FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

~~FOR THE~~ THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2022 AND ~~2016~~2021

(Unaudited)

(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended
�� September 30, September 30,
2017 2016 2017 2016
INTEREST INCOME
Interest and fees on loans $ 5,662 $ 5,509 $ 16,718 $ 16,433
Interest and dividend income on investment securities:
Taxable 1,103 1,362 3,317 4,306
Tax-exempt 1,290 957 3,733 2,819
Dividends 11 16 33 47
Dividend income on restricted investment in bank stocks 89 73 244 197
Interest on interest-bearing deposits in other banks 9 9 26 25
Total interest income 8,164 7,926 24,071 23,827
INTEREST EXPENSE
Interest on deposits 1,055 803 2,955 2,482
Interest on short-term borrowings 369 113 767 274
Interest on long-term borrowings 363 393 1,111 1,148
Total interest expense 1,787 1,309 4,833 3,904
Net interest income 6,377 6,617 19,238 19,923
Provision for loan losses 84 1,133 167 1,700
Net interest income after provision for loan losses 6,293 5,484 19,071 18,223
NON-INTEREST INCOME
Trust department 203 208 660 638
Service charges and fees 460 475 1,357 1,336
Bank owned life insurance income 160 161 478 490
ATM fees and debit card income 351 323 1,034 966
Gains on sales of mortgage loans 81 101 205 258
Net investment securities gains 414 395 886 789
Gains from life insurance proceeds — 458 — 458
Other 44 37 126 189
Total non-interest income 1,713 2,158 4,746 5,124
NON-INTEREST EXPENSE
Salaries and employee benefits 3,050 2,606 8,823 7,979
Occupancy, net 423 512 1,340 1,301
Furniture and equipment 146 146 422 410
Computer expense 252 248 765 718
Professional services 201 140 634 442
Pennsylvania shares tax 157 189 568 566
FDIC insurance 81 85 241 402
ATM and debit card fees 184 184 509 490
Data processing fees 148 149 442 417
Foreclosed assets held for resale expense 13 89 119 201
Advertising 146 93 408 256
Other 880 637 2,339 2,050
Total non-interest expense 5,681 5,078 16,610 15,232
Income before income tax expense 2,325 2,564 7,207 8,115
Income tax expense 269 420 946 1,304
NET INCOME $ 2,056 $ 2,144 $ 6,261 $ 6,811
PER SHARE DATA
Net income per share:
Basic $ 0.36 $ 0.38 $ 1.10 $ 1.21
Diluted 0.36 0.38 1.10 1.21
Dividends per share 0.27 0.27 0.81 0.81


(Dollars in thousands, except per share data)	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

INTEREST INCOME
Interest and fees on loans	$	8,486	$	7,989	$	16,662	$	16,143
Interest and dividend income on securities:
Taxable		1,716		1,360		3,287		2,600
Tax-exempt		849		862		1,685		1,702
Dividends		11		12		24		24
Dividend income on restricted investment in bank stocks		49		27		70		53
Interest on interest-bearing deposits in other banks		—		9		12		12
Total interest income		11,111		10,259		21,740		20,534
INTEREST EXPENSE
Interest on deposits		706		783		1,391		1,578
Interest on short-term borrowings		182		20		210		40
Interest on long-term borrowings		168		211		358		428
Interest on subordinated debt		274		274		544		547
Total interest expense		1,330		1,288		2,503		2,593
Net interest income		9,781		8,971		19,237		17,941
Provision for loan losses		218		135		437		270
Net interest income after provision for loan losses		9,563		8,836		18,800		17,671
NON-INTEREST INCOME
Trust department		268		265		518		518
Service charges and fees		549		481		1,058		856
Increase in cash surrender value of life insurance		148		150		296		299
ATM fees and debit card income		558		568		1,067		1,084
Net (losses) gains on sales of mortgage loans		—		308		(34)		662
Net securities (losses) gains		(68)		28		(131)		143
Other		59		65		129		178
Total non-interest income		1,514		1,865		2,903		3,740
NON-INTEREST EXPENSE
Salaries and employee benefits		3,462		3,461		7,016		6,761
Occupancy, net		478		483		970		980
Furniture and equipment expense		147		142		302		280
Computer expense		358		315		728		585
Professional services		370		273		668		532
Pennsylvania shares tax		324		313		648		626
FDIC insurance, net		120		120		257		207
ATM and debit card fees		242		283		370		483
Data processing fees		251		323		509		617
Foreclosed assets held for resale expense, net		—		—		—		3
Advertising		118		109		190		181
Other		725		725		1,453		1,489
Total non-interest expense		6,595		6,547		13,111		12,744
Income before income tax expense		4,482		4,154		8,592		8,667
Income tax expense		660		549		1,227		1,184
NET INCOME	$	3,822	$	3,605	$	7,365	$	7,483
PER SHARE DATA
Net income per share:
Basic	$	0.64	$	0.61	$	1.24	$	1.27
Diluted		0.64		0.61		1.24		1.27
Dividends per share		0.28		0.27		0.56		0.55

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

(Dollars in thousands) Three Months Ended
September 30,
2017 2016
Net Income $ 2,056 $ 2,144

Other comprehensive loss:
Unrealized net holding gains (losses) on available-for-sale investment securities arising during the period, net of income taxes of $134 and $(836), respectively 251 (1,642 )

Less reclassification adjustment for net gains included in net income, net of income taxes of $(140) and $(134), respectively (a) (b) (274 ) (261 )

Total other comprehensive loss (23 ) (1,903 )

Total Comprehensive Income $ 2,033 $ 241


(Dollars in thousands)	Three Months Ended
	June 30,
	2022		2021

Net Income	$	3,822	$	3,605

Other comprehensive (loss) income:
Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $(2,850) and $583, respectively		(10,723)		2,198

Less reclassification adjustment for net gains included in net income, net of income taxes of $(6) and $(0), respectively (a) (b)		(21)		—

Total other comprehensive (loss) income		(10,744)		2,198

Total Comprehensive (Loss) Income	$	(6,922)	$	5,803

~~(a) Gross amounts are included in net investment securities gains on the Consolidated Statements of Income~~


(Dollars in thousands)	Six Months Ended
	June 30,
	2022		2021

Net Income	$	7,365	$	7,483

Other comprehensive loss:
Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $(7,445) and $(459), respectively		(28,006)		(1,725)

Less reclassification adjustment for net gains included in net income, net of income taxes of $(6) and $(0), respectively (a) (b)		(21)		—

Total other comprehensive loss		(28,027)		(1,725)

Total Comprehensive (Loss) Income	$	(20,662)	$	5,758

______________________________

(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.

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

(Dollars in thousands) Nine Months Ended
September 30,
2017 2016
Net Income $ 6,261 $ 6,811

Other comprehensive income:
Unrealized net holding gains on available-for-sale investment securities arising during the period, net of income taxes of $1,874 and $2,700, respectively 3,619 5,216

Less reclassification adjustment for net gains included in net income, net of income taxes of $(301) and $(268), respectively (a) (b) (585 ) (521 )

Total other comprehensive income 3,034 4,695

Total Comprehensive Income $ 9,295 $ 11,506

~~(a) Gross amounts are included in net investment securities 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

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2022 AND ~~2016~~2021

(Unaudited)

(Dollars in thousands, except per share data)
Accumulated
Other Total
Common Stock Retained Comprehensive Treasury Stockholders’
Shares Amount Surplus Earnings (Loss) Income Stock Equity

Balance at January 1, 2017 5,904,563 $ 11,809 $ 35,047 $ 70,004 $ (1,419 ) $ (5,756 ) $ 109,685
Net Income 6,261 6,261
Other comprehensive income, net of taxes 3,034 3,034
Issuance of common stock under dividend reinvestment plan 34,790 70 862 932
Dividends - $0.81 per share (4,603 ) (4,603 )
Balance at September 30, 2017 5,939,353 $ 11,879 $ 35,909 $ 71,662 $ 1,615 $ (5,756 ) $ 115,309

Balance at January 1, 2016 5,853,317 $ 11,707 $ 33,830 $ 66,622 $ 2,035 $ (5,756 ) $ 108,438
Net Income 6,811 6,811
Other comprehensive income, net of taxes 4,695 4,695
Issuance of common stock under dividend reinvestment plan 39,604 79 941 1,020
Dividends - $0.81 per share (4,562 ) (4,562 )
Balance at September 30, 2016 5,892,921 $ 11,786 $ 34,771 $ 68,871 $ 6,730 $ (5,756 ) $ 116,402


								Accumulated
(Dollars in thousands, except								Other				Total
per share data)	Common Stock					Retained		Comprehensive		Treasury		Stockholders’
	Shares	Amount		Surplus		Earnings		(Loss) Income		Stock		Equity
Balance at January 1, 2022	6,178,835	$	12,358	$	40,940	$	93,378	$	7,588	$	(5,709)	$	148,555
Net Income							3,543						3,543
Other comprehensive loss, net of taxes									(17,282)				(17,282)
Issuance of common stock under dividend reinvestment plan	16,297		32		372								404
Dividends - $0.28 per share							(1,665)						(1,665)
Balance at March 31, 2022	6,195,132	$	12,390	$	41,312	$	95,256	$	(9,694)	$	(5,709)	$	133,555
Net Income							3,822						3,822
Other comprehensive loss, net of taxes									(10,744)				(10,744)
Issuance of common stock under dividend reinvestment plan	17,840		36		379								415
Dividends - $0.28 per share							(1,669)						(1,669)
Balance at June 30, 2022	6,212,972	$	12,426	$	41,691	$	97,409	$	(20,438)	$	(5,709)	$	125,379


								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
Net Income							3,605						3,605
Other comprehensive income, net of taxes									2,198				2,198
Issuance of common stock under dividend reinvestment plan	14,976		30		329								359
Dividends - $0.27 per share							(1,593)						(1,593)
Balance at June 30, 2021	6,146,561	$	12,293	$	40,223	$	89,550	$	11,145	$	(5,709)	$	147,502

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~FOR THE NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2022 AND ~~2016~~2021

(Unaudited)


(Dollars in thousands)	2022		2021

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,365	$	7,483
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		437		270
Depreciation and amortization		528		514
Net premium amortization on securities		1,633		1,366
Deferred income tax expense benefit		(25)		(150)
Net losses (gains) on sales of mortgage loans		34		(662)
Proceeds from sales of mortgage loans originated for sale		4,429		21,427
Originations of mortgage loans originated for sale		(6,068)		(20,490)
Net securities losses (gains)		131		(143)
(Increase) decrease in accrued interest receivable		(112)		170
Increase in cash surrender value of bank owned life insurance		(296)		(299)
Net losses on disposals of premises and equipment		10		1
Increase in other assets		(639)		(1,116)
Amortization of investment in low-income housing partnerships		120		185
Increase (decrease) in accrued interest payable		22		(121)
Increase in other liabilities		37		241
NET CASH PROVIDED BY OPERATING ACTIVITIES		7,606		8,676
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equity securities and debt securities available-for-sale		170		—
Proceeds from maturities and redemptions of debt securities available-for-sale		28,871		30,836
Purchases of debt securities available-for-sale		(38,324)		(65,305)
Net decrease in time deposits with other banks		247		—
Net change in restricted investment in bank stocks		(3,834)		(359)
Net increase in loans		(50,331)		(21,649)
Purchase of premises and equipment		(325)		(131)
Purchase of investment in real estate venture		(645)		—
Proceeds from sales of foreclosed assets held for resale		—		28
NET CASH USED IN INVESTING ACTIVITIES		(64,171)		(56,580)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(84,361)		125,859
Net increase in short-term borrowings		102,346		7,005
Repayment of finance lease obligations		(5)		(5)
Repayment of long-term borrowings		(10,000)		(10,000)
Common stock issued		805		729
Dividends paid		(3,334)		(3,240)
NET CASH PROVIDED BY FINANCING ACTIVITIES		5,451		120,348

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(51,114)		72,444
CASH AND CASH EQUIVALENTS, BEGINNING		61,338		24,180
CASH AND CASH EQUIVALENTS, ENDING	$	10,224	$	96,624

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	2,481	$	2,714
Income taxes paid		949		1,401
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Purchased securities settling after quarter end		—		5,783
Loans transferred from held for sale portfolio		(6,652)		—
Common stock subscription receivable		14		13
Right-of-use assets obtained in exchange for lease liabilities		35		33

(Dollars in thousands)
2017 2016
OPERATING ACTIVITIES
Net income $ 6,261 $ 6,811
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 167 1,700
Depreciation and amortization 841 885
Net premium amortization on investment securities 3,544 2,896
Deferred income tax expense 25 124
Gains on sales of mortgage loans (205 ) (258 )
Proceeds from sales of mortgage loans originated for resale 6,749 7,088
Originations of mortgage loans originated for resale (7,846 ) (9,594 )
Gains on sales of investment securities (886 ) (789 )
Net (gains) losses on sales of foreclosed real estate held for resale, including write-downs (26 ) 110
(Increase) decrease in accrued interest receivable (117 ) 352
Earnings on investment in bank owned life insurance (478 ) (490 )
Gain from bank-owned life insurance proceeds — (458 )
Decrease (increase) in other assets 110 (761 )
Amortization of investment in real estate ventures 121 132
Increase in accrued interest payable 78 8
(Decrease) increase in other liabilities (436 ) 17
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,902 7,773
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale 77,710 66,814
Proceeds from maturities and redemptions of investment securities available-for-sale 15,518 13,108
Purchases of investment securities available-for-sale (72,735 ) (48,345 )
Proceeds from maturities and redemptions of investment securities held-to-maturity 4 9
Net change in restricted investment in bank stocks 1,005 137
Net (increase) decrease in loans (19,291 ) 3,788
Proceeds from bank-owned life insurance — 1,290
Purchases of premises and equipment (173 ) (243 )
Purchase of investment in real estate venture (239 ) (1,178 )
Proceeds from sales of foreclosed assets held for resale 398 232
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,197 35,612
FINANCING ACTIVITIES
Net increase in deposits 33,734 29,271
Net decrease in short-term borrowings (28,081 ) (60,895 )
Proceeds from long-term borrowings — 10,000
Repayment of long-term borrowings (10,094 ) (5,086 )
Common stock issued 932 984
Dividends paid (4,603 ) (4,562 )
NET CASH USED IN FINANCING ACTIVITIES (8,112 ) (30,288 )
INCREASE IN CASH AND CASH EQUIVALENTS 1,987 13,097
CASH AND CASH EQUIVALENTS, BEGINNING 9,128 9,008
CASH AND CASH EQUIVALENTS, ENDING $ 11,115 $ 22,105
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 4,755 $ 3,896
Income taxes paid 1,200 873
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Purchased securities settling after quarter end — 1,262
Loans transferred to foreclosed assets held for resale 177 200
Loans transferred (from) to held for sale portfolio — (171 )
Common stock subscription receivable — 36

See accompanying notes to consolidated financial statements.

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 ― BASIS OF PRESENTATION, ~~AND~~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 ~~U.S.~~accounting principles generally accepted ~~accounting principles~~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 and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017,~~2022, are not necessarily indicative of the results for the year ending December 31, ~~2017.~~2022. 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, ~~2016.~~2021.

~~For comparative purposes, the September 30, 2016 balances have been reclassified to conform to the September 30, 2017 presentation. Such reclassifications had no impact on net income.~~

Subsequent Events

The ~~Corporation~~Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of ~~September~~June 30, ~~2017~~2022 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. In October 2017, the Corporation purchased a property at a cost of $2,387,000 which the Corporation has been operating as a banking branch in Stroudsburg, Pennsylvania since 2007. Previous to the purchase settlement date, the property was leased and accounted for under the guidelines of a capital lease in the total assets of the Corporation.

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

Recently adopted ASUs:

~~Except as disclosed below, there~~There were no ~~new accounting pronouncements affecting the Corporation~~ASUs adopted during the ~~nine months ended September 30, 2017 that were not already adopted by the Corporation.~~first two quarters of 2022.

~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09,~~~~Revenue from Contracts with Customers (Topic 606)~~~~, which supersedes the revenue requirements in~~~~Revenue Recognition (Topic 605).~~ This ASU requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The ASU is effective for annual reporting periods beginning after December 31, 2016, including interim periods within the reporting period. Early application is not permitted. In August 2015, the FASB issued an update ASU 2015-14 which approved a one-year delay of the effective date of this standard. The deferral would require public entities to apply the standard for annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued an update ASU 2016-08 which updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. In April 2016, the FASB issued an update ASU 2016-10, that updates the standard by identifying performance obligations and licenses of intellectual property, which clarifies the guidance surrounding licensing arrangements and the identification of performance obligations. In May 2016, the FASB issued an update ASU 2016-12 which articulates narrow-scope improvements and practical expedients. In December, the FASB issued an update ASU 2016-20. The amendments affect narrow aspects of the guidance issued in ASU 2014-09 including Loan Guarantee Fees, Contract Costs, Provisions for Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining Performance Obligations, Disclosure of Prior Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liability, Advertising Costs, Fixed Odds Wagering Contracts in the Casino Industry, and Costs Capitalized for Advisors to Private Funds and Public Funds. In February 2017, the FASB issued an update ASU 2017-05 with amendments to clarify that a financial asset is within the scope of Subtopic 610.20 if it meets the definition of an in substance nonfinancial asset. The Corporation’s revenue has been more significantly weighted towards net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard. The Corporation is continuing to assess its revenue streams and reviewing its contracts with customers that are potentially affected by the new guidance including wealth and asset management revenue, fees on deposits, gains and losses on the sale of other real estate owned, credit and debit card interchange fees. The Corporation will adopt the requirements of the new standard on January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Corporation will recognize the cumulative effect of adopting this ASU as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Corporation will also be subject to expanded disclosure requirements upon adoption for which the Corporation is still in the process of evaluating.

~~In January 2016, the FASB issued ASU No. 2016-01,~~~~Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities~~. The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, the guidance revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with fair value of financial instruments. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

~~In February 2016, the FASB issued ASU 2016-02,~~~~Leases (Topic 842)~~. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this ASU will result in an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities for operating leases in which the Corporation is the lessee. The Corporation has not yet determined the impact ASU 2016-02 will have on its consolidated financial statements.

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. The~~Instruments. ASU 2016-13 requires ~~that~~ financial assets measured at amortized cost ~~should~~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 ~~allowance for~~measurement of expected credit losses ~~should reflect management’s~~is based on relevant information about past events, including historical experience, current ~~estimate~~conditions, and reasonable and supportable forecasts that affect the collectability of ~~credit losses that are expected to occur over~~ the ~~remaining life of a financial asset. This~~reported amount. ASU 2016-13 is ~~in contrast to existing guidance whereby credit losses generally are not recognized until they are incurred. For public companies, this update will be~~ effective for ~~fiscal years~~annual periods and interim periods within those annual periods beginning after December 15, 2019. In November 2019, ~~including interim periods within those fiscal years. Early application will be permitted~~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 ~~all entities for~~smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018. While~~2022. It is currently unclear how the ~~Corporation~~adoption of this standard will impact the Company’s consolidated financial statements, but the Company is currently evaluating the provisions of ~~the~~ ASU 2016-13 to determine the potential impact that the adoption of the ~~new~~ standard ~~will~~may have on the ~~Corporation’s consolidated financial statements, it~~Company. The Company has taken steps to prepare for the implementation when it becomes effective, such asas: forming an internal committee, gathering pertinent data, consulting with outside professionals, subscribing to a new software system, and ~~begun evaluating its current IT systems.~~running existing and new methodologies concurrently through the period of implementation.

In ~~August 2016,~~March 2022, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ASU ~~2016-15,~~2022-02, ~~Classification of Certain Cash Receipts~~Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and ~~Cash Payments.~~Vintage Disclosures~~The amendments are intended~~, which eliminates the accounting guidance on troubled debt restructurings (“TDRs”) by creditors that have adopted the current expected credit losses (“CECL”) model and enhances disclosure requirements for certain loan refinancing and restructurings by creditors made to ~~reduce diversity in practice. The guidance clarifies the classification of various business activities as financing, operating or investing activity.~~borrowers experiencing financial

difficulty. The ASU ~~contains additional~~also amends the guidance ~~clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class~~on “vintage disclosures” to require disclosure of ~~cash flows (including when reasonable judgment is required to estimate and allocate cash flows) versus when an entity should classify~~current-period gross charge-offs by year of origination. For entities that have not yet adopted ASU 2016-13, the ~~aggregate amount into one class of cash flows on the basis of predominance. The~~ amendments in ASU 2022-02 are effective ~~for public business entities for fiscal years,~~upon adoption of ASU 2016-13. Entities may elect to apply the guidance on TDR recognition and ~~interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted.~~measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively. If an entity ~~early adopts~~elects to adopt the ~~amendments in an interim period, any adjustments~~updated guidance on TDR recognition and measurement prospectively, the guidance should be ~~reflected as~~applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures should be adopted prospectively. The Company plans to adopt ASU 2022-02 upon the ~~beginning~~adoption of ~~the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Corporation~~ASU 2016-13 and is currently ~~assessing~~evaluating the provisions of ASU 2022-02 and ASU 2016-13 to determine the potential impact ~~that this guidance~~the new standard will have ~~on its consolidated financial statements and related disclosures.~~

~~In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04,~~~~Intangibles – Goodwill and Other (Topic 350)~~: Simplifying the Test for Goodwill Impairment. The ASU simplifies 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 its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial ~~position or results of operations.~~statements.

~~In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-07,~~~~Compensation - Retirement Benefits (Topic 715)~~: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments apply to all entities that offer employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715, Compensation — Retirement Benefits. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments also allow only the service cost component to be eligible for capitalization when applicable (e.g., as a cost of internally manufactured inventory or a self-constructed asset). The ASU is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

~~In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-08,~~~~Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20)~~: Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Corporation is currently assessing the impact that this guidance will have on its consolidated financial statements and related disclosures.

NOTE 3 —~~INVESTMENT~~ SECURITIES

The ~~Corporation~~Company classifies its ~~investment~~ securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase. ~~Investment securities~~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. ~~Investment securities~~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 ~~and equity securities~~ 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 (loss) income ~~(loss)~~(AOCI) in the ~~Consolidated Balance Sheets~~consolidated balance sheets and ~~Consolidated Statements~~consolidated statements of ~~Changes~~changes in ~~Stockholders’ Equity.~~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 ~~investment~~ securities gains and losses. The cost of ~~investment~~ 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 ~~investment~~debt securities classified as “Available-For-Sale” ~~or “Held-to-Maturity”~~ were as follows at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016:~~2021:

	Available-for-Sale Securities

										Debt Securities Available-for-Sale
(Dollars in thousands)			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
September 30, 2017:	Cost		Gains		Losses			Value
										Amortized		Unrealized		Unrealized		Fair
June 30, 2022:										Cost		Gains		Losses		Value
U.S. Treasury securities	$	—	$	—	$	—		$	—	$	20,228	$	—	$	(1,270)	$	18,958
Obligations of U.S. Government Corporations and Agencies:
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgage-backed		87,287		239		(987	)		86,539		113,450		14		(9,219)		104,245
Other		23,092		201		(253	)		23,040		5,988		4		(53)		5,939
Other mortgage backed securities											40,815		—		(2,259)		38,556
Obligations of state and political subdivisions		217,639		4,448		(1,376	)		220,711		175,292		1,011		(11,767)		164,536
Asset backed securities											32,365		—		(1,005)		31,360
Corporate debt securities		29,724		73		(727	)		29,070		47,994		156		(1,484)		46,666
Marketable equity securities		809		923		—			1,732
Total	$	358,551	$	5,884	$	(3,343	)	$	361,092	$	436,132	$	1,185	$	(27,057)	$	410,260

~~Held-to-Maturity Securities~~

~~(Dollars in thousands)~~

~~Gross~~

~~Amortized~~

~~Unrealized~~

~~Fair~~

~~September 30, 2017:~~

~~Cost~~

~~Gains~~

~~Losses~~

~~Value~~

~~Obligations of U.S. Government Corporations and Agencies:~~

~~Mortgage-backed~~

—

~~Total~~

—

Available-for-Sale Securities
(Dollars in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2016: Cost Gains Losses Value
U.S. Treasury securities $ 1,008 $ 2 $ — $ 1,010
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed 112,155 83 (1,331 ) 110,907
Other 21,399 82 (511 ) 20,970
Obligations of state and political subdivisions 211,154 2,776 (2,796 ) 211,134
Corporate debt securities 35,178 4 (1,206 ) 33,976
Marketable equity securities 810 830 — 1,640
Total $ 381,704 $ 3,777 $ (5,844 ) $ 379,637

Held-to-Maturity Securities
(Dollars in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2016: Cost Gains Losses Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed $ 4 $ — $ — $ 4
Total $ 4 $ — $ — $ 4


	Debt Securities Available-for-Sale
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2021:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	7,825	$	—	$	(96)	$	7,729
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgage-backed		116,039		560		(1,688)		114,911
Other		7,636		5		(65)		7,576
Other mortgage backed securities		39,881		99		(430)		39,550
Obligations of state and political subdivisions		175,021		11,709		(554)		186,176
Asset backed securities		36,555		143		(156)		36,542
Corporate debt securities		45,354		448		(370)		45,432
Total	$	428,311	$	12,964	$	(3,359)	$	437,916

Securities Available-for-Sale with an aggregate fair value of ~~$302,579,000~~$288,785,000 at ~~September~~June 30, ~~2017~~2022 and ~~$320,319,000~~$401,861,000 at December 31, ~~2016, and securities Held-to-Maturity with an aggregate book value of $0 at September 30, 2017 and $4,000 at December 31, 2016,~~2021, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase ~~debtor in possession funds~~ and the Federal Discount Window aggregating ~~$226,380,000~~$236,643,000 at ~~September~~June 30, ~~2017~~2022 and ~~$221,818,000~~$318,074,000 at December 31, ~~2016.~~

2021.

The amortized cost and estimated fair value ~~and weighted average yield~~ of debt ~~and equity~~ securities, by contractual maturity, are shown below at ~~September~~June 30, ~~2017.~~2022. 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)
September 30, 2017
Available-For-Sale Held-To-Maturity
U.S. Government Obligations U.S. Government
Corporations & of State Corporate Marketable Corporations &
U.S. Treasury Agencies & Political Debt Equity Agencies
Securities Obligations¹ Subdivisions² Securities Securities³ Obligations¹
Within 1 Year:
Amortized cost $ — $ ― $ 1,642 $ 533 $ ― $ ―
Fair value — ― 1,657 520 ― ―
Weighted average yield — ― 2.55 % 2.32 % ― ―

1 - 5 Years:
Amortized cost — 6,858 28,807 6,391 ― —
Fair value — 6,831 29,091 6,365 ― —
Weighted average yield — 2.09 % 2.76 % 2.35 % ― —

5 - 10 Years:
Amortized cost ― 40,792 71,628 22,800 ― ―
Fair value ― 40,012 72,657 22,185 ― ―
Weighted average yield ― 2.10 % 3.29 % 2.68 % ― ―

After 10 Years:
Amortized cost ― 62,729 115,562 — 809 ―
Fair value ― 62,736 117,306 — 1,732 ―
Weighted average yield — 2.23 % 3.51 % — 5.46 % —

Total:
Amortized cost $ — $ 110,379 $ 217,639 $ 29,724 $ 809 $ —
Fair value — 109,579 220,711 29,070 1,732 —
Weighted average yield — 2.18 % 3.33 % 2.60 % 5.46 % —


			June 30, 2022
			Debt Securities Available-For-Sale
(Dollars in thousands)				U.S. Government		Other		Obligations
				Agency &		Mortgage		of State		Asset		Corporate
	U.S. Treasury			Sponsored Agency		Backed Debt		& Political		Backed		Debt
	Securities			Obligations¹		Securities¹		Subdivisions		Securities		Securities
Within 1 Year:
Amortized cost	$	—		$	—	$	—	$	2,553	$	—	$	1,536
Fair value		—			—		—		2,554		—		1,534

1 - 5 Years:
Amortized cost		12,389			323		7,941		21,300		33		13,212
Fair value		11,902			321		7,748		21,056		33		13,246

5 - 10 Years:
Amortized cost		7,839			13,904		2,713		30,191		—		33,246
Fair value		7,056			13,834		2,615		29,294		—		31,886

After 10 Years:
Amortized cost		—			105,211		30,161		121,248		32,332		—
Fair value		—			96,029		28,193		111,632		31,327		—

Total:
Amortized cost	$	20,228		$	119,438	$	40,815	$	175,292	$	32,365	$	47,994
Fair value		18,958			110,184		38,556		164,536		31,360		46,666

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

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

²~~Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.~~

³~~Marketable equity securities are not considered to have defined maturities and are included in the after ten year category.~~

There were no aggregate ~~investments~~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 ~~September~~June 30, ~~2017.~~2022. 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~~There were 0 proceeds from sales of investments in ~~Available-for-Sale debt and equity securities~~Debt Securities Available-For-Sale for the three months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021. Therefore, there were ~~$25,718,000 and $39,406,000, respectively. Gross~~0 gains ~~realized on these sales were $414,000 and $497,000, respectively. Gross~~or losses realized onduring these ~~sales were $0 and $102,000, respectively.~~periods. There were no0 impairment losses realized on ~~Available-for-Sale equity securities for~~Debt Securities Available-For-Sale during the three months ended ~~September~~June 30, ~~2017 and 2016.~~2022 or 2021.

~~Proceeds~~There were 0 proceeds from sales of investments in ~~Available-for-Sale debt and equity securities~~Debt Securities Available-For-Sale for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021. Therefore , there were ~~$77,710,000 and $66,814,000, respectively. Gross~~0 gains ~~realized on these sales were $949,000 and $932,000, respectively. Gross~~or losses realized onduring these ~~sales were $63,000 and $143,000, respectively.~~periods. There were no0 impairment losses realized on ~~Available-for-Sale~~Debt Securities Available-For-Sale during the six months ended June 30, 2022 or 2021.

At June 30, 2022 and December 31, 2021, the Company had $1,661,000 and $1,962,000, respectively, in equity securities ~~for~~recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~2021:


(Dollars in thousands)	Six months ended		Six months ended
	June 30, 2022		June 30, 2021
Net (losses) and gains recognized during the period on equity securities	$	(158)	$	143
Less: Net gains recognized during the period on equity securities sold during the period		27		—
Net (losses) and gains recognized during the reporting period on equity securities still held at the reporting date	$	(131)	$	143

There were no0 proceeds from sales of investments in Held-to-Maturity debt securities during the ~~three~~six months ended June 30, 2022 or ~~nine month periods ended September 30, 2017 or 2016.~~2021. 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. ~~Investment securities~~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 ~~other-than-temporary impairment~~OTTI occurs on debt securities, the amount of the ~~other-than-temporary impairment~~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 ~~other-than-temporary impairment~~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 ~~other-than-temporary impairment~~OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total ~~other-than-temporary impairment~~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~~consolidated statements of ~~Income.~~income. The amount of the total ~~other-than-temporary impairment~~OTTI related to the other factors shall be recognized in other comprehensive (loss) income, ~~(loss),~~ net of applicable taxes. The previous amortized cost basis less the ~~other-than-temporary impairment~~OTTI recognized in earnings becomes the new amortized cost basis of the ~~investment.~~

security.

The fair market value of the equity securities tends to fluctuate with the overall equity markets as well as the trends specific to each institution. The equity securities portfolio is reviewed in a similar manner as that of the debt securities with greater emphasis placed on the length of time the market value has been less than the carrying value and the financial sector outlook. The Corporation also reviews dividend payment activities, levels of non-performing assets and loan loss reserves. The starting point for the equity analysis is the length and severity of market value decline. The realized loss is recognized as impairment charges on securities on the Consolidated Statements of Income. The amount of the total other-than-temporary impairment is recognized in other comprehensive income (loss), net of applicable taxes. The previous cost basis less the other-than-temporary impairment recognized in earnings becomes the new 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 ~~September~~June 30, ~~2017~~2022 or December 31, ~~2016.~~2021.

~~In accordance with disclosures required by FASB ASC 320-10-50,~~~~Investments - Debt and Equity Securities~~~~, the~~The summary below shows the gross unrealized losses and fair value of the ~~Corporation’s investments,~~Company’s debt securities. Totals are aggregated by investment category ~~that~~where individual securities have been in a continuous ~~unrealized~~ loss position for less than 12 months or 12 months or more as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016:~~2021:

June 30, 2022

~~September 30, 2017~~

(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

18,958

(1,270)

—

18,958

(1,270)

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

Mortgage-backed

83,061

(6,799)

18,270

(2,420)

101,331

(9,219)

Other

201

(1)

5,463

(52)

5,664

(53)

Other mortgage-backed debt securities

31,323

(1,646)

7,234

(613)

38,557

(2,259)

Obligations of state and political subdivisions

100,845

(9,382)

9,718

(2,385)

110,563

(11,767)

Asset backed securities

24,945

(445)

6,415

(560)

31,360

(1,005)

Corporate debt securities

31,256

(1,324)

5,590

(160)

36,846

(1,484)

Total

290,589

(20,867)

52,690

(6,190)

343,279

(27,057)

(Dollars in thousands) Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
Available-for-Sale:
U.S. Treasury securities $ ― $ ― $ ― $ ― $ ― $ ―
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed 41,978 (576 ) 20,092 (411 ) 62,070 (987 )
Other 7,230 (253 ) — — 7,230 (253 )
Obligations of state and political subdivisions 41,993 (863 ) 15,667 (513 ) 57,660 (1,376 )
Corporate debt securities 3,316 (182 ) 18,570 (545 ) 21,886 (727 )
Marketable equity securities — — — — — —
$ 94,517 $ (1,874 ) $ 54,329 $ (1,469 ) $ 148,846 $ (3,343 )

December 31, ~~2016~~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
	Value		Loss			Value		Loss			Value		Loss
																Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-Sale:																Value		Loss		Value		Loss		Value		Loss
U.S. Treasury securities	$	—	$	—		$	—	$	—		$	—	$	—		$	7,729	$	(96)	$	—	$	—	$	7,729	$	(96)
Obligations of U.S. Government Corporations and Agencies:
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgage-backed		89,444		(1,216	)		8,783		(115	)		98,227		(1,331	)		66,195		(1,271)		11,697		(417)		77,892		(1,688)
Other		10,340		(500	)		1,741		(11	)		12,081		(511	)		—		—		6,687		(65)		6,687		(65)
Other mortgage-backed debt securities																	11,036		(225)		7,362		(205)		18,398		(430)
Obligations of state and political subdivisions		95,481		(2,796	)		—		—			95,481		(2,796	)		25,867		(362)		3,931		(192)		29,798		(554)
Asset backed securities																	11,232		(49)		6,315		(107)		17,547		(156)
Corporate debt securities		21,656		(749	)		10,298		(457	)		31,954		(1,206	)		19,485		(315)		3,445		(55)		22,930		(370)
Marketable equity securities		—		—			—		—			—		—
	$	216,921	$	(5,261	)	$	20,822	$	(583	)	$	237,743	$	(5,844	)
Total																$	141,544	$	(2,318)	$	39,437	$	(1,041)	$	180,981	$	(3,359)

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 ~~FHLMC (“~~Federal Home Loan Mortgage ~~Corporation”~~Corporation (“FHLMC”), ~~FNMA (“~~Federal National Mortgage ~~Association”~~Association (“FNMA”) ~~or GNMA (“~~, Government National Mortgage ~~Association”~~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. ~~The marketable equity~~Asset backed securities consist of ~~stocks in other bank holding companies.~~ 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 62153 debt securities with a less than one year ~~or less~~ unrealized loss position, or any of their 3431 debt securities with a ~~greater than~~ one year or greater unrealized loss position as of ~~September~~June 30, ~~2017,~~2022, represent an other-than-temporary impairment, as ~~these~~the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Company expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of June 30, 2022.

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 $1,399,000 and $100,000 at September 30, 2017 and December 31, 2016, respectively.

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~~principally to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable. 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 ~~secured~~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~~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.

SBA Paycheck Protection Program (“PPP”) loans that have been issued by the Company as a result of the enactment of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) in response to the economic impact of the COVID-19 pandemic are included in the Company’s Commercial and Industrial portfolio and are underwritten according to all terms and conditions pursuant to the PPP as administered by the SBA under the CARES Act. See the Coronavirus Pandemic Impact on the Loan Portfolio section on page 14 for more information regarding the Company’s underwriting of these loans.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions. 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 SBA, United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”). Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S. Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan. As of June 30, 2022, the Company's balance of GGLs was $5,267,000, compared to $3,829,000 at December 31, 2021.

Commercial Real Estate Lending

The ~~Corporation~~Company engages in commercial real estate lending in its primary market area and surrounding areas. The ~~Corporation’s commercial real estate~~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 ~~secured~~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 residential real estate~~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~~principally 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 ~~determined by~~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 $765,000 and $6,006,000 at June 30, 2022 and December 31, 2021, respectively.

Consumer Lending

The ~~Corporation~~Company offers a variety of secured and unsecured consumer loans, including vehicle loans, stock secured loans and loans secured by financial institution deposits. These loans originate primarily within or with customers from the 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 ~~determined by~~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 CARES Act was enacted in the United States on March 27, 2020. The Company is approved by the SBA to fund loans under the SBA’s Paycheck Protection Program created as part of the CARES Act. The PPP loans have 1.00% interest rates, lender fees, two or five-year terms (depending on date of origination), and may qualify for forgiveness. 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 June 30, 2022, the Company held 3 PPP loans in its Commercial and Industrial portfolio which carried a balance of $146,000, of which 2 loans carrying an aggregate balance of $137,000 were granted during the first round of PPP issuance and 1 loan carrying a balance of $9,000 was granted during the second round of PPP issuance. At December 31, 2021, the Company held 122 PPP loans in its Commercial and Industrial portfolio, which carried an aggregate balance of $4,894,000, of which 2 loans carrying an aggregate balance of $160,000 were granted during the first round of PPP issuance and 120 loans carrying an aggregate balance of $4,734,000 were granted during the second round of PPP issuance.

An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as troubled debt restructurings as long as specific criteria are met. To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of September 30, 2021 or the termination date of the national emergency related to the COVID-19 pandemic as declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019. In compliance with Section 4013 of the CARES Act, the Company 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 were granted in compliance with Section 4013 of the CARES Act, there were 0 loan modifications still actively on deferral as of June 30, 2022, compared to December 31, 2021 when there was 1 loan modification still actively on deferral carrying a balance of $9,423,000. See page 24 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~~industrial and ~~Commercial Real Estate~~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 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~~real estate and ~~Consumer~~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 ~~charged~~written down to the estimated fair value of the collateral less cost to sell.

~~Loans~~Existing loans in which the borrower ~~is in~~has declared bankruptcy are considered on a case by case basis ~~and~~to determine whether repayment is likely to occur (eg. reaffirmation by the borrower with demonstrated repayment ability). Otherwise, loans are ~~either~~ charged off in full or ~~reaffirmed by~~written down to the ~~borrower.~~

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 ~~as to~~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~~TDR 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~~TDRs 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 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.

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 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.~~consolidated balance sheets. As of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, the amount of the reserve for unfunded lending commitments was ~~$145,000~~$117,000 and ~~$202,000,~~$177,000, 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 ~~Bank~~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 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 ~~Bank~~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 ~~Bank~~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 TDRs as long as the criteria set forth in Section 4013 of the CARES Act are met. See page 24 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 ~~Bank’s~~Company’s loan policy. Primary responsibility for assigning the asset quality rating rests with the ~~lender.~~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, as well as other variables such as current economic conditions, and individual strengths and weaknesses.~~

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 or assets 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 ~~currently protected~~adequately collateralized but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the ~~Bank’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 ~~Bank~~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 ~~Bank~~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 ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016:~~2021:

Commercial and
(Dollars in thousands) Industrial Commercial Real Estate
September 30, December 31, September 30, December 31,
2017 2016 2017 2016
Grade:
1-6    Pass $ 91,704 $ 78,319 $ 259,331 $ 243,023
7       Special Mention 12 4,425 2,355 6,224
8       Substandard 1,352 684 14,614 13,817
9       Doubtful ― ― ― ―
Add (deduct):   Unearned discount and ― ― ― ―
Net deferred loan fees and costs 168 145 549 455
Total loans $ 93,236 $ 83,573 $ 276,849 $ 263,519


	Commercial and
(Dollars in thousands)	Industrial				Commercial Real Estate
	June 30,		December 31,		June 30,		December 31,
	2022		2021		2022		2021
Grade:
1-6 Pass	$	81,317	$	81,561	$	547,062	$	498,565
7 Special Mention		—		—		1,019		1,098
8 Substandard		755		796		19,294		21,248
9 Doubtful		—		—		—		—
Add (deduct): Unearned discount and		—		—		—		—
Net deferred loan fees and costs		467		169		883		743
Total loans	$	82,539	$	82,526	$	568,258	$	521,654

Residential Real Estate
Including Home Equity Consumer
September 30, December 31, September 30, December 31,
2017 2016 2017 2016
Grade:
1-6    Pass $ 164,111 $ 165,862 $ 6,122 $ 6,073
7        Special Mention 788 1,664 1 71
8        Substandard 1,601 1,523 25 9
9        Doubtful ― ― ― ―
Add (deduct):   Unearned discount and (2 ) (6 ) ― ―
Net deferred loan fees and costs (40 ) (8 ) 94 102
Total loans $ 166,458 $ 169,035 $ 6,242 $ 6,255


	Residential Real Estate
	Including Home Equity				Consumer
	June 30,		December 31,		June 30,		December 31,
	2022		2021		2022		2021
Grade:
1-6 Pass	$	147,874	$	141,983	$	5,277	$	5,210
7 Special Mention		—		570		61		—
8 Substandard		912		1,020		—		5
9 Doubtful		—		—		—		—
Add (deduct): Unearned discount and		—		—		—		—
Net deferred loan fees and costs		(165)		(190)		64		63
Total loans	$	148,621	$	143,383	$	5,402	$	5,278

Total Loans
September 30, December 31,
2017 2016
Grade:
1-6    Pass $ 521,268 $ 493,277
7       Special Mention 3,156 12,384
8       Substandard 17,592 16,033
9       Doubtful ― ―
Add (deduct):   Unearned discount and (2 ) (6 )
Net deferred loan fees and costs 771 694
Total loans $ 542,785 $ 522,382


	Total Loans
	June 30,		December 31,
	2022		2021
Grade:
1-6 Pass	$	781,530	$	727,319
7 Special Mention		1,080		1,668
8 Substandard		20,961		23,069
9 Doubtful		0		0
Add (deduct): Unearned discount and		0		0
Net deferred loan fees and costs		1,249		785
Total loans	$	804,820	$	752,841

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of ~~$45,954,000~~$23,897,000 and ~~$2,351,000~~$1,583,000 at ~~September~~June 30, ~~2017~~2022 and ~~$36,289,000~~$24,647,000 and ~~$2,780,000~~$1,671,000 at December 31, ~~2016.~~2021. Commercial and Industrial loans also included $5,267,000 and $3,829,000 of Government Guaranteed Loans and $146,000 and $4,894,000 of Paycheck Protection Program loans as of June 30, 2022 and December 31, 2021, respectively. Loans held for sale amounted to ~~$1,399,000~~$765,000 at ~~September~~June 30, ~~2017~~2022 and ~~$100,000~~$6,006,000 at December 31, ~~2016.~~2021.

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 June 30, 2022:
Allowance for Loan Losses:
Beginning balance	$	665	$	5,759	$	1,538	$	78	$	897	$	8,937
Charge-offs		(9)		—		—		(4)		—		(13)
Recoveries		1		—		13		4		—		18
Provision (credit)		18		195		58		1		(54)		218
Ending Balance	$	675	$	5,954	$	1,609	$	79	$	843	$	9,160

(Dollars in thousands)	Commercial		Commercial			Residential
	and Industrial		Real Estate			Real Estate		Consumer			Unallocated			Total
As of and for the three month period ended September 30, 2017:

(Dollars in thousands)																	Commercial		Commercial		Residential
																	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the six months ended June 30, 2022:
Allowance for Loan Losses:
Beginning balance	$	845	$	4,582		$	1,712	$	103		$	111		$	7,353		$	681	$	5,408	$	1,539	$	84	$	968	$	8,680
Charge-offs		—		—			—		(25	)		—			(25	)		(9)		—		—		(6)		—		(15)
Recoveries		1		25			9		1			—			36			2		38		14		4		—		58
Provision		55		(35	)		30		35			(1	)		84
Provision (credit)																		1		508		56		(3)		(125)		437
Ending Balance	$	901	$	4,572		$	1,751	$	114		$	110		$	7,448		$	675	$	5,954	$	1,609	$	79	$	843	$	9,160
Ending balance: individually
evaluated for impairment																	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance: collectively
evaluated for impairment																	$	675	$	5,954	$	1,609	$	79	$	843	$	9,160

Loans Receivable:
Ending Balance																	$	82,539	$	568,258	$	148,621	$	5,402	$	—	$	804,820
Ending balance: individually
evaluated for impairment																	$	991	$	10,448	$	845	$	—	$	—	$	12,284
Ending balance: collectively
evaluated for impairment																	$	81,548	$	557,810	$	147,776	$	5,402	$	—	$	792,536


(Dollars in thousands)	Commercial			Commercial			Residential												Commercial		Commercial		Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the nine month period ended September 30, 2017:
																			and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three months ended June 30, 2021:
Allowance for Loan Losses:
Beginning balance	$	836		$	4,421		$	1,777		$	95		$	228		$	7,357		$	790	$	4,786	$	1,606	$	93	$	772	$	8,047
Charge-offs		—			(97	)		(61	)		(59	)		—			(217	)		—		(29)		(55)		(10)		—		(94)
Recoveries		74			52			9			6			—			141			—		30		1		5		—		36
Provision		(9	)		196			26			72			(118	)		167
Provision (credit)																				61		143		(13)		7		(63)		135
Ending Balance	$	901		$	4,572		$	1,751		$	114		$	110			7,448		$	851	$	4,930	$	1,539	$	95	$	709	$	8,124
Ending balance: individually evaluated for impairment	$	—		$	161		$	16		$	—		$	—		$	177
Ending balance: collectively evaluated for impairment	$	901		$	4,411		$	1,735		$	114		$	110		$	7,271

Loans Receivable:
Ending Balance	$	93,236		$	276,849		$	166,458		$	6,242		$	—		$	542,785
Ending balance: individually evaluated for impairment	$	1,218		$	13,992		$	976		$	—		$	—		$	16,186
Ending balance: collectively evaluated for impairment	$	92,018		$	262,857		$	165,482		$	6,242		$	—		$	526,599

(Dollars in thousands) Commercial Commercial Residential
and Industrial Real Estate Real Estate Consumer Unallocated Total
As of and for the three month period ended September 30, 2016:
Allowance for Loan Losses:
Beginning balance $ 702 $ 4,014 $ 1,697 $ 106 $ 700 $ 7,219
Charge-offs (193 ) (1,133 ) (20 ) (9 ) ― (1,355 )
Recoveries 2 ― ― 1 ― 3
Provision 272 1,393 35 2 (569 ) 1,133
Ending Balance $ 783 $ 4,274 $ 1,712 $ 100 $ 131 $ 7,000

(Dollars in thousands) Commercial Commercial Residential
and Industrial Real Estate Real Estate Consumer Unallocated Total
As of and for the nine month period ended September 30, 2016:
Allowance for Loan Losses:
Beginning balance $ 725 $ 3,983 $ 1,777 $ 96 $ 158 $ 6,739
Charge-offs (195 ) (1,190 ) (45 ) (32 ) ― (1,462 )
Recoveries 6 ― 12 5 ― 23
Provision 247 1,481 (32 ) 31 (27 ) 1,700
Ending Balance $ 783 $ 4,274 $ 1,712 $ 100 $ 131 $ 7,000
Ending balance: individually evaluated for impairment $ — $ 150 $ 19 $ — $ — $ 169
Ending balance: collectively evaluated for impairment $ 783 $ 4,124 $ 1,693 $ 100 $ 131 $ 6,831

Loans Receivable:
Ending Balance $ 80,328 $ 258,762 $ 168,546 $ 6,375 $ — $ 514,011
Ending balance: individually evaluated for impairment $ 418 $ 13,014 $ 836 $ — $ — $ 14,268
Ending balance: collectively evaluated for impairment $ 79,910 $ 245,748 $ 167,710 $ 6,375 $ — $ 499,743

(Dollars in thousands) Commercial Commercial Residential
and Industrial Real Estate Real Estate Consumer Unallocated Total
As of and for the year ended December 31, 2016
Allowance for Loan Losses:
Beginning balance $ 725 $ 3,983 $ 1,777 $ 96 $ 158 $ 6,739
Charge-offs (195 ) (1,200 ) (61 ) (38 ) — (1,494 )
Recoveries 9 — 12 8 — 29
Provision 297 1,638 49 29 70 2,083
Ending Balance $ 836 $ 4,421 $ 1,777 $ 95 $ 228 $ 7,357
Ending balance: individually evaluated for impairment $ — $ 200 $ 19 $ — $ — $ 219
Ending balance: collectively evaluated for impairment $ 836 $ 4,221 $ 1,758 $ 95 $ 228 $ 7,138

Loans Receivable:
Ending Balance $ 83,573 $ 263,519 $ 169,035 $ 6,255 $ — $ 522,382
Ending balance: individually evaluated for impairment $ 416 $ 12,873 $ 1,008 $ — $ — $ 14,297
Ending balance: collectively evaluated for impairment $ 83,157 $ 250,646 $ 168,027 $ 6,255 $ — $ 508,085

Of the $1,078,000 in foreclosed assets held for resale at September 30, 2017, $22,000 was secured by residential real estate, $50,000 was secured by land, and $1,006,000 was secured by commercial real estate. Of the $1,273,000 in foreclosed assets held for resale at December 31, 2016, $50,000 was secured by residential real estate, $50,000 was secured by land, and $1,173,000 was secured by commercial real estate. At September 30, 2017 and December 31, 2016, 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 $498,000 at September 30, 2017 and $649,000 at December 31, 2016. These balances were not included in foreclosed assets held for resale at September 30, 2017 or December 31, 2016.


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the six months ended June 30, 2021:
Allowance for Loan Losses:
Beginning balance	$	787	$	4,762	$	1,643	$	94	$	647	$	7,933
Charge-offs		(13)		(29)		(55)		(20)		—		(117)
Recoveries		—		30		1		7		—		38
Provision (credit)		77		167		(50)		14		62		270
Ending Balance	$	851	$	4,930	$	1,539	$	95	$	709	$	8,124
Ending balance: individually
evaluated for impairment	$	—	$	1	$	—	$	—	$	—	$	1
Ending balance: collectively
evaluated for impairment	$	851	$	4,929	$	1,539	$	95	$	709	$	8,123

Loans Receivable:
Ending Balance	$	103,894	$	486,825	$	145,965	$	5,221	$	—	$	741,905
Ending balance: individually
evaluated for impairment	$	1,047	$	13,861	$	1,185	$	—	$	—	$	16,093
Ending balance: collectively
evaluated for impairment	$	102,847	$	472,964	$	144,780	$	5,221	$	—	$	725,812


(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the year ended December 31, 2021:
Allowance for Loan Losses:
Beginning balance	$	787	$	4,762	$	1,643	$	94	$	647	$	7,933
Charge-offs		(13)		(29)		(80)		(36)		0		(158)
Recoveries		0		30		4		11		0		45
Credit (provision)		(93)		645		(28)		15		321		860
Ending Balance	$	681	$	5,408	$	1,539	$	84	$	968	$	8,680
Ending balance: individually
evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0
Ending balance: collectively
evaluated for impairment	$	681	$	5,408	$	1,539	$	84	$	968	$	8,680

Loans Receivable:
Ending Balance	$	82,526	$	521,654	$	143,383	$	5,278	$	0	$	752,841
Ending balance: individually
evaluated for impairment	$	1,017	$	11,803	$	853	$	0	$	0	$	13,673
Ending balance: collectively
evaluated for impairment	$	81,509	$	509,851	$	142,530	$	5,278	$	0	$	739,168

From time to time, the Bank may agree to modify the contractual terms of a borrower’s loan. In cases where the modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).

The outstanding recorded investment of TDRs as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016~~2021 was ~~$10,851,000~~$7,669,000 and ~~$11,629,000,~~$8,020,000, respectively. The decrease in TDRs at ~~September~~June 30, ~~2017~~2022 as compared to December 31, ~~2016~~2021 is mainly attributable to ~~large~~regular principal payments and paydowns ~~made~~ on existing TDRs ~~net against smaller~~that were completed during the six months ended June 30, 2022. There were 0 unfunded commitments on TDRs at June 30, 2022 and December 31, 2021.

During the three months ended June 30, 2022, 1 loan with a post modification balance of $372,000 was modified as a TDR. NaN loans were modified as TDRs during the ~~nine~~first three months of 2022. During the six months ended ~~September~~June 30, ~~2017. There was $2,000 in unfunded commitments on TDRs at September 30, 2017 and December 31, 2016.~~

~~During the three months ended September 30, 2017, no loans were modified as TDRs as compared to the same period in 2016, when two~~2021, 3 loans with a combined post modification balance of ~~$1,860,000~~$301,000 were ~~classified~~modified as TDRs. NaN loans were modified as TDRs during the three months ended June 30, 2021. The loan modifications for the ~~three~~six months ended ~~September~~June 30, ~~2016~~2022 consisted of ~~one term~~1 payment modification, ~~and one payment modification.~~

~~During the nine months ended September 30, 2017, two loans with a combined post modification balance of $107,000 were classified as TDRs, as~~ compared to the ~~same period in 2016, when nine loans with a combined post modification balance of $2,402,000 were classified as TDRs. The~~ loan modifications for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 which consisted of ~~two payment modifications. The loan modifications for the nine months ended September 30, 2016 consisted of six~~2 term modifications and ~~three~~1 payment ~~modifications.~~modification.

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


(Dollars in thousands)					June 30,		December 31,
	September 30,		December 31,
	2017		2016
					2022		2021
Non-accrual TDRs	$	280	$	267	$	1,355	$	1,413
Accruing TDRs		10,571		11,362		6,314		6,607
Total	$	10,851	$	11,629	$	7,669	$	8,020

At ~~September~~June 30, ~~2017, eight~~2022, 3 Commercial and Industrial loans classified as TDRs with a combined recorded investment of $682,000, 6 Commercial Real Estate loans classified as TDRs with a combined recorded investment of ~~$469,000~~$318,000, and ~~one Commercial and Industrial~~1 Residential Real Estate loan classified as a TDR with a recorded investment of $12,000 were not in compliance with the terms of their restructure, compared to ~~September~~June 30, ~~2016~~2021 when ~~nine~~3 Commercial and Industrial loans classified as TDRs with a combined recorded investment of $736,000, 7 Commercial Real Estate loans classified as TDRs with a combined recorded investment of ~~$781,000~~$479,000, 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.

~~During~~Of the ~~three months ended September 30, 2017, no~~ loans that were modified as TDRs within the ~~preceding~~ twelve months ~~had~~preceding June 30, 2022, 0 loans experienced payment defaults ~~as compared to~~during the ~~same period in 2016 when one~~three months ended June 30, 2022. NaN Commercial ~~and Industrial~~Real Estate loan ~~in the amount of $15,000~~ that was modified as a TDR within the ~~preceding~~ twelve months ~~had~~preceding June 30, 2022 experienced a payment ~~default. During~~default during the ~~nine~~six months ended ~~September~~June 30, ~~2017, no~~2022, but the loan was subsequently paid off during the first quarter of 2022. Of the loans that were modified as TDRs ~~within~~during the ~~preceding~~ twelve months ~~had~~preceding June 30, 2021, 3 Commercial Real Estate loans totaling $300,000 experienced payment defaults ~~as compared to~~during the ~~same period in 2016 when one Commercial and Industrial loan in the amount of $15,000~~three months ended June 30, 2021. NaN loans that ~~was~~were modified as ~~a TDR within~~TDRs during the ~~preceding~~ twelve months ~~had~~preceding June 30, 2021 experienced a payment ~~default.~~

defaults during the first three months of 2021.

The following table presents information regarding the loan modifications categorized as TDRs during the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2022 and the ~~three and nine~~six months ended ~~September~~June 30, ~~2016. No~~2021. NaN loans were modified as TDRs during the three months ended ~~September~~June 30, ~~2017.~~2021.

(Dollars in thousands) Three Months Ended September 30, 2016
Pre-Modification Post-Modification
Number Outstanding Recorded Outstanding Recorded Recorded
of Contracts Investment Investment Investment
Commercial and Industrial — $ — $ — $ —
Commercial Real Estate 2 1,860 1,860 1,858
Total 2 $ 1,860 $ 1,860 $ 1,858


(Dollars in thousands)	For the Three Months Ended June 30, 2022
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial Real Estate	1	$	347	$	372	$	372
Total	1	$	347	$	372	$	372


(Dollars in thousands)	For the Six Months Ended June 30, 2022
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial Real Estate	1	$	347	$	372	$	372
Total	1	$	347	$	372	$	372

(Dollars in thousands)	For the Six Months Ended June 30, 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

(Dollars in thousands) Nine Months Ended September 30, 2017
Pre-Modification Post-Modification
Number Outstanding Recorded Outstanding Recorded Recorded
of Contracts Investment Investment Investment
Commercial and Industrial 1 $ 38 $ 38 $ 37
Commercial Real Estate 1 72 72 70
Total 2 $ 110 $ 110 $ 107

(Dollars in thousands) Nine Months Ended September 30, 2016
Pre-Modification Post-Modification
Number Outstanding Recorded Outstanding Recorded Recorded
of Contracts Investment Investment Investment
Commercial and Industrial 4 $ 86 $ 86 $ 22
Commercial Real Estate 5 2,316 2,316 2,064
Total 9 $ 2,402 $ 2,402 $ 2,086

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2022 and the ~~three and nine~~six months ended ~~September~~June 30, ~~2016~~2021 with the total number of each type of modification performed. NoNaN loans were modified as TDRs during the three months ended ~~September~~June 30, ~~2017.~~2021.


	For the Three Months Ended June 30, 2022
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial Real Estate	—	—	1	1
Total	—	—	1	1


	For the Six Months Ended June 30, 2022
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial Real Estate	—	—	1	1
Total	—	—	1	1


	For the Six Months Ended June 30, 2021
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial Real Estate	—	2	1	3
Total	—	2	1	3

Nine Months Ended September 30, 2017
Rate Term Payment Number
Modification Modification Modification Modified
Commercial and Industrial ― — 1 1
Commercial Real Estate — — 1 1
Total — — 2 2

Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
Rate Term Payment Number Rate Term Payment Number
Modification Modification Modification Modified Modification Modification Modification Modified
Commercial and Industrial ― — ― — ― 3 1 4
Commercial Real Estate — 1 1 2 — 3 2 5
Total — 1 1 2 — 6 3 9

~~During~~

In the ~~nine~~wake of the COVID-19 pandemic, during the second quarter of 2020, the Company began granting loan modification requests to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met. The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the six months ended ~~September~~June 30, ~~2017, two existing TDRs experienced subsequent modifications. An existing Commercial and Industrial TDR~~2022:


(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, 2021	—	$	—	1	$	9,423	—	$	—	—	$	—	1	$	9,423
Additional modifications granted for the three months ended March 31, 2022	—		—	—		—	—		—	—		—	—		—
Section 4013 CARES Act modifications returned to normal payment status during the three months ended March 31, 2022 (a)	—		—	(1)		(9,423)	—		—	—		—	(1)		(9,423)
Principal payments net of draws on active deferred loans for the three months ended March 31, 2022 (b)	N/A		—	N/A		—	N/A		—	N/A		—	N/A		—
Balance at March 31, 2022	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—
Additional modifications granted for the three months ended June 30, 2022	—		—	—		—	—		—	—		—	—		—
Section 4013 CARES Act modifications returned to normal payment status during the three months ended June 30, 2022 (a)	—		—	—		—	—		—	—		—	—		—
Principal payments net of draws on active deferred loans for the three months ended June 30, 2022 (b)	N/A		—	N/A		—	N/A		—	N/A		—	N/A		—
Balance at June 30, 2022	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—

Percent of Total Section 4013 CARES Act Modifications as of June 30, 2022			0.00%			0.00%			0.00%			0.00%			0.00%
Percent of Total Section 4013 CARES Act Modifications to Total Loans as of June 30, 2022			0.00%			0.00%			0.00%			0.00%			0.00%
Subsequent modifications granted during the three months ended June 30, 2022 for active deferred loans outstanding as of June 30, 2022	—	$	—	—	$	—	—	$	—	—	$	—	—	$	—

(a) Includes payments made prior to ~~the owner of a greenhouse in the amount of $309,000 was subsequently modified~~return to normal payment status during the ~~nine months ended September 30, 2017 to extend~~three month period

(b) Draws include those made on lines of credit and other loans contractually allowing draws of principal. No construction loans have experienced a Section 4013 CARES Act modification at the maturity date of the loan and change payments to interest-only with all other accrued interest and principal to be due in full at maturity. An existing Commercial Real Estate TDR to a travel agency in the amount of $38,000 was subsequently modified during the nine months ended September 30, 2017 to allow interest only payments through April 2018, after which time regular principal and interest payments will commence. Both TDRs retain their original classification as “payment” modifications as of September 30, 2017.dates indicated.

The recorded investment, unpaid principal balance, and the related allowance of the ~~Corporation’s~~Company’s impaired loans are summarized below ~~for the periods ended September~~at June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.


(Dollars in thousands)	September 30, 2017						December 31, 2016						June 30, 2022						December 31, 2021
			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	$	1,218	$	1,218	$	―	$	416	$	416	$	―	$	991	$	991	$	0	$	1,017	$	1,017	$	0
Commercial Real Estate		11,279		13,528		―		11,905		14,352		―		10,448		13,381		0		11,803		14,735		0
Residential Real Estate		804		950		―		584		745		―		845		877		0		853		885		0


With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—		0		0		0		0		0		0
Commercial Real Estate		2,713		4,128		161		968		2,383		200		—		—		—		—		—		0
Residential Real Estate		172		172		16		424		424		19		0		0		0		0		0		0
Total	$	16,186	$	19,996	$	177	$	14,297	$	18,320	$	219	$	12,284	$	15,249	$	—	$	13,673	$	16,637	$	0


Total consists of:
Commercial and Industrial	$	1,218	$	1,218	$	—	$	416	$	416	$	—	$	991	$	991	$	0	$	1,017	$	1,017	$	0
Commercial Real Estate	$	13,992	$	17,656	$	161	$	12,873	$	16,735	$	200	$	10,448	$	13,381	$	—	$	11,803	$	14,735	$	0
Residential Real Estate	$	976	$	1,122	$	16	$	1,008	$	1,169	$	19	$	845	$	877	$	—	$	853	$	885	$	0

At ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016, $10,851,000~~2021, $7,669,000 and ~~$11,629,000~~$8,020,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of ~~$7,000~~$0 at both June 30, 2022 and ~~$0, respectively.~~December 31, 2021. The recorded investment represents the loan balance reflected on the ~~Consolidated Balance Sheets~~consolidated balance sheets net of any charge-offs. The unpaid ~~principal~~ 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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~2021.


(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended				For the Three Months Ended				For the Three Months Ended
	September 30, 2017				September 30, 2016
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
									June 30, 2022				June 30, 2021
									Average		Interest		Average		Interest
									Recorded		Income		Recorded		Income
									Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,225	$	5	$	455	$	2	$	998	$	3	$	1,057	$	2
Commercial Real Estate		11,353		127		12,132		160		10,801		70		12,750		95
Residential Real Estate		813		1		415		―		847		0		1,233		1


With an allowance recorded:
Commercial and Industrial		—		—		—		—		0		0		0		0
Commercial Real Estate		2,271		2		958		—		0		0		483		0
Residential Real Estate		163		—		424		―		0		0		0		0
Total	$	15,825	$	135	$	14,384	$	162	$	12,646	$	73	$	15,523	$	98


Total consists of:
Commercial and Industrial	$	1,225	$	5	$	455	$	2	$	998	$	3	$	1,057	$	2
Commercial Real Estate	$	13,624	$	129	$	13,090	$	160	$	10,801	$	70	$	13,233	$	95
Residential Real Estate	$	976	$	1	$	839	$	—	$	847	$	0	$	1,233	$	1

Of the ~~$135,000~~$73,000 and ~~$162,000~~$98,000 in interest income recognized on impaired loans for the three months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~2021 respectively, ~~$1,000~~$0 and ~~$5,000~~$3,000 in interest income was recognized with respect to non-accrual ~~loans.~~loans for each respective period.

(Dollars in thousands) For the Nine Months Ended For the Nine Months Ended
September 30, 2017 September 30, 2016
Average Interest Average Interest
Recorded Income Recorded Income
Investment Recognized Investment Recognized
With no related allowance recorded:
Commercial and Industrial $ 1,240 $ 21 $ 473 $ 12
Commercial Real Estate 11,730 376 10,396 331
Residential Real Estate 910 2 417 ―

With an allowance recorded:
Commercial and Industrial — — — —
Commercial Real Estate 1,498 2 3,350 74
Residential Real Estate 229 — 427 ―
Total $ 15,607 $ 401 $ 15,063 $ 417

Total consists of:
Commercial and Industrial $ 1,240 $ 21 $ 473 $ 12
Commercial Real Estate $ 13,228 $ 378 $ 13,746 $ 405
Residential Real Estate $ 1,139 $ 2 $ 844 $ —


(Dollars in thousands)	For the Six Months Ended				For the Six Months Ended
	June 30, 2022				June 30, 2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,004	$	5	$	1,071	$	5
Commercial Real Estate		11,247		142		12,564		188
Residential Real Estate		849		—		1,142		1

With an allowance recorded:
Commercial and Industrial		—		—		—		—
Commercial Real Estate		—		—		484		—
Residential Real Estate		—		—		—		—
Total	$	13,100	$	147	$	15,261	$	194

Total consists of:
Commercial and Industrial	$	1,004	$	5	$	1,071	$	5
Commercial Real Estate	$	11,247	$	142	$	13,048	$	188
Residential Real Estate	$	849	$	—	$	1,142	$	1

Of the ~~$401,000~~$147,000 and ~~$417,000~~$194,000 in interest income recognized on impaired loans for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~2021 respectively, ~~$18,000~~$0 and ~~$5,000~~$3,000 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 ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016~~2021 were as follows:


(Dollars in thousands)					June 30,		December 31,
	September 30,		December 31,
	2017		2016
					2022		2021
Commercial and Industrial	$	811	$	—	$	683	$	708
Commercial Real Estate		3,828		1,927		4,454		5,519
Residential Real Estate		976		1,008		833		839
Total non-accrual loans		5,615		2,935		5,970		7,066
Foreclosed assets held for resale		1,078		1,273		—		—
Loans past-due 90 days or more and still accruing interest		119		34		166		—
Total non-performing assets	$	6,812	$	4,242	$	6,136	$	7,066

There were 0 foreclosed assets held for resale at June 30, 2022 or December 31, 2021. Consumer mortgage loans secured by residential real estate for which the Company has entered into formal foreclosure proceedings but for which physical possession has yet to be obtained amounted to $41,000 at both June 30, 2022 and December 31, 2021. These balances were not included in foreclosed assets held for resale at June 30, 2022 or December 31, 2021.

The following tables present the classes of the loan portfolio, including non-accrual loans and TDRs, summarized by past-due status at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016:~~2021:


(Dollars in thousands)													90 Days														90 Days
													Or Greater
													Past Due
					90 Days								and Still
	30-59 Days		60-89 Days		or Greater		Total				Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Interest
September 30, 2017:
																											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
June 30, 2022:
Commercial and Industrial	$	54	$	13	$	—	$	67	$	93,169	$	93,236	$	—	$	150	$	—	$	656	$	806	$	81,733	$	82,539	$	0
Commercial Real Estate		892		372		834		2,098		274,751		276,849		97		474		—		3,783		4,257		564,001		568,258		0
Residential Real Estate		2,099		247		465		2,811		163,647		166,458		22		150		117		999		1,266		147,355		148,621		166
Consumer		25		10		—		35		6,207		6,242		—		0		9		0		9		5,393		5,402		0
Total	$	3,070	$	642	$	1,299	$	5,011	$	537,774	$	542,785	$	119	$	774	$	126	$	5,438	$	6,338	$	798,482	$	804,820	$	166


(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, 2021:
Commercial and Industrial	$	47	$	0	$	678	$	725	$	81,801	$	82,526	$	—
Commercial Real Estate		116		189		4,891		5,196		516,458		521,654		—
Residential Real Estate		553		191		839		1,583		141,800		143,383		—
Consumer		14		0		0		14		5,264		5,278		—
Total	$	730	$	380	$	6,408	$	7,518	$	745,323	$	752,841	$	—

(Dollars in thousands) 90 Days
Or Greater
Past Due
90 Days and Still
30-59 Days 60-89 Days or Greater Total Total Accruing
Past Due Past Due Past Due Past Due Current Loans Interest
December 31, 2016:
Commercial and Industrial $ 130 $ — $ — $ 130 $ 83,443 $ 83,573 $ —
Commercial Real Estate 1,019 273 1,927 3,219 260,300 263,519 —
Residential Real Estate 1,750 542 1,020 3,312 165,723 169,035 34
Consumer 28 8 — 36 6,219 6,255 —
Total $ 2,927 $ 823 $ 2,947 $ 6,697 $ 515,685 $ 522,382 $ 34

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

At June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, commitments to lend additional funds with respect to impaired loans consisted of ~~three irrevocable letters of credit totaling $1,268,000. One~~one irrevocable letter of credit ~~in the amount of~~totaling $1,249,000 that was associated with a loan to a developer of a residential sub-division. ~~Two irrevocable letters~~

NOTE 5 — DEPOSITS

Major classifications of ~~credit totaling $19,000 were associated with~~deposits at June 30, 2022 and December 31, 2021 consisted of:


(Dollars in thousands)	June 30,		December 31,
	2022		2021
Non-interest bearing demand	$	230,513	$	249,040
Interest bearing demand		325,624		395,033
Savings		276,599		260,804
Time certificates of deposits less than $250,000		147,603		158,914
Time certificates of deposits $250,000 or greater		11,699		13,030
Other time		1,570		1,148
Total deposits	$	993,608	$	1,077,969

Total deposits decreased $84,361,000 to $993,608,000 as of June 30, 2022 due to decreases in non-interest bearing, interest bearing demand and time deposits. The decrease in deposits was mainly the result of a ~~loan to a non-profit community recreation facility.~~$95,504,000 decrease in highly rate sensitive deposits and other normal fluctuations in deposits during the six months ended June 30, 2022.

NOTE 56 —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 June 30, 2022 and December 31, 2021 are as follows:


(Dollars in thousands)	June 30, 2022				December 31, 2021
			Average				Average
	Amount		Rate		Amount		Rate
Federal funds purchased	$	0	0	%	$	0	0.36	%
Securities sold under agreements to repurchase		25,311	0.36	%		27,377	0.35	%
Federal Discount Window		0	0.70	%		0	0.36	%
Federal Home Loan Bank of Pittsburgh		104,412	1.16	%		0	0.34	%
Total	$	129,723	0.77	%	$	27,377	0.35	%

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 Consolidated Balance Sheets,~~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 ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.

(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
September 30, 2017
Repurchase agreements (a) $ 20,397 $ ― $ 20,397 $ (20,397 ) $ ― $ ―

December 31, 2016
Repurchase agreements (a) $ 18,490 $ ― $ 18,490 $ (18,490 ) $ ― $ ―

(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

June 30, 2022

Repurchase agreements (a)

25,311

(25,311)

December 31, 2021

Repurchase agreements (a)

27,377

(27,377)

(a)	As of June 30, 2022 and December 31, 2021, the fair value of securities pledged in connection with repurchase agreements was $30,603,000 and $37,735,000 , respectively.

~~(a) As of September 30, 2017 and December 31, 2016, the fair value of securities pledged in connection with repurchase agreements was $24,764,000 and $25,298,000, respectively.~~

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of ~~September~~June 30, ~~2017:~~2022:


(Dollars in thousands)	Remaining Contractual Maturity of the Agreements										Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
	Continuous		30 days		Days		90 Days		Total
September 30, 2017:
											Overnight				Greater		Greater
											and		Up to		30 -90		than
											Continuous		30 days		Days		90 Days		Total
June 30, 2022:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	20,397	$	—	$	—	$	—	$	20,397	$	25,311	$	0	$	0	$	0	$	25,311
Total	$	20,397	$	—	$	—	$	—	$	20,397	$	25,311	$	0	$	0	$	0	$	25,311

Long-Term Borrowings

and Letters of Credit

Long-term borrowings are comprised of advances from the FHLB.

Irrevocable standby letters of credit may be issued to a customer/beneficiary by the FHLB on the Company’s behalf in order to secure public/municipal unit deposits, provide credit enhancement to certain transaction types, or to support payment obligations to third parties. These irrevocable standby letters of credit are supported by an irrevocable and ~~a capital lease assumed~~independent guarantee by the FHLB for the Company’s pledging obligation to secure public/municipal unit deposits which eliminates the need for the Company to pledge collateral in the amount necessary to secure these funds. The Company began utilizing this service offered by the FHLB during the second quarter of 2021. There were 0 irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on June 30, 2022. Any irrevocable standby letters of credit are issued as ~~a result of the acquisition of Pocono Community Bank.~~ necessary in an amount appropriate to secure specific public/municipal unit deposits.

Under terms of a blanket agreement, collateral for the FHLB loans isand letters of credit consists of certain qualifying assets of the Corporation’s banking subsidiary. ~~The principal~~Principal qualifying assets are certain real estate mortgages and ~~certain~~ investment securities. As of June 30, 2022, loans of $641,482,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $458,318,000. As of June 30, 2022, 0 securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

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

The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and then float based on a benchmark rate (as defined). Interest is payable semi-annually in arrears on June 30 and December 31 of each year, which began on June 30, 2021, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 31, June 30, September 30 and December 31. The 2020 Notes will mature on December 31, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 31, 2025 and prior to December 31, 2030. 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 68 —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 4 branch banking facilities and 1 parcel of land under operating leases. At June 30, 2022, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $1,013,000 and $1,495,000, respectively. At December 31, 2021, right-of-use assets and lease liabilities stood at $1,025,000 and $1,499,000, respectively. Further options to extend or terminate the lease are not applicable for any of the 5 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.

~~NOTE 7~~

The Bank recognized total operating lease costs for the six months ended June 30, 2022 and 2021 of $90,000 and $89,000, respectively. Operating lease costs are included in occupancy, net in the accompanying statements of income. Cash payments totaled $83,000 and $77,000, respectively, for the six months ended June 30, 2022 and 2021.

The Bank currently has 1 finance lease for equipment. At June 30, 2022, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $34,000 and $11,000, respectively. At December 31, 2021, right-of-use assets and lease liabilities stood at $34,000 and $16,000, 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 six months ended June 30, 2022 and 2021 were immaterial. Cash payments totaled $5,000 for the six months ended June 30, 2022 and 2021.

The following table displays the weighted-average term and discount rates for operating and finance leases outstanding as of June 30, 2022 and December 31, 2021.

June 30,

December 31,

June 30,

December 31,

2022

2021

2022

2021

Operating

Operating

Finance

Finance

Weighted-average term (years)

24.20

24.51

1.17

1.67

Weighted-average discount rate

3.91%

3.89%

0.68%

0.68%

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)	June 30,		December 31,		June 30,		December 31,
	2022		2021		2022		2021
Minimum Lease Payments due:	Operating		Operating		Finance		Finance
Within one year	$	100	$	120	$	10	$	10
After one but within two years		68		68		2		7
After two but within three years		68		68		—		—
After three but within four years		68		68		—		—
After four but within five years		75		68		—		—
After five years		2,149		2,190		—		—
Total undiscounted cash flows		2,528		2,582		12		17
Discount on cash flows		(1,033)		(1,083)		(1)		(1)
Total lease liability	$	1,495	$	1,499	$	11	$	16

NOTE 9 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Financial Instruments with ~~Off Balance~~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.~~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 ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021 were as follows:


(Dollars in thousands)
	September 30, 2017		December 31, 2016
					June 30, 2022		December 31, 2021
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	96,567	$	84,519	$	123,931	$	142,335
Financial standby letters of credit	$	440	$	453	$	1,714	$	2,000
Performance standby letters of credit	$	2,994	$	5,341	$	3,113	$	3,727

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 ~~September~~June 30, ~~2017,~~2022, the ~~Corporation~~Company had ~~$443,307,000~~$716,879,000 in loans secured by real estate, which represented ~~81.7%~~89.1% of total loans. The real estate loan portfolio is largely secured by lessors of residential buildings and dwellings, lessors of non-residential buildings, and lessors of hotels/motels. As of ~~September~~

June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, 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 810 —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 ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016, investments~~2021, securities measured at fair value on a recurring basis and the valuation methods used are as follows:


(Dollars in thousands)

	Level 1		Level 2		Level 3		Total
September 30, 2017
Available-for-Sale Securities:

June 30, 2022									Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	―	$	—	$	―	$	—	$	18,958	$	0	$	0	$	18,958
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		―		86,539		―		86,539
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed										0		104,245		0		104,245
Other		―		23,040		―		23,040		0		5,939		0		5,939
Other mortgage backed debt securities										0		38,556		0		38,556
Obligations of state and political subdivisions		―		220,711		―		220,711		0		164,536		0		164,536
Asset backed securities										0		31,360		0		31,360
Corporate debt securities		―		29,070		―		29,070		0		46,666		0		46,666
Total debt securities available-for-sale										18,958		391,302		0		410,260
Marketable equity securities		1,732		—		—		1,732		1,661		0		0		1,661
Total	$	1,732	$	359,360	$	—	$	361,092
Total recurring fair value measurements									$	20,619	$	391,302	$	0	$	411,921


(Dollars in thousands)

December 31, 2021	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	7,729	$	0	$	0	$	7,729
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed		0		114,911		0		114,911
Other		0		7,576		0		7,576
Other mortgage backed debt securities		0		39,550		0		39,550
Obligations of state and political subdivisions		0		186,176		0		186,176
Asset backed securities		0		36,542		0		36,542
Corporate debt securities		0		45,432		0		45,432
Total debt securities available-for-sale		7,729		430,187		0		437,916
Marketable equity securities		1,962		0		0		1,962
Total recurring fair value measurements	$	9,691	$	430,187	$	0	$	439,878

(Dollars in thousands)

Level 1 Level 2 Level 3 Total
December 31, 2016
Available-for-Sale Securities:
U.S. Treasury securities $ — $ 1,010 $ — $ 1,010
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed — 110,907 — 110,907
Other — 20,970 — 20,970
Obligations of state and political subdivisions — 211,134 — 211,134
Corporate debt securities — 33,976 — 33,976
Marketable equity securities 1,640 — — 1,640
Total $ 1,640 $ 377,997 $ — $ 379,637

The estimated fair values of equity securities and US Treasury debt securities classified as Level 1 are derived from quoted market prices in active markets; ~~these assets~~the equity securities 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 ~~investments.~~securities. There were no transfers between Level 1 and Level 2 during ~~2017~~2022 or ~~2016.~~2021.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, impaired loans measured at fair value on a nonrecurring basis ~~and the valuation methods used~~ are as follows:


(Dollars in thousands)									Level 1		Level 2		Level 3		Total
	Level 1		Level 2		Level 3		Total
Assets at September 30, 2017
Assets at June 30, 2022
Impaired loans:
Commercial Real Estate	$	―	$	―	$	6,402	$	6,402	$	0	$	0	$	5,919	$	5,919
Residential Real Estate		—		—		260		260		0		0		30		30
Total impaired loans	$	―	$	―	$	6,662	$	6,662	$	0	$	0	$	5,949	$	5,949


(Dollars in thousands)									Level 1		Level 2		Level 3		Total
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2016
Assets at December 31, 2021
Impaired loans:
Commercial Real Estate	$	―	$	―	$	4,763	$	4,763	$	0	$	0	$	5,954	$	5,954
Residential Real Estate		—		—		524		524		0		0		30		30
Total impaired loans	$	―	$	―	$	5,287	$	5,287	$	0	$	0	$	5,984	$	5,984

The ~~Bank’s~~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.~~end unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Company. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values. For impaired loans less than $250,000 upon classification and annually at year end, the ~~Bank~~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~~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 ~~2017~~2022 and ~~2016.~~

2021.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

~~At September 30, 2017 and December 31, 2016,~~There were no foreclosed assets held for resale measured at fair value on a nonrecurring basis at June 30, 2022 and ~~the valuation methods used are as follows:~~December 31, 2021.

(Dollars in thousands) Level 1 Level 2 Level 3 Total
Assets at September 30, 2017
Foreclosed assets held for resale:
Commercial Real Estate $ ― $ ― $ 81 $ 81
Total foreclosed assets held for resale $ ― $ ― $ 81 $ 81

(Dollars in thousands) Level 1 Level 2 Level 3 Total
Assets at December 31, 2016
Other foreclosed assets held for resale:
Commercial Real Estate $ — $ — $ 248 $ 248
Total foreclosed assets held for resale $ — $ — $ 248 $ 248

The ~~Bank’s~~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 ~~2017~~2022 and ~~2016.~~2021.

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

Quantitative Information about Level 3 Fair Value Measurements
Fair Value Weighted
(Dollars in thousands) Estimate Valuation Technique Unobservable Input Range Average
September 30, 2017
Impaired loans $ 3,389 Appraisal of collateral^1,3 Appraisal adjustments² (10%) – (57%) (17% )
Impaired loans $ 3,273 Discounted cash flow Discount rate (7%) – (8%) (7% )
Foreclosed assets held for resale $ 81 Appraisal of collateral^1,3 Appraisal adjustments² (35%) – (35%) (35% )

December 31, 2016
Impaired loans $ 2,119 Appraisal of collateral^1,3 Appraisal adjustments² (10%) – (79%) (21% )
Impaired loans $ 3,168 Discounted cash flow Discount rate (7%) – (7%) (7% )
Foreclosed assets held for resale $ 248 Appraisal of collateral^1,3 Appraisal adjustments² (23%) – (37%) (32% )


(Dollars in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
June 30, 2022	Estimate		Valuation Technique	Unobservable Input	Range	Average
Impaired loans - collateral dependent	$	3,120	Appraisal of collateral^1,3 Certificate of Inspection^1,3	Appraisal adjustments² Qualitative Adjustments⁴	(15%) – (44%)	(15%)
Impaired loans - other	$	2,829	Discounted cash flow	Discount rate	(7%) – (7%)	(7%)

December 31, 2021
Impaired loans - collateral dependent	$	3,120	Appraisal of collateral^1,3 Certificate of Inspection^1,3	Appraisal adjustments² Qualitative Adjustments⁴	(15%) – (44%)	(15%)
Impaired loans - other	$	2,864	Discounted cash flow	Discount rate	(7%) – (7%)	(7%)

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

	Carrying		Fair Value Measurements at September 30, 2017

(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total		Carrying		Fair Value Measurements at June 30, 2022
											Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	9,371	$	9,371	$	―	$	―	$	9,371	$	9,441	$	9,441	$	0	$	0	$	9,441
Interest-bearing deposits in other banks		1,744		—		1,744		—		1,744		783		0		783		0		783
Time deposits with other banks		1,482		—		1,482		—		1,482		0		0		0		0		0
Investment securities available-for-sale		361,092		1,732		359,360		—		361,092
Investment securities held-to-maturity		—		—		—		—		—
Restricted investment in bank stocks		4,472		—		4,472		—		4,472		5,753		0		5,753		0		5,753
Net loans		535,337		—		—		537,800		537,800		795,660		0		0		774,976		774,976
Mortgage servicing rights		381		—		—		381		381		349		0		0		349		349
Accrued interest receivable		4,034		—		4,034		—		4,034		4,473		0		4,473		0		4,473


FINANCIAL LIABILITIES:
Core Deposits		562,839		―		562,839		―		562,839
Time Deposits		196,877		—		196,357		—		196,357
Demand, savings and other deposits												832,736		0		832,736		0		832,736
Time deposits												160,872		0		156,636		0		156,636
Short-term borrowings		41,209		―		41,209		―		41,209		129,723		0		129,106		0		129,106
Long-term borrowings		65,022		―		65,549		―		65,549		25,000		0		24,598		0		24,598
Subordinated debentures												25,000		0		22,428		0		22,428
Accrued interest payable		505		―		505		―		505		273		0		273		0		273


OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		―		―		―		―		―		0		0		0		0		0

Carrying Fair Value Measurements at December 31, 2016
(Dollars in thousands) Amount Level 1 Level 2 Level 3 Total
FINANCIAL ASSETS:
Cash and due from banks $ 8,338 $ 8,338 $ — $ — $ 8,338
Interest-bearing deposits in other banks 790 — 790 — 790
Time deposits with other banks 1,482 — 1,482 — 1,482
Investment securities available-for-sale 379,637 1,640 377,997 — 379,637
Investment securities held-to-maturity 4 — 4 — 4
Restricted investment in bank stocks 5,477 — 5,477 — 5,477
Net loans 515,025 — — 504,206 504,206
Mortgage servicing rights 431 — — 431 431
Accrued interest receivable 3,917 — 3,917 — 3,917

FINANCIAL LIABILITIES:
Core Deposits 532,661 — 532,661 — 532,661
Time Deposits 193,321 — 192,812 — 192,812
Short-term borrowings 69,290 — 69,290 — 69,290
Long-term borrowings 75,116 — 75,718 — 75,718
Accrued interest payable 427 — 427 — 427

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS ― ― ― ― ―


(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2021
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	9,600	$	9,600	$	0	$	0	$	9,600
Interest-bearing deposits in other banks		51,738		0		51,738		0		51,738
Time deposits with other banks		247		0		247		0		247
Restricted investment in bank stocks		1,919		0		1,919		0		1,919
Net loans		744,161		0		0		762,914		762,914
Mortgage servicing rights		367		0		0		367		367
Accrued interest receivable		4,361		0		4,361		0		4,361

FINANCIAL LIABILITIES:
Demand, savings and other deposits		904,877		0		904,877		0		904,877
Time deposits		173,092		0		172,897		0		172,897
Short-term borrowings		27,377		0		27,380		0		27,380
Long-term borrowings		35,000		0		35,987		0		35,987
Subordinated debentures		25,000		0		24,384		0		24,384
Accrued interest payable		251		0		251		0		251

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		0		0		0		0		0

NOTE 11 — REVENUE RECOGNITION

In accordance with ASU 2014-09 Revenue 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 ~~following information should not be interpreted~~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 time deposits with maturities in excess of one year, are recognized as an ~~estimate~~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 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 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 June 30, 2022 and December 31, 2021, the fair value of trust assets under management was $111,330,000 and $108,339,000, respectively. The costs of acquiring asset management customers are incremental and recognized within non-interest expense in the ~~entire Corporation since a fair value calculation is only provided for a limited portion~~consolidated statements of ~~the Corporation’s assets~~income.

Interchange Fees and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at September 30, 2017 and December 31, 2016:Surcharges

~~Cash and Due From Banks, Interest-Bearing Deposits in Other Banks, Time Deposits with Other Banks, Restricted Investment in Bank Stocks, Accrued Interest Receivable and Accrued Interest Payable~~

~~The fair values~~Interchange fees are ~~equal~~related to the ~~current carrying values.~~

~~Investment Securities~~

~~The fair values~~acceptance and settlement of investment securities are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industrydebit card transactions, both point-of-sale and ATM, to ~~value debt securities without relying on the securities’ relationship to other benchmark quoted prices.~~

~~Loans~~

~~Fair values are estimated for categories of loans with similar financial characteristics. Loans are segregated by type such as Commercial~~cover operating costs and ~~Industrial, Commercial and Residential Real Estate mortgages and Consumer. For estimation purposes, each loan category is further segmented into fixed and adjustable rate interest terms.~~

The fair value of each category of performing loans is calculated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

~~Fair value for impaired loans is based on management’s estimate of future cash flows discounted using a rate commensurate with the risk~~risks associated with the ~~estimated future cash flows or based~~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 ~~value~~consolidated statements of income. A surcharge is assessed for use of the ~~collateral if repayment is expected solely from collateral. The assumptions used~~Company’s ATMs by ~~management~~non-customers. All interchange fees and surcharges are ~~judgmentally determined using information regarding each specific borrower.~~

~~Mortgage Servicing Rights~~

~~Servicing rights are carried at cost. The carrying amount approximates fair value.~~

~~Deposits~~

~~The fair value of deposits with no stated maturity, such~~recognized as ~~demand deposits, savings accounts and money market accounts, is equal~~received on a daily basis for the prior business day’s transactions. All expenses related to the ~~amount payable~~settlement of debit card transactions (both point-of-sale and ATM) are recognized on ~~demand at September 30, 2017~~a monthly basis and ~~December 31, 2016.~~

Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar term borrowings, to a schedule of aggregated expected monthly maturities on time deposits.

~~Short-Term and Long-Term Borrowings~~

~~The fair values of short-term borrowings are equal to the current carrying values, and long-term borrowings are estimated using discounted cash flow analyses based~~included in non-interest expense on the ~~Corporation’s incremental borrowing rate for similar instruments.~~consolidated statements of income.

~~Off-Balance Sheet Financial Instruments~~

The fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

NOTE 912 —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. Potential~~Company. At June 30, 2022 and 2021, there were 0 potential common shares ~~that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method.~~outstanding. The following table sets forth the computation of basic and diluted earnings per share.

	Three Months Ended
	September 30,

(In thousands, except earnings per share)	2017		2016		Three Months Ended
					June 30,
					2022		2021
Net income	$	2,056	$	2,144	$	3,822	$	3,605
Weighted-average common shares outstanding		5,695		5,646		5,964		5,905
Basic earnings per share	$	0.36	$	0.38

Weighted-average common shares outstanding		5,695		5,646
Common stock equivalents due to effect of stock options		2		2
Total weighted-average common shares and equivalents		5,697		5,648
Diluted earnings per share	$	0.36	$	0.38
Basic and diluted earnings per share					$	0.64	$	0.61

	Nine Months Ended
	September 30,

(In thousands, except earnings per share)	2017		2016		Six Months Ended
					June 30,
					2022		2021
Net income	$	6,261	$	6,811	$	7,365	$	7,483
Weighted-average common shares outstanding		5,683		5,633		5,956		5,894
Basic earnings per share	$	1.10	$	1.21

Weighted-average common shares outstanding		5,683		5,633
Common stock equivalents due to effect of stock options		2		2
Total weighted-average common shares and equivalents		5,685		5,635
Diluted earnings per share	$	1.10	$	1.21
Basic and diluted earnings per share					$	1.24	$	1.27

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 June 30, 2022 and December 31, 2021.

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.

Goodwill was evaluated for impairment at December 31, 2021, and it was determined that goodwill was not impaired. Management evaluated the need for an interim goodwill impairment analysis and determined that there were no triggering events or negative factors affecting goodwill since the previous test that would indicate goodwill was impaired as of June 30, 2022.

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 ~~2016~~2021 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, ~~2016.~~

2021.

RESULTS OF OPERATIONS

Quarter ended ~~September~~June 30, ~~2017~~2022 compared to quarter ended ~~September~~June 30, ~~2016~~2021

First Keystone Corporation realized earnings for the three months ended ~~September~~June 30, ~~2017~~2022 of ~~$2,056,000, a decrease~~$3,822,000, an increase of ~~$88,000,~~$217,000, or ~~4.1%~~6.0% from the ~~third~~second quarter of ~~2016.~~2021. The ~~decrease~~increase in net income for the three months ended ~~September~~June 30, ~~2017~~2022 was primarily due to an increase in ~~salaries~~interest income, mainly due to increased interest rates and ~~employee benefits as well as an increase~~growth in commercial real estate loans and increased interest ~~expense~~and dividend income earned on ~~deposits and short-term borrowings, as compared to the three months ended September 30, 2016.~~securities.

On a per share basis, ~~net income was $0.36~~ for the three months ended ~~September~~June 30, ~~2017~~2022, net income was $0.64 versus ~~$0.38~~$0.61 for the same three ~~months ended September 30, 2016.~~month period of 2021. Cash dividends amounted to $0.28 and $0.27 per share for the three months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~

2021, 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. ~~For~~In the three months ended ~~September~~June 30, ~~2017,~~2022, interest income amounted to ~~$8,164,000,~~$11,111,000, an increase of ~~$238,000~~$852,000 or ~~3.0%~~8.3% from the three months ended ~~September~~June 30, ~~2016,~~2021, while interest expense amounted to ~~$1,787,000 for~~$1,330,000 in the three months ended ~~September~~June 30, ~~2017,~~2022, an increase of ~~$478,000~~$42,000 or ~~36.5%~~3.3% from the three months ended ~~September~~June 30, ~~2016.~~2021. As a result, net interest income ~~decreased $240,000~~increased $810,000 or ~~3.6%~~9.0% to ~~$6,377,000~~$9,781,000 from ~~$6,617,000~~$8,971,000 for the same period in ~~2016.~~2021.

The ~~Corporation’s~~Company’s net interest margin for the three months ended ~~September~~June 30, ~~2017~~2022 was ~~3.05%~~3.36% compared to ~~3.19%~~3.23% for ~~the~~ same period in ~~2016.~~2021. The ~~decrease~~increase in net interest margin was primarily a result of ~~the unprecedented continuing low interest rate environment.~~

increases in yields earned on securities and commercial loans.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the three months ended ~~September~~June 30, ~~2017~~2022 and ~~September 30, 2016~~2021 was ~~$84,000~~$218,000 and ~~$1,133,000,~~$135,000, respectively. The ~~decrease~~increase 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 June 30, 2022 is also reflective of management’s assessment of the continued credit risk associated with the uncertainty surrounding geopolitical and economic concerns. Charge-off and recovery activity in the allowance for loan losses resulted in net recoveries of ~~$11,000~~ $5,000

and net charge-offs of ~~$1,352,000~~$58,000 for the the three months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~2021, respectively. See Allowance for Loan Losses on page 4145 for further discussion.

NON-INTEREST INCOME

Total non-interest income was ~~$1,713,000~~$1,514,000 for the three months ended ~~September~~June 30, ~~2017,~~2022, as compared to ~~$2,158,000~~$1,865,000 for the same period in ~~2016,~~2021, a decrease of ~~$445,000,~~$351,000, or ~~20.6%~~18.8%. ~~The decrease was mainly the result of a decrease in~~

Net securities (losses) gains from life insurance proceeds. During the third quarter of 2016, the Corporation received $458,000 in tax-free claims income from life insurance proceeds as the result of a death benefit paid on a life insurance policy covering one of its former employees that remained an insured person by the Corporation’s bank-owned life insurance program following her separation of employment. ATM fees and debit card income increased $28,000 or 8.7%decreased $96,000 to ~~$351,000~~($68,000) for the three months ended ~~September~~June 30, 2017. Gains on sales of mortgage loans decreased $20,000 or 19.8% due to a decrease in loans originated with the intent to sell and volume of loans sold. Net gains on sales of investment securities increased $19,000 to $414,000 for the three months ended September 30, 20172022 as compared to the three months ended ~~September~~June 30, ~~2016. The Bank has taken gains and~~2021. This decrease was due to the Company recognizing $68,000 in net losses on held equity securities in the ~~portfolio~~second quarter of 2022 as compared to ~~reduce market risk and protect from further changes~~recognizing $28,000 in ~~value~~net gains on held equity securities in the ~~face~~second quarter of 2021. Trust department income increased $3,000 or 1.1% to $268,000 for the three months ended June 30, 2022 as compared to the same period in 2021.

Service charges and fee income increased $68,000 or 14.1%. The increase was mainly due to increases in ~~long-term interest rates. The net effect of~~overdraft fees as compared to the same period in 2021. ATM fees and debit card income decreased $10,000 or 1.8% to $558,000 for the three months ended June 30, 2022.

Net (losses) gains on sales of mortgage loans ~~and net investment securities gains was $495,000~~decreased $308,000 or 100.0% to $0 due to no sales of mortgage loans in the ~~third~~second quarter of ~~2017,~~2022 as the rate environment has led to many loans being sold at a ~~decrease of $1,000~~loss and there have been fewer mortgages originated with intent to sell. Other non-interest income decreased $6,000 or ~~0.2% from the third quarter of 2016.~~

~~NON-INTEREST EXPENSE~~

~~Total non-interest expense was $5,681,000~~9.2% to $59,000 for the three months ended ~~September~~June 30, ~~2017, as compared to $5,078,000~~2022.

NON-INTEREST EXPENSE

Total non-interest expense was $6,595,000 for the three months ended ~~September~~June 30, ~~2016. Non-interest expense increased $603,000 or 11.9%.~~2022, as compared to $6,547,000 for the three months ended June 30, 2021

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to ~~$3,050,000~~$3,462,000 or ~~53.7%~~52.5% of total non-interest expense for the three months ended ~~September~~June 30, ~~2017,~~2022, as compared to ~~$2,606,000~~$3,461,000 or ~~51.3%~~52.9% for the ~~same~~ three months ~~of 2016. The increase was due to the bank adding new sales positions and additional staff, as well as increased costs associated with employee health care.~~ended June 30, 2021.

Net occupancy, furniture and equipment, and computer expense amounted to ~~$821,000~~$983,000 for the three months ended ~~September~~June 30, ~~2017, a decrease~~2022, an increase of ~~$85,000~~$43,000 or ~~9.3%.~~4.6% which was due to the implementation of several new software programs throughout 2021 and early 2022 to increase security and efficiency. Professional services increased ~~$61,000~~$97,000 or ~~43.6%~~35.5% to ~~$201,000~~$370,000 as of ~~September~~June 30, ~~2017.~~2022. The increase was ~~due to pricing increases~~mainly the result of an increase in consulting expense as the result of strategic planning and consulting services associated with implementing new internal systems contracts along with normal increases in annual audit ~~and tax services and additional fees incurred for financial services department analysis and consulting.~~expenses. Pennsylvania shares tax expense amounted to ~~$157,000~~$324,000 for the three months ended ~~September~~June 30, ~~2017, a decrease~~2022, an increase of ~~$32,000~~$11,000 or ~~16.9%~~3.5% as compared to the three months ended ~~September~~June 30, ~~2016.~~2021.

~~FDIC~~Federal Deposit Insurance Corporation (“FDIC”) insurance expense ~~decreased $4,000 or 4.7% from~~amounted to $120,000 for the ~~third quarter of 2016.~~three months ended June 30, 2022 and 2021. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to ~~$184,000~~$242,000 for the three months ended ~~September~~June 30, ~~2017 and 2016. Data processing expenses decreased $1,000~~2022, a decrease of $41,000 or 0.7% to $148,000 for the three months ended September 30, 2017 as compared to the same three months of 2016. Foreclosed assets held for resale expense decreased $76,000 in the third quarter of 2017 as the result of normal costs related to foreclosed assets and the net effect of gains on sold foreclosed asset properties during the three months ended September 30, 2017. Advertising expense increased $53,000 or 57.0% during the three months ended September 30, 2017 as compared to the same three months of 2016. The increase was primarily due to increased media advertising for the rollout of new rewards checking and savings products.

~~Other non-interest expense amounted to $880,000 for the three months ended September 30, 2017, an increase of $243,000 or 38.1%~~14.5% as compared to the three months ended ~~September~~June 30, ~~2016.~~2021. The ~~increase~~decrease was ~~due~~the result of negotiations of new internal systems contracts resulting in vendor relationship credits that were applied to the expenses related to those systems. Data processing expenses amounted to $251,000 for the three months ended June 30, 2022 as compared to $323,000 for the same period of 2021, a decrease of $72,000 or 22.3%. This decrease was also the result of the negotiations of new systems contracts.

Advertising expense amounted to $118,000 in the second quarter of 2022, an increase ~~in collections fees attributable~~of $9,000 or 8.3% as compared to ~~increased legal costs.~~the three months ended June 30, 2021. Other non-interest expense amounted to $725,000 for the three months ended June 30, 2022 and 2021.

INCOME TAXES

Income tax expense amounted to ~~$269,000~~$660,000 for the three months ended ~~September~~June 30, ~~2017,~~2022, as compared to ~~$420,000~~$549,000 for the three months ended ~~September~~June 30, ~~2016, a decrease~~2021, an increase of ~~$151,000.~~$111,000. The effective total income tax rate was ~~11.6%~~14.7% for the ~~third quarter of 2017~~three months ended June 30, 2022 as compared to ~~16.4%~~13.2% for the ~~third quarter of 2016.~~three months ended June 30, 2021. The ~~decrease~~increase in the effective tax rate was mainly due to ~~a net increase~~higher overall operating income. The Company recognized $58,000 and $101,000 of tax credits from low-income housing partnerships in ~~tax-exempt interest earned from investments in state~~the three months ended June 30, 2022 and ~~local units of government.~~2021, respectively.

Six months ended June 30, 2022 compared to six months ended June 30, 2021

~~Nine months ended September 30, 2017 compared to nine months ended September 30, 2016~~

First Keystone Corporation realized earnings for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 of ~~$6,261,000,~~$7,365,000, a decrease of ~~$550,000,~~$118,000, or ~~8.1%~~1.6% from the same period in ~~2016.~~2021. The decrease in net income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 was primarily due to ~~an increase~~less PPP loan fees and a decrease in ~~salaries~~non-interest income, mainly due to fewer sales of mortgage loans and ~~employee benefits as well as an increase in interest expense on deposits and short-term borrowings.~~net securities losses.

On a per share basis, ~~for the nine months ended September 30, 2017,~~ net income was ~~$1.10 versus $1.21~~$1.24 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2022 versus $1.27 for the same period in 2021. Cash dividends amounted to ~~$0.81~~$0.56 and $0.55 per share for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~2021, 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. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, interest income amounted to ~~$24,071,000,~~$21,740,000, an increase of ~~$244,000~~$1,206,000 or ~~1.0%~~5.9% from the ~~first nine~~six months ~~of 2016,~~ended June 30, 2021, while interest expense amounted to ~~$4,833,000 for~~$2,503,000 in the ~~nine~~six months ended ~~September~~June 30, ~~2017, an increase~~2022, a decrease of ~~$929,000,~~$90,000 or ~~23.8%~~3.5% from the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. As a result, net interest income ~~decreased $685,000~~increased $1,296,000 or ~~3.4%~~7.2% to ~~$19,238,000~~$19,237,000 from ~~$19,923,000~~$17,941,000 for the same period in ~~2016.~~2021.

The ~~Corporation’s~~Company’s net interest margin for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 was ~~3.06%~~3.28% compared to ~~3.18%~~3.30% for ~~the~~ same period in ~~2016.~~2021. The decrease in net interest margin was a result of ~~the unprecedented continuing low interest rate environment.~~a decrease in yield earned on loans plus an increase in cost of short term borrowings.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~September 30, 2016~~2021 was ~~$167,000~~$437,000 and ~~$1,700,000,~~$270,000, respectively. The ~~decrease~~increase 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. ~~Net charge-offs~~The provision for loan losses for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 is also reflective of management’s assessment of the continued credit risk associated with the uncertainty surrounding geopolitical and ~~2016 were $76,000~~economic concerns. Charge-off and ~~$1,439,000,~~recovery activity in the allowance for loan losses resulted in net recoveries of $43,000 and net charge-offs of $79,000 for the six months ended June 30, 2022 and 2021, respectively. See Allowance for Loan Losses on page 4145 for further discussion.

NON-INTEREST INCOME

Total non-interest income was ~~$4,746,000~~$2,903,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, as compared to ~~$5,124,000~~$3,740,000 for the same period in ~~2016,~~2021, a decrease of ~~$378,000,~~$837,000, or ~~7.4%~~22.4%. The decrease was due to recognizing net losses on the sales of mortgage loans and net securities losses on held equity securities during the first half of 2022 as compared to recognizing net gains on both during the same period of 2021.

ATM fees and debit card income ~~increased by $68,000~~decreased $17,000 or ~~7.0%~~1.6% to ~~$1,034,000~~$1,067,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2022. Service charges and fee income increased $202,000 for the six months ended June 30, 2022. The increase was mainly due to increased overdraft fees on DDA accounts. Gains on sales of mortgage loans decreased ~~$53,000~~$696,000 or ~~20.5%~~105.1% due to a ~~decrease~~low number of individual loans sold in the first half of 2022 and many of the loans sold in 2022 being

sold at a loss. These factors were due to the current rate environment and fewer loans being originated with the intent to sell ~~and volume of loans sold. Net gains on sales of investment securities increased $97,000 to $886,000~~in 2022.

Trust department income was $518,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and 2021. Net securities (losses) gains decreased $274,000 or 191.6% to ($131,000) for the six months ended June 30, 2022 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. The ~~Bank has taken gains and~~decrease was due to the Company recognizing $131,000 in net losses on held equity securities in the ~~portfolio~~first half of 2022 as compared to ~~reduce market risk and protect from further changes~~recognizing $143,000 in ~~value~~net gains on held equity securities in the ~~face of increases~~same period in long-term interest rates. Gains from life insurance proceeds decreased $458,000. In the third quarter of 2016, the Corporation received tax-free claims income from life insurance proceeds as the result of a death benefit paid on a life insurance policy covering one of its former employees that remained an insured person by the Corporation’s bank-owned life insurance program following her separation of employment. The net effect of gains on sales of mortgage loans and net investment securities gains was $1,091,000 in the nine months ended September 30, 2017, an increase of $44,000 or 4.2% from the nine months ended September 30, 2016.2021.

NON-INTEREST EXPENSE

Total non-interest expense was ~~$16,610,000~~$13,111,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, as compared to ~~$15,232,000~~$12,744,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. Non-interest expense increased ~~$1,378,000~~$367,000 or ~~9.0%~~2.9%.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to ~~$8,823,000~~$7,016,000 or ~~53.1%~~53.5% of total non-interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, as compared to ~~$7,979,000~~$6,761,000 or ~~52.4%~~53.1% for the ~~same nine~~six months ~~of 2016.~~ended June 30, 2021. The increase was mainly due to normal merit increases and new hires along with an increase in medical insurance costs as compared to the ~~bank adding new sales positions in the commercial and residential mortgage lending areas and additional staff, as well as increased costs associated with employee health care.~~first half of 2021.

Net occupancy, furniture and equipment, and computer expense amounted to ~~$2,527,000~~$2,000,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, an increase of ~~$98,000~~$155,000 or ~~4.0%~~8.4%. The increase is the result of the implementation of several new software programs to increase security and efficiency. Professional services increased ~~$192,000~~$136,000 or ~~43.4%~~25.6% to ~~$634,000 as of September~~$668,000 for the six months ended June 30, ~~2017.~~2022. The increase was ~~due to pricing increases~~mainly the result of an increase in consulting expense as the result of strategic planning and consulting services associated with implementing new internal systems contracts along with normal increases in annual audit ~~and tax services, out of scope audit work associated with the 2016 annual report and additional fees incurred for financial services department analysis and consulting.~~expenses. Pennsylvania shares tax expense amounted to ~~$568,000~~$648,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, an increase of ~~$2,000~~$22,000 or ~~0.4%~~3.5% as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021.

FDIC insurance expense ~~decreased $161,000~~increased $50,000 or ~~40.0% from~~24.2% for the ~~same nine~~six months ~~of 2016. The decrease was due to changes in assessment methodologies implemented by the FDIC in the second half of 2016.~~ended June 30, 2022. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense ~~increased $19,000~~amounted to $370,000 for the six months ended June 30, 2022, a decrease of $113,000 or ~~3.9%~~23.4% as compared to the six months ended June 30, 2021. The decrease was the result of negotiations of new internal systems contracts resulting in vendor relationship credits that were applied to the expenses related to those systems. Data processing expenses amounted to $509,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017. Data processing expenses increased $25,000~~2022, a decrease of $108,000 or 6.0% to $442,000 for the nine months ended September 30, 2017. Foreclosed assets held for resale expense decreased $82,000 in the nine months ended September 30, 2017. The decrease was due to lower maintenance costs and sales expenses in the early part of 2017 and the net effect of gains on sold foreclosed asset properties during the third quarter of 2017. Advertising expense increased $152,000 or 59.4% during the nine months ended September 30, 201717.5% as compared to the ~~same nine~~six months ended June 30, 2021. This decrease was also the result of ~~2016. The increase was primarily due to increased media advertising for~~ the ~~rollout~~negotiations of new ~~rewards checking and savings products.~~systems contracts.

Advertising expense increased $9,000 or 5.0% during the six months ended June 30, 2022. Other non-interest expense amounted to ~~$2,339,000~~$1,453,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017, an increase~~2022, a decrease of ~~$289,000~~$36,000 or ~~14.1%~~2.4% as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016. The increase~~2021. This decrease was mainly due to ~~an increase~~a decrease in ~~Kasasa brand product fees incurred~~the provision for unfunded commitments, as athe result of ~~discontinued services, an increase~~higher line of credit usage and lower officer commitments, along with a decrease in loan collections ~~fees attributable to increased~~expenses, as the result of legal ~~costs, promotional expenses related to~~and insurance reimbursements following the ~~mortgage servicing department and closing costs associated with the sale~~payoff of a ~~property.~~non-accrual commercial real estate loan.

INCOME TAXES

Income tax expense amounted to ~~$946,000~~$1,227,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, as compared to ~~$1,304,000~~$1,184,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016, a decrease~~2021, an increase of ~~$358,000.~~$43,000. The effective total income tax rate was ~~13.1%~~14.3% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 as compared to ~~16.1%~~13.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. The ~~decrease~~increase in the effective tax rate was mainly due to ~~a net increase~~higher overall operating income. The Company recognized $132,000 and $202,000 of tax credits from low-income housing partnerships in ~~tax-exempt interest from investments in state~~the six months ended June 30, 2022 and ~~local units of government.~~2021, respectively.

FINANCIAL CONDITION

SUMMARY

Total assets ~~increased~~decreased to ~~$985,108,000~~$1,304,582,000 as of ~~September~~June 30, ~~2017, an increase~~2022, a decrease of ~~$825,000~~$15,768,000 from year-end ~~2016.~~2021. Total assets as of December 31, ~~2016~~2021 amounted to ~~$984,283,000.~~$1,320,350,000.

Total ~~investments~~debt securities available-for-sale decreased ~~$18,549,000~~$27,656,000 or ~~4.9%~~6.3% to ~~$361,092,000~~$410,260,000 as of ~~September~~June 30, ~~2017.~~2022 from December 31, 2021.

Total loans increased ~~$20,403,000~~$51,979,000 or ~~3.9%.~~6.9% to $804,820,000 as of June 30, 2022 from December 31, 2021. Loan demand grew in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 as the Bank has ~~seen~~realized an increase in loan originations, primarily in the commercial real estate ~~and commercial and industrial portfolios.~~portfolio.

Total deposits ~~increased $33,734,000~~decreased $84,361,000 or ~~4.6%~~7.8% to ~~$759,716,000~~$993,608,000 as of ~~September~~June 30, ~~2017.~~2022 from December 31, 2021. The decrease was mainly due to a decrease in highly rate sensitive deposits 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 ~~decreased~~increased in the ~~first nine~~six months ~~of 2017~~ended June 30, 2022 by ~~$38,175,000~~$92,346,000 to ~~$106,231,000~~$154,723,000 from ~~$144,406,000~~$62,377,000 as of December 31, ~~2016.~~2021. Borrowings ~~decreased~~increased mainly due to ~~increased~~decreased deposit ~~balances.~~balances and growth in the loan portfolio.

Total stockholders’ equity ~~increased~~amounted to ~~$115,309,000~~$125,379,000 at ~~September~~June 30, ~~2017, an increase~~2022, a decrease of ~~$5,624,000~~$23,176,000 or ~~5.1%~~15.6% from December 31, ~~2016.~~

2021 due to a decrease in the market value of the securities portfolio resulting in an accumulated other comprehensive loss position.

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 ~~92.5%~~94.1% at ~~September~~June 30, ~~2017, compared to 92.4%~~2022 and 94.0% at ~~September~~June 30, ~~2016.~~2021. 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 ~~$542,785,000~~$804,820,000 as of ~~September~~June 30, ~~2017,~~2022, up ~~$20,403,000,~~$51,979,000, or ~~3.9%~~6.9% since year-end ~~2016.~~2021. The loan portfolio continues to be well diversified. Non-performing assets ~~increased~~decreased since year-end ~~2016,~~2021, and overall asset quality has remained consistent. Total non-performing assets were ~~$6,812,000~~$6,136,000 as of ~~September~~June 30, ~~2017, an increase~~2022, a decrease of ~~$2,570,000,~~$930,000, or ~~60.6%~~13.2% from ~~$4,242,000~~$7,066,000 reported in non-performing assets as of December 31, ~~2016.~~2021. Total allowance for loan losses to total non-performing assets was ~~109.3%~~149.28% as of ~~September~~June 30, ~~2017~~2022 and ~~173.5%~~122.84% at December 31, ~~2016.~~2021. See the Non-Performing Assets section on page 47 for more information.

In addition to loans, another primary earning asset is our overall ~~investment~~securities portfolio, which decreased in size from December 31, ~~2016~~2021 to ~~September~~June 30, ~~2017. Available-for-sale~~2022. Debt securities available-for-sale amounted to ~~$361,092,000~~$410,260,000 as of ~~September~~June 30, ~~2017,~~2022, a decrease of ~~$18,545,000~~$27,656,000 from year-end ~~2016.~~2021. The decrease in debt securities available-for-sale is mainly due to a $35,521,000 decrease in the market value of the portfolio as a result of the current interest rate environment and $22,444,000 in principal paydowns on debt securities, offset by the deployment of $38,349,000 in cash to purchase debt securities, along with other portfolio activity.

Interest-bearing deposits in other banks ~~increased~~decreased as of ~~September~~June 30, ~~2017,~~2022, to ~~$1,744,000~~$783,000 from ~~$790,000~~$51,738,000 at year-end ~~2016.~~2021 due to decreased cash held at the Federal Reserve Bank. Time deposits with other banks were ~~$1,482,000~~$0 at ~~September~~June 30, ~~2017~~2022 and $247,000 at December 31, ~~2016.~~

2021 due to the maturity of the one remaining time deposit.

LOANS

Total loans increased to ~~$542,785,000~~$804,820,000 as of ~~September~~June 30, ~~2017~~2022 as compared to ~~$522,382,000~~$752,841,000 as of December 31, ~~2016.~~2021. The table on page 19 provides data relating to the composition of the ~~Corporation’s~~Company’s loan portfolio on the dates indicated. Total loans increased by ~~$20,403,000~~$51,979,000 or ~~3.9%~~6.9%.

Steady demand for borrowing by ~~both individuals and~~ businesses accounted for the ~~3.9%~~6.9% increase in the loan portfolio from December 31, ~~2016~~2021 to ~~September~~June 30, ~~2017. The Commercial and Industrial portfolio increased $9,663,000 to $93,236,000 as of September 30, 2017, as compared to $83,573,000 at December 31, 2016. The increase in~~2022. Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased $13,000 or 0.02% from $82,526,000 at December 31, 2021 to $82,539,000 at June 30, 2022. The small increase in the Commercial and Industrial portfolio during the six months ended June 30, 2022 was ~~attributed~~mainly the result of a reduction of $4,748,000 in the portion of the Commercial and Industrial portfolio attributable to SBA PPP loans, the balance of which decreased from $4,894,000 at December 31, 2021 to $146,000 at June 30, 2022, as a result of loan forgiveness. The portion of the Commercial and Industrial portfolio excluding SBA PPP loans increased $4,761,000 during the six months ended June 30, 2022, mainly resulting from $7,438,000 in new loan originations ~~totaling $24,183,000~~for the six months ended June 30, 2022 and an increase in utilization of existing Commercial and Industrial lines of credit of $1,801,000, offset by loan payoffs of ~~$15,809,000, as well as~~$1,587,000 and regular principal payments and other typical fluctuations ~~and activity~~ in the Commercial and Industrial portfolio ~~including utilization of existing lines of credit.~~during the six months ended June 30, 2022. The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased ~~$13,330,000 to $276,849,000 at September 30, 2017, as compared to $263,519,000~~$46,604,000 or 8.9% from $521,654,000 at December 31, ~~2016.~~2021 to $568,258,000 at June 30, 2022. The increase is mainly attributable to new loan originations of $87,507,000 for the six months ended June 30, 2022, offset by loan payoffs of $36,826,000 and a decrease in utilization of existing Commercial Real Estate lines of credit of $761,000, as well as regular principal payments and other typical amortization in the Commercial Real Estate portfolio during the six months ended June 30, 2022. Residential Real Estate loans increased $5,238,000 or 3.7% from $143,383,000 at December 31, 2021 to $148,621,000 at June 30, 2022. The increase was mainly the result of ~~$48,570,000~~$17,062,000 in new loan originations and an increase in utilization of existing Residential Real Estate (Home Equity) lines of credit of $2,491,000, offset by ~~$22,187,000 in~~net loans sold of $2,719,000, loan payoffs of $10,187,000 (of which $3,600,000 was refinanced with the Bank during the six months ended June 30,2022 with the new refinanced loan balances included in ~~addition to~~the new loan origination total), and regular principal payments and other typical amortizations in the Commercial Real Estate portfolio. Residential Real Estate loans decreased $2,577,000 to $166,458,000 at September 30, 2017, as compared to $169,035,000 at December 31, 2016. The decrease was the result of $12,324,000 in new loan originations offset by loan payoffs of $11,237,000, net loans sold of $1,340,000, and regular principal payments. Net loans soldamortization in the Residential Real Estate portfolio during the six months ended June 30, 2022. Net loans sold for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 consisted of total loans sold during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 of ~~$6,545,000,~~$4,463,000, offset with loans opened and sold in the same quarter during ~~any quarter~~the first two quarters of ~~2017~~2022 which amounted to ~~$5,205,000.~~$1,744,000. The ~~Corporation~~Company continues to originate and sell certain long-term fixed rate residential mortgage loans, which conform to secondary market ~~requirements.~~requirements, when the market pricing is favorable. 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 despite the continued slow economic conditions.~~borrowers.

Management believes that the loan portfolio is well diversified. The total commercial portfolio was ~~$370,085,000~~$650,797,000 at ~~September~~June 30, ~~2017.~~2022. Of total loans, ~~$276,849,000~~$568,258,000 or ~~51.0%~~70.6% 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.

The largest relationship is comprised of various real estate entities with a mutual owner who is a related party of the bank and began real estate investment and development activities in 1989. The relationship had outstanding loan balances and unused commitments of $14,725,000 at September 30, 2017. The individual owns a diverse mix of real estate entities which specialize in construction/development projects, leasing of commercial office space, and rental of multi-tenant residential units. This relationship is comprised of $13,625,000 in term debt and two lines of credit totaling $1,100,000. The relationship is well secured by first lien mortgages on income producing commercial and residential real estate, plus assignment of governmental leases and collateral pledge of cash accounts and marketable securities.

The second largest relationship is comprised of multiple first and second lien mortgages relating to the purchase and improvements of several existing hotels. The principal and related owners/guarantors have extensive experience in the hotel industry, owning and operating hotels in various states for over twenty-five years. At September 30, 2017, the relationship had outstanding loan balances and unused commitments of $10,140,000. The debt is comprised of $10,085,000 in term debt and two lines of credit totaling $55,000. The loans are secured by commercial real estate and business assets.

The third largest relationship consists of a large, suburban/rural public school district that provides educational services to over 5,000 students and employs approximately 750 individuals as administrative, professional, and support staff. At September 30, 2017, the relationship had outstanding balances totaling $9,665,000 which consisted entirely of tax-free commercial term debt. The relationship is secured by business assets and the full faith, credit, and taxing power of the district.

The fourth largest relationship consists of a real estate development/holding company that was established in 2006 to construct a multi-tenant medical complex, as well as the medical-related entities that operate out of the complex. The relationship had outstanding loan balances and unused commitments of $8,286,000 at September 30, 2017. The debt is comprised of $7,836,000 in term debt and $450,000 in lines of credit. The relationship is secured by commercial real estate and business assets, as well as the assignment of leases and a life insurance policy.

The fifth largest relationship consists of a city incorporated in 1870, encompassing approximately 2.7 square miles, with a population of over 9,000. In 2016, the city undertook to refinance existing general obligation notes and bonds, to obtain interim financing (pending receipt of grants) to complete construction of a new wastewater treatment plant, and to fund an easement acquisition and obstruction removal project pertaining to the city’s municipal airport. At September 30, 2017, the relationship had outstanding loan balances and unused commitments of $8,085,000, which was comprised of $5,913,000 in term debt and $2,172,000 in available credit on three tax-free commercial loans. The relationship is secured by the full faith, credit, and taxing power of the city.

~~Each of the five relationships is located within the Corporation’s market area.~~

All of the above mentioned loans are performing as agreed and all are graded pass. The property securing each of the loans was appraised at the time the loan was originated. Appraisals are ordered independently of the loan approval process from appraisers on an approved list. All appraisals are reviewed internally for conformity with accepted standards of the Bank.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as ~~$521,268,000~~$781,530,000 or ~~96.2%~~97.3% of gross loans are graded Pass; ~~$3,156,000~~$1,080,000 or ~~0.6%~~0.1% are graded Special Mention; ~~$17,592,000~~$20,961,000 or ~~3.2%~~2.6% 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 to ~~$20,748,000~~$22,041,000 at ~~September~~June 30, ~~2017,~~2022, as compared to ~~$28,417,000~~$24,737,000 at December 31, ~~2016.~~2021. Commercial and Industrial non-pass grades decreased to ~~$1,364,000~~$755,000 as of ~~September~~June 30, ~~2017~~2022 as compared to ~~$5,109,000~~$796,000 as of December 31, ~~2016.~~2021. Commercial Real Estate non-pass grades decreased to ~~$16,969,000~~$20,313,000 as of ~~September~~

June 30, ~~2017~~2022 as compared to ~~$20,041,000~~$22,346,000 as of December 31, ~~2016.~~2021. The Residential Real Estate and Consumer loan non-pass grades decreased to ~~$2,415,000~~$973,000 as of ~~September~~June 30, ~~2017~~2022 as compared to ~~$3,267,000~~$1,595,000 as of December 31, ~~2016.~~

2021.

The ~~$3,745,000~~ decrease in Commercial ~~and Industrial~~Real Estate non-pass grades ~~was~~from December 31, 2021 to June 30, 2022 is mainly the result of a payoff that was completed during the ~~upgrade~~second quarter of nine loans totaling $4,411,000 net against the downgrade of four loans totaling $810,000, combined with typical amortization and other fluctuations in the Commercial and Industrial non-pass grade portfolio. Four of the upgraded loans totaling $3,946,000 are2022 on a Substandard non-accrual loan to a ~~manufacturer~~contractor specializing in modular construction that ~~produces parts for various industries. The~~carried a balance of $1,000,000 at December 31, 2021. Four loans to the owners/operators of an indoor family entertainment complex that carried an aggregate balance of $753,000 at December 31, 2021 were also upgraded from ~~Special Mention~~Substandard to pass-grade status during the second quarter of 2017 due to the borrower’s improved financial performance and debt service capacity. Five of the upgraded loans totaling $465,000 are to a contractor specializing in concrete projects. The loans were upgraded from Special Mention to pass-grade status during the threesix months ended ~~September~~June 30, 2017 due to improved financial performance as reflected by increased sales and improved cash flow and debt service capacity. The four downgraded loans are to a plastic processing company focused on non-post-consumer recycling. The loans were downgraded to Substandard and moved to non-accrual status during the first quarter of 2017 due to a downturn in revenues resulting from lower commodity prices for new plastic produced from petroleum and natural gas liquids.

2022.

The $3,072,000 decrease in the Commercial Real Estate non-pass grade portfolio was the result of several fluctuations including large upgrades to pass-grade status and significant payments, pay-downs, and pay-offs net against loans transferred to (or originated at) non-pass grade status and the repurchase of a portion of a non-pass grade participation loan, combined with other normal activity in the Commercial Real Estate non-pass grade portfolio during the nine months ended September 30, 2017. A repurchase of one participant’s portion of a non-pass grade participation loan to a student housing holding company was completed during the three months ended September 30, 2017; the repurchased portion totaled $1,350,000. One loan in the amount of $1,086,000 to the owner of a golf course and related facilities was upgraded from Special Mention to pass-grade status during the second quarter of 2017, and one loan in the amount of $536,000 to a contractor specializing in concrete projects was upgraded from Special Mention to pass-grade status during the three months ended September 30, 2017. Payments and principal pay-downs totaling $330,000 were made on a purchased participation loan to the owner of a recreation facility during the nine month period ended September 30, 2017. Two loans totaling $654,000 to a plastic processing company focused on non-post-consumer recycling were downgraded to Substandard and moved to non-accrual status during the first quarter of 2017 due to a downturn in revenues resulting from lower commodity prices for new plastic produced from petroleum and natural gas liquids.

Activity associated with four loans to the developer of a residential sub-division resulted in a net decrease of $2,568,000 in the Commercial Real Estate non-pass grade portfolio during the nine months ended September 30, 2017. Two loans totaling $2,220,000 were paid off and a $500,000 pay-down was made on one of the guarantor’s existing loans during the first quarter of 2017. A loan with an outstanding recorded investment of $152,000 at September 30, 2017 was originated at substandard status during the second quarter of 2017 to allow for the construction of an additional single family spec home in light of a perceived increase in interest on the part of prospective purchasers and to support sales momentum and provide available inventory of homes for sale in the aftermath of the successful sale of an existing spec home. The Bank granted the loan based on the borrower’s excellent loan payment history with the Bank and taking into account the existence of other viable sources of repayment, but inadequate debt service capability based on historical income led to the loan’s substandard risk rating.

~~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

September 30, December 31,
(Dollars in thousands) 2017 2016
Commercial and Industrial $ 93,236 $ 83,573
Commercial Real Estate 276,849 263,519
Residential Real Estate 166,458 169,035
Consumer 6,242 6,255
Total loans $ 542,785 $ 522,382


(Dollars in thousands)	June 30,		December 31,
	2022		2021
Commercial and Industrial	$	82,539	$	82,526
Commercial Real Estate		568,258		521,654
Residential Real Estate		148,621		143,383
Consumer		5,402		5,278
Total Loans	$	804,820	$	752,841

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of ~~September~~June 30, ~~2017,~~2022, the allowance for loan losses was ~~$7,448,000~~$9,160,000 as compared to ~~$7,357,000~~$8,680,000 as of December 31, ~~2016.~~2021. 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. On a quarterly basis, management evaluates the qualitative factors utilized in the calculation of the Company’s allowance for loan losses and various adjustments are made to these factors as deemed necessary at the time of evaluation. The uncertain economic climate has played a large role in the qualitative factor adjustments that have been implemented throughout 2021 and the first half of 2022. Qualitative factors remained unchanged during the first quarter of 2021, as the economy and unemployment levels showed marked improvement over the prior quarter. During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Company’s market areas demonstrated marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to an artificial increase in market values in the real estate sector as individuals’ willingness to pay above-average market prices has sparked uncertainty surrounding collateral values in the real estate market.

Qualitative factors remained unchanged during the third quarter of 2021. During the fourth quarter of 2021, the qualitative factors related to external factors/conditions were increased by one basis point across all loan segments due increased inflation rates, as well as elevated unemployment levels (although improved from 2020 and early 2021) and the uncertainty of how broad the changes implemented by the Federal Reserve would be. The qualitative factors related to collateral values were also increased by one basis point across all loan segments during the fourth quarter of 2021, as collateral values continued to artificially increase as individuals were willing to pay above-average market prices in all sectors. During the first quarter of 2022, the qualitative factors related to the local/regional economy were increased by one basis point across all loan segments due to ongoing economic uncertainty resulting from supply chain disruptions caused by the COVID-19 pandemic, conflicts in foreign countries causing inflationary pressures due to reductions/disruptions in the production of the commodities controlled by these countries, increased interest rates, and the overall inflation rate continuing to rise. During the second quarter of 2022, the qualitative factors remained unchanged. Modifications granted in compliance with Section 4013 of the CARES Act were highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio. See Allowance for Loan Losses on page 15 for further discussion.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016. For~~2021. Net recoveries as a percentage of average loans was 0.006% for the ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~ net charge-offs as a percentage of average loans was ~~0.01% and 0.28, respectively.~~0.011% for the six months ended June 30, 2021. Net ~~charge-offs~~recoveries amounted to ~~$76,000 and $1,439,000~~$43,000 the six months ended June 30, 2022 as compared to net charge-offs of $79,000 for the ~~nine month periods~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~2021.

For the ~~first nine~~six months ~~of 2017,~~ended June 30, 2022, the provision for loan losses was ~~$167,000~~$437,000 as compared to ~~$1,700,000~~$270,000 for the ~~first nine~~six months ~~of 2016.~~ended June 30, 2021. The provision, net of charge-offs and recoveries, ~~increased~~resulted in the quarter end ~~Allowance~~allowance for ~~Loan Losses to $7,448,000~~loan losses of $9,160,000 of which ~~12.1%~~7.4% was attributed to the Commercial and Industrial component; ~~61.4%~~65.0% attributed to the Commercial Real Estate component; ~~23.5%~~17.5% attributed to the Residential Real Estate ~~component (primarily residential mortgages); 1.5%~~component; 0.9% attributed to the Consumer component; and ~~1.5%~~9.2% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page ~~14)~~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 ~~September~~June 30, ~~2017.~~2022.

Analysis of Allowance for Loan Losses

September 30, September 30,
(Dollars in thousands) 2017 2016
Balance at beginning of the nine month period $ 7,357 $ 6,739
Charge-offs:
Commercial and Industrial — 195
Commercial Real Estate 97 1,190
Residential Real Estate 61 45
Consumer 59 32
217 1,462
Recoveries:
Commercial and Industrial 74 6
Commercial Real Estate 52 ―
Residential Real Estate 9 12
Consumer 6 5
141 23

Net charge-offs 76 1,439
Additions charged to operations 167 1,700
Balance at end of the nine month period $ 7,448 $ 7,000

Ratio of net charge-offs during the period to average loans outstanding during the period 0.01 % 0.28 %
Allowance for loan losses to average loans outstanding during the period 1.41 % 1.35 %


(Dollars in thousands)
	June 30,			June 30,
As of and for the six months ended:	2022			2021
Beginning balance	$	8,680		$	7,933
Charge-offs:
Commercial and Industrial		9			13
Commercial Real Estate		—			29
Residential Real Estate		—			55
Consumer		6			20
		15			117
Recoveries:
Commercial and Industrial		2			—
Commercial Real Estate		38			30
Residential Real Estate		14			1
Consumer		4			7
		58			38

Net (recoveries) charge-offs		(43)			79
Additions charged to operations		437			270
Balance at end of period	$	9,160		$	8,124

Ratio of net (recoveries) charge-offs during the period to average loans outstanding during the period		(0.006)	%		0.011	%
Allowance for loan losses to average loans outstanding during the period		1.177	%		1.120	%

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 recoveries along with the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to ~~1.41%~~1.177% and 1.120% at ~~September~~June 30, ~~2017~~2022 and ~~1.35% at September 30, 2016.~~

2021, respectively.

NON-PERFORMING ASSETS

The table on page 4550 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 TDRs 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 ~~$6,812,000~~$6,136,000 as of ~~September~~June 30, ~~2017~~2022, as compared to ~~$4,242,000~~$7,066,000 as of December 31, ~~2016.~~2021. The economy is very unstable. Inflation is at a four-decade high. The war between Ukraine and Russia is creating worldwide turmoil. The unemployment rate has dropped significantly compared to the beginning of the COVID-19 pandemic, but the labor force participation rate has also fallen. The need for workers has driven wages up in ~~particular, high unemployment/labor underutilization rate, weak job markets, unsettled fuel prices~~most sectors. Inflation is causing extreme concerns in all areas of the economy. The war abroad and ~~energy costs,~~its effects on various commodities are pushing inflationary concerns. Values of new and used homes and automobiles continue to climb. The Federal Reserve has indicated a plan to continue to raise interest rates at an accelerated level throughout the ~~continued slowness~~year. There has also been a resurgence of the COVID-19 pandemic in some areas of the ~~housing industry in our market areas~~country and world. These forces have had a direct effect on the ~~Corporation’s~~Company’s non-performing assets. The ~~Corporation~~Company is closely monitoring all segments of its ~~Commercial Real Estate~~loan portfolio because of the current uncertain economic environment. ~~In particular, vacancy rates are rising, while property values in some markets have fallen.~~ Non-accrual loans totaled ~~$5,615,000~~$5,970,000 as of ~~September~~June 30, ~~2017~~2022, as compared to ~~$2,935,000~~$7,066,000 as of December 31, ~~2016.~~2021. The ~~significant increase~~decrease in non-accrual loans ~~at September 30, 2017 as compared to~~from December 31, ~~2016 is~~2021 to June 30, 2022 was mainly ~~attributable to seven loans to a plastic processing company focused on non-post-consumer recycling and a related guarantor totaling $1,534,000 that were moved to~~the result of the payoff of one non-accrual ~~status during the first quarter of 2017 and $1,350,000 that was repurchased during the third quarter of 2017 on a non-accrual participation~~ loan to a ~~student housing holding company. Foreclosed~~contractor specializing in modular construction which carried a balance of $1,000,000 at December 31, 2021. There were no foreclosed assets held for resale ~~amounted to $1,078,000 at September~~as of June 30, ~~2017 as compared to $1,273,000 at~~2022 and December 31, ~~2016. Loans~~2021. There was one loan past-due 90 days or more and still accruing interest ~~amounted to $119,000 as~~at June 30, 2022 that carried a balance of ~~September 30, 2017 as compared to $34,000 as~~$166,000 and was well-secured by residential real estate and in the process of ~~December 31, 2016. At September 30, 2017,~~collection. There were no loans past-due 90 days or more and still accruing interest ~~consisted~~as of two Commercial Real Estate loans, and one Residential Real Estate loan. The majority of the loans are well secured and all are in the process of collection. The borrower of the Residential Real Estate loan totaling $22,000 has filed bankruptcy and loan payments are currently being made through a trustee.December 31, 2021.

Non-performing assets to total loans was ~~1.3%~~0.76% at ~~September~~June 30, ~~2017 as compared to 0.8%~~2022 and 0.94% at December 31, ~~2016.~~2021. Non-performing assets to total assets was ~~0.7%~~0.47% at ~~September~~June 30, ~~2017 as compared to 0.4%~~2022 and 0.54% at December 31, ~~2016.~~2021. The allowance for loan losses to total non-performing assets was ~~109.3%~~149.28% as of ~~September~~June 30, ~~2017~~2022 as compared to ~~173.5%~~122.84% as of December 31, ~~2016.~~2021. Additional detail can be found on page 4550 in the Non-Performing Assets and Impaired Loans table and page 2526 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 ~~specialist~~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 ~~$5,143,000~~$10,416,000 at ~~September~~June 30, ~~2017,~~2022, compared to ~~$5,556,000~~$10,463,000 at December 31, ~~2016.~~

2021.

Impaired loans were ~~$16,186,000~~$12,284,000 at ~~September~~June 30, ~~2017~~2022 and ~~$14,297,000~~$13,673,000 at December 31, ~~2016.~~2021. The largest impaired loan relationship at ~~September~~June 30, ~~2017~~2022 and December 31, 2021 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate. At June 30, 2022, the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date, compared to December 31, 2021 when the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date. The second largest impaired loan relationship at June 30, 2022 and December 31, 2021 consisted of one performing loan to a student housing holding company, ~~in the amount of $3,126,000,~~ which ~~was~~is classified as a TDR. The loan is secured by commercial real ~~estate. The loan was downgraded~~estate and carried a balance of $2,829,000 as of June 30, 2022, net of $943,000 that had been charged off to ~~substandard status and modified as a TDR during the first quarter of 2015 due~~date, compared to the borrower’s failure to achieve stabilization and meet projected occupancy rates that was attributed to the overall economic decline in students’ disposable income and an increase in enrollment in online courses. The loan experienced a secondary modification during the third quarter of 2016 to extend the repayment term and modify the interest rate. The discounted cash flow evaluation at September 30, 2017 resulted in a specific allocation of $0. The second largest impaired loan relationship at September 30, 2017 consisted of a substandard performing loan to a developer of a residential sub-division in the amount of $2,656,000, which was secured by commercial real estate. The contract was extended andDecember 31, 2021 when the loan ~~was modified as~~carried a ~~TDR during the fourth quarter~~balance of ~~2015 because the weak real estate market has hindered the process~~$2,864,000, net of ~~the development plans and expected sales of building lots have not materialized. The discounted cash flow evaluation at September 30, 2017 resulted in a specific allocation of $0.~~$943,000 that had been charged off to date. The third largest impaired loan relationship at ~~September~~June 30, ~~2017~~2022 and December 31, 2021 consisted of afive non-performing ~~participation loan~~loans to a ~~student housing holding~~plastic processing company ~~which was~~focused on non-post-consumer recycling. Three loans are classified in the Commercial and Industrial portfolio and modified as TDRs and two loans are secured by commercial real estate. The ~~Corporation’s share~~loans carried an aggregate balance of $1,128,000 at June 30, 2022, compared to December 31, 2021 when the ~~loan at September 30, 2017 was $2,318,000. The loan was downgraded to substandard and placed on non-accrual status during the third quarter~~loans carried an aggregate balance of 2015 due to the borrower’s inability to reach a break-even rental income, related to the borrower’s failure to meet projected occupancy rates. During the three months ended September 30, 2017, one participant’s share in the amount of $1,350,000 was repurchased. The collateral evaluation of the total participation at September 30, 2017 carried a value of $3,162,000, after considering estimated appraisal adjustments and cost to sell of 21% and considering the total participation outstanding note balance, resulted in the Bank’s specific allocation of $152,000 for its share of the participation.$1,176,000.

The ~~Bank~~Company estimates impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the ~~$16,186,000~~$12,284,000 in impaired loans at ~~September~~June 30, ~~2017,~~2022, none were located outside of the ~~Corporation’s~~Company’s primary market area.

The outstanding recorded investment of ~~loans categorized as~~ TDRs ~~was $10,851,000~~ as of ~~September~~June 30, ~~2017 as compared to $11,629,000 as of~~2022 and December 31, ~~2016.~~2021 was $7,669,000 and $8,020,000, respectively. The decrease in TDRs at ~~September~~June 30, ~~2017~~2022 as compared to December 31, ~~2016~~2021 is mainly attributable to ~~large~~regular principal payments and paydowns ~~made~~ on existing TDRs ~~net against smaller loans modified as TDRs~~that were completed during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2022. Of the ~~thirty-one~~twenty-nine restructured loans at ~~September~~June 30, ~~2017, six~~2022, four loans ~~are~~were classified in the Commercial and Industrial portfolio, ~~and twenty-five~~twenty-four loans ~~are~~were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio. Troubled debt restructurings at June 30, 2022 consisted of ten term modifications beyond the original stated term, three rate modifications, and fifteen payment modifications. There was also one troubled debt restructuring that experienced all three types of modifications—payment, rate, and term. TDRs are separately evaluated for payment disclosures, and if necessary, a specific allocation is established. There were no specific allocations attributable to the TDRs at June 30, 2022 or December 31, 2021. There were no unfunded commitments attributable to the TDRs at June 30, 2022 and December 31, 2021.

At ~~September~~June 30, ~~2017, eight~~2022, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $682,000, six Commercial Real Estate loans classified as TDRs with a combined recorded investment of ~~$469,000~~$318,000, and one ~~Commercial and Industrial~~Residential Real Estate loan classified as a TDR with a ~~recorded investment~~balance of $12,000 were not in compliance with the terms of their restructure, compared to ~~September~~June 30, ~~2016~~2021 when ~~nine~~three Commercial ~~Real Estate~~and Industrial loans classified as TDRs with a combined recorded investment of ~~$781,000~~$736,000, seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $479,000, 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. ~~Troubled debt restructurings at September 30, 2017 consisted of sixteen term modifications beyond~~

Of the original stated term, four interest rate modifications, and ten payment modifications. At September 30, 2017, there was also one troubled debt restructuring that experienced all three types of modifications – payment, rate, and term. TDRs are separately identified for impairment disclosures, and if necessary, a specific allocation is established. As of September 30, 2017 and December 31, 2016, there were $7,000 sand $0, respectively in specific allocations attributable to the TDRs. There were $2,000 in unused commitments attributable to TDRs at September 30, 2017 and December 31, 2016.

~~During the three months ended September 30, 2017, no~~ loans that were modified as TDRs within the ~~preceding~~ twelve months ~~had~~preceding June 30, 2022, no loans experienced payment defaults ~~as compared to~~during the ~~same period in 2016 when one~~three months ended June 30, 2022. One Commercial ~~and Industrial~~Real Estate loan ~~in the amount of $15,000~~ that was modified as a TDR within the ~~preceding~~ twelve months ~~had~~preceding June 30, 2022 experienced a payment ~~default. During~~default during the ~~nine~~six months ended ~~September~~June 30, ~~2017, no~~2022, but the loan was subsequently paid off during the first quarter of 2022. Of the loans that were modified as TDRs ~~within~~during the ~~preceding~~ twelve months ~~had~~preceding June 30, 2021, three Commercial Real Estate loans totaling $300,000 experienced payment defaults ~~as compared to~~during the ~~same period in 2016 when one Commercial and Industrial loan in the amount of $15,000~~three months ended June 30, 2021. No loans that ~~was~~were modified as ~~a TDR within~~TDRs during the ~~preceding~~ twelve months ~~had~~preceding June 30, 2021 experienced a payment ~~default.~~

defaults during the first three months of 2021.

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, 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 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 ~~2017.~~2022. Excluding the assets disclosed in the Non-Performing Assets and Impaired Loans tables below 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.

Should the economic climate no longer continue to be stable or deteriorate further, borrowers may experience difficulty, and the level of impaired loans and non-performing assets, charge-offs and delinquencies could rise and possibly require additional increases in the Corporation’s allowance for loan losses.

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 remains in a very frail state. The war between Ukraine and Russia has exacerbated the difficulties in the national and state economy and experts at all levels are attempting to calculate the intermediate or long term affects. The Company may experience difficulties collecting payments on time from its borrowers, and certain types of loans may need to be modified, which could cause a rise in the level of impaired loans, non-performing assets, charge-offs, and delinquencies. Should such metrics increase, additions to the balance of the Company’s allowance for

loan losses could be required. The extent of the impact of these stressors on the Company’s operational and financial performance will depend on certain developments including inflationary controls enacted, the labor force, supply bottlenecks, the longevity of the war, and the effectiveness in controlling the lingering effects of the COVID-19 outbreak, etc. and any after-effects of these factors. These factors may not immediately impact the Company’s operational and financial performance, as the effects of these factors may lag into the future. The Company is also susceptible to the impact of economic and fiscal policy factors that may evolve in the current economic environment.

A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans. As of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Non-Performing Assets and Impaired Loans

September 30, December 31,
(Dollars in thousands) 2017 2016
Non-Performing Assets
Non-accrual loans $ 5,615 $ 2,935
Foreclosed assets held for resale 1,078 1,273
Loans past-due 90 days or more and still accruing interest 119 34
Total non-performing assets $ 6,812 $ 4,242

Impaired loans
Non-accrual loans $ 5,615 $ 2,935
Accruing TDRs 10,571 11,362
Total impaired loans 16,186 14,297
Allocated allowance for loan losses (177 ) (219 )
Net investment in impaired loans $ 16,009 $ 14,078

Impaired loans with a valuation allowance $ 2,885 $ 1,392
Impaired loans without a valuation allowance 13,301 12,905
Total impaired loans $ 16,186 $ 14,297

Allocated valuation allowance as a percent of impaired loans 1.1 % 1.5 %
Impaired loans to total loans 3.0 % 2.7 %
Non-performing assets to total loans 1.3 % 0.8 %
Non-performing assets to total assets 0.7 % 0.4 %
Allowance for loan losses to impaired loans 46.0 % 51.5 %
Allowance for loan losses to total non-performing assets 109.3 % 173.5 %


(Dollars in thousands)	June 30,			December 31,
	2022			2021
Non-performing assets
Non-accrual loans	$	5,970		$	7,066
Foreclosed assets held for resale		—			—
Loans past-due 90 days or more and still accruing interest		166			—
Total non-performing assets	$	6,136		$	7,066

Impaired loans
Non-accrual loans	$	5,970		$	7,066
Accruing TDRs		6,314			6,607
Total impaired loans		12,284			13,673
Allocated allowance for loan losses		—			—
Net investment in impaired loans	$	12,284		$	13,673

Impaired loans with a valuation allowance	$	—		$	—
Impaired loans without a valuation allowance		12,284			13,673
Total impaired loans	$	12,284		$	13,673

Allocated valuation allowance as a percent of impaired loans		—	%		—	%
Impaired loans to total loans		1.53	%		1.81	%
Non-performing assets to total loans		0.76	%		0.94	%
Non-performing assets to total assets		0.47	%		0.54	%
Allowance for loan losses to impaired loans		74.57	%		63.48	%
Allowance for loan losses to total non-performing assets		149.28	%		122.84	%

Real estate mortgages comprise ~~81.7%~~89.1% of the loan portfolio as of ~~September~~June 30, ~~2017,~~2022, as compared to ~~82.8%~~88.3% as of December 31, ~~2016.~~2021. 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.

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 ~~increased $33,734,000~~decreased $84,361,000 to ~~$759,716,000~~$993,608,000 as of ~~September~~June 30, ~~2017~~2022 as non-interest bearing deposits ~~increased~~decreased by ~~$14,817,000~~$18,527,000 and interest bearing deposits ~~increased~~decreased by ~~$18,917,000~~$65,834,000 from year-end ~~2016. Total~~2021. The decrease in deposits ~~increased due to~~was the ~~deposit~~result of ~~funds by municipal depositors through~~a $95,504,000 decrease in highly rate sensitive deposits and other normal ~~seasonal generation of tax revenues. Demand deposits, savings accounts and certificates of deposit increased from year-end 2016.~~fluctuations. Total short-term and long-term borrowings ~~decreased~~increased to ~~$106,231,000~~$154,723,000 as of ~~September~~June 30, ~~2017,~~2022, from ~~$144,406,000~~$62,377,000 at year-end ~~2016,~~2021, an increase of $92,346,000 or 148.0%. The increase in total borrowings was mainly the result of increased short-term borrowings as deposits decreased and cash balances were deployed into earning assets.

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 ~~decrease~~fixed interest rate of ~~$38,175,000, or 26.4%. Total borrowings decreased due to increased deposit balances~~4.375% per year for the first five years and then float based on a ~~decrease in the balance of the investment portfolio.~~benchmark rate (as defined).

CAPITAL STRENGTH

Normal increases in capital are generated by net income, less dividends paid out. During the ~~first nine~~six months ~~of the year,~~ended June 30, 2022, net income less dividends paid increased capital by ~~$1,658,000.~~$4,031,000. Accumulated other comprehensive (loss) income ~~(loss)~~ derived from net unrealized gains on ~~investment~~debt securities available-for-sale also impacts capital. At December 31, ~~2016,~~2021 accumulated other comprehensive ~~loss~~income was ~~$(1,419,000).~~$7,588,000. Accumulated other comprehensive ~~income~~loss stood at ~~$1,615,000~~$20,438,000 at ~~September~~June 30, ~~2017, an increase~~2022, a decrease of ~~$3,034,000.~~$28,026,000. 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 nine months of 2017 at an overall net gain of $886,000. TheseThe fluctuations from net unrealized gains on ~~investment~~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 ~~233,112~~231,611 and 231,612 shares of common stock as treasury stock at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021, respectively. This had an effect of reducing our total stockholders’ equity by ~~$5,756,000~~$5,709,000 as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.

Total stockholders’ equity was ~~$115,309,000~~$125,379,000 as of ~~September~~June 30, ~~2017,~~2022, and ~~$109,685,000~~$148,555,000 as of December 31, ~~2016.~~2021.

At ~~September~~June 30, ~~2017~~2022 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III. The following table presents the Bank’s capital ratios as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016:~~2021:



					To Be Well
					Capitalized
					Under Prompt
	June 30,		December 31,		Corrective Action
	2022		2021		Regulations
Tier 1 leverage ratio (to average assets)	10.77	%	10.14	%	5.00	%
Common Equity Tier 1 capital ratio (to risk-weighted assets)	15.29	%	15.52	%	6.50	%
Tier 1 risk-based capital ratio (to risk-weighted assets)	15.29	%	15.52	%	8.00	%
Total risk-based capital ratio	16.34	%	16.57	%	10.00	%

To Be Well
Capitalized
Under Prompt
September 30, December 31, Corrective Action
2017 2016 Regulations
Tier 1 leverage ratio (to average assets) 8.67 % 8.67 % 5.00 %
Common Equity Tier 1 capital ratio (to risk-weighted assets) 13.34 % 13.06 % 6.50 %
Tier 1 risk-based capital ratio (to risk-weighted assets) 13.34 % 13.06 % 8.00 %
Total risk-based capital ratio 14.53 % 14.24 % 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 ~~is being~~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 onas of January 1, 2019. ~~Management believes that, as~~As of ~~September~~June 30, ~~2017,~~2022, the ~~Corporation would meet~~Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in ~~basis as if all such requirements were currently in effect.~~

basis.

The Corporation’s capital ratios are not materially different ~~that~~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;~~lines, notes, etc., with various levels of capacity;

·●

~~Borrowing capacity available from correspondent banks: FHLB, Atlantic Community Bankers Bank (“ACBB”),~~

~~and Federal Reserve Bank;~~

Securities sold under agreements to repurchase; and

·●

Brokered CDs.

At ~~September~~June 30, ~~2017,~~2022 the ~~Corporation~~Company had ~~$280,740,000~~$458,318,000 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)~~borrowings, and irrevocable standby letters of credit issued by FHLB); the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was ~~$6,182,000.~~

$2,519,000.

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 ~~$20,397,000~~$25,311,000 at ~~September~~June 30, ~~2017.~~

2022.

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 ~~$7,902,000~~$7,606,000 and ~~$7,773,000 during the nine months ended September~~$8,676,000 at June 30, ~~2017~~2022 and ~~2016,~~2021, respectively. Net income amounted to ~~$6,261,000~~$7,365,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~$6,811,000~~$7,483,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~2021, net premium amortization on ~~investment~~ securities amounted to ~~$3,544,000~~$1,633,000 and ~~$2,896,000,~~$1,366,000, respectively. Net ~~cash utilized for originations~~losses on sales of mortgage loans ~~originated~~amounted to $34,000 for ~~resale and cash proceeds (including gains)~~the six months ended June 30, 2022, compared to net gains on sales of mortgage loans of $662,000 for the six months ended June 30, 2021. Originations from sales of mortgage loans originated for resale ~~was $1,097,000 and $2,506,000~~exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $1,639,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022, and ~~2016,~~proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $937,000 for the six months ended June 30, 2021. Net securities losses amounted to $131,000 for the six months ended June 30, 2022, compared to net securities gains of $143,000 for the six months ended June 30, 2021. Accrued interest receivable increased by $112,000 and decreased by $170,000 during the six months ended June 30, 2022 and 2021, respectively. Other assets ~~decreased $110,000~~increased by $639,000 and $1,116,000 during the ~~nine~~ six

months ended ~~September~~June 30, ~~2017~~2022 and 2021, respectively. Other liabilities increased by $37,000 during the six months ended June 30, 2022 and increased ~~$761,000~~by $241,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2016. Other liabilities decreased $436,000 during the nine months ended September 30, 2017 and increased $17,000 during the nine months ended September 30, 2016.~~

2021.

Investing activities ~~provided $2,197,000~~used cash of $64,171,000 and ~~$35,612,000~~$56,580,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~2021, respectively. Net activity in the available-for-sale securities portfolio (including proceeds from ~~sales,~~sale, maturities, and redemptions, net against purchases) ~~provided~~used cash of ~~$20,493,000 and $31,577,000~~$9,283,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022, compared to $34,469,000 for the six months ended June 30, 2021. Changes in restricted investment in bank stocks used cash of $3,834,000 and ~~2016,~~$359,000 during the six months ended June 30, 2022 and 2021, respectively. Net cash used to originate loans amounted to ~~$19,291,000 during~~$50,331,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017, and net cash provided by~~2022, compared to $21,649,000 for the ~~loan portfolio amounted to $3,788,000 during the nine~~six months ended ~~September~~June 30, ~~2016.~~

2021.

Financing activities ~~used cash of $8,112,000 and $30,288,000 during the nine months ended September 30, 2017 and 2016, respectively. Net deposits~~ provided cash of ~~$33,734,000~~$5,451,000 and ~~$29,271,000~~$120,348,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~2021, respectively. Deposits decreased by $84,361,000 during the six months ended June 30, 2022, compared to an increase of $125,859,000 during the six months ended June 30, 2021. Short-term borrowings ~~decreased~~increased by ~~$28,081,000~~$102,346,000 and ~~$60,895,000~~$7,005,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~2021, respectively. Repayment of long-term borrowings used cash of ~~$10,094,000 during the nine months ended September~~$10,000,000 at both June 30, ~~2017~~2022 and ~~proceeds from long-term borrowings exceeded repayment of long-term borrowings by $4,914,000 during the nine months ended September 30, 2016.~~2021, respectively. Dividends paid amounted to ~~$4,603,000 and $4,562,000~~$3,334,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~

2022, compared to $3,240,000 for the six months ended June 30, 2021.

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.

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 have and could result in further 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,~~Investment~~Investments – Debt ~~and Equity~~ 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 rates on 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 ~~September~~June 30, ~~2017.~~2022.

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 into 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 and interest-bearing liability 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 on the next page 49 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 ~~7.3%~~8.63%, ~~13.9%~~16.56% and ~~19.7%~~24.40% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would increase ~~2.2%~~2.41% and ~~0.5%~~decrease 0.35% 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 ~~100 –~~ 150 - 175 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 ~~cannot~~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 ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2022, the cost of interest-bearing liabilities averaged ~~0.8%~~0.54%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged ~~3.8%~~3.68%.

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 ~~September~~June 30, ~~2017, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with decreases of 8.7% and 31.6%, respectively. Additionally,~~2022, net present value is projected to ~~increase 0.5%~~decrease 1.65%, 8.10%, and ~~decrease 3.8% and 11.4%~~16.34% in the 100, 200, and 300 basis point immediate increase scenarios, respectively. ~~These~~Additionally, the 100 and 200

basis point immediate decrease scenarios are estimated to affect net present value with a decrease of 7.51% and 26.68%, respectively. All of these scenarios presented are within the ~~Corporation’s~~Company’s policy ~~limits, aside from the 200 basis point immediate decrease scenario at a 31.6% decrease compared to a policy limit of a 30.0% decrease.~~

limits.

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~~ +300 bp Shock vs. Stable Rate	(24.40)	~~(19.7~~	) %
~~+200~~ +200 bp Shock vs. Stable Rate	(16.56)	~~(13.9~~	) %
~~+100~~ +100 bp Shock vs. Stable Rate	(8.63)	~~(7.3~~	) %
Flat rate
~~-100~~ ‒100 bp Shock vs. Stable Rate	2.41	~~2.2~~	%
~~-200~~ ‒200 bp Shock vs. Stable Rate	(0.35)	~~0.5~~	%

Effect on Net Present Value of Balance Sheet
Static Net Present Value Change
~~+300~~ +300 bp Shock vs. Stable Rate	(16.34)	~~(11.4~~	) %
~~+200~~ +200 bp Shock vs. Stable Rate	(8.10)	~~(3.8~~	) %
~~+100~~ +100 bp Shock vs. Stable Rate	(1.65)	~~0.5~~	%
Flat rate
~~-100~~ ‒100 bp Shock vs. Stable Rate	(7.51)	~~(8.7~~	) %
~~-200~~ ‒200 bp Shock vs. Stable Rate	(26.68)	~~(31.6~~	) %

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 ~~September~~June 30, ~~2017.~~2022.

Item 9A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 indicated that management’s review of the Corporation’s internal control over financial reporting identified a material weakness at December 31, 2016, and described the Corporation’s remediation plan to address such deficiency. Such remediation efforts include enhancements to the Corporation’s review process to ensure a review is being performed at an appropriate level of precision to include expanded validation of inputs and assumptions to source documents and ensuring clerical accuracy. During the quarter ended September 30, 2017, the Corporation is continuing the remediation efforts described in Item 9A of its Annual Report on Form 10-K.

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 ~~September~~June 30, ~~2017,~~2022, 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

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, ~~2016.~~2021.

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

(b)
Average Price Paid per Share

(d)

Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs

April 1 - April 30, 2022

―

120,000

~~July~~

May 1 ~~— July~~- May 31, ~~2017~~2022

―

120,000

June 1 - June 30, 2022

―

120,000

~~August1 — August 31, 2017~~

Total

―

120,000

~~September 1 — September 30, 2017~~

―

~~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

(a)

Exhibits required by Item 3.

~~Defaults Upon Senior Securities~~601 Regulation S-K

~~None.~~

~~Item 4.~~

~~Mine Safety Disclosures~~

~~Not applicable.~~

Exhibit Number

~~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
3i 3.1		Articles of Incorporation, as amended (Incorporated by reference to Exhibit ~~3(i)~~3.1 to the Registrant’s Report on Form ~~10-Q for the quarter ended September 30, 2012)~~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 ~~February 14, 2013)~~January 26, 2021).

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(c)~~ 10.1(d)		Supplemental Employee Retirement Plan – Matthew P. Prosseda (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, ~~2013)~~2018).*

~~10.4~~ 14		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).*

14		First Keystone Corporation Directors and Senior Management Code of Ethics (Incorporated by reference to Exhibit 1499.1 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		Inline XBRL Instance Document.**

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

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

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

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

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

~~November 8, 2017~~	~~/s/ Matthew P. Prosseda~~
August 5, 2022	~~Matthew P. Prosseda~~ /s/ Elaine A. Woodland
	Elaine A. Woodland
	President and Chief Executive Officer
	(Principal Executive Officer)

~~November 8, 2017~~

August 5, 2022	/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 10-Q for the quarter ended September 30, 2012).~~

~~3ii~~		~~By-Laws, as amended and restated (Incorporated by reference to Exhibit 3(ii) to the Registrant’s Report on Form 8-K dated February 14, 2013).~~

~~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(c)~~		Supplemental Employee Retirement Plan – Matthew P. Prosseda (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, 2013).*

~~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).*

14		~~First Keystone Corporation Directors and Senior Management Code of Ethics (Incorporated by reference to Exhibit 14 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	¨ ☒
	Emerging growth company	¨ ☐



Title of each class	Trading symbol	Name of each exchange on which registered
Common stock	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

*(Dollars in thousands, except per share data)*	September 30,			December 31,
	2017			2016
ASSETS
Cash and due from banks	$	9,371		$	8,338
Interest-bearing deposits in other banks		1,744			790
Total cash and cash equivalents		11,115			9,128
Time deposits with other banks		1,482			1,482
Investment securities available-for-sale		361,092			379,637
Investment securities held-to-maturity (fair value 2017- $0; 2016 - $4)		—			4
Restricted investment in bank stocks		4,472			5,477
Loans		542,785			522,382
Allowance for loan losses		(7,448	)		(7,357	)
Net loans		535,337			515,025
Premises and equipment, net		18,506			19,237
Accrued interest receivable		4,034			3,917
Cash surrender value of bank owned life insurance		22,196			21,718
Investments in low-income housing partnerships		2,673			2,555
Goodwill		19,133			19,133
Foreclosed assets held for resale		1,078			1,273
Deferred income taxes		1,163			2,760
Other assets		2,827			2,937
TOTAL ASSETS	$	985,108		$	984,283
LIABILITIES
Deposits:
Non-interest bearing	$	125,131		$	110,314
Interest bearing		634,585			615,668
Total deposits		759,716			725,982
Short-term borrowings		41,209			69,290
Long-term borrowings		65,022			75,116
Accrued interest payable		505			427
Other liabilities		3,347			3,783
TOTAL LIABILITIES		869,799			874,598
STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares as of September 30, 2017 and December 31, 2016; issued 0 in 2017 and 2016		―			―
Common stock, par value $2.00 per share; authorized 20,000,000 shares as of September 30, 2017 and December 31, 2016; issued 5,939,353 as of September 30, 2017 and 5,904,563 as of December 31, 2016; outstanding 5,706,241 as of September 30, 2017 and 5,671,451 as of December 31, 2016		11,879			11,809
Surplus		35,909			35,047
Retained earnings		71,662			70,004
Accumulated other comprehensive income (loss)		1,615			(1,419	)
Treasury stock, at cost, 233,112 shares in 2017 and 2016		(5,756	)		(5,756	)
TOTAL STOCKHOLDERS’ EQUITY		115,309			109,685
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	985,108		$	984,283


	(Unaudited)
(Dollars in thousands, except share and per share data)	June 30,		December 31,
	2022		2021
ASSETS
Cash and due from banks	$	9,441	$	9,600
Interest-bearing deposits in other banks		783		51,738
Total cash and cash equivalents		10,224		61,338
Time deposits with other banks		—		247
Debt securities available-for-sale, at fair value		410,260		437,916
Marketable equity securities, at fair value		1,661		1,962
Restricted investment in bank stocks, at cost		5,753		1,919

Loans		804,055		746,835
Loans held for sale		765		6,006
Allowance for loan losses		(9,160)		(8,680)
Net loans		795,660		744,161
Premises and equipment, net		17,960		18,158
Operating lease right-of-use assets		1,013		1,025
Accrued interest receivable		4,473		4,361
Cash surrender value of bank owned life insurance		25,088		24,792
Investments in low-income housing partnerships		2,055		1,530
Goodwill		19,133		19,133
Deferred income taxes		6,844		—
Other assets		4,458		3,808
TOTAL ASSETS	$	1,304,582	$	1,320,350

LIABILITIES
Deposits:
Non-interest bearing	$	230,513	$	249,040
Interest bearing		763,095		828,929
Total deposits		993,608		1,077,969
Short-term borrowings		129,723		27,377
Long-term borrowings		25,000		35,000
Subordinated debentures		25,000		25,000
Operating lease liabilities		1,495		1,499
Accrued interest payable		273		251
Deferred income taxes		—		631
Other liabilities		4,104		4,068
TOTAL LIABILITIES		1,179,203		1,171,795

STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares as of June 30, 2022 and December 31, 2021; issued 0 as of June 30, 2022 and December 31, 2021		0		0
Common stock, par value $2.00 per share; authorized 20,000,000 shares as of June 30, 2022 and December 31, 2021; issued 6,212,972 as of June 30, 2022 and 6,178,835 as of December 31, 2021; outstanding 5,981,361 as of June 30, 2022 and 5,947,223 as of December 31, 2021		12,426		12,358
Surplus		41,691		40,940
Retained earnings		97,409		93,378
Accumulated other comprehensive (loss) income		(20,438)		7,588
Treasury stock, at cost, 231,611 shares as of June 30, 2022 and 231,612 shares as of December 31, 2021		(5,709)		(5,709)

TOTAL STOCKHOLDERS’ EQUITY		125,379		148,555
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,304,582	$	1,320,350

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2016:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	4	$	—	$	—	$	4
Total	$	4	$	—	$	—	$	4

(Dollars in thousands)
	September 30, 2017
	Available-For-Sale														Held-To-Maturity
			U.S. Government			Obligations									U.S. Government
			Corporations &			of State			Corporate			Marketable			Corporations &
	U.S. Treasury		Agencies			& Political			Debt			Equity			Agencies
	Securities		Obligations¹			Subdivisions²			Securities			Securities³			Obligations¹
Within 1 Year:
Amortized cost	$	—	$	―		$	1,642		$	533		$	―		$	―
Fair value		—		―			1,657			520			―			―
Weighted average yield		—		―			2.55	%		2.32	%		―			―

1 - 5 Years:
Amortized cost		—		6,858			28,807			6,391			―			—
Fair value		—		6,831			29,091			6,365			―			—
Weighted average yield		—		2.09	%		2.76	%		2.35	%		―			—

5 - 10 Years:
Amortized cost		―		40,792			71,628			22,800			―			―
Fair value		―		40,012			72,657			22,185			―			―
Weighted average yield		―		2.10	%		3.29	%		2.68	%		―			―

After 10 Years:
Amortized cost		―		62,729			115,562			—			809			―
Fair value		―		62,736			117,306			—			1,732			―
Weighted average yield		—		2.23	%		3.51	%		—			5.46	%		—

Total:
Amortized cost	$	—	$	110,379		$	217,639		$	29,724		$	809		$	—
Fair value		—		109,579			220,711			29,070			1,732			—
Weighted average yield		—		2.18	%		3.33	%		2.60	%		5.46	%		—

(Dollars in thousands)	Three Months Ended September 30, 2016
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		—	$	—	$	—	$	—
Commercial Real Estate		2		1,860		1,860		1,858
Total		2	$	1,860	$	1,860	$	1,858

(Dollars in thousands)	Nine Months Ended September 30, 2017
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		1	$	38	$	38	$	37
Commercial Real Estate		1		72		72		70
Total		2	$	110	$	110	$	107

(Dollars in thousands)	Nine Months Ended September 30, 2016
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		4	$	86	$	86	$	22
Commercial Real Estate		5		2,316		2,316		2,064
Total		9	$	2,402	$	2,402	$	2,086

(Dollars in thousands)	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2017				September 30, 2016
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,240	$	21	$	473	$	12
Commercial Real Estate		11,730		376		10,396		331
Residential Real Estate		910		2		417		―

With an allowance recorded:
Commercial and Industrial		—		—		—		—
Commercial Real Estate		1,498		2		3,350		74
Residential Real Estate		229		—		427		―
Total	$	15,607	$	401	$	15,063	$	417

Total consists of:
Commercial and Industrial	$	1,240	$	21	$	473	$	12
Commercial Real Estate	$	13,228	$	378	$	13,746	$	405
Residential Real Estate	$	1,139	$	2	$	844	$	—