What changed in this filing

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Item 1. Financial Statements

2023-08-09 compared with 2023-05-11 · 464 added, 318 removed, 1336 unchanged (37% of the section changed)

29 unchanged sentences

Preferred stock, par value $ 2.00 per share;

authorized 1,000,000 shares as of March 31, 2023 and December 31, 2022;

issued 0 as of March 31, 2023 and December 31, 2022

authorized 1,000,000 shares as of June 30, 2023 and December 31, 2022;

issued 0 as of June 30, 2023 and December 31, 2022

Common stock, par value $ 2.00 per share;

authorized 20,000,000 shares as of March 31, 2023 and December 31, 2022;

issued 6,271,550 as of March 31, 2023 and 6,250,763 as of December 31, 2022;

outstanding 6,039,939 as of March 31, 2023 and 6,019,152 as of December 31, 2022

authorized 20,000,000 shares as of June 30, 2023 and December 31, 2022;

issued 6,296,383 as of June 30, 2023 and 6,250,763 as of December 31, 2022;

outstanding 6,064,772 as of June 30, 2023 and 6,019,152 as of December 31, 2022

Retained earnings

Accumulated other comprehensive loss

Treasury stock, at cost, 231,611 shares as of March 31, 2023 and December 31, 2022

Treasury stock, at cost, 231,611 shares as of June 30, 2023 and December 31, 2022

TOTAL STOCKHOLDERS’ EQUITY

5 unchanged sentences

Three Months Ended

Six Months Ended

INTEREST INCOME

39 unchanged sentences

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Dollars in thousands)

Three Months Ended

Other comprehensive loss:

Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $( 993 ) and $( 2,850 ), respectively

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

Total other comprehensive loss

Total Comprehensive Loss

(Dollars in thousands)

Six Months Ended

Other comprehensive income (loss):

9 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(Dollars in thousands, except

8 unchanged sentences

Balance at March 31, 2023

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.28 per share

Balance at June 30, 2023

(Dollars in thousands, except

per share data)

Comprehensive

Stockholders’

Balance at January 1, 2022

3 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

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2023 AND 2022

SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(Dollars in thousands)

2 unchanged sentences

Provision for credit losses

Provision (credit) for credit losses on unfunded commitments

Depreciation and amortization

Net premium amortization on securities

Deferred income tax (benefit) expense

Deferred income tax expense (benefit)

Common stock issued

Net (gains) losses on sales of mortgage loans

2 unchanged sentences

Net securities losses

Decrease in accrued interest receivable

Decrease (increase) in accrued interest receivable

Increase in cash surrender value of bank owned life insurance

3 unchanged sentences

Increase in accrued interest payable

Decrease in other liabilities

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

(Decrease) increase in other liabilities

NET CASH PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

12 unchanged sentences

Repayment of finance lease obligations

Common stock issued

Repayment of long-term borrowings

Dividends paid

NET CASH USED IN FINANCING ACTIVITIES

NET CASH USED IN (PROVIDED BY) FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

3 unchanged sentences

Interest paid

Income taxes paid

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Loans transferred from held for sale to held for investment 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, 2023, are not necessarily indicative of the results for the year ending December 31, 2023.

Operating results for the three and six months ended June 30, 2023, are not necessarily indicative of the results for the year ending December 31, 2023.

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, 2022.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, 2023 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, 2023 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.

53 unchanged sentences

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 (loss) 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 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.

12 unchanged sentences

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

There was no allowance for credit losses for Available-For-Sale debt securities as of March 31, 2023;

There was no allowance for credit losses for Available-For-Sale debt securities as of June 30, 2023;

therefore, it is not present in the table below.

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, 2023 and December 31, 2022:

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, 2023 and December 31, 2022:

Debt Securities Available-for-Sale

(Dollars in thousands)

March 31, 2023:

June 30, 2023:

Treasury securities

17 unchanged sentences

Corporate debt securities

Securities Available-for-Sale with an aggregate fair value of $ 254,601,000 at March 31, 2023 and $ 315,836,000 at December 31, 2022, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 202,659,000 at March 31, 2023 and $ 241,385,000 at December 31, 2022.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at March 31, 2023.

Securities Available-for-Sale with an aggregate fair value of $ 247,027,000 at June 30, 2023 and $ 315,836,000 at December 31, 2022, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 195,838,000 at June 30, 2023 and $ 241,385,000 at December 31, 2022.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at June 30, 2023.

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, 2023

June 30, 2023

Debt Securities Available-For-Sale

11 unchanged sentences

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

At March 31, 2023, the Corporation had holdings of securities from one issuer in excess of ten percent of consolidated stockholders’ equity, other than the U.S.

At June 30, 2023, 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 $ 16,601,000 as of March 31, 2023.

Holdings in Sallie Mae Bank securities had a fair value of $ 16,095,000 as of June 30, 2023.

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 March 31, 2022.

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.

Proceeds from sales of Debt Securities Available-For-Sale for the three months ended March 31, 2023 and 2022 were $ 23,230,000 and $ 0 , respectively.

There were no proceeds from sales of Debt Securities Available-For-Sale for the three months ended June 30, 2023 and 2022.

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

Proceeds from sales of Debt Securities Available-For-Sale for the six months ended June 30, 2023 and 2022 were $ 23,230,000 and $ 0 , respectively.

Gross gains realized on these sales were $ 447,000 and $ 0 , respectively.

1 unchanged sentence

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, 2023 and December 31, 2022:

March 31, 2023

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, 2023 and December 31, 2022:

June 30, 2023

(Dollars in thousands)

23 unchanged sentences

Corporate debt securities

There were 173 individual debt securities in an unrealized loss position as of March 31, 2023, with a combined depreciation in value representing 8.61 % of the debt securities portfolio.

There were 183 individual debt securities in an unrealized loss position as of December 31, 2022, with their combined depreciation in value representing 9.11 % of the debt securities portfolio.

There were 173 individual debt securities in an unrealized loss position as of June 30, 2023, with a combined decline in value representing 10.13 % of the debt securities portfolio.

There were 183 individual debt securities in an

unrealized loss position as of December 31, 2022, with their combined decline in value representing 9.11 % of the debt securities portfolio.

Available-for-sale debt securities are required to be individually evaluated for impairment in accordance with ASC 326, Financial Instruments – Credit Losses.

3 unchanged sentences

Consideration is given to (1) the financial condition and near-term prospects of the issuer, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values.

In analyzing an

issuer’s financial condition, management considers whether the debt securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the debt securities.

In analyzing an issuer’s financial condition, management considers whether the debt securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the debt securities.

All issues of U.S.

2 unchanged sentences

The Company made a policy election to exclude accrued interest receivable from the amortized cost basis of debt securities available for sale.

Accrued interest receivable on debt securities available for sale is reported as a component of accrued interest receivable on the Company’s consolidated balance sheet and totaled $ 2,122,000 as of March 31, 2023.

Accrued interest receivable on debt securities available for sale is excluded from the estimate of credit losses.

All debt securities available for sale in an unrealized loss position as of March 31, 2023, continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary.

All debt securities available for sale in an unrealized loss position, as of June 30, 2023, continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary.

Also, as part of our evaluation of our intent and ability to hold debt securities for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategies, cash flow needs, liquidity position, capital adequacy and interest rate risk position.

5 unchanged sentences

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

At March 31, 2023 and December 31, 2022, the Company had $ 1,544,000 and $ 1,699,000 , respectively, in equity securities recorded at fair value.

The following is a summary of realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2023 and 2022:

At June 30, 2023 and December 31, 2022, the Company had $ 1,476,000 and $ 1,699,000 , respectively, in equity securities recorded at fair value.

The following is a summary of realized gains and losses recognized in net income on equity securities during the six months ended June 30, 2023 and 2022:

(Dollars in thousands)

Three months ended

March 31, 2023

March 31, 2022

Six months ended

June 30, 2023

June 30, 2022

Net losses from market value fluctuations recognized during the period on equity securities

5 unchanged sentences

The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

If an impairment loss on an equity security is considered to be other-than-temporary, a loss in the amount of the difference between the cost and fair value of the

security is recognized.

If an impairment loss on an equity security is considered to be other-than-temporary, a loss in the amount of the difference between the cost and fair value of the security is recognized.

Once the impairment is recorded, this becomes the new cost basis of the equity security and cannot be adjusted upward if there is a subsequent recovery in the fair value of the security.

The Company monitors the equity securities 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 equity securities to be other-than-temporarily impaired at March 31, 2023 or December 31, 2022.

Based on the factors described above, management did not consider any equity securities to be other-than-temporarily impaired at June 30, 2023 or December 31, 2022.

NOTE 4 — LOANS AND ALLOWANCE FOR CREDIT LOSSES

3 unchanged sentences

The loans receivable portfolio is segmented into the following segments:

Real Estate (including both commercial and residential loans), Agricultrual, Commercial and Industrial, Consumer, and State and Political Subdivisions.

Real Estate (including both commercial and residential loans), Agricultural, Commercial and Industrial, Consumer, and State and Political Subdivisions.

Real Estate Lending

15 unchanged sentences

Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years .

In general, home equity

lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years .

In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years .

In underwriting one-to-four family residential mortgage loans, the Company evaluates the borrower’s ability to make monthly payments, the borrower’s prior loan repayment history and the value of the property securing the loan.

6 unchanged sentences

These loans are sold without recourse.

Loans held for sale amounted to $ 115,000 and $ 71,000 at March 31, 2023 and December 31, 2022, respectively.

Loans held for sale amounted to $ 0 and $ 71,000 at June 30, 2023 and December 31, 2022, respectively.

Agricultural Lending

1 unchanged sentence

Agricultural loans are typical secured by collateral related to the farming activities.

These loans originate from customers within our primary market area or the surrounding areas.

These loans originate from customers within the Company’s primary market area or the surrounding areas.

In underwriting agricultural loans, an analysis is performed regarding the borrower’s ability to repay the loan, the borrower’s capital and collateral, and the past, present, and future cash flows of the borrower, as well as the agricultural industry as a whole.

13 unchanged sentences

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

Commercial and industrial loans are typically made on the basis of the

borrower’s ability to make repayment from cash flows from the borrower’s primary business activities.

Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the borrower’s primary business activities.

As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

SBA Paycheck Protection Program (“PPP”) loans that have been issued by the Company as a result of the enactment of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) in response to the economic impact of the COVID-19 pandemic are included in the Company’s Commercial and Industrial portfolio and are underwritten according to all terms and conditions pursuant to the PPP as administered by the SBA under the CARES Act.

The PPP loans have 1.00% interest rates, lender fees, two or five-year terms (depending on date of origination), and may qualify for forgiveness.

These loans funded by the Company are subject to the terms and conditions applicable to all loans made pursuant to the PPP, as administered by the SBA under the CARES Act.

The PPP calls for these loans to be fully guaranteed by the SBA.

PPP loan origination fees and certain loan origination costs have been deferred with the net amount accreted using the straight line method over the contractual life of the related loans as an interest yield adjustment.

If a loan is forgiven pursuant to the terms and conditions applicable to the PPP, the remaining origination fees and costs are recognized at the time of forgiveness.

As of March 31, 2023, the Company held 2 PPP loans in its Commercial and Industrial portfolio carrying an aggregate balance of $ 101,000 which were granted during the first round of PPP issuance and did not qualify for forgiveness.

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

As an addition to the commercial loans receivable portfolio, the Company may purchase the guaranteed portion of loans secured by the U.S.

3 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, 2023, the Company's balance of GGLs was $ 4,595,000 , compared to $ 4,631,000 at December 31, 2022.

As of June 30, 2023, the Company's balance of GGLs was $ 4,542,000 , compared to $ 4,631,000 at December 31, 2022.

Consumer Lending

9 unchanged sentences

State and Political Subdivisions Lending

The Company, from time to time, may originate loans to state and political subdivisions that are within the Bank’s primary market area or surrounding areas.

The Company, from time to time, may originate loans to state and political subdivisions that are within the Company’s primary market area or surrounding areas.

These loans may be either taxable or tax-free.

1 unchanged sentence

State and political loans are typically secured by the taxing power of the borrowing entity.

In some cases, the loans may also

be secured by the property/item being purchased.

In some cases, the loans may also be secured by the property/item being purchased.

Audited financial statements are required as part of the underwriting for all state and political loans and a full analysis of all components of the audited statements is performed.

27 unchanged sentences

The allowance for credit losses (“ACL”) is an estimate of losses arising from borrowers’ inability to make loan payments as required, which is calculated via a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio.

The Company completed a one-time adjustment to decrease the ACL at the adoption of ASU 2016-13 through retained earnings, but all subsequent adjustments will be established through provisions for credit losses charged against income.

The Company completed a one-time adjustment to

decrease the ACL at the adoption of ASU 2016-13 through retained earnings, but all subsequent adjustments will be established through provisions for credit losses charged against income.

Loans deemed to be uncollectible are charged against the ACL and subsequent recoveries, if any, are credited to the allowance.

The ACL is maintained at a level estimated by management to be adequate to absorb potential loan losses.

Management’s periodic evaluation of the adequacy of the ACL is based on specific expectations for the future economic

environment that are incorporated in the projection, with loss expectations to revert to the long-run historical mean after such time as management can make or obtain a reasonable and supportable forecast.

Management’s periodic evaluation of the adequacy of the ACL is based on specific expectations for the future economic environment that are incorporated in the projection, with loss expectations to revert to the long-run historical mean after such time as management can make or obtain a reasonable and supportable forecast.

Management also considers the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may impact the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral (if the loan is collateral dependent), composition of the loan portfolio, and other relevant factors.

63 unchanged sentences

Loans individually evaluated for impairment may also have a zero specific allocation if the loans are deemed to have no impairment, or if the amount of the impairment will be charged off.

From time to time, the Company may agree to modify or restructure the contractual terms of loans to borrowers experiencing financial difficulties.

ASU 2022-02, Loan Modifications Experiencing Financial Difficulty, eliminated the accounting guidance for Troubled Debt Restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty.

In accordance with the new guidance, the Company no longer evaluates loans with modifications made to borrowers experiencing financial difficulty individually for impairment, nor establishes a related specific reserve for such loans, but rather these loans are included in their respective portfolio segment and evaluated collectively for impairment to establish an allowance for credit losses.

Any modifications of loans to borrowers experiencing financial difficulty that are classified as non-accrual or are otherwise designated as collateral dependent are individually evaluated for determination of expected credit losses.

There were no loan modifications made to borrowers experiencing financial difficulties during the three or six months ended June 30, 2023.

The most common types of concessions granted upon modification of a loan to a borrower experiencing financial difficulties include:

2 unchanged sentences

Loans so modified remain collectively evaluated for determination of expected credit losses, unless, during the process of evaluation, it is determined that the loan should be placed on non-accrual status until the Company determines that future collection of principal and interest is reasonably assured or the loan is otherwise deemed to be collateral dependent.

There may be certain types of loans for which the expectation of credit loss is zero after evaluating historical loss information, making necessary adjustments for current conditions and reasonable and supportable forecasts, and considering any collateral or guarantee arrangements that are not free-standing contracts.

15 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, 2023 and December 31, 2022, the amount of the reserve for unfunded lending commitments was $ 237,000 and $ 68,000 , respectively.

As of June 30, 2023 and December 31, 2022, the amount of the reserve for unfunded lending commitments was $ 260,000 and $ 68,000 , respectively.

The Company made a policy election to exclude accrued interest receivable from the amortized cost basis of loans.

Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Company’s consolidated balance sheet and totaled $ 1,762,000 as of March 31, 2023.

Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Company’s

consolidated balance sheet and totaled $ 1,906,000 as of June 30, 2023.

Accrued interest receivable on loans is excluded from the estimate of credit losses.

36 unchanged sentences

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

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

on additional collateral and/or refinancing plan is completed.

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

The following table presents the classes of the loan portfolio summarized by risk rating and year of origination and gross charge offs by loan portfolio summarized by year of origination as of March 31, 2023:

(Dollars in thousands)

36 unchanged sentences

Total Gross Charge Offs

Commercial and Industrial Loans include loans categorized as tax-free in the amount of $ 10,000 and State and Political Subdivision Loans include loans categorized as tax-free in the amount of $ 29,454,000 as of March 31, 2023.

Commercial and Industrial Loans also include $ 4,595,000 of GGLs and $ 101,000 of PPP loans as of March 31, 2023.

Loans held for sale amounted to $ 115,000 at March 31, 2023 and are included in the Real Estate Loans category.

Commercial and Industrial Loans also include $ 4,542,000 of GGLs as of June 30, 2023.

Loans held for sale are included in the Real Estate Loans category.

There were no loans held for sale at June 30, 2023.

The activity in the allowance for credit losses by loan class (post adoption of ASU No.

2016-13), is summarized below for the three months ended March 31, 2023.

2016-13), is summarized below for the three and six months ended June 30, 2023.

(Dollars in thousands)

and Industrial

As of and for the three months ended March 31, 2023:

As of and for the three months ended June 30, 2023:

Allowance for Credit Losses:

Beginning balance

Provision (credit)

Ending Balance

(Dollars in thousands)

and Industrial

As of and for the six months ended June 30, 2023:

Allowance for Credit Losses:

Balance at December 31, 2022

14 unchanged sentences

evaluated for impairment

The Company's activity in the allowance for credit losses on unfunded commitments for the period ended March 31, 2023 was as follows:

The Company's activity in the allowance for credit losses on unfunded commitments for the six months ended June 30, 2023 was as follows:

(Dollars in thousands)

1 unchanged sentence

CECL adoption adjustment

Provision for credit losses

Balance at March 31, 2023

The recorded investment, unpaid principal balance, and the related allowance of the Company’s individually evaluated loans are summarized below at March 31, 2023:

Provision for credit losses on unfunded commitments

Balance at June 30, 2023

The recorded investment, unpaid principal balance, and the related allowance of the Company’s individually evaluated loans are summarized below at June 30, 2023:

(Dollars in thousands)

March 31, 2023

June 30, 2023

With no related allowance recorded:

6 unchanged sentences

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 individually evaluated loans are summarized below for the three months ended March 31, 2023:

The average recorded investment and interest income recognized for the Company’s individually evaluated loans are summarized below for the three and six months ended June 30, 2023:

(Dollars in thousands)

For the Three Months Ended

March 31, 2023

June 30, 2023

With no related allowance recorded:

4 unchanged sentences

Commercial and Industrial

Of the $ 6,000 in interest income recognized on individually evaluated loans for the three months ended March 31, 2023, $ 0 in interest income was recognized with respect to non-accrual loans.

The following table presents collateral-dependent loans by segment for the period ended March 31, 2023.

Of the $ 6,000 in interest income recognized on individually evaluated loans for the three months ended June 30, 2023, $ 0 in interest income was recognized with respect to non-accrual loans.

(Dollars in thousands)

March 31, 2023

For the Six Months Ended

June 30, 2023

With no related allowance recorded:

Commercial and Industrial

At March 31, 2023, there were no commitments to lend additional funds with respect to individually evaluated loans.

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, 2023 and December 31, 2022 were as follows:

With an allowance recorded:

Commercial and Industrial

Total consists of:

Commercial and Industrial

Of the $ 12,000 in interest income recognized on individually evaluated loans for the six months ended June 30, 2023, $ 0 in interest income was recognized with respect to non-accrual loans.

The following table presents collateral-dependent loans by segment for the period ended June 30, 2023.

(Dollars in thousands)

June 30, 2023

Commercial and Industrial

At June 30, 2023, there were no commitments to lend additional funds with respect to individually evaluated loans.

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, 2023 and December 31, 2022 were as follows:

(Dollars in thousands)

Commercial and Industrial

State and Political Subdivisions

3 unchanged sentences

Total non-performing assets

There were no foreclosed assets held for resale at March 31, 2023 or December 31, 2022.

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, 2023 and December 31, 2022.

These balances were not included in foreclosed assets held for resale at March 31, 2023 or December 31, 2022.

The following tables present the classes of the loan portfolio, including individually evaluated loans, summarized by past-due status at March 31, 2023 and December 31, 2022:

There were no foreclosed assets held for resale at June 30, 2023 or December 31, 2022.

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 $ 138,000 at June 30, 2023 and $ 41,000 at December 31, 2022.

These balances were not included in foreclosed assets held for resale at June 30, 2023 or December 31, 2022.

The following tables present the classes of the loan portfolio, including individually evaluated loans, summarized by past-due status at June 30, 2023 and December 31, 2022:

(Dollars in thousands)

March 31, 2023:

June 30, 2023:

Commercial and Industrial

34 unchanged sentences

The activity in the allowance for credit losses by loan class (prior to adoption of ASU No.

2016-13), is summarized below for the three months ended March 31, 2022 and the year ended December 31, 2022.

2016-13), is summarized below for the three and six months ended June 30, 2022 and the year ended December 31, 2022.

(Dollars in thousands)

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

Provision (credit)

Ending Balance

(Dollars in thousands)

and Industrial

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

Allowance for Credit Losses:

Beginning balance

(Credit) provision

Provision (credit)

Ending Balance

14 unchanged sentences

Beginning balance

(Credit) provision

Proviion (credit)

Ending Balance

9 unchanged sentences

evaluated for impairment

The outstanding recorded investment of TDRs as of December 31, 2022 $ 7,480,000 .

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 modififed as TDRs during the first three months of 2022.

The loan modifications for the six months ended June 30, 2022 consisted of one payment modification.

The outstanding recorded investment of TDRs as of December 31, 2022 was $ 7,480,000 .

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

3 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 recorded investment of $ 13,000 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, 2022, one commercial real estate loan 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.

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.

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.

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

(Dollars in thousands)

For the Three Months Ended June 30, 2022

Pre-Modification

Post-Modification

Commercial Real Estate

(Dollars in thousands)

For the Six Months Ended June 30, 2022

Pre-Modification

Post-Modification

Commercial Real Estate

The following table provides detail regarding they types of loan modifications made for loans categorized as TDRs during the three and six months ended June 30, 2022.

For the Three Months Ended June 30, 2022

Commercial Real Estate

For the Six Months Ended June 30, 2022

Commercial Real Estate

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

16 unchanged sentences

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.

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.

(Dollars in thousands)

For the Three Months Ended

March 31, 2022

June 30, 2022

With no related allowance recorded:

10 unchanged sentences

Residential Real Estate

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

Of the $ 73,000 in interest income recognized on impaired loans for the three months ended June 30, 2022, $ 0 in interest income was recognized with respect to non-accrual loans.

(Dollars in thousands)

For the Six Months Ended

June 30, 2022

With no related allowance recorded:

Commercial and Industrial

Commercial Real Estate

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 in interest income recognized on impaired loans for the six months ended June 30, 2022, $ 0 in interest income was recognized with respect to non-accrual loans.

NOTE 5 — DEPOSITS

Major classifications of deposits at March 31, 2023 and December 31, 2022 consisted of:

Major classifications of deposits at June 30, 2023 and December 31, 2022 consisted of:

(Dollars in thousands)

4 unchanged sentences

Total deposits

Total deposits decreased $ 45,584,000 to $ 947,915,000 as of March 31, 2023 due to decreases in non-interest bearing demand, interest bearing demand and savings deposits.

The decrease in deposits was mainly the result of a $ 38,711,000 decrease in municipal deposits and other normal fluctuations in deposits during the three months ended March 31, 2023.

Total deposits decreased $ 57,658,000 to $ 935,841,000 as of June 30, 2023 due to decreases in non-interest bearing demand, interest bearing demand and savings deposits.

The decrease in deposits was mainly the result of a $ 39,273,000 decrease in municipal deposits and other normal fluctuations in deposits during the six months ended June 30, 2023.

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, 2023 and December 31, 2022 are as follows:

Short-term borrowings and weighted–average interest rates at June 30, 2023 and December 31, 2022 are as follows:

(Dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

10 unchanged sentences

In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fails to make an interest payment to the counterparty).

payment to the counterparty).

The collateral is held by a correspondent bank in the counterparty’s custodial account.

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

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of March 31, 2023 and December 31, 2022.

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of June 30, 2023 and December 31, 2022.

(Dollars in thousands)

of Liabilities

March 31, 2023

June 30, 2023

Repurchase agreements (a)

1 unchanged sentence

Repurchase agreements (a)

(a) As of March 31, 2023 and December 31, 2022, the fair value of securities pledged in connection with repurchase agreements was $ 26,188,000 and $ 34,160,000 , respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, 2023:

(a) As of June 30, 2023 and December 31, 2022, the fair value of securities pledged in connection with repurchase agreements was $ 24,285,000 and $ 34,160,000 , respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of June 30, 2023:

(Dollars in thousands)

Remaining Contractual Maturity of the Agreements

March 31, 2023:

June 30, 2023:

Repurchase agreements and repurchase-to-maturity transactions:

2 unchanged sentences

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

The Company’s long-term borrowings consist of notes at fixed interest rates.

Upon any default, under the terms of a master agreement, FHLB may declare all indebtedness of the Company immediately due.

In addition, FHLB shall not be required to fund advances under any outstanding commitments.

As of June 30, 2023 and December 31, 2022, the Company had $ 25,000,000 in long-term borrowings outstanding with the FHLB.

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

1 unchanged sentence

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, 2023.

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on June 30, 2023.

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, 2023, loans of $ 714,475,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 504,375,900 .

As of March 31, 2023, no securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

As of June 30, 2023, loans of $ 716,188,000 were pledged to FHLB which resulted in a FHLB

maximum borrowing capacity of $ 505,628,000 .

As of June 30, 2023, no securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

NOTE 7 — SUBORDINATED DEBT

On December 10, 2020, the Corporation issued $ 25,000,000 aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors.

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

regulatory capital purposes.

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

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

7 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 Company currently leases three branch banking facilities and one parcel of land under operating leases.

At March 31, 2023, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,548,000 and $ 2,041,000 , respectively.

The Company currently leases two branch banking facilities and one parcel of land under operating leases.

At June 30, 2023, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,523,000 and $ 2,019,000 , respectively.

At December 31, 2022, right-of-use assets and lease liabilities stood at $ 1,541,000 and $ 2,029,000 , respectively, in the consolidated balance sheets.

4 unchanged sentences

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

The Company recognized total operating lease costs for the three months ended March 31, 2023 and 2022 of $ 58,000 and $ 45,000 , respectively.

The Company recognized total operating lease costs for the six months ended June 30, 2023 and 2022 of $ 113,000 and $ 90,000 , respectively.

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

Cash payments totaled $ 55,000 and $ 41,000 , respectively, for the three months ended March 31, 2023 and 2022.

Cash payments totaled $ 106,000 and $ 83,000 , respectively, for the six months ended June 30, 2023 and 2022.

The Company currently has one finance lease for equipment.

At March 31, 2023, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $ 34,000 and $ 4,000 , respectively.

At June 30, 2023, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $ 34,000 and $ 1,000 , respectively.

At December 31, 2022, right-of-use assets and lease liabilities stood at $ 34,000 and $ 6,000 , respectively.

4 unchanged sentences

therefore, our incremental borrowing rate was used.

Total finance lease costs that were recognized by the Company for the three months ended March 31, 2023 and 2022 were immaterial.

Cash payments totaled $ 2,000 for the three months ended March 31, 2023 and 2022.

The following table displays the weighted-average term and discount rates for operating and finance leases outstanding as of March 31, 2023 and December 31, 2022.

Total finance lease costs that were recognized by the Company for the six months ended June 30, 2023 and 2022 were immaterial.

Cash payments totaled $ 5,000 for the six months ended June 30, 2023 and 2022.

The following table displays the weighted-average term and discount rates for operating and finance leases outstanding as of June 30, 2023 and December 31, 2022.

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, 2023 and December 31, 2022 were as follows:

The contract or notional amounts at June 30, 2023 and December 31, 2022 were as follows:

(Dollars in thousands)

March 31, 2023

June 30, 2023

December 31, 2022

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, 2023, the Company had $ 767,060,000 in loans secured by real estate, which represented 89.0 % of total loans.

At June 30, 2023, the Company had $ 774,688,000 in loans secured by real estate, which represented 88.9 % 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, 2023 and December 31, 2022, 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 of June 30, 2023 and December 31, 2022, 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.

26 unchanged sentences

Financial Assets Measured at Fair Value on a Recurring Basis

At March 31, 2023 and December 31, 2022, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

At June 30, 2023 and December 31, 2022, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)

March 31, 2023

June 30, 2023

Debt Securities Available-for-Sale:

40 unchanged sentences

Following the adoption of ASU No.

2016-13, at March 31, 2023, individually evaluated loans measured at fair value on a nonrecurring basis are as follows:

2016-13, at June 30, 2023 measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)

Assets at March 31, 2023

Assets at June 30, 2023

Individually evaluated loans:

Commercial Real Estate

Residential Real Estate

Total individually evaluated loans

8 unchanged sentences

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, 2023 and December 31, 2022.

There were no foreclosed assets held for resale measured at fair value on a nonrecurring basis at June 30, 2023 and December 31, 2022.

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.

5 unchanged sentences

2016-13 Adoption:

March 31, 2023

June 30, 2023

Valuation Technique

25 unchanged sentences

(Dollars in thousands)

Fair Value Measurements at March 31, 2023

Fair Value Measurements at June 30, 2023

FINANCIAL ASSETS:

43 unchanged sentences

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

As of March 31, 2023 and December 31, 2022, the fair value of trust assets under management was $ 113,687,000 and $ 111,172,000 , respectively.

As of June 30, 2023 and December 31, 2022, the fair value of trust assets under management was $ 114,166,000 and $ 111,172,000 , 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 Corporation.

At March 31, 2023 and 2022, there were no potential common shares outstanding.

At June 30, 2023 and 2022, 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, 2023 and December 31, 2022.

Goodwill totaled $ 19,133,000 at June 30, 2023 and December 31, 2022.

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, 2022, 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, 2023.

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

11 unchanged sentences

RESULTS OF OPERATIONS

Quarter ended March 31, 2023 compared to quarter ended March 31, 2022

First Keystone Corporation realized earnings for the three months ended March 31, 2023 of $1,357,000, a decrease of $2,186,000, or 61.7% from the first quarter of 2022.

The decrease in net income for the three months ended March 31, 2023 was primarily due to increases in interest paid on deposits, interest paid on short-term borrowings through the Federal Home Loan Bank, and salaries and employee benefits expenses, as well as a reduction in PPP fees.

On a per share basis, for the three months ended March 31, 2023, net income was $0.23 versus $0.60 for the same three month period of 2022.

Cash dividends amounted to $0.28 per share for the three months ended March 31, 2023 and 2022.

Quarter ended June 30, 2023 compared to quarter ended June 30, 2022

First Keystone Corporation realized earnings for the three months ended June 30, 2023 of $1,139,000, a decrease of $2,683,000, or 70.2% from the second quarter of 2022.

The decrease in net income for the three months ended June 30, 2023 was primarily due to increases in interest paid on deposits, interest paid on short-term borrowings through the Federal Home Loan Bank, and salaries and employee benefits expenses, as well as a reduction in PPP fees.

On a per share basis, for the three months ended June 30, 2023, net income was $0.19 versus $0.64 for the same three month period of 2022.

Cash dividends amounted to $0.28 per share for the three months ended June 30, 2023 and 2022.

NET INTEREST INCOME

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

In the three months ended March 31, 2023, interest income amounted to $13,307,000, an increase of $2,678,000 or 25.2% from the three months ended March 31, 2022, while interest expense amounted to $5,503,000 in the three months ended March 31, 2023, an increase of $4,330,000 or 369.1% from the three months ended March 31, 2022.

In the three months ended June 30, 2023, interest income amounted to $13,651,000, an increase of $2,540,000 or 22.9% from the three months ended June 30, 2022.

The increase in interest income during the three months ended June 30, 2023 was mainly the result of an increase in interest earned on commercial real estate loans and an increase in interest earned on taxable securities.

Interest expense amounted to $6,543,000 in the three months ended June 30, 2023, an increase of $5,213,000 or 392.0% from the three months ended June 30, 2022.

As a result, net interest income decreased $2,673,000 or 27.3% to $7,108,000 from $9,781,000 for the same period in 2022.

The Company’s net interest margin for the three months ended March 31, 2023 was 2.61% compared to 3.19% for same period in 2022.

The Company’s net interest margin for the three months ended June 30, 2023 was 2.38% compared to 3.36% for same period in 2022.

The decrease in net interest margin was primarily a result of increased rates paid on deposit products and short-term borrowings.

PROVISION FOR CREDIT LOSSES

The provision for credit losses for the three months ended March 31, 2023 and 2022 was $0 and $219,000, respectively.

The provision for credit losses for the three months ended June 30, 2023 and 2022 was $34,000 and $218,000, respectively.

The decrease in the provision for credit 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 credit losses for the three months ended March 31, 2023 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 credit losses resulted in net charge-offs of $13,000 for the three months ended March 31, 2023 and net recoveries of $38,000 for the the three months ended March 31, 2022.

The provision for credit losses for the three months ended June 30, 2023 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 credit losses resulted in net charge-offs of $19,000 and net recoveries of $5,000 for the three months ended June 30, 2023 and 2022, respectively.

See Allowance for Credit Losses on page 50 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $1,452,000 for the three months ended March 31, 2023, as compared to $1,389,000 for the same period in 2022, an increase of $63,000, or 4.5%.

Net securities losses decreased $7,000 to ($56,000) for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

This decrease was mainly due to to the Company recognizing $63,000 in net losses on held equity securities in the first quarter of 2022 as compared to recognizing $155,000 in net losses on held equity securities and $99,000 in net gains on the sales of taxable municipal debt securities in the first quarter of 2023.

Trust department income decreased $20,000 or 8.0% to $230,000 for the three months ended March 31, 2023 as compared to the same period in 2022.

Total non-interest income was $1,539,000 for the three months ended June 30, 2023, as compared to $1,514,000 for the same period in 2022, an increase of $25,000, or 1.7%.

Net securities losses decreased $1,000 to ($69,000) for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Net securities losses were the result of recognizing $69,000 in net losses on held equity securities in the second quarter of 2023 compared to $68,000 in net losses on held equity securities for the same period in 2022.

Trust department income decreased $20,000 or 7.5% to $248,000 for the three months ended June 30, 2023 as compared to the same period in 2022.

Service charges and fee income increased $22,000 or 4.0%.

The increase was mainly due to increases in overdraft fees as compared to the same period in 2022.

ATM fees and debit card income increased $23,000 or 4.5% to $532,000 for the three months ended March 31, 2023 due to increased transaction volume.

Net gains (losses) on sales of mortgage loans increased $51,000 or 150.0% to $17,000.

In the prior year, many of the loans sold in the first quarter were sold at a loss.

Other non-interest income decreased $15,000 or 21.4% to $55,000 for the three months ended March 31, 2023.

The decrease was due to lower retail investment income as income from annuities was lower in the first quarter of 2023 as compared to the same period in 2022.

ATM fees and debit card income increased $8,000 or 1.4% to $566,000 for the three months ended June 30, 2023.

Net gains (losses) on sales of mortgage loans increased $17,000 during the second quarter of 2023 as there were no sales of mortgage loans in the second quarter of 2022.

Other non-interest income decreased $6,000 or 10.2% to $53,000 for the three months ended June 30, 2023.

The decrease was due to lower building rental income and lower retail investment income as income from annuities was lower in the second quarter of 2023 as compared to the same period in 2022.

NON-INTEREST EXPENSE

Total non-interest expense was $7,753,000 for the three months ended March 31, 2023, as compared to $6,516,000 for the three months ended March 31, 2022.

Total non-interest expense was $7,157,000 for the three months ended June 30, 2023, as compared to $6,595,000 for the three months ended June 30, 2022.

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

Salaries and benefits amounted to $4,386,000 or 56.6% of total non-interest expense for the three months ended March 31, 2023, as compared to $3,554,000 or 54.5% for the three months ended March 31, 2022.

The increase was mainly due to increased costs associated with medical insurance plus normal merit increases for employees, filling existing open positions, plus new hires as compared to the same period in 2022.

Net occupancy, furniture and equipment, and computer expense amounted to $1,043,000 for the three months ended March 31, 2023, an increase of $26,000 or 2.6% which was mainly due to higher rent costs associated with a new leased branch location and higher utility costs.

Professional services increased $137,000 or 46.0% to $435,000 as of March 31, 2023.

The increase was mainly the result increased accounting expense related to the adoption of ASU 2016-13 along with an increase in legal fees related to a customer’s estate.

Pennsylvania shares tax expense amounted to $241,000 for the three months ended March 31, 2023, a decrease of $83,000 or 25.6% as compared to the three months ended March 31, 2022.

This increase was due to lower equity due to the unrealized loss position in the securities portfolio at December 31, 2022.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense amounted to $176,000 for the three months ended March 31, 2023, an increase of $39,000 or 28.5% as compared to the same period in 2022.

Salaries and benefits amounted to $3,733,000 or 52.2% of total non-interest expense for the three months ended June 30, 2023, as compared to $3,462,000 or 52.5% for the three months ended June 30, 2022.

The increase was due to normal merit increases for employees, filling existing open positions, plus new hires as compared to the same period in 2022.

Net occupancy, furniture and equipment, and computer expense amounted to $1,121,000 for the three months ended June 30, 2023, an increase of $138,000 or 14.0% which was mainly due to increased bank building costs as the result of purchasing and renovating a new branch and higher software costs as the bank implemented a new accounting system during the second quarter of 2023.

Professional services decreased $24,000 or 6.5% to $346,000 as of June 30, 2023, versus the second quarter of 2022.

Pennsylvania shares tax expense amounted to $241,000 for the three months ended June 30, 2023, a decrease of $83,000 or 25.6% as compared to the three months ended June 30, 2022.

This decrease was due to lower equity due to the unrealized loss position in the securities portfolio at December 31, 2022.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense amounted to $178,000 for the three months ended June 30, 2023, an increase of $58,000 or 48.3% as compared to the same period in 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 $307,000 for the three months ended March 31, 2023, an increase of $179,000 or 139.8% as compared to the three months ended March 31, 2022.

This increase was result of third party pricing increases, increased debit card transaction volume, increased ATM fraud and credits that were used to lower third party costs in the first quarter of 2022.

Data processing expenses amounted to $312,000 for the three months ended March 31, 2023 as compared to $258,000 for the same period of 2022, an increase of $54,000 or 20.9%.

This increase was mainly the result of third party pricing increases and credits used to lower third party costs in the first quarter of 2022.

Advertising expense amounted to $74,000 in the first quarter of 2023, an increase of $2,000 or 2.8% as compared to the three months ended March 31, 2023.

Other non-interest expense amounted to $779,000 for the three months ended March 31, 2023, an increase of $51,000 or 7.0% as compared to 2022 mainly due to an increase in the provision for unfunded commitments as a result of increased funding and loss rates utilized in the methodology upon the adoption of ASU 2016-13 in 2023.

Income tax expense amounted to $146,000 for the three months ended March 31, 2023, as compared to $567,000 for the three months ended March 31, 2022, a decrease of $421,000.

The effective total income tax rate was 9.7% for the three months ended March 31, 2023 as compared to 13.8% for the three months ended March 31, 2022.

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

The Company recognized $58,000 and $74,000 of tax credits from low-income housing partnerships in the three months ended March 31, 2023 and 2022, respectively.

ATM and debit card fees expense amounted to $278,000 for the three months ended June 30, 2023, an increase of $36,000 or 14.9% as compared to the three months ended June 30, 2022.

This increase was a result of third party pricing increases, increased debit card transaction volume and increased ATM fraud.

Data processing expenses amounted to $357,000 for the three months ended June 30, 2023 as compared to $251,000 for the same period of 2022, an increase of $106,000 or 42.2%.

This increase was mainly the result of third party pricing increases, credits used to lower third party costs in the second quarter of 2022 and increased costs associated with preparation for the upgrade of the Bank’s online and mobile banking platforms.

Advertising expense amounted to $154,000 in the second quarter of 2023, an increase of $36,000 or 30.5% as compared to the three months ended June 30, 2023.

The increase was due to the Bank marketing the new full-service Bethlehem branch, along with utilizing more television and newspaper advertising in the second quarter of 2023 as compared to the same period in 2022.

Other non-interest expense amounted to $749,000 for the three months ended June 30, 2023, an increase of $24,000 or 3.3% as compared to 2022.

Income tax expense amounted to $317,000 for the three months ended June 30, 2023, as compared to $660,000 for the three months ended June 30, 2022, a decrease of $343,000.

The effective total income tax rate was 21.8% for the three months ended June 30, 2023 as compared to 14.7% for the three months ended June 30, 2022.

The increase in the effective tax rate was mainly due to lower tax-exempt income earned on securities.

The Company recognized $58,000 of tax credits from low-income housing partnerships in the three months ended June 30, 2023 and 2022.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

First Keystone Corporation realized earnings for the six months ended June 30, 2023 of $2,496,000, a decrease of $4,869,000, or 66.1% from the same period in 2022.

The decrease in net income for the six months ended June 30, 2023 was primarily due to less PPP loan fees and an increase in interest expense, mainly due to increases in interest paid on deposits and interest paid on short-term borrowings through the Federal Home Loan Bank.

On a per share basis, net income was $0.41 for the six months ended June 30, 2023 versus $1.24 for the same period in 2022.

Cash dividends amounted to $0.56 per share for the six months ended June 30, 2023 and 2022

NET INTEREST INCOME

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

For the six months ended June 30, 2023, interest income amounted to $26,958,000, an increase of $5,218,000 or 24.0% from the six months ended June 30, 2022.

The increase in interest income during the six months ended June 30, 2023 was mainly the result of an increase in interest earned on commercial real estate loans and an increase in interest earned on taxable securities.

Interest expense amounted to $12,046,000 in the six months ended June 30, 2023 an increase of $9,543,000 or 381.3% from the six months ended June 30, 2022.

As a result, net interest income decreased $4,325,000 or 22.5% to $14,912,000 from $19,237,000 for the same period in 2022.

The Company’s net interest margin for the six months ended June 30, 2023 was 2.50% compared to 3.28% for same period in 2022.

The decrease in net interest margin was primarily a result of increased rates paid on deposit products and short-term borrowings.

PROVISION FOR CREDIT LOSSES

The provision for credit losses for the six months ended June 30, 2023 and 2022 was $34,000 and $437,000, respectively.

The provision for credit losses for the six months ended June 30, 2023 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 credit losses resulted in net charge-offs of

$32,000 and net recoveries of $43,000 for the six months ended June 30, 2023 and 2022, respectively.

See Allowance for Credit Losses on page 50 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $2,991,000 for the six months ended June 30, 2023, as compared to $2,903,000 for the same period in 2022, an increase of $88,000, or 3.0%.

ATM fees and debit card income increased $31,000 or 2.9% to $1,098,000 for the six months ended June 30, 2023 due to increased ATM interchange fees as the result of increased transaction volume.

Service charges and fee income increased $38,000 for the six months ended June 30, 2023.

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

Gains on sales of mortgage loans increased $68,000 or 200.0% 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 $478,000 for the six months ended June 30, 2023 a decrease of $40,000 or 7.7% as compared to the same period in 2022.

Net securities losses increased $6,000 or 4.6% to ($125,000) for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

The increase was due to the Company recognizing $224,000 in net losses on held equity securities and $99,000 in net gains on the sales of debt securities in the first half of 2023 as compared to recognizing $131,000 in net losses on held equity securities in the same period in 2022.

NON-INTEREST EXPENSE

Total non-interest expense was $14,910,000 for the six months ended June 30, 2023, as compared to $13,111,000 for the six months ended June 30, 2022.

Non-interest expense increased $1,799,000 or 13.7%.

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

Salaries and benefits amounted to $8,119,000 or 54.5% of total non-interest expense for the six months ended June 30, 2023, as compared to $7,016,000 or 53.5% for the six months ended June 30, 2022.

The increase was mainly due to normal merit increases and new hires along with an increase in medical insurance costs and a bonus paid to all employees in January of 2023.

Net occupancy, furniture and equipment, and computer expense amounted to $2,164,000 for the six months ended June 30, 2023, an increase of $164,000 or 8.2%.

The increase was due to increased bank building costs as the result of purchasing and renovating a new branch and higher software costs as the Bank implemented a new accounting system in the first half of 2023.

Professional services increased $113,000 or 16.9% to $781,000 for the six months ended June 30, 2023.

The increase was mainly the result of increases in annual audit expenses for 2023 along with additional audit expenses relating to year end 2022.

Pennsylvania shares tax expense amounted to $482,000 for the six months ended June 30, 2023, a decrease of $166,000 or 25.6% as compared to the six months ended June 30, 2022.

This decrease was due to lower equity due to the unrealized loss position in the securities portfolio at December 31, 2022.

FDIC insurance expense increased $97,000 or 37.7% for the six months ended June 30, 2023.

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 $585,000 for the six months ended June 30, 2023, an increase of $215,000 or 58.1% as compared to the six months ended June 30, 2022.

The increase was the result of third party pricing increases, increased debit card transaction volume and increased ATM fraud.

Data processing expenses amounted to $669,000 for the six months ended June 30, 2023, an increase of $160,000 or 31.4% as compared to the six months ended June 30, 2022.

This increase was the result of third party pricing increases, credits used to lower third party costs in the first half of 2022 and increased costs associated with preparation for the upgrade of the Bank’s online and mobile banking platforms.

Advertising expense increased $38,000 or 20.0% during the six months ended June 30, 2023.

This increase was mainly due to the Bank marketing the new full-service Bethelehem branch, along with utilizing more television and

radio advertising in the first half of 2023 as compared to the same period of 2022.

Other non-interest expense amounted to $1,528,000 for the six months ended June 30, 2023, an increase of $75,000 or 5.2% as compared to the six months ended June 30, 2022.

This increase was mainly the result of an increase in the provision for unfunded commitments as the result of increased funding rates and loss rates utilized in the methodology upon the adoption of ASU 2016-13 in 2023, as well as an increase in unfunded lending commitments.

Income tax expense amounted to $463,000 for the six months ended June 30, 2023, as compared to $1,227,000 for the six months ended June 30, 2022, a decrease of $764,000.

The effective total income tax rate was 15.6% for the six months ended June 30, 2023 as compared to 14.3% for the six months ended June 30, 2022.

The increase in the effective tax rate was mainly due to fewer tax credits from low-income housing partnerships in the current year and lower tax-exempt income earned on securities.

The Company recognized $116,000 and $132,000 of tax credits from low-income housing partnerships in the six months ended June 30, 2023 and 2022, respectively.

FINANCIAL CONDITION

Total assets decreased to $1,310,647,000 as of March 31, 2023, a decrease of $18,547,000 from year-end 2022.

Total assets decreased to $1,307,899,000 as of June 30, 2023, a decrease of $21,295,000 from year-end 2022.

Total assets as of December 31, 2022 amounted to $1,329,194,000.

Total debt securities available-for-sale decreased $27,174,000 or 7.3% to $346,270,000 as of March 31, 2023 from December 31, 2022.

Total debt securities available-for-sale decreased $41,864,000 or 11.2% to $331,580,000 as of June 30, 2023 from December 31, 2022.

The decrease was mainly due to the sales of tax-exempt municipals and principal paydowns.

Total loans increased $3,714,000 or 0.4% to $862,183,000 as of March 31, 2023 from December 31, 2022.

Loan demand grew slightly in the three months ended March 31, 2023 as the Bank has realized an increase in loan originations, primarily in the Real Estate portfolio.

Total deposits decreased $45,584,000 or 4.6% to $947,915,000 as of March 31, 2023 from December 31, 2022.

The decrease was mainly due to a decrease in both non-interest and interest bearing deposits, primarily municipal deposits.

Total loans increased $12,770,000 or 1.5% to $871,239,000 as of June 30, 2023 from December 31, 2022.

Loan demand grew in the six months ended June 30, 2023 as the Bank has realized an increase in loan originations, primarily commercial real estate loans.

Total deposits decreased $57,658,000 or 5.8% to $935,841,000 as of June 30, 2023 from December 31, 2022.

The decrease was mainly due to a decrease in both non-interest and interest bearing deposits, primarily municipal deposits and savings and money market accounts, stemming from decreased stimulus funded deposits, etc.

The Company continues to maintain and manage its asset growth.

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, 2023 by $26,489,000 to $204,907,000 from $178,418,000 as of December 31, 2022.

Total borrowings increased in the six months ended June 30, 2023 by $39,941,000 to $218,359,000 from $178,418,000 as of December 31, 2022.

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

Total stockholders’ equity amounted to $125,026,000 at March 31, 2023, an increase of $4,640,000 or 3.9% from December 31, 2022 due to an increase in the market value of the securities portfolio.

Total stockholders’ equity amounted to $121,185,000 at June 30, 2023, an increase of $799,000 or 0.7% from December 31, 2022.

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 93.3% at March 31, 2023 and 94.4% at March 31, 2022.

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 earning asset ratio (average interest earning assets divided by average total assets) equaled 93.2% at June 30, 2023 and 94.1% at June 30, 2022.

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 $862,183,000 as of March 31, 2023, up $3,714,000, or 0.4% since year-end 2022.

Our primary earning asset, total loans, increased to $871,239,000 as of June 30, 2023, up $12,770,000 or 1.5% since year-end 2022.

The loan portfolio continues to be well diversified.

Non-performing assets decreased since year-end 2022, and overall asset quality has remained consistent.

Total non-performing assets were $5,169,000 as of March 31, 2023, a decrease of $190,000, or 3.5% from $5,359,000 reported in non-performing assets as of December 31, 2022.

Total allowance for credit losses to total non-performing assets was 138.14% as of March 31, 2023 and 154.39% at December 31, 2022.

Non-performing assets increased since year-end 2022, and overall asset quality has remained consistent.

Total non-performing assets were $5,673,000 as of June 30, 2023, an increase of $314,000, or 5.9% from $5,359,000 reported in non-performing assets as of December 31, 2022.

Total allowance for credit losses to total non-performing assets was 138.14% as of June 30, 2023 and 154.39% at December 31, 2022.

See the Non-Performing Assets section on page 52 for more information.

In addition to loans, another primary earning asset is our overall securities portfolio, which decreased in size from December 31, 2022 to March 31, 2023.

Debt securities available-for-sale amounted to $346,270,000 as of March 31, 2023, a decrease of $27,174,000 from year-end 2022.

In addition to loans, another primary earning asset is our overall securities portfolio, which decreased in size from December 31, 2022 to June 30, 2023.

Debt securities available-for-sale amounted to $331,580,000 as of June 30, 2023, a decrease of $41,864,000 from year-end 2022.

The decrease in debt securities available-for-sale is mainly due to the sales of $23,131,000 of tax-exempt municipals during the first quarter of 2023.

There were also principal paydowns on debt securities of $7,665,000 offset by an increase in the market value of the portfolio of $4,782,000 during the quarter ended March 31, 2023.

Interest-bearing deposits in other banks decreased as of March 31, 2023, to $1,035,000 from $1,297,000 at year-end 2022 due to decreased cash held at the Federal Home Loan Bank.

Total loans increased to $862,183,000 as of March 31, 2023 as compared to $858,469,000 as of December 31, 2022.

There were also principal paydowns on debt securities of $15,611,000.

Interest-bearing deposits in other banks decreased as of June 30, 2023, to $1,178,000 from $1,297,000 at year-end 2022 due to decreased cash held at the Federal Home Loan Bank.

Total loans increased to $871,239,000 as of June 30, 2023 as compared to $858,469,000 as of December 31, 2022.

The table on page 21 provides data relating to the composition of the Company’s loan portfolio on the dates indicated.

Total loans increased by $12,770,000 or 1.5%.

Steady demand for borrowing by businesses accounted for the 0.4% increase in the loan portfolio from December 31, 2022 to March 31, 2023.

The Real Estate portfolio increased $2,180,000 or 0.30% from $764,880,000 at December 31, 2022 to $767,060,000 at March 31, 2023.

The increase in the Real Estate portfolio for the three months ended March 31, 2023 was mainly the result of $16,448,000 in new loan originations, which were offset by loan payoffs of $8,449,000 and a decrease of $1,447,000 in utilization of existing real estate lines of credit, along with regular principal payments and other typical fluctuations in the Real Estate portfolio.

The Agricultural portfolio decreased $77,000 or 9.0% from $860,000 at December 31, 2022 to $783,000 at March 31, 2023.

The decrease in the Agricultural portfolio was mainly the result of a decrease of $71,000 in utilization of existing agricultural-related lines of credit during the three months ended March 31, 2023, along with regular principal payments.

There were no new agricultural loans originated during the three months ended March 31, 2023 and payoffs of agricultural loans for the three months ended March 31, 2023 did not have a material impact on the change in the portfolio balance.

Overall, the Commercial and Industrial portfolio increased $2,203,000 from $56,077,000 or 3.9% from December 31, 2022 to $58,280,000 at March 31, 2023.

The increase in the Commercial and Industrial portfolio during the three months ended March 31, 2023 was mainly attributable to the portion of the Commercial and Industrial portfolio excluding PPP loans which increased $2,215,000 during the three months ended March 31, 2023.

The increase was attributable to $4,088,000 in new loan originations, offset by loan payoffs of $422,000 and a decrease of $200,000 in utilization of existing commercial and industrial lines of credit, as well as regular principal payments and other typical amortization in the Commercial and

Industrial portfolio.

The portion of the Commercial and Industrial portfolio attributable to PPP loans decreased $12,000 from December 31, 2022 to March 31, 2023.

Consumer loans increased $137,000 or 2.4% from $5,707,000 at December 31, 2022 to $5,844,000 at March 31, 2023.

Steady demand for borrowing by businesses accounted for the 1.5% increase in the loan portfolio from December 31, 2022 to June 30, 2023.

The Real Estate portfolio increased $9,808,000 or 1.3% from $764,880,000 at December 31, 2022 to $774,688,000 at June 30, 2023.

The increase in the Real Estate portfolio for the six months ended June 30, 2023 was mainly the result of $41,847,000 in new loan originations, which were offset by loan payoffs of $18,002,000 and a decrease of $6,286,000 in utilization of existing real estate lines of credit, along with regular principal payments and other typical fluctuations in the Real Estate portfolio.

The Agricultural portfolio increased $2,000 or 0.2% from $860,000 at December 31, 2022 to $862,000 at June 30, 2023.

The increase in the Agricultural portfolio for the six months ended June 30, 2023 was mainly the result of an increase of $16,000 in utilization of existing agricultural lines of credit, offset with regular principal payments and other typical fluctuations in the Agricultural portfolio.

There were no new agricultural loans originated during the six months ended June 30, 2023 and payoffs of agricultural loans for the six months ended June 30, 2023 did not have a material impact on the change in the portfolio balance.

Overall, the Commercial and Industrial portfolio increased $5,236,000 or 9.3% from $56,077,000 at December 31, 2022 to $61,313,000 at June 30, 2023.

The increase in the Commercial and Industrial portfolio during the six months ended June 30, 2023 was mainly attributable to the portion of the Commercial and Industrial portfolio excluding PPP loans which increased $5,260,000 during the six months ended June 30, 2023.

The increase was attributable to $6,191,000 in new loan originations and an increase of $1,126,000 in utilization of existing commercial and industrial lines of credit, offset by loan payoffs of $671,000, as well as regular principal payments and other typical amortization in the Commercial and Industrial portfolio.

The portion of the Commercial and Industrial portfolio attributable to PPP loans decreased $24,000 from December 31, 2022 to June 30, 2023.

Consumer loans increased $422,000 or 7.4% from $5,707,000 at December 31, 2022 to $6,129,000 at June 30, 2023.

The increase is mainly attributable to new loan originations of $1,630,000, offset by loan payoffs of $568,000 and a decrease of $40,000 in utilization of existing consumer lines of credit, along with regular principal payments.

The State and Political Subdivisions portfolio decreased $729,000 or 2.40% from $30,945,00 at December 31, 2022 to $30,216,000 at March 31, 2023.

The decrease is mainly the result of $630,000 in loan payoffs for the three months ended March 31, 2023 along with regular principal payments.

There were no new state and political loans originated during the three months ended March 31, 2023.

The State and Political Subdivisions portfolio decreased $2,698,000 or 8.7% from $30,945,000 at December 31, 2022 to $28,247,000 at June 30, 2023.

The decrease is mainly the result of $2,419,000 in loan payoffs for the six months ended June 30, 2023 along with regular principal payments, offset by $50,000 in new loan originations and a $50,000 increase in utilization of existing state and political subdivision lines of credit.

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.

The Company continues its efforts to lend to creditworthy borrowers.Management believes that the loan portfolio is well diversified.

The Company derives ongoing income

from the servicing of mortgages sold in the secondary market.

The Company continues its efforts to lend to creditworthy borrowers.

Management believes that the loan portfolio is well diversified.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $849,067,000 or 97.6% of gross loans are graded Pass;

4 unchanged sentences

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

Overall, non-pass grades decreased to $20,678,000 at March 31, 2023, as compared to $20,935,000 at December 31, 2022.

Commercial and Industrial non-pass grades decreased to $716,000 as of March 31, 2023 as compared to $725,000 as of December 31, 2022.

Real Estate non-pass grades decreased to $19,962,000 as of March 31, 2023 as compared to $20,210,000 as of December 31, 2022.

Overall, non-pass grades increased $83,000 to $21,018,000 at June 30, 2023, as compared to $20,935,000 at December 31, 2022.

Real Estate non-pass grades increased $106,000 to $20,316,000 as of June 30, 2023 as compared to $20,210,000 as of December 31, 2022.

Commercial and Industrial non-pass grades decreased $33,000 to $692,000 as of June 30, 2023 as compared to $725,000 as of December 31, 2022.

Consumer non-pass grades increased to $10,000 as of June 30, 2023 as compared to $0 as of December 31, 2022.

There were no Agricultural or State and Political Subdivision non-pass grades at June 30, 2023 or December 31, 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 credit losses constitutes the amount available to absorb losses within the loan portfolio.

As of March 31, 2023, the allowance for credit losses was $7,142,000 as compared to $8,274,000 as of December 31, 2022.

As of June 30, 2023, the allowance for credit losses was $7,157,000 as compared to $8,274,000 as of December 31, 2022.

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

4 unchanged sentences

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

This assessment results in an

allocated allowance.

This assessment results in an allocated allowance.

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

3 unchanged sentences

Upon adoption of ASU No.

2016-13 in the first quarter of 2023, the qualitative factors used in the allowance calculation were adjusted from five loan pools utilized under previous methodology to fifteen loan segmentation pools aligning with the segmentation of the quarterly call report.

2016-13 in the first

quarter of 2023, the qualitative factors used in the allowance calculation were adjusted from five loan pools utilized under previous methodology to fifteen loan segmentation pools aligning with the segmentation of the quarterly call report.

There were no material increases or decreases in the qualitative factors arising from the realigning of the qualitative factor pools/segments and no additional qualitative factor adjustments were deemed necessary for the first quarter of 2023.

The Analysis of Allowance for Credit Losses table contains an analysis of the allowance for credit losses indicating charge-offs and recoveries for the three months ended March 31, 2023 and 2022.

Net charge-offs as a percentage of average loans was 0.002% for the three months ended March 31, 2023 and net recoveries as a percentage of average loans was 0.005% as of March 31, 2022.

Net charge-offs amounted to $13,000 the three months ended March 31, 2023 as compared to net recoveries of $38,000 for the three months ended March 31, 2022.

For the three months ended March 31, 2023, the provision for credit losses was $0 as compared to $219,000 for the three months ended March 31, 2022.

The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for credit losses of $7,142,000 of which 3.7% was attributed to the Commercial and Industrial component;

94.3% attributed to the Real Estate component;

0.7% attributed to the State and Political Subdivision component;

and 1.3% attributed to the Consumer component (refer to the activity in Note 4 – Loans and Allowance for Credit Losses on page 13).

The Company determined that the balance of the allowance for credit losses during the current quarter was sufficient to cover the estimated potential credit losses for the remaining balance of financial assets in the loan portfolio as of March 31, 2023 which resulted in no additional provision for credit losses for the three months ended March 31, 2023.

During the second quarter of 2023, qualitative factors related to delinquency trends were increased by four basis points for each of the following loan segmentation pools:

(a) revolving, open-end, 1-4 family residential properties (and extended under lines of credit) and (b) secured by multifamily (5 or more) residential properties.

Both of these loan segmentation pools are included in the Real Estate component of the loan portfolio.

The Analysis of Allowance for Credit Losses table contains an analysis of the allowance for credit losses indicating charge-offs and recoveries for the six months ended June 30, 2023 and 2022.

Net charge-offs as a percentage of average loans was 0.004% for the six months ended June 30, 2023 and net recoveries as a percentage of average loans was 0.006% as of June 30, 2022.

Net charge-offs amounted to $32,000 the six months ended June 30, 2023 as compared to net recoveries of $43,000 for the six months ended June 30, 2022.

For the six months ended June 30, 2023, the provision for credit losses was $34,000 as compared to $437,000 for the six months ended June 30, 2022.

The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for credit losses of $7,157,000, of which 94.4% was attributed to the Real Estate component, 0.0% attributed to the Agricultural component, 3.8% attributed to the Commercial and Industrial component, 1.2% attributed to the Consumer component, and 0.6% attributed to the State and Political Subdivisions component (refer to the activity in Note 4 – Loans and Allowance for Credit Losses on page 13).

Analysis of Allowance for Credit Losses (Post-Adoption of ASU No.

(Dollars in thousands)

As of and for the three months ended:

As of and for the six months ended:

Balance at prior year-end

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(Dollars in thousands)

As of and for the three months ended:

As of and for the six months ended:

Beginning balance

11 unchanged sentences

It is the policy of management and the Company’s Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio.

A provision for credi losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio.

A provision for credit losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio.

This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.

1 unchanged sentence

A detailed quarterly analysis to determine the adequacy of the Company’s allowance for credit 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 credit losses as a percentage of year-to-date average loans amounted to 0.831% and 1.167% at March 31, 2023 and 2022, 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 credit losses as a percentage of year-to-date average loans amounted to 0.828% and 1.177% at June 30, 2023 and 2022, 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 $5,169,000 as of March 31, 2023, as compared to $5,359,000 as of December 31, 2022.

Total non-performing assets amounted to $5,673,000 as of June 30, 2023, as compared to $5,359,000 as of December 31, 2022.

The economy remains unstable.

Inflation has receded in recent months but remains at a high level, and is well above the Federal Reserve’s target rate of 2%.

Consumer spending remains high, allowing the inflation rate to continue to remain higher than desired.

Business sentiment is downbeat and business investment has slowed.

Many economists and influential thinkers believe at least a mild recession will hit the United States economy by the final quarter of 2023.

Inflation has receded in recent months, but as of June 2023 was at 3%, above the Federal Reserve’s target rate of 2%.

The war between Ukraine and Russia continues to produce worldwide consternation.

The continued backing by the United States, both monetary and weapons, to Ukraine to support the NATO initiative has been a strain on the economy.

The unemployment rate is still low even though it has begun to slowly increase over the last two quarters, and the labor force participation rate remains low.

The need for workers has driven wages up in most sectors.

Attempting to rein in inflation has proven to be a very difficult task.

The OPEC nations slashing the daily output of oil, and the recent failures of two very large banks have proven to be large factors in the attempts to control inflation.

Values of new and used homes and automobiles have come back down, but higher interest rates have greatly curtailed borrowing.

The Federal Reserve has indicated a plan to potentially further raise interest rates if inflation does not continue to decrease, but expects at a minimum to hold rates steady through the end of the year.

The continued backing by the United States, both with money and weapons, to Ukraine to support the NATO initiative has been a strain on the economy.

Values of new and used homes and automobiles have remained high, and higher interest rates have added to the curtailed borrowing.

The Federal Reserve appears to be wrapping up its schedule of rate hikes, indicating a plan to potentially further raise interest rates at least one more time by years’ end if inflation does not continue to decrease, but expects at a minimum to hold rates steady through the end of the year and into next year.

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

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

Non-accrual loans totaled $5,037,000 as of March 31, 2023, as compared to $5,051,000 as of December 31, 2022.

There were no foreclosed assets held for resale as of March 31, 2023 and December 31, 2022.

There was one loan past-due 90 days or more and still accruing interest at March 31, 2023 that carried a balance of $132,000 which was well-secured by residential real estate and in the process of collection, compared to December 31, 2022 when there were three loans carrying an aggregate balance of $308,000 that were past-due 90 days or more and still accruing interest.

The loan past-due 90 days or more and still accruing interest as of December 31, 2022 consisted of three real estate loans, all of which were well secured and in the process of collection.

Non-performing assets to total loans was 0.60% at March 31, 2023 and 0.62% at December 31, 2022.

Non-performing assets to total assets was 0.39% at March 31, 2023 and 0.40% at December 31, 2022.

The allowance for credit losses to total non-performing assets was 138.14% as of March 31, 2023 as compared to 154.39% as of December 31, 2022.

Additional detail can be found on page 51 in the Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No.

Non-accrual loans totaled $5,089,000 as of June 30, 2023, as compared to $5,051,000 as of December 31, 2022.

There were no foreclosed assets held for resale as of June 30, 2023 and December 31, 2022.

There were five loans past-due 90 days or more and still accruing interest at June 30, 2023 that carried a balance of $584,000 which were well-secured by commercial and residential real estate and in the process of collection, compared to December 31, 2022 when there were three loans carrying an aggregate balance of $308,000 that were past-due 90 days or more and still accruing interest.

The loan past-due 90 days or more and still accruing interest as of December 31, 2022 consisted of three loans secured by commercial and residential real estate, all of which were well secured and in the process of collection.

Non-performing assets to total loans was 0.65% at June 30, 2023 and 0.62% at December 31, 2022.

Non-performing assets to total assets was 0.43% at June 30, 2023 and 0.40% at December 31, 2022.

The allowance for credit losses to total non-performing assets was 126.16% as of June 30, 2023 as compared to 154.39% as of December 31, 2022.

Additional detail can be found on page 55 and 56 in the Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No.

20016-13) and Non-Performing Assets to Impaired Loans (Pre-Adoption of ASU No.

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Performing substandard loans which have not been designated for individual impairment 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 designated for individual impairment amounted to $15,007,000 at March 31, 2023.

Individually evaluated loans were $5,346,000 at March 31, 2023 and $11,207,000 at December 31, 2022.

The largest individually evaluated loan relationship at March 31, 2023 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate.

At March 31, 2023, the loan carried a balance of $2,340,000, net of $1,989,000 that had been charged off to date.

The second largest individually evaluated loan relationship at March 31, 2023 consisted of five non-performing loans to a plastic processing company focused on non-post-consumer recycling.

Performing substandard loans not designated for individual impairment amounted to $15,289,000 at June 30, 2023.

Individually evaluated loans were $5,398,000 at June 30, 2023 and $11,207,000 at December 31, 2022.

The largest individually evaluated loan relationship at June 30, 2023 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate.

At June 30, 2023, the loan carried a balance of $2,340,000, net of $1,989,000 that had been charged off to date.

The second largest individually evaluated loan relationship at June 30, 2023 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 two loans are secured by commercial real estate.

The loans carried an aggregate balance of $1,081,000 at March 31, 2023.

The third largest individually evaluated loan relationship at March 31, 2023 consisted of a non-performing loan to the owner of a golf course and catering venue which is secured by commercial real estate.

At March 31, 2023, the loan carried a balance of $582,000.

The loans carried an aggregate balance of $1,042,000 at June 30, 2023.

The third largest individually evaluated loan relationship at June 30, 2023 consisted of a non-performing loan to the owner of a golf course and catering venue which is secured by commercial real estate.

At June 30, 2023, the loan carried a balance of $582,000.

The Company determines the need for individual evaluation of loans 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 $5,346,000 in individually evaluated loans at March 31, 2023, none were located outside of the Company’s primary market area.

Of the $5,398,000 in individually evaluated loans at June 30, 2023, none were located outside of the Company’s primary market area.

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 in a very frail state.

The war between Ukraine and Russia, inflationary pressures, OPEC cutting the oil supply, large bank failures, a slow increase in the unemployment rate, and recission concerns 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 economic climate remains in a very uncertain state.

An elevated level of consumer spending, the war between Ukraine and Russia, inflationary pressures, OPEC cutting the oil supply, large bank failures, political turmoil, the inability for government to approve state and/or national budgets, and recession concerns have all exacerbated the difficulties in the national and state economy.

Experts at all levels are attempting to calculate the intermediate or long term affects of such issues.

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 individually evaluated loans, non-performing assets, charge-offs, and delinquencies.

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

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, the longevity of the war, the effectiveness in controlling the lingering effects of the COVID-19 outbreak, the ongoing political landscape, and the looming threat of a recession, 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.

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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, 2023 and December 31, 2022, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

As of June 30, 2023 and December 31, 2022, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No.

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Allowance for credit losses to total non-performing assets

Real estate mortgages comprise 89.0% of the loan portfolio as of March 31, 2023, as compared to 89.1% as of December 31, 2022.

Real estate mortgages comprise 88.9% of the loan portfolio as of June 30, 2023, as compared to 89.1% as of December 31, 2022.

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

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

Total deposits decreased $45,584,000 to $947,915,000 as of March 31, 2023 as non-interest bearing deposits decreased by $2,133,000 and interest bearing deposits decreased by $43,451,000 from year-end 2022.

The decrease in deposits was the result of a $38,711,000 decrease in municipal deposits and other normal fluctuations.

Total short-term and long-term borrowings increased to $204,907,000 as of March 31, 2023, from $178,418,000 at year-end 2022, an increase of $26,489,000 or 14.8%.

Total deposits decreased $57,658,000 to $935,841,000 as of June 30, 2023 as non-interest bearing deposits decreased by $11,235,000 and interest bearing deposits decreased by $46,423,000 from year-end 2022.

The decrease in deposits was the result of a $39,273,000 decrease in municipal deposits and other fluctuations.

Total short-term and long-term borrowings increased to $218,359,000 as of June 30, 2023, from $178,418,000 at year-end 2022, an increase of $39,941,000 or 22.4%.

The increase in total borrowings was mainly the result of increased short-term borrowings due to decreased deposits and growth in the loan portfolio.

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

During the three months ended March 31, 2023, net income less dividends paid decreased capital by $328,000.

The decrease was offset by a one-time cumulative effect adjustment to retained earnings in the amount of $728,000 upon the adoption of ASU 2016-13.

During the six months ended June 30, 2023, net income less dividends paid decreased capital by $880,000.

The decrease was offset by a one-time cumulative effect adjustment that increased retained earnings by $728,000 upon the adoption of ASU 2016-13.

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

At December 31, 2022 accumulated other comprehensive loss was ($29,558,000).

Accumulated other comprehensive loss stood at ($25,780,000) at March 31, 2023, an increase of $3,778,000.

Accumulated other comprehensive loss stood at ($29,516,000) at June 30, 2023, an increase of $42,000.

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, 2023 and December 31, 2022, respectively.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of March 31, 2023 and December 31, 2022.

Total stockholders’ equity was $125,026,000 as of March 31, 2023, and $120,386,000 as of December 31, 2022.

At March 31, 2023 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, 2023 and December 31, 2022:

The Company held 231,611 shares of common stock as treasury stock at June 30, 2023 and December 31, 2022, respectively.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of June 30, 2023 and December 31, 2022.

Total stockholders’ equity was $121,185,000 as of June 30, 2023, and $120,386,000 as of December 31, 2022.

At June 30, 2023 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, 2023 and December 31, 2022:

Corrective Action

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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, 2023, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

As of June 30, 2023, 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.

4 unchanged sentences

● Proceeds from sales or maturities of securities;

● Payments received on loans and mortgage-backed securities;

● Payments received on loans and mortgage-backed and asset-backed securities;

● Overnight correspondent bank borrowings on various credit lines, notes, etc., with various levels of capacity;

1 unchanged sentence

● Brokered CDs.

At March 31, 2023 the Company had $504,376,000 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, 2023 the Company had $505,628,000 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 $9,261,000.

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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 $20,734,000 at March 31, 2023.

Securities sold under agreements to repurchase were $19,308,000 at June 30, 2023.

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.

2 unchanged sentences

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

Net cash flows used in operating activities were $2,827,000 for the three months ended March 31, 2023, compared to net cash flows provided by operating activities of $5,448,000 for the three months ended March 31, 2022.

Net income amounted to $1,357,000 for the three months ended March 31, 2023 and $3,543,000 for the three months ended March 31, 2022.

During the three months ended March 31, 2023 and 2022, net premium amortization on securities amounted to $400,000 and $838,000, respectively.

Net gains on sales of mortgage loans amounted to $17,000 for the three months ended March 31, 2023, compared to net losses on sales of mortgage loans of $34,000 for the three months ended March 31, 2022.

Originations of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $27,000 for the three months ended March 31, 2023, compared to the three months ended March 31, 2022 when proceeds (net of gains/losses) from sales of mortgage loans exceeded originations of mortgage loans originated for resale by $1,228,000.

Net securities losses amounted to $56,000 and $63,000 for the three months ended March 31, 2023 and 2022, respectively.

Accrued interest receivable decreased by $356,000 and $40,000 during the three months ended March 31, 2023 and 2022, respectively.

Other assets increased by $706,000 and $655,000 during the three months ended March 31, 2023 and 2022, respectively.

Accrued interest payable increased by $726,000 during the three months ended March 31, 2023, compared to an increase of $255,000 during the three months ended March 31, 2022.

Other liabilities decreased by $5,125,000 during the three months ended March 31, 2023 and decreased by $347,000 during the three months ended March 31, 2022.

Investing activities provided cash of $24,775,000 during the three months ended March 31, 2023, compared to the three months ended March 31, 2022 when investing activities used cash of $48,070,000.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) provided cash of $31,655,000 during the three months ended March 31, 2023 and used cash of $19,679,000 during the three months ended March 31, 2022.

Changes in restricted investment in bank stocks used cash of $1,216,000 and $1,130,000 during the three months ended March 31, 2023 and 2022, respectively.

Net cash used to originate loans amounted to $3,683,000 for the three months ended March 31, 2023, compared to $27,411,000 for the three months ended March 31, 2022.

Purchases of premises and equipment used cash of $868,000 and $97,000 during the three months ended March 31, 2023 and 2022, respectively.

Purchase of investment in real estate ventures used cash of $1,113,000 during the three months ended March 31, 2023, compared to $0 for the three months ended March 31, 2022.

Financing activities used cash of $20,373,000 and $8,817,000 during the three months ended March 31, 2023 and 2022, respectively.

Deposits decreased by $45,584,000 during the three months ended March 31, 2023, compared to a decrease of $32,492,000 during the three months ended March 31, 2022.

Short-term borrowings increased by $26,489,000 and $24,954,000 during the three months ended March 31, 2023 and 2022, respectively.

Dividends paid amounted to $1,685,000 for the three months ended March 31, 2023, compared to $1,665,000 for the three months ended March 31, 2022.

Net cash flows provided by operating activities were $357,000 for the six months ended June 30, 2023, compared to net cash flows provided by operating activities of $8,411,000 for the six months ended June 30, 2022.

Net income amounted to $2,496,000 for the six months ended June 30, 2023 and $7,365,000 for the six months ended June 30, 2022.

During the six months ended June 30, 2023 and 2022, net premium amortization on securities amounted to $799,000 and $1,633,000, respectively.

Net gains on sales of mortgage loans amounted to $34,000 for the six months ended June 30, 2023, compared to net losses on sales of mortgage loans of $34,000 for the six months ended June 30, 2022.

Proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $105,000 for the six months ended June 30, 2023, compared to the six months ended June 30, 2022 when originations of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $1,639,000.

Net securities losses amounted to $125,000 and $131,000 for the six months ended June 30, 2023 and 2022, respectively.

Accrued interest receivable decreased by $218,000 and increased by $112,000 during the six months ended June 30, 2023 and 2022, respectively.

Other assets increased by $87,000 and $639,000 during the six months ended June 30, 2023 and 2022, respectively.

Accrued interest payable increased by $608,000 during the six months ended June 30, 2023, compared to an increase of $22,000 during the six months ended June 30, 2022.

Other liabilities decreased by $5,188,000 during the six months ended June 30, 2023 and increased by $97,000 during the six months ended June 30, 2022.

Investing activities provided cash of $23,778,000 during the six months ended June 30, 2023, compared to the six months ended June 30, 2022 when investing activities used cash of $64,171,000.

Net activity in the available-for-sale

securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) provided cash of $41,217,000 during the six months ended June 30, 2023 and used cash of $9,283,000 during the six months ended June 30, 2022.

Changes in restricted investment in bank stocks used cash of $1,481,000 and $3,834,000 during the six months ended June 30, 2023 and 2022, respectively.

Net cash used to originate loans amounted to $12,873,000 for the six months ended June 30, 2023, compared to $50,331,000 for the six months ended June 30, 2022.

Purchases of premises and equipment used cash of $1,251,000 and $325,000 during the six months ended June 30, 2023 and 2022, respectively.

Purchase of investment in real estate venture used cash of $1,834,000 during the six months ended June 30, 2023, compared to $645,000 for the six months ended June 30, 2022.

Financing activities used cash of $21,098,000 and provided cash of $4,646,000 during the six months ended June 30, 2023 and 2022, respectively.

Deposits decreased by $57,658,000 during the six months ended June 30, 2023, and decreased by $84,361,000 during the six months ended June 30, 2022.

Short-term borrowings increased by $39,941,000 and $102,346,000 during the six months ended June 30, 2023 and 2022, respectively.

Dividends paid amounted to $3,376,000 for the six months ended June 30, 2023, compared to $3,334,000 for the six months ended June 30, 2022.

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

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

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, 2023.

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 June 30, 2023.

Earnings at Risk

18 unchanged sentences

In addition, the earnings simulation model projects net interest income would increase 8.25%, 18.72%, and 28.35% in the 100, 200 and 300 basis point decreasing rate scenarios presented.

All of these forecasts are within the Company’s one year policy guidelines, aside from the 200 basis point immediate increase scenario at (28.36)% and the 300 basis point immediate increase scenario at (40.90)% vs.

All of the forecasts in the increasing rate scenarios presented are outside of the Company’s policy guidelines with the 100 basis point immediate increase scenario at (16.34)%, the 200 basis point immediate increase scenario at (31.71)% and the 300 basis point immediate increase scenario at (45.79)% vs.

the policy limits of (15.00)%, (20.00)%, and (25.00)%, respectively.

2 unchanged sentences

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

For the three months ended March 31, 2023, the cost of interest-bearing liabilities averaged 2.29%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 4.40%.

For the three months ended June 30, 2023, the cost of interest-bearing liabilities averaged 2.52%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 4.46%.

Net Present Value Estimation

The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model.

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

present value of liability cash flows.

At March 31, 2023, net present value is projected to decrease 2.71%, 8.61%, and 16.25% in the 100, 200, and 300 basis point immediate increase scenarios, respectively.

Additionally, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with a decrease of 3.75% and 16.10%, respectively.

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 June 30, 2023, net present value is projected to decrease 4.07%, 10.93%, and 19.31% in the 100, 200, and 300 basis point immediate increase scenarios, respectively.

Additionally, the 100, 200 and

300 basis point immediate decreases in rates are estimated to affect net present value with a decrease of 1.12%, 9.50%, and 26.89%, respectively.

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

4 unchanged sentences

Effect on Net Interest Income

1-Year Net Income Simulation Projection

1-Year Net Interest Income Simulation Projection

+300 bp Shock vs.

3 unchanged sentences

‒200 bp Shock vs.

‒300 bp Shock vs.

Effect on Net Present Value of Balance Sheet

5 unchanged sentences

‒200 bp Shock vs.

‒300 bp Shock vs.

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

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