What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2024-06-03 compared with 2023-11-07 · 566 added, 716 removed, 1129 unchanged (53% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share and per share data)

September 30,

Cash and due from banks

24 unchanged sentences

Preferred stock, par value $ 2.00 per share;

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

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

authorized 1,000,000 shares as of March 31, 2024 and December 31, 2023;

issued 0 as of March 31, 2024 and December 31, 2023

Common stock, par value $ 2.00 per share;

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

issued 6,322,772 as of September 30, 2023 and 6,250,763 as of December 31, 2022;

outstanding 6,091,161 as of September 30, 2023 and 6,019,152 as of December 31, 2022

authorized 20,000,000 shares as of March 31, 2024 and December 31, 2023;

issued 6,384,894 as of March 31, 2024 and 6,352,665 as of December 31, 2023;

outstanding 6,153,283 as of March 31, 2024 and 6,121,054 as of December 31, 2023

Retained earnings

Accumulated other comprehensive loss

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

Treasury stock, at cost, 231,611 shares as of March 31, 2024 and December 31, 2023

TOTAL STOCKHOLDERS’ EQUITY

5 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

INTEREST INCOME

Interest and fees on loans

10 unchanged sentences

Net interest income

(Credit) provision for credit losses

Net interest income after (credit) provision for credit losses

Provision for credit losses

Net interest income after provision for credit losses

NON-INTEREST INCOME

3 unchanged sentences

ATM fees and debit card income

Net gains (losses) on sales of mortgage loans

Net gains on sales of mortgage loans

Net securities losses

10 unchanged sentences

Data processing fees

Goodwill Impairment

Total non-interest expense

Income before income tax expense

Income tax expense

Income before income tax (benefit) expense

Income tax (benefit) expense

NET (LOSS) INCOME

PER SHARE DATA

Net income per share:

Net (loss) income per share:

Dividends per share

1 unchanged sentence

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Dollars in thousands)

Three Months Ended

September 30,

Other comprehensive loss:

Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $( 1,711 ) and $( 3,243 ), respectively

Fair value adjustment on derivatives

Total other comprehensive loss

Total Comprehensive Loss

(Dollars in thousands)

Nine Months Ended

September 30,

Other comprehensive loss:

Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $( 1,679 ) and $( 10,688 ), respectively

Net (loss) income

Other comprehensive income:

Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $( 177 ) and $ 1,025 , respectively

Less reclassification adjustment for net gains included in net income, net of income taxes of $( 0 ) and $( 21 ), respectively (a) (b)

Fair value adjustment on derivatives

Total other comprehensive loss

Total Comprehensive Loss

Fair value adjustment on derivatives, net of income tax benefit of $ 586 and $ 0 , respectively

Total other comprehensive income

Total comprehensive (loss) income

______________________________

4 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

THREE MONTHS ENDED MARCH 31, 2024 AND 2023

(Dollars in thousands, except

3 unchanged sentences

Balance at January 1, 2024

Cumulative effect of adoption of ASU No.

Other comprehensive income, net of taxes

2 unchanged sentences

Balance at March 31, 2024

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.28 per share

Balance at June 30, 2023

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.28 per share

Balance at September 30, 2023

(Dollars in thousands, except

per share data)

Comprehensive

Stockholders’

Balance at January 1, 2023

Other comprehensive loss, net of taxes

Cumulative effect of adoption of ASU No.

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

1 unchanged sentence

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, 2022

Other comprehensive loss, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.28 per share

Balance at September 30, 2022

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

THREE MONTHS ENDED MARCH 31, 2024 AND 2023

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

(Credit) provision for credit losses

Provision (credit) for credit losses on unfunded commitments

Net (loss) income

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Provision for credit losses on loans

Provision for credit losses on unfunded commitments

Goodwill impairment

Depreciation and amortization

Net premium amortization on securities

Deferred income tax expense (benefit)

Deferred income tax benefit

Common stock issued

Net (gains) losses on sales of mortgage loans

Net gains on sales of mortgage loans

Proceeds from sales of mortgage loans originated for sale

1 unchanged sentence

Net securities losses

Increase in accrued interest receivable

(Increase) decrease 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 PROVIDED BY OPERATING ACTIVITIES

Increase (decrease) increase in other liabilities

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

2 unchanged sentences

Purchases of debt securities available-for-sale

Net decrease in time deposits with other banks

Net change in restricted investment in bank stocks

Net increase in loans

Net decrease (increase) in loans

Purchase of premises and equipment

Purchase of investment in real estate venture

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES:

Net decrease in deposits

Net increase (decrease) in deposits

Net increase in short-term borrowings

Repayment of finance lease obligations

Repayment of long-term borrowings

Dividends paid

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

2 unchanged sentences

Interest paid

Income taxes paid

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Purchased securities settling after year-end

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 and nine months ended September 30, 2023, are not necessarily indicative of the results for the year ending December 31, 2023.

Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results for the year ending December 31, 2024.

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, 2023.

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 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 March 31, 2024 for items that should potentially be recognized or disclosed in these consolidated financial statements.

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

1 unchanged sentence

Adopted ASUs:

In January of 2023, the Corporation adopted ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

2016-13 required financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

The Corporation took steps to prepare for the implementation over the past several years, such as:

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

The Corporation also completed a data and model validation analysis and prepared policies related to the adoption process.

The Corporation adopted the ASU’s provisions using the modified retrospective method and evaluated the impact the current expected credit loss (“CECL”) model had on the accounting for credit losses, and recognized a one-time, cumulative-effect adjustment to retained earnings at the beginning of the first reporting period in which the new standard became effective.

The cumulative-effect adjustment resulted in an increase to retained earnings of $ 768,000 , an additional reserve for unfunded commitments of $ 147,000 , a decrease in the allowance for credit losses of $ 1,119,000 , and a decrease in deferred tax assets of $ 204,000 , as outlined in the table on the next page.

There was no impact on the securities portfolio upon adoption.

This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

January 1, 2023

As Reported Under ASU

2016-13 Adoption

Allowance For Credit Losses

Deferred Income Taxes

Other Liabilities

Retained Earnings

Effect on deferred tax assets related to the adjustment to the allowance for credit losses and reserve for unfunded lending commitments from the adoption of ASU 2016-13 using a 21 % tax rate

Adjustment to the reserve for unfunded lending commitments related to the adoption of ASU 2016-13

Adjustment to undistributed profits related to the adoption of ASU 2016-13

In January of 2023, the Corporation adopted ASU No.

2022-02, Financial Instruments-Credit Losses (Topic 326):

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

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

The Corporation adopted the ASU’s provisions using the modified retrospective method in conjunction with the CECL adoption.

The adoption of ASU 2022-02 did not have a material impact on the Corporation’s consolidated financial statements.

There were no ASUs adopted during the first quarter of 2024.

Pending ASUs:

In March of 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2023-02, Investments- Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method .

ASU 2023-02 allows for standardization of accounting methodology for tax credit equity investments when certain requirements are met.

The standard provides the ability for both current and prospective tax credit investors to avoid the complexities of accounting for tax credits outside of the proportional amortization method.

To qualify for the proportional amortization method, the following conditions must be met:

it is probable that the income tax credits allocable to the investor will be available, 2.

the investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project, 3.

substantially all of the projected benefits are from income tax credits and other income tax benefits, 4.

the investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive, and 5.

the investor is a limited liability investor in the limited liability entity for both legal and tax purposes and the investor’s liability is limited to its capital investment.

The amendments in this ASU will be applied either on a modified retrospective basis or a retrospective basis.

In December of 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.

ASU 2023-09 requires enhanced income tax disclosures related to the rate reconciliation and information related to income taxes paid.

The ASU was issued to enhance transparency and decision usefulness of income tax disclosures.

The standard requires:

consistent categories and greater disaggregation of information in the rate reconciliation, and 2.

income taxes paid, net of refunds received, disaggregated by jurisdiction based on an established threshold.

The amendments in this ASU will be applied on a prospective basis and retrospective application is permitted.

The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years beginning after December 15, 2024.

Early adoption is permitted for all entities in any interim period.

The Corporation is currently evaluating the provisions of ASU 2023-02 and does not expect the adoption of the standard to have a material impact on the Corporation’s financial statements.

The Company is currently evaluating the provisions of ASU 2023-09 and does not expect the adoption of the standard to have a material impact on the Company’s financial statements.

NOTE 3 — SECURITIES

4 unchanged sentences

Securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

At March 31, 2024 and December 31, 2023, all debt securities held were classified as available-for-sale.

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

14 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 September 30, 2023;

There was no allowance for credit losses for Available-For-Sale debt securities as of March 31, 2024;

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 September 30, 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 March 31, 2024 and December 31, 2023:

Debt Securities Available-for-Sale

(Dollars in thousands)

September 30, 2023:

March 31, 2024:

Treasury securities

17 unchanged sentences

Corporate debt securities

Securities Available-for-Sale with an aggregate fair value of $ 274,422,000 at September 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 $ 219,538,000 at September 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 September 30, 2023.

Debt securities Available-for-Sale with an aggregate fair value of $ 319,904,000 at March 31, 2024 and $ 249,114,000 at December 31, 2023, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $ 179,652,000 at March 31, 2024 and $ 182,050,000 at December 31, 2023.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at March 31, 2024.

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.

September 30, 2023

March 31, 2024

Debt Securities Available-For-Sale

11 unchanged sentences

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

At September 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.

At March 31, 2024 and December 31, 2023, the Corporation had holdings of securities from the following issuers in excess of ten percent of consolidated stockholders’ equity (excluding holdings of the U.S.

Government and U.S.

Government Agencies and Corporations).

Holdings in Sallie Mae Bank securities had a fair value of $ 15,912,000 as of September 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 September 30, 2022.

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

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

There were no proceeds from sales of Debt Securities Available-For-Sale for the three months ended September 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 nine months ended September 30, 2023 and 2022 were $ 23,230,000 and $ 0 , respectively.

(Dollars in thousands)

March 31, 2024:

Sallie Mae Bank

Nelnet Student Loan Trust

Velocity Commercial Capital

Navient Student Loan Trust

(Dollars in thousands)

December 31, 2023:

Sallie Mae Bank

Nelnet Student Loan Trust

Navient Student Loan Trust

Proceeds from sales of Debt Securities Available-For-Sale for the three months ended March 31, 2024 and 2023 were $ 0 and $ 23,230,000 , respectively.

Gross gains realized on these sales were $ 0 and $ 447,000 , 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 September 30, 2023 and December 31, 2022:

September 30, 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 March 31, 2024 and December 31, 2023:

March 31, 2024

(Dollars in thousands)

23 unchanged sentences

Corporate debt securities

There were 178 individual debt securities in an unrealized loss position as of September 30, 2023, with a combined decline in value representing 12.02 % of the debt securities portfolio.

There were 174 individual debt securities in an unrealized loss position as of March 31, 2024, with a combined decline in value representing 7.64 % of the debt securities portfolio.

There were 177 individual debt securities in an unrealized loss position as of December 31, 2023, with their combined decline in value representing 7.75 % of the debt securities portfolio.

9 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 $ 2,216,000 as of September 30, 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 September 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.

All debt securities available for sale in an unrealized loss position, as of March 31, 2024, 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.

adequacy and interest rate risk position.

We do not currently intend to sell the debt securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities.

2 unchanged sentences

Equity Securities

Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income.

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

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

At September 30, 2023 and December 31, 2022, the Company had $ 1,389,000 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 nine months ended September 30, 2023 and 2022:

At March 31, 2024 and December 31, 2023, the Company had $ 1,297,000 and $ 1,482,000 , 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, 2024 and 2023:

(Dollars in thousands)

Nine months ended

September 30, 2023

September 30, 2022

Three months ended

March 31, 2024

March 31, 2023

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

1 unchanged sentence

Net losses recognized during the reporting period on equity securities still held at the reporting date

Management evaluates equity securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

Equity securities are generally evaluated for OTTI under FASB ASC 320, Investments - Debt and Equity Securities.

In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the equity security or more likely than not will be required to sell the equity security before its anticipated recovery.

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.

Management evaluates equity securities for impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

Equity securities without readily determinable fair values are generally evaluated for impairment under FASB ASC 321, Equity Securities.

In determining impairment under the FASB ASC 321 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the equity security or more likely than not will be required to sell the equity security before its anticipated recovery.

The assessment of whether an impairment 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 exist, 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 September 30, 2023 or December 31, 2022.

Based on the factors described above, management did not consider any equity securities to be impaired at March 31, 2024 or December 31, 2023.

NOTE 4 — LOANS AND ALLOWANCE FOR CREDIT LOSSES

30 unchanged sentences

These loans are sold without recourse.

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

Loans held for sale amounted to $ 109,000 and $ 214,000 at March 31, 2024 and December 31, 2023, respectively.

Agricultural Lending

3 unchanged sentences

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.

In general, these loans would be secured by cropland, pastureland, orchardland, or timberland that is committed to ongoing management and agricultural production, with a maximum loan-to-value ratio of 70 % and a maximum term of ten years .

Commercial and Industrial Lending

16 unchanged sentences

The loans are sponsored by one of the various government agencies including the SBA, United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”).

Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S.

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 September 30, 2023, the Company's balance of GGLs was $ 4,501,000 , compared to $ 4,631,000 at December 31, 2022.

As of March 31, 2024, the Company's balance of GGLs was $ 4,433,000 , compared to $ 4,470,000 at December 31, 2023.

Consumer Lending

43 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 on January 1, 2023 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.

7 unchanged sentences

This average annual charge-off rate contains loss content over several vintages and is used as a foundation for estimating the credit loss content for loans by segmented pools at the balance sheet date and is used to determine a historical charge-off rate.

When estimating expected credit losses, the Company considers forward-looking information that is both reasonable, supportable, and relevant to assessing the collectability of cash flows.

When estimating expected credit losses, the Company considers forward-looking information that is reasonable, supportable, and relevant to assessing the collectability of cash flows.

Reasonable and supportable forecasts may extend over the entire contractual term of a loan or a period shorter than the contractual term.

9 unchanged sentences

Management considers qualitative factors that are relevant to the Company as of the reporting date, which may include but are not limited to:

1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere;

1) changes in lending policies and procedures, including changes in underwriting standards and collection,

charge-off, and recovery practices not considered elsewhere;

2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments;

33 unchanged sentences

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

payment record, and the amount of the shortfall in relation to the principal and interest owed.

Once identified as impaired, the loans are measured individually for impairment based on one of the following methods:

11 unchanged sentences

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 nine months ended September 30, 2023.

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

19 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 September 30, 2023 and December 31, 2022, the amount of the reserve for unfunded lending commitments was $ 233,000 and $ 68,000 , respectively.

As of March 31, 2024 and December 31, 2023, the amount of the reserve for unfunded lending commitments was $ 186,000 and $ 166,000 , 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 $ 2,239,000 as of September 30, 2023.

Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Company’s consolidated balance sheet and totaled $ 2,530,000 as of March 31, 2024 compared to $ 2,476,000 at December 31, 2023.

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

38 unchanged sentences

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

The following table presents the classes of the loan portfolio summarized by risk rating and year of origination and gross charge offs by loan portfolio summarized by year of origination as of September 30, 2023.

The following tables present the classes of the loan portfolio summarized by risk rating and year of origination and year-to-date gross charge offs by loan portfolio summarized by year of origination as of March 31, 2024 and December 31, 2023.

(Dollars in thousands)

As of March 31, 2024:

7 Special Mention

35 unchanged sentences

Total Gross Charge Offs

State and Political Subdivision Loans include loans categorized as tax-free in the amount of $ 27,012,000 as of September 30, 2023.

Commercial and Industrial Loans include $ 4,501,000 of GGLs as of September 30, 2023.

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

There were no loans held for sale at September 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 and nine months ended September 30, 2023.

(Dollars in thousands)

and Industrial

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

Allowance for Credit Losses:

Beginning balance

Ending Balance

(Dollars in thousands)

and Industrial

As of and for the nine months ended September 30, 2023:

Allowance for Credit Losses:

Balance at December 31, 2022

CECL adoption adjustment

Beginning balance January 1, 2023

(Credit) Provision

Ending Balance

Ending balance:

evaluated for impairment

Ending balance:

evaluated for impairment

Reserve for Unfunded Lending Commitments

Loans Receivable:

Ending Balance

Ending balance:

evaluated for impairment

Ending balance:

evaluated for impairment

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

(Dollars in thousands)

Balance at December 31, 2022

CECL adoption adjustment

Provision for credit losses on unfunded commitments

Balance at September 30, 2023

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

(Dollars in thousands)

September 30, 2023

Commercial and Industrial

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

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

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

(Dollars in thousands)

For the Three Months Ended September 30, 2023

Commercial and Industrial

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

(Dollars in thousands)

For the Nine Months Ended September 30, 2023

Commercial and Industrial

Of the $ 18,000 in interest income recognized on individually evaluated loans for the nine months ended September 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 September 30, 2023.

(Dollars in thousands)

September 30, 2023

Commercial and Industrial

At September 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 September 30, 2023 and December 31, 2022 were as follows:

(Dollars in thousands)

September 30,

Commercial and Industrial

State and Political Subdivisions

Total non-accrual loans

Foreclosed assets held for resale

Loans past-due 90 days or more and still accruing interest

Total non-performing assets

There were no foreclosed assets held for resale at September 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 September 30, 2023 and $ 41,000 at December 31, 2022.

These balances were not included in foreclosed assets held for resale at September 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 September 30, 2023 and December 31, 2022:

(Dollars in thousands)

September 30, 2023:

Commercial and Industrial

State and Political Subdivisions

(Dollars in thousands)

December 31, 2022:

As of December 31, 2023:

7 Special Mention

8 Substandard

Unearned discount

Net deferred loan fees and costs

Total Real Estate Loans

Agricultural:

7 Special Mention

8 Substandard

Unearned discount

Net deferred loan fees and costs

Total Agricultural Loans

Commercial and Industrial:

State and Political Subdivisions

2016-13 Disclosures:

For periods prior to the adoption of ASU No.

2016-13, when management deemed the collection of contractual cashlows was unlikely for a specific instrument (mainly non-accrual loans and TDRs, then referred to as impaired loans), a specific reserve was calculated under ASC 310-10.

Management further calculated a general reserve for performing assets under its previous methodology, following ASC 450-20 which utilized historical loss experience and qualitative factor adjustments to arrive at a calculated allowance for credit losses.

Upon adoption of ASU No.

2016-13, the classes of the loan portfolio were updated to match the segmentation used under the CECL model and have been updated from Commercial and Industrial, Commercial Real Estate, Residential Real Estate, and Consumer to Real Estate, Agricultural, Commercial and Industrial, Consumer, and State and Political Subdivisions.

Comparative, pre-ASU No.

2016-13 adoption data has not been updated to reflect the new loan classes/segmentation utilized under the CECL model.

The following table presents the classes of the loan portfolio summarized by risk rating as of December 31,

Commercial and

(Dollars in thousands)

Commercial Real Estate

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

Residential Real Estate

Including Home Equity

Total Commercial and

Industrial Loans

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

Total Consumer Loans

State and Political Subdivisions:

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

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 and nine months ended September 30, 2022 and the year ended December 31, 2022.

Total State and Political Subdivision Loans

7 Special Mention

8 Substandard

Unearned discount

Net deferred loan fees and costs

Gross Charge Offs:

Commercial and Industrial

State and Political Subdivisions

Total Gross Charge Offs

State and Political Subdivision Loans include loans categorized as tax-free in the amount of $ 26,190,000 at March 31, 2024 and $ 26,181,000 at December 31, 2023.

Commercial and Industrial Loans include $ 4,433,000 of GGLs as of March 31, 2024 and $ 4,470,000 of GGLs as of December 31, 2023.

Loans held for sale are included in the Real Estate Loans category and amounted to $ 109,000 at March 31, 2024 and $ 214,000 at December 31, 2023.

The activity in the allowance for credit losses by loan class is summarized below for the three months ended March 31, 2024 and 2023 and the year ended December 31, 2023.

(Dollars in thousands)

and Industrial

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

Allowance for Loan Losses:

Beginning balance

Provision (credit)

As of and for the three months ended March 31, 2024:

Beginning balance January 1, 2024

Ending Balance

Ending balance:

evaluated for impairment

Ending balance:

evaluated for impairment

Reserve for Unfunded Lending Commitments

Loans Receivable:

Ending Balance

Ending balance:

evaluated for impairment

Ending balance:

evaluated for impairment

(Dollars in thousands)

and Industrial

As of and for the nine months ended September 30, 2022:

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

Allowance for Credit Losses:

Beginning balance

Provision (credit)

Balance at December 31, 2022

CECL adoption adjustment

Beginning balance January 1, 2023

(Credit) Provision

Ending Balance

3 unchanged sentences

evaluated for impairment

Reserve for Unfunded Lending Commitments

Loans Receivable:

8 unchanged sentences

Allowance for Credit Losses:

Beginning balance

Provision (credit)

Balance at December 31, 2022

CECL adoption adjustment

Beginning balance January 1, 2023

(Credit) Provision

Ending Balance

3 unchanged sentences

evaluated for impairment

Reserve for Unfunded Lending Commitments

Loans Receivable:

4 unchanged sentences

evaluated for impairment

During the three months ended September 30, 2022, one loan with a post modification balance of $ 143,000 was modified as a TDR.

During the nine months ended September 30, 2022, two loans with a combined post modification recorded investment of $ 515,000 were modified as TDRs.

The loan modifications for the nine months ended September 30, 2022 consisted of two payment modifications.

The outstanding recorded investment of TDRs as of September 30, 2022 was $ 7,589,000 .

There were no unfunded commitments on TDRs at September 30, 2022.

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

The Company's activity in the allowance for credit losses on unfunded commitments for the three months ended March 31, 2024 and 2023 was as follows:

(Dollars in thousands)

Non-accrual TDRs

Accruing TDRs

At September 30, 2022, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $ 670,000 and four Commercial Real Estate loans classified as TDRs with a combined recorded investment of $ 107,000 were not in compliance with the terms of their restructure.

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

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

Balance at December 31

CECL adoption adjustment

Credit for credit losses on unfunded commitments

Balance at March 31

The following table presents outstanding loan balances by loan class prior to allocation of net deferred fees and costs, as well as the balance of net loans after allocation of net deferred fees and costs and the allowance for credit losses as of March 31, 2024 and December 31, 2023.

(Dollars in thousands)

For the Three Months Ended September 30, 2022

Pre-Modification

Post-Modification

Commercial Real Estate

Commercial and Industrial

State and Political Subdivisions

Net Deferred Fees and Costs

Allowance for Credit Losses

During the three months ended March 31, 2024, a modification was granted on one loan to a borrower experiencing financial difficulty which carried a post modification recorded investment of $ 9,455,000 .

The loan modification granted during the three months ended March 31, 2024 was a payment modification which allowed a period of interest-only payments of six months.

There were no loan modifications granted to borrowers experiencing financial difficulty during the three months ended March 31, 2023.

The outstanding recorded investment of loans to borrowers experiencing financial difficulty was $ 9,455,000 at March 31, 2024, compared to $ 0 at December 31, 2023.

There were no unfunded commitments on modified loans to borrowers experiencing financial difficulty as of March 31, 2024.

The following table presents the outstanding recorded investment of loans to borrowers experiencing financial difficulties at March 31, 2024.

There were no loan modifications granted to borrowers experiencing financial difficulty as of December 31, 2023.

(Dollars in thousands)

For the Nine Months Ended September 30, 2022

Modifications of Loans to Borrowers Experiencing Financial Difficulty:

At March 31, 2024 there were no modifications of loans to borrowers experiencing financial difficulty that were not in compliance with the terms of their restructure.

The modification of a loan to a borrower experiencing financial difficulty that was completed during the twelve months preceding March 31, 2024 experienced a payment default during the three months ended March 31, 2024, but was paid current by the customer as of March 31, 2024.

The following table presents information regarding modifications of loans to borrowers experiencing financial difficulty that were completed during the three months ended March 31, 2024.

There were no modifications of loans to borrowers experiencing financial difficulty completed during the three months ended March 31, 2023.

(Dollars in thousands)

For the Three Months Ended March 31, 2024

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 nine months ended September 30, 2022.

For the Three Months Ended September 30, 2022

Commercial Real Estate

For the Nine Months Ended September 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.

The following table provides detail regarding they types of loan modifications made for borrowers experiencing financial difficulty during the three months ended March 31, 2024.

There were no modifications of loans to borrowers experiencing financial difficulty completed during the three months ended March 31, 2023.

For the Three Months Ended March 31, 2024

The recorded investment, unpaid principal balance, and the related allowance of the Company’s non-accrual loans are summarized below at March 31, 2024 and December 31, 2023:

(Dollars in thousands)

March 31, 2024

Commercial and Industrial

(Dollars in thousands)

December 31, 2023

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

At December 31, 2022, $ 7,480,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at December 31, 2022.

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

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

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

The average recorded investment and interest income recognized for the Company’s non-accrual loans are summarized below for the three months ended March 31, 2024 and 2023:

(Dollars in thousands)

For the Three Months Ended September 30, 2022

For the Three Months Ended March 31, 2024

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Of the $ 75,000 in interest income recognized on impaired loans for the three months ended September 30, 2022, $ 0 in interest income was recognized with respect to non-accrual loans.

(Dollars in thousands)

For the Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Of the $ 222,000 in interest income recognized on impaired loans for the nine months ended September 30, 2022, $ 0 in interest income was recognized with respect to non-accrual loans.

The following table presents the Company’s individually evaluated, collateral-dependent loans by segment as of March 31, 2024 and December 31, 2023.

(Dollars in thousands)

March 31, 2024

Commercial and Industrial

(Dollars in thousands)

December 31, 2023

Commercial and Industrial

At March 31, 2024 and December 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, 2024 and December 31, 2023 were as follows:

(Dollars in thousands)

Commercial and Industrial

State and Political Subdivisions

Total non-accrual loans

Foreclosed assets held for resale

Loans past-due 90 days or more and still accruing interest

Total non-performing assets

There were no foreclosed assets held for resale at March 31, 2024 or December 31, 2023.

These balances were not included in foreclosed assets held for resale at March 31, 2024 or December 31, 2023.

The following tables present the classes of the loan portfolio, including individually evaluated loans, summarized by past-due status at March 31, 2024 and December 31, 2023.

(Dollars in thousands)

March 31, 2024:

Commercial and Industrial

State and Political Subdivisions

(Dollars in thousands)

December 31, 2023:

Commercial and Industrial

State and Political Subdivisions

NOTE 5 — DEPOSITS

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

Major classifications of deposits at March 31, 2024 and December 31, 2023 consisted of:

(Dollars in thousands)

September 30,

Non-interest bearing demand

3 unchanged sentences

Total deposits

Total deposits decreased $ 1,196,000 to $ 992,303,000 as of September 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 $ 13,876,000 decrease in municipal deposits offset by increased time deposits as the result of higher rate CD promotions during the nine months ended September 30, 2023.

Time deposits increased during the nine months ended September 30, 2023 as the result of higher rate CD offerings along with an increase in brokered CDs of $ 20,250,000 .

Total deposits increased $ 1,212,000 to $ 981,651,000 as of March 31, 2024 due to increases in non-interest bearing demand and time deposits.

The increase in deposits was mainly the result of increased time deposits as the result of new higher rate CD promotions during the quarter offset by a $ 12,374,000 decrease in municipal deposits.

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 September 30, 2023 and December 31, 2022 are as follows:

Short-term borrowings and weighted–average interest rates at March 31, 2024 and December 31, 2023 are as follows:

(Dollars in thousands)

September 30, 2023

March 31, 2024

December 31, 2023

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 September 30, 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 March 31, 2024 and December 31, 2023.

(Dollars in thousands)

of Liabilities

September 30, 2023

March 31, 2024

Repurchase agreements (a)

1 unchanged sentence

Repurchase agreements (a)

(a) As of September 30, 2023 and December 31, 2022, the fair value of securities pledged in connection with repurchase agreements was $ 22,799,000 and $ 34,160,000 , respectively.

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

(a) As of March 31, 2024 and December 31, 2023, the fair value of securities pledged in connection with repurchase agreements was $ 38,841,000 and $ 28,902,000 , respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, 2024:

(Dollars in thousands)

Remaining Contractual Maturity of the Agreements

September 30, 2023:

March 31, 2024:

Repurchase agreements and repurchase-to-maturity transactions:

5 unchanged sentences

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

As of Septmeber 30, 2023 and December 31, 2022, the Company had $ 22,000,000 and $ 25,000,000 , respectively, in long-term borrowings outstanding with the FHLB.

As of March 31, 2024 and December 31, 2023, the Company had $ 122,000,000 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.

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

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 September 30, 2023.

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on March 31, 2024.

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 September 30, 2023, loans of $ 728,242,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 509,624,000 .

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

As of March 31, 2024, loans of $ 760,325,000 were pledged to FHLB which resulted in a

FHLB maximum borrowing capacity of $ 531,226,000 .

As of March 31, 2024, no securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

NOTE 7 — SUBORDINATED DEBT

11 unchanged sentences

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

At September 30, 2023, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,498,000 and $ 1,998,000 , respectively.

At March 31, 2024, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,479,000 and $ 1,987,000 , respectively.

At December 31, 2023, right-of-use assets and lease liabilities stood at $ 1,472,000 and $ 1,976,000 , 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 nine months ended September 30, 2023 and 2022 of $ 167,000 and $ 135,000 , respectively.

The Company recognized total operating lease costs for the three months ended March 31, 2024 and 2023 of $ 53,000 and $ 58,000 , respectively.

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

Cash payments totaled $ 155,000 and $ 125,000 , respectively, for the nine months ended September 30, 2023 and 2022.

The Company’s one finance lease for equipment expired as of August 31, 2023 The equipment will continue to depreciate for an additional two years .

At September 30, 2023, right-of-use assets and lease liabilities were recorded related to the finance lease totaling $ 34,000 and $ 0 , respectively.

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

Amounts recognized as right-of-use assets and lease liabilities related to finance leases are included in premises and equipment, net and other liabilities, respectively, in the accompanying balance sheet.

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

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

The lease did not contain an implicit rate;

therefore, our incremental borrowing rate was used.

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

Cash payments totaled $ 7,000 for the nine months ended September 30, 2023 and 2022.

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

September 30,

Cash payments totaled $ 49,000 and $ 55,000 , respectively, for the three months ended March 31, 2024 and 2023.

The following table displays the weighted-average term and discount rates for operating leases outstanding as of March 31, 2024 and December 31, 2023.

Weighted-average term (years)

Weighted-average discount rate

A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating or finance lease liability is as follows:

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

(Dollars in thousands)

September 30,

Minimum Lease Payments due:

14 unchanged sentences

Fair Values of Derivative Instruments on the Statement of Financial Condition

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022:

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023:

(Dollars in thousands)

September 30, 2023

March 31, 2024

Derivative Assets

10 unchanged sentences

Other Liabilities

The following table presents the derivative liabilities subject to an enforceable master netting arrangement as of March 31, 2024 and December 31, 2023:

of Liabilities

(Dollars in thousands)

March 31, 2024

December 31, 2023

The following table presents the remaining contractual maturity of the master netting arrangements as of March 31, 2024:

Remaining Contractual Maturity of the Agreements

(Dollars in thousands)

March 31, 2024:

Fair Value Hedges of Interest Rate Risk

3 unchanged sentences

Such derivatives are used to hedge the changes in fair value of certain of its pools of fixed rate assets.

As of September 30, 2023, the Company had a total of two interest rate swaps with a combined notional amount of $ 50,000,000 hedging fixed-rate available-for-sale debt securities.

As of September 30, 2023 and December 31, 2022, the following amounts were recorded on the balance sheet related to the cumulative basis adjustment for fair value hedges:

As of March 31, 2024, the Company had a total of two interest rate swaps with a combined notional amount of $ 50,000,000 hedging fixed-rate available-for-sale debt securities.

As of March 31, 2024 and December 31, 2023, the following amounts were recorded on the balance sheet related to the cumulative basis adjustment for fair value hedges:

(Dollars in thousands)

September 30,

Carrying amount of hedged assets:

3 unchanged sentences

Available-for-sale - MBS

Interst rate swaps notional amount

Interest rate swaps notional amount

(Dollars in thousands)

September 30,

Cumulative amount of fair value hedging adjustment included in the carrying amount of assets:

1 unchanged sentence

Available-for-sale - MBS

The table below presents the pre-tax effects of the Company’s derivative instruments designated as fair value hedges on the Consolidated Statements of Income for the years ended September 30, 2023 and 2022:

The table below presents the pre-tax effects of the Company’s derivative instruments designated as fair value hedges on the Consolidated Statements of Income for the year-to-date periods ended March 31, 2024 and 2023:

(Dollars in thousands)

September 30,

Amount of gain recognized in other comprehensive loss

Amount of gain (loss) , net of fair value re-measurements, included in interest income

Amount of loss recognized in other comprehensive loss

Amount of gain, net of fair value re-measurements, included in interest income

Cash Flow Hedges of Interest Rate Risk

2 unchanged sentences

These interest rate products are designated as cash flow hedges.

As of September 30, 2023,

the Company had a total of two interest rate swaps with a combined notional amount of $ 100,000,000 hedging specific short-term wholesale funding positions.

As of March 31, 2024, the Company had a total of two interest rate swaps with a combined notional amount of $ 100,000,000 hedging specific short-term wholesale funding positions.

For derivatives designated as cash flow hedges, the gain or loss on the derivatives is recorded in other comprehensive loss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings.

2 unchanged sentences

For cash flow hedges on the Company's short-term wholesale funding positions, amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s hedged variable rate short-term wholesale funding positions.

During the year ended September 30, 2023, the Company reclassified $ 24,000 as a reduction in interest expense.

The table below presents the pre-tax effects of the Company’s derivative instruments designated as cash flow hedges on the Consolidated Statements of Income for the years ended September 30, 2023 and 2022:

During the year-to-date period ended March 31, 2024, the Company reclassified $ 248,000 as a reduction in interest expense.

The table below presents the pre-tax effects of the Company’s derivative instruments designated as cash flow hedges on the Consolidated Statements of Income for the year-to-date periods ended March 31, 2024 and 2023:

(Dollars in thousands)

September 30,

Amount of gain recognized in other comprehensive loss

Amount of gain (loss) reclassified from accumulated other comprehensive income to interest expense

Amount of loss recognized in other comprehensive loss

Amount of gain reclassified from accumulated other comprehensive loss to interest expense

Interest rate swaps notional amount

2 unchanged sentences

The Company also has agreements with its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the Company could be required to terminate its derivative positions with the counterparty.

As of September 30, 2023 and December 31, 2022, the Company had no derivatives in a net liability position and accordingly did not have to post any collateral.

As of March 31, 2024 and December 31, 2023, the Company’s derivatives were in a net liability position

resulting in the Company having collateral in the amount of $ 4,650,000 posted with the counterparty at both March 31, 2024 and December 31, 2023.

NOTE 10 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

8 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 September 30, 2023 and December 31, 2022 were as follows:

The contract or notional amounts at March 31, 2024 and December 31, 2023 were as follows:

(Dollars in thousands)

September 30, 2023

March 31, 2024

December 31, 2023

14 unchanged sentences

The Company originates primarily commercial and residential real estate loans to customers predominately in the Company’s primary five county, Pennsylvania market area.

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 September 30, 2023, the Company had $ 784,126,000 in loans secured by real estate, which represented 89.0 % of total loans.

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, 2024, the Company had $ 813,044,000 in loans secured by real estate, which represented 89.4 % 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 September 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 of March 31, 2024 and December 31, 2023, 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.

25 unchanged sentences

Financial Assets Measured at Fair Value on a Recurring Basis

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

At March 31, 2024 and December 31, 2023, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)

September 30, 2023

March 31, 2024

Debt Securities Available-for-Sale:

34 unchanged sentences

Non-recurring adjustments can also include certain specific allocation amounts for individually evaluated collateral-dependent loans as calculated when establishing the allowance for credit losses.

The Company’s valuation procedure for any individually evaluated 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.

The Company’s valuation procedure for any individually evaluated 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.

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

2 unchanged sentences

There were no transfers between valuation levels in 2024 and 2023.

Following the adoption of ASU No.

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

Individually evaluated loans measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023 are as follows:

(Dollars in thousands)

Assets at September 30, 2023

Assets at March 31, 2024

Individually evaluated loans:

Total individually evaluated loans

Prior to the adoption of ASU No.

2016-13, at December 31, 2022, impaired loans measured at fair value on a nonrecurring basis were as follows:

(Dollars in thousands)

Assets at December 31, 2023

Impaired loans:

Commercial Real Estate

Residential Real Estate

Total impaired loans

Individually evaluated loans:

Total individually evaluated loans

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 September 30, 2023 and December 31, 2022.

There were no foreclosed assets held for resale measured at fair value on a nonrecurring basis at March 31, 2024 and December 31, 2023.

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

4 unchanged sentences

Quantitative Information about Level 3 Fair Value Measurements

2016-13 Adoption:

September 30, 2023

March 31, 2024

Valuation Technique

6 unchanged sentences

( 15 %) – ( 15 %)

2016-13 Adoption:

December 31, 2023

Impaired loans - collateral dependent

Individually evaluated loans - collateral dependent

Appraisal of collateral 1,3

3 unchanged sentences

( 5 %) – ( 5 %)

Impaired loans - other

Discounted cash flow

Discount rate

( 4 %) – ( 7 %)

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

5 unchanged sentences

(Dollars in thousands)

Fair Value Measurements at September 30, 2023

Fair Value Measurements at March 31, 2024

FINANCIAL ASSETS:

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Accrued interest receivable

Derivative Assets

FINANCIAL LIABILITIES:

5 unchanged sentences

Accrued interest payable

Derivative Liabilities

(Dollars in thousands)

6 unchanged sentences

Accrued interest receivable

Derivative Assets

FINANCIAL LIABILITIES:

5 unchanged sentences

Accrued interest payable

Derivative Liabilities

NOTE 12 — REVENUE RECOGNITION

3 unchanged sentences

All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers.

The Company elected to adopt practical expedient related to incremental costs of obtaining deposit contracts.

The Company elected to adopt the practical expedient related to incremental costs of obtaining deposit contracts.

As such, any costs associated with acquiring the deposits, except for time deposits with maturities in excess of one year, are recognized as an expense within non-interest expense in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would have been recognized is one year or less.

7 unchanged sentences

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

As of September 30, 2023 and December 31, 2022, the fair value of trust assets under management was $ 116,688,000 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.

As of March 31, 2024 and December 31, 2023, the fair value of trust

assets under management was $ 112,141,000 and $ 109,064,000 , respectively.

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

Interchange Fees and Surcharges

5 unchanged sentences

All expenses related to the settlement of debit card transactions (both point-of-sale and ATM) are recognized on a monthly basis and included in non-interest expense on the consolidated statements of income.

NOTE 13 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding for the period.

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 September 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.

NOTE 13 — (LOSSES) EARNINGS PER SHARE

Basic (losses) earnings per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding for the period.

Diluted (losses) earnings per share 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, 2024 and 2023, there were no potential common shares outstanding.

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

(In thousands, except earnings per share)

Three Months Ended

September 30,

Weighted-average common shares outstanding

Basic and diluted earnings per share

(In thousands, except earnings per share)

Nine Months Ended

September 30,

Net (loss) income

Weighted-average common shares outstanding

Basic and diluted earnings per share

Basic and diluted (losses) earnings per share

NOTE 14 — GOODWILL

2 unchanged sentences

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

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

Goodwill totaled $ 0 at March 31, 2024 and $ 19,133,000 at December 31, 2023.

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

1 unchanged sentence

Any change in the assumptions utilized to determine the carrying value of goodwill could adversely affect our results of operations.

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 September 30, 2023.

Goodwill was evaluated for impairment using a qualitative impairment test at December 31, 2023, and it was determined that goodwill was not impaired.

Due primarily to the decrease in the Company’s stock price during the first quarter of 2024 as a triggering event management evaluated the need for an interim goodwill impairment analysis.

The decrease prompted the Company to assess its goodwill utilizing a quantitative impairment test and determined it was more likely than not the fair value of the Company was less than the carrying amount as of March 31, 2024.

Based on the results of the impairment test, the Company recorded a goodwill impairment charge of $ 19,133,000 effective March 31, 2024.

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

This quarterly report contains certain forward-looking statements, which are included pursuant to the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, and reflect management’s beliefs and expectations based on information currently available.

These forward-looking statements are inherently subject to significant risks and uncertainties, including changes in general economic and financial market conditions, the Company’s ability to effectively carry out its business plans and changes in regulatory or legislative requirements.

Other factors that could cause or contribute to such differences are changes in competitive conditions, and pending or threatened litigation.

Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially.

In addition to historical information, this Form 10-Q may contain forward-looking statements.

Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, noninterest income, earnings or loss per share, asset mix and quality, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of Management or the Board of Directors, and (c) statements of assumptions, such as economic conditions in the Company's market areas.

Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "intends", "will", "should", "anticipates", or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.

Forward-looking statements are subject to certain risks and uncertainties such as national, regional and local economic conditions, competitive factors, and regulatory limitations.

Actual results may differ materially from those projected in the forward-looking statements.

Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following:

short-term and long-term effects of inflation and rising costs on the Company, customers and economy;

legislative and regulatory changes;

banking system instability caused by failures and continuing financial uncertainty of various banks which may adversely impact the Company and its securities and loan values, deposit stability, capital adequacy, financial condition, operations, liquidity, and results of operations;

effects of governmental and fiscal policies, as well as legislative and regulatory changes;

effects of new laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) and their application with which the Company and its subsidiaries must comply;

impacts of the capital and liquidity requirements of the Basel III standards or any similar standards;

effects of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;

ineffectiveness of the business strategy due to changes in current or future market conditions;

future actions or inactions of the United States government, including the effects of short-term and long-term federal budget and tax negotiations and a failure to increase the government debt limit or a prolonged shutdown of the federal government;

effects of economic conditions particularly with regard to the negative impact of any pandemic, epidemic or health-related crisis and the responses thereto on the operations of the Company and current customers, specifically the effect of the economy on loan customers' ability to repay loans;

effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services;

inflation, securities market and monetary fluctuations;

risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and interest rate protection agreements, as well as interest rate risks;

difficulties in acquisitions and integrating and operating acquired business operations, including information technology difficulties;

challenges in establishing and maintaining operations in new markets;

effects of technology changes;

effects of general economic conditions and more specifically in the Company's market areas;

failure of assumptions underlying the establishment of reserves for credit losses and estimations of values of collateral and various financial assets and liabilities;

acts of war or terrorism or geopolitical instability;

disruption of credit and equity markets;

ability to manage current levels of impaired assets;

loss of certain key officers;

ability to maintain the value and image of the Company's brand and protect the Company's intellectual property rights;

continued relationships with major customers;

and, potential impacts to the Company from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses.

Management considers subsequent events occurring after the balance sheet date for matters which may require adjustments to, or disclosure in, the consolidated financial statements.

We caution readers not to place undue reliance on these forward-looking statements.

They only reflect Management's analysis as of this date.

The Company does not revise or update these forward-looking statements to reflect events or changed circumstances.

Please carefully review the risk factors described in other documents the Company files from time to time with the SEC, including the Annual Reports

on Form 10-K and the Quarterly Reports on Form 10-Q.

Please also carefully review any Current Reports on Form 8-K filed by the Company with the SEC.

CRITICAL ACCOUNTING POLICIES

1 unchanged sentence

The Significant Accounting Policies are summarized in Note 1 to the consolidated financial statements included in the 2023 Annual Report on Form 10-K.

Effective January 1, 2023, the Company elected to adopt ASU No.

2016-13, referred to as CECL.

Please refer to Note 2- Recent Accounting Standards Updates, Note 3- Securities, and Note 4- Loans and Allowance for Credit Losses for updates reflecting the adoption of ASU No.

These Notes supplement updates to the accounting policies previously disclosed in Note 1- Summary of Significant Accounting Policies of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

RESULTS OF OPERATIONS

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

First Keystone Corporation realized earnings for the three months ended September 30, 2023 of $1,283,000, a decrease of $2,221,000, or 63.4% from the third quarter of 2022.

The decrease in net income for the three months ended September 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 September 30, 2023, net income was $0.21 versus $0.58 for the same three month period of 2022.

Cash dividends amounted to $0.28 per share for the three months ended September 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 September 30, 2023, interest income amounted to $14,237,000, an increase of $2,340,000 or 19.7% from the three months ended September 30, 2022, while interest expense amounted to $7,353,000 in the three months ended September 30, 2023, an increase of $4,975,000 or 209.2% from the three months ended September 30, 2022.

As a result, net interest income decreased $2,635,000 or 27.7% to $6,884,000 from $9,519,000 for the same period in 2022.

The Company’s net interest margin for the three months ended September 30, 2023 was 2.23% compared to 3.24% 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 September 30, 2023 carried a credit balance of $370,000, compared to a provision balance of $219,000 for the three months ended September 30, 2022.

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 September 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 recoveries of $30,000 and net charge-offs of $168,000 for the three months ended September 30, 2023 and 2022, respectively.

See Allowance for Credit Losses on page 52 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $1,476,000 for the three months ended September 30, 2023, as compared to $1,493,000 for the same period in 2022, a decrease of $17,000, or 1.1%.

Net securities losses increased $37,000 to ($87,000) for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Net securities losses were the result of recognizing $87,000 in net losses on held equity securities in the third quarter of 2023 compared to $50,000 in net losses on held equity securities for the same period in 2022.

Trust department income decreased $5,000 or 2.1% to $231,000 for the three months ended September 30, 2023 as compared to the same period in 2022.

Service charges and fee income decreased $17,000 or 3.0% while, ATM fees and debit card income increased $25,000 or 4.7% to $556,000 for the three months ended September 30, 2023.

Net gains (losses) on sales of mortgage loans increased $14,000 during the third quarter of 2023 as there were two mortgage loans repurchased from Fannie Mae for a net loss of $3,000 in the third quarter of 2022.

Other non-interest income decreased $3,000 or 5.4% to $53,000 for the three months ended September 30, 2023.

NON-INTEREST EXPENSE

Total non-interest expense was $7,420,000 for the three months ended September 30, 2023, as compared to $6,711,000 for the three months ended September 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 $4,020,000 or 54.2% of total non-interest expense for the three months ended September 30, 2023, as compared to $3,677,000 or 54.8% for the three months ended September 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 $1,102,000 for the three months ended September 30, 2023, an increase of $125,000 or 12.8% 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 increased $41,000 or 13.9% to $336,000 as of September 30, 2023 versus the third quarter of 2022.

This was due to increases in audit fees in 2023 and higher consulting fees associated with implementing new internal systems contracts.

Pennsylvania shares tax expense amounted to $189,000 for the three months ended September 30, 2023, a decrease of $123,000 or 39.4% as compared to the three months ended September 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 $175,000 for the three months ended September 30, 2023, an increase of $59,000 or 50.9% 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 $283,000 for the three months ended September 30, 2023, an increase of $9,000 or 3.3% as compared to the three months ended September 30, 2022.

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

Data processing expenses amounted to $544,000 for the three months ended June 30, 2023 as compared to $205,000 for the same period of 2022, an increase of $339,000 or 165.4%.

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

Advertising expense amounted to $152,000 in the third quarter of 2023, an increase of $56,000 or 58.3% as compared to the three months ended September 30, 2023.

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

Other non-interest expense amounted to $619,000 for the three months ended September 30, 2023, a decrease of $140,000 or 18.4% as compared to 2022.

The decrease was mainly the result of a fraud settlement related to a customer’s deposit relationship in the third quarter of 2022.

Income tax expense amounted to $27,000 for the three months ended September 30, 2023, as compared to $578,000 for the three months ended September 30, 2022, a decrease of $551,000.

The effective total income tax rate was 2.1% for the three months ended September 30, 2023 as compared to 14.2% for the three months ended September 30, 2022.

The decrease in the effective tax rate was mainly due to lower pre-tax earnings in relation to the amount of tax-exempt income earned on securities and low-income housing tax credits.

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

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

First Keystone Corporation realized earnings for the nine months ended September 30, 2023 of $3,779,000, a decrease of $7,090,000, or 65.2% from the same period in 2022.

The decrease in net income for the nine months ended September 30, 2023 was primarily due to less PPP loan fees, increases in salaries and benefits and data processing expenses, 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 $0.62 for the nine months ended September 30, 2023 versus $1.82 for the same period in 2022.

Cash dividends amounted to $0.84 per share for the nine months ended September 30, 2023 and 2022.

Quarter ended March 31, 2024 compared to quarter ended March 31, 2023

First Keystone Corporation realized a loss for the three months ended March 31, 2024 of $18,377,000, a decrease of $19,734,000 from the first quarter of 2023.

The decrease in net income for the three months ended March 31, 2024 was primarily due to the Company recognizing a full goodwill impairment of $19,133,000 as well as increases in interest paid on deposits, interest paid on long-term borrowings through the Federal Home Loan Bank, and salaries and related payroll taxes.

On a per share basis, for the three months ended March 31, 2024, net losses were $3.00 versus earnings of $0.23 for the same three month period of 2023.

Quarterly regular cash dividends amounted to $0.28 per share for the three months ended March 31, 2024 and 2023.

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 nine months ended September 30, 2023, interest income amounted to $41,195,000, an increase of $7,558,000 or 22.5% from the nine months ended September 30, 2022, while interest expense amounted to $19,399,000 in the nine months ended September 30, 2023 an increase of $14,518,000 or 297.4% from the nine months ended September 30, 2022.

In the three months ended March 31, 2024, interest income amounted to $16,946,000, an increase of $3,639,000 or 27.3% from the three months ended March 31, 2023, while interest expense amounted to $9,471,000 in the three months ended March 31, 2024, an increase of $3,968,000 or 72.1% from the three months ended March 31, 2023.

As a result, net interest income decreased $329,000 or 4.2% to $7,475,000 from $7,804,000 for the same period in 2023.

The Company’s net interest margin for the nine months ended September 30, 2023 was 2.41% compared to 3.26% 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.

The Company’s net interest margin for the three months ended March 31, 2024 was 2.25% compared to 2.61% for same period in 2023.

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

PROVISION FOR CREDIT LOSSES

The provision for credit losses for the nine months ended September 30, 2023 carried a credit balance of $336,000, compared to a provision balance of $656,000 for the nine months ended September 30, 2023.

The provision for credit losses for the nine months ended September 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 $2,000 and $125,000 for the nine months ended September 30, 2023 and 2022, respectively.

The provision for credit losses for the three months ended March 31, 2024 and 2023 was $264,000 and $0, respectively.

The increase 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, 2024 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 recoveries of $7,000 for the three months ended March 31, 2024 and net charge-offs of $13,000 for the three months ended March 31, 2023.

See Allowance for Credit Losses on page 49 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $4,467,000 for the nine months ended September 30, 2023, as compared to $4,396,000 for the same period in 2022, an increase of $71,000, or 1.6%.

ATM fees and debit card income increased $56,000 or 3.5% to $1,654,000 for the nine months ended September 30, 2023 due to increased ATM interchange fees as the result of increased transaction volume.

Service charges and fee income increased $21,000 for the nine months ended September 30, 2023.

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

Gains(losses) on sales of mortgage loans increased $82,000 or 215.8% due to a low number of individual loans sold in the first nine months of 2022 and many of the loans sold in 2022 being sold at a loss.

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

Trust department income was $709,000 for the nine months ended September 30, 2023 a decrease of $45,000 or 6.0% as compared to the same period in 2022.

Net securities losses increased $31,000 or 17.1% to ($212,000) for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

The decrease was due to the Company recognizing $311,000 in net losses on held equity securities and $99,000 in net gains on the sales of debt securities in the first nine months of 2023 as compared to recognizing $181,000 in net losses on held equity securities in the same period in 2022.

Total non-interest income was $1,344,000 for the three months ended March 31, 2024, as compared to $1,452,000 for the same period in 2023, a decrease of $108,000, or 7.4%.

Net securities losses increased $128,000 to ($184,000) for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.

Net securities losses were the result of recognizing $184,000 in net losses on held equity securities in the first quarter of 2024 compared to $155,000 in net losses on held equity securities offset by $99,000 in net gains on sold debt securities during the same period in 2023.

Trust department income increased $14,000 or 6.1% to $244,000 for the three months ended March 31, 2024 as compared to the same period in 2023.

Service charges and fee income was $525,000 for the first three months of 2024, remaining the same as the first three months of 2023.

ATM fees and debit card income decreased $15,000 or 2.8% to $517,000 for the three months ended March 31, 2024.

Net gains on sales of mortgage loans decreased $6,000 during the first quarter of 2024.

Other non-interest income increased $14,000 or 25.5% to $69,000 for the three months ended March 31, 2024 due to higher retail investment income as a result of more income from annuities.

NON-INTEREST EXPENSE

Total non-interest expense was $22,330,000 for the nine months ended September 30, 2023, as compared to $19,822,000 for the nine months ended September 30, 2022.

Non-interest expense increased $2,508,000 or 12.7%.

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

Salaries and benefits amounted to $12,139,000 or 54.4% of total non-interest expense for the nine months ended September 30, 2023, as compared to $10,693,000 or 53.9% for the nine months ended September 30, 2022.

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

Net occupancy, furniture and equipment, and computer expense amounted to $3,266,000 for the nine months ended September 30, 2023, an increase of $289,000 or 9.7%.

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

Professional services increased $154,000 or 16.0% to $1,117,000 for the nine months ended September 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 $671,000 for the nine months ended September 30, 2023, a decrease of $289,000 or 30.1% as compared to the nine months ended September 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 $156,000 or 41.8% for the nine months ended September 30, 2023.

Total non-interest expense was $27,145,000 for the three months ended March 31, 2024, as compared to $7,753,000 for the three months ended March 31, 2023.

Salaries and benefits amounted to $4,554,000 or 16.8% of total non-interest expense for the three months ended March 31, 2024, as compared to $4,386,000 or 56.6% for the three months ended March 31, 2023.

The increase was due to an increase in salaries in the first quarter of 2024 as compared to the same period in 2023 in an effort to offer more competitive wages in our various markets, increase retention and support the Company’s growth.

Net occupancy, furniture and equipment, and computer expense amounted to $1,086,000 for the three months ended March 31, 2024, an increase of $43,000 or 4.1% which was mainly due to increased snow plowing and salting expenses during the first quarter of 2024.

Professional services decreased $2,000 or 0.5% to $433,000 as of March 31, 2024 versus the first quarter of 2023.

Pennsylvania shares tax expense amounted to $206,000 for the three months ended March 31, 2024, a decrease of $35,000 or 14.5% as compared to the three months ended March 31, 2023.

This decrease was due to a Pennsylvania shares tax credit for a donation to a local non-profit organization being recognized in the first quarter of 2024.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense amounted to $188,000 for the three months ended March 31, 2024, an increase of $12,000 or 6.8% as compared to the same period in 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 $868,000 for the nine months ended September 30, 2023, an increase of $224,000 or 34.8% as compared to the nine months ended September 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 $1,213,000 for the nine months ended September 30, 2023, an increase of $499,000 or 69.9% as compared to the nine months ended September 30, 2022.

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

Advertising expense increased $94,000 or 32.9% during the nine months ended September 30, 2023.

This increase was mainly due to the Bank marketing the new full-service Bethelehem branch, along with utilizing more television, billboard and radio advertising in the first nine months of 2023 as compared to the same period of 2022.

Other non-interest expense amounted to $2,147,000 for the nine months ended September 30, 2023, a decrease of $65,000 or 2.9% as compared to the nine months ended September 30, 2022.

The decrease was mainly the result of a fraud reimbursement to one customer and a fraud settlement related to another customer’s deposit relationship both in 2022.

Income tax expense amounted to $490,000 for the nine months ended September 30, 2023, as compared to $1,805,000 for the nine months ended September 30, 2022, a decrease of $1,315,000.

The effective total income tax rate was 11.5% for the nine months ended September 30, 2023 as compared to 14.2% for the nine months ended September 30, 2022.

The decrease in the effective tax rate was mainly due to lower pre-tax earnings in relation to the amount of tax-exempt income earned on securities and low-income housing tax credits.

The Company recognized $174,000 and $191,000 of tax credits from low-income housing partnerships in the nine months ended September 30, 2023 and 2022, respectively.

ATM and debit card fees expense amounted to $222,000 for the three months ended March 31, 2024, a decrease of $85,000 or 27.7% as compared to the three months ended March 31, 2023.

This decrease in the first quarter of 2024 was a result of lower call center expenses and lower debit card losses mainly as the result of an ATM fraud event in the first quarter of 2023.

Data processing expenses amounted to $289,000 for the three months ended March 31, 2024 as compared to $312,000 for the same period of 2023, a decrease of $23,000 or 7.4% mainly due to the implementation of a new vendor relationship for online banking.

Advertising expense amounted to $104,000 in the first quarter of 2024, an increase of $30,000 or 40.5% as compared to the three months ended March 31, 2023.

The increase was mainly due to the Bank promoting a new branch location and utilizing more television and billboard advertising in the first quarter of 2024 as compared to the same period in 2023.

The Company recognized goodwill impairment in the amount of $19,133,000 during the first quarter of 2024.

This was the result of goodwill impairment testing performed due to the decrease of the Company’s stock price during the first quarter of 2024 as a triggering event.

The goodwill impairment has no impact on regulatory capital ratios, liquidity or the Company’s cash balances.

Other non-interest expense amounted to $930,000 for the three months ended March 31, 2024, an increase of $151,000 or 19.4% as compared to the three months ended March 31, 2023.

The increase was mainly the result of monthly amortization of a new low income housing partnership beginning in the fourth quarter of 2023.

Management of the Company believes that investors’ understanding of the Company’s performance is enhanced by disclosing non-GAAP financial measures without the effects of the impairment as a reasonable basis for comparison of the Corporation’s ongoing results of operations.

These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results.

Our non-GAAP measures may not be comparable to non-GAAP measures of other companies.

The following Non-GAAP Reconciliation Schedule provides a reconciliation of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.

NON-GAAP RECONCILIATION SCHEDULE

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

(Dollars in thousands)

March 31, 2024

March 31, 2023

Net interest income after provision for credit losses

Total non-interest income

Total non-interest expense

Income tax benefit (expense)

Other expense:

Goodwill impairment

Income tax expense

After tax adjustment to GAAP

Adjusted net income

Income tax benefit amounted to $213,000 for the three months ended March 31, 2024, as compared to income tax expense of $146,000 for the three months ended March 31, 2023, a decrease of $359,000.

The effective total income tax rate was 1.1% for the three months ended March 31, 2024 as compared to 9.7% for the three months ended March 31, 2023.

The decrease in the effective tax rate was mainly due to the goodwill impairment, as discussed in Note 14, which is nondeductible for tax purposes, offset by the tax benefit of tax-exempt income earned on securities and more low-income housing tax credits.

The Company recognized $210,000 and $58,000 of tax credits from low-income housing partnerships in the three months ended March 31, 2024 and 2023, respectively.

FINANCIAL CONDITION

Total assets decreased to $1,319,714,000 as of September 30, 2023, a decrease of $9,480,000 from year-end 2022.

Total assets decreased to $1,409,698,000 as of March 31, 2024, a decrease of $6,172,000 from year-end 2023.

Total assets as of December 31, 2023 amounted to $1,415,870,000.

Total debt securities available-for-sale decreased $40,267,000 or 10.8% to $333,177,000 as of September 30, 2023 from December 31, 2022.

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

Total loans increased $22,640,000 or 2.6% to $881,038,000 as of September 30, 2023 from December 31, 2022.

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

Total deposits decreased $1,196,000 or 0.1% to $992,303,000 as of September 30, 2023 from December 31, 2022.

The decrease was mainly due to a decrease in non-interest bearing deposits, offset by an increase in interest bearing deposits due to the purchase of $20,250,000 in Brokered CD’s in the third quarter of 2023.

Total debt securities available-for-sale increased $16,039,000 or 4.1% to $409,007,000 as of March 31, 2024 from December 31, 2023 mainly due to the execution of a balance sheet leverage strategy.

The increase was mainly due to the purchase of several securities in the combined amount of $39,124,000 offset by calls, maturities, and principal paydowns during 2024.

Total loans decreased $1,607,000 or 0.2% to $909,471,000 as of March 31, 2024 from December 31, 2023.

Slow loan demand during the first quarter of 2024 contributed to the decrease in total loans.

Real estate loans, the largest segment of the Company’s loan portfolio, increased by $1,551,000 during the three months ended March 31, 2024.

This was offset by a decrease in Commercial and Industrial loans of $3,156,000 during the three months ended March 31, 2024 mainly due to a large paydown that was completed on a commercial and industrial line of credit which resulted in a decrease of $3,126,000 in the balance of the loan during the three months ended March 31, 2024.

Total deposits increased $1,212,000 or 0.1% to $981,651,000 as of March 31, 2024 from December 31, 2023.

The increase was mainly due to an increase in time deposits as the result of new higher rate CD promotions during the quarter offset by a $12,374,000 decrease in municipal deposits.

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 decreased in the nine months ended September 30, 2023 by $1,642,000 to $176,776,000 from $178,418,000 as of December 31, 2022.

Borrowings decreased mainly due to decreased repurchase balances and the maturity of a long-term note.

Total stockholders’ equity amounted to $115,021,000 at September 30, 2023, a decrease of $5,365,000 or 4.5% from December 31, 2022 due to a decrease in the market value of the securities portfolio.

Total borrowings increased in the three months ended March 31, 2024 by $12,817,000 to $288,285,000 from $275,468,000 as of December 31, 2023.

Borrowings increased mainly due to increased repurchase agreement balances.

Total stockholders’ equity amounted to $103,711,000 at March 31, 2024, a decrease of $17,904,000 or 14.7% from December 31, 2023 due to a decrease in retained earnings as a result of the Company recognizing goodwill impairment of $19,133,000, offset by an increase in the market value of the securities portfolio.

SEGMENT REPORTING

3 unchanged sentences

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 93.1% at September 30, 2023 and 94.0% at September 30, 2022.

The earning asset ratio (average interest earning assets divided by average total assets) equaled 93.6% at March 31, 2024 and 93.3% at March 31, 2023.

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 $881,038,000 as of September 30, 2023, up $22,569,000 or 2.6% since year-end 2022.

Our primary earning asset, total loans, decreased to $909,471,000 as of March 31, 2024, down $1,607,000 or 0.2% since year-end 2023.

The loan portfolio continues to be well diversified.

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

Total non-performing assets were $6,293,000 as of September 30, 2023, an increase of $934,000, or 17.4% 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 108.33% as of September 30, 2023 and 154.39% at December 31, 2022.

Non-performing assets decreased since year-end 2023, and overall asset quality has remained consistent.

Total non-performing assets were $5,101,000 as of March 31, 2024, a decrease of $580,000, or 10.2% from $5,681,000 reported in non-performing assets as of December 31, 2023.

Total allowance for credit losses to total non-performing assets was 141.07% as of March 31, 2024 and 121.90% at December 31, 2023.

See the Non-Performing Assets section on page 50 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 September 30, 2023.

Debt securities available-for-sale amounted to $333,177,000 as of September 30, 2023, a decrease of $40,267,000 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 $22,344,000.

Interest-bearing deposits in other banks increased as of September 30, 2023, to $2,100,000 from $1,297,000 at year-end 2022 due to increased balances due from the Federal Reserve Bank.

Total loans increased to $881,038,000 as of September 30, 2023 as compared to $858,469,000 as of December 31, 2022.

In addition to loans, another primary earning asset is our overall securities portfolio, which increased in size from December 31, 2023 to March 31, 2024 mainly due to the execution of a balance sheet leverage strategy.

Debt securities available-for-sale amounted to $409,007,000 as of March 31, 2024, an increase of $16,039,000 from year-end 2023.

The increase in debt securities available-for-sale is mainly due to the purchase of debt securities in the amount of $39,124,000, offset by calls and maturities of debt securities in the amount of $9,167,000 and paydowns on debt securities in the amount of $12,823,000 during the first quarter of 2024.

Interest-bearing deposits in other banks decreased as of March 31, 2024, to $5,296,000 from $7,551,000 at year-end 2023 due to decreased balances due from the Federal Reserve Bank and the Federal Home Loan Bank.

Total loans decreased to $909,471,000 as of March 31, 2024 as compared to $911,078,000 as of December 31, 2023.

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 $22,569,000 or 2.6%.

Steady demand for borrowing by businesses accounted for the 2.6% increase in the loan portfolio from December 31, 2022 to September 30, 2023.

The Real Estate portfolio increased $19,246,000 or 2.5% from $764,880,000 at December 31, 2022 to $784,126,000 at September 30, 2023.

The increase in the Real Estate portfolio for the nine months ended September 30, 2023 was mainly the result of $66,345,000 in new loan originations, which were offset by loan payoffs of $31,182,000 and a decrease of $3,664,000 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 $152,000 or 17.7% from $860,000 at December 31, 2022 to $708,000 at September 30, 2023.

The decrease in the Agricultural portfolio for the nine months ended September 30, 2023 was mainly the result of an increase of $38,000 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 nine months ended September 30, 2023 and payoffs of agricultural loans for the nine months ended September 30, 2023 did not have a material impact on the change in the portfolio balance.

Overall, the Commercial and Industrial portfolio increased $6,789,000 or 12.1% from $56,077,000 at December 31, 2022 to $62,866,000 at September 30, 2023.

The increase in the Commercial and Industrial portfolio during the nine months ended September 30, 2023 was mainly attributable to the portion of the Commercial and Industrial portfolio (excluding PPP loans) which increased $6,825,000 during the nine months ended September 30, 2023.

The increase was attributable to $9,154,000 in new loan originations offset by a decrease of $420,000 in utilization of existing commercial and industrial lines of credit and loan payoffs of $1,010,000, 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 $36,000 from December 31, 2022 to September 30, 2023.

Consumer loans increased $511,000 or 9.0% from $5,707,000 at December 31, 2022 to $6,218,000 at September 30, 2023.

Total loans decreased by $1,607,000 or 0.2%.

The Real Estate portfolio increased $1,551,000 or 0.2% from $811,493,000 at December 31, 2023 to $813,044,000 at March 31, 2024.

The increase in the Real Estate portfolio for the three months ended March 31, 2024 was mainly the result of an increase in utilization of existing real estate lines of credit of $3,372,000 and $20,338,000 in new loan originations, which were offset by loan payoffs of $8,196,000, along with regular principal payments and other typical fluctuations in the Real Estate portfolio.

The Agricultural portfolio decreased $30,000 or 4.5% from $671,000 at December 31, 2023 to $641,000 at March 31, 2024.

The decrease in the Agricultural portfolio for the three months ended March 31, 2024 was mainly the result of a decrease of $24,000 in utilization of existing agricultural lines of credit along with regular principal payments and other typical fluctuations in the Agricultural portfolio.

There were no new agricultural loans originated during the three months ended March 31, 2024 and no payoffs of agricultural loans for the three months ended March 31, 2024.

The Commercial and Industrial portfolio decreased $3,156,000 or 4.7% from $66,909,000 at December 31, 2023 to $63,753,000 at March 31, 2024.

The decrease was attributable to a decrease of $2,199,000 in utilization of existing commercial and industrial lines of credit, loan payoffs of $1,797,000, and regular principal payments and other typical amortization in the Commercial and Industrial portfolio, offset by $1,799,000 in new loan originations.

Consumer loans increased $19,000 or 0.3% from $5,824,000 at December 31, 2023 to $5,843,000 at March 31, 2024.

The increase is mainly attributable to new loan originations of $756,000, offset by loan payoffs of $296,000 and a decrease of $2,000 in utilization of existing consumer lines of credit, along with regular principal payments.

The State and Political Subdivisions portfolio decreased $3,825,000 or 12.4% from $30,945,000 at December 31, 2022 to $27,120,000 at September 30, 2023.

The decrease is mainly the result of $2,419,000 in loan payoffs for the nine months ended September 30, 2023 along with regular principal payments, offset by $734,000 in new loan originations.

The State and Political Subdivisions portfolio increased $9,000 or 0.03% from $26,181,000 at December 31, 2023 to $26,190,000 at March 31, 2024.

The increase is mainly the result of an increase of $500,000 in utilization of existing lines of credit for the three months ended March 31, 2024, offset with regular principal payments.

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.

8 unchanged sentences

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

Overall, non-pass grades decreased $318,000 to $20,617,000 at September 30, 2023, as compared to $20,935,000 at December 31, 2022.

Real Estate non-pass grades decreased $310,000 to $19,900,000 as of September 30, 2023 as compared to $20,210,000 as of December 31, 2022.

Commercial and Industrial non-pass grades decreased $57,000 to $668,000 as of September 30, 2023 as compared to $725,000 as of December 31, 2022.

Consumer non-pass grades increased to $49,000 as of September 30, 2023 as compared to $0 as of December 31, 2022.

There were no Agricultural or State and Political Subdivision non-pass grades at September 30, 2023 or December 31, 2022.

Overall, non-pass grades decreased $1,089,000 to $23,003,000 at March 31, 2024, as compared to $24,092,000 at December 31, 2023.

Real Estate non-pass grades decreased $1,070,000 to $22,314,000 as of March 31, 2024 as compared to $23,384,000 as of December 31, 2023.

Commercial and Industrial non-pass grades decreased $6,000 to $644,000 as of March 31, 2024 as compared to $650,000 as of December 31, 2023.

Consumer non-pass grades decreased $13,000 to $45,000 as of March 31, 2024 as compared to $58,000 as of December 31, 2023.

There were no Agricultural or State and Political Subdivision non-pass grades at March 31, 2024 or December 31, 2023.

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

(Dollars in thousands)

September 30,

Commercial and Industrial

2 unchanged sentences

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

As of September 30, 2023, the allowance for credit losses was $6,817,000 as compared to $8,274,000 as of December 31, 2022.

As of March 31, 2024, the allowance for credit losses was $7,196,000 as compared to $6,925,000 as of December 31, 2023.

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

1 unchanged sentence

The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry.

Risk is further mitigated through

the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Management performs a quarterly analysis to determine the adequacy of the allowance for credit losses.

5 unchanged sentences

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

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.

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.

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.

During the third quarter of 2023, various qualitative factor decreases were implemented across multiple loan segmentation pools.

Delinquency trends were decreased by twelve basis points for each of the following loan segmentation pools:

(a) construction, land development, and other land loans, (b) residential construction (loans to build homes, both speculative and owner-occupied, and 1-4 family lot loans), (c) agribusiness, farmland, or secured by farmland, (d) loans secured by junior liens, and (e) loans secured by other non-farm, non-residential properties.

All of these loan segmentation pools are included in the Real Estate Component of the loan portfolio.

Additionally, delinquency trends were decreased by eight basis points and volume trends were decreased by twelve basis points across all three loan segmentation pools in the Consumer portfolio, volume trends for Commercial and Industrial loans were decreased by eight basis points, and delinquency trends for Agricultural loans were decreased by eight basis points during the third 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 nine months ended September 30, 2023 and 2022.

Net charge-offs as a percentage of average loans was 0.00% and 0.02% for the nine months ended September 30, 2023 and 2022, respectively.

Net charge-offs amounted to $2,000 the nine months ended September 30, 2023 as compared to $125,000 for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, the provision for credit losses carried a credit balance of $336,000 as compared to the provision for credit losses of $656,000 for the nine months ended September 30, 2022.

During the first quarter of 2024, qualitative factors related to delinquency trends were decreased by eight basis points related to loans (a) secured by first liens, (b) secured by owner-occupied, non-farm, non-residential properties, and (c) other revolving credit plans.

Qualitative factors related to volume trends were increased by eight basis points related to loans secured by junior liens and decreased by eight basis points related to other revolving credit plans.

Qualitative factors related to collateral values were also increased by four basis points related to commercial and industrial loans during the first quarter of 2024.

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, 2024 and 2023.

Net recoveries as a percentage of average loans was (0.001)% and 0.002% for the three months ended March 31, 2024 and 2023, respectively.

Net recoveries amounted to $7,000 for the three months ended March 31, 2024 as compared to net charge-offs of $13,000 for the three months ended March 31, 2023.

For the three months ended March 31, 2024, the provision for credit losses was $264,000 as compared to $0 for the three months ended March 31, 2023.

The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for credit losses of $7,196,000, of which 93.4% was attributed to the Real Estate component, 0.0% attributed to the Agricultural component, 4.5% attributed to the Commercial and Industrial component, 1.2% attributed to the Consumer component, and 0.9% attributed to the State and Political Subdivisions component (refer to the activity in Note 4 – Loans and Allowance for Credit Losses on page 12).

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

Analysis of Allowance for Credit Losses

(Dollars in thousands)

September 30,

As of and for the nine months ended:

As of and for the three months ended:

Balance at prior year-end

5 unchanged sentences

State and Political Subdivisions

Net charge-offs

(Credits) additions charged to operations

Balance at end of period

Ratio of net charge-offs during the period to average loans outstanding during the period

Allowance for credit losses to average loans outstanding during the period

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

(Dollars in thousands)

September 30,

As of and for the nine months ended:

Beginning balance

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Net recoveries

Additions charged to operations

Net (recoveries) charge-offs

Provision (credits) charged to operations

Balance at end of period

Ratio of net recoveries during the period to average loans outstanding during the period

Ratio of net (recoveries) charge-offs during the period to average loans outstanding during the period

Allowance for credit losses to average loans outstanding during the period

4 unchanged sentences

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 0.79% and 1.16% at September 30, 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 0.793% and 0.831% at March 31, 2024 and 2023, respectively.

NON-PERFORMING ASSETS

1 unchanged sentence

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest.

A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured.

When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period

A loan may remain on accrual status if it is in the process of

collection and is either guaranteed or well secured.

When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period income.

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

Total non-performing assets amounted to $6,293,000 as of September 30, 2023, as compared to $5,359,000 as of December 31, 2022.

Total non-performing assets amounted to $5,101,000 as of March 31, 2024, as compared to $5,681,000 as of December 31, 2023.

The economy remains unstable.

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

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

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 been receding in recent months, as low as 3% as of June 2023;

however, it has risen to 3.7% as of September 2023.

Many economists and influential thinkers believe that the economy is moving forward in spite of certain forecasts and predictors.

Inflation is not receding as fast as the Federal Reserve had hoped.

Despite fluctuations throughout the first quarter of 2024, the inflation rate returned to 3.4% at March 31, 2024, consistent with the inflation rate as of December 31, 2023.

The Federal Reserve’s target rate of inflation is 2%.

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

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 $5,009,000 as of September 30, 2023, as compared to $5,051,000 as of December 31, 2022.

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

There were five loans past-due 90 days or more and still accruing interest at September 30, 2023 that carried a balance of $1,284,000 which were well-secured by commercial and residential real estate and in the process of collection, compared to December 31, 2022 when loans past-due 90 days or more and still accruing interest amounted to $308,000.

The loans 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 0.71% at September 30, 2023 and 0.62% at December 31, 2022.

Non-performing assets to total assets was 0.48% at September 30, 2023 and 0.40% at December 31, 2022.

The allowance for credit losses to total non-performing assets was 108.33% as of September 30, 2023 as compared to 154.39% as of December 31, 2022.

Additional detail can be found on page 58 and 59 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.

2016-13) tables and page 26 in the Non-Performing Assets table.

Asset quality is a priority and the Company retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation effortsand engages an annual external loan review.

The heightened conflict with Israel and Palestine has caused much hostility throughout the world and is becoming prevalent on college campuses and centers of influence throughout the US with protests that have become heated and violent.

The constant disputing over whether to continue US support of Ukraine and Israel in ongoing efforts has been a strain on the economy.

Values of new and used homes and automobiles have remained high.

Higher interest rates have added to the curtailed borrowing.

Consumer savings is dwindling, and credit balances are growing.

Supply chains are back up and running efficiently in many areas.

Labor continues to remain costly and unpredictable.

The Federal Reserve has paused rate hikes but has yet to implement its plan to potentially begin reducing rates in 2024.

These forces have had a direct effect on the Corporation’s nonperforming assets.

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

Non-accrual loans totaled $4,604,000 as of March 31, 2024, as compared to $4,616,000 as of December 31, 2023.

There were no foreclosed assets held for resale as of March 31, 2024 and December 31, 2023.

There were three loans past-due 90 days or more and still accruing interest at March 31, 2024 that carried a balance of $497,000,, compared to December 31, 2023 when there were five loans past-due 90 days or more and still accruing interest which carried an aggregate balance of $1,065,000.

The loans past-due 90 days or more and still accruing interest as of March 31, 2024 were 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 0.56% at March 31, 2024 and 0.62% at December 31, 2023.

Non-performing assets to total assets was 0.36% at March 31, 2024 and 0.40% at December 31, 2023.

The allowance for credit losses to total non-performing assets was 141.07% as of March 31, 2024 as compared to 121.90% as of December 31, 2023.

Additional detail can be found on page 53 in the Non-Performing Assets and Individually Evaluated Loans table and page 29 in the Non-Performing Assets table.

Performing substandard loans, which have not been designated for individual evaluation to determine expected credit losses, 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 $14,929,000 at September 30, 2023.

Individually evaluated loans were $5,318,000 at September 30, 2023, compared to impaired loans of $11,207,000 at December 31, 2022.

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

At September 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 September 30, 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 $18,354,000 at March 31, 2024 and $19,418,000 at December 31, 2023.

Individually evaluated loans were $4,913,000 at March 31, 2024, compared to $4,925,000 at December 31, 2023.

The largest individually evaluated loan relationship at March 31, 2024 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate.

At March 31, 2024, the loan carried a balance of $1,990,000, net of $1,989,000 that had been charged off to date.

The second largest individually evaluated loan relationship at March 31, 2024 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 $1,005,000 at September 30, 2023.

The third largest individually evaluated loan relationship at September 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 September 30, 2023, the loan carried a balance of $582,000.

The loans carried an aggregate balance of $975,000 at March 31, 2024.

The third largest individually evaluated loan relationship at March 31, 2024 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, 2024, 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 $5,318,000 in individually evaluated loans at September 30, 2023, none were located outside of the Company’s primary market area.

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 $4,913,000 in individually evaluated loans at March 31, 2024, none were located outside of the Company’s primary market area.

The outstanding recorded investment of modified loans to borrowers experiencing financial difficulty as of March 31, 2024 amounted to $9,455,000 and was classified in the Real Estate portfolio.

There were no loan modifications completed with respect to borrowers experiencing financial difficulty during the year ended December 31, 2023.

The loan modification to a borrower experiencing financial difficulty as of March 31, 2024 was a payment modification which allowed a period of interest-only payments of six months.

There were no unfunded commitments on modified loans to borrowers experiencing financial difficulty and all modified loans to borrowers experiencing financial difficulty were in compliance with restructure terms as of March 31, 2024.

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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The Company actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in 2024.

Excluding the assets disclosed in the Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No.

2016-13) and Non-Performign Assets and Impaired Loans (Pre-Adoption of ASU No.

2016-13) tables below, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

Excluding the assets disclosed in the Non-Performing Assets and Individually Evaluated Loans table below, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses.

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 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, 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.

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

The economic climate remains in a state of flux.

The war between Ukraine and Russia moves into its third year and the Israeli conflict in the Gaza strip has intensified and incited worldwide hostilities.

Inflationary pressures have become persistently elevated which has created much debate and concern regarding the appropriate steps to be taken to overcome the effects of monetary policy adjustments that have been and will be made to affect the change.

The looming Presidential election and the legal issues that permeate the leading Presidential candidates, commodity prices remaining high even as inflationary pressures have eased, gas prices fluctuating widely from week to week, small businesses closing, larger corporations cutting jobs, unprecedented weather conditions seen around the world, and the fears recession may still be looming have all exacerbated the difficulties in the national and state economy.

Experts at all levels continue to ascertain the intermediate or long term effects of such issues.

The Corporation 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 Corporation’s allowance for credit losses could be required.

The extent of the impact of these stressors on the Corporation’s operational and financial performance will depend on certain developments including reactions to inflationary controls enacted, the labor force, the longevity of the wars, 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 Corporation’s operational and financial performance, as the effects of these factors may

lag into the future.

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

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

As of September 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.

As of March 31, 2024 and December 31, 2023, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Non-Performing Assets and Individually Evaluated Loans

(Dollars in thousands)

September 30,

Non-performing assets

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Allowance for credit losses to total non-performing assets

Non-Performing Assets and Impaired Loans (Pre-Adoption of ASU No.

(Dollars in thousands)

Non-performing assets

Non-accrual loans

Foreclosed assets held for resale

Loans past-due 90 days or more and still accruing interest

Total non-performing assets

Impaired loans

Non-accrual loans

Accruing TDRs

Total impaired loans

Allocated allowance for credit losses

Net investment in impaired loans

Impaired loans with a valuation allowance

Impaired loans without a valuation allowance

Total impaired loans

Allocated valuation allowance as a percent of impaired loans

Impaired loans to total loans

Non-performing assets to total loans

Non-performing assets to total assets

Allowance for credit losses to impaired loans

Allowance for credit losses to total non-performing assets

Real estate mortgages comprise 89.0% of the loan portfolio as of September 30, 2023, as compared to 89.1% as of December 31, 2022.

Real estate mortgages comprise 89.4% of the loan portfolio as of March 31, 2024, as compared to 89.1% as of December 31, 2023.

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

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Consumer and commercial retail deposits are attracted primarily by the Bank’s nineteen full service office locations and through its internet banking presence.

The Bank offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products.

The Bank offers a broad selection of deposit products and

continually evaluates its interest rates and fees on deposit products.

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

Total deposits decreased $1,196,000 to $992,303,000 as of September 30, 2023 as non-interest bearing deposits decreased by $6,451,000 and interest bearing deposits increased by $5,255,000 from year-end 2022.

The decrease in deposits was the result of a $13,876,000 decrease in municipal deposits offset by an increase in time deposits as the result of higher rate CD offerings along with an increase in brokered CDs of $20,250,000.

Total short-term and long-term borrowings decreased to $176,776,000 as of September 30, 2023, from $178,418,000 at year-end 2022, a decrease of $1,642,000 or 0.9%.

Total borrowings decreased mainly due to a decrease in the balance of repurchase agreements and the maturity of a long-term note.

Total deposits increased $1,212,000 to $981,651,000 as of March 31, 2024 as non-interest bearing deposits increased by $6,415,000 and interest bearing deposits decreased by $5,203,000 from year-end 2023.

The increase in deposits was mainly the result of an increase in time deposits of $21,202,000 as the result of new higher rate CD promotions during the quarter offset by a $12,374,000 decrease in municipal deposits and other normal fluctuations.

Total short-term and long-term borrowings increased to $288,285,000 as of March 31, 2024, from $275,468,000 at year-end 2023, an increase of $12,817,000 or 4.7%.

Total borrowings increased mainly due to an increase in the balance of repurchase agreements since year-end.

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the “2020 Notes”).

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

During the nine months ended September 30, 2023, net income less dividends paid decreased capital by $1,296,000.

The decrease was offset by a one-time cumulative effect adjustment that increased retained earnings by $768,000 upon the adoption of ASU 2016-13.

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

During the three months ended March 31, 2024, net loss less dividends paid decreased capital by $20,091,000.

Accumulated other comprehensive loss derived from net unrealized gains on debt securities available-for-sale and interest rate derivatives also impacts capital.

At December 31, 2023 accumulated other comprehensive loss was $29,645,000.

Accumulated other comprehensive loss stood at ($35,719,000) at September 30, 2023, a decrease of $6,161,000.

Accumulated other comprehensive loss stood at $27,919,000 at March 31, 2024, an improvement of $1,726,000.

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 and derivatives 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 September 30, 2023 and December 31, 2022, respectively.

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

Total stockholders’ equity was $115,021,000 as of September 30, 2023, and $120,386,000 as of December 31, 2022.

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

September 30,

Corrective Action

The Company held 231,611 shares of common stock as treasury stock at March 31, 2024 and December 31, 2023, respectively.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of March 31, 2024 and December 31, 2023.

Total stockholders’ equity was $103,711,000 as of March 31, 2024, and $121,615,000 as of December 31, 2023.

At March 31, 2024 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, 2024 and December 31, 2023:

Minimum Capital

Adequacy with

Capital Buffer

Tier 1 leverage ratio (to average assets)

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

The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio

to 10.5% on a fully phased-in basis as of January 1, 2019.

As of September 30, 2023, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

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, 2024, 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.

8 unchanged sentences

● Brokered CDs.

At September 30, 2023 the Company had $509,624,000 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 March 31, 2024 the Company had $531,226,000 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 $83,402,000.

2 unchanged sentences

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 $17,715,000 at September 30, 2023.

Securities sold under agreements to repurchase were $31,782,000 at March 31, 2024.

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 provided by operating activities were $2,812,000 for the nine months ended September 30, 2023, compared to net cash flows provided by operating activities of $12,614,000 for the nine months ended September 30, 2022.

Net income amounted to $3,779,000 for the nine months ended September 30, 2023 and $10,869,000 for the nine months ended September 30, 2022.

During the nine months ended September 30, 2023 and 2022, net premium amortization on securities amounted to $1,196,000 and $2,346,000, respectively.

Net gains on sales of mortgage loans amounted to $44,000 for the nine months ended September 30, 2023, compared to net losses on sales of mortgage loans of $38,000 for the nine months ended September 30, 2022.

Proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $114,000 for the nine months ended September 30, 2023, compared to the nine months ended September 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 $2,819,000.

Net securities losses amounted to $212,000 and $181,000 for the nine months ended September 30, 2023 and 2022, respectively.

Accrued interest receivable increased by $224,000 and $118,000 during the nine months ended September 30, 2023 and 2022, respectively.

Accrued interest payable increased by $1,097,000 during the nine months ended September 30, 2023, compared to an increase of $322,000 during the nine months ended September 30, 2022.

Other liabilities decreased by $4,848,000 during the nine months ended September 30, 2023 and decreased by $262,000 during the nine months ended September 30, 2022.

Investing activities provided cash of $7,007,000 during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022 when investing activities used cash of $96,167,000.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) provided cash of $33,337,000 during the nine months ended September 30, 2023 and used cash of $1,754,000 during the nine months ended September 30, 2022.

Changes in restricted investment in bank stocks provided cash of $119,000 and used cash of $2,489,000 during the nine months ended September 30, 2023 and 2022, respectively.

Net cash used to originate loans amounted to $22,641,000 for the nine months ended September 30, 2023, compared to $90,178,000 for the nine months ended September 30, 2022.

Purchases of premises and equipment used cash of $1,442,000 and $445,000 during the nine months ended September 30, 2023 and 2022, respectively.

Purchase of investment in real estate venture used cash of $2,366,000 during the nine months ended September 30, 2023, compared to $1,548,000 for the nine months ended September 30, 2022.

Financing activities used cash of $7,920,000 and provided cash of $32,695,000 during the nine months ended September 30, 2023 and 2022, respectively.

Deposits decreased by $1,196,000 during the nine months ended September 30, 2023, and decreased by $19,660,000 during the nine months ended September 30, 2022.

Short-term borrowings increased by $1,358,000 and $67,371,000 during the nine months ended September 30, 2023 and 2022, respectively.

Repayment of long-term borrowings amounted to $3,000,000 and $10,000,000 during the nine months ended September 30, 2023 and 2022, respectively.

Dividends paid amounted to $5,075,000 for the nine months ended September 30, 2023, compared to $5,009,000 for the nine months ended September 30, 2022.

Net cash flows provided by operating activities were $2,048,000 for the three months ended March 31,2024, compared to net cash flows used in operating activities of $2,418,000 for the three months ended March 31, 2023.

Net loss amounted to $18,377,000 for the three months ended March 31, 2024, compared to net income of $1,357,000 for the three months ended March 31, 2023.

The goodwill impairment was a non-cash charge and amounted to $19,133,000 for the three months ended March 31, 2024;

therefore, had no effect on liquidity.

For the three months ended March 31, 2023, there was no goodwill impairment.

During the three months ended March 31, 2024 and 2023, net premium amortization on securities amounted to $251,000 and $400,000, respectively.

Net gains on sales of mortgage loans amounted to $11,000 for the three months ended March 31, 2024 and $17,000 for the three months ended March 31, 2023.

Proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $115,000 for the three months ended March 31, 2024, compared to the three months ended March 31, 2023 when originations of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $27,000.

Net securities losses amounted to $184,000 and $56,000 for the three months ended March 31 2024 and 2023, respectively.

Accrued interest receivable increased by

$90,000 for the three months ended March 31, 2024 and decreased by $356,000 for the three months ended March 31, 2023.

Accrued interest payable increased $286,000 and $726,000 for the three months ended March 31, 2024 and 2023, respectively.

Amortization of investment in real estate ventures amounted to $205,000 for the three months ended March 31, 2024 and $53,000 for the three months ended March 31, 2023.

Other assets increased $500,000 and $706,000 for the three months ended March 31, 2024 and 2023, respectively.

Other liabilities increased $338,000 during the three months ended March 31, 2024, compared to a decrease of $5,147,000 during the three months ended March 31, 2023.

Investing activities used cash of $16,135,000 during the three months ended March 31, 2024, compared to the three months ended March 31, 2023 when investing activities provided cash of $24,775,000.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $17,134,000 during the three months ended March 31, 2024 and provided cash of $31,655,000 during the three months ended March 31, 2023.

Changes in restricted investment in bank stocks used cash of $65,000 and $1,216,000 during the three months ended March 31, 2024 and 2023, respectively.

A net decrease in loans provided cash of $1,510,000 for the three months ended March 31, 2024, compared to net cash used to originate loans of $3,683,000 for the three months ended March 31, 2023.

Purchases of premises and equipment used cash of $446,000 and $868,000 during the three months ended March 31, 2024 and 2023, respectively.

Purchase of investment in real estate venture had no transactions during the three months ended March 31, 2024, compared to cash used for the purchase of real estate ventures of $1,113,000 during the three months ended March 31, 2023.

Financing activities provided cash of $12,315,000 and used cash of $20,782,000 during the three months ended March 31, 2024 and 2023, respectively.

Deposits increased by $1,212,000 during the three months ended March 31, 2024 and decreased by $45,584,000 during the three months ended March 31, 2023.

Short-term borrowings increased by $12,817,000 and $26,489,000 during the three months ended March 31, 2024 and 2023, respectively.

Dividends paid amounted to $1,714,000 for the three months ended March 31, 2024, compared to $1,685,000 for the three months ended March 31, 2023.

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

17 unchanged sentences

Several techniques are used for measuring interest rate sensitivity.

Interest rate risk arises from the mismatches in the repricing of rates on assets and

liabilities within a given time period, referred to as a rate sensitivity gap.

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

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

2 unchanged sentences

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 September 30, 2023.

The Company’s cumulative gap at one year indicates the Company is liability sensitive at March 31, 2024.

Earnings at Risk

21 unchanged sentences

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

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

For the nine months ended September 30, 2023, the cost of interest-bearing liabilities averaged 2.70%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 4.53%.

However, the Company’s interest-sensitive assets are able to

decline by these amounts.

For the three months ended March 31, 2024 the cost of interest-bearing liabilities averaged 3.48%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 5.09%.

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.

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 September 30, 2023, net present value is projected to decrease 2.29%, 6.25%, and 11.20% in the 100, 200, and 300 basis point immediate increase scenarios, 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 March 31, 2024, net present value is projected to decrease 3.23%, 7.12%, and 12.03% 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 1.34%, 6.38%, and 18.21%, respectively.

23 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements