UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2021

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

For the transition period from _____________ to _______________

Commission File Number: 0-13222

Citizens Financial Services, Inc.

(Exact Name of Registrant as Specified in its Charter)

Pennsylvania		23-2265045
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

15 South Main Street, Mansfield, Pennsylvania		16933
(Address of principal executive offices)		(Zip code)

(570) 662-2121
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Trading Symbol(s)	Name of Each Exchange on Which Registered

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $1.00 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

☐ Yes ☒ No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

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

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter; $220,569,000 as of June 30, 2021.

As of April 26, 2022, there were 3,944,347 shares of the registrant’s common stock outstanding.

EXPLANATORY NOTE

On March 10, 2022, Citizens Financial Services, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Original Filing”). The sole purpose of this Form 10-K/A (Amendment No. 1) is to amend Part II, Item 8 (Financial Statements and Supplementary Data) of the Original Filing to correct an inadvertent error with respect to the date of the Report of Independent Registered Public Accounting Firm on the Company’s consolidated financial statements, and related notes, contained in the Original Filing. The correct date is March 10, 2022, rather than March 11, 2021.

PART II

ITEM 8.

Financial Statements and Supplementary Data.

Citizens Financial Services, Inc.

Consolidated Balance Sheet

	December 31,
(in thousands, except share data)	2021			2020
ASSETS:
Cash and cash equivalents:
Noninterest-bearing	$	14,051		$	16,374
Interest-bearing		158,782			52,333
Total cash and cash equivalents		172,833			68,707
Interest bearing time deposits with other banks		11,026			13,758
Equity securities		2,270			1,931
Available-for-sale securities		412,402			295,189
Loans held for sale		4,554			14,640
Loans (net of allowance for loan losses: 2021, $17,304; 2020, $15,815)		1,424,229			1,389,466
Premises and equipment		17,016			16,948
Accrued interest receivable		5,235			5,998
Goodwill		31,376			31,376
Bank owned life insurance		38,503			32,589
Other intangibles		1,627			1,668
Other assets		22,792			19,404
TOTAL ASSETS	$	2,143,863		$	1,891,674
LIABILITIES:
Deposits:
Noninterest-bearing	$	358,073		$	303,762
Interest-bearing		1,478,078			1,285,096
Total deposits		1,836,151			1,588,858
Borrowed funds		73,977			88,838
Accrued interest payable		711			1,017
Other liabilities		20,532			18,702
TOTAL LIABILITIES		1,931,371			1,697,415
STOCKHOLDERS’ EQUITY:
Preferred Stock $1.00 par value; authorized 3,000,000 shares 2021 and 2020; none issued in 2021 or 2020		-			-
Common Stock $1.00 par value; authorized 25,000,000 shares 2021 and 2020; issued 4,388,901 and 4,350,342 shares in 2021 and 2020, respectively		4,389			4,350
Additional paid-in capital		78,395			75,908
Retained earnings		146,010			126,627
Accumulated other comprehensive income (loss)		(155	)		2,587
Treasury stock, at cost:
444,481 and 428,492 shares for 2021 and 2020, respectively		(16,147	)		(15,213	)
TOTAL STOCKHOLDERS’ EQUITY		212,492			194,259
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,143,863		$	1,891,674

See accompanying notes to consolidated financial statements.

Citizens Financial Services, Inc.

Consolidated Statement of Income

Year Ended December 31,

(in thousands, except per share data)	2021		2020			2019
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	66,371	$	63,538		$	54,911
Interest-bearing deposits with banks		447		401			407
Investment securities:
Taxable		3,820		4,090			4,673
Nontaxable		2,201		1,869			1,492
Dividends		378		398			497
TOTAL INTEREST AND DIVIDEND INCOME		73,217		70,296			61,980
INTEREST EXPENSE:
Deposits		5,837		6,851			9,219
Borrowed funds		1,268		1,254			2,821
TOTAL INTEREST EXPENSE		7,105		8,105			12,040
NET INTEREST INCOME		66,112		62,191			49,940
Provision for loan losses		1,550		2,400			1,675
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		64,562		59,791			48,265
NON-INTEREST INCOME:
Service charges		4,755		4,221			4,687
Trust		865		803			750
Brokerage and insurance		1,625		1,297			1,141
Equity security gains (losses), net		339		(41	)		120
Available for sale security gains, net		212		305			24
Gains on loans sold		1,283		2,168			473
Earnings on bank owned life insurance		1,828		695			623
Other		1,398		1,974			568
TOTAL NON-INTEREST INCOME		12,305		11,422			8,386
NON-INTEREST EXPENSES:
Salaries and employee benefits		25,902		24,190			20,456
Occupancy		2,966		2,557			2,174
Furniture and equipment		519		757			674
Professional fees		1,526		1,517			1,423
Federal depository insurance		522		476			75
Pennsylvania shares tax		880		868			808
Amortization of intangibles		192		216			259
Merger and acquisition		-		2,179			466
ORE expenses		439		451			376
Software expenses		1,321		1,155			948
Other		7,283		6,481			5,682
TOTAL NON-INTEREST EXPENSES		41,550		40,847			33,341
Income before provision for income taxes		35,317		30,366			23,310
Provision for income taxes		6,199		5,263			3,820
NET INCOME	$	29,118	$	25,103		$	19,490
PER COMMON SHARE DATA:
EARNINGS PER SHARE - BASIC	$	7.38	$	6.53		$	5.42
EARNINGS PER SHARE - DILUTED	$	7.38	$	6.53		$	5.41
CASH DIVIDENDS PER SHARE	$	1.86	$	1.90		$	1.74

Number of shares used in computation - basic		3,945,299		3,844,241			3,597,709
Number of shares used in computation - diluted		3,945,299		3,846,082			3,599,805

See accompanying notes to consolidated financial statements.

Citizens Financial Services, Inc.

Consolidated Statement of Changes in Comprehensive Income

Year Ended December 31,


(in thousands)	2021			2020			2019
Net Income	$	29,118		$	25,103		$	19,490

Other Comprehensive (loss) income
Securities available for sale
Unrealized holding (loss) gain during the period		(7,071	)		5,074			4,156
Income tax effect		(1,485	)		1,066			873
Subtotal		(5,586	)		4,008			3,283
Reclassification adjustment for gains
included in income		(212	)		(305	)		(24	)
Income tax effect		(44	)		(65	)		(4	)
Subtotal		(168	)		(240	)		(20	)

Unrealized gain (loss) on interest rate swap		1,920			(11	)		-
Income tax effect		402			(2	)		-
Other comprehensive gain (loss) on interest rate swap		1,518			(9	)		-

Change in unrecognized pension costs		1,892			(688	)		36
Income tax effect		398			(145	)		7
Other comprehensive gain (loss) gain on unrecognized pension costs		1,494			(543	)		29

Net other comprehensive (loss) income		(2,742	)		3,216			3,292
Comprehensive income	$	26,376		$	28,319		$	22,782

See accompanying notes to consolidated financial statements.

Citizens Financial Services, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

	Common Stock				Additional Paid-in			Retained			Accumulated Other Comprehensive			Treasury Stock
(in thousands, except share data)	Shares		Amount		Capital			Earnings			Income (Loss)			Stock			Total
Balance, December 31, 2018		3,904,212	$	3,904	$	53,099		$	99,727		$	(3,921	)	$	(13,580	)	$	139,229
Comprehensive income:
Net income									19,490									19,490
Net other comprehensive income												3,292						3,292
Stock dividend (1%)		34,456		35		2,067			(2,102	)								-
Purchase of treasury stock (21,551 shares)															(1,291	)		(1,291	)
Restricted stock, executive and Board of Director awards						(374	)								489			115
Restricted stock vesting						254												254
Forfeited restricted stock						43									(43	)		-
Cash dividends, $1.743 per share									(6,315	)								(6,315	)
Balance, December 31, 2019		3,938,668	$	3,939	$	55,089		$	110,800		$	(629	)	$	(14,425	)	$	154,774
Comprehensive income:
Net income									25,103									25,103
Net other comprehensive income												3,216						3,216
Stock dividend (1%)		38,318		38		1,878			(1,916	)								-
Stock issued for acquisition		373,356		373		18,854												19,227
Purchase of treasury stock (40,438 shares)															(2,122	)		(2,122	)
Restricted stock, executive and Board of Director awards						(260	)								408			148
Restricted stock vesting						326												326
Sale of treasury stock						1									125			126
Forfeited restricted stock						19									(19	)		-
Cash dividend reinvestment paid from treasury stock						1			(821	)					820			-
Cash dividends, $1.900 per share									(6,539	)								(6,539	)
Balance, December 31, 2020		4,350,342	$	4,350	$	75,908		$	126,627		$	2,587		$	(15,213	)	$	194,259

Comprehensive income:
Net income									29,118									29,118
Net other comprehensive loss												(2,742	)					(2,742	)
Stock dividend (1%)		38,559		39		2,313			(2,352	)								-
Purchase of treasury stock (23,390 shares)															(1,374	)		(1,374	)
Restricted stock, executive and Board of Director awards						(273	)								444			171
Restricted stock vesting						443												443
Forfeited restricted stock						4									(4	)		-
Cash dividends, $1.861 per share									(7,383	)								(7,383	)
Balance, December 31, 2021		4,388,901	$	4,389	$	78,395		$	146,010		$	(155	)	$	(16,147	)	$	212,492

See accompanying notes to consolidated financial statements.

Citizens Financial Services, Inc.

Consolidated Statement of Cash Flows

	Year Ended December 31,
(in thousands)	2021			2020			2019
Cash Flows from Operating Activities:
Net income	$	29,118		$	25,103		$	19,490
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,550			2,400			1,675
Depreciation and amortization		1,113			1,138			1,043
Amortization and accretion of loans and other assets		(4,535	)		(3,960	)		(545	)
Amortization and accretion on investment securities		2,215			1,155			308
Deferred income taxes		689			367			317
Equity security (gains) losses, net		(339	)		41			(120	)
Available for sale security (gains) losses, net		(212	)		(305	)		(24	)
Earnings on bank owned life insurance		(1,828	)		(695	)		(623	)
Stock awards		614			473			369
Originations of loans held for sale		(44,668	)		(88,024	)		(21,157	)
Proceeds from sales of loans held for sale		55,621			75,809			21,780
Realized gains on loans sold		(1,283	)		(2,168	)		(473	)
(Increase) decrease in accrued interest receivable		764			(857	)		(103	)
Increase (decrease) in accrued interest payable		(306	)		(235	)		12
Other, net		180			1,580			(182	)
Net cash provided by operating activities		38,693			11,822			21,767
Cash Flows from Investing Activities:
Available-for-sale securities:
Proceeds from sales of available-for-sale securities		29,198			23,415			10,489
Proceeds from maturity and principal repayments of securities		55,520			70,008			62,625
Purchase of securities		(211,218	)		(143,987	)		(68,963	)
Purchase of equity securities		-			(1,339	)		(65	)
Proceeds from sale of equity securities		-			168			-
Proceeds from redemption of Regulatory Stock		4,989			9,454			10,787
Purchase of Regulatory Stock		(3,688	)		(7,396	)		(11,526	)
Net increase in loans		(32,111	)		(63,440	)		(37,492	)
Purchase of interest bearing time deposits		-			(350	)		(248	)
Proceeds from matured interest-bearing time deposits with other banks		2,732			848			1,490
Purchase of bank owned life insurance		(7,800	)		-			-
Purchase of premises, equipment and software		(1,105	)		(942	)		(483	)
Proceeds from sale of premises and equipment		-			-			7
Proceeds from life insurance		3,714			-			-
Proceeds from sale of foreclosed assets held for sale		1,537			1,805			1,056
Acquisition, net of cash paid		-			1,022			-
Net cash used in investing activities		(158,232	)		(110,734	)		(32,323	)
Cash Flows from Financing Activities:
Net increase in deposits		247,293			168,914			25,962
Proceeds from long-term borrowings		9,869			20,000			10,000
Repayments of long-term borrowings		(26,800	)		(15,000	)		(3,123	)
Net increase (decrease) in short-term borrowed funds		2,060			(16,280	)		(12,954	)
Purchase of treasury stock		(1,374	)		(2,122	)		(1,291	)
Sale of treasury stock to employee stock purchase plan		-			126			-
Dividends paid		(7,383	)		(6,539	)		(6,315	)
Net cash provided by financing activities		223,665			149,099			12,279
Net increase in cash and cash equivalents		104,126			50,187			1,723
Cash and Cash Equivalents at Beginning of Year		68,707			18,520			16,797
Cash and Cash Equivalents at End of Year	$	172,833		$	68,707		$	18,520

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	7,411		$	8,175		$	12,028
Income taxes paid	$	5,500		$	4,750		$	3,300
Non-cash activities:
Stock dividend	$	2,352		$	1,916		$	2,102
Real estate acquired in settlement of loans	$	906		$	281		$	3,836
Right of use asset and liability	$	1,636		$	636		$	1,454

Acquisition of				Midcoast Community Bancorp Inc.
Non-cash assets acquired
Available-for-sale securities	$	-		$	-		$	-
Interest bearing time deposits with other banks		-			-			-
Loans		-			223,235			-
Premises and equipment		-			1,787			-
Accrued interest receivable		-			586			-
Bank owned life insurance		-			3,766			-
Intangibles		-			157			-
Deferred tax asset		-			3,402			-
Other assets		-			2,878			-
Goodwill		-			8,080			-
		-			243,891			-
Liabilities assumed
Noninterest-bearing deposits		-			38,694			-
Interest-bearing deposits		-			170,132			-
Accrued interest payable		-			164			-
Borrowed funds		-			15,497
Other liabilities		-			1,198			-
		-			225,685			-
Net non-cash liabilities acquired		-			18,206			-
Cash and cash equivalents acquired	$	-		$	8,637		$	-

See accompanying notes to consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Organization

Citizens Financial Services, Inc. (individually and collectively, the “Company”) is headquartered in Mansfield, Pennsylvania, and provides a full range of banking and related services through its wholly owned subsidiary, CZFS Acquisition Company, LLC (CZFS), and its wholly owned subsidiary, First Citizens Community Bank (the “Bank”), and its wholly owned subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1^st Realty of PA, LLC (“Realty”). CZFS was formed in March 2020 as part of the merger with Midcoast Community Bancorp. Inc. (MidCoast). Realty was formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer. On December 11, 2015, the Company completed its acquisition of The First National Bank of Fredericksburg (FNB). On December 8, 2017, the Bank completed its acquisition of the S&T Bank branch in State College (State College). On April 17, 2020, the Company completed its acquisition of MidCoast. As of December 31, 2021, the Bank operates thirty full-service banking branches in Potter, Tioga, Bradford, Clinton, Lebanon, Lancaster, Berks, Schuylkill, Centre and Chester counties, Pennsylvania, Allegany County, New York, and the cities of Wilmington and Dover, Delaware, and a limited branch office in Union county, Pennsylvania. The Bank also provides trust services, including the administration of trusts and estates, retirement plans, and other employee benefit plans, along with a brokerage division that provides a comprehensive menu of investment services. The Bank serves individual and corporate customers and is subject to competition from other financial institutions and intermediaries with respect to these services. The Company and Bank are supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to additional regulation and supervision by the Pennsylvania Department of Banking.

A summary of significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:

Basis of Presentation

The financial statements are consolidated to include the accounts of the Company, and its subsidiary CZFS, and its subsidiary, First Citizens Community Bank, and its subsidiaries, First Citizens Insurance Agency, Inc. and 1^st Realty of PA, LLC. These statements have been prepared in accordance with U.S. generally accepted accounting principles. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.

Use of Estimates

In preparing the financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, goodwill, derivatives, pension plans and deferred tax assets and liabilities.

Operating Segments

An operating segment is defined as a component of an enterprise that engages in business activities that generates revenue and incurs expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of resource allocation and performance. While the Company’s chief decision makers monitor the revenue streams of the various Company’s products, services and regions, operations are managed and financial performance is evaluated on a Company-wide basis. Consistent with our internal reporting, the Company’s business activities are reported as one segment, which is community banking.

Cash and Cash Equivalents

Cash equivalents include cash on hand, deposits in banks and interest-earning deposits. Interest-earning deposits with original maturities of 90 days or less are considered cash equivalents.

Interest bearing time deposits with other banks are not included with cash and cash equivalents as the original maturities were greater than 90 days.

Investment Securities

Investment securities at the time of purchase are classified as one of the three following types:

Held-to-Maturity Securities - Includes securities that the Company has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. The Company had no held-to-maturity securities as of December 31, 2021 and 2020.

Trading Securities - Includes debt and equity securities bought and held principally for the purpose of selling them in the near term. Such securities are reported at fair value with unrealized holding gains and losses included in earnings. The Company had no trading securities as of December 31, 2021 and 2020.

Available-for-Sale Securities – This category included debt securities not classified as held-to-maturity or trading securities that will be held for indefinite periods of time. These securities may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of the estimated income tax effect.

The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security.

Debt securities are periodically reviewed for other-than-temporary impairment. Management considers whether the present value of future cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings.

The fair value of investments, except certain state and municipal securities, is based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value is based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.

Equity Securities – This category includes common stocks of public companies. Such securities are reported at fair value with unrealized holding gains and losses included in earnings.

Restricted Stock - Common stock of the Federal Reserve Bank, Federal Home Loan Bank of Pittsburgh (FHLB) and correspondent banks represent ownership in institutions which are wholly owned by other financial institutions. These restricted equity securities are accounted for at cost and are classified as other assets.

Loans Held for Sale

Certain newly originated fixed-rate residential mortgage loans are classified as held for sale, because it is management’s intent to sell these residential mortgage loans. The residential mortgage loans held for sale are carried at the lower of aggregate cost or fair value.

Loans

Interest on all loans is recognized on the accrual basis based upon the principal amount outstanding. The accrual of interest income on loans is discontinued when, in the opinion of management, doubt exists as to the ability to collect such interest. Payments received on non-accrual loans are applied to the outstanding principal balance or recorded as interest income, depending upon our assessment of our ultimate ability to collect principal and interest. Loans are returned to the accrual status when factors indicating doubtful collectability cease to exist.

The Company recognizes nonrefundable loan origination fees, SBA fees and certain direct loan origination costs over the life of the related loan as an adjustment of loan yield using the interest method.

Allowance for Loan Losses

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in the Company’s loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based upon management’s periodic evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses are particularly susceptible to significant change in the near term.

Impaired loans are other commercial, other agricultural, municipal, agricultural real estate, commercial real estate loans and certain residential mortgages cross collateralized with commercial relationships for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Company may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial, agricultural, municipal or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value; or, as a practical expedient in the case of a collateral dependent loan, the difference between the fair value of the collateral and the recorded amount of the loans.

Mortgage loans on one to four family properties and all consumer loans are large groups of smaller balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which is defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

The Company allocates the allowance based on the factors described below, which conform to the Company’s loan classification policy. In reviewing risk within the loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) residential real estate loans; (ii) commercial real estate (iii) agricultural real estate loans; (iv) construction; (v) consumer loans; (vi) other commercial loans (vii) other agricultural loans and (viii) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non classified loans. The following qualitative factors are analyzed:

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Level of and trends in delinquencies, impaired/classified loans

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Change in volume and severity of past due loans

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Volume of non-accrual loans

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Volume and severity of classified, adversely or graded loans

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Level of and trends in charge-offs and recoveries

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Trends in volume, terms and nature of the loan portfolio

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Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices

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Changes in the quality of the Bank’s loan review system

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Experience, ability and depth of lending management and other relevant staff

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National, state, regional and local economic trends and business conditions

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General economic conditions

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Unemployment rates

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Inflation / CPI

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Changes in values of underlying collateral for collateral-dependent loans

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Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses.

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Existence and effect of any credit concentrations, and changes in the level of such concentrations

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Any change in the level of board oversight

The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.

Loan Charge-off Policies

Consumer loans are generally fully or partially charged down to the fair value of collateral securing the asset when the loan is 180 days past due for open-end loans or 120 days past due for closed-end loans unless the loan is well secured and in the process of collection. All other loans are generally charged down to the net realizable value when the loan is 90 days past due.

Troubled Debt Restructurings

Purchased Credit Impaired Loans

The Company purchased loans in connection with its acquisitions of FNB in 2015, the State College branch in 2017 and MidCoast in 2020, some of which showed evidence of credit deterioration as of the acquisition since origination. These purchased credit impaired (“PCI”) loans were recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Over the life of the loan, expected cash flows continue to be estimated. If this subsequent estimate indicated that the present value of expected cash flows is less than the carrying amount, a charge to the allowance for loan loss is made through a provision. If the estimate indicates that the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Such PCI loans are accounted for individually, and the Company estimates the amount and timing of expected cash flows for each loan. The expected cash flows in excess of the amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not amortized over the remaining life of the loan (nonaccretable difference).

For loans purchased that did not show evidence of credit deterioration, the difference between the fair value of the loan at the acquisition date and the loan’s face value is being amortized as a yield adjustment over the estimated remaining life of the loan using the effective interest method.

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell. Prior to foreclosure, as the value of the underlying loan is written down to fair market value of the real estate or other assets to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on disposition, are included in other expenses and gains and losses are included in other non-interest income or other non-interest expense.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed on straight line and accelerated methods over the estimated useful lives of the assets, which range from 3 to 15 years for furniture, fixtures and equipment and 5 to 40 years for building premises. Repair and maintenance expenditures which extend the useful life of an asset are capitalized and other repair expenditures are expensed as incurred.

When premises or equipment are retired or sold, the remaining cost and accumulated depreciation are removed from the accounts and any gain or loss is credited to income or charged to expense, respectively.

The Company has operating leases for several branch locations. Generally, the underlying lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company may also lease certain office equipment under operating leases. Many of our leases include both lease (e.g., minimum rent payments) and non-lease components (e.g., common-area or other maintenance costs). The Company accounts for each component separately based on the standalone price of each component. In addition, there are several operating leases with lease terms of less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our right of use (ROU) assets and lease liabilities.

Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management and is based on whether the extension options are reasonably certain to be exercised after giving proper consideration to all facts and circumstances of the lease. If management determines that the Company is reasonably certain to exercise the extension option(s), the additional term is included in the calculation of the lease liability.

As most of our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments

Intangible Assets

Intangible assets, other than goodwill, include core deposit intangibles and mortgage servicing rights (MSRs). Core deposit intangibles are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized over 10 years using the sum-of-the-years digits method of amortization, while the covenant not to compete was amortized over four years on a straight line basis.

MSRs arise from the Company originating certain loans for the express purpose of selling such loans in the secondary market. The Company maintains all servicing rights for these loans. The loans held for sale are carried at lower of cost or market. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio and measured annually for impairment.

The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.

Goodwill

The Company utilizes a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company may also perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Based on the fair value of the reporting unit, no impairment of goodwill was recognized in 2021, 2020 or 2019.

Bank Owned Life Insurance

The Company has purchased life insurance policies on certain employees. Any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these agreements, the Bank receives the cash surrender value of the policy plus 50% of the benefit in excess of the cash surrender value and the remaining amount of the payout will be given to the beneficiary named by the insured person in the policy. The Company is the sole beneficiary of any death benefits received from non-active insured persons. Additionally, as a result of the MidCoast acquisition, the Company acquired life insurance policies on former MidCoast employees. The Company is owner and sole beneficiary of these policies. The Company acquired life insurance policies on former FNB employees and directors, as part of the acquisition of FNB. The policies obtained as part of the acquisition provide a fixed dollar benefit to the former employee or director beneficiaries, whether or not the insured person is affiliated with the Company at the time of his or her death. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as other non-interest income. The obligation of $696,000 and $687,000 under split-dollar benefit agreements to former employees and directors or their beneficiaries have been recognized as liabilities on the consolidated balance sheet at December 31, 2021 and 2020. The expenses associated with the split dollar benefit were $9,000, $3,000 and $36,000 for 2021, 2020 and 2019, respectively.

Income Taxes

The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period.

Derivatives

Derivative financial instruments are recognized as assets or liabilities at fair value. The Company has interest rate swap agreements which are used as part of its asset liability management to help manage interest rate risk. The Company does not use derivatives for trading purposes.

At the inception of a derivative contract, the Company designates the derivative as one of three types based on the purpose of the contract and belief as to its effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions, at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Employee Benefit Plans

The Company has noncontributory defined benefit pension plans covering employees hired before January 1, 2007 and employees acquired as part of the FNB acquisition. It is the Company’s policy to fund pension costs on a current basis to the extent deductible under existing tax regulations. Such contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The plan acquired as part of the FNB acquisition was terminated in 2019.

The Company has a defined contribution, 401(k) plan covering eligible employees. The employee may also contribute to the plan on a voluntary basis, up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k). Under the plan, the Company also makes contributions on behalf of eligible employees, which vest immediately. For employees hired after January 1, 2007, in lieu of the pension plan, an additional annual discretionary 401(k) plan contribution is made and is equal to a percentage of an employee’s base compensation.

The Company also has a profit-sharing plan for employees which provide tax-deferred salary savings to plan participants. The Company has a deferred compensation plan for directors who have elected to defer all or portions of their fees until their retirement or termination from service.

The Company has a restricted stock plan which covers eligible employees and non-employee corporate directors. Under the plan, awards are granted based upon performance related requirements and are subject to certain vesting criteria. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.

The Company has an employee stock purchase plan that allows employees to withhold money from their paychecks, which is then utilized to purchase shares of the Company’s stock on either the open market or through treasury stock, if shares are unavailable on the open market.

The Company maintains a non-qualified supplemental executive retirement plan (“SERP”) for certain executives to compensate those executive participants in the Company’s noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. The SERP is considered an unfunded plan for tax and ERISA purposes and all obligations arising under the SERP are payable from the general assets of the Company. Expenses under the SERP are recognized as earned over the expected years of service.

The Company maintains a non-tax qualified executive deferred compensation plan (“Deferred Compensation Plan”) for eligible employees designated by the board of directors. Each of the named executive officers are eligible to participate in the Deferred Compensation Plan. The Deferred Compensation Plan is considered an unfunded plan for tax and ERISA purposes and all obligations arising under the Deferred Compensation Plan are payable from the general assets of the Company. Expenses under the Deferred Compensation Plan are recognized as earned over the expected years of service.

Advertising Costs

Advertising costs are generally expensed as incurred and amounted to $460,000, $470,000 and $466,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Comprehensive Income (Loss)

The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other comprehensive income (loss) is comprised of unrealized holding gains (losses) on the available-for-sale securities portfolio and unrecognized pension costs.

Recent Accounting Pronouncements – Not yet effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. In that regard, we have formed a cross-functional working group. The working group is comprised of individuals from various functional areas including credit, loan origination and finance. We are currently working through our implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other things. We are also in the process of implementing a third-party vendor solution to assist us in the application of the ASU 2016-13. The adoption of the ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs .

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2020, the FASB issued ASU 2020-1, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option, in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.

In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

In August 2020, the FASB issued ASU 2020-6, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, which clarifies that, for each reporting period, an entity should reevaluate whether a callable debt security is within the scope of ASC 310-20-35-33. For public business entities, ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which makes minor technical corrections and clarifications to the ASC. The amendments in Sections B and C of the ASU are effective for annual periods beginning after December 15, 2020, for public business entities. For all other entities, the amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which requires an entity to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. An entity should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update), to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU was effective upon issuance and did not have a significant impact on the Company’s financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which addresses how an acquirer should recognize and measure revenue contracts acquired in a business combination. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Treasury Stock

The purchase of the Company’s common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a last-in-first-out basis.

Cash Flows

The Company utilizes the net reporting of cash receipts and cash payments for deposit, short-term borrowing and lending activities.

Trust, Brokerage and Insurance Assets and Income

Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such assets are not assets of the Company. The majority of trust revenue is earned and collected monthly, with the amount determined based on a percentage of the fair value of the trust assets under management. Trust fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. None of the contracts with trust customers provide for incentive-based fees. In addition, trust revenue includes fees for provision of services, including employee benefit plan administration, tax return preparation and estate planning and settlement. Fees for such services are billed based on contractual arrangements or established fee schedules and are typically billed upon completion of providing such services. Brokerage and insurance commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Other performance obligations (such as the delivery of account statements to customers) are generally considered immaterial to the overall transaction price.

Earnings Per Share

The following table sets forth the computation of earnings per share. Earnings per share calculations give retroactive effect to stock dividends declared by the Company.

	2021		2020		2019
Basic earnings per share computation:
Net income applicable to common stock	$	29,118,000	$	25,103,000	$	19,490,000
Weighted average common shares outstanding		3,945,299		3,844,241		3,597,709
Earnings per share - basic	$	7.38	$	6.53	$	5.42

Diluted earnings per share computation:
Net income applicable to common stock	$	29,118,000	$	25,103,000	$	19,490,000

Weighted average common shares outstanding for basic earnings per share		3,945,299		3,844,241		3,597,709
Add: Dilutive effects of restricted stock		-		1,841		2,096
Weighted average common shares outstanding for dilutive earnings per share		3,945,299		3,846,082		3,599,805
Earnings per share - dilutive	$	7.38	$	6.53	$	5.41

Nonvested shares of restricted stock totaling 5,494, 4,302 and 3,576 were outstanding during 2021, 2020 and 2019, respectively, but were not included in the computation of diluted earnings per common share because to do so would be anti-dilutive. These anti-dilutive shares had per share prices ranging from $44.93-63.19, $58.37-$62.93 and $52.44-$62.93 for 2021, 2020 and 2019, respectively.

Reclassification

Certain of the prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no material effect on net income or stockholders’ equity.

2. REVENUE RECOGNITION

Under ASC Topic 606, management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold and earnings on bank owned life insurances are not within the scope of this topic. The main types of noninterest income within the scope of the standard are as follows:

•

Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.

•

Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction.

•

Gains (losses) on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.

•

Brokerage and insurance – Fees include commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Fees for these services are billed monthly and are recorded as revenue at the end of the month for which the wealth management service has been performed. Other performance obligations (such as the delivery of account statements to customers) are generally considered immaterial to the overall transaction price.

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the years ended December 31, 2021, 2020 and 2019 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

Revenue stream
Service charges on deposit accounts	2021		2020		2019
Overdraft fees	$	1,111	$	1,171	$	1,536
Statement fees		225		207		206
Interchange revenue		2,801		2,287		2,294
ATM income		388		323		392
Other service charges		230		233		259
Total Service Charges		4,755		4,221		4,687
Trust		865		803		750
Brokerage and insurance		1,625		1,297		1,141
Other		492		339		348
Total	$	7,737	$	6,660	$	6,926

3. RESTRICTIONS ON CASH AND DUE FROM BANKS

Effective, March 26, 2020, the Federal Reserve reduced reserve requirements to zero for all depository institutions. There were no required federal reserves included in “Cash and due from banks” at December 31, 2021 or December 31, 2020. The required reserves are used to facilitate the implementation of monetary policy by the Federal Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of vault cash and a depository amount held with the Federal Reserve Bank. Federal law prohibits the Company from borrowing from the Bank unless the loans are secured by specific collateral.

Non-retirement account deposits with one financial institution are insured up to $250,000. At times, the Company maintains cash and cash equivalents with other financial institutions in excess of the insured amount.

4. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at December 31, 2021 and 2020 were as follows (in thousands):

December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
U.S. Agency securities	$	73,803	$	976	$	(834	)	$	73,945
U.S. Treasuries		116,743		63		(1,459	)		115,347
Obligations of state and political subdivisions		109,367		2,706		(52	)		112,021
Corporate obligations		10,378		39		(84	)		10,333
Mortgage-backed securities in government sponsored entities		101,727		597		(1,568	)		100,756
Total available-for-sale securities	$	412,018	$	4,381	$	(3,997	)	$	412,402

December 31, 2020
Available-for-sale securities:
U.S. Agency securities	$	79,065	$	2,403	$	(52	)	$	81,416
U.S. Treasuries		27,442		601		-			28,043
Obligations of state and political subdivisions		100,089		2,938		(55	)		102,972
Corporate obligations		6,413		96		-			6,509
Mortgage-backed securities in government sponsored entities		74,512		1,874		(137	)		76,249
Total available-for-sale securities	$	287,521	$	7,912	$	(244	)	$	295,189

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at December 31, 2021 and 2020 (in thousands). As of December 31, 2021, the Company owned 138 securities each of whose fair value was less than its cost basis.

	Less than Twelve Months					Twelve Months or Greater					Total
2021	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. agency securities	$	26,754	$	(387	)	$	7,542	$	(447	)	$	34,296	$	(834	)
U.S. Treasuries		106,794		(1,459	)		-		-			106,794		(1,459	)
Obligations of states and political subdivisions		10,744		(26	)		2,899		(26	)		13,643		(52	)
Corporate obligations		6,922		(84	)		-		-			6,922		(84	)
Mortgage-backed securities in government sponsored entities		60,182		(1,305	)		7,975		(263	)		68,157		(1,568	)
Total securities	$	211,396	$	(3,261	)	$	18,416	$	(736	)	$	229,812	$	(3,997	)

	Less than Twelve Months					Twelve Months or Greater					Total
2020	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. agency securities	$	13,720	$	(52	)	$	-	$	-		$	13,720	$	(52	)
Obligations of states and political subdivisions		5,407		(55	)		-		-			5,407		(55	)
Mortgage-backed securities in government sponsored entities		14,600		(99	)		5,633		(38	)		20,233		(137	)
Total securities	$	33,727	$	(206	)	$	5,633	$	(38	)	$	39,360	$	(244	)

As of December 31, 2021, the Company’s investment securities portfolio contained unrealized losses on U.S. Treasuries, agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, obligations of states and political subdivisions, corporate obligations and mortgage backed securities in government sponsored entities. For fixed maturity available for sale investments management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. As of December 31, 2021 and 2020, the Company had concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

Proceeds from sales of securities available-for-sale during 2021, 2020 and 2019 were $29,198,000, $23,415,000, and $10,489,000, respectively. The gross gains realized during 2021 consisted of $177,000 and $125,000 from the sales of six treasury securities and three agency securities, respectively. The gross losses realized during 2021 consisted of $90,000 from the sale of one agency security. The gross gains realized during 2020 consisted of $344,000 from the sales of seventeen mortgage backed securities. The gross losses realized during 2020 consisted of $39,000 from the sale of two mortgage backed securities. The gross gains realized during 2019 consisted of $1,000 and $24,000 from the sales of two agency securities and four treasury securities, respectively. The gross losses realized during 2019 consisted of $1,000 from the sale of one agency security. Gross gains and gross losses were realized as follows on available for sale securities (in thousands):

	2021			2020			2019
Gross gains	$	302		$	344		$	25
Gross losses		(90	)		(39	)		(1	)
Net gains	$	212		$	305		$	24

The following table presents the net gains (losses) on the Company’s equity investments recognized in earnings during 2021, 2020 and 2019 and the portion of unrealized gains for the period that relates to equity investments held at December 31, 2021, 2020 and 2019 (in thousands):

Equity Securities	2021		2020			2019
Net gains (losses) recognized in equity securities during the period	$	339	$	(109	)	$	120
Less: Net gains realized on the sale of equity securities during the period		-		68			-
Net unrealized gains (losses)	$	339	$	(41	)	$	120

Investment securities with an approximate carrying value of $295,028,000 and $245,351,000 at December 31, 2021 and 2020, respectively, were pledged to secure public funds and certain other deposits as provided by law and certain borrowing arrangements of the Company.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and fair value of debt securities at December 31, 2021, by contractual maturity are shown below (in thousands). Municipal securities that have been refunded and will therefore pay-off on the call date are reflected in the table below utilizing the call date as the date of repayment as payment is guaranteed on that date:

Available-for-sale securities:	Amortized Cost		Fair Value
Due in one year or less	$	15,002	$	15,175
Due after one year through five years		108,284		108,590
Due after five years through ten years		133,646		132,786
Due after ten years		155,086		155,851
Total	$	412,018	$	412,402

5. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central and south central Pennsylvania, southern New York and Wilmington and Dover, Delaware. Although the Company had a diversified loan portfolio at December 31, 2021 and 2020, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio, as well as how those segments are analyzed within the allowance for loan losses as of December 31, 2021 and 2020 (in thousands):

2021	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	201,097	$	620	$	14	$	200,463
Commercial		687,338		8,381		2,145		676,812
Agricultural		312,011		5,355		1,643		305,013
Construction		55,036		-		-		55,036
Consumer		25,858		-		-		25,858
Other commercial loans		74,585		186		-		74,399
Other agricultural loans		39,852		991		-		38,861
State and political subdivision loans		45,756		-		-		45,756
Total		1,441,533		15,533		3,802		1,422,198
Allowance for loan losses		17,304		121		-		17,183
Net loans	$	1,424,229	$	15,412	$	3,802	$	1,405,015

2020
Real estate loans:
Residential	$	201,911	$	990	$	20	$	200,901
Commercial		596,255		9,183		2,937		584,135
Agricultural		315,158		4,645		1,686		308,827
Construction		35,404		-		-		35,404
Consumer		30,277		2		-		30,275
Other commercial loans		114,169		1,335		232		112,602
Other agricultural loans		48,779		1,122		-		47,657
State and political subdivision loans		63,328		-		-		63,328
Total		1,405,281		17,277		4,875		1,383,129
Allowance for loan losses		15,815		510		-		15,305
Net loans	$	1,389,466	$	16,767	$	4,875	$	1,367,824

During 2021 the Company continued to participate in the Paycheck Protection Program (“PPP”), administered directly by the U.S. SBA. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of December 31, 2021 and 2020, the Company had outstanding principal balances of $6.8 million and $37.2 million, respectively, of PPP loans that are included in other commercial loans. During 2021, the Company originated $24.3 million of loans, of which $6.0 million remain outstanding as of December 31, 2021. During 2020, the Company originated $54.3 million of loans under this program of which $806,000 remain outstanding as of December 31, 2021. The PPP loans are fully guaranteed by the SBA, have an interest rate of 1.0% per annum, and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. The SBA has issued guidance for forgiveness with a streamlined approach for loans of $150,000 or less.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $3.8 million in fees associated with the processing of these loans in 2021 and 2020. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2. As of December 31, 2021, $270,000 of deferred fees remain to be amortized related to the PPP loans.

As of December 31, 2021 and 2020, net unamortized loan fees, including PPP fees, and costs of $2,038,000 and $2,344,000, respectively, were included in the carrying value of loans. Purchased loans acquired in connection with the FNB acquisition, the State College branch acquisition and the MidCoast acquisition were recorded at fair value on their acquisition date without a carryover of the related allowance for loan losses.

Upon acquisition, the Company evaluated whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans’ collateral. The carrying value of PCI loans was $3,802,000 and $4,875,000 at December 31, 2021 and 2020, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows.

On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the MidCoast acquisition was $8,005,000 and the estimated fair value of the loans was $4,869,000. Total contractually required payments on these loans, including interest, at the acquisition date was $8,801,000. However, the Company’s preliminary estimate of expected cash flows was $5,835,000 at the acquisition date. At the acquisition date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $2,966,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $966,000 on the acquisition date relating to these impaired loans.

The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the MidCoast Acquisition as of April 17, 2020 (in thousands):

	April 17, 2020
Contractually required principal and interest at acquisition	$	8,801
Non-accretable discount		(2,966	)
Expected cash flows		5,835
Accretable discount		(966	)
Estimated fair value	$	4,869

Changes in the accretable discount for PCI loans were as follows for the years ended December 31, 2021 and 2020 (in thousands):

	December 31, 2021			December 31, 2020
Balance at beginning of period	$	788		$	89
Addition due to MidCoast Acquisition		-			966
Accretion		(499	)		(267	)
Reclassification of non-accretable discount		81			-
Balance at end of period	$	370		$	788

The following table presents additional information regarding PCI loans (in thousands):

	December 31, 2021		December 31, 2020
Outstanding balance	$	6,159	$	8,958
Carrying amount		3,802		4,875

Real estate loans serviced for Freddie Mac, Fannie Mae and the FHLB, which are not included in the Consolidated Balance Sheet, totaled $197,037,000 and $178,986,000 at December 31, 2021 and 2020, respectively. Loans sold to Freddie Mac and Fannie Mae were sold without recourse and total $184,897,000 and $162,050,000 at December 31, 2021 and 2020, respectively. Additionally, the Bank acquired a portfolio of loans sold to the FHLB during the acquisition of FNB, which were sold under the Mortgage Partnership Finance Program (“MPF”). The Bank was not an active participant in the MPF program in 2021 or 2020. The MPF portfolio balance was $12,140,000 and $16,936,000 at December 31, 2021 and 2020, respectively. The FHLB maintains a first-loss position for the MPF portfolio that totals $157,000. Should the FHLB exhaust its first-loss position, recourse to the Bank’s credit enhancement would be up to the next $590,000 of losses. The Bank did not experience any losses for the MPF portfolio during 2021, 2020 or 2019.

The segments of the Bank’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist of 15 to 30 year first mortgages on residential real estate, while residential real estate home equities are consumer purpose installment loans or lines of credit secured by a mortgage which is often a second lien on residential real estate with terms of 15 years or less. Commercial real estate are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate are loans secured by a mortgage on real estate used in agriculture production. Construction real estate are loans secured by residential or commercial real estate used during the construction phase of residential and commercial projects. Consumer loans are typically unsecured or primarily secured by collateral other than real estate and overdraft lines of credit connected with customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non real estate collateral. State and political subdivisions are loans for state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Management considers other commercial loans, other agricultural loans, commercial and agricultural real estate loans and state and political subdivision loans which are 90 days or more past due to be impaired. Certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships determined to be impaired may be classified as impaired as well. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance allocation or a charge-off to the allowance.

The following table includes the recorded investment and unpaid principal balances for impaired loans by class, with the associated allowance amount as of December 31, 2021 and 2020, if applicable (in thousands):

2021	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	697	$	495	$	45	$	540	$	6
Home Equity		97		37		43		80		6
Commercial		9,330		8,096		285		8,381		61
Agricultural		5,694		5,167		188		5,355		14
Consumer		-		-		-		-		-
Other commercial loans		813		92		94		186		34
Other agricultural loans		1,274		991		-		991		-
Total	$	17,905	$	14,878	$	655	$	15,533	$	121

2020	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	1,070	$	740	$	123	$	863	$	9
Home Equity		150		70		57		127		9
Commercial		9,847		8,323		860		9,183		95
Agricultural		4,811		2,799		1,846		4,645		83
Consumer		2		2		-		2		-
Other commercial loans		1,908		1,094		241		1,335		170
Other agricultural loans		1,262		19		1,103		1,122		144
Total	$	19,050	$	13,047	$	4,230	$	17,277	$	510

The following table includes the average investment in impaired loans and the income recognized on impaired loans for 2021, 2020 and 2019 (in thousands):

					Interest
	Average		Interest		Income
	Recorded		Income		Recognized
2021	Investment		Recognized		Cash Basis
Real estate loans:
Mortgages	$	682	$	16	$	-
Home Equity		99		4		-
Commercial		8,789		288		31
Agricultural		4,562		82		-
Other commercial loans		704		2		-
Other agricultural loans		1,044		3		-
Total	$	15,880	$	395	$	31

2020
Real estate loans:
Mortgages	$	956	$	20	$	-
Home Equity		139		6		-
Commercial		10,354		358		27
Agricultural		3,918		75		-
Consumer		3		-		-
Other commercial loans		1,671		3		-
Other agricultural loans		1,237		6		-
Total	$	18,278	$	468	$	27

2019
Real estate loans:
Mortgages	$	1,062	$	16	$	-
Home Equity		119		6		-
Commercial		11,756		453		24
Agricultural		4,899		78		-
Consumer		2		-		-
Other commercial loans		2,056		1		-
Other agricultural loans		1,400		4		-
Total	$	21,294	$	558	$	24

Credit Quality Information

For commercial real estate loans, agricultural real estate loans, construction loans, other commercial loans, other agricultural loans and state and political subdivision loans, management uses a nine point internal risk rating system to monitor the credit quality. The first five categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

•

Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

•

Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

•

Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial and agricultural loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated over $1.0 million in the last years, 3) review a majority of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of December 31, 2021 and 2020 (in thousands):

2021	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	646,137	$	35,332	$	5,869	$	-	$	-	$	687,338
Agricultural		291,537		15,105		5,369		-		-		312,011
Construction		55,036		-		-		-		-		55,036
Other commercial loans		70,932		3,289		316		48		-		74,585
Other agricultural loans		37,800		1,351		701		-		-		39,852
State and political subdivision loans		45,588		168		-		-		-		45,756
Total	$	1,147,030	$	55,245	$	12,255	$	48	$	-	$	1,214,578

2020
Real estate loans:
Commercial	$	563,121	$	24,329	$	8,805	$	-	$	-	$	596,255
Agricultural		289,216		14,307		11,635		-		-		315,158
Construction		35,404		-		-		-		-		35,404
Other commercial loans		106,604		3,808		3,672		85		-		114,169
Other agricultural loans		45,758		1,431		1,590		-		-		48,779
State and political subdivision loans		58,649		4,372		307		-		-		63,328
Total	$	1,098,752	$	48,247	$	26,009	$	85	$	-	$	1,173,093

For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2021 and 2020 (in thousands):

2021	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	150,320	$	608	$	14	$	150,942
Home Equity		50,122		33		-		50,155
Consumer		25,858		-		-		25,858
Total	$	226,300	$	641	$	14	$	226,955

2020	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	145,843	$	1,039	$	20	$	146,902
Home Equity		54,961		48		-		55,009
Consumer		30,247		30		-		30,277
Total	$	231,051	$	1,117	$	20	$	232,188

Aging Analysis of Past Due Loans by Class

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loans as of December 31, 2021 and 2020 (in thousands):

	30-59 Days		60-89 Days		90 Days		Total Past						Total Financing		90 Days and
2021	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	220	$	170	$	209	$	599	$	150,329	$	14	$	150,942	$	13
Home Equity		103		-		33		136		50,019		-		50,155		33
Commercial		127		115		1,969		2,211		682,982		2,145		687,338		-
Agricultural		31		-		1,367		1,398		308,970		1,643		312,011		-
Construction		-		-		-		-		55,036		-		55,036		-
Consumer		163		1		-		164		25,694		-		25,858		-
Other commercial loans		17		10		92		119		74,466		-		74,585		-
Other agricultural loans		10		-		-		10		39,842		-		39,852		-
State and political
subdivision loans		-		-		-		-		45,756		-		45,756		-
Total	$	671	$	296	$	3,670	$	4,637	$	1,433,094	$	3,802	$	1,441,533	$	46
Loans considered non-accrual	$	-	$	-	$	3,624	$	3,624	$	3,992	$	-	$	7,616
Loans still accruing		671		296		46		1,013		1,429,102		3,802		1,433,917
Total	$	671	$	296	$	3,670	$	4,637	$	1,433,094	$	3,802	$	1,441,533

2020
Real estate loans:
Mortgages	$	864	$	414	$	518	$	1,796	$	145,086	$	20	$	146,902	$	252
Home Equity		152		62		34		248		54,761		-		55,009		23
Commercial		836		439		1,822		3,097		590,221		2,937		596,255		70
Agricultural		2,283		-		1,329		3,612		309,860		1,686		315,158		150
Construction		-		-		-		-		35,404		-		35,404		-
Consumer		147		9		30		186		30,091		-		30,277		30
Other commercial loans		930		-		133		1,063		112,874		232		114,169		-
Other agricultural loans		1,044		-		-		1,044		47,735		-		48,779		-
State and political
subdivision loans		-		-		-		-		63,328		-		63,328		-
Total	$	6,256	$	924	$	3,866	$	11,046	$	1,389,360	$	4,875	$	1,405,281	$	525
Loans considered non-accrual	$	3,032	$	28	$	3,341	$	6,401	$	4,331	$	-	$	10,732
Loans still accruing		3,224		896		525		4,645		1,385,029		4,875		1,394,549
Total	$	6,256	$	924	$	3,866	$	11,046	$	1,389,360	$	4,875	$	1,405,281

Nonaccrual Loans

Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected.

The following table reflects the loans on nonaccrual status as of December 31, 2021 and 2020, respectively. The balances are presented by class of loan (in thousands):

	2021		2020
Real estate loans:
Mortgages	$	595	$	787
Home Equity		-		25
Commercial		2,945		4,529
Agricultural		3,133		3,133
Other commercial loans		140		1,284
Other agricultural loans		803		974
	$	7,616	$	10,732

Interest income on loans would have increased by approximately $573,000, $756,000 and $647,000 during 2021, 2020 and 2019, respectively, if these loans had performed in accordance with their terms.

Loan Modifications Related to COVID-19

The Company has elected to follow the loan modification guidance under Section 4013 of the CARES Act with regard to COVID-19 modifications made between March 1, 2020 and the earlier of either January 1, 2022 or the 60th day after the end of the COVID-19 national emergency. Under section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. A modification of six months or less is considered to be a short-term loan modification. In response to the COVID-19 pandemic, the Company has prudently executed loan modifications for existing loan customers, which includes deferrals of interest and in certain cases deferrals of principal and interest. The following table presents information regarding loans which were subject to a loan modification related to COVID-19 during 2021, with balances as of December 31, 2020 and December 31, 2021, as well as the balance by modification type as of December 31, 2021 (dollars in thousands).

	Number of loans		Balance as of December 31, 2020		Number of loans		Balance as of December 31, 2021		Principal and Interest Deferral		Principal Deferral		% of loans as of December 31, 2021
Real estate loans:
Mortgages		1	$	209		-	$	-	$	-	$	-		0.00	%
Home Equity		1		49		-		-		-		-		0.00	%
Commercial		12		26,039		-		-		-		-		0.00	%
Agricultural		3		181		-		-		-		-		0.00	%
Other commercial loans		2		249		-		-		-		-		0.00	%
Total		19	$	26,727		-	$	-	$	-	$	-		0.00	%

Troubled Debt Restructurings (TDRs)

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company’s investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower’s ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of December 31, 2021, 2020 and 2019, included within the allowance for loan losses are reserves of $26,000, $257,000 and $345,000, respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the years ended December 31, 2021, 2020 and 2019 were as follows (dollars in thousands):

2021	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		4	$	-	$	1,469	$	-	$	1,469
Agricultural		-		4		-		2,090		-		2,090
Total		-		8	$	-	$	3,559	$	-	$	3,559

2020
Real estate loans:
Mortgages	-	1	$	-	$	2	$	-	$	2
Commercial	-	10		-		2,456		-		2,456
Agricultural	-	2		-		494		-		494
Consumer	-	1		-		3				3
Other commercial loans	-	2		-		1,094				1,094
Other agricultural loans	-	1		-		19		-		19
Total	-	17	$	-	$	4,068	$	-	$	4,068

2019
Real estate loans:
Mortgages	-	1	$	-	$	4	$	-	$	4
Home Equity	-	1		-		40		-		40
Commercial	-	6		-		918		-		918
Agricultural	-	5		-		1,731		-		1,731
Consumer	-	1		-		3				3
Other commercial loans	-	1		-		55				55
Other agricultural loans	-	5		-		1,054		-		1,054
Total	-	20	$	-	$	3,805	$	-	$	3,805

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which begin January 1, 2021, 2020 and 2019, respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	December 31, 2021				December 31, 2020				December 31, 2019
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		-	$	-		1	$	110		-	$	-
Agricultural		-		-		-		-		1		1,439
Other agricultural loans		-		-		-		-		3		137
Total recidivism		-	$	-		1	$	110		4	$	1,576

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of December 31, 2021 and 2020 included with other assets are $1,180,000 and $1,836,000, respectively, of foreclosed assets. As of December 31, 2021, included within the foreclosed assets is $353,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2021, the Company has initiated formal foreclosure proceedings on $224,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.

Allowance for Loan Losses

The following tables roll forward the balance of the allowance for loan and lease losses for the years ended December 31, 2021, 2020 and 2019 and is segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2021, 2020 and 2019 (in thousands):

	Balance at December 31, 2020		Charge-offs			Recoveries		Provision			Balance at December 31, 2021		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,174	$	-		$	-	$	(27	)	$	1,147	$	12	$	1,135
Commercial		6,216		(54	)		89		1,848			8,099		61		8,038
Agricultural		4,953		-			-		(224	)		4,729		14		4,715
Construction		122		-			-		312			434		-		434
Consumer		321		(27	)		21		(53	)		262		-		262
Other commercial loans		1,226		(133	)		43		(113	)		1,023		34		989
Other agricultural loans		864		-			-		(306	)		558		-		558
State and political subdivision loans		479		-			-		(198	)		281		-		281
Unallocated		460		-			-		311			771		-		771
Total	$	15,815	$	(214	)	$	153	$	1,550		$	17,304	$	121	$	17,183

	Balance at December 31, 2019		Charge-offs			Recoveries		Provision			Balance at December 31, 2020		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,114	$	-		$	14	$	46		$	1,174	$	18	$	1,156
Commercial		4,549		(435	)		37		2,065			6,216		95		6,121
Agricultural		5,022		(4	)		19		(84	)		4,953		83		4,870
Construction		43		-			-		79			122		-		122
Consumer		112		(50	)		21		238			321		-		321
Other commercial loans		1,255		(44	)		12		3			1,226		170		1,056
Other agricultural loans		961		-			-		(97	)		864		144		720
State and political subdivision loans		536		-			-		(57	)		479		-		479
Unallocated		253		-			-		207			460		-		460
Total	$	13,845	$	(533	)	$	103	$	2,400		$	15,815	$	510	$	15,305

	Balance at December 31, 2018		Charge-offs			Recoveries		Provision			Balance at December 31, 2019		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,105	$	(32	)	$	-	$	41		$	1,114	$	32	$	1,082
Commercial		4,115		(578	)		-		1,012			4,549		251		4,298
Agricultural		4,264		-			-		758			5,022		151		4,871
Construction		58		-			-		(15	)		43		-		43
Consumer		120		(49	)		33		8			112		-		112
Other commercial loans		1,354		(38	)		10		(71	)		1,255		147		1,108
Other agricultural loans		752		(60	)		-		269			961		154		807
State and political subdivision loans		762		-			-		(226	)		536		-		536
Unallocated		354		-			-		(101	)		253		-		253
Total	$	12,884	$	(757	)	$	43	$	1,675		$	13,845	$	735	$	13,110

As discussed in Footnote 1, management evaluates various qualitative factors on a quarterly basis. The following are explanations for the changes in the allowance by portfolio segments:

2021

Residential - There was a decrease in the historical loss factor for residential loans when comparing 2020 and 2021 and a slight decrease in the specific reserve for residential loans between 2020 and 2021. The qualitative factor for the level of past due loans for residential real estate loans was decreased due to a decrease in past due loans during 2021.

Commercial real estate – There was a decrease in the historical loss factor and the specific reserve for commercial real estate loans from 2020 to 2021. The qualitative factor for the volume of non-accrual loans was decreased for commercial real estate loans due to a decrease in the volume of non-accrual loans during 2021. The decrease in the qualitative factors was offset by the increase in the commercial real estate portfolio, which resulted in the provision for 2021.

Agricultural real estate – There was no change in the historical loss factor for agricultural real estate loans from 2020 to 2021 The specific reserve for agricultural real estate loans decreased from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for agricultural real estate loans during 2021 due to a decrease in substandard loans.

Construction - There was no change in the historical loss factor or specific reserve for construction loans from 2020 to 2021. The qualitative factors for trends in volume, terms and nature of the portfolio, experience and depth of lending management and relevant staff, and changes in value of underlying value of collateral were increased for the construction loan portfolio during 2021 due to the increase in the overall size of the portfolio, the increase in the size of individual construction loans and the complexity of the construction projects funded.

Consumer - There was a decrease in the historical loss factor for consumer loans from 2020 to 2021. The negative provision was due to a decrease in consumer loans.

Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2020 and 2021. The specific reserve for other commercial loans decreased from 2020 to 2021. The qualitative factors for the level of past due loans, the volume of non-accrual loans and the volume and severity of classified, adversely or graded loans were decreased for other commercial loans due to a decrease in past due loans, non-accrual loans and substandard loans during 2021.

Other agricultural - There was a decrease in the historical loss factor for other agricultural loans from 2020 to 2021. The specific reserve for other agricultural loans decreased from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for other agricultural loans during 2021 due to a decrease in substandard loans. The negative provision was primarily due to the overall decrease in other agricultural loans.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for municipal loans during 2021 due to a decrease in substandard loans. The negative provision was primarily due to the overall decrease in other municipal loans during 2021.

2020

Residential - There was a slight decrease in the historical loss factor for residential loans when comparing 2019 and 2020 and a slight decrease in the specific reserve for residential loans between 2019 and 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Commercial real estate– There was an increase in the historical loss factor for commercial real estate loans from 2019 to 2020. The specific reserve for commercial real estate loans decreased from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for commercial real estate loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Agricultural real estate – There was a decrease in the historical loss factor and specific reserve for agricultural real estate loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for agricultural real estate loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Consumer - There was a slight decrease in the historical loss factor for consumer loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for consumer loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2019 and 2020. The specific reserve for other commercial loans increased from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020. The majority of the increase in other commercial loans was attributable to PPP loans, which are guaranteed by the SBA and therefore do not have an associated allowance and loans acquired in the MidCoast acquisition, which are not subject to the allowance.

Other agricultural - There was a slight decrease in the historical loss factor for other agricultural loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020. The negative provision for state and political loans in 2020 is due to the decrease in the amount of state and political loans outstanding from 2019 to 2020.

2019

Residential - There was a slight increase in the historical loss factor for residential loans when comparing 2018 and 2019. The specific reserve for residential loans decreased slightly between 2018 and 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to an increase in the unemployment rates in the local economy during 2019.

Commercial real estate– There was an increase in the historical loss factor for commercial real estate loans from 2018 to 2019. The specific reserve for commercial real estate loans increased from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all commercial real estate loans due to an increase in the unemployment rates in the local economy during 2019. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of classified and past due loans.

Agricultural real estate – There was an increase in the historical loss factor for agricultural real estate loans from 2018 to 2019. The specific reserve for agricultural real estate loans increased from 2018 to 2019. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for agricultural real estate due to an increase in classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2019.

Other commercial - There was a slight decrease in the historical loss factor for other commercial loans when comparing 2018 and 2019. The specific reserve for other commercial loans decreased from 2018 to 2019. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for other commercial loans due to a decrease in classified and non-accrual loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to an increase in the unemployment rates in the local economy during 2019.

Other agricultural - There was a slight increase in the historical loss factor for other agricultural loans from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural loan categories due to an increase in the unemployment rates in the local economy during 2019.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to an increase in the unemployment rates in the local economy during 2019. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of special mention loans.

6. PREMISES & EQUIPMENT

Premises and equipment at December 31, 2021 and 2020 are summarized as follows (in thousands):

	December 31,
	2021		2020
Land	$	5,462	$	5,385
Buildings		20,094		19,373
Furniture, fixtures and equipment		7,275		7,046
Construction in process		67		147
		32,898		31,951
Less: accumulated depreciation		15,882		15,003
Premises and equipment, net	$	17,016	$	16,948

Depreciation expense amounted to $922,000, $921,000 and $784,000 for 2021, 2020 and 2019, respectively.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table provides the gross carrying value and accumulated amortization of intangible assets as of December 31, 2021 and 2020 (in thousands):

	December 31, 2021							December 31, 2020
	Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
Amortized intangible assets (1):
MSRs	$	2,499	$	(1,326	)	$	1,173	$	2,153	$	(1,131	)	$	1,022
Core deposit intangibles		1,943		(1,489	)		454		1,943		(1,297	)		646
Total amortized intangible assets	$	4,442	$	(2,815	)	$	1,627	$	4,096	$	(2,428	)	$	1,668
Unamortized intangible assets:
Goodwill	$	31,376						$	31,376

(1) Excludes fully amortized intangible assets

The following table provides the current year and estimated future amortization expense for the next five years of amortized intangible assets (in thousands). We based our projections of amortization expense shown below on existing asset balances at December 31, 2021. Future amortization expense may vary from these projections:

	MSRs		Core deposit intangibles		Total
Year ended December 31, 2021	$	265	$	192	$	457
Estimate for year ended December 31,
2022		305		156		461
2023		244		121		365
2024		192		86		278
2025		146		50		196
2026		107		17		124

8. FEDERAL HOME LOAN BANK (FHLB) STOCK

As a member of the FHLB of Pittsburgh, the Bank is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. As of December 31, 2021 and 2020, included in other assets, the Bank held $3,292,000 and $4,593,000, respectively, of FHLB stock. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) A significant decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management considered that the FHLB’s regulatory capital ratios are strong, liquidity appears adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of excess capital stock from its members and has paid a quarterly cash dividend.

9. DEPOSITS

The following table shows the breakdown of deposits as of December 31, 2021 and 2020, by deposit type (in thousands):

	2021		2020
Non-interest-bearing deposits	$	358,073	$	303,762
NOW accounts		485,292		422,083
Savings deposits		313,048		255,853
Money market deposit accounts		350,122		225,968
Certificates of deposit		329,616		381,192
Total	$	1,836,151	$	1,588,858

Certificates of deposit of $250,000 or more amounted to $79,610,000 and $75,869,000 at December 31, 2021 and 2020, respectively. Brokered deposits totaled $23,839,000 as of December 31, 2020. There were no brokered certificates of deposits as of December 31, 2021.

Following are maturities of certificates of deposit as of December 31, 2021 (in thousands):

2022	$	184,857
2023		68,192
2024		42,549
2025		16,257
2026		11,994
Thereafter		5,767
Total certificates of deposit	$	329,616

10. BORROWED FUNDS AND REPURCHASE AGREEMENTS

The following table shows the breakdown of borrowed funds as of December 31, 2021 and 2020 (dollars in thousands):

	Securities
	Sold Under			FHLB			Federal			FRB												Total
	Agreements to			Advances			Funds			BIC			Subordinated			Notes			Term			Borrowed
	Repurchase(a)			(b)			Lines (c)			Line (d)			Debt (e)			Payable (f)			Loans(g)			Funds
2021
Balance at December 31	$	16,873		$	-		$	-		$	-		$	9,879		$	7,500		$	39,725		$	73,977
Highest balance at any month-end		16,873			-			-			-			9,879			7,500			66,525			100,777
Average balance		14,726			-			-			-			7,036			7,500			55,360			84,622
Weighted average interest rate:
Paid during the year		0.06	%		0.00	%		0.51	%		0.22	%		4.17	%		3.57	%		1.26	%		1.50	%
As of year-end		0.08	%		0.00	%		0.00	%		0.00	%		4.18	%		3.57	%		1.15	%		1.56	%
2020
Balance at December 31	$	14,813		$	-		$	-		$	-		$	-		$	7,500		$	66,525		$	88,838
Highest balance at any month-end		14,813			67,106			-			-			-			7,500			79,022			168,441
Average balance		12,903			12,371			-			109			-			7,500			60,355			93,238
Weighted average interest rate:
Paid during the year		0.36	%		1.63	%		0.51	%		0.34	%		0.00	%		3.83	%		1.19	%		1.34	%
As of year-end		0.11	%		0.00	%		0.00	%		0.00	%		0.00	%		3.57	%		1.12	%		1.16	%

(a) We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The collateral pledged on the repurchase agreements by the remaining contractual maturity of the repurchase agreements in the Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020 is presented in the following tables (in thousands).

	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to				Greater than
2021	Continuous		30 Days		30 - 90 Days		90 days		Total
Repurchase Agreements:
U.S. agency securities	$	17,155	$	-	$	-	$	-	$	17,155
Total carrying value of collateral pledged	$	17,155	$	-	$	-	$	-	$	17,155
Total liability recognized for repurchase agreements									$	16,873

	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to				Greater than
2020	Continuous		30 Days		30 - 90 Days		90 days		Total
Repurchase Agreements:
U.S. agency securities	$	16,735	$	-	$	-	$	-	$	16,735
Total carrying value of collateral pledged	$	16,735	$	-	$	-	$	-	$	16,735
Total liability recognized for repurchase agreements									$	14,813

(b) FHLB Advances consist of an “Open RepoPlus” agreement with the FHLB of Pittsburgh. FHLB “Open RepoPlus” advances are short-term borrowings that bear interest based on the FHLB discount rate or Federal Funds rate, whichever is higher. The Company has a borrowing limit of $756,225,000, inclusive of any outstanding advances and letters of credit. FHLB advances are secured by a blanket security agreement that includes the Company’s FHLB stock, as well as certain investment and mortgage-backed securities held in safekeeping at the FHLB and certain residential and commercial mortgage loans. A portion of these advances, $25.0 million, are subject to interest rate swap arrangements. See Note 17 for additional information.

(c) The federal funds lines consist of unsecured lines from two third party banks at market rates. The Company has a borrowing limit totaling $34,000,000, inclusive of any outstanding balances. No specific collateral is required to be pledged for these borrowings.

(d) The Federal Reserve Bank Borrower in Custody (FRB BIC) Line consists of a borrower in custody in agreement opened in January 2010 with the Federal Reserve Bank of Philadelphia secured by municipal loans maintained in the Company’s possession. As of December 31, 2021 and 2020, the Company has a borrowing limit of $1,068,000 and $4,379,000, respectively, inclusive of any outstanding advances. The approximate carrying value of the municipal loan collateral was $1,683,000 and $12,932,000 as of December 31, 2021 and 2020, respectively.

(e) In April 2021, the Company issued $10.0 million of fixed to floating rate subordinated notes that mature on April 16, 2031, unless redeemed earlier. The notes bear interest at 4% per annum through April 16, 2026 and subsequently pay interest at the 90-day average secured overnight financing rate, determined on the determination date of the applicable interest period, plus 323 basis points. The Company may redeem the notes, in whole or in part, on or after April 16, 2026, and at any time upon the occurrence of certain events, subject in each case to the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Issuance costs associated with the notes totaled $131,000 and were capitalized and will be amortized over the life of the note on a straight-line basis, which approximates the effective yield method. As of December 31, 2021, the net unamortized issuance costs totaled $121,000.

(f) In December 2003, the Company formed a special purpose entity (“Entity”) to issue $7,500,000 of floating rate obligated mandatory redeemable trust preferred securities as part of a pooled offering. The rate was determined quarterly and floated based on the 3 month LIBOR plus 2.80 percent. The Entity may redeem them, in whole or in part, at face value after December 17, 2008, and on a quarterly basis thereafter. The Company borrowed the proceeds of the issuance from the Entity in December 2003 in the form of a $7,500,000 note payable. Debt issue costs of $75,000 have been capitalized and fully amortized as of December 31, 2008. Under current accounting rules, the Company’s minority interest in the Entity was recorded at the initial investment amount and is included in the other assets section of the balance sheet. The Entity is not consolidated as part of the Company’s consolidated financial statements. The $7,500,000 note payable is subject to an interest rate swap arrangement. See Note 17 for additional information.

(g) Term Loans consist of separate loans with the FHLB of Pittsburgh as follows (dollars in thousands):

Interest Rate			Maturity	December 31, 2021		December31, 2020
Fixed:
	0.38	%	January 4, 2021		-		25,000
	0.26	%	January 3, 2022		25,000		-
	2.08	%	January 6, 2022		4,725		4,725
	2.46	%	March 28, 2024		5,000		5,000
	1.69	%	August 20, 2024		5,000		5,000
	2.61	%	February 3, 2021		-		2,000
	3.52	%	July 12, 2021		-		2,000
	2.37	%	August 20, 2021		-		2,800
	0.25	%	July 9, 2021		-		15,000
	1.24	%	March 3, 2025		-		5,000
Total term loans				$	39,725	$	66,525

Following are maturities of borrowed funds as of December 31, 2021 (in thousands):

2022	$	46,598
2023		-
2024		10,000
2025		-
2026		-
Thereafter		17,379
Total borrowed funds	$	73,977

11. EMPLOYEE BENEFIT PLANS

Noncontributory Defined Benefit Pension Plan

The Bank sponsors a trusteed, noncontributory defined benefit pension plan covering substantially all employees and officers hired prior to January 1, 2007. The Bank also assumed the noncontributory defined benefit pension plan of FNB when it was acquired during 2015. The FNB plan was frozen prior to the acquisition and therefore, no additional benefits will accrue for employees covered under that plan. The Board of Directors in 2018 voted to terminate the plan acquired as part of the FNB acquisition with final settlement occurring in the fourth quarter of 2019. These two plans are collectively referred to herein as “the Plans”. The pension plans call for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank and compensation rates during employment. Upon retirement or other termination of employment, employees can elect either an annuity benefit or a lump sum distribution of vested benefits in the pension plan. The Bank’s funding policy is to make annual contributions, if needed, based upon the funding formula developed by the pension plans’ actuary. The Bank did not make any contributions to the pension plans in 2021, 2020 or 2019.

In lieu of the pension plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting length of service requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee’s base compensation. The contribution amount is placed in a separate account within the 401(k) plan and is subject to a vesting requirement. Contributions by the Company totaled $290,000, $212,0000 and $200,000 for 2021, 2020 and 2019, respectively.

The following table sets forth the obligation and funded status of the Plans as of December 31 (in thousands):

	2021			2020
Change in benefit obligation
Benefit obligation at beginning of year	$	14,020		$	13,027
Service cost		380			330
Interest cost		270			332
Actuarial (Gain) / Loss		(438	)		1,810
Settlement gain		(17	)		(34	)
Benefits paid		(1,092	)		(1,445	)
Benefit obligation at end of year		13,123			14,020
Change in plan assets
Fair value of plan assets at beginning of year		13,247			13,277
Actual return (loss) on plan assets		1,761			1,415
Employer contribution		-			-
Benefits paid		(1,092	)		(1,445	)
Fair value of plan assets at end of year		13,916			13,247
Funded status	$	793		$	(773	)

Amounts not yet recognized as a component of net periodic pension cost as of December 31 (in thousands):

Amounts recognized in accumulated other comprehensive loss consists of:	2021		2020
Net loss	$	2,491	$	4,383
Prior service cost		-		-
Total	$	2,491	$	4,383

The accumulated benefit obligation for the defined benefit pension plan was $13,123,000 and $14,020,000 at December 31, 2021 and 2020 respectively.

The components of net periodic benefit costs for the years ended December 31 are as follows (in thousands):

	2021			2020			2019			Affected line item on the Consolidated Statement of Income
Service cost	$	380		$	330		$	289		Salary and Employee Benefits
Interest cost		270			332			588		Other Expenses
Return on plan assets		(895	)		(862	)		(924	)	Other Expenses
Settlement loss (gain)		235			302			(259	)	Other Expenses
Net amortization and deferral		336			233			272		Other Expenses
Net periodic benefit cost	$	326		$	335		$	(34	)

The estimated net loss that will be amortized from accumulated other comprehensive loss into the net periodic benefit cost (income) in 2022 is $142,000.

The weighted-average assumptions used to determine benefit obligations at December 31, 2021 and 2020 is summarized in the following table. The change in the discount rate is the primary driver of the actuarial gain that occurred in 2021 of $438,000.

	2021			2020
Discount rate FCCB Plan		2.25	%		2.00	%
Rate of compensation increase		3.00	%		3.00	%

The weighted-average assumptions used to determine net periodic benefit cost (income) for the year ended December 31. Due to the decision to terminate the pension plan acquired as part of the FNB acquisition, the discount rate for the plans will be separated for 2019.

	2021			2020			2019
Discount rate FCCB Plan		2.00	%		2.75	%		4.00	%
Discount rate FNB Plan	NA				NA			3.49	%
Expected long-term return on plan assets FCCB plan		7.00	%		7.00	%		7.00	%
Rate of compensation increase		3.00	%		3.00	%		3.00	%

The long-term rate of return on plan assets gives consideration to returns currently being earned on plan assets as well as future rates expected to be earned. The investment objective is to maximize total return consistent with the interests of the participants and beneficiaries, and prudent investment management. The allocation of the pension plan assets is determined on the basis of sound economic principles and is continually reviewed in light of changes in market conditions. Asset allocation favors equity securities, with a target allocation of 50-70%. The target allocation for debt securities is 30-50%. At December 31, 2021, the pension plan had a sufficient cash and money market position in order to re-allocate the equity portfolio for diversification purposes and reduce risk in the total portfolio. The following table sets forth by level, within the fair value hierarchy as defined in footnote 19, the Plan’s assets at fair value as of December 31, 2021 and 2020 (dollars in thousands):

2021	Level I		Level II		Level III		Total		Allocation
Assets
Cash and cash equivalents	$	188	$	-	$	-	$	188		1.4	%
Equity Securities		6,291		-		-		6,291		45.2	%
Mutual Funds and ETF’s		5,246		-		-		5,246		37.7	%
Corporate Bonds		-		2,191		-		2,191		15.7	%
Total	$	11,725	$	2,191	$	-	$	13,916		100.0	%

2020	Level I		Level II		Level III		Total		Allocation
Assets
Cash and cash equivalents	$	456	$	-	$	-	$	456		3.4	%
Equity Securities		5,709		-		-		5,709		43.1	%
Mutual Funds and ETF’s		4,410		-		-		4,410		33.3	%
Corporate Bonds		-		2,672		-		2,672		20.2	%
Total	$	10,575	$	2,672	$	-	$	13,247		100.0	%

Equity securities include the Company’s common stock in the amounts of $686,000 (4.9% of total plan assets) and $627,000 (4.7% of total plan assets) at December 31, 2021 and 2020, respectively.

The Bank does not expect to make a contribution to its pension plan in 2022. Expected future benefit payments that the Bank estimates from its pension plan are as follows (in thousands):

2022	$	420
2023		634
2024		806
2025		1,161
2026		2,130
2027 - 2031		3,944

Defined Contribution Plan

The Company sponsors a voluntary 401(k) savings plan which eligible employees can elect to contribute up to the maximum amount allowable not to exceed the limits of IRS Code Sections 401(k). Under the plan, the Company also makes required contributions on behalf of the eligible employees. The Company’s contributions vest immediately. Contributions by the Company totaled $563,000, $518,000 and $446,000 for 2021, 2020 and 2019, respectively.

Directors’ Deferred Compensation Plan

The Company’s directors may elect to defer all or portions of their fees until their retirement or termination from service. Amounts deferred under the deferred compensation plan earn interest based upon the highest current rate offered to certificate of deposit customers. Amounts deferred under the deferred compensation plan are not guaranteed and represent a general liability of the Company. As of December 31, 2021 and 2020, an obligation of $587,000 and $632,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Amounts included in interest expense on the deferred amounts totaled $6,000, $8,000 and $19,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Restricted Stock Plan

The Company maintains a Restricted Stock Plan (the Plan) whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements. Awards granted under the Plan are in the form of the Company’s common stock and maybe subject to certain vesting requirements including in the case of employees, continuous employment or service with the Company. In April 2016, the Company’s stockholder authorized a total of 150,000 shares of the Company’s common stock to be made available under the Plan. As of December 31, 2021, 119,391 shares remain available to be issued under the Plan. The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation. The following table details the vesting, awarding and forfeiting of unearned restricted shares during 2021:

	2021
	Shares			Weighted Average Market Price
Outstanding, beginning of year		10,202		$	55.93
Granted		4,660			60.73
Forfeited		(70	)		55.03
Vested		(7,838	)		56.51
Outstanding, end of year		6,954		$	58.51

Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. Compensation expense related to restricted stock was $318,000, $333,000 and $299,000 for the years ended December 31, 2021, 2020 and 2019, respectively. The per share weighted-average grant-date fair value of restricted shares granted during 2021, 2020 and 2019 was $60.73, $50.89 and $60.02, respectively. At December 31, 2021, the total compensation cost related to nonvested awards that has not yet been recognized was $407,000, which is expected to be recognized over the next 3 years.

Supplemental Executive Retirement Plan

The Company maintains a non-qualified supplemental executive retirement plan (“SERP”) for certain executives to compensate those executive participants in the Company’s noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. At December 31, 2021 and 2020, an obligation of $2,509,000 and $2,077,000, respectively, for the SERP was included in other liabilities in the Consolidated Balance Sheet. Expenses related to the SERP totaled $473,000, $107,000 and $251,000 for the years ended December 31, 2021, 2020 and 2019, respectively. Benefit payments for 2021 and 2020 were $42,000 and $32,000, respectively. There were no benefit payments in 2019.

Deferred Compensation Plan

The Company in 2018 initiated a non-qualified executive deferred compensation plan for eligible employees designated by the Board of Directors. At December 31, 2021 and 2020, an obligation of $940,000 and $631,000, respectively, was included in other liabilities for the deferred compensation plan in the Consolidated Balance Sheet. Expenses related to the deferred compensation plan totaled $309,000, $230,000 and $343,000 for the years ended December 31, 2021, 2020 and 2019, respectively. There were no benefit payments in 2021, 2020 or 2019.

Salary Continuation Plan

The Company maintains a salary continuation plan for certain employees acquired through the acquisition of the FNB. At December 31, 2021 and 2020 an obligation of $646,000 and $673,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Expenses related to the salary continuation plan totaled $49,000, $51,000 and $52,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Continuation of Life Insurance Plan

The Company, as part of the acquisition of FNB, has promised a continuation of life insurance coverage to certain persons post-retirement. GAAP requires the recording of post-retirement costs and a liability equal to the present value of the cost of post-retirement insurance during the person’s term of service. The estimated present value of future benefits to be paid totaled $696,000 and $687,000 at December 31, 2021 and 2020, respectively, which is included in other liabilities in the Consolidated Balance Sheet. Expenses for the plan totaled $9,000, $2,600 and $36,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

12. INCOME TAXES

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2021		2020		2019
Currently payable	$	5,510	$	4,896	$	3,503
Deferred tax liability (asset)		689		367		317
Provision for income taxes	$	6,199	$	5,263	$	3,820

The following temporary differences gave rise to the net deferred tax asset and liabilities at December 31, 2021 and 2020, respectively (in thousands):

Deferred tax assets:	2021		2020
Allowance for loan losses	$	4,712	$	5,135
Deferred compensation		491		520
Merger & acquisition costs		1		2
Allowance for losses on available-for-sale securities		4		15
Pension and other retirement obligation		360		599
Unrealized loss on interest rate swap		-		2
Interest on non-accrual loans		795		778
Incentive plan accruals		536		489
Other real estate owned		16		16
Low income housing tax credits		137		131
NOL carry forward		1,226		1,321
Right of use asset		686		482
Accrued vacation		168		187
Other		159		224
Total	$	9,291	$	9,901

Deferred tax liabilities:	2021			2020
Premises and equipment	$	(559	)	$	(612	)
Investment securities accretion		(90	)		(68	)
Loan fees and costs		(644	)		(333	)
Goodwill and core deposit intangibles		(2,309	)		(2,293	)
Mortgage servicing rights		(246	)		(215	)
Unrealized gains on available-for-sale securities		(81	)		(1,612	)
Unrealized gains on equity securities		(61	)		-
Unrealized gains on interest rate swap		(401	)		-
Right of use asset		(685	)		(480	)
Other		(133	)		(245	)
Total		(5,209	)		(5,858	)
Deferred tax (liability) asset, net	$	4,082		$	4,043

No valuation allowance was established at December 31, 2021 and 2020, due to the Company’s ability to carryback to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.

The total provision for income taxes is different from that computed at the statutory rates due to the following items (dollars in thousands):

	Year Ended December 31,
	2021			2020			2019
Provision at statutory rates on pre-tax income	$	7,413		$	6,377		$	4,895
Effect of tax-exempt income		(764	)		(936	)		(920	)
Low income housing tax credits		(141	)		(141	)		(141	)
Bank owned life insurance		(384	)		(146	)		(131	)
Nondeductible interest		44			44			52
Nondeductible merger and acquisition expenses		-			32			38
Other items		31			33			27
Provision for income taxes	$	6,199		$	5,263		$	3,820
Statutory tax rates		21	%		21	%		21	%
Effective tax rates		17.6	%		17.3	%		16.4	%

The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. With limited exception, the Company’s federal and state income tax returns for taxable years through 2017 have been closed for purposes of examination by the federal and state taxing authorities.

Investments in Qualified Affordable Housing Projects

As of December 31, 2021 and 2020, the Company was invested in five and four partnerships, respectively, that provide affordable housing. The balance of the investments, which is included within other assets in the Consolidated Balance Sheet, was $288,000 and $216,000 as of December 31, 2021 and 2020, respectively. Investments purchased prior to January 1, 2015, are accounted for utilizing the effective yield method. As of December 31, 2021, the Company has $141,000 of tax credits remaining that will be recognized over one year for partnerships entered into prior to January 1, 2021. During 2021, the Company entered into an additional partnership that is expected to generate tax credits of $2,951,000 that will be utilized over the next twelve years. Tax credits of $141,000 were recognized as a reduction of tax expense during 2021, 2020 and 2019. Included within other expenses on the Consolidated Statement of Income was $108,000 of amortization of the investments in qualified affordable housing projects for 2021, 2020 and 2019, respectively.

13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The components of accumulated other comprehensive income (loss), net of tax, as of December 31, were as follows (in thousands):

	2021			2020
Net unrealized gain on securities available for sale	$	385		$	7,668
Tax effect		(81	)		(1,610	)
Net -of-tax amount		304			6,058

Unrealized gain (loss) on interest rate swap		1,910			(11	)
Tax effect		(401	)		2
Net -of-tax amount		1,509			(9	)

Unrecognized pension costs		(2,491	)		(4,383	)
Tax effect		523			921
Net -of-tax amount		(1,968	)		(3,462	)

Total accumulated other comprehensive (loss) income	$	(155	)	$	2,587

The following tables present the changes in accumulated other comprehensive income (loss) by component net of tax for the years ended December 31, 2021, 2020 and 2019 (in thousands):

	Unrealized gain (loss) on available for sale securities (a)			Unrealized gain (loss) on interest rate swap (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2018	$	(973	)	$	-		$	(2,948	)	$	(3,921	)
Other comprehensive income (loss) before reclassifications (net of tax)		3,283			-			(186	)		3,097
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		(20	)		-			215			195
Net current period other comprehensive income (loss)		3,263			-			29			3,292
Balance as of December 31, 2019	$	2,290		$	-		$	(2,919	)	$	(629	)

Balance as of December 31, 2019	$	2,290		$	-		$	(2,919	)	$	(629	)
Other comprehensive income (loss) before reclassifications (net of tax)		4,008			4			(727	)		3,285
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		(240	)		(13	)		184			(69	)
Net current period other comprehensive income (loss)		3,768			(9	)		(543	)		3,216
Balance as of December 31, 2020	$	6,058		$	(9	)	$	(3,462	)	$	2,587

Balance as of December 31, 2020	$	6,058		$	(9	)	$	(3,462	)	$	2,587
Other comprehensive income (loss) before reclassifications (net of tax)		(5,586	)		1,403			1,229			(2,954	)
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		(168	)		115			265			212
Net current period other comprehensive income (loss)		(5,754	)		1,518			1,494			(2,742	)
Balance as of December 31, 2021	$	304		$	1,509		$	(1,968	)	$	(155	)

(a) Amounts in parentheses indicate debits

The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the years ended December 31, 2021, 2020 and 2019 (in thousands):

Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated comprehensive income (loss) (a)									Affected line item in the Consolidated Statement of Income
	December 31,
	2021			2020			2019
Unrealized gains and losses on available for sale securities
	$	212		$	305		$	24		Available for sale securities gains, net
		(44	)		(65	)		(4	)	Provision for income taxes
	$	168		$	240		$	20		Net of tax

Unrealized gain (loss) on interest rate swap	$	(147	)	$	18		$	-		Interest expense
		32			(5	)		-		Provision for income taxes
	$	(115	)	$	13		$	-		Net of tax
Defined benefit pension items
	$	(336	)	$	(233	)	$	(272	)	Other expenses
		71			49			57		Provision for income taxes
	$	(265	)	$	(184	)	$	(215	)	Net of tax
Total reclassifications	$	(212	)	$	69		$	(195	)

(a) Amounts in parentheses indicate debits

14. RELATED PARTY TRANSACTIONS

Certain executive officers and directors of the Company, or companies in which they have 10 percent or more beneficial ownership, were indebted to the Bank. A summary of loan activity for the years ended December 31, 2021 and 2020 with officers, directors, stockholders and associates of such persons is listed below (in thousands):

	Year Ended December 31,
	2021			2020
Balance, beginning of year	$	12,970		$	13,457
New loans		5,341			5,098
Repayments		(6,631	)		(5,585	)
Balance, end of year	$	11,680		$	12,970

15. REGULATORY MATTERS

Dividend Restrictions:

The approval of the Federal Reserve Board (FRB) is required for the Bank to pay dividends to the Company if the total of all dividends declared in any calendar year exceeds the Bank’s net income (as defined) for that year combined with its retained net income for the preceding two calendar years. Under this formula, the Bank can declare dividends in 2022 without approval of the FRB or Pennsylvania Department of Banking of approximately $30,429,000, plus the Bank’s 2022 year-to-date net income at the time of the dividend declaration.

Loans:

The Bank is subject to regulatory restrictions which limit its ability to loan funds to the Company. At December 31, 2021, the Bank’s regulatory lending limit amounted to approximately $29,855,000.

Regulatory Capital Requirements:

Federal regulations require the Bank to maintain minimum amounts of capital. Specifically, the Bank is required to maintain certain minimum dollar amounts and ratios of Total, Tier I and Common Equity Tier I capital to risk-weighted assets and of Tier I capital to average total assets.

In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) established five capital categories ranging from “well capitalized” to “critically under-capitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized”, it would become subject to a series of increasingly restrictive regulatory actions.

As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. Following the passage of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in response to the COVID-19 pandemic, the federal banking regulators revised the CBLR framework as follows: (i) beginning in the second quarter of 2020, a qualifying community bank need only have a leverage ratio of at least 8%, subject to the other qualifying requirements, and (ii) if a qualifying community bank’s leverage ratio falls below 8%, then it will have two calendar quarters to maintain a leverage ratio of 7% or greater. These revisions under the CARES Act are effective April 23, 2020 and will terminate upon the earlier of the termination of the national emergency related to COVID-19 or December 31, 2020. Following such termination there is a grace period for returning to the 9% CBLR threshold. The CBLR will be set at 8% for the remainder of 2020, 8.5% for 2021, and 9% thereafter. The grace period is also adjusted to account for the graduating increase. As a result, in 2020 and 2021, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 7% and 7.5%, respectively. Thereafter, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply. At December 31, 2021 and 2020, the Bank was considered “well-capitalized” under the CBLR framework, with a leverage ratio of 8.94% and 8.75%, respectively.

16. COMMITMENTS, CONTINGENT LIABILITIES, RISKS AND UNCERTAINTIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet.

Credit Extension Commitments

The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments, whose contract amounts represent credit risk at December 31, 2021 and 2020, are as follows (in thousands):

	2021		2020
Commitments to extend credit	$	275,998	$	274,327
Standby letters of credit		17,083		21,978
	$	293,081	$	296,305

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company on extension of credit is based on management’s credit assessment of the counter party.

Standby letters of credit are conditional commitments issued by the Company to guarantee a financial agreement between a customer and a third party. Performance letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized during the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

The Company also offers limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing for business, personal or household use. The non-contractual amount of financial instruments with off-balance sheet risk at December 31, 2021 was $12,230,000. The Company reserves the right to discontinue this service without prior notice.

Legal and Regulatory Proceedings

In the ordinary course of business, the Company is subject to legal proceedings, including claims, litigation, investigations and administrative proceedings, all of which are considered incidental to the normal conduct of business. Litigation may relate to lending, deposit and other customer relationships, vendor and contractual issues, employee matters, intellectual property matters, personal injuries and torts, regulatory and legal compliance, and other matters. The Company believes it has substantial defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal proceedings, intends to defend itself vigorously.

The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in its consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments. Where a loss is not probable or the amount of a probable loss is not reasonably estimable, the Company does not accrue legal reserves. Additionally, for those matters where a loss is reasonably possible and the amount of loss is reasonably estimable, the Company estimates the amount of losses that it could incur beyond the accrued legal reserves. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.”

While the outcome of legal proceedings and the timing of the ultimate resolution are inherently difficult to predict, based on information currently available, advice of counsel and available insurance coverage, the Company believes that it has established adequate legal reserves. Further, based upon available information, the Company is of the opinion that these legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to the Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

Paycheck Protection Program (PPP)

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company may be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against and is not resolved in a manner favorable to the Company, it may result in significant financial liability or adversely affect reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company , the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

17. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed interest payments. As of December 31, 2021 and 2020, the Company had six interest rate swaps with a notional of $50.5 million associated with the Company’s cash outflows associated with various floating-rate amounts.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in earnings during the periods ended December 31, 2021 and 2020. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that $0 will be reclassified as an increase in interest expense.

Customer Swaps

The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of customers desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. In order to economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into derivative contracts with third parties to offset the customer contracts, such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts decrease over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to customers. The Company utilizes a loan hedging program to accommodate clients preferring a fixed rate loan. The loan documents include an addendum with a zero premium collar. The zero premium collar is a cap and floor at the same interest rate, resulting in a fixed rate to the borrower. To hedge this embedded option, the Company enters into a dealer facing trade exactly mirroring the terms of the loan addendum. At December 31, 2021, the Company had interest rate swaps related to this program with an aggregate notional amount of $87.3 million.

Counterparty Credit Risk

As a result of its derivative contracts, the Company is exposed to credit risk. Specifically, approved counterparties and exposure limits are defined. On at least an annual basis, the customer derivative contracts and related counterparties are evaluated for credit risk with an adjustment made to the contracts fair value. In accordance with the interest rate agreements with derivative dealers, the Company may be required to post margin to these counterparties. At December 31, 2021, the Company has required collateral with certain of its derivative counterparties in the amount of $5.2 million and was not holding collateral of any derivative counterparties.

The following table reflects the estimated fair value positions of derivative contracts as of December 31, 2021:

Derivatives designated as hedging instruments under ASC 815 (in thousands):

						Fair Value December 31,
Third party interest rate swaps	Balance Sheet Location	Notional Amount		Interest rate Paid	Interest rate Received	2021		2020
Maturing in 2025	other assets/(other liabilities)	$	15,000	Fixed - 0.57%	3-Month Libor	$	291	$	(143	)
Maturing in 2027	other assets/(other liabilities)		10,000	Fixed - 0.65%	3-Month Libor		361		(50	)
Maturing in 2027	other assets/(other liabilities)		7,500	Fixed - 3.57%	3-Month Libor + 280		239		(87	)
Maturing in 2027	other assets/(other liabilities)		6,000	Fixed - 0.61%	3-Month Libor		244		24
Maturing in 2029	other assets/(other liabilities)		6,000	Fixed - 0.72%	3-Month Libor		329		74
Maturing in 2032	other assets/(other liabilities)		6,000	Fixed - 0.82%	3-Month Libor		446		171
		$	50,500			$	1,910	$	(11	)

Derivatives not designated as hedging instruments under ASC 815 (in thousands):

		December 31, 2021					December 31, 2020
Interest Rate Products	Balance Sheet Location	Notional Amount		Fair Value			Notional Amount		Fair Value
Zero Premium Collar	other assets/(other liabilities)	$	67,375	$	(1,817	)	$	64,013	$	1,111
Zero Premium Collar	other assets/(other liabilities)	$	19,938	$	284		$	-	$	-

Dealer Offset to Zero Premium Collar	other assets/(other liabilities)	$	67,375	$	1,817		$	64,013	$	(1,111	)
Dealer Offset to Zero Premium Collar	other assets/(other liabilities)	$	19,938	$	(284	)	$	-	$	-

The following table presents the effect of the Company’s cash flow hedge accounting on Accumulated Other Comprehensive Income for the periods ended December 31, 2021 and 2020 (in thousands):

The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
	Amount of (Loss) Gain Recognized in OCI on Derivatives					Location of Gain Reclassified from	Amount of (loss) gain reclassified from Accumulated OCI into income
	Year Ended December 31,					Accumulated OCI into	Year Ended December 31,
Derivatives in Hedging relationships	2021		2020			Income	2021			2020
Interest rate Products	$	1,921	$	(11	)	Interest Expense	$	(147	)	$	18

18. LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

Lessee Accounting

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches with terms extending through 2030. All of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s Consolidated Balance Sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as right-of-use (“ROU”) assets and corresponding lease liabilities.

The following table represents the Consolidated Balance Sheet classification of the Company’s ROU assets and lease liabilities (in thousands). The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), on the Consolidated Balance Sheet.

	Balance at December 31,
Lease Type	2021		2020		Affected line item on the Consolidated Balance Sheet
Right of Use Assets
Operating	$	3,264	$	2,286	Other Assets

Lease Liabilities:
Operating	$	3,266	$	2,295	Other Liabilities

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The following table displays the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases outstanding as of December 31, 2021:

	Operating
Weighted average term (years)		6.16
Weighted average discount rate		1.84	%

The following table represents lease costs and other lease information for the years ended December 31, 2021, and 2020, respectively (in thousands). As the Company elected not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

	December 31,
Lease Cost	2021		2020		2019
Operating lease cost	$	676	$	571	$	340
Variable lease cost		63		50		88
Total lease cost	$	739	$	621	$	428

Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2021 along with a reconciliation to the discounted amount recorded on the December 31, 2021 Consolidated Balance Sheet (in thousands):

Undiscounted cash flows due within	Operating
2022		672
2023		604
2024		513
2025		447
2026		377
2027 and thereafter		851
Total undiscounted cash flows		3,464
Impact of present value discount		(198	)
Amount reported on balance sheet	$	3,266

19. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows:

Level I:	Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:	Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The fair values of equity securities and securities available for sale are determined by quoted prices in active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities and classified as Level II. The fair values consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The following tables present the assets reported on the consolidated balance sheet at their fair value on a recurring basis as of December 31, 2021 and 2020 (in thousands) by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

2021	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets:
Equity securities	$	2,270	$	-		$	-	$	2,270
Available for sale securities:
U.S. Agency securities		-		73,945			-		73,945
U.S. Treasuries securities		115,347		-			-		115,347
Obligations of state and political subdivisions		-		112,021			-		112,021
Corporate obligations		-		10,333			-		10,333
Mortgage-backed securities in government sponsored entities		-		100,756			-		100,756
Other Assets:
Derivative instruments		-		4,011			-		4,011
Liabilities:
Derivative instruments		-		(2,101	)		-		(2,101	)

2020	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets:
Equity securities	$	1,931	$	-		$	-	$	1,931
Available for sale securities:
U.S. Agency securities		-		81,416			-		81,416
U.S. Treasuries securities		28,043		-			-		28,043
Obligations of state and political subdivisions		-		102,972			-		102,972
Corporate obligations		-		6,509			-		6,509
Mortgage-backed securities in government sponsored entities		-		76,249			-		76,249
Other Assets:
Derivative instruments		-		1,111			-		1,111
Liabilities:
Derivative instruments		-		(1,122	)		-		(1,122	)

Financial Instruments, Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during 2021 and 2020 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense.

Assets measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020 (in thousands) are included in the table below:

2021	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	459	$	459
Other real estate owned		-		-		552		552

2020	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	3,243	$	3,243
Other real estate owned		-		-		1,700		1,700

•

Impaired Loans - The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not currently being carried at its fair value. The fair values above excluded estimated selling costs of $47,000 and $356,000 at December 31, 2021 and 2020, respectively.

•

Other Real Estate Owned – OREO is carried at the lower of cost or fair value, less estimated costs to sell, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as a Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques (dollars in thousands).

2021	Fair Value	Valuation Technique(s)	Unobservable input	Range	Weighted average
Impaired Loans	459	Appraised Collateral Values	Discount for time since appraisal	0-100%	23.38%
			Selling costs	8%-10%	8.27%
			Holding period	6 - 12 months	11.52 months

Other real estate owned	552	Appraised Collateral Values	Discount for time since appraisal	20-44%	41.76%

2020	Fair Value	Valuation Technique(s)	Unobservable input	Range	Weighted average
Impaired Loans	3,243	Appraised Collateral Values	Discount for time since appraisal	0-100%	20.61%
			Selling costs	5%-10%	9.51%
			Holding period	6 - 12 months	11.65 months

Other real estate owned	1,700	Appraised Collateral Values	Discount for time since appraisal	20-31%	28.67%

Financial Instruments Not Required to be Measured or Reported at Fair Value

The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows (in thousands):

December 31, 2021	Carrying Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	11,026	$	11,026	$	-	$	-	$	11,026
Loans held for sale		4,554		4,554		-		-		4,554
Net loans		1,424,229		1,426,698		-		-		1,426,698

Financial liabilities:
Deposits		1,836,151		1,836,179		1,506,535		-		329,644
Borrowed funds		73,977		72,346		-		-		72,346

December 31, 2020	Carrying Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	13,758	$	13,758	$	-	$	-	$	13,758
Loans held for sale		14,640		14,640		-		-		14,640
Net loans		1,389,466		1,404,166		-		-		1,404,166

Financial liabilities:
Deposits		1,588,858		1,593,738		1,506,535		-		87,206
Borrowed funds		88,838		88,263		-		-		88,263

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.

Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The carrying amounts for cash and cash equivalents, bank owned life insurance, regulatory stock, accrued interest receivable and payable approximate fair value and are considered Level I measurements.

20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

The following is condensed financial information for Citizens Financial Services, Inc.:

CITIZENS FINANCIAL SERVICES, INC.
CONDENSED BALANCE SHEET

	December 31,
(in thousands)	2021		2020
Assets:
Cash	$	15,046	$	5,301
Investments		2,150		1,866
Investment in subsidiary:		212,057		194,312
Other assets		1,297		846
Total assets	$	230,550	$	202,325

Liabilities:
Other liabilities	$	679	$	566
Borrowed funds		17,379		7,500
Total liabilities		18,058		8,066
Stockholders’ equity		212,492		194,259
Total liabilities and stockholders’ equity	$	230,550	$	202,325

CITIZENS FINANCIAL SERVICES, INC.
CONDENSED STATEMENT OF INCOME
	Year Ended December 31,
(in thousands)	2021		2020			2019
Dividends from:
Bank subsidiary	$	8,994	$	16,171		$	9,565
Equity securities		104		45			17
Total income		9,098		16,216			9,582
Realized securities gains (losses)		284		(23	)		101
Expenses		1,008		775			1,103
Income before equity in undistributed earnings of subsidiary		8,374		15,418			8,580
Equity in undistributed earnings - First Citizens Community Bank		20,744		9,685			10,910
Net income	$	29,118	$	25,103		$	19,490
Comprehensive income	$	26,376	$	28,319		$	22,782

CITIZENS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
	Year Ended December 31,
(in thousands)	2021			2020			2019
Cash flows from operating activities:
Net income	$	29,118		$	25,103		$	19,490
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(20,744	)		(9,685	)		(10,910	)
Investment securities (gains) losses, net		(284	)		23			(101	)
Other, net		543			14			717
Net cash provided by operating activities		8,633			15,455			9,196
Cash flows from investing activities:
Purchases of equity securities		-			(1,339	)		-
Proceeds from the sale of equity securities		-			168			-
Acquisition of Midcoast		-			(7,614	)		-
Net cash used in investing activities		-			(8,785	)		-
Cash flows from financing activities:
Cash dividends paid		(7,383	)		(6,539	)		(6,315	)
Issuance of subordinated debt		9,869			-			-
Purchase of treasury stock		(1,374	)		(2,122	)		(1,291	)
Sale of treasury stock to employee stock purchase plan		-			126			-
Net cash provided by (used in) financing activities		1,112			(8,535	)		(7,606	)
Net decrease in cash		9,745			(1,865	)		1,590
Cash at beginning of year		5,301			7,166			5,576
Cash at end of year	$	15,046		$	5,301		$	7,166

21. CONSOLIDATED CONDENSED QUARTERLY DATA (UNAUDITED)

The following table presents summarized quarterly financial data for 2021 and 2020:

(in thousands, except share data)			Three Months Ended,
2021	Mar 31		June 30		Sep 30		Dec 31
Interest income	$	18,295	$	18,075	$	18,342	$	18,505
Interest expense		1,854		1,863		1,752		1,636
Net interest income		16,441		16,212		16,590		16,869
Provision for loan losses		650		500		400		-
Non-interest income		3,998		2,677		2,618		2,461
Investment securities gains, net		237		29		234		51
Non-interest expenses		9,947		10,320		10,400		10,883
Income before provision for income taxes		10,079		8,098		8,642		8,498
Provision for income taxes		1,616		1,451		1,578		1,554
Net income	$	8,463	$	6,647	$	7,064	$	6,944
Earnings Per Share Basic	$	2.14	$	1.69	$	1.79	$	1.76
Earnings Per Share Diluted	$	2.14	$	1.69	$	1.79	$	1.76

				Three Months Ended,
2020	Mar 31			June 30		Sep 30		Dec 31
Interest income	$	15,339		$	18,160	$	18,386	$	18,411
Interest expense		2,449			1,874		1,916		1,866
Net interest income		12,890			16,286		16,470		16,545
Provision for loan losses		400			550		550		900
Non-interest income		2,105			1,941		3,386		3,726
Investment securities gains, net		(254	)		128		152		238
Non-interest expenses		8,921			11,413		9,692		10,821
Income before provision for income taxes		5,420			6,392		9,766		8,788
Provision for income taxes		889			1,054		1,759		1,561
Net income	$	4,531		$	5,338	$	8,007	$	7,227
Earnings Per Share Basic	$	1.26		$	1.37	$	2.02	$	1.83
Earnings Per Share Diluted	$	1.26		$	1.37	$	2.02	$	1.83

22. ACQUISITION OF MIDCOAST COMMUNITY BANCORP, INC.

In the third quarter of 2019, the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of MidCoast Community Bancorp, Inc. (“MidCoast”) for $6.50 per share in cash and stock. MidCoast was a Pennsylvania Corporation that conducted its business primarily through, its wholly owned subsidiary MidCoast Community Bank, which operated from a main office in Wilmington, Delaware, and two branches in Wilmington, Delaware, and one branch in Dover, Delaware.

The transaction closed on April 17, 2020, with MidCoast Community Bank having been merged into First Citizens Community Bank, with First Citizens Community Bank as the surviving entity. The acquisition established the Company’s presence in the Wilmington and Dover, Delaware markets.

Under the terms of the merger agreement, the Company acquired all of the outstanding shares of MidCoast for a total purchase price of approximately $26,843,000. As a result of the acquisition, the Company issued 373,356 common shares and $7.6 million in cash to the former shareholders of MidCoast. The shares were issued with a value of $51.50 per share, which was based on the close price of the Company’s stock on April 17, 2020.

The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of MidCoast. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Company also recorded an identifiable intangible asset representing the core deposit base of MidCoast based on management’s evaluation of the cost of such deposits relative to alternative funding sources. Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. MidCoast’s loans were deemed to have credit impairment at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $4,869,000 of purchased credit-impaired loans. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

MidCoast’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and pre-payment speeds.

The following table summarizes the purchase of MidCoast as of April 17, 2020:

(In Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
Citizens Financial Services, Inc. shares issued		373,356
Value assigned to Citizens Financial Services, Inc. common share	$	51.50
Purchase price assigned to MidCoast common shares exchanged for Citizens Financial Services, Inc.				$	19,228
Purchase Price Consideration - Cash for Common Stock
Purchase price assigned to MidCoast common shares exchanged for cash					7,615
Total Purchase Price					26,843
Net Assets Acquired:
MidCoast Community Bancorp, Inc shareholders’ equity	$	24,330
Adjustments to reflect assets acquired at fair value:
Investments
Loans
Interest rate		1,424
General credit		(4,375	)
Specific credit - non-amortizing		(2,135	)
Specific credit - amortizing		(966	)
Core deposit intangible		157
Owned premises		(426	)
Other assets		65
Deferred tax assets		2,217
Adjustments to reflect liabilities acquired at fair value:
Time deposits		(1,018	)
Borrowings		(497	)
Other liabilities		(13	)
					18,763
Goodwill resulting from merger				$	8,080

The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed:

(In Thousands)
Total purchase price				$	26,843
Net assets acquired:
Cash and cash equivalents	$	8,637
Loans		223,235
Premises and equipment, net		1,787
Accrued interest receivable		586
Bank-owned life insurance		3,766
Intangibles		157
Deferred tax asset		3,402
Other assets		2,878
Time deposits		(123,841	)
Deposits other than time deposits		(84,985	)
Accrued interest payable		(164	)
Borrowings		(15,497	)
Other liabilities		(1,198	)
					18,763
Goodwill resulting from the MidCoast merger				$	8,080

The Company recorded goodwill and other intangibles associated with the acquisition of MidCoast totaling $8,237,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment from April 17, 2020 to December 31, 2021. None of the goodwill acquired is expected to be deductible for tax purposes.

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. For the period from April 17, 2020 to December 31, 2021, no such adjustments were recorded. The identifiable intangible asset consists of core deposit intangibles which are being amortized on an accelerated basis over the useful life of such assets. The gross carrying amount of the core deposit intangible at December 31, 2021 and 2020 was $157,000, and accumulated amortization was $46,000 and 19,000 as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, the current year and estimated future amortization expense for the core deposit intangibles was (in thousands):

	Core deposit intangibles
Amortization for 2021	$	27
Estimate for year ending December 31,
2022		24
2023		21
2024		18
2025		15
2026		12
Thereafter		21
Total	$	111

Amounts recognized separately from the acquisition include primarily legal fees, investment banking fees, system conversion costs, severance costs and contract termination costs. These costs were included in merger and acquisition expenses within non-interest expenses on the Consolidated Statement of Income and amounted to approximately $2,179,000 and $466,000 for 2020 and 2019, respectively.

Results of operations for MidCoast prior to the acquisition date are not included in the Consolidated Statement of Income for 2020.

The following table presents financial information regarding the former MidCoast operations included in our Consolidated Statement of Income from the date of acquisition through December 31, 2020 under the column “Actual from Acquisition Date through December 31, 2020”. In addition, the following table presents unaudited pro forma information as if the acquisition of MidCoast had occurred on January 1, 2019 under the “Pro Forma” columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited proforma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments are included in the numbers below.

	Actual from Acquisition		Pro Formas
	Date Through		Twelve Months Ended December 31,
(In Thousands, Except Per Share Data)	December 31, 2020		2020		2019
Net interest income	$	9,314	$	63,860	$	60,097
Non-interest income		1,024		11,743		8,685
Net income		4,909		23,274		22,251
Pro forma earnings per share:
Basic			$	5.94	$	5.66
Diluted			$	5.94	$	5.66

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course by management or employees in the normal course of performing their assigned functions.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting.

In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework. Because there were no material weaknesses discovered, management believes that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.

/s/ Randall E. Black

By: Randall E. Black

Chief Executive Officer and President

(Principal Executive Officer)

Date: March 10, 2022

/s/ Stephen J. Guillaume

By: Stephen J. Guillaume

Chief Financial Officer

(Principal Financial & Accounting Officer)

Date: March 10, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of

Citizens Financial Services, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Citizens Financial Services, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses (ALL)

Description of the Matter

The Company’s loan portfolio totaled $1.4 billion as of December 31, 2021, and the associated ALL was $17.3 million. As discussed in Notes 1 and 5 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.

We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.

How We Addressed the Matter in Our Audit

We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment.

To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL.

Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s historical loan performance data and third-party macroeconomic data, and considered the existence of new or contrary information. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s loan portfolio, various internal risk metrics, and asset quality trends.

We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.

We have served as the Company’s auditor since 1994.

/s/S.R. Snodgrass, P.C.

Cranberry Township, Pennsylvania

March 10, 2022

PART IV

ITEM 15.

Exhibits and Financial Statement Schedules.

(a)	The following documents are filed as a part of this report:

The following financial statements are incorporated by reference in Item 8:

Report of Independent Registered Public Accounting Firm (PCAOB ID 74)

Consolidated Balance Sheet as of December 31, 2021 and 2020

Consolidated Statement of Income for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statement of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019

Notes to Consolidated Financial Statements

All financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statement or in the notes thereto, which are incorporated by reference at subsection (a)(1) of this Item.

The following Exhibits are filed herewith:

23.1

Consent of Snodgrass, P.C., Independent Registered Public Accountants

31.1

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

31.2

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

32.1

Section 1350 Certification of Chief Executive Officer

32.2

Section 1350 Certification of Chief Financial Officer

101

The following materials from the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows, and (vi) related notes.

104

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CITIZENS FINANCIAL SERVICES, INC.

Date: April 29, 2022	By:	/s/ Randall E. Black
		Randall E. Black
		Chief Executive Officer and President
		(Principal Executive Officer)