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 subject to such filing requirements for the past 90 days.

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).

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 definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act

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 7(a)(2)(B) of the Exchange Act.¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule ~~12b-2~~12b-2 of the Act). Yes¨☐ Nox☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

Common Stock, $2 Par Value, ~~5,832,107~~5,899,973 shares as of May ~~7, 2020.~~5, 2021.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31, ~~2020~~2021 AND ~~2019~~2020

(Unaudited)


(Dollars in thousands, except per share data)	Three Months Ended
	March 31,
	2021		2020

Interest and fees on loans	$	8,154	$	7,758
Interest and dividend income on securities:
Taxable		1,240		1,276
Tax-exempt		840		630
Dividends		12		12
Dividend income on restricted investment in bank stocks		26		90
Interest on interest-bearing deposits in other banks		3		2
Total interest income		10,275		9,768
INTEREST EXPENSE
Interest on deposits		795		1,884
Interest on short-term borrowings		20		242
Interest on long-term borrowings		217		266
Interest on subordinated debt		273		—
Total interest expense		1,305		2,392
Net interest income		8,970		7,376
Provision for loan losses		135		194
Net interest income after provision for loan losses		8,835		7,182
NON-INTEREST INCOME
Trust department		253		221
Service charges and fees		375		499
Increase in cash surrender value of life insurance		149		154
ATM fees and debit card income		516		399
Gains on sales of mortgage loans		354		93
Net securities gains (losses)		115		(467)
Other		113		84
Total non-interest income		1,875		983
NON-INTEREST EXPENSE
Salaries and employee benefits		3,300		3,219
Occupancy, net		497		518
Furniture and equipment expense		138		134
Computer expense		270		260
Professional services		259		242
Pennsylvania shares tax		313		224
FDIC insurance, net		87		—
ATM and debit card fees		200		209
Data processing fees		294		294
Foreclosed assets held for resale expense, net		3		9
Advertising		72		91
Other		764		715
Total non-interest expense		6,197		5,915
Income before income tax expense		4,513		2,250
Income tax expense		635		197
NET INCOME	$	3,878	$	2,053
PER SHARE DATA
Net income per share:
Basic	$	0.66	$	0.35
Diluted		0.66		0.35
Dividends per share		0.28		0.27

(Dollars in thousands, except per share data)

2020 2019
Interest and fees on loans $ 7,758 $ 7,074
Interest and dividend income on securities:
Taxable 1,276 1,218
Tax-exempt 630 1,018
Dividends 12 11
Dividend income on restricted investment in bank stocks 90 184
Interest on interest-bearing deposits in other banks 2 9
Total interest income 9,768 9,514

INTEREST EXPENSE
Interest on deposits 1,884 1,378
Interest on short-term borrowings 242 1,115
Interest on long-term borrowings 266 200
Total interest expense 2,392 2,693
Net interest income 7,376 6,821
Provision for loan losses 194 92
Net interest income after provision for loan losses 7,182 6,729

NON-INTEREST INCOME
Trust department 221 261
Service charges and fees 499 514
Bank owned life insurance income 154 155
ATM fees and debit card income 399 377
Gains on sales of mortgage loans 93 40
Net securities (losses) gains (467 ) 103
Other 84 57
Total non-interest income 983 1,507

NON-INTEREST EXPENSE
Salaries and employee benefits 3,219 3,132
Occupancy, net 518 464
Furniture and equipment 134 140
Computer expense 260 280
Professional services 242 270
Pennsylvania shares tax 224 192
FDIC insurance — 65
ATM and debit card fees 209 211
Data processing fees 294 267
Foreclosed assets held for resale expense 9 38
Advertising 91 153
Other 715 643
Total non-interest expense 5,915 5,855
Income before income tax expense 2,250 2,381
Income tax expense 197 138
NET INCOME $ 2,053 $ 2,243

PER SHARE DATA
Net income per share:
Basic $ 0.35 $ 0.39
Diluted 0.35 0.39
Dividends per share 0.27 0.27

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

THREE MONTHS ENDED MARCH 31, ~~2020~~2021 AND ~~2019~~2020

(Unaudited)


(Dollars in thousands)	Three Months Ended
	March 31,
	2021		2020

Net Income	$	3,878	$	2,053

Other comprehensive (loss) income:
Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $(1,042) and $176, respectively		(3,923)		661

Less reclassification adjustment for net gains included in net income, net of income taxes of $(0) and $(15), respectively (a) (b)		—		(56)

Total other comprehensive (loss) income		(3,923)		605

Total Comprehensive (Loss) Income	$	(45)	$	2,658

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

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

~~(Dollars in thousands)~~

March 31,
2020 2019
Net Income $ 2,053 $ 2,243

Other comprehensive income:
Unrealized net holding gains on debt securities available-for-sale arising during the period, net of income taxes of $176 and $986, respectively 661 3,709

Less reclassification adjustment for net realized gains included in net income, net of income taxes of $(15) and $(18), respectively (a) (b) (56 ) (67 )

Total other comprehensive income 605 3,642

Total Comprehensive Income $ 2,658 $ 5,885

~~_______________________~~

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

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

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, ~~2020~~2021 AND ~~2019~~2020

(Unaudited)


								Accumulated
(Dollars in thousands, except								Other				Total
per share data)	Common Stock					Retained		Comprehensive		Treasury		Stockholders’
	Shares	Amount		Surplus		Earnings		Income		Stock		Equity
Balance at January 1, 2021	6,115,281	$	12,231	$	39,543	$	85,307	$	12,870	$	(5,709)	$	144,242
Net Income							3,878						3,878
Other comprehensive loss, net of taxes									(3,923)				(3,923)
Issuance of common stock under dividend reinvestment plan	16,304		32		351								383
Dividends - $0.28 per share							(1,647)						(1,647)
Balance at March 31, 2021	6,131,585	$	12,263	$	39,894	$	87,538	$	8,947	$	(5,709)	$	142,933


			��					Comprehensive				Stockholders’
Balance at January 1, 2020	6,048,506	$	12,097	$	38,365	$	79,778	$	4,221	$	(5,709)	$	128,752
Net Income							2,053						2,053
Other comprehensive income, net of taxes									605				605
Issuance of common stock under dividend reinvestment plan	15,213		30		280								310
Dividends - $0.27 per share							(1,570)						(1,570)
Balance at March 31, 2020	6,063,719	$	12,127	$	38,645	$	80,261	$	4,826	$	(5,709)	$	130,150

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

Accumulated
Other Total
Common Stock Retained Comprehensive Treasury Stockholders’
Shares Amount Surplus Earnings Income Stock Equity

Balance at January 1, 2020 6,048,506 $ 12,097 $ 38,365 $ 79,778 $ 4,221 $ (5,709 ) $ 128,752
Net Income 2,053 2,053
Other comprehensive income, net of taxes 605 605
Issuance of common stock under dividend reinvestment plan 15,213 30 280 310
Dividends - $0.27 per share (1,570 ) (1,570 )
Balance at March 31, 2020 6,063,719 $ 12,127 $ 38,645 $ 80,261 $ 4,826 $ (5,709 ) $ 130,150

Balance at January 1, 2019 5,996,322 $ 11,993 $ 37,255 $ 75,798 $ (2,581 ) $ (5,709 ) $ 116,756
Net Income 2,243 2,243
Other comprehensive income, net of taxes 3,642 3,642
Issuance of common stock under dividend reinvestment plan 12,312 24 254 278
Dividends - $0.27 per share (1,557 ) (1,557 )
Balance at March 31, 2019 6,008,634 $ 12,017 $ 37,509 $ 76,484 $ 1,061 $ (5,709 ) $ 121,362

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, ~~2020~~2021 AND ~~2019~~2020

(Unaudited)


(Dollars in thousands)	2021		2020

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,878	$	2,053
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		135		194
Depreciation and amortization		255		488
Net premium amortization on securities		658		498
Deferred income tax benefit		(147)		(247)
Gains on sales of mortgage loans		(354)		(93)
Proceeds from sales of mortgage loans originated for sale		9,381		3,137
Originations of mortgage loans originated for sale		(11,365)		(3,100)
Net securities (gains) losses		(115)		467
Decrease (increase) in accrued interest receivable		186		(217)
Increase in cash surrender value of bank owned life insurance		(149)		(154)
Net losses on disposals of premises and equipment		1		—
Increase in other assets		(889)		(537)
Amortization of investment in low-income housing partnerships		93		91
Increase (decrease) in accrued interest payable		232		(56)
Increase (decrease) in other liabilities		433		(1,159)
NET CASH PROVIDED BY OPERATING ACTIVITIES		2,233		1,365

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of debt securities available-for-sale		—		11,182
Proceeds from maturities and redemptions of debt securities available-for-sale		14,300		15,324
Purchases of debt securities available-for-sale		(40,987)		(31,902)
Net change in restricted investment in bank stocks		200		(2,516)
Net increase in loans		(62)		(13,877)
Purchase of premises and equipment		(13)		(120)
Proceeds from sales of foreclosed assets held for resale		28		—
NET CASH USED IN INVESTING ACTIVITIES		(26,534)		(21,909)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		40,369		(26,831)
Net increase in short-term borrowings		2,929		51,716
Repayment of finance lease obligations		(2)		—
Repayment of long-term borrowings		(5,000)		(5,000)
Common stock issued		366		303
Dividends paid		(1,647)		(1,570)
NET CASH PROVIDED BY FINANCING ACTIVITIES		37,015		18,618

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		12,714		(1,926)
CASH AND CASH EQUIVALENTS, BEGINNING		24,180		10,724
CASH AND CASH EQUIVALENTS, ENDING	$	36,894	$	8,798

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	1,073	$	2,448

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Loans transferred to foreclosed assets held for resale		—		50
Common stock subscription receivable		17		7
Right-of-use assets obtained in exchange for lease liabilities		33		—

~~(Dollars in thousands)~~

2020 2019
OPERATING ACTIVITIES
Net income $ 2,053 $ 2,243
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 194 92
Depreciation and amortization 488 254
Net premium amortization on investment securities 498 733
Deferred income tax (benefit) expense (247 ) 62
Gains on sales of mortgage loans (93 ) (40 )
Proceeds from sales of mortgage loans originated for resale 3,137 1,250
Originations of mortgage loans originated for resale (3,100 ) (964 )
Net securities losses (gains) 467 (103 )
Net losses on sales of foreclosed real estate held for resale, including write-downs — 20
(Increase) decrease in accrued interest receivable (217 ) 367
Earnings on investment in bank owned life insurance (154 ) (155 )
Net losses on disposals of premises and equipment — 4
Increase in other assets (537 ) (1,860 )
Amortization of investment in real estate ventures 91 88
(Decrease) increase in accrued interest payable (56 ) 58
(Decrease) increase in other liabilities (1,159 ) 1,198
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,365 3,247

INVESTING ACTIVITIES
Proceeds from sales of debt securities available-for-sale 11,182 32,374
Proceeds from maturities and redemptions of debt securities available-for-sale 15,324 4,520
Purchases of debt securities available-for-sale (31,902 ) —
Net change in restricted investment in bank stocks (2,516 ) 1,173
Net increase in loans (13,877 ) (11,891 )
Purchases of premises and equipment (120 ) (234 )
Proceeds from sales of foreclosed assets held for resale — 197
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (21,909 ) 26,139

FINANCING ACTIVITIES
Net (decrease) increase in deposits (26,831 ) 25,867
Net increase (decrease) in short-term borrowings 51,716 (42,966 )
Repayment of long-term borrowings (5,000 ) (10,000 )
Common stock issued 303 278
Dividends paid (1,570 ) (1,557 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 18,618 (28,378 )

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,926 ) 1,008
CASH AND CASH EQUIVALENTS, BEGINNING 10,724 10,950
CASH AND CASH EQUIVALENTS, ENDING $ 8,798 $ 11,958

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid 2,448 2,635
Income taxes paid (249 ) 62

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Loans transferred to foreclosed assets held for resale 50 —
Common stock subscription receivable 7 —
Right-of-use assets obtained in exchange for lease liabilities — 1,465

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 ― BASIS OF PRESENTATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS

The consolidated financial statements include the accounts of First Keystone Corporation (the “Corporation”) and its wholly owned subsidiary First Keystone Community Bank (the “Bank”) (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three ~~month period~~months ended March 31, ~~2020,~~2021, are not necessarily indicative of the results for the year ending December 31, ~~2020.~~2021. For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Subsequent Events

The ~~Corporation~~Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, ~~2020~~2021 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income. The Corporation may experience difficulties collecting monthly payments on time from its borrowers, property values may decline, and certain types of loans may need to be extended or modified. The extent of the impact of COVID-19 on the Corporation’s operational and financial performance will depend on certain developments including the duration and spread of the outbreak and the impact on our customers, employees and vendors.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in the United States. The Corporation is approved by the U.S. Small Business Administration (“SBA”) to fund loans under the SBA’s Paycheck Protection Program (“PPP”) created as part of the CARES Act. To date, the Bank has received 456 applications for PPP loans for a combined total of $32,367,000. As of April 30, 2020, 432 PPP loan applications were approved, and 152 of the loans were funded for $16,010,000. The PPP loans have 1.00% interest rates, lender fees, and two-year terms. These forgivable loans funded by the Corporation are subject to the terms and conditions applicable to all loans made pursuant to the PPP as administered by the SBA under the CARES Act.

In addition, subsequent to March 31, 2020, there have been loan modification requests to defer principal and/or interest payments or modify interest rates in the wake of the COVID-19 pandemic. As of April 30, 2020, there have been 493 loan modifications approved across all loan segments, for customers with current loan balances of $181,704,000. At this time, there have been no material fluctuations in loan delinquencies because of COVID-19.

~~Other financial impact could occur, though such potential impact is unknown at this time.~~

NOTE 2 ― RECENT ACCOUNTING STANDARDS UPDATES (“ASU”)

Recently adopted ASUs:

In January ~~2017,~~2021, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ASU ~~2017-04,~~2021-01, ~~Intangibles – Goodwill and Other (Topic 350)~~:~~Simplifying the Test for Goodwill Impairment.~~ The ASU simplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under the amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The update also eliminated the requirements for zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments are effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this update on January 1, 2020 did not have a material impact on the Corporation’s consolidated financial position or results of operations.

~~In August 2018, the FASB issued ASU 2018-13,~~~~Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to Disclosure Requirements for Fair Value Measurement.~~The amendments in this Update removed required disclosures regarding: 1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2. The policy for timing of transfers between levels, 3. The valuation processes for Level 3 fair value measurements, and 4. The Update modified the disclosure requirements on fair value measurements in Topic 820: a) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and b) The range and weighted average significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. The adoption of this update on January 1, 2020 did not have a material impact on the Corporation’s consolidated financial statements and related disclosures.

~~In March 2020, the FASB issued ASU 2020-04~~, Reference Rate Reform (Topic 848): Scope, which refines the scope of Topic 848,Reference Rate Reform, and clarifies some of its guidance as part of the FASB’s ongoing monitoring of global reference rate reform activities. The ASU provides certain optional expedients and exceptions ~~for~~when applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”), or by another reference rate that is expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The ~~Corporation~~Company has evaluated ~~the impact of~~ the provisions of ASU ~~2020-04~~2021-01 on our financial condition, results of operations and cash flows, and determined that there is no material impact on the consolidated financial statements and related disclosures.

Pending ASUs:

In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments.~~Instruments. ASU No. 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10,Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. While the ~~Corporation~~Company (a smaller reporting company) is currently evaluating the provisions of ASU 2016-13 to determine the potential impact of the new standard will have on the ~~Corporation’s~~Company's consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such

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

NOTE 3 —SECURITIES

The ~~Corporation~~Company classifies its securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase. Securities are accounted for on a trade date basis. Debt securities are classified as Held-to-Maturity when the ~~Corporation~~Company has the ability and positive intent to hold the securities to maturity. Securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

Debt securities not classified as Held-to-Maturity are included in the Available-for-Sale category and are carried at fair value. The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive income ~~(loss)~~ (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity. Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions, controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Equity securities without readily determinable fair values are recorded at cost less impairment, if any.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums to the earliest call date and accretion of discounts to expected maturity. Such amortization and accretion, as well as interest and dividends, are included in interest and dividend income from ~~investment~~ securities. Realized gains and losses are included in net securities gains and losses. The cost of securities sold, redeemed or matured is based on the specific identification method.

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:

Debt Securities Available-for-Sale

(Dollars in thousands)

Gross

Amortized

Unrealized

Fair

March 31, 2021:

Cost

Gains

Losses

Value

Obligations of U.S. Government Agencies and Sponsored Agencies:

Mortgage-backed

81,151

1,398

(834)

81,715

Other

9,736

(99)

9,641

Other mortgage backed securities

36,183

359

(153)

36,389

Obligations of state and political subdivisions

172,755

11,262

(1,029)

182,988

Asset backed securities

42,371

292

(132)

42,531

Corporate debt securities

34,253

481

(223)

34,511

Total

376,449

13,796

(2,470)

387,775

Debt Securities Available-for-Sale
(Dollars in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2020: Cost Gains Losses Value
U.S. Treasury securities $ — $ — $ — $ —
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed 62,235 1,055 (785 ) 62,505
Other 12,341 7 (119 ) 12,229
Other mortgage backed debt securities 10,187 — (824 ) 9,363
Obligations of state and political subdivisions 131,424 9,052 (9 ) 140,467
Asset backed securities 42,889 — (2,123 ) 40,766
Corporate debt securities 18,479 118 (264 ) 18,333
Total $ 277,555 $ 10,232 $ (4,124 ) $ 283,663


	Debt Securities Available-for-Sale
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2020:	Cost		Gains		Losses		Value
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgage-backed	$	76,270	$	1,628	$	(325)	$	77,573
Other		10,534		2		(106)		10,430
Other mortgage backed securities		39,420		470		(46)		39,844
Obligations of state and political subdivisions		150,922		14,193		(14)		165,101
Asset backed securities		44,751		158		(88)		44,821
Corporate debt securities		28,523		481		(62)		28,942
Total	$	350,420	$	16,932	$	(641)	$	366,711

Debt Securities Available-for-Sale
(Dollars in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2019: Cost Gains Losses Value
U.S. Treasury securities $ 2,852 $ 3 $ ― $ 2,855
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed 77,131 539 (387 ) 77,283
Other 10,381 4 (88 ) 10,297
Other mortgage backed securities 11,145 3 (10 ) 11,138
Obligations of state and political subdivisions 114,934 5,490 (48 ) 120,376
Asset backed securities 37,596 115 (175 ) 37,536
Corporate debt securities 18,546 182 (285 ) 18,443
Total $ 272,585 $ 6,336 $ (993 ) $ 277,928

Securities Available-for-Sale with an aggregate fair value of ~~$183,713,000~~$316,901,000 at March 31, ~~2020~~2021 and ~~$201,468,000~~$315,146,000 at December 31, ~~2019,~~2020, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating ~~$128,721,000~~$235,084,000 at March 31, ~~2020~~2021 and ~~$143,546,000~~$231,750,000 at December 31, ~~2019.~~

2020.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at March 31, ~~2020.~~2021. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

~~(Dollars in thousands)~~

March 31, 2020
Debt Securities Available-For-Sale
U.S. Government Other Obligations
Corporations & Mortgage of State Asset Corporate
U.S. Treasury Agencies Backed Debt & Political Backed Debt
Securities Obligations¹ Securities¹ Subdivisions Securities Securities
Within 1 Year:
Amortized cost $ — $ ― $ — $ 1,001 $ — $ 2,000
Fair value — ― — 1,011 — 1,968

1 - 5 Years:
Amortized cost — 772 — 21,473 2,872 16,479
Fair value — 788 — 22,070 2,737 16,365

5 - 10 Years:
Amortized cost — 21,610 — 23,936 4,686 —
Fair value — 21,337 — 25,293 4,462 —

After 10 Years:
Amortized cost — 52,194 10,187 85,014 35,331 —
Fair value — 52,609 9,363 92,093 33,567 —

Total:
Amortized cost $ — $ 74,576 $ 10,187 $ 131,424 $ 42,889 $ 18,479
Fair value — 74,734 9,363 140,467 40,766 18,333

~~______________________~~


	March 31, 2021
	Debt Securities Available-For-Sale
(Dollars in thousands)		U.S. Government		Other		Obligations
		Agency &		Mortgage		of State		Asset		Corporate
		Sponsored Agency		Backed Debt		& Political		Backed		Debt
		Obligations¹		Securities¹		Subdivisions		Securities		Securities
Within 1 Year:
Amortized cost		$	—	$	—	$	3,808	$	—	$	621
Fair value			—		—		3,848		—		623

1 - 5 Years:
Amortized cost			515		2,057		19,871		2,670		15,582
Fair value			521		2,065		20,932		2,706	��	15,976

5 - 10 Years:
Amortized cost			19,714		6,425		19,707		—		18,050
Fair value			19,679		6,433		21,023		—		17,912

After 10 Years:
Amortized cost			70,658		27,701		129,369		39,701		—
Fair value			71,156		27,891		137,185		39,825		—

Total:
Amortized cost		$	90,887	$	36,183	$	172,755	$	42,371	$	34,253
Fair value			91,356		36,389		182,988		42,531		34,511

¹~~Mortgage-backed securities are allocated for maturity reporting at their original maturity date.~~

Mortgage-backed securities are allocated for maturity reporting at their original maturity date.

There were no aggregate securities with a single issuer (excluding the U.S. Government and U.S. Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at March 31, ~~2020.~~2021. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s,

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

Proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended March 31, 2021 and 2020 were $0 and ~~2019 were~~ $11,182,000, ~~and $32,374,000,~~ respectively. Gross gains realized on these sales were ~~$176,000~~$0 and ~~$187,000,~~$176,000, respectively. Gross losses ~~realized~~ on these sales were ~~$105,000~~$0 and ~~$102,000,~~$105,000, respectively. There were no0 impairment losses realized on Debt Securities Available-For-Sale during the three months ended March 31, ~~2020~~2021 or ~~2019.~~

2020.

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the ~~Corporation~~Company had ~~$1,394,000~~$1,761,000 and ~~$1,933,000,~~$1,646,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


(Dollars in thousands)	Three months ended		Three months ended
	March 31, 2021		March 31, 2020
Net gains and (losses) recognized during the period on equity securities	$	115	$	(538)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		—		—
Net gains and (losses) recognized during the reporting period on equity securities still held at the reporting date	$	115	$	(538)

~~(Dollars in thousands)~~

Three months ended Three months ended
March 31, 2020 March 31, 2019
Net (losses) and gains recognized during the period on equity securities $ (538 ) $ 18
Less: Net gains and (losses) recognized during the period on equity securities sold during the period — —
Unrealized (losses) and gains recognized during the reporting period on equity securities still held at the reporting date $ (538 ) $ 18

There were no0 proceeds from sales of investments in Held-to-Maturity debt securities during the ~~first~~ three months ~~of 2020~~ended March 31, 2021 or ~~2019.~~2020. Therefore, there were no0 gains or losses realized during these periods.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under FASB ASC 320,Investments - Debt and Equity Securities. In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs on debt securities, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements of income. The amount of the total OTTI related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The ~~Corporation~~Company and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at March 31, ~~2020~~2021 or December 31, ~~2019.~~2020.

The summary below shows the gross unrealized losses and fair value of the ~~Corporation’s~~Company’s debt securities. Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of March 31, ~~2020~~2021 and December 31, ~~2019:~~

2020:

March 31, ~~2020~~2021


(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
																Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-Sale:	Value		Loss			Value		Loss			Value		Loss			Value		Loss		Value		Loss		Value		Loss
U.S. Treasury securities	$	—	$	—		$	—	$	—		$	—	$	—
Obligations of U.S. Government
Corporations and Agencies:
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgage-backed		20,750		(466	)		7,747		(319	)		28,497		(785	)	$	25,214	$	(832)	$	521	$	(2)	$	25,735	$	(834)
Other		6,092		(64	)		4,396		(55	)		10,488		(119	)		—		—		8,289		(99)		8,289		(99)
Other mortgage backed debtsecurities		7,492		(824	)		—		—			7,492		(824	)
Other mortgage backed debt securities																	15,569		(153)		—		—		15,569		(153)
Obligations of state and political subdivisions		1,507		(9	)		—		—			1,507		(9	)		33,888		(1,029)		—		—		33,888		(1,029)
Asset backed securities		40,766		(2,123	)		—		—			40,766		(2,123	)		4,738		(119)		6,105		(13)		10,843		(132)
Corporate debt securities		4,041		(118	)		7,355		(146	)		11,396		(264	)		10,382		(168)		3,445		(55)		13,827		(223)
Total	$	80,648	$	(3,604	)	$	19,498	$	(520	)	$	100,146	$	(4,124	)	$	89,791	$	(2,301)	$	18,360	$	(169)	$	108,151	$	(2,470)

December 31, ~~2019~~2020


(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-Sale:	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgage-backed	$	13,859	$	(302)	$	5,729	$	(23)	$	19,588	$	(325)
Other		2,497		(32)		6,709		(74)		9,206		(106)
Other mortgage backed debt securities		8,290		(46)		—		—		8,290		(46)
Obligations of state and political subdivisions		4,122		(14)		—		—		4,122		(14)
Asset backed securities		6,827		(8)		11,018		(80)		17,845		(88)
Corporate debt securities		5,489		(11)		1,949		(51)		7,438		(62)
Total	$	41,084	$	(413)	$	25,405	$	(228)	$	66,489	$	(641)

~~(Dollars in thousands)~~

Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Available-for-Sale: Value Loss Value Loss Value Loss
U.S. Treasury securities $ ― $ ― $ — $ — $ ― $ ―
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed 39,085 (221 ) 12,650 (166 ) 51,735 (387 )
Other 4,382 (24 ) 4,594 (64 ) 8,976 (88 )
Other mortgage backed debt securities 4,056 (10 ) ― ― 4,056 (10 )
Obligations of state and political subdivisions 1,993 (15 ) 1,081 (33 ) 3,074 (48 )
Asset backed securities 19,236 (175 ) — — 19,236 (175 )
Corporate debt securities 3,484 (16 ) 7,231 (269 ) 10,715 (285 )
Total $ 72,236 $ (461 ) $ 25,556 $ (532 ) $ 97,792 $ (993 )

The ~~Corporation~~Company invests in various forms of agency debt including residential and commercial mortgage-backed securities and callable debt. The mortgage-backed agency securities are issued by Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) or, Government National Mortgage Association (“GNMA”) or Small Business Administration (“SBA”). The other mortgage-backed securities consist of private (non-agency) residential and commercial mortgage backed securities. The municipal securities consist of general obligations and revenue bonds. Asset backed securities consist of bonds backed by consumer loans. Corporate debt securities consist of senior debt and subordinated debt holdings.

The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the market place and credit premiums for various types of agency debt. These factors change continuously and therefore the market value of these securities may be higher or lower than the ~~Corporation’s~~Company’s carrying value at any measurement date. Management does not believe any of their 2740 debt securities with a less than one year unrealized loss position, or any of their 1314 debt securities with a one year or greater unrealized loss position as of March 31, ~~2020,~~2021, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The ~~Corporation~~Company expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of March 31, ~~2020.~~2021.

NOTE 4 —LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses. Interest on loans is recognized as income over the term of each loan, generally, by the accrual method. Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $2,342,000 and $2,292,000 at March 31, 2020 and December 31, 2019, respectively.

As an addition to the commercial loans receivable portfolio, the Corporation may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the U.S. Small Business Administration (SBA), United States Department of Agriculture (USDA), and the Farm Service Agency (FSA). Government Guaranteed Loans (“GGLs”) carry no credit risk due to an unconditional and irrevocable guarantee on all principal and accrued interest, which is supported by the full faith and credit of the U.S. Government. As of March 31, 2020, the Corporation’s balance of GGLs amounted to $6,059,000, compared to $6,150,000 at December 31, 2019.

The loans receivable portfolio is segmented into commercial, residential and consumer loans. Commercial loans consist of the following classes: Commercial and Industrial, and Commercial Real Estate.

Commercial and Industrial Lending

The ~~Corporation~~Company originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and are reviewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum thresholds have been established by the ~~Corporation~~Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals or internal evaluations, etc. Commercial and industrial loans are typically supported by personal guarantees of the borrower.

In underwriting commercial and industrial loans, an analysis is performed to evaluate the ~~borrower's~~borrower’s character and capacity to repay the loan, the adequacy of the ~~borrower's~~borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the ~~Corporation's~~Company’s analysis of the borrower’s ability to repay.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions. Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the borrower’s primary business activities. As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

As an addition to the commercial loans receivable portfolio, the Company may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the U.S. Small Business Administration (“SBA”), United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”). Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S. Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan. As of March 31, 2021, the Company's balance of GGLs amounted to $5,005,000, compared to $5,128,000 at December 31, 2020.

Commercial Real Estate Lending

The ~~Corporation~~Company engages in commercial real estate lending in its primary market area and surrounding areas. The ~~Corporation’s~~Company’s commercial real estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels. Generally, commercial real estate loans have terms that do not exceed twenty

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

In underwriting these loans, the ~~Corporation~~Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The value of the property is determined by either independent appraisers or internal evaluations performed by Bank officers.

Commercial real estate loans generally present a higher level of risk than residential real estate secured loans. Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

Residential Real Estate Lending (Including Home Equity)

The ~~Corporation’s~~Company’s residential real estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit. These loans are generated by the ~~Corporation’s~~Company’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within or with customers from the ~~Corporation’s~~Company’s market area.

The ~~Corporation’s~~Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The ~~Corporation~~Company offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction. Loans with terms of thirty years are normally held for sale and sold without recourse; most of the residential mortgages held in the ~~Corporation’s~~Company’s residential real estate portfolio have maximum terms of twenty years. Generally, the majority of the ~~Corporation’s~~Company’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at ~~ninety-five~~NaN percent or less. Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years. In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

In underwriting one-to-four family residential mortgage loans, the ~~Corporation~~Company evaluates the borrower’s ability to make monthly payments, the borrower’s prior loan repayment history and the value of the property securing the loan. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background. A majority of the properties securing residential real estate loans made by the ~~Corporation~~Company are appraised by independent appraisers. The ~~Corporation~~Company generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the ~~Corporation~~Company is in a subordinate position, especially to another lender, for the loan collateral.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $19,380,000 and $17,300,000 at March 31, 2021 and December 31, 2020, respectively.

Consumer Lending

The ~~Corporation~~Company offers a variety of secured and unsecured consumer loans, including vehicle loans, stock loans and loans secured by financial institution deposits. These loans originate primarily within or with customers from the ~~Corporation’s~~Company’s market area.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability

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

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Coronavirus Pandemic Impact on the Loan Portfolio

As a result of the economic impact of the COVID-19 coronavirus pandemic, the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) was enacted in the United States on March 27, 2020. The Company is approved by the SBA to fund loans under the SBA’s Paycheck Protection Program (“PPP”) created as part of the CARES Act. The PPP loans have 1.00% interest rates, lender fees, two or five-year terms (depending on date of origination), and may qualify for forgiveness. These loans funded by the Company are subject to the terms and conditions applicable to all loans made pursuant to the PPP, as administered by the SBA under the CARES Act. The PPP calls for these loans to be fully guaranteed by the SBA. PPP loan origination fees and certain loan origination costs have been deferred with the net amount accreted using the straight line method over the contractual life of the related loans as an interest yield adjustment. If a loan is forgiven pursuant to the terms and conditions applicable to the PPP, the remaining origination fees and costs are recognized at the time of forgiveness. All PPP loans are carried in the Company’s Commercial and Industrial loan portfolio. As of March 31, 2021, the Company held 525 PPP loans in its Commercial and Industrial portfolio, which carried a balance of $27,145,000, compared to 441 PPP loans as of December 31, 2020 which carried a balance of $22,976,000.

An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as troubled debt restructurings (“TDRs”), as long as specific criteria are met. To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of June 30, 2021 or the termination date of the national emergency related to the COVID-19 pandemic as declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019. In compliance with Section 4013 of the CARES Act, the Company has granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments. Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there were 17 loan modifications still actively on deferral carrying an aggregate balance of $13,641,000 as of March 31, 2021, compared to December 31, 2020 when there were 44 loan modifications still actively on deferral carrying an aggregate balance of $16,541,000. See page 22 for additional information regarding the Section 4013 CARES Act modifications.

Delinquent Loans

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 10 days or more. Delinquent notices are generated automatically when a loan is 10 or 15 days past-due, depending on loan type. Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the ~~Bank~~Company estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. Should a ~~Government Guaranteed Loan~~GGL default, demand is made to the originating bank for repurchase of the loan. If

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

Residential Real Estate and Consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected. At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full. Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg. reaffirmation by the borrower with demonstrated repayment ability). Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or ~~interest, even though the loan may currently be performing.~~interest. A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in the process of collection. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against interest income. Certain non-accrual loans may continue to perform; that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management's judgment regarding the collectability of principal.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level estimated by management to be adequate to absorb potential loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the ~~Corporation’s~~Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are individually classified as impaired. Select loans are not aggregated for collective impairment evaluation, as such; all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. ~~Troubled debt restructurings~~TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s ~~effective~~contractual rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the ~~loans~~loan may be reported ~~net,~~ at the ~~fair~~net realizable value of the collateral. For troubled debt restructurings that subsequently default, the ~~Corporation~~Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers all other loans not identified as impaired (aside from ~~Government Guaranteed Loans,~~GGLs, which do not require an allowance) and is based on historical losses and qualitative factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over ~~a time~~an eight quarter lookback period that management has determined best represents the current credit cycle. Qualitative factors impacting each portfolio segment may include: delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.

In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors related to the local/regional economy were increased by 2 basis points across all loan segments during the first quarter of 2020 and increased by an additional basis point across all loan segments during the second quarter of 2020. The qualitative factor relating to the impact of external factors/conditions for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of 2020. The qualitative factors relating to the impact of external factors/conditions were increased by 2 additional basis points across all loan segments during the fourth quarter of 2020. No additional qualitative factor increases were performed during the first quarter of 2021. Modifications granted in compliance with Section 4013 of the CARES Act are highest in the Commercial Real Estate portfiolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio.

~~Government Guaranteed Loans~~GGLs do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S. Government. Should a GGL default, the loan will be repurchased by the originating bank or the appropriate government agency that has provided the guarantee for the loan.

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

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the amount of the reserve for unfunded lending commitments was ~~$161,000~~$144,000 and ~~$117,000,~~$129,000, respectively.

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

A loan is considered impaired when, based on current information and events, it is probable that the ~~Corporation~~Company will be unable to collect all amounts due according to the contractual terms of the ~~original~~existing loan agreement. Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s ~~effective~~contractual interest rate at inception or the ~~fair~~net realizable value of the collateral for certain collateral dependent loans.

From time to time, the Bank may agree to modify/restructure the contractual terms of a ~~borrower’s~~borrower's loan. The restructuring of a loan is considered a ~~“troubled debt restructuring”~~TDR if both the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the ~~Corporation~~Company has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the

debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan. A less common concession is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the ~~Corporation~~Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months. Any loan modifications made in response to the COVID-19 pandemic are not considered ~~troubled debt restructurings~~TDRs as long as the criteria set forth in Section 4013 of the CARES Act are met.

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

The ~~Bank~~Company utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings. An asset quality rating is assigned using the guidance provided in the ~~Corporation’s~~Company’s loan policy. Primary responsibility for assigning the asset quality rating rests with the credit department. The asset quality rating is validated periodically by both an internal and external loan review process.

The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on financial condition and trends. The grade also reflects current economic and industry conditions; as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

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

Risk grade characteristics are as follows:

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

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

At the low-risk end of the rating scale, a risk grade of 1 – Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss. Loan grades then progress through escalating ratings of 2 through 6 based upon risk. Risk Grade 2 – Modest Risk are loans with sufficient cash flows; Risk Grade 3 – Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers; Risk Grade 4 – Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher; and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets. Risk Grade 6 – Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained. Loans in this category are performing according to terms, but present some type of potential concern.

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

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

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

constitute increased credit risk, but not to the point of justifying a classification of substandard. No loss of principal or interest is ~~envisioned; however, they constitute an undue credit~~envisioned, but risk ~~that may be minor but is unwarranted in light of the circumstances surrounding a specific asset. Risk~~ is increasing beyond that at which the loan originally would have been granted. Historically, cash flows are inconsistent; financial trends show some deterioration. Liquidity and leverage are above industry averages. Financial information could be incomplete or inadequate. A Special Mention asset has potential weaknesses that deserve management’s close attention.

Risk Grade 8 − SUBSTANDARD (Non-Pass Category)

Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct possibility that the ~~Corporation~~Company will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default and require more intensive supervision by ~~Corporation~~Company management.

Risk Grade 9 − DOUBTFUL (Non-Pass Category)

Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The following table presents the classes of the loan portfolio summarized by risk rating as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:


	Commercial and
(Dollars in thousands)	Industrial				Commercial Real Estate
	March 31,		December 31,		March 31,		December 31,
	2021		2020		2021		2020
Grade:
1-6 Pass	$	90,792	$	90,906	$	450,477	$	444,119
7 Special Mention		—		—		795		814
8 Substandard		867		919		20,996		20,975
9 Doubtful		—		—		—		—
Add (deduct): Unearned discount and		—		—		—		—
Net deferred loan fees and costs		(363)		50		721		820
Total loans	$	91,296	$	91,875	$	472,989	$	466,728

Commercial and
(Dollars in thousands) Industrial Commercial Real Estate
March 31, December 31, March 31, December 31,
2020 2019 2020 2019
Grade:
1-6    Pass $ 85,418 $ 84,999 $ 399,740 $ 382,510
7       Special Mention — 2 — 944
8       Substandard 963 1,068 12,229 11,590
9       Doubtful — — — ―
Add (deduct):Unearned discount and — — — ―
  Net deferred loan fees and costs 642 643 827 757
Total loans $ 87,023 $ 86,712 $ 412,796 $ 395,801


	Residential Real Estate
	Including Home Equity				Consumer
	March 31,		December 31,		March 31,		December 31,
	2021		2020		2021		2020
Grade:
1-6 Pass	$	152,144	$	155,698	$	4,977	$	4,934
7 Special Mention		223		225		—		—
8 Substandard		1,402		1,186		33		18
9 Doubtful		—		—		—		—
Add (deduct): Unearned discount and		—		—		—		—
Net deferred loan fees and costs		(142)		(126)		67		72
Total loans	$	153,627	$	156,983	$	5,077	$	5,024


	Total Loans
	March 31,		December 31,
	2021		2020
Grade:
1-6 Pass	$	698,390	$	695,657
7 Special Mention		1,018		1,039
8 Substandard		23,298		23,098
9 Doubtful		0		0
Add (deduct): Unearned discount and		0		0
Net deferred loan fees and costs		283		816
Total loans	$	722,989	$	720,610

Residential Real Estate
Including Home Equity Consumer
March 31, December 31, March 31, December 31,
2020 2019 2020 2019
Grade:
1-6   Pass $ 155,124 $ 158,301 $ 5,570 $ 5,662
7      Special Mention — 117 31 83
8      Substandard 1,089 1,048 8 35
9      Doubtful — — — ―
Add (deduct): Unearned discount and — — — —
  Net deferred loan fees and costs (108 ) (116 ) 83 89
Total loans $ 156,105 $ 159,350 $ 5,692 $ 5,869

Total Loans
March 31, December 31,
2020 2019
Grade:
1-6   Pass $ 645,852 $ 631,472
7      Special Mention 31 1,146
8      Substandard 14,289 13,741
9      Doubtful — —
Add (deduct): Unearned discount and — —
  Net deferred loan fees and costs 1,444 1,373
Total loans $ 661,616 $ 647,732

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of ~~$17,117,000~~$8,572,000 and ~~$1,966,000~~$1,800,000 at March 31, ~~2020~~2021 and ~~$17,848,000~~$9,337,000 and ~~$2,007,000~~$1,843,000 at December 31, ~~2019.~~2020. Commercial and Industrial loans also included ~~$6,059,000~~$5,005,000 and ~~$6,150,000~~$5,128,000 of Government Guaranteed Loans and $27,145,000 and $22,976,000 of Paycheck Protection Program loans as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Loans held for sale amounted to ~~$2,342,000~~$19,380,000 at March 31, ~~2020~~2021 and ~~$2,292,000~~$17,300,000 at December 31, ~~2019.~~2020.

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


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three months ended March 31, 2021:
Allowance for Loan Losses:
Beginning balance	$	787	$	4,762	$	1,643	$	94	$	647	$	7,933
Charge-offs		(13)		—		—		(10)		—		(23)
Recoveries		—		—		—		2		—		2
Provision (credit)		16		24		(37)		7		125		135
Ending Balance	$	790	$	4,786	$	1,606	$	93	$	772	$	8,047
Ending balance: individually
evaluated for impairment	$	—	$	5	$	—	$	—	$	—	$	5
Ending balance: collectively
evaluated for impairment	$	790	$	4,781	$	1,606	$	93	$	772	$	8,042

Loans Receivable:
Ending Balance	$	91,296	$	472,989	$	153,627	$	5,077	$	—	$	722,989
Ending balance: individually
evaluated for impairment	$	1,059	$	13,049	$	1,257	$	—	$	—	$	15,365
Ending balance: collectively
evaluated for impairment	$	90,237	$	459,940	$	152,370	$	5,077	$	—	$	707,624

(Dollars in thousands) Commercial Commercial Residential
and Industrial Real Estate Real Estate Consumer Unallocated Total
As of and for the three month period ended
March 31, 2020:
Allowance for Loan Losses:
Beginning balance $ 634 $ 4,116 $ 1,665 $ 114 $ 476 $ 7,005
Charge-offs (4 ) — — (16 ) — (20 )
Recoveries — — — — — —
Provision 33 212 (22 ) 15 (44 ) 194
Ending Balance $ 663 $ 4,328 $ 1,643 $ 113 $ 432 $ 7,179
Ending balance: individually evaluated for impairment $ ― $ 1 $ — $ ― $ ― $ 1
Ending balance: collectively evaluated for impairment $ 663 $ 4,327 $ 1,643 $ 113 $ 432 $ 7,178

Loans Receivable:
Ending Balance $ 87,023 $ 412,796 $ 156,105 $ 5,692 $ ― $ 661,616
Ending balance: individually evaluated for impairment $ 1,077 $ 11,510 $ 1,109 $ ― $ ― $ 13,696
Ending balance: collectively evaluated for impairment $ 85,946 $ 401,286 $ 154,996 $ 5,692 $ ― $ 647,920

(Dollars in thousands) Commercial Commercial Residential
and Industrial Real Estate Real Estate Consumer Unallocated Total

As of and for the three month period ended
March 31, 2019:
Allowance for Loan Losses:
Beginning balance $ 724 $ 3,700 $ 1,650 $ 117 $ 554 $ 6,745
Charge-offs — (64 ) — (15 ) — (79 )
Recoveries 1 — 2 1 — 4
Provision 7 229 (11 ) 7 (140 ) 92
Ending Balance $ 732 $ 3,865 $ 1,641 $ 110 $ 414 $ 6,762
Ending balance: individually evaluated for impairment $ ― $ 4 $ — $ ― $ ― $ 4
Ending balance: collectively evaluated for impairment $ 732 $ 3,861 $ 1,641 $ 110 $ 414 $ 6,758

Loans Receivable:
Ending Balance $ 93,575 $ 359,073 $ 159,624 $ 5,711 $ ― $ 617,983
Ending balance: individually evaluated for impairment $ 1,116 $ 15,557 $ 491 $ ― $ ― $ 17,164
Ending balance: collectively evaluated for impairment $ 92,459 $ 343,516 $ 159,133 $ 5,711 $ ― $ 600,819


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three months ended March 31, 2020:
Allowance for Loan Losses:
Beginning balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Charge-offs		(4)		—		—		(16)		—		(20)
Recoveries		—		—		—		—		—		—
Provision (credit)		33		212		(22)		15		(44)		194
Ending Balance	$	663	$	4,328	$	1,643	$	113	$	432	$	7,179
Ending balance: individually
evaluated for impairment	$	—	$	1	$	—	$	—	$	—	$	1
Ending balance: collectively
evaluated for impairment	$	663	$	4,327	$	1,643	$	113	$	432	$	7,178

Loans Receivable:
Ending Balance	$	87,023	$	412,796	$	156,105	$	5,692	$	—	$	661,616
Ending balance: individually
evaluated for impairment	$	1,077	$	11,510	$	1,109	$	—	$	—	$	13,696
Ending balance: collectively
evaluated for impairment	$	85,946	$	401,286	$	154,996	$	5,692	$	—	$	647,920


(Dollars in thousands)	Commercial			Commercial			Residential												Commercial		Commercial		Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the year ended
December 31, 2019
																			and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the year ended December 31, 2020:
Allowance for Loan Losses:
Beginning balance	$	724		$	3,700		$	1,650		$	117		$	554		$	6,745		$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Charge-offs		―			(64	)		(69	)		(71	)		—			(204	)		(90)		(141)		(33)		(37)		0		(301)
Recoveries		6			―			2			6			—			14			14		0		8		7		0		29
Provision		(96	)		480			82			62			(78	)		450
Provision (credit)																				229		787		3		10		171		1,200
Ending Balance	$	634		$	4,116		$	1,665		$	114		$	476		$	7,005		$	787	$	4,762	$	1,643	$	94	$	647	$	7,933
Ending balance: individually
evaluated for impairment	$	—		$	1		$	—		$	—		$	—		$	1		$	0	$	8	$	0	$	0	$	0	$	8
Ending balance: collectively
evaluated for impairment	$	634		$	4,115		$	1,665		$	114		$	476		$	7,004		$	787	$	4,754	$	1,643	$	94	$	647	$	7,925


Loans Receivable:
Ending Balance	$	86,712		$	395,801		$	159,350		$	5,869		$	—		$	647,732		$	91,875	$	466,728	$	156,983	$	5,024	$	0	$	720,610
Ending balance: individually
evaluated for impairment	$	1,084		$	11,158		$	712		$	—		$	—		$	12,954		$	1,095	$	12,923	$	1,036	$	0	$	0	$	15,054
Ending balance: collectively
evaluated for impairment	$	85,628		$	384,643		$	158,638		$	5,869		$	—		$	634,778		$	90,780	$	453,805	$	155,947	$	5,024	$	0	$	705,556

Of the $169,000 in foreclosed assets held for resale at March 31, 2020, $38,000 was represented by land, $50,000 was represented by residential real estate, and $81,000 was represented by commercial real estate. Of the $119,000 in foreclosed assets held for resale at December 31, 2019, $38,000 was represented by land and $81,000 was represented by commercial real estate. At March 31, 2020 and December 31, 2019, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $996,000 at March 31, 2020 and $617,000 at December 31, 2019. These balances were not included in foreclosed assets held for resale at March 31, 2020 or December 31, 2019.

The outstanding recorded investment of TDRs as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 was ~~$8,470,000~~$9,675,000 and ~~$8,678,000,~~$9,563,000, respectively. The ~~decrease~~increase in TDRs at March 31, ~~2020~~2021 as compared to December 31, ~~2019~~2020 is mainly attributable to 3 loans that were modified as TDRs during the three months ended March 31, 2021, net against payments and payoffs on existing ~~troubled debt restructurings~~TDRs that were completed during the ~~first quarter of 2020.~~three months ended March 31, 2021. There were no0 unfunded commitments on TDRs at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

During the three months ended March 31, 2021, 3 loans with a combined post modification balance of $301,000 were modified as TDRs. NaN loans were modified as TDRs during the three months ended March 31, 2020. The loan modifications for the three months ended March 31, 2021 consisted of 2 term modifications and 1 payment modification.

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


(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,
	2020		2019
					2021		2020
Non-accrual TDRs	$	1,725	$	112	$	1,555	$	1,587
Accruing TDRs		6,745		8,566		8,120		7,976
Total	$	8,470	$	8,678	$	9,675	$	9,563

At March 31, 2021, 6 Commercial Real Estate loans classified as TDRs with a combined recorded investment of $299,000, 3 Commercial and Industrial loans classified as TDRs with a combined recorded investment of $737,000, and 1 Residential Real Estate loan classified as a TDR with a recorded investment of $17,000 were not in compliance with the terms of their restructure, compared to March 31, 2020 ~~nine~~when 9 Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,377,000 were not in compliance with the terms of their ~~restructure, compared to March 31, 2019 when six~~restructure.

NaN Commercial Real Estate ~~loans classified as TDRs with a combined recorded investment~~loan in the amount of ~~$597,000 and one Commercial and Industrial loan classified~~$92,000 that was modified as a TDR ~~with~~within the twelve months preceding March 31, 2021 experienced a ~~recorded investment of $5,000 were not in compliance with~~payment default during the ~~terms of their restructure.~~

three months ended March 31, 2021. No loans were modified as TDRs within the twelve months preceding March 31, 2020. Of

The following table presents information regarding the ~~loans that were modified~~loan modifications categorized as TDRs ~~during the twelve months preceding March 31, 2019, two Commercial Real Estate Loans with a combined recorded investment of $113,000 experienced payment defaults~~ during the three months ended ~~Mach~~March 31, ~~2019.~~

No2021. NaN loans were modified as TDRs during the three months ended March 31, ~~2020 and 2019.~~2020.


(Dollars in thousands)	For the Three Months Ended March 31, 2021
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial Real Estate	3	$	301	$	301	$	301
Total	3	$	301	$	301	$	301

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three months ended March 31, 2021 with the total number of each type of modification performed. NaN loans were modified as TDRs during the three months ended March 31, 2020.


	For the Three Months Ended March 31, 2021
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial Real Estate	—	2	1	3
Total	—	2	1	3

~~On March 27, 2020, in response to~~In the wake of the COVID-19 pandemic, during the ~~CARES Act was signed into law.~~second quarter of 2020, the Company began granting loan modification requests to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, ~~provides financial institutions the option to suspend requirements to categorize certain loan modifications as TDRs~~ as long as the specific criteria set forth in the Act are met. ~~To qualify, the~~The table below presents information related to loan modifications ~~must be short-term (granted for temporary relief, ex. six months),~~ made ~~on a good-faith basis~~ in ~~response to the COVID-19 pandemic, and the contractual payments~~compliance with Section 4013 of the CARES Act for the three months ended March 31, 2021. No loan ~~must have been paid current (less than 30 days past due prior to any relief) at~~modifications were granted in compliance with Section 4013 of the ~~time a modification was implemented. While requests for modifications had been made, no modifications had been completed as part of this program as of~~CARES Act during the three months ended March 31, 2020.


(Dollars in thousands)	Commercial and			Commercial			Residential
	Industrial			Real Estate			Real Estate			Consumer			Total
		Recorded			Recorded			Recorded			Recorded			Recorded
	Count	Investment		Count	Investment		Count	Investment		Count	Investment		Count	Investment
Balance at December 31, 2020	7	$	1,012	35	$	15,260	2	$	269	—	$	—	44	$	16,541
Additional modifications granted for the three months ended March 31, 2021	2		190	2		10,414	1		16	1		2	6		10,622
Section 4013 CARES Act modifications returned to normal payment status during the three months ended March 31, 2021 (a)	(2)		(612)	(29)		(12,780)	(2)		(130)	—		—	(33)		(13,522)
Principal payments net of draws on active deferred loans for the three months ended March 31, 2021 (b)	N/A		—	N/A		—	N/A		—	N/A		—	N/A		—
Balance at March 31, 2021	7	$	590	8	$	12,894	1	$	155	1	$	2	17	$	13,641

Percent of Total Section 4013 CARES Act Modifications as of March 31, 2021			4.33%			94.52%			1.14%			0.01%			100.00%
Percent of Total Section 4013 CARES Act Modifications to Total Loans as of March 31, 2021			0.08%			1.79%			0.02%			0.00%			1.89%
Subsequent modifications granted during the three months ended March 31, 2021 for active deferred loans outstanding as of March 31, 2021	6	$	447	6	$	12,681	—	$	—	—	$	—	12	$	13,128

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

(b) Draws include those made on lines of credit and other loans contractually allowing draws of principal. No construction loans have experienced a Section 4013 CARES Act modification at the dates indicated.

The recorded investment, unpaid principal balance, and the related allowance of the ~~Corporation’s~~Company’s impaired loans are summarized below at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	March 31, 2020						December 31, 2019						March 31, 2021						December 31, 2020
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
															Unpaid						Unpaid
													Recorded		Principal		Related		Recorded		Principal		Related
													Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	1,077	$	1,077	$	—	$	1,084	$	1,084	$	—	$	1,059	$	1,059	$	0	$	1,095	$	1,095	$	0
Commercial Real Estate		11,396		14,289		—		11,130		14,147		—		12,566		15,498		0		12,438		15,400		0
Residential Real Estate		1,089		1,174		—		712		822		—		1,257		1,341		0		1,036		1,120		0


With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—		0		0		0		0		0		0
Commercial Real Estate		114		114		1		28		28		1		483		483		5		485		485		8
Residential Real Estate		20		20		—		—		—		—		0		0		0		0		0		0
Total	$	13,696	$	16,674	$	1	$	12,954	$	16,081	$	1	$	15,365	$	18,381	$	5	$	15,054	$	18,100	$	8


Total consists of:
Commercial and Industrial	$	1,077	$	1,077	$	—	$	1,084	$	1,084	$	—	$	1,059	$	1,059	$	0	$	1,095	$	1,095	$	0
Commercial Real Estate	$	11,510	$	14,403	$	1	$	11,158	$	14,175	$	1	$	13,049	$	15,981	$	5	$	12,923	$	15,885	$	8
Residential Real Estate	$	1,109	$	1,194	$	—	$	712	$	822	$	—	$	1,257	$	1,341	$	—	$	1,036	$	1,120	$	0

~~______________________~~

At March 31, ~~2020~~2021 and December 31, ~~2019, $8,470,000~~2020, $9,675,000 and ~~$8,678,000~~$9,563,000 of loans classified as TDRs were included in impaired loans ~~both~~ with a total allocated allowance of ~~$1,000, respectively.~~$0 at both March 31, 2021 and December 31, 2020. The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs. The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the ~~Corporation’s~~Company’s impaired loans are summarized below for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.


(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended				For the Three Months Ended				For the Three Months Ended
	March 31, 2020				March 31, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
									March 31, 2021				March 31, 2020
									Average		Interest		Average		Interest
									Recorded		Income		Recorded		Income
									Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,079	$	6	$	1,122	$	14	$	1,085	$	2	$	1,079	$	6
Commercial Real Estate		11,131		76		15,574		150		12,376		93		11,131		76
Residential Real Estate		925		—		440		1		1,050		1		925		0


With an allowance recorded:
Commercial and Industrial		—		—		—		—		0		0		0		0
Commercial Real Estate		118		1		94		1		485		0		118		1
Residential Real Estate		21		1		—		―		0		0		21		1
Total	$	13,274	$	84	$	17,230	$	166	$	14,996	$	96	$	13,274	$	84


Total consists of:
Commercial and Industrial	$	1,079	$	6	$	1,122	$	14	$	1,085	$	2	$	1,079	$	6
Commercial Real Estate	$	11,249	$	77	$	15,668	$	151	$	12,861	$	93	$	11,249	$	77
Residential Real Estate	$	946	$	1	$	440	$	1	$	1,050	$	1	$	946	$	1

~~_____________________~~

Of the ~~$84,000~~$96,000 and ~~$166,000~~$84,000 in interest income recognized on impaired loans for the three months ended March 31, 2021 and 2020, respectively, $0 and ~~2019, respectively,~~ $5,000 ~~and $0~~ in interest income was recognized with respect to non-accrual ~~loans.~~loans for each respective period.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


(Dollars in thousands)					March 31,		December 31,
	March 31,		December 31,
	2020		2019
					2021		2020
Commercial and Industrial	$	768	$	—	$	737	$	745
Commercial Real Estate		5,094		3,697		5,268		5,315
Residential Real Estate		1,089		691		1,240		1,018
Total non-accrual loans		6,951		4,388		7,245		7,078
Foreclosed assets held for resale		169		119		—		28
Loans past-due 90 days or more and still accruing interest		579		100		54		13
Total non-performing assets	$	7,699	$	4,607	$	7,299	$	7,119

There were no foreclosed assets held for resale at March 31, 2021. The $28,000 in foreclosed assets held for resale at December 31, 2020 was represented by land. At December 31, 2020, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Company has entered into formal foreclosure proceedings but for which physical possession has yet to be obtained amounted to $41,000 at both March 31, 2021 and December 31, 2020. These balances were not included in foreclosed assets held for resale at March 31, 2021 or December 31, 2020.

The following tables present the classes of the loan portfolio summarized by past-due status at March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:


(Dollars in thousands)													90 Days														90 Days
													Or Greater
													Past Due
					90 Days				Current–				and Still
	30-59 Days		60-89 Days		or Greater		Total		29 Days		Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
March 31, 2020:
																											Or Greater
																											Past Due
																			90 Days					Current-			and Still
															30-59 Days		60-89 Days		or Greater		Total			29 Days	Total		Accruing
															Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
March 31, 2021:
Commercial and Industrial	$	698	$	380	$	91	$	1,169	$	85,854	$	87,023	$	92	$	75	$	33	$	704	$	812	$	90,484	$	91,296	$	0
Commercial Real Estate		2,942		301		4,935		8,178		404,618		412,796		487		2,866		—		4,499		7,365		465,624		472,989		54
Residential Real Estate		1,303		177		913		2,393		153,712		156,105		—		530		21		1,240		1,791		151,836		153,627		0
Consumer		20		5		—		25		5,667		5,692		—		3		6		0		9		5,068		5,077		0
Total	$	4,963	$	863	$	5,939	$	11,765	$	649,851	$	661,616	$	579	$	3,474	$	60	$	6,443	$	9,977	$	713,012	$	722,989	$	54


(Dollars in thousands)													90 Days
													Or Greater
													Past Due
					90 Days					Current-			and Still
	30-59 Days		60-89 Days		or Greater		Total			29 Days	Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
December 31, 2020:
Commercial and Industrial	$	—	$	0	$	745	$	745	$	91,130	$	91,875	$	—
Commercial Real Estate		1,879		968		4,552		7,399		459,329		466,728		—
Residential Real Estate		628		74		1,031		1,733		155,250		156,983		13
Consumer		19		6		0		25		4,999		5,024		—
Total	$	2,526	$	1,048	$	6,328	$	9,902	$	710,708	$	720,610	$	13

(Dollars in thousands) 90 Days
Or Greater
Past Due
90 Days Current– and Still
30-59 Days 60-89 Days or Greater Total 29 Days Total Accruing
Past Due Past Due Past Due Past Due Past Due Loans Interest
December 31, 2019:
Commercial and Industrial $ — $ 26 $ — $ 26 $ 86,686 $ 86,712 $ —
Commercial Real Estate 880 957 3,502 5,339 390,462 395,801 —
Residential Real Estate 1,118 506 613 2,237 157,113 159,350 100
Consumer 24 5 — 29 5,840 5,869 —
Total $ 2,022 $ 1,494 $ 4,115 $ 7,631 $ 640,101 $ 647,732 $ 100

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

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $1,249,000 that was associated with a loan to a developer of a residential sub-division.

NOTE 5 — DEPOSITS

Major classifications of deposits at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 consisted of:


(Dollars in thousands)					March 31,		December 31,
	March 31,		December 31,
	2020		2019
					2021		2020
Non-interest bearing demand	$	153,029	$	134,648	$	226,581	$	198,499
Interest bearing demand		211,598		218,847		329,711		330,253
Savings		173,769		173,069		234,375		214,908
Time certificates of deposits less than $250,000		176,383		210,916		170,819		177,652
Time certificates of deposits $250,000 or greater		18,639		23,006		14,975		15,029
Other time deposits		1,379		1,142
Other time						1,396		1,147
Total deposits	$	734,797	$	761,628	$	977,857	$	937,488

Total ~~Deposits decreased $26,831,000~~deposits increased $40,369,000 to ~~$734,797,000~~$977,857,000 as of March 31, ~~2020~~2021 due to ~~decreases~~increases in ~~interest~~non-interest bearing ~~savings,~~ and ~~time~~savings deposits. The ~~decrease~~increase in deposits was ~~mainly due to~~ the ~~Corporation calling $40,000,000 worth~~result of ~~brokered CDs~~government stimulus funds, PPP loan proceeds and other normal fluctuations in deposits during the ~~quarter~~three months ended March 31, ~~2020 due to the changing rate environment.~~2021.

NOTE 6 —BORROWINGS

Short-Term Borrowings

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, the Federal Discount Window, and Federal Home Loan Bank of Pittsburgh (“FHLB”) advances, which generally represent overnight or less than 30-day borrowings. Short-term borrowings and weighted–average interest rates at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:


(Dollars in thousands)	March 31, 2020					December 31, 2019					March 31, 2021				December 31, 2020
			Average					Average
	Amount		Rate			Amount		Rate
													Average				Average
											Amount		Rate		Amount		Rate
Federal funds purchased	$	—		—		$	—		2.01	%	$	0	0	%	$	0	0.37	%
Securities sold under agreements to repurchase		12,551		1.05	%		14,042		1.03	%		22,423	0.34	%		19,494	0.58	%
Federal Discount Window		—		—			—		2.92	%		0	0	%		0	0.37	%
Federal Home Loan Bank		93,828		1.64	%		40,621		2.59	%
Federal Home Loan Bank of Pittsburgh												0	0.34	%		0	1.00	%
Total	$	106,379		1.50	%	$	54,663		2.37	%	$	22,423	0.34	%	$	19,494	0.82	%

The increase in short-term borrowings is due to advances taken from the Federal Home Loan Bank, including a 21-day $50,000,000 term note, to fund decreased deposit balances resulting from the call of brokered CDs.

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

The ~~Corporation~~Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the ~~Corporation~~Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the ~~Corporation~~Company to repurchase the assets.

As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability on the ~~Corporation’s~~Company’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is not offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the ~~Corporation~~Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the ~~Corporation~~Company be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a correspondent bank in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities.

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

(Dollars in thousands) Gross Net Amounts
Amounts of Liabilities
Offset Presented
Gross in the in the
Amounts of Consolidated Consolidated Cash
Recognized Balance Balance Financial Collateral Net
Liabilities Sheet Sheet Instruments Pledge Amount
March 31, 2020
Repurchase agreements (a) $ 12,551 $ ― $ 12,551 $ (12,551 ) $ ― $ ―

December 31, 2019
Repurchase agreements (a) $ 14,042 $ ― $ 14,042 $ (14,042 ) $ ― $ ―

~~______________________~~

~~(a) As of March 31, 2020 and December 31, 2019, the fair value of securities pledged in connection with repurchase agreements was $21,779,000 and $22,413,000, respectively.~~

(Dollars in thousands)

Gross

Net Amounts

Amounts

of Liabilities

Offset

Presented

Gross

in the

Amounts of

Consolidated

Cash

Recognized

Balance

Financial

Collateral

Net

Liabilities

Sheet

Instruments

Pledge

Amount

March 31, 2021

Repurchase agreements (a)

22,423

(22,423)

December 31, 2020

Repurchase agreements (a)

19,494

(19,494)

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

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, ~~2020:~~2021:


(Dollars in thousands)	Remaining Contractual Maturity of the Agreements										Remaining Contractual Maturity of the Agreements
	Overnight				Greater
	and		Up to		30 -90		than
March 31, 2020:	Continuous		30 days		Days		90 Days		Total
											Overnight				Greater		Greater
											and		Up to		30 -90		than
											Continuous		30 days		Days		90 Days		Total
March 31, 2021:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	12,551	$	―	$	―	$	―	$	12,551	$	22,423	$	0	$	0	$	0	$	22,423
Total	$	12,551	$	―	$	―	$	―	$	12,551	$	22,423	$	0	$	0	$	0	$	22,423

Long-Term Borrowings

Long-term borrowings are comprised of advances from the FHLB. Under terms of a blanket agreement, collateral for the FHLB loans is certain qualifying assets of the Corporation’s banking subsidiary. The principal assets are certain real estate mortgages and investment securities.

NOTE 7 — SUBORDINATED DEBT

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. The Company intends to use the net proceeds it received from the sale of the Notes to support organic growth and for general corporate purposes.

The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and then float based on a benchmark rate (as defined). Interest will be payable semi-annually in arrears on June 30 and December 31 of each year, beginning on June 30, 2021, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 31, June 30, September 30 and December 31. The 2020 Notes will mature on December 31, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 31, 2025 and prior to December 31, 2030. Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 capital, the Corporation may redeem, in whole and not in part, at any time upon giving not less than ten days’ notice, an amount equal to one hundred percent (100%) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.

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

NOTE 78 —COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are various pending legal actions and proceedings that are not reflected in the consolidated financial statements. Management does not believe the outcome of these actions and proceedings will have a material effect on the consolidated financial position or results of operations of the ~~Corporation.~~

Company.

The Bank currently leases ~~three~~3 branch banking facilities and ~~one~~1 parcel of land under operating leases. At March 31, ~~2020,~~2021, right-of-use assets and lease liabilities were recorded related to these operating leases totaling ~~$1,312,000~~$1,101,000 and ~~$1,577,000,~~$1,558,000, respectively. At December 31, ~~2019,~~2020, right-of-use assets and lease liabilities stood at ~~$1,470,000~~$1,061,000 and ~~$1,663,000,~~$1,513,000, respectively. Further options to extend or terminate the lease are not applicable for any of the ~~four~~4 leases. No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components. None of the leases contained an implicit rate; therefore, our incremental borrowing rate was used for each of the leases.

The Bank recognized total operating lease costs for the three months ended March 31, 2021 and 2020 of $44,000 and ~~March 31, 2019 of~~ $111,000, ~~and $48,000,~~ respectively. Cash payments totaled $44,000 and $38,000, respectively, for the three months ended March 31, 2021 and 2020.

The Bank currently has 1 finance lease for equipment. At March 31, 2021, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $34,000 and $23,000, respectively. At December 31, 2020, right-of-use assets and ~~2019.~~lease liabilities stood at $94,000 and $84,000, respectively. Amounts recognized as right-of-use assets and lease liabilities related to finance leases are included in Premises and equipment, net and Other liabilities, respectively, in the accompanying balance sheet. Further options to extend or terminate the lease are not applicable for the lease. No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components. The lease did not contain an implicit rate; therefore, our incremental borrowing rate was used.

Total finance lease costs that were recognized by the Bank for the three months ended March 31, 2021 were immaterial. Cash payments as of March 31, 2021 totaled $2,000.

The following table displays the weighted-average term and discount rates for operating and finance leases outstanding as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

March 31,

December 31,

March 31,

December 31,

2021

2020

2021

2020

Operating

Operating

Finance

Finance

Weighted-average term (years)

25.04

25.09

2.42

5.55

Weighted-average discount rate

3.88%

3.86%

0.68%

0.88%

March 31, December 31,
2020 2019
Operating Operating
Weighted-average term (years) 25.56 25.63
Weighted-average discount rate 3.86 % 3.85 %

A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating or finance lease liability is as follows:



(Dollars in thousands)	March 31,			March 31,		December 31,		March 31,		December 31,
	2020
Minimum lease payments due:
				2021		2020		2021		2020
Minimum Lease Payments due:				Operating		Operating		Finance		Finance
Within one year	$	139		$	131	$	140	$	10	$	19
After one but within two years		106			75		86		10		19
After two but within three years		75			68		68		4		15
After three but within four years		68			68		68		—		9
After four but within five years		68			68		68		—		9
After five years		2,309			2,241		2,258		—		16
Total undiscounted cash flows		2,765			2,651		2,688		24		87
Discount on cash flows		(1,188	)		(1,093)		(1,175)		(1)		(3)
Total lease liability	$	1,577		$	1,558	$	1,513	$	23	$	84

NOTE 89 —FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Financial Instruments with Off-Balance Sheet Risk

The ~~Corporation~~Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the ~~Corporation~~Company has in particular classes of financial instruments. The ~~Corporation~~Company does not engage in trading activities with respect to any of its financial instruments with off-balance sheet risk.

The ~~Corporation’s~~Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.

The ~~Corporation~~Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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

The contract or notional amounts at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


(Dollars in thousands)
	March 31, 2021		December 31, 2020
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	124,402	$	114,836
Financial standby letters of credit	$	1,129	$	1,175
Performance standby letters of credit	$	3,810	$	3,448

~~(Dollars in thousands)~~

March 31, 2020 December 31, 2019
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 140,367 $ 122,082
Financial standby letters of credit $ 335 $ 335
Performance standby letters of credit $ 3,230 $ 3,230

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The ~~Corporation~~Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the ~~Corporation~~Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied income-producing commercial properties, and residential real estate.

Standby letters of credit are conditional commitments issued by the ~~Corporation~~Company to guarantee payment to a third party when a customer either fails to repay an obligation or fails to perform some non-financial obligation. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The ~~Corporation~~Company may hold collateral (similar to the items held as collateral for commitments to extend credit) to support standby letters of credit for which collateral is deemed necessary.

Financial Instruments with Concentrations of Credit Risk

The ~~Corporation~~Company originates primarily commercial and residential real estate loans to customers in northeastern Pennsylvania. The ability of the majority of the ~~Corporation’s~~Company’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area. At March 31, ~~2020,~~2021, the ~~Corporation~~Company had ~~$568,901,000~~$626,616,000 in loans secured by real estate, which represented ~~86.0%~~86.7% of total loans. The real estate loan portfolio is largely secured by lessors of residential buildings and dwellings, lessors of non-residential buildings, and lessors of hotels/motels. As of

March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, management is of the opinion that there were no concentrations exceeding 10% of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.

As all financial instruments are subject to some level of credit risk, the ~~Corporation~~Company requires collateral and/or guarantees for all loans. Collateral may include, but is not limited to property, plant, and equipment, commercial and/or residential real estate property, land, and pledge of securities. In the event of a borrower’s default, the collateral supporting the loan may be seized in order to recoup losses associated with the loan. The ~~Corporation~~Company also establishes an allowance for loan losses that constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.

NOTE 910 —FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information ~~available in the circumstances.~~available. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Inputs: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.

Financial Assets Measured at Fair Value on a Recurring Basis

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, securities measured at fair value on a recurring basis and the valuation methods used are as follows:


(Dollars in thousands)

March 31, 2021	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed	$	0	$	81,715	$	0	$	81,715
Other		0		9,641		0		9,641
Other mortgage backed debt securities		0		36,389		0		36,389
Obligations of state and political subdivisions		0		182,988		0		182,988
Asset backed securities		0		42,531		0		42,531
Corporate debt securities		0		34,511		0		34,511
Total debt securities available-for-sale		0		387,775		0		387,775
Marketable equity securities		1,761		0		0		1,761
Total recurring fair value measurements	$	1,761	$	387,775	$	0	$	389,536

~~(Dollars in thousands)~~


(Dollars in thousands)

December 31, 2020	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed	$	0	$	77,573	$	0	$	77,573
Other		0		10,430		0		10,430
Other mortgage backed debt securities		0		39,844		0		39,844
Obligations of state and political subdivisions		0		165,101		0		165,101
Asset backed securities		0		44,821		0		44,821
Corporate debt securities		0		28,942		0		28,942
Total debt securities available-for-sale		0		366,711		0		366,711
Marketable equity securities		1,646		0		0		1,646
Total recurring fair value measurements	$	1,646	$	366,711	$	0	$	368,357

March 31, 2020 Level 1 Level 2 Level 3 Total
Debt Securities Available-for-Sale:
U.S. Treasury securities $ — $ — $ — $ —
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed — 62,505 — 62,505
Other — 12,229 — 12,229
Other mortgage backed debt securities — 9,363 — 9,363
Obligations of state and political subdivisions — 140,467 — 140,467
Asset backed securities — 40,766 — 40,766
Corporate debt securities — 18,333 — 18,333
Total debt securities available-for-sale — 283,663 — 283,663
Marketable equity securities 1,394 — — 1,394
Total recurring fair value measurements $ 1,394 $ 283,663 $ — $ 285,057

~~(Dollars in thousands)~~

December 31, 2019 Level 1 Level 2 Level 3 Total
Debt Securities Available-for-Sale:
U.S. Treasury securities $ — $ 2,855 $ — $ 2,855
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed — 77,283 — 77,283
Other — 10,297 — 10,297
Other mortgage backed debt securities — 11,138 — 11,138
Obligations of state and political subdivisions — 120,376 — 120,376
Asset backed securities — 37,536 — 37,536
Corporate debt securities — 18,443 — 18,443
Total debt securities available-for-sale — 277,928 — 277,928
Marketable equity securities 1,933 — — 1,933
Total recurring fair value measurements $ 1,933 $ 277,928 $ — $ 279,861

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets; these assets consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the ~~Corporation~~Company (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The ~~Corporation~~Company does not have any Level 3 inputs for securities. There were no0 transfers between Level 1 and Level 2 during ~~2020~~2021 or ~~2019.~~2020.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, impaired loans measured at fair value on a nonrecurring basis are as follows:


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at March 31, 2021
Impaired loans:
Commercial Real Estate	$	0	$	0	$	6,480	$	6,480
Residential Real Estate		0		0		110		110
Total impaired loans	$	0	$	0	$	6,590	$	6,590


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2020
Impaired loans:
Commercial Real Estate	$	0	$	0	$	6,497	$	6,497
Residential Real Estate		0		0		111		111
Total impaired loans	$	0	$	0	$	6,608	$	6,608

~~(Dollars~~The Company’s impaired loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end unless the Board of Directors waives such requirement for a specific loan, in ~~thousands)~~

Level 1 Level 2 Level 3 Total
Assets at March 31, 2020
Impaired loans:
Commercial Real Estate $ ― $ ― $ 6,287 $ 6,287
Residential Real Estate ― ― 189 189
Total impaired loans $ ― $ ― $ 6,476 $ 6,476

(Dollars in thousands)
Level 1 Level 2 Level 3 Total
Assets at December 31, 2019
Impaired loans:
Commercial Real Estate $ — $ — $ 6,218 $ 6,218
Residential Real Estate — — 221 221
Total impaired loans $ — $ — $ 6,439 $ 6,439

~~These~~favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Company. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values. For impaired loans less than $250,000 upon classification and annually at year end, the Company completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no0 transfers between valuation levels in ~~2020~~2021 and ~~2019.~~2020.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, foreclosed assets held for resale measured at fair value on a nonrecurring basis are as follows:


(Dollars in thousands)									Level 1		Level 2		Level 3		Total
	Level 1		Level 2		Level 3		Total
Assets at March 31, 2020
Assets at March 31, 2021
Foreclosed assets held for resale:
Commercial Real Estate	$	―	$	―	$	81	$	81	$	0	$	0	$	0	$	0
Total foreclosed assets held for resale	$	―	$	―	$	81	$	81	$	0	$	0	$	0	$	0


(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2020
Foreclosed assets held for resale:
Commercial Real Estate	$	0	$	0	$	28	$	28
Total foreclosed assets held for resale	$	0	$	0	$	28	$	28

(Dollars in thousands)
Level 1 Level 2 Level 3 Total
Assets at December 31, 2019
Foreclosed assets held for resale:
Commercial Real Estate $ — $ — $ 81 $ 81
Total foreclosed assets held for resale $ — $ — $ 81 $ 81

The Company’s foreclosed asset valuation procedure requires an appraisal or a Certificate of Inspection, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases in which the Bank has obtained a sales agreement. These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were no0 transfers between valuation levels in ~~2020~~2021 and ~~2019.~~2020.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the ~~Corporation~~Company has utilized Level 3 inputs to determine the fair value:

(Dollars in thousands)
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Weighted
March 31, 2020 Estimate Valuation Technique Unobservable Input Range Average
Impaired loans $ 3,366 Appraisal of collateral^1,3 Appraisal adjustments² (13%) – (77%) (17%)
Impaired loans $ 3,110 Discounted cash flow Discount rate (5%) – (9%) (7%)
Foreclosed assets held for resale $ 81 Appraisal of collateral^1,3 Appraisal adjustments² (35%) – (35%) (35%)

December 31, 2019
Impaired loans $ 3,419 Appraisal of collateral^1,3 Appraisal adjustments² (10%) – (77%) (17%)
Impaired loans $ 3,020 Discounted cash flow Discount rate (7%) – (8%) (7%)
Foreclosed assets held for resale $ 81 Appraisal of collateral^1,3 Appraisal adjustments² (35%) – (35%) (35%)


(Dollars in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
March 31, 2021	Estimate		Valuation Technique	Unobservable Input	Range	Average
Impaired loans - collateral dependent	$	3,677	Appraisal of collateral^1,3 Certificate of Inspection^1,3	Appraisal adjustments² Qualitative Adjustments⁴	(5%) – (73%)	(9%)
Impaired loans - other	$	2,913	Discounted cash flow	Discount rate	(7%) – (7%)	(7%)
Foreclosed assets held for resale	$	—	Appraisal of collateral^1,3 Certificate of Inspection^1,3	Appraisal adjustments² Qualitative Adjustments⁴	(0%) –(0%)	(0%)

December 31, 2020
Impaired loans - collateral dependent	$	3,679	Appraisal of collateral^1,3 Certificate of Inspection^1,3	Appraisal adjustments² Qualitative Adjustments⁴	(15%) – (73%)	(17%)
Impaired loans - other	$	2,929	Discounted cash flow	Discount rate	(7%) – (7%)	(7%)
Foreclosed assets held for resale	$	28	Appraisal of collateral^1,3 Certificate of Inspection^1,3	Appraisal adjustments² Qualitative Adjustments⁴	(28%) – (28%)	(28%)

~~____________________~~

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

²2. Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

³3. Includes qualitative adjustments by management and estimated liquidation expenses.

4. Collateral values may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Fair Value of Financial Instruments Measured on a Nonrecurring Basis

(Dollars in thousands)

Carrying

Fair Value Measurements at March 31, 2021

Amount

Level 1

Level 2

Level 3

Total

FINANCIAL ASSETS:

Cash and due from banks

8,706

Interest-bearing deposits in other banks

28,188

Time deposits with other banks

247

251

Restricted investment in bank stocks

2,047

Net loans

714,942

740,383

Mortgage servicing rights

295

Accrued interest receivable

4,358

FINANCIAL LIABILITIES:

Demand, savings and other deposits

790,667

Time deposits

187,190

188,679

Short-term borrowings

22,423

22,427

Long-term borrowings

40,000

41,684

Subordinated debentures

25,000

24,615

Accrued interest payable

637

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

—


(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2020
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,833	$	8,833	$	0	$	0	$	8,833
Interest-bearing deposits in other banks		15,347		0		15,347		0		15,347
Time deposits with other banks		247		0		253		0		253
Restricted investment in bank stocks		2,247		0		2,247	��	0		2,247
Net loans		712,677		0		0		741,934		741,934
Mortgage servicing rights		262		0		0		262		262
Accrued interest receivable		4,544		0		4,544		0		4,544

FINANCIAL LIABILITIES:
Demand, savings and other deposits		743,660		0		743,660		0		743,660
Time deposits		193,828		0		196,200		0		196,200
Short-term borrowings		19,494		0		19,498		0		19,498
Long-term borrowings		45,000		0		47,237		0		47,237
Subordinated debentures		25,000		0		25,378		0		25,378
Accrued interest payable		405		0		405		0		405

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		0		0		0		0		0

(Dollars in thousands)
Carrying Fair Value Measurements at March 31, 2020
Amount Level 1 Level 2 Level 3 Total
FINANCIAL ASSETS:
Cash and due from banks $ 7,785 $ 7,785 $ ― $ ― $ 7,785
Interest-bearing deposits in other banks 1,013 — 1,013 — 1,013
Time deposits with other banks 247 — 251 — 251
Restricted investment in bank stocks 6,740 — 6,740 — 6,740
Net loans 654,437 — — 681,960 681,960
Mortgage servicing rights 278 — — 278 278
Accrued interest receivable 3,622 — 3,622 — 3,622

FINANCIAL LIABILITIES:
Demand, savings and other deposits 538,396 — 538,396 — 538,396
Time deposits 196,401 — 199,153 — 199,153
Short-term borrowings 106,379 — 106,310 — 106,310
Long-term borrowings 50,000 — 52,570 — 52,570
Accrued interest payable 550 — 550 — 550

OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS ― ― ― ― ―

(Dollars in thousands) Carrying Fair Value Measurements at December 31, 2019
Amount Level 1 Level 2 Level 3 Total
FINANCIAL ASSETS:
Cash and due from banks $ 10,251 $ 10,251 $ — $ — $ 10,251
Interest-bearing deposits in other banks 473 — 473 — 473
Time deposits with other banks 247 — 250 — 250
Restricted investment in bank stocks 4,224 — 4,224 — 4,224
Net loans 640,727 — — 655,301 655,301
Mortgage servicing rights 283 — — 283 283
Accrued interest receivable 3,405 — 3,405 — 3,405

FINANCIAL LIABILITIES:
Demand, savings and other deposits 526,564 — 526,564 — 526,564
Time deposits 235,064 — 235,134 — 235,134
Short-term borrowings 54,663 — 54,655 — 54,655
Long-term borrowings 55,000 — 55,809 — 55,809
Accrued interest payable 606 — 606 — 606

OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS — — — — —

NOTE 1011 —REVENUE RECOGNITION

In accordance with ASU 2014-09Revenue from Contracts with Customers – Topic 606, and all subsequent ASUs that modified ASC 606, the main types of revenue contracts included in non-interest income within the consolidated statements of income are as follows:

Deposits related fees and service charges

Service charges and fees on deposits, which are included as liabilities in the consolidated balance sheets, consist of fees related to monthly fees for various retail and business checking accounts, automated teller machine (“ATM”) fees (charged for withdrawals by our deposit customers from other bank ATMs) and insufficient funds fees (“NSF”) (which are charged when customers overdraw their accounts beyond available funds). All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. The ~~Corporation~~Company elected to adopt practical expedient related to incremental costs of obtaining deposit contracts. As such, any costs associated with acquiring the deposits, except for ~~certificate of~~time deposits ~~(“CDs”)~~ with maturities in excess of one year, are recognized as an expense within non-interest expense in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would have been recognized is one year or less.

Wealth/Asset/Trust Management Fees

Wealth management services are delivered to individuals, corporations and retirement funds located primarily within our geographic markets. The Trust Department of the ~~Corporation~~Company conducts the wealth management operations, which provides a broad range of personal and corporate fiduciary services, including the administration of estates.

Assets held in a fiduciary capacity by the Trust Department are not assets of the ~~Corporation~~Company and, therefore, are not included in our consolidated financial statements. Wealth management fees, which are contractually agreed with each customer, are earned each month and recognized on a cash basis based on average fair value of the trust assets under management. The services provided under such a contract are considered a single performance obligation under ASC 606 because they embody a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Wealth management fees charged by the Trust Department follow a tiered structure based on the type and size of the assets under management. Wealth management fees are included within non-interest income in the consolidated statements of income. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the fair value of trust

assets under management was ~~$111,199,000~~$106,981,000 and ~~$111,160,000,~~$107,336,000, respectively. The costs of acquiring asset management customers are incremental and recognized within non-interest expense in the consolidated statements of income.

Interchange Fees and Surcharges

Interchange fees are related to the acceptance and settlement of debit card transactions, both point-of-sale and ATM, to cover operating costs and risks associated with the approval and settlement of the transactions. Interchange fees vary by type of transaction and each merchant sector. Net income recognized from interchange fees is included in non-interest income on the consolidated statements of income. A surcharge is assessed for use of the ~~Corporation’s~~Company’s ATMs by non-customers. All interchange fees and surcharges are recognized as received on a daily basis for the prior business day’s transactions. All expenses related to the settlement of debit card transactions (both point-of-sale and ATM) are recognized on a monthly basis and included in non-interest expense on the consolidated statements of income.

NOTE 1112 —EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the ~~Corporation.~~Company. At March 31, ~~2020~~2021 and ~~2019,~~2020, there were no0 potential common shares outstanding. The following table sets forth the computation of basic and diluted earnings per share.


(In thousands, except earnings per share)	Three Months Ended				Three Months Ended
	March 31,
	2020		2019
					March 31,
					2021		2020
Net income	$	2,053	$	2,243	$	3,878	$	2,053
Weighted-average common shares outstanding		5,817		5,765		5,884		5,817
Basic and diluted earnings per share	$	0.35	$	0.39	$	0.66	$	0.35

NOTE 13 — GOODWILL

Goodwill resulted from the acquisition of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed of the branch of another financial institution in Danville, Pennsylvania, in January 2004. Such goodwill represents the excess cost of the acquired assets relative to the assets’ fairvalue at the dates of acquisition. In accordance with current accounting standards, goodwill is not amortized. Goodwill totaled $19,133,000 at March 31, 2021 and December 31, 2020.

Impairment testing is performed on an annual basis, using either a qualitative or quantitative approach. The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price. Any change in the assumptions utilized to determine the carrying value of goodwill could adversely affect our results of operations. Management notes that the emergence of COVID-19 as a global pandemic in 2020 resulted in significant deterioration in general economic conditions and the environment in which the Company operates. This uncertainty in 2020 resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered through the end of 2020 and into 2021.

Goodwill was evaluated for impairment at December 31, 2020, and it was determined that goodwill was not impaired. Management evaluated the need for an interim goodwill impairment analysis and determined that there were no triggering events or negative factors affecting goodwill since the previous test that would indicate goodwill was impaired as of March 31, 2021.

Item 2. First Keystone Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operation

This quarterly report contains certain forward-looking statements, which are included pursuant to the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, and reflect management’s beliefs and expectations based on information currently available. These forward-looking statements are inherently subject to significant risks and uncertainties, including changes in general economic and financial market conditions, the ~~Corporation’s~~Company’s ability to effectively carry out its business plans and changes in regulatory or legislative requirements. Other factors that could cause or contribute to such differences are changes in competitive conditions, and pending or threatened litigation. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially.

CRITICAL ACCOUNTING ESTIMATES

The ~~Corporation~~Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the ~~Corporation~~Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the consolidated financial statements included in the ~~2019~~2020 Annual Report on Form 10-K. There have been no changes to the Critical Accounting Estimates since the ~~Corporation~~Company filed its Annual Report on Form 10-K for the year ended December 31, ~~2019.~~

2020.

RESULTS OF OPERATIONS

Quarter ended March 31, ~~2020~~2021 compared to quarter ended March 31, ~~2019~~

2020

First Keystone Corporation realized earnings for the first quarter of ~~2020~~2021 of ~~$2,053,000, a decrease~~$3,878,000, an increase of ~~$190,000,~~$1,825,000, or ~~8.5%~~88.9% from the first quarter of ~~2019.~~2020. The ~~decrease~~increase in net income for the three months ended March 31, ~~2020~~2021 was primarily due to ~~a decrease~~increases in net interest income, net securities gains, ~~offset by an increase in net interest income.~~

and gains on sales of mortgage loans.

On a per share basis, for the three months ended March 31, ~~2020,~~2021, net income was ~~$0.35~~$0.66 versus ~~$0.39~~$0.35 for the same three month period of ~~2019.~~2020. Cash dividends amounted to $0.28 and $0.27 per share for the the three months ended March 31, 2021 and 2020, ~~and 2019.~~

respectively.

NET INTEREST INCOME

The major source of operating income for the ~~Corporation~~Company is net interest income, defined as interest income less interest expense. In the three months ended March 31, ~~2020,~~2021, interest income amounted to ~~$9,768,000,~~$10,275,000, an increase of ~~$254,000~~$507,000 or ~~2.7%~~5.2% from the three months ended March 31, ~~2019,~~2020, while interest expense amounted to ~~$2,392,000~~$1,305,000 in the three months ended March 31, ~~2020,~~2021, a decrease of ~~$301,000~~$1,087,000 or ~~11.2%~~45.4% from the three months ended March 31, ~~2019.~~2020. As a result, net interest income increased ~~$555,000~~$1,594,000 or ~~8.1%~~21.6% to ~~$7,376,000~~$8,970,000 from ~~$6,821,000~~$7,376,000 for the same period in ~~2019.~~

2020.

The ~~Corporation’s~~Company’s net interest margin for the three months ended March 31, ~~2020~~2021 was ~~3.28%~~3.37% compared to ~~3.15%~~3.28% for same period in ~~2019.~~2020. The increase in net interest margin was primarily a result of ~~an increase~~a decrease in ~~yield~~yields on ~~the loan portfolio.~~

deposits.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the three months ended March 31, 2021 and 2020 was $135,000 and ~~March 31, 2019 was~~ $194,000, ~~and $92,000,~~ respectively. The ~~increase~~decrease in the provision for loan losses resulted from the ~~Corporation’s~~Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. The provision for loan losses for the three months ended March 31, 2021 is also reflective of management’s assessment of the credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic. Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of ~~$20,000~~$21,000 and ~~$75,000~~

$20,000 for the the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. See Allowance for Loan Losses on page 3639 for further discussion.

NON-INTEREST INCOME

Total non-interest income was ~~$983,000~~$1,875,000 for the three months ended March 31, ~~2020,~~2021, as compared to ~~$1,507,000~~$983,000 for the same period in ~~2019, a decrease~~2020, an increase of ~~$524,000,~~$892,000, or ~~34.8%~~90.7%. The ~~decrease~~increase was due to increased gains realized on held equity securities and an increase in gains on the ~~result~~sales of ~~a decrease in net~~mortgage loans.

Net securities ~~(losses)~~ gains increased $582,000 to $115,000 for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. This increase was mainly due to the ~~Corporation recording~~Company realizing $115,000 in gains on held equity securities in the first quarter of 2021 as compared to realizing $538,000 in losses on held equity securities in the first quarter of 2020. ~~Net securities gains decreased $570,000~~Trust department income increased $32,000 or 14.5% to ~~$(467,000)~~$253,000 for the three months ended March 31, ~~2020~~2021 as compared to the ~~three months ended March 31, 2019. Trust department~~same period in 2020.

Service charges and fee income decreased ~~$40,000~~$124,000 or ~~15.3%~~24.8%. The decrease was mainly due to ~~$221,000~~lower fees earned on deposit accounts as there have been fewer customers in overdraft status during the first quarter of 2021 as compared to 2020. ATM fees and debit card income increased $117,000 or 29.3% to $516,000 for the three months ended March 31, ~~2020~~2021 due to an increase in transaction volume. Gains on sales of mortgage loans increased $261,000 or 280.6% to $354,000 due to a higher volume of sold loans in the first quarter of 2021 as compared to ~~the same period in 2019. Service charges and fee income decreased $15,000 or 2.9%. ATM fees and debit card income increased $22,000 or 5.8% to $399,000~~2020.

NON-INTEREST EXPENSE

Total non-interest expense was $6,197,000 for the three months ended March 31, ~~2020. Gains on sales of mortgage loans increased $53,000 or 132.5% due to twice as many sold loans in the first quarter of 2020~~2021, as compared to ~~2019.~~

~~NON-INTEREST EXPENSE~~

~~Total non-interest expense was~~ $5,915,000 for the three months ended March 31, ~~2020, as compared to $5,855,000 for the three months ended March 31, 2019. Non-interest expense increased $60,000 or 1.0%.~~

2020.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to ~~$3,219,000~~$3,300,000 or ~~54.4%~~53.3% of total non-interest expense for the three months ended March 31, ~~2020,~~2021, as compared to ~~$3,132,000~~$3,219,000 or ~~53.5%~~54.4% for the ~~same~~ three months ~~of 2019.~~ended March 31, 2020. The increase was ~~primarily~~ due to ~~performance salaries~~normal merit increases, increased commissions associated with loan growth, increased health care costs and an increase in ~~commissions and referral fees associated with loan growth and retail non-deposit activity.~~

profit sharing expense.

Net occupancy, furniture and equipment, and computer expense amounted to ~~$912,000~~$905,000 for the three months ended March 31, ~~2020, an increase~~2021, a decrease of ~~$28,000~~$7,000 or ~~3.2%~~0.8%. Professional services ~~decreased $28,000~~increased $17,000 or ~~10.4%~~7.0% to ~~$242,000~~$259,000 as of March 31, ~~2020. The decrease was~~2021 due to ~~consent~~increased consulting fees ~~paid to~~associated with goodwill impairment testing and broker fees resulting from the ~~Corporation’s previous auditors for a review~~issuance of ~~the 2018 10K in the first quarter of 2019.~~subordinated debt. Pennsylvania shares tax expense amounted to ~~$224,000~~$313,000 for the three months ended March 31, ~~2020,~~2021, an increase of ~~$32,000~~$89,000 or ~~16.7%~~39.7% as compared to the ~~same~~ three months ~~in 2019.~~ended March 31, 2020. The increase was the result of an increase in total equity.

~~FDIC~~Federal Deposit Insurance Corporation (“FDIC”) insurance expense ~~decreased $65,000 or 100.0%~~increased $87,000 for the three months ended March 31, ~~2020.~~2021. This ~~decrease~~increase was due to small bank assessment credits received from the FDIC for the ~~fourth~~first quarter of ~~2019~~2020 effectively reducing the expense for the first quarter of 2020.FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to ~~$209,000~~$200,000 for the three months ended March 31, ~~2020,~~2021, a decrease of ~~$2,000~~$9,000 or ~~1.0%~~4.3% as compared to the ~~same~~ three months ~~of 2019.~~ended March 31, 2020. Data processing expenses amounted to $294,000 for the three months ended March 31, ~~2020, an increase of $27,000 or 10.1% as compared to the first quarter of 2019. The increase was a result of annual contracted pricing increases from our main third-party data processor.~~ 2021 and 2020.

Foreclosed assets held for resale expense decreased ~~$29,000 in~~$6,000 to $3,000 for the ~~first quarter of 2020. The decrease is the result of the Bank having fewer foreclosed properties in 2020.~~three months ended March 31, 2021. Advertising expense decreased ~~$62,000~~$19,000 or ~~40.5%~~20.9% during the three months ended March 31, ~~2020.~~2021. This decrease was due to a ~~more aggressive advertising approach~~decrease in ~~early 2019, as the first quarter of 2020 saw less~~civic and newspaper advertising ~~billboard~~as compared to the same period in 2020. Civic advertising ~~digital and social media~~was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor are still being affected. In addition, newspaper advertising ~~and ad creation.~~is down due to utilizing more digitally focused advertising mediums.

Other non-interest expense amounted to ~~$715,000~~$764,000 for the three months ended March 31, 2021, an increase of $49,000 or 6.9% as compared to the three months ended March 31, 2020. The increase was due to higher promotional expenses for free appraisals given by the Bank and fraud losses due to an isolated incident.

INCOME TAXES

Income tax expense amounted to $635,000 for the three months ended March 31, 2021, as compared to $197,000 for the three months ended March 31, 2020, an increase of ~~$72,000 or 11.2% as compared to the three months ended March 31, 2019.~~$438,000. The ~~increase~~effective total income tax rate was ~~due to an increase in the provision for unfunded commitments due to higher officer commitment balances requiring a reserve.~~

~~INCOME TAXES~~

~~Income tax expense amounted to $197,000~~14.1% for the three months ended March 31, ~~2020,~~2021 as compared to ~~$138,000~~8.8% for the three months ended March 31, ~~2019, an increase of $59,000. The effective total income tax rate was 8.8% for the first quarter of 2020 as compared to 5.8% for the first quarter of 2019.~~2020. The increase in the effective tax rate was mainly due to ~~a net decrease in tax-exempt income from investments in and loans to state and local units of government.~~higher overall operating income. The ~~Corporation~~Company recognized $101,000 of tax credits from low-income housing partnerships in the ~~first quarter of~~three months ended March 31, 2021 and 2020.

FINANCIAL CONDITION

SUMMARY

Total assets increased to ~~$1,027,207,000~~$1,215,521,000 as of March 31, ~~2020,~~2021, an increase of ~~$19,981,000~~$36,474,000 from year-end ~~2019.~~2020. Total assets as of December 31, ~~2019~~2020 amounted to ~~$1,007,226,000.~~

$1,179,047,000.

Total debt securities available-for-sale increased ~~$5,735,000~~$21,064,000 or ~~2.1%~~5.7% to ~~$283,663,000~~$387,775,000 as of March 31, ~~2020~~2021 from December 31, ~~2019.~~

2020.

Total loans increased ~~$13,884,000~~$2,379,000 or ~~2.1%~~0.3% to ~~$661,616,000~~$722,989,000 as of March 31, ~~2020~~2021 from December 31, ~~2019.~~2020. Loan demand grew in the three months ended March 31, ~~2020~~2021 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

Total deposits ~~decreased $26,831,000~~increased $40,369,000 or ~~3.5%~~4.3% to ~~$734,797,000~~$977,857,000 as of March 31, ~~2020~~2021 from December 31, ~~2019.~~2020. The ~~decrease~~increase was mainly due to the ~~call~~deposit of ~~$40,000,000 in brokered CDs.~~

government stimulus funds and PPP loan proceeds, and other normal fluctuations.

The ~~Corporation~~Company continues to maintain and manage its asset growth. The ~~Corporation’s~~Company’s strong equity capital position provides an opportunity to further leverage its asset growth. Total borrowings ~~increased~~decreased in the ~~first~~ three months ~~of 2020~~ended March 31, 2021 by ~~$46,716,000~~$2,071,000 to ~~$156,379,000~~$62,423,000 from ~~$109,663,000~~$64,494,000 as of December 31, ~~2019.~~2020. Borrowings ~~increased~~decreased mainly due to ~~decreased deposit balances and growth in~~ the ~~loan portfolio.~~

maturity of a long-term note.

Total stockholders’ equity ~~increased~~decreased to ~~$130,150,000~~$142,933,000 at March 31, ~~2020, an increase~~2021, a decrease of ~~$1,398,000~~$1,309,000 or ~~1.1%~~0.9% from December 31, ~~2019~~2020 due to ~~an increase~~a decrease in accumulated other comprehensive income ~~and~~offset by an increase in retained earnings.

SEGMENT REPORTING

Currently, management measures the performance and allocates the resources of the ~~Corporation~~Company as a single segment.

EARNING ASSETS

Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the ~~Corporation~~Company maximizes income. The earning asset ratio (average interest earning assets divided by average total assets) equaled 93.9% at March 31, 2021 and 92.8% at March 31, ~~2020 and 92.4% at March 31, 2019.~~2020. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and ~~investment~~ securities.

Our primary earning asset, total loans, increased to ~~$661,616,000~~$722,989,000 as of March 31, ~~2020,~~2021, up ~~$13,884,000,~~$2,379,000, or ~~2.1%~~0.3% since year-end ~~2019.~~2020. The loan portfolio continues to be well diversified. Non-performing assets increased since year-end ~~2019,~~2020, but overall asset quality has remained consistent. Total non-performing assets were ~~$7,699,000~~$7,299,000 as of March 31, ~~2020,~~2021, an increase of ~~$3,092,000,~~$180,000, or ~~67.1%~~2.5% from ~~$4,607,000~~$7,119,000 reported in non-performing assets as of December 31, ~~2019. Total allowance for loan losses to total non-performing assets was 93.25% as of March 31, 2020 and 152.05% at December 31, 2019.~~2020. The increase in non-performing assets during the first quarter of ~~2020~~2021 was mainly due to ~~several loans~~one loan that ~~were~~was moved to non-accrual status during the three months ended March 31, 2021. Total allowance for loan losses to total non-performing assets was 110.25% as of March 31, 2021 and 111.43% at December 31, 2020. See the Non-Performing Assets section on ~~Page 37~~page 41 for more information.

In addition to loans, another primary earning asset is our overall ~~investment~~securities portfolio, which increased in size from December 31, ~~2019~~2020 to March 31, ~~2020.~~2021. Debt securities available-for-sale amounted to ~~$283,663,000~~$387,775,000 as of March 31, ~~2020,~~2021, an increase of ~~$5,735,000~~$21,064,000 from year-end ~~2019.~~

2020.

Interest-bearing deposits in other banks increased as of March 31, ~~2020,~~2021, to ~~$1,013,000~~$28,188,000 from ~~$473,000~~$15,347,000 at year-end ~~2019.~~2020 due to increased cash held at the Federal Reserve Bank. Time deposits with other banks were $247,000 at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

LOANS

Total loans increased to ~~$661,616,000~~$722,989,000 as of March 31, ~~2020~~2021 as compared to ~~$647,732,000~~$720,610,000 as of December 31, ~~2019.~~2020. The table on page 1819 provides data relating to the composition of the ~~Corporation’s~~Company’s loan portfolio on the dates indicated. Total loans increased by ~~$13,884,000~~$2,379,000 or ~~2.1%~~0.3%.

Steady demand for borrowing by businesses (including loans issued through the Bank’s participation in the SBA’s Paycheck Protection Program) accounted for the ~~2.1%~~0.3% increase in the loan portfolio from December 31, ~~2019~~2020 to March 31, ~~2020. The Commercial and Industrial portfolio increased $311,000 to $87,023,000 as of March 31, 2020, as compared to $86,712,000 at December 31, 2019. The increase in~~2021. Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) decreased $579,000 or 0.6% to $91,296,000 at March 31, 2021 compared to $91,875,000 at December 31, 2020. The decrease in the Commercial and Industrial portfolio was ~~attributed~~mainly attributable to the portion of the Commercial and Industrial portfolio not attributable to the PPP loans which decreased $4,641,000 during the three months ended March 31, 2021. The decrease was mainly attributable to $681,000 in new loan originations ~~totaling $3,128,000~~ offset by a ~~$687,000~~$448,000 decrease in utilization of existing Commercial and Industrial lines of credit and loan payoffs of ~~$823,000,~~$3,650,000, as well as regular principal payments and other typical fluctuations ~~and activity~~ in the Commercial and Industrial portfolio. The portion of the Commercial and Industrial portfolio attributable to the PPP loans increased by $4,062,000 during the three months ended March 31, 2021 as a result of $15,335,000 in new PPP loans originated during the three months ended March 31, 2021 which were offset by $11,273,000 in PPP loans paid off/forgiven during the same three-month period. The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased ~~$16,995,000~~$6,261,000 or 1.3% to ~~$412,796,000~~$472,989,000 at March 31, ~~2020, as~~2021 compared to ~~$395,801,000~~$466,728,000 at December 31, ~~2019.~~2020. The increase was mainly the result of ~~$25,848,000~~$25,948,000 in new loan originations ~~net against~~and a ~~$286,000 decrease~~$6,543,000 increase in utilization of existing Commercial Real Estate lines of credit, ~~and $5,321,000~~offset by $15,914,000 in loan payoffs, in addition to regular principal payments and other typical ~~amortizations~~amortization in the Commercial Real Estate portfolio. Residential Real Estate loans decreased ~~$3,245,000~~$3,356,000 or 2.1% to ~~$156,105,000~~$153,627,000 at March 31, ~~2020, as~~2021 compared to ~~$159,350,000~~$156,983,000 at December 31, ~~2019.~~2020. The decrease was the result of ~~$4,012,000~~$8,492,000 in new loan originations ~~offset by~~and a ~~$150,000 decrease~~$958,000 increase in utilization of existing Residential Real Estate (Home Equity) lines of credit, offset by loan payoffs of ~~$3,054,000,~~$7,829,000, net loans sold of ~~$1,338,000~~$3,574,000 and regular principal payments and other typical amortization in the Residential Real Estate portfolio. Net loans sold ~~in the Residential Real Estate portfolio~~ for the three months ended March 31, ~~2020~~2021 consisted of total loans sold during the three months ended March 31, ~~2020~~2021 of ~~$3,044,000,~~$9,026,000, offset with loans opened and sold in the same quarter during the first quarter of ~~2020~~2021 which amounted to ~~$1,706,000.~~$5,452,000. The ~~Corporation~~Company continues to originate and sell certain long-term fixed rate residential mortgage loans which conform to secondary market requirements. The ~~Corporation~~Company derives ongoing income from the servicing of mortgages sold in the secondary market. The ~~Corporation~~Company continues its efforts to lend to creditworthy borrowers.

Management believes that the loan portfolio is well diversified. The total commercial portfolio was ~~$499,819,000~~$564,285,000 at March 31, ~~2020.~~2021. Of total loans, ~~$412,796,000~~$472,989,000 or ~~62.4%~~65.4% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings. The ~~Corporation~~Company continues to monitor these portfolios.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as ~~$645,852,000~~$698,390,000 or ~~97.8%~~96.6% of gross loans are graded Pass; ~~$31,000~~$1,018,000 or ~~0.1%~~0.2% are graded Special Mention; ~~$14,289,000~~$23,298,000 or ~~2.1%~~3.2% are graded Substandard; and $0 are graded Doubtful. The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower. See Note 4 — Loans and Allowance for Loan Losses for risk grading tables.

Overall, non-pass grades ~~decreased~~increased to ~~$14,320,000~~$24,316,000 at March 31, ~~2020,~~2021, as compared to ~~$14,887,000~~$24,137,000 at December 31, ~~2019.~~2020. Commercial and Industrial non-pass grades decreased to ~~$963,000~~$867,000 as of March 31, ~~2020~~2021 as compared to ~~$1,070,000~~$919,000 as of December 31, ~~2019.~~2020. Commercial Real Estate non-pass grades ~~decreased~~increased to ~~$12,229,000~~$21,791,000 as of March 31, ~~2020~~2021 as compared to ~~$12,534,000~~$21,789,000 as of December 31, ~~2019.~~2020. The Residential Real Estate and Consumer loan non-pass grades ~~decreased~~increased to ~~$1,128,000~~$1,658,000 as of March 31, ~~2020~~2021 as compared to ~~$1,283,000~~$1,429,000 as of December 31, ~~2019.~~

2020.

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

Total Loans



(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,
	2020		2019
					2021		2020
Commercial and Industrial	$	87,023	$	86,712	$	91,296	$	91,875
Commercial Real Estate		412,796		395,801		472,989		466,728
Residential Real Estate		156,105		159,350		153,627		156,983
Consumer		5,692		5,869		5,077		5,024
Total loans	$	661,616	$	647,732
Total Loans					$	722,989	$	720,610

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of March 31, ~~2020,~~2021, the allowance for loan losses was ~~$7,179,000~~$8,047,000 as compared to ~~$7,005,000~~$7,933,000 as of December 31, ~~2019.~~2020. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Management performs a quarterly analysis to determine the adequacy of the allowance for loan losses. The methodology in determining adequacy incorporates specific and general allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process. This assessment results in an allocated allowance. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority.

Management considers, based upon its methodology, that the allowance for loan losses is adequate to cover foreseeable future losses. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future. In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors ~~across all loan segments~~related to the local/regional economy were increased by two basis points ~~for~~across all loan segments during the first quarter of 2020, and increased by an additional basis point across all loan segments during the second quarter of 2020. The qualitative factor relating to the impact of external factors/conditions for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of 2020. The qualitative factors relating to the impact of external factors/conditions were increased by two additional basis points across all loan segments during the fourth quarter of 2020. No additional qualitative factor increases were performed during the first quarter of 2021. Modifications granted in compliance with Section 4013 of the CARES Act

are highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio. See Allowance for Loan Losses on page 15 for further discussion.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020. For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, net charge-offs as a percentage of average loans was 0.003% ~~and 0.012%, respectively.~~for each respective period. Net charge-offs amounted to ~~$20,000~~$21,000 for ~~the first three months of 2020 as compared to $75,000 for the first three months of 2019. The decrease in net charge-offs during~~ the three months ended March 31, ~~2020~~2021 as compared to $20,000 for the three months ended March 31, ~~2019 is mainly due to one charge-off that was completed during~~2020.

For the three months ended March 31, ~~2019 on a Commercial Real Estate loan to a landscaping company in the amount of $51,000.~~

~~For the first three months of 2020,~~2021, the provision for loan losses was ~~$194,000~~$135,000 as compared to ~~$92,000~~$194,000 for the ~~first~~ three months ~~of 2019.~~ended March 31, 2020. The provision, net of charge-offs and recoveries, resulted in the quarter end ~~Allowance~~allowance for ~~Loan Losses~~loan losses of ~~$7,179,000~~$8,047,000 of which ~~9.2%~~9.8% was attributed to the Commercial and Industrial component; ~~60.3%~~59.5% attributed to the Commercial Real Estate component; ~~22.9%~~20.0% attributed to the Residential Real Estate component; ~~1.6%~~1.1% attributed to the Consumer component; and ~~6.0%~~9.6% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page ~~13)~~12). The ~~Corporation~~Company determined that the provision for loan losses made during the current quarter was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of March 31, ~~2020.~~2021.

Analysis of Allowance for Loan Losses


(Dollars in thousands)	March 31,			March 31,			March 31,			March 31,
	2020			2019
Balance at beginning of the three month period	$	7,005		$	6,745
							2021			2020
Balance at beginning of period							$	7,933		$	7,005
Charge-offs:
Commercial and Industrial		4			—			13			4
Commercial Real Estate		—			64			—			—
Residential Real Estate		—			—			—			—
Consumer		16			15			10			16
		20			79
								23			20
Recoveries:
Commercial and Industrial		—			1			—			—
Commercial Real Estate		—			—			—			—
Residential Real Estate		—			2			—			—
Consumer		—			1			2			—
		—			4

								2			—

Net charge-offs		20			75			21			20
Additions charged to operations		194			92			135			194
Balance at end of the three month period	$	7,179		$	6,762

Balance at end of period							$	8,047		$	7,179

Ratio of net charge-offs during the period to average loans outstanding during the period		0.003	%		0.012	%		0.003	%		0.003	%
Allowance for loan losses to average loans outstanding during the period		1.097	%		1.101	%		1.116	%		1.097	%

It is the policy of management and the ~~Corporation’s~~Company’s Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio. A provision for loan losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio. This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.

The loan review process, which is conducted quarterly, is an integral part of the Bank’s evaluation of the loan portfolio. A detailed quarterly analysis to determine the adequacy of the ~~Corporation’s~~Company’s allowance for loan losses is reviewed by the Board of Directors.

With the Bank’s manageable level of net charge-offs and the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.116% at March 31, 2021 and 1.097% at March 31, ~~2020 and 1.101% at March 31, 2019.~~2020.

NON-PERFORMING ASSETS

The table on page 4043 details the ~~Corporation’s~~Company’s non-performing assets and impaired loans as of the dates indicated. Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or ~~interest, even though the loan currently is performing.~~interest. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period income. A modification of a loan constitutes a ~~troubled debt restructuring (“TDR”)~~TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession that the ~~Corporation~~Company would not otherwise consider. Modifications to loans classified as TDRs generally include reductions in contractual interest rates, principal deferments and extensions of maturity dates at a stated interest rate lower than the current market for a new loan with similar risk characteristics. While unusual, there may be instances of loan principal forgiveness. Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in Section 4013 of the CARES Act are met. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

Total non-performing assets amounted to ~~$7,699,000~~$7,299,000 as of March 31, ~~2020,~~2021, as compared to ~~$4,607,000~~$7,119,000 as of December 31, ~~2019.~~2020. The economy, in particular, the political unrest both domestic and abroad, the ~~looming~~recent presidential election, the partial and full shutdowns of various ~~tariffs both imposed and threatened,~~government offices, the ~~concerns and discussions of a potential~~ recession resulting from the ~~recent rate cuts by the Fed,~~COVID-19 pandemic, and the ~~continued slowness in the housing industries in our market areas has~~large unemployment totals have had a direct effect on the ~~Corporation’s~~Company’s non-performing assets. The ~~Corporation~~Company is closely monitoring its Commercial Real Estate portfolio because of the current uncertain economic environment. Non-accrual loans totaled ~~$6,951,000~~$7,245,000 as of March 31, ~~2020,~~2021, as compared to ~~$4,388,000~~$7,078,000 as of December 31, ~~2019.~~2020. There were no Foreclosed ~~assets held~~Assets Held for ~~resale increased to $169,000~~Resale as of March 31, ~~2020,~~2021, compared to ~~$119,000~~$28,000 as of December 31, ~~2019.~~2020. Loans past-due 90 days or more and still accruing interest amounted to ~~$579,000~~$54,000 at March 31, ~~2020,~~2021, as compared to ~~$100,000~~$13,000 as of December 31, ~~2019.~~2020. At March 31, ~~2020,~~2021, loans past-due 90 days or more and still accruing interest consisted of ~~two Commercial and Industrial loans and~~ one Commercial Real Estate loan which ~~were all~~was well secured and in the process of collection.

The increase in non-accrual loans at March 31, 2020, as compared to December 31, 2019 is mainly due to the addition of several large loans/loan relationships to non-accrual status during the first quarter of 2020. Five loans to a plastic processing company focused on non-post-consumer recycling totaling $1,323,000 were moved to non-accrual status during the first quarter of 2020 due to strained liquidity and the borrower’s inability to make required payments, as the owner has ceased operations and is exploring options to liquidate the business. A loan in the amount of $846,000 to a golf course and catering venue was moved to non-accrual status during the first quarter of 2020 due to the borrower’s inability to make monthly payments due to cash flow challenges exacerbated by the seasonality of the industry. A residential mortgage in the amount of $356,000 to the owner of a manufacturing company was also moved to non-accrual status during the first quarter of 2020, as poor payment performance has led to foreclosure proceedings related to the associated property.

Non-performing assets to total loans was ~~1.16%~~1.01% at March 31, ~~2020~~2021 and ~~0.71%~~0.99% at December 31, ~~2019.~~2020. Non-performing assets to total assets was ~~0.75%~~0.60% at both March 31, ~~2020~~2021 and ~~0.46% at~~ December 31, ~~2019.~~2020. The allowance for loan losses to total non-performing assets was ~~93.25%~~110.25% as of March 31, ~~2020~~2021 as compared to ~~152.05%~~111.43% as of December 31, ~~2019.~~2020. Additional detail can be found on page 4043 in the Non-Performing Assets and Impaired Loans table and page 2224 in the Non-Performing Assets table. Asset quality is a priority and the ~~Corporation~~Company retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation efforts.

~~Potential problem loans are defined as performing~~Performing substandard loans which are not deemed to be ~~impaired. These loans~~impaired have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future. ~~Potential problem~~Performing substandard loans not deemed to be impaired amounted to ~~$2,861,000~~$10,157,000 at March 31, ~~2020,~~2021, compared to ~~$4,074,000~~$9,992,000 at December 31, ~~2019.~~

2020.

Impaired loans were ~~$13,696,000~~$15,365,000 at March 31, ~~2020~~2021 and ~~$12,954,000~~$15,054,000 at December 31, ~~2019.~~2020. The largest impaired loan relationship at March 31, 2021 and December 31, 2020 consisted of a non-performing ~~participation~~ loan to a student housing holding company which was secured by commercial real estate. ~~The Corporation’s share of~~At March 31, 2021, the loan ~~at March~~carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date, compared to December 31, 2020 ~~was $3,176,000,~~when the loan carried a balance of $3,090,000, net of ~~$1,904,000~~$1,989,000 that had been charged off to date. The second largest impaired loan relationship at March 31, 2021 and December 31, 2020 consisted of one performing loan to a student housing holding company, which was classified as a TDR. The loan was secured by commercial real estate and carried a balance of ~~$2,977,000~~$2,913,000 as of March 31, 2021, net of $943,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $2,929,000, net of $943,000 that had been charged off to date. The third largest

impaired loan relationship at March 31, 2021 and December 31, 2020 consisted of a substandard performing loan to a developer of a residential ~~sub-division in the amount of $1,463,000, which~~sub-division. The loan was secured by commercial real estate and classified as a TDR.

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

The ~~Corporation~~Company estimates impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the ~~$13,696,000~~$15,365,000 in impaired loans at March 31, ~~2020,~~2021, none were located outside of the ~~Corporation’s~~Company’s primary market area.

The outstanding recorded investment of ~~loans categorized as~~ TDRs ~~was $8,470,000~~ as of March 31, ~~2020 as compared to $8,678,000 as of~~2021 and December 31, ~~2019.~~2020 was $9,675,000 and $9,563,000, respectively. The ~~decrease~~increase in TDRs at March 31, ~~2020~~2021 as compared to December 31, ~~2019~~2020 is mainly attributable to three loans that were modified as TDRs during the three months ended March 31, 2021, net against payments and payoffs on existing ~~troubled debt restructurings~~TDRs that were completed during the ~~first quarter of 2020.~~three months ended March 31, 2021. Of the ~~twenty-six~~thirty-two restructured loans at March 31, ~~2020,~~2021, six loans ~~are~~were classified in the Commercial and Industrial portfolio, ~~nineteen~~twenty-five loans ~~are~~were classified in the Commercial Real Estate portfolio, and one loan iswas classified in the Residential Real Estate portfolio. At March 31, 2020, nine Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,377,000 were not in compliance with the terms of their restructure, compared to March 31, 2019 when six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $597,000 and one Commercial and Industrial loan classified as a TDR with a recorded investment of $5,000 were not in compliance with the terms of their restructure. Troubled debt restructurings at March 31, ~~2020~~2021 consisted of ~~eleven~~thirteen term modifications beyond the original stated term, three ~~interest~~ rate modifications, and ~~eleven~~fifteen payment modifications. ~~At March 31, 2020, there~~There was also one troubled debt restructuring that experienced all three types of modifications—payment, rate, and term. TDRs are separately evaluated for payment disclosures, and if necessary, a specific allocation is established. There were no specific allocations ~~of $1,000~~ attributable to the TDRs at ~~both~~ March 31, ~~2020 and~~2021 or December 31, ~~2019, respectively.~~2020. There were no unfunded commitments attributable to the TDRs at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

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

One Commercial Real Estate loan in the amount of $92,000 that was modified as a TDR within the twelve months preceding March 31, 2021 experienced a payment default during the three months ended March 31, 2021. No loans were modified as TDRs within the twelve months preceding March 31, 2020. Of the loans that were modified as TDRs during the twelve months preceding March 31, 2019, two Commercial Real Estate Loans with a combined recorded investment of $113,000 experienced payment defaults during the three months ended March 31, 2019.

The ~~Corporation’s~~Company’s non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year ~~end.~~end, unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.

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

Improving loan quality is a priority. The ~~Corporation~~Company actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in ~~2020.~~2021. Excluding the assets disclosed in the Non-Performing Assets and Impaired Loans tables on page 4043 and the Troubled Debt Restructurings section in Note 4 — Loans and Allowance for Loan Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination.

The economic climate is unclear at this time. The COVID-19 pandemic has caused much upheaval and uncertainty in the national and state economy. Experts at all levels are uncertain as to the intermediate or long term affects that may arise. ~~Borrowers~~The Company may experience ~~difficulty,~~difficulties collecting monthly payments on time from its borrowers, property values may decline, and certain types of loans may need to be modified, which could cause a rise in the level of impaired loans, ~~and~~ non-performing assets, charge-offs, and ~~delinquencies could rise and possibly require additional increases in~~delinquencies. Should such metrics increase, additions to the ~~Corporation’s~~balance of the Company’s allowance for loan ~~losses.~~

~~In addition, regulatory authorities, as an integral part~~losses could be required. The extent of ~~their examinations, periodically review~~ the ~~allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at~~impact of the ~~time~~COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments including the duration and spread of ~~examination.~~

the outbreak.

A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Non-Performing Assets and Impaired Loans


(Dollars in thousands)	March 31,			December 31,			March 31,			December 31,
	2020			2019
Non-Performing Assets:
							2021			2020
Non-performing assets
Non-accrual loans	$	6,951		$	4,388		$	7,245		$	7,078
Foreclosed assets held for resale		169			119			—			28
Loans past-due 90 days or more and still accruing interest		579			100			54			13
Total non-performing assets	$	7,699		$	4,607		$	7,299		$	7,119

Impaired Loans:

Impaired loans
Non-accrual loans	$	6,951		$	4,388		$	7,245		$	7,078
Accruing TDRs		6,745			8,566			8,120			7,976
Total impaired loans		13,696			12,954			15,365			15,054
Allocated allowance for loan losses		(1	)		(1	)		(5)			(8)
Net investment in impaired loans	$	13,695		$	12,953		$	15,360		$	15,046


Impaired loans with a valuation allowance	$	134		$	28		$	483		$	486
Impaired loans without a valuation allowance		13,562			12,926			14,882			14,568
Total impaired loans	$	13,696		$	12,954		$	15,365		$	15,054


Allocated valuation allowance as a percent of impaired loans		0.01	%		0.01	%		0.03	%		0.05	%
Impaired loans to total loans		2.07	%		2.00	%		2.13	%		2.09	%
Non-performing assets to total loans		1.16	%		0.71	%		1.01	%		0.99	%
Non-performing assets to total assets		0.75	%		0.46	%		0.60	%		0.60	%
Allowance for loan losses to impaired loans		52.42	%		54.08	%		52.37	%		52.70	%
Allowance for loan losses to total non-performing assets		93.25	%		152.05	%		110.25	%		111.43	%

Real estate mortgages comprise ~~86.0%~~86.7% of the loan portfolio as of March 31, ~~2020,~~2021, as compared to ~~85.7%~~86.6% as of December 31, ~~2019.~~2020. Real estate mortgages consist of both residential and commercial real estate loans. The real estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities. Also, the residential real estate loan portfolio is largely comprised of fixed rate mortgages. The real estate loans are concentrated primarily in the ~~Corporation’s~~Company’s market area and are subject to risks associated with the local economy. The commercial real estate loans typically reprice approximately every three to five years and are also concentrated in the ~~Corporation’s~~Company’s market area. The ~~Corporation’s~~Company’s loss exposure on its impaired loans continues to be mitigated by collateral positions on these loans. The allocated allowance for loan losses associated with impaired loans is generally computed based upon the related collateral value of the loans. The collateral values are determined by recent appraisals or Certificates of Inspection, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management’s expertise and knowledge of the borrower and the borrower’s business.

GOODWILL

The Company performs an annual evaluation for impairment. Any impairment of goodwill results in a charge to income. The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price. Any change in the assumptions which we utilize to determine the carrying value of goodwill could adversely impact our results of operations.

The Company periodically assesses whether events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. Management notes that the emergence of COVID-19 as a global pandemic during 2020 resulted in significant deterioration in general economic conditions and the environment in which the Company operates. This uncertainty in 2020 resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered through the end of 2020 and into 2021, and the Company’s core income has remained strong due to SBA lender fees, lending activity and steady net interest income.

DEPOSITS, ~~AND~~ OTHER BORROWED FUNDS

AND SUBORDINATED DEBT

Consumer and commercial retail deposits are attracted primarily by the Bank’s eighteen full service office locations, one loan production office and through its internet banking presence. The Bank offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products. The Bank regularly reviews competing financial institutions’ interest rates, especially when establishing interest rates on certificates of deposit.

Total deposits ~~decreased $26,831,000~~increased $40,369,000 to ~~$734,797,000~~$977,857,000 as of March 31, ~~2020~~2021 as non-interest bearing deposits increased by ~~$18,381,000~~$28,082,000 and interest bearing deposits ~~decreased~~increased by ~~$45,212,000~~$12,287,000 from year-end ~~2019. Total~~2020. The increase in deposits ~~decreased due to~~was the ~~Corporation calling $40,000,000 worth~~result of ~~brokered CDs~~government stimulus funds, PPP loan proceeds and other normal fluctuations in deposits during the ~~quarter~~three months ended March 31, ~~2020 due to the changing rate environment.~~2021. Total short-term and long-term borrowings ~~increased~~decreased to ~~$156,379,000~~$62,423,000 as of March 31, ~~2020,~~2021, from ~~$109,663,000~~$64,494,000 at year-end ~~2019, an increase~~2020, a decrease of ~~$46,716,000~~$2,071,000 or ~~42.6%~~3.2%. The ~~increase~~decrease in total borrowings was mainly the result of ~~decreasing deposit balances~~the maturity of a long-term note.

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the “2020 Notes”). The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and ~~increases in the loan and securities portfolios.~~then float based on a benchmark rate (as defined).

CAPITAL STRENGTH

Normal increases in capital are generated by net income, less dividends paid out. During the ~~first~~ three months ~~of the year,~~ended March 31, 2021, net income less dividends paid increased capital by ~~$483,000.~~$2,231,000. Accumulated other comprehensive income (loss) derived from net unrealized gains on debt securities available-for-sale also impacts capital. At December 31, ~~2019~~2020 accumulated other comprehensive income was ~~$4,221,000.~~$12,870,000. Accumulated other comprehensive income stood at ~~$4,826,000~~$8,947,000 at March 31, ~~2020, an increase~~2021, a decrease of ~~$605,000.~~$3,923,000. Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank’s ~~investment~~securities portfolio, as well as its decision to sell securities at a gain or loss. In order to protect the Bank from market risk in the event of further interest rate increases, the Bank chose to sell a portion of its securities during the first three months of 2020 at an overall net gain of $71,000. The fluctuations from net unrealized gains on debt securities available-for-sale do not affect regulatory capital, as the Bank elected to opt-out of the inclusion of this item with the filing of the March 31, 2015 Call Report.

The ~~Corporation~~Company held 231,612 shares of common stock as treasury stock at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. This had an effect of reducing our total stockholders’ equity by $5,709,000 as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Total stockholders’ equity was ~~$130,150,000~~$142,933,000 as of March 31, ~~2020,~~2021, and ~~$128,752,000~~$144,242,000 as of December 31, ~~2019.~~

2020.

At March 31, ~~2020~~2021 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III. The following table presents the Bank’s capital ratios as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:

							To Be Well Capitalized
							Under Prompt
	March 31,			December 31,			Corrective Action
	2020			2019			Regulations


														To Be Well
														Capitalized
														Under Prompt
										March 31,		December 31,		Corrective Action
										2021		2020		Regulations
Tier 1 leverage ratio (to average assets)		9.54	%		9.42	%		5.00	%	10.87	%	10.81	%	5.00	%
Common Equity Tier 1 capital ratio (to risk-weighted assets)		13.24	%		13.50	%		6.50	%	16.06	%	15.99	%	6.50	%
Tier 1 risk-based capital ratio (to risk-weighted assets)		13.24	%		13.50	%		8.00	%	16.06	%	15.99	%	8.00	%
Total risk-based capital ratio		14.27	%		14.53	%		10.00	%	17.12	%	17.05	%	10.00	%

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis as of January 1, 2019. As of March 31, ~~2020,~~2021, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

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

LIQUIDITY

The ~~Corporation’s~~Company’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and to provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity is needed to provide the funding requirements of depositors’ withdrawals, loan growth, and other operational needs.

Sources of liquidity are as follows:

·●

Growth in the core deposit base;

·●

Proceeds from sales or maturities of ~~investment~~ securities;

·●

Payments received on loans and mortgage-backed securities;

·●

Overnight correspondent bank borrowings on various credit lines, notes, etc., with various levels of capacity;

·●

Securities sold under agreements to repurchase; and

·●

Brokered CDs.

At March 31, ~~2020,~~2021, the ~~Corporation~~Company had ~~$367,482,000~~$416,223,000 in ~~available~~maximum borrowing capacity at FHLB ~~(which takes into account~~(inclusive of the outstanding balances of FHLB long-term notes and FHLB short-term borrowings); the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was ~~$5,743,000.~~

$3,787,000.

The ~~Corporation~~Company enters into “Repurchase Agreements” in which it agrees to sell securities subject to an obligation to repurchase the same or similar securities. Because the agreement both entitles and obligates the ~~Corporation~~Company to repurchase the assets, the ~~Corporation~~Company may transfer legal control of the securities while still retaining effective control. As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and

act as an additional source of liquidity. Securities sold under agreements to repurchase were ~~$12,551,000~~$22,423,000 at March 31, ~~2020.~~

2021.

Asset liquidity is provided by ~~investment~~ securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks. The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities. Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing deposits. Also, short-term borrowings provide funds to meet liquidity needs.

Net cash flows provided by operating activities were ~~$1,365,000 and $3,247,000 at~~$2,233,000 as of March 31, ~~2020 and 2019 respectively.~~2021, compared to $1,365,000 as of March 31, 2020. Net income amounted to $3,878,000 for the three months ended March 31, 2021 and $2,053,000 for the three months ended March 31, ~~2020 and $2,243,000 for the three months ended March 31, 2019.~~2020. During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, net premium amortization on ~~investment~~ securities amounted to $658,000 and $498,000, respectively. Gains on sales of mortgage loans were $354,000 as of March 31, 2021, compared to $93,000 as of March 31, 2020. Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $1,984,000 during the three months ended March 31, 2021 and ~~$733,000, respectively. Proceeds~~proceeds (including gains) from sales of mortgage loans originated for resale exceeded ~~cash utilized for~~ originations of mortgage loans originated for resale by $37,000 ~~and $286,000~~during the three months ended March 31, 2020. Net securities gains were $115,000 for the three months ended March 31, ~~2020 and 2019, respectively. Net~~2021, compared to net securities losses ~~were~~of $467,000 for the three months ended March 31, ~~2020, compared to net securities gains of $103,000 for the three months ended March 31, 2019.~~2020. Other assets increased by ~~$537,000~~$889,000 and ~~$1,860,000~~$537,000 during the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. Other liabilities increased by $433,000 during the three months ended March 31, 2021 and decreased by $1,159,000 during the three months ended March 31, ~~2020, compared to an increase of $1,198,000 during the three months ended March 31, 2019.~~

2020.

Investing activities used cash of $26,534,000 and $21,909,000 during the three months ended March 31, 2021 and 2020, ~~and provided cash of $26,139,000 during the three months ended March 31, 2019.~~respectively. Net activity in the available-for-sale securities portfolio (including proceeds from ~~sale,~~sales, maturities, and redemptions net against purchases) used cash of $26,687,000 during the three months ended March 31, 2021, compared to $5,396,000 during the three months ended March 31, ~~2020 and provided cash of $36,894,000 during the three months ended March 31, 2019.~~2020. Net cash used to originate loans amounted to ~~$13,877,000~~$62,000 and ~~$11,891,000~~$13,877,000 during the three months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively.

Financing activities provided cash of $37,015,000 and $18,618,000 during the three months ended March 31, 2021 and 2020, ~~and used cash of $28,378,000~~respectively. Deposits increased by $40,369,000 during the three months ended March 31, ~~2019. Deposits~~2021 and decreased by $26,831,000 during the three months ended March 31, ~~2020 and~~2020. Short-term borrowings increased by ~~$25,867,000~~$2,929,000 and $51,716,000 during the three months ended March 31, ~~2019. Short-term borrowings increased by $51,716,000~~2021 and ~~decreased by $42,966,000 during the three months ended March 31,~~ 2020, ~~and 2019,~~ respectively. Repayment of long-term borrowings amounted to $5,000,000 for both the three months ended March 31, 2021 and 2020, respectively. Dividends paid amounted to $1,647,000 and ~~$10,000,000~~$1,570,000 for the three months ended March 31, ~~2019. Dividends paid amounted to $1,570,000~~2021 and ~~$1,557,000 during the three months ended March 31,~~ 2020, ~~and 2019,~~ respectively.

Managing liquidity remains an important segment of asset/liability management. The overall liquidity position of the ~~Corporation~~Company is maintained by an active asset/liability management committee. The ~~Corporation~~Company believes that its core deposit base is stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and are measured on a monthly basis. These measurements indicate that liquidity generally remains stable and exceeds the ~~Corporation’s~~Company’s minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly utilizing new options, such as the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The ~~Corporation’s~~Company’s market risk is composed primarily of interest rate risk. The ~~Corporation’s~~Company’s interest rate risk results from timing differences in the repricing of assets, liabilities, off-balance sheet instruments, and changes in relationships between rate indices and the potential exercise of explicit or embedded options.

Increases in the level of interest rates also may adversely affect the fair value of the ~~Corporation’s~~Company’s securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the ~~Corporation’s~~Company’s interest-earning assets, which could adversely affect the ~~Corporation’s~~Company’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the ~~Corporation’s~~Company’s stockholders’ equity, if retained. Under FASB ASC 320-10,Investments – Debt Securities, changes in the unrealized gains and losses, net of taxes, on debt securities classified as available-for-sale are reflected in the ~~Corporation’s~~Company’s stockholders’ equity. The ~~Corporation~~Company does not own any trading assets.

Asset/Liability Management

The principal objective of asset/liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The ~~Corporation~~Company actively manages the interest rate sensitivity of its assets and liabilities. Several techniques are used for measuring interest rate sensitivity. Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a given time period, referred to as a rate sensitivity gap. If more assets than liabilities mature or reprice within the time frame, the ~~Corporation~~Company is asset sensitive. This position would contribute positively to net interest income in a rising rate environment. Conversely, if more liabilities mature or reprice, the ~~Corporation~~Company is liability sensitive. This position would contribute positively to net interest income in a falling rate environment. The ~~Corporation’s~~Company’s cumulative gap at one year indicates the ~~Corporation~~Company is liability sensitive at March 31, ~~2020.~~2021.

Earnings at Risk

The Bank’s Asset/Liability Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the ~~Corporation’s~~Company’s Board of Directors. The ~~Corporation~~Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet beyond interest rate sensitivity gap. Although the ~~Corporation~~Company continues to measure its interest rate sensitivity gap, the ~~Corporation~~Company utilizes additional modeling for interest rate risk in the overall balance sheet. Earnings at risk and economic values at risk are analyzed.

Earnings simulation modeling addresses earnings at risk and net present value estimation addresses economic value at risk. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk to the ~~Corporation.~~Company.

Earnings Simulation Modeling

The ~~Corporation’s~~Company’s net income is affected by changes in the level of interest rates. Net income is also subject to changes in the shape of the yield curve. For example, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and increased liability rates, while a steepening would result in increased earnings as earning asset yields widen.

Earnings simulation modeling is the primary mechanism used in assessing the impact of changes in interest rates on net interest income. The model reflects management’s assumptions related to asset yields and rates paid on liabilities, deposit sensitivity, size and composition of the balance sheet. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Earnings at risk is the change in net interest income from a base case scenario under various scenarios of rate shock increases and decreases in the interest rate earnings simulation model.

The table ~~below~~on the next page presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates. The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors. The earnings simulation model projects net interest income would decrease ~~4.83%~~3.49%, ~~10.05%~~7.32% and ~~14.76%~~10.90% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest

income would decrease ~~1.74%~~2.43% and ~~6.33%~~7.97% in the 100 and 200 basis point decreasing rate scenarios presented. All of these forecasts are within the ~~Corporation’s~~Company’s one year policy guidelines.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current unprecedented low interest rate environment with federal funds trading in the 0 – 25 basis point range. Results of the decreasing basis point declining scenarios are affected by the fact that many of the ~~Corporation’s~~Company’s interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points. However, the ~~Corporation’s~~Company’s interest-sensitive assets are able to decline by these amounts. For the three months ended March 31, ~~2020,~~2021, the cost of interest-bearing liabilities averaged ~~1.30%~~0.63%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged ~~4.30%~~3.84%.

Net Present Value Estimation

The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. At March 31, ~~2020,~~2021, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with decreases of ~~79.23%~~24.83% and ~~190.73%~~68.60%, respectively. Additionally, net present value is projected to increase ~~50.60%~~12.54%, ~~78.02%~~17.35%, and ~~89.72%~~16.61% in the 100, 200, and 300 basis point immediate increase scenarios, respectively. These scenarios presented are within the ~~Corporation’s~~Company’s policy limits, aside from the 100 basis point immediate decrease scenario at ~~(79.23)~~(24.83)% vs. a policy limit of (20)% and the 200 basis point immediate decrease scenario at ~~(190.73)~~(68.60)% vs. a policy limit of (30.0)%.

The computation of the effects of hypothetical interest rate changes are based on many assumptions. They should not be relied upon solely as being indicative of actual results, since the computations do not account for actions management could undertake in response to changes in interest rates.

Effect of Change in Interest Rates

	~~Projected Change~~
	Projected Change
Effect on Net Interest Income
1-Year Net Income Simulation Projection
+300 bp Shock vs. Stable Rate	(10.90)	~~(14.76~~	) %
+200 bp Shock vs. Stable Rate	(7.32)	~~(10.05~~	) %
+100 bp Shock vs. Stable Rate	(3.49)	~~(4.83~~	) %
Flat rate
~~-100~~ ‒100 bp Shock vs. Stable Rate	(2.43)	~~(1.74~~	) %
~~-200~~ ‒200 bp Shock vs. Stable Rate	(7.97)	~~(6.33~~	) %

Effect on Net Present Value of Balance Sheet
Static Net Present Value Change
+300 bp Shock vs. Stable Rate	16.61	~~89.72~~	%
+200 bp Shock vs. Stable Rate	17.35	~~78.02~~	%
+100 bp Shock vs. Stable Rate	12.54	~~50.60~~	%
Flat rate
~~-100~~ ‒100 bp Shock vs. Stable Rate	(24.83)	~~(79.23~~	) %
~~-200~~ ‒200 bp Shock vs. Stable Rate	(68.60)	~~(190.73~~	) %

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information with respect to quantitative and qualitative disclosures about market risk is included in the information under Management’s Discussion and Analysis in Item 2.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. First Keystone Corporation maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) designed to ensure that information required to be disclosed in the reports that the ~~Corporation~~Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those disclosure controls and procedures performed as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer of the ~~Corporation~~Company concluded that the ~~Corporation’s~~Company’s disclosure controls and procedures were effective as of March 31, ~~2020.~~2021.

Changes in internal control over financial reporting. There were no other changes in the ~~Corporation’s~~Company’s internal control over financial reporting during the fiscal quarter ended March 31, ~~2020,~~2021, that materially affected, or are reasonably likely to materially affect, the ~~Corporation’s~~Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings~~

Item 1. Legal Proceedings

Although the ~~Corporation~~Company is subject to various claims and legal actions that occur from time to time in the ordinary course of business, the ~~Corporation~~Company is not party to any pending legal proceedings that management believes could have a material adverse effect on its business, results of operations, financial condition or cash flows.

~~Item 1A.~~

~~Risk Factors~~

Item 1A. Risk Factors

~~The COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, liquidity, and financial condition.~~

The World Health Organization has declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate. The COVID-19 pandemic and similar issues in the future could have a material adverse effect on our ability to operate, results of operations, liquidity, and financial condition. Several public health organizations have recommended, and some local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances. Such preventive measures, or others we may voluntarily put in place, may have a material adverse effect on our business for an indefinite period, such as the limitation of hours at branch locations, decreased employee availability, disruptions to the businesses of our vendors, and others. Our customers may also face these and other challenges, which could lead to a disruption in demand for our services. Although these disruptions may continue to occur, the long-term economic impact and near-term financial impacts of the COVID-19 pandemic, including but not limited to, possible impairment and other charges, cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.

~~Other than the item listed above, there~~There have been no material changes to the risk factors disclosed in Item 1A “Risk Factors” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 — January 31, ~~2020~~2021	―	―	―	120,000
February 1 — February ~~29, 2020~~28, 2021	―	―	―	120,000
March 1 — March 31, ~~2020~~2021	―	―	―	120,000
Total	―	―	―	120,000

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

~~Item 3.~~

(a)

~~Defaults Upon Senior Securities~~

~~None.~~

~~Item 4.~~

~~Mine Safety Disclosures~~

~~Not applicable.~~

~~Item 5.~~

~~Other Information~~

~~None.~~

~~Item 6.~~

~~Exhibits and Reports on Form 8-K~~

~~(a)~~

Exhibits required by Item 601 Regulation S-K


Exhibit Number		Description of Exhibit
3.1	3i	Articles of Incorporation, as amended (Incorporated by reference to Exhibit ~~3(i)~~3.1 to the Registrant’s Report on Form 8-K dated August 28, 2018).

	~~3ii~~
3.2		By-Laws, as amended and restated (Incorporated by reference to Exhibit ~~3(ii)~~3.2 to the Registrant’s Report on Form 8-K dated August 28, 2018).

	~~10.1(a)~~
10.1(a)		Supplemental Employee Retirement Plan – J. Gerald Bazewicz (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

	~~10.1(b)~~
10.1(b)		Supplemental Employee Retirement Plan – David R. Saracino (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

	~~10.1(d)~~
10.1(d)		Supplemental Employee Retirement Plan – Elaine Woodland (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

	~~10.2~~
10.2		Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018).*

~~10.4~~

First Keystone Corporation 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2006).*

First Keystone Corporation Directors and Senior Management Code of Ethics (Incorporated by reference to Exhibit 99.1 to Registrant’s Report on Form 8-K dated August 27, 2013).

	~~31.1~~
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.**

	~~31.2~~
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.**

	~~32.1~~
32.1		Section 1350 Certification of Chief Executive Officer.**

	~~32.2~~
32.2		Section 1350 Certification of Chief Financial Officer.**

	~~101.INS~~
101.INS		Inline XBRL Instance Document.**

	~~101.SCH~~
101.SCH		Inline XBRL Taxonomy Extension Schema Document.**

	~~101.CAL~~
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.**

	~~101.DEF~~
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.**

	~~101.LAB~~
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.**

	~~101.PRE~~
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.**

104		Cover Page Interactive Data File (Formatted as Inline XBRL and Contained in Exhibit 101)

* Denotes a compensatory plan.

~~Denotes a compensatory plan.~~

~~Filed herewith.~~

** Filed herewith.

The ~~Corporation~~Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the ~~Corporation’s~~Company’s principal executive offices.

FIRST KEYSTONE CORPORATION

SIGNATURES

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


	FIRST KEYSTONE CORPORATION
		Registrant


May ~~8, 2020~~7, 2021		/s/ Elaine A. Woodland
		Elaine A. Woodland
		President and Chief Executive Officer
		(Principal Executive Officer)



May ~~8, 2020~~7, 2021		/s/ Diane C.A. Rosler
		Diane C.A. Rosler
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

~~INDEX TO EXHIBITS~~

	~~Exhibit~~	~~Description~~
	3i	~~Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to the Registrant’s Report on Form 8-K dated August 28, 2018).~~

~~3ii~~

~~By-Laws, as amended and restated (Incorporated by reference to Exhibit 3(ii) to the Registrant’s Report on Form 8-K dated August 28, 2018).~~

~~10.1(a)~~

Supplemental Employee Retirement Plan – J. Gerald Bazewicz (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

~~10.1(b)~~

Supplemental Employee Retirement Plan – David R. Saracino (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

~~10.1(d)~~

Supplemental Employee Retirement Plan – Elaine Woodland (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

~~10.2~~

Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018).*

~~10.4~~

First Keystone Corporation 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2006).*

~~First Keystone Corporation Directors and Senior Management Code of Ethics (Incorporated by reference to Exhibit 99.1 to Registrant’s Report on Form 8-K dated August 27, 2013).~~

~~31.1~~

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.**

~~31.2~~

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.**

~~32.1~~

Section 1350 Certification of Chief Executive Officer.**

~~32.2~~

Section 1350 Certification of Chief Financial Officer.**

~~101.INS~~

XBRL Instance Document.**

~~101.SCH~~

XBRL Taxonomy Extension Schema Document.**

~~101.CAL~~

XBRL Taxonomy Extension Calculation Linkbase Document.**

~~101.DEF~~

XBRL Taxonomy Extension Definition Linkbase Document.**

~~101.LAB~~

XBRL Taxonomy Extension Label Linkbase Document.**

~~101.PRE~~

XBRL Taxonomy Extension Presentation Linkbase Document.**

~~Denotes a compensatory plan.~~

~~Filed herewith.~~

The Corporation will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Corporation’s principal executive offices.

~~Pennsylvania~~		~~23-2249083~~
Pennsylvania		23-2249083
(State or other jurisdiction of		~~(I.R.S. Employer~~
incorporation or organization)		(I.R.S. Employer Identification No.)



111 West Front Street, Berwick, PA		18603
(Address of principal executive offices)		(Zip Code)


Large accelerated filer	☐	¨	Accelerated filer	x ☐
Non-accelerated filer	☒	¨	Smaller reporting company	x ☒
Emerging growth company	☐	¨



Title of each class		Trading symbol	Name of each exchange on which registered
Common stock	~~FKYS~~	FKYS	OTC: Pink

	x
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

	¨
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	(Unaudited)
(Dollars in thousands, except share and per share data)	March 31,		December 31,
	2021		2020
ASSETS
Cash and due from banks	$	8,706	$	8,833
Interest-bearing deposits in other banks		28,188		15,347
Total cash and cash equivalents		36,894		24,180
Time deposits with other banks		247		247
Debt securities available-for-sale, at fair value		387,775		366,711
Marketable equity securities, at fair value		1,761		1,646
Restricted investment in bank stocks, at cost		2,047		2,247

Loans		703,609		703,310
Loans held for sale		19,380		17,300
Allowance for loan losses		(8,047)		(7,933)
Net loans		714,942		712,677
Premises and equipment, net		18,454		18,678
Operating lease right-of-use assets		1,101		1,061
Accrued interest receivable		4,358		4,544
Cash surrender value of bank owned life insurance		24,343		24,194
Investments in low-income housing partnerships		1,373		1,466
Goodwill		19,133		19,133
Foreclosed assets held for resale		—		28
Other assets		3,093		2,235
TOTAL ASSETS	$	1,215,521	$	1,179,047

LIABILITIES
Deposits:
Non-interest bearing	$	226,581	$	198,499
Interest bearing		751,276		738,989
Total deposits		977,857		937,488
Short-term borrowings		22,423		19,494
Long-term borrowings		40,000		45,000
Subordinated debentures		25,000		25,000
Operating lease liabilities		1,558		1,513
Accrued interest payable		637		405
Deferred income taxes		957		2,146
Other liabilities		4,156		3,759
TOTAL LIABILITIES		1,072,588		1,034,805

STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares as of March 31, 2021 and December 31, 2020; issued 0 as of March 31, 2021 and December 31, 2020		0		0
Common stock, par value $2.00 per share; authorized 20,000,000 shares as of March 31, 2021 and December 31, 2020; issued 6,131,585 as of March 31, 2021 and 6,115,281 as of December 31, 2020; outstanding 5,899,973 as of March 31, 2021 and 5,883,669 as of December 31, 2020		12,263		12,231
Surplus		39,894		39,543
Retained earnings		87,538		85,307
Accumulated other comprehensive income		8,947		12,870
Treasury stock, at cost, 231,612 shares as of March 31, 2021 and December 31, 2020		(5,709)		(5,709)

TOTAL STOCKHOLDERS’ EQUITY		142,933		144,242
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,215,521	$	1,179,047

	2020			2019
OPERATING ACTIVITIES
Net income	$	2,053		$	2,243
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		194			92
Depreciation and amortization		488			254
Net premium amortization on investment securities		498			733
Deferred income tax (benefit) expense		(247	)		62
Gains on sales of mortgage loans		(93	)		(40	)
Proceeds from sales of mortgage loans originated for resale		3,137			1,250
Originations of mortgage loans originated for resale		(3,100	)		(964	)
Net securities losses (gains)		467			(103	)
Net losses on sales of foreclosed real estate held for resale, including write-downs		—			20
(Increase) decrease in accrued interest receivable		(217	)		367
Earnings on investment in bank owned life insurance		(154	)		(155	)
Net losses on disposals of premises and equipment		—			4
Increase in other assets		(537	)		(1,860	)
Amortization of investment in real estate ventures		91			88
(Decrease) increase in accrued interest payable		(56	)		58
(Decrease) increase in other liabilities		(1,159	)		1,198
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,365			3,247

INVESTING ACTIVITIES
Proceeds from sales of debt securities available-for-sale		11,182			32,374
Proceeds from maturities and redemptions of debt securities available-for-sale		15,324			4,520
Purchases of debt securities available-for-sale		(31,902	)		—
Net change in restricted investment in bank stocks		(2,516	)		1,173
Net increase in loans		(13,877	)		(11,891	)
Purchases of premises and equipment		(120	)		(234	)
Proceeds from sales of foreclosed assets held for resale		—			197
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(21,909	)		26,139

FINANCING ACTIVITIES
Net (decrease) increase in deposits		(26,831	)		25,867
Net increase (decrease) in short-term borrowings		51,716			(42,966	)
Repayment of long-term borrowings		(5,000	)		(10,000	)
Common stock issued		303			278
Dividends paid		(1,570	)		(1,557	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		18,618			(28,378	)

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,926	)		1,008
CASH AND CASH EQUIVALENTS, BEGINNING		10,724			10,950
CASH AND CASH EQUIVALENTS, ENDING	$	8,798		$	11,958

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		2,448			2,635
Income taxes paid		(249	)		62

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Loans transferred to foreclosed assets held for resale		50			—
Common stock subscription receivable		7			—
Right-of-use assets obtained in exchange for lease liabilities		—			1,465

(Dollars in thousands)
	Carrying		Fair Value Measurements at March 31, 2020
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,785	$	7,785	$	―	$	―	$	7,785
Interest-bearing deposits in other banks		1,013		—		1,013		—		1,013
Time deposits with other banks		247		—		251		—		251
Restricted investment in bank stocks		6,740		—		6,740		—		6,740
Net loans		654,437		—		—		681,960		681,960
Mortgage servicing rights		278		—		—		278		278
Accrued interest receivable		3,622		—		3,622		—		3,622

FINANCIAL LIABILITIES:
Demand, savings and other deposits		538,396		—		538,396		—		538,396
Time deposits		196,401		—		199,153		—		199,153
Short-term borrowings		106,379		—		106,310		—		106,310
Long-term borrowings		50,000		—		52,570		—		52,570
Accrued interest payable		550		—		550		—		550

OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS		―		―		―		―		―