What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-08-05 compared with 2022-05-06 · 450 added, 301 removed, 1164 unchanged (39% of the section changed)

31 unchanged sentences

Preferred stock, par value $ 2.00 per share;

authorized 1,000,000 shares as of March 31, 2022 and December 31, 2021;

issued 0 as of March 31, 2022 and December 31, 2021

authorized 1,000,000 shares as of June 30, 2022 and December 31, 2021;

issued 0 as of June 30, 2022 and December 31, 2021

Common stock, par value $ 2.00 per share;

authorized 20,000,000 shares as of March 31, 2022 and December 31, 2021;

issued 6,195,132 as of March 31, 2022 and 6,178,835 as of December 31, 2021;

outstanding 5,963,521 as of March 31, 2022 and 5,947,223 as of December 31, 2021

authorized 20,000,000 shares as of June 30, 2022 and December 31, 2021;

issued 6,212,972 as of June 30, 2022 and 6,178,835 as of December 31, 2021;

outstanding 5,981,361 as of June 30, 2022 and 5,947,223 as of December 31, 2021

Retained earnings

Accumulated other comprehensive (loss) income

Treasury stock, at cost, 231,611 shares as of March 31, 2022 and 231,612 shares as of December 31, 2021

Treasury stock, at cost, 231,611 shares as of June 30, 2022 and 231,612 shares as of December 31, 2021

TOTAL STOCKHOLDERS’ EQUITY

3 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Dollars in thousands, except per share data)

Three Months Ended

Six Months Ended

INTEREST INCOME

Interest and fees on loans

17 unchanged sentences

ATM fees and debit card income

(Losses) gains on sales of mortgage loans

Net (losses) gains on sales of mortgage loans

Net securities (losses) gains

19 unchanged sentences

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Dollars in thousands)

Three Months Ended

Other comprehensive (loss) income:

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

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

Total other comprehensive (loss) income

Total Comprehensive (Loss) Income

(Dollars in thousands)

Six Months Ended

Other comprehensive loss:

Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $( 7,445 ) and $( 459 ), respectively

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

Total other comprehensive loss

Total Comprehensive Loss

Total Comprehensive (Loss) Income

______________________________

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

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

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Dollars in thousands, except

8 unchanged sentences

Balance at March 31, 2022

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.28 per share

Balance at June 30, 2022

(Dollars in thousands, except

per share data)

Comprehensive

Stockholders’

Balance at January 1, 2021

3 unchanged sentences

Balance at March 31, 2021

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.27 per share

Balance at June 30, 2021

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Dollars in thousands)

9 unchanged sentences

Net securities losses (gains)

Decrease in accrued interest receivable

(Increase) decrease in accrued interest receivable

Increase in cash surrender value of bank owned life insurance

2 unchanged sentences

Amortization of investment in low-income housing partnerships

Increase in accrued interest payable

(Decrease) increase in other liabilities

Increase (decrease) in accrued interest payable

Increase in other liabilities

NET CASH PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sales of equity securities and debt securities available-for-sale

Proceeds from maturities and redemptions of debt securities available-for-sale

4 unchanged sentences

Purchase of premises and equipment

Purchase of investment in real estate venture

Proceeds from sales of foreclosed assets held for resale

7 unchanged sentences

Dividends paid

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

NET CASH PROVIDED BY FINANCING ACTIVITIES

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

3 unchanged sentences

Interest paid

Income taxes paid

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Purchased securities settling after quarter end

Loans transferred from held for sale portfolio

Common stock subscription receivable

11 unchanged sentences

In the opinion of management, all adjustments considered necessary for fair presentation have been included.

Operating results for the three months ended March 31, 2022, are not necessarily indicative of the results for the year ending December 31, 2022.

Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results for the year ending December 31, 2022.

For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, 2022 for items that should potentially be recognized or disclosed in these consolidated financial statements.

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of June 30, 2022 for items that should potentially be recognized or disclosed in these consolidated financial statements.

The evaluation was conducted through the date these consolidated financial statements were issued.

1 unchanged sentence

Recently adopted ASUs:

There were no ASUs adopted during the first quarter of 2022.

There were no ASUs adopted during the first two quarters of 2022.

Pending ASUs:

15 unchanged sentences

The amendments on TDR disclosures and vintage disclosures should be adopted prospectively.

The Company plans to adopt ASU 2022-02 upon the adoption of ASU 2016-13 and is currently evaluating the provisions of ASU 2022-02 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

The Company plans to adopt ASU 2022-02 upon the adoption of ASU 2016-13 and is currently evaluating the provisions of ASU 2022-02 and ASU 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

NOTE 3 — SECURITIES

12 unchanged sentences

The cost of securities sold, redeemed or matured is based on the specific identification method.

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at March 31, 2022 and December 31, 2021:

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at June 30, 2022 and December 31, 2021:

Debt Securities Available-for-Sale

(Dollars in thousands)

March 31, 2022:

June 30, 2022:

Treasury securities

17 unchanged sentences

Corporate debt securities

Securities Available-for-Sale with an aggregate fair value of $ 365,293,000 at March 31, 2022 and $ 401,861,000 at December 31, 2021, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 285,453,000 at March 31, 2022 and $ 318,074,000 at December 31, 2021.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at March 31, 2022.

Securities Available-for-Sale with an aggregate fair value of $ 288,785,000 at June 30, 2022 and $ 401,861,000 at December 31, 2021, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 236,643,000 at June 30, 2022 and $ 318,074,000 at December 31, 2021.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at June 30, 2022.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

March 31, 2022

June 30, 2022

Debt Securities Available-For-Sale

13 unchanged sentences

Government and U.S.

Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at March 31, 2022.

The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch.

Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at June 30, 2022.

The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s,

Standard and Poor’s or Fitch.

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

There were no proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended March 31, 2022 or 2021.

There were no proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended June 30, 2022 and 2021.

Therefore, there were no gains or losses realized during these periods.

At March 31, 2022 and December 31, 2021, the Company had $ 1,899,000 and $ 1,962,000 , respectively, in equity securities recorded at fair value.

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2022 and 2021:

There were no impairment losses realized on Debt Securities Available-For-Sale during the three months ended June 30, 2022 or 2021.

There were no proceeds from sales of investments in Debt Securities Available-For-Sale for the six months ended June 30, 2022 and 2021.

Therefore , there were no gains or losses realized during these periods.

There were no impairment losses realized on Debt Securities Available-For-Sale during the six months ended June 30, 2022 or 2021.

At June 30, 2022 and December 31, 2021, the Company had $ 1,661,000 and $ 1,962,000 , respectively, in equity securities recorded at fair value.

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the six months ended June 30, 2022 and 2021:

(Dollars in thousands)

Three months ended

March 31, 2022

March 31, 2021

Six months ended

June 30, 2022

June 30, 2021

Net (losses) and gains recognized during the period on equity securities

1 unchanged sentence

Net (losses) and gains recognized during the reporting period on equity securities still held at the reporting date

There were no proceeds from sales of investments in Held-to-Maturity debt securities during the three months ended March 31, 2022 or 2021.

There were no proceeds from sales of investments in Held-to-Maturity debt securities during the six months ended June 30, 2022 or 2021.

Therefore, there were no gains or losses realized during these periods.

10 unchanged sentences

The Company and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months.

Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at March 31, 2022 or December 31, 2021.

Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at June 30, 2022 or December 31, 2021.

The summary below shows the gross unrealized losses and fair value of the Company’s debt securities.

Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of March 31, 2022 and December 31, 2021:

March 31, 2022

Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of June 30, 2022 and December 31, 2021:

June 30, 2022

(Dollars in thousands)

31 unchanged sentences

These factors change continuously and therefore the market value of these securities may be higher or lower than the Company’s carrying value at any measurement date.

Management does not believe any of their 125 debt securities with a less than one year unrealized loss position, or any of their 29 debt securities with a one year or greater unrealized loss position as of March 31, 2022, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Company expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of March 31, 2022.

Management does not believe any of their 153 debt securities with a less than one year unrealized loss position, or any of their 31 debt securities with a one year or greater unrealized loss position as of June 30, 2022, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Company expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of June 30, 2022.

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

27 unchanged sentences

Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan.

As of March 31, 2022, the Company's balance of GGLs was $ 5,326,000 , compared to $ 3,829,000 at December 31, 2021.

As of June 30, 2022, the Company's balance of GGLs was $ 5,267,000 , compared to $ 3,829,000 at December 31, 2021.

Commercial Real Estate Lending

25 unchanged sentences

These loans are sold without recourse.

Loans held for sale amounted to $ 4,706,000 and $ 6,006,000 at March 31, 2022 and December 31, 2021, respectively.

Loans held for sale amounted to $ 765,000 and $ 6,006,000 at June 30, 2022 and December 31, 2021, respectively.

Consumer Lending

17 unchanged sentences

All PPP loans are carried in the Company’s Commercial and Industrial loan portfolio.

As of March 31, 2022, the Company held 51 PPP loans in its Commercial and Industrial portfolio which carried a balance of $ 1,244,000 , of which 2 loans carrying an aggregate balance of $ 148,000 were granted during the first round of PPP issuance and 49 loans carrying an aggregate balance of $ 1,096,000 were granted during the second round of PPP issuance.

As of June 30, 2022, the Company held 3 PPP loans in its Commercial and Industrial portfolio which carried a balance of $ 146,000 , of which 2 loans carrying an aggregate balance of $ 137,000 were granted during the first round of PPP issuance and 1 loan carrying a balance of $ 9,000 was granted during the second round of PPP issuance.

At December 31, 2021, the Company held 122 PPP loans in its Commercial and Industrial portfolio, which carried an aggregate balance of $ 4,894,000 , of which 2 loans carrying an aggregate balance of $ 160,000 were granted during the first round of PPP issuance and 120 loans carrying an aggregate balance of $ 4,734,000 were granted during the second round of PPP issuance.

2 unchanged sentences

In compliance with Section 4013 of the CARES Act, the Company granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments.

Of the loan modifications that were granted in compliance with Section 4013 of the CARES Act, there were no loan modifications still actively on deferral as of March 31, 2022, compared to December 31, 2021 when there was 1 loan modification still actively on deferral carrying a balance of $ 9,423,000 .

Of the loan modifications that were granted in compliance with Section 4013 of the CARES Act, there were no loan modifications still actively on deferral as of June 30, 2022, compared to December 31, 2021 when there was 1 loan modification still actively on deferral carrying a balance of $ 9,423,000 .

See page 24 for additional information regarding the Section 4013 CARES Act modifications.

49 unchanged sentences

The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets.

As of March 31, 2022 and December 31, 2021, the amount of the reserve for unfunded lending commitments was $ 121,000 and $ 177,000 , respectively.

As of June 30, 2022 and December 31, 2021, the amount of the reserve for unfunded lending commitments was $ 117,000 and $ 177,000 , respectively.

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

50 unchanged sentences

Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The following table presents the classes of the loan portfolio summarized by risk rating as of March 31, 2022 and December 31, 2021:

The following table presents the classes of the loan portfolio summarized by risk rating as of June 30, 2022 and December 31, 2021:

Commercial and

18 unchanged sentences

Net deferred loan fees and costs

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $ 24,793,000 and $ 1,627,000 at March 31, 2022 and $ 24,647,000 and $ 1,671,000 at December 31, 2021.

Commercial and Industrial loans also included $ 5,326,000 and $ 3,829,000 of Government Guaranteed Loans and $ 1,244,000 and $ 4,894,000 of Paycheck Protection Program loans as of March 31, 2022 and December 31, 2021, respectively.

Loans held for sale amounted to $ 4,706,000 at March 31, 2022 and $ 6,006,000 at December 31, 2021.

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $ 23,897,000 and $ 1,583,000 at June 30, 2022 and $ 24,647,000 and $ 1,671,000 at December 31, 2021.

Commercial and Industrial loans also included $ 5,267,000 and $ 3,829,000 of Government Guaranteed Loans and $ 146,000 and $ 4,894,000 of Paycheck Protection Program loans as of June 30, 2022 and December 31, 2021, respectively.

Loans held for sale amounted to $ 765,000 at June 30, 2022 and $ 6,006,000 at December 31, 2021.

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

1 unchanged sentence

and Industrial

As of and for the three months ended March 31, 2022:

As of and for the three months ended June 30, 2022:

Allowance for Loan Losses:

Beginning balance

Credit (provision)

Provision (credit)

Ending Balance

(Dollars in thousands)

and Industrial

As of and for the six months ended June 30, 2022:

Allowance for Loan Losses:

Beginning balance

Provision (credit)

Ending Balance

Ending balance:

evaluated for impairment

9 unchanged sentences

and Industrial

As of and for the three months ended March 31, 2021:

As of and for the three months ended June 30, 2021:

Allowance for Loan Losses:

2 unchanged sentences

Ending Balance

(Dollars in thousands)

and Industrial

As of and for the six months ended June 30, 2021:

Allowance for Loan Losses:

Beginning balance

Provision (credit)

Ending Balance

Ending balance:

evaluated for impairment

12 unchanged sentences

Beginning balance

Provision (credit)

Credit (provision)

Ending Balance

9 unchanged sentences

evaluated for impairment

The outstanding recorded investment of TDRs as of March 31, 2022 and December 31, 2021 was $ 7,736,000 and $ 8,020,000 , respectively.

The decrease in TDRs at March 31, 2022 as compared to December 31, 2021 is mainly attributable to regular principal payments and paydowns on existing TDRs that were completed during the three months ended March 31, 2022.

There were no unfunded commitments on TDRs at March 31, 2022 and December 31, 2021.

No loans were modified as TDRs during the three months ended March 31, 2022, compared to the three months ended March 31, 2021 when three loans with a combined post modification balance of $ 301,000 were modified as TDRs.

The loan modifications for the three months ended March 31, 2021 consisted of two term modifications and one payment modification.

The outstanding recorded investment of TDRs as of June 30, 2022 and December 31, 2021 was $ 7,669,000 and $ 8,020,000 , respectively.

The decrease in TDRs at June 30, 2022 as compared to December 31, 2021 is mainly attributable to regular principal payments and paydowns on existing TDRs that were completed during the six months ended June 30, 2022.

There were no unfunded commitments on TDRs at June 30, 2022 and December 31, 2021.

During the three months ended June 30, 2022, one loan with a post modification balance of $ 372,000 was modified as a TDR.

No loans were modified as TDRs during the first three months of 2022.

During the six months ended June 30, 2021, three loans with a combined post modification balance of $ 301,000 were modified as TDRs.

No loans were modified as TDRs during the three months ended June 30, 2021.

The loan modifications for the six months ended June 30, 2022 consisted of one payment modification, compared to the loan modifications for the six months ended June 30, 2021 which consisted of two term modifications and one payment modification.

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

2 unchanged sentences

Accruing TDRs

At March 31, 2022, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 696,000 , six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 431,000 , and one Residential Real Estate loan classified as a TDR with a balance of $ 13,000 were not in compliance with the terms of their restructure, compared to March 31, 2021 when three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 737,000 , six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 299,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 17,000 were not in compliance with the terms of their restructure.

One Commercial Real Estate loan that was modified as a TDR within the twelve months preceding March 31, 2022 experienced a payment default during the three months ended March 31, 2022, but the loan was subsequently paid off prior to the end of the quarter.

Of the loans that were modified as TDRs during the twelve months preceding March 31, 2021, one Commercial Real Estate loan in the amount of $ 92,000 experienced a payment default during the three months ended March 31, 2021.

The following table presents information regarding the loan modifications categorized as TDRs during the three months ended March 31, 2021.

No loans were modified as TDRs during the three months ended March 31, 2022.

At June 30, 2022, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 682,000 , six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 318,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 12,000 were not in compliance with the terms of their restructure, compared to June 30, 2021 when three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 736,000 , seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 479,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 17,000 were not in compliance with the terms of their restructure.

Of the loans that were modified as TDRs within the twelve months preceding June 30, 2022, no loans experienced payment defaults during the three months ended June 30, 2022.

One Commercial Real Estate loan that was modified as a TDR within the twelve months preceding June 30, 2022 experienced a payment default during the six months ended June 30, 2022, but the loan was subsequently paid off during the first quarter of 2022.

Of the loans that were modified as TDRs during the twelve months preceding June 30, 2021, three Commercial Real Estate loans totaling $ 300,000 experienced payment defaults during the three months ended June 30, 2021.

No loans that were modified as TDRs during the twelve months preceding June 30, 2021 experienced payment defaults during the first three months of 2021.

The following table presents information regarding the loan modifications categorized as TDRs during the three and six months ended June 30, 2022 and the six months ended June 30, 2021.

No loans were modified as TDRs during the three months ended June 30, 2021.

(Dollars in thousands)

For the Three Months Ended March 31, 2021

For the Three Months Ended June 30, 2022

Pre-Modification

1 unchanged sentence

Commercial Real Estate

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

No loans were modified as TDRs during the three months ended March 31, 2022.

For the Three Months Ended March 31, 2021

(Dollars in thousands)

For the Six Months Ended June 30, 2022

Pre-Modification

Post-Modification

Commercial Real Estate

(Dollars in thousands)

For the Six Months Ended June 30, 2021

Pre-Modification

Post-Modification

Commercial Real Estate

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

No loans were modified as TDRs during the three months ended June 30, 2021.

For the Three Months Ended June 30, 2022

Commercial Real Estate

For the Six Months Ended June 30, 2022

Commercial Real Estate

For the Six Months Ended June 30, 2021

Commercial Real Estate

In the wake of the COVID-19 pandemic, during the second quarter of 2020, the Company began granting loan modification requests to defer principal and/or interest payments or modify interest rates.

These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met.

The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the three months ended March 31, 2022:

The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the six months ended June 30, 2022:

(Dollars in thousands)

5 unchanged sentences

Balance at March 31, 2022

Percent of Total Section 4013 CARES Act Modifications as of March 31, 2022

Percent of Total Section 4013 CARES Act Modifications to Total Loans as of March 31, 2022

Subsequent modifications granted during the three months ended March 31, 2022 for active deferred loans outstanding as of March 31, 2022

Additional modifications granted for the three months ended June 30, 2022

Section 4013 CARES Act modifications returned to normal payment status during the three months ended June 30, 2022 (a)

Principal payments net of draws on active deferred loans for the three months ended June 30, 2022 (b)

Balance at June 30, 2022

Percent of Total Section 4013 CARES Act Modifications as of June 30, 2022

Percent of Total Section 4013 CARES Act Modifications to Total Loans as of June 30, 2022

Subsequent modifications granted during the three months ended June 30, 2022 for active deferred loans outstanding as of June 30, 2022

(a) Includes payments made prior to return to normal payment status during the three month period

1 unchanged sentence

No construction loans have experienced a Section 4013 CARES Act modification at the dates indicated.

The recorded investment, unpaid principal balance, and the related allowance of the Company’s impaired loans are summarized below at March 31, 2022 and December 31, 2021.

The recorded investment, unpaid principal balance, and the related allowance of the Company’s impaired loans are summarized below at June 30, 2022 and December 31, 2021.

(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

11 unchanged sentences

Residential Real Estate

At March 31, 2022 and December 31, 2021, $ 7,736,000 and $ 8,020,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at both March 31, 2022 and December 31, 2021.

At June 30, 2022 and December 31, 2021, $ 7,669,000 and $ 8,020,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at both June 30, 2022 and December 31, 2021.

The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs.

The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Company’s impaired loans are summarized below for the three months ended March 31, 2022 and 2021.

The average recorded investment and interest income recognized for the Company’s impaired loans are summarized below for the three and six months ended June 30, 2022 and 2021.

(Dollars in thousands)

1 unchanged sentence

For the Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

With no related allowance recorded:

10 unchanged sentences

Residential Real Estate

Of the $ 74,000 and $ 96,000 in interest income recognized on impaired loans for the three months ended March 31, 2022 and 2021 respectively, $ 0 in interest income was recognized with respect to non-accrual loans for each respective period.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of March 31, 2022 and December 31, 2021 were as follows:

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

(Dollars in thousands)

For the Six Months Ended

June 30, 2022

June 30, 2021

With no related allowance recorded:

Commercial and Industrial

1 unchanged sentence

Residential Real Estate

With an allowance recorded:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Total consists of:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Of the $ 147,000 and $ 194,000 in interest income recognized on impaired loans for the six months ended June 30, 2022 and 2021 respectively, $ 0 and $ 3,000 in interest income was recognized with respect to non-accrual loans for each respective period.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of June 30, 2022 and December 31, 2021 were as follows:

(Dollars in thousands)

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Total non-accrual loans

2 unchanged sentences

Total non-performing assets

There were no foreclosed assets held for resale at March 31, 2022 or December 31, 2021.

Consumer mortgage loans secured by residential real estate for which the Company has entered into formal foreclosure proceedings but for which physical possession has yet to be obtained amounted to $ 41,000 at both March 31, 2022 and December 31, 2021.

These balances were not included in foreclosed assets held for resale at March 31, 2022 or December 31, 2021.

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

There were no foreclosed assets held for resale at June 30, 2022 or December 31, 2021.

These balances were not included in foreclosed assets held for resale at June 30, 2022 or December 31, 2021.

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

(Dollars in thousands)

March 31, 2022:

June 30, 2022:

Commercial and Industrial

7 unchanged sentences

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

At March 31, 2022 and December 31, 2021, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $ 1,249,000 that was associated with a loan to a developer of a residential sub-division.

At June 30, 2022 and December 31, 2021, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $ 1,249,000 that was associated with a loan to a developer of a residential sub-division.

NOTE 5 — DEPOSITS

Major classifications of deposits at March 31, 2022 and December 31, 2021 consisted of:

Major classifications of deposits at June 30, 2022 and December 31, 2021 consisted of:

(Dollars in thousands)

4 unchanged sentences

Total deposits

Total deposits decreased $ 32,492,000 to $ 1,045,477,000 as of March 31, 2022 due to decreases in non-interest bearing, interest bearing demand and time deposits.

The decrease in deposits was mainly the result of a $ 42,476,000 decrease in highly rate sensitive deposits and other normal fluctuations in deposits during the three months ended March 31, 2022.

Total deposits decreased $ 84,361,000 to $ 993,608,000 as of June 30, 2022 due to decreases in non-interest bearing, interest bearing demand and time deposits.

The decrease in deposits was mainly the result of a $ 95,504,000 decrease in highly rate sensitive deposits and other normal fluctuations in deposits during the six months ended June 30, 2022.

NOTE 6 — BORROWINGS

1 unchanged sentence

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, the Federal Discount Window, and Federal Home Loan Bank of Pittsburgh (“FHLB”) advances, which generally represent overnight or less than 30-day borrowings.

Short-term borrowings and weighted–average interest rates at March 31, 2022 and December 31, 2021 are as follows:

Short-term borrowings and weighted–average interest rates at June 30, 2022 and December 31, 2021 are as follows:

(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

13 unchanged sentences

The counterparty has the right to sell or repledge the investment securities.

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of March 31, 2022 and December 31, 2021.

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of June 30, 2022 and December 31, 2021.

(Dollars in thousands)

of Liabilities

March 31, 2022

June 30, 2022

Repurchase agreements (a)

1 unchanged sentence

Repurchase agreements (a)

(a) As of March 31, 2022 and December 31, 2021, the fair value of securities pledged in connection with repurchase agreements was $ 33,762,000 and $ 37,735,000 , respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, 2022:

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

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

(Dollars in thousands)

Remaining Contractual Maturity of the Agreements

March 31, 2022:

June 30, 2022:

Repurchase agreements and repurchase-to-maturity transactions:

5 unchanged sentences

The Company began utilizing this service offered by the FHLB during the second quarter of 2021.

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on March 31, 2022.

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on June 30, 2022.

Any irrevocable standby letters of credit are issued as necessary in an amount appropriate to secure specific public/municipal unit deposits.

1 unchanged sentence

Principal qualifying assets are certain real estate mortgages and investment securities.

As of March 31, 2022, loans of $ 615,523,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 440,392,000 .

As of March 31, 2022, no securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

As of June 30, 2022, loans of $ 641,482,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 458,318,000 .

As of June 30, 2022, no securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

NOTE 7 — SUBORDINATED DEBT

1 unchanged sentence

The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.

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

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

The 2020 Notes bear a fixed interest rate of 4.375 % per year for the first five years and then float based on a benchmark rate (as defined).

6 unchanged sentences

Management does not believe the outcome of these actions and proceedings will have a material effect on the consolidated financial position or results of operations of the Company.

The Bank currently leases three branch banking facilities and one parcel of land under operating leases.

At March 31, 2022, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,035,000 and $ 1,513,000 , respectively.

The Bank currently leases four branch banking facilities and one parcel of land under operating leases.

At June 30, 2022, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,013,000 and $ 1,495,000 , respectively.

At December 31, 2021, right-of-use assets and lease liabilities stood at $ 1,025,000 and $ 1,499,000 , respectively.

Further options to extend or terminate the lease are not applicable for any of the four leases.

Further options to extend or terminate the lease are not applicable for any of the five leases.

No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components.

1 unchanged sentence

therefore, our incremental borrowing rate was used for each of the leases.

The Bank recognized total operating lease costs for the three months ended March 31, 2022 and 2021 of $ 45,000 and $ 44,000 , respectively.

The Bank recognized total operating lease costs for the six months ended June 30, 2022 and 2021 of $ 90,000 and $ 89,000 , respectively.

Operating lease costs are included in occupancy, net in the accompanying statements of income.

Cash payments totaled $ 41,000 and $ 39,000 , respectively, for the three months ended March 31, 2022 and 2021.

Cash payments totaled $ 83,000 and $ 77,000 , respectively, for the six months ended June 30, 2022 and 2021.

The Bank currently has one finance lease for equipment.

At March 31, 2022, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $ 34,000 and $ 14,000 , respectively.

At June 30, 2022, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $ 34,000 and $ 11,000 , respectively.

At December 31, 2021, right-of-use assets and lease liabilities stood at $ 34,000 and $ 16,000 , respectively.

4 unchanged sentences

therefore, our incremental borrowing rate was used.

Total finance lease costs that were recognized by the Bank for the three months ended March 31, 2022 and 2021 were immaterial.

Cash payments totaled $ 2,000 for the three months ended March 31, 2022 and 2021.

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

Total finance lease costs that were recognized by the Bank for the six months ended June 30, 2022 and 2021 were immaterial.

Cash payments totaled $ 5,000 for the six months ended June 30, 2022 and 2021.

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

Weighted-average term (years)

22 unchanged sentences

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

The contract or notional amounts at March 31, 2022 and December 31, 2021 were as follows:

The contract or notional amounts at June 30, 2022 and December 31, 2021 were as follows:

(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

15 unchanged sentences

The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area.

At March 31, 2022, the Company had $ 691,911,000 in loans secured by real estate, which represented 88.8 % of total loans.

At June 30, 2022, the Company had $ 716,879,000 in loans secured by real estate, which represented 89.1 % of total loans.

The real estate loan portfolio is largely secured by lessors of residential buildings and dwellings, lessors of non-residential buildings, and lessors of hotels/motels.

As of March 31, 2022 and December 31, 2021, management is of the opinion that there were no concentrations exceeding 10% of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.

June 30, 2022 and December 31, 2021, management is of the opinion that there were no concentrations exceeding 10% of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.

As all financial instruments are subject to some level of credit risk, the Company requires collateral and/or guarantees for all loans.

7 unchanged sentences

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability.

When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from

that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

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

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly.

15 unchanged sentences

Financial Assets Measured at Fair Value on a Recurring Basis

At March 31, 2022 and December 31, 2021, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

At June 30, 2022 and December 31, 2021, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)

March 31, 2022

June 30, 2022

Debt Securities Available-for-Sale:

32 unchanged sentences

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At March 31, 2022 and December 31, 2021, impaired loans measured at fair value on a nonrecurring basis are as follows:

At June 30, 2022 and December 31, 2021, impaired loans measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)

Assets at March 31, 2022

Assets at June 30, 2022

Impaired loans:

10 unchanged sentences

A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.

For impaired loans less than $ 250,000 upon classification and annually at year end, the Company completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.These assets are included as Level 3 fair values, based upon the lowest level that is

significant to the fair value measurements.

The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs.

1 unchanged sentence

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

There were no foreclosed assets held for resale measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021.

There were no foreclosed assets held for resale measured at fair value on a nonrecurring basis at June 30, 2022 and December 31, 2021.

The Company’s foreclosed asset valuation procedure requires an appraisal or a Certificate of Inspection, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases in which the Bank has obtained a sales agreement.

4 unchanged sentences

Quantitative Information about Level 3 Fair Value Measurements

March 31, 2022

June 30, 2022

Valuation Technique

28 unchanged sentences

(Dollars in thousands)

Fair Value Measurements at March 31, 2022

Fair Value Measurements at June 30, 2022

FINANCIAL ASSETS:

43 unchanged sentences

The services provided under such a contract are considered a single performance obligation under ASC 606 because they embody a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

Wealth management fees charged by the Trust Department follow a tiered structure based on the type and size of the assets under management.

Wealth management fees charged by the Trust Department follow a tiered structure

based on the type and size of the assets under management.

Wealth management fees are included within non-interest income in the consolidated statements of income.

As of March 31, 2022 and December 31, 2021, the fair value of trust assets under management was $ 109,713,000 and $ 108,339,000 , respectively.

As of June 30, 2022 and December 31, 2021, the fair value of trust assets under management was $ 111,330,000 and $ 108,339,000 , respectively.

The costs of acquiring asset management customers are incremental and recognized within non-interest expense in the consolidated statements of income.

9 unchanged sentences

Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

At March 31, 2022 and 2021, there were no potential common shares outstanding.

At June 30, 2022 and 2021, there were no potential common shares outstanding.

The following table sets forth the computation of basic and diluted earnings per share.

3 unchanged sentences

Basic and diluted earnings per share

(In thousands, except earnings per share)

Six Months Ended

Weighted-average common shares outstanding

Basic and diluted earnings per share

NOTE 13 — GOODWILL

2 unchanged sentences

In accordance with current accounting standards, goodwill is not amortized.

Goodwill totaled $ 19,133,000 at March 31, 2022 and December 31, 2021.

Goodwill totaled $ 19,133,000 at June 30, 2022 and December 31, 2021.

Impairment testing is performed on an annual basis, using either a qualitative or quantitative approach.

2 unchanged sentences

Goodwill was evaluated for impairment at December 31, 2021, and it was determined that goodwill was not impaired.

Management evaluated the need for an interim goodwill impairment analysis and determined that there were no triggering events or negative factors affecting goodwill since the previous test that would indicate goodwill was impaired as of March 31, 2022.

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

8 unchanged sentences

RESULTS OF OPERATIONS

Quarter ended March 31, 2022 compared to quarter ended March 31, 2021

First Keystone Corporation realized earnings for the first quarter of 2022 of $3,543,000, a decrease of $335,000, or 8.6% from the first quarter of 2021.

The decrease in net income for the three months ended March 31, 2022 was primarily due to a decrease in non-interest income, mainly due to losses on sales of mortgage loans and net securities losses, as compared to gains on sales of mortgage loans and net securities gains realized during the same period in 2021.

On a per share basis, for the three months ended March 31, 2022, net income was $0.60 versus $0.66 for the same three month period of 2021.

Cash dividends amounted to $0.28 per share for the three months ended March 31, 2022 and 2021.

Quarter ended June 30, 2022 compared to quarter ended June 30, 2021

First Keystone Corporation realized earnings for the three months ended June 30, 2022 of $3,822,000, an increase of $217,000, or 6.0% from the second quarter of 2021.

The increase in net income for the three months ended June 30, 2022 was primarily due to an increase in interest income, mainly due to increased interest rates and growth in commercial real estate loans and increased interest and dividend income earned on securities.

On a per share basis, for the three months ended June 30, 2022, net income was $0.64 versus $0.61 for the same three month period of 2021.

Cash dividends amounted to $0.28 and $0.27 per share for the three months ended June 30, 2022 and 2021, respectively.

NET INTEREST INCOME

The major source of operating income for the Company is net interest income, defined as interest income less interest expense.

In the three months ended March 31, 2022, interest income amounted to $10,629,000, an increase of $354,000 or 3.4% from the three months ended March 31, 2021.

The increase in interest income was mainly the result of a $331,000 increase in interest earned on taxable securities and a $228,000 increase in interest earned on loans, offset by a $246,000 decrease in SBA PPP lender fees.

Interest expense amounted to $1,173,000 in the three months ended March 31, 2022, a decrease of $132,000 or 10.1% from the three months ended March 31, 2021, mainly due to a $110,000 decrease in interest paid on deposits.

In the three months ended June 30, 2022, interest income amounted to $11,111,000, an increase of $852,000 or 8.3% from the three months ended June 30, 2021, while interest expense amounted to $1,330,000 in the three months ended June 30, 2022, an increase of $42,000 or 3.3% from the three months ended June 30, 2021.

As a result, net interest income increased $810,000 or 9.0% to $9,781,000 from $8,971,000 for the same period in 2021.

The Company’s net interest margin for the three months ended March 31, 2022 was 3.19% compared to 3.37% for same period in 2021.

The decrease in net interest margin was primarily a result of a decrease in yields on loans.

The Company’s net interest margin for the three months ended June 30, 2022 was 3.36% compared to 3.23% for same period in 2021.

The increase in net interest margin was primarily a result of increases in yields earned on securities and commercial loans.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the three months ended March 31, 2022 and 2021 was $219,000 and $135,000, respectively.

The provision for loan losses for the three months ended June 30, 2022 and 2021 was $218,000 and $135,000, respectively.

The increase in the provision for loan losses resulted from the Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors.

The provision for loan losses for the three months ended March 31, 2022 is also reflective of

management’s assessment of the continued credit risk associated with the economic uncertainty surrounding the COVID-19 pandemic.

Charge-off and recovery activity in the allowance for loan losses resulted in net recoveries of $38,000 and net charge-offs of $21,000 for the the three months ended March 31, 2022 and 2021, respectively.

The provision for loan losses for the three months ended June 30, 2022 is also reflective of management’s assessment of the continued credit risk associated with the uncertainty surrounding geopolitical and economic concerns.

Charge-off and recovery activity in the allowance for loan losses resulted in net recoveries of $5,000

and net charge-offs of $58,000 for the the three months ended June 30, 2022 and 2021, respectively.

See Allowance for Loan Losses on page 45 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $1,389,000 for the three months ended March 31, 2022, as compared to $1,875,000 for the same period in 2021, a decrease of $486,000, or 25.9%.

The decrease was due to recognizing losses on the sales of mortgage loans and net securities losses on held equity securities during the first quarter of 2022 as compared to recognizing gains on both during the same period of 2021.

Net securities (losses) gains decreased $178,000 to ($63,000) for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

This decrease was due to the Company recognizing $63,000 in losses on held equity securities in the first quarter of 2022 as compared to recognizing $115,000 in gains on held equity securities in the first quarter of 2021.

Trust department income decreased $3,000 or 1.2% to $250,000 for the three months ended March 31, 2022 as compared to the same period in 2021.

Total non-interest income was $1,514,000 for the three months ended June 30, 2022, as compared to $1,865,000 for the same period in 2021, a decrease of $351,000, or 18.8%.

Net securities (losses) gains decreased $96,000 to ($68,000) for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

This decrease was due to the Company recognizing $68,000 in net losses on held equity securities in the second quarter of 2022 as compared to recognizing $28,000 in net gains on held equity securities in the second quarter of 2021.

Trust department income increased $3,000 or 1.1% to $268,000 for the three months ended June 30, 2022 as compared to the same period in 2021.

Service charges and fee income increased $68,000 or 14.1%.

The increase was mainly due to increases in overdraft fees and prepayment penalties earned on commercial loan payoffs as compared to the same period in 2021.

ATM fees and debit card income decreased $7,000 or 1.4% to $509,000 for the three months ended March 31, 2022.

(Losses) gains on sales of mortgage loans decreased $388,000 or 109.6% to ($34,000) due to a lower number of individual sold loans in the first quarter of 2022 as compared to the first quarter of 2021.

Many of the loans sold in the first quarter of 2022 were sold at a loss.

Other non-interest income decreased $43,000 or 38.1% to $70,000 for the three months ended March 31, 2022.

The decrease was due to lower retail investment income as income from annuities was lower in the first quarter of 2022 as compared to the same period in 2021.

The increase was mainly due to increases in overdraft fees as compared to the same period in 2021.

ATM fees and debit card income decreased $10,000 or 1.8% to $558,000 for the three months ended June 30, 2022.

Net (losses) gains on sales of mortgage loans decreased $308,000 or 100.0% to $0 due to no sales of mortgage loans in the second quarter of 2022 as the rate environment has led to many loans being sold at a loss and there have been fewer mortgages originated with intent to sell.

Other non-interest income decreased $6,000 or 9.2% to $59,000 for the three months ended June 30, 2022.

NON-INTEREST EXPENSE

Total non-interest expense was $6,516,000 for the three months ended March 31, 2022, as compared to $6,197,000 for the three months ended March 31, 2021.

Total non-interest expense was $6,595,000 for the three months ended June 30, 2022, as compared to $6,547,000 for the three months ended June 30, 2021

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense.

Salaries and benefits amounted to $3,554,000 or 54.5% of total non-interest expense for the three months ended March 31, 2022, as compared to $3,300,000 or 53.3% for the three months ended March 31, 2021.

The increase was mainly due to normal merit increases and new hires along with an increase in medical insurance costs since the first quarter of 2021.

Net occupancy, furniture and equipment, and computer expense amounted to $1,017,000 for the three months ended March 31, 2022, an increase of $112,000 or 12.4% which was due to the implementation of several new software programs throughout 2021.

Professional services increased $39,000 or 15.1% to $298,000 as of March 31, 2022.

The increase was mainly the result of an increase in consulting expense as the result of strategic planning and consulting services associated with implementing new internal systems contracts.

Pennsylvania shares tax expense amounted to $324,000 for the three months ended March 31, 2022, an increase of $11,000 or 3.5% as compared to the three months ended March 31, 2021.

The increase was the result of an increase in total equity.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased $50,000 for the three months ended March 31, 2022.

Salaries and benefits amounted to $3,462,000 or 52.5% of total non-interest expense for the three months ended June 30, 2022, as compared to $3,461,000 or 52.9% for the three months ended June 30, 2021.

Net occupancy, furniture and equipment, and computer expense amounted to $983,000 for the three months ended June 30, 2022, an increase of $43,000 or 4.6% which was due to the implementation of several new software programs throughout 2021 and early 2022 to increase security and efficiency.

Professional services increased $97,000 or 35.5% to $370,000 as of June 30, 2022.

The increase was mainly the result of an increase in consulting expense as the result of strategic planning and consulting services associated with implementing new internal systems contracts along with normal increases in annual audit expenses.

Pennsylvania shares tax expense amounted to $324,000 for the three months ended June 30, 2022, an increase of $11,000 or 3.5% as compared to the three months ended June 30, 2021.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense amounted to $120,000 for the three months ended June 30, 2022 and 2021.

FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to $128,000 for the three months ended March 31, 2022, a decrease of $72,000 or 36.0% as compared to the three months ended March 31, 2021.

The decrease was the result of negotiations on new internal systems contracts resulting in relationship credits that were applied to the expenses related to those

Data processing expenses amounted to $258,000 for the three months ended March 31, 2021 as compared to $294,000 for the same period of 2020, a decrease of $36,000 or 12.2%.

This decrease was also the result of the negotiations on new internal systems contracts.

Foreclosed assets held for resale expense decreased $3,000 for the three months ended March 31, 2022.

As of March 31, 2022 the Company did not own any foreclosed properties.

Advertising expense amounted to $72,000 in the first quarter of 2022 and 2021.

Other non-interest expense amounted to $728,000 for the three months ended March 31, 2022, a decrease of $36,000 or 4.7% as compared to the three months ended March 31, 2021.

This decrease was mainly due to a decrease in the provision for unfunded commitments due to a decrease in commercial real estate commitments in the first quarter of 2022 as compared to the same period in 2021.

Income tax expense amounted to $567,000 for the three months ended March 31, 2022, as compared to $635,000 for the three months ended March 31, 2021, a decrease of $68,000.

The effective total income tax rate was 13.8% for the three months ended March 31, 2022 as compared to 14.1% for the three months ended March 31, 2021.

The decrease in the effective tax rate was mainly due to lower overall operating income.

The Company recognized $74,000 and $101,000 of tax credits from low-income housing partnerships in the three months ended March 31, 2022 and 2021, respectively.

ATM and debit card fees expense amounted to $242,000 for the three months ended June 30, 2022, a decrease of $41,000 or 14.5% as compared to the three months ended June 30, 2021.

The decrease was the result of negotiations of new internal systems contracts resulting in vendor relationship credits that were applied to the expenses related to those systems.

Data processing expenses amounted to $251,000 for the three months ended June 30, 2022 as compared to $323,000 for the same period of 2021, a decrease of $72,000 or 22.3%.

This decrease was also the result of the negotiations of new systems contracts.

Advertising expense amounted to $118,000 in the second quarter of 2022, an increase of $9,000 or 8.3% as compared to the three months ended June 30, 2021.

Other non-interest expense amounted to $725,000 for the three months ended June 30, 2022 and 2021.

Income tax expense amounted to $660,000 for the three months ended June 30, 2022, as compared to $549,000 for the three months ended June 30, 2021, an increase of $111,000.

The effective total income tax rate was 14.7% for the three months ended June 30, 2022 as compared to 13.2% for the three months ended June 30, 2021.

The increase in the effective tax rate was mainly due to higher overall operating income.

The Company recognized $58,000 and $101,000 of tax credits from low-income housing partnerships in the three months ended June 30, 2022 and 2021, respectively.

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

First Keystone Corporation realized earnings for the six months ended June 30, 2022 of $7,365,000, a decrease of $118,000, or 1.6% from the same period in 2021.

The decrease in net income for the six months ended June 30, 2022 was primarily due to less PPP loan fees and a decrease in non-interest income, mainly due to fewer sales of mortgage loans and net securities losses.

On a per share basis, net income was $1.24 for the six months ended June 30, 2022 versus $1.27 for the same period in 2021.

Cash dividends amounted to $0.56 and $0.55 per share for the six months ended June 30, 2022 and 2021, respectively.

NET INTEREST INCOME

The major source of operating income for the Company is net interest income, defined as interest income less interest expense.

For the six months ended June 30, 2022, interest income amounted to $21,740,000, an increase of $1,206,000 or 5.9% from the six months ended June 30, 2021, while interest expense amounted to $2,503,000 in the six months ended June 30, 2022, a decrease of $90,000 or 3.5% from the six months ended June 30, 2021.

As a result, net interest income increased $1,296,000 or 7.2% to $19,237,000 from $17,941,000 for the same period in 2021.

The Company’s net interest margin for the six months ended June 30, 2022 was 3.28% compared to 3.30% for same period in 2021.

The decrease in net interest margin was a result of a decrease in yield earned on loans plus an increase in cost of short term borrowings.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the six months ended June 30, 2022 and 2021 was $437,000 and $270,000, respectively.

The provision for loan losses for the six months ended June 30, 2022 is also reflective of management’s assessment of the continued credit risk associated with the uncertainty surrounding geopolitical and economic concerns.

Charge-off and recovery activity in the allowance for loan losses resulted in net recoveries of $43,000 and net charge-offs of $79,000 for the six months ended June 30, 2022 and 2021, respectively.

See Allowance for Loan Losses on page 45 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $2,903,000 for the six months ended June 30, 2022, as compared to $3,740,000 for the same period in 2021, a decrease of $837,000, or 22.4% .

The decrease was due to recognizing net losses on the sales of mortgage loans and net securities losses on held equity securities during the first half of 2022 as compared to recognizing net gains on both during the same period of 2021.

ATM fees and debit card income decreased $17,000 or 1.6% to $1,067,000 for the six months ended June 30, 2022.

Service charges and fee income increased $202,000 for the six months ended June 30, 2022.

The increase was mainly due to increased overdraft fees on DDA accounts.

Gains on sales of mortgage loans decreased $696,000 or 105.1% due to a low number of individual loans sold in the first half of 2022 and many of the loans sold in 2022 being

sold at a loss.

These factors were due to the current rate environment and fewer loans being originated with the intent to sell in 2022.

Trust department income was $518,000 for the six months ended June 30, 2022 and 2021.

Net securities (losses) gains decreased $274,000 or 191.6% to ($131,000) for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

The decrease was due to the Company recognizing $131,000 in net losses on held equity securities in the first half of 2022 as compared to recognizing $143,000 in net gains on held equity securities in the same period in 2021.

NON-INTEREST EXPENSE

Total non-interest expense was $13,111,000 for the six months ended June 30, 2022, as compared to $12,744,000 for the six months ended June 30, 2021.

Non-interest expense increased $367,000 or 2.9%.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense.

Salaries and benefits amounted to $7,016,000 or 53.5% of total non-interest expense for the six months ended June 30, 2022, as compared to $6,761,000 or 53.1% for the six months ended June 30, 2021.

The increase was mainly due to normal merit increases and new hires along with an increase in medical insurance costs as compared to the first half of 2021.

Net occupancy, furniture and equipment, and computer expense amounted to $2,000,000 for the six months ended June 30, 2022, an increase of $155,000 or 8.4%.

The increase is the result of the implementation of several new software programs to increase security and efficiency.

Professional services increased $136,000 or 25.6% to $668,000 for the six months ended June 30, 2022.

Pennsylvania shares tax expense amounted to $648,000 for the six months ended June 30, 2022, an increase of $22,000 or 3.5% as compared to the six months ended June 30, 2021.

FDIC insurance expense increased $50,000 or 24.2% for the six months ended June 30, 2022.

FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to $370,000 for the six months ended June 30, 2022, a decrease of $113,000 or 23.4% as compared to the six months ended June 30, 2021.

The decrease was the result of negotiations of new internal systems contracts resulting in vendor relationship credits that were applied to the expenses related to those systems.

Data processing expenses amounted to $509,000 for the six months ended June 30, 2022, a decrease of $108,000 or 17.5% as compared to the six months ended June 30, 2021.

This decrease was also the result of the negotiations of new systems contracts.

Advertising expense increased $9,000 or 5.0% during the six months ended June 30, 2022.

Other non-interest expense amounted to $1,453,000 for the six months ended June 30, 2022, a decrease of $36,000 or 2.4% as compared to the six months ended June 30, 2021.

This decrease was mainly due to a decrease in the provision for unfunded commitments, as the result of higher line of credit usage and lower officer commitments, along with a decrease in loan collections expenses, as the result of legal and insurance reimbursements following the payoff of a non-accrual commercial real estate loan.

Income tax expense amounted to $1,227,000 for the six months ended June 30, 2022, as compared to $1,184,000 for the six months ended June 30, 2021, an increase of $43,000.

The effective total income tax rate was 14.3% for the six months ended June 30, 2022 as compared to 13.7% for the six months ended June 30, 2021.

The increase in the effective tax rate was mainly due to higher overall operating income.

The Company recognized $132,000 and $202,000 of tax credits from low-income housing partnerships in the six months ended June 30, 2022 and 2021, respectively.

FINANCIAL CONDITION

Total assets decreased to $1,297,087,000 as of March 31, 2022, a decrease of $23,263,000 from year-end 2021.

Total assets decreased to $1,304,582,000 as of June 30, 2022, a decrease of $15,768,000 from year-end 2021.

Total assets as of December 31, 2021 amounted to $1,320,350,000.

Total debt securities available-for-sale decreased $3,035,000 or 0.7% to $434,881,000 as of March 31, 2022 from December 31, 2021.

Total loans increased $26,187,000 or 3.5% to $779,028,000 as of March 31, 2022 from December 31, 2021.

Loan demand grew in the three months ended March 31, 2022 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

Total deposits decreased $32,492,000 or 3.0% to $1,045,477,000 as of March 31, 2022 from December 31, 2021.

Total debt securities available-for-sale decreased $27,656,000 or 6.3% to $410,260,000 as of June 30, 2022 from December 31, 2021.

Total loans increased $51,979,000 or 6.9% to $804,820,000 as of June 30, 2022 from December 31, 2021.

Loan demand grew in the six months ended June 30, 2022 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

Total deposits decreased $84,361,000 or 7.8% to $993,608,000 as of June 30, 2022 from December 31, 2021.

The decrease was mainly due to a decrease in highly rate sensitive deposits and other normal fluctuations.

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The Company’s strong equity capital position provides an opportunity to further leverage its asset growth.

Total borrowings increased in the three months ended March 31, 2022 by $24,954,000 to $87,331,000 from $62,377,000 as of December 31, 2021.

Total borrowings increased in the six months ended June 30, 2022 by $92,346,000 to $154,723,000 from $62,377,000 as of December 31, 2021.

Borrowings increased mainly due to decreased deposit balances and growth in the loan portfolio.

Total stockholders’ equity decreased to $133,555,000 at March 31, 2022, a decrease of $15,000,000 or 10.1% from December 31, 2021 due to a decrease in the market value of the securities portfolio resulting in an accumulated other comprehensive loss position.

Total stockholders’ equity amounted to $125,379,000 at June 30, 2022, a decrease of $23,176,000 or 15.6% from December 31, 2021 due to a decrease in the market value of the securities portfolio resulting in an accumulated other comprehensive loss position.

SEGMENT REPORTING

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By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Company maximizes income.

The earning asset ratio (average interest earning assets divided by average total assets) equaled 94.4% at March 31, 2022 and 93.9% at March 31, 2021.

The earning asset ratio (average interest earning assets divided by average total assets) equaled 94.1% at June 30, 2022 and 94.0% at June 30, 2021.

This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels.

The primary earning assets are loans and securities.

Our primary earning asset, total loans, increased to $779,028,000 as of March 31, 2022, up $26,187,000, or 3.5% since year-end 2021.

Our primary earning asset, total loans, increased to $804,820,000 as of June 30, 2022, up $51,979,000, or 6.9% since year-end 2021.

The loan portfolio continues to be well diversified.

Non-performing assets decreased since year-end 2021, but overall asset quality has remained consistent.

Total non-performing assets were $7,018,000 as of March 31, 2022, a decrease of $48,000, or 0.7% from $7,066,000 reported in non-performing assets as of December 31, 2021.

Total allowance for loan losses to total non-performing assets was 127.34% as of March 31, 2022 and 122.84% at December 31, 2021.

Non-performing assets decreased since year-end 2021, and overall asset quality has remained consistent.

Total non-performing assets were $6,136,000 as of June 30, 2022, a decrease of $930,000, or 13.2% from $7,066,000 reported in non-performing assets as of December 31, 2021.

Total allowance for loan losses to total non-performing assets was 149.28% as of June 30, 2022 and 122.84% at December 31, 2021.

See the Non-Performing Assets section on page 47 for more information.

In addition to loans, another primary earning asset is our overall securities portfolio, which decreased in size from December 31, 2021 to March 31, 2022.

Debt securities available-for-sale amounted to $434,881,000 as of March 31, 2022, a decrease of $3,035,000 from year-end 2021.

The decrease in debt securities available-for-sale is mainly due to a $21,876,000 decrease in the market value of the portfolio as a result of the current interest rate environment, offset by the deployment of $34,314,000 in cash to purchase debt securities, along with other portfolio activity.

Interest-bearing deposits in other banks decreased as of March 31, 2022, to $1,068,000 from $51,738,000 at year-end 2021 due to decreased cash held at the Federal Reserve Bank.

Time deposits with other banks were $0 at March 31, 2022 and $247,000 at December 31, 2021 due to the maturity of the one remaining time deposit.

Total loans increased to $779,028,000 as of March 31, 2022 as compared to $752,841,000 as of December 31, 2021.

In addition to loans, another primary earning asset is our overall securities portfolio, which decreased in size from December 31, 2021 to June 30, 2022.

Debt securities available-for-sale amounted to $410,260,000 as of June 30, 2022, a decrease of $27,656,000 from year-end 2021.

The decrease in debt securities available-for-sale is mainly due to a $35,521,000 decrease in the market value of the portfolio as a result of the current interest rate environment and $22,444,000 in principal paydowns on debt securities, offset by the deployment of $38,349,000 in cash to purchase debt securities, along with other portfolio activity.

Interest-bearing deposits in other banks decreased as of June 30, 2022, to $783,000 from $51,738,000 at year-end 2021 due to decreased cash held at the Federal Reserve Bank.

Time deposits with other banks were $0 at June 30, 2022 and $247,000 at December 31, 2021 due to the maturity of the one remaining time deposit.

Total loans increased to $804,820,000 as of June 30, 2022 as compared to $752,841,000 as of December 31, 2021.

The table on page 19 provides data relating to the composition of the Company’s loan portfolio on the dates indicated.

Total loans increased by $51,979,000 or 6.9%.

Steady demand for borrowing by businesses accounted for the 3.5% increase in the loan portfolio from December 31, 2021 to March 31, 2022.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) decreased $695,000 or 0.8% from $82,526,000 at December 31, 2021 to $81,831,000 at March 31, 2022.

The decrease in the Commercial and Industrial portfolio during the three months ended March 31, 2022 was mainly attributable to a reduction of $3,650,000 in the portion of the Commercial and Industrial portfolio attributable to SBA PPP loans, the balance of which decreased from $4,894,000 at December 31, 2021 to $1,244,000 at March 31, 2022, as a result of loan forgiveness.

The portion of the Commercial and Industrial portfolio excluding SBA PPP loans increased $2,955,000 during the three months ended March 31, 2022, mainly resulting from $3,246,000 in new loan originations for the three months ended March 31, 2022 and an increase in utilization of existing Commercial and Industrial lines of credit of $2,013,000, offset by loan payoffs of $808,000 and regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio during the three months ended March 31, 2022.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $28,267,000 or 5.4% from $521,654,000 at December 31, 2021 to $549,921,000 at March 31, 2022.

The increase is mainly attributable to new loan originations of $53,605,000 for the three months ended March 31, 2022, offset by loan payoffs of $23,289,000 and a decrease in utilization of existing Commercial Real Estate lines of credit of $1,002,000, as well as regular principal payments and other typical amortization in the Commercial Real Estate portfolio during the three months ended March 31, 2022.

Residential Real Estate loans decreased $1,393,000 or 1.0% from $143,383,000 at December 31, 2021 to $141,990,000 at March 31, 2022.

The decrease was mainly the result of $7,180,000 in new loan originations and an increase in utilization of existing Residential Real Estate (Home Equity) lines of credit of $1,018,000, offset by net loans sold of $2,719,000, loan payoffs of $6,294,000 (of which $1,872,000 was refinanced with the Bank during the three months ended March 31,2022 with the new refinanced loan balances included in the new

loan origination total), and regular principal payments and other typical amortization in the Residential Real Estate portfolio during the three months ended March 31, 2022.

Net loans sold for the three months ended March 31, 2022 consisted of total loans sold during the three months ended March 31, 2022 of 4,463,000, offset with loans opened and sold in the same quarter during the first quarter of 2022 which amounted to $1,744,000.

The Company continues to originate and sell certain long-term fixed rate residential mortgage loans which conform to secondary market requirements.

Steady demand for borrowing by businesses accounted for the 6.9% increase in the loan portfolio from December 31, 2021 to June 30, 2022.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased $13,000 or 0.02% from $82,526,000 at December 31, 2021 to $82,539,000 at June 30, 2022.

The small increase in the Commercial and Industrial portfolio during the six months ended June 30, 2022 was mainly the result of a reduction of $4,748,000 in the portion of the Commercial and Industrial portfolio attributable to SBA PPP loans, the balance of which decreased from $4,894,000 at December 31, 2021 to $146,000 at June 30, 2022, as a result of loan forgiveness.

The portion of the Commercial and Industrial portfolio excluding SBA PPP loans increased $4,761,000 during the six months ended June 30, 2022, mainly resulting from $7,438,000 in new loan originations for the six months ended June 30, 2022 and an increase in utilization of existing Commercial and Industrial lines of credit of $1,801,000, offset by loan payoffs of $1,587,000 and regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio during the six months ended June 30, 2022.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $46,604,000 or 8.9% from $521,654,000 at December 31, 2021 to $568,258,000 at June 30, 2022.

The increase is mainly attributable to new loan originations of $87,507,000 for the six months ended June 30, 2022, offset by loan payoffs of $36,826,000 and a decrease in utilization of existing Commercial Real Estate lines of credit of $761,000, as well as regular principal payments and other typical amortization in the Commercial Real Estate portfolio during the six months ended June 30, 2022.

Residential Real Estate loans increased $5,238,000 or 3.7% from $143,383,000 at December 31, 2021 to $148,621,000 at June 30, 2022.

The increase was mainly the result of $17,062,000 in new loan originations and an increase in utilization of existing Residential Real Estate (Home Equity) lines of credit of $2,491,000, offset by net loans sold of $2,719,000, loan payoffs of $10,187,000 (of which $3,600,000 was refinanced with the Bank during the six months ended June 30,2022 with the new refinanced loan balances included in the new loan origination total), and regular principal payments and other typical amortization in the Residential Real Estate portfolio during the six months ended June 30, 2022.

Net loans sold for the six months ended June 30, 2022 consisted of total loans sold during the six months ended June 30, 2022 of $4,463,000, offset with loans opened and sold in the same quarter during the first two quarters of 2022 which amounted to $1,744,000.

The Company continues to originate and sell certain long-term fixed rate residential mortgage loans, which conform to secondary market requirements, when the market pricing is favorable.

The Company derives ongoing income from the servicing of mortgages sold in the secondary market.

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Management believes that the loan portfolio is well diversified.

The total commercial portfolio was $631,752,000 at March 31, 2022.

The total commercial portfolio was $650,797,000 at June 30, 2022.

Of total loans, $568,258,000 or 70.6% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings.

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See Note 4 — Loans and Allowance for Loan Losses for risk grading tables.

Overall, non-pass grades decreased to $24,091,000 at March 31, 2022, as compared to $24,737,000 at December 31, 2021.

Commercial and Industrial non-pass grades decreased to $774,000 as of March 31, 2022 as compared to $796,000 as of December 31, 2021.

Commercial Real Estate non-pass grades decreased to $21,837,000 as of March 31, 2022 as compared to $22,346,000 as of December 31, 2021.

The Residential Real Estate and Consumer loan non-pass grades decreased to $1,480,000 as of March 31, 2022 as compared to $1,595,000 as of December 31, 2021.

Overall, non-pass grades decreased to $22,041,000 at June 30, 2022, as compared to $24,737,000 at December 31, 2021.

Commercial and Industrial non-pass grades decreased to $755,000 as of June 30, 2022 as compared to $796,000 as of December 31, 2021.

Commercial Real Estate non-pass grades decreased to $20,313,000 as of

June 30, 2022 as compared to $22,346,000 as of December 31, 2021.

The Residential Real Estate and Consumer loan non-pass grades decreased to $973,000 as of June 30, 2022 as compared to $1,595,000 as of December 31, 2021.

The decrease in Commercial Real Estate non-pass grades from December 31, 2021 to June 30, 2022 is mainly the result of a payoff that was completed during the second quarter of 2022 on a Substandard non-accrual loan to a contractor specializing in modular construction that carried a balance of $1,000,000 at December 31, 2021.

Four loans to the owners/operators of an indoor family entertainment complex that carried an aggregate balance of $753,000 at December 31, 2021 were also upgraded from Substandard to pass-grade status during the six months ended June 30, 2022.

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

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The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio.

As of March 31, 2022, the allowance for loan losses was $8,937,000 as compared to $8,680,000 as of December 31, 2021.

As of June 30, 2022, the allowance for loan losses was $9,160,000 as compared to $8,680,000 as of December 31, 2021.

The allowance for loan losses is established through a provision for loan losses charged to expenses.

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The methodology in determining adequacy incorporates specific and general allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process.

This assessment results in an allocated

This assessment results in an allocated allowance.

Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority.

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On a quarterly basis, management evaluates the qualitative factors utilized in the calculation of the Company’s allowance for loan losses and various adjustments are made to these factors as deemed necessary at the time of evaluation.

The economic impact caused by the COVID-19 pandemic has played a large role in the qualitative factor adjustments that have been implemented throughout 2021 and the first quarter of 2022.

The uncertain economic climate has played a large role in the qualitative factor adjustments that have been implemented throughout 2021 and the first half of 2022.

Qualitative factors remained unchanged during the first quarter of 2021, as the economy and unemployment levels showed marked improvement over the prior quarter.

During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Company’s market areas demonstrated marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to increasing market values in the real estate sector.

During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Company’s market areas demonstrated marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to an artificial increase in market values in the real estate sector as individuals’ willingness to pay above-average market prices has sparked uncertainty surrounding collateral values in the real estate market.

Qualitative factors remained unchanged during the third quarter of 2021.

During the fourth quarter of 2021, the qualitative factors related to external factors/conditions were increased by one basis point across all loan segments due increased inflation rates, as well as elevated unemployment levels (although improved from 2020 and early 2021) and the uncertainty of how broad the changes implemented by the Federal Reserve would be, and the qualitative factors related to collateral values were increased by one basis point across all loan segments, as collateral values continued to artificially increase as individuals were willing to pay above-average market prices in all sectors.

The qualitative factors related to collateral values were also increased by one basis point across all loan segments during the fourth quarter of 2021, as collateral values continued to artificially increase as individuals were willing to pay above-average market prices in all sectors.

During the first quarter of 2022, the qualitative factors related to the local/regional economy were increased by one basis point across all loan segments due to ongoing economic uncertainty resulting from supply chain disruptions caused by the COVID-19 pandemic, conflicts in foreign countries causing inflationary pressures due to reductions/disruptions in the production of the commodities controlled by these countries, increased interest rates, and the overall inflation rate continuing to rise.

During the second quarter of 2022, the qualitative factors remained unchanged.

Modifications granted in compliance with Section 4013 of the CARES Act were highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio.

See Allowance for Loan Losses on page 15 for further discussion.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the three months ended March 31, 2022 and 2021.

Net recoveries as a percentage of average loans was 0.005% for the three months ended March 31, 2022 and net charge-offs as a percentage of average loans was 0.003% for the three months ended March 31, 2021.

Net recoveries amounted to $38,000 the three months ended March 31, 2022 as compared to net charge-offs of $21,000 for the three months ended March 31, 2021.

For the three months ended March 31, 2022, the provision for loan losses was $219,000 as compared to $135,000 for the three months ended March 31, 2021.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the six months ended June 30, 2022 and 2021.

Net recoveries as a percentage of average loans was 0.006% for the six months ended June 30, 2022 and net charge-offs as a percentage of average loans was 0.011% for the six months ended June 30, 2021.

Net recoveries amounted to $43,000 the six months ended June 30, 2022 as compared to net charge-offs of $79,000 for the six months ended June 30, 2021.

For the six months ended June 30, 2022, the provision for loan losses was $437,000 as compared to $270,000 for the six months ended June 30, 2021.

The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for loan losses of $9,160,000 of which 7.4% was attributed to the Commercial and Industrial component;

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and 9.2% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page 12).

The Company determined that the provision for loan losses made during the current quarter was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of March 31, 2022.

Analysis of Allowance for Loan Losses

(Dollars in thousands)

Balance at beginning of period

As of and for the six months ended:

Beginning balance

Commercial and Industrial

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A detailed quarterly analysis to determine the adequacy of the Company’s allowance for loan losses is reviewed by the Board of Directors.

With the Bank’s manageable level of net charge-offs and recoveries along with the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.167% and 1.116% at March 31, 2022 and 2021, respectively.

With the Bank’s manageable level of net charge-offs and recoveries along with the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.177% and 1.120% at June 30, 2022 and 2021, respectively.

NON-PERFORMING ASSETS

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Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

Total non-performing assets amounted to $7,018,000 as of March 31, 2022, as compared to $7,066,000 as of December 31, 2021.

Total non-performing assets amounted to $6,136,000 as of June 30, 2022, as compared to $7,066,000 as of December 31, 2021.

The economy is very unstable.

Inflation is at a four-decade high.

The war between Ukraine and Russia is creating worldwide turmoil.

The unemployment rate has dropped significantly compared to the beginning of the COVID-19 pandemic, but the labor force participation rate has also fallen.

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Values of new and used homes and automobiles continue to climb.

The Federal Reserve has indicated a plan to raise interest rates at an accelerated level throughout the year and there has been a resurgence of the COVID-19 pandemic in some areas of the country and world.

The Federal Reserve has indicated a plan to continue to raise interest rates at an accelerated level throughout the year.

There has also been a resurgence of the COVID-19 pandemic in some areas of the country and world.

These forces have had a direct effect on the Company’s non-performing assets.

The Company is closely monitoring its Commercial Real Estate portfolio because of the current uncertain economic environment.

Non-accrual loans totaled $7,018,000 as of March 31, 2022, as compared to $7,066,000 as of December 31, 2021.

There were no foreclosed assets held for resale as of March 31, 2022 and December 31, 2021.

There were no loans past-due 90 days or more and still accruing interest at March 31, 2022 and December 31, 2021.

Non-performing assets to total loans was 0.90% at March 31, 2022 and 0.94% at December 31, 2021.

Non-performing assets to total assets was 0.54% at March 31, 2022 and December 31, 2021, respectively.

The allowance for loan losses to total non-performing assets was 127.34% as of March 31, 2022 as compared to 122.84% as of December 31, 2021.

The Company is closely monitoring all segments of its loan portfolio because of the current uncertain economic environment.

Non-accrual loans totaled $5,970,000 as of June 30, 2022, as compared to $7,066,000 as of December 31, 2021.

The decrease in non-accrual loans from December 31, 2021 to June 30, 2022 was mainly the result of the payoff of one non-accrual loan to a contractor specializing in modular construction which carried a balance of $1,000,000 at December 31, 2021.

There were no foreclosed assets held for resale as of June 30, 2022 and December 31, 2021.

There was one loan past-due 90 days or more and still accruing interest at June 30, 2022 that carried a balance of $166,000 and was well-secured by residential real estate and in the process of collection.

There were no loans past-due 90 days or more and still accruing interest as of December 31, 2021.

Non-performing assets to total loans was 0.76% at June 30, 2022 and 0.94% at December 31, 2021.

Non-performing assets to total assets was 0.47% at June 30, 2022 and 0.54% at December 31, 2021.

The allowance for loan losses to total non-performing assets was 149.28% as of June 30, 2022 as compared to 122.84% as of December 31, 2021.

Additional detail can be found on page 50 in the Non-Performing Assets and Impaired Loans table and page 26 in the Non-Performing Assets table.

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Performing substandard loans which are not deemed to be impaired have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future.

Performing substandard loans not deemed to be impaired amounted to $10,113,000 at March 31, 2022, compared to $10,463,000 at December 31, 2021.

Impaired loans were $13,373,000 at March 31, 2022 and $13,673,000 at December 31, 2021.

The largest impaired loan relationship at March 31, 2022 and December 31, 2021 consisted of a non-performing loan to a student housing holding company which was secured by commercial real estate.

At March 31, 2022, the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date, compared to December 31, 2021 when the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date.

The second largest impaired loan relationship at March 31, 2022 and December 31, 2021 consisted of one performing loan to a student housing holding company, which was classified as a TDR.

The loan was secured by commercial real estate and carried a balance of $2,846,000 as of March 31, 2022, net of $943,000 that had been charged off to date, compared to December 31, 2021 when the loan carried a balance of $2,864,000, net of $943,000 that had been charged off to date.

The third largest impaired loan relationship at March 31, 2022 and December 31, 2021 consisted of five non-performing loans to a plastic processing company focused on non-post-consumer recycling.

Three loans were classified in the Commercial and Industrial portfolio and modified as TDRs and two loans were secured by commercial real estate.

The loans carried an aggregate balance of $1,153,000 at March 31, 2022, compared to December 31, 2021 when the loans carried an aggregate balance of $1,176,000.

Performing substandard loans not deemed to be impaired amounted to $10,416,000 at June 30, 2022, compared to $10,463,000 at December 31, 2021.

Impaired loans were $12,284,000 at June 30, 2022 and $13,673,000 at December 31, 2021.

The largest impaired loan relationship at June 30, 2022 and December 31, 2021 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate.

At June 30, 2022, the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date, compared to December 31, 2021 when the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date.

The second largest impaired loan relationship at June 30, 2022 and December 31, 2021 consisted of one performing loan to a student housing holding company, which is classified as a TDR.

The loan is secured by commercial real estate and carried a balance of $2,829,000 as of June 30, 2022, net of $943,000 that had been charged off to date, compared to December 31, 2021 when the loan carried a balance of $2,864,000, net of $943,000 that had been charged off to date.

The third largest impaired loan relationship at June 30, 2022 and December 31, 2021 consisted of five non-performing loans to a plastic processing company focused on non-post-consumer recycling.

Three loans are classified in the Commercial and Industrial portfolio and modified as TDRs and two loans are secured by commercial real estate.

The loans carried an aggregate balance of $1,128,000 at June 30, 2022, compared to December 31, 2021 when the loans carried an aggregate balance of $1,176,000.

The Company estimates impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell.

For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another.

Of the $13,373,000 in impaired loans at March 31, 2022, none were located outside of the Company’s primary market area.

The outstanding recorded investment of TDRs as of March 31, 2022 and December 31, 2021 was $7,736,000 and $8,020,000, respectively.

Of the twenty-eight restructured loans at March 31, 2022, four loans were classified in the

Commercial and Industrial portfolio, twenty-three loans were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio.

Troubled debt restructurings at March 31, 2022 consisted of ten term modifications beyond the original stated term, three rate modifications, and fourteen payment modifications.

Of the $12,284,000 in impaired loans at June 30, 2022, none were located outside of the Company’s primary market area.

The outstanding recorded investment of TDRs as of June 30, 2022 and December 31, 2021 was $7,669,000 and $8,020,000, respectively.

Of the twenty-nine restructured loans at June 30, 2022, four loans were classified in the Commercial and Industrial portfolio, twenty-four loans were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio.

Troubled debt restructurings at June 30, 2022 consisted of ten term modifications beyond the original stated term, three rate modifications, and fifteen payment modifications.

There was also one troubled debt restructuring that experienced all three types of modifications—payment, rate, and term.

TDRs are separately evaluated for payment disclosures, and if necessary, a specific allocation is established.

There were no specific allocations attributable to the TDRs at March 31, 2022 or December 31, 2021.

There were no unfunded commitments attributable to the TDRs at March 31, 2022 and December 31, 2021.

At March 31, 2022, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $696,000, six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $431,000, and one Residential Real Estate loan classified as a TDR with a balance of $13,000 were not in compliance with the terms of their restructure, compared to March 31, 2021 when three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $737,000, six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $299,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $17,000 were not in compliance with the terms of their restructure.

Of the loans that were modified as TDRs during the twelve months preceding March 31, 2021, one Commercial Real Estate loan in the amount of $92,000 experienced a payment default during the three months ended March 31, 2021.

There were no specific allocations attributable to the TDRs at June 30, 2022 or December 31, 2021.

There were no unfunded commitments attributable to the TDRs at June 30, 2022 and December 31, 2021.

At June 30, 2022, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $682,000, six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $318,000, and one Residential Real Estate loan classified as a TDR with a balance of $12,000 were not in compliance with the terms of their restructure, compared to June 30, 2021 when three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $736,000, seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $479,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $17,000 were not in compliance with the terms of their restructure.

Of the loans that were modified as TDRs within the twelve months preceding June 30, 2022, no loans experienced payment defaults during the three months ended June 30, 2022.

Of the loans that were modified as TDRs during the twelve months preceding June 30, 2021, three Commercial Real Estate loans totaling $300,000 experienced payment defaults during the three months ended June 30, 2021.

No loans that were modified as TDRs during the twelve months preceding June 30, 2021 experienced payment defaults during the first three months of 2021.

The Company’s non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end, unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Company.

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They may require additions to allowances based upon their judgments about information available to them at the time of examination.

The economic climate remains uncertain at this time.

The COVID-19 pandemic has caused much upheaval and uncertainty in the national and state economy and experts at all levels are attempting to calculate the intermediate or long term affects.

The economic climate remains in a very frail state.

The war between Ukraine and Russia has exacerbated the difficulties in the national and state economy and experts at all levels are attempting to calculate the intermediate or long term affects.

The Company may experience difficulties collecting payments on time from its borrowers, and certain types of loans may need to be modified, which could cause a rise in the level of impaired loans, non-performing assets, charge-offs, and delinquencies.

Should such metrics increase, additions to the balance of the Company’s allowance for loan losses could be required.

The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments including inflationary pressures, the labor force, supply bottlenecks, the government’s ability to respond to foreign and domestic issues, and the effectiveness in controlling the lingering effects of the outbreak, etc.

Should such metrics increase, additions to the balance of the Company’s allowance for

loan losses could be required.

The extent of the impact of these stressors on the Company’s operational and financial performance will depend on certain developments including inflationary controls enacted, the labor force, supply bottlenecks, the longevity of the war, and the effectiveness in controlling the lingering effects of the COVID-19 outbreak, etc.

and any after-effects of these factors.

These factors may not immediately impact the Company’s operational and financial performance, as the effects of these factors may lag into the future.

The Company is also susceptible to the impact of economic and fiscal policy factors that may evolve in the post-pandemic environment.

The Company is also susceptible to the impact of economic and fiscal policy factors that may evolve in the current economic environment.

A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans.

As of March 31, 2022 and December 31, 2021, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

As of June 30, 2022 and December 31, 2021, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Non-Performing Assets and Impaired Loans

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Allowance for loan losses to total non-performing assets

Real estate mortgages comprise 88.8% of the loan portfolio as of March 31, 2022, as compared to 88.3% as of December 31, 2021.

Real estate mortgages comprise 89.1% of the loan portfolio as of June 30, 2022, as compared to 88.3% as of December 31, 2021.

Real estate mortgages consist of both residential and commercial real estate loans.

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The Bank regularly reviews competing financial institutions’ interest rates, especially when establishing interest rates on certificates of deposit.

Total deposits decreased $32,492,000 to $1,045,477,000 as of March 31, 2022 as non-interest bearing deposits decreased by $7,440,000 and interest bearing deposits decreased by $25,052,000 from year-end 2021.

Total deposits decreased $84,361,000 to $993,608,000 as of June 30, 2022 as non-interest bearing deposits decreased by $18,527,000 and interest bearing deposits decreased by $65,834,000 from year-end 2021.

The decrease in deposits was the result of a $95,504,000 decrease in highly rate sensitive deposits and other normal fluctuations.

short-term and long-term borrowings increased to $87,331,000 as of March 31, 2022, from $62,377,000 at year-end 2021, an increase of $24,954,000 or 40.0%.

Total short-term and long-term borrowings increased to $154,723,000 as of June 30, 2022, from $62,377,000 at year-end 2021, an increase of $92,346,000 or 148.0%.

The increase in total borrowings was mainly the result of increased short-term borrowings as deposits decreased and cash balances were deployed into earning assets.

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Normal increases in capital are generated by net income, less dividends paid out.

During the three months ended March 31, 2022, net income less dividends paid increased capital by $1,878,000.

During the six months ended June 30, 2022, net income less dividends paid increased capital by $4,031,000.

Accumulated other comprehensive (loss) income derived from net unrealized gains on debt securities available-for-sale also impacts capital.

At December 31, 2021 accumulated other comprehensive income was $7,588,000.

Accumulated other comprehensive loss stood at ($9,694,000) at March 31, 2022, a decrease of $17,282,000.

Accumulated other comprehensive loss stood at $20,438,000 at June 30, 2022, a decrease of $28,026,000.

Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank’s securities portfolio, as well as its decision to sell securities at a gain or loss.

The fluctuations from net unrealized gains on debt securities available-for-sale do not affect regulatory capital, as the Bank elected to opt-out of the inclusion of this item with the filing of the March 31, 2015 Call Report.

The Company held 231,611 shares of common stock as treasury stock at March 31, 2022 and December 31, 2021.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of March 31, 2022 and December 31, 2021.

Total stockholders’ equity was $133,555,000 as of March 31, 2022, and $148,555,000 as of December 31, 2021.

At March 31, 2022 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III.

The following table presents the Bank’s capital ratios as of March 31, 2022 and December 31, 2021:

The Company held 231,611 and 231,612 shares of common stock as treasury stock at June 30, 2022 and December 31, 2021, respectively.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of June 30, 2022 and December 31, 2021.

Total stockholders’ equity was $125,379,000 as of June 30, 2022, and $148,555,000 as of December 31, 2021.

At June 30, 2022 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III.

The following table presents the Bank’s capital ratios as of June 30, 2022 and December 31, 2021:

Corrective Action

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Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital buffer requirement was phased in over three years beginning in 2016.

The capital buffer

requirement was phased in over three years beginning in 2016.

The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis as of January 1, 2019.

As of March 31, 2022, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

As of June 30, 2022, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

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

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● Brokered CDs.

At March 31, 2022 the Company had $440,392,000 in maximum borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes, FHLB short-term borrowings, and irrevocable standby letters of credit issued by FHLB);

At June 30, 2022 the Company had $458,318,000 in maximum borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes, FHLB short-term borrowings, and irrevocable standby letters of credit issued by FHLB);

the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $2,519,000.

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As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and act as an additional source of liquidity.

Securities sold under agreements to repurchase were $24,082,000 at March 31, 2022.

Securities sold under agreements to repurchase were $25,311,000 at June 30, 2022.

Asset liquidity is provided by securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks.

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Also, short-term borrowings provide funds to meet liquidity needs.

Net cash flows provided by operating activities were $5,448,000 and $2,233,000 as of March 31, 2022 and 2021, respectively.

Net income amounted to $3,543,000 for the three months ended March 31, 2022 and $3,878,000 for the three months ended March 31, 2021.

During the three months ended March 31, 2022 and 2021, net premium amortization on securities amounted to $838,000 and $658,000, respectively.

Net losses on sales of mortgage loans amounted to $34,000 for the three months ended March 31, 2022, compared to gains on sales of mortgage loans of $354,000 for the three months ended March 31, 2021.

Proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $1,228,000 for the three months ended March 31, 2022, and originations of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $1,984,000 for the three months ended March 31, 2021.

Net securities losses amounted to $63,000 for the three months ended March 31, 2022, compared to net securities gains of $115,000 for the three months ended March 31, 2021.

Accrued interest receivable decreased by $40,000 and $186,000 during the three months ended March 31, 2022 and 2021, respectively.

Other assets increased by $655,000 and $889,000 during the three months ended March 31, 2022 and 2021, respectively.

Other liabilities decreased by $347,000 during the three months ended March 31, 2022 and increased by $433,000 during the three months ended March 31, 2021.

Investing activities used cash of $48,070,000 and $26,534,000 during the three months ended March 31, 2022 and 2021, respectively.

Net activity in the available-for-sale securities portfolio (including proceeds from maturities and redemptions, net against purchases) used cash of $19,679,000 during the three months ended March 31, 2022, compared to $26,687,000 for the three months ended March 31, 2021.

Changes in restricted investment in bank stocks used cash of

$1,130,000 during the three months ended March 31, 2022 and provided cash of $200,000 during the three months ended March 31, 2021.

Net cash used to originate loans amounted to $27,411,000 for the three months ended March 31, 2022, compared to $62,000 for the three months ended March 31, 2021.

Financing activities used cash of $8,817,000 during the three months ended March 31, 2022 and provided cash of $37,015,000 during the three months ended March 31, 2021.

Deposits decreased by $32,492,000 during the three months ended March 31, 2022, compared to an increase of $40,369,000 during the three months ended March 31, 2021.

Short-term borrowings increased by $24,954,000 and $2,929,000 during the three months ended March 31, 2022 and 2021, respectively.

No repayment of long-term borrowings transpired during the three months ended March 31, 2022, compared to the three months ended March 31, 2021 when repayment of long-term borrowings used cash of $5,000,000.

Dividends paid amounted to $1,665,000 for the three months ended March 31, 2022, compared to $1,647,000 for the three months ended March 31, 2021.

Net cash flows provided by operating activities were $7,606,000 and $8,676,000 at June 30, 2022 and 2021, respectively.

Net income amounted to $7,365,000 for the six months ended June 30, 2022 and $7,483,000 for the six months ended June 30, 2021.

During the six months ended June 30, 2022 and 2021, net premium amortization on securities amounted to $1,633,000 and $1,366,000, respectively.

Net losses on sales of mortgage loans amounted to $34,000 for the six months ended June 30, 2022, compared to net gains on sales of mortgage loans of $662,000 for the six months ended June 30, 2021.

Originations from sales of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $1,639,000 for the six months ended June 30, 2022, and proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $937,000 for the six months ended June 30, 2021.

Net securities losses amounted to $131,000 for the six months ended June 30, 2022, compared to net securities gains of $143,000 for the six months ended June 30, 2021.

Accrued interest receivable increased by $112,000 and decreased by $170,000 during the six months ended June 30, 2022 and 2021, respectively.

Other assets increased by $639,000 and $1,116,000 during the six

months ended June 30, 2022 and 2021, respectively.

Other liabilities increased by $37,000 during the six months ended June 30, 2022 and increased by $241,000 during the six months ended June 30, 2021.

Investing activities used cash of $64,171,000 and $56,580,000 during the six months ended June 30, 2022 and 2021, respectively.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $9,283,000 during the six months ended June 30, 2022, compared to $34,469,000 for the six months ended June 30, 2021.

Changes in restricted investment in bank stocks used cash of $3,834,000 and $359,000 during the six months ended June 30, 2022 and 2021, respectively.

Net cash used to originate loans amounted to $50,331,000 for the six months ended June 30, 2022, compared to $21,649,000 for the six months ended June 30, 2021.

Financing activities provided cash of $5,451,000 and $120,348,000 during the six months ended June 30, 2022 and 2021, respectively.

Deposits decreased by $84,361,000 during the six months ended June 30, 2022, compared to an increase of $125,859,000 during the six months ended June 30, 2021.

Short-term borrowings increased by $102,346,000 and $7,005,000 during the six months ended June 30, 2022 and 2021, respectively.

Repayment of long-term borrowings used cash of $10,000,000 at both June 30, 2022 and 2021, respectively.

Dividends paid amounted to $3,334,000 for the six months ended June 30, 2022, compared to $3,240,000 for the six months ended June 30, 2021.

Managing liquidity remains an important segment of asset/liability management.

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Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates.

As a result, increases in interest rates could result in decreases in the fair value of the Company’s interest-earning assets, which could adversely affect the Company’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Company’s stockholders’ equity, if retained.

As a result, increases in interest rates have and could result in further decreases in the fair value of the Company’s interest-earning assets, which could adversely affect the Company’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Company’s stockholders’ equity, if retained.

Under FASB ASC 320-10, Investments – Debt Securities , changes in the unrealized gains and losses, net of taxes, on debt securities classified as available-for-sale are reflected in the Company’s stockholders’ equity.

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Several techniques are used for measuring interest rate sensitivity.

Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a given time period, referred to as a rate sensitivity gap.

Interest rate risk arises from the mismatches in the repricing of rates on assets and liabilities within a given time period, referred to as a rate sensitivity gap.

If more assets than liabilities mature or reprice within the time frame, the Company is asset sensitive.

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Conversely, if more liabilities mature or reprice, the Company is liability sensitive.

This position would contribute positively to net interest income in a falling rate environment.

The Company’s cumulative gap at one year indicates the Company is liability sensitive at March 31, 2022.

position would contribute positively to net interest income in a falling rate environment.

The Company’s cumulative gap at one year indicates the Company is liability sensitive at June 30, 2022.

Earnings at Risk

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The earnings simulation model projects net interest income would decrease 8.63%, 16.56% and 24.40% in the 100, 200 and 300 basis point increasing rate scenarios presented.

In addition, the earnings simulation model projects net interest income would decrease 0.05% and 4.99% in the 100 and 200 basis point decreasing rate scenarios presented.

In addition, the earnings simulation model projects net interest income would increase 2.41% and decrease 0.35% in the 100 and 200 basis point decreasing rate scenarios presented.

All of these forecasts are within the Company’s one year policy guidelines.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current unprecedented low interest rate environment with federal funds trading in the 25 - 50 basis point range.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current low interest rate environment with federal funds trading in the 150 - 175 basis point range.

Results of the decreasing basis point declining scenarios are affected by the fact that many of the Company’s interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points.

However, the Company’s interest-sensitive assets are able to decline by these amounts.

For the three months ended March 31, 2022, the cost of interest-bearing liabilities averaged 0.51%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 3.57%.

For the six months ended June 30, 2022, the cost of interest-bearing liabilities averaged 0.54%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 3.68%.

Net Present Value Estimation

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The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows.

At March 31, 2022, net present value is projected to increase 4.52%, 1.23%, and 5.67% in the 100, 200, and 300 basis point immediate increase scenarios, respectively.

Additionally, the 100 and 200 basis point immediate decrease scenarios are estimated to affect net present value with a decrease of 16.75% and 51.31%, respectively.

These scenarios presented are within the Company’s policy limits, aside from the 200 basis point immediate decrease scenario at (51.31)% vs.

a policy limit of (30.0)%.

At June 30, 2022, net present value is projected to decrease 1.65%, 8.10%, and 16.34% in the 100, 200, and 300 basis point immediate increase scenarios, respectively.

Additionally, the 100 and 200

basis point immediate decrease scenarios are estimated to affect net present value with a decrease of 7.51% and 26.68%, respectively.

All of these scenarios presented are within the Company’s policy limits.

The computation of the effects of hypothetical interest rate changes are based on many assumptions.

19 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements