What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-07 compared with 2020-11-16 · 435 added, 610 removed, 1048 unchanged (50% of the section changed)

3 unchanged sentences

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

September 30,

Cash and due from banks

18 unchanged sentences

Long-term borrowings

Subordinated debentures

Operating lease liabilities

5 unchanged sentences

Preferred stock, par value $ 2.00 per share;

authorized 1,000,000 shares as of September 30, 2020 and December 31, 2019;

issued 0 as of September 30, 2020 and December 31, 2019

authorized 1,000,000 shares as of March 31, 2021 and December 31, 2020;

issued 0 as of March 31, 2021 and December 31, 2020

Common stock, par value $ 2.00 per share;

authorized 20,000,000 shares as of September 30, 2020 and December 31, 2019;

issued 6,097,519 as of September 30, 2020 and 6,048,506 as of December 31, 2019;

outstanding 5,865,907 as of September 30, 2020 and 5,816,894 as of December 31, 2019

authorized 20,000,000 shares as of March 31, 2021 and December 31, 2020;

issued 6,131,585 as of March 31, 2021 and 6,115,281 as of December 31, 2020;

outstanding 5,899,973 as of March 31, 2021 and 5,883,669 as of December 31, 2020

Retained earnings

Accumulated other comprehensive income

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

Treasury stock, at cost, 231,612 shares as of March 31, 2021 and December 31, 2020

TOTAL STOCKHOLDERS’ EQUITY

3 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(Dollars in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 30,

Interest and fees on loans

7 unchanged sentences

Interest on long-term borrowings

Interest on subordinated debt

Total interest expense

5 unchanged sentences

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 (losses) gains

Net securities gains (losses)

Total non-interest income

18 unchanged sentences

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(Dollars in thousands)

Three Months Ended

September 30,

Other comprehensive income:

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

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

Total other comprehensive income

Total Comprehensive Income

(Dollars in thousands)

Nine Months Ended

September 30,

Other comprehensive income:

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

Other comprehensive (loss) income:

Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $( 1,042 ) and $ 176 , respectively

Less reclassification adjustment for net gains included in net income, net of income taxes of $( 0 ) and $( 15 ), 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.

Total other comprehensive (loss) income

Total Comprehensive (Loss) 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.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Dollars in thousands, except per share data)

THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(Dollars in thousands, except

per share data)

Comprehensive

1 unchanged sentence

Balance at January 1, 2021

Other comprehensive income, net of taxes

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

1 unchanged sentence

Balance at March 31, 2021

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.27 per share

Balance at June 30, 2020

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.27 per share

Balance at September 30, 2020

(Dollars in thousands, except per share data)

Comprehensive

Stockholders’

(Loss) Income

Balance at January 1, 2020

3 unchanged sentences

Balance at March 31, 2020

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.27 per share

Balance at June 30, 2019

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.27 per share

Balance at September 30, 2019

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(Dollars in thousands)

4 unchanged sentences

Net premium amortization on securities

Deferred income tax (benefit) expense

Deferred income tax benefit

Gains on sales of mortgage loans

1 unchanged sentence

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

Earnings on investment in bank owned life insurance

Net securities (gains) losses

Decrease (increase) 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

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

Increase (decrease) in accrued interest payable

Increase (decrease) in other liabilities

NET CASH PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

5 unchanged sentences

Purchase of premises and equipment

Purchase of investment in real estate venture

Proceeds from sales of foreclosed assets held for resale

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

NET CASH USED IN INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits

Net decrease in short-term borrowings

Proceeds from long-term borrowings

Net increase (decrease) in deposits

Net increase in short-term borrowings

Repayment of finance lease obligations

Repayment of long-term borrowings

1 unchanged sentence

Dividends paid

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

INCREASE IN CASH AND CASH EQUIVALENTS

NET CASH PROVIDED BY FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

2 unchanged sentences

Interest paid

Income taxes paid

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Loans transferred to foreclosed assets held for resale

Loans transferred from held for sale portfolio

Common stock subscription receivable

11 unchanged sentences

In the opinion of management, all adjustments considered necessary for fair presentation have been included.

Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results for the year ending December 31, 2020.

Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results for the year ending December 31, 2021.

For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2020 for items that should potentially be recognized or disclosed in these consolidated financial statements.

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, 2021 for items that should potentially be recognized or disclosed in these consolidated financial statements.

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

1 unchanged sentence

Recently adopted ASUs:

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 Company’s consolidated financial position or results of operations.

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

The amendments in this update removed required disclosures regarding:

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,

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

In March 2020, the FASB issued ASU 2020-04, 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.

In January 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope , which refines the scope of Topic 848, Reference Rate Reform , and clarifies some of its guidance as part of the FASB’s ongoing monitoring of global reference rate reform activities.

The ASU provides certain optional expedients and exceptions when 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 Company 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.

The Company has evaluated the provisions of ASU 2021-01 on our financial condition, results of operations and cash flows, and determined that there is no material impact on the consolidated financial statements and related disclosures.

Pending ASUs:

6 unchanged sentences

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

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

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

10 unchanged sentences

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

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

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

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

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

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

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

Debt Securities Available-for-Sale

(Dollars in thousands)

September 30, 2020:

Treasury securities

March 31, 2021:

Obligations of U.S.

8 unchanged sentences

December 31, 2020:

Treasury securities

Obligations of U.S.

5 unchanged sentences

Corporate debt securities

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

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at September 30, 2020.

Securities Available-for-Sale with an aggregate fair value of $ 316,901,000 at March 31, 2021 and $ 315,146,000 at December 31, 2020, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 235,084,000 at March 31, 2021 and $ 231,750,000 at December 31, 2020.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at March 31, 2021.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2020

March 31, 2021

Debt Securities Available-For-Sale

13 unchanged sentences

Government and U.S.

Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at September 30, 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.

Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at March 31, 2021.

The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s,

Standard and Poor’s or Fitch.

The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended September 30, 2020 and 2019 were $ 8,140,000 and $ 39,651,000 , respectively.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended March 31, 2021 and 2020 were $ 0 and $ 11,182,000 , respectively.

Gross gains realized on these sales were $ 0 and $ 176,000 , respectively.

Gross losses on these sales were $ 0 and $ 105,000 , respectively.

There were no impairment losses realized on Debt Securities Available-For-Sale during the three months ended September 30, 2020 or 2019.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the nine months ended September 30, 2020 and 2019 were $ 21,692,000 and $ 72,025,000 , respectively.

Gross gains realized on these sales were $ 414,000 and $ 905,000 , respectively.

Gross losses realized on these sales were $ 186,000 and $ 149,000 , respectively.

There were no impairment losses realized on Debt Securities Available-For-Sale during the nine months ended September 30, 2020 or 2019.

At September 30, 2020 and December 31, 2019, the Company had $ 1,393,000 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 the nine months ended September 30, 2020 and 2019:

There were no impairment losses realized on Debt Securities Available-For-Sale during the three months ended March 31, 2021 or 2020.

At March 31, 2021 and December 31, 2020, the Company had $ 1,761,000 and $ 1,646,000 , respectively, in equity securities recorded at fair value.

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2021 and 2020:

(Dollars in thousands)

Nine months ended

September 30, 2020

September 30, 2019

Net (losses) and gains recognized during the period on equity securities

Three months ended

March 31, 2021

March 31, 2020

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

Net (losses) and gains recognized during the reporting period on equity securities still held at the reporting date

There were no proceeds from sales of investments in Held-to-Maturity debt securities during the nine months ended September 30, 2020 or 2019.

Net gains and (losses) recognized during the reporting period on equity securities still held at the reporting date

There were no proceeds from sales of investments in Held-to-Maturity debt securities during the three months ended March 31, 2021 or 2020.

Therefore, there were no gains or losses realized during these periods.

10 unchanged sentences

The Company and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months.

Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at September 30, 2020 or December 31, 2019.

Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at March 31, 2021 or December 31, 2020.

The summary below shows the gross unrealized losses and fair value of the Company’s debt securities.

Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of September 30, 2020 and December 31, 2019:

September 30, 2020

Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of March 31, 2021 and December 31, 2020:

March 31, 2021

(Dollars in thousands)

2 unchanged sentences

Available-for-Sale:

Treasury securities

Obligations of U.S.

10 unchanged sentences

Available-for-Sale:

Treasury securities

Obligations of U.S.

5 unchanged sentences

Corporate debt securities

The Company invests in various forms of agency debt including mortgage-backed securities and callable debt.

The mortgage-backed securities are issued by Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) or Government National Mortgage Association (“GNMA”).

The Company invests in various forms of agency debt including residential and commercial mortgage-backed securities and callable debt.

The mortgage-backed agency securities are issued by Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”) or Small Business Administration (“SBA”).

The other mortgage-backed securities consist of private (non-agency) residential and commercial mortgage backed securities.

The municipal securities consist of general obligations and revenue bonds.

Asset backed securities consist of bonds backed by consumer loans.

Corporate debt securities consist of senior debt and subordinated debt holdings.

1 unchanged sentence

These factors change continuously and therefore the market value of these securities may be higher or lower than the Company’s carrying value at any measurement date.

Management does not believe any of their 18 debt securities with a less than one year unrealized loss position, or any of their 15 debt securities with a one year or greater unrealized loss position as of September 30, 2020, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Company expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of September 30, 2020.

Management does not believe any of their 40 debt securities with a less than one year unrealized loss position, or any of their 14 debt securities with a one year or greater unrealized loss position as of March 31, 2021, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Company expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of March 31, 2021.

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

2 unchanged sentences

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

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

These loans are sold without recourse.

Loans held for sale amounted to $ 12,274,000 and $ 2,292,000 at September 30, 2020 and December 31, 2019, respectively.

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

The originating bank retains the unguaranteed portion of the loan.

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

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

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

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

As of September 30, 2020, the Company's balance of GGLs amounted to $ 5,215,000 , compared to $ 6,150,000 at December 31, 2019.

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

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

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

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

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

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

As of September 30, 2020, the Company had funded 490 PPP loans, which carried a balance of $ 31,729,000 .

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 (“TDRs”), as long as specific criteria are met.

To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of December 31, 2020 or the 60th day after the end of the COVID-19 pandemic is declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019.

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

Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there were 189 loan modifications still actively on deferral carrying an aggregate balance of $ 74,935,000 as of September 30, 2020.

See page 26 for additional information regarding the Section 4013 CARES Act modifications.

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

4 unchanged sentences

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.

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.

2 unchanged sentences

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

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

4 unchanged sentences

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

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

The originating bank retains the unguaranteed portion of the loan.

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

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

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

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

As of March 31, 2021, the Company's balance of GGLs amounted to $ 5,005,000 , compared to $ 5,128,000 at December 31, 2020.

Commercial Real Estate Lending

1 unchanged sentence

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

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

Generally, commercial real estate loans have terms that do not exceed twenty

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

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

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

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.

11 unchanged sentences

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

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

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

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

3 unchanged sentences

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

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

These loans are sold without recourse.

Loans held for sale amounted to $ 19,380,000 and $ 17,300,000 at March 31, 2021 and December 31, 2020, respectively.

Consumer Lending

2 unchanged sentences

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.

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.

3 unchanged sentences

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

Coronavirus Pandemic Impact on the Loan Portfolio

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

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

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

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

The PPP calls for these loans to be fully guaranteed by the SBA.

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

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

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

As of March 31, 2021, the Company held 525 PPP loans in its Commercial and Industrial portfolio, which carried a balance of $ 27,145,000 , compared to 441 PPP loans as of December 31, 2020 which carried a balance of $ 22,976,000 .

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.

Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there were 17 loan modifications still actively on deferral carrying an aggregate balance of $ 13,641,000 as of March 31, 2021, compared to December 31, 2020 when there were 44 loan modifications still actively on deferral carrying an aggregate balance of $ 16,541,000 .

See page 22 for additional information regarding the Section 4013 CARES Act modifications.

Delinquent Loans

4 unchanged sentences

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.

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

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

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.

4 unchanged sentences

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.

18 unchanged sentences

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.

TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s contractual rate at inception.

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

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

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

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 an eight quarter lookback period that management has determined best represents the current credit cycle.

1 unchanged sentence

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 across all loan segments were increased by two basis points during the first quarter of 2020 and again by an additional basis point across all loan segments during the second quarter of 2020.

The qualitative factor for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of 2020, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio.

Modifications granted in compliance with Section 4013 of the CARES Act are highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear.

Government Guaranteed Loans 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.

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.

No additional qualitative factor increases were performed during the first quarter of 2021.

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

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

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

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

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 Company has taken the conservative approach and has calculated a qualitative allocation for the PPP loans under the general component of the allowance for the Commercial and Industrial portfolio.

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

2 unchanged sentences

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

As of September 30, 2020 and December 31, 2019, the amount of the reserve for unfunded lending commitments was $ 138,000 and $ 117,000 , respectively.

As of March 31, 2021 and December 31, 2020, the amount of the reserve for unfunded lending commitments was $ 144,000 and $ 129,000 , respectively.

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

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

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

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

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

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

The restructuring of a loan is considered a TDR if both the following conditions are met:

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

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

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.

3 unchanged sentences

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

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

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

See page 22 for further discussion of the Section 4013 CARES Act modifications.

20 unchanged sentences

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

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

Assets in this category are protected but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

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 adequately collateralized but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

The loans may

constitute increased credit risk, but not to the point of justifying a classification of substandard.

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

Historically, cash flows are inconsistent;

12 unchanged sentences

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

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

The following table presents the classes of the loan portfolio summarized by risk rating as of March 31, 2021 and December 31, 2020:

Commercial and

1 unchanged sentence

Commercial Real Estate

September 30,

7 Special Mention

5 unchanged sentences

Including Home Equity

September 30,

7 Special Mention

3 unchanged sentences

Net deferred loan fees and costs

September 30,

7 Special Mention

3 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 $ 7,322,000 and $ 1,885,000 at September 30, 2020 and $ 17,848,000 and $ 2,007,000 at December 31, 2019.

Commercial and Industrial loans also included $ 5,215,000 and $ 6,150,000 of Government Guaranteed Loans and $ 31,729,000 and $ 0 of Paycheck Protection Program loans as of September 30, 2020 and December 31, 2019, respectively.

Loans held for sale amounted to $ 12,274,000 at September 30, 2020 and $ 2,292,000 at December 31, 2019.

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $ 8,572,000 and $ 1,800,000 at March 31, 2021 and $ 9,337,000 and $ 1,843,000 at December 31, 2020.

Commercial and Industrial loans also included $ 5,005,000 and $ 5,128,000 of Government Guaranteed Loans and $ 27,145,000 and $ 22,976,000 of Paycheck Protection Program loans as of March 31, 2021 and December 31, 2020, respectively.

Loans held for sale amounted to $ 19,380,000 at March 31, 2021 and $ 17,300,000 at December 31, 2020.

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

1 unchanged sentence

and Industrial

As of and for the three month period ended September 30, 2020:

Allowance for Loan Losses:

Beginning balance

Provision (credit)

Ending Balance

(Dollars in thousands)

and Industrial

As of and for the nine months ended September 30, 2020:

As of and for the three months ended March 31, 2021:

Allowance for Loan Losses:

14 unchanged sentences

and Industrial

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

Allowance for Loan Losses:

Beginning balance

Provision (credit)

Ending Balance

(Dollars in thousands)

and Industrial

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

As of and for the three months ended March 31, 2020:

Allowance for Loan Losses:

29 unchanged sentences

evaluated for impairment

Of the $ 88,000 in foreclosed assets held for resale at September 30, 2020, $ 38,000 was represented by land and $ 50,000 was represented by residential real estate.

Of the $ 119,000 in foreclosed assets held for resale at December 31, 2019, $ 38,000 was represented by land and $ 81,000 was represented by commercial real estate.

At September 30, 2020 and December 31, 2019, all foreclosed assets were held as the result of obtaining physical possession.

Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $ 971,000 at September 30, 2020 and $ 617,000 at December 31, 2019.

These balances were not included in foreclosed assets held for resale at September 30, 2020 or December 31, 2019.

The outstanding recorded investment of TDRs as of September 30, 2020 and December 31, 2019 was $ 8,807,000 and $ 8,678,000 , respectively.

The increase in TDRs at September 30, 2020 as compared to December 31, 2019 is mainly attributable to seven loans that were modified as TDRs during the nine months ended September 30, 2020, net against payments, payoffs, and charge-offs on existing TDRs that were completed during the nine months ended September 30, 2020.

There were no unfunded commitments on TDRs at September 30, 2020 and December 31, 2019.

During the three months ended September 30, 2020, four loans with a combined post modification balance of $ 366,000 were modified as TDRs.

No loans were modified as TDRs during the three months ended September 30, 2019.

The loan modifications for the three months ended September 30, 2020 consisted of one term modification and three payment modifications.

During the nine months ended September 30, 2020, seven loans with a combined post modification balance of $ 525,000 were modified as TDRs.

No loans were modified as TDRs during the nine months ended September 30, 2019.

The loan modifications for the nine months ended September 30, 2020 consisted of one term modification and six payment modifications.

The outstanding recorded investment of TDRs as of March 31, 2021 and December 31, 2020 was $ 9,675,000 and $ 9,563,000 , respectively.

The increase in TDRs at March 31, 2021 as compared to December 31, 2020 is mainly attributable to three loans that were modified as TDRs during the three months ended March 31, 2021, net against payments and payoffs on existing TDRs that were completed during the three months ended March 31, 2021.

There were no unfunded commitments on TDRs at March 31, 2021 and December 31, 2020.

During the three months ended March 31, 2021, three loans with a combined post modification balance of $ 301,000 were modified as TDRs.

No loans were modified as TDRs during the three months ended March 31, 2020.

The loan modifications for the three months ended March 31, 2021 consisted of two term modifications and one payment modification.

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

(Dollars in thousands)

September 30,

Non-accrual TDRs

Accruing TDRs

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

No loans that were modified as TDRs during the twelve months preceding September 30, 2020 experienced payment defaults during the three months ended September 30, 2020.

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

No loans that were modified as TDRs during the twelve months preceding September 30, 2019 experienced payment defaults during the three or nine months ended September 30, 2019.

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

No loans were modified as TDRs during the three and nine months ended September 30, 2019.

(Dollars in thousands)

For the Three Months Ended September 30, 2020

Pre-Modification

Post-Modification

Commercial and Industrial

Commercial Real Estate

At March 31, 2021, six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 299,000 , three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 737,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 17,000 were not in compliance with the terms of their restructure, compared to March 31, 2020 when nine Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 1,377,000 were not in compliance with the terms of their restructure.

One Commercial Real Estate loan in the amount of $ 92,000 that was modified as a TDR within the twelve months preceding March 31, 2021 experienced a payment default during the three months ended March 31, 2021.

No loans were modified as TDRs within the twelve months preceding March 31, 2020.

The following table presents information regarding the loan modifications categorized as TDRs during the three months ended March 31, 2021.

No loans were modified as TDRs during the three months ended March 31, 2020.

(Dollars in thousands)

For the Nine Months Ended September 30, 2020

For the Three Months Ended March 31, 2021

Pre-Modification

Post-Modification

Commercial and Industrial

Commercial Real Estate

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

No loans were modified as TDRs during the three or the nine months ended September 30, 2020.

For the Three Months Ended September 30, 2020

Commercial and Industrial

Commercial Real Estate

For the Nine Months Ended September 30, 2020

Commercial and Industrial

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three months ended March 31, 2021 with the total number of each type of modification performed.

No loans were modified as TDRs during the three months ended March 31, 2020.

For the Three Months Ended March 31, 2021

Commercial Real Estate

In the wake of the COVID-19 pandemic, loan modification requests have been granted to defer principal and/or interest payments or modify interest rates.

In the wake of the COVID-19 pandemic, during the second quarter of 2020, the Company began granting loan modification requests to defer principal and/or interest payments or modify interest rates.

These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met.

The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the three month period ended September 30, 2020:

The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the three months ended March 31, 2021.

No loan modifications were granted in compliance with Section 4013 of the CARES Act during the three months ended March 31, 2020.

(Dollars in thousands)

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 (a)

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

Balance at September 30, 2020

Percent of Total Section 4013 CARES Act modifications

Percent of Total Section 4013 CARES Act modifications to Total Loans

Subsequent modifications granted for active deferred loans

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

Balance at December 31, 2020

Additional modifications granted for the three months ended March 31, 2021

Section 4013 CARES Act modifications returned to normal payment status during the three months ended March 31, 2021 (a)

Principal payments net of draws on active deferred loans for the three months ended March 31, 2021 (b)

Balance at March 31, 2021

Percent of Total Section 4013 CARES Act Modifications as of March 31, 2021

Percent of Total Section 4013 CARES Act Modifications to Total Loans as of March 31, 2021

Subsequent modifications granted during the three months ended March 31, 2021 for active deferred loans outstanding as of March 31, 2021

( a) Includes payments made prior to return to normal payment status during the quarter ended March 31, 2021

(b) Draws include those made on lines of credit and other loans contractually allowing draws of principal.

No construction loans have experienced a Section 4013 CARES Act modification at the dates indicated.

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

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

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

11 unchanged sentences

Residential Real Estate

At September 30, 2020 and December 31, 2019, $ 8,807,000 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.

At March 31, 2021 and December 31, 2020, $ 9,675,000 and $ 9,563,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at both March 31, 2021 and December 31, 2020.

The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs.

The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Company’s impaired loans are summarized below for the three and nine months ended September 30, 2020 and 2019.

The average recorded investment and interest income recognized for the Company’s impaired loans are summarized below for the three months ended March 31, 2021 and 2020.

(Dollars in thousands)

1 unchanged sentence

For the Three Months Ended

September 30, 2020

September 30, 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 $ 97,000 and $ 108,000 in interest income recognized on impaired loans for the three months ended September 30, 2020 and 2019, respectively, $ 0 in interest income was recognized with respect to non-accrual loans for each respective period.

(Dollars in thousands)

For the Nine Months Ended

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

With no related allowance recorded:

10 unchanged sentences

Residential Real Estate

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

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

Of the $ 96,000 and $ 84,000 in interest income recognized on impaired loans for the three months ended March 31, 2021 and 2020, respectively, $ 0 and $ 5,000 in interest income was recognized with respect to non-accrual loans for each respective period.

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

(Dollars in thousands)

September 30,

Commercial and Industrial

5 unchanged sentences

Total non-performing assets

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

There were no foreclosed assets held for resale at March 31, 2021.

The $ 28,000 in foreclosed assets held for resale at December 31, 2020 was represented by land.

At December 31, 2020, all foreclosed assets were held as the result of obtaining physical possession.

Consumer mortgage loans secured by residential real estate for which the Company has entered into formal foreclosure proceedings but for which physical possession has yet to be obtained amounted to $ 41,000 at both March 31, 2021 and December 31, 2020.

These balances were not included in foreclosed assets held for resale at March 31, 2021 or December 31, 2020.

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

(Dollars in thousands)

September 30, 2020:

March 31, 2021:

Commercial and Industrial

7 unchanged sentences

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

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

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

NOTE 5 — DEPOSITS

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

Major classifications of deposits at March 31, 2021 and December 31, 2020 consisted of:

(Dollars in thousands)

September 30,

Non-interest bearing demand

3 unchanged sentences

Total deposits

Total deposits increased $ 157,591,000 to $ 919,219,000 as of September 30, 2020 due to increases in non-interest bearing, interest bearing and savings deposits.

The increase in deposits was the result of many different factors including the deposit of at least $ 19,000,000 in stimulus funds, via check or ACH, $ 31,729,000 in PPP loan proceeds, higher levels of saving, a $ 58,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during the nine months ended September 30, 2020.

Total deposits increased $ 40,369,000 to $ 977,857,000 as of March 31, 2021 due to increases in non-interest bearing and savings deposits.

The increase in deposits was the result of government stimulus funds, PPP loan proceeds and other normal fluctuations in deposits during the three months ended March 31, 2021.

NOTE 6 — BORROWINGS

1 unchanged sentence

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, the Federal Discount Window, and Federal Home Loan Bank of Pittsburgh (“FHLB”) advances, which generally represent overnight or less than 30-day borrowings.

Short-term borrowings and weighted–average interest rates at September 30, 2020 and December 31, 2019 are as follows:

Short-term borrowings and weighted–average interest rates at March 31, 2021 and December 31, 2020 are as follows:

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

3 unchanged sentences

Federal Home Loan Bank of Pittsburgh

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

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

8 unchanged sentences

The counterparty has the right to sell or repledge the investment securities.

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

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

(Dollars in thousands)

of Liabilities

September 30, 2020

March 31, 2021

Repurchase agreements (a)

1 unchanged sentence

Repurchase agreements (a)

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

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

(a) As of March 31, 2021 and December 31, 2020, the fair value of securities pledged in connection with repurchase agreements was $ 25,577,000 and $ 23,695,000 , respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, 2021:

(Dollars in thousands)

Remaining Contractual Maturity of the Agreements

September 30, 2020:

March 31, 2021:

Repurchase agreements and repurchase-to-maturity transactions:

4 unchanged sentences

The principal assets are certain real estate mortgages and investment securities.

NOTE 7 — SUBORDINATED DEBT

On December 10, 2020, the Corporation issued $ 25,000,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors.

The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.

The Company intends to use the net proceeds it received from the sale of the Notes to support organic growth and for general corporate purposes.

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

Interest will be payable semi-annually in arrears on June 30 and December 31 of each year, beginning on June 30, 2021, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 31, June 30, September 30 and December 31.

The 2020 Notes will mature on December 31, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 31, 2025 and prior to December 31, 2030.

Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 capital, the Corporation may redeem, in whole and not in part, at any time upon giving not less than ten days ’ notice, an amount equal to one hundred percent ( 100 %) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.

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

NOTE 8 — COMMITMENTS AND CONTINGENCIES

2 unchanged sentences

The Bank currently leases three branch banking facilities and one parcel of land under operating leases.

At September 30, 2020, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,125,000 and $ 1,535,000 , respectively.

At March 31, 2021, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,101,000 and $ 1,558,000 , respectively.

At December 31, 2020, right-of-use assets and lease liabilities stood at $ 1,061,000 and $ 1,513,000 , respectively.

3 unchanged sentences

therefore, our incremental borrowing rate was used for each of the leases.

The Bank recognized total operating lease costs for the nine months ended September 30, 2020 and 2019 of $ 332,000 and $ 144,000 , respectively.

Cash payments totaled $ 116,000 for the nine months ended September 30, 2020 and 2019.

The Bank currently has two finance leases for equipment.

At September 30, 2020, right-of-use assets and lease liabilities were recorded related to these finance leases totaling $ 54,000 and $ 48,000 , respectively.

The Bank recognized total operating lease costs for the three months ended March 31, 2021 and 2020 of $ 44,000 and $ 111,000 , respectively.

Cash payments totaled $ 44,000 and $ 38,000 , respectively, for the three months ended March 31, 2021 and 2020.

The Bank currently has one finance lease for equipment.

At March 31, 2021, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $ 34,000 and $ 23,000 , respectively.

At December 31, 2020, right-of-use assets and lease liabilities stood at $ 94,000 and $ 84,000 , respectively.

Amounts recognized as right-of-use assets and lease liabilities related to finance leases are included in Premises and equipment, net and Other liabilities , respectively, in the accompanying balance sheet.

Further options to extend or terminate the lease are not applicable for any of the two leases.

Further options to extend or terminate the lease are not applicable for the lease.

No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components.

Neither of the leases contained an implicit rate;

therefore, our incremental borrowing rate was used for each of the leases.

Total finance lease costs that were recognized by the Bank for the nine months ended September 30, 2020 were immaterial.

No cash payments were made as of September 30, 2020.

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

September 30,

The lease did not contain an implicit rate;

therefore, our incremental borrowing rate was used.

Total finance lease costs that were recognized by the Bank for the three months ended March 31, 2021 were immaterial.

Cash payments as of March 31, 2021 totaled $ 2,000 .

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

Weighted-average term (years)

2 unchanged sentences

(Dollars in thousands)

September 30,

Minimum Lease Payments due:

18 unchanged sentences

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

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

The contract or notional amounts at March 31, 2021 and December 31, 2020 were as follows:

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

15 unchanged sentences

The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area.

At September 30, 2020, the Company had $ 598,634,000 in loans secured by real estate, which represented 85.0 % of total loans.

At March 31, 2021, the Company had $ 626,616,000 in loans secured by real estate, which represented 86.7 % 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 September 30, 2020 and December 31, 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.

March 31, 2021 and December 31, 2020, management is of the opinion that there were no concentrations exceeding 10% of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.

As all financial instruments are subject to some level of credit risk, the Company requires collateral and/or guarantees for all loans.

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Financial Assets Measured at Fair Value on a Recurring Basis

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

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

(Dollars in thousands)

September 30, 2020

March 31, 2021

Debt Securities Available-for-Sale:

Treasury securities

Obligations of U.S.

11 unchanged sentences

Debt Securities Available-for-Sale:

Treasury securities

Obligations of U.S.

16 unchanged sentences

Financial Assets Measured at Fair Value on a Nonrecurring Basis

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

At March 31, 2021 and December 31, 2020, impaired loans measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)

Assets at September 30, 2020

Assets at March 31, 2021

Impaired loans:

8 unchanged sentences

Total impaired loans

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements.

The Company’s impaired loan valuation procedure for any loans greater than $ 250,000 requires an appraisal to be obtained and reviewed annually at year end unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Company.

A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.

For impaired loans less than $ 250,000 upon classification and annually at year end, the Company completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements.

The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs.

1 unchanged sentence

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

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

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

(Dollars in thousands)

Assets at September 30, 2020

Assets at March 31, 2021

Foreclosed assets held for resale:

6 unchanged sentences

Total foreclosed assets held for resale

The Company’s foreclosed asset valuation procedure requires an appraisal or a Certificate of Inspection, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases in which the Bank has obtained a sales agreement.

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements.

3 unchanged sentences

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2020

March 31, 2021

Valuation Technique

2 unchanged sentences

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 5 % ) – ( 73 % )

5 unchanged sentences

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 0 % ) –( 0 % )

2 unchanged sentences

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 15 % ) – ( 73 % )

5 unchanged sentences

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 28 % ) – ( 28 % )

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

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.

1 unchanged sentence

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)

Fair Value Measurements at September 30, 2020

Fair Value Measurements at March 31, 2021

FINANCIAL ASSETS:

10 unchanged sentences

Long-term borrowings

Subordinated debentures

Accrued interest payable

14 unchanged sentences

Long-term borrowings

Subordinated debentures

Accrued interest payable

15 unchanged sentences

Wealth management fees are included within non-interest income in the consolidated statements of income.

As of September 30, 2020 and December 31, 2019, the fair value of trust assets under management was $ 111,381,000 and $ 111,160,000 , respectively.

The costs of acquiring asset

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

As of March 31, 2021 and December 31, 2020, the fair value of trust

assets under management was $ 106,981,000 and $ 107,336,000 , respectively.

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

Interchange Fees and Surcharges

8 unchanged sentences

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

At September 30, 2020 and 2019, there were no potential common shares outstanding.

At March 31, 2021 and 2020, there were no potential common shares outstanding.

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

1 unchanged sentence

Three Months Ended

September 30,

Weighted-average common shares outstanding

Basic and diluted earnings per share

(In thousands, except earnings per share)

Nine Months Ended

September 30,

Weighted-average common shares outstanding

Basic and diluted earnings per share

NOTE 13 — GOODWILL

Management notes that the emergence of COVID-19 as a global pandemic during the first nine months of 2020 has resulted in significant deterioration in 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, a quantitative analysis of the fair value of the Corporation as of September 30, 2020 was performed.

We utilized an independent third party in our analysis which considered both income and market approaches.

The income approach used a discounted cash flow analysis based on a five-year forecast of results, including potential cost synergies a buyer would consider.

The market approaches took into account the fair value of comparable companies (public guideline companies) as well as the Corporation’s current stock price adjusted for a control premium.

We assigned weightings of 40 % to the income approach, 10 % to the public guideline companies’ result and 50 % to the Corporation’s stock price with control premium result.

The results indicated the Corporation’s fair value exceeded its carrying value by approximately 2 % and no impairment was recognized.

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.

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

Goodwill totaled $ 19,133,000 at March 31, 2021 and December 31, 2020.

Impairment testing is performed on an annual basis, using either a qualitative or quantitative approach.

The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price.

Any change in the assumptions which we utilize to determine the carrying value of goodwill could adversely impact our results of operations.

Any change in the assumptions utilized to determine the carrying value of goodwill could adversely affect our results of operations.

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

Goodwill was evaluated for impairment at December 31, 2020, and it was determined that goodwill was not impaired.

Management evaluated the need for an interim goodwill impairment analysis and determined that there were no triggering events or negative factors affecting goodwill since the previous test that would indicate goodwill was impaired as of March 31, 2021.

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

8 unchanged sentences

RESULTS OF OPERATIONS

Quarter ended September 30, 2020 compared to quarter ended September 30, 2019

First Keystone Corporation realized earnings for the third quarter of 2020 of $3,137,000, an increase of $214,000, or 7.3% from the third quarter of 2019.

The increase in net income for the three months ended September 30, 2020 was primarily due to a decrease in interest expense on deposits and short-term borrowings, plus an increase in interest and fee income on loans.

On a per share basis, for the three months ended September 30, 2020, net income was $0.54 versus $0.50 for the third quarter of 2019.

Cash dividends amounted to $0.27 per share for the the three months ended September 30, 2020 and 2019.

Quarter ended March 31, 2021 compared to quarter ended March 31, 2020

First Keystone Corporation realized earnings for the first quarter of 2021 of $3,878,000, an increase of $1,825,000, or 88.9% from the first quarter of 2020.

The increase in net income for the three months ended March 31, 2021 was primarily due to increases in net interest income, net securities gains, and gains on sales of mortgage loans.

On a per share basis, for the three months ended March 31, 2021, net income was $0.66 versus $0.35 for the same three month period of 2020.

Cash dividends amounted to $0.28 and $0.27 per share for the the three months ended March 31, 2021 and 2020, respectively.

NET INTEREST INCOME

The major source of operating income for the Company is net interest income, defined as interest income less interest expense.

In the three months ended September 30, 2020, interest income amounted to $9,852,000, an increase of $124,000 or 1.3% from the three months ended September 30, 2019, while interest expense amounted to $1,231,000 in the three months ended September 30, 2020, a decrease of $1,358,000 or 52.5% from the three months ended September 30, 2019.

In the three months ended March 31, 2021, interest income amounted to $10,275,000, an increase of $507,000 or 5.2% from the three months ended March 31, 2020, while interest expense amounted to $1,305,000 in the three months ended March 31, 2021, a decrease of $1,087,000 or 45.4% from the three months ended March 31, 2020.

As a result, net interest income increased $1,594,000 or 21.6% to $8,970,000 from $7,376,000 for the same period in 2020.

The Company’s net interest margin for the three months ended September 30, 2020 was 3.59% compared to 3.26% for same period in 2019.

The increase in net interest margin was primarily a result of a decrease in yield on short-term borrowings as a result of deposit growth and the continuing low interest rate environment.

The Company’s net interest margin for the three months ended March 31, 2021 was 3.37% compared to 3.28% for same period in 2020.

The increase in net interest margin was primarily a result of a decrease in yields on deposits.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the three months ended September 30, 2020 and 2019 was $294,000 and $175,000, respectively.

The increase in the provision for loan losses resulted from the Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors.

The provision for loan losses for the three months ended September 30, 2020 is also reflective of management’s assessment of the increased credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic.

Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $49,000

and $27,000 for the the three months ended September 30, 2020 and 2019, respectively.

The provision for loan losses for the three months ended March 31, 2021 and 2020 was $135,000 and $194,000, respectively.

The decrease in the provision for loan losses resulted from the Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors.

The provision for loan losses for the three months ended March 31, 2021 is also reflective of management’s assessment of the credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic.

Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $21,000 and

$20,000 for the the three months ended March 31, 2021 and 2020, respectively.

See Allowance for Loan Losses on page 39 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $1,515,000 for the three months ended September 30, 2020, as compared to $2,226,000 for the same period in 2019, a decrease of $711,000, or 31.9%.

The decrease was mainly due to decreased gains on securities and lower service charge and fee income.

Net securities gains decreased $651,000 to $(9,000) for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

This decrease was due to the Bank taking $671,000 in net gains on sold securities in the third quarter of 2019 as compared to taking $61,000 in net gains on sold securities in the third quarter of 2020.

Trust department income increased $1,000 or 0.5% to $222,000 for the three months ended September 30, 2020 as compared to the same period in 2019.

Total non-interest income was $1,875,000 for the three months ended March 31, 2021, as compared to $983,000 for the same period in 2020, an increase of $892,000, or 90.7%.

The increase was due to increased gains realized on held equity securities and an increase in gains on the sales of mortgage loans.

Net securities gains increased $582,000 to $115,000 for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

This increase was mainly due to the Company realizing $115,000 in gains on held equity securities in the first quarter of 2021 as compared to realizing $538,000 in losses on held equity securities in the first quarter of 2020.

Trust department income increased $32,000 or 14.5% to $253,000 for the three months ended March 31, 2021 as compared to the same period in 2020.

Service charges and fee income decreased $124,000 or 24.8%.

The decrease was mainly due to lower fees earned on deposit accounts as there have been fewer customers in overdraft status during the third quarter of 2020 as compared to 2019.

In addition, there were larger prepayment penalties earned on commercial loan payoffs in the third quarter of 2019.

ATM fees and debit card income increased $74,000 or 17.3% to $501,000 for the three months ended September 30, 2020 as a result of increased transaction volume.

Gains on sales of mortgage loans increased $87,000 or 100.0% to $174,000 due to higher average gains on individual sold loans in the third quarter of 2020 as compared to 2019.

NON-INTEREST EXPENSE

Total non-interest expense was $6,256,000 for the three months ended September 30, 2020, as compared to $5,859,000 for the three months ended September 30, 2019, an increase of $397,000 or 6.8%.

The increase was mainly due to increased salaries and employee benefits and higher FDIC insurance expense.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense.

Salaries and benefits amounted to $3,554,000 or 56.8% of total non-interest expense for the three months ended September 30, 2020, as compared to $3,287,000 or 56.1% for the three months ended September 30, 2019.

The increase was due to increased commissions associated with loan growth and bonuses paid to all employees for working through the COVID-19 pandemic.

Net occupancy, furniture and equipment, and computer expense amounted to $907,000 for the three months ended September 30, 2020, an increase of $58,000 or 6.8%.

The increase is mainly the result of increased rent expense associated with the new leasing standard.

Professional services increased $2,000 or 0.9% to $220,000 as of September 30, 2020.

Pennsylvania shares tax expense amounted to $231,000 for the three months ended September 30, 2020, an increase of $4,000 or 1.8% as compared to the three months ended September 30, 2019.

The increase was the result of an increase in total equity.

FDIC insurance expense increased $148,000 or 197.3% for the three months ended September 30, 2020.

This increase was due to small bank assessment credits received from the FDIC for the third quarter of 2019 effectively reducing the expense for the third quarter of 2019.

FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

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

Data processing expenses amounted to $283,000 for the three months ended September 30, 2020, an increase of $9,000 or 3.3% as compared to the three months ended September 30, 2019.

Foreclosed assets held for resale expense increased $27,000 to $30,000 for the three months ended September 30, 2020.

This increase was due to a loss incurred on the sale of a foreclosed property during the third quarter

Advertising expense decreased $81,000 or 49.7% during the three months ended September 30, 2020.

This decrease was due to a less aggressive advertising approach in 2020 due to the COVID-19 pandemic, as the third quarter of 2020 saw less newspaper advertising and civic advertising.

Civic advertising was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor were canceled.

Other non-interest expense amounted to $623,000 for the three months ended September 30, 2020, a decrease of $58,000 or 8.5% as compared to the three months ended September 30, 2019.

The decrease was due to a decrease in the provision for unfunded commitments due to increased utilization of commercial and industrial lines of credit and a decrease in commercial real estate commitments in the third quarter of 2020.

Income tax expense amounted to $449,000 for the three months ended September 30, 2020, as compared to $408,000 for the three months ended September 30, 2019, an increase of $41,000.

The effective total income tax rate was 12.5% for the three months ended September 30, 2020 as compared to 12.2% for the three months ended September 30, 2019.

The increase in the effective tax rate was mainly due to a net decrease in tax-exempt income from investments in and loans to state and local units of government.

The Company recognized $101,000 of tax credits from low-income housing partnerships in the three months ended September 30, 2020.

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

First Keystone Corporation realized earnings for the nine months ended September 30, 2020 of $8,571,000, an increase of $875,000, or 11.4% from the same period in 2019.

The increase in net income for the nine months ended September 30, 2020 was primarily due to an increase in net interest income, offset by a decrease in net securities gains.

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

Cash dividends amounted to $0.81 per share for the nine months ended September 30, 2020 and 2019.

NET INTEREST INCOME

The major source of operating income for the Company is net interest income, defined as interest income less interest expense.

For the nine months ended September 30, 2020, interest income amounted to $29,251,000, an increase of $530,000 or 1.8% from the nine months ended September 30, 2019, while interest expense amounted to $5,136,000 in the nine months ended September 30, 2020, a decrease of $2,743,000 or 34.8% from the nine months ended September 30, 2019.

As a result, net interest income increased $3,273,000 or 15.7% to $24,115,000 from $20,842,000 for the same period in 2019.

The Company’s net interest margin for the nine months ended September 30, 2020 was 3.45% compared to 3.19% for same period in 2019.

The increase in net interest margin was a result of a decrease in yield on short-term borrowings as a result of deposit growth and the continuing low interest rate environment.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the nine months ended September 30, 2020 and 2019 was $682,000 and $313,000, respectively.

The provision for loan losses for the nine months ended September 30, 2020 is also reflective of management’s assessment of the increased credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic.

Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $108,000 and $138,000 for the nine months ended September 30, 2020 and 2019, respectively.

See Allowance for Loan Losses on page 47 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $4,119,000 for the nine months ended September 30, 2020, as compared to $5,349,000 for the same period in 2019, a decrease of $1,230,000, or 23.0%.

The decrease was mainly the result of a decrease in net gains on the sales of securities and net losses on held equity securities in the nine months ended September, 30 2020, plus a decrease in service charges and fees offset by an increase in gains on the sales of mortgage loans.

ATM fees and debit card income increased $141,000 or 11.5% to $1,364,000 for the nine months ended September 30, 2020 due to an increase in transaction volume.

Service charges and fee income decreased $426,000 for the nine months ended September 30, 2020.

The decrease was mainly due to lower fees earned on deposit accounts as overdraft fees and several other deposit account service charges were waived during the second quarter of 2020 due to the COVID-19 pandemic.

In addition, there were fewer prepayment penalties earned on commercial loan payoffs during the nine months ended September 30, 2020.

Gains on sales of mortgage loans increased $269,000 or 133.2% due to higher average gains on individual sold loans in 2020 as compared to 2019.

Trust department income decreased $69,000 or 9.2% to $677,000 for the nine months ended September 30, 2020 as compared to the same period in 2019.

The decrease was mainly the result of higher income earned from estate fees in the nine months ended September 30, 2019.

Net securities gains decreased $1,149,000 or 137.3% to $(312,000) for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

The decrease was due to the Company recognizing $540,000 in net losses on held equity securities in the nine months ended September 30, 2020 and the Company recognizing $528,000 less in gains on the sales of securities during the same period in 2020 as compared to the same period in 2019.

The decrease was mainly due to lower fees earned on deposit accounts as there have been fewer customers in overdraft status during the first quarter of 2021 as compared to 2020.

ATM fees and debit card income increased $117,000 or 29.3% to $516,000 for the three months ended March 31, 2021 due to an increase in transaction volume.

Gains on sales of mortgage loans increased $261,000 or 280.6% to $354,000 due to a higher volume of sold loans in the first quarter of 2021 as compared to 2020.

NON-INTEREST EXPENSE

Total non-interest expense was $17,826,000 for the nine months ended September 30, 2020, as compared to $17,369,000 for the nine months ended September 30, 2019.

Non-interest expense increased $457,000 or 2.6%.

Total non-interest expense was $6,197,000 for the three months ended March 31, 2021, as compared to $5,915,000 for the three months ended March 31, 2020.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense.

Salaries and benefits amounted to $9,732,000 or 54.6% of total non-interest expense for the nine months ended September 30, 2020, as compared to $9,372,000 or 54.0% for the nine months ended September 30, 2019.

The increase was due to increased commissions associated with loan growth and bonuses paid to all employees for working through the COVID-19 pandemic.

Net occupancy, furniture and equipment, and computer expense amounted to $2,722,000 for the nine months ended September 30, 2020, an increase of $108,000 or 4.1%.

The increase is mainly the result of increased rent expense associated with the new leasing standard.

Professional services decreased $11,000 or 1.6% to $685,000 for the nine months ended September 30, 2020.

Pennsylvania shares tax expense amounted to $680,000 for the nine months ended September 30, 2020, an increase of $69,000 or 11.3% as compared to the nine months ended September 30, 2019.

Salaries and benefits amounted to $3,300,000 or 53.3% of total non-interest expense for the three months ended March 31, 2021, as compared to $3,219,000 or 54.4% for the three months ended March 31, 2020.

The increase was due to normal merit increases, increased commissions associated with loan growth, increased health care costs and an increase in profit sharing expense.

Net occupancy, furniture and equipment, and computer expense amounted to $905,000 for the three months ended March 31, 2021, a decrease of $7,000 or 0.8%.

Professional services increased $17,000 or 7.0% to $259,000 as of March 31, 2021 due to increased consulting fees associated with goodwill impairment testing and broker fees resulting from the issuance of subordinated debt.

Pennsylvania shares tax expense amounted to $313,000 for the three months ended March 31, 2021, an increase of $89,000 or 39.7% as compared to the three months ended March 31, 2020.

The increase was the result of an increase in total equity.

FDIC insurance expense increased $32,000 or 51.6% for the nine months ended September 30, 2020.

This increase was due to small bank assessment credits received from the FDIC effectively reducing the expense in 2019.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased $87,000 for the three months ended March 31, 2021.

This increase was due to small bank assessment credits received from the FDIC for the first quarter of 2020 effectively reducing the expense for the first quarter of 2020.

FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to $676,000 for the nine months ended September 30, 2020, an increase of $12,000 or 1.8% as compared to the nine months ended September 30, 2019.

Data processing expenses amounted to $884,000 for the nine months ended September 30, 2020, an increase of $38,000 or 4.5% as compared to the nine months ended September 30, 2019.

The increase was the result of annual contracted pricing increases from our main third-party data processor.

Foreclosed assets held for resale expense decreased $2,000 for the nine months ended September 30, 2020.

Advertising expense decreased $231,000 or 48.5% during the nine months ended September 30, 2020.

The decrease was

due to a less aggressive advertising approach in the first nine months of 2020 due to the COVID-19 pandemic, as this period in 2020 saw less newspaper, billboard, digital and civic advertising.

Civic advertising was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor were canceled.

Other non-interest expense amounted to $2,064,000 for the nine months ended September 30, 2020, an increase of $82,000 or 4.1% as compared to the nine months ended September 30, 2019.

The increase was due to several factors.

There was an increase in the provision for unfunded commitments due to higher commitment balances requiring a reserve, an increase in loan collections expense resulting from a right of setoff taken from a customer’s account in the prior year to cover various expenses paid by the Bank and higher promotional expenses for free appraisals given by the Bank.

This was offset by lower travel and entertainment expenses in 2020 as the result of the COVID-19 pandemic.

Income tax expense amounted to $1,155,000 for the nine months ended September 30, 2020, as compared to $813,000 for the nine months ended September 30, 2019, an increase of $342,000.

The effective total income tax rate was 11.9% for the nine months ended September 30, 2020 as compared to 9.6% for the nine months ended September 30, 2019.

The increase in the effective tax rate was mainly due to a net decrease in tax-exempt income from investments in and loans to state and local units of government.

The Company recognized $303,000 of tax credits from low-income housing partnerships in the nine months ended September 30, 2020.

ATM and debit card fees expense amounted to $200,000 for the three months ended March 31, 2021, a decrease of $9,000 or 4.3% as compared to the three months ended March 31, 2020.

Data processing expenses amounted to $294,000 for the three months ended March 31, 2021 and 2020.

Foreclosed assets held for resale expense decreased $6,000 to $3,000 for the three months ended March 31, 2021.

Advertising expense decreased $19,000 or 20.9% during the three months ended March 31, 2021.

This decrease was due to a decrease in civic and newspaper advertising as compared to the same period in 2020.

Civic advertising was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor are still being affected.

In addition, newspaper advertising is down due to utilizing more digitally focused advertising mediums.

Other non-interest expense amounted to $764,000 for the three months ended March 31, 2021, an increase of $49,000 or 6.9% as compared to the three months ended March 31, 2020.

The increase was due to higher promotional expenses for free appraisals given by the Bank and fraud losses due to an isolated incident.

Income tax expense amounted to $635,000 for the three months ended March 31, 2021, as compared to $197,000 for the three months ended March 31, 2020, an increase of $438,000.

The effective total income tax rate was 14.1% for the three months ended March 31, 2021 as compared to 8.8% for the three months ended March 31, 2020.

The increase in the effective tax rate was mainly due to higher overall operating income.

The Company recognized $101,000 of tax credits from low-income housing partnerships in the three months ended March 31, 2021 and 2020.

FINANCIAL CONDITION

Total assets increased to $1,134,735,000 as of September 30, 2020, an increase of $127,509,000 from year-end 2019.

Total assets increased to $1,215,521,000 as of March 31, 2021, an increase of $36,474,000 from year-end 2020.

Total assets as of December 31, 2020 amounted to $1,179,047,000.

Total debt securities available-for-sale increased $38,593,000 or 13.9% to $316,521,000 as of September 30, 2020 from December 31, 2019.

In the third quarter of 2020, the Company purchased $3,500,000 in subordinated debt from other financial institutions.

Total loans increased $56,308,000 or 8.7% to $704,040,000 as of September 30, 2020 from December 31, 2019.

Loan demand grew in the nine months ended September 30, 2020 as the Bank has realized an increase in loan originations, primarily in the commercial real estate and commercial and industrial portfolios.

The increase was mainly due the origination of $31,729,000 in PPP loans.

Interest receivable increased $1,325,000 or 38.9% to $4,730,000 as of September 30, 2020 from December 31, 2019.

The increase was mainly due to the full payment deferrals of several loans that were modified in response to the COVID-19 pandemic under Section 4013 of the CARES Act.

Total deposits increased $157,591,000 or 20.7% to $919,219,000 as of September 30, 2020 from December 31, 2019.

The increase was mainly due to the deposit of customer stimulus funds issued in accordance with the CARES Act, the deposit of PPP loan proceeds, higher levels of saving and an increase in deposits associated with municipal customers.

Total debt securities available-for-sale increased $21,064,000 or 5.7% to $387,775,000 as of March 31, 2021 from December 31, 2020.

Total loans increased $2,379,000 or 0.3% to $722,989,000 as of March 31, 2021 from December 31, 2020.

Loan demand grew in the three months ended March 31, 2021 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

Total deposits increased $40,369,000 or 4.3% to $977,857,000 as of March 31, 2021 from December 31, 2020.

The increase was mainly due to the deposit of government stimulus funds and PPP loan proceeds, and other normal fluctuations.

The Company continues to maintain and manage its asset growth.

The Company’s strong equity capital position provides an opportunity to further leverage its asset growth.

Total borrowings decreased in the nine months ended September 30, 2020 by $41,540,000 to $68,123,000 from $109,663,000 as of December 31, 2019.

Borrowings decreased mainly due to increased deposit balances.

Total stockholders’ equity increased to $140,469,000 at September 30, 2020, an increase of $11,717,000 or 9.1% from December 31, 2019 primarily due to an increase in accumulated other comprehensive income and retained earnings.

Total borrowings decreased in the three months ended March 31, 2021 by $2,071,000 to $62,423,000 from $64,494,000 as of December 31, 2020.

Borrowings decreased mainly due to the maturity of a long-term note.

Total stockholders’ equity decreased to $142,933,000 at March 31, 2021, a decrease of $1,309,000 or 0.9% from December 31, 2020 due to a decrease in accumulated other comprehensive income offset by an increase in retained earnings.

SEGMENT REPORTING

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By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Company maximizes income.

The earning asset ratio (average interest earning assets divided by average total assets) equaled 93.0% at September 30, 2020 and 92.4% at September 30, 2019.

The earning asset ratio (average interest earning assets divided by average total assets) equaled 93.9% at March 31, 2021 and 92.8% at March 31, 2020.

This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels.

The primary earning assets are loans and investment securities.

Our primary earning asset, total loans, increased to $704,040,000 as of September 30, 2020, up $56,308,000, or 8.7% since year-end 2019.

The primary earning assets are loans and securities.

Our primary earning asset, total loans, increased to $722,989,000 as of March 31, 2021, up $2,379,000, or 0.3% since year-end 2020.

The loan portfolio continues to be well diversified.

Non-performing assets increased since year-end 2020, but overall asset quality has remained consistent.

Total non-performing assets were $7,470,000 as of September 30, 2020, an increase of $2,863,000, or 62.1% from $4,607,000 reported in non-performing assets as of December 31, 2019.

Total allowance for loan losses to total non-performing assets was 101.46% as of September 30, 2020 and 152.05% at December 31, 2019.

The increase in non-performing assets during the third quarter of 2020 was mainly due to several loans that were moved to non-accrual status during the first quarter of 2020.

Total non-performing assets were $7,299,000 as of March 31, 2021, an increase of $180,000, or 2.5% from $7,119,000 reported in non-performing assets as of December 31, 2020.

The increase in non-performing assets during the first quarter of 2021 was mainly due to one loan that was moved to non-accrual status during the three months ended March 31, 2021.

Total allowance for loan losses to total non-performing assets was 110.25% as of March 31, 2021 and 111.43% at December 31, 2020.

See the Non-Performing Assets section on page 41 for more information.

In addition to loans, another primary earning asset is our overall investment portfolio, which increased in size from December 31, 2019 to September 30, 2020.

Debt securities available-for-sale amounted to $316,521,000 as of September 30, 2020, an increase of $38,593,000 from year-end 2019.

Interest-bearing deposits in other banks increased as of September 30, 2020, to $36,349,000 from $473,000 at year-end 2019 due to increased cash held at the Federal Reserve Bank.

Time deposits with other banks were $247,000 at September 30, 2020 and December 31, 2019.

Total loans increased to $704,040,000 as of September 30, 2020 as compared to $647,732,000 as of December 31, 2019.

In addition to loans, another primary earning asset is our overall securities portfolio, which increased in size from December 31, 2020 to March 31, 2021.

Debt securities available-for-sale amounted to $387,775,000 as of March 31, 2021, an increase of $21,064,000 from year-end 2020.

Interest-bearing deposits in other banks increased as of March 31, 2021, to $28,188,000 from $15,347,000 at year-end 2020 due to increased cash held at the Federal Reserve Bank.

Time deposits with other banks were $247,000 at March 31, 2021 and December 31, 2020.

Total loans increased to $722,989,000 as of March 31, 2021 as compared to $720,610,000 as of December 31, 2020.

The table on page 19 provides data relating to the composition of the Company’s loan portfolio on the dates indicated.

Total loans increased by $2,379,000 or 0.3%.

Steady demand for borrowing by businesses (including loans issued through the Bank’s participation in the SBA’s Paycheck Protection Program) accounted for the 8.7% increase in the loan portfolio from December 31, 2019 to September 30, 2020.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased $13,585,000 to $100,297,000 at September 30, 2020 compared to $86,712,000 at December 31, 2019.

The increase in the Commercial and Industrial portfolio was mainly attributable to originations of PPP loans which amounted to $31,729,000.

The portion of the Commercial and Industrial portfolio not attributable to the Paycheck Protection Program loans decreased $18,144,000 during the nine months ended September 30, 2020.

Steady demand for borrowing by businesses (including loans issued through the Bank’s participation in the SBA’s Paycheck Protection Program) accounted for the 0.3% increase in the loan portfolio from December 31, 2020 to March 31, 2021.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) decreased $579,000 or 0.6% to $91,296,000 at March 31, 2021 compared to $91,875,000 at December 31, 2020.

The decrease in the Commercial and Industrial portfolio was mainly attributable to the portion of the Commercial and Industrial portfolio not attributable to the PPP loans which decreased $4,641,000 during the three months ended March 31, 2021.

The decrease was mainly attributable to $681,000 in new loan originations offset by a $448,000 decrease in utilization of existing Commercial and Industrial lines of credit and loan payoffs of $3,650,000, as well as regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $45,294,000 to $441,095,000 at September 30, 2020 compared to $395,801,000 at December 31, 2019.

The increase was mainly the result of $78,368,000 in new loan originations net against a $742,000 decrease in utilization of existing Commercial Real Estate lines of credit and $27,538,000 in loan payoffs, in addition to regular principal payments and other typical amortization in the Commercial Real Estate portfolio.

Residential Real Estate loans decreased $1,811,000 to $157,539,000 at September 30, 2020 compared to $159,350,000 at December 31, 2019.

The decrease was the result of $22,949,000 in new loan originations, offset by a $1,262,000 decrease in utilization of existing Residential Real Estate (Home Equity) lines of credit, loan

payoffs of $16,182,000, net loans sold of $4,855,000 and regular principal payments and other typical amortization in the Residential Real Estate portfolio.

Net loans sold in the nine months ended September 30, 2020 consisted of total loans sold during the nine months ended September 30, 2020 of $11,962,000, offset with loans opened and sold in the same quarter during the first three quarters of 2020 which amounted to $7,107,000.

The portion of the Commercial and Industrial portfolio attributable to the PPP loans increased by $4,062,000 during the three months ended March 31, 2021 as a result of $15,335,000 in new PPP loans originated during the three months ended March 31, 2021 which were offset by $11,273,000 in PPP loans paid off/forgiven during the same three-month period.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $6,261,000 or 1.3% to $472,989,000 at March 31, 2021 compared to $466,728,000 at December 31, 2020.

The increase was mainly the result of $25,948,000 in new loan originations and a $6,543,000 increase in utilization of existing Commercial Real Estate lines of credit, offset by $15,914,000 in loan payoffs, in addition to regular principal payments and other typical amortization in the Commercial Real Estate portfolio.

Residential Real Estate loans decreased $3,356,000 or 2.1% to $153,627,000 at March 31, 2021 compared to $156,983,000 at December 31, 2020.

The decrease was the result of $8,492,000 in new loan originations and a $958,000 increase in utilization of existing Residential Real Estate (Home Equity) lines of credit, offset by loan payoffs of $7,829,000, net loans sold of $3,574,000 and regular principal payments and other typical amortization in the Residential Real Estate portfolio.

Net loans sold for the three months ended March 31, 2021 consisted of total loans sold during the three months ended March 31, 2021 of $9,026,000, offset with loans opened and sold in the same quarter during the first quarter of 2021 which amounted to $5,452,000.

The Company continues to originate and sell certain long-term fixed rate residential mortgage loans which conform to secondary market requirements.

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Management believes that the loan portfolio is well diversified.

The total commercial portfolio was $541,392,000 at September 30, 2020.

The total commercial portfolio was $564,285,000 at March 31, 2021.

Of total loans, $472,989,000 or 65.4% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings.

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See Note 4 — Loans and Allowance for Loan Losses for risk grading tables.

Overall, non-pass grades increased to $23,728,000 at September 30, 2020, as compared to $14,887,000 at December 31, 2019.

Commercial and Industrial non-pass grades decreased to $983,000 as of September 30, 2020 as compared to $1,070,000 as of December 31, 2019.

Commercial Real Estate non-pass grades increased to $21,370,000 as of September 30, 2020 as compared to $12,534,000 as of December 31, 2019.

The Residential Real Estate and Consumer loan non-pass grades increased to $1,375,000 as of September 30, 2020 as compared to $1,283,000 as of December 31, 2019.

The increase in Commercial Real Estate non-pass grades at September 30, 2020 as compared to December 31, 2019 is mainly due to various large loans/loan relationships that were downgraded to Special Mention status during the three months ended September 30, 2020.

One Commercial Real Estate loan to the owner/operator of a hotel that carried a balance of $9,423,000 was downgraded to Special Mention during the three months ended September 30, 2020, as occupancy levels have been adversely impacted by the COVID-19 coronavirus pandemic, but the business remains operational.

One Commercial Real Estate loan to a real estate developer that carried a balance of $1,328,000 was downgraded to Special Mention during the three months ended September 30, 2020, as the borrower was unable to pay off the loan or refinance through another institution at maturity;

the Bank has agreed to extend the maturity date of the loan for one year in conjunction with a principal paydown financed by partial release of the mortgaged premises.

Four Commercial Real Estate loans to the owners/operators of an indoor family entertainment complex that carried a balance of $792,000 were downgraded to Special Mention during the three months ended September 30, 2020, as the business was adversely impacted by the COVID-19 coronavirus pandemic and has ceased operations.

Net against the large additions to Special Mention status, there was also one Commercial Real Estate loan to the owner of a recreation facility that was classified as Substandard and carried a balance of $2,640,000 as of December 31, 2019 which was paid off during the second quarter of 2020.

Overall, non-pass grades increased to $24,316,000 at March 31, 2021, as compared to $24,137,000 at December 31, 2020.

Commercial and Industrial non-pass grades decreased to $867,000 as of March 31, 2021 as compared to $919,000 as of December 31, 2020.

Commercial Real Estate non-pass grades increased to $21,791,000 as of March 31, 2021 as compared to $21,789,000 as of December 31, 2020.

The Residential Real Estate and Consumer loan non-pass grades increased to $1,658,000 as of March 31, 2021 as compared to $1,429,000 as of December 31, 2020.

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

(Dollars in thousands)

September 30,

Commercial and Industrial

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The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio.

As of September 30, 2020, the allowance for loan losses was $7,579,000 as compared to $7,005,000 as of December 31, 2019.

As of March 31, 2021, the allowance for loan losses was $8,047,000 as compared to $7,933,000 as of December 31, 2020.

The allowance for loan losses is established through a provision for loan losses charged to expenses.

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However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future.

In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors 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 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.

No additional qualitative factor increases were performed during the first quarter of 2021.

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 Company’s loan portfolio.

See Allowance for Loan Losses on page 15 for further discussion.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the nine months ended September 30, 2020 and 2019.

For the nine months ended September 30, 2020 and 2019, net charge-offs as a percentage of average loans was 0.02% for each respective period.

Net charge-offs amounted to $108,000 for the nine months ended September 30, 2020 as compared to $138,000 for the the nine months ended September 30, 2019.

The decrease in net charge-offs during the nine months ended September 30, 2020 as compared to the the nine months ended September 30, 2019 is mainly due to one charge-off that was completed during the first quarter of 2019 on a Commercial Real Estate loan to a landscaping company in the amount of $51,000.

For the nine months ended September 30, 2020, the provision for loan losses was $682,000 as compared to $313,000 for the nine months ended September 30, 2019.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the three months ended March 31, 2021 and 2020.

For the three months ended March 31, 2021 and 2020, net charge-offs as a percentage of average loans was 0.003% for each respective period.

Net charge-offs amounted to $21,000 for the three months ended March 31, 2021 as compared to $20,000 for the three months ended March 31, 2020.

For the three months ended March 31, 2021, the provision for loan losses was $135,000 as compared to $194,000 for the three months ended March 31, 2020.

The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for loan losses of $8,047,000 of which 9.8% was attributed to the Commercial and Industrial component;

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and 9.6% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page 12).

The Company determined that the provision for loan losses made during the current quarter was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of September 30, 2020.

Analysis of Allowance for Loan Losses

(Dollars in thousands)

September 30,

Balance at beginning of period

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A detailed quarterly analysis to determine the adequacy of the Company’s allowance for loan losses is reviewed by the Board of Directors.

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

With the Bank’s manageable level of net charge-offs and the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.116% at March 31, 2021 and 1.097% at March 31, 2020.

NON-PERFORMING ASSETS

The table on page 43 details the Company’s non-performing assets and impaired loans as of the dates indicated.

A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured.

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While unusual, there may be instances of loan principal forgiveness.

Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in

Section 4013 of the CARES Act are met.

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

Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

Total non-performing assets amounted to $7,470,000 as of September 30, 2020, as compared to $4,607,000 as of December 31, 2019.

The economy, in particular, the political unrest both domestic and abroad, the looming presidential election, the partial and full shutdowns of various government offices, the recession resulting from the COVID-19 pandemic, the large unemployment totals, and the continued slowness in the housing industries in our market areas has had a direct effect on the Company’s non-performing assets.

Total non-performing assets amounted to $7,299,000 as of March 31, 2021, as compared to $7,119,000 as of December 31, 2020.

The economy, in particular, the political unrest both domestic and abroad, the recent presidential election, the partial and full shutdowns of various government offices, the recession resulting from the COVID-19 pandemic, and the large unemployment totals have had a direct effect on the Company’s non-performing assets.

The Company is closely monitoring its Commercial Real Estate portfolio because of the current uncertain economic environment.

Non-accrual loans totaled $6,840,000 as of September 30, 2020, as compared to $4,388,000 as of December 31, 2019.

Foreclosed assets held for resale decreased to $88,000 as of September 30, 2020, compared to $119,000 as of December 31, 2019.

Loans past-due 90 days or more and still accruing interest amounted to $542,000 at September 30, 2020, as compared to $100,000 as of December 31, 2019.

At September 30, 2020, loans past-due 90 days or more and still accruing interest consisted of two Commercial Real Estate loans which were both well secured and in the process of collection.

The increase in non-accrual loans at September 30, 2020, as compared to December 31, 2019 is mainly due to the addition of several large loans/loan relationships to non-accrual status during the first quarter of 2020.

Five loans to a plastic processing company focused on non-post-consumer recycling totaling $1,275,000 were moved to non-accrual status during the first quarter of 2020 due to strained liquidity and the borrower’s inability to make required payments, as the owner has decreased the level of operations and is exploring options to obtain an additional investor or liquidate the business.

A loan in the amount of $829,000 to a golf course and catering venue was moved to non-accrual status during the first quarter of 2020 due to the borrower’s inability to make monthly payments due to cash flow challenges exacerbated by the seasonality of the industry.

A residential mortgage in the amount of $356,000 to the owner of a manufacturing company was also moved to non-accrual status during the first quarter of 2020, as poor payment performance has led to foreclosure proceedings related to the associated property.

Non-performing assets to total loans was 1.06% at September 30, 2020 and 0.71% at December 31, 2019.

Non-performing assets to total assets was 0.66% at September 30, 2020 and 0.46% at December 31, 2019.

The allowance for loan losses to total non-performing assets was 101.46% as of September 30, 2020 as compared to 152.05% as of December 31, 2019.

Non-accrual loans totaled $7,245,000 as of March 31, 2021, as compared to $7,078,000 as of December 31, 2020.

There were no Foreclosed Assets Held for Resale as of March 31, 2021, compared to $28,000 as of December 31, 2020.

Loans past-due 90 days or more and still accruing interest amounted to $54,000 at March 31, 2021, as compared to $13,000 as of December 31, 2020.

At March 31, 2021, loans past-due 90 days or more and still accruing interest consisted of one Commercial Real Estate loan which was well secured and in the process of collection.

Non-performing assets to total loans was 1.01% at March 31, 2021 and 0.99% at December 31, 2020.

Non-performing assets to total assets was 0.60% at both March 31, 2021 and December 31, 2020.

The allowance for loan losses to total non-performing assets was 110.25% as of March 31, 2021 as compared to 111.43% as of December 31, 2020.

Additional detail can be found on page 43 in the Non-Performing Assets and Impaired Loans table and page 24 in the Non-Performing Assets table.

Asset quality is a priority and the Company retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation efforts.

Potential problem loans are defined as performing substandard loans which are not deemed to be impaired.

These loans have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future.

Potential problem loans amounted to $645,000 at September 30, 2020, compared to $4,074,000 at December 31, 2019.

Impaired loans were $13,972,000 at September 30, 2020 and $12,954,000 at December 31, 2019.

The largest impaired loan relationship at September 30, 2020 consisted of a non-performing loan to a student housing holding company which was secured by commercial real estate.

At September 30, 2020, the loan carried a balance of $3,176,000, net of $1,904,000 that had been charged off to date.

The second largest impaired loan relationship at September 30, 2020 consisted of one performing loan to a student housing holding company, which was classified as a TDR.

The loan was secured by commercial real estate and carried a balance of $2,946,000 as of September 30, 2020, net of $943,000 that had been charged off to date.

The third largest impaired loan relationship at September 30, 2020 consisted of a substandard performing loan to a developer of a residential sub-division in the amount of $1,432,000, which was secured by commercial real estate and classified as a TDR.

Performing substandard loans which are not deemed to be impaired have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future.

Performing substandard loans not deemed to be impaired amounted to $10,157,000 at March 31, 2021, compared to $9,992,000 at December 31, 2020.

Impaired loans were $15,365,000 at March 31, 2021 and $15,054,000 at December 31, 2020.

The largest impaired loan relationship at March 31, 2021 and December 31, 2020 consisted of a non-performing loan to a student housing holding company which was secured by commercial real estate.

At March 31, 2021, the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date.

The second largest impaired loan relationship at March 31, 2021 and December 31, 2020 consisted of one performing loan to a student housing holding company, which was classified as a TDR.

The loan was secured by commercial real estate and carried a balance of $2,913,000 as of March 31, 2021, net of $943,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $2,929,000, net of $943,000 that had been charged off to date.

The third largest

impaired loan relationship at March 31, 2021 and December 31, 2020 consisted of a substandard performing loan to a developer of a residential sub-division.

The loan was secured by commercial real estate and classified as a TDR.

The loan carried a balance of $1,263,000 at March 31, 2021 compared to $1,326,000 at December 31, 2020.

The Company estimates impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell.

For collateral dependent loans, the estimated appraisal adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another.

Of the $13,972,000 in impaired loans at September 30, 2020, none were located outside of the Company’s primary market area.

The outstanding recorded investment of TDRs as of September 30, 2020 and December 31, 2019 was $8,807,000 and $8,678,000, respectively.

Of the thirty-three restructured loans at September 30, 2020, eight loans were classified in the Commercial and Industrial portfolio, twenty-four loans were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio.

Troubled debt restructurings at September 30, 2020 consisted of twelve term modifications beyond the original stated term, three rate modifications, and seventeen payment modifications.

For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another.

Of the $15,365,000 in impaired loans at March 31, 2021, none were located outside of the Company’s primary market area.

The outstanding recorded investment of TDRs as of March 31, 2021 and December 31, 2020 was $9,675,000 and $9,563,000, respectively.

Of the thirty-two restructured loans at March 31, 2021, six loans were classified in the Commercial and Industrial portfolio, twenty-five loans were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio.

Troubled debt restructurings at March 31, 2021 consisted of thirteen term modifications beyond the original stated term, three rate modifications, and fifteen payment modifications.

There was also one troubled debt restructuring that experienced all three types of modifications—payment, rate, and term.

TDRs are separately evaluated for payment disclosures, and if necessary, a specific allocation is established.

There were no specific allocations attributable to the TDRs at September 30, 2020, compared to December 31, 2019 when there were specific allocations of $1,000 attributable to the TDRs.

There were no unfunded commitments attributable to the TDRs at September 30, 2020 and December 31, 2019.

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

No loans that were modified as TDRs during the twelve months preceding September 30, 2020 experienced payment defaults during the three months ended September 30, 2020.

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

No loans that were modified as TDRs during the twelve months preceding September 30, 2019 experienced payment defaults during the three or nine months ended September 30, 2019.

The Company’s non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end.

There were no specific allocations attributable to the TDRs at March 31, 2021 or December 31, 2020.

There were no unfunded commitments attributable to the TDRs at March 31, 2021 and December 31, 2020.

At March 31, 2021, six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $299,000, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $737,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $17,000 were not in compliance with the terms of their restructure, compared to March 31, 2020 when nine Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,377,000 were not in compliance with the terms of their restructure.

One Commercial Real Estate loan in the amount of $92,000 that was modified as a TDR within the twelve months preceding March 31, 2021 experienced a payment default during the three months ended March 31, 2021.

No loans were modified as TDRs within the twelve months preceding March 31, 2020.

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

A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.

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

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

Improving loan quality is a priority.

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The Company may experience difficulties collecting monthly payments on time from its borrowers, property values may decline, and certain types of loans may need to be modified, which could cause a rise in the level of impaired loans, non-performing assets, charge-offs, and delinquencies.

Should increases occur in these areas, additions to the balance of the Company’s allowance for loan losses could be required.

The extent of the impact of the

COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments including the duration and spread of the outbreak.

Should such metrics increase, additions to the balance of the Company’s allowance for loan losses could be required.

The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments including the duration and spread of the outbreak.

A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans.

As of September 30, 2020 and December 31, 2019, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

As of March 31, 2021 and December 31, 2020, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Non-Performing Assets and Impaired Loans

(Dollars in thousands)

September 30,

Non-performing assets

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Allowance for loan losses to total non-performing assets

Real estate mortgages comprise 85.0% of the loan portfolio as of September 30, 2020, as compared to 85.7% as of December 31, 2019.

Real estate mortgages comprise 86.7% of the loan portfolio as of March 31, 2021, as compared to 86.6% as of December 31, 2020.

Real estate mortgages consist of both residential and commercial real estate loans.

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The allocated allowance for loan losses associated with impaired loans is generally computed based upon the related collateral value of the loans.

The collateral values are determined by recent appraisals, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management’s expertise and knowledge of the borrower and the borrower’s business.

The Corporation performs its annual goodwill assessment each December.

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

The reduction in interest rates and the resultant impact to margin, the impact of full and partial

closures on business clients leading to loss of jobs for consumers and reduced cash flow for businesses, the execution of Paycheck Protection Program (“PPP”) loans and modifications, and the inflow of deposits as customers flock to safety are all signs indicative of the economic and industry stress.

While the Corporation’s core income has remained strong year to date due to PPP fees, mortgage banking and steady net interest income, the provision expense has increased as the risk inherent in the loan portfolio has been recognized through changing qualitative factors.

The full impact to earnings in the banking industry and to the Corporation specifically, remains uncertain as there have been a multitude of government plans implemented during the second quarter of 2020 aimed at providing financial assistance to businesses.

However, the stock price for the Corporation has been negatively impacted, as has been the case with stock prices of the Corporation’s peers.

Based on the totality of the circumstances and the impact of the economic conditions on the stock price, management concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and engaged an independent third party to perform the quantitative analysis of comparing the fair value of the Corporation to its carrying value, including goodwill.

The quantitative assessment of goodwill was performed utilizing a discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approach”).

The income approach measures the fair value of an interest in a business by discounting expected future cash flows to present value.

One market approach takes into consideration the fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives.

The second market approach considered the Corporation’s current stock price adjusted for a control premium.

The results of the income approach were weighted at 40% while the results of the market approaches were weighted 10% and 50%, respectively.

The results of the quantitative impairment analysis indicated that the Corporation’s fair value exceeded the carrying value by approximately 2%.

The collateral values are determined by recent appraisals or Certificates of Inspection, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management’s expertise and knowledge of the borrower and the borrower’s business.

The Company performs an annual evaluation for impairment.

Any impairment of goodwill results in a charge to income.

The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price.

Any change in the assumptions which we utilize to determine the carrying value of goodwill could adversely impact our results of operations.

DEPOSITS AND OTHER BORROWED FUNDS

The Company periodically assesses whether events or changes in circumstances indicate that the carrying amount of goodwill may be impaired.

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

This uncertainty in 2020 resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered through the end of 2020 and into 2021, and t he Company’s core income has remained strong due to SBA lender fees, lending activity and steady net interest income.

Goodwill was evaluated for impairment at December 31, 2020, and it was determined that goodwill was not impaired.

DEPOSITS, OTHER BORROWED FUNDS AND SUBORDINATED DEBT

Consumer and commercial retail deposits are attracted primarily by the Bank’s eighteen full service office locations, one loan production office and through its internet banking presence.

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The Bank regularly reviews competing financial institutions’ interest rates, especially when establishing interest rates on certificates of deposit.

Total deposits increased $157,591,000 to $919,219,000 as of September 30, 2020 as non-interest bearing deposits increased by $67,248,000 and interest bearing deposits increased by $90,343,000 from year-end 2019.

The increase in deposits was the result of many different factors including the deposit of at least $19,000,000 in stimulus funds, via check or ACH, $31,729,000 in PPP loan proceeds, less consumer spending, a $58,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during the nine months ended September 30, 2020.

Total short-term and long-term borrowings decreased to $68,123,000 as of September 30, 2020, from $109,663,000 at year-end 2019, a decrease of $41,540,000 or 37.9%.

The decrease in total borrowings was mainly the result of increasing deposit balances in 2020.

Total deposits increased $40,369,000 to $977,857,000 as of March 31, 2021 as non-interest bearing deposits increased by $28,082,000 and interest bearing deposits increased by $12,287,000 from year-end 2020.

The increase in deposits was the result of government stimulus funds, PPP loan proceeds and other normal fluctuations in deposits during the three months ended March 31, 2021.

Total short-term and long-term borrowings decreased to $62,423,000 as of March 31, 2021, from $64,494,000 at year-end 2020, a decrease of $2,071,000 or 3.2%.

The decrease in total borrowings was mainly the result of the maturity of a long-term note.

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the “2020 Notes”).

The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.

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

CAPITAL STRENGTH

Normal increases in capital are generated by net income, less dividends paid out.

During the nine months ended September 30, 2020, net income less dividends paid increased capital by $3,847,000.

During the three months ended March 31, 2021, net income less dividends paid increased capital by $2,231,000.

Accumulated other comprehensive income (loss) derived from net unrealized gains on debt securities available-for-sale also impacts capital.

At December 31, 2020 accumulated other comprehensive income was $12,870,000.

Accumulated other comprehensive income stood at $11,115,000 at September 30, 2020, an increase of $6,894,000.

Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank’s investment portfolio, as well as its decision to sell securities at a gain or loss.

In order to protect the Bank from market risk in the event of further interest rate increases, the Bank chose to sell a portion of its securities during the nine months ended September 30, 2020 at an overall net gain of $228,000.

Accumulated other comprehensive income stood at $8,947,000 at March 31, 2021, a decrease of $3,923,000.

Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank’s securities portfolio, as well as its decision to sell securities at a gain or loss.

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

The Company held 231,612 shares of common stock as treasury stock at September 30, 2020 and December 31, 2019, respectively.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of September 30, 2020 and December 31, 2019, respectively.

Total stockholders’ equity was $140,469,000 as of September 30, 2020, and $128,752,000 as of December 31, 2019.

At September 30, 2020 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III.

The following table presents the Bank’s capital ratios as of September 30, 2020 and December 31, 2019:

September 30,

The Company held 231,612 shares of common stock as treasury stock at March 31, 2021 and December 31, 2020.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of March 31, 2021 and December 31, 2020.

Total stockholders’ equity was $142,933,000 as of March 31, 2021, and $144,242,000 as of December 31, 2020.

At March 31, 2021 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III.

The following table presents the Bank’s capital ratios as of March 31, 2021 and December 31, 2020:

Corrective Action

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The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis as of January 1, 2019.

As of September 30, 2020, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

As of March 31, 2021, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

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

The Company’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and to provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk.

The Company’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk.

Adequate liquidity is needed to provide the funding requirements of depositors’ withdrawals, loan growth, and other operational needs.

1 unchanged sentence

● Growth in the core deposit base;

● Proceeds from sales or maturities of investment securities;

● Proceeds from sales or maturities of securities;

● Payments received on loans and mortgage-backed securities;

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● Brokered CDs.

At September 30, 2020, the Company had $382,155,000 in available borrowing capacity at FHLB (which takes into account FHLB long-term notes and FHLB short-term borrowings);

At March 31, 2021, the Company had $416,223,000 in maximum borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes and FHLB short-term borrowings);

the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $3,787,000.

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Because the agreement both entitles and obligates the Company to repurchase the assets, the Company may transfer legal control of the securities while still retaining effective control.

As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and act as an additional source of liquidity.

Securities sold under agreements to repurchase were $23,123,000 at September 30, 2020.

Asset liquidity is provided by investment securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks.

As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and

act as an additional source of liquidity.

Securities sold under agreements to repurchase were $22,423,000 at March 31, 2021.

Asset liquidity is provided by securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks.

The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities.

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Also, short-term borrowings provide funds to meet liquidity needs.

Net cash flows used in operating activities were $1,468,000 as of September 30, 2020, compared to net cash flows provided by operating activities of $8,297,000 as of September 30, 2019.

Net income amounted to $8,571,000 for the nine months ended September 30, 2020 and $7,696,000 for the nine months ended September 30, 2019.

During the nine months ended September 30, 2020 and 2019, net premium amortization on investment securities amounted to $1,484,000 and $2,054,000, respectively.

Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $9,714,000 and $1,105,000 for the nine months ended September 30, 2020 and 2019, respectively.

Net securities losses were $312,000 for the nine months ended September 30, 2020, compared to net securities gains of $837,000 for the nine months ended September 30, 2019.

Accrued interest receivable increased by $1,325,000 during the nine months ended September 30, 2020 and decreased by $566,000 during the nine months ended September 30, 2019.

Other assets decreased by $388,000 during the nine months ended September 30, 2020 and increased by $1,964,000 during the nine months ended September 30, 2019.

Other liabilities decreased by $1,310,000 during the nine months ended September 30, 2020, compared to an increase of $1,097,000 during the nine months ended September 30, 2019.

Investing activities used cash of $75,567,000 during the nine months ended September 30, 2020 and provided cash of $6,268,000 during the nine months ended September 30, 2019.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions net against purchases) used cash of $31,122,000 during the nine months ended September 30, 2020 and provided cash of $27,012,000 during the nine months ended September 30, 2019.

Net cash used to originate loans amounted to $46,218,000 and $23,560,000 during the nine months ended September 30, 2020 and 2019, respectively.

Financing activities provided cash of $112,287,000 during the nine months ended September 30, 2020 and used cash of $8,615,000 during the nine months ended September 30, 2019.

Deposits increased by $157,591,000 and $69,425,000 during the nine months ended September 30, 2020 and 2019, respectively.

Short-term borrowings decreased by $31,540,000 and $84,257,000 during the nine months ended September 30, 2020 and 2019, respectively.

There were no proceeds from long-term borrowings during the nine months ended September 30, 2020, compared to proceeds from long-term borrowings of $30,000,000 for the nine months ended September 30, 2019.

Repayment of long-term borrowings amounted to $10,000,000 for the nine months ended September 30, 2020 and $20,000,000 for the nine months ended September 30, 2019.

Dividends paid amounted to $4,724,000 and $4,680,000 during the nine months ended September 30, 2020 and 2019, respectively.

Net cash flows provided by operating activities were $2,233,000 as of March 31, 2021, compared to $1,365,000 as of March 31, 2020.

Net income amounted to $3,878,000 for the three months ended March 31, 2021 and $2,053,000 for the three months ended March 31, 2020.

During the three months ended March 31, 2021 and 2020, net premium amortization on securities amounted to $658,000 and $498,000, respectively.

Gains on sales of mortgage loans were $354,000 as of March 31, 2021, compared to $93,000 as of March 31, 2020.

Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $1,984,000 during the three months ended March 31, 2021 and proceeds (including gains) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $37,000 during the three months ended March 31, 2020.

Net securities gains were $115,000 for the three months ended March 31, 2021, compared to net securities losses of $467,000 for the three months ended March 31, 2020.

Other assets increased by $889,000 and $537,000 during the three months ended March 31, 2021 and 2020, respectively.

Other liabilities increased by $433,000 during the three months ended March 31, 2021 and decreased by $1,159,000 during the three months ended March 31, 2020.

Investing activities used cash of $26,534,000 and $21,909,000 during the three months ended March 31, 2021 and 2020, respectively.

Net activity in the available-for-sale securities portfolio (including proceeds from sales, maturities, and redemptions net against purchases) used cash of $26,687,000 during the three months ended March 31, 2021, compared to $5,396,000 during the three months ended March 31, 2020.

Net cash used to originate loans amounted to $62,000 and $13,877,000 during the three months ended March 31, 2021 and 2020, respectively.

Financing activities provided cash of $37,015,000 and $18,618,000 during the three months ended March 31, 2021 and 2020, respectively.

Deposits increased by $40,369,000 during the three months ended March 31, 2021 and decreased by $26,831,000 during the three months ended March 31, 2020.

Short-term borrowings increased by $2,929,000 and $51,716,000 during the three months ended March 31, 2021 and 2020, respectively.

Repayment of long-term borrowings amounted to $5,000,000 for both the three months ended March 31, 2021 and 2020, respectively.

Dividends paid amounted to $1,647,000 and $1,570,000 for the three months ended March 31, 2021 and 2020, respectively.

Managing liquidity remains an important segment of asset/liability management.

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These measurements indicate that liquidity generally remains stable and exceeds the Company’s minimum defined levels of adequacy.

Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that

are reasonably likely to result in, liquidity increasing or decreasing in any material way.

Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way.

Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly utilizing new options, such as the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).

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This position would contribute positively to net interest income in a falling rate environment.

The Company’s cumulative gap at one year indicates the Company is liability sensitive at September 30, 2020.

The Company’s cumulative gap at one year indicates the Company is liability sensitive at March 31, 2021.

Earnings at Risk

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The earnings simulation model projects net interest income would decrease 3.49%, 7.32% and 10.90% in the 100, 200 and 300 basis point increasing rate scenarios presented.

In addition, the earnings simulation model projects net interest income would decrease 2.27% and 7.77% in the 100 and 200 basis point decreasing rate scenarios presented.

In addition, the earnings simulation model projects net interest

income would decrease 2.43% and 7.97% in the 100 and 200 basis point decreasing rate scenarios presented.

All of these forecasts are within the Company’s one year policy guidelines.

2 unchanged sentences

However, the Company’s interest-sensitive assets are able to decline by these amounts.

For the nine months ended September 30, 2020, the cost of interest-bearing liabilities averaged 0.93%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 4.14%.

For the three months ended March 31, 2021, the cost of interest-bearing liabilities averaged 0.63%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 3.84%.

Net Present Value Estimation

1 unchanged sentence

The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows.

At September 30, 2020, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with decreases of 98.80% and 242.28%, respectively.

At March 31, 2021, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with decreases of 24.83% and 68.60%, respectively.

Additionally, net present value is projected to increase 12.54%, 17.35%, and 16.61% in the 100, 200, and 300 basis point immediate increase scenarios, respectively.

23 unchanged sentences

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-Q

Item 1. Financial Statements