What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-15 compared with 2022-03-14 · 149 added, 200 removed, 1249 unchanged (22% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

To the Shareholders and Board of Directors of

First Keystone Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Keystone Corporation and Subsidiary (collectively the "Corporation") as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for the years then ended, and the related notes (collectively, the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of First Keystone Corporation and Subsidiary (Company) as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Corporation’s management.

Our responsibility is to express an opinion on the Corporation’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

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Critical Audit Matter Description

As disclosed in Note 3 to the Company's consolidated financial statements, the Corporation’s loan portfolio totaled $753M as of December 31, 2021, and the related allowance for loan losses was $8.7M.

As disclosed in Note 3 to the Company's consolidated financial statements, the Company’s loan portfolio totaled $858M as of December 31, 2022, and the related allowance for loan losses was $8.3M.

As described in Note 1, the allowance for loan losses consists of specific and general reserve components in order to estimate losses that have been incurred as of the consolidated balance sheet date.

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o Testing the risk grade factor based on the risk rating assigned to each

o Evaluating the completeness, accuracy, and relevance of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroborating these inputs by comparing to the Corporation’s lending practices, historical loan portfolio performance, and third-party macroeconomic data.

o Evaluating the completeness, accuracy, and relevance of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroborating these inputs by comparing to the Company’s lending practices, historical loan portfolio performance, and third-party macroeconomic data.

o Testing the mathematical accuracy of the calculation and allocation of qualitative factors to the appropriate loan categories.

/s/ Baker Tilly US, LLP

We have served as the Corporation's auditor since 2018.

Baker Tilly US, LLP

We have served as the Company’s auditor since 2018.

Iselin, New Jersey

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Investments in low-income housing partnerships

Foreclosed assets held for resale

Deferred income taxes

Non-interest bearing

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Retained earnings

Accumulated other comprehensive income

Treasury stock, at cost, 231,612 shares as of December 31, 2021 and December 31, 2020

Accumulated other comprehensive (loss) income

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

TOTAL STOCKHOLDERS’ EQUITY

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Years Ended December 31,

INTEREST INCOME

Interest and fees on loans

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Net interest income

Provision for loan losses

Net interest income after provision for loan losses

(Credit) provision for loan losses

Net interest income after (credit) provision for loan losses

NON-INTEREST INCOME

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ATM fees and debit card income

Gains on sales of mortgage loans

Net securities gains (losses)

Net (losses) gains on sales of mortgage loans

Net securities (losses) gains

Total non-interest income

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FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Dollars in thousands)

Years Ended December 31,

Other comprehensive (loss) income:

Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $( 1,404 ) and $ 2,347 , respectively

Less reclassification adjustment for net gains included in net income, net of income taxes of $( 1 ) and $( 49 ), respectively (a) (b)

Total other comprehensive (loss) income

Total Comprehensive Income

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

Other comprehensive loss:

Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $( 10,027 ) and $( 1,404 ), respectively

Less reclassification adjustment for net losses (gains) included in net income, net of income taxes of $ 153 and $( 1 ), respectively (a) (b)

Total other 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.

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Stockholders’

Income (Loss)

Balance at January 1, 2021

Other comprehensive income, net of taxes

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

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Balance at December 31, 2021

Other comprehensive income, net of taxes

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

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Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

(Credit) provision for loan losses

Depreciation and amortization

Net premium amortization on securities

Deferred income tax benefit

Net gains on sales of mortgage loans

Deferred income tax expense (benefit)

Net losses (gains) on sales of mortgage loans

Proceeds from sales of mortgage loans originated for sale

Originations of mortgage loans originated for sale

Net securities (gains) losses

Net losses on sales of foreclosed real estate held for resale, including write-downs

Decrease (increase) in accrued interest receivable

Net securities losses (gains)

(Increase) decrease in accrued interest receivable

Increase in cash surrender value of bank owned life insurance

Net losses on disposals of premises and equipment

(Increase) decrease in other assets

Increase in other assets

Amortization of investment in low-income housing partnerships

Decrease in accrued interest payable

Increase (decrease) in other liabilities

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

Increase (decrease) in accrued interest payable

Increase in other liabilities

NET CASH PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

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Purchases of debt securities available-for-sale

Net decrease in time deposits with other banks

Net change in restricted investment in bank stocks

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CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits

Net increase (decrease) in short-term borrowings

Net (decrease) increase in deposits

Net increase in short-term borrowings

Repayment of finance lease obligations

Repayment of long-term borrowings

Proceeds from issuance of subordinated debentures

Common stock issued

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NET CASH PROVIDED BY FINANCING ACTIVITIES

INCREASE IN CASH AND CASH EQUIVALENTS

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

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SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Loans transferred to foreclosed assets held for resale

Loans transferred from held for sale portfolio

Purchased securities settling after year-end

Loans transferred from held for sale to held for investment portfolio

Common stock subscription receivable

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Note 3 – Loans and Allowance for Loan Losses summarizes the types of lending in which the Corporation engages.

The inherent risks associated with lending activities are mitigated by adhering to conservative underwriting practices and policies, as well as portfolio diversification and thorough monitoring of the loan portfolio.

The inherent risks associated with lending activities are mitigated by adhering to established underwriting practices and policies, as well as portfolio diversification and thorough monitoring of the loan portfolio.

It is management’s opinion that the investment and loan portfolios were well balanced at December 31, 2022, to the extent necessary to avoid any significant concentrations of credit risk.

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Debt securities not classified as Held-to-Maturity are included in the Available-for-Sale category and are carried at fair value.

The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive income (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity.

The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive (loss) income (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity.

Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

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Such amortization and accretion, as well as interest and dividends, are included in interest and dividend income on securities.

Realized gains and losses are included in net securities gains and losses.

Realized gains and losses are included in net securities gains and losses in the consolidated statements of income.

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

In accordance with Accounting Standard Update 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income.

In accordance with ASC 825-10, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income.

Equity securities without readily determinable fair values are recorded at cost less impairment, if any.

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The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements of income.

The amount of the total OTTI related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes.

The amount of the total OTTI related to the other factors shall be recognized in other comprehensive (loss) income, net of applicable taxes.

The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security.

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Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis of the borrower’s ability to repay.

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that have been issued by the Corporation as a result of the enactment of the CARES Act in response to the economic impact of the COVID-19 pandemic are included in the Corporation’s Commercial and Industrial portfolio and are underwritten pursuant to the PPP as administered by the SBA under the CARES Act.

SBA PPP loans that have been issued by the Corporation as a result of the enactment of the CARES Act in response to the economic impact of the COVID-19 pandemic are included in the Corporation’s Commercial and Industrial portfolio and are underwritten pursuant to the PPP as administered by the SBA under the CARES Act.

See the Coronavirus Pandemic Impact on the Loan Portfolio section on page 62 for more information regarding the Corporation’s underwriting of these loans.

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

As of December 31, 2021, the Corporation 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.

At December 31, 2020, the Corporation held 441 PPP loans in its Commercial and Industrial portfolio which carried an aggregate balance of $ 22,976,000 , all of which were granted during the first round of PPP issuance.

As of December 31, 2022, the Corporation held 2 PPP loans in its Commercial and Industrial portfolio, which carried an aggregate balance of $ 113,000 which were granted during the first round of PPP issuance and did not qualify for forgiveness.

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

An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as Troubled Debt Restructurings (“TDRs”), as long as specific criteria are met.

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

Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there was 1 loan modification still actively on deferral

carrying a balance of $ 9,423,000 as of December 31, 2021, compared to December 31, 2020 when there were 44 loan modifications still actively on deferral carrying an aggregate balance of $ 16,541,000 .

Of the loan modifications that have

been granted in compliance with Section 4013 of the CARES Act, there were no loan modifications still actively on deferral as of December 31, 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 77 for additional information regarding the Section 4013 CARES Act modifications.

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delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.

In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors related to the local/regional economy were increased by two basis points across all loan segments during the first quarter of 2020, and increased by an additional basis point across all loan segments during the second quarter of 2020.

The qualitative factor relating to the impact of external factors/conditions for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of 2020.

The qualitative factors relating to the impact of external factors/conditions were increased by two additional basis points across all loan segments during the fourth quarter of 2020.

Qualitative factors remained unchanged during the first quarter of 2021.

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 Corporation’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.

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 to current economic uncertainty caused by the COVID-19 pandemic including increased inflation, 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 may be, and the qualitative factors related to collateral values were increased by one basis point across all loan segments, as collateral values have continued to artificially increase as individuals have been willing to pay above-average market prices in all sectors.

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 Corporation’s loan portfolio.

GGLs do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S.

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A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the existing loan agreement.

Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s contractual interest rate at inception or the net realizable value of the collateral for certain collateral dependent loans.

Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash

flows using the loan’s contractual interest rate at inception or the net realizable value of the collateral for certain collateral dependent loans.

From time to time, the Corporation may agree to modify/restructure the contractual terms of a borrower's loan.

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For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Corporation determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months.

Loans modified in a TDR considered impaired and may or may not be placed on non-accrual status until the Corporation determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months.

Any loan modifications made in response to the COVID-19 pandemic are not considered TDRs as long as the criteria set forth in Section 4013 of the CARES Act are met.

See page 77 for further discussion of the Section 4013 CARES Act modifications.

The Corporation utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings.

An asset quality rating is assigned using the guidance provided in the Corporation’s loan policy.

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and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets.

Risk Grade 6 - Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained.

Risk Grade 6 - Management Attention are loans with weaknesses resulting from declining performance trends and the

borrower’s cash flows may be temporarily strained.

Loans in this category are performing according to terms, but present some type of potential concern.

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Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable.

The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is

deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed.

The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed.

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

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The amount of servicing income earned was $ 230,000 and $ 228,000 at December 31, 2022 and 2021, respectively.

Amortization recognized in relation to mortgage servicing rights was $ 120,000 and $ 130,000 at December 31, 2021 and 2020, respectively.

Amortization recognized in relation to mortgage servicing rights

was $ 88,000 and $ 120,000 at December 31, 2022 and 2021, respectively.

Both income and amortization are included in service charges and fees on the consolidated statements of income.

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Bank Owned Life Insurance

The cash surrender value of bank owned life insurance is carried as an asset, and changes in cash surrender value are recorded as non-interest income.

The cash surrender value of bank owned life insurance is carried as an asset, and changes in cash surrender value are recorded as non-interest income in the consolidated statements of income.

The Corporation entered into agreements to provide post-retirement benefits to two retired employees in the form of life insurance payable to the employee’s beneficiaries upon their death through endorsement split dollar life insurance arrangements.

The Corporation’s accrued liabilities for this benefit agreement as of December 31, 2021 and 2020 which are included in other liabilities in the Corporation’s consolidated balance sheets was $ 56,000 and $ 36,000 , respectively.

The related (expense) income for this benefit agreement amounted to $( 20,000 ) in 2021 and $ 2,000 in 2020.

The Corporation’s accrued liabilities for this benefit agreement as of December 31, 2022 and 2021 which are included in other liabilities in the Corporation’s consolidated balance sheets were $ 53,000 and $ 56,000 , respectively.

The related income (expense) for this benefit agreement amounted to $ 3,000 in 2022 and $( 20,000 ) in 2021.

The expense recognized in 2021 was the result of service costs associated with the benefit agreement.

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Under the cost method, the Corporation recognizes tax credits as they are allocated and amortizes the initial cost of the investment over the period that the tax credits are allocated to the Corporation.

The amount of tax credits allocated to the Corporation were $ 405,000 in 2021 and 2020, and the amortization of the investments in the limited partnerships were $ 371,000 and $ 362,000 in 2021 and 2020, respectively.

The amount of tax credits allocated to the Corporation were $ 249,000 and $ 405,000 in 2022 and 2021, respectively, and the amortization of the investments in the limited partnerships were $ 225,000 and $ 371,000 in 2022 and 2021, respectively.

During 2021, the Corporation became a limited partner in a real estate venture with an initial investment of $ 435,000 .

In 2022, capital contributions in the combined amount of $ 2,458,000 were made in relation to the new real estate venture.

The new limited partnership has not begun amortizing and future contributions will be required.

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Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell on the date of foreclosure, establishing a new cost basis.

After foreclosure, valuations are periodically performed and if fair value less cost to sell declines subsequent to foreclosure, a valuation allowance is recorded through expense.

After foreclosure, valuations are periodically performed and if fair value less cost to sell declines subsequent to foreclosure, a valuation allowance is

recorded through expense.

Revenues derived from and costs to maintain the assets and subsequent gains and losses on sales are included in non-interest expense on the consolidated statements of income.

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The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.

The Corporation recognizes interest and penalties on income taxes, if any, as a component of income tax expense.

The Corporation recognizes interest and penalties on income taxes, if any, as a component of income tax expense in the consolidated statements of income.

Earnings Per Share

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Trust Department income is generally recognized on a cash basis and is not materially different than if it were reported on an accrual basis (see Table 5 – Non-Interest Income for details).

Comprehensive Income (Loss)

The Corporation is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented.

Accumulated other comprehensive income (loss) is comprised of net unrealized holding gains (losses) on the debt securities available-for-sale portfolio.

The Corporation has elected to report these effects on the consolidated statements of comprehensive income.

Comprehensive (Loss) Income

The Corporation is required to present accumulated other comprehensive (loss) income in a full set of general-purpose financial statements for all periods presented.

Accumulated other comprehensive (loss) income is comprised of net unrealized holding (losses) gains on the debt securities available-for-sale portfolio.

The Corporation has elected to report these effects on the consolidated statements of comprehensive (loss) income.

Advertising Costs

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Recent Accounting Standards Updates (“ASU”):

Except as disclosed below, there were no new accounting pronouncements affecting the Corporation during the year ended December 31, 2021 that were not already adopted by the Corporation in previous periods.

Recently adopted ASUs:

In January 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope , which refines the scope of Topic 848, Reference Rate Reform , and clarifies some of its guidance as part of the FASB’s ongoing monitoring of global reference rate reform activities.

The ASU provides certain optional expedients and exceptions when applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”), or by another reference rate that is expected to be discontinued.

The amendments are effective for all entities as of March 12, 2020 through December 31, 2022.

The Company has evaluated the provisions of ASU 2021-01 on our financial condition, results of operations and cash flows, and determined that there is no material impact on the consolidated financial statements and related disclosures.

There were no new accounting pronouncements affecting the Corporation during the year ended December 31, 2022 that were not already adopted by the Corporation in previous periods.

Pending ASUs:

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In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

It is currently unclear how the adoption of this standard will impact the Corporation’s consolidated financial statements, but the Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact that the adoption of the standard may have on the Corporation.

The Corporation has taken steps to prepare for the implementation when it becomes effective, such as:

The Corporation has taken steps to prepare for the implementation, such as:

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

The Corporation has elected to adopt this pronouncement as of January 1, 2023.

The Corporation continues to evaluate the impact the CECL model will have on the accounting for credit losses, and expects to recognize a one-time, cumulative effect adjustment to the allowance for loan losses at the beginning of the first reporting period in which the new standard is effective.

The Corporation is completing its data and model validation analysis and working to finalize policies and control framework related to the adoption process.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures , which eliminates the accounting guidance on troubled debt restructurings (“TDRs”) by creditors that have adopted the current expected credit losses (“CECL”) model and enhances disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty.

The ASU also amends the guidance on “vintage disclosures” to require disclosure of current-period gross charge-offs by year of origination.

For entities that have not yet adopted ASU 2016-13, the amendments in ASU 2022- 02 are effective upon adoption of ASU 2016-13.

Entities may elect to apply the guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively.

If an entity elects to adopt the updated guidance on TDR recognition and measurement prospectively, the guidance should be applied to modifications occurring after the date of

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

The Company adopted ASU 2022-02 upon the adoption of ASU 2016-13, and does not anticipate a material impact on the Company’s consolidated financial statements.

Transfer of Financial Assets

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Mortgage-backed securities

There were no aggregate securities with a single issuer (excluding the U.S.

At December 31, 2022, the Corporation had holdings of securities from one issuer in excess of ten percent of consolidated stockholders’ equity, other than the U.S.

Government and U.S.

Government Agencies and Corporations.

Holdings in Sallie Mae Bank securities had a fair value of $ 17,362,000 as of December 31, 2022.

There were no aggregate holdings of securities with a single issuer (excluding the U.S.

Government and U.S.

Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at December 31, 2021.

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December 31, 2021

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

Net (losses) and gains from market value fluctuations recognized during the period on equity securities

Net gains recognized during the period on equity securities sold during the period

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

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

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

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The municipal securities consist of general obligations and revenue bonds.

Asset backed securities consist of bonds backed by consumer loans.

Asset-backed securities consist of private (non-agency) student loan pools backed by the Federal Family Education Loan Program (“FFELP”) which carry a 97% federal government guarantee.

Corporate debt securities consist of senior debt and subordinated debt holdings.

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Add (deduct):

Unearned discount and

Unearned discount

Net deferred loan fees and costs

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Add (deduct):

Unearned discount and

Unearned discount

Net deferred loan fees and costs

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Add (deduct):

Unearned discount and

Unearned discount

Net deferred loan fees and costs

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Loans held for sale amounted to $ 71,000 at December 31, 2022 and $ 6,006,000 at December 31, 2021.

During the year ended December 31, 2022, $ 7,900,000 in loans that had been previously held for sale were transferred to held for investment status, as the Corporation no longer had the intent to sell these loans.

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

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Beginning balance

Provision (credit)

(Credit) provision

Ending Balance

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The outstanding recorded investment of loans categorized as TDRs as of December 31, 2022 and December 31, 2021 was $ 7,480,000 and $ 8,020,000 , respectively.

The decrease in TDRs at December 31, 2021 as compared to December 31, 2020 is mainly attributable to the payoff of a Commercial Real Estate TDR to a real estate holding company which was completed during the third quarter of 2021 in the amount of $ 1,010,000 , as well as regular principal payments on existing TDRs during the year ended December 31, 2021.

The decrease in TDRs at December 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 year ended December 31, 2022.

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

During the year ended December 31, 2021, four loans with a combined post modification balance of $ 360,000 were modified as TDRs, compared to the year ended December 31, 2020 when eight loans with a combined post modification balance of $ 1,536,000 were modified as TDRs.

The loan modifications for the year ended December 31, 2021 consisted of two term modifications beyond the original stated term and two payment modifications, compared to December 31, 2020 when the loan modifications consisted of two term modifications beyond the original stated term and six payment modifications.

During the year ended December 31, 2022, two loans with a combined post modification balance of $ 515,000 were modified as TDRs, compared to the year ended December 31, 2021 when four loans with a combined post modification balance of $ 360,000 were modified as TDRs.

The loan modifications for the year ended December 31, 2022 consisted of two payment modifications, compared to December 31, 2021 when the loan modifications consisted of two term modifications beyond the original stated term and two payment modifications.

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

2 unchanged sentences

Accruing TDRs

At December 31, 2021, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 708,000 , ten Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 590,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 14,000 were not in compliance with the terms of their restructure, compared to December 31, 2020 when three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 745,000 , seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 984,000 , and one Residential Real Estate loan classified as a TDR with a recorded investment of $ 18,000 were not in compliance with the terms of their restructure.

At December 31, 2022, three commercial and industrial loans classified as TDRs with a combined recorded investment of $ 664,000 and five commercial real estate loans classified as TDRs with a combined recorded investment of $ 684,000 were not in compliance with the terms of their restructure, compared to December 31, 2021 when three commercial and industrial loans classified as TDRs with a combined recorded investment of $ 708,000 , ten commercial real estate loans classified as TDRs with a combined recorded investment of $ 590,000 , and one residential real estate loan classified as a TDR with a recorded investment of $ 14,000 were not in compliance with the terms of their restructure.

Of the loans that were modified as TDRs within the twelve months preceding December 31, 2022, no loans experienced payment defaults during the year ended December 31, 2022.

Three commercial real estate loans totaling $ 285,000 that were modified as TDRs within the twelve months preceding December 31, 2021 experienced payment defaults during the year ended December 31, 2021.

Of the loans that were modified as TDRs during the twelve months preceding December 31, 2020, two Commercial Real Estate loans totaling $ 57,000 experienced payment defaults during the year ended December 31, 2020.

The following table presents information regarding the loan modifications categorized as TDRs during the year ended December 31, 2022 and 2021.

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Post-Modification

Commercial and Industrial

Commercial Real Estate

3 unchanged sentences

Post-Modification

Commercial and Industrial

Commercial Real Estate

1 unchanged sentence

Year Ended December 31, 2022

Commercial and Industrial

Commercial Real Estate

Year Ended December 31, 2021

Commercial and Industrial

Commercial Real Estate

1 unchanged sentence

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 the loan modifications made in compliance with Section 4013 of the CARES Act for the year ended December 31, 2021:

(Dollars in thousands)

Commercial and

Balance at December 31, 2020

Additional modifications granted for the three months ended March 31, 2021

Section 4013 CARES Act modifications returned to normal payment status during the three months ended March 31, 2021 (a)

Principal payments net of draws on active deferred loans for the three months ended March 31, 2021 (b)

Balance at March 31, 2021

Additional modifications granted for the three months ended June 30, 2021

Section 4013 CARES Act modifications returned to normal payment status during the three months ended June 30, 2021 (a)

Principal payments net of draws on active deferred loans for the three months ended June 30, 2021 (b)

Balance at June 30, 2021

Additional modifications granted for the three months ended September 30, 2021

Section 4013 CARES Act modifications returned to normal payment status during the three months ended September 30, 2021 (a)

Principal payments net of draws on active deferred loans for the three months ended September 30, 2021 (b)

Balance at September 30, 2021

Additional modifications granted for the three months ended December 31, 2021

Section 4013 CARES Act modifications returned to normal payment status during the three months ended December 31, 2021 (a)

Principal payments net of draws on active deferred loans for the three months ended December 31, 2021 (b)

Balance at December 31, 2021

Percent of Total Section 4013 CARES Act Modifications as of December 31, 2021

Percent of Total Section 4013 CARES Act Modifications to Total Loans as of December 31, 2021

Subsequent modifications granted during the three months ended December 31, 2021 for active deferred loans outstanding as of December 31, 2021

As of December 31, 2022, there were no loan modifications in compliance with Section 4013 of the CARES Act that were still actively on deferral, compared to December 31, 2021 when there was one loan in the amount of $ 9,423,000 that was still actively on deferral, which was returned to normal payment status during the first quarter of 2022.

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

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If interest on non-accrual loans had been accrued at original contract rates, interest income would have increased by $ 2,174,000 in 2022 and $ 1,858,000 in 2021.

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

The $ 28,000 in foreclosed assets held for resale at December 31, 2020 was represented by land.

At December 31, 2020, all foreclosed assets were held as the result of obtaining physical possession.

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

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

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Residential Real Estate

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

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

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Accumulated depreciation

Depreciation amounted to $ 1,008,000 for 2021 and $ 1,041,000 for 2020.

Depreciation amounted to $ 1,026,000 for 2022 and $ 1,008,000 for 2021 in the consolidated statements of income.

NOTE 5 — DEPOSITS

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Total deposits

Total deposits increased $ 140,481,000 to $ 1,077,969,000 as of December 31, 2021 due to increases in non-interest bearing, interest bearing and savings deposits.

The increase in deposits was the result of many different factors including the deposit of stimulus funds, PPP loan proceeds, a $ 73,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during 2021.

Total deposits decreased $ 84,470,000 to $ 993,499,000 as of December 31, 2022 due to decreases in non-interest bearing, interest bearing, savings and time deposits.

The decrease in deposits was mainly the result of a $ 70,297,000 decrease in municipal deposits and other normal fluctuations in deposits during 2022.

As of December 31, 2022 and 2021 the Corporation had $ 20,000,000 in brokered deposits (CDs).

The following is a schedule reflecting classification and remaining maturities of time deposits at December 31, 2022:

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(Dollars in thousands)

Due 2021, 1.42 % to 1.58 %

Due 2022, 2.34 %

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Irrevocable standby letters of credit may be issued to a customer/beneficiary by the FHLB on the Corporation’s behalf in order to secure public/municipal unit deposits, provide credit enhancement to certain transaction types, or to support payment obligations to third parties.

These irrevocable standby letters of credit are supported by an irrevocable

and independent guarantee by the FHLB for the Corporation’s pledging obligation to secure public/municipal unit deposits which eliminates the need for the Corporation to pledge collateral in the amount necessary to secure these funds.

These irrevocable standby letters of credit are supported by an irrevocable and independent guarantee by the FHLB for the Corporation’s pledging obligation to secure public/municipal unit deposits which eliminates the need for the Corporation to pledge collateral in the amount necessary to secure these funds.

The Corporation 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 December 31, 2021.

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on December 31, 2022 or 2021.

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

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Income tax expense and rate

The components of the net deferred tax liability at December 31, 2021 and 2020 are as follows:

The components of the net deferred tax asset and liability at December 31, 2022 and 2021 are as follows:

(Dollars in thousands)

Deferred Tax Assets:

Net unrealized losses on debt securities available-for-sale

Allowance for loan losses

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Impairment loss on securities

Writedowns on OREO properties

Deferred health insurance

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Mortgage servicing rights

Net Deferred Tax Liability

Net Deferred Tax Asset (Liability)

A valuation allowance for deferred tax assets was recorded in the amount of $ 258,000 and $ 438,000 at December 31, 2022 and 2021, respectively.

2 unchanged sentences

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is

dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

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

At December 31, 2021, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,025,000 and $ 1,499,000 , respectively.

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

At December 31, 2022, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,541,000 and $ 2,029,000 , respectively, in the consolidated balance sheets.

Options to extend or terminate a lease may be included in our lease agreements.

When it is reasonably certain that we will exercise those options, the right-of-use asset and lease liability will reflect the renewal or termination option.

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.

2 unchanged sentences

The Corporation recognized total operating lease costs for the years ended December 31, 2022 and 2021 of $ 191,000 and $ 178,000 , respectively.

Cash payments totaled $ 156,000 and $ 154,000 for the years ended December 31, 2021 and 2020, respectively.

Cash payments totaled $ 177,000 and $ 156,000 for the years ended December 31, 2022 and 2021, respectively, in the consolidated statements of income.

The Corporation currently has one finance lease for equipment.

2 unchanged sentences

Further options to extend or terminate the lease are not applicable.

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.

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

The lease does not contain an implicit rate;

1 unchanged sentence

Total finance lease costs that were recognized by the Corporation for the years ended December 31, 2022 and 2021 were immaterial.

Cash payments totaled $ 10,000 and $ 4,000 for the years ended December 31, 2021 and 2020, respectively.

Cash payments totaled $ 10,000 for the years ended December 31, 2022 and 2021.

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

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The summary of activity on the related party loans represent funds drawn and outstanding at the date of the consolidated financial statements.

Commitments by the Bank to related parties on lines of credit and letters of credit for

2021 and 2020, presented an additional off-balance sheet risk to the extent of undisbursed funds in the amounts of $ 4,896,000 and $ 7,453,000 respectively, on the above loans.

Commitments by the Bank to related parties on lines of credit and letters of credit for 2022 and 2021, presented an additional off-balance sheet risk to the extent of undisbursed funds in the amounts of $ 4,492,000 and $ 4,896,000 respectively, on the above loans.

Deposits from certain officers, directors and immediate family members and/or their related companies held by the Bank amounted to $ 27,248,000 and $ 25,995,000 at December 31, 2022 and 2021, respectively.

64 unchanged sentences

Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Corporation evaluates each customer’s creditworthiness on a case-by-case basis.

The Corporation evaluates each customer’s

creditworthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the borrower.

98 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 Corporation 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.

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.

2 unchanged sentences

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At December 31, 2021 and 2020, foreclosed assets held for resale measured at fair value on a nonrecurring basis and the valuation methods used are as follows:

(Dollars in thousands)

Assets at December 31, 2021

Foreclosed assets held for resale:

Commercial Real Estate

Total foreclosed assets held for resale

(Dollars in thousands)

Assets at December 31, 2020

Foreclosed assets held for resale:

Commercial Real Estate

Total foreclosed assets held for resale

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

The Corporation’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.

17 unchanged sentences

( 4 %) – ( 7 %)

Foreclosed assets held for resale

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 0 % ) –( 0 % )

December 31, 2021

9 unchanged sentences

( 7 %) – ( 7 %)

Foreclosed assets held for resale

Appraisal of collateral 1,3

Certificate of Inspection 1,3

Appraisal adjustments 2

Qualitative Adjustments 4

( 28 % ) – ( 28 % )

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

39 unchanged sentences

NOTE 17 — REVENUE RECOGNITION

As of January 1, 2018, the Corporation adopted ASU 2014-09 Revenue from Contracts with Customers - Topic 606 and all subsequent ASUs that modified ASC 606.

The Corporation has elected to apply the ASU and all related ASUs using the modified retrospective implementation method.

The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods, however, additional disclosures have been added in accordance with the ASU.

The Corporation has elected to apply the guidance outlined in FASB ASC 606 regarding the measurement or recognition of revenue.

The main types of revenue contracts included in non-interest income within the Consolidated Statements of Income which are subject to ASC 606 are as follows:

Deposits related fees and service charges

Deposit related fees and service charges

Service charges and fees on deposits, which are included as liabilities in the consolidated balance sheets, consist of fees related to monthly fees for various retail and business checking accounts, automated teller machine (“ATM”) fees (charged for withdrawals by our deposit customers from other bank ATMs) and insufficient funds fees (“NSF”) (which are charged when customers overdraw their accounts beyond available funds).

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Management notes that the emergence of COVID-19 as a global pandemic in 2020 and throughout 2021 resulted in significant deterioration in general economic conditions and the environment in which the Company operates.

This uncertainty in 2020 resulted in significant decreases in the market prices for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered through the end of 2020 and throughout 2021.

This uncertainty resulted in significant decreases in the market prices

for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered throughout 2021 and 2022.

Goodwill was evaluated for impairment at December 31, 2022, and it was determined that goodwill was not impaired.

13 unchanged sentences

Retained earnings

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

Treasury stock, at cost

5 unchanged sentences

Dividends from subsidiary bank

Net securities gains (losses)

Net securities (losses) gains

Interest on subordinated debt

4 unchanged sentences

EQUITY IN UNDISTRIBUTED EARNINGS OF BANKING SUBSIDIARY

STATEMENTS OF COMPREHENSIVE INCOME

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Dollars in thousands)

Years Ended December 31,

Other comprehensive income:

Equity in other comprehensive income of banking subsidiary

Total other comprehensive income

Total Comprehensive Income

Other comprehensive loss:

Equity in other comprehensive loss of banking subsidiary

Total other comprehensive loss

Total Comprehensive (Loss) Income

STATEMENTS OF CASH FLOWS

3 unchanged sentences

Adjustments to reconcile net income to net cash provided by operating activities:

(Gains) losses on securities

Deferred income tax expense (benefit)

Losses (gains) on securities

Deferred income tax (benefit) expense

Equity in undistributed earnings of banking subsidiary

Investment in banking subsidiary

Increase in prepaid/accrued expenses and other assets/liabilities

(Decrease) increase in advances from banking subsidiary

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

Increase (decrease) in prepaid/accrued expenses and other assets/liabilities

Decrease in advances from banking subsidiary

NET CASH PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

2 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of subordinated debentures

Proceeds from issuance of common stock

Dividends paid

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

NET CASH USED IN FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

2 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-K

Item 8. Financial Statements and Supplementary Data