-of-use assets and lease liabilities for operating

leases of $1,470,000 and $1,663,000, respectively, on its consolidated balance sheet.

In March 2017, the Financial Accounting

Standards Board (“FASB”) issued ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20) :

Premium Amortization on Purchased Callable Debt Securities.

The ASU shortens the amortization period for certain callable

debt securities held at a premium, and requires that the premiums be amortized to the earliest call date.

ASU 2017-08 is effective

for annual periods and interim periods within those annual periods beginning after December 15, 2018.

The Corporation was already

accounting for callable debt securities in this manner, and the adoption of this standard had no material impact on the consolidated

financial statements and related disclosures.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Intangibles –Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment .

The ASU simplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

Instead, under the amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount.

Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable.

The update also eliminated the requirements for zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.

The amendments were effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

The adoption of this update on January 1, 2020 did not have a material impact on the Corporation’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13 , Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to Disclosure Requirements for Fair Value Measurement .

The amendments in this update removed required disclosures regarding:

The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2.

The policy for timing of transfers between levels, 3.

The valuation processes for Level 3 fair value measurements, and 4.

The update modified the disclosure requirements on fair value measurements in Topic 820:

a) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and b) The range and weighted average significant unobservable inputs used to develop Level 3 fair value measurements.

For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

The amendments in this update were effective for all entities for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019.

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

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) , which provides optional

expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate ("LIBOR"), or by another reference rate that is expected to be discontinued.

The amendments are effective for all entities as of March 12, 2020 through December 31, 2022.

The Corporation has evaluated the impact of the provisions of ASU 2020-04 on our financial condition, results of operations and cash flows, and determined that there is no material impact on the consolidated financial statements and related disclosures.

Pending ASUs:

2 unchanged sentences

Measurement of Credit Losses on Financial Instruments.

requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance

for credit losses that is deducted from the amortized cost basis.

The measurement of expected credit losses is based on relevant

information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that

affect the collectability of the reported amount.

2016-13 is effective for annual periods and interim periods within those

annual periods beginning after December 15, 2019.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit

Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting

companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

While the Corporation

(a smaller reporting company) is currently evaluating the provisions of ASU 2016-13 to determine the potential impact of the new

standard will have on the Corporation’s consolidated financial statements, it has taken steps to prepare for the implementation

when it becomes effective, such as:

forming an internal committee, gathering pertinent data, consulting with outside professionals,

subscribing to a new software system, and running existing and new methodologies concurrently through the period of implementation.

In January 2017, the FASB issued ASU 2017-04,

Intangibles – Goodwill and Other (Topic 350) :

Simplifying the Test for Goodwill Impairment.

The ASU simplifies

the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

Instead, under the amendments,

an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount.

Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount when measuring

the goodwill impairment loss, if applicable.

The update also eliminated the requirements for zero or negative carrying amount

to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.

The amendments are effective for public business entities for its annual or any interim goodwill impairment tests in fiscal years

beginning after December 15, 2019.

The adoption of this update is not expected to have a material impact on the Corporation’s

consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13,

Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to Disclosure Requirements for Fair Value Measurement.

The amendments in this Update removed required disclosures regarding as follows:

The amount of and reasons for transfers

between Level 1 and Level 2 of the fair value hierarchy, 2.

The policy for timing of transfers between levels, 3.

The valuation

processes for Level 3 fair value measurements, and 4.

The Update modified the disclosure requirements on fair value measurements

in Topic 820:

a) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring

Level 3 fair value measurements held at the end of the reporting period

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

and b) The range and weighted average significant unobservable

inputs used to develop Level 3 fair value measurements.

For certain unobservable inputs, an entity may disclose other quantitative

information (such as the median or arithmetic average) in lieu of the weighted average if the entity

determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable

inputs used to develop Level 3 fair value measurements.

The amendments in this Update are effective for all entities for fiscal

years, and interim periods within those fiscal years beginning after December 15, 2019.

The Corporation is assessing the impact

that this guidance will have on its consolidated financial statements and related disclosures.

2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

While the Corporation (a smaller reporting company) is currently evaluating the provisions of ASU 2016-13 to determine the potential impact of the new standard will have on the Corporation's consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such as:

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

Transfer of Financial Assets

Transfers of financial assets are accounted

for as sales when control over assets has been surrendered.

Control over transferred assets is deemed to be surrendered when (1)

the assets have been isolated from the Corporation, (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 Corporation does not maintain effective

control over the transferred assets through an agreement to repurchase them before their maturity.

Transfers of financial assets are accounted for as sales when control over assets has been surrendered.

Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (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 Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the

Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of

In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit.

Such financial instruments are recorded in the consolidated balance sheets when they are funded.

Reclassifications

Certain amounts previously reported have

been reclassified, when necessary, to conform with presentations used in the 2019 consolidated financial statements.

Such reclassifications

have no effect on the Corporation’s net income.

Certain amounts previously reported have been reclassified, when necessary, to conform with presentations used in the 2020 consolidated financial statements.

Such reclassifications have no effect on the Corporation’s net income.

NOTE 2 — RESTRICTED CASH BALANCES

The Bank is required to maintain certain

average reserve balances as established by the Federal Reserve Bank.

The amount of those reserve balances for the reserve computation

period which included December 31, 2019 and 2018, was $1,352,000 and $1,178,000, respectively, which was satisfied through the

restriction of vault cash.

In addition, the Bank maintains a clearing balance at the Federal Reserve Bank to offset daily cash

management activities and specific charges for services.

At December 31, 2019 and 2018, the amount of this balance was $463,000

and $1,118,000, respectively.

The Bank was previously required to maintain certain average reserve balances as established by the Federal Reserve Board.

The amount of the reserve balance for the reserve computation period, which included December 31, 2019, was $ 1,352,000 , which was satisfied through the restriction of vault cash.

Effective March 26, 2020, the average cash reserve requirement was suspended, as the Federal Reserve Board reduced reserve requirement ratios to zero percent in response to the COVID-19 pandemic in order to support the flow of credit to households and businesses.

The Bank maintains a clearing balance at the Federal Reserve Bank to offset daily cash management activities and specific charges for services.

At December 31, 2020 and 2019, the amount of this balance was $ 15,251,000 and $ 463,000 , respectively.

NOTE 3 — SECURITIES

The amortized cost, related estimated fair

value, and unrealized gains and losses for debt securities classified as “available-for-sale” were as follows at December

31, 2019 and 2018:

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

Debt Securities Available-for-Sale

(Dollars in thousands)

Securities Available-for-Sale

December 31, 2020:

Treasury securities

Obligations of U.S.

Government Corporations and Agencies:

Government Agencies and Sponsored Agencies:

Mortgage-backed

3 unchanged sentences

Corporate debt securities

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

Debt Securities Available-for-Sale

(Dollars in thousands)

Securities Available-for-Sale

December 31, 2019:

Treasury securities

Obligations of U.S.

Government Corporations and Agencies:

Government Agencies and Sponsored Agencies:

Mortgage-backed

3 unchanged sentences

Corporate debt securities

Debt securities available-for-sale with

an aggregate fair value of $201,468,000 at December 31, 2019 and $149,993,000 at December 31, 2018, were pledged to secure public

funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $143,546,000 at

December 31, 2019 and $112,528,000 at December 31, 2018.

The amortized cost and fair value of securities,

by contractual maturity, are shown below at December 31, 2019.

Expected maturities will differ from contractual maturities because

borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Debt securities available-for-sale with an aggregate fair value of $ 315,146,000 at December 31, 2020 and $ 201,468,000 at December 31, 2019, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 231,750,000 at December 31, 2020 and $ 143,546,000 at December 31, 2019.

The amortized cost and fair value of securities, by contractual maturity, are shown below at December 31, 2020.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)

5 unchanged sentences

Mortgage-backed securities

There were no aggregate securities with

a single issuer (excluding the U.S.

There were no aggregate securities with a single issuer (excluding the U.S.

Government and U.S.

Government Agencies and Corporations) which exceeded ten percent of consolidated

stockholders’ equity at December 31, 2019.

The quality rating of the obligations of state and political subdivisions are

generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch.

The typical exceptions are local issues

which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in debt

securities available-for-sale during 2019 and 2018 were $106,623,000 and $44,122,000, respectively.

Gross gains realized on these

sales were $947,000 and $122,000, respectively.

Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at December 31, 2020.

The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch.

The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in debt securities available-for-sale during 2020 and 2019 were $ 21,692,000 and $ 106,623,000 , respectively.

Gross gains realized on these sales were $ 415,000 and $ 947,000 , respectively.

Gross losses on these sales were $ 186,000 and $ 409,000 , respectively.

no impairment losses realized on debt securities available-for-sale during 2019 or 2018.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

At December 31, 2019 and 2018, the Corporation

had $1,933,000 and $1,560,000, respectively, in equity securities recorded at fair value.

Prior to January 1, 2018, equity securities

were stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive

income (AOCI), net of tax.

At December 31, 2017, net unrealized gains, net of tax, of $634,000 had been recognized in AOCI.

January 1, 2018, these unrealized gains and losses were reclassified out of AOCI and into retained earnings with subsequent changes

in fair value being recognized in net income.

The following is a summary of unrealized and realized gains and losses recognized

in net income on equity securities during 2019 and 2018:

There were no impairment losses realized on debt securities available-for-sale during 2020 or 2019.

At December 31, 2020 and 2019, the Corporation had $ 1,646,000 and $ 1,933,000 , respectively, in equity securities recorded at fair value.

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during 2020 and 2019:

(Dollars in thousands)

Net gains and (losses) recognized during

the period on equity securities

Net gains and (losses) recognized during the period on equity securities sold

during the period

gains and (losses) recognized during the reporting period on equity securities

still held at the reporting date

The Corporation and its investment advisors

monitor the entire portfolio at least quarterly with particular attention given to securities in a continuous loss position of

at least ten percent for over twelve months.

Based on the factors described above, management did not consider any securities

to be other-than-temporarily impaired at December 31, 2019 and 2018.

The summary below shows the gross unrealized

losses and fair value of the Corporation’s debt securities, aggregated by investment category, of which individual securities

have been in a continuous unrealized loss position for less than 12 months or 12 months or more as of December 31, 2019 and 2018:

December 31, 2020

December 31, 2019

Net (losses) and gains recognized during the period on equity securities

Net gains and (losses) recognized during the period on equity securities sold during the period

Net (losses) and gains recognized during the reporting period on equity securities still held at the reporting date

The Corporation and its investment advisors monitor the entire portfolio at least quarterly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months.

Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at December 31, 2020 and 2019.

The summary below shows the gross unrealized losses and fair value of the Corporation’s debt securities, aggregated by investment category, of which individual securities have been in a continuous unrealized loss position for less than 12 months or 12 months or more as of December 31, 2020 and 2019:

December 31, 2020

(Dollars in thousands)

Than 12 Months

Less Than 12 Months

12 Months or More

2 unchanged sentences

Obligations of U.S.

Corporations and Agencies:

Government Agencies and Sponsored Agencies:

Mortgage-backed

mortgage backed debt securities

of state and political subdivisions

Other mortgage backed debt securities

Obligations of state and political subdivisions

Asset backed securities

Corporate debt securities

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

December 31, 2019

(Dollars in thousands)

Than 12 Months

Less Than 12 Months

12 Months or More

Available-for-Sale:

1 unchanged sentence

Obligations of U.S.

Corporations and Agencies:

Government Agencies and Sponsored Agencies:

Mortgage-backed

mortgage backed debt securities

of state and political subdivisions

Other mortgage backed debt securities

Obligations of state and political subdivisions

Asset backed securities

Corporate debt securities

The Corporation invests in various forms

of agency debt including mortgage backed securities and callable debt.

The mortgage backed securities are issued by FHLMC (“Federal

Home Loan Mortgage Corporation”), FNMA (“Federal National Mortgage Association”) or GNMA (“Government

National Mortgage Association”).

The Corporation invests in various forms of agency debt including mortgage backed securities and callable debt.

The mortgage backed securities are issued by FHLMC (“Federal Home Loan Mortgage Corporation”), FNMA (“Federal National Mortgage Association”) or GNMA (“Government National Mortgage Association”).

The municipal securities consist of general obligations and revenue bonds.

The fair market

value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads

in the market place and credit premiums for various types of agency debt.

These factors change continuously and therefore the

market value of these securities may be higher or lower than the Corporation’s carrying value at any measurement date.

does not believe any of their 23 debt securities with a less than one year unrealized loss position, or any of their 15 debt securities

with a one year or greater unrealized loss position, as of December 31, 2019, represent an other-than-temporary impairment, as

these unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Corporation expects to collect all principal and interest payments defined under the original terms as all contracted payments

on securities in the portfolio are current as of December 31, 2020.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the market place and credit premiums for various types of agency debt.

These factors change continuously and therefore the market value of these securities may be higher or lower than the Corporation’s carrying value at any measurement date.

Management does not believe any of their 14 debt securities with a less than one year unrealized loss position, or any of their 17 debt securities with a one year or greater unrealized loss position, as of December 31, 2020, represent an other-than-temporary impairment, as these unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Corporation expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of December 31, 2020.

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table presents the classes of the loan portfolio

summarized by risk rating as of December 31, 2019 and 2018:

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

Commercial and

(Dollars in thousands)

Commercial Real Estate

7 Special Mention

1 unchanged sentence

Add (deduct):

Unearned discount

Unearned discount and

Net deferred loan fees and costs

Residential Real Estate

Including Home Equity

7 Special Mention

8 Substandard

2 unchanged sentences

Net deferred loan fees and costs

7 Special Mention

8 Substandard

2 unchanged sentences

Net deferred loan fees and costs

Commercial and Industrial and Commercial

Real Estate include loans categorized as tax-free in the amounts of $17,848,000 and $2,007,000 at December 31, 2019 and $24,161,000

and $2,164,000 at December 31, 2018.

Commercial and Industrial loans also included $6,150,000 of Government Guaranteed Loans as

of December 31, 2019.

The Corporation did not hold any GGLs in its loan receivable portfolio as of December 31, 2018.

for sale amounted to $2,292,000 at December 31, 2019 and $365,000 at December 31, 2018.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

The activity in the allowance for loan

losses, by loan class, is summarized below for the years indicated.

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $ 9,337,000 and $ 1,843,000 at December 31, 2020 and $ 17,848,000 and $ 2,007,000 at December 31, 2019.

Commercial and Industrial loans also included $ 5,128,000 and $ 6,150,000 of GGLs and $ 22,976,000 and $ 0 of PPP loans as of December 31, 2020 and 2019, respectively.

Loans held for sale amounted to $ 17,300,000 at December 31, 2020 and $ 2,292,000 at December 31, 2019.

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

(Dollars in thousands)

and Industrial

As of and for the year ended December 31, 2020:

Allowance for Loan Losses:

1 unchanged sentence

Ending Balance

individually evaluated for impairment

collectively evaluated for impairment

Ending balance:

evaluated for impairment

Ending balance:

evaluated for impairment

Loans Receivable:

Ending Balance

individually evaluated for impairment

collectively evaluated for impairment

Ending balance:

evaluated for impairment

Ending balance:

evaluated for impairment

(Dollars in thousands)

and Industrial

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

Allowance for Loan Losses:

Beginning balance

Provision (credit)

Ending Balance

9 unchanged sentences

evaluated for impairment

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated

Financial Statements

Of the $119,000 in foreclosed assets held

for resale at December 31, 2019, $38,000 was represented by land, and $81,000 was represented by commercial real estate.

All foreclosed

assets were held as the result of obtaining physical possession.

Of the $1,163,000 in foreclosed assets held for resale at December

31, 2018, $268,000 was represented by residential real estate, $39,000 was represented by land, and $856,000 was represented by

commercial real estate.

Consumer mortgage loans secured by residential real estate for which the Corporation has entered into

formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $617,000 at

December 31, 2019 and $718,000 at December 31, 2018.

These balances were not included in foreclosed assets held for resale at

December 31, 2019 and 2018.

From time to time, the Corporation may

agree to modify the contractual terms of a borrower’s loan.

In cases where the modifications represent a concession to a

borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).

The outstanding recorded investment of

loans categorized as TDRs as of December 31, 2019 and December 31, 2018 was $8,678,000 and $13,777,000, respectively.

in TDRs at December 31, 2019 is mainly attributable to one large loan to a real estate developer specializing in commercial office

space that carried a value of $4,296,000 and was modified as a TDR during the fourth quarter of 2018;

the loan was subsequently

paid off during the year ended December 31, 2019.

The outstanding recorded investment of loans categorized as TDRs as of December 31, 2020 and December 31, 2019 was $ 9,563,000 and $ 8,678,000 , respectively.

The increase in TDRs at December 31, 2020 as compared to December 31, 2019 is mainly attributable to eight loans that were modified as TDRs during the year ended December 31, 2020, net against payments, payoffs, and charge-offs on existing TDRs that were completed during the year ended December 31, 2020.

There were no unfunded commitments on TDRs at December 31, 2020 and 2019.

During the year ended December 31, 2019,

no loans were modified as TDRs, compared to the year ended December 31, 2018 when eleven loans with a combined post modification

balance of $5,627,000 were modified as TDRs.

The loan modifications for the year ended December 31, 2018 consisted of one interest

rate modification, three term modifications beyond the original stated term and seven payment modifications.

The following table presents the outstanding

recorded investment of TDRs at the dates indicated:

During the year ended December 31, 2020, eight loans with a combined post modification balance of $ 1,536,000 were modified as TDRs, compared to the year ended December 31, 2019 when no loans were modified as TDRs.

The loan modifications for the year ended December 31, 2020 consisted of two term modifications beyond the original stated term and six payment modifications.

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

(Dollars in thousands)

1 unchanged sentence

Accruing TDRs

At December 31, 2019, six Commercial Real

Estate loans classified as TDRs with a combined recorded investment of $464,000 were not in compliance with the terms of their

restructure, compared to December 31, 2018 when eight Commercial Real Estate loans classified as TDRs with a combined recorded

investment of $499,000 and one Commercial and Industrial loan classified as a TDR with a recorded investment of $6,000 were not

in compliance with the terms of their restructure.

No loans were modified as TDRs within the

twelve months preceding December 31, 2019, as compared to the year ended December 31, 2018 when four Commercial Real Estate loans

totaling $163,000 that were modified as TDRs within the twelve months preceding December 31, 2018 had experienced payment defaults.

KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial

following table presents information regarding the loan modifications categorized as TDRs during the year ended December 31, 2018.

At December 31, 2020, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 745,000 , seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 984,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 18,000 were not in compliance with the terms of their restructure, compared to December 31, 2019 when six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 464,000 were not in compliance with the terms of their restructure.

Two Commercial Real Estate loans totaling $ 57,000 that were modified as TDRs within the twelve months preceding December 31, 2020 experienced payment defaults during the year ended December 31, 2020.

No loans were modified as TDRs within the twelve months preceding December 31, 2019.

The following table presents information regarding the loan modifications categorized as TDRs during the year ended December 31, 2020.

No loans were modified as TDRs during the year ended December 31, 2019.

in thousands)

Ended December 31, 2018

(Dollars in thousands)

Year Ended December 31, 2020

Pre-Modification

Post-Modification

Outstanding Recorded

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

The following table provides detail regarding

the types of loan modifications made for loans categorized as TDRs during the year ended December 31, 2018 with the total number

of each type of modification performed.

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the year ended December 31, 2020 with the total number of each type of modification performed.

No loans were modified as TDRs during the year ended December 31, 2019.

Ended December 31, 2018

Year Ended December 31, 2020

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

The recorded investment, unpaid principal

balance, and the related allowance of the Corporation’s impaired loans are summarized below at December 31, 2019 and 2018.

In the wake of the COVID-19 pandemic, during the second quarter of 2020, the Corporation began granting loan modification requests to defer principal and/or interest payments or modify interest rates.

These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met.

The table below presents information related to the loan modifications made in compliance with Section 4013 of the CARES Act for the year ended December 31, 2020:

(Dollars in thousands)

no related allowance recorded:

and Industrial

an allowance recorded:

and Industrial

At December 31, 2019 and 2018, $8,678,000 and $13,777,000 of

loans classified as TDRs were included in impaired loans both with a total allocated allowance of $1,000, respectively.

investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs.

The unpaid balance

is equal to the gross amount due on the loan.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial

The average recorded investment and interest

income recognized for the Corporation’s impaired loans are summarized below for the years ended December 31, 2019 and 2018.

Commercial and

Balance at June 30, 2020

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

Section 4013 CARES Act modifications returned to normal payment status during the three months ended September 30, 2020 (a)

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

Balance at September 30, 2020

Additional modifications granted for the three months ended December 31,2020

Section 4013 CARES Act modifications returned to normal payment status during the three months ended December 31, 2020 (a)

Principal payments net of draws on active deferred loans for the three months ended December 31, 2020 (b)

Balance at December 31, 2020

Percent of Total Section 4013 CARES Act Modifications as of December 31, 2020

Percent of Total Section 4013 CARES Act Modifications to Total Loans as of December 31, 2020

Subsequent modifications granted for active deferred loans as of December 31, 2020

Includes payments made prior to return to normal payment status during the quarters ended September 30 and December 31, 2020

Draws include those made on lines of credit and other loans contractually allowing draws of principal.

No construction loans have experienced a Section 4013 CARES Act Modification as of the dates indicated.

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below at December 31, 2020 and 2019.

(Dollars in thousands)

the Year Ended

December 31, 2020

the Year Ended

December 31, 2019

11 unchanged sentences

Residential Real Estate

Of the $498,000 and $690,000 in interest income recognized

on impaired loans for the years ended December 31, 2019 and 2018, respectively, $5,000 and $9,000 in interest income was recognized

with respect to non-accrual loans.

Total non-performing assets (which includes

loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing

interest) as of December 31, 2019 and 2018 were as follows:

At December 31, 2020 and 2019, $ 9,563,000 and $ 8,678,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 and $ 1,000 , respectively.

The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs.

The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the years ended December 31, 2020 and 2019.

(Dollars in thousands)

For the Year Ended

December 31, 2020

December 31, 2019

With no related allowance recorded:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

With an allowance recorded:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Total consists of:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Of the $ 392,000 and $ 498,000 in interest income recognized on impaired loans for the years ended December 31, 2020 and 2019, respectively, $ 5,000 in interest income was recognized with respect to non-accrual loans for each respective period.

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

(Dollars in thousands)

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Total non-accrual loans

Foreclosed assets held for resale

Loans past-due 90 days or more

and still accruing interest

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

Total non-performing assets

If interest on non-accrual loans had been

accrued at original contract rates, interest income would have increased by $996,000 in 2019 and $784,000 in 2018.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial

The following tables present the classes

of the loan portfolio summarized by the past-due status at December 31, 2019 and 2018:

If interest on non-accrual loans had been accrued at original contract rates, interest income would have increased by $ 1,461,000 in 2020 and $ 996,000 in 2019.

The $ 28,000 in foreclosed assets held for resale at December 31, 2020 was represented by land.

Of the $ 119,000 in foreclosed assets held for resale at December 31, 2019, $ 38,000 was represented by land and $ 81,000 was represented by commercial real estate.

At December 31, 2020 and 2019, all foreclosed assets were held as the result of obtaining physical possession.

Consumer mortgage loans secured by residential real estate for which the Corporation has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $ 815,000 at December 31, 2020 and $ 617,000 at December 31, 2019.

These balances were not included in foreclosed assets held for resale at December 31, 2020 and 2019.

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

(Dollars in thousands)

and Industrial

December 31, 2020:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

(Dollars in thousands)

and Industrial

At December 31, 2019 and 2018, commitments

to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit in the amount of $1,249,000

that was associated with a loan to a developer of a residential sub-division.

December 31, 2019:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

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

NOTE 5 — PREMISES AND EQUIPMENT

Premises and equipment at December 31,

2019 and 2018 is as follows:

Premises and equipment at December 31, 2020 and 2019 is as follows:

(Dollars in thousands)

3 unchanged sentences

Accumulated depreciation

Depreciation amounted to $1,112,000 for

2019 and $1,141,000 for 2018.

KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial

Depreciation amounted to $ 1,041,000 for 2020 and $ 1,112,000 for 2019.

NOTE 6 — DEPOSITS

Major classifications of deposits at December

31, 2019 and 2018 consisted of:

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

(Dollars in thousands)

4 unchanged sentences

Total deposits

The following is a schedule reflecting

classification and remaining maturities of time deposits at December 31, 2019:

Total deposits increased $ 175,860,000 to $ 937,488,000 as of December 31, 2020 due to increases in non-interest bearing, interest bearing and savings deposits.

The increase in deposits was the result of many different factors including the deposit of stimulus funds, PPP loan proceeds, an $ 83,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during 2020.

The following is a schedule reflecting classification and remaining maturities of time deposits at December 31, 2020:

(Dollars in thousands)

Total time deposits

NOTE 7 — SHORT-TERM BORROWINGS

Short-term borrowings include federal funds

purchased, securities sold under agreements to repurchase, Federal Discount Window, and Federal Home Loan Bank (“FHLB”)

advances, which generally represent overnight or less than 30-day borrowings.

Short-term borrowings and weighted-average

interest rates at and for the years ended December 31, 2019 and 2018 are as follows:

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, Federal Discount Window, and FHLB advances, which generally represent overnight or less than 30 -day borrowings.

Short-term borrowings and weighted-average interest rates at and for the years ended December 31, 2020 and 2019 are as follows:

(Dollars in thousands)

2 unchanged sentences

Federal Discount Window

Federal Home Loan Bank

At December 31, 2019, the maximum borrowing

capacity of federal funds purchased and the Federal Discount Window was $15,000,000 and $4,805,000, respectively.

to Note 8 ― Long-Term Borrowings for the Corporation’s maximum borrowing capacity at FHLB.

KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial

Securities Sold Under Agreements to Repurchase (“Repurchase

The Corporation enters into agreements

under which it sells securities subject to an obligation to repurchase the same or similar securities.

Under these arrangements,

the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles

and obligates the Corporation to repurchase the assets.

As a result, these repurchase agreements

are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase

of securities.

The obligation to repurchase the securities is reflected as a liability on the Corporation’s consolidated

balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset

In other words, there is not offsetting or netting of the investment securities assets with the repurchase agreement

In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to

be done with the repurchase agreements.

The right of setoff for a repurchase agreement

resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should

the Corporation be in default (e.g., fails to make an interest payment to the counterparty).

The collateral is held by a correspondent

bank in the counterparty’s custodial account.

Federal Home Loan Bank of Pittsburgh

At December 31, 2020, the maximum borrowing capacity of federal funds purchased and the Federal Discount Window was $ 15,000,000 and $ 4,215,000 , respectively.

Please refer to Note 8 ― Long-Term Borrowings for the Corporation’s maximum borrowing capacity at FHLB.

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

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.

Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets.

As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities.

The obligation to repurchase the securities is reflected as a liability on the Corporation’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts.

In other words, there is not offsetting or netting of the investment securities assets with the repurchase agreement liabilities.

In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty).

The collateral is held by a correspondent bank in the counterparty’s custodial account.

The counterparty has the right to sell or repledge the investment securities.

The following table presents the short-term

borrowings subject to an enforceable master netting arrangement or repurchase agreements as of December 31, 2019 and 2018.

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

(Dollars in thousands)

agreements (a)

(a) As of December 31, 2019 and 2018, the fair value of securities

pledged in connection with repurchase agreements was $22,413,000 and $16,970,000, respectively.

The following table presents the remaining

contractual maturity of the master netting arrangement or repurchase agreements as of December 31, 2019.

of Liabilities

December 31, 2020

Repurchase agreements (a)

December 31, 2019

Repurchase agreements (a)

(a) As of December 31, 2020 and 2019, the fair value of securities pledged in connection with repurchase agreements was $ 23,695,000 and $ 22,413,000 , respectively .

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of December 31, 2020.

(Dollars in thousands)

Contractual Maturity of the Agreements

Repurchase agreements and repurchase-to-maturity

transactions:

Remaining Contractual Maturity of the Agreements

December 31, 2020:

Repurchase agreements and repurchase-to-maturity transactions:

Treasury and/or agency securities

KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial

NOTE 8 — LONG-TERM BORROWINGS

Long-term borrowings are comprised of advances

Under terms of a blanket agreement, collateral for the FHLB loans is certain qualifying assets of the Corporation’s

banking subsidiary.

Long-term borrowings are comprised of advances from FHLB.

Under terms of a blanket agreement, collateral for the FHLB loans is certain qualifying assets of the Corporation’s banking subsidiary.

The qualifying assets are real estate mortgages and certain investment securities.

A schedule of long-term borrowings by maturity

as of December 31, 2019 and 2018 follows:

A schedule of long-term borrowings by maturity as of December 31, 2020 and 2019 follows:

(Dollars in thousands)

1 unchanged sentence

Due 2021, 1.42 % to 1.58 %

Due 2021, 1.42% to 1.58%

Due 2022, 2.34 %

2 unchanged sentences

Due 2028, 5.14 %

The Corporation’s long-term borrowings

consist of notes at fixed interest rates.

Upon any default, under the terms of a master agreement, FHLB may declare all indebtedness

of the Corporation immediately due.

Total long-term borrowings

The Corporation’s long-term borrowings consist of notes at fixed interest rates.

Upon any default, under the terms of a master agreement, FHLB may declare all indebtedness of the Corporation immediately due.

In addition, FHLB shall not be required to fund advances under any outstanding commitments.

At December 31, 2019, the Corporation’s maximum borrowing capacity at FHLB, which takes into account FHLB long-term notes

and FHLB short-term borrowings, was $353,426,000.

At December 31, 2020, the Corporation’s maximum borrowing capacity at FHLB, which takes into account FHLB long-term notes and FHLB short-term borrowings, was $ 402,240,000 .

NOTE 9 — SUBORDINATED DEBENTURES

On December 10, 2020, the Corporation issued $ 25,000,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors.

The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.

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

Interest will be payable semi-annually in arrears on June 30 and December 31 of each year, beginning on June 30, 2021, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 31, June 30, September 30 and December 31.

The 2020 Notes will mature on December 31, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 31, 2025 and prior to December 31, 2030.

Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 capital, the Corporation may redeem, in whole and not in part, at any time upon giving not less than ten days ’ notice, an amount equal to one hundred percent ( 100 %) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.

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

NOTE 10 — INCOME TAXES

The current and deferred components of

the income tax expense consisted of the following:

The current and deferred components of the income tax expense consisted of the following:

(Dollars in thousands)

Income tax expense

The following is a reconciliation between

the income tax expense and the amount of income taxes which would have been provided at the statutory rate of 21%:

The following is a reconciliation between the income tax expense and the amount of income taxes which would have been provided at the statutory rate of 21 %:

(Dollars in thousands)

4 unchanged sentences

Income tax expense and rate

KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial

The components of the net deferred tax

(liability) asset at December 31, 2019 and 2018 are as follows:

The components of the net deferred tax liability at December 31, 2020 and 2019 are as follows:

(Dollars in thousands)

Allowance for loan

Deferred Tax Assets:

Allowance for loan losses

Provision for unfunded commitments

3 unchanged sentences

Operating lease liabilities

Finance lease liabilities

Loan purchase accounting

Limited partnership investments

Alternative minimum tax credits

Net unrealized losses on debt

securities available-for-sale

Impairment loss on securities

Writedowns on OREO properties

Capital and net operating loss

carry forwards

Valuation allowance related to

state net operating losses

Tax Liabilities:

Net unrealized gains on debt

securities available-for-sale

Deferred health insurance

Capital and net operating loss carry forwards

Valuation allowance related to state net operating losses

Deferred Tax Liabilities:

Net unrealized gains on debt securities available-for-sale

Loan fees and costs

Net unrealized gains on marketable

equity securities

Operating lease right-of-use

Net unrealized gains on marketable equity securities

Operating lease right-of-use assets

Accumulated depreciation

Mortgage servicing rights

Deferred Tax (Liability) Asset

A valuation allowance for deferred tax

assets was recorded in the amount of $70,000 at December 31, 2019 and 2018.

The valuation allowance relates to state net operating

loss carryforwards for which realizability is uncertain.

At December 31, 2019 and 2018, the Corporation had state net operating

loss carryforwards, net of a valuation allowance, of $0, which are available to offset future state taxable income, and expire

at various dates through 2039.

In assessing the realizability of deferred

tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during

periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities,

projected future taxable income and tax planning strategies in making this assessment.

Based on the level of historical taxable

income and projections for future taxable income over the periods in which the deferred tax assets are deductible and tax planning

strategies, management believes it is more likely than not that the Corporation will realize the benefits of these deferred tax

assets, net of any valuation allowance at December 31, 2019.

The Corporation did not have any uncertain

tax positions at December 31, 2019 and 2018.

The Corporation and its subsidiary file

a consolidated federal income tax return.

The Corporation is no longer subject to examination by Federal or State taxing authorities

for the years before 2016.

KEYSTONE CORPORATION AND SUBSIDIARY

to Consolidated Financial Statements

10 — EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION AGREEMENTS

Corporation maintains a 401k Plan which has a combined tax qualified savings feature and profit sharing feature for the benefit

of its employees.

Net Deferred Tax Liability

A valuation allowance for deferred tax assets was recorded in the amount of $ 88,000 and $ 70,000 at December 31, 2020 and 2019, respectively.

The valuation allowance relates to state net operating loss carryforwards for which realizability is uncertain.

At December 31, 2020 and 2019, the Corporation had state net operating loss carryforwards, net of a valuation allowance, of $ 0 , which are available to offset future state taxable income, and expire at various dates through 2040 .

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible and tax planning strategies, management believes it is more likely than not that the Corporation will realize the benefits of these deferred tax assets, net of any valuation allowance at December 31, 2020.

The Corporation did not have any uncertain tax positions at December 31, 2020 and 2019.

The Corporation and its subsidiary file a consolidated federal income tax return.

The Corporation is no longer subject to examination by Federal or State taxing authorities for the years before 2017.

NOTE 11 — EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION AGREEMENTS

The Corporation maintains a 401k Plan which has a combined tax qualified savings feature and profit sharing feature for the benefit of its employees.

Effective January 1, 2014, the plan became a Safe Harbor Plan.

Under the savings feature, the Corporation

makes safe harbor matching contributions of 100% of the first 3% of compensation an employee contributes to the Plan and 50% of

the next 2% of compensation an employee contributes to the Plan.

The safe harbor matching contributions amounted to $309,000

and $296,000 in 2019 and 2018, respectively.

Under the profit sharing feature, contributions, at the discretion of the Board

of Directors, are funded currently and amounted to $329,000 and $304,000 in 2019 and 2018, respectively.

Corporation also has non-qualified deferred compensation agreements with one of its current officers and five retired officers.

These agreements are essentially unsecured promises by the Corporation to make monthly payments to the officers over fifteen or

twenty year periods.

Under the savings feature, the Corporation makes safe harbor matching contributions of 100 % of the first 3 % of compensation an employee contributes to the Plan and 50 % of the next 2 % of compensation an employee contributes to the Plan.

The safe harbor matching contributions amounted to $ 330,000 and $ 309,000 in 2020 and 2019, respectively.

Under the profit sharing feature, contributions, at the discretion of the Board of Directors, are funded currently and amounted to $ 455,000 and $ 329,000 in 2020 and 2019, respectively.

The Corporation also has non-qualified deferred compensation agreements with one of its current officers and five retired officers.

These agreements are essentially unsecured promises by the Corporation to make monthly payments to the officers over fifteen or twenty year periods.

Payments begin based upon specific criteria — generally, when the officer retires.

To account for the

cost of payments yet to be made in the future, the Corporation recognizes an accrued liability in years prior to when payments

begin based on the present value of those future payments.

The Corporation’s accrued liability for these deferred compensation

agreements, reported in other liabilities on the consolidated balance sheets, as of December 31, 2019 and 2018, was $1,056,000

and $1,109,000, respectively.

The related expense for these agreements, reported in salaries and employee benefits on the consolidated

statements of income, amounted to $73,000 and $(229,000) in 2019 and 2018, respectively.

In 2018, there was a $(305,000) plan

expense reversal associated with the resignation of a previously covered officer.

11 — COMMITMENTS AND CONTINGENCIES

Corporation’s banking subsidiary currently leases three branch banking facilities and one parcel of land under operating

At December 31, 2019, right-of-use assets and lease liabilities were recorded related to these operating leases totaling

$1,470,000 and $1,663,000, respectively.

Further options to extend or terminate the lease are not applicable for any of the four

No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration

of lease versus non-lease components.

To account for the cost of payments yet to be made in the future, the Corporation recognizes an accrued liability in years prior to when payments begin based on the present value of those future payments.

The Corporation’s accrued liability for these deferred compensation agreements, reported in other liabilities on the consolidated balance sheets, as of December 31, 2020 and 2019, was $ 995,000 and $ 1,056,000 , respectively.

The related expense for these agreements, reported in salaries and employee benefits on the consolidated statements of income, amounted to $ 70,000 and $ 73,000 in 2020 and 2019, respectively.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are various pending legal actions and proceedings that are not reflected in the consolidated financial statements.

Management does not believe the outcome of these actions and proceedings will have a material effect on the consolidated financial position of the Corporation.

The Corporation currently leases three branch banking facilities and one parcel of land under operating leases.

At December 31, 2020, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,061,000 and $ 1,513,000 , respectively.

Further options to extend or terminate the leases are not applicable for any of the four leases.

No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components.

None of the leases contained an implicit rate;

therefore, our incremental borrowing rate

was used for each of the leases.

Bank recognized total operating lease costs for the year ended December 31, 2019 of $257,000.

therefore, our incremental borrowing rate was used for each of the leases.

The Corporation recognized total operating lease costs for the years ended December 31, 2020 and 2019 of $ 413,000 and $ 257,000 , respectively.

Cash payments totaled $ 154,000 and $ 156,000 for the years ended December 31, 2020 and 2019, respectively.

The Corporation currently has three finance leases for equipment.

At December 31, 2020, right-of-use assets and lease liabilities were recorded related to these finance leases totaling $ 94,000 and $ 84,000 , respectively.

Amounts recognized as right-of-use assets related to finance leases are included in Premises and equipment, net in the accompanying balance sheet.

Further options to extend or terminate the lease are not applicable for any of the three leases.

No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components.

None of the leases contained an implicit rate;

therefore, our incremental borrowing rate was used for each of the leases.

Total finance lease costs that were recognized by the Corporation for the year ended December 31, 2020 were immaterial.

Cash payments totaled $ 4,000 .

Rent expense for the year ended December 31, 2018 was $170,000.

following table displays the weighted-average term and discount rates for operating leases outstanding as of December 31, 2019.

Weighted-average

discount rate

maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease

liability is as follows:

in thousands)

Lease Payments due:

one but within two years

two but within three years

three but within four years

four but within five years

undiscounted cash flows

on cash flows

lease liability

KEYSTONE CORPORATION AND SUBSIDIARY

to Consolidated Financial Statements

the normal course of business, there are various pending legal actions and proceedings that are not reflected in the consolidated

financial statements.

Management does not believe the outcome of these actions and proceedings will have a material effect on

the consolidated financial position of the Corporation.

12 — RELATED PARTY TRANSACTIONS

directors, executive officers and immediate family members of First Keystone Corporation and its subsidiary, and companies in

which they are principal owners (i.e., at least 10% ownership), were indebted to the Corporation at December 31, 2019 and 2018.

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

Weighted-average term (years)

Weighted-average discount rate

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

(Dollars in thousands)

Minimum Lease Payments due:

Within one year

After one but within two years

After two but within three years

After three but within four years

After four but within five years

After five years

Total undiscounted cash flows

Discount on cash flows

Total lease liability

NOTE 13 — RELATED PARTY TRANSACTIONS

Certain directors, executive officers and immediate family members of First Keystone Corporation and its subsidiary, and companies in which they are principal owners (i.e., at least 10% ownership), were indebted to the Corporation at December 31, 2020 and 2019.

The loans do not involve more than the normal risk of collectability nor present other unfavorable features.

summary of the activity on the related party loans consists of the following:

in thousands)

at December 31

summary of activity on the related party loans represent funds drawn and outstanding at the date of the consolidated financial

Commitments by the Bank to related parties on lines of credit and letters of credit for 2019 and 2018, presented an

additional off-balance sheet risk to the extent of undisbursed funds in the amounts of $5,810,000 and $4,958,000 respectively,

on the above loans.

from certain officers, directors and immediate family members and/or their related companies held by the Bank amounted to $21,140,000

and $18,696,000 at December 31, 2019 and 2018, respectively.

13 — REGULATORY MATTERS

Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior

regulatory approval.

At December 31, 2019, $9,506,000 of retained earnings were available for dividends without prior regulatory

approval, subject to the regulatory capital requirements discussed below.

Regulations also limit the amount of loans and advances

from the Bank to the Corporation to 10% of consolidated net assets.

Corporation is subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet

minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators

that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements.

Under capital

adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines

that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance sheet items as calculated

under regulatory accounting practices.

The Corporation’s capital amounts and classification are also subject to qualitative

judgments by the regulators about components, risk weightings and other factors.

Management believes, as of December 31, 2019

and 2018, that the Corporation and the Bank met all capital adequacy requirements to which they are subject.

July 2, 2013, the Board of Governors of the Federal Reserve System finalized its rule implementing the Basel III regulatory capital

framework, which the FDIC adopted on July 9, 2013.

Under the rule, minimum requirements increased both the quantity and quality

of capital held by banking organizations.

Consistent with the Basel III framework, the rule included a new minimum ratio of common

equity tier 1 capital to risk-weighted assets of 4.5 percent, and a common equity tier 1 conservation buffer of 2.5 percent of

risk-weighted assets, that applies to all supervised financial institutions, which is to be phased in over a three year period

beginning January 1, 2016, with the full 2.5 percent required as of January 1, 2019.

The rule also raised the minimum ratio of

tier 1 capital to risk-weighted assets from 4 percent to 6 percent, and includes a minimum leverage ratio of 4 percent for all

banking organizations.

KEYSTONE CORPORATION AND SUBSIDIARY

to Consolidated Financial Statements

measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth

in the table below) of total capital, tier I capital and common equity tier 1 capital (as defined in the regulations) to risk

weighted assets (as defined), and of tier I capital (as defined) to average assets (as defined).

of December 31, 2019 the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as Well

Capitalized under the regulatory framework for prompt corrective action.

To be categorized as Well Capitalized, the Bank must

maintain minimum total risk-based, tier I risk-based, common equity tier 1 risk-based and tier I leverage ratios as set forth

in the table.

There are no conditions or events since the notification that management believes have changed the Bank’s

in thousands)

of December 31, 2019:

Capital (to Risk-Weighted Assets)

I Capital (to Risk-Weighted Assets)

Equity Tier 1 Capital (to Risk-Weighted Assets)

I Capital (to Average Assets)

in thousands)

of December 31, 2018:

Capital (to Risk-Weighted Assets)

I Capital (to Risk-Weighted Assets)

Equity Tier 1 Capital (to Risk-Weighted Assets)

I Capital (to Average Assets)

capital conservation buffer phase-in began January 1, 2016.

The capital conservation buffer increased from 1.875% in 2018 to 2.50%

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

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

Instruments with Off-Balance Sheet Risk

Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing

needs of its customers.

These financial instruments include commitments to extend credit and standby letters of credit.

instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated

balance sheets.

The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in

particular classes of financial instruments.

The Corporation does not engage in trading activities with respect to any of its

A summary of the activity on the related party loans consists of the following:

(Dollars in thousands)

Balance at January 1

Balance at December 31

The summary of activity on the related party loans represent funds drawn and outstanding at the date of the consolidated financial statements.

Commitments by the Bank to related parties on lines of credit and letters of credit for 2020 and 2019, presented an additional off-balance sheet risk to the extent of undisbursed funds in the amounts of $ 7,453,000 and $ 5,810,000 respectively, on the above loans.

Deposits from certain officers, directors and immediate family members and/or their related companies held by the Bank amounted to $ 25,332,000 and $ 21,140,000 at December 31, 2020 and 2019, respectively.

NOTE 14 — REGULATORY MATTERS

Under Pennsylvania banking law, the Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.

At December 31, 2020, $ 13,179,000 of retained earnings were available for dividends without prior regulatory approval, subject to the regulatory capital requirements discussed below.

Regulations also limit the amount of loans and advances from the Bank to the Corporation to 10% of consolidated net assets.

The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The Corporation’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Management believes, as of December 31, 2020 and 2019, that the Corporation and the Bank met all capital adequacy requirements to which they are subject.

On July 2, 2013, the Board of Governors of the Federal Reserve System finalized its rule implementing the Basel III regulatory capital framework, which the FDIC adopted on July 9, 2013.

Under the rule, minimum requirements increased both the quantity and quality of capital held by banking organizations.

Consistent with the Basel III framework, the rule included a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent, and a common equity tier 1 conservation buffer of 2.5 percent of risk-weighted assets, that applies to all supervised financial institutions, which was phased in over a three year period beginning January 1, 2016, with the full 2.5 percent required as of January 1, 2019.

The rule also raised the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent, and includes a minimum leverage ratio of 4 percent for all banking organizations.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, tier I capital and common equity tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of tier I capital (as defined) to average assets (as defined).

As of December 31, 2020 the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as Well Capitalized under the regulatory framework for prompt corrective action.

To be categorized as Well Capitalized, the Bank must maintain minimum total risk-based, tier I risk-based, common equity tier 1 risk-based and tier I leverage ratios as set forth in the table.

There are no conditions or events since the notification that management believes have changed the Bank’s category.

(Dollars in thousands)

Minimum Capital

To Be Well Capitalized

Adequacy with

Under Prompt Corrective

Capital Buffer

Action Provisions

As of December 31, 2020:

Total Capital (to Risk-Weighted Assets)

Tier I Capital (to Risk-Weighted Assets)

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

Tier I Capital (to Average Assets)

(Dollars in thousands)

Minimum Capital

To Be Well Capitalized

Adequacy with

Under Prompt Corrective

Capital Buffer

Action Provisions

As of December 31, 2019:

Total Capital (to Risk-Weighted Assets)

Tier I Capital (to Risk-Weighted Assets)

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

Tier I Capital (to Average Assets)

The capital conservation buffer phase-in began January 1, 2016.

The capital conservation buffer of 2.50 % was fully phased in effective January 1, 2019.

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

NOTE 15 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Financial Instruments with Off-Balance Sheet Risk

Corporation’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for

commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.

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

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

contract or notional amounts at December 31, 2019 and 2018 were as follows:

in thousands)

instruments whose contract amounts represent credit risk:

to extend credit

standby letters of credit

to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.

These financial instruments include commitments to extend credit and standby letters of credit.

Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

The Corporation does not engage in trading activities with respect to any of its financial instruments with off-balance sheet risk.

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

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

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

The contract or notional amounts at December 31, 2020 and 2019 were as follows:

(Dollars in thousands)

Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit

Financial standby letters of credit

Performance standby letters 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 that may require payment of a fee.

Since some of

the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Since some of the commitments may expire without being drawn upon, the total

commitment amounts do not necessarily represent future cash requirements.

The Corporation evaluates each customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if

deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the borrower.

Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied income-producing

commercial properties, and residential real estate.

letters of credit are conditional commitments issued by the Corporation to guarantee payment to a third party when a customer

either fails to repay an obligation or fails to perform some non-financial obligation.

The credit risk involved in issuing letters

of credit is essentially the same as that involved in extending loan facilities to customers.

The Corporation may hold collateral

(similar to the items held as collateral for commitments to extend credit) to support standby letters of credit for which collateral

is deemed necessary.

Instruments with Concentrations of Credit Risk

Corporation originates primarily commercial and residential real estate loans to customers in northeastern Pennsylvania.

of the majority of the Corporation’s customers to honor their contractual loan obligations is dependent on the economy and

real estate market in this area.

At December 31, 2019, the Corporation had $555,151,000 in loans secured by real estate, which

represented 85.7% of total loans.

The real estate loan portfolio is largely secured by lessors of residential buildings and dwellings,

lessors of non-residential buildings, and lessors of hotels/motels.

As of December 31, 2019 and 2018, management is of the opinion

that there were no concentrations exceeding 10% of total loans with regard to loans to borrowers who were engaged in similar activities

that were similarly impacted by economic or other conditions.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

all financial instruments are subject to some level of credit risk, the Corporation requires collateral and/or guarantees for

Collateral may include, but is not limited to property, plant, and equipment, commercial and/or residential real estate

property, land, and pledge of securities.

In the event of a borrower’s default, the collateral supporting the loan may be

seized in order to recoup losses associated with the loan.

The Corporation also establishes an allowance for loan losses that

constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.

15 — STOCKHOLDERS’ EQUITY

Corporation also offers to its shareholders a Dividend Reinvestment and Stock Purchase Plan.

Participation in this plan by shareholders

began in 2001.

The plan provides First Keystone shareholders a convenient and economical way to purchase additional shares of

common stock by reinvesting dividends.

A plan participant can elect full dividend reinvestment or partial dividend reinvestment

provided at least 25 shares are enrolled in the plan.

In addition, plan participants may make additional voluntary cash purchases

of common stock under the plan of not less than $100 per calendar quarter or more than $2,500 in any calendar quarter.

transferred under this Dividend Reinvestment and Stock Purchase Plan were 52,184 in 2019 and 45,371 in 2018.

Remaining shares

authorized in the plan were 524,864 as of December 31, 2019.

of First Keystone common stock are purchased for the plan either in the open market by an independent broker on behalf of the

plan, directly from First Keystone as original issue shares, or through negotiated transactions.

A combination of the previous

methods could also occur.

16 — FAIR VALUE MEASUREMENTS

value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer

the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at

the measurement date under current market conditions.

This guidance provides additional information on determining when the volume

and level of activity for the asset or liability has significantly decreased.

The guidance also includes information on identifying

circumstances when a transaction may not be considered orderly.

value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether

there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market

activity for the asset or liability.

When the reporting entity concludes there has been a significant decrease in the volume and

level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments

to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability,

some transactions may not be orderly.

In those situations, the entity must evaluate the weight of the evidence to determine whether

the transaction is orderly.

The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the borrower.

Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied income-producing commercial properties, and residential real estate.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee payment to a third party when a customer either fails to repay an obligation or fails to perform some non-financial obligation.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The Corporation may hold collateral (similar to the items held as collateral for commitments to extend credit) to support standby letters of credit for which collateral is deemed necessary.

Financial Instruments with Concentrations of Credit Risk

The Corporation originates primarily commercial and residential real estate loans to customers in northeastern Pennsylvania.

The ability of the majority of the Corporation’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area.

At December 31, 2020, the Corporation had $ 623,711,000 in loans secured by real estate, which represented 86.6 % of total loans.

The real estate loan portfolio is largely secured by lessors of residential buildings and dwellings, lessors of non-residential buildings, and lessors of hotels/motels.

As of December 31, 2020 and 2019, management is of the opinion that there were no concentrations exceeding 10 % of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.

As all financial instruments are subject to some level of credit risk, the Corporation requires collateral and/or guarantees for all loans.

Collateral may include, but is not limited to property, plant, and equipment, commercial and/or residential real estate property, land, and pledge of securities.

In the event of a borrower’s default, the collateral supporting the loan may be seized in order to recoup losses associated with the loan.

The Corporation also establishes an allowance for loan losses that constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.

NOTE 16 — STOCKHOLDERS’ EQUITY

The Corporation also offers to its shareholders a Dividend Reinvestment and Stock Purchase Plan.

Participation in this plan by shareholders began in 2001.

The plan provides First Keystone shareholders a convenient and economical way to purchase additional shares of common stock by reinvesting dividends.

A plan participant can elect full dividend reinvestment or partial dividend reinvestment provided at least 25 shares are enrolled in the plan.

In addition, plan participants may make additional voluntary cash purchases of common stock under the plan of not less than $ 100 per calendar quarter or more than $ 2,500 in any calendar quarter.

Shares transferred under this Dividend Reinvestment and Stock Purchase Plan were 66,775 in 2020 and 52,184 in 2019.

Remaining shares authorized in the plan were 458,089 as of December 31, 2020.

Shares of First Keystone common stock are purchased for the plan either in the open market by an independent broker on behalf of the plan, directly from First Keystone as original issue shares, or through negotiated transactions.

A combination of the previous methods could also occur.

NOTE 17 — FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.

This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased.

The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability.

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

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly.

In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly.

The guidance provides a list of circumstances that may indicate that a transaction is not orderly.

A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market

participants at the measurement date.

Inputs to valuation techniques refer to the assumptions that market participants would use

in pricing the asset or liability.

Inputs may be observable, meaning those that reflect the assumptions market participants would

use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning

those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the

asset or liability based upon the best information available in the circumstances.

Fair value measurement and disclosure guidance

establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for

identical assets or liabilities and the lowest priority to unobservable inputs.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.

Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances.

Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted

assets or liabilities;

Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially

the full term of the asset or liability;

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable

(i.e., supported by little or no market activity).

description of the valuation methodologies used for instruments measured at fair value, as well as the general classification

of such instruments pursuant to the valuation hierarchy, is set forth as follows.

Level 1 Inputs :

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

Level 2 Inputs :

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

Level 3 Inputs:

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

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

Financial Assets Measured at Fair Value on a Recurring Basis

At December 31, 2019 and 2018, securities

measured at fair value on a recurring basis and the valuation methods used are as follows:

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

(Dollars in thousands)

1 unchanged sentence

Debt Securities Available-for-Sale:

Treasury securities

Obligations of U.S.

Corporations and Agencies:

Government Agencies and Sponsored Agencies:

Mortgaged-backed

Other mortgage backed debt

Obligations of state and

political subdivisions

Other mortgage backed debt securities

Obligations of state and political subdivisions

Asset backed securities

3 unchanged sentences

Total recurring fair value measurements

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands)

3 unchanged sentences

Obligations of U.S.

Corporations and Agencies:

Government Agencies and Sponsored Agencies:

Mortgaged-backed

Other mortgage backed debt securities

Obligations of state and political

Obligations of state and political subdivisions

Asset backed securities

debt securities

securities available-for-sale

Corporate debt securities

Total debt securities available-for-sale

Marketable equity securities

Total recurring fair value measurements

The estimated fair values of equity securities

classified as Level 1 are derived from quoted market prices in active markets;

these assets consist mainly of stocks held in other

The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party

pricing agencies.

The estimated fair values are derived primarily from cash flow models, which include assumptions for interest

rates, credit losses, and prepayment speeds.

The significant inputs utilized in the cash flow models are based on market data

obtained from sources independent of the Corporation (observable inputs), and are therefore classified as Level 2 within the fair

value hierarchy.

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets;

these assets consist mainly of stocks held in other banks.

The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies.

The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds.

The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Corporation (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy.

The Corporation does not have any Level 3 inputs for securities.

There were no transfers between Level 1 and

Level 2 during 2019 and 2018.

Financial Assets Measured at Fair Value on a Nonrecurring

At December 31, 2019 and 2018, impaired

loans measured at fair value on a nonrecurring basis and the valuation methods used are as follows:

There were no transfers between Level 1 and Level 2 during 2020 and 2019.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At December 31, 2020 and 2019, impaired loans measured at fair value on a nonrecurring basis and the valuation methods used are as follows:

(Dollars in thousands)

2 unchanged sentences

Commercial Real Estate

impaired loans

Residential Real Estate

Total impaired loans

(Dollars in thousands)

Assets at December 31, 2019

Impaired loans:

The Bank’s impaired loan valuation

procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end.

collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar

business professionals to ascertain current values.

For impaired loans less than $250,000 upon classification and annually at

year end, the Bank completes a Certificate of Inspection, which includes an onsite inspection, insured values, tax assessed values,

recent sales comparisons and a review of the previous evaluations.

These assets are included as Level 3 fair values, based upon

the lowest level that is significant to the fair value measurements.

The fair value consists of the impaired loan balances less

the valuation allowance and/or charge-offs.

Commercial Real Estate

Residential Real Estate

Total impaired loans

The Corporation’s impaired loan valuation procedure for any loans greater than $ 250,000 requires an appraisal to be obtained and reviewed annually at year end unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead.

A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.

For impaired loans less than $ 250,000 upon classification and annually at year end, the Corporation completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.

These assets are included

as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements.

The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs.

There were no transfers between valuation levels in 2020 and 2019.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nonfinancial Assets Measured at Fair Value on a Nonrecurring

At December 31, 2019 and 2018, foreclosed

assets held for resale measured at fair value on a nonrecurring basis and the valuation methods used are as follows:

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At December 31, 2020 and 2019, foreclosed assets held for resale measured at fair value on a nonrecurring basis and the valuation methods used are as follows:

(Dollars in thousands)

at December 31, 2019

assets held for resale:

Assets at December 31, 2020

Foreclosed assets held for resale:

Commercial Real Estate

Total foreclosed assets held for resale

(Dollars in thousands)

at December 31, 2018

assets held for resale:

Assets at December 31, 2019

Foreclosed assets held for resale:

The Corporation’s foreclosed asset

valuation procedure requires an appraisal, which considers the sales prices of similar properties in the proximate vicinity, to

be completed periodically with the exception of those cases in which the Bank has obtained a sales agreement.

These assets are

included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements.

There were no

transfers between valuation levels in 2019 and 2018.

The following table presents additional

quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized

Level 3 inputs to determine the fair value:

Commercial Real Estate

Total foreclosed assets held for resale

The Corporation’s foreclosed asset valuation procedure requires an appraisal or a Certificate of Inspection, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases in which the Bank has obtained a sales agreement.

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements.

There were no transfers between valuation levels in 2020 and 2019.

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

(Dollars in thousands)

Information about Level 3 Fair Value Measurements

of collateral 1,3

adjustments 2

assets held for resale

of collateral 1,3

adjustments 2

of collateral 1,3

adjustments 2

assets held for resale

of collateral 1,3

adjustments 2

1 Fair value is generally determined through independent

appraisals of the underlying collateral, as defined by Bank regulators.

2 Appraisals may be adjusted downward by management

for qualitative factors such as economic conditions and estimated liquidation expenses.

The typical range of appraisal adjustments

are presented as a percent of the appraisal value.

3 Includes qualitative adjustments by management

and estimated liquidation expenses.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Fair Value of Financial Instruments

The estimated fair values, and related

carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2020

Valuation Technique

Unobservable Input

Impaired loans - collateral dependent

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 15 % ) – ( 73 % )

Impaired loans - other

Discounted cash flow

Discount rate

( 7 % ) – ( 7 % )

Foreclosed assets held for resale

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 28 % ) –( 28 % )

December 31, 2019

Impaired loans - collateral dependent

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 10 % ) – ( 77 % )

Impaired loans - other

Discounted cash flow

Discount rate

( 7 % ) – ( 8 % )

Foreclosed assets held for resale

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 35 % ) – ( 35 % )

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

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

The typical range of appraisal adjustments are presented as a percent of the appraisal value.

Includes qualitative adjustments by management and estimated liquidation expenses.

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

Fair Value of Financial Instruments Measured on a Nonrecurring Basis

(Dollars in thousands)

Value Measurements at December 31, 2019

and due from banks

Interest-bearing

deposits in other banks

deposits with other banks

investment in bank stocks

servicing rights

interest receivable

savings and other deposits

interest payable

SHEET FINANCIAL INSTRUMENTS

Fair Value Measurements at December 31, 2020

FINANCIAL ASSETS:

Cash and due from banks

Interest-bearing deposits in other banks

Time deposits with other banks

Restricted investment in bank stocks

Mortgage servicing rights

Accrued interest receivable

FINANCIAL LIABILITIES:

Demand, savings and other deposits

Time deposits

Short-term borrowings

Long-term borrowings

Subordinated debentures

Accrued interest payable

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

(Dollars in thousands)

Value Measurements at December 31, 2018

Fair Value Measurements at December 31, 2019

FINANCIAL ASSETS:

Cash and due from

Interest-bearing deposits in

Cash and due from banks

Interest-bearing deposits in other banks

Time deposits with other banks

Restricted investment in bank

Restricted investment in bank stocks

Mortgage servicing rights

6 unchanged sentences

Accrued interest payable

SHEET FINANCIAL INSTRUMENTS

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

NOTE 18 — REVENUE RECOGNITION

As of January 1, 2018, the Corporation

adopted ASU 2014-09 Revenue from Contracts with Customers - Topic 606 and all subsequent ASUs that modified ASC 606.

Corporation has elected to apply the ASU and all related ASUs using the modified retrospective implementation method.

The implementation

of the guidance had no material impact on the measurement or recognition of revenue of prior periods, however, additional disclosures

have been added in accordance with the ASU.

The main types of revenue contracts included

in non-interest income within the Consolidated Statements of Income which are subject to ASC 606 are as follows:

As of January 1, 2018, the Corporation adopted ASU 2014-09 Revenue from Contracts with Customers - Topic 606 and all subsequent ASUs that modified ASC 606.

The Corporation has elected to apply the ASU and all related ASUs using the modified retrospective implementation method.

The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods, however, additional disclosures have been added in accordance with the ASU.

The main types of revenue contracts included in non-interest income within the Consolidated Statements of Income which are subject to ASC 606 are as follows:

Deposits related fees and service charges

Service charges and fees on deposits, which

are included as liabilities in the consolidated balance sheets, consist of fees related to monthly fees for various retail and

business checking accounts, automated teller machine (“ATM”) fees (charged for withdrawals by our deposit customers

from other bank ATMs) and insufficient funds fees (“NSF”) (which are charged when customers overdraw their accounts

beyond available funds).

All deposit liabilities are considered to have one-day terms and therefore related fees are recognized

in income at the time when the services are provided to the customers.

The Corporation elected to adopt practical expedient related

to incremental costs of obtaining deposit contracts.

As such, any costs associated with acquiring the deposits, except for certificate

of deposits (“CDs”) with maturities in excess of one year, are recognized as an expense within the non-interest expense

in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would

have been recognized is one year or less.

Service charges and fees on deposits, which are included as liabilities in the consolidated balance sheets, consist of fees related to monthly fees for various retail and business checking accounts, automated teller machine (“ATM”) fees (charged for withdrawals by our deposit customers from other bank ATMs) and insufficient funds fees (“NSF”) (which are charged when customers overdraw their accounts beyond available funds).

All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers.

The Corporation elected to adopt practical expedient related to incremental costs of obtaining deposit contracts.

As such, any costs associated with acquiring the deposits, except for certificate of deposits (“CDs”) with maturities in excess of one year, are recognized as an expense within the non-interest expense in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would have been recognized is one year or less.

Wealth/Asset/Trust Management Fees

Wealth management services are delivered

to individuals, corporations and retirement funds located primarily within our geographic markets.

The Trust Department of the

Corporation conducts the wealth management operations, which provides a broad range of personal and corporate fiduciary services,

including the administration of estates.

Assets held in a fiduciary capacity by

the Trust Department are not assets of the Corporation and, therefore, are not included in our Consolidated Financial Statements.

Wealth management fees, which are contractually agreed with each customer, are earned each month and recognized on a cash basis

based on average fair value of the trust assets under management.

The services provided under such a contract are considered a

single performance obligation under ASC 606 because they embody a series of distinct goods or services that are substantially

the same and have the same pattern of transfer to the customer.

Wealth management fees charged by the Trust Department follow

a tiered structure based on the type and size of the assets under management.

Wealth management fees are included within non-interest

income in the consolidated statements of income.

As of December 31, 2019 and December 31, 2018, the fair value of trust assets

under management was $111,160,000 and $105,917,000, respectively.

The costs of acquiring asset management customers are incremental

and recognized within the non-interest expense of the consolidated statements of income.

Wealth management services are delivered to individuals, corporations and retirement funds located primarily within our geographic markets.

The Trust Department of the Corporation conducts the wealth management operations, which provides a broad range of personal and corporate fiduciary services, including the administration of estates.

Assets held in a fiduciary capacity by the Trust Department are not assets of the Corporation and, therefore, are not included in our Consolidated Financial Statements.

Wealth management fees, which are contractually agreed with each customer, are earned each month and recognized on a cash basis based on average fair value of the trust assets under management.

The services provided under such a contract are considered a single performance obligation under ASC 606 because they embody a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

Wealth management fees charged by the Trust Department follow a tiered structure based on the type and size of the assets under management.

Wealth management fees are included within non-interest income in the consolidated statements of income.

As of December 31, 2020 and 2019, the fair value of trust assets under management was $ 107,336,000 and $ 111,160,000 , respectively.

The costs of acquiring asset management customers are incremental and recognized within the non-interest expense of the consolidated statements of income.

Interchange Fees and Surcharges

Interchange fees are related to the acceptance

and settlement of debit card transactions, both point-of-sale and ATM, to cover operating costs and risks associated with the

approval and settlement of the transactions.

Interchange fees are related to the acceptance and settlement of debit card transactions, both point-of-sale and ATM, to cover operating costs and risks associated with the approval and settlement of the transactions.

Interchange fees vary by type of transaction and each merchant sector.

recognized from interchange fees is included in non-interest income on the consolidated statements of income.

A surcharge is assessed

for use of the Corporation’s ATMs by non-customers.

All interchange fees and surcharges are recognized as received on a

daily basis for the prior business day’s transactions.

All expenses related to the settlement of debit card transactions

(both point-of-sale and ATM) are recognized on a monthly basis and included in non-interest expense on the consolidated statements

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Net income recognized from interchange fees is included in non-interest income on the consolidated statements of income.

A surcharge is assessed for use of the Corporation’s ATMs by non-customers.

All interchange fees and surcharges are recognized as received on a daily basis for the prior business day’s transactions.

All expenses related to the settlement of debit card transactions (both point-of-sale and ATM) are recognized on a monthly basis and included in non-interest expense on the consolidated statements of income.

NOTE 19 — GOODWILL

Impairment testing is performed using either a qualitative or quantitative approach.

The Corporation has selected September 30 as the date it performs the annual goodwill impairment test.

Management notes that the emergence of COVID-19 as a global pandemic in 2020 has resulted in significant deterioration in general economic conditions and has caused a deterioration in the environment in which the Corporation operates.

This uncertainty has resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Corporation.

Based on the totality of the circumstances and the impact of the economic conditions on the stock price, the events more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.

As such, an interim quantitative analysis of the fair value of the Corporation as of December 31, 2020 was also performed.

The interim quantitative analysis considered both income and market valuation approaches.

The income approach used a discounted cash flow analysis based on a five-year forecast of results, including potential cost synergies a market participant would consider.

The market approaches took into account the fair value of comparable companies as well as the Corporation’s current stock price adjusted for a control premium.

We assigned weightings of 40 % to the income approach and 60 % to the market approach.

The results indicated the Corporation’s fair value exceeded its carrying value and no impairment was recognized.

The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price.

Any change in the assumptions which we utilize to determine the carrying value of goodwill could adversely impact our results of operations.

NOTE 20 — PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information for First

Keystone Corporation (parent company only) was as follows:

Condensed financial information for First Keystone Corporation (parent company only) was as follows:

BALANCE SHEETS

4 unchanged sentences

Advances from banking subsidiary

Subordinated Debentures

Accrued expenses and other liabilities

TOTAL LIABILITIES

STOCKHOLDERS’

STOCKHOLDERS’ EQUITY

Retained earnings

Accumulated other comprehensive

income (loss)

Accumulated other comprehensive income

Treasury stock, at cost

TOTAL STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS’

TOTAL STOCKHOLDERS’ EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

STATEMENTS OF INCOME

(Dollars in thousands)

Ended December 31,

Dividends from subsidiary

Net securities gains (losses)

OPERATING EXPENSES

INCOME TAX EXPENSE (BENEFIT)

Years Ended December 31,

Dividends from subsidiary bank

Net securities (losses) gains

Interest on subordinated debt

Other expense

TOTAL EXPENSE

INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE

INCOME TAX (BENEFIT) EXPENSE

EQUITY IN UNDISTRIBUTED EARNINGS OF BANKING SUBSIDIARY

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

STATEMENTS OF COMPREHENSIVE INCOME

1 unchanged sentence

Years Ended December 31,

Other comprehensive income (loss):

Equity in other comprehensive income

(loss) of banking subsidiary

Total other comprehensive income (loss)

Other comprehensive income:

Equity in other comprehensive income of banking subsidiary

Total other comprehensive income

Total Comprehensive Income

1 unchanged sentence

(Dollars in thousands)

Ended December 31,

Years Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash provided

by operating activities:

(Gains) losses on securities

Deferred income tax expense

Equity in undistributed earnings

of banking subsidiary

Decrease (increase) in prepaid/accrued

expenses and other assets/liabilities

(Decrease) increase in advances

from banking subsidiary

NET CASH PROVIDED BY OPERATING

Adjustments to reconcile net income to net cash provided by operating activities:

Losses (gains) on securities

Deferred income tax (benefit) expense

Equity in undistributed earnings of banking subsidiary

Investment in banking subsidiary

(Increase) decrease in prepaid/accrued expenses and other assets/liabilities

Increase (decrease) in advances from banking subsidiary

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of subordinated debentures

Proceeds from issuance of common stock

Dividends paid

NET CASH USED IN FINANCING ACTIVITIES

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

AND CASH EQUIVALENTS, ENDING

CHANGES IN AND DISAGREEMENTS

WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

CASH AND CASH EQUIVALENTS, ENDING

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data