FRANKLIN FINANCIAL SERVICES CORP /PA/ Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

Summary of selected financial data from and for the year ended the 31st of December

                                         2021              2020           2019           2018           2017
(Dollars in thousands,
except per share)
Balance Sheet Highlights
Total assets                       $      1,773,806    $ 1,535,038    $ 1,269,157    $ 1,209,587    $ 1,179,813
Investment and equity
securities                                  530,292        397,331        187,873        131,846        127,336
Loans, net                                  983,746        992,915        922,609        960,960        931,908
Deposits                                  1,584,359      1,354,573      1,125,392      1,082,629      1,047,181
Shareholders' equity                   157,065        145,176        127,528        118,396        115,144

Summary of Operations
Interest income                    $         47,573    $    45,939    $    49,235    $    44,868    $    39,885
Interest expense                              2,902          3,978          7,113          4,214          2,491
Net interest income                          44,671         41,961         42,122         40,654         37,394
Provision for loan losses                    (2,100)         4,625            237          9,954            670
Net interest income after
provision for loan losses                    46,771         37,336         41,885         30,700         36,724
Noninterest income                           19,488         15,084         15,424         12,629         12,189
Noninterest expense                          43,245         39,362         38,314         37,369         43,172
Income before income taxes                   23,014         13,058         18,995          5,960          5,741
Federal income tax expense
(benefit)                                     3,398            258          2,880           (165)         3,565
Net income                         $         19,616    $    12,800    $    16,115    $     6,125    $     2,176

Performance Measurements
Return on average assets                       1.17%          0.91%          1.29%          0.52%          0.19%
Return on average equity                      13.20%          9.56%         13.17%          5.34%          1.80%
Return on average tangible
equity (1)                                    14.05%         10.24%         14.22%          5.80%          1.94%
Efficiency ratio (1)                          66.12%         67.32%         65.36%         68.27%         82.59%
Net interest margin, fully
tax equivalent                                 2.88%          3.21%          3.68%          3.78%          3.72%

Shareholders' Value
(per common share)
Diluted earnings per share         $            4.42   $       2.93   $       3.67   $       1.39   $       0.50
Basic earnings per share                        4.44           2.94           3.68           1.40           0.50
Regular cash dividends paid                     1.25            1.2           1.17           1.05           0.93
Book value                                     35.36          33.07          29.30          26.85          26.44
Tangible book value (1)                        33.34          31.02          27.23          24.81          24.37
Market value**                                 33.10          27.03          38.69          31.50          37.36
Market value/book value
ratio                                         93.61%         81.74%        132.05%        117.32%        141.30%
Market value/tangible book
value ratio                                   99.29%         87.13%        142.11%        126.97%        153.30%
Price/earnings multiple
year-to-date                                    7.49           9.23          10.54          22.66          74.72
Current quarter dividend
yield*                                         3.87%          4.44%          3.10%          3.43%          2.49%
Dividend payout ratio                         28.16%         40.83%         31.74%         75.07%        185.25%

Safety and Soundness
Average equity/average
assets                                         8.89%          9.48%          9.78%          9.73%         10.62%
Risk-based capital ratio
(Total)                                       18.41%         17.69%         16.08%         15.21%         15.31%
Leverage ratio (Tier 1)                        8.52%          8.69%          9.72%          9.78%          9.73%
Common equity ratio (Tier 1)                  15.20%         14.32%         14.82%         13.96%         14.06%
Nonperforming loans/gross
loans                                          0.74%          0.87%          0.42%          0.27%          0.28%
Nonperforming assets/total
assets                                         0.42%          0.57%          0.31%          0.44%          0.45%
Allowance for loan
loss/loans                                     1.51%          1.66%          1.28%          1.28%          1.25%
Net loan recoveries
(charge-offs)/average loans                    0.02%          0.02%         -0.07%         -0.97%          0.01%

Assets under Management
Trust and Investment
Services (fair value)              $        946,964    $   836,381    $   790,949    $   684,825    $   686,941
Held at third-party brokers
(fair value)                                 58,052        112,624        

127,976 122,213 158,145


** Based on the closing price of FRAF as quoted on the Nasdaq Capital Market for 2021, 2020 and 2019 and the
OTCQX for all prior periods
(1) See the section titled "GAAP versus Non-GAAP Presentation" that


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Application of critical accounting policies:

Disclosure of the Corporation's significant accounting policies is included in
Note 1 to the consolidated financial statements. These policies are particularly
sensitive requiring significant judgments, estimates and assumptions to be made
by Management. Senior management has discussed the development of such
estimates, and related Management Discussion and Analysis disclosure, with the
Audit Committee of the Board of Directors.

The following accounting policy is identified by management to be critical to
the results of operations: Allowance for Loan Losses and the Annual Goodwill
Impairment Evaluation.

GAAP versus non-GAAP Presentations - The Corporation supplements its traditional
GAAP measurements with certain non-GAAP measurements to evaluate its performance
and to eliminate the effect of intangible assets.  By eliminating intangible
assets, the Corporation believes it presents a measurement that is comparable to
companies that have no intangible assets or to companies that have eliminated
intangible assets in similar calculations. However, not all companies may use
the same calculation method for each measurement. The Efficiency Ratio measures
the cost to generate one dollar of revenue. The non-GAAP measurements are not
intended to be used as a substitute for the related GAAP measurements. The
following table shows the calculation of the non-GAAP measurements.

(Dollars in thousands, except
per share)                                       For the Year Ended December 31
                                    2021         2020         2019         2018         2017
Return on Average Tangible
Equity (non-GAAP)
Net income                       $  19,616    $  12,800    $  16,115    $   6,125    $   2,176

Average shareholders'
equity                             148,637      133,958      122,377      114,625      120,993
Less average intangible assets      (9,016)      (9,016)      (9,016)      (9,016)      (9,016)
Average shareholders'
equity (non-GAAP)                  139,621      124,942      113,361      105,609      111,977

Return on average tangible
equity (non-GAAP)                    14.05%       10.24%       14.22%        5.80%        1.94%

Tangible Book Value (per
share) (non-GAAP)
Shareholders' equity        $ 157,065    $ 145,176    $ 127,528    $ 118,396    $ 115,144
Less intangible assets              (9,016)      (9,016)      (9,016)      (9,016)      (9,016)
Shareholders' equity
(non-GAAP)                         148,049      136,160      118,512      109,380      106,128

Shares outstanding (in
thousands)                           4,441        4,389        4,353        4,409        4,355

Tangible book value (non-GAAP)       33.34        31.02        27.23        24.81        24.37

Efficiency Ratio (non-GAAP)
Noninterest expense              $  43,245    $  39,362    $  38,314    $  37,369    $  43,172

Net interest income                 44,671       41,961       42,122       40,654       37,394
Plus tax equivalent adjustment
to net interest income               1,466        1,407        1,393        1,522        2,690
Plus noninterest income, net
of securities transactions          19,271       15,104       15,102       12,564       12,186
Total revenue                       65,408       58,472       58,617       

54,740 52,270

Efficiency ratio (non-GAAP) 66.12% 67.32% 65.36% 68.27% 82.59%

Results of Operations:

Management's Overview

The following discussion and analysis is intended to assist the reader in
reviewing the financial information presented and should be read in conjunction
with the consolidated financial statements and other financial data presented
elsewhere herein.


Franklin Financial Services Company published consolidated result
$19.6 million ($4.42 per diluted share) for 2021 compared to $12.8 million
($2.93 per diluted share) for the same period in 2020.

?Year-to-date, net interest income was $44.7 million (including $3.3 million of
PPP interest and fees), an increase of 6.5% compared to $42.0 million for the
same period in 2020 (including $2.9 million of PPP interest and fees). On a
year-over-year comparison, the net interest margin was 2.88% for 2021 compared
to 3.21% in 2020. The decrease in the 2021 net interest margin was due primarily
to a 0.45% decline in the yield on earning assets from 3.51% in 2020 to

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3.06% in 2021 as all asset classes had lower yields in 2021. This decrease was
partially offset by a reduction in the cost of interest-bearing liabilities from
0.39% for 2020 to 0.24% for 2021. Likewise, the cost of all deposits decreased
from 0.28% in 2020 to 0.12% in 2021.
?Average earning assets for 2021 were $1.7 billion compared to $1.4 billion in
2020, an increase of 18.8%. In 2021, the average balance of interest-bearing
cash balances increased $34.2 million (45.6%), the average balance of the
investment portfolio increased $203.5 million (71.9%) and the average balance of
the loan portfolio increased $16.1 million (1.6%), over the prior year averages.
Within the loan portfolio, average commercial loan balances increased $5.8
million during the year. The average balance of PPP loans included in the
commercial loan portfolio for 2021 was $41.4 million. Total deposits averaged
$1.5 billion for 2021, an increase of $232 million (18.5%) over the average
balance for 2020. All deposit categories reported a year-over-year increase in
average balances, except for time deposits.
?The provision for loan loss expense was a reversal of $2.1 million compared to
a $4.6 million provision expense for the same period in 2020. The 2020 provision
expense was the result of an increase in several qualitative factors in the
allowance for loan loss calculation due to the projected economic effects and
impact of the COVID-19 pandemic. During 2021, several qualitative factors were
reduced, reflecting a lower risk of loss in the loan portfolio, and the
twenty-quarter historical average charge-off rate used in the calculation
decreased, thereby resulting in a reversal of the provision for loan loss
expense. The allowance for loan loss ratio was 1.51% of gross loans as of
December 31, 2021, compared to 1.66% at December 31, 2020.
?Noninterest income was $19.5 million compared to $15.1 million in 2020.
Significant year-to-date variances include the gain on sale of $1.8 million on
the sale of the Bank's headquarters building, increases in Investment and Trust
Services fees ($1.1 million), gains on the sale of mortgages (up $894 thousand)
and debit card income (up $326 thousand). These increases were partially offset
by a decrease of $545 thousand from gains on bank owned life insurance.
?Noninterest expense was $43.2 million in 2021 compared to $39.4 million in
2020. The following categories contributed to the year-over-year increase:
salaries and benefits increased $2.4 million (primarily incentive compensation
and health insurance), FDIC insurance increased $278 thousand, data processing
expense increased $607 thousand, and a nonservice pension settlement expense of
$425 thousand. Other expenses decreased $293 thousand due primarily to a $636
thousand expense reversal relating to the reversal of a previously established
off-balance sheet liability reserve.
?The effective tax rate was 14.8% for 2021.
Total assets at December 31, 2021 were $1.774 billion compared $1.535 billion at
December 31, 2020, an increase of 15.6%. Significant balance sheet changes since
December 31, 2020, include:
?Short-term interest-bearing deposits in other banks increased $124.6 million
(310.8%) and the investment portfolio increased $132.9 million (33.5%).
?The net loan portfolio decreased $9.2 million over the year-end 2020 balance.
Commercial loans were down $13.9 million from year-end 2020 as new production
was completely offset by a $44.5 million reduction in PPP loans. The Bank held
$7.8 million in PPP loans at December 31, 2021, and $370 thousand of deferred
PPP fees remaining to be recognized.
?As of December 31, 2021, the Bank had no loans under a COVID modified payment
schedule and all loans previously on modified payment have returned to
contractual payment schedules.
?Deposits increased $230 million (17.0%) over year-end 2020, with all deposit
products showing an increase except time deposits. Money management accounts and
interest-bearing checking products showed the largest increases over the prior
?Shareholders' equity increased $11.9 million from December 31, 2020, due
primarily to an increase of $14.1 million in retained earnings during 2021
partially offset by a decrease of $3.7 million in accumulated other
comprehensive income (AOCI) as the fair value of the investment portfolio
declined during the year. At December 31, 2021, the book value of the
Corporation's common stock was $35.36 per share and tangible book value was
$33.34 per share. In December 2021, an open market repurchase plan was approved
to repurchase 150,000 shares over a one-year period.

Other key performance measures are presented in section 6 of this report.

A more detailed discussion of the areas that had the greatest effect on the reported results follows.


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  Table of Contents

Net Interest Income

The most important source of the Corporation's earnings is net interest income,
which is defined as the difference between income on interest-earning assets and
the expense of interest-bearing liabilities supporting those assets. Principal
categories of interest-earning assets are loans and securities, while deposits,
short-term borrowings and long-term debt are the principal categories of
interest-bearing liabilities. For the purpose of this discussion, balance sheet
items refer to the average balance for the year and net interest income is
adjusted to a fully taxable-equivalent basis. This tax-equivalent adjustment
facilitates performance comparisons between taxable and tax-free assets by
increasing the tax-free income by an amount equivalent to the Federal income
taxes that would have been paid if this income were taxable at the Corporation's
21% Federal statutory rate. The components of net interest income are detailed
in Tables 1, 2 and 3.

Table 1 show the change in tax-equivalent net interest income year over year.
Changes in interest income and expense are driven by changes in balance (volume)
and changes in the average rate on interest-earning assets and interest-bearing
liabilities. The changes attributable to rate or volume are shown in Table 2.
The yield on earning assets (Table 3) declined from 3.51% for 2020 to 3.06% for
2021. The benefit provided by tax-exempt income was $1.5 million in 2021.

                          Table 1. Net Interest Income

(Dollars in thousands)                2021      2020        $        %
Interest income                     $ 47,573  $ 45,939  $   1,634     3.6
Interest expense                       2,902     3,978    (1,076)  (27.0)
Net interest income                   44,671    41,961      2,710     6.5
Tax equivalent adjustment              1,466     1,407         59     4.2

Tax-equivalent net interest income $46,137 $43,368 $2,769 6.4

Table 2 identifies increases and decreases in tax equivalent net interest income
due to either changes in average volume or to changes in average rates for
interest-earning assets and interest-bearing liabilities. Numerous and
simultaneous balance and rate changes occur during the year. The amount of
change that is not due solely to volume or rate is allocated proportionally to

      Table 2. Rate-Volume Analysis of Tax Equivalent Net Interest Income
                                      2021 Compared to 2020                    2020 Compared to 2019
Increase (Decrease) due to:        Increase (Decrease) due to:              Increase (Decrease) due to:
(Dollars in thousands)          Volume           Rate         Net        Volume           Rate         Net
Interest earned on:
obligations in other banks    $      159       $   (386)   $   (227)   $     (11)       $ (1,111)   $ (1,122)
Investment securities:
Taxable                            3,262           (771)       2,491        2,555           (580)       1,975
Nontaxable                           877           (168)         709          826           (135)         691
Commercial, industrial and
agriculture                          237           (924)       (687)          882         (4,599)     (3,717)
Residential mortgage                (89)           (271)       (360)           46           (324)       (278)
Home equity loans and lines          397           (849)       (452)          291         (1,002)       (711)
Consumer                              10             209         219           39           (159)       (120)
Loans                                555         (1,835)     (1,280)        1,258         (6,084)     (4,826)
Total net change in
interest income                    4,853         (3,160)       1,693        4,628         (7,910)     (3,282)

Interest expense on:
Interest-bearing checking            164           (439)       (275)          188           (671)       (483)
Money management                     230           (988)       (758)          347         (2,908)     (2,561)
Savings                               18            (59)        (41)           44           (318)       (274)
Time deposits                      (110)           (514)       (624)         (56)           (152)       (208)
Other borrowings                       -               -           -         (18)            (18)        (36)
Subordinate Notes                    619               3         622          213             214         427
Total net change in
interest expense                     921         (1,997)     (1,076)          718         (3,853)     (3,135)
Change in tax equivalent
net interest income           $    3,932       $ (1,163)   $   2,769   $    3,910       $ (4,057)   $   (147)


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The following table shows average balances, tax equivalent (T/E) interest income and expense, and returns earned or rates paid on assets or liabilities. Unexpected loans are included in average loan balances.

                    Table 3. Analysis of Net Interest Income

                                           2021                                    2020
                             Average     Income or     Average       Average     Income or     Average
(Dollars in thousands)       balance      expense     yield/rate     balance      expense     yield/rate

Interest-bearing assets:

Interest bearing

obligations of other banks $   109,263   $      249        0.23%   $    75,063   $      476        0.63%
Investment securities:
Taxable                        392,789        7,216        1.84%       219,815        4,725        2.15%
Tax Exempt                      93,764        2,661        2.84%        63,246        1,952        3.09%
Investments                    486,553        9,877        2.03%       283,061        6,677        2.36%
Commercial, industrial and
agricultural                   849,201       33,982        4.00%       843,412       34,669        4.11%
Residential mortgage            68,581        2,382        3.47%        70,932        2,742        3.87%
Home equity loans and
lines                           83,465        2,103        2.52%        71,042        2,555        3.60%
Consumer                         6,855          446        6.51%         6,581          227        3.45%
Loans                        1,008,102       38,913        3.86%       991,967       40,193        4.05%
Total interest-earning
assets                       1,603,918   $   49,039        3.06%     1,350,091   $   47,346        3.51%
Other assets                    67,381                                  63,507
Total assets               $ 1,671,299                             $ 1,413,598

Interest-bearing checking  $   472,596   $      521        0.11%   $   379,564   $      796        0.21%
Money Management               537,010          830        0.15%       460,447        1,588        0.34%
Savings                        112,506           64        0.06%        93,645          105        0.11%
Time                            72,525          438        0.60%        81,847        1,062        1.30%
Total interest-bearing
deposits                     1,194,637        1,853        0.16%     1,015,503        3,551        0.35%
Other borrowings                     -            -            -             -            -            -
Subordinate notes               19,571        1,049        5.36%         8,022          427        5.32%
Total interest-bearing
liabilities                  1,214,208        2,902        0.24%     1,023,525        3,978        0.39%
deposits                       293,027                                 240,042
Other liabilities               15,427                                  16,073
Shareholders' equity      148,637                                 133,958
Total liabilities and
shareholders' equity  $ 1,671,299                             $ 1,413,598
T/E net interest
income/Net interest margin                   46,137        2.88%                     43,368        3.21%
Tax equivalent adjustment                   (1,466)                                 (1,407)
Net interest income                      $   44,671                              $   41,961

Net Interest Spread                                        2.82%                                   3.12%
Cost of Funds                                              0.19%                                   0.31%
Cost of Deposits                                           0.12%                                   0.28%

Provision for Loan Losses

In 2021, the Bank recorded gross loan charge-offs of $330 thousand, which were
more than offset by $707 thousand of recoveries, resulting in net loan recovery
of $377 thousand. For 2021, the Corporation reversed $2.1 million through the
provision for loan loss expense. The allowance for loan losses was $15.1 million
at year-end 2021 (1.51% of total loans), compared to $16.8 million at year-end
2020 (1.66% of total loans). Management closely monitors the credit quality of
the portfolio in order to ensure that an appropriate ALL is maintained. As part
of this process, Management performs a comprehensive analysis of the loan
portfolio considering delinquencies trends and events, current economic
conditions, and other relevant factors to determine the adequacy of the
allowance for loan losses and the provision for loan losses. For more
information, refer to the Loan Quality discussion and Table 10.


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  Table of Contents

Noninterest Income

The following table presents a comparison of non-interest income for the years ended December 31, 2021 and 2020:

                          Table 4. Noninterest Income

(Dollars in thousands)                                2021      2020    Amount      %
Noninterest Income
Investment and trust services fees                  $  7,111  $  6,040  $ 1,071     17.7
Loan service charges                                     904       853       51      6.0
Gain on sale of loans                                  2,430     1,536      894     58.2
Deposit service charges and fees                       2,258     1,977      281     14.2
Other service charges and fees                         1,650     1,446      204     14.1
Debit card income                                      2,170     1,844      326     17.7
Increase in cash surrender value of life insurance       446       457     (11)    (2.4)
Bank owned life insurance gain                           295       840    (545)   (64.9)
Net gain on sales of debt securities                     127        29       98    337.9
Change in fair value of equity securities                 90      (49)      139  (283.7)
Gain on sale of bank premises                          1,776         -    1,776      N/A
Other                                                    231       111      120    108.1
Total                                               $ 19,488  $ 15,084  $ 4,404     29.2

The most significant changes in non-interest income are discussed below:

Investment and Trust Service fees: These fees are comprised of asset management
fees, estate administration and settlement fees, employee benefit plans, and
commissions from the sale of insurance and investment products. Asset management
fees are recurring in nature and are affected by the fair value of assets under
management at the time the fees are recognized. Asset management fees totaled
$6.5 million for 2021, an increase of $865 thousand over 2020. The fair value of
trust assets under management was $947.0 million at year-end, compared to
$836.4 million at the end of 2020. By the nature of an estate settlement, these
fees are considered nonrecurring. Estate fees increased by $260 thousand, to
$454 thousand in 2021. Commissions from the sale of insurance and investment
products decreased by $48 thousand compared to 2020.

Loan servicing fees: This category primarily includes commercial letter of credit fees, commercial loan prepayment penalties, mortgage servicing fees and consumer debt protection fees.

Gain on Sale of Loans: This category includes the cost of selling mortgages in the secondary market.

Deposit fees: This category is comprised primarily of fees from overdrafts, an
overdraft protection program, service charges, and account analysis fees. The
increase of $281 thousand in this category was due to the addition of new
deposit products.

Other service charges and fees: The most significant items in this category
include fees from the Bank's merchant card program and ATM fees. Merchant card
fees increased $45 thousand while ATM fees increased $25 thousand, due to higher

Debit card income: Debit card fees are comprised of both a retail and business
card program. Retail fees increased by $268 thousand, 19% increase over the
prior year, while business card fees increased $113 thousand, a 25% increase
over the prior year. The business debit card offers a cash back rewards program
based on usage, while the retail debit card offers reward points based on usage.
Debit card income is reported net of reward program expense.

Gain on bank-owned life insurance: The Bank received larger death benefits from bank-owned life insurance policies in 2020 than in 2021.

Capital gain on sale of bank premises: The Bank sold its current head office to 20 South Main Street, Chambersburg, Pennsylvania as indicated previously.


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  Table of Contents

Noninterest Expense

The following table presents a comparison of non-interest expenses for the years ended December 31, 2021 and 2020:

                          Table 5. Noninterest Expense
(Dollars in thousands)                                Change
Noninterest Expense             2021      2020    Amount     %
Salaries and benefits         $ 24,780  $ 22,392  $ 2,388    10.7
Net occupancy                    3,580     3,350      230     6.9
Marketing and advertising        1,533     1,757    (224)  (12.7)
Legal and professional           2,013     1,802      211    11.7
Data processing                  4,026     3,419      607    17.8
Pennsylvania bank shares tax     1,017       965       52     5.4
FDIC insurance                     735       457      278    60.8
ATM/debit card processing        1,305     1,088      217    19.9
Telecommunications                 407       458     (51)  (11.1)
Nonservice pension                 819       351      468   133.3
Other                            3,030     3,323    (293)   (8.8)
Total                         $ 43,245  $ 39,362  $ 3,883     9.9

The most significant changes in non-interest expenses are described below:

Salaries and benefits: This category is the largest noninterest expense category
and includes expenses for salaries, health benefits, insurance, pension service,
taxes and other employee benefit programs. This category increased by $2.4
million compared to the prior year from salary increases of $877 thousand due to
higher expense for incentive compensation plans, $710 thousand increase in
health insurance expense as the Bank's self-funded plan generated less surplus
in 2021 compared to 2020, and $365 thousand due to merit increases. See Note 17
of the accompanying consolidated financial statements for additional information
on benefit plans.

Net Occupancy: This category includes all of the expense associated with the
properties and facilities used for bank operations such as depreciation, leases,
maintenance, utilities and real estate taxes. Equipment maintenance contracts
and depreciation increased during 2021 but were offset by a decrease in
depreciation expense as the Bank sold its headquarters building at 20 South Main
Street, Chambersburg, PA.

Legal and professional fees: This category consists of fees paid to outside
legal counsel, consultants, and audit fees. Legal fees increased $67 thousand
due to services provided in the normal course of business. Internal and external
audit fees increased by $21 thousand.

Data processing: The largest cost in this category is the expense associated
with the Bank's core processing system and related services and accounted for
$2.3 million of the total data processing costs compared to $1.8 million in
2020. The increase was due to increased transaction volume and the introduction
of new products. An increase in software expense contributed $347 thousand to
the total increase in this category.

FDIC insurance: This category consists of the total fees paid to the Federal
Deposit Insurance Corporation (FDIC). The expense for 2021 increased compared to
prior year due to growth of the Bank's balance sheet.

Nonservice pension: The increase in the nonservice pension expense was due to
$425 thousand of pension settlement costs related to lump-sum pension payouts
during the year.

Provision for Income Taxes

The Corporation recorded a Federal income tax expense of $3.4 million compared
to $258 thousand in 2020. The effective tax rate for 2021 and 2020 was 14.8% and
2.0%, respectively. In 2020, Corporation recorded an income tax benefit of $1.1
million due to the passage of the Coronavirus Aid, Relief and Economic Security
Act (the CARES Act) in March 2020. The CARES Act allowed for net operating
losses (NOL) incurred in 2018, 2019 and 2020 to be carried back to offset
taxable income earned during the five-year period prior to the year in which the
NOL was incurred. The Corporation incurred an NOL in 2018 that it was able to
carryback to prior periods when the statutory rate for the Corporation was 34%
as compared to the current rate of 21%. Without the benefit of the NOL
carryback, the effective tax rate for 2020 would have been 10.5%. The
Corporation's 2021 effective tax rate was lower than its statutory rate due to
the effect of tax-exempt income from certain investment securities, loans, and
bank owned life insurance. The Corporation's 2021 effective tax rate was higher
than the comparable rate in 2020 (adjusted of the NOL) due to higher pre-tax,


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Income. For a more complete analysis of the federal income tax expense, refer to note 14 of the accompanying consolidated financial statements.

Financial condition

One method of evaluating the Corporation's condition is in terms of its sources
and uses of funds. Assets represent uses of funds while liabilities represent
sources of funds. At December 31, 2021, total assets increased 15.6% over the
prior year to $1.77 billion from $1.54 billion at the end of 2020.

Interest-bearing deposits at other banks:

This asset increased to $175.2 million at December 31, 2021 compared to $52.8
million at December 31, 2020, as the Bank had excess cash from growth in
deposits that outpaced the growth of earning assets. The average balance for
2021 increased to $109.3 million compared to $75.1 million in 2020. At year-end,
$10.5 million was in the form of long-term certificates of deposit and $163.3
million was held in an interest-bearing account at the Federal Reserve.

Investment security:

AFS securities

The investment portfolio serves as a mechanism to invest funds if funding
sources out pace lending activity, to provide liquidity for lending and
operations, and provide collateral for deposits and borrowings. The mix of
securities and investing decisions are made as a component of balance sheet
management. Debt securities include U.S. Government Agencies, U.S. Government
Agency mortgage-backed securities, non-agency mortgage-backed securities, state
and municipal government bonds, and corporate debt in the form of bank-issued
subordinated debt. The average life of the portfolio is 6.9 years and
$160.3 million (fair value) is pledged as collateral for deposits. The Bank has
no investments in a single issuer that exceeds 10% of shareholders equity. All
securities are classified as available for sale and all investment balances
refer to fair value, unless noted otherwise. The following table presents the
amortized cost and estimated fair value of investment securities by type at
December 31 for the past two years:

   Table 6. Investment Securities at Amortized Cost and Estimated Fair Value

                                               2021                    2020
                                      Amortized      Fair     Amortized      Fair
(Dollars in thousands)                   Cost       value        Cost       value

United States government and agency securities $94,360 $93,760 $12,594 $

Municipal securities                    206,501     212,227     236,253     247,054
Corporate securities                     24,794      24,939      20,421      20,288

Agency mortgage-backed securities 123,686 122,669 70,443


Non-agency mortgage-backed securities 30,904 30,666 8,412

Asset-backed securities                  45,472      45,550      36,246      36,330
Total                                 $ 525,717   $ 529,811   $ 384,369   $ 396,940


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The following table presents investment securities at December 31, 2021 by
maturity, and the weighted average yield for each maturity presented. The yields
presented in this table are calculated using tax-equivalent interest and the
amortized cost.

             Table 7. Maturity Distribution of Investment Portfolio

                                              After one year        After five years        After ten
                      One year or less      through five years      through ten years         years              Total
                        Fair                   Fair                    Fair                 Fair               Fair
(Dollars in
thousands)              Value     Yield        Value      Yield        Value     Yield     Value    Yield     Value    Yield
Available for Sale
U.S. Government and
Agency securities    $         -       -   $      1,016    0.94%   $     91,510  1.28%   $   1,234  1.01%   $  93,760  1.27%
Municipal securities      1,862    2.98%          5,171    2.74%         39,635  2.51%     165,559  2.61%     212,227  2.60%
Corporate securities           -       -               -       -         23,688  4.38%       1,251  4.28%      24,939  4.37%
securities                1,044    1.76%          1,846    2.86%         33,934  1.69%      85,845  0.89%     122,669  1.14%
securities                  504    3.83%          7,931    3.77%          5,414  1.78%      16,817  1.82%      30,666  2.34%
securities                   20    2.27%            536    2.37%            481  0.80%      44,513  0.88%      45,550  0.90%
Total                $    3,430    2.73%   $     16,500    3.13%   $    

194,662 1.99% $315,219 1.86% $529,811 1.95%

Table 3 shows the two-year trend of average balances and yields on the
investment portfolio. The tax-equivalent yield on the portfolio decreased from
2.36% in 2020 to 2.03% in 2021. U.S. Agency mortgage-backed securities and
municipal bonds continue to comprise the largest sectors by fair value of the
portfolio, approximately 23% and 40% respectively. The Bank expects that the
portfolio will continue to remain concentrated in these investment sectors. The
portfolio produced $71.3 million in cash flows in 2021 while $215.67 million was
invested into the portfolio during the year.

Municipal Bonds: This sector holds $212.2 million or 40% of the total portfolio
and the amortized cost decreased by $30.0 million year over year. The Bank's
municipal bond portfolio is well diversified geographically and is comprised of
both tax-exempt (46% of the portfolio) and taxable (54% of the portfolio)
municipal bonds. Sixty-five percent of the portfolio are general obligation
bonds and thirty-five percent are revenue bonds. The portfolio holds bonds from
221 issuers within 34 states. The largest dollar exposure is in the states of
Texas (14%) and California and Pennsylvania (11% each). When purchasing
municipal bonds, the Bank looks primarily to the underlying credit of the issuer
as a sign of credit quality and then to any credit enhancement. The entire
portfolio is rated "A" or higher by a nationally recognized rating agency.

Corporate bonds: This sector mainly includes $20.8 million subordinated debt from 42 different Community bank issuers.

Mortgage-backed Securities (MBS): This sector holds $153.3 million or 29% of the
total portfolio. The majority of this sector ($122.7 million) is comprised of
bonds issued and guaranteed by the U.S. Government or a government sponsored
entity. The non-agency MBS portfolio is comprised of senior private label
first-lien commercial and residential mortgages. As senior position bonds, they
benefit from credit support in the form of junior tranches and reserve funds
that absorb loss prior to the senior bonds.

Asset-backed Securities (ABS): This sector holds $45.6 million, or 9%, of the
total portfolio. FFELP (Federal Family Education Loan Program) bonds make up the
maturity of this sector and have a 97% guarantee from the US Department of
Education. The FFELP bonds are all rated AAA.

Impairment: For securities with an unrealized loss, Management applies a
systematic methodology in order to perform an assessment of the potential for
other-than-temporary impairment. In the case of debt securities, investments
considered for other-than-temporary impairment: (1) had a specified maturity or
repricing date, (2) were generally expected to be redeemed at par, and (3) were
expected to achieve a recovery in market value within a reasonable period of
time. In addition, the Bank considers whether it intends to sell these
securities or whether it will be forced to sell these securities before the
earlier of amortized cost recovery or maturity. The impairment identified on
debt securities and subject to assessment at December 31, 2021, was deemed to be
temporary and required no further adjustments to the financial statements,
unless otherwise noted. The Bank recorded no impairment charges in 2021.

Equity securities at fair value

The Company holds an equity investment whose fair value is readily determinable. AT December 31, 2021this investment was recorded at fair value ($481,000) with changes in value reported by result in 2021.


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  Table of Contents

Restricted Stock at Cost

The Bank held $495 thousand of restricted stock at the end of 2021 of which $465
thousand is stock in the Federal Home Loan Bank of Pittsburgh (FHLB). FHLB stock
is carried at a cost of $100 per share. FHLB stock is evaluated for impairment
primarily based on an assessment of the ultimate recoverability of its cost. As
a government sponsored entity, FHLB has the ability to raise funding through the
U.S. Treasury that can be used to support it operations. There is not a public
market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and
low-cost funding) add value to the stock beyond purely financial measures. If
FHLB stock were deemed to be impaired, the write-down for the Bank could be
significant. Management intends to remain a member of the FHLB and believes that
it will be able to fully recover the cost basis of this investment.


The loan portfolio decreased by 1.1% ($10.9 million) in 2021, due primarily to
$44.5 million in forgiveness on PPP loans (included in the commercial loan line)
partially offset by an increase in commercial real estate loans and in junior
liens and lines of credit from the Bank's FlexLOC product. The FlexLOC was a new
product introduced in 2021 that allows consumers to draw on a variable rate
line-of-credit and then lock in a fixed rate and repayment term for a portion of
the draw. Average gross loans for 2021 increased by $16.1 million to $1.0
billion compared to $992.0 million in 2020. Commercial, mortgage and home equity
loans and lines all showed an increase in average balances during the year,
which was partially offset by a decline in consumer loans. The yield on the
portfolio decreased in 2021 to 3.86% from 4.05% in 2020. Table 3 presents detail
on the average balances and yields earned on loans for the past two years.

The following table shows loans outstanding, by class, as of December 31 for the
past 2 years.

                            Table 8. Loan Portfolio

(Dollars in thousands)                         2021        2020         Amount     %
Residential real estate 1-4 family
Consumer first lien                         $   71,828  $    77,373  $  (5,545)   (7.2)
Commercial first lien                           60,655       59,851         804     1.3
Total first liens                              132,483      137,224     (4,741)   (3.5)

Consumer junior lien and lines of credit        67,103       60,935       6,168    10.1
Commercial junior liens and lines of credit      4,841        4,425         416     9.4
Total junior liens and lines of credit          71,944       65,360       6,584    10.1
Total residential real estate 1-4 family       204,427      202,584       1,843     0.9

Residential real estate construction
Consumer                                         8,278        6,751       1,527    22.6
Commercial                                      12,379        9,558       2,821    29.5
Total residential real estate construction      20,657       16,309       4,348    26.7

Commercial real estate                         522,779      503,977      18,802     3.7
Commercial                                     244,543      281,257    (36,714)  (13.1)
Total commercial                               767,322      785,234    (17,912)   (2.3)

Consumer                                         6,406        5,577         829    14.9
Total loans                                    998,812    1,009,704    (10,892)   (1.1)
Less: Allowance for loan losses               (15,066)     (16,789)       1,723  (10.3)
Net loans                                   $  983,746  $   992,915  $  (9,169)   (0.9)

Residential real estate: This category is comprised of first lien loans and, to
a lesser extent, junior liens and lines of credit secured by residential real
estate. Total residential real estate loans increased $1.8 million in 2021 from
2020, primarily in consumer junior lien and lines of credit. In 2021, the Bank
originated $127.6 million in mortgages compared to $125.4 million in 2020,
including approximately $107.7 million for sale in the secondary market. The
Bank does not originate or hold any loans that would be considered sub-prime or
Alt-A and does not generally originate mortgages outside of its primary market

Commercial purpose loans in this category represent loans made for various
business needs but are secured with residential real estate. In addition to the
real estate collateral, it is possible that additional security is provided by
personal guarantees or UCC filings. These loans are underwritten as commercial
loans and are not originated to be sold.


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Residential real estate construction: The largest component of this category
represents loans to residential real estate developers and home builders of
$12.4 million, while loans for individuals to construct personal residences
totaled $8.3 million at December 31, 2021. The Bank's exposure to residential
construction loans is concentrated primarily in south central Pennsylvania. Real
estate construction loans, including residential real estate and land
development loans, occasionally provide an interest reserve in order to assist
the developer during the development stage when minimal cash flow is generated.

Commercial real estate (CRE): This category includes commercial, industrial, and
farm loans, where real estate serves as the primary collateral for the loan.
This loan category increased by $18.8 million over the prior year. The largest
sectors (by collateral) in CRE are: hotel & motel ($75.8 million), apartment
units ($69.7 million), office buildings ($50.1 million), development land
($49.2 million) and manufacturing ($38.1 million). The majority of the Bank's
hotel exposure is located along the Interstate 81 (I-81) corridor through
south-central Pennsylvania. The portfolio is comprised of properties operating
under 18 flagged brands and 3 independent operators.

Also included in CRE are real estate construction loans totaling $92.6 million.
At December 31, 2021, the Bank had $25.8 million in real estate construction
loans funded with an interest reserve and capitalized $755 thousand of interest
in 2021 from these reserves on active projects for commercial construction. Real
estate construction loans are monitored on a regular basis by either an
independent third-party inspector or the assigned loan officer depending on loan
amount or complexity of the project. This monitoring process includes, at a
minimum, the submission of invoices or AIA documents (depending on the
complexity of the project) detailing costs incurred by the borrower, on-site
inspections, and a signature by the assigned loan officer for disbursement of
funds. All real estate construction loans are underwritten in the same manner,
regardless of the use of an interest reserve.

Commercial: This category includes commercial, industrial, farm, agricultural,
and tax-free loans. Collateral for these loans may include business assets or
equipment, personal guarantees, or other non-real estate collateral. Commercial
loans decreased $36.7 million over the 2020 ending balance, primarily due to PPP
loan forgiveness. At December 31, 2021, the Bank had approximately $141 million
of tax-free loans in its portfolio. The largest sectors (by industry) are:
utilities ($52.0 million), public administration ($49.0 million), real estate,
rental and leasing ($18.2 million) and manufacturing ($13.5 million). This
category also includes $7.8 million of PPP loans that are 100% guaranteed by the

Participations: At December 31, 2021, the outstanding commercial participations
accounted for 10.1%, or $77.5 million, of commercial purpose loans compared to
8.7%, or $68.7 million, at the prior year-end. The Bank's total exposure
(including unfunded commitments) to purchased participations was $95.9 million
at December 31, 2021 and $84.0 million at December 31, 2020. The commercial loan
participations are comprised of $23.2 million of commercial loans and $54.3
million of CRE loans, reported in the respective loan segment. The Bank expects
that commercial lending will continue to be the primary area of loan growth in
the future via in-market lending.

Consumer loans: This category is mainly composed of unsecured personal lines of credit and shows an increase of $829,000 in 2021 compared to 2020 closing balances.


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  Table of Contents

         Table 9. Maturities and Interest Rate Terms of Selected Loans

The following table shows the declared maturities (or previous repayment dates) of the loans selected in December 31, 2021.

                                      Less than                                  Over
(Dollars in thousands)                 1 year      1-5 years     5-15 years    15 years      Total
Residential real estate 1-4 family
Fixed rate                           $       961   $    9,410   $     43,214   $  15,459   $  69,044
Variable rate                              5,147       16,614         48,955      64,667     135,383
                                           6,108       26,024         92,169      80,126     204,427
Residential real estate construction
Fixed rate                                 8,702            -              -           -       8,702
Variable rate                              9,417        2,538              -           -      11,955
                                          18,119        2,538              -           -      20,657
Commercial real estate
Fixed rate                                 2,190       42,004         50,076           -      94,270
Variable rate                             33,675      115,893        235,137      43,804     428,509
                                          35,865      157,897        285,213      43,804     522,779
Fixed rate                                   726       54,292         38,839       8,606     102,463
Variable rate                             31,764       16,231         38,398      55,687     142,080
                                          32,490       70,523         77,237      64,293     244,543
Fixed rate                                    90        2,443             27       1,688       4,248
Variable rate                              1,135          398            625           -       2,158
                                           1,225        2,841            652       1,688       6,406

                                     $    93,807   $  259,823   $   

455 271 $189,911 $998,812

Loan Quality:

Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to
evaluate loan quality. This risk rating scale is used primarily for commercial
purpose loans. Consumer purpose loans are identified as either a pass or
substandard rating based on the performance status of the loans. Substandard
consumer loans are loans that are 90 days or more past due and still accruing.
Loans rated 1 - 4 are considered pass credits. Loans that are rated 5-Pass Watch
are credits that have been identified as credits that are likely to warrant
additional attention and monitoring. Loans rated 6-Other Asset Especially
Mentioned (OAEM) or worse begin to receive enhanced monitoring and reporting by
the Bank. Loans rated 7-Substandard or 8-Doubtful exhibit the greatest financial
weakness and present the greatest possible risk of loss to the Bank. Nonaccrual
loans are rated no better than 7-Substandard. The following represent some of
the factors used in determining the risk rating of a borrower: cash flow, debt
coverage, liquidity, management, and collateral. Risk ratings, for pass credits,
are generally reviewed annually for term debt and at renewal for revolving or
renewing debt. The Bank monitors overall loan quality of the portfolio by
reviewing three primary measurements: (1) loans rated 6-OAEM or worse
(collectively "watch list"), (2) delinquent loans, and (3) net-charge-offs.

Watch list loans exhibit financial weaknesses that increase the potential risk
of default or loss to the Bank. However, inclusion on the watch list, does not
by itself, mean a loss is certain. The watch list includes both performing and
nonperforming loans. Watch list loans totaled $36.6 million at year-end compared
to $66.1 million one year earlier. During 2020, the Bank downgraded its hotel
portfolio due to the pandemic. Many of these loans had the risk-rating upgraded
during 2021 as the loans moved from a modified payment schedule to regular
payment schedule. As a result, the watch list decreased year-over year. At
year-end 2020, the Bank had $32.7 million of hotel loans rated 6-OAEM and $14.5
million rated 7-Substandard. At December 31, 2021, 6-rated hotels decreased to
$17.1 million and 7-rated hotels decreased to $13.4 million. Included in the
watch list are $7.4 million of nonaccrual loans. The composition of the watch
list (loans rated 6, 7 or 8), by primary collateral, is shown in Note 6 of the
accompanying financial statements.

Delinquent loans are a result of borrowers' cash flow and/or alternative sources
of cash being insufficient to repay loans. The Bank's likelihood of collateral
liquidation to repay the loans becomes more probable the further behind a
borrower falls, particularly when loans reach 90 days or more past due.
Management monitors the performance status of loans by the use of an aging
report. The aging report can provide an early indicator of loans that may become
severely delinquent and possibly result in a loss to the Bank. See Note 6 in the
accompanying financial statements for information on the aging of payments in
the loan portfolio.


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Nonaccruing loans generally represent Management's determination that the
borrower will be unable to repay the loan in accordance with its contractual
terms and that collateral liquidation may or may not fully repay both interest
and principal. It is the Bank's policy to evaluate the probable collectability
of principal and interest due under terms of loan contracts for all loans
90-days or more, nonaccrual loans, or impaired loans. Further, it is the Bank's
policy to discontinue accruing interest on loans that are not adequately secured
and in the process of collection. Upon determination of nonaccrual status, the
Bank subtracts any current year accrued and unpaid interest from its income, and
any prior year accrued and unpaid interest from the allowance for loan losses.
Management continually monitors the status of nonperforming loans, the value of
any collateral and potential of risk of loss. Nonaccrual loans are rated no
better than 7-Substandard.

The Bank's Loan Management Committee reviews these loans and risk ratings on a
quarterly basis in order to proactively identify and manage problem loans. In
addition, a committee meets monthly to discuss possible workout strategies for
all credits rated 7-Substandard or worse and OREO. Management also tracks other
commercial loan risk measurements including high loan to value loans,
concentrations, participations and policy exceptions and reports these to the
Credit Risk Oversight Committee of the Board of Directors. The Bank also uses a
third-party consultant to assist with internal loan review with a goal of
reviewing 80% of commercial loans each year. The FDIC defines certain
supervisory loan-to-value lending limits. The Bank's internal loan-to-value
limits are all equal to or less than the supervisory loan-to-value limits.
However, in certain circumstances, the Bank may make a loan that exceeds the
supervisory loan-to-value. At December 31, 2021, the Bank had loans of
$17.9 million (1.8% of gross loans) that exceeded the supervisory loan-to value
limit, compared to 2.3% at the prior year end.

Nonaccrual loans decreased by $1.3 million from year-end 2020, primarily in the
commercial real estate category as a result of paydowns during the year. The
most significant nonaccrual loan is a $5.6 million hotel loan that has been on
nonaccrual since September 2020 but was current on its payments as of December
31, 2021. The Bank continues to work with the borrower and the hotel management
company to monitor operations. The Bank has established a $698 thousand specific
reserve on this loan.

In addition to monitoring nonaccrual loans, the Bank also closely monitors
impaired loans and troubled debt restructurings (TDR). A loan is considered to
be impaired when, based on current information and events, it is probable that
the Bank will be unable to collect all interest and principal payments due
according to the originally contracted terms of the loan agreement. Nonaccrual
loans (excluding consumer purpose loans) and TDR loans are considered impaired.

A loan is considered a troubled debt restructuring (TDR) if the creditor (the
Bank), for economic or legal reasons related to the debtor's financial
difficulties, grants a concession to the debtor that it would not otherwise
consider. These concessions may include lowering the interest rate, extending
the maturity, reamortization of payment, or a combination of multiple
concessions. The Bank reviews all loans rated 6-OAEM or worse when it is
providing a loan restructure, modification or new credit facility to determine
if the action is a TDR. If a TDR loan is placed on nonaccrual status, it remains
on nonaccrual status for at least six months to ensure performance.

In accordance with financial accounting standards, TDR loans are always
considered impaired until they are paid-off or in certain circumstances
refinanced. However, an impaired TDR loan can be a performing loan under its
modified terms. Impaired loans totaled $11.6 million at year-end compared to
$17.3 million at the prior year end. The decrease was due primarily to a
refinancing of a TDR loan to a new loan at market rates and terms and therefore
being removed from TDR. Included in the impaired loan totals are $5.6 million of
TDR loans.

Paycheck Protection Program. In March 2020, Congress passed the CARES Act to
provide economic relief to small business and consumers affect by the COVID-19
pandemic. Included in this Act was the Paycheck Protection Program (PPP)
administered by the Small Business Administration (SBA). The PPP is a small
business loan program designed to assist in allowing small businesses to keep
workers on the payroll during the COVID-19 pandemic. When workers are kept on
the payroll for the qualifying period, the loan could be forgiven if the small
business incurs eligible expenses. The PPP loans are 100 percent guaranteed by
the SBA and have a maturity of two-years or five-years with a fixed interest
rate of 1% for the life of the loan. Borrowers of PPP loans do not have to make
payments on the loan for the first six months, and the loans will fully amortize
for the remainder of the two- or five-year terms.

In December 2020, Congress passed a second stimulus package that provided for a
second round of funding for small business, that meet certain eligibility
requirements, through the PPP. PPP loans under the second round of funding are
for a 5-year term with a fixed interest rate of 1% and initial principal
payments deferred for up to 10 months under certain circumstances.

The SBA paid originating banks a processing fee ranging from 1% to 5% of the
loan, depending on the loan balance for round 1 of PPP funding. The SBA will pay
processing fees to originating banks for round 2 of PPP funding at levels
similar to those paid in round 1. The Bank will recognize these fees in interest
income over the contractual life (two or five years) of the loan. As PPP loans
are granted forgiveness by the SBA, fee recognition will accelerate. At December
31, 2021, the Bank had $7. 8 million in PPP loans and $370 thousand of PPP fees
remaining to be recognized.


————————————————– ——————————


The PPP loans are 100% guaranteed by the SBA, thereby presenting no credit risk
to the Bank once the SBA guarantee is fulfilled, if necessary. However, the PPP
loan is only designed to cover short-term operating needs of the borrower. If
the economy does not recover quickly from the pandemic and the borrower
experiences long-term operational problems beyond the PPP funding, the
performance of other loans to these customers could begin to deteriorate.

Allowance for loan losses:

Management monitors loan performance on a monthly basis and performs a quarterly
evaluation of the adequacy of the allowance for loan losses (ALL). The ALL is
determined by segmenting the loan portfolio based on the loan's collateral. When
calculating the ALL, consideration is given to a variety of factors in
establishing this estimate including, but not limited to, current economic
conditions, diversification of the loan portfolio, delinquency statistics,
results of internal loan reviews, historical charge-offs, the adequacy of the
underlying collateral (if collateral dependent) and other relevant factors. The
Bank begins enhanced monitoring of all loans rated 6-OAEM or worse and obtains a
new appraisal or asset valuation for any loans placed on nonaccrual and rated 7
- Substandard or worse. Management, at its discretion, may determine that
additional adjustments to the appraisal or valuation are required. Valuation
adjustments will be made as necessary based on factors, including, but not
limited to: the economy, deferred maintenance, industry, type of
property/equipment, age of the appraisal, etc. and the knowledge Management has
about a particular situation. In addition, the cost to sell or liquidate the
collateral is also estimated and deducted from the valuation in order to
determine the net realizable value to the Bank. When determining the allowance
for loan losses, certain factors involved in the evaluation are inherently
subjective and require material estimates that may be susceptible to significant
change, including the amounts and timing of future cash flows expected to be
received on impaired loans. Management monitors the adequacy of the allowance
for loan losses on an ongoing basis and reports its adequacy quarterly to the
Credit Risk Oversight Committee of the Board of Directors. Management believes
that the allowance for loan losses at December 31, 2021 is adequate.

The analysis for determining the ALL is consistent with guidance set forth in
generally accepted accounting principles (GAAP) and the Interagency Policy
Statement on the Allowance for Loan and Lease Losses. The analysis has three
components: specific, general and unallocated. The specific component addresses
specific reserves established for impaired loans. A loan is considered to be
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all interest and principal payments due according
to the originally contracted terms of the loan agreement. Collateral values
discounted for market conditions and selling costs are used to establish
specific allocations for impaired loans. However, it is possible that as a
result of the credit analysis, a specific reserve is not required for an
impaired loan. Commercial loans with a balance less than $250 thousand, and all
consumer purpose loans are not included in the specific reserve analysis as
impaired loans but are added to the general allocation pool. Loans that are
evaluated for a specific reserve, but not needing a specific reserve are not
added back to the general allocation pool. The Bank has one loan for $5.8
million with a specific reserve ($698 thousand) at December 31, 2021. Note 6 of
the accompanying financial statements provides additional information about the
ALL established for impaired loans.

The general allocation component addresses the reserves established for pools of
homogenous loans. The general component includes a quantitative and qualitative
analysis. When calculating the general allocation, the Bank segregates its loan
portfolio into the following segments based primarily on the type of supporting
collateral: residential real estate, commercial, industrial or agricultural real
estate; commercial and industrial (commercial non-real estate), and consumer.
Each segment may be further segregated by type of collateral, lien position, or
owner/nonowner occupied properties. PPP loans, because of the SBA guarantee,
were excluded from the quantitative analysis. The quantitative analysis uses the
Bank's twenty quarter rolling historical loan loss experience as determined for
each loan segment to determine a loss factor applicable to each loan segment.
The allowance established as a result of the quantitative analysis was $2.8
million compared to $3.7 million at year-end 2020. The decrease in the
quantitative component was due primarily to a decrease in the twenty-quarter
historical loss factor as older higher loss rates came out of the rolling

The qualitative analysis utilizes a risk matrix that incorporates four primary
risk factors: economic conditions, delinquency, classified loans, and level of
risk, and assigns a risk level (as measured in basis points) to each factor. In
determining the risk level for these primary factors, consideration is given to
operational factors such as: loan volume, management, loan review process,
credit concentrations, competition, and legal and regulatory issues. The level
of risk (as measured in basis points) for each primary factor is set for six
risk levels ranging from minimal risk to extreme risk and is determined
independently for commercial loans, residential mortgage loans and consumer
loans. During 2020, as a result of the negative effects of the pandemic on the
economy, the Bank increased the basis point risk factor for certain qualitative
components. During 2021, as the level of risk picture became clearer, the Bank
reduced certain qualitative risk factors. In addition, in 2021 the Bank
discontinued its carve out of modified loans for a separate qualitative
assessment that it implemented in 2020. As a result of these changes, the
qualitative component of the ALL decreased from $12.1 million at year-end 2020
to $11.0 million at December 31, 2021.

The unallocated component is maintained to cover uncertainties that could affect
Management's estimate of probable loss. The unallocated component of the ALL
reflects the margin of imprecision inherent in the underlying assumptions used
in the methodologies for estimating specific and general losses in the
portfolio. The unallocated allowance was $589 thousand at December 31, 2021.


————————————————– ——————————


Real estate appraisals and collateral valuations are an important part of the
Bank's process for determining potential loss on collateral dependent loans and
thereby have a direct effect on the determination of loan reserves, charge-offs
and the calculation of the allowance for loan losses. As long as the loan
remains a performing loan, no further updates to appraisals are required. If a
loan or relationship migrates to nonaccrual and a risk rating of 7-Substandard
or worse, an evaluation for impairment status is made based on the current
information available at the time of downgrade and a new appraisal or collateral
valuation is obtained. We believe this practice complies with the regulatory

In determining the allowance for loan losses, Management, at its discretion, may
determine that additional adjustments to the fair value obtained from an
appraisal or collateral valuation are required. Adjustments will be made as
necessary based on factors, including, but not limited to the economy, deferred
maintenance, industry, type of property or equipment etc., and the knowledge
Management has about a particular situation. In addition, the cost to sell or
liquidate the collateral is also estimated and deducted from the valuation in
order to determine the net realizable value to the Bank. If an appraisal is not
available, Management may make its best estimate of the real value of the
collateral or use last known market value and apply appropriate discounts.  If
an adjustment is made to the collateral valuation, this will be documented with
appropriate support and reported to the Loan Management Committee.

The following table shows the breakdown of the allowance for loan losses and other loan performance ratios at December 31, 2021 and 2020:

                       Table 10. Loan Performance Ratios

(Dollars in thousands)                              Residential Real Estate 

1-4 Family

                                                              Junior Liens &                      Commercial
                                             First Liens     Lines of Credit     Construction    Real Estate    Commercial    Consumer     Unallocated       Total
Loans at December 31, 2021                  $     132,483    $        71,944    $      20,657    $   522,779    $  244,543    $  6,406    $           -   $   998,812
Average Loans for 2021                            133,452             69,083           20,389        509,706       264,772       6,836                -     1,004,237
Nonaccrual Loans at December 31, 2021                  50                 38              424          6,812            60            -               -         7,384
Allowance for Loan Losses at December 31,
2021                                                  555                226              294          9,163         5,679          97             775         16,789
Net Recoveries/(Charge-offs) for 2021                   4                (10)                -           490          (195)        (91)               -           198

Loans/Total Gross Loans at December 31,
2021                                                   13%                 7%               2%            52%           24%          1%               -           100%
Nonaccrual Loans/Total Gross Loans at
December 31, 2021                                    0.04%              0.05%            2.05%          1.30%         0.02%       0.00%               -          0.74%
Allowance for Loan Loss/Gross Loans at
December 31, 2021                                    0.42%              0.31%            1.42%          1.75%         2.32%       1.51%               -          1.68%
Net Recoveries (Charge-offs)/Average
Loans for 2021                                       0.00%             -0.01%            0.00%          0.10%        -0.07%      -1.33%               -          0.02%
Allowance for Loan Loss/Nonaccrual Loans
at December 31, 2021                                                                                                                                           227.37%

Loans at December 31, 2020                $ 137,224    $ 65,360    $ 16,309    $ 503,977    $ 281,257    $ 5,577    $     -   $ 1,009,704
Average Loans for 2020                      141,265      57,409      14,896

500,325 275,037 6,366 – 995,297 Loans not accrued at December 31, 2020

            41          10         512        8,033          108           -         -         8,704
Allowance for Loan Losses at December
31, 2020                                        475         252         325 

8,168 5,127 130,589 15,066 Net recoveries/(charges) for 2020

              -        170         (28)         (56)         455       (164)         -           377

Loans/Total Gross Loans at December 31,
2020                                             14%          6%          2%          50%          28%         1%         -           100%
Nonaccrual Loans/Total Gross Loans at
December 31, 2020                              0.03%       0.02%       

3.14% 1.59% 0.04% 0.00% – 0.86% Allowance for loan losses/Gross loans at
December 31, 2020

                              0.35%       0.39%       

1.99% 1.62% 1.82% 2.33% – 1.49% Net Collections/(Charges)/Average Loans for 2020

                                 0.00%       0.30%      -0.19%       -0.01%        0.17%     -2.58%         -          0.04%
Allowance for Loan Loss/Nonaccrual
Loans at December 31, 2020                                                                                                         173.09%


The Bank has $9.0 million of goodwill recorded on its balance sheet as the
result of corporate acquisitions. Goodwill is not amortized, nor deductible for
tax purposes. However, goodwill is tested for impairment at least annually in
accordance with ASC Topic 350. Goodwill was tested for impairment as of
August 31, 2021. The 2021 test was conducted using a qualitative assessment
method that requires the use of significant assumptions in order to make a
determination of impairment. These assumptions may include, but are not limited
to: macroeconomic factors, banking industry conditions, banking merger and
acquisition trends, the


————————————————– ——————————


Historical financial performance of the Bank, share price of the Company, forecast of the financial performance of the Bank and bonuses for change of control. Management has determined that the Bank’s goodwill was not impaired in 2021.

The 2020 impairment test was conducted using several quantitative methods,
including an income approach, market value approach and a change of control
acquisition approach. Each of these quantitative approaches included different
scenarios with different assumptions. These scenarios were weighted based upon
Management's judgement. Based upon this assessment, the estimated fair value of
the Corporation exceeded its carrying value by 24% and Management determined the
Bank's goodwill was not impaired.

At December 31, 2021, Management subsequently considered certain qualitative
factors affecting the Corporation and determined that it was not likely that the
results of the prior test had changed, and it determined that goodwill was not
impaired at year-end.


The Bank depends on deposits generated in the normal course of business as its
primary source of funds. The Bank offers numerous deposit products including
demand deposits (noninterest and interest-bearing accounts), savings, money
management accounts, and time deposits (certificates of deposits/CDs) to retail,
commercial, and municipal customers. Table 11 shows a comparison of the major
deposit categories over a two-year period at December 31, including balances and
the percentage change in balances year-over-year. Table 3, presented previously,
shows the average balance of the major deposit categories and the average cost
of these deposits over a two-year period.

                               Table 11. Deposits

(Dollars in thousands)            2021          2020       Amount      %
Noninterest-bearing checking  $   298,403   $   259,060   $  39,343  15.2
Interest-bearing checking         511,969       409,178     102,791  25.1
Money management                  579,826       501,017      78,809  15.7
Savings                           119,908       109,153      10,755   9.9
Time deposits                      74,253        76,165     (1,912)  (2.5)
Total                         $ 1,584,359   $ 1,354,573   $ 229,786  17.0

Noninterest-bearing checking: This category increased year over year by $39.3
million, primarily in commercial accounts, while the average balance increased
by $53.0 million for the year. As a noninterest bearing account, these deposits
contribute approximately 9 basis points to the net interest margin.

Interest-bearing checking: This category saw an increase in both the ending and
average balance for the year compared to prior year-end, while the cost of these
accounts decreased year over year. Both commercial and retail accounts grew
during 2021.

Money management: The year over year balance increased $78.8 million, in both
retail and commercial accounts and the average balance increased $76.6 million
compared to the 2020 average balance. The cost of this product decreased during
the year as market rates decreased.

Savings: Savings accounts increased $10.8 million during the year and represents
the thirteenth consecutive year of growth, mostly in regular savings accounts in
2021. The cost of this product decreased during the year as market rates

Term deposits: Term deposits declined in 2021 as customers transferred funds to more liquid accounts and rates fell.

Reciprocal deposits: At year-end 2021, the Bank had $256.7 million placed in the
IntraFi Network deposit program ($185.0 million in interest-bearing checking and
$71.7 million in money management) and $4.1 million of time deposits placed into
the CDARS program. These programs allow the Bank to offer full FDIC coverage to
large depositors, but with the convenience to the customer of only having to
deal with one bank. The Bank solicits these deposits from within its market and
it believes they present no greater risk than any other local deposit. Only
reciprocal deposits that exceed 20% of liabilities are considered brokered
deposits. At December 31, 2021, the Bank's reciprocal deposits were 16.0% of
total liabilities.

The Bank continually reviews different methods of funding growth that include
traditional deposits and other wholesale sources. Competition from other local
financial institutions, internet banks and brokerages will continue to be a
challenge for the Bank in its efforts to attract new and retain existing deposit
accounts. This competition is not expected to lessen in the future.

Uninsured deposits: Estimated uninsured deposits at December 31, 2021 were
$142.0 million (9.0% of total deposits) compared to $150.6 million (11.1% of
total deposits at December 31, 2020). The insured deposit data for 2021 and 2020
reflect deposits at an aggregate level, but do not include public funds secured
by collateral.


————————————————– ——————————


AT December 31, 2021term deposits exceeding the FDIC the limit of insurance and term deposits not otherwise insured at maturity were as follows:

                  Table 12. Time Deposits of $250,000 or More

                                                Instruments that      Time Deposits
                                                 Meet or Exceed       that Meet or
                                                 FDIC Insurance        Exceed FDIC
(Dollars in thousands)                               Limit           Insurance Limit
Maturity distribution:
Within three months                            $            3,254   $           5,254
Over three through six months                               5,409           


Over six through twelve months                              1,072               2,572
Over twelve months                                            171                 421
Total                                          $            9,906   $          15,156


Short-term Borrowings: The Bank has access to short-term borrowings from the
FHLB in the form of a revolving term commitment used to fund the short-term
liquidity needs of the Bank. These borrowings reprice on a daily basis and the
interest rate fluctuates with short-term market interest rates. The Bank's
maximum borrowing capacity with the FHLB at December 31, 2021 was $369.9 million
with $369.9 million available to borrow. The Bank had no short-term borrowings
at December 31, 2021 and 2020.

Long-term Debt: On August 4, 2020, the Corporation completed the sale of a
subordinated debt note offering. The Corporation sold $15.0 million of
subordinated debt notes with a maturity date of September 1, 2030. These notes
are noncallable for 5 years and carry a fixed interest rate of 5% per year for 5
years and then convert to a floating rate of SOFR plus 4.93% per year for the
remainder of the term. The notes can be redeemed at par beginning 5 years prior
to maturity. The Corporation also sold $5.0 million of subordinated debt notes
with a maturity date of September 1, 2035. These notes are noncallable for 10
years and carry a fixed interest rate of 5.25% per year for 10 years and then
convert to a floating rate of SOFR plus 4.92% per year for the remainder of the
term. The notes can be redeemed at par beginning 5 years prior to maturity. The
notes are structured to qualify as Tier 2 capital for the Corporation and any
funds it invests in the Bank qualify as Tier 1 capital at the Bank. The
Corporation paid an issuance fee of 2% of the total issue that will be amortized
to the call date of each issue on a pro-rata basis. The notes are recorded on
the consolidated balance sheet net of unamortized debt issuance costs. The
proceeds are intended to be used for general corporate purposes.


Shareholders' equity increased by $11.9 million to $157.1 million at
December 31, 2021. The increase was the result of 2021 net income of $19.6
million, offset by $5.5 million in dividends ($1.25 per share), and a decrease
of $3.7 million in accumulated other comprehensive income due primarily to a
decrease of the fair value of the investment portfolio. The dividend payout
ratio was 28.2% in 2021 compared to 40.8% in 2020.

The Board of Directors frequently authorizes the repurchase of the Corporation's
$1.00 par value common stock. Information regarding stock repurchase plans in
place during the year are included in Item 5 Market for Registrant's Common
Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Additional information on Shareholders' Equity is reported in Note 19 of the
accompanying consolidated financial statements.

The Corporation's dividend reinvestment plan (DRIP) allows for shareholders to
purchase additional shares of the Corporation's common stock by reinvesting cash
dividends paid on their shares or through optional cash payments. The Dividend
Reinvestment Plan (DRIP) added $2.4 million to capital during 2021. This total
was comprised of $1.0 million from the reinvestment of quarterly dividends and
$1.4 million of optional cash contributions.

A strong capital position is important to the Corporation as it provides a solid
foundation for the future growth of the Corporation, as well as instills
confidence in the Bank by depositors, regulators and investors, and is
considered essential by Management. The Corporation is continually exploring
other sources of capital as part of its capital management plan for the
Corporation and the Bank.

Common measures of adequate capitalization for banking institutions are capital
ratios. These ratios indicate the proportion of permanently committed funds to
the total asset base. Guidelines issued by federal and state regulatory
authorities require both banks and bank holding companies to meet minimum
leverage capital ratios and risk-based capital ratios.

The leverage ratio compares Tier 1 capital to average assets while the
risk-based ratio compares Tier 1 and total capital to risk-weighted assets and
off-balance-sheet activity in order to make capital levels more sensitive to the
risk profiles of individual banks.


————————————————– ——————————


Tier 1 capital includes common stock, additional contributed capital, retained earnings and items of other comprehensive income, less goodwill and other intangible assets. Total capital includes Tier 1 capital plus the allowable portion of the loan loss allowance.

The Corporation, as a bank holding company, is required to comply with the
capital adequacy standards established by Federal Reserve Board. The Bank is
required to comply with capital adequacy standards established by the FDIC. In
addition, the Pennsylvania Department of Banking also requires state-chartered
banks to maintain a 6% leverage capital level and 10% risk-based capital,
defined substantially the same as the federal regulations.

The Corporation and the Bank are subject to the capital requirements contained
in the regulation generally referred to as Basel III. The Basel III standards
were effective for the Corporation and the Bank, effective January 1, 2015.
Basel III imposes significantly higher capital requirements and more restrictive
leverage and liquidity ratios than those previously in place. The capital ratios
to be considered "well capitalized" under Basel III are: (1) Common Equity Tier
1(CET1) of 6.5%, (2) Tier 1 Leverage of 5%, (3) Tier 1 Risk-Based Capital of 8%,
and (4) Total Risk-Based Capital of 10%. The CET1 ratio is a new capital ratio
under Basel III and the Tier 1 risk-based capital ratio of 8% has been increased
from 6%. The rules also included changes in the risk weights of certain assets
to better reflect credit and other risk exposures. In addition, a capital
conservation buffer of 2.50% is applicable to all of the capital ratios except
for the Tier 1 Leverage ratio. The capital conservation buffer is equal to the
lowest value of the three applicable capital ratios less the regulatory minimum
("adequately capitalized") for each respective capital measurement. The Bank's
capital conservation buffer at December 31, 2021 was 8.54%. Compliance with the
capital conservation buffer is required in order to avoid limitations on certain
capital distributions, especially dividends. As of December 31, 2021, the Bank
was "well capitalized' under the Basel III requirements. For additional
information on the capital ratios see the section titled Shareholders' Equity,
and Table 13.

On August 4, 2020, the Corporation completed the sale of a $20 million
subordinated debt note offering. The notes are structured to qualify as Tier 2
capital for the Corporation and any funds it invests in the Bank qualify as Tier
1 capital at the Bank.

In 2019, the Community Bank Leverage Ratio (CBLR) was approved by federal
banking agencies as an optional capital measure available to Qualifying
Community Banking Organizations (QCBO). If a bank qualifies as a QCBR and
maintains a CBLR of 9% or greater, the bank would be considered
"well-capitalized" for regulatory capital purposes and exempt from complying
with the Basel III risk-based capital rule. The CBLR rule was effective January
1, 2020 and banks could opt-in through an election in the first quarter 2020
regulatory filings. The Bank meets the criteria of a QCBO but did not opt-in to
the CBLR.

The consolidated asset limit on small bank holding companies is $3 billion and a
company with assets under that limit is not subject to the consolidated capital
rules but may file reports that include capital amounts and ratios. The
Corporation has elected to file those reports.

The following table presents capital ratios for the Corporation at December 31:

                            Table 13. Capital Ratios

                                                     2021                 2020
                                              Corporation   Bank   Corporation   Bank
Common Equity Tier 1 risk-based capital ratio      15.20%  15.28%       14.32%  14.07%
Total risk-based capital ratio                     18.41%  16.54%       17.69%  15.33%
Tier 1 risk-based capital ratio                    15.20%  15.28%       14.32%  14.07%
Tier 1 leverage ratio                               8.52%   8.57%        8.69%   8.54%

For further information on capital adequacy, refer to Note 2 of the accompanying consolidated financial statements.

The local economy

The Corporation's primary market area includes Franklin, Fulton, Cumberland and
Huntingdon County, PA. This area is diverse in demographic and economic makeup.
County populations range from a low of approximately 15,000 in Fulton County to
over 260,000 in Cumberland County. Unemployment in the Bank's market area
decreased during 2021 over 2020 as the local economy recovered from the worst
effects of the COVID-19 pandemic shutdowns. The market area has a diverse
economic base and local industries include, warehousing, truck and rail shipping
centers, light and heavy manufacturers, health care, higher education
institutions, farming and agriculture, and a varied service sector. The market
area provides easy access to the major metropolitan markets on the east coast
via trucking and rail transportation. Because of this, warehousing and
distribution companies continue to find the area attractive. The local economy
is not overly dependent on any one industry or business and Management believes
that the Bank's primary market area continues to be well suited for growth. The
following provides selected economic data for the Bank's primary market at
December 31:


————————————————– ——————————

  Table of Contents

                                 Economic Data

                                                                   2021           2020
Unemployment Rate (seasonally adjusted)
Market area range (1)                                           3.6% - 5.2%   4.8% - 10.1%
Pennsylvania                                                           5.7%           6.6%
United States                                                          4.2%           6.7%

Housing Price Index - year over year change
PA, nonmetropolitan statistical area                                  11.5% 


United States                                                         16.4% 


Building permits – year to year variation -12 months Harrisburg-Carlisle, Pennsylvania MSA & Chambersburg-Waynesboro, Pennsylvania MSA Residentialvalued



Multifamily, estimated                                               -24.0% 


(1) franklin, cumberland, Fulton and Huntingdon Counties

The assets and liabilities of the Corporation are financial in nature, as such,
the pricing of products, customer demand for certain types of products, and the
value of assets and liabilities are greatly influenced by interest rates. As
such, interest rates and changes in interest rates may have a more significant
effect on the Corporation's financial results than on other types of industries.
Because of this, the Corporation watches the actions of the Federal Reserve Open
Market Committee (FOMC) as it makes decisions about interest rate changes and
monetary policy. In January 2022, the FOMC release included this: "Indicators of
economic activity and employment have continued to strengthen. The sectors most
adversely affected by the pandemic have improved in recent months but are being
affected by the recent sharp rise in COVID-19 cases. Job gains have been solid
in recent months, and the unemployment rate has declined substantially. Supply
and demand imbalances related to the pandemic and the reopening of the economy
have continued to contribute to elevated levels of inflation. Overall financial
conditions remain accommodative, in part reflecting policy measures to support
the economy and the flow of credit to U.S. households and businesses." With the
Federal Reserve decreasing its level of bond purchases, and economic improvement
coupled with inflation, the possibility of rate increases by the FOMC appears
more likely. Over the long-term, the Bank benefits from higher interest rates,
but any increase in rates in 2022 is not expected to have a material effect on
the Corporation.


The Company conducts substantially all of its business through its banking subsidiary. The Company’s cash needs are funded primarily by the banking subsidiary, supplemented by cash from its dividend reinvestment plan.

The Bank must meet the financial needs of the customers that it serves, while
providing a satisfactory return on the shareholders' investment. In order to
accomplish this, the Corporation must maintain sufficient liquidity in order to
respond quickly to the changing level of funds required for both loan and
deposit activity. The goal of liquidity management is to meet the ongoing cash
flow requirements of depositors who want to withdraw funds and of borrowers who
request loan disbursements. The Bank regularly reviews it liquidity position by
measuring its projected net cash flows (in and out) at a 30 and 90-day interval.
The Bank stress tests this measurement by assuming a level of deposit out-flows
that have not historically been realized. In addition to this forecast, other
funding sources are reviewed as a method to provide emergency funding if
necessary. The objective of this measurement is to identify the amount of cash
that could be raised quickly without the need to liquidate assets. The Bank also
stresses its liquidity position utilizing different longer-term scenarios. The
varying degrees of stress create pressure on deposit flows in its local market,
reduce access to wholesale funding and limit access of funds available through
brokered deposit channels. In addition to stressing cash flow, specific
liquidity risk indicators are monitored to help identify risk areas. This
analysis helps identify and quantify the potential cash surplus/deficit over a
variety of time horizons to ensure the Bank has adequate funding resources.
Assumptions used for liquidity stress testing are subjective. Should an evolving
liquidity situation or business cycle present new data, potential assumption
changes will be considered. The Bank believes it can meet all anticipated
liquidity demands.

Historically, the Bank has satisfied its liquidity needs from earnings,
repayment of loans, amortizing and maturing investment securities, loan sales,
deposit growth and its ability to access existing lines of credit. All
investment securities are classified as available for sale; therefore,
securities that are unencumbered (approximately $378.8 million fair value) as
collateral for borrowings are an additional source of readily available
liquidity, either by selling the security or, more preferably, to provide
collateral for additional borrowing. The Bank also has access to other wholesale
funding via the brokered CD market.

The FHLB system has always been a major source of funding for community banks.
There are no indicators that lead the Bank to believe the FHLB will discontinue
its lending function or restrict the Bank's ability to borrow. If either of
these events were to occur,


————————————————– ——————————


it would have a negative effect on the Bank, and it is unlikely that the Bank
could replace the level of FHLB funding in a short time. The Bank has also
established credit at the Federal Reserve Discount Window and an unsecured line
of credit at a correspondent bank.

The following table shows the Bank's available liquidity at December 31, 2021.

(Dollars in thousands)

          Liquidity Source              Capacity    Outstanding    Available
Federal Home Loan Bank                $  369,860  $           -  $   369,860
Federal Reserve Bank Discount Window      22,125              -       22,125
Correspondent Banks                       56,000              -       56,000
Total                                 $  447,985  $           -  $   447,985

Off-balance sheet commitments

The Corporation's financial statements do not reflect various commitments that
are made in the normal course of business, which may involve some liquidity
risk. These commitments consist mainly of unfunded loans and letters of credit
made under the same standards as on-balance sheet loans and lines of credit.
Because these unfunded instruments have fixed maturity dates and many of them
will expire without being drawn upon, they do not generally present any
significant liquidity risk to the Corporation. Unused commitments and standby
letters of credit totaled $375.6 million and $23.3 million, respectively, at
December 31, 2021, compared to $312.0 million and $22.3 million, respectively,
at December 31, 2020. In the second quarter of 2018, the Bank established a $2.4
million allowance against letters of credit issued in connection with a
commercial borrower that declared bankruptcy in the second quarter of 2018. In
the first quarter of 2020, the Bank was notified that one letter of credit for
$250 thousand was cancelled and the amount was reversed from the liability with
an offsetting amount recorded in other expense. In the second quarter of 2021,
the Bank was notified that a second letter of credit for $636 thousand was
cancelled and the amount was reversed from the liability with an offsetting
amount recorded in other expense. At December 31, 2021, this reserve was $1.5

Management believes that any amounts actually drawn upon can be funded in the
normal course of operations. The Corporation has no investment in or financial
relationship with any unconsolidated entities that are reasonably likely to have
a material effect on liquidity.

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