What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-11-05 compared with 2021-08-06 · 421 added, 369 removed, 1274 unchanged (38% of the section changed)

3 unchanged sentences

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

September 30,

Cash and due from banks

26 unchanged sentences

Preferred stock, par value $ 2.00 per share;

authorized 1,000,000 shares as of June 30, 2021 and December 31, 2020;

issued 0 as of June 30, 2021 and December 31, 2020

authorized 1,000,000 shares as of September 30, 2021 and December 31, 2020;

issued 0 as of September 30, 2021 and December 31, 2020

Common stock, par value $ 2.00 per share;

authorized 20,000,000 shares as of June 30, 2021 and December 31, 2020;

issued 6,146,561 as of June 30, 2021 and 6,115,281 as of December 31, 2020;

outstanding 5,914,949 as of June 30, 2021 and 5,883,669 as of December 31, 2020

authorized 20,000,000 shares as of September 30, 2021 and December 31, 2020;

issued 6,162,075 as of September 30, 2021 and 6,115,281 as of December 31, 2020;

outstanding 5,930,463 as of September 30, 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 June 30, 2021 and December 31, 2020

Treasury stock, at cost, 231,612 shares as of September 30, 2021 and December 31, 2020

TOTAL STOCKHOLDERS’ EQUITY

3 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(Dollars in thousands, except per share data)

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Interest and fees on loans

40 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(Dollars in thousands)

Three Months Ended

Other comprehensive income:

Unrealized net holding gains on debt securities available-for-sale arising during the period, net of income taxes of $ 583 and $ 1,414 , respectively

September 30,

Other comprehensive (loss) income:

Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $( 654 ) and $ 290 , respectively

Less reclassification adjustment for net gains included in net income, net of income taxes of $( 1 ) and $( 13 ), respectively (a) (b)

Total other comprehensive income

Total other comprehensive (loss) income

Total Comprehensive Income

(Dollars in thousands)

Six Months Ended

Nine Months Ended

September 30,

Other comprehensive (loss) income:

8 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2021 AND 2020

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(Dollars in thousands, except

11 unchanged sentences

Balance at June 30, 2021

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.28 per share

Balance at September 30, 2021

(Dollars in thousands, except

per share data)

Comprehensive

9 unchanged sentences

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

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2021 AND 2020

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(Dollars in thousands)

9 unchanged sentences

Net securities (gains) losses

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

Decrease (increase) in accrued interest receivable

3 unchanged sentences

Amortization of investment in low-income housing partnerships

Decrease in accrued interest payable

Increase (decrease) in accrued interest payable

Increase (decrease) in other liabilities

NET CASH PROVIDED BY OPERATING ACTIVITIES

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sales of debt securities available-for-sale

Proceeds from sales of equity securities and debt securities available-for-sale

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

13 unchanged sentences

NET CASH PROVIDED BY FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

4 unchanged sentences

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Purchased securities settling after quarter end

Loans transferred to foreclosed assets held for resale

13 unchanged sentences

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

Operating results for the three and six months ended June 30, 2021, are not necessarily indicative of the results for the year ending December 31, 2021.

Operating results for the three and nine months ended September 30, 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 June 30, 2021 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 September 30, 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.

31 unchanged sentences

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

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

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, 2021 and December 31, 2020:

Debt Securities Available-for-Sale

(Dollars in thousands)

June 30, 2021:

September 30, 2021:

Treasury securities

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 $ 335,549,000 at June 30, 2021 and $ 315,146,000 at December 31, 2020, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 253,679,000 at June 30, 2021 and $ 231,750,000 at December 31, 2020.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at June 30, 2021.

Securities Available-for-Sale with an aggregate fair value of $ 406,792,000 at September 30, 2021 and $ 315,146,000 at December 31, 2020, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 335,068,000 at September 30, 2021 and $ 231,750,000 at December 31, 2020.

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

June 30, 2021

September 30, 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 June 30, 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.

Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at September 30, 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 June 30, 2021 and 2020 were $ 0 and $ 2,370,000 , respectively.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended September 30, 2021 and 2020 were $ 0 and $ 8,140,000 , respectively.

Gross gains realized on these sales were $ 0 and $ 142,000 , respectively.

There were no gross losses realized on these sales for the three months ended June 30, 2021 or 2020.

There were no impairment losses realized on Debt Securities Available-For-Sale during the three months ended June 30, 2021 or 2020.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the six months ended June 30, 2021 and 2020 were $ 0 and $ 13,552,000 , respectively.

Gross losses realized on these sales were $ 0 and $ 81,000 , respectively.

There were no impairment losses realized on Debt Securities Available-For-Sale during the three months ended September 30, 2021 or 2020.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the nine months ended September 30, 2021 and 2020 were $ 0 and $ 21,692,000 , respectively.

Gross gains realized on these sales were $ 0 and $ 414,000 , respectively.

Gross losses realized on these sales were $ 0 and $ 186,000 , respectively.

There were no impairment losses realized on Debt Securities Available-For-Sale during the six months ended June 30, 2021 or 2020.

At June 30, 2021 and December 31, 2020, the Company had $ 1,789,000 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 six months ended June 30, 2021 and 2020:

There were no impairment losses realized on Debt Securities Available-For-Sale during the nine months ended September 30, 2021 or 2020.

At September 30, 2021 and December 31, 2020, the Company had $ 1,805,000 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 nine months ended September 30, 2021 and 2020:

(Dollars in thousands)

Six months ended

June 30, 2021

June 30, 2020

Nine months ended

September 30, 2021

September 30, 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 gains recognized during the period on equity securities sold during the period

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 six months ended June 30, 2021 or 2020.

There were no proceeds from sales of investments in Held-to-Maturity debt securities during the nine months ended September 30, 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 June 30, 2021 or December 31, 2020.

Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at September 30, 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 June 30, 2021 and December 31, 2020:

June 30, 2021

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, 2021 and December 31, 2020:

September 30, 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.

13 unchanged sentences

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 26 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 June 30, 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 June 30, 2021.

Management does not believe any of their 47 debt securities with a

less than one year unrealized loss position, or any of their 16 debt securities with a one year or greater unrealized loss position as of September 30, 2021, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Company expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of September 30, 2021.

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

17 unchanged sentences

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

SBA Paycheck Protection Program (“PPP”) loans that have been issued by the Company as a result of the enactment of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) in response to the economic impact of the COVID-19 pandemic are included in the Company’s Commercial and Industrial portfolio and are underwritten according to all terms and conditions pursuant to the PPP as administered by the SBA under the CARES Act.

See the Coronavirus Pandemic Impact on the Loan Portfolio section on page 15 for more information regarding the Company’s underwriting of these loans.

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

3 unchanged sentences

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.

The loans are sponsored by one of the various government agencies including the SBA, United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”).

Government Guaranteed Loans ("GGLs") carry no credit risk due to

an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S.

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

As of June 30, 2021, the Company's balance of GGLs amounted to $ 4,949,000 , compared to $ 5,128,000 at December 31, 2020.

As of September 30, 2021, the Company's balance of GGLs amounted to $ 4,897,000 , 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.

20 unchanged sentences

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

These loans are sold without recourse.

Loans held for sale amounted to $ 16,373,000 and $ 17,300,000 at June 30, 2021 and December 31, 2020, respectively.

These loans are sold without

Loans held for sale amounted to $ 18,220,000 and $ 17,300,000 at September 30, 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.

4 unchanged sentences

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.

As a result of the economic impact of the COVID-19 coronavirus pandemic, the 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 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.

4 unchanged sentences

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

As of June 30, 2021, the Company held 433 PPP loans in its Commercial and Industrial portfolio which carried a balance of $ 21,338,000 , of which 135 loans carrying a balance of $ 5,216,000 were granted during the first round of PPP issuance and 298 loans carrying a balance of $ 16,122,000 were granted during the second round of PPP issuance.

As of September 30, 2021, the Company held 240 PPP loans in its Commercial and Industrial portfolio which carried a balance of $ 12,648,000 , of which 2 loans carrying an aggregate balance of $ 165,000 were granted during the first round of PPP issuance and 238 loans carrying an aggregate balance of $ 12,483,000 were granted during the second round of PPP issuance.

At December 31, 2020, the Company held 441 PPP loans in its Commercial and Industrial portfolio which carried a balance of $ 22,976,000 , all of which were granted during the first round of PPP issuance.

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

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

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 September 30, 2021 or the termination date of the national emergency related to the COVID-19 pandemic as declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019.

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

Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there were 8 loan modifications still actively on deferral carrying an aggregate balance of $ 10,568,000 as of June 30, 2021, compared to December 31, 2020 when there were 44 loan modifications still actively on deferral carrying an aggregate balance of $ 16,541,000 .

Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there was 1 loan modification still actively on deferral carrying a balance of $ 9,423,000 as of September 30, 2021, compared to December 31, 2020 when there were 44 loan modifications still actively on deferral carrying an aggregate balance of $ 16,541,000 .

See page 25 for additional information regarding the Section 4013 CARES Act modifications.

5 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 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.

24 unchanged sentences

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

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

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

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

11 unchanged sentences

Qualitative factors remained unchanged during the first quarter of 2021.

During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Company’s market areas have shown marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to increasing market values in the real estate sector.

During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Company’s market areas demonstrated marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to increasing market values in the real estate sector.

Qualitative factors remained unchanged during the third quarter of 2021.

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

6 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 June 30, 2021 and December 31, 2020, the amount of the reserve for unfunded lending commitments was $ 116,000 and $ 129,000 , respectively.

September 30, 2021 and December 31, 2020, the amount of the reserve for unfunded lending commitments was $ 92,000 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.

50 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 June 30, 2021 and December 31, 2020:

The following table presents the classes of the loan portfolio summarized by risk rating as of September 30, 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 $ 25,629,000 and $ 1,758,000 at June 30, 2021 and $ 9,337,000 and $ 1,843,000 at December 31, 2020.

Commercial and Industrial loans also included $ 4,949,000 and $ 5,128,000 of Government Guaranteed Loans and $ 21,338,000 and $ 22,976,000 of Paycheck Protection Program loans as of June 30, 2021 and December 31, 2020, respectively.

Loans held for sale amounted to $ 16,373,000 at June 30, 2021 and $ 17,300,000 at December 31, 2020.

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $ 25,483,000 and $ 1,715,000 at September 30, 2021 and $ 9,337,000 and $ 1,843,000 at December 31, 2020.

Commercial and Industrial loans also included $ 4,897,000 and $ 5,128,000 of Government Guaranteed Loans and $ 12,648,000 and $ 22,976,000 of Paycheck Protection Program loans as of September 30, 2021 and December 31, 2020, respectively.

Loans held for sale amounted to $ 18,220,000 at September 30, 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 months ended June 30, 2021:

As of and for the three months ended September 30, 2021:

Allowance for Loan Losses:

4 unchanged sentences

and Industrial

As of and for the six months ended June 30, 2021:

As of and for the nine months ended September 30, 2021:

Allowance for Loan Losses:

14 unchanged sentences

and Industrial

As of and for the three months ended June 30, 2020:

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

Allowance for Loan Losses:

4 unchanged sentences

and Industrial

As of and for the six months ended June 30, 2020:

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

Allowance for Loan Losses:

29 unchanged sentences

evaluated for impairment

The outstanding recorded investment of TDRs as of June 30, 2021 and December 31, 2020 was $ 9,515,000 and $ 9,563,000 , respectively.

The decrease in TDRs at June 30, 2021 as compared to December 31, 2020 is mainly attributable to principal payments made on existing TDRs during the six months ended June 30, 2021.

There were no unfunded commitments on TDRs at June 30, 2021 and December 31, 2020.

During the six months ended June 30, 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 June 30, 2021.

During the three months ended June 30, 2020, three loans with a combined post modification balance of $ 159,000 were modified as TDRs.

No loans were modified as TDRs during the first three months of 2020.

The loan modifications for the six months

ended June 30, 2021 consisted of two term modifications and one payment modification, compared to the loan modifications for the six months ended June 30, 2020 which consisted of three payment modifications.

The outstanding recorded investment of TDRs as of September 30, 2021 and December 31, 2020 was $ 8,414,000 and $ 9,563,000 , respectively.

The decrease in TDRs at September 30, 2021 as compared to December 31, 2020 is mainly attributable to the payoff of a Commercial Real Estate TDR to a real estate holding company which was completed during the third quarter of 2021 in the amount of $ 1,010,000 , as well as regular principal payments made on existing TDRs during the nine months ended September 30, 2021.

There were no unfunded commitments on TDRs at September 30, 2021 and December 31, 2020.

During the three months ended September 30, 2021, one loan with a post modification balance of $ 59,000 was modified as a TDR, compared to the three months ended September 30, 2020 when four loans with a combined post modification balance of $ 366,000 were modified as TDRs.

During the nine months ended September 30, 2021, four

loans with a combined post modification balance of $ 360,000 were modified as TDRs, compared to the nine months ended September 30, 2020 when seven loans with a combined post modification balance of $ 525,000 were modified as TDRs.

The loan modifications for the nine months ended September 30, 2021 consisted of two term modifications and two payment modifications, compared to the loan modifications for the nine months ended September 30, 2020 which consisted of one term modification and six payment modifications.

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

Three Commercial Real Estate loans totaling $ 300,000 that were modified as a TDRs within the twelve months preceding June 30, 2021 experienced a payment defaults during the three months ended June 30, 2021.

No loans that were modified as TDRs during the twelve months preceding June 20, 2021 experienced payment defaults during the first three months of 2021.

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

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

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

No loans were modified as TDRs during the three months ended June 30, 2021.

At September 30, 2021, eight Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 541,000 , three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 724,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 15,000 were not in compliance with the terms of their restructure, compared to September 30, 2020 when 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.

Three Commercial Real Estate loans totaling $ 291,000 that were modified as a TDRs within the twelve months preceding September 30, 2021 experienced payment defaults during the nine months ended September 30, 2021.

No loans that were modified as TDRs during the twelve months preceding September 30, 2021 experienced payment defaults during the three months ended September 30, 2021.

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, 2020 experienced payment defaults during the three months ended September 30, 2020.

The following table presents information regarding the loan modifications categorized as TDRs during the three and nine months ended September 30, 2021 and 2020.

(Dollars in thousands)

For the Six Months Ended June 30, 2021

For the Three Months Ended September 30, 2021

Pre-Modification

2 unchanged sentences

(Dollars in thousands)

For the Three Months Ended June 30, 2020

For the Nine Months Ended September 30, 2021

Pre-Modification

2 unchanged sentences

(Dollars in thousands)

For the Six Months Ended June 30, 2020

For the Three Months Ended September 30, 2020

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 six months ended June 30, 2021 and the three and six months ended June 30, 2020 with the total number of each type of modification performed.

No loans were modified as TDRs during the three months ended June 30, 2021.

For the Six Months Ended June 30, 2021

(Dollars in thousands)

For the Nine Months Ended September 30, 2020

Pre-Modification

Post-Modification

Commercial and Industrial

Commercial Real Estate

For the Three Months Ended June 30, 2020

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, 2021 and 2020 with the total number of each type of modification performed.

For the Three Months Ended September 30, 2021

Commercial Real Estate

For the Six Months Ended June 30, 2020

For the Nine Months Ended September 30, 2021

Commercial Real Estate

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

Commercial Real Estate

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

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

The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the six months ended June 30, 2021.

The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the nine months ended September 30, 2021.

(Dollars in thousands)

9 unchanged sentences

Balance at June 30, 2021

Percent of Total Section 4013 CARES Act Modifications as of June 30, 2021

Percent of Total Section 4013 CARES Act Modifications to Total Loans as of June 30, 2021

Subsequent modifications granted during the three months ended June 30, 2021 for active deferred loans outstanding as of June 30, 2021

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

Additional modifications granted for the three months ended September 30, 2021

Section 4013 CARES Act modifications returned to normal payment status during the three months ended September 30, 2021 (a)

Principal payments net of draws on active deferred loans for the three months ended Setpember 30, 2021 (b)

Balance at September 30, 2021

Percent of Total Section 4013 CARES Act Modifications as of September 30, 2021

Percent of Total Section 4013 CARES Act Modifications to Total Loans as of September 30, 2021

Subsequent modifications granted during the three months ended September 30, 2021 for active deferred loans outstanding as of September 30, 2021

( a) Includes payments made prior to return to normal payment status during the three month period

(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 June 30, 2021 and December 31, 2020.

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

(Dollars in thousands)

June 30, 2021

September 30, 2021

December 31, 2020

11 unchanged sentences

Residential Real Estate

At June 30, 2021 and December 31, 2020, $ 9,515,000 and $ 9,563,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at both June 30, 2021 and December 31, 2020.

At September 30, 2021 and December 31, 2020, $ 8,414,000 and $ 9,563,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at both September 30, 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 six months ended June 30, 2021 and 2020.

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, 2021 and 2020.

(Dollars in thousands)

1 unchanged sentence

For the Three Months Ended

June 30, 2021

June 30, 2020

September 30, 2021

September 30, 2020

With no related allowance recorded:

10 unchanged sentences

Residential Real Estate

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

Of the $ 84,000 and $ 97,000 in interest income recognized on impaired loans for the three months ended September 30, 2021 and 2020 respectively, $ 0 in interest income was recognized with respect to non-accrual loans for each respective period.

(Dollars in thousands)

For the Six Months Ended

June 30, 2021

June 30, 2020

For the Nine Months Ended

September 30, 2021

September 30, 2020

With no related allowance recorded:

10 unchanged sentences

Residential Real Estate

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

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

Of the $ 278,000 and $ 262,000 in interest income recognized on impaired loans for the nine months ended September 30, 2021 and 2020 respectively, $ 3,000 and $ 5,000 in interest income was recognized with respect to non-accrual loans for each respective period.

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

(Dollars in thousands)

September 30,

Commercial and Industrial

5 unchanged sentences

Total non-performing assets

There were no foreclosed assets held for resale at June 30, 2021.

There were no foreclosed assets held for resale at September 30, 2021.

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

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

Consumer mortgage loans secured by residential real estate for which the Company has entered into formal foreclosure proceedings but for which physical possession has yet to be obtained amounted to $ 41,000 at both June 30, 2021 and December 31, 2020.

These balances were not included in foreclosed assets held for resale at June 30, 2021 or December 31, 2020.

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

These balances were not included in foreclosed assets held for resale at September 30, 2021 or December 31, 2020.

The following tables present the classes of the loan portfolio, including non-accrual loans and TDRs, summarized by past-due status at September 30, 2021 and December 31, 2020:

(Dollars in thousands)

June 30, 2021:

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

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

NOTE 5 — DEPOSITS

Major classifications of deposits at June 30, 2021 and December 31, 2020 consisted of:

Major classifications of deposits at September 30, 2021 and December 31, 2020 consisted of:

(Dollars in thousands)

September 30,

Non-interest bearing demand

3 unchanged sentences

Total deposits

Total deposits increased $ 125,859,000 to $ 1,063,347,000 as of June 30, 2021 due to increases in non-interest bearing, interest bearing demand and savings deposits.

The increase in deposits was the result of government stimulus funds, PPP loan proceeds, a $ 75,356,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during the six months ended June 30, 2021.

Total deposits increased $ 208,016,000 to $ 1,145,504,000 as of September 30, 2021 due to increases in non-interest bearing, interest bearing demand and savings deposits.

The increase in deposits was the result of government stimulus funds, PPP loan proceeds, a $ 128,271,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during the nine months ended September 30, 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 June 30, 2021 and December 31, 2020 are as follows:

Short-term borrowings and weighted–average interest rates at September 30, 2021 and December 31, 2020 are as follows:

(Dollars in thousands)

June 30, 2021

September 30, 2021

December 31, 2020

13 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 June 30, 2021 and December 31, 2020.

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

(Dollars in thousands)

of Liabilities

June 30, 2021

September 30, 2021

Repurchase agreements (a)

1 unchanged sentence

Repurchase agreements (a)

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

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

(a) As of September 30, 2021 and December 31, 2020, the fair value of securities pledged in connection with repurchase agreements was $ 34,552,000 and $ 23,695,000 , respectively.

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

(Dollars in thousands)

Remaining Contractual Maturity of the Agreements

June 30, 2021:

September 30, 2021:

Repurchase agreements and repurchase-to-maturity transactions:

3 unchanged sentences

Irrevocable standby letters of credit may be issued to a customer/beneficiary by the FHLB on the Company’s behalf in order to secure public/municipal unit deposits, provide credit enhancement to certain transaction types, or to support payment obligations to third parties.

These irrevocable standby letters of credit are supported by an irrevocable and independent guarantee by the FHLB for the Company’s pledging obligation to secure public/municipal unit deposits which eliminates the need to for the Company to pledge collateral in the amount necessary to secure these funds.

These irrevocable standby letters of credit are supported by an irrevocable and independent guarantee by the FHLB for the Company’s pledging obligation to secure public/municipal unit deposits which eliminates the need for the Company to pledge collateral in the amount necessary to secure these funds.

The Company began utilizing this service offered by the FHLB during the second quarter of 2021.

FHLB has issued an active irrevocable standby letter of credit for $ 65,000,000 which could be drawn on through FHLB’s close of business on June 30, 2021 and will be renewed as necessary in an amount appropriate to secure specific public/municipal unit deposits.

FHLB has issued active irrevocable standby letters of credit for $ 51,400,000 which could be drawn on through FHLB’s close of business on September 30, 2021 and will be renewed as necessary in an amount appropriate to secure specific public/municipal unit deposits.

Under terms of a blanket agreement, collateral for the FHLB loans and letters of credit consists of certain qualifying assets of the Corporation’s banking subsidiary.

Principal qualifying assets are certain real estate mortgages and investment securities.

As of June 30, 2021, loans of $ 577,576,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 413,373,000 .

As of June 30, 2021, no investment securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

As of September 30, 2021, loans of $ 582,085,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 416,371,000 .

As of September 30, 2021, no investment securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

NOTE 7 — SUBORDINATED DEBT

3 unchanged sentences

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.

Interest is payable semi-annually in arrears on June 30 and December 31 of each year, which began 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.

5 unchanged sentences

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

At June 30, 2021, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,074,000 and $ 1,537,000 , respectively.

At September 30, 2021, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,050,000 and $ 1,518,000 , 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 six months ended June 30, 2021 and 2020 of $ 89,000 and $ 221,000 , respectively.

Cash payments totaled $ 77,000 for the six months ended June 30, 2021 and 2020.

The Bank recognized total operating lease costs for the nine months ended September 30, 2021 and 2020 of $ 133,000 and $ 332,000 , respectively.

Cash payments totaled $ 116,000 for the nine months ended September 30, 2021 and 2020.

The Bank currently has one finance lease for equipment.

At June 30, 2021, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $ 34,000 and $ 21,000 , respectively.

At September 30, 2021, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $ 34,000 and $ 19,000 , respectively.

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

4 unchanged sentences

therefore, our incremental borrowing rate was used.

Total finance lease costs that were recognized by the Bank for the six months ended June 30, 2021 were immaterial.

Cash payments as of June 30, 2021 totaled $ 5,000 .

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

Total finance lease costs that were recognized by the Bank for the nine months ended September 30, 2021 were immaterial.

Cash payments as of September 30, 2021 totaled $ 7,000 .

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

September 30,

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 June 30, 2021 and December 31, 2020 were as follows:

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

(Dollars in thousands)

June 30, 2021

September 30, 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 June 30, 2021, the Company had $ 632,790,000 in loans secured by real estate, which represented 85.3 % of total loans.

At September 30, 2021, the Company had $ 656,748,000 in loans secured by real estate, which represented 86.8 % 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 June 30, 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.

September 30, 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.

25 unchanged sentences

Financial Assets Measured at Fair Value on a Recurring Basis

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

At September 30, 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)

June 30, 2021

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

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

(Dollars in thousands)

Assets at June 30, 2021

Assets at September 30, 2021

Impaired loans:

14 unchanged sentences

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

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

At September 30, 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 June 30, 2021

Assets at September 30, 2021

Foreclosed assets held for resale:

12 unchanged sentences

Quantitative Information about Level 3 Fair Value Measurements

June 30, 2021

September 30, 2021

Valuation Technique

40 unchanged sentences

(Dollars in thousands)

Fair Value Measurements at June 30, 2021

Fair Value Measurements at September 30, 2021

FINANCIAL ASSETS:

45 unchanged sentences

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

As of June 30, 2021 and December 31, 2020, the fair value of trust

assets under management was $ 106,527,000 and $ 107,336,000 , respectively.

As of September 30, 2021 and December 31, 2020, the fair value of

trust assets under management was $ 105,733,000 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.

9 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 June 30, 2021 and 2020, there were no potential common shares outstanding.

At September 30, 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

1 unchanged sentence

(In thousands, except earnings per share)

Six Months Ended

Nine Months Ended

September 30,

Weighted-average common shares outstanding

4 unchanged sentences

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

Goodwill totaled $ 19,133,000 at June 30, 2021 and December 31, 2020.

Goodwill totaled $ 19,133,000 at September 30, 2021 and December 31, 2020.

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

4 unchanged sentences

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

Management evaluated the need for an interim goodwill impairment analysis and determined that there were

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

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 September 30, 2021.

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

8 unchanged sentences

RESULTS OF OPERATIONS

Quarter ended June 30, 2021 compared to quarter ended June 30, 2020

First Keystone Corporation realized earnings for the second quarter of 2021 of $3,605,000, an increase of $224,000, or 6.6% from the second quarter of 2020.

The increase in net income for the three months ended June 30, 2021 was primarily due to increases in net interest income, ATM and debit card fees, and service charges and fees.

On a per share basis, for the three months ended June 30, 2021, net income was $0.61 versus $0.58 for the same three month period of 2020.

Cash dividends amounted to $0.27 per share for the three months ended June 30, 2021 and 2020.

Quarter ended September 30, 2021 compared to quarter ended September 30, 2020

First Keystone Corporation realized earnings for the third quarter of 2021 of $4,023,000, an increase of $886,000, or 28.2% from the third quarter of 2020.

The increase in net income for the three months ended September 30, 2021 was primarily due to increases in net interest income, ATM and debit card fees, and service charges and fees, offset by a decrease in salaries and employee benefits.

On a per share basis, for the three months ended September 30, 2021, net income was $0.68 versus $0.54 for the same three month period of 2020.

Cash dividends amounted to $0.28 and $0.27 per share for the three months ended September 30, 2021 and 2020, respectively.

NET INTEREST INCOME

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

In the three months ended June 30, 2021, interest income amounted to $10,259,000, an increase of $628,000 or 6.5% from the three months ended June 30, 2020, while interest expense amounted to $1,288,000 in the three months ended June 30, 2021, a decrease of $225,000 or 14.9% from the three months ended June 30, 2020.

In the three months ended September 30, 2021, interest income amounted to $10,716,000, an increase of $864,000 or 8.8% from the three months ended September 30, 2020, while interest expense amounted to $1,283,000 in the three months ended September 30, 2021, an increase of $52,000 or 4.2% from the three months ended September 30, 2020.

As a result, net interest income increased $812,000 or 9.4% to $9,433,000 from $8,621,000 for the same period in 2020.

The Company’s net interest margin for the three months ended June 30, 2021 was 3.23% compared to 3.48% for same period in 2020.

The Company’s net interest margin for the three months ended September 30, 2021 was 3.18% compared to 3.59% for same period in 2020.

The decrease in net interest margin was primarily a result of decreases in yields earned on loans and securities.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the three months ended June 30, 2021 and 2020 was $135,000 and $194,000, respectively.

The provision for loan losses for the three months ended September 30, 2021 and 2020 was $185,000 and $294,000, 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 June 30, 2021 is also reflective of management’s assessment of the credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic.

Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $58,000 and

$39,000 for the the three months ended June 30, 2021 and 2020, respectively.

The provision for loan losses for the three months ended September 30, 2021 is also reflective of management’s assessment of the continued 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 $49,000 for the the three months ended September 30, 2021 and 2020, respectively.

See Allowance for Loan Losses on page 46 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $1,865,000 for the three months ended June 30, 2021, as compared to $1,621,000 for the same period in 2020, an increase of $244,000, or 15.1%.

The increase was due to increased service charges and fee income, increased ATM fees and debit card income and an increase in gains on the sales of mortgage loans.

Net securities gains decreased $136,000 to $28,000 for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

This decrease was mainly due to the Company taking $96,000 in gains on sold debt securities in the second quarter of 2020 as compared to $0 in the second quarter of 2021.

Trust department income increased $31,000 or 13.2% to $265,000 for the three months ended June 30, 2021 as compared to the same period in 2020 due to increased income on IRA accounts.

Total non-interest income was $1,697,000 for the three months ended September 30, 2021, as compared to $1,515,000 for the same period in 2020, an increase of $182,000, or 12.0%.

The increase was due to increased service charges and fee income, increased ATM fees and debit card income and an increase in gains on held equity securities.

Net securities gains increased $31,000 to $22,000 for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

This increase was due to the Company taking $18,000 in gains on held equity securities in the third quarter of 2021 as compared to taking $70,000 in losses on held equity securities and $61,000 in net gains on the sale of debt securities in the third quarter of 2020.

Trust department income increased $21,000 or 9.5% to $243,000 for the three months ended September 30, 2021 as compared to the same period in 2020 due to increased income on IRA accounts.

Service charges and fee income increased $87,000 or 21.3%.

The increase was due to an increase in prepayment penalties earned on commercial loan payoffs, an increase in service charges on DDA accounts and an increase in fees on sold mortgages.

ATM fees and debit card income increased $104,000 or 22.4% to $568,000 for the three months ended June 30, 2021 due to increased debit card interchange fees as the result of increased transaction volume in the second quarter of 2021.

Gains on sales of mortgage loans increased $104,000 or 51.0% to $308,000 due to a higher volume of sold loans in the second quarter of 2021 as compared to the second quarter of 2020.

The increase was mainly due to an increase in overdraft fees as compared to the same period in 2020.

ATM fees and debit card income increased $54,000 or 10.8% to $555,000 for the three months ended September 30, 2021 due to increased debit card interchange fees as the result of increased transaction volume in the second quarter of 2021.

Gains on sales of mortgage loans decreased $35,000 or 20.1% to $139,000 due to lower average gains on individual sold loans in the third quarter of 2021 as compared to the third quarter of 2020.

NON-INTEREST EXPENSE

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

Total non-interest expense was $6,267,000 for the three months ended September 30, 2021, as compared to $6,256,000 for the three months ended September 30, 2020.

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

Salaries and benefits amounted to $3,461,000 or 52.9% of total non-interest expense for the three months ended June 30, 2021, as compared to $2,959,000 or 52.3% for the three months ended June 30, 2020.

The increase was due to normal merit increases, new position hires and the filling of vacant positions.

Net occupancy, furniture and equipment, and computer expense amounted to $940,000 for the three months ended June 30, 2021, an increase of $37,000 or 4.1% which was due to the implementation of several new software programs.

Professional services increased $50,000 or 22.4% to $273,000 as of June 30, 2021.

The increase was due to normal increases in audit and tax servives expenses along with an increase in consulting expense due to broker fees resulting from the Company’s subordinated debt issuance.

Pennsylvania shares tax expense amounted to $313,000 for the three months ended June 30, 2021, an increase of $88,000 or 39.1% as compared to the three months ended June 30, 2020.

Salaries and benefits amounted to $3,303,000 or 52.7% of total non-interest expense for the three months ended September 30, 2021, as compared to $3,554,000 or 56.8% for the three months ended September 30, 2020.

The decrease was due to lower expense associated with health insurance.

Net occupancy, furniture and equipment, and computer expense amounted to $913,000 for the three months ended September 30, 2021, an increase of $6,000 or 0.7% which was due to the implementation of several new software programs offset by a decrease in rent expense.

Professional services increased $24,000 or 10.9% to $244,000 as of September 30, 2021.

The increase was mainly the result of an increase in consulting expense due to broker fees resulting from the Company’s subordinated debt issuance.

Pennsylvania shares tax expense amounted to $309,000 for the three months ended September 30, 2021, an increase of $78,000 or 33.8% as compared to the three months ended September 30, 2020.

The increase was the result of increases in total equity.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased $99,000 for the three months ended June 30, 2021.

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

Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased $30,000 for the three months ended September 30, 2021.

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

ATM and debit card fees expense amounted to $283,000 for the three months ended June 30, 2021, an increase of $69,000 or 32.2% as compared to the three months ended June 30, 2020.

ATM and debit card fees expense amounted to $281,000 for the three months ended September 30, 2021, an increase of $28,000 or 11.1% as compared to the three months ended September 30, 2020.

The increase was due to increased electronic funds transfer fees as the result of increased customer transaction volume.

Data processing expenses amounted to $323,000 for the six months ended June 30, 2021 as compared to $307,000 for the same period of 2020, an increase of $16,000 or 5.2%.

Foreclosed assets held for resale expense decreased $5,000 for the three months ended June 30, 2021.

As of June 30, 2021 the Company did not own any foreclosed properties.

Advertising expense increased $37,000 or 51.4%

during the three months ended June 30, 2021.

This increase was mainly due to an increase in civic and digital and social media advertising as compared to the same period in 2020.

Data processing expenses amounted to $295,000 for the three months ended September 30, 2020 as compared to $283,000 for the same period of 2020, an increase of $12,000 or 4.2%.

Foreclosed assets held for resale expense decreased $30,000 for the three months ended September 30, 2021.

As of September 30, 2021 the Company did not own any foreclosed properties.

Advertising expense increased $19,000 or 23.2% during the three months ended September 30, 2021.

This increase was mainly due to an increase in digital and

social media and civic advertising as compared to the same period in 2020.

In 2020, civic advertising was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor were canceled.

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

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

Income tax expense amounted to $549,000 for the three months ended June 30, 2021, as compared to $509,000 for the three months ended June 30, 2020, an increase of $40,000.

The effective total income tax rate was 13.2% for the three months ended June 30, 2021 as compared to 13.1% for the three months ended June 30, 2020.

Other non-interest expense amounted to $718,000 for the three months ended September 30, 2021, an increase of $95,000 or 15.2% as compared to the three months ended September 30, 2020.

This increase was mainly due to an increase in the provision for unfunded commitments due to an increase in commercial real estate commitments in the third quarter of 2021 as compared to the same period in 2020.

Income tax expense amounted to $655,000 for the three months ended September 30, 2021, as compared to $449,000 for the three months ended September 30, 2020, an increase of $206,000.

The effective total income tax rate was 14.0% for the three months ended September 30, 2021 as compared to 12.5% for the three months ended September 30, 2020.

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

The Company recognized $101,000 of tax credits from low-income housing partnerships in the three months ended June 30, 2021 and 2020.

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

First Keystone Corporation realized earnings for the six months ended June 30, 2021 of $7,483,000, an increase of $2,049,000, or 37.7% from the same period in 2020.

The increase in net income for the six months ended June 30, 2021 was primarily due to an increase in net interest income, net securities gains, and gains on sales of mortgage loans.

On a per share basis, net income was $1.27 for the six months ended June 30, 2021 versus $0.93 for the same period in 2020.

Cash dividends amounted to $0.55 and $0.54 per share for the six months ended June 30, 2021 and 2020, respectively.

The Company recognized $101,000 of tax credits from low-income housing partnerships in the three months ended September 30, 2021.

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020

First Keystone Corporation realized earnings for the nine months ended September 30, 2021 of $11,506,000, an increase of $2,935,000, or 34.2% from the same period in 2020.

The increase in net income for the nine months ended September 30, 2021 was primarily due to an increase in net interest income, net securities gains, and gains on sales of mortgage loans.

On a per share basis, net income was $1.95 for the nine months ended September 30, 2021 versus $1.47 for the same period in 2020.

Cash dividends amounted to $0.81 and $0.83 per share for the nine months ended September 30, 2021 and 2020, respectively.

NET INTEREST INCOME

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

For the six months ended June 30, 2021, interest income amounted to $20,534,000, an increase of $1,135,000 or 5.9% from the six months ended June 30, 2020, while interest expense amounted to $2,593,000 in the six months ended June 30, 2021, a decrease of $1,312,000 or 33.6% from the six months ended June 30, 2020.

For the nine months ended September 30, 2021, interest income amounted to $31,250,000, an increase of $1,999,000 or 6.8% from the nine months ended September 30, 2020, while interest expense amounted to $3,876,000 in the nine months ended September 30, 2021, a decrease of $1,260,000 or 24.5% from the nine months ended September 30, 2020.

As a result, net interest income increased $3,259,000 or 13.5% to $27,374,000 from $24,115,000 for the same period in 2020.

The Company’s net interest margin for the six months ended June 30, 2021 was 3.30% compared to 3.39% for same period in 2020.

The Company’s net interest margin for the nine months ended September 30, 2021 was 3.25% compared to 3.45% for same period in 2020.

The decrease in net interest margin was a result of decreases in yields earned on loans and securities.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the six months ended June 30, 2021 and 2020 was $270,000 and $388,000, respectively.

The provision for loan losses for the nine months ended September 30, 2021 and 2020 was $455,000 and $682,000, respectively.

The provision for loan losses for the six months ended June 30, 2021 is also reflective of management’s assessment of the increased credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic.

Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $79,000 and $59,000 for the six months ended June 30, 2021 and 2020, respectively.

The provision for loan losses for the nine months ended September 30, 2021 is also reflective of management’s assessment of the continued 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 $100,000 and $108,000 for the nine months ended September 30, 2021 and 2020, respectively.

See Allowance for Loan Losses on page 46 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $3,740,000 for the six months ended June 30, 2021, as compared to $2,604,000 for the same period in 2020, an increase of $1,136,000, or 43.6%.

The increase was due to an increase in net gains on

securities, an increase in gains on sold loans and an increase in ATM fees and debit card income during the six months ended June 30, 2021.

ATM fees and debit card income increased $221,000 or 25.6% to $1,084,000 for the six months ended June 30, 2021 due to increased debit card interchange fees as the result of increased transaction volume in 2021.

Service charges and fee income increased $15,000 for the six months ended June 30, 2021.

Total non-interest income was $5,437,000 for the nine months ended September 30, 2021, as compared to $4,119,000 for the same period in 2020, an increase of $1,318,000, or 32.0%.

The increase was due to an increase in net gains on securities, an increase in gains on sold loans and an increase in ATM fees and debit card income during the nine months ended September 30, 2021.

ATM fees and debit card income increased $275,000 or 20.2% to $1,639,000 for the nine months ended September 30, 2021 due to increased debit card interchange fees as the result of increased transaction volume in 2021.

Service charges and fee income increased $102,000 for the nine months ended September 30, 2021.

The increase was due to increased prepayment penalties earned on commercial loan payoffs and an increase in service charges and overdraft fees on DDA accounts.

In the prior year, there were lower fees earned on deposit accounts as overdraft fees and several other deposit account service charges were waived due to the COVID-19 pandemic.

Gains on sales of mortgage loans increased $330,000 or 70.1% due to a higher volume of sold loans in 2021 as compared to 2020.

Trust department income increased $63,000 or 13.8% to $518,000 for the six months ended June 30, 2021 as compared to the same period in 2020.

The increase was the result of higher income earned from estate fees and IRA accounts in the six months ended June 30, 2021.

Net securities gains increased $446,000 or 147.2% to $143,000 for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

The increase was mainly due to the Company recognizing $470,000 in net losses on held equity securities in the six months ended June 30, 2020 as compared to realizing $143,000 in net gains on held equity securities in the same period in 2021.

Trust department income increased $84,000 or 12.4% to $761,000 for the nine months ended September 30, 2021 as compared to the same period in 2020.

The increase was the result of higher income earned from estate fees and IRA accounts during the nine months ended September 30, 2021.

Net securities gains increased $477,000 or 152.9% to $165,000 for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

The increase was due to the Company recognizing $540,000 in net losses on held equity securities offset by $228,000 in net gains on sold debt securities during the nine months ended September 30, 2020 as compared to realizing $161,000 in net gains on held equity securities in the same period in 2021.

NON-INTEREST EXPENSE

Total non-interest expense was $12,744,000 for the six months ended June 30, 2021, as compared to $11,570,000 for the six months ended June 30, 2020.

Total non-interest expense was $19,011,000 for the nine months ended September 30, 2021, as compared to $17,826,000 for the nine months ended September 30, 2020.

Non-interest expense increased $1,185,000 or 6.6%.

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

Salaries and benefits amounted to $6,761,000 or 53.1% of total non-interest expense for the six months ended June 30, 2021, as compared to $6,178,000 or 53.4% for the six months ended June 30, 2020.

Salaries and benefits amounted to $10,064,000 or 52.9% of total non-interest expense for the nine months ended September 30, 2021, as compared to $9,732,000 or 54.6% for the nine months ended September 30, 2020.

The increase was due to normal merit increases, new position hires, the filling of vacant positions and an increase in profit sharing expense.

Net occupancy, furniture and equipment, and computer expense amounted to $1,845,000 for the six months ended June 30, 2021, an increase of $30,000 or 1.7%.

The increase is the result of the implementation of several new software programs.

Professional services increased $67,000 or 14.4% to $532,000 for the six months ended June 30, 2021.

This increase was due to normal increases in audit and tax services expenses along with an increase in consulting expense due to goodwill impairment testing and broker fees resulting from the Company’s subordinated debt issuance.

Pennsylvania shares tax expense amounted to $626,000 for the six months ended June 30, 2021, an increase of $177,000 or 39.4% as compared to the six months ended June 30, 2020.

The increase was the result of increases in total equity.

FDIC insurance expense increased $186,000 or 885.7% for the six months ended June 30, 2021.

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

Net occupancy, furniture and equipment, and computer expense amounted to $2,758,000 for the nine months ended September 30, 2021, an increase of $36,000 or 1.3%.

The increase is the result of the implementation of several new software programs offset by a decrease in rent expense.

Professional services increased $91,000 or 13.3% to $776,000 for the nine months ended September 30, 2021.

This increase was mainly due to an increase in consulting expense due to goodwill impairment testing and broker fees resulting from the Company’s subordinated debt issuance.

Pennsylvania shares tax expense amounted to $935,000 for the nine months ended September 30, 2021, an increase of $255,000 or 37.5% as compared to the nine months ended September 30, 2020.

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

FDIC insurance expense increased $216,000 or 229.8% for the nine months ended September 30, 2021.

This increase was mainly due to small bank assessment credits received from the FDIC effectively reducing the expense in 2020, coupled with growth in total assets in 2021.

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 $483,000 for the six months ended June 30, 2021, an increase of $60,000 or 14.2% as compared to the six months ended June 30, 2020.

ATM and debit card fees expense amounted to $764,000 for the nine months ended September 30, 2021, an increase of $88,000 or 13.0% as compared to the nine months ended September 30, 2020.

The increase was due to increased electronic funds transfer fees as the result of increased customer transaction volume.

Data processing expenses amounted to $617,000 for the six months ended June 30, 2021, an increase of $16,000 or 2.7% as compared to the six months ended June 30, 2020.

Foreclosed assets held for resale expense decreased $11,000 for the six months ended June 30, 2021.

As of June 30, 2021 the Company did not own any foreclosed properties.

Advertising expense increased $18,000 or 11.0% during the six months ended June 30, 2021.

The increase was mainly due to an increase in digital and social media, radio, billboard and television advertising as compared to 2020.

Data processing expenses amounted to $912,000 for the nine months ended September 30, 2021, an increase of $28,000 or 3.2% as compared to the nine months ended September 30, 2020.

Foreclosed assets held for resale expense decreased $41,000 for the nine months ended September 30, 2021.

As of September 30, 2021, the Company did not own any foreclosed properties.

Advertising expense increased $37,000 or 15.1% during the nine months ended September 30, 2021.

The increase was mainly due to an increase in digital and social media, business development, radio, billboard and television advertising as compared to 2020.

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

Other non-interest expense amounted to $1,489,000 for the six months ended June 30, 2021, an increase of $48,000 or 3.3% as compared to the six months ended June 30, 2020.

Income tax expense amounted to $1,184,000 for the six months ended June 30, 2021, as compared to $706,000 for the six months ended June 30, 2020, an increase of $478,000.

The effective total income tax rate was 13.7% for the six months ended June 30, 2021 as compared to 11.5% for the six months ended June 30, 2020.

Other non-interest expense amounted to $2,207,000 for the nine months ended September 30, 2021, an increase of $143,000 or 6.9% as compared to the nine months ended September 30, 2020.

This increase was due to the Company pledging a $50,000 donation to a local community organization along with fraud losses due to an isolated incident.

Income tax expense amounted to $1,839,000 for the nine months ended September 30, 2021, as compared to $1,155,000 for the nine months ended September 30, 2020, an increase of $684,000.

The effective total income tax rate was 13.8% for the nine months ended September 30, 2021 as compared to 11.9% for the nine months ended September 30, 2020.

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

The Company recognized $202,000 of tax credits from low-income housing partnerships in the six months ended June 30, 2021 and 2020.

The Company recognized $303,000 of tax credits from low-income housing partnerships in the nine months ended September 30, 2021.

FINANCIAL CONDITION

Total assets increased to $1,310,466,000 as of June 30, 2021, an increase of $131,419,000 from year-end 2020.

Total assets increased to $1,389,939,000 as of September 30, 2021, an increase of $210,892,000 from year-end 2020.

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

Total debt securities available-for-sale increased $36,704,000 or 10.0% to $403,415,000 as of June 30, 2021 from December 31, 2020.

Total loans increased $21,295,000 or 3.0% to $741,905,000 as of June 30, 2021 from December 31, 2020.

Loan demand grew in the six months ended June 30, 2021 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

Total deposits increased $125,859,000 or 13.4% to $1,063,347,000 as of June 30, 2021 from December 31, 2020.

Total debt securities available-for-sale increased $66,123,000 or 18.0% to $432,834,000 as of September 30, 2021 from December 31, 2020.

Total loans increased $36,175,000 or 5.0% to $756,785,000 as of September 30, 2021 from December 31, 2020.

Loan demand grew in the nine months ended September 30, 2021 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

Total deposits increased $208,016,000 or 22.2% to $1,145,504,000 as of September 30, 2021 from December 31, 2020.

The increase was mainly due to the deposit of government stimulus funds, PPP loan proceeds, a $128,271,000 increase in highly rate sensitive deposits and other normal fluctuations.

1 unchanged sentence

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

Total borrowings decreased in the six months ended June 30, 2021 by $2,995,000 to $61,499,000 from $64,494,000 as of December 31, 2020.

Borrowings decreased mainly due to the maturity of two long-term notes offset by an increase in the balance of repurchase agreements.

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

Total borrowings increased in the nine months ended September 30, 2021 by $359,000 to $64,853,000 from $64,494,000 as of December 31, 2020.

Borrowings increased mainly due to an increase in the balance of repurchase agreements offset by the maturity of two long-term notes.

Total stockholders’ equity increased to $147,788,000 at September 30, 2021, an increase of $3,546,000 or 2.5% from December 31, 2020 due to an increase in retained earnings offset by a decrease in accumulated other comprehensive income.

SEGMENT REPORTING

3 unchanged sentences

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 94.0% at June 30, 2021 and 92.9% at June 30, 2020.

The earning asset ratio (average interest earning assets divided by average total assets) equaled 94.1% at September 30, 2021 and 93.0% at September 30, 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 securities.

Our primary earning asset, total loans, increased to $741,905,000 as of June 30, 2021, up $21,295,000, or 3.0% since year-end 2020.

Our primary earning asset, total loans, increased to $756,785,000 as of September 30, 2021, up $36,175,000, or 5.0% 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 $8,057,000 as of

June 30, 2021, an increase of $938,000, or 13.2% from $7,119,000 reported in non-performing assets as of December 31, 2020.

The increase in non-performing assets during the six months ended June 30, 2021 was mainly due to one loan that was moved to non-accrual status during the three months ended June 30, 2021.

Total allowance for loan losses to total non-performing assets was 100.83% as of June 30, 2021 and 111.43% at December 31, 2020.

Total non-performing assets were $7,998,000 as of September 30, 2021, an increase of $879,000, or 12.3% from $7,119,000 reported in non-performing assets as of December 31, 2020.

The increase in non-performing assets during the nine months ended September 30, 2021 was mainly due to one loan that was moved to non-accrual status during the quarter ended June 30, 2021.

Total allowance for loan losses to total non-performing assets was 103.63% as of September 30, 2021 and 111.43% at December 31, 2020.

See the Non-Performing Assets section on page 48 for more information.

In addition to loans, another primary earning asset is our overall securities portfolio, which increased in size from December 31, 2020 to June 30, 2021.

Debt securities available-for-sale amounted to $403,415,000 as of June 30, 2021, an increase of $36,704,000 from year-end 2020.

Interest-bearing deposits in other banks increased as of June 30, 2021, to $87,837,000 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 June 30, 2021 and December 31, 2020.

Total loans increased to $741,905,000 as of June 30, 2021 as compared to $720,610,000 as of December 31, 2020.

In addition to loans, another primary earning asset is our overall securities portfolio, which increased in size from December 31, 2020 to September 30, 2021.

Debt securities available-for-sale amounted to $432,834,000 as of September 30, 2021, an increase of $66,123,000 from year-end 2020.

Interest-bearing deposits in other banks increased as of September 30, 2021, to $121,705,000 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 September 30, 2021 and December 31, 2020.

Total loans increased to $756,785,000 as of September 30, 2021 as compared to $720,610,000 as of December 31, 2020.

The table on page 20 provides data relating to the composition of the Company’s loan portfolio on the dates indicated.

Total loans increased by $36,175,000 or 5.0%.

Steady demand for borrowing by businesses accounted for the 3.0% increase in the loan portfolio from December 31, 2020 to June 30, 2021.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased $12,019,000 or 13.1% to $103,894,000 at June 30, 2021 compared to $91,875,000 at December 31, 2020.

The increase in the Commercial and Industrial portfolio resulted mainly from the portion of the Commercial and Industrial portfolio not attributable to the Paycheck Protection Program loans which increased $13,657,000 during the six months ended June 30, 2021.

The increase was mainly due to $18,931,000 in new loan originations and an increase in utilization of existing Commercial and Industrial lines of credit of $1,212,000, offset with loan payoffs of $3,737,000, as well as regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio.

The portion of the Commercial and Industrial portfolio attributable to the PPP loans decreased by $1,638,000 during the six months ended June 30, 2021 as a result of $16,834,000 in new PPP loans originated during the six months ended June 30, 2021 which were offset by $18,472,000 in PPP loans paid off/forgiven during the same six-month period.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $20,097,000 or 4.3% to $486,825,000 at June 30, 2021 compared to $466,728,000 at December 31, 2020.

Steady demand for borrowing by businesses accounted for the 5.0% increase in the loan portfolio from December 31, 2020 to September 30, 2021.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased $2,916,000 or 3.2% to $94,791,000 at September 30, 2021 compared to $91,875,000 at December 31, 2020.

The increase in the Commercial and Industrial portfolio during the nine months ended September 30, 2021 was mainly attributable to a $17,388,000 increase in the portion of the Commercial and Industrial portfolio excluding Paycheck Protection Program loans.

The increase was mainly attributable to $21,176,000 in new loan originations and an increase in utilization of existing Commercial and Industrial lines of credit of $860,000, offset with loan payoffs of $4,648,000, as well as regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio.

The portion of the Commercial and Industrial portfolio attributable to the PPP loans decreased by $10,328,000 during the nine months ended September 30, 2021 as a result of $12,483,000 in new PPP loans originated during the nine months ended September 30, 2021 which were offset by $22,811,000 in PPP loans paid off/forgiven during the same nine-month period.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $46,273,000 or 9.9% to $513,001,000 at September 30, 2021 compared to $466,728,000 at December 31, 2020.

The increase was mainly the result of $100,528,000 in new loan originations and a $9,360,000 increase in utilization of existing Commercial Real Estate lines of credit, offset by $41,394,000 in loan payoffs, in addition to regular principal payments and other typical amortization in the Commercial Real Estate portfolio.

Residential Real Estate loans decreased $11,018,000 or 7.0% to $145,965,000 at June 30, 2021 compared to $156,983,000 at December 31, 2020.

The decrease was the result of $15,249,000 in new loan originations offset by a decrease in utilization of existing Residential Real Estate (Home Equity) lines of credit of $186,000, loan payoffs of $15,770,000, net loans sold of $10,037,000, and regular principal payments and other typical amortization in the Residential Real Estate portfolio.

Net loans sold for the six months ended June 30, 2021 consisted of total loans sold during the six months ended June 30, 2021 of $20,765,000, offset with loans opened and sold in the same quarter during the first two quarters of 2021 which amounted to $10,728,000.

Residential Real Estate loans decreased $13,236,000 or 8.4% to $143,747,000 at September 30, 2021 compared to $156,983,000 at December 31, 2020.

The decrease was the result of $22,653,000 in new loan originations and an increase in utilization of existing Residential Real Estate (Home Equity) lines of credit of $170,000, offset by loan payoffs of $23,775,000, net loans sold of $11,529,000, and regular principal payments and other typical amortization in the Residential Real Estate portfolio.

Net loans sold for the nine months ended September 30, 2021 consisted of total loans sold during the nine months ended September 30, 2021 of $24,019,000, offset with loans opened

and sold in the same quarter during the first three quarters of 2021 which amounted to $12,490,000.

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

2 unchanged sentences

Management believes that the loan portfolio is well diversified.

The total commercial portfolio was $590,719,000 at June 30, 2021.

The total commercial portfolio was $607,792,000 at September 30, 2021.

Of total loans, $513,001,000 or 67.8% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings.

1 unchanged sentence

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $730,910,000 or 96.7% of gross loans are graded Pass;

$928,000 or 0.1% are graded Special Mention;

$1,329,000 are graded Special Mention;

$23,966,000 or 3.2% are graded Substandard;

and $0 are graded Doubtful.

The rating is intended to represent the best assessment of risk available at a

given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower.

The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower.

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

Overall, non-pass grades increased to $25,036,000 at June 30, 2021, as compared to $24,137,000 at December 31, 2020.

Commercial and Industrial non-pass grades decreased to $835,000 as of June 30, 2021 as compared to $919,000 as of December 31, 2020.

Commercial Real Estate non-pass grades increased to $22,740,000 as of June 30, 2021 as compared to $21,789,000 as of December 31, 2020.

The Residential Real Estate and Consumer loan non-pass grades increased to $1,461,000 as of June 30, 2021 as compared to $1,429,000 as of December 31, 2020.

The increase in Commercial Real Estate non-pass grades during the six months ended June 30, 2021 is mainly due to the downgrade of one loan to a contractor specializing in modular construction in the amount of $1,000,000.

Overall, non-pass grades increased to $25,295,000 at September 30, 2021, as compared to $24,137,000 at December 31, 2020.

Commercial and Industrial non-pass grades decreased to $822,000 as of September 30, 2021 as compared to $919,000 as of December 31, 2020.

Commercial Real Estate non-pass grades increased to $22,609,000 as of September 30, 2021 as compared to $21,789,000 as of December 31, 2020.

The Residential Real Estate and Consumer loan non-pass grades increased to $1,864,000 as of September 30, 2021 as compared to $1,429,000 as of December 31, 2020.

The increase in Commercial Real Estate non-pass grades during the nine months ended September 30, 2021 is mainly due to the downgrade of one loan to a contractor specializing in modular construction in the amount of $1,000,000.

The loan was downgraded to substandard and placed on non-accrual status during the second quarter of 2021 as a result of the borrower’s inability to make payments as scheduled, as the business has ceased operations and has entered into bankruptcy proceedings.

1 unchanged sentence

(Dollars in thousands)

September 30,

Commercial and Industrial

3 unchanged sentences

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

As of June 30, 2021, the allowance for loan losses was $8,124,000 as compared to $7,933,000 as of December 31, 2020.

As of September 30, 2021, the allowance for loan losses was $8,288,000 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.

10 unchanged sentences

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.

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

Qualitative factors remained unchanged during the first quarter of 2021.

During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Company’s market areas demonstrated marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to increasing market values in the real estate sector.

Qualitative factors remained unchanged during the third quarter of 2021.

See Allowance for Loan Losses on page 16 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 six months ended June 30, 2021 and 2020.

For the six months ended June 30, 2021 and 2020, net charge-offs as a percentage of average loans was 0.01% for each respective period.

Net charge-offs amounted to $79,000 the six months ended June 30, 2021 as compared to $59,000 for the six months ended June 30, 2020.

For the six months ended June 30, 2021, the provision for loan losses was $270,000 as compared to $388,000 for the six months ended June 30, 2020.

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, 2021 and 2020.

Net charge-offs as a percentage of average loans was 0.01.

Net charge-offs amounted to $100,000 the nine months ended September 30, 2021 as compared to $108,000 for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, the provision for loan losses was $455,000 as compared to $682,000 for the nine months ended September 30, 2020.

The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for loan losses of $8,288,000 of which 9.2% was attributed to the Commercial and Industrial component;

3 unchanged sentences

and 8.5% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page 16).

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 June 30, 2021.

Analysis of Allowance for Loan Losses

(Dollars in thousands)

September 30,

Balance at beginning of period

12 unchanged sentences

A provision for loan losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio.

This evaluation takes into account such factors as portfolio

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

This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.

The loan review process, which is conducted quarterly, is an integral part of the Bank’s evaluation of the loan portfolio.

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

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

NON-PERFORMING ASSETS

6 unchanged sentences

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

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

Total non-performing assets amounted to $8,057,000 as of June 30, 2021, as compared to $7,119,000 as of December 31, 2020.

The economy, although showing much improvement, is still in flux.

Total non-performing assets amounted to $7,998,000 as of September 30, 2021, as compared to $7,119,000 as of December 31, 2020.

The economy is still in flux.

Businesses have reopened to find customers wanting to return, but employees, in many cases, wanting to continue to work from home or remain unemployed.

The work force has dwindled, inflationary pressures have caused prices to increase, the vaccination debate continues, and some government spending, subsidies, and moratoriums are still in place.

The work force has dwindled, inflationary pressures have caused prices to increase, the vaccination debate continues, and political unrest has reached an unprecedented level.

These forces have had a direct effect on the Company’s non-performing assets.

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

Non-accrual loans totaled $8,057,000 as of June 30, 2021, as compared to $7,078,000 as of December 31, 2020.

The increase in non-accrual loans at June 30, 2021 compared to December 31, 2020 is maily due to one loan in the amount of $1,000,000 to a contractor specializing in modular construction that was moved to non-accrual status during the second quarter of 2021 due to the borrower’s inability to make payments as scheduled, as the business has ceased operations and has entered into bankruptcy proceedings.

There were no foreclosed assets held for resale as of June 30, 2021, compared to $28,000 in foreclosed assets held for resale as of December 31, 2020.

There were no loans past-due 90 days or more and still accruing interest at June 30, 2021, as compared to $13,000 in loans past-due 90 days or more and still accruing interest as of December 31, 2020.

Non-performing assets to total loans was 1.09% at June 30, 2021 and 0.99% at December 31, 2020.

Non-performing assets to total assets was 0.62% at June 30, 2021 and December 31, 2020.

The allowance for loan losses to total non-performing assets was 100.83% as of June 30, 2021 as compared to 111.43% as of December 31, 2020.

Non-accrual loans totaled $7,923,000 as of September 30, 2021, as compared to $7,078,000 as of December 31, 2020.

The increase in non-accrual loans at September 30, 2021 compared to December 31, 2020 is mainly due to one loan in the amount of $1,000,000 to a contractor specializing in modular construction that was moved to non-accrual status during the second quarter of 2021 due to the borrower’s inability to make payments as scheduled, as the business has ceased operations and has entered into bankruptcy proceedings.

There were no foreclosed assets held for resale as of September 30, 2021, compared to $28,000 in foreclosed assets held for resale as of December 31, 2020.

There were $75,000 in loans past-due 90 days or more and still accruing interest at September 30, 2021, as compared to $13,000 in loans past-due 90 days or more and still accruing interest as of December 31, 2020

Non-performing assets to total loans was 1.06% at September 30, 2021 and 0.99% at December 31, 2020.

Non-performing assets to total assets was 0.58% at September 30, 2021 and December 31, 2020.

The allowance for loan losses to total non-performing assets was 103.63% as of September 30, 2021 as compared to 111.43% as of December 31, 2020.

Additional detail can be found on page 51 in the Non-Performing Assets and Impaired Loans table and page 27 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.

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 $10,209,000 at June 30, 2021, compared to $9,992,000 at December 31, 2020.

Impaired loans were $16,093,000 at June 30, 2021 and $15,054,000 at December 31, 2020.

The largest impaired loan relationship at June 30, 2021 and December 31, 2020 consisted of a non-performing loan to a student housing holding company which was secured by commercial real estate.

At June 30, 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 June 30, 2021 and December 31, 2020 consisted of one performing loan to a student housing holding company, which was classified as a TDR.

The loan was secured by commercial real estate and carried a balance of $2,897,000 as of June 30, 2021, net of $943,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $2,929,000, net of $943,000 that had been charged off to date.

The third largest impaired loan relationship at June 30, 2021 and December 31, 2020 consisted of a substandard performing loan to a developer of a residential sub-division.

Performing substandard loans not deemed to be impaired amounted to $10,291,000 at September 30, 2021, compared to $9,992,000 at December 31, 2020.

Impaired loans were $14,889,000 at September 30, 2021 and $15,054,000 at December 31, 2020.

The largest impaired loan relationship at September 30, 2021 and December 31, 2020 consisted of a non-performing loan to a student housing holding company which was secured by commercial real estate.

At September 30, 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 September 30, 2021 and December 31, 2020 consisted of one performing loan to a student housing holding company, which was classified as a TDR.

The loan was secured by commercial real estate and carried a balance of $2,880,000 as of September 30, 2021, net of $943,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $2,929,000, net of $943,000 that had been charged off to date.

The third largest impaired loan relationship at September 30, 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 June 30, 2021 compared to $1,326,000 at December 31, 2020.

The loan carried a balance of $1,232,000 at September 30, 2021 compared to $1,326,000 at December 31, 2020.

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

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

Of the $16,093,000 in impaired loans at June 30, 2021, none were located outside of the Company’s primary market area.

The outstanding recorded investment of TDRs as of June 30, 2021 and December 31, 2020 was $9,515,000 and $9,563,000, respectively.

The decrease in TDRs at June 30, 2021 as compared to December 31, 2020 is mainly attributable to principal payments made on existing TDRs during the six months ended June 30, 2021.

Of the thirty-two restructured loans at June 30, 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 June 30, 2021 consisted of thirteen term modifications beyond the original stated term, three rate modifications, and fifteen payment modifications.

Of the $14,889,000 in impaired loans at September 30, 2021, none were located outside of the Company’s primary market area.

The outstanding recorded investment of TDRs as of September 30, 2021 and December 31, 2020 was $8,414,000 and $9,563,000, respectively.

The decrease in TDRs at September 30, 2021 as compared to December 31, 2020 is mainly attributable to the payoff of a Commercial Real Estate TDR to a real estate holding company which was completed during the third quarter of 2021 in the amount of $1,010,000, as well as regular principal payments made on

existing TDRs during the nine months ended September 30, 2021.

Of the thirty-three restructured loans at September 30, 2021, six loans were classified in the Commercial and Industrial portfolio, twenty-six 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, 2021 consisted of thirteen term modifications beyond the original stated term, three rate modifications, and sixteen 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 June 30, 2021 or December 31, 2020.

There were no unfunded commitments attributable to the TDRs at June 30, 2021 and December 31, 2020.

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

Three Commercial Real Estate loans totaling $300,000 that were modified as TDRs within the twelve months preceding June 30, 2021 experienced payment defaults during the three months ended June 30, 2021.

No loans that were modified as TDRs during the twelve months preceding June 30, 2021 experienced payment defaults during the first three months of 2021.

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

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

There were no specific allocations attributable to the TDRs at September 30, 2021 or December 31, 2020.

There were no unfunded commitments attributable to the TDRs at September 30, 2021 and December 31, 2020.

At September 30, 2021, eight Commercial Real Estate loans classified as TDRs with a combined recorded investment of $541,000, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $724,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $15,000 were not in compliance with the terms of their restructure, compared to September 30, 2020 when 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.

Three Commercial Real Estate loans totaling $291,000 that were modified as TDRs within the twelve months preceding September 30, 2021 experienced payment defaults during the nine months ended September 30, 2021.

No loans that were modified as TDRs during the twelve months preceding September 30, 2021 experienced payment defaults during the three months ended September 30, 2021.

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, 2020 experienced payment defaults during the three months ended September 30, 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.

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

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

9 unchanged sentences

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 inflationary pressures, the labor force, and the effectiveness in controlling the spread of the outbreak, etc.

The extent of the impact of the COVID-19

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

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

As of June 30, 2021 and December 31, 2020, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

As of September 30, 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

18 unchanged sentences

Allowance for loan losses to total non-performing assets

Real estate mortgages comprise 85.3% of the loan portfolio as of June 30, 2021, as compared to 86.6% as of December 31, 2020.

Real estate mortgages comprise 86.8% of the loan portfolio as of September 30, 2021, as compared to 86.6% as of December 31, 2020.

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

8 unchanged sentences

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.

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.

3 unchanged sentences

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

2 unchanged sentences

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

Total deposits increased $125,859,000 to $1,063,347,000 as of June 30, 2021 as non-interest bearing deposits increased by $19,116,000 and interest bearing deposits increased by $106,743,000 from year-end 2020.

Total deposits increased $208,016,000 to $1,145,504,000 as of September 30, 2021 as non-interest bearing deposits increased by $46,103,000 and interest bearing deposits increased by $161,913,000 from year-end 2020.

The increase in deposits was the result of government stimulus funds, PPP loan proceeds, a $128,271,000 increase in highly rate sensitive deposits and other normal fluctuations.

Total short-term and long-term borrowings decreased to $61,499,000 as of June 30, 2021, from $64,494,000 at year-end 2020, a decrease of $2,995,000 or 4.6%.

The decrease in total borrowings was mainly the result of the maturity of two long-term notes offset by an increase in the balance of repurchase agreements.

Total short-term and long-term borrowings increased to $64,853,000 as of September 30, 2021, from $64,494,000 at year-end 2020, an increase of $359,000 or 0.6%.

The increase in total borrowings was mainly the result of an increase in the balance of repurchase agreements offset by the maturity of two long-term notes.

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 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).

1 unchanged sentence

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

During the six months ended June 30, 2021, net income less dividends paid increased capital by $4,243,000.

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

During the nine months ended September 30, 2021, net income less dividends paid increased capital by $6,609,000.

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 $11,145,000 at June 30, 2021, a decrease of $1,725,000.

Accumulated other comprehensive income stood at $8,682,000 at September 30, 2021, a decrease of $4,188,000.

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 June 30, 2021 and December 31, 2020.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of June 30, 2021 and December 31, 2020.

Total stockholders’ equity was $147,502,000 as of June 30, 2021, and $144,242,000 as of December 31, 2020.

At June 30, 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 June 30, 2021 and December 31, 2020:

The Company held 231,612 shares of common stock as treasury stock at September 30, 2021 and December 31, 2020.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of September 30, 2021 and December 31, 2020.

Total stockholders’ equity was $147,788,000 as of September 30, 2021, and $144,242,000 as of December 31, 2020.

At September 30, 2021 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III.

The following table presents the Bank’s capital ratios as of September 30, 2021 and December 31, 2020:

September 30,

Corrective Action

7 unchanged sentences

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 June 30, 2021, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

As of September 30, 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.

8 unchanged sentences

● Brokered CDs.

At June 30, 2021, the Company had $413,373,000 in maximum borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes, FHLB short-term borrowings, and irrevocable standby letters of credit issued by FHLB);

At September 30, 2021, the Company had $416,371,000 in maximum borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes, FHLB short-term borrowings, and irrevocable standby letters of credit issued by FHLB);

the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $3,313,000.

2 unchanged sentences

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 $26,499,000 at June 30, 2021.

Securities sold under agreements to repurchase were $29,853,000 at September 30, 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.

2 unchanged sentences

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

Net cash flows provided by operating activities were $8,676,000 as of June 30, 2021, compared $4,846,000 as of June 30, 2020.

Net income amounted to $7,483,000 for the six months ended June 30, 2021 and $5,434,000 for the six months ended June 30, 2020.

During the six months ended June 30, 2021 and 2020, net premium amortization on investment securities amounted to $1,366,000 and $982,000, respectively.

Gains on sales of mortgage loans were $662,000 as of June 30, 2021, compared to $297,000 as of June 30, 2020.

Proceeds (including gains) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $937,000 during the six months ended June 30, 2021 and originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $1,408,000 during the six months ended June 30, 2020.

Net securities gains were $143,000 for the six months ended June 30, 2021, compared to net securities losses of $303,000 for the six months ended June 30, 2020.

Other assets increased by $1,116,000 during the six months ended June 30, 2021 and decreased by $715,000 during the six months ended June 30, 2020.

Other liabilities increased by $241,000 during the six months ended June 30, 2021 and decreased by $28,000 during the six months ended June 30, 2020.

Investing activities used cash of $56,580,000 and $55,050,000 during the six months ended June 30, 2021 and 2020, respectively.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions net against purchases) used cash of $34,469,000 during the six months ended June 30, 2021, compared to $28,171,000 during the six months ended June 30, 2020.

Net cash used to originate loans amounted to $21,649,000 and $27,544,000 during the six months ended June 30, 2021 and 2020, respectively.

Financing activities provided cash of $120,348,000 and $49,230,000 during the six months ended June 30, 2021 and 2020, respectively.

Deposits increased by $125,859,000 and $83,098,000 during the six months ended June 30, 2021

and 2020, respectively.

Short-term borrowings increased by $7,005,000 during the six months ended June 30, 2021 and decreased by $21,348,000 during the six months ended June 30, 2020.

Repayment of long-term borrowings amounted to $10,000,000 for both the six months ended June 30, 2021 and 2020, respectively.

Dividends paid amounted to $3,240,000 and $3,145,000 for the six months ended June 30, 2021 and 2020, respectively.

Net cash flows provided by operating activities were $11,261,000 as of September 30, 2021, compared to cash used in operating activities of $1,468,000 as of September 30, 2020.

Net income amounted to $11,506,000 for the nine months ended September 30, 2021 and $8,571,000 for the nine months ended September 30, 2020.

During the nine months ended September 30, 2021 and 2020, net premium amortization on investment securities amounted to $2,124,000 and $1,484,000, respectively.

Gains on sales of mortgage loans were $801,000 as of September 30, 2021, compared to $471,000 as of September 30, 2020.

Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $1,383,000 and $9,714,000 for the nine months ended September 30, 2021 and 2020.

Net securities gains were $165,000 for the nine months ended September 30, 2021, compared to net securities losses of $312,000 for the nine months ended September 30, 2020.

Accrued interest receivable decreased by $261,000 for the nine months ended September 30, 2021 and increased by $1,325,000 for the nine months ended September 30, 2020.

Other assets increased by $1,422,000 during the nine months ended September 30, 2021 and decreased by $388,000 during the nine months ended September 30, 2020.

Other liabilities increased by $44,000 during the nine months ended September 30, 2021 and decreased by $1,310,000 during the nine months ended September 30, 2020.

Investing activities used cash of $107,970,000 and $75,567,000 during the nine months ended September 30, 2021 and 2020, respectively.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions net against purchases) used cash of $73,542,000 during the nine months ended September 30, 2021, compared to $31,122,000 during the nine months ended September 30, 2020.

Net cash used to originate loans amounted to $34,091,000 and $46,218,000 during the nine months ended September 30, 2021 and 2020, respectively.

Financing activities provided cash of $204,577,000 and $112,287,000 during the nine months ended September 30, 2021 and 2020, respectively.

Deposits increased by $208,016,000 and $157,591,000 during the nine months ended September 30, 2021 and 2020, respectively.

Short-term borrowings increased by $10,359,000 during the nine months ended September 30, 2021 and decreased by $31,540,000 during the nine months ended September 30, 2020.

Repayment of long-term borrowings amounted to $10,000,000 for both the nine months ended September 30, 2021 and 2020, respectively.

Dividends paid amounted to $4,897,000 and $4,724,000 for the nine months ended September 30, 2021 and 2020, respectively.

Managing liquidity remains an important segment of asset/liability management.

22 unchanged sentences

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 June 30, 2021.

The Company’s cumulative gap at one year indicates the Company is liability sensitive at September 30, 2021.

Earnings at Risk

17 unchanged sentences

The earnings simulation model projects net interest income would decrease 4.32%, 8.65% and 12.90% in the 100, 200 and 300 basis point increasing rate scenarios presented.

In addition, the earnings simulation model projects net interest income would decrease 1.67% and 7.63% in the 100 and 200 basis point decreasing rate scenarios presented.

In addition, the earnings simulation model projects net interest

income would decrease 2.09% and 7.95% 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 six months ended June 30, 2021, the cost of interest-bearing liabilities averaged 0.61%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 3.75%.

For the nine months ended September 30, 2021, the cost of interest-bearing liabilities averaged 0.59%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 3.68%.

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 June 30, 2021, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with decreases of 32.64% and 91.53%, respectively.

At September 30, 2021, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with decreases of 33.18% and 91.91%, respectively.

Additionally, net present value is projected to increase 15.61%, 21.47%, and 20.45% 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