What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-03-14 compared with 2021-03-15 · 192 added, 210 removed, 1257 unchanged (24% of the section changed)

21 unchanged sentences

Critical Audit Matters

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

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

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

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

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

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

Allowance for Loan Losses – Qualitative Factor Adjustments – Refer to Notes 1 and 3 to the consolidated financial statements

Critical Audit Matter Description

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

As disclosed in Note 3 to the Company's consolidated financial statements, the Corporation’s loan portfolio totaled $753M as of December 31, 2021, and the related allowance for loan losses was $8.7M.

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

17 unchanged sentences

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

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

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

3 unchanged sentences

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

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

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

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

Critical Audit Matter Description

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

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

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

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

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

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

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

How the Critical Audit Matter was Addressed in the Audit

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

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

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

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

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

o Testing the mathematical accuracy of the calculations performed.

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

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

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

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

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

/s/ Baker Tilly US, LLP

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

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

Baker Tilly US, LLP

Iselin, New Jersey

67 unchanged sentences

Gains on sales of mortgage loans

Net securities (losses) gains

Net securities gains (losses)

Total non-interest income

21 unchanged sentences

Years Ended December 31,

Other comprehensive income:

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

Other comprehensive (loss) income:

Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $( 1,404 ) and $ 2,347 , respectively

Less reclassification adjustment for net gains included in net income, net of income taxes of $( 1 ) and $( 49 ), respectively (a) (b)

Total other comprehensive income

Total other comprehensive (loss) income

Total Comprehensive Income

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

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

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

5 unchanged sentences

Stockholders’

(Loss) Income

Balance at January 1, 2020

16 unchanged sentences

Net premium amortization on securities

Deferred income tax (benefit) expense

Gains on sales of mortgage loans

Deferred income tax benefit

Net gains on sales of mortgage loans

Proceeds from sales of mortgage loans originated for sale

Originations of mortgage loans originated for sale

Net securities losses (gains)

Net securities (gains) losses

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

(Increase) decrease in accrued interest receivable

Decrease (increase) in accrued interest receivable

Increase in cash surrender value of bank owned life insurance

Net losses on disposals of premises and equipment

Decrease (increase) in other assets

(Increase) decrease in other assets

Amortization of investment in low-income housing partnerships

Decrease in accrued interest payable

(Decrease) increase in other liabilities

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

Increase (decrease) in other liabilities

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

Purchases of debt securities available-for-sale

Net decrease in time deposits with other banks

Net change in restricted investment in bank stocks

3 unchanged sentences

Proceeds from sales of foreclosed assets held for resale

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

NET CASH USED IN INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits

Net decrease in short-term borrowings

Net increase (decrease) in short-term borrowings

Repayment of finance lease obligations

Proceeds from long-term borrowings

Repayment of long-term borrowings

2 unchanged sentences

Dividends paid

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

NET CASH PROVIDED BY FINANCING ACTIVITIES

INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

4 unchanged sentences

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Purchased securities settling after year end

Loans transferred to foreclosed assets held for resale

18 unchanged sentences

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

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

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

the making of commercial, consumer and mortgage loans;

6 unchanged sentences

The types of securities in which the Corporation invests are presented in Note 2 – Securities.

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

Credit risk as it relates to investment activities is moderated through the monitoring of ratings, geographic concentrations, etc.

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

Note 3 – Loans and Allowance for Loan Losses summarizes the types of lending in which the Corporation engages.

4 unchanged sentences

Actual results could differ from those estimates.

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

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

Subsequent Events

3 unchanged sentences

The dividend is payable on March 31, 2022 to shareholders of record as of March 10, 2022.

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

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

Cash and Cash Equivalents

12 unchanged sentences

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

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

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

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

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

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

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

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

In accordance with Accounting Standard Update 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income.

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

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

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

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

Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under Financial Accounting Standards Board (“FASB”) ASC 320, Investments - Debt and Equity Securities .

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

13 unchanged sentences

Restricted Investment in Bank Stocks

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

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

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

17 unchanged sentences

Commercial and Industrial Lending

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

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

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

8 unchanged sentences

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

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that have been issued by the Corporation as a result of the enactment of the CARES Act in response to the economic impact of the COVID-19 pandemic are included in the Corporation’s Commercial and Industrial portfolio and are underwritten 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 61 for more information regarding the Corporation’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, 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 December 31, 2020, the Corporation's balance of GGLs amounted to $ 5,128,000 , compared to $ 6,150,000 at December 31, 2019.

As of December 31, 2021, the Corporation's balance of GGLs was $ 3,829,000 , compared to $ 5,128,000 at December 31, 2020.

Commercial Real Estate Lending

10 unchanged sentences

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

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

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

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

24 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 (“CARES”) Act was enacted in the United States on March 27, 2020.

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

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 Corporation 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.

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

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

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

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

1 unchanged sentence

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

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

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

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

As of December 31, 2021, the Corporation held 122 PPP loans in its Commercial and Industrial portfolio, which carried an aggregate balance of $ 4,894,000 , of which 2 loans carrying an aggregate balance of $ 160,000 were granted during the first round of PPP issuance and 120 loans carrying an aggregate balance of $ 4,734,000 were granted during the second round of PPP issuance.

At December 31, 2020, the Corporation held 441 PPP loans in its Commercial and Industrial portfolio which carried an aggregate 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 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 Corporation has granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments.

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

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 December 31, 2021, compared to December 31, 2020 when there were 44 loan modifications still actively on deferral carrying an aggregate balance of $ 16,541,000 .

See page 77 for additional information regarding the Section 4013 CARES Act modifications.

6 unchanged sentences

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

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

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

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

5 unchanged sentences

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

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

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

18 unchanged sentences

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

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

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

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

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

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

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

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

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

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

The historical loss component of the allowance is determined by losses recognized by portfolio segment over an eight quarter lookback period that management has determined best represents the current credit cycle.

Qualitative factors impacting each portfolio segment may include:

3 unchanged sentences

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

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

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

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 Corporation’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.

During the fourth quarter of 2021, the qualitative factors related to external factors/conditions were increased by one basis point across all loan segments due to current economic uncertainty caused by the COVID-19 pandemic including increased inflation, as well as elevated unemployment levels (although improved from 2020 and early 2021) and the uncertainty of how broad the changes implemented by the Federal Reserve may be, and the qualitative factors related to collateral values were increased by one basis point across all loan segments, as collateral values have continued to artificially increase as individuals have been willing to pay above-average market prices in all sectors.

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

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

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

6 unchanged sentences

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

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

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

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

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

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

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

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

5 unchanged sentences

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

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

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

See page 77 for further discussion of the Section 4013 CARES Act modifications.

20 unchanged sentences

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

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

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

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

12 unchanged sentences

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

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

The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is

deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed.

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

19 unchanged sentences

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

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

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

The Corporation’s accrued liabilities for this benefit agreement as of December 31, 2021 and 2020 which are included in other liabilities in the Corporation’s consolidated balance sheets was $ 56,000 and $ 36,000 , respectively.

The related (expense) income for this benefit agreement amounted to $( 20,000 ) in 2021 and $ 2,000 in 2020.

The expense recognized in 2021 was the result of service costs associated with the benefit agreement.

Investments in Low-Income Housing Partnerships

3 unchanged sentences

The amount of tax credits allocated to the Corporation were $ 405,000 in 2021 and 2020, and the amortization of the investments in the limited partnerships were $ 371,000 and $ 362,000 in 2021 and 2020, respectively.

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

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

During 2021, the Corporation became a limited partner in a real estate venture with an initial investment of $ 435,000 .

The new limited partnership has not begun amortizing and future contributions will be required.

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

7 unchanged sentences

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

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

Management notes that the emergence of COVID-19 as a global pandemic during 2020 and throughout 2021 has resulted in significant deterioration in general economic conditions and has caused a deterioration in the environment in which the Corporation operates.

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

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

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

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

The Corporation has evaluated the goodwill included in its consolidated balance sheet at December 31, 2021, and has determined there was no impairment as of that date.

In addition, the Corporation did not identify any impairment in 2020.

24 unchanged sentences

(In thousands, except earnings per share)

Year Ended December 31,

Weighted-average common shares outstanding

6 unchanged sentences

Assets held in trust were $ 108,339,000 and $ 107,336,000 at December 31, 2021 and 2020, respectively.

Trust Department income is

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

Trust Department income is generally recognized on a cash basis and is not materially different than if it were reported on an accrual basis (see Table 5 – Non-Interest Income for details).

Comprehensive Income (Loss)

4 unchanged sentences

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

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

Recent Accounting Standards Updates (“ASU”):

Except as disclosed below, there were no new accounting pronouncements affecting the Corporation during the year ended December 31, 2021 that were not already adopted by the Corporation in previous periods.

Recently adopted ASUs:

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

Simplifying the Test for Goodwill Impairment .

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

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

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

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

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

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

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

The amendments in this update removed required disclosures regarding:

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

The policy for timing of transfers between levels, 3.

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

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

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

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

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

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

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

expedients and exceptions for applying U.S.

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

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

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

The ASU provides certain optional expedients and exceptions when applying U.S.

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

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

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

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

Pending ASUs:

6 unchanged sentences

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

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

It is currently unclear how the adoption of this standard will impact the Corporation’s consolidated financial statements, but the Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact that the adoption of the standard may have on the Corporation.

The Corporation has taken steps to prepare for the implementation when it becomes effective, such as:

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

8 unchanged sentences

Such reclassifications have no effect on the Corporation’s net income.

NOTE 2 — RESTRICTED CASH BALANCES

The Bank was previously required to maintain certain average reserve balances as established by the Federal Reserve Board.

The amount of the reserve balance for the reserve computation period, which included December 31, 2019, was $ 1,352,000 , which was satisfied through the restriction of vault cash.

Effective March 26, 2020, the average cash reserve requirement was suspended, as the Federal Reserve Board reduced reserve requirement ratios to zero percent in response to the COVID-19 pandemic in order to support the flow of credit to households and businesses.

The Bank maintains a clearing balance at the Federal Reserve Bank to offset daily cash management activities and specific charges for services.

At December 31, 2020 and 2019, the amount of this balance was $ 15,251,000 and $ 463,000 , respectively.

NOTE 2 — SECURITIES

46 unchanged sentences

December 31, 2020

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

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

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

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

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

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

27 unchanged sentences

Corporate debt securities

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

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

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

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

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

The municipal securities consist of general obligations and revenue bonds.

The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the market place and credit premiums for various types of agency debt.

Asset backed securities consist of bonds backed by consumer loans.

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

The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the marketplace and credit premiums for various types of agency debt.

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

Management does not believe any of their 54 debt securities with a less than one year unrealized loss position, or any of their 21 debt securities with a one year or greater unrealized loss position, as of December 31, 2021, represent an other-than-temporary impairment, as these unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Corporation expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of December 31, 2020.

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

NOTE 3 — LOANS AND ALLOWANCE FOR LOAN LOSSES

29 unchanged sentences

Beginning balance

Provision (credit)

Ending Balance

27 unchanged sentences

The outstanding recorded investment of loans categorized as TDRs as of December 31, 2021 and December 31, 2020 was $ 8,020,000 and $ 9,563,000 , respectively.

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

The decrease in TDRs at December 31, 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 on existing TDRs during the year ended December 31, 2021.

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

During the year ended December 31, 2020, eight loans with a combined post modification balance of $ 1,536,000 were modified as TDRs, compared to the year ended December 31, 2019 when no loans were modified as TDRs.

The loan modifications for the year ended December 31, 2020 consisted of two term modifications beyond the original stated term and six payment modifications.

During the year ended December 31, 2021, four loans with a combined post modification balance of $ 360,000 were modified as TDRs, compared to the year ended December 31, 2020 when eight loans with a combined post modification balance of $ 1,536,000 were modified as TDRs.

The loan modifications for the year ended December 31, 2021 consisted of two term modifications beyond the original stated term and two payment modifications, compared to December 31, 2020 when the loan modifications consisted of two term modifications beyond the original stated term and six payment modifications.

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

2 unchanged sentences

Accruing TDRs

At December 31, 2020, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 745,000 , seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 984,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 18,000 were not in compliance with the terms of their restructure, compared to December 31, 2019 when six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 464,000 were not in compliance with the terms of their restructure.

Two Commercial Real Estate loans totaling $ 57,000 that were modified as TDRs within the twelve months preceding December 31, 2020 experienced payment defaults during the year ended December 31, 2020.

No loans were modified as TDRs within the twelve months preceding December 31, 2019.

The following table presents information regarding the loan modifications categorized as TDRs during the year ended December 31, 2020.

No loans were modified as TDRs during the year ended December 31, 2019.

At December 31, 2021, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 708,000 , ten Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 590,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 14,000 were not in compliance with the terms of their restructure, compared to December 31, 2020 when three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 745,000 , seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 984,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 18,000 were not in compliance with the terms of their restructure.

Three Commercial Real Estate loans totaling $ 285,000 that were modified as TDRs within the twelve months preceding December 31, 2021 experienced payment defaults during the year ended December 31, 2021.

Of the loans that were modified as TDRs during the twelve months preceding December 31, 2020, two Commercial Real Estate loans totaling $ 57,000 experienced payment defaults during the year ended December 31, 2020.

The following table presents information regarding the loan modifications categorized as TDRs during the year ended December 31, 2021 and 2020.

(Dollars in thousands)

4 unchanged sentences

Commercial Real Estate

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the year ended December 31, 2020 with the total number of each type of modification performed.

No loans were modified as TDRs during the year ended December 31, 2019.

(Dollars in thousands)

Year Ended December 31, 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 year ended December 31, 2021 and 2020 with the total number of each type of modification performed.

Year Ended December 31, 2021

Commercial and Industrial

Commercial Real Estate

Year Ended December 31, 2020

Commercial and Industrial

Commercial Real Estate

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

3 unchanged sentences

Commercial and

Balance at December 31, 2020

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

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

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

Balance at March 31, 2021

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

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

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

Balance at June 30, 2021

9 unchanged sentences

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

Subsequent modifications granted for active deferred loans as of December 31, 2020

Includes payments made prior to return to normal payment status during the quarters ended September 30 and December 31, 2020

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

No construction loans have experienced a Section 4013 CARES Act Modification as of the dates indicated.

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

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

14 unchanged sentences

Residential Real Estate

At December 31, 2020 and 2019, $ 9,563,000 and $ 8,678,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 and $ 1,000 , respectively.

At December 31, 2021 and 2020, $ 8,020,000 and $ 9,563,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at both December 31, 2021 and December 31, 2020.

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

18 unchanged sentences

Residential Real Estate

Of the $ 392,000 and $ 498,000 in interest income recognized on impaired loans for the years ended December 31, 2020 and 2019, respectively, $ 5,000 in interest income was recognized with respect to non-accrual loans for each respective period.

Of the $ 357,000 and $ 392,000 in interest income recognized on impaired loans for the years ended December 31, 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 December 31, 2021 and 2020 were as follows:

8 unchanged sentences

If interest on non-accrual loans had been accrued at original contract rates, interest income would have increased by $ 1,858,000 in 2021 and $ 1,461,000 in 2020.

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

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

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

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

Consumer mortgage loans secured by residential real estate for which the Corporation has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $ 815,000 at December 31, 2020 and $ 617,000 at December 31, 2019.

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

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 Corporation has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $ 41,000 at both December 31, 2021 and December 31, 2020.

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

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

9 unchanged sentences

Residential Real Estate

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

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

16 unchanged sentences

Total deposits increased $ 140,481,000 to $ 1,077,969,000 as of December 31, 2021 due to increases in non-interest bearing, interest bearing and savings deposits.

The increase in deposits was the result of many different factors including the deposit of stimulus funds, PPP loan proceeds, an $ 83,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during 2020.

The increase in deposits was the result of many different factors including the deposit of stimulus funds, PPP loan proceeds, a $ 73,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during 2021.

The following is a schedule reflecting classification and remaining maturities of time deposits at December 31, 2021:

37 unchanged sentences

Long-term borrowings are comprised of advances from FHLB.

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

Under terms of a blanket agreement, collateral for the FHLB loans is certain qualifying assets of the Bank.

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

2 unchanged sentences

Due 2021, 1.42 % to 1.58 %

Due 2022, 2.34 %

6 unchanged sentences

In addition, FHLB shall not be required to fund advances under any outstanding commitments.

At December 31, 2020, the Corporation’s maximum borrowing capacity at FHLB, which takes into account FHLB long-term notes and FHLB short-term borrowings, was $ 402,240,000 .

Irrevocable standby letters of credit may be issued to a customer/beneficiary by the FHLB on the Corporation’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 Corporation’s pledging obligation to secure public/municipal unit deposits which eliminates the need for the Corporation to pledge collateral in the amount necessary to secure these funds.

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

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on December 31, 2021.

Any irrevocable standby letters of credit are issued 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 Bank.

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

As of December 31, 2021, loans of $ 605,865,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 433,394,000 .

As of December 31, 2021, no securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

NOTE 8 — SUBORDINATED DEBENTURES

1 unchanged sentence

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

The Corporation utilized the net proceeds it received from the sale of the 2020 Notes to support organic growth and for general corporate purposes.

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

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

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.

22 unchanged sentences

Finance lease liabilities

Loan purchase accounting

Limited partnership investments

16 unchanged sentences

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

The ultimate realization of deferred tax assets is

dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

26 unchanged sentences

Cash payments totaled $ 156,000 and $ 154,000 for the years ended December 31, 2021 and 2020, respectively.

The Corporation currently has three finance leases for equipment.

At December 31, 2020, right-of-use assets and lease liabilities were recorded related to these finance leases totaling $ 94,000 and $ 84,000 , respectively.

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

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

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

None of the leases contained an implicit rate;

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

Total finance lease costs that were recognized by the Corporation for the year ended December 31, 2020 were immaterial.

Cash payments totaled $ 4,000 .

The Corporation currently has one finance lease for equipment.

At December 31, 2021, right-of-use assets and lease liabilities were recorded related to this finance lease totaling $ 34,000 and $ 16,000 , respectively.

Amounts recognized as right-of-use assets related to finance leases are included in premises and equipment, net in the accompanying consolidated balance sheets.

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

No significant assumptions or judgements were made in determining whether a contract contained a lease or in the

consideration of lease versus non-lease components.

The lease does not contain an implicit rate;

therefore, our incremental borrowing rate was used for the lease.

Total finance lease costs that were recognized by the Corporation for the years ended December 31, 2021 and 2020 were immaterial.

Cash payments totaled $ 10,000 and $ 4,000 for the years ended December 31, 2021 and 2020, respectively.

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

21 unchanged sentences

The summary of activity on the related party loans represent funds drawn and outstanding at the date of the consolidated financial statements.

Commitments by the Bank to related parties on lines of credit and letters of credit for 2020 and 2019, presented an additional off-balance sheet risk to the extent of undisbursed funds in the amounts of $ 7,453,000 and $ 5,810,000 respectively, on the above loans.

Commitments by the Bank to related parties on lines of credit and letters of credit for

2021 and 2020, presented an additional off-balance sheet risk to the extent of undisbursed funds in the amounts of $ 4,896,000 and $ 7,453,000 respectively, on the above loans.

Deposits from certain officers, directors and immediate family members and/or their related companies held by the Bank amounted to $ 25,995,000 and $ 25,332,000 at December 31, 2021 and 2020, respectively.

14 unchanged sentences

As of December 31, 2021 the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as Well Capitalized under the regulatory framework for prompt corrective action.

To be categorized as Well Capitalized, the Bank must maintain minimum total risk-based, tier I risk-based, common equity tier 1 risk-based and tier I leverage ratios as set forth in the table.

To be categorized as Well Capitalized, the Bank must maintain minimum total risk-based, tier 1 risk-based, common equity tier 1 risk-based and tier 1 leverage ratios as set forth in the table.

There are no conditions or events since the notification that management believes have changed the Bank’s category.

8 unchanged sentences

Total Capital (to Risk-Weighted Assets)

Tier I Capital (to Risk-Weighted Assets)

Tier 1 Capital (to Risk-Weighted Assets)

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

Tier I Capital (to Average Assets)

Tier 1 Capital (to Average Assets)

(Dollars in thousands)

7 unchanged sentences

Total Capital (to Risk-Weighted Assets)

Tier I Capital (to Risk-Weighted Assets)

Tier 1 Capital (to Risk-Weighted Assets)

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

Tier I Capital (to Average Assets)

Tier 1 Capital (to Average Assets)

The capital conservation buffer phase-in began January 1, 2016.

13 unchanged sentences

(Dollars in thousands)

December 31, 2021

December 31, 2020

Financial instruments whose contract amounts represent credit risk:

4 unchanged sentences

Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee.

Since some of the commitments may expire without being drawn upon, the total

commitment amounts do not necessarily represent future cash requirements.

Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Corporation evaluates each customer’s creditworthiness on a case-by-case basis.

76 unchanged sentences

Total recurring fair value measurements

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets;

these assets consist mainly of stocks held in other banks.

The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies.

The estimated fair values of equity securities and US Treasury debt securities classified as Level 1 are derived from quoted market prices in active markets;

the equity securities consist mainly of stocks held in other banks.

The estimated fair values of all other debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies.

The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds.

16 unchanged sentences

Total impaired loans

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

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

For impaired loans less than $ 250,000 upon classification and annually at year end, the Corporation completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.

These assets are included

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

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

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

91 unchanged sentences

Long-term borrowings

Subordinated debentures

Accrued interest payable

28 unchanged sentences

NOTE 18 – GOODWILL

Impairment testing is performed using either a qualitative or quantitative approach.

The Corporation has selected September 30 as the date it performs the annual goodwill impairment test.

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

This uncertainty has resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Corporation.

Based on the totality of the circumstances and the impact of the economic conditions on the stock price, the events more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill.

As such, an interim quantitative analysis of the fair value of the Corporation as of December 31, 2020 was also performed.

The interim quantitative analysis considered both income and market valuation approaches.

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

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

We assigned weightings of 40 % to the income approach and 60 % to the market approach.

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

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

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

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

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

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

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

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

Management notes that the emergence of COVID-19 as a global pandemic in 2020 and throughout 2021 resulted in significant deterioration in general economic conditions and the environment in which the Company operates.

This uncertainty in 2020 resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered through the end of 2020 and throughout 2021.

Goodwill was evaluated for impairment at December 31, 2021, 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 December 31, 2021.

NOTE 19 — PARENT COMPANY FINANCIAL INFORMATION

19 unchanged sentences

Dividends from subsidiary bank

Net securities (losses) gains

Net securities gains (losses)

Interest on subordinated debt

1 unchanged sentence

TOTAL EXPENSE

INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE

INCOME TAX (BENEFIT) EXPENSE

INCOME BEFORE INCOME TAX BENEFIT

INCOME TAX BENEFIT

EQUITY IN UNDISTRIBUTED EARNINGS OF BANKING SUBSIDIARY

11 unchanged sentences

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

Losses (gains) on securities

Deferred income tax (benefit) expense

(Gains) losses on securities

Deferred income tax expense (benefit)

Equity in undistributed earnings of banking subsidiary

Investment in banking subsidiary

(Increase) decrease in prepaid/accrued expenses and other assets/liabilities

Increase (decrease) in advances from banking subsidiary

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

Increase in prepaid/accrued expenses and other assets/liabilities

(Decrease) increase in advances from banking subsidiary

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sales of equity securities

NET CASH PROVIDED BY INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES:

2 unchanged sentences

Dividends paid

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

INCREASE IN CASH AND CASH EQUIVALENTS

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

2 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-K

Item 8. Financial Statements and Supplementary Data