UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2017~~March 31, 2021

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to______________________

Commission file number: 001-38229

FIDELITY D & D BANCORP, INC.

STATE OF INCORPORATION: IRS EMPLOYER IDENTIFICATION NO:

~~PENNSYLVANIA~~Pennsylvania 23-3017653

Address of principal executive offices:

~~BLAKELY~~Blakely & ~~DRINKER ST.~~Drinker St.

~~DUNMORE, PENNSYLVANIA~~Dunmore, Pennsylvania 18512

TELEPHONE: 570-342-8281

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


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

~~570-342-8281~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days. [X] YES [ ] NO

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). [X] YES [ ] NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ~~[ ]~~ o	Non-accelerated filer x	Accelerated filer ~~[ ]~~
~~Non-accelerated filer [ ]~~o			Smaller reporting company ~~[X]~~
~~(Do not check if a smaller reporting company)~~x		Emerging growth company ~~[ ]~~o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] YES [X] NO

The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on ~~October 31, 2017,~~April 30, 2021, the latest practicable date, was ~~3,729,978~~4,995,547 shares.

Table Of Contents

FIDELITY D & D BANCORP, INC.

Form 10-Q ~~September 30, 2017~~March 31, 2021

Index


Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020	3
	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020	4
	Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020	5
	Consolidated Statements of Changes in Shareholders’ Equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020	6
	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020	7
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3337
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	5157
Item 4.	Controls and Procedures	5662

Part II. Other Information
Item 1.	Legal Proceedings	5763
Item 1A.	Risk Factors	5763
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5763
Item 3.	Defaults upon Senior Securities	5763
Item 4.	Mine Safety Disclosures	5763
Item 5.	Other Information	5763
Item 6.	Exhibits	5764
Signatures		5966

‎

Table Of Contents

PART I – Financial Information

Item 1: Financial Statements


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)	September 30, 2017		December 31, 2016		March 31, 2021		December 31, 2020
Assets:
Cash and due from banks	$	11,835	$	12,856	$	38,964	$	19,408
Interest-bearing deposits with financial institutions		30,046		12,987		183,989		49,938
Total cash and cash equivalents		41,881		25,843		222,953		69,346
Available-for-sale securities		151,995		130,037		436,622		392,420
Federal Home Loan Bank stock		2,543		2,606
Restricted investments in bank stock						2,931		2,813
Loans and leases, net (allowance for loan losses of
$9,356 in 2017; $9,364 in 2016)		625,111		588,130
Loans held-for-sale (fair value $1,662 in 2017, $2,907 in 2016)		1,629		2,854
$14,839 in 2021; $14,202 in 2020)						1,127,320		1,105,450
Loans held-for-sale (fair value $11,208 in 2021, $30,858 in 2020)						11,001		29,786
Foreclosed assets held-for-sale		927		1,306		413		256
Bank premises and equipment, net		16,899		17,164		27,275		27,626
Leased property under finance leases, net						259		283
Right-of-use assets						6,999		7,082
Cash surrender value of bank owned life insurance		19,857		11,435		44,582		44,285
Accrued interest receivable		2,769		2,246		5,723		5,712
Goodwill		209		-		7,053		7,053
Core deposit intangible, net						1,645		1,734
Other assets		14,446		11,323		18,316		5,664
Total assets	$	878,266	$	792,944	$	1,913,092	$	1,699,510
Liabilities:
Deposits:
Interest-bearing	$	562,719	$	492,306	$	1,204,548	$	1,102,009
Non-interest-bearing		185,858		211,153		518,352		407,496
Total deposits		748,577		703,459		1,722,900		1,509,505
Accrued interest payable and other liabilities		6,781		4,631		18,776		10,400
Short-term borrowings		12,920		4,223
Finance lease obligation						267		291
Operating lease liabilities						7,567		7,644
FHLB advances		23,704		-		-		5,000
Total liabilities		791,982		712,313		1,749,510		1,532,840
Shareholders' equity:
Preferred stock authorized 5,000,000 shares with no par value; none issued		-		-
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 3,729,978 in 2017; and 2,453,805 in 2016)		28,200		27,155
Preferred stock authorized 5,000,000 shares with no par value; NaN issued						-		-
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 4,995,547 at March 31, 2021; and 4,977,750 at December 31, 2020)						78,222		77,676
Retained earnings		56,163		52,095		84,197		80,042
Accumulated other comprehensive income		1,921		1,381		1,163		8,952
Total shareholders' equity		86,284		80,631		163,582		166,670
Total liabilities and shareholders' equity	$	878,266	$	792,944	$	1,913,092	$	1,699,510

See notes to unaudited consolidated financial statements

‎

Table Of Contents


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
(dollars in thousands except per share data)	March 31, 2021		March 31, 2020
Interest income:
Loans and leases:
Taxable	$	12,188	$	8,063
Nontaxable		320		297
Interest-bearing deposits with financial institutions		21		12
Restricted investments in bank stock		33		65
Investment securities:
U.S. government agency and corporations		700		846
States and political subdivisions (nontaxable)		854		423
States and political subdivisions (taxable)		224		5
Total interest income		14,340		9,711
Interest expense:
Deposits		864		1,516
Other short-term borrowings and other		-		75
FHLB advances		26		114
Total interest expense		890		1,705
Net interest income		13,450		8,006
Provision for loan losses		800		300
Net interest income after provision for loan losses		12,650		7,706
Other income:
Service charges on deposit accounts		566		559
Interchange fees		949		557
Service charges on loans		511		438
Fees from trust fiduciary activities		494		419
Fees from financial services		175		159
Fees and other revenue		178		250
Earnings on bank-owned life insurance		296		165
Gain (loss) on write-down, sale or disposal of:
Loans		2,347		215
Premises and equipment		-		(7)
Total other income		5,516		2,755
Other expenses:
Salaries and employee benefits		5,876		3,923
Premises and equipment		1,642		1,118
Data processing and communication		603		460
Advertising and marketing		901		432
Professional services		937		415
Merger-related expenses		523		271
Automated transaction processing		292		227
Office supplies and postage		113		106
PA shares tax		50		66
Loan collection		50		29
Other real estate owned		25		27
FDIC assessment		111		-
FHLB prepayment fee		369		-
Other		(36)		230
Total other expenses		11,456		7,304
Income before income taxes		6,710		3,157
Provision for income taxes		1,043		523
Net income	$	5,667	$	2,634
Per share data:
Net income - basic	$	1.14	$	0.69
Net income - diluted	$	1.13	$	0.69
Dividends	$	0.30	$	0.28

See notes to unaudited consolidated financial statements

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

(Unaudited)

Three months ended

Nine months ended
(dollars in thousands except per share data)

September 30, 2017

September 30, 2016

September 30, 2017

September 30, 2016
Interest income:

Loans and leases:

Taxable

$
6,672

$
5,960

$
19,398

$
17,571
Nontaxable

220

195

647

579
Interest-bearing deposits with financial institutions

12

13

22

59
Investment securities:

U.S. government agency and corporations

610

500

1,887

1,236
States and political subdivisions (nontaxable)

368

321

1,081

954
Other securities

46

17

113

58
Total interest income

7,928

7,006

23,148

20,457
Interest expense:

Deposits

742

580

1,971

1,727
Securities sold under repurchase agreements

3

4

15

16
Other short-term borrowings and other

60

1

197

14
FHLB advances

77

-

174

-
Total interest expense

882

585

2,357

1,757
Net interest income

7,046

6,421

20,791

18,700
Provision for loan losses

375

225

925

650
Net interest income after provision for loan losses

6,671

6,196

19,866

18,050
Other income:

Service charges on deposit accounts

582

564

1,674

1,567
Interchange fees

431

378

1,256

1,115
Fees from trust fiduciary activities

253

176

756

539
Fees from financial services

169

126

434

436
Service charges on loans

201

194

597

665
Fees and other revenue

222

201

661

593
Earnings on bank-owned life insurance

158

89

422

264
Gain (loss) on sale or disposal of:

Loans

232

302

684

629
Investment securities

-

-

-

9
Premises and equipment

-

(6)

-

(6)
Total other income

2,248

2,024

6,484

5,811
Other expenses:

Salaries and employee benefits

3,235

2,892

9,559

8,660
Premises and equipment

919

898

2,816

2,642
Advertising and marketing

270

198

850

656
Professional services

404

334

1,330

1,122
FDIC assessment

68

98

201

335
Loan collection

84

16

191

141
Other real estate owned

37

69

183

158
Office supplies and postage

109

110

339

352
Automated transaction processing

185

179

543

460
Data processing and communication

297

261

880

720
PA shares tax

183

165

394

471
Other

244

189

597

449
Total other expenses

6,035

5,409

17,883

16,166
Income before income taxes

2,884

2,811

8,467

7,695
Provision for income taxes

658

776

2,078

2,031
Net income

$
2,226

$
2,035

$
6,389

$
5,664
Per share data:

Net income - basic (1)

$
0.60

$
0.55

$
1.72

$
1.54
Net income - diluted (1)

$
0.60

$
0.55

$
1.72

$
1.54
Dividends (1)

$
0.21

$
0.19

$
0.62

$
0.57

See notes to unaudited consolidated financial statements

~~(1)~~

On August 15, 2017, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend. Per share data for the three and nine months ended September 30, 2016 has been restated for the effects thereof.

Table Of Contents



Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income	Three months ended
(Unaudited)	March 31,
(dollars in thousands)	2021		2020

Net income	$	5,667	$	2,634

Other comprehensive (loss) income, before tax:
Unrealized holding (loss) gain on available-for-sale debt securities		(9,860)		4,111
Reclassification adjustment for net gains realized in income		-		-
Net unrealized (loss) gain		(9,860)		4,111
Tax effect		2,071		(863)
Unrealized (loss) gain, net of tax		(7,789)		3,248
Other comprehensive (loss) gain, net of tax		(7,789)		3,248
Total comprehensive (loss) income, net of tax	$	(2,122)	$	5,882

See notes to unaudited consolidated financial statements

‎

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income
Three months ended

Nine months ended
(Unaudited)
September 30,

September 30,
(dollars in thousands)
2017

2016

2017

2016

Net income
$
2,226

$
2,035

$
6,389

$
5,664

Other comprehensive income (loss), before tax:

Unrealized holding gain (loss) on available-for-sale securities

104

(361)

818

1,932
Reclassification adjustment for net gains realized in income

-

-

-

(9)
Net unrealized gain (loss)

104

(361)

818

1,923
Tax effect

(35)

123

(278)

(654)
Unrealized gain (loss), net of tax

69

(238)

540

1,269
Other comprehensive income (loss), net of tax

69

(238)

540

1,269
Total comprehensive income, net of tax
$
2,295

$
1,797

$
6,929

$
6,933

See notes to unaudited consolidated financial statements

Table Of Contents


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 2021 and 2020
(Unaudited)							Accumulated
							other
	Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income (loss)		Total
Balance, December 31, 2019		3,781,500	$	30,848	$	72,385	$	3,602	$	106,835
Net income						2,634				2,634
Other comprehensive income								3,248		3,248
Issuance of common stock through Employee Stock Purchase Plan		3,885		219						219
Issuance of common stock from vested restricted share grants through stock compensation plans		12,261		-						-
Stock-based compensation expense				275						275
Cash dividends declared						(1,071)				(1,071)
Balance, March 31, 2020		3,797,646	$	31,342	$	73,948	$	6,850	$	112,140

Balance, December 31, 2020		4,977,750	$	77,676	$	80,042	$	8,952	$	166,670
Net income						5,667				5,667
Other comprehensive loss								(7,789)		(7,789)
Issuance of common stock through Employee Stock Purchase Plan		4,738		270						270
Issuance of common stock from vested restricted share grants through stock compensation plans		11,059		-						-
Issuance of common stock through exercise of SSARs		2,000		-						-
Stock-based compensation expense				276						276
Cash dividends declared						(1,512)				(1,512)
Balance, March 31, 2021		4,995,547	$	78,222	$	84,197	$	1,163	$	163,582

See notes to unaudited consolidated financial statements

‎

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

For the nine months ended September 30, 2017 and 2016

(Unaudited)

Accumulated

other

Capital stock

Retained

comprehensive

(dollars in thousands)
Shares

Amount

earnings

income

Total
Balance, December 31, 2015

2,443,405

$
26,700

$
47,463

$
2,188

$
76,351
Net income

5,664

5,664
Other comprehensive income

1,269

1,269
Issuance of common stock through Employee Stock Purchase Plan

3,695

111

111
Issuance of common stock from vested restricted share grants through stock compensation plans

6,205

Issuance of common stock through exercise of stock options

500

14

14
Stock-based compensation expense

248

248
Cash dividends declared

(2,098)

(2,098)
Balance, September 30, 2016

2,453,805

$
27,073

$
51,029

$
3,457

$
81,559

Balance, December 31, 2016

2,453,805

$
27,155

$
52,095

$
1,381

$
80,631
Net income

6,389

6,389
Other comprehensive income

540

540
Issuance of common stock through Employee Stock Purchase Plan

4,085

126

126
Issuance of common stock through Dividend Reinvestment Plan

7,744

331

331
Issuance of common stock from vested restricted share grants through stock compensation plans

9,657

Issuance of common stock through exercise of stock options

11,500

332

332
Stock-based compensation expense

256

256
Issuance of common stock from stock split

1,243,187

Cash in lieu of fractional shares paid due to the stock split

(11)

(11)
Cash dividends declared

(2,310)

(2,310)
Balance, September 30, 2017

3,729,978

$
28,200

$
56,163

$
1,921

$
86,284

See notes to unaudited consolidated financial statements

Table Of Contents



Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Nine months ended September 30,				Three months ended March 31,
(dollars in thousands)	2017		2016		2021		2020

Cash flows from operating activities:
Net income	$	6,389	$	5,664	$	5,667	$	2,634
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		2,324		2,519		1,394		835
Provision for loan losses		925		650		800		300
Deferred income tax expense		1,070		1,192
Deferred income tax (benefit) expense						(544)		442
Stock-based compensation expense		419		385		266		243
Excess tax benefit from exercise of stock options		66		-
Excess tax benefit from exercise of SSARs						26		-
Proceeds from sale of loans held-for-sale		33,498		34,623		82,284		13,055
Originations of loans held-for-sale		(29,342)		(32,155)		(60,426)		(11,232)
Earnings from bank-owned life insurance		(422)		(264)		(296)		(165)
Net gain from sales of loans		(684)		(629)		(2,347)		(215)
Net gain from sales of investment securities		-		(9)
Net loss from sale and write-down of foreclosed assets held-for-sale		83		57
Net loss from disposal of equipment		-		6
Net (gain) loss from sale and write-down of foreclosed assets held-for-sale						(15)		17
Net loss from write-down and disposal of bank premises and equipment						-		7
Operating lease payments						7		8
Change in:
Accrued interest receivable		(519)		97		(11)		42
Other assets		(4,262)		(2,760)		(1,605)		(903)
Accrued interest payable and other liabilities		1,928		906		492		(178)
Net cash provided by operating activities		11,473		10,282		25,692		4,890

Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		-		2,884		-		7,765
Proceeds from maturities, calls and principal pay-downs		14,795		15,139		14,276		8,832
Purchases		(36,786)		(20,707)		(69,290)		(31,617)
Decrease in FHLB stock		63		919
Net increase in loans and leases		(39,271)		(20,584)
Purchase of life insurance policies		(8,000)		-
Acquisition of bank premises and equipment		(747)		(1,075)
Net cash acquired in acquisition of bank branch		11,817		-
Proceeds from sale of bank premises and equipment		6		-
(Increase) decrease in restricted investments in bank stock						(118)		1,651
Net (increase) decrease in loans and leases						(25,056)		5,837
Principal portion of lease payments received under direct finance leases						1,123��		759
Purchases of bank premises and equipment						(286)		(271)
Proceeds from sale of foreclosed assets held-for-sale		511		354		107		236
Net cash used in investing activities		(57,612)		(23,070)		(79,244)		(6,808)

Cash flows from financing activities:
Net increase in deposits		31,308		51,132		213,425		83,924
Net increase (decrease) in short-term borrowings		8,697		(17,208)
Proceeds from issuance of FHLB advances		25,704		-
Net decrease in short-term borrowings						-		(37,839)
Repayment of FHLB advances		(2,000)		-		(5,000)		-
Repayment of finance lease obligation						(24)		(18)
Proceeds from employee stock purchase plan participants		126		111		270		219
Exercise of stock options		332		14
Dividends paid, net of dividends reinvested		(1,979)		(2,098)
Cash paid in lieu of fractional shares		(11)		-
Dividends paid						(1,512)		(1,071)
Net cash provided by financing activities		62,177		31,951		207,159		45,215
Net increase in cash and cash equivalents		16,038		19,163		153,607		43,297
Cash and cash equivalents, beginning		25,843		12,277		69,346		15,663

Cash and cash equivalents, ending	$	41,881	$	31,440	$	222,953	$	58,960

See notes to unaudited consolidated financial statements

‎

Table Of Contents


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
(Unaudited)	Nine months ended September 30,				Three months ended March 31,
(dollars in thousands)	2017		2016		2021		2020
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	2,219	$	1,793	$	1,046	$	1,784
Income tax		1,300		500		-		-
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized gains on available-for-sale securities		818		1,923		(9,860)		4,111
Transfers from loans to foreclosed assets held-for-sale		216		1,104		249		-
Transfers from loans to loans held-for-sale		2,752		3,306
Transfers from loans to loans held-for-sale, net						1,491		1,662
Security settlement pending						7,894		1,445

Acquisition of West Scranton Branch from Wayne Bank	March 17, 2017
Non-cash assets acquired:
Loans	$	1,574
Bank premises and equipment		264
Goodwill		209
Accrued interest receivable and other assets		4
Total non-cash assets acquired	$	2,051
Liabilities assumed:
Deposits	$	13,809
Accrued interest payable and other liabilities		59
Total liabilities assumed	$	13,868


See notes to unaudited consolidated financial statements

‎

Table Of Contents

FIDELITY D & D BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of operations and critical accounting policies

Nature of operations

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

On February 26, 2021, the Company announced the execution of an agreement and plan of reorganization to acquire Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned subsidiary, Landmark Community Bank (“Landmark Bank”). Subject to the terms and conditions of the agreement, Landmark will merge with and into an acquisition subsidiary of the Company and Landmark Bank will merge with and into the Bank.

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

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

Principles of consolidation

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

For additional information and disclosures required under U.S. GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020.

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

In the opinion of management, the consolidated balance sheets as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020 and the related consolidated statements of income, ~~and~~ consolidated statements of comprehensive income ~~for the three and nine months ended September 30, 2017 and 2016,~~ and consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2021 and 2020, and consolidated statements of cash flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 present fairly the financial condition and results of operations of the Company. All material adjustments required for a fair presentation have been made. These adjustments are of a normal recurring nature. Certain reclassifications have been made to the ~~2016~~2020 financial statements to conform to the ~~2017~~2021 presentation.

On August 15, 2017, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend on its common stock outstanding to shareholders as of September 18, 2017 and distributed on September 28, 2017. All share and per share information included in the accompanying consolidated financial statements and footnotes has been retroactively adjusted to reflect this stock split.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after ~~September 30, 2017~~March 31, 2021 through the date these consolidated financial statements were issued.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, ~~2016,~~2020, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

Critical accounting policies

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

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses at ~~September 30, 2017~~March 31, 2021 is adequate and ~~reasonable.~~reasonable to cover incurred losses. Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different

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assumptions and could, therefore, calculate a materially different allowance amount. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.

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

The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB). Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained. On occasion, the Company may transfer loans from the loan portfolio to loans HFS. Under these circumstances, pricing may be obtained from other entities and the residential mortgage loans are transferred at the lower of cost or market value and simultaneously sold. For other loans transferred to HFS, pricing may be obtained from other entities or modeled and the other loans are transferred at the lower of cost or market value and then sold. As of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, loans classified as HFS consisted of residential mortgage loans.

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

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

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

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

The Company maintains bank owned life insurance policies (BOLI) for a selected group of employees, namely its officers where the Company is the owner and sole beneficiary of the policies. The earnings from the BOLI are recognized as a component of other income in the consolidated statements of income. The BOLI is an asset that can be liquidated, if necessary, with tax consequences. However, the Company intends to hold these policies and accordingly, the Company has not provided for deferred taxes on the earnings from the increase in the cash surrender value.

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

For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions. ~~Expenditures for construction in process, a component of other assets in the consolidated balance sheets, are included in acquisition of premises and equipment.~~

2. New accounting pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (CECL). The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

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An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. As it relates to CECL, this guidance amends certain provisions contained in ASU 2016-13, particularly in regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses.

The amendments in this update are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 for public companies. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption (modified-retrospective approach). Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan

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losses and require the Company to record loan losses more rapidly. The Company has engaged the services of a qualified third-party service provider to assist management in estimating credit allowances under this standard and is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

~~In March 2016,~~ On October 16, 2019, the FASB ~~issued ASU 2016-09,~~ ~~Compensation – Stock Compensation (Topic 718) Improvements~~decided to ~~Employee Share-Based Payment Accounting~~. The areas for simplification in the update involve several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. Amendments should be applied using either a modified retrospective transition method by means of a cumulative-effect adjustmentmove forward with finalizing its proposal to equity as of the beginning of the period in which the guidance is adopted, retrospectively, prospectively, or using either a prospective transition method or a retrospective transition method. The Company adopted this accounting standard during the first quarter of 2017 and does not expect this amendment to have a material impact on its consolidated financial statements.

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; recognize revenue when (or as) the entity satisfies a performance obligation. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or a modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption.

Subsequently, the FASB issued additional guidance to clarify certain implementation issues. Specifically, the FASB issued Principal versus Agent Considerations, Identifying Performance Obligations and Licensing, Narrow-Scope Improvements and Practical Expedients and Technical Corrections and Improvements in March, April, May and December 2016, respectively. These amendments do not change the core principle in Revenue from Contracts with Customers (Topic 606) anddefer the effective date and transition requirements are consistent with those in Topic 606. The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of the guidance, and non-interest income. The Company is currently assessing our revenue streams that are within the scope of the standard; including wealth management fees, deposit related fees and gains on the sale of other real estate owned. The Company expects that this guidance may change how certain non-interest income is recognized but does not expect the new standard, or any of its amendments,for ASU 2016-13 for smaller reporting companies to have a material effect on its consolidated financial statements. The Company does anticipate the guidance will require expanded footnote disclosures. The Company plans to adopt this guidance on January 1, 2018 using the modified retrospective approach with a cumulative adjustment to opening retained earnings, if such adjustment is deemed to be material.

~~In January 2016, the FASB issued ASU 2016-01 related to Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The update applies to all entities that hold financial assets or owe financial liabilities. The amendments in this update make targeted improvements to U.S. GAAP as follows:~~

~~Require equity investments to be measured at fair value with changes in fair value recognized in net income;~~

~~Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment;~~

~~Require public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes;~~

~~Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset;~~

~~Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities.~~

~~The amendments are effective for public business entities for~~ fiscal years beginning after December ~~15, 2017,~~31, 2022, including interim periods within those fiscal ~~years. The~~periods. Since the Company ~~is evaluating~~currently meets the ~~impact~~SEC definition of a smaller reporting company, the ~~adoption of ASU 2016-01 on its consolidated financial statements, but does not expect it~~delay will be applicable to ~~have a significant impact.~~the Company.

In ~~February 2016,~~August 2018, the FASB issued ASU ~~2016-02,~~ ~~Leases (Topic 842)~~ to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 requires the recognition of a right-of-use asset and related lease liability by lessees for leases classified as operating leases under GAAP. The Company is expected to make an election to exclude leases less than 12 months from the provisions of this ASU.2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). The amendments in this update ~~are effective~~change the disclosure requirements for the Company for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the amendments in this update are permitted. A modified retroactive approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period. Upon adoption, this change in accounting guidance could have a significant impact on the consolidated balance sheets and could potentially impact debt covenant agreements with our customers. The Company is currently evaluating the amount of the impact of

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~~ASU 2016-02 on its consolidated financial statements.~~

~~In August 2016, the FASB released ASU 2016-15,~~ ~~Statement of Cash Flows (Topic 230)~~ to clarify the presentation of certain cash receipts and payments on the statement of cash flows. The update addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements, but does not expect it to have a significant impact.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles-Goodwill and Other (Topic 350)~~ to simplify the test for goodwill impairment. To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity should apply the amendments in his update on a prospective basis. The amendments in this update are effective for the Company for its annual goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will early adopt this standard and it will not have an impact on its consolidated financial statements.

~~In March 2017, the FASB issued ASU 2017-08,~~ ~~Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities~~ to amend the amortization period for certain purchased callable debt securities held at a premium. The amendments in this update shorten the amortization period for the premium to the earliest call date.defined benefit plans. The amendments in this update are effective for fiscal years ~~and interim periods within those fiscal years, beginning~~ending after December 15, ~~2018. Early adoption is permitted, including adoption in an interim period.~~2020 for the Company. An entity should apply the amendments in this update on a ~~modified~~ retrospective basis ~~through~~to all periods presented. The update was effective for the Company on January 1, 2021 and the amendments in this update did not have a ~~cumulative effect adjustment directly~~material impact on the Company’s disclosures.

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

3. Accumulated other comprehensive income

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

As of and for the nine months ended September 30, 2017

Unrealized gains

(losses) on

available-for-sale

(dollars in thousands)
securities

Total
Beginning balance
$
1,381

$
1,381

Other comprehensive income before reclassifications, net of tax

540

540
Amounts reclassified from accumulated other comprehensive income, net of tax

-

-
Net current-period other comprehensive income

540

540
Ending balance
$
1,921

$
1,921



As of and for the three months ended March 31, 2021
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	debt securities
Beginning balance	$	8,952

Other comprehensive loss before reclassifications, net of tax		(7,789)
Amounts reclassified from accumulated other comprehensive income, net of tax		-
Net current-period other comprehensive loss		(7,789)
Ending balance	$	1,163

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As of and for the three months ended September 30, 2017

Unrealized gains

(losses) on

available-for-sale

(dollars in thousands)
securities

Total
Beginning balance
$
1,852

$
1,852

Other comprehensive income before reclassifications, net of tax

69

69
Amounts reclassified from accumulated other comprehensive income, net of tax

-

-
Net current-period other comprehensive income

69

69
Ending balance
$
1,921

$
1,921

1211

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As of and for the nine months ended September 30, 2016

Unrealized gains

(losses) on

available-for-sale

(dollars in thousands)
securities

Total
Beginning balance
$
2,188

$
2,188

Other comprehensive income before reclassifications, net of tax

1,275

1,275
Amounts reclassified from accumulated other comprehensive income, net of tax

(6)

(6)
Net current-period other comprehensive income

1,269

1,269
Ending balance
$
3,457

$
3,457


As of and for the three months ended March 31, 2020
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities
Beginning balance	$	3,602

Other comprehensive income before reclassifications, net of tax		3,248
Amounts reclassified from accumulated other comprehensive income, net of tax		-
Net current-period other comprehensive income		3,248
Ending balance	$	6,850

As of and for the three months ended September 30, 2016

Unrealized gains

(losses) on

available-for-sale

(dollars in thousands)
securities

Total
Beginning balance
$
3,695

$
3,695

Other comprehensive loss before reclassifications, net of tax

(238)

(238)
Amounts reclassified from accumulated other comprehensive income, net of tax

-

-
Net current-period other comprehensive loss

(238)

(238)
Ending balance
$
3,457

$
3,457

There were 0 amounts reclassified from accumulated other comprehensive income for the three months ended March 31, 2021 and 2020.

Details about accumulated other

comprehensive income components
Amount reclassified from accumulated

Affected line item in the statement
(dollars in thousands)
other comprehensive income

where net income is presented

Three months ended

Nine months ended

September 30,

September 30,

2017

2016

2017

2016

Unrealized gains on AFS securities
$
-

$
-

$
-

$
9

Gain on sale of investment securities

-

-

-

(3)

Provision for income taxes
Total reclassifications for the period
$
-

$
-

$
-

$
6

Net income

4. Investment securities

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

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), ~~Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB)~~FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed and adjustable, have varying ~~short-~~short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions

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

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The amortized cost and fair value of investment securities at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020 are summarized as follows:

Gross

Gross

Amortized

unrealized

unrealized

Fair
(dollars in thousands)

cost

gains

losses

value
September 30, 2017

Available-for-sale securities:

Agency - GSE

$
16,269

$
21

$
(77)

$
16,213
Obligations of states and political subdivisions

41,759

2,056

(80)

43,735
MBS - GSE residential

90,761

804

(294)

91,271

Total debt securities

148,789

2,881

(451)

151,219

Equity securities - financial services

294

482

-

776

Total available-for-sale securities

$
149,083

$
3,363

$
(451)

$
151,995



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
March 31, 2021
Available-for-sale debt securities:
Agency - GSE	$	58,792	$	336	$	(2,278)	$	56,850
Obligations of states and political subdivisions		226,443		5,118		(3,400)		228,161
MBS - GSE residential		149,915		3,047		(1,351)		151,611

Total available-for-sale debt securities	$	435,150	$	8,501	$	(7,029)	$	436,622

Gross

Gross

Amortized

unrealized

unrealized

Fair
(dollars in thousands)

cost

gains

losses

value
December 31, 2016

Available-for-sale securities:

Agency - GSE

$
18,362

$
58

$
(144)

$
18,276
Obligations of states and political subdivisions

38,648

1,803

(260)

40,191
MBS - GSE residential

70,639

851

(553)

70,937

Total debt securities

127,649

2,712

(957)

129,404

Equity securities - financial services

294

339

-

633

Total available-for-sale securities

$
127,943

$
3,051

$
(957)

$
130,037



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2020
Available-for-sale debt securities:
Agency - GSE	$	45,146	$	392	$	(91)	$	45,447
Obligations of states and political subdivisions		192,385		7,480		(152)		199,713
MBS - GSE residential		143,557		3,881		(178)		147,260

Total available-for-sale debt securities	$	381,088	$	11,753	$	(421)	$	392,420

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The amortized cost and fair value of debt securities at ~~September 30, 2017~~March 31, 2021 by contractual maturity are summarized below:



	Amortized		Fair		Amortized		Fair
(dollars in thousands)	cost		value		cost		value
Available-for-sale securities:
Debt securities:
Due in one year or less	$	4,004	$	4,007	$	967	$	1,007
Due after one year through five years		13,084		13,120		5,961		6,298
Due after five years through ten years		2,556		2,649		73,232		70,598
Due after ten years		38,384		40,172		205,075		207,108

Total debt securities		58,028		59,948

MBS - GSE residential		90,761		91,271		149,915		151,611

Total available-for-sale debt securities	$	148,789	$	151,219	$	435,150	$	436,622

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

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The following table presents the fair value and gross unrealized losses of ~~investment~~debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016:~~ 2020:



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

September 30, 2017
March 31, 2021
Agency - GSE	$	5,051	$	(29)	$	3,022	$	(48)	$	8,073	$	(77)	$	50,552	$	(2,278)	$	-	$	-	$	50,552	$	(2,278)
Obligations of states and political subdivisions		2,416		(41)		2,254		(39)		4,670		(80)		127,546		(3,400)		-		-		127,546		(3,400)
MBS - GSE residential		34,146		(208)		4,740		(86)		38,886		(294)		67,080		(1,351)		-		-		67,080		(1,351)
Total	$	41,613	$	(278)	$	10,016	$	(173)	$	51,629	$	(451)	$	245,178	$	(7,029)	$	-	$	-	$	245,178	$	(7,029)
Number of securities		29				9				38				128				-				128

December 31, 2016
December 31, 2020
Agency - GSE	$	6,032	$	(144)	$	-	$	-	$	6,032	$	(144)	$	27,602	$	(91)	$	-	$	-	$	27,602	$	(91)
Obligations of states and political subdivisions		8,690		(260)		-		-		8,690		(260)		15,256		(152)		-		-		15,256		(152)
MBS - GSE residential		41,111		(553)		-		-		41,111		(553)		14,753		(178)		-		-		14,753		(178)
Total	$	55,833	$	(957)	$	-	$	-	$	55,833	$	(957)	$	57,611	$	(421)	$	-	$	-	$	57,611	$	(421)
Number of securities		48				-				48				30				-				30

The Company had ~~thirty-eight~~128 debt securities in an unrealized loss position at ~~September 30, 2017,~~March 31, 2021, including ~~eight~~22 agency securities, t~~wenty-two~~22 mortgage-backed securities and ~~eight~~84 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at ~~September 30, 2017: 0.94%~~March 31, 2021: 4.31% for ~~agencies; 0.75%~~agencies, 1.97% for total MBS-GSE; and ~~1.69%~~2.60% for municipals. ~~In addition, three agency securities, three mortgage-backed securities and three municipal~~None of these securities had been in an unrealized loss position in excess of 12 months. ~~The changes~~Management has no intent to sell any securities in ~~the prices on these securities are the result~~an unrealized loss position as of ~~interest rate movement and management believes they are temporary in nature.~~March 31, 2021.

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

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

For all ~~security types,~~debt securities, as of ~~September 30, 2017,~~March 31, 2021, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nonor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.

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5. Loans and leases

The classifications of loans and leases at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020 are summarized as follows:



(dollars in thousands)	September 30, 2017		December 31, 2016		March 31, 2021		December 31, 2020

Commercial and industrial	$	112,096	$	98,477	$	295,595	$	280,757
Commercial real estate:
Non-owner occupied		93,398		87,220		202,500		192,143
Owner occupied		109,598		113,104		179,932		179,923
Construction		6,123		3,987		11,721		10,231
Consumer:
Home equity installment		28,282		28,466		38,425		40,147
Home equity line of credit		53,177		51,609		47,675		49,725
Auto loans and leases		79,629		56,841
Auto loans						96,841		98,386
Direct finance leases						20,421		20,095
Other		5,784		13,301		6,098		7,602
Residential:
Real estate		138,709		134,475		221,766		218,445
Construction		8,315		10,496		22,340		23,357
Total		635,111		597,976		1,143,314		1,120,811
Less:
Allowance for loan losses		(9,356)		(9,364)		(14,839)		(14,202)
Unearned lease revenue		(644)		(482)		(1,155)		(1,159)

Loans and leases, net	$	625,111	$	588,130	$	1,127,320	$	1,105,450

As of March 31, 2021, total loans of $1.1 billion were reflected net of deferred loan fees of $0.4 million, including $4.3 million in deferred fee income from Paycheck Protection Program (PPP) loans net of $3.9 million in deferred loan costs on other loans. Net deferred loan costs of ~~$2.0~~$1.7 million, ~~and $1.8~~including $2.2 million in deferred fee income from PPP loans net of $3.9 million in deferred loan costs, have been included in the carrying values of loans at ~~September 30, 2017 and~~ December 31, ~~2016, respectively.~~2020.

Commercial and industrial loan balances were $295.6 million at March 31, 2021 and $280.8 million on December 31, 2020. As of March 31, 2021, the commercial and industrial loan balance included $144.7 million in PPP loans (net of deferred fees) compared to $129.9 million as of December 31, 2020.

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

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced amounted to ~~$296.9~~$420.5 million as of ~~September 30, 2017~~March 31, 2021 and ~~$285.2~~$366.5 million as of December 31, ~~2016.~~2020. Mortgage servicing rights amounted to $1.8 million and $1.3 million ~~both~~ as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment

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experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or ~~reaffirmed as the case may be.~~reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

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

Paycheck Protection Program Loans

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

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted, extending the authority to make PPP loans through March 31, 2021, revising certain PPP requirements, and permitting second draw PPP loans. On March 11, 2021, the American Rescue Plan Act of 2021 (American Rescue Plan Act) was enacted expanding eligibility for first and second draw PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness.

As of March 31, 2021, the Company had 1,414 PPP loans outstanding totaling $149.1 million, which represents a $17.0 million, or 13%, increase from the 1,246 loans totaling $132.1 million as of December 31, 2020. During the first quarter of 2021, the Company recognized $1.8 million in SBA fees from PPP loans. Unearned fees attributed to PPP loans, net of $0.2 million in fees paid to referral sources as prescribed by the SBA under the PPP program, were $4.3 million as of March 31, 2021.

Acquired loans

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

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

The Company reported provisional fair value adjustments regarding the acquired MNB Corporation loan portfolio. Therefore, the Company did not record an allowance on the acquired non-purchased credit impaired loans. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the calculation of the allowance for loan losses after the initial valuation and provide reserves accordingly.

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

With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value result in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan's acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.

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

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yield to be subsequently recognized on a prospective basis over the loan’s remaining life.

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

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

Within the ASC 310-20 loans, the Company identified certain loans that have higher risk due to the COVID-19 pandemic. Although performing at the time of acquisition and likely will continue making payments in accordance with contractual terms, management elected a higher credit adjustment on these loans to reflect the greater inherent risk that the borrower will default on payments. These higher risk factors include loans that requested forbearance consistent with FIL-17-2020 FDIC Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory Assistance, loans that were in industries determined to be at greater risk to economic disruption due to COVID-19, and loans that had a prior history of delinquency greater than 60 days at any point in the lifetime of the loan.

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



	For the three months ended
(dollars in thousands)	March 31, 2021
Balance at beginning of period	$	563
Accretable yield on acquired loans		-
Reclassification from non-accretable difference		13
Accretion of accretable yield		(103)
Balance at end of period	$	473

During the first quarter of 2021, management performed an analysis of all loans accounted for under ASC 310-30. NaN loans had actual payments exceed estimates resulting in a $13 thousand reclassification from non-accretable discount to accretable discount. Additionally, 1 loan was paid off with $17 thousand in accretable yield and $269 in non-accretable yield amortized to interest income.

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

Non-accrual loans

Non-accrual loans, segregated by class, at March 31, 2021 and December 31, 2020, were as follows:



(dollars in thousands)	March 31, 2021		December 31, 2020
Commercial and industrial	$	507	$	590
Commercial real estate:
Non-owner occupied		821		846
Owner occupied		1,560		1,123
Consumer:
Home equity installment		26		61
Home equity line of credit		287		395
Auto loans		14		27
Residential:
Real estate		714		727
Total	$	3,929	$	3,769

The table above excludes $1.3 million in purchased credit impaired loans, net of unamortized fair value adjustments.

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

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~~Non-accrual loans, segregated by class, at September 30, 2017 and December 31, 2016, were as follows:~~

(dollars in thousands)
September 30, 2017

December 31, 2016

Commercial and industrial
$
14

$
11
Commercial real estate:

Non-owner occupied

584

1,407
Owner occupied

1,148

3,078
Construction

169

193
Consumer:

Home equity installment

15

31
Home equity line of credit

513

737
Auto loans and leases

-

25
Other

-

6
Residential:

Real estate

1,421

1,882
Total
$
3,864

$
7,370

Troubled Debt Restructuring (TDR)

A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company ~~offers various types of~~typically considers the following concessions when modifying a loan, ~~however, forgiveness of principal is rarely granted. C&I loans modified in a TDR often involve~~which may include lowering interest rates below the market rate, temporary interest-only ~~payments,~~payment periods, term extensions ~~and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. CRE loans modified in a TDR can involve reducing the~~at interest ~~rate for the remaining term of the loan, extending the maturity date at an interest rate~~rates lower than the current market rate for new debt with similar risk and/or ~~substituting~~ converting revolving credit lines to term loans. The Company typically does not forgive principal when granting a TDR modification.

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

Beginning the week of March 16, 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. Modification terms included interest only or ~~guarantor. Commercial real estate construction~~full payment deferral for up to 6 months. As of March 31, 2021, the Company had 5 temporary modifications with principal balances totaling $0.7 million. As of December 31, 2020, the Company had 10 temporary modifications with principal balances totaling $2.2 million.

There were 0 loans modified in a TDR ~~may also involve extending~~for the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for an extended period of time. After the lowered monthly payment period ends, the borrower would revert back to paying principalthree months ended March 31, 2021 and interest pursuant to the original terms with the maturity date adjusted accordingly. Consumer loan modifications are typically not granted and therefore standard modification terms do not exist for loans of this type.

Loans modified in a TDR may or may not be placed on non-accrual status. As of September 30, 2017, total TDRs amounted to $3.9 million, consisting of 15 loans (12 CRE loans, 1 C&I loan, 1 HELOC and 1 residential mortgage to 10 unrelated borrowers), of which two CRE loans, totaling $0.7 million, one HELOC, totaling $0.4 million, and one residential mortgage, totaling $0.9 million, were on non-accrual status. The September 30, 2017 balance represented a $0.6 million increase over the December 31, 2016 balance, which amounted to $3.3 million consisting of 9 loans (6 CRE loans, 1 C&I loan, 1 HELOC and 1 residential mortgage to 6 unrelated borrowers), of which the HELOC, totaling $0.6 million, and the residential mortgage, totaling $0.9 million, were on non-accrual status. This increase in TDRs was attributed to the addition of the six accruing TDRs in the category of CRE, totaling $1.0 million in the first nine months of 2017.2020. Of the TDRs outstanding as of ~~September 30, 2017~~March 31, 2021 and ~~December 31, 2016,~~2020, when modified, the concessions granted consisted of temporary interest-only payments, extensions of maturity date, or a reduction in the rate of interest to a below-market rate for a contractual period of time. Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms.

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~~There were no loans modified in a TDR during the three months ended September 30, 2017 and 2016. The following presents by class, information related to loans modified in a TDR:~~

Loans modified as TDRs for the nine months ended:
(dollars in thousands)
September 30, 2017

September 30, 2016

Recorded

Increase in

Recorded

Increase in

Number

investment

allowance

Number

investment

allowance

of

(as of

(as of

of

(as of

(as of

contracts

period end)

period end)

contracts

period end)

period end)
Commercial real estate - non-owner occupied

1

$
119

$
4

-

$
-

$
-
Commercial real estate - owner occupied

5

926

187

-

-

-
Consumer home equity line of credit

-

-

-

1

650

105
Total

6

$
1,045

$
191

1

$
650

$
105

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

~~The following presents by class, loans modified as a TDR that subsequently defaulted (i.e. 90 days or more past due following a modification) during the periods indicated:~~

Loans modified as a TDR within the previous twelve months that subsequently defaulted during the:
(dollars in thousands)
Nine months ended September 30, 2017

Nine months ended September 30, 2016

Number of

Recorded

Number of

Recorded

contracts

investment

contracts

investment
Commercial real estate - owner occupied

$
-

1
$
20

~~In the above table, the period end balances are inclusive of all partial pay downs and charge-offs since the modification date.~~

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. There were no loans modified as a TDR within the previous twelve months that subsequently defaulted (i.e. 90 days or more past due following a modification) during the three months ended March 31, 2021 and 2020.

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

As of ~~September 30, 2017~~March 31, 2021 and ~~2016, respectively,~~2020, the balance of outstanding TDRs was $3.1 million and $1.5 million, respectively. As of March 31, 2021 and 2020, the allowance for impaired loans that have been modified in a TDR was ~~$0.8~~$0.7 million and ~~$0.4~~$0.2 million, respectively.

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Past due loans

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



														Recorded															Recorded
					Past due									investment past						Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days		30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
September 30, 2017	past due		past due		or more (1)		past due		Current		loans (3)			and accruing
March 31, 2021																past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing

Commercial and industrial	$	56	$	116	$	14	$	186	$	111,910	$	112,096		$	-		185		-		507		692		294,903		295,595			-
Commercial real estate:
Non-owner occupied		528		658		584		1,770		91,628		93,398			-		-		-		821		821		201,679		202,500			-
Owner occupied		54		-		1,148		1,202		108,396		109,598			-		-		-		1,560		1,560		178,372		179,932			-
Construction		-		-		169		169		5,954		6,123			-		-		-		-		-		11,721		11,721			-
Consumer:
Home equity installment		156		26		15		197		28,085		28,282			-		130		5		26		161		38,264		38,425			-
Home equity line of credit		61		72		513		646		52,531		53,177			-		55		-		287		342		47,333		47,675			-
Auto loans and leases		181		102		-		283		78,702		78,985	(2)		-
Auto loans																	103		52		46		201		96,640		96,841			32
Direct finance leases																	107		194		27		328		18,938		19,266	⁽²⁾		27
Other		88		12		-		100		5,684		5,784			-		4		-		-		4		6,094		6,098			-
Residential:
Real estate		-		334		1,421		1,755		136,954		138,709			-		77		-		714		791		220,975		221,766			-
Construction		-		-		-		-		8,315		8,315			-		-		-		-		-		22,340		22,340			-
Total	$	1,124	$	1,320	$	3,864	$	6,308	$	628,159	$	634,467		$	-	$	661	$	251	$	3,988	$	4,900	$	1,137,259	$	1,142,159		$	59

⁽¹⁾ Includes ~~$3.9 million of~~ non-accrual loans. ⁽²⁾ Net of unearned lease revenue of ~~$0.6~~$1.2 million. ⁽³⁾ Includes net deferred loan fees of ($448 thousand).



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

Commercial and industrial	$	288		505		590		1,383		279,374		280,757			-
Commercial real estate:
Non-owner occupied		79		-		846		925		191,218		192,143			-
Owner occupied		1		-		1,123		1,124		178,799		179,923			-
Construction		-		-		-		-		10,231		10,231			-
Consumer:
Home equity installment		102		-		61		163		39,984		40,147			-
Home equity line of credit		24		-		395		419		49,306		49,725			-
Auto loans		197		25		27		249		98,137		98,386			-
Direct finance leases		294		-		61		355		18,581		18,936	⁽²⁾		61
Other		9		-		-		9		7,593		7,602			-
Residential:
Real estate		-		74		727		801		217,644		218,445			-
Construction		-		-		-		-		23,357		23,357			-
Total	$	994	$	604	$	3,830	$	5,428	$	1,114,224	$	1,119,652		$	61

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of $1.2 million. ⁽³⁾ Includes net deferred loan costs of ~~$2.0~~$1.7 million.

‎

Table Of Contents

Impaired loans

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



														Recorded				Recorded		Recorded
					Past due									investment past		Unpaid		investment		investment		Total
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days		principal		with		with no		recorded		Related
December 31, 2016	past due		past due		or more (1)		past due		Current		loans (3)			and accruing

(dollars in thousands)																balance		allowance		allowance		investment		allowance
March 31, 2021
Commercial and industrial	$	208	$	-	$	11	$	219	$	98,258	$	98,477		$	-	$	605	$	461	$	46	$	507	$	150
Commercial real estate:
Non-owner occupied		180		-		1,407		1,587		85,633		87,220			-		2,834		1,678		1,144		2,822		490
Owner occupied		13		776		3,078		3,867		109,237		113,104			-		2,414		1,851		197		2,048		602
Construction		-		-		193		193		3,794		3,987			-
Consumer:
Home equity installment		213		25		31		269		28,197		28,466			-		59		-		26		26		-
Home equity line of credit		-		-		737		737		50,872		51,609			-		336		32		255		287		1
Auto loans and leases		293		59		44		396		55,963		56,359	(2)		19
Other		37		2		6		45		13,256		13,301			-
Auto loans																	37		10		4		14		3
Residential:
Real estate		14		421		1,882		2,317		132,158		134,475			-		762		554		160		714		141
Construction		-		-		-		-		10,496		10,496			-
Total	$	958	$	1,283	$	7,389	$	9,630	$	587,864	$	597,494		$	19	$	7,047	$	4,586	$	1,832	$	6,418	$	1,387

~~(1)~~ ~~Includes $7.4~~



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

At March 31, 2021, impaired loans totaled $6.4 million consisting of $2.5 million in accruing TDRs and $3.9 million in non-accrual loans. ~~(2)~~ ~~Net~~At December 31, 2020, impaired loans totaled $6.3 million consisting of ~~unearned lease revenue~~$2.5 million in accruing TDRs and $3.8 million in non-accrual loans. As of ~~$0.5 million.~~ ~~(3)~~ ~~Includes net deferred loan costs~~March 31, 2021, the non-accrual loans included 3 TDRs to 2 unrelated borrowers totaling $0.7 million compared with 4 TDRs to 3 unrelated borrowers totaling $0.7 million as of ~~$1.8 million.~~December 31, 2020.

~~Impaired loans~~

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

At September 30, 2017, impaired loans consisted of accruing TDRs of $1.9 million, $3.9 million in non-accrual loans and $1.5 million in accruing impaired loans. At December 31, 2016, impaired loans consisted of accruing TDRs of $1.8 million, $7.4 million in non-accrual loans and $2.2 million in accruing loans. As of September 30, 2017, the non-accrual loans included four TDRs to three unrelated borrowers totaling $2.0 million compared with two TDRs totaling $1.5 million as of December 31, 2016.

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

Recorded

Recorded

Unpaid

investment

investment

Total

principal

with

with no

recorded

Related
(dollars in thousands)
balance

allowance

allowance

investment

allowance
September 30, 2017

Commercial and industrial
$
228

$
204

$
24

$
228

$
193
Commercial real estate:

Non-owner occupied

2,405

1,997

288

2,285

612
Owner occupied

2,769

2,452

254

2,706

464
Construction

392

-

169

169

-
Consumer:

Home equity installment

48

-

15

15

-
Home equity line of credit

809

81

432

513

53
Auto loans and leases

8

-

-

-

-
Other

-

-

-

-

-
Residential:

Real estate

1,439

1,158

263

1,421

317
Construction

-

-

-

-

-
Total
$
8,098

$
5,892

$
1,445

$
7,337

$
1,639

~~Table Of Contents~~

Recorded

Recorded

Unpaid

investment

investment

Total

principal

with

with no

recorded

Related
(dollars in thousands)
balance

allowance

allowance

investment

allowance
December 31, 2016

Commercial and industrial
$
235

$
206

$
29

$
235

$
193
Commercial real estate:

Non-owner occupied

3,346

2,611

405

3,016

993
Owner occupied

5,363

4,351

876

5,227

1,389
Construction

416

-

193

193

-
Consumer:

Home equity installment

64

-

31

31

-
Home equity line of credit

778

650

87

737

167
Auto

25

25

-

25

3
Other

6

6

-

6

1
Residential:

Real estate

1,949

1,466

416

1,882

315
Construction

-

-

-

-

-
Total
$
12,182

$
9,315

$
2,037

$
11,352

$
3,061

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

‎

For the nine months ended

September 30, 2017

September 30, 2016

Cash basis

Cash basis

Average

Interest

interest

Average

Interest

interest

recorded

income

income

recorded

income

income
(dollars in thousands)
investment

recognized

recognized

investment

recognized

recognized
Commercial and industrial
$
232

$
7

$
-

$
502

$
12

$
-
Commercial real estate:

Non-owner occupied

3,054

114

-

5,030

93

-
Owner occupied

4,393

223

-

3,562

107

-
Construction

184

-

-

217

-

-
Consumer:

Home equity installment

19

-

-

119

3

-
Home equity line of credit

722

5

-

772

25

-
Auto

21

4

-

40

-

-
Other

4

1

-

6

-

-
Residential:

Real estate

1,428

77

-

750

4

-
Construction

-

-

-

-

-

-
Total
$
10,057

$
431

$
-

$
10,998

$
244

$
-

2019

Table Of Contents


	For the three months ended
	September 30, 2017						September 30, 2016						March 31, 2021						March 31, 2020
					Cash basis						Cash basis						Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest		Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income		recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	223	$	3	$	-	$	255	$	3	$	-	$	438	$	-	$	-	$	252	$	-	$	-
Commercial real estate:
Non-owner occupied		2,588		52		-		3,336		47		-		2,318		22		-		884		6		-
Owner occupied		3,521		152		-		5,068		29		-		1,853		4		-		2,327		6		-
Construction		173		-		-		204		-		-		-		-		-		-		-		-
Consumer:
Home equity installment		15		-		-		51		-		-		46		4		-		49		-		-
Home equity line of credit		659		5		-		871		8		-		366		4		-		245		-		-
Auto		-		-		-		30		-		-
Auto Loans														51		-		-		52		-		-
Other		3		-		-		6		-		-		-		-		-		-		-		-
Residential:
Real estate		1,421		54		-		770		2		-		761		-		-		1,102		-		-
Construction		-		-		-		-		-		-
Total	$	8,603	$	266	$	-	$	10,591	$	89	$	-	$	5,833	$	34	$	-	$	4,911	$	12	$	-

Credit Quality Indicators

Commercial and industrial and commercial real estate

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

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

Pass

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

Special Mention

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

Substandard

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

Doubtful

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

~~Table Of Contents~~

Consumer and residential

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

Table Of Contents

The following table presents loans including ~~$2.0 million~~($448 thousand) and ~~$1.8~~$1.7 million of deferred (fees)/costs, segregated by class, categorized into the appropriate credit quality indicator category as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively:

Commercial credit exposure

Credit risk profile by creditworthiness category



	March 31, 2021
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	289,630	$	2,623	$	3,342	$	-	$	295,595
Commercial real estate - non-owner occupied		191,235		5,343		5,922		-		202,500
Commercial real estate - owner occupied		169,042		2,415		8,475		-		179,932
Commercial real estate - construction		10,505		1,216		-		-		11,721
Total commercial	$	660,412	$	11,597	$	17,739	$	-	$	689,748

September 30, 2017
(dollars in thousands)
Pass

Special mention

Substandard

Doubtful

Total

Commercial and industrial
$
110,839

$
535

$
722

$
-

$
112,096
Commercial real estate - non-owner occupied

86,159

817

6,422

-

93,398
Commercial real estate - owner occupied

103,288

2,692

3,618

-

109,598
Commercial real estate - construction

5,954

-

169

-

6,123
Total commercial
$
306,240

$
4,044

$
10,931

$
-

$
321,215

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity



	September 30, 2017						March 31, 2021
(dollars in thousands)	Performing		Non-performing		Total		Performing		Non-performing		Total

Consumer
Home equity installment	$	28,267	$	15	$	28,282	$	38,399	$	26	$	38,425
Home equity line of credit		52,664		513		53,177		47,388		287		47,675
Auto loans and leases (1)		78,985		-		78,985
Auto loans								96,795		46		96,841
Direct finance leases ⁽¹⁾								19,239		27		19,266
Other		5,784		-		5,784		6,098		-		6,098
Total consumer	$	165,700	$	528	$	166,228		207,919		386		208,305
Residential
Real estate	$	137,288	$	1,421	$	138,709		221,052		714		221,766
Construction		8,315		-		8,315		22,340		-		22,340
Total residential	$	145,603	$	1,421	$	147,024		243,392		714		244,106
Total consumer & residential	$	311,303	$	1,949	$	313,252	$	451,311	$	1,100	$	452,411

⁽¹⁾Net of unearned lease revenue of ~~$0.6~~$1.2 million.

Commercial credit exposure

Credit risk profile by creditworthiness category


	December 31, 2016										December 31, 2020
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total		Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	97,308	$	479	$	690	$	-	$	98,477	$	272,889	$	4,162	$	3,706	$	-	$	280,757
Commercial real estate - non-owner occupied		83,962		1,811		7,591		-		93,364		179,311		6,445		6,387		-		192,143
Commercial real estate - owner occupied		99,981		1,075		5,904		-		106,960		167,873		3,241		8,809		-		179,923
Commercial real estate - construction		3,794		-		193		-		3,987		8,635		1,233		363		-		10,231
Total commercial	$	285,045	$	3,365	$	14,378	$	-	$	302,788	$	628,708	$	15,081	$	19,265	$	-	$	663,054

~~Table Of Contents~~

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity


	December 31, 2016						December 31, 2020
(dollars in thousands)	Performing		Non-performing		Total		Performing		Non-performing		Total

Consumer
Home equity installment	$	28,435	$	31	$	28,466	$	40,086	$	61	$	40,147
Home equity line of credit		50,872		737		51,609		49,330		395		49,725
Auto loans and leases (2)		56,315		44		56,359
Auto loans								98,359		27		98,386
Direct finance leases⁽²⁾								18,875		61		18,936
Other		13,295		6		13,301		7,602		-		7,602
Total consumer	$	148,917	$	818	$	149,735		214,252		544		214,796
Residential
Real estate	$	132,593	$	1,882	$	134,475		217,718		727		218,445
Construction		10,496		-		10,496		23,357		-		23,357
Total residential	$	143,089	$	1,882	$	144,971		241,075		727		241,802
Total consumer & residential	$	292,006	$	2,700	$	294,706	$	455,327	$	1,271	$	456,598

⁽²⁾Net of unearned lease revenue of ~~$0.5~~$1.2 million.

Table Of Contents

Allowance for loan losses

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

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

~~identification of specific impaired loans by loan category;~~

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

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

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

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

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

~~Qualitative factor adjustments include:~~

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

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

~~trends in volume and terms of loans;~~

~~changes in risk selection and underwriting standards;~~

~~changes in lending policies and legal and regulatory requirements;~~

~~experience, ability and depth of lending management;~~

~~national and local economic trends and conditions; and~~

~~changes in credit concentrations.~~

identification of specific impaired loans by loan category;

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

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

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

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

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

Qualitative factor adjustments include:

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

olevels of and trends in charge-offs and recoveries;

otrends in volume and terms of loans;

ochanges in risk selection and underwriting standards;

ochanges in lending policies and legal and regulatory requirements;

oexperience, ability and depth of lending management;

onational and local economic trends and conditions; and

ochanges in credit concentrations.

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

~~Table Of Contents~~

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

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

‎

Table Of Contents

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



As of and for the nine months ended September 30, 2017
As of and for the three months ended March 31, 2021														As of and for the three months ended March 31, 2021
	Commercial &		Commercial					Residential						Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total		industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,075	$	4,706	$	1,834		$	1,622	$	127	$	9,364	$	2,407	$	6,383	$	2,552		$	2,781	$	79	$	14,202
Charge-offs		(76)		(416)		(505)			(38)		-		(1,035)		(7)		(124)		(28)			(43)		-		(202)
Recoveries		5		44		53			-		-		102		4		11		24			-		-		39
Provision		395		(232)		587			215		(40)		925		(62)		810		(133)			177		8		800
Ending balance	$	1,399	$	4,102	$	1,969		$	1,799	$	87	$	9,356	$	2,342	$	7,080	$	2,415		$	2,915	$	87	$	14,839
Ending balance: individually evaluated for impairment	$	193	$	1,076	$	53		$	317	$	-	$	1,639	$	150	$	1,092	$	4		$	141	$	-	$	1,387
Ending balance: collectively evaluated for impairment	$	1,206	$	3,026	$	1,916		$	1,482	$	87	$	7,717	$	2,192	$	5,988	$	2,411		$	2,774	$	87	$	13,452
Loans Receivables:
Ending balance (2)	$	112,096	$	209,119	$	166,228	(1)	$	147,024	$	-	$	634,467	$	295,595	$	394,153	$	208,305	⁽¹⁾	$	244,106	$	-	$	1,142,159
Ending balance: individually evaluated for impairment	$	228	$	5,160	$	528		$	1,421	$	-	$	7,337	$	507	$	4,870	$	327		$	714	$	-	$	6,418
Ending balance: collectively evaluated for impairment	$	111,868	$	203,959	$	165,700		$	145,603	$	-	$	627,130	$	295,088	$	389,283	$	207,978		$	243,392	$	-	$	1,135,741

⁽¹⁾ Net of unearned lease revenue of ~~$0.6~~$1.2 million. ⁽²⁾ Includes ~~$2.0~~($448 thousand) of net deferred loan fees.



As of and for the year ended December 31, 2020
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,484	$	3,933	$	2,013		$	2,278	$	39	$	9,747
Charge-offs		(372)		(465)		(296)			(35)		-		(1,168)
Recoveries		26		30		120			197		-		373
Provision		1,269		2,885		715			341		40		5,250
Ending balance	$	2,407	$	6,383	$	2,552		$	2,781	$	79	$	14,202
Ending balance: individually evaluated for impairment	$	213	$	790	$	52		$	151	$	-	$	1,206
Ending balance: collectively evaluated for impairment	$	2,194	$	5,593	$	2,500		$	2,630	$	79	$	12,996
Loans Receivables:
Ending balance⁽²⁾	$	280,757	$	382,297	$	214,796	⁽¹⁾	$	241,802	$	-	$	1,119,652
Ending balance: individually evaluated for impairment	$	590	$	4,540	$	483		$	727	$	-	$	6,340
Ending balance: collectively evaluated for impairment	$	280,167	$	377,757	$	214,313		$	241,075	$	-	$	1,113,312

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



As of and for the three months ended March 31, 2020
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,484	$	3,933	$	2,013	$	2,278	$	39	$	9,747
Charge-offs		(64)		(163)		(43)		(31)		-		(301)
Recoveries		12		2		64		193		-		271
Provision		121		171		60		(47)		(5)		300
Ending balance	$	1,553	$	3,943	$	2,094	$	2,393	$	34	$	10,017

Direct finance leases

As of and for the three months ended September 30, 2017

Commercial &

Commercial

Residential

(dollars in thousands)
industrial

real estate

Consumer

real estate

Unallocated

Total
Allowance for Loan Losses:

Beginning balance
$
1,383

$
4,510

$
1,939

$
1,511

$
63

$
9,406
Charge-offs

(46)

(48)

(345)

-

-

(439)
Recoveries

2

3

9

-

-

14
Provision

60

(363)

366

288

24

375
Ending balance
$
1,399

$
4,102

$
1,969

$
1,799

$
87

$
9,356

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

The Company originates direct finance leases through 2 automobile dealerships. The carrying amount of the Company’s lease

As of and for the year ended December 31, 2016

Commercial &

Commercial

Residential

(dollars in thousands)
industrial

real estate

Consumer

real estate

Unallocated

Total
Allowance for Loan Losses:

Beginning balance
$
1,336

$
5,014

$
1,533

$
1,407

$
237

$
9,527
Charge-offs

(224)

(592)

(504)

(60)

-

(1,380)
Recoveries

55

37

100

-

-

192
Provision

(92)

247

705

275

(110)

1,025
Ending balance
$
1,075

$
4,706

$
1,834

$
1,622

$
127

$
9,364
Ending balance: individually evaluated for impairment
$
193

$
2,382

$
171

$
315

$
-

$
3,061
Ending balance: collectively evaluated for impairment
$
882

$
2,324

$
1,663

$
1,307

$
127

$
6,303
Loans Receivables:

Ending balance (2)
$
98,477

$
204,311

$
149,735
(1)
$
144,971

$
-

$
597,494
Ending balance: individually evaluated for impairment
$
235

$
8,436

$
799

$
1,882

$
-

$
11,352
Ending balance: collectively evaluated for impairment
$
98,242

$
195,875

$
148,936

$
143,089

$
-

$
586,142

~~(1)~~ ~~Net~~Table Of Contents

receivables, net of unearned ~~lease revenue~~income, was $6.3 million and $6.0 million as of ~~$0.5 million.~~ ~~(2)~~ ~~Includes $1.8~~March 31, 2021 and December 31, 2020, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to $13.0 million and $12.9 million at March 31, 2021 and December 31, 2020, respectively, and are included in the carrying value of ~~net deferred loan costs.~~direct finance leases.

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

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(dollars in thousands)	Amount

2021	$	6,055
2022		5,364
2023		4,982
2024		3,640
2025		369
2026 and thereafter		11
Total future minimum lease payments receivable		20,421
Less: Unearned income		(1,155)
Undiscounted cash flows to be received	$	19,266

As of and for the nine months ended September 30, 2016

Commercial &

Commercial

Residential

(dollars in thousands)
industrial

real estate

Consumer

real estate

Unallocated

Total
Allowance for Loan Losses:

Beginning balance
$
1,336

$
5,014

$
1,533

$
1,407

$
237

$
9,527
Charge-offs

(199)

(526)

(356)

(60)

-

(1,141)
Recoveries

39

36

85

-

-

160
Provision

(45)

284

526

10

(125)

650
Ending balance
$
1,131

$
4,808

$
1,788

$
1,357

$
112

$
9,196

As of and for the three months ended September 30, 2016

Commercial &

Commercial

Residential

(dollars in thousands)
industrial

real estate

Consumer

real estate

Unallocated

Total
Allowance for Loan Losses:

Beginning balance
$
1,231

$
4,880

$
1,692

$
1,365

$
39

$
9,207
Charge-offs

(30)

(183)

(91)

-

-

(304)
Recoveries

18

3

47

-

-

68
Provision

(88)

108

140

(8)

73

225
Ending balance
$
1,131

$
4,808

$
1,788

$
1,357

$
112

$
9,196

6. Earnings per share

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards. The Company maintains ~~two~~2 active share-based compensation plans that may generate additional potentially dilutive common shares. For granted and unexercised ~~stock options and~~ stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued ~~stock options or~~ SSARs were exercised and converted into common stock. As of the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2021, there were ~~16,707 and 12,237~~31,934 potentially dilutive shares related to issued and unexercised ~~stock options and~~ SSARs compared to ~~2,925 and 2,592~~28,070 for the same ~~2016 periods,~~2020 period, respectively. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were ~~9,504 and 8,130~~10,875 potentially dilutive shares related to unvested restricted share grants as of the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 compared to ~~8,747 and 6,482~~6,303 for the ~~three and nine months ended September 30, 2016,~~same 2020 period, respectively.

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

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



	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2017		2016		2017		2016		2021		2020
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664	$	5,667	$	2,634
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104		4,990,768		3,792,741
Basic EPS	$	0.60	$	0.55	$	1.72	$	1.54	$	1.14	$	0.69

Diluted EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664	$	5,667	$	2,634
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104		4,990,768		3,792,741
Potentially dilutive common shares		26,211		11,672		20,367		9,074		42,809		34,373
Weighted-average common and potentially dilutive shares outstanding		3,738,508		3,692,379		3,725,226		3,688,178		5,033,577		3,827,114
Diluted EPS	$	0.60	$	0.55	$	1.72	$	1.54	$	1.13	$	0.69

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7. Stock plans

The Company has ~~two~~2 stock-based compensation plans (the stock compensation plans) from which it can grant stock-based compensation awards and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance. The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. The Company’s stock compensation plans were shareholder-approved and

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permit the grant of share-based compensation awards to its employees and directors. The Company believes that the stock-based compensation plans will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock. In return, the Company hopes to secure, retain and motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders. In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.

At the 2012 annual shareholders’ meeting, the Company’s shareholders approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans). ~~The 2012 stock incentive plans replaced both the expired 2000 Independent Directors Stock Option Plan and the 2000 Stock Incentive Plan (collectively, the 2000 stock incentive plans).~~ Unless terminated by the Company’s board of directors, the 2012 stock incentive plans will expire on and no stock-based awards shall be granted after the year ~~2022.~~2022.

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

During the first quarter of 2021, the Company ~~granted~~approved a 1-year LTIP and awarded restricted stock to senior officers and ~~SSARs~~managers in February ~~2016~~and March 2021 based on ~~2015 performance~~2020 performance.

During the first quarter of 2020, the Company approved a 1-year LTIP and awarded restricted stock to senior officers and managers in February ~~2017~~and March 2020 based on ~~2016~~2019 performance.

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 under the 2012 stock incentive plans:



	September 30, 2017				September 30, 2016
			Weighted-				Weighted-		March 31, 2021				March 31, 2020
			average				average				Weighted-				Weighted-
	Shares		grant date		Shares		grant date		Shares		average grant		Shares		average grant
	granted		fair value		granted		fair value		granted		date fair value		granted		date fair value

Director plan	8,400	(2)	$	26.17	8,400	(1)	$	21.60	12,500	⁽²⁾	$	52.00	6,000	⁽²⁾	$	56.63
Omnibus plan	4,749	(3)		23.93	4,734	(3)		19.48	13,552	⁽³⁾		52.00	11,761	⁽³⁾		55.06
Omnibus plan	75	(1)		26.17	75	(1)		21.00	50	⁽¹⁾		58.17	50	⁽¹⁾		57.62
Omnibus plan									36	⁽³⁾		58.17	-			-
Total	13,224		$	25.36	13,209		$	20.84	26,138		$	52.02	17,811		$	55.59

⁽¹⁾ Vest after 1 year ⁽²⁾ ~~Vest after 2 years – 50% each year~~ ~~(3)~~ Vest after 3 years – 33% each year⁽³⁾ Vest fully after 3 years

The fair value of the ~~4,749~~ shares granted ~~on February 7, 2017~~in 2021 was calculated using the grant date stock price with a discount valuation. The Chaffe model was used to calculate the discount. Since the shares vest over three years and then have a further two-year holding period, the historical volatility of the five years prior to the issue date was used to estimate volatility. The five year treasury yield was used as the interest rate. The Company does pay a dividend, but since the shareholder will receive the dividends during vesting and the post-vest restriction period, no dividend yield was used in the calculation as not to inflate the discount. The grant date stock price was $26.17 and the discount of 8.548% was calculated using an interest rate of 1.841% and a 5 year historical volatility of 18.556%.price.

~~Table Of Contents~~

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



	2012 Stock incentive plans					2012 Stock incentive plans
	Director	Omnibus	Total		Weighted- average grant date fair value	Director	Omnibus	Total		Weighted- average grant date fair value
Non-vested balance at December 31, 2016	8,400	13,562	21,962	$	20.31
Non-vested balance at December 31, 2020						9,402	20,675	30,077	$	53.36
Granted	8,400	4,824	13,224		25.36	12,500	13,638	26,138		52.02
Forfeited	-	-	-			-	(255)	(255)		52.68
Vested	(8,400)	(6,082)	(14,482)		20.47	(4,998)	(6,061)	(11,059)		52.28
Non-vested balance at September 30, 2017	8,400	12,304	20,704	$	23.59
Non-vested balance at March 31, 2021						16,904	27,997	44,901	$	53.14

The Company granted 24,346 SSARs under the Omnibus Plan on February 7, 2017. The Company estimated the fair value of SSARs using the Black-Scholes-Merton valuation model on the grant date. The Company used the following assumptions: the risk-free interest rate is the rate equivalent to the expected term of the option interpolated from the U.S. Treasury Yield Curve on the valuation date and historical volatility is calculated by taking the standard deviation of historical returns using weekly and monthly data. The fair value of these SSARs was $5.06 per share, based on a risk-free interest rate of 2.386%, a dividend yield of 3.110% and a volatility of 23.434% using an expected term of ten years.
‎

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



	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)
Outstanding December 31, 2016	29,014	$	3.48	9.1
Outstanding December 31, 2020					97,264	$	9.47	6.5
Granted	24,346		5.06	9.3	-
Exercised	-		-		(2,932)		3.48
Forfeited	-		-		-
Outstanding September 30, 2017	53,360	$	4.20	8.8
Outstanding March 31, 2021					94,332	$	9.66	6.3

Of the SSARs outstanding at ~~September 30, 2017, 9,668~~March 31, 2021, 90,639 vested and were exercisable. SSARs vest over a three year period – 33% per year.

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

Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 and the unrecognized stock-based compensation expense as of ~~September 30, 2017:~~March 31, 2021:


		Three months ended			Nine months ended
		September 30,			September 30,				Three months ended March 31,
(dollars in thousands)	2017		2016		2017			2016	2021			2020
Stock-based compensation expense:
Director stock incentive plan	$	28	$	45	$	89	$	129	$	75	$	78
Omnibus stock incentive plan		49		36		144		104		157		170
Employee stock purchase plan		-		-		23		15		44		27
Total stock-based compensation expense	$	77	$	81	$	256	$	248	$	276	$	275

In addition, during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and 2020, the Company ~~accrued $54 thousand~~reversed accruals of ($10 thousand) and ~~$163 thousand, respectively,~~($32 thousand) in stock-based compensation expense for restricted stock and SSARs ~~to be~~ awarded under the Omnibus Plan. ~~The Company accrued $51 thousand and $137 thousand, respectively, in stock-based compensation expense during the three and nine months ended September 30, 2016.~~


				As of
(dollars in thousands)				~~September 30, 2017~~March 31, 2021
Unrecognized stock-based compensation expense:
Director plan	$	846	$	~~146~~
Omnibus plan		1,249		~~330~~
Total unrecognized stock-based compensation expense	$	2,095	$	~~476~~

The unrecognized stock-based compensation expense as of ~~September 30, 2017~~March 31, 2021 will be recognized ratably over the periods ended ~~January 2019~~February 2024 and ~~January 2020~~March 2024 for the Director Plan and the Omnibus Plan, respectively.

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~~Transactions under the Company’s stock option plan for the nine months ended September 30, 2017 are presented in the following table:~~

Options

Weighted-average exercise price

Weighted-average remaining contractual term (years)
Outstanding and exercisable, December 31, 2016

22,500

$
19.12

1.0
Granted

-

-

Exercised

(17,250)

19.27

Forfeited

-

-

Outstanding and exercisable, September 30, 2017

5,250

$
18.62

0.3

During the first nine months of 2017, there were 17,250 stock options exercised at a price of $19.27 per share. The intrinsic value of these stock options was $64,055. The tax deduction realized from the exercise of these options was $257,492 resulting in a tax benefit of $87,547. During the first nine months of 2016, there were 750 stock options exercised at a price of $18.50 per share. The intrinsic value of these stock options was $2,585 and the tax deduction realized from the exercise of these options was $2,375 resulting in a tax benefit of $808. The Company has not issued stock options since 2008.

In addition to the 2012 stock incentive plans, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 165,000 shares of its un-issued capital stock for issuance under the plan. The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company. Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined. As of ~~September 30, 2017, 69,701~~March 31, 2021, 89,642 shares have been issued under the ESPP. The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance. The Company recognizes compensation expense on its ESPP on the date the shares are purchased, and it is included as a component of salaries and employee benefits in the consolidated statements of income.

8. Fair value measurements

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

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

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

Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value. Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.

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

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fair value measurement.

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

~~Table Of Contents~~

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


September 30, 2017
March 31, 2021											March 31, 2021
					Quoted prices		Significant		Significant						Quoted prices		Significant		Significant
					in active		other		other						in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs		Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)		amount		fair value		(Level 1)		(Level 2)		(Level 3)

Financial assets:
Cash and cash equivalents	$	41,881	$	41,881	$	41,881	$	-	$	-	$	222,953	$	222,953	$	222,953	$	-	$	-
Available-for-sale securities		151,995		151,995		776		151,219		-
FHLB stock		2,543		2,543		-		2,543		-
Available-for-sale debt securities												436,622		436,622		-		436,622		-
Restricted investments in bank stock												2,931		2,931		-		2,931		-
Loans and leases, net		625,111		623,567		-		-		623,567		1,127,320		1,137,198		-		-		1,137,198
Loans held-for-sale		1,629		1,662		-		1,662		-		11,001		11,208		-		11,208		-
Accrued interest receivable		2,769		2,769		-		2,769		-		5,723		5,723		-		5,723		-
Financial liabilities:
Deposits with no stated maturities		640,173		640,173		-		640,173		-		1,611,034		1,611,034		-		1,611,034		-
Time deposits		108,404		107,564		-		107,564		-		111,867		111,929		-		111,929		-
Short-term borrowings		12,920		12,920		-		12,920		-
FHLB advances		23,704		23,617		-		23,617		-
Accrued interest payable		319		319		-		319		-		182		182		-		182		-


December 31, 2016
December 31, 2020											December 31, 2020
					Quoted prices		Significant		Significant						Quoted prices		Significant		Significant
					in active		other		other						in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs		Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)		amount		fair value		(Level 1)		(Level 2)		(Level 3)

Financial assets:
Cash and cash equivalents	$	25,843	$	25,843	$	25,843	$	-	$	-	$	69,346	$	69,346	$	69,346	$	-	$	-
Available-for-sale securities		130,037		130,037		633		129,404		-
FHLB stock		2,606		2,606		-		2,606		-
Available-for-sale debt securities												392,420		392,420		-		392,420		-
Restricted investments in bank stock												2,813		2,813		-		2,813		-
Loans and leases, net		588,130		590,688		-		-		590,688		1,105,450		1,116,711		-		-		1,116,711
Loans held-for-sale		2,854		2,907		-		2,907		-		29,786		30,858		-		30,858		-
Accrued interest receivable		2,246		2,246		-		2,246		-		5,712		5,712		-		5,712		-
Financial liabilities:
Deposits with no stated maturities		610,706		610,706		-		610,706		-		1,381,722		1,381,722		-		1,381,722		-
Time deposits		92,753		91,969		-		91,969		-		127,783		128,200		-		128,200		-
Short-term borrowings		4,223		4,223		-		4,223		-
FHLB advances												5,000		5,348		-		5,348		-
Accrued interest payable		181		181		-		181		-		337		337		-		337		-

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

~~Cash and cash equivalents;~~

~~Non-interest bearing deposit accounts;~~

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

~~Short-term borrowings.~~

Cash and cash equivalents;

Non-interest bearing deposit accounts;

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

Short-term borrowings.

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

~~Loans~~Originated loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected cash flows discounted atusing the exit price notion. The discount rate is based upon current offering rates, with an additional discount

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for ~~similar loans. Current offering rates consider, among other things,~~expected potential charge-offs. Additionally, an environmental general credit ~~risk.~~ risk adjustment is subtracted from the net present value to arrive at the total estimated fair value of the accruing loan portfolio.

The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

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

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

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

Certificates of deposit: The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities. ~~The fair value of certificates of deposit acquired through the Wayne Bank branch acquisition represents the estimated fair value of these deposits.~~

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

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



			Quoted prices
			in active		Significant other		Significant other				Quoted prices		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs		Total carrying value		in active markets		observable inputs		unobservable inputs
(dollars in thousands)	September 30, 2017		(Level 1)		(Level 2)		(Level 3)		March 31, 2021		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	16,213	$	-	$	16,213	$	-	$	56,850	$	-	$	56,850	$	-
Obligations of states and political subdivisions		43,735		-		43,735		-		228,161		-		228,161		-
MBS - GSE residential		91,271		-		91,271		-		151,611		-		151,611		-
Equity securities - financial services		776		776		-		-
Total available-for-sale securities	$	151,995	$	776	$	151,219	$	-
Total available-for-sale debt securities									$	436,622	$	-	$	436,622	$	-



			Quoted prices
			in active		Significant other		Significant other				Quoted prices		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs		Total carrying value		in active markets		observable inputs		unobservable inputs
(dollars in thousands)	December 31, 2016		(Level 1)		(Level 2)		(Level 3)		December 31, 2020		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	18,276	$	-	$	18,276	$	-	$	45,447	$	-	$	45,447	$	-
Obligations of states and political subdivisions		40,191		-		40,191		-		199,713		-		199,713		-
MBS - GSE residential		70,937		-		70,937		-		147,260		-		147,260		-
Equity securities - financial services		633		633		-		-
Total available-for-sale securities	$	130,037	$	633	$	129,404	$	-
Total available-for-sale debt securities									$	392,420	$	-	$	392,420	$	-

~~Equity securities in the AFS portfolio are measured at fair value using quoted market prices for identical assets and are classified within Level 1 of the valuation hierarchy.~~ Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained. ~~For the periods ending September 30, 2017 and December 31, 2016, there were no transfers to or from Level 1 and Level 2 fair value measurements for financial assets measured on a recurring basis.~~

There were no0 changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively.

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



			Quoted prices in		Significant other		Significant other				Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs		Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at September 30, 2017		(Level 1)		(Level 2)		(Level 3)		at March 31, 2021		(Level 1)		(Level 2)		(Level 3)

Impaired loans	$	4,253	$	-	$	-	$	4,253	$	3,199	$	-	$	-	$	3,199
Other real estate owned		764		-		-		764		177		-		-		177
Total	$	5,017	$	-	$	-	$	5,017	$	3,376	$	-	$	-	$	3,376

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			Quoted prices in		Significant other		Significant other				Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs		Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2016		(Level 1)		(Level 2)		(Level 3)		at December 31, 2020		(Level 1)		(Level 2)		(Level 3)

Impaired loans	$	6,254	$	-	$	-	$	6,254	$	2,930	$	-	$	-	$	2,930
Other real estate owned		872		-		-		872		182		-		-		182
Total	$	7,126	$	-	$	-	$	7,126	$	3,112	$	-	$	-	$	3,112

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

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis.

Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value.

Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.

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

At ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from ~~-20.54% to -53.00%~~-26.16% and -48.22% and from ~~-22.72%~~-27.04% to ~~-57.49%~~-70.66%, respectively. The ~~weighted-average~~weighted average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to ~~-30.71% and -32.47%~~-42.16% as of ~~September 30, 2017~~March 31, 2021 and -44.49% as of December 31, ~~2016,~~2020, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed. Accordingly, fair value estimates for impaired loans are classified as Level 3.

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, the discounts applied to the appraised values of ORE ranged from ~~-17.95% to -99.00%~~-16.63% and ~~-21.74% to -99.00%~~-77.60% and from -21.47% and -77.60%, respectively. As of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, the ~~weighted-average~~weighted average of discount to the appraisal values of ORE amounted to ~~-28.19%~~-27.87% and ~~-32.38%~~-31.30%, respectively.

~~As of September 30, 2017, the Company had one automobile in~~At March 31, 2021 and December 31, 2020, there were no other repossessed ~~assets with a balance of $4 thousand. As of December 31, 2016, the~~assets. The Company ~~had one automobile in other repossessed assets with a balance of $8 thousand. There were no adjustments~~refers to the ~~carrying value of these automobiles.~~National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.

9. Acquisition

On ~~March 17, 2017,~~May 1, 2020, the Company completed ~~the~~its previously announced acquisition of MNB of Bangor, Pennsylvania. MNB was a 1-bank holding company organized under the ~~West Scranton branch~~laws of ~~Wayne Bank,~~ the Commonwealth of Pennsylvania and was headquartered in Bangor, PA. Its wholly owned subsidiary, founded in 1890, Merchants Bank of Bangor, was an independent community bank chartered under the laws of the Commonwealth of Pennsylvania. Merchants Bank conducted full-service commercial banking ~~subsidiary~~services through 9 bank centers located in Northampton County, Pennsylvania. The acquisition expanded Fidelity Deposit and Discount Bank’s full-service footprint into Northampton County, Pennsylvania, and the Lehigh Valley. The Company transacted the merger to complement the Company’s existing operations, while consistent with the Company’s strategic plan of ~~Norwood Financial Corp., pursuant to~~enhancing long-term shareholder value. The fair value of total assets acquired as a result of the merger totaled $451.4 million, loans totaled $245.3 million and deposits totaled $395.6 million. Goodwill recorded in the merger was $6.8 million.

In accordance with the terms of the ~~Branch Purchase and Deposit Assumption~~Reorganization Agreement, ~~dated September 29, 2016. The Company purchased all~~on May 1, 2020 each share of MNB common stock was converted into the right to receive 1.039 shares of the ~~deposit liabilities associated~~Company’s common stock. As a result of the merger, the Company issued 1,176,970 shares of its common stock, valued at $45.4 million, and cash in exchange for fractional shares based upon $43.77, the determined market price of the Company’s common stock in accordance with the ~~branch, certain loans, and~~Reorganization Agreement. The results of the ~~branch real estate, and immediately closed~~combined entity’s operations

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are included in the ~~branch and consolidated~~Company’s Consolidated Financial Statements from the ~~acquired deposits and loans into its nearby West Scranton branch office.~~date of acquisition. The ~~Company expects this transaction to expand its customer base in West Scranton.~~

~~The transaction has been~~acquisition of MNB was accounted for as a business combination using the acquisition method of ~~accounting. The~~accounting and, accordingly, assets acquired, ~~assets~~liabilities assumed, and ~~assumed liabilities~~consideration paid were recorded at ~~book value which also represented~~ estimated fair ~~value at~~values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of ~~acquisition. Management made significant estimates and exercised significant judgement in estimating fair value, but~~ the ~~fair value adjustments were deemed immaterial to the financial statements.~~ acquisition.

~~The Company recognized $41 thousand of acquisition-related costs during the first nine months of 2017. These costs are being~~

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~~expensed as incurred and are presented in non-interest expenses on the consolidated statements of income. Costs incurred in 2017 consist principally of legal fees and other professional fees.~~

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


Purchase Price Consideration in Common Stock
MNB shares outstanding			1,132,873
Exchange ratio			1.039
Total FDBC shares			1,177,055

Shares paid in cash for fractional shares			84.71
Cash consideration (per MNB share)		$	43.77
Cash portion of purchase price (cash in lieu of fractional shares)		$	3,708

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

Allocation of Purchase Price	In thousands
Total Purchase Price		$	45,411

Estimated Fair Value of Assets Acquired
Cash and cash equivalents	53,004
Investment securities	123,420
Loans held for sale	604
Loans	244,679
Restricted investments in bank stock	692
Premises and equipment	6,907
Core deposit intangible asset	1,973
Other assets	13,264
Total assets acquired	444,543

Estimated Fair Value of Liabilities Assumed
Non-interest bearing deposits	118,822
Interest bearing deposits	276,816
FHLB borrowings	7,627
Other liabilities	2,710
Total liabilities assumed	405,975

Net Assets Acquired			38,568
Goodwill Recorded in Acquisition		$	6,843

Pursuant to the accounting requirements, the Corporation assigned a fair value to the assets acquired and liabilities assumed of MNB. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

The assets acquired and liabilities assumed in the acquisition of MNB were recorded at their estimated fair values based on management’s best estimates using information available at the date of ~~acquisition:~~the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, any material adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition. The items most susceptible to adjustment are the fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition. Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

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Investment securities available-for-sale

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

Loans

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

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


Dollars in thousands
~~(dollars in thousands)~~Gross amortized cost basis at April 30, 2020	~~March 17, 2017~~	$	250,347
Interest rate fair value adjustment on pools of homogeneous loans			3,335
~~Cash and cash equivalents~~Credit fair value adjustment on pools of homogeneous loans	$	~~11,817~~
~~Loans~~		~~1,574~~
~~Bank premises and equipment~~		~~264~~
~~Goodwill~~		~~209~~
~~Accrued interest receivable and other assets~~		4
~~Total assets acquired~~	$	~~13,868~~
		(6,863)
~~Deposits~~Credit fair value adjustment on purchased credit impaired loans	$	~~13,809~~	(1,536)
~~Accrued interest payable and other liabilities~~Fair value of acquired loans at April 30, 2020		59 $	245,283
~~Total liabilities assumed~~	$	~~13,868~~

~~The Company~~For loans acquired ~~$1.6 million in residential and consumer loans. None of the loans that were acquired had~~without evidence of credit quality ~~deterioration.~~

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

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


Dollars in thousands
Contractual principal and interest at acquisition	$	3,778
Nonaccretable difference		(2,214)
Expected cash flows at acquisition		1,564
Accretable yield		(248)
Fair value of purchased impaired loans	$	1,316

The Company assumed leases on 4 branch facilities of MNB. The Company prepared an internal analysis to compare the lease contract obligations to comparable market rental rates. The Company believed that the leased contract rates were in a reasonable range of market rental rates and concluded that no fair market value adjustment related to leasehold interest was necessary. The fair value of MNB’s buildings, and improvements, was determined by the Company that the book value will be used as a proxy for fair value therefore no fair value adjustment is warranted.

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Core Deposit Intangible

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

Time Deposits

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

FHLB Borrowings

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

Supplemental Pro Forma Financial Information

The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the twelve months ended December 31, 2020 and 2019, respectively, as if MNB had been acquired on January 1, 2019. This unaudited pro forma information combines the historical results of MNB with the Corporation’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision expense resulting from recording loan assets at fair value, cost savings or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.


	Years ended December 31,
(Dollars in thousands)	2020		2019
Net interest income	$	48,812	$	46,199
Other income		14,387		11,966
Total net interest income and other income	$	63,199	$	58,165

Net income		14,272		16,035

Basic earnings per common share	$	2.87	$	3.24
Diluted earnings per common share	$	2.85	$	3.21

Merger-related expenses

For the three months ended March 31, 2020, the Company incurred merger-related expenses related to the merger with MNB totaling $0.3 million, primarily consisting of professional fees.

Pending Acquisition

On February 26, 2021, the Company announced the execution of an agreement and plan of reorganization to acquire Landmark Bancorp, Inc. (“Landmark”) in a transaction valued on February 25, 2021 at $43.4 million. Under the terms of the agreement, Landmark shareholders will receive as consideration 0.272 shares of Fidelity common stock and $3.26 in cash for each share of Landmark common stock that they own as of the closing date. Landmark is the holding company of Landmark Community Bank (“Landmark Bank”) which operates 5 retail community banking offices in Northeastern Pennsylvania. Subject to the terms and conditions of the agreement, Landmark will merge with and into an acquisition subsidiary of the Company and Landmark Bank will merge with and into the Bank. The merger which is subject to approval of Landmark’s shareholders, regulatory approvals and other customary closing conditions, is currently expected to close in the third quarter of 2021. During the three months ended March 31, 2021, the Company incurred $0.5 million in merger-related expenses related to the pending acquisition of ~~the West Scranton branch~~Landmark, primarily consisting of ~~Wayne bank totaling $0.2 million. Goodwill is not amortized, but is periodically evaluated for impairment.~~professional fees. The Company ~~did not recognize any impairment during~~expects to incur another $3.2 million in non-recurring costs to facilitate the ~~nine months ended September 30, 2017. For income tax purposes, goodwill will be deducted over a 15 year period.~~anticipated merger and integrate systems in 2021.

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10. Employee Benefits

Bank-Owned Life Insurance (BOLI)

The Company has purchased single premium BOLI policies on certain officers. The policies are recorded at their cash surrender values. Increases in cash surrender values are included in non-interest income in the consolidated statements of income. ~~In March 2017,~~As a result of the acquisition of MNB, the Company added BOLI with a value of $9.3 million during 2020. During the fourth quarter of 2020, the Company purchased an additional ~~$8.0~~$11.0 million of BOLI. The policies’ cash surrender value totaled ~~$19.9~~$44.6 million and ~~$11.4~~$44.3 million, respectively, as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020 and is reflected as an asset on the consolidated balance sheets. ~~As of September 30, 2017~~For the three months ended March 31, 2021 and ~~2016,~~2020, the Company has recorded income of ~~$422~~$296 thousand and ~~$264~~$165 thousand, respectively.

Officer Life Insurance

In 2017, the Bank entered into separate split dollar life insurance arrangements (Split Dollar Agreements) with ~~eleven~~11 officers. This plan provides each officer a specified death benefit should the officer die while in the Bank’s employ. The Bank paid the insurance premiums in March 2017 and the arrangements were effective in March 2017. In March 2019, the Bank entered into a new Split Dollar Agreement with 1 officer. In January 2021, the Bank entered into Split Dollar Agreements with 15 officers. The Bank owns the policies and all cash values thereunder. Upon death of the covered employee, the agreed-upon amount of death proceeds from the policies will be paid directly to the insured’s beneficiary. As of ~~September 30, 2017,~~March 31, 2021, the policies had total death benefits of ~~$20.6~~$42.6 million of which ~~$4.0~~$4.4 million would have been paid to the officer’s beneficiaries and the remaining ~~$16.6~~$38.2 million would have been paid to the Bank. In addition, ~~three~~4 executive officers have the opportunity to retain a split dollar benefit equal to two times their highest base salary after separation from service if the vesting requirements are met. As of ~~September 30, 2017,~~March 31, 2021 and December 31, 2020, the Company accrued expenses of ~~$21~~$164 thousand and $154 thousand for the split dollar benefit.

Supplemental Executive Retirement plan (SERP)

On March 29, 2017, the Bank entered into separate supplemental executive retirement agreements (individually the “SERP Agreement”) with ~~five~~5 officers, pursuant to which the Bank will credit an amount to a SERP account established on each participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2017 until retirement. On March 20, 2019, the Bank entered into a SERP Agreement with 1 officer, pursuant to which the Bank will credit an amount to a SERP account established for the participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2019 until normal retirement age. As of ~~September 30, 2017,~~March 31, 2021 and December 31, 2020, the Company accrued expenses of ~~$268 thousand~~$2.1 million and $2.0 million in connection with the SERP.

11. Revenue Recognition

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

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

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

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

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

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

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

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Contract balances

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

Remaining performance obligations

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

Contract acquisition costs

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

12. Leases

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

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

The Company’s operating leases, where the Company is lessee, include property, land and equipment. As of March 31, 2021, 10 of the Company’s branch properties were leased under operating leases. In 4 of the branch leases, the Company leases the land from an unrelated third party, and the buildings are the Company’s own capital improvement. The Company also leases three standalone ATMs under operating leases. Additionally, the Company has four equipment leases classified as finance leases.

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




(dollars in thousands)	March 31, 2021		December 31, 2020

Equipment	$	485	$	485
Less accumulated depreciation and amortization		(226)		(202)
Leased property under finance leases, net	$	259	$	283

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The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of March 31, 2021:


(dollars in thousands)	Amount

2021	$	76
2022		101
2023		74
2024		17
2025		8
2026 and thereafter		-
Total minimum lease payments ^(a)		276
Less amount representing interest ^(b)		(9)
Present value of net minimum lease payments	$	267

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

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

As of March 31, 2021, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem and Martins Creek branches under the terms of operating leases. Common area maintenance is included in variable lease payments in the table below. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest and are expensed as incurred. The Bethlehem branch has variable lease payments that increase annually and are expensed as incurred.


(dollars in thousands)	March 31, 2021		March 31, 2020
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	24	$	20
Interest on lease liabilities		2		2
Operating lease cost		148		108
Short-term lease cost		5		5
Variable lease cost		1		(1)
Total lease cost	$	180	$	134

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	2	$	2
Operating cash flows from operating leases (Fixed payments)	$	138	$	99
Operating cash flows from operating leases (Liability reduction)	$	77	$	39
Financing cash flows from finance leases	$	24	$	18
Right-of-use assets obtained in exchange for new finance lease liabilities	$	-	$	-
Right-of-use assets obtained in exchange for new operating lease liabilities	$	-	$	-
Weighted-average remaining lease term - finance leases		2.89 yrs		3.42 yrs
Weighted average remaining lease term - operating leases		21.13 yrs		23.66 yrs
Weighted-average discount rate - finance leases		2.50%		3.07%
Weighted-average discount rate - operating leases		3.57%		3.78%

During the first quarter of 2021, $171 thousand of the total lease cost is included in premises and equipment expense and $9 thousand is included in other expenses on the consolidated statements of income. Operating lease expense is recognized on a straight-line basis over the lease term. We recognized both the interest expense and amortization expense for finance leases in premises and equipment expense since the interest expense portion was immaterial.

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The future minimum lease payments for the Company’s branch network and equipment under operating leases that have lease terms in excess of one year as of March 31, 2021 are as follows:


(dollars in thousands)	Amount

2021	$	415
2022		518
2023		508
2024		511
2025		517
2026 and thereafter		8,381
Total future minimum lease payments		10,850
Plus variable payment adjustment		220
Less amount representing interest		(3,503)
Present value of net future minimum lease payments	$	7,567

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


(dollars in thousands)	Amount

2021	$	154
2022		104
2023		48
2024		51
2025		54
2026 and thereafter		81
Total lease payments to be received	$	492

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

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


	For the three months ended March 31,
(dollars in thousands)	2021		2020
Lease income - direct finance leases
Interest income on lease receivables	$	190	$	176

Lease income - operating leases		51		57
Total lease income	$	241	$	233

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

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of ~~September 30, 2017~~March 31, 2021 compared to December 31, ~~2016~~2020 and a comparison of the results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016.~~2020. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s ~~2016~~2020 Annual Report filed on Form 10-K.

Forward-looking statements

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

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

~~the effects of economic conditions on current customers, specifically the effect of the economy on loan customers’ ability to repay loans;~~

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

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

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

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

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

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

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

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

~~technological changes;~~

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

~~acquisitions and integration of acquired businesses;~~

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

~~volatilities in the securities markets;~~

~~acts of war or terrorism;~~

~~disruption of credit and equity markets; and~~

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

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

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

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

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

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

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

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

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

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

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

technological changes;

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

acquisitions and integration of acquired businesses;

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

volatilities in the securities markets;

acts of war or terrorism;

disruption of credit and equity markets; and

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

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

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

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Executive Summary

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

As a leading Northeastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while

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maintaining strong asset quality and controlling operating expenses. We continue to implement strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase low cost core ~~deposits.~~deposits (see “Funds Provided” section of this management’s discussion and analysis). These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new ~~small-~~business prospects. The Bank has a personal and ~~middle-sized business prospects.~~corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand our franchise footprint, consisting presently of our ~~10-branch~~20-branch network. ~~Currently, the Company is constructing a new branch in Dallas, PA in order to expand our presence in Luzerne County, which is expected to open in the third quarter of 2018.~~

On August 15, 2017, the Company declared a three-for-two stock split to shareholders effected in the form of a 50% stock dividend. All share and per share information included in the accompanying management’s discussion and analysis has been retroactively adjusted to reflect this stock split.

We are impacted by both national and regional economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, primarily in Lackawanna and Luzerne ~~counties. Although the U.S. economy has shown signs of modest improvement, the general operating environment~~counties, and our local market area continue to remain challenging. For the near-term, we expect to continue to operate in a low, but slowly-rising interest rate environment. A rising rate environment positions the Company to improve its net interest income performance.Eastern Pennsylvania, primarily Northampton County. The Federal Open Market Committee (FOMC) ~~adjusted~~began increasing interest rates at the ~~short-term federal funds rate up~~end of 2015 in an attempt to return to a “normal” stance. Rate cuts of 50 and 100 basis points so far during 2017. Expectations are for short-term rates to rise once more this year, potentially pressuring deposit rate pricing. The national unemployment rate for September 2017 was 4.2%, down from 4.7% at December 2016. The unemployment rate in Scranton - Wilkes-Barre Metropolitan Statistical Area (local) decreased during the first ~~nine months~~quarter of ~~2017 as well, but continued to lag behind~~2020 at the ~~unemployment rates~~start of the ~~state and nation.~~pandemic completely reversed the increases initiated by the FOMC at the end of 2015. According to the U.S. Bureau of Labor Statistics, the ~~local~~national unemployment rate ~~at September 30, 2017~~for March 2021 was ~~5.0%~~6.0%, ~~a decrease of 0.4~~down 0.7 percentage points from ~~5.4%~~December 2020. However, the unemployment rates in the Scranton - Wilkes-Barre - Hazleton and the Allentown – Bethlehem - Easton Metropolitan Statistical Areas (local) increased and remained at a higher level than the national unemployment rate. The local unemployment rates at March 31, 2021 were 9.0% and 7.3%, respectively, an increase of 1.0 and 0.7 percentage points from the 8.0% and 6.6%, respectively, at December 31, ~~2016. Although the~~2020. The local unemployment ~~rate decreased during~~rates have risen as a result of the effects of the pandemic. The increase in unemployment and business restrictions has had an effect on spending in our market area and unemployment is expected to remain above the pre-pandemic levels for the next few months. Stimulus payments and enhanced unemployment benefits have supported the economy throughout 2020 and the first ~~nine months~~quarter of ~~2017, it was due~~2021 and the government could continue to ~~a drop in the labor force rather than an increase in jobs. Seasonal fluctuations in unemployment are expected.~~provide this support throughout 2021. The median home values in the ~~region have gone up 4.4% over the past~~Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro increased 13.6% and 14.2% from a year ~~and~~ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, and values are expected to ~~rise 2.2% within~~grow 6.7% and 9.8% in the next year. In light of these expectations, we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

~~During~~On May 1, 2020, the ~~third quarter~~Company completed its previously announced acquisition of ~~2017,~~MNB Corporation (“MNB”) and its wholly-owned bank subsidiary. The merger expanded the Company’s ~~loan growth was negated by approximately $6~~full-service footprint into Northampton County, PA and the Lehigh Valley. Non-recurring costs to facilitate the merger and integrate systems of $2.5 million ~~in cash inflow from~~were incurred during 2020.

On February 26, 2021, the ~~satisfaction of two commercial real estate loans. Management focused on growing business and public deposits~~Company announced an agreement to acquire Landmark Bancorp, Inc. (“Landmark”). The Company expects to complete the merger with Landmark during the third quarter of ~~2017 to pay down short-term borrowings.~~2021. The Company expects non-recurring costs to facilitate the anticipated merger and integrate systems in 2021 incurred by the Company to be $3.7 million, of which $0.5 million was ~~successful~~recognized in the first quarter. The Company remains committed to selectively expanding branch banking and wealth management locations in Northeastern and Eastern Pennsylvania as opportunities arrive going forward.

For the first quarter of 2021, net income was ~~able~~$5.7 million, or $1.13 diluted earnings per share, compared to ~~grow non-interest bearing business accounts by $11.7~~$2.6 million, ~~interest-bearing business accounts by $8.3 million, interest-bearing public accounts by $7.7 million, business money market accounts by $6.3~~or $0.69 diluted earnings per share, for the first quarter of 2020. Non-recurring merger-related costs and a FHLB prepayment penalty incurred during the first quarter of 2021 are not a part of the Company’s normal operations. If these expenses had not occurred, adjusted net income (non-GAAP) for the three months ended March 31, 2021 and 2020 would have been $6.5 million and ~~$6.1~~$2.9 million, respectively. Adjusted diluted EPS (non-GAAP) would have been $1.29 and $0.76 for the three months ended March 31, 2021 and 2020, respectively.

For the quarters ended March 31, 2021 and 2020, tangible common book value per share (non-GAAP) was $31.00 and $29.47, respectively. These non-GAAP measures should be reviewed in ~~CDs during~~connection with the ~~third quarter~~reconciliation of ~~2017.~~these non-GAAP ratios. See “Non-GAAP Financial Measures” located below within this management’s discussion and analysis.

Branch managers, relationship bankers, mortgage originators and our business service partners are all focused on developing a mutually profitable full banking relationship. We understand our markets, offer products and services along with financial advice that is appropriate for our community, clients and prospects. The Company continues to focus on the trusted financial advisor model by utilizing the team approach of experienced bankers that are fully engaged and dedicated towards maintaining and growing profitable relationships.

In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years. As described more fully in Part II, Item 1A, “Risk Factors” below, as well as Part I, Item 1A, “Risk

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Factors,” and in the “Supervisory and Regulation” section of management’s discussion and analysis of financial condition and results of operations in our ~~2016~~2020 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us. In addition, final rules to implement Basel III regulatory capital reform, approved by the federal bank regulatory agencies in 2013, subject many banks including the Company, to capital requirements which ~~will be phased in. The initial provisions~~became effective for ~~us began~~the Company on January 1, ~~2015.~~2015 and were fully phased in on January 1, 2019. The rules also revise the minimum risk-based and leverage capital ratio requirements applicable to the Company and revise the calculation of risk-weighted assets to enhance their risk sensitivity. We will continue to prepare for the impacts ~~that~~of the continuing implementation of the Dodd-Frank Act and the Basel III capital standards, and related rulemaking will have on our business, financial condition and results of operations.

~~General~~Non-GAAP Financial Measures

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare the Company’s financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company’s tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% at March 31, 2021 and 2020.

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



(dollars in thousands)	March 31, 2021		March 31, 2020
Interest income (GAAP)	$	14,340	$	9,711
Adjustment to FTE		416		191
Interest income adjusted to FTE (non-GAAP)		14,756		9,902
Interest expense (GAAP)		890		1,705
Net interest income adjusted to FTE (non-GAAP)	$	13,866	$	8,197

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




(dollars in thousands)	March 31, 2021		March 31, 2020
Efficiency Ratio (non-GAAP)
Non-interest expenses (GAAP)	$	11,456	$	7,304

Net interest income (GAAP)		13,450		8,006
Plus: taxable equivalent adjustment		416		191
Non-interest income (GAAP)		5,516		2,755
Net interest income (FTE) plus non-interest income (non-GAAP)	$	19,382	$	10,952
Efficiency ratio (non-GAAP)		59.11%		66.69%

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


(dollars in thousands)	March 31, 2021		March 31, 2020
Tangible Book Value per Share (non-GAAP)
Total assets (GAAP)	$	1,913,092	$	1,062,495
Less: Intangible assets, primarily goodwill		(8,697)		(209)
Tangible assets		1,904,395		1,062,286
Total shareholders' equity (GAAP)		163,582		112,140
Less: Intangible assets, primarily goodwill		(8,697)		(209)
Tangible common equity	$	154,884	$	111,931

Common shares outstanding, end of period		4,995,547		3,797,646
Tangible Common Book Value per Share	$	31.00	$	29.47

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



	March 31, 2021								March 31, 2020
(dollars in thousands except per share data)	Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share		Income before ‎income taxes		Provision for ‎income taxes		Net income		Diluted earnings ‎per share
Results of operations (GAAP)	$	6,710	$	1,043	$	5,667	$	1.13	$	3,157	$	523	$	2,634	$	0.69
Add: Merger-related expenses		523		8		515		0.10		271		9		262		0.07
Add: FHLB prepayment penalty		369		78		291		0.06		-		-		-		-
Adjusted earnings (non-GAAP)	$	7,602	$	1,129	$	6,473	$	1.29	$	3,428	$	532	$	2,896	$	0.76

General

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

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

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

~~Table Of Contents~~

Comparison of the results of operations

Three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020

Overview

For the ~~third~~first quarter of ~~2017,~~2021, the Company generated ~~$2.2 million in~~ net income of $5.7 million, or ~~$0.60~~$1.13 per diluted share, ~~an increase of $0.2~~compared to $2.6 million, or 9%, over the $2.0 million, or $0.55 per diluted share, generated for the third quarter of 2016. Net income also grew during the first nine months of 2017 to $6.4 million, or $1.72 per diluted share, an increase of $0.7 million, or 13%, compared to $5.7 million, or $1.54$0.69 per diluted share, for the ~~same 2016 period. In~~first quarter of 2020. The $3.1 million, or 115%, increase in net income was primarily the ~~both the quarter~~result of $5.4 million higher net interest income and ~~year-to-date comparisons, the increase was due to higher revenue which~~$2.8 million more ~~than~~non-interest income partially offset ~~additional~~by a $4.2 million rise in non-interest expenses and an$0.5 million increase in the provision for loan losses. The increase in non-interest expenses was driven by the impact of adding the operations of MNB along with merger-related expenses incurred in connection with the acquisitions of MNB and Landmark.

Return on average assets (ROA) was ~~1.03%~~1.29% and ~~1.07%~~1.04% for the ~~third~~first quarters of ~~2017~~2021 and ~~2016, respectively, and 1.02% and 1.01% for~~2020. During the nine months ended September 30, 2017 and 2016, respectively. In the quarterly comparison, the decrease in ROA was the result of the growth in average assets outpacing net income growth. In the year-to-date comparison, ROA increased by one basis point due to continuous growth in net income. Returnsame time periods, return on average shareholders’ equity (ROE) was ~~10.36%~~13.75% and ~~9.99% for~~9.74%, respectively. ROA and ROE both increased due to the ~~third quarters of 2017 and 2016, respectively, and 10.24% and 9.55% for the nine months ended September 30, 2017 and 2016, respectively. In both periods, ROE increased primarily from the leverage~~ growth in ~~2017 and also~~ net income ~~growth outpacing~~relative to the increase in average ~~shareholders’~~assets and equity.

Net interest income and interest sensitive assets / liabilities

For the ~~third~~first quarter of ~~2017,~~2021, net interest income increased ~~$0.6~~$5.4 million, or ~~10%~~68%, to ~~$7.0~~$13.4 million from ~~$6.4~~$8.0 million for the ~~third~~first quarter of ~~2016, due to higher interest income partially offset by increased interest expenses. Although the yield on interest-earning assets remained flat, the Company produced $0.9~~2020. The $4.6 million ~~in additional interest income from growth of $90.3 million in average interest-earning assets. This~~ growth in interest income was ~~primarily driven~~produced by the addition of $707.6 million in average interest-earning assets partially offset by the effect of a 58 basis point decline in FTE yield earned on those assets. The loan portfolio ~~with~~drove this interest income growth due to $405.9 million more in average ~~balance growth of $69.6 million which contributed~~loans, primarily from the MNB acquisition and PPP lending. In the investment portfolio, an ~~additional $0.8 million to interest income. In conjunction,~~increase in the average balances of municipal securities ~~increased $27.0 million which produced $0.2 million more~~was the biggest driver of interest income ~~from~~growth. The average balance of total securities grew $223.1 million producing $0.7 million in additional FTE interest income despite a decrease of 93 basis points in yields earned on investments. On the liability side, total interest-bearing liabilities grew $454.3 million, on average, with a 67 basis point decrease in rates paid thereon. A 61 basis point decrease in rates paid on deposits offset the effect of $482.0 million higher average interest-bearing ~~liabilities were $76.1~~deposits resulting in $0.6 million ~~higher with a fourteen basis point increase in average rates paid which resulted in $0.3 million more~~less interest expense from deposits for the first quarter ~~ended September 30, 2017~~of 2021 compared to the ~~2016~~2020 like period.

~~Net interest income increased $2.1~~There was also $0.2 million or 11%, to $20.8 million for the nine months ended September 30, 2017 compared to $18.7 million for the same 2016 period. Growth in average interest-earning assets and the higher yields earned thereon produced $2.8 million moreless in interest ~~income. The loan portfolio experienced average balance growth of $64.2 million which had the effect of producing $1.9 million in income despite the negative impact of~~expense on borrowings due to lower rates paid on a ~~three basis point decline in yield. The average~~lower balance of total investments grew $27.1 million, mostly in higher yielding mortgage-backed securities, resulting in another $0.9 million in interest income. Interest income growth was partially offset by $0.6 million in additional interest expense. average borrowings.

Table Of Contents

The higher interest expense was primarily attributable to $42.0 million more in average borrowings which resulted in $0.4 million more interest expense. Of the increase in average borrowings, $19.1 million was FHLB advances used mostly to purchase securities and $22.9 million was overnight borrowings used to fund loan growth. Larger average interest-bearing deposits of $22.2 million with a five basis point increase in rates contributed another $0.2 million to interest expense.

~~The fully-taxable equivalent (FTE)~~FTE net interest rate spread increased by nine basis points and margin decreased by ~~fourteen~~eight basis points, respectively, for the three months ended ~~September 30, 2017,~~March 31, 2021 compared to the same ~~2016 period as a result of~~2020 period. The yields earned on interest-earning assets declined slower than the ~~higher~~ rates paid on interest-bearing liabilities ~~while~~causing the ~~yield on interest-earning assets was unchanged. For the nine months ended September 30, 2017, the spread was 3.58% compared to 3.59% for the nine months ended September 30, 2016.~~improvement in net interest rate spread. The ~~spread fell one basis point because rates paid on interest-bearing liabilities increased faster than the yield earned on interest-earning assets. The FTE~~decrease in net interest rate margin ~~decreased by eleven basis points to 3.67% for the third quarter of 2017 compared to 3.78% for the third quarter of 2016~~was due to the ~~larger~~higher average balance of interest-earning assets. For the nine months ended September 30, 2017, margin increased to 3.72% compared to 3.71% for the same 2016 period. Margin growth resulted from growth of $17.6 million in average non-interest-bearing deposits mitigating the increase in the cost of funds.interest-bearing cash. The overall 23 basis point cost of funds, which includes the impact of non-interest bearing deposits, ~~increased eleven and seven~~decreased 54 basis points for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2021 compared to the same ~~2016~~2020 periods. The primary reason for the ~~increase~~decline was ~~higher average borrowings which were used to fund asset growth along with an increase~~the reduction in ~~average interest-bearing deposits and the~~ rates paid ~~thereon.~~ on deposits compared to the same 2020 periods.

For the remainder of ~~2017,~~2021, the Company expects to operate in a ~~gradually increasing~~relatively low interest rate environment. A rate environment with ~~rising~~falling interest rates positions the Company to ~~improve~~reduce its interest income performance from new and maturing earning assets. Until there is a sustained period of yield curve steepening, with rates rising more sharply at the long end, the interest rate margin may experience compression. ~~However for~~The FOMC began easing the ~~rest of 2017, the Company anticipates net interest income to improve as growth in interest-earning assets would help mitigate an adverse impact of rate movements~~ ~~on cost of funds. The Federal Open Market Committee (FOMC) has been gradually increasing the short-term~~ federal funds rate ~~since~~during the ~~end~~second half of ~~2015, but it had a minimal effect on~~2019 and continued through the first quarter of 2020 which reduced rates paid on ~~funding sources.~~interest-bearing liabilities. On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans ~~rose 25~~was cut 75 basis points in ~~March 2017~~the second half of 2019 and another 25150 basis points in ~~June 2017. The focus for~~ the ~~last~~first quarter of ~~2017~~2020. The Blue-Chip Financial Forecasts’ consensus forecasts are predicting a steepening yield curve, with basically flat short-term rates and rising long-term rates. The 2021 focus is to manage net interest income ~~after years of~~through a ~~sustained low interest~~relatively flat forecasted rate ~~environment~~cycle by ~~maintaining~~controlling loan and deposit pricing to maintain a reasonable spread. Interest ~~expense~~income is projected to ~~continue~~increase for the remainder of 2021. Management expects to ~~grow in~~actively reduce the ~~fourth quarter~~cost of ~~2017 from growth in deposits and borrowings and an increase in rates~~

~~Table Of Contents~~

~~paid on both.~~funds to partially mitigate spread compression throughout this flat rate cycle. Continued growth in the loan portfolios complemented with investment security growth is expected to boost interest income, and when coupled with a proactive relationship approach to deposit cost setting strategies should help mitigate spread compression and contain the interest rate margin at acceptable levels.

The Company’s cost of interest-bearing liabilities was ~~59 basis points and 54 basis points~~0.31% for the three ~~and nine~~ months ended ~~September 30, 2017, respectively, and 45~~March 31, 2021, or 67 basis points ~~for both~~lower than the ~~three and nine months ended September 30, 2016, respectively. The primary reason~~cost for the ~~increase~~same 2020 periods. The decrease in interest paid on both ~~periods was higher average borrowings. Increases in~~deposits and borrowings contributed to the ~~average balance~~lower cost of interest-bearing ~~deposits and~~liabilities. The FOMC is not expected to cut the federal funds rate further, but the Company has the opportunity to reduce rates paid on ~~these~~ deposits ~~also contributed to the higher cost of interest-bearing liabilities in both periods. During the third quarter of 2017,~~as higher-priced promotional rates ~~paid on interest-bearing deposits started to inch up from historic low levels over the past four years. Interest~~and negotiated rates ~~along the treasury yield curve have been volatile~~reprice into products with ~~shorter-term rates rising faster than long-term rates producing a flatter yield curve during 2017. Competition among banks has already begun to pressure banks to increase deposit~~lower rates. If rates continue to rise in the last quarter of 2017, the effect could pressure net interest income if short-term rates rise more rapidly than longer-term interest rates, thereby compressing the interest rate spread. To help mitigate the impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships, generate new loan volumes, and retain and generate higher levels of average non-interest bearing deposit balances. Strategically deploying no- and low-cost deposits into interest earning-assets is an effective margin-preserving strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin.

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

The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, ~~to a tax-equivalent basis (FTE),~~ using the corporate federal tax rate of ~~34%~~21% for March 31, 2021 and 2020 to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. ~~The FTE adjustment to interest income was $325 thousand~~See “Non-GAAP Financial Measures” within this management’s discussion and ~~$285 thousand~~analysis for the ~~third quarters of 2017 and 2016, respectively, and $959 thousand and $845 thousand for the nine months ended September 30, 2017 and 2016, respectively.~~FTE adjustments. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans ~~HFS~~held-for-sale (HFS) and non-accrual loans but exclude the allowance for loan losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan ~~cost~~fee/(cost) amortization of ~~$113 thousand~~$1.4 million and ~~$117 thousand for~~($0.2 million) during the ~~third~~first quarters of ~~2017~~2021 and ~~2016, respectively, and $354 thousand and $353 thousand for the first nine months of 2017 and 2016,~~2020, respectively, are included in interest income from loans. MNB loan fair value purchase accounting adjustments of $455 thousand are included in interest income from loans and $30 thousand reduced interest expense on deposits for the three months ended March 31, 2021. Fair value purchase accounting adjustments are preliminary and subject to refinement. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans. Net interest margin is calculated by dividing ~~annualized~~ net interest ~~income - FTE~~income-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source:

‎

3641

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	Three months ended												Three months ended
(dollars in thousands)	September 30, 2017						September 30, 2016						March 31, 2021						March 31, 2020
	Average				Yield /		Average				Yield /		Average				Yield /		Average				Yield /
Assets	balance		Interest		rate		balance		Interest		rate		balance		Interest		rate		balance		Interest		rate

Interest-earning assets
Interest-bearing deposits	$	3,646	$	12	1.30	%	$	9,980	$	13	0.53	%	$	85,985	$	21	0.10	%	$	6,853	$	12	0.72	%
Restricted investments in bank stock														2,892		33	4.56			3,434		65	7.61
Investments:
Agency - GSE		17,481		63	1.43			18,102		61	1.34			53,068		181	1.38			5,943		40	2.70
MBS - GSE residential		88,928		547	2.44			69,146		439	2.53			146,487		519	1.44			125,504		806	2.58
State and municipal (nontaxable)		41,880		578	5.48			36,100		505	5.56			157,508		1,186	3.05			51,313		535	4.19
Other		3,549		48	5.31			1,485		18	4.81
State and municipal (taxable)														49,414		224	1.84			641		5	2.97
Total investments		151,838		1,236	3.23			124,833		1,023	3.26			406,477		2,110	2.11			183,401		1,386	3.04
Loans and leases:
Commercial and commercial real estate (taxable)		298,598		3,515	4.67			271,865		3,064	4.48
Commercial and commercial real estate (nontaxable)		32,318		333	4.09			26,770		295	4.38
C&I and CRE (taxable)														645,596		7,805	4.90			320,019		3,985	5.01
C&I and CRE (nontaxable)														42,294		404	3.87			36,675		376	4.13
Consumer		108,513		1,123	4.10			77,933		983	5.02			162,325		1,574	3.93			163,376		1,611	3.97
Residential real estate		202,003		2,034	4.00			195,229		1,913	3.90			311,897		2,809	3.65			236,138		2,467	4.20
Total loans and leases		641,432		7,005	4.33			571,797		6,255	4.35			1,162,112		12,592	4.39			756,208		8,439	4.49
Total interest-earning assets		796,916		8,253	4.11	%		706,610		7,291	4.11	%		1,657,466		14,756	3.61	%		949,896		9,902	4.19	%
Non-interest earning assets		59,987						50,349						121,813						69,656
Total assets	$	856,903					$	756,959					$	1,779,279					$	1,019,552

Liabilities and shareholders' equity

Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	189,037	$	208	0.44	%	$	156,545	$	129	0.33	%	$	484,245	$	376	0.31	%	$	248,364	$	372	0.60	%
Savings and clubs		126,768		42	0.13			121,829		39	0.13			186,473		32	0.07			104,309		26	0.10
MMDA		119,705		216	0.72			130,745		199	0.61			361,446		266	0.30			199,078		595	1.20
Certificates of deposit		106,761		276	1.03			96,554		213	0.88			119,691		190	0.64			118,116		523	1.78
Total interest-bearing deposits		542,271		742	0.54			505,673		580	0.46			1,151,855		864	0.30			669,867		1,516	0.91
Repurchase agreements		7,269		3	0.18			9,108		4	0.18
Overnight borrowings		17,817		60	1.33			158		1	2.91
Short-term borrowings														144		-	0.51			16,174		75	1.87
FHLB advances		23,704		77	1.28			-		-	-			3,389		26	3.12			15,000		114	3.06
Total interest-bearing liabilities		591,061		882	0.59	%		514,939		585	0.45	%		1,155,388		890	0.31	%		701,041		1,705	0.98	%
Non-interest bearing deposits		173,627						155,516						437,740						194,847
Non-interest bearing liabilities		6,942						5,409						18,944						14,891
Total liabilities		771,630						675,864						1,612,072						910,779
Shareholders' equity		85,273						81,095						167,207						108,773
Total liabilities and shareholders' equity	$	856,903					$	756,959					$	1,779,279					$	1,019,552
Net interest income - FTE			$	7,371					$	6,706					$	13,866					$	8,197

Net interest spread					3.52	%					3.66	%					3.30	%					3.21	%
Net interest margin					3.67	%					3.78	%					3.39	%					3.47	%
Cost of funds					0.46	%					0.35	%					0.23	%					0.77	%

~~Table Of Contents~~

Nine months ended
(dollars in thousands)
September 30, 2017

September 30, 2016

Average

Yield /

Average

Yield /
Assets
balance

Interest

rate

balance

Interest

rate

Interest-earning assets

Interest-bearing deposits
$
2,604

$
22

1.15
%

$
14,892

$
59

0.53
%
Investments:

Agency - GSE

17,982

191

1.42

18,305

173

1.26

MBS - GSE residential

88,742

1,696

2.56

69,334

1,063

2.05

State and municipal (nontaxable)

41,397

1,700

5.49

35,359

1,495

5.65

Other

3,598

119

4.40

1,575

63

5.40

Total investments

151,719

3,706

3.27

124,573

2,794

3.00

Loans and leases:

Commercial and commercial real estate (taxable)

295,520

10,234

4.63

275,133

9,135

4.43

Commercial and commercial real estate (nontaxable)

31,393

981

4.18

27,095

878

4.33

Consumer

101,323

3,175

4.19

70,712

2,817

5.32

Residential real estate

200,047

5,989

4.00

191,111

5,619

3.93

Total loans and leases

628,283

20,379

4.34

564,051

18,449

4.37

Federal funds sold

-

-

-

-

-

-

Total interest-earning assets

782,606

24,107

4.12
%

703,516

21,302

4.04
%
Non-interest earning assets

56,515

49,216

Total assets
$
839,121

$
752,732

Liabilities and shareholders' equity

Interest-bearing liabilities

Deposits:

Interest-bearing checking
$
185,093

$
548

0.40
%

$
155,543

$
342

0.29
%
Savings and clubs

125,787

122

0.13

119,577

113

0.13

MMDA

117,596

578

0.66

132,381

621

0.63

Certificates of deposit

100,829

723

0.96

99,589

651

0.87

Total interest-bearing deposits

529,305

1,971

0.50

507,090

1,727

0.45

Repurchase agreements

10,068

15

0.20

10,874

16

0.20

Overnight borrowings

23,892

197

1.10

975

14

1.92

FHLB advances

19,096

174

1.21

-

-

-

Total interest-bearing liabilities

582,361

2,357

0.54
%

518,939

1,757

0.45
%
Non-interest bearing deposits

167,313

149,724

Non-interest bearing liabilities

6,021

4,841

Total liabilities

755,695

673,504

Shareholders' equity

83,426

79,228

Total liabilities and shareholders' equity
$
839,121

$
752,732

Net interest income - FTE

$
21,750

$
19,545

Net interest spread

3.58
%

3.59
%
Net interest margin

3.72
%

3.71
%
Cost of funds

0.42
%

0.35
%

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

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	Nine months ended September 30,												Three months ended March 31,
(dollars in thousands)	2017 compared to 2016						2016 compared to 2015						2021 compared to 2020						2020 compared to 2019
	Increase (decrease) due to												Increase (decrease) due to
	Volume		Rate		Total		Volume		Rate		Total		Volume		Rate		Total		Volume		Rate		Total
Interest income:
Interest-bearing deposits	$	(72)	$	35	$	(37)	$	9	$	28	$	37	$	28	$	(19)	$	9	$	13	$	(16)	$	(3)
Restricted investments in bank stock														(9)		(23)		(32)		(24)		(11)		(35)
Investments:
Agency - GSE		(3)		21		18		6		(1)		5		169		(28)		141		1		-		1
MBS - GSE residential		336		297		633		84		304		388		116		(403)		(287)		(10)		(105)		(115)
State and municipal		157		(30)		127		(4)		(20)		(24)		853		(203)		650		39		(33)		6
Other		65		(10)		55		(11)		(57)		(68)
Total investments		555		278		833		75		226		301		1,138		(634)		504		30		(138)		(108)
Loans and leases:
Residential real estate		265		104		369		341		(30)		311		697		(355)		342		254		(166)		88
Commercial and CRE		801		367		1,168		653		(204)		449
C&I and CRE														3,877		(34)		3,843		110		(106)		4
Consumer		1,042		(684)		358		128		(123)		5		(16)		(21)		(37)		63		47		110
Total loans and leases		2,108		(213)		1,895		1,122		(357)		765		4,558		(410)		4,148		427		(225)		202
Total interest income		2,591		100		2,691		1,206		(103)		1,103		5,715		(1,086)		4,629		446		(390)		56

Interest expense:
Deposits:
Interest-bearing checking		71		136		207		50		67		117		237		(233)		4		38		(6)		32
Savings and clubs		9		-		9		6		(50)		(44)		16		(10)		6		(4)		(6)		(10)
Money market		(70)		27		(43)		65		16		81		290		(619)		(329)		196		(87)		109
Certificates of deposit		8		63		71		(39)		(27)		(66)		7		(340)		(333)		-		54		54
Total deposits		18		226		244		82		6		88		550		(1,202)		(652)		230		(45)		185
Repurchase agreements		(1)		-		(1)		(1)		2		1
Overnight borrowings		191		(8)		183		(20)		19		(1)		(43)		(32)		(75)		(129)		(67)		(196)
FHLB advances		174		-		174		(255)		-		(255)		(90)		2		(88)		(59)		30		(29)
Total interest expense		382		218		600		(194)		27		(167)		417		(1,232)		(815)		42		(82)		(40)
Net interest income	$	2,209	$	(118)	$	2,091	$	1,400	$	(130)	$	1,270	$	5,298	$	146	$	5,444	$	404	$	(308)	$	96

Provision for loan losses

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

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

•specific loans that could have loss potential;

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

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

•trends in volume and terms of loans;

•changes in risk selection and underwriting standards;

•changes in lending policies and legal and regulatory requirements;

•experience, ability and depth of lending management;

•national and local economic trends and conditions; and

•changes in credit concentrations.

For the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, the Company recorded a provision for loan losses of ~~$0.4~~$0.8 million and ~~$0.2~~$0.3 million, respectively, a ~~$0.2~~$0.5 million, or 167%, increase. ~~Macroeconomic factors, particularly anticipated regulatory requirements due to the Company’s asset growth and default rates for residential properties~~The increase in the ~~Company’s operating area, supported the increase.~~

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~~For the nine months ended September 30, 2017 and 2016, the Company recorded a~~ provision for loan losses ~~of $0.9 million and $0.6 million, respectively, a $0.3 million increase. This increase~~from the year earlier period was ~~due~~ primarily attributed to ~~net growth in~~higher credit losses inherent within the loan portfolio ~~but also~~that were a result of the COVID-19 crisis and its effects.

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See the discussion of the qualitative factors within the “Allowance for loan losses” section of this management’s discussion and analysis. Although uncertainty over COVID’s duration and severity complicates management’s ability to ~~fund~~render a more precise estimate of credit losses, management currently believes the ~~expected~~level of provisioning for the three months ended March 31, 2021 was adequate based on the information that was available as of the reporting date and subsequent period up to the filing date.

The provision for loan losses derives from the reserve required from the allowance ~~requirements implied from certain macroeconomic and other business factors.~~for loan losses calculation. The Company continued provisioning for the three months ended March 31, 2021 to maintain an allowance level that management deemed adequate.

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

Other income

For the ~~third~~first quarter of ~~2017,~~2021, non-interest income amounted to ~~$2.2~~$5.5 million, an increase of $0.2 million, from $2.0 million recorded for the third quarter of 2016. Increases in trust income of $0.1 million, $0.1 million of interchange fees and earnings on bank owned life insurance (BOLI) of $0.1 million partially offset $0.1 million fewer gains on loan sales.

~~Non-interest income amounted to $6.5 million for the nine months ended September 30, 2017, an increase of $0.7~~$2.7 million, or ~~12%~~100%, ~~from the $5.8~~compared to $2.8 million recorded for the same ~~2016~~2020 period. Heightened mortgage activity caused gains on loan sales to increase $2.1 million and service charges on loans to increase $0.1 million. Interchange fees were $0.4 million higher than the first quarter of 2020 with more debit cards issued after the merger with MNB. Additionally, earnings on bank-owned life insurance grew $0.1 million and fees from trust fiduciary activities increased $0.1 million partially offset by a $0.1 million reduction in other income from increased mortgage servicing rights amortization.

Operating expenses

For the quarter ended March 31, 2021, total non-interest operating expenses were $11.5 million, an increase of $4.2 million, or 57%, compared to $7.3 million for the same 2020 quarter. Salary and employee benefits rose $2.0 million, or 50%, to $5.9 million for the first quarter of 2021 from $3.9 million for the first quarter of 2020. The increase was primarily due to ~~$0.2~~salaries and benefits from additional employees resulting from the merger. Premises and equipment expenses increased $0.5 million, inor 47%, primarily due to property and equipment acquired from the merger. Professional fees increased $0.5 million due to expenses related to the pandemic, higher legal and audit expenses, and expenses after the merger with MNB. Advertising and marketing expense increased $0.5 million due to additional ~~trust revenue, an increase of $0.2~~donations and more advertising. The Company incurred a $0.4 million ~~in BOLI earnings, $0.1 million more service charges on deposits, and $0.1 million higher interchange fees.~~

~~Other operating expenses~~

~~For~~FHLB prepayment penalty during the three months ended ~~September 30, 2017, non-interest~~March 31, 2021. Merger-related expenses ~~increased $0.6 million, or 12%, compared to~~during the ~~three months ended September 30, 2016 from $5.4 million to $6.0 million. Salaries and employee benefits grew~~first quarter of 2021 were $0.3 million during the third quarter of 2017 to $3.2 million from $2.9 million during the third quarter of 2016. The increase resulted from additional full-time employees hired, more summer staff requirements, annual merit increases, increased incentive compensation plus additional expenses for a retirement benefit plan that was implementedhigher than in the first quarter of ~~2017. Advertising and marketing expenses increased $0.1 million~~2020 due to ~~television advertising during~~ the ~~third quarter~~timing of ~~2017 that~~ the Company did not have during the third quarter of 2016. Professional fees were $0.1 million higher during the third quarter of 2017 due to stock split processing expenses and increased legal expenses. Loan collection expense increased $0.1 million due primarily to expenses related to one large property that went into foreclosure that was subsequently sold.

For the nine months ended September 30, 2017, non-interest expenses increased $1.7 million, or 11%, compared to the nine months ended September 30, 2016, from $16.2 million to $17.9 million. Salaries and employee benefits increased $0.9 million, from $8.7 million for the first nine months of 2016 to $9.6 million for the same 2017 period. The increase stemmed from full-time staff additions or replacements to previously vacant positions, more seasonal hires, annual merit increases, one-time salary increases awarded to certain employees in the normal course of performance management, increased incentive compensation and added retirement benefits.pending merger. Data processing and communications increased $0.2 million due to additional costs related to a new integrated dealer lending program and higher data center costs incurred during 2017. Premises and equipment increased $0.2 million due mostly to additional building maintenance expenses and ~~higher lease payments from~~ the construction of a new branch. Professional fees were $0.2 million higher due primarily to a one-time NASDAQ listing fee incurred in 2017 and increased legal expenses in the normal course of business. Automated transaction processingFDIC assessment also both increased $0.1 million for the nine months ended September 30, 2017 compared to the 2016 like period due to expenses incurred related to updating customer debit cards with the new chip technology and increased debit card activity during 2017. Advertising and marketing was up $0.2 million during the nine months ended September 30, 2017 because of donations made through the Educational Improvement Tax Credit program in the second quarter of 2017 which were not made in 2016 that were partially offset by a corresponding $0.1 million decrease in the PA shares tax.million. Partially offsetting these increases was a ~~$0.1~~$0.3 million ~~decrease~~reduction in ~~the FDIC assessment.~~ other expenses due to higher loan origination cost deferrals from PPP lending and mortgage activity.

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, ~~at September 30, 2017~~were 1.35% and ~~2016 were~~ 1.79% for the three months ended March 31, 2021 and ~~1.84%, respectively.~~2020. The expense ratio decreased ~~due to higher~~because of increased levels of average ~~assets which were able to absorb the higher non-interest expenses.~~assets. The efficiency ratio ~~is non-interest expenses as a percentage~~(non-GAAP) decreased from 66.69% at March 31, 2020 to 59.11% at March 31, 2021 due to revenue increasing faster than expenses. For more information on the calculation of ~~fully tax equivalent net interest income plus non-interest income, adjusted for non-recurring items. The~~the efficiency ratio, ~~also decreased from 63.75% at September 30, 2016~~see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.

Merger related expenses expected to ~~62.79% at September 30, 2017 due to higher revenue.~~be incurred by the Company of $3.2 million are anticipated over the remainder of 2021 for legal, investment banking, audit, data processing, regulatory filings, shareholder conversion and severance costs for the pending merger with Landmark Bancorp, Inc.

Provision for income taxes

~~For the quarter ended September 30, 2017, the~~The provision for income taxes ~~decreased $0.1 million to $0.7 million from $0.8~~increased $0.5 million for the ~~quarter ended September 30, 2016 despite an increase in pre-tax income. For the nine~~three months ended September 30, 2017, the provision for income taxes remained unchanged at approximately $2.0 million despite a $0.8 million increase in income before taxes. During the first nine months of 2017, there was a $0.2 million tax deduction recorded, the majority of which was recorded in the third quarter, related to the excess tax benefit realized from the increase in the fair value of stock options exercised. During the nine months ended September 30, 2017, there were 17,250 stock options exercised, 16,472 during the third quarter, compared to 750 stock options exercised in the same 2016 period, none of which were exercised during the third quarter. There was also more tax-free income recorded for the first nine months of 2017March 31, 2021 compared to the same ~~2016 period.~~2020 period due to higher pre-tax income. The Company's effective tax rate was 15.5% at March 31, 2021 compared to 16.6% at March 31, 2020. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The decrease in the effective tax rate was primarily due to higher tax-exempt interest income. Due to challenges relating to current market conditions, the Company may not have the ability to make a reliable estimate of all or part of its ordinary income. If the federal corporate tax rate is increased, the Company’s net deferred tax liabilities will be re-valued upon adoption of the new tax rate. A federal tax rate increase will increase net deferred tax liabilities with a corresponding increase to provision for income taxes.

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Comparison of financial condition at

~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020

Overview

Consolidated assets increased ~~$85.3~~$213.6 million, or ~~11%~~13%, to ~~$878.2 million~~$1.9 billion as of ~~September 30, 2017~~March 31, 2021 from ~~$792.9 million at~~$1.7 billion as of December 31, ~~2016.~~2020. The increase in assets occurred primarily in cash and cash equivalents and the investment portfolio primarily from growth in deposits. As explained in greater detail below, growth in deposits occurred because of seasonal tax cycles, PPP loan proceeds, business activity, government relief due to the pandemic and ~~investment portfolios of $35.8 million and $22.0 million, respectively, and bank-owned life insurance of $8.4 million utilizing~~increases in personal account balances. Cash inflow from growth in deposits of ~~$45.1~~$213.4 million borrowings of $32.4 million and $4.1 million in retained earnings, net of dividends declared. Borrowings consisted of $23.7 million in FHLB advances and $8.7 million in additional short-term borrowings. For the last quarter of 2017, the Company expectswas used to ~~continue using deposit growth to fund loan growth~~purchase investment securities and pay down borrowings.

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Funds Deployed:

Investment securities

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

As of ~~September 30, 2017,~~March 31, 2021, the carrying value of investment securities amounted to ~~$152.0~~$436.6 million, or ~~17%~~23% of total assets, compared to ~~$130.0~~$392.4 million, or ~~16%~~23% of total assets, at December 31, ~~2016. On September 30, 2017, 60%~~2020. As of March 31, 2021, 35% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations.

Investment securities were comprised of AFS securities as of ~~September 30, 2017.~~March 31, 2021 and December 31, 2020. The AFS securities were recorded with a net unrealized gain of ~~$2.9 million and $2.1~~$1.5 million as of ~~September 30, 2017~~March 31, 2021 and a net unrealized gain of $11.3 million as of December 31, ~~2016, or a~~2020. Of the net ~~improvement~~decline in the unrealized gain position of ~~$0.8~~$9.8 million, ~~during the first nine months of 2017.~~$5.6 million was attributable to municipal securities, $2.0 million was attributable to mortgage-backed securities and $2.2 million was attributable to agency securities. The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve ~~decline,~~rise, especially at the intermediate and long end, the values of debt securities tend to ~~rise.~~decline. Whether or not the value of the Company’s investment portfolio will continue to ~~exceed~~change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. ~~When~~Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates ~~rise,~~decline, the market values of the Company’s debt securities portfolio could be subject to market value ~~declines.~~increases.

As of ~~September 30, 2017,~~March 31, 2021, the Company had ~~$130.6~~$331.2 million in public deposits, or ~~17%~~19% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on these public ~~deposits.~~deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. As of ~~September 30, 2017,~~March 31, 2021, the balance of pledged securities required for deposit ~~and repurchase agreement~~ accounts was ~~$141.6 million.~~$341.2 million, or 78% of total securities.

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether impairment exists and whether the impairment is temporary or other-than-temporary. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security is other-than-temporarily impaired. If a decline in value is deemed to be other-than-temporary, the amortized cost of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized. During the ~~nine months~~quarter ended ~~September 30, 2017,~~March 31, 2021, the Company did not incur other-than-temporary impairment charges from its investment securities portfolio.

During the ~~first nine~~three months ~~of 2017,~~ended March 31, 2021, the carrying value of total investments increased ~~$22.0~~$44.2 million, or ~~17%~~11%. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile. The Company expects to grow the portfolio and increase its relative size with a preference toward mortgage-backed securities. If rates rise, the strategy will provide a good source of cash flow to reinvest into higher yielding interest-sensitive assets. During the first quarter of 2017, the Company purchased approximately $20 million of securities, primarily MBS - GSE residential, funded mostly by $10 million in debt maturing in two years and another $7 million in borrowings laddered out from six months to one year matching a spread expected to produce a suitable after-tax return.

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A comparison of investment securities at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020 is as follows:



	September 30, 2017				December 31, 2016				March 31, 2021				December 31, 2020
(dollars in thousands)	Amount		%		Amount		%		Amount		%		Amount		%

MBS - GSE residential	$	91,271	60.0	%	$	70,937	54.5	%	$	151,611	34.7	%	$	147,260	37.5	%
State & municipal subdivisions		43,735	28.8			40,191	30.9			228,161	52.3			199,713	50.9
Agency - GSE		16,213	10.7			18,276	14.1			56,850	13.0			45,447	11.6
Equity securities - financial services		776	0.5			633	0.5
Total	$	151,995	100.0	%	$	130,037	100.0	%	$	436,622	100.0	%	$	392,420	100.0	%

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As of ~~September 30, 2017,~~March 31, 2021, there were no investments from any one ~~state and municipal~~ issuer with an aggregate book value that exceeded 10% of the Company’s shareholders’ equity.

The distribution of debt securities by stated maturity and tax-equivalent yield at ~~September 30, 2017~~March 31, 2021 are as follows:



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

MBS - GSE residential	$	-	-	%	$	2,262	3.59	%	$	4,345	3.80	%	$	84,664	3.27	%	$	91,271	3.31	%	$	-	-	%	$	172	4.16	%	$	5,011	3.44	%	$	146,428	2.59	%	$	151,611	2.62	%
State & municipal subdivisions		-	-			914	6.44			2,649	5.24			40,172	5.10			43,735	5.13			1,007	6.02			-	-			24,063	1.69			203,091	3.47			228,161	3.29
Agency - GSE		4,007	1.37			12,206	1.48			-	-			-	-			16,213	1.45			-	-			6,298	2.70			46,535	1.17			4,017	1.55			56,850	1.35
Total debt securities	$	4,007	1.37	%	$	15,382	2.05	%	$	6,994	4.34	%	$	124,836	3.84	%	$	151,219	3.62	%	$	1,007	6.02	%	$	6,470	2.73	%	$	75,609	1.48	%	$	353,536	3.08	%	$	436,622	2.80	%

In the above table, the book yields on state & municipal subdivisions were adjusted to a tax-equivalent basis using the corporate federal tax rate of ~~34%~~21%. In addition, average yields on securities AFS are based on amortized cost and do not reflect unrealized gains or losses.

~~Federal Home Loan Bank Stock~~

Restricted investments in bank stock

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaling $45 thousand was acquired from the merger with MNB in 2020. The dividends received from the FHLB totaled $35 thousand and $70 thousand for the three months ended March 31, 2021 and 2020, respectively. The balance in FHLB and ACBB stock was ~~$2.5~~$2.9 million and ~~$2.6~~$2.8 million as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, respectively.

Loans held-for-sale (HFS)

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

As of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, loans HFS consisted of residential mortgages with carrying amounts of ~~$1.6~~$11.0 million and ~~$2.9~~$29.8 million, respectively, which approximated their fair values. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021, residential mortgage loans with principal balances of ~~$30.9~~$80.7 million were sold into the secondary market and the Company recognized net gains of ~~$0.6~~$2.3 million, compared to ~~$34.4~~$12.9 million and ~~$0.6~~$0.2 million, respectively, during the ~~nine~~three months ended September 30, 2016. During 2017, the Company also sold one SBA guaranteed loan with a principal balance of $2.4 million and recognized a net gain on the sale of $0.1 million. The Company did not sell any SBA guaranteed loans in 2016. March 31, 2020.

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster personal relationships. At ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, the servicing portfolio balance of sold residential mortgage loans was ~~$296.9~~$420.5 million and ~~$285.2~~$366.5 million, ~~respectively. At September 30, 2017 and December 31, 2016, the~~respectively, with mortgage servicing ~~portfolio balance~~rights of ~~sold SBA loans was $5.7~~$1.8 million and ~~$4.1~~$1.3 million for the same periods, respectively.

Loans and leases

As of ~~September 30, 2017,~~March 31, 2021, the Company ~~has~~had gross loans and leases, including Company-originated loans, MNB-acquired loans, and PPP loans, totaling ~~$635.1 million~~$1.14 billion compared to ~~$598.0 million~~$1.12 billion at December 31, ~~2016. The growth~~2020, an increase of ~~$37.1~~$22 million, or 6%2%.

The increase resulted primarily from $15 million growth in PPP loans, net of deferred fees, that occurred during the quarter. The increase in PPP loans was the result of $71 million in second round PPP loans originated, net of deferred fees, partially offset by $56 million in SBA forgiveness and customer loan payments received from PPP loans originated in 2020, net of deferred fees, during the first quarter of 2021.

As of March 31, 2021, Company-originated loans, excluding the PPP loans and MNB-acquired loans, totaled $801 million compared with $781 million as of December 31, 2020, an increase of $20 million, or 3%, ~~was largely~~with growth primarily attributed to the ~~Company’s continued efforts to grow the commercial and~~

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industrial portfolio through opportunities with local government entities including counties, townships, boroughs, cities and school districts. The Company attributes customer loyalty to being a trusted financial advisor to clients. Additionally, the indirect auto and lease portfolio continues to grow, as planned, due to new relationships with automobile dealerships in Northeastern Pennsylvania.

~~Commercial and industrial and commercial real estate~~

~~The commercial and industrial (C&I) portfolio and~~ commercial real estate ~~(CRE)~~ portfolio, ~~compared to December 31, 2016, had growth~~resulting from the origination of $13.6 million, or 14%, and $4.8 million, or 2%, respectively. The major contributors to the growth in the C&I portfolio were local government entities. These opportunities continue through developing influential relationships utilized through the Company’s strategy. The Company also expandedseveral large commercial real estate ~~secured lending. Growth in owner occupied CRE~~ loans ~~was offset by expected payoffs of $3.9 million received~~ during the third quarter of 2017 due to the sale of a company. Furthermore, during this quarter, the Company foreclosed on one large owner occupied CRE collateral, which was subsequently sold. In addition, the increase in CRE construction loans was due to loans added during the third quarter of 2017 to one customer for several construction projects. The Company expects modest growth for the remainder of 2017. quarter.

~~Consumer~~
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The consumer loan portfolio grew 11%, or approximately $16.7 million, from $150.2 million on December 31, 2016 to $166.9 million at September 30, 2017. The growth was largely driven by an increase of $22.8 million in auto loans and leases. Additional support was realized from $1.6 million in home equity line of credit usage from new and existing clients. These increases more than offset a $7.5 million reduction in other consumer loans that was directly related to a temporary overdraft at the end of 2016.

~~Residential~~

The residential loan portfolio grew approximately $2.0 million, or 1%, from $145.0 million at December 31, 2016 to $147.0 million at September 30, 2017. Construction loans realized a reduction of $2.2 million while held-for-investment real estate mortgages, which make up roughly 94%, of this category grew $4.2 million.

The composition of the loan portfolio at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020 is summarized as follows:


	September 30, 2017				December 31, 2016				March 31, 2021				December 31, 2020
(dollars in thousands)	Amount		%		Amount		%		Amount		%		Amount		%

Commercial and industrial	$	112,096	17.6	%	$	98,477	16.5	%	$	295,595	25.8	%	$	280,757	25.0	%
Commercial real estate:
Non-owner occupied		93,398	14.7			87,220	14.5			202,500	17.7			192,143	17.1
Owner occupied		109,598	17.3			113,104	18.9			179,932	15.7			179,923	16.1
Construction		6,123	1.0			3,987	0.7			11,721	1.0			10,231	0.9
Consumer:
Home equity installment		28,282	4.5			28,466	4.8			38,425	3.4			40,147	3.6
Home equity line of credit		53,177	8.4			51,609	8.6			47,675	4.2			49,725	4.4
Auto and leases		79,629	12.5			56,841	9.5
Auto										96,841	8.5			98,386	8.8
Direct finance leases										20,421	1.8			20,095	1.8
Other		5,784	0.9			13,301	2.2			6,098	0.5			7,602	0.7
Residential:
Real estate		138,709	21.9			134,475	22.5			221,766	19.4			218,445	19.5
Construction		8,315	1.2			10,496	1.8			22,340	2.0			23,357	2.1
Gross loans		635,111	100.0	%		597,976	100.0	%		1,143,314	100.0	%		1,120,811	100.0	%
Less:
Allowance for loan losses		(9,356)				(9,364)				(14,839)				(14,202)
Unearned lease revenue		(644)				(482)				(1,155)				(1,159)
Net loans	$	625,111			$	588,130			$	1,127,320			$	1,105,450

Loans held-for-sale	$	1,629			$	2,854			$	11,001			$	29,786

Commercial & industrial and commercial real estate

As of March 31, 2021, the commercial loan portfolio grew by $27 million to $690 million over the December 31, 2020 balance of $663 million, a 4% increase for the quarter. First quarter growth was attributed to $15 million net growth in PPP loans and $12 million in commercial real estate (CRE) loans from new relationships in the Lehigh Valley.

The commercial loan portfolio consisted of $536 million company-originated loans, including $145 million in PPP loans, and $154 million in loans acquired from MNB.

Paycheck Protection Program Loans

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans, and during the second and third quarter of 2020, the Company originated 1,551 loans totaling $159 million under the Paycheck Protection Program.

Under the PPP, the entire principal amount of the borrower’s loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount, so long as the employer maintains or quickly rehires employees and maintains salary levels and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

Beginning in the fourth quarter of 2020 and continuing during the first quarter of 2021 and subsequent period up to the filing date, the Company submitted PPP forgiveness applications totaling $159 million to the SBA and received approval for $84 million with $75 million awaiting approval as of March 31, 2021.

As part of the Economic Relief Act, which became law on December 27, 2020, an additional $284 billion was allocated to a reauthorized and revised PPP. On January 19, 2021, the Company began processing and originating PPP loans for this second round, and as of March 31, 2021, the Company originated 895 loans totaling $74 million.

As a PPP lender, the Company expects to recognize fee income of approximately $9.6 million with $5.1 million recognized to date, including $3.3 million of PPP fee income recognized during 2020 and $1.8 million recognized during the first quarter of 2021. Unearned fees attributed to PPP loans, net of $0.2 million in fees paid to referral sources as prescribed by the SBA under the PPP, were $4.3 million as of March 31, 2021.

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The PPP loans originated by size were as follows as of March 31, 2021:



(dollars in thousands)	Balance originated		Current balance		Total SBA fee		SBA fee recognized
$150,000 or less	$	74,018	$	41,976	$	4,553	$	2,145
Greater than $150,000 but less than $2,000,000		127,541		75,449		4,745		2,709
$2,000,000 or higher		31,656		31,656		316		193
Total PPP loans originated	$	233,215	$	149,081	$	9,614	$	5,047

Consumer

As of March 31, 2021, the consumer loan portfolio decreased by $6 million to $210 million over the December 31, 2020 balance of $216 million, a 3% decrease for the quarter. The first quarter decrease was attributed to pay downs in debt resulting from the availability of COVID-related government stimulus, mortgage refinancing paying off home equity loans and less demand for home equity products.

The consumer loan portfolio consisted of home equity installment, home equity line of credit, auto, direct finance leases and other consumer loans.

Residential

As of March 31, 2021, the residential loan portfolio increased by $2 million to $244 million over the December 31, 2020 balance of $242 million, a 1% increase for the quarter. With most of the mortgage origination activity conforming and sold in the secondary market, mortgages held-for-investment grew 1%.

The residential loan portfolio consisted primarily of held-for-investment residential loans for primary residences. Company-originated loans totaled $210 million and acquired loans from MNB totaled $34 million as of March 31. 2021 compared to Company-originated loans of $203 million and acquired loans of $38 million as of December 31, 2020.

The Company’s service team is experienced, knowledgeable, and dedicated to servicing the community and its clients. The Company will continue to provide products and services that benefit our clients as well as the community which is very important to our success. There is much uncertainty regarding the effects COVID-19 may have on demand for loans and leases. The Company has been proactively trying to reach out to customers to understand their needs during this crisis.

Allowance for loan losses

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

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•identification of specific impaired loans by loan category;

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

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

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

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

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

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grades and loan charge-offs. The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.

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

Acquired ASC 310-20 loans, which are loans that did not meet the criteria of ASC 310-30, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. These loans are initially recorded at fair value and include credit and interest rate marks associated with purchase accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans after acquisition. As of March 31, 2021, no allowance was recorded for credit deterioration in acquired loans.

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

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


	As of and for the			As of and for the			As of and for the
	three months ended			twelve months ended			three months ended
(dollars in thousands)	March 31, 2021			December 31, 2020			March 31, 2020

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

Charge-offs:
Commercial and industrial		(7)			(372)			(64)
Commercial real estate		(124)			(465)			(163)
Consumer		(28)			(296)			(43)
Residential		(43)			(35)			(31)
Total		(202)			(1,168)			(301)

Recoveries:
Commercial and industrial		4			26			12
Commercial real estate		11			30			2
Consumer		24			120			64
Residential		-			197			193
Total		39			373			271
Net charge-offs		(163)			(795)			(30)
Provision for loan losses		800			5,250			300
Balance at end of period	$	14,839		$	14,202		$	10,017

Allowance for loan losses to total loans		1.30	%		1.27	%		1.34	%
Net charge-offs to average total loans outstanding		0.06	%		0.08	%		0.02	%
Average total loans	$	1,162,112		$	1,019,373		$	756,208
Loans 30 - 89 days past due and accruing	$	912		$	1,598		$	8,308
Loans 90 days or more past due and accruing	$	59		$	61		$	-
Non-accrual loans	$	3,929		$	3,769		$	3,654
Allowance for loan losses to non-accrual loans		3.78	x		3.77	x		2.74	x
Allowance for loan losses to non-performing loans		3.72	x		3.71	x		2.74	x

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For the three months ended March 31, 2021, the allowance increased $0.6 million, or 4%, to $14.8 million from $14.2 million at December 31, 2020 due to provisioning of $0.8 million partially offset by $0.2 million in net charge-offs. The allowance for loan and lease losses was $9.4 million at September 30, 2017 and $9.4 million for the year ended December 31, 2016. Relative to the loan portfolio, which grew $37.1 million through September 30, 2017, the allowance decreased from 1.56% of total loans at December 31, 2016 to 1.47% at September 30, 2017.

~~During the nine months ended September 30, 2017, management~~ increased qualitative factor loss estimates due to certain macroeconomic and business factors. One factor identified the inverse effect of rising interest rates on commercial real estate values. Another involved relatively higher delinquency rates on urban residential properties (3.1% regionally vs. 1.6% nationally) within the Company’s operating area on properties that were relatively more likely to have negative equity (29.1% regionally vs. 10.4% nationally). Lastly, management identified potentially increased legal and regulatory requirements as the result of the Company’s growing asset size.

~~Although the allowance decreased relative to loans, the Company reported improving asset quality. At September 30, 2017, fewer non-performing loans reduced the ratio of non-performing loans~~slightly as a percentage of total loans to ~~0.61% at September 30, 2017 versus 1.23%~~1.30% from 1.27% at December 31, ~~2016. Further, allowance levels at September 30, 2017 were sufficient to cover non-accrual loans 2.42x, a substantial increase over 1.27x reported at December 31, 2016.~~

~~Net charge-offs against~~2020 as the loan portfolio increased by 2% while the allowance ~~totaled $0.9 million~~ for loan losses increased by 4% during the ~~nine months ended September 30, 2017. This compared with $1.0 million as of September 30, 2016 and $1.2 million for the year ended December 31, 2016.~~ same period.

For the nine months ended September 30, 2017, commercial loan charge-offs were $0.5 million or about 48% of total charge-offs. Significant commercial charge-offs totaled $0.3 million, which comprised 32% of total year-to-date charge-offs, and occurred in the CRE portfolio from a single borrower in both the second and third quarters of 2017. The Company anticipates no further losses, as these loans were satisfied at the end of the third quarterLoans acquired from the ~~sale~~MNB merger (performing and non-performing) were initially recorded at their acquisition-date fair values. Because there is no initial credit valuation allowance recorded under this method, the Company establishes a post-acquisition allowance of loan losses to record losses which may subsequently arise on the ~~foreclosed asset serving as collateral. Also~~acquired loans. Since no deterioration was noted for ~~the nine months ended September 30, 2017, consumer charge-offs were $0.5 million or about 49% of total charge-offs. A substantial charge-off~~any such loans following acquisition, no allowance for ~~$0.3 million occurred~~loan and lease losses was provided at this time.

PPP loans made to eligible borrowers have a 100% SBA guarantee. Given this guarantee, no allowance for ~~a single borrower in the HELOC portfolio during the third quarter of 2017. This charge-off~~loan and lease losses was ~~in anticipation of the credit being moved to ORE in the fourth quarter.~~ recorded for these loans.

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

During the first quarter of 2021, management increased the qualitative factors associated with its commercial, consumer, and residential portfolios related to the ~~allowance~~rise in rates that occurred during the quarter, and the adverse impact that these increased rates are anticipated to have on estimated credit losses.

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

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


	For the three		% of Total		For the three		% of Total
	months ended		Net		months ended		Net
(dollars in thousands)	March 31, 2021		Charge-offs		March 31, 2020		Charge-offs
Net charge-offs
Commercial and industrial	$	(3)	2	%	$	(52)	173	%
Commercial real estate		(113)	69			(161)	537
Consumer		(4)	3			21	(70)
Residential		(43)	26			162	(540)
Total net charge-offs	$	(163)	100	%	$	(30)	100	%

For the three months ended March 31, 2021, net charge-offs against the allowance totaled $163 thousand compared with net charge-offs of $30 thousand for the three months ended March 31, 2020, representing a $133 thousand increase. The increase was attributed to a $192 thousand one-time recovery during the first quarter of 2020 in the ~~economy~~form of a reimbursement from the Federal National Mortgage Association (“FNMA”) for previously sold mortgages that were charged-off. Excluding the one-time FNMA recovery in 2020, net charge-offs for the three months ended March 31, 2021 would have shown an improvement, decreasing by $59 thousand, or 36%, compared to the prior period.

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~~and pressure on property values. In contrast, an abrupt significant increase in the U.S. Prime lending rate could adversely impact the debt service capacity of existing borrowers' ability to repay.~~

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

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

As of and for the
As of and for the
As of and for the

nine months ended
twelve months ended
nine months ended
(dollars in thousands)
September 30, 2017
December 31, 2016
September 30, 2016

Balance at beginning of period
$
9,364

$
9,527

$
9,527

Charge-offs:

Commercial and industrial

(76)

(224)

(199)

Commercial real estate

(416)

(592)

(526)

Consumer

(505)

(504)

(356)

Residential

(38)

(60)

(60)

Total

(1,035)

(1,380)

(1,141)

Recoveries:

Commercial and industrial

5

55

39

Commercial real estate

44

37

36

Consumer

53

100

85

Residential

-

-

-

Total

102

192

160

Net charge-offs

(933)

(1,188)

(981)

Provision for loan losses

925

1,025

650

Balance at end of period
$
9,356

$
9,364

$
9,196

Allowance for loan losses to total loans

1.47
%

1.57
%

1.61
%
Net charge-offs to average total loans outstanding

0.20
%

0.21
%

0.23
%
Average total loans
$
628,283

$
568,953

$
564,051

Loans 30 - 89 days past due and accruing
$
2,444

$
2,241

$
4,074

Loans 90 days or more past due and accruing
$
-

$
19

$
66

Non-accrual loans
$
3,864

$
7,370

$
5,861

Allowance for loan losses to loans 90 days or more past due and accruing

N/A
*

492.84
x

139.33
x
Allowance for loan losses to non-accrual loans

2.42
x

1.27
x

1.57
x
Allowance for loan losses to non-performing loans

2.42
x

1.27
x

1.55
x

*N/A – Ratio is not applicable because numerator is zero.

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

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



	September 30, 2017				December 31, 2016				September 30, 2016				March 31, 2021				December 31, 2020				March 31, 2020
			Category				Category				Category				Category				Category				Category
			% of				% of				% of				% of				% of				% of
(dollars in thousands)	Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans
Category
Commercial real estate	$	4,102	33	%	$	4,706	34	%	$	4,808	35	%	$	7,080	35	%	$	6,383	34	%	$	3,943	30	%
Commercial and industrial		1,399	18			1,075	17			1,131	16			2,342	26			2,407	25			1,553	16
Consumer		1,969	26			1,834	25			1,788	24			2,415	18			2,552	19			2,094	28
Residential real estate		1,799	23			1,622	24			1,357	25			2,915	21			2,781	22			2,393	26
Unallocated		87	-			127	-			112	-			87	-			79	-			34	-
Total	$	9,356	100	%	$	9,364	100	%	$	9,196	100	%	$	14,839	100	%	$	14,202	100	%	$	10,017	100	%

The allocation of the allowance for the commercial loan portfolio, which is comprised of CRE and C&I loans, accounted for approximately 63% of the total allowance for loan losses at March 31, 2021, which represents a one percentage point increase from 62% of the total allowance for loan losses at December 31, 2020 and a eight percentage point increase from the 55% of the total allowance for loan and lease losses at March 31, 2020.

The increase in the allowance allocated to the commercial portfolio was attributed to the recognition of increased inherent risk due to the economic impact of the COVID-19 pandemic.

The allocation of the allowance for the consumer loan portfolio, accounted for approximately 16% of the total allowance for loan losses at March 31, 2021, which represents a two percentage point decrease from 18% of the total allowance for loan losses at December 31, 2020 and a five percentage point decrease from 21% of the total allowance for loan losses at March 31, 2020.

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

The allocation of the allowance for the residential real estate portfolio, accounted for approximately 20% of the total allowance for loan losses at March 31, 2021 unchanged from 20% of the total allowance for loan losses at December 31, 2020 and a four percentage point decrease from 24% of the total allowance for loan losses at March 31, 2020.

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

The unallocated amount represents the portion of the allowance not specifically identified with a loan or groups of loans. The unallocated reserve was less than 1% of the total allowance for loan losses at March 31, 2021, unchanged from less than 1% of the total allowance for loan losses at December 31, 2020 and March 31, 2020.

Non-performing assets

The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, troubled debt ~~restructured loans~~restructurings (TDRs), other real estate owned (ORE) and repossessed assets. At September 30, 2017, non-performing assets represented 0.76% of total assets compared with 1.33% as of December 31, 2016 and 1.32% as of September 30, 2016. The improvement resulted from a combination of $107.8 million in total asset growth and a $3.5 million net reduction of total non-performing assets year-over-year.

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



(dollars in thousands)	September 30, 2017		December 31, 2016		September 30, 2016		March 31, 2021		December 31, 2020		March 31, 2020

Loans past due 90 days or more and accruing	$	-	$	19	$	66	$	59	$	61	$	-
Non-accrual loans *		3,864		7,370		5,861		3,929		3,769		3,654
Total non-performing loans		3,864		7,389		5,927		3,988		3,830		3,654
Troubled debt restructurings		1,881		1,823		2,478		2,489		2,571		988
Other real estate owned and repossessed assets		927		1,306		1,752		413		256		116
Total non-performing assets	$	6,672	$	10,518	$	10,157	$	6,890	$	6,657	$	4,758

Total loans, including loans held-for-sale	$	636,096	$	600,348	$	573,898	$	1,153,160	$	1,149,438	$	746,715
Total assets	$	878,266	$	792,944	$	770,423	$	1,913,092	$	1,699,510	$	1,062,495
Non-accrual loans to total loans		0.61%		1.23%		1.02%		0.34%		0.33%		0.49%
Non-performing loans to total loans		0.61%		1.23%		1.03%		0.35%		0.33%		0.49%
Non-performing assets to total assets		0.76%		1.33%		1.32%		0.36%		0.39%		0.45%

* In the table above, the amount includes non-accrual TDRs of ~~$2.0~~$0.7 million as of ~~September 30, 2017, $1.5~~March 31, 2021, $0.7 million as of December 31, ~~2016~~2020 and ~~$20 thousand~~$0.6 million as of ~~September 30, 2016.~~ March 31, 2020.

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

Non-performing assets represented 0.36% of total assets at March 31, 2021 compared with 0.39% at December 31, 2020 and 0.45% at March 31, 2020. The year-to-date improvement in the non-performing assets ratio was the result of the $214 million, or 13%, increase in total assets to $1.9 billion at March 31, 2021 outpacing the $0.2 million, or 4%, increase in non-performing assets, and the year-over-year improvement in the non-performing assets ratio was the result of the $851 million, or 80%, increase in total assets outpacing the $2.1 million, or 45%, increase in non-performing assets.

For the three months ended March 31, 2021, non-performing assets increased to $6.9 million from $6.7 million at December 31, 2020. The $0.2 million increase resulted from a $0.1 million increase in non-accrual loans and a $0.1 million increase in other real estate owned and repossessed assets.

From ~~September 30, 2016~~December 31, 2020 to ~~September 30, 2017, non-performing~~March 31, 2021, non-accrual loans ~~which consists~~increased $0.1 million, or 4%, from $3.8 million to $3.9 million. The $0.1 million increase in non-accrual loans was the result of ~~accruing~~$0.6 million in new non-accruals, offset by $0.3 million in payments and $0.1 million in charge-offs. At March 31, 2021, there were a total of 40 loans to 34 unrelated borrowers with balances that ~~are~~ranged from less than $1 thousand to $0.5 million. At December 31, 2020, there were a total of 46 loans to 38 unrelated borrowers with balances that ranged from less than $1 thousand to $0.5 million.

There was one direct finance lease totaling $27 thousand and two auto loans totaling $32 thousand that were over 90 days past due as ~~well as all non-accrual loans, decreased from $5.9 million~~of March 31, 2021 compared to $3.9 million, a $2.0 million, or a 35% decrease. The change in non-performing loans was the result of charge-offs, transfers to ORE, payments, and miscellaneous transfers back to accrual from all loan types. This decrease in non-performing loans was driven by a $2.9 million net decrease in non-accrual commercial loans due to the payoff of two ~~CRE loans for a single borrower,~~direct finance leases totaling $2.5 million, in the third quarter of 2017. The net decrease in non-accrual commercial loans was partially offset by a $0.6 million net increase of residential mortgage non-accrual loans and a $0.3 million net increase in consumer non-accrual loans.

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From December 31, 2016 to September 30, 2017, non-performing loans decreased from $7.4 million to $3.9 million, a $3.5 million, or 48% decrease. This decrease was driven by payments received of $3.3 million, charge-offs of $0.7 million, transfers back to accrual of $1.0 million and transfers to ORE of $0.2 million. These reductions$61 thousand that were ~~partially offset by additions and miscellaneous expenses totaling $1.7 million.~~

~~From December 31, 2016 to September 30, 2017, the portion of accruing loans that was~~ over 90 days past due ~~decreased from $19 thousand to zero. Accruing loans over 90 days past due at~~as of December 31, ~~2016 consisted of four loans to four unrelated borrowers ranging from $1 thousand to $9 thousand.~~2020. The Company seeks payments from all past due customers through an aggressive customer communication process. A past due loan will be placed on non-accrual at the ~~90 day~~90-day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts.

From December 31, 2016 to September 30, 2017, non-accruing loans of all types decreased by $3.5 million, or 48%, from $7.4 million to $3.9 million. At December 31, 2016, there were a total of 46 loans to 39 unrelated borrowers with balances that ranged from less than $1 thousand to $2.3 million. At September 30, 2017, there were a total of 35 loans to 28 unrelated borrowers with balances that ranged from less than $1 thousand to $0.9 million. The decrease in non-accruing loans is primarily attributable to the payoff of two significant non-accrual owner-occupied CRE loans to one borrower with balances totaling $2.5 million. During the third quarter of 2017, the Company foreclosed on the collateral for these loans and sold the foreclosed assets.
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The composition of non-performing loans as of ~~September 30, 2017~~March 31, 2021 is as follows:




			Past due									Past due
	Gross		90 days or		Non-		Total non-		% of	Gross		90 days or		Non-		Total non-		% of
	loan		more and		accrual		performing		gross	loan		more and		accrual		performing		gross
(dollars in thousands)	balances		still accruing		loans		loans		loans	balances		still accruing		loans		loans		loans
Commercial and industrial	$	112,096	$	-	$	14	$	14	0.01%	$	295,595	$	-	$	507	$	507	0.17%
Commercial real estate:
Non-owner occupied		93,398		-		584		584	0.63%		202,500		-		821		821	0.41%
Owner occupied		109,598		-		1,148		1,148	1.05%		179,932		-		1,560		1,560	0.87%
Construction		6,123		-		169		169	2.76%		11,721		-		-		-	-
Consumer:
Home equity installment		28,282		-		15		15	0.05%		38,425		-		26		26	0.07%
Home equity line of credit		53,177		-		513		513	0.96%		47,675		-		287		287	0.60%
Auto loans and leases *		78,985		-		-		-	-
Auto loans											96,841		32		14		46	0.05%
Direct finance leases *											19,266		27		-		27	0.14%
Other		5,784		-		-		-	-		6,098		-		-		-	-
Residential:
Real estate		138,709		-		1,421		1,421	1.02%		221,766		-		714		714	0.32%
Construction		8,315		-		-		-	-		22,340		-		-		-	-
Loans held-for-sale		1,629		-		-		-	-		11,001		-		-		-	-

Total	$	636,096	$	-	$	3,864	$	3,864	0.61%	$	1,153,160	$	59	$	3,929	$	3,988	0.35%

*Net of unearned lease revenue of ~~$0.6~~$1.2 million.

Payments received from non-accrual loans are recognized on a cost recovery method. Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. If the non-accrual loans that were outstanding as of ~~September 30, 2017~~March 31, 2021 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of ~~$0.2 million.~~$78 thousand.

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



As of and for the three months ended March 31, 2021
	Accruing		Non-accruing
	Commercial		Commercial		Commercial
(dollars in thousands)	real estate		real estate		& industrial		Total
Troubled Debt Restructures:
Beginning balance	$	2,571	$	456	$	206	$	3,233
Additions		2		-		-		2
Pay downs / payoffs		(84)		(1)		(6)		(91)
Ending balance	$	2,489	$	455	$	200	$	3,144
Number of loans		7		1		2		10



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

The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a ~~troubled debt restructure (TDR).~~TDR. TDRs arise when a

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borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards in order to maximize the Company’s recovery.

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

From December 31, ~~2016~~2020 to ~~September 30, 2017,~~March 31, 2021, TDRs ~~increased from nine loans totaling $3.3 million to fifteen loans totaling $3.9 million. This increase of $0.6~~decreased $0.1 million, or ~~16%~~3%, ~~was~~ primarily due to the ~~addition~~payoff of ~~six CRE loans to four unrelated borrowers totaling $1.1~~a $0.1 million ~~during the first nine months of 2017.~~accruing commercial real estate TDR. At December 31, ~~2016, the nine~~2020, there were a total of 12 TDRs ~~consisted of six CRE loans totaling $1.8 million, one C&I loan totaling $25~~by 9 unrelated borrowers with balances that ranged from $1 thousand ~~one residential mortgage totaling $0.9~~to $1.3 million, and ~~one HELOC totaling $0.6~~at March 31, 2021, there were a total of 10 TDRs by 7 unrelated borrowers with balances that ranged from $91 thousand to $1.3 million.

Loans modified in a TDR may or may not be placed on non-accrual status. At September 30, 2017, the fifteen TDRs consisted of twelve CRE loans totaling $2.6 million, one C&I loan totaling $25 thousand, one residential mortgage loan totaling $0.9 million and one HELOC totaling $0.4 million.

~~At December~~March 31, ~~2016, two~~2021, there were three TDRs totaling ~~$1.5~~$0.7 million that were on ~~non-accrual. These consisted of one residential mortgage and one HELOC. At September 30, 2017,~~non-accrual status compared to four TDRs totaling ~~$2.0~~$0.7 million ~~were on non-accrual. These consisted~~at December 31, 2020.

Beginning the week of ~~two CRE loans, one residential mortgage~~March 16, 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. Modification terms included interest only or full payment deferral for up to 6 months. As of March 31, 2021, the Company had 5 temporary modifications with principal balances totaling $0.7 million outstanding, which included 3 additional deferral requests for temporary forbearance modifications totaling $0.3 million and ~~one HELOC.~~2 first requests for temporary forbearance modifications totaling $0.2 million.

Details with respect to the actual loan modifications are as follows:

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Types of Loans	Number of Loans	Deferral Period		Balance	Percentage of Tier 1 Capital
Commercial Purpose	5	Up to 6 months	$	717	0.5%

The following ~~tables set forth~~table provides information with respect to the ~~activity in TDRs~~Company’s commercial COVID-19 accommodations by sector at March 31, 2021.


(dollars in thousands)	Count		Balance

Real Estate Rental and Leasing	3	$	445
Construction	2		272
Total commercial accommodations	5	$	717

The global pandemic referred to as COVID-19, and ~~for~~ the ~~periods indicated:~~

As of and for the nine months ended September 30, 2017

Accruing

Non-accruing

Commercial &

Commercial

Consumer

Commercial

Residential

(dollars in thousands)
industrial

real estate

HELOC

real estate

real estate

Total

Troubled Debt Restructures:

Beginning balance
$
25

$
1,798

$
650

$
-

$
881

$
3,354
Additions

-

1,059

-

-

-

1,059
Transfers

-

(969)

-

969

-

-
Pay downs / payoffs

-

(32)

-

(227)

(18)

(277)
Charge offs

-

-

(255)

-

-

(255)
Ending balance
$
25

$
1,856

$
395

$
742

$
863

$
3,881

As of and for the year ended December 31, 2016

Accruing

Non-accruing

Commercial &

Commercial

Consumer

Commercial
Residential

(dollars in thousands)
industrial

real estate

HELOC

real estate
real estate

Total

Troubled Debt Restructures:

Beginning balance
$
525

$
1,898

$
-

$
-

$
-

$
2,423
Additions

-

4

650

-

881

1,535
Transfers

-

(20)

-

20

-

-
Pay downs / payoffs

(500)

(84)

-

-

-

(584)
Charge offs

-

-

-

(20)

-

(20)
Ending balance
$
25

$
1,798

$
650

$
-

$
881

$
3,354

~~If applicable,~~government responses thereafter, have created many impediments to loan production relative to the measures taken to slow the spread. These measures have put a ~~TDR loan classified as non-accrual would require~~large strain on a ~~minimum~~wide variety of ~~six months of payments before consideration for a return to accrual status.~~industries within the global economy generally, and the Company’s market specifically. The concessions granted consisted of temporary interest-only payments or a reduction in the rate of interest to a below-market rate for a contractual period of time. The Company believes concessions have been made in the best interestsoverall economic impact and effect of the ~~borrower~~measures is yet to be fully understood as its effects will most likely lag while businesses and governments inject resources to help lessen the ~~Company. If~~impact. Despite efforts to lessen the impact, it is the Company’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans characterized as a TDR perform according to the restructured terms for a satisfactory period of time, the TDR designation may be removed in a new calendar year if the loan yields a market rate of interest.and comply with terms.

Foreclosedassets held-for-sale

From December 31, ~~2016~~2020 to ~~September 30, 2017,~~March 31, 2021, foreclosed assets held-for-sale (ORE) ~~decreased~~increased from ~~$1.3 million~~$256 thousand to ~~$0.9 million,~~$413 thousand, a ~~$0.4 million,~~$157 thousand, or ~~29%~~62%, ~~decrease.~~ increase. During the first quarter, two properties to two unrelated borrowers for $248 thousand were added; two properties for $90 thousand were sold; and one foreclosed asset was written down by $1 thousand to fair market value.

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



	September 30, 2017			December 31, 2016			March 31, 2021			December 31, 2020
(dollars in thousands)	Amount		#	Amount		#	Amount		#	Amount		#

Balance at beginning of period	$	1,298	13	$	1,074	14	$	256	6	$	349	7

Additions		207	4		1,056	11		248	2		770	10
Pay downs		(18)			(18)			-			(1)
Write downs		(91)			(80)			(1)			(36)
Sold		(474)	(6)		(734)	(12)		(90)	(2)		(826)	(11)
Balance at end of period	$	922	11	$	1,298	13	$	413	6	$	256	6

As of ~~September 30, 2017,~~March 31, 2021, ORE consisted of ~~eleven~~six properties ~~from eleven~~securing loans to six unrelated borrowers totaling ~~$0.9 million.~~

~~Three of these~~$413 thousand. Two properties ($~~0.1 million)~~248 thousand) to two unrelated borrowers were added in ~~2017; three~~2021; two properties ($133 thousand) to two unrelated borrowers were added in ~~2016~~2020; one property ($~~0.5 million); one~~31 thousand) was added in ~~2015~~2019; one property ($~~0.1 million); two were added in 2014 ($42~~1 thousand)~~; one~~ was added in ~~2012 ($100); and one was added in 2011 ($0.2 million).~~2017. Of the ~~eleven~~six properties, ~~seven totaling $0.6 million were~~three properties are under agreement of sale and three properties are listed for ~~sale, while the four remaining properties totaling $0.3 million were either in negotiations for sale or in process for disposition.~~sale.

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As of ~~September 30, 2017,~~March 31, 2021 and December 31, 2020, the Company had ~~one~~no other repossessed ~~asset held-for-sale, with a balance of $4 thousand. There was one repossessed asset held-for-sale at December 31, 2016, with a balance of $8 thousand.~~assets held-for-sale.

Cash surrender value of bank owned life insurance

The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies. BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as components of non-interest income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company. This profitability is used to offset a portion of current and future employee benefit costs. In March ~~2017,~~2019, the Company invested ~~$8.0~~$2.0 million in additional BOLI as a source of funding for additional life insurance benefits that provides for payments upon death for officers and employee benefit expenses related to the Company’s non-qualified ~~Supplemental Executive Retirement Plan (SERP)~~SERP implemented for certain executive ~~officers that provides for payments upon death.~~officers. In December 2020, the Company invested in $6 million in BOLI and $5 million in BOLI with annuity rider investments. The BOLI can be liquidated if necessary, with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that enhances the Company’s capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value.

Premises and equipment

Net of depreciation, premises and equipment decreased $0.3 million during the first three months of 2021. The Company added $0.2 million in fixed assets which was offset by $0.5 million in depreciation expense. The Company expects to begin branch remodeling and corporate center planning which may increase construction in process by approximately $2.5 million in 2021. On December 23, 2020, the Commonwealth of Pennsylvania authorized the release of $2.0 million in Redevelopment Assistance Capital Program (RACP) funding for the Company’s headquarters project in Lackawanna County. Although the Company was awarded the grant, funds will not be available until a final project is selected and certain requirements are met.

Other assets

~~The $3.1~~During the first three months of 2021, the $12.7 million increase in other assets was due mostly to $7.9 million of municipal security settlements pending and $1.9 million in ~~higher residual values associated with recording new automobile leases, net~~SBA fees receivable from loans originated under the second round of lease disposals, $0.5 million higher prepaid expenses, $0.4 million increase in the prepaid dealer reserve and $0.2 million more in construction-in-process. Over the next twelve months, construction-in-process is expected to increase by approximately $2.0 million for construction of a new Dallas branch.PPP.

Funds Provided:

Deposits

The Company is a community based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 1020 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law.�� Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market and non-interest bearing checking (DDA). The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years. Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.

‎

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



	September 30, 2017				December 31, 2016				March 31, 2021				December 31, 2020
(dollars in thousands)	Amount		%		Amount		%		Amount		%		Amount		%

Interest-bearing checking	$	202,096	27.0	%	$	161,563	23.0	%	$	513,735	29.8	%	$	453,896	30.0	%
Savings and clubs		129,199	17.3			120,512	17.1			197,138	11.4			179,676	11.9
Money market		123,020	16.4			117,478	16.7			381,808	22.2			340,654	22.6
Certificates of deposit		108,404	14.5			92,753	13.2			111,867	6.5			127,783	8.5
Total interest-bearing		562,719	75.2			492,306	70.0			1,204,548	69.9			1,102,009	73.0
Non-interest bearing		185,858	24.8			211,153	30.0			518,352	30.1			407,496	27.0
Total deposits	$	748,577	100.0	%	$	703,459	100.0	%	$	1,722,900	100.0	%	$	1,509,505	100.0	%

Total deposits increased ~~$45.1~~$213.4 million, or 6%14%, from ~~$703.5 million~~$1.5 billion at December 31, ~~2016~~2020 to ~~$748.6 million~~$1.7 billion at ~~September 30, 2017. The increase primarily came from growth in~~March 31, 2021. Non-interest bearing and interest-bearing checking accounts contributed the most to the deposit growth with increases of ~~$40.5 million. Most~~$110.9 million and $59.8 million, respectively. Of the growth in non-interest bearing checking accounts, $43.4 million was seasonal deposits from one public customer which flowed out of the bank on April 1, 2021. Tax deposits are usually received mid-quarter and retained for a short period of time with disbursements occurring shortly after they are received. The remaining growth of over $67 million was primarily due to an increase in business deposit account balances from second round PPP proceeds. The increase in interest-bearing checking accounts was primarily due to seasonal tax cycles, business activity, government relief due to the pandemic and shifts from ~~public deposits which fluctuate throughout the year~~maturing CDs. Money market accounts also increased $41.2 million mostly due to seasonal college tuition cycles, higher balances of personal and business ~~deposits.~~accounts and shifts from other types of deposit accounts. The ~~increased lending to local government entities along with a focus~~Company focuses on obtaining a ~~full banking~~full-banking relationship with ~~these~~existing checking account customers has caused public deposit growth during the first nine months of 2017. CDs contributed $15.7 million to deposit growth due to CDs acquired in a branch acquisition during the first quarter of 2017 and $5.0 million in CDs to one publicas well as forming new customer ~~during the second quarter of 2017. Additionally, money market~~relationships. Savings accounts ~~and savings and clubs both~~ increased ~~by $5.5 million and $8.7 million, respectively. Non-interest bearing deposits fell $25.3~~$17.5 million due to ~~a temporary deposit of $48.7 million received at the end of 2016 that was transferred to a trust escrow~~an increase in personal account in January. Excluding this temporary deposit, the Company experienced growth in non-interest-bearing deposits. During the first quarter of 2017, the Company completed the acquisition of Wayne Bank’s West Scranton branch which increased deposits by $13.9 million. For a discussion on the acquisition, see “Acquisition” located in the financial statement footnotes.balances. The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop ~~deposit gathering~~creative programs for its customers. For 2021, the Company expects deposit growth to fund asset growth with expansion in the new Lehigh Valley market and the pending acquisition of Landmark. The Company expects ~~asset growth for 2017 funded primarily by growth in~~business deposits ~~plus utilization~~to continue growing during the second quarter of ~~available borrowing capacity. Transactional~~2021 as PPP loan proceeds flow into deposit accounts and ~~CD growth~~pandemic-related government relief is ~~projected as a result of~~

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~~our relationship strategy.~~distributed. When pandemic-related restrictions are fully lifted, the Company anticipates personal and business spending to increase and therefore average deposit balances to decline. Seasonal public deposit fluctuations are ~~expected to remain volatile~~usual, and at times may partially offset this deposit growth.

Customers’ interest in long-term time deposit products continues to be weak with a sustaining preference for non-maturing transaction deposits. The Company’s portfolio of CDs increased mostly due to $11.5 million in CDs acquired from the West Scranton branch of Wayne Bank duringDuring the first quarter of ~~2017. The Company expects~~2021, CDs also decreased $15.9 million as rates dropped during 2020 and previous years' promotional CDs reached maturity. Most of the maturing CD balances were transferred to ~~increase 14% in 2017 mostly as a result of this acquisition. If rates continue to rise, demand for CDs may also increase thereby possibly increasing funding costs.~~interest-bearing checking and money market accounts. The Company will continue to pursue strategies to grow and retain retail and business customers with an emphasis on deepening and broadening existing and creating new relationships.

The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program and Insured Cash Sweep (ICS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum insured amount of ~~$250,000 per person.~~$250,000. In the CDARS program, deposits with varying terms and interest rates, originated in the Company’s own markets, are exchanged for deposits of other financial institutions that are members in the CDARS network. By placing the deposits in other participating institutions, the deposits of our customers are fully insured by the FDIC. In return for deposits placed with network institutions, the Company receives from network institutions deposits that are approximately equal in amount and are comprised of terms similar to those placed for our customers. Deposits the Company receives from other institutions are considered reciprocal deposits by regulatory definitions. AsThe Company did not have any CDARs as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016, CDARS~~2020. As of March 31, 2021 and December 31, 2020, ICS reciprocal deposits represented ~~$1.1~~$5.7 million and $46.2 million, or less than 1% and 3%, of total ~~deposits.~~deposits which are included in interest-bearing checking accounts in the table above. The $40.5 million decrease in ICS deposits is primarily due to public funds deposit transfers from ICS accounts to other interest-bearing checking accounts.

The maturity distribution of certificates of deposit at ~~September 30, 2017~~March 31, 2021 is as follows:


			More than		More than		More						More than		More than		More
	Three months		three months		six months to		than twelve				Three months		three months		six months to		than twelve
(dollars in thousands)	or less		to six months		twelve months		months		Total		or less		to six months		twelve months		months		Total
CDs of $100,000 or more	$	7,641	$	4,933	$	19,794	$	25,381	$	57,749	$	11,304	$	16,803	$	18,566	$	10,081	$	56,754
CDARS		1,136		-		-		-		1,136
Total CDs of $100,000 or more		8,777		4,933		19,794		25,381		58,885
CDs of less than $100,000		5,493		6,410		8,942		28,674		49,519		10,992		7,176		14,997		21,936		55,101
Total CDs	$	14,270	$	11,343	$	28,736	$	54,055	$	108,404	$	22,296	$	23,979	$	33,563	$	32,017	$	111,855

There is a remaining time deposit premium of $12 thousand that will be amortized into income on a level yield amortization method over the contractual life of the deposits.

Certificates of deposit of $250,000 or more amounted to ~~$31.4~~$32.5 million and ~~$25.7~~$41.1 million as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~

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2020, respectively.

~~Including CDARS, approximately 13%~~Approximately 53% of the CDs, with a weighted-average interest rate of ~~0.74%~~0.62%, are scheduled to mature ~~in the fourth quarter of 2017~~during 2021 and an additional ~~43%~~34%, with a weighted-average interest rate of ~~0.90%~~0.54%, are scheduled to mature ~~in 2018.~~during 2022. Renewing CDs ~~may~~are currently expected to re-price to lower ~~or higher~~ market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. ~~As noted, the widespread preference continues for customers with maturing CDs to hold their deposits in readily available transaction accounts.~~ The Company ~~does~~plans to address repricing CDs in the ordinary course of business on a relationship basis and is prepared to match rates when prudent to maintain relationships. Growth in CD accounts is challenged by the current and expected rate environment and clients’ preference for short-term rates, as well as aggressive competitor rates. The Company is not ~~expect significant~~currently offering any CD ~~growth other than from~~promotions but may resume promotions in the ~~branch purchase during 2017, but will develop CD promotional programs when the Company deems that it is economically feasible to do so or when demand exists. As with all promotions, the~~future. The Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company.

Borrowings

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

Repurchase agreements are non-insured interest-bearing liabilities that have a perfected security interest in qualified investments of the Company as required by the FDIC Depositor Protection Act of 2009. Repurchase agreements are offered through a sweep product. A sweep account is designed to ensure that on a daily basis, an attached DDA is adequately funded and excess funds are transferred, or swept, into an interest-bearing overnight repurchase agreement account. Due to the constant inflow and outflow of funds of the sweep product, their balances tend to be somewhat volatile, similar to a DDA. Customer liquidity is the typical cause for variances in repurchase agreements, which during the first nine months of 2017 increased $8.7 million from the end of 2016. In addition, short-termShort-term borrowings may include overnight balances with FHLB line of credit and/or correspondent bank’s federal funds lines which the Company may require to fund daily liquidity needs such as deposit ~~and repurchase agreement cash~~ outflow, loan demand and operations. ~~The Company did not require any overnight~~There were no short-term borrowings ~~at September 30, 2017~~as of March 31, 2021 and December 31, ~~2016, respectively. The Company would have had to use overnight borrowings at December 31, 2016 if not for a $48.7 million temporary deposit at the end of 2016.~~2020 as growth in deposits funded asset growth.

During the first quarter of ~~2017,~~2021, the Company ~~borrowed $17~~paid off $5 million in FHLB advances with a weighted average interest rate of 3.07%. As of March 31, 2021, the Company had the ability to borrow an additional $447.5 million from the FHLB to purchase securities. The borrowings were laddered out with maturities ranging from July 2017 to January 2019 and interest rates ranging from 0.64% to 1.34%. During the second quarter of 2017, the Company borrowed another $6.7 million from the FHLB to fund loan growth and replace seasonalFHLB.

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deposits. The borrowing matures in May 2019 and has an interest rate of 1.43%. During the third quarter of 2017, $2.0 million that was borrowed in January 2017 matured and was rolled into a new $2.0 million advance from the FHLB that matures July 2018 and has an interest rate of 1.52%.

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

September 30, 2017

December 31, 2016
(dollars in thousands)
Amount

%

Amount

%

Overnight borrowings
$
-

-
%

$
-

-
%
Securities sold under repurchase agreements

12,920

35.3

4,223

100.0

FHLB advances

23,704

64.7

-

-

Total
$
36,624

100.0
%

$
4,223

100.0
%

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Management of interest rate risk and market risk analysis.

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

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

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

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

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

To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals. A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) indicates the opposite effect. The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income

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through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread. At ~~September 30, 2017,~~March 31, 2021, the Company maintained a one-year cumulative gap of positive (asset sensitive) ~~$75.2~~$311.1 million, or 9%16%, of total assets. The effect of this positive gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of falling interest rates. Conversely, in an increasing interest rate environment, net interest income could be positively impacted because more assets than liabilities will re-price upward during the one-year period.

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

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

The following table illustrates the Company’s interest sensitivity gap position at ~~September 30, 2017:~~March 31, 2021:



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

Cash and cash equivalents	$	30,066	$	-	$	-	$	11,815	$	41,881	$	183,989	$	-	$	-	$	38,964	$	222,953
Investment securities (1)(2)		5,807		16,666		51,025		81,040		154,538		9,799		19,993		78,398		331,363		439,553
Loans and leases(2)		193,914		115,094		170,889		146,843		626,740		397,441		199,112		315,142		226,626		1,138,321
Fixed and other assets		-		19,857		-		35,250		55,107		-		44,582		-		67,683		112,265
Total assets	$	229,787	$	151,617	$	221,914	$	274,948	$	878,266	$	591,229	$	263,687	$	393,540	$	664,636	$	1,913,092
Total cumulative assets	$	229,787	$	381,404	$	603,318	$	878,266			$	591,229	$	854,916	$	1,248,456	$	1,913,092

Non-interest-bearing transaction deposits (3)	$	-	$	18,604	$	51,074	$	116,180	$	185,858	$	-	$	51,887	$	142,443	$	324,022	$	518,352
Interest-bearing transaction deposits (3)		190,785		22,528		164,088		76,914		454,315		412,057		-		272,250		408,374		1,092,681
Certificates of deposit		14,270		40,079		46,544		7,511		108,404		22,296		57,613		24,286		7,672		111,867
Repurchase agreements		12,920		-		-		-		12,920
Short-term borrowings												-		-		-				-
FHLB advances		2,500		4,500		16,704		-		23,704		-		-		-		-		-
Other liabilities		-		-		-		6,781		6,781		-		-		-		26,610		26,610
Total liabilities	$	220,475	$	85,711	$	278,410	$	207,386	$	791,982	$	434,353	$	109,500	$	438,979	$	766,678	$	1,749,510
Total cumulative liabilities	$	220,475	$	306,186	$	584,596	$	791,982			$	434,353	$	543,853	$	982,832	$	1,749,510

Interest sensitivity gap	$	9,312	$	65,906	$	(56,496)	$	67,562			$	156,876	$	154,187	$	(45,439)	$	(102,042)
Cumulative gap	$	9,312	$	75,218	$	18,722	$	86,284			$	156,876	$	311,063	$	265,624	$	163,582

Cumulative gap to total assets		1.1%		8.6%		2.1%		9.8%				8.2%		16.3%		13.9%		8.6%

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

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

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

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

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

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

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The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity). This analysis assumed that the adjusted interest-earning asset and interest-bearing liability levels at ~~September 30, 2017~~March 31, 2021 remained constant. The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the ~~September 30, 2017~~March 31, 2021 levels:



	% change				% change
	Rates +200		Rates -200		Rates +200		Rates -200
Earnings at risk:
Net interest income	5.5	%	(7.8)	%	3.4	%	(2.0)	%
Net income	12.9		(17.1)		8.2		(4.3)
Economic value at risk:
Economic value of equity	0.5		(29.8)		8.5		(27.9)
Economic value of equity as a percent of total assets	0.1		(4.5)		1.1		(3.7)

Economic value has the most meaning when viewed within the context of risk-based capital. Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%. At ~~September 30, 2017,~~March 31, 2021, the Company’s risk-based capital ratio was ~~14.8%~~16.47%.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning ~~October~~April 1, ~~2017,~~2021, under alternate interest rate scenarios using the income simulation model described above:



	Net interest		$		%		Net interest		$		%
(dollars in thousands)	income		variance		variance		income		variance		variance
Simulated change in interest rates
+200 basis points	$	30,609	$	1,584	5.5	%	$	53,029	$	1,722	3.4	%
+100 basis points		29,873		848	2.9			51,868		561	1.1
Flat rate		29,025		-	-			51,307		-	-
-100 basis points		27,302		(1,723)	(5.9)			51,265		(42)	(0.1)
-200 basis points		26,757		(2,268)	(7.8)			50,277		(1,030)	(2.0)

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

Liquidity

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

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closely monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities.

The Company’s contingency funding plan (CFP) sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal. The Company established guidelines for identifying, measuring, monitoring and

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managing the resolution of potentially serious liquidity crises. The CFP outlines required monitoring tools, acceptable alternative funding sources and required actions during various liquidity scenarios. Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity conditions. At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s Asset/Liability Committee. As of ~~September 30, 2017,~~March 31, 2021, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021, the Company ~~acquired $16.0~~generated $153.6 million of cash. During the period, the Company’s operations provided approximately ~~$11.5~~$25.5 million mostly from ~~$21.3~~$13.7 million of net cash inflow from the components of net interest income and ~~$4.2~~$21.9 million inof proceeds over originations of loans ~~HFS over originations;~~held for sale, partially offset by net non-interest expense/income related payments of ~~$10.8 million, $1.3 million in estimated tax payments and a $1.9 million increase in the residual value from the Company’s automobile leasing activities.~~$10.0 million. Cash inflow from interest-earning assets, deposits, ~~borrowings~~loan payments and the ~~acquisition~~sale of ~~a bank branch~~securities were used to purchase investment securities and replace maturing and cash runoff of securities, ~~purchase bank owned life insurance,~~ fund the loan portfolio, pay down borrowings, invest in bank premises and equipment and make net dividend payments. The Company received a large amount of public deposits over the past ~~two~~five years. The seasonal nature of deposits from municipalities and other public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of cash outflow from this customer base, including maintaining the requirements to pledge investment securities. Accordingly, the use of short-term overnight borrowings could be used to fulfill funding gap needs. The CFP is a tool to help the Company ensure that alternative funding sources are available to meet its liquidity needs.

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

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

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

In addition to lending commitments, the Company has contractual obligations related to operating lease commitments. Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes. The Company’s position with respect to lending commitments and significant contractual lease obligations, both on a short- and long-term basis has not changed materially from December 31, 2016.

During the third quarter of 2016, the Company entered into an agreement to acquire all the deposits, certain loans and fixed assets of a bank branch. The transaction was completed in March 2017. As a result of this transaction, the Company experienced an increase of $13.9 million in deposits in March 2017.

As of ~~September 30, 2017,~~March 31, 2021, the Company maintained ~~$41.9~~$223.0 million in cash and cash equivalents and ~~$153.6~~$447.6 million of investments AFS and loans HFS. Also as of ~~September 30, 2017,~~March 31, 2021, the Company had approximately ~~$200.2~~$447.5 million available to borrow from the FHLB, ~~$21.0~~$31.0 million from correspondent banks, ~~$65.2~~$87.3 million from the FRB and ~~$44.0~~$255.7 million from the ~~CDARS~~Promontory One-Way Buy program. The combined total of ~~$525.9 million~~$1.5 billion represented ~~60%~~78% of total assets at ~~September 30, 2017.~~March 31, 2021. Management believes this level of liquidity to be strong and adequate to support current operations.

Capital

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021, total shareholders' equity ~~increased $5.7~~decreased $3.1 million, or 7%2%, due principally ~~from~~to the ~~$6.4 million in net income added into retained earnings. Capital was further enhanced by the $0.5~~$7.8 million after tax ~~improvement~~reduction in the net unrealized gain position in the Company’s investment portfolio ~~$0.1~~which was partially offset by $5.7 million in net income added into retained earnings. Capital was enhanced by $0.3 million from investments in the Company’s common stock via the Employee Stock Purchase Plan (ESPP)~~, $0.3 million from issuance of common stock through the dividend reinvestment plan, $0.3 million from the issuance of common stocks through the exercise of stock options~~ and $0.3 million from stock-based compensation expense from the ESPP and ~~unvested~~ restricted ~~stock.~~stock and SSARs. These items were ~~partially~~ offset by ~~$2.3~~$1.5 million of cash dividends declared on the Company’s common stock. The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was ~~36.2%~~26.7% for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2021. The balance of earnings is retained to further strengthen the Company’s capital position.

As of ~~September 30, 2017,~~March 31, 2021, the Company reported a net unrealized gain position of ~~$1.9~~$1.2 million, net of tax, from the securities AFS portfolio compared to a net unrealized gain of ~~$1.4~~$9.0 million as of December 31, ~~2016.~~2020. The ~~improvement~~reduction during the first ~~nine months~~quarter of ~~2017~~2021 was from ~~all security types.~~the $7.8 million reduction in net unrealized gains on AFS securities, net of tax. Lower net unrealized gains on municipal and mortgage-backed securities and net unrealized losses on agency securities contributed to the lower total net unrealized gains in investment portfolio. Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and not in the creditworthiness of the issuers. Generally, when U.S. Treasury rates rise, investment securities’ pricing declines and fair values of investment securities also decline. While volatility has existed in the yield curve within the past twelve months, ~~a rising~~an

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improving rate environment is ~~inevitable~~expected and during the period of ~~rising~~increasing rates, the Company expects pricing in the bond portfolio to decline. There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of

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investment securities. To help maintain a healthy capital position, the Company can issue stock to participants in the DRP and ESPP plans. The DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants. During the first three months of 2021, the Company acquired shares in the open market to fulfill the needs of the DRP. Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet.

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

Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted ~~assets and certain off-balance sheet items.~~assets. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. A capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements ~~rising up to~~of 2.50% ~~by 2019.~~. As of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, the Company and the Bank exceeded all capital adequacy requirements to which it was subject.

The Company continues to closely monitor and evaluate alternatives to enhance its capital ratios as the regulatory and economic environments change. The following table depicts the capital amounts and ratios of the Company, on a ~~combined~~consolidated basis, and the Bank as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016:~~2020:



										To be well capitalized														For capital adequacy				To be well capitalized
				For capital						under prompt corrective								For capital						purposes with capital				under prompt corrective
	Actual			adequacy purposes						action provisions					Actual			adequacy purposes						conservation buffer*				action provisions
(dollars in thousands)	Amount		Ratio	Amount			Ratio			Amount			Ratio		Amount		Ratio	Amount			Ratio			Amount		Ratio		Amount			Ratio
As of September 30, 2017:
As of March 31, 2021:

Total capital (to risk-weighted assets)
Consolidated	$	91,967	14.8%	≥	$	57,672	≥	9.3%	(1)			N/A		N/A	$	166,381	16.5%	≥	$	80,840		8.0%	≥	$	106,102		10.5%			N/A		N/A
Bank	$	91,152	14.7%	≥	$	57,274	≥	9.3%	(1)	≥	$	61,918	≥	10.0%	$	166,344	16.5%	≥	$	80,834		8.0%	≥	$	106,095		10.5%	≥	$	101,043		10.0%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	84,154	13.5%	≥	$	35,850	≥	5.8%	(1)			N/A		N/A	$	153,722	15.2%	≥	$	45,472		4.5%	≥	$	70,735		7.0%			N/A		N/A
Bank	$	83,392	13.5%	≥	$	35,603	≥	5.8%	(1)	≥	$	40,247	≥	6.5%	$	153,686	15.2%	≥	$	45,469		4.5%	≥	$	70,730		7.0%	≥	$	65,678		6.5%

Tier I capital (to risk-weighted assets)
Consolidated	$	84,154	13.5%	≥	$	45,203	≥	7.3%	(1)			N/A		N/A	$	153,722	15.2%	≥	$	60,630		6.0%	≥	$	85,892		8.5%			N/A		N/A
Bank	$	83,392	13.5%	≥	$	44,891	≥	7.3%	(1)	≥	$	49,535	≥	8.0%	$	153,686	15.2%	≥	$	60,626		6.0%	≥	$	85,886		8.5%	≥	$	80,834		8.0%

Tier I capital (to average assets)
Consolidated	$	84,154	9.8%	≥	$	34,365	≥	4.0%				N/A		N/A	$	153,722	8.7%	≥	$	70,487		4.0%	≥	$	70,487		4.0%			N/A		N/A
Bank	$	83,392	9.7%	≥	$	34,333	≥	4.0%		≥	$	42,917	≥	5.0%	$	153,686	8.7%	≥	$	70,487		4.0%	≥	$	70,487		4.0%	≥	$	88,109		5.0%

~~(1)~~ ~~Includes 1.25%~~

‎

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As of December 31, 2020:

Total capital (to risk-weighted assets)
Consolidated	$	161,199	16.5%	≥	$	78,356	8.0%	≥	$	102,842	10.5%			N/A	N/A
Bank	$	161,145	16.5%	≥	$	78,342	8.0%	≥	$	102,823	10.5%	≥	$	97,927	10.0%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	148,931	15.2%	≥	$	44,075	4.5%	≥	$	68,562	7.0%			N/A	N/A
Bank	$	148,879	15.2%	≥	$	44,067	4.5%	≥	$	68,549	7.0%	≥	$	63,653	6.5%

Tier I capital (to risk-weighted assets)
Consolidated	$	148,931	15.2%	≥	$	58,767	6.0%	≥	$	83,253	8.5%			N/A	N/A
Bank	$	148,879	15.2%	≥	$	58,756	6.0%	≥	$	83,238	8.5%	≥	$	78,342	8.0%

Tier I capital (to average assets)
Consolidated	$	148,931	8.8%	≥	$	67,584	4.0%	≥	$	67,584	4.0%			N/A	N/A
Bank	$	148,879	8.8%	≥	$	67,584	4.0%	≥	$	67,584	4.0%	≥	$	84,479	5.0%

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

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As of December 31, 2016:

Total capital (to risk-weighted assets)

Consolidated
$
86,702

14.9%
≥
$
46,550
≥
8.6%
(2)

N/A

N/A
Bank
$
86,332

14.8%
≥
$
46,538
≥
8.6%
(2)
≥
$
58,172
≥
10.0%

Tier 1 common equity (to risk-weighted assets)

Consolidated
$
79,250

13.6%
≥
$
26,184
≥
5.1%
(2)

N/A

N/A
Bank
$
79,033

13.6%
≥
$
26,178
≥
5.1%
(2)
≥
$
37,812
≥
6.5%

Tier I capital (to risk-weighted assets)

Consolidated
$
79,250

13.6%
≥
$
34,912
≥
6.6%
(2)

N/A

N/A
Bank
$
79,033

13.6%
≥
$
34,903
≥
6.6%
(2)
≥
$
46,538
≥
8.0%

Tier I capital (to average assets)

Consolidated
$
79,250

10.3%
≥
$
30,717
≥
4.0%

N/A

N/A
Bank
$
79,033

10.3%
≥
$
30,650
≥
4.0%

≥
$
38,313
≥
5.0%

~~(2)~~ ~~Includes a 0.625% capital conservation buffer.~~

The Company advises readers to refer to the Supervision and Regulation section of Management’s Discussion and Analysis of Financial Condition and Results of Operation, of its ~~2016~~2020 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective. The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended ~~September 30, 2017.~~March 31, 2021.

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PART II - Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Management of the Company does not believe there have been any material changes to the risk factors that were disclosed in the ~~2016~~2020 Form 10-K filed with the Securities and Exchange Commission on March ~~10, 2017.~~19, 2021.

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

None

Item 3. Default Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

‎

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Item 6. Exhibits

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

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

3(ii) Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit ~~3(ii)~~3.1 to Registrant’s Form 8-K filed with the SEC on ~~November 21, 2007.~~April 16, 2020.

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

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

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

*10.2 ~~Registrant’s 2000 Independent Directors Stock Option Plan.~~ ~~Incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.~~

*~~10.3 Amendment, dated October 2, 2007, to the Registrant’s 2000 Independent Directors Stock Option Plan.~~ ~~Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.~~

*~~10.4 Registrant’s 2000 Stock Incentive Plan.~~ ~~Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.~~

*~~10.5 Amendment, dated October 2, 2007, to the Registrant’s 2000 Stock Incentive Plan.~~ ~~Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.~~

*~~10.6~~ Registrant’s 2002 Employee Stock Purchase Plan. Incorporated by reference to Appendix A to Definitive proxy Statement filed with the SEC on March 28, 2002.

*~~10.7~~10.3 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Daniel J. Santaniello, dated March 23, 2011. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*~~10.8~~10.4 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bankand Timothy P. O’Brien, dated March 23, 2011. Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*~~10.9~~10.5 2012 Omnibus Stock Incentive Plan. Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

*~~10.10~~10.6 2012 Director Stock Incentive Plan. Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

~~Table Of Contents~~

*~~10.11~~10.7Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Salvatore R. DeFrancesco, Jr. dated as of March 17, 2016. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 18, 2016.

**10.12 Change in Control and Severance Agreement between the Registrant, The Fidelity Deposit and Discount Bank and Michael J. Pacyna dated as of March 29, 2017. ~~Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.~~

*10.1310.8 Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Eugene J. Walsh dated as of March 29, 2017. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*~~10.14~~10.9 Form of Supplemental Executive Retirement Plan – Applicable to Daniel J. Santaniello and Salvatore R. DeFrancesco, Jr. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*~~10.15~~10.10 Form of Supplemental Executive Retirement Plan – Applicable to Eugene J. Walsh and Timothy P O’Brien. Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*~~10.16~~10.11 Form of Split Dollar Life Insurance Agreement – Applicable to Daniel J. Santaniello, Salvatore R. DeFrancesco, Jr. and Eugene J. Walsh. Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*~~10.17~~10.12 Form of Split Dollar Life Insurance Agreement – Applicable to Timothy P ~~O’Brien and Michael Pacyna.~~O’Brien. Incorporated by reference to Exhibit 99.4 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

11~~Statement regarding computation~~*10.13 Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Michael J. Pacyna dated as of ~~earnings per share.~~ ~~Included herein in Note No. 6, “Earnings per share,” contained within~~March 20, 2019. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the ~~Notes~~SEC on March 21, 2019.

*10.14 Form of Supplemental Executive Retirement Plan for Michael J. Pacyna. Incorporated by reference to ~~Consolidated Financial Statements, and incorporated herein~~Exhibit 99.2

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

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

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

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

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

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

101 Interactive data files: The following, from Fidelity D&D Bancorp, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017,~~March 31, 2021, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016;~~2020; Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016;~~2020; Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~2016;~~2020; Consolidated Statements of Changes in Shareholders’ Equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016;~~2020; Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 and the Notes to the Consolidated Financial Statements. **

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

________________________________________________

* Management contract or compensatory plan or arrangement.

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

‎

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Signatures

FIDELITY D & D BANCORP, INC.

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


	Fidelity D & D Bancorp, Inc.

Date: ~~November 8, 2017~~May 14, 2021	/s/Daniel J. Santaniello
	Daniel J. Santaniello, President and Chief Executive Officer

	Fidelity D & D Bancorp, Inc.

Date: ~~November 8, 2017~~May 14, 2021	/s/Salvatore R. DeFrancesco, Jr.
	Salvatore R. DeFrancesco, Jr., Treasurer and Chief Financial Officer

5966



Details about accumulated other
comprehensive income components	Amount reclassified from accumulated								Affected line item in the statement
(dollars in thousands)	other comprehensive income								where net income is presented
	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016

Unrealized gains on AFS securities	$	-	$	-	$	-	$	9	Gain on sale of investment securities
		-		-		-		(3)	Provision for income taxes
Total reclassifications for the period	$	-	$	-	$	-	$	6	Net income


Loans modified as a TDR within the previous twelve months that subsequently defaulted during the:
(dollars in thousands)	Nine months ended September 30, 2017				Nine months ended September 30, 2016

		Number of		Recorded		Number of		Recorded
		contracts		investment		contracts		investment
Commercial real estate - owner occupied			$	-		1	$	20


	For the nine months ended
	September 30, 2017						September 30, 2016
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized
Commercial and industrial	$	232	$	7	$	-	$	502	$	12	$	-
Commercial real estate:
Non-owner occupied		3,054		114		-		5,030		93		-
Owner occupied		4,393		223		-		3,562		107		-
Construction		184		-		-		217		-		-
Consumer:
Home equity installment		19		-		-		119		3		-
Home equity line of credit		722		5		-		772		25		-
Auto		21		4		-		40		-		-
Other		4		1		-		6		-		-
Residential:
Real estate		1,428		77		-		750		4		-
Construction		-		-		-		-		-		-
Total	$	10,057	$	431	$	-	$	10,998	$	244	$	-



	Options		Weighted-average exercise price	Weighted-average remaining contractual term (years)
Outstanding and exercisable, December 31, 2016	22,500	$	19.12	1.0
Granted	-		-
Exercised	(17,250)		19.27
Forfeited	-		-
Outstanding and exercisable, September 30, 2017	5,250	$	18.62	0.3


As of December 31, 2016:

Total capital (to risk-weighted assets)
Consolidated	$	86,702	14.9%	≥	$	46,550	≥	8.6%	(2)			N/A		N/A
Bank	$	86,332	14.8%	≥	$	46,538	≥	8.6%	(2)	≥	$	58,172	≥	10.0%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	79,250	13.6%	≥	$	26,184	≥	5.1%	(2)			N/A		N/A
Bank	$	79,033	13.6%	≥	$	26,178	≥	5.1%	(2)	≥	$	37,812	≥	6.5%

Tier I capital (to risk-weighted assets)
Consolidated	$	79,250	13.6%	≥	$	34,912	≥	6.6%	(2)			N/A		N/A
Bank	$	79,033	13.6%	≥	$	34,903	≥	6.6%	(2)	≥	$	46,538	≥	8.0%

Tier I capital (to average assets)
Consolidated	$	79,250	10.3%	≥	$	30,717	≥	4.0%				N/A		N/A
Bank	$	79,033	10.3%	≥	$	30,650	≥	4.0%		≥	$	38,313	≥	5.0%