What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2024-11-08 compared with 2024-08-09 · 442 added, 378 removed, 1417 unchanged (37% 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 June 30, 2024 and December 31, 2023;

issued 0 as of June 30, 2024 and December 31, 2023

authorized 1,000,000 shares as of September 30, 2024 and December 31, 2023;

issued 0 as of September 30, 2024 and December 31, 2023

Common stock, par value $ 2.00 per share;

authorized 20,000,000 shares as of June 30, 2024 and December 31, 2023;

issued 6,417,006 as of June 30, 2024 and 6,352,665 as of December 31, 2023;

outstanding 6,185,395 as of June 30, 2024 and 6,121,054 as of December 31, 2023

authorized 20,000,000 shares as of September 30, 2024 and December 31, 2023;

issued 6,417,006 as of September 30, 2024 and 6,352,665 as of December 31, 2023;

outstanding 6,185,395 as of September 30, 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 June 30, 2024 and December 31, 2023

Treasury stock, at cost, 231,611 shares as of September 30, 2024 and December 31, 2023

TOTAL STOCKHOLDERS’ EQUITY

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

INTEREST INCOME

11 unchanged sentences

Net interest income

Provision for credit losses

Provision (credit) for credit losses

Net interest income after provision for credit losses

5 unchanged sentences

Net gains on sales of mortgage loans

Net securities losses

Net securities gains (losses)

Total non-interest income

11 unchanged sentences

Total non-interest expense

Income before income tax expense (benefit)

Income tax expense (benefit)

Income (loss) before income tax expense (benefit)

Income tax expense (benefit) expense

NET INCOME (LOSS)

7 unchanged sentences

Three Months Ended

Other comprehensive loss:

Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $( 875 ) and $( 993 ), respectively

Fair value adjustment on derivatives, net of income tax benefit of $ 167 and $ 0 , respectively

Total other comprehensive loss

Total comprehensive loss

September 30,

Other comprehensive income (loss):

Unrealized net holding gains (losses) on debt securities available-for-sale arising during the period, net of income taxes of $ 2,670 and $( 1,711 ), respectively

Fair value adjustment on derivatives, net of income tax expense of $ 1,506 and $ 0 , respectively

Total other comprehensive income (loss)

Total comprehensive income (loss)

(Dollars in thousands)

Six Months Ended

Nine Months Ended

September 30,

Net (loss) income

Other comprehensive (loss) income:

Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $( 1,053 ) and $ 32 , respectively

Other comprehensive income (loss):

Unrealized net holding gains (losses) on debt securities available-for-sale arising during the period, net of income taxes of $ 1,617 and $( 1,679 ), 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, net of income tax benefit of $ 753 and $ 0 , respectively

Total other comprehensive (loss) income

Total comprehensive (loss) income

Fair value adjustment on derivatives, net of income tax expense of $ 753 and $ 0 , respectively

Total other comprehensive income (loss)

Total comprehensive loss

______________________________

4 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2024 AND 2023

NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023

(Dollars in thousands, except

11 unchanged sentences

Balance at June 30, 2024

Other comprehensive income, net of taxes

Issuance of common stock under dividend reinvestment plan

Dividends - $ 0.28 per share

Balance at September 30, 2024

(Dollars in thousands, except

per share data)

Comprehensive

Stockholders’

Balance at January 1, 2023

8 unchanged sentences

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

See accompanying notes to consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2024 AND 2023

NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023

(Dollars in thousands)

2 unchanged sentences

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

Provision for credit losses on loans

Provision (credit) for credit losses on loans

Provision for credit losses on unfunded commitments

8 unchanged sentences

Net securities losses

(Increase) decrease in accrued interest receivable

Increase in accrued interest receivable

Increase in cash surrender value of bank owned life insurance

Net losses on disposals of premises and equipment

Decrease (increase) in other assets

Increase in other assets

Amortization of investment in low-income housing partnerships

Increase in accrued interest payable

Increase (decrease) increase in other liabilities

(Decrease) increase in accrued interest payable

Increase (decrease) in other liabilities

NET CASH PROVIDED BY OPERATING ACTIVITIES

12 unchanged sentences

Repayment of finance lease obligations

Repayment of long-term borrowings

Dividends paid

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

4 unchanged sentences

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Purchased securities settling after year-end

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 six months ended June 30, 2024, are not necessarily indicative of the results for the year ending December 31, 2024.

Operating results for the three and nine months ended September 30, 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 June 30, 2024 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 September 30, 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:

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

There were no ASUs adopted during the nine months ended September 30, 2024.

Pending ASUs:

17 unchanged sentences

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

At June 30, 2024 and December 31, 2023, all debt securities held were classified as available-for-sale.

At September 30, 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 June 30, 2024;

There was no allowance for credit losses for Available-For-Sale debt securities as of September 30, 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 June 30, 2024 and December 31, 2023:

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, 2024 and December 31, 2023:

Debt Securities Available-for-Sale

(Dollars in thousands)

June 30, 2024:

September 30, 2024:

Treasury securities

17 unchanged sentences

Corporate debt securities

Debt securities Available-for-Sale with an aggregate fair value of $ 326,659,000 at June 30, 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 $ 184,259,000 at June 30, 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 June 30, 2024.

Debt securities Available-for-Sale with an aggregate fair value of $ 272,130,000 at September 30, 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 $ 217,142,000 at September 30, 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 September 30, 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.

June 30, 2024

September 30, 2024

Debt Securities Available-For-Sale

11 unchanged sentences

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

At June 30, 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.

At September 30, 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.

1 unchanged sentence

(Dollars in thousands)

June 30, 2024:

September 30, 2024:

Sallie Mae Bank

7 unchanged sentences

Navient Student Loan Trust

There were no proceeds from sales of Debt Securities Available-For-Sale for the three months ended June 30, 2024 and 2023.

There were no proceeds from sales of Debt Securities Available-For-Sale for the three months ended September 30, 2024 and 2023.

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

Proceeds from sales of Debt Securities Available-For-Sale for the six months ended June 30, 2024 and 2023 were $ 0 and $ 23,230,000 , respectively.

Proceeds from sales of Debt Securities Available-For-Sale for the nine months ended September 30, 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 June 30, 2024 and December 31, 2023:

June 30, 2024

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, 2024 and December 31, 2023:

September 30, 2024

(Dollars in thousands)

23 unchanged sentences

Corporate debt securities

There were 178 individual debt securities in an unrealized loss position as of June 30, 2024, with a combined decline in value representing 8.61 % of the debt securities portfolio.

There were 169 individual debt securities in an unrealized loss position as of September 30, 2024, with a combined decline in value representing 5.88 % 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 $ 2,383,000 as of June 30, 2024.

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 June 30, 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.

All debt securities available for sale in an unrealized loss position, as of September 30, 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.

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

6 unchanged sentences

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

At June 30, 2024 and December 31, 2023, the Company had $ 1,288,000 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 six months ended June 30, 2024 and 2023:

At September 30, 2024 and December 31, 2023, the Company had $ 1,434,000 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 nine months ended September 30, 2024 and 2023:

(Dollars in thousands)

Six months ended

June 30, 2024

June 30, 2023

Nine months ended

September 30, 2024

September 30, 2023

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

8 unchanged sentences

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 impaired at June 30, 2024 or December 31, 2023.

Based on the factors described above, management did not consider any equity securities to be impaired at September 30, 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 $ 305,000 and $ 214,000 at June 30, 2024 and December 31, 2023, respectively.

Loans held for sale amounted to $ 426,000 and $ 214,000 at September 30, 2024 and December 31, 2023, respectively.

Agricultural Lending

24 unchanged sentences

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

As of June 30, 2024, the Company's balance of GGLs was $ 4,380,000 , compared to $ 4,470,000 at December 31, 2023.

As of September 30, 2024, the Company's balance of GGLs was $ 4,338,000 , compared to $ 4,470,000 at December 31, 2023.

Consumer Lending

138 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 June 30, 2024 and December 31, 2023, the amount of the reserve for unfunded lending commitments was $ 196,000 and $ 166,000 , respectively.

As of September 30, 2024 and December 31, 2023, the amount of the reserve for unfunded lending commitments was $ 173,000 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 $ 2,650,000 as of June 30, 2024 compared to $ 2,476,000 at December 31, 2023.

Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Company’s consolidated balance sheet and totaled $ 2,542,000 as of September 30, 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 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 June 30, 2024 and December 31, 2023.

(Dollars in thousands)

As of June 30, 2024:

As of September 30, 2024:

7 Special Mention

74 unchanged sentences

Total Gross Charge Offs

State and Political Subdivision Loans include loans categorized as tax-free in the amount of $ 26,078,000 at June 30, 2024 and $ 26,181,000 at December 31, 2023.

Commercial and Industrial Loans include $ 4,380,000 of GGLs as of June 30, 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 $ 305,000 at June 30, 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 and six months ended June 30, 2024 and 2023 and the year ended December 31, 2023.

State and Political Subdivision Loans include loans categorized as tax-free in the amount of $ 24,408,000 at September 30, 2024 and $ 26,181,000 at December 31, 2023.

Commercial and Industrial Loans include $ 4,338,000 of GGLs as of September 30, 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 $ 426,000 at September 30, 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 and nine months ended September 30, 2024 and 2023 and the year ended December 31, 2023.

(Dollars in thousands)

and Industrial

As of and for the three months ended June 30, 2024:

As of and for the three months ended September 30, 2024:

Allowance for Credit Losses:

3 unchanged sentences

and Industrial

As of and for the six months ended June 30, 2024:

As of and for the nine months ended September 30, 2024:

Beginning balance January 1, 2024

13 unchanged sentences

and Industrial

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

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

Allowance for Loan Losses:

Beginning balance

Provision (credit)

(Credit) Provision

Ending Balance

1 unchanged sentence

and Industrial

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

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

Allowance for Credit Losses:

35 unchanged sentences

evaluated for impairment

The Company's activity in the allowance for credit losses on unfunded commitments for the six months ended June 30, 2024 and 2023 was as follows:

The Company's activity in the allowance for credit losses on unfunded commitments for the nine months ended September 30, 2024 and 2023 was as follows:

(Dollars in thousands)

1 unchanged sentence

CECL adoption adjustment

Credit for credit losses on unfunded commitments

Balance at June 30

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 June 30, 2024 and December 31, 2023.

Reserve for credit losses on unfunded commitments

Balance at September 30

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, derivative fair value adjustment, and the allowance for credit losses as of September 30, 2024 and December 31, 2023.

(Dollars in thousands)

September 30,

Commercial and Industrial

2 unchanged sentences

Allowance for Credit Losses

During the six months ended June 30, 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 .

There were no modifications of loans to borrowers experiencing financial difficulty granted during the three months ended June 30, 2024.

The loan modification granted during the six months ended June 30, 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 or six months ended June 30, 2023.

The outstanding recorded investment of loans to borrowers experiencing financial difficulty was $ 9,455,000 at June 30, 2024, compared to $ 0 at December 31, 2023.

There were no unfunded commitments on modified loans to borrowers experiencing financial difficulty as of June 30, 2024.

The following table presents the outstanding recorded investment of loans to borrowers experiencing financial difficulties at June 30, 2024.

During the nine months ended September 30, 2024, two modifications were granted on loans to borrowers experiencing financial difficulty which carried a combined post modification recorded investment of $ 9,575,000 .

One modification of a loan to a borrower experiencing financial difficulty was granted during the three months ended September 30, 2024 to extend the maturity date of the loan by ten months .

The loan carried a post modification recorded investment of $ 120,000 .

The other loan modification granted on a loan to a borrower experiencing financial difficulty during the nine months ended September 30, 2024 was completed during the first quarter of 2024 and consisted of a payment modification which allowed a period of interest-only payments of six months.

This loan carried a post modification recorded investment of $ 9,455,000 .

There were no loan modifications granted to borrowers experiencing financial difficulty during the three or nine months ended September 30, 2023.

The outstanding recorded investment of loans to borrowers experiencing financial difficulty was $ 9,547,000 at September 30, 2024, compared to $ 0 at December 31, 2023.

There were no unfunded commitments on modified loans to borrowers experiencing financial difficulty as of September 30, 2024.

The following table presents the outstanding recorded investment of loans to borrowers experiencing financial difficulty at September 30, 2024.

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

(Dollars in thousands)

September 30,

Modifications of Loans to Borrowers Experiencing Financial Difficulty:

At June 30, 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 June 30, 2024 experienced a payment default during the six months ended June 30, 2024.

There were no payment defaults on the modification of a loan to a borrower experiencing financial difficulty during the three months ended June 30, 2024, and the loan was paid current by the customer as of June 30, 2024.

The following table presents information regarding modifications of loans to borrowers experiencing financial difficulty that were completed during the six months ended June 30, 2024.

There were no modifications of loans to borrowers experiencing financial difficulty completed during the three months ended June 30, 2024 or the three or six months ended June 30, 2023.

At September 30, 2024 there were no modifications of loans to borrowers experiencing financial difficulty that were not in compliance with the terms of their restructure.

Of the modifications of loans to borrowers experiencing financial difficulty that were completed during the twelve months preceding September 30, 2024, the loan carrying a post modification recorded investment of $ 9,455,000 experienced a payment default during the nine months ended September 30, 2024, but the loan was paid current by the customer as of September 30, 2024.

There were no payment defaults on modifications of loans to borrowers experiencing financial difficulty during the three months ended September 30, 2024.

The following table presents information regarding modifications of loans to borrowers experiencing financial difficulty that were completed during the three and nine months ended September 30, 2024.

There were no modifications of loans to borrowers experiencing financial difficulty completed during the three or nine months ended September 30, 2023.

(Dollars in thousands)

For the Six Months Ended June 30, 2024

For the Three Months Ended September 30, 2024

Pre-Modification

Post-Modification

The following table provides detail regarding they types of loan modifications made for borrowers experiencing financial difficulty during the six months ended June 30, 2024.

There were no modifications of loans to borrowers experiencing financial difficulty completed during the three months ended June 30, 2024 or the three or six months ended June 30, 2023.

For the Six Months Ended June 30, 2024

The recorded investment, unpaid principal balance, and the related allowance of the Company’s non-accrual loans are summarized below at June 30, 2024 and December 31, 2023:

(Dollars in thousands)

June 30, 2024

For the Nine Months Ended September 30, 2024

Pre-Modification

Post-Modification

The following table provides detail regarding the types of loan modifications made for borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024.

There were no modifications of loans to borrowers experiencing financial difficulty completed during the three or nine months ended September 30, 2023.

For the Three Months Ended September 30, 2024

For the Nine Months Ended September 30, 2024

The recorded investment, unpaid principal balance, and the related allowance of the Company’s non-accrual loans are summarized below at September 30, 2024 and December 31, 2023:

(Dollars in thousands)

September 30, 2024

Commercial and Industrial

4 unchanged sentences

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

The average recorded investment and interest income recognized for the Company’s non-accrual loans are summarized below for the three and six months ended June 30, 2024 and 2023:

The average recorded investment and interest income recognized for the Company’s non-accrual loans are summarized below for the three and nine months ended September 30, 2024 and 2023:

(Dollars in thousands)

For the Three Months Ended June 30, 2024

For the Three Months Ended September 30, 2024

Commercial and Industrial

(Dollars in thousands)

For the Six Months Ended June 30, 2024

For the Nine Months Ended September 30, 2024

Commercial and Industrial

(Dollars in thousands)

For the Three Months Ended June 30, 2023

For the Three Months Ended September 30, 2023

Commercial and Industrial

(Dollars in thousands)

For the Six Months Ended June 30, 2023

For the Nine Months Ended September 30, 2023

Commercial and Industrial

The following table presents the Company’s individually evaluated, collateral-dependent loans by segment as of June 30, 2024 and December 31, 2023.

The following table presents the Company’s individually evaluated, collateral-dependent loans by segment as of September 30, 2024 and December 31, 2023.

(Dollars in thousands)

June 30, 2024

September 30, 2024

Commercial and Industrial

2 unchanged sentences

Commercial and Industrial

At June 30, 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 June 30, 2024 and December 31, 2023 were as follows:

At September 30, 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 September 30, 2024 and December 31, 2023 were as follows:

(Dollars in thousands)

September 30,

Commercial and Industrial

4 unchanged sentences

Total non-performing assets

There were no foreclosed assets held for resale at June 30, 2024 or December 31, 2023.

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 $ 137,000 at June 30, 2024 and $ 138,000 at December 31, 2023.

These balances were not included in foreclosed assets held for resale at June 30, 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 June 30, 2024 and December 31, 2023.

There were no foreclosed assets held for resale at September 30, 2024 or December 31, 2023.

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 $ 134,000 at September 30, 2024 and $ 138,000 at December 31, 2023.

These balances were not included in foreclosed assets held for resale at September 30, 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 September 30, 2024 and December 31, 2023.

(Dollars in thousands)

June 30, 2024:

September 30, 2024:

Commercial and Industrial

5 unchanged sentences

NOTE 5 — DEPOSITS

Major classifications of deposits at June 30, 2024 and December 31, 2023 consisted of:

Major classifications of deposits at September 30, 2024 and December 31, 2023 consisted of:

(Dollars in thousands)

September 30,

Non-interest bearing demand

3 unchanged sentences

Total deposits

Total deposits increased $ 3,770,000 to $ 984,209,000 as of June 30, 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 first half of 2024, offset by a $ 5,208,000 decrease in municipal deposits.

Total deposits increased $ 39,470,000 to $ 1,019,909,000 as of September 30, 2024 due to increases in non-interest bearing demand deposits, interest bearing demand deposits 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 first nine months of 2024 which increased the balance of retail CDs by $ 33,251,000 and an increase of $ 4,930,000 in brokered CDs during the nine months ended September 30, 2024.

There was also a $ 22,277,000 increase in municipal deposits in 2024, offset by a decrease of $ 15,994,000 in savings during the nine months ended September 30, 2024.

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 June 30, 2024 and December 31, 2023 are as follows:

Short-term borrowings and weighted–average interest rates at September 30, 2024 and December 31, 2023 are as follows:

(Dollars in thousands)

June 30, 2024

September 30, 2024

December 31, 2023

13 unchanged sentences

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

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of June 30, 2024 and December 31, 2023.

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as o September 30, 2024 and December 31, 2023.

(Dollars in thousands)

of Liabilities

June 30, 2024

September 30, 2024

Repurchase agreements (a)

1 unchanged sentence

Repurchase agreements (a)

(a) As of June 30, 2024 and December 31, 2023, the fair value of securities pledged in connection with repurchase agreements was $ 37,880,000 and $ 28,902,000 , respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of June 30, 2024:

(a) As of September 30, 2024 and December 31, 2023, the fair value of securities pledged in connection with repurchase agreements was $ 35,004,000 and $ 28,902,000 , respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of September 30, 2024:

(Dollars in thousands)

Remaining Contractual Maturity of the Agreements

June 30, 2024:

September 30, 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 June 30, 2024 and December 31, 2023, the Company had $ 122,000,000 in long-term borrowings outstanding with the FHLB.

As of September 30, 2024 and December 31, 2023, the Company’s long-term borrowings outstanding with the FHLB amounted to $ 102,000,000 and $ 122,000,000 , respectively.

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.

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on June 30, 2024.

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on September 30, 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 June 30, 2024, loans of $ 761,536,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 532,749,000 .

As of June 30, 2024, no securities were pledged as collateral to FHLB to secure FHLB loans and letters of credit.

As of September 30, 2024, loans of $ 740,039,000 were pledged to FHLB which resulted in a FHLB maximum borrowing capacity of $ 517,200,000 .

As of September 30, 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 June 30, 2024, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,453,000 and $ 1,965,000 , respectively.

At September 30, 2024, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,427,000 and $ 1,943,000 , 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 six months ended June 30, 2024 and 2023 of $ 107,000 and $ 113,000 , respectively.

The Company recognized total operating lease costs for the nine months ended September 30, 2024 and 2023 of $ 142,000 and $ 167,000 , respectively.

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

Cash payments totaled $ 99,000 and $ 106,000 , respectively, for the six months ended June 30, 2024 and 2023.

The following table displays the weighted-average term and discount rates for operating leases outstanding as of June 30, 2024 and December 31, 2023.

Cash payments totaled $ 132,000 and $ 155,000 , respectively, for the nine months ended September 30, 2024 and 2023.

The following table displays the weighted-average term and discount rates for operating leases outstanding as of September 30, 2024 and December 31, 2023.

September 30,

Weighted-average term (years)

2 unchanged sentences

(Dollars in thousands)

September 30,

Minimum Lease Payments due:

12 unchanged sentences

The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and cash payments principally related to specific assets and short-term wholesale funding positions.

The Company entered into four swap contracts effective September 20, 2023.

The Company entered into four swap contracts effective September 20, 2023 and one additional swap contract effective September 4, 2024.

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 June 30, 2024 and December 31, 2023:

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, 2024 and December 31, 2023:

(Dollars in thousands)

June 30, 2024

September 30, 2024

Derivative Assets

10 unchanged sentences

Other Liabilities

The following table presents the derivative liabilities subject to an enforceable master netting arrangement as of June 30, 2024 and December 31, 2023:

The following table presents the derivative liabilities subject to an enforceable master netting arrangement as of September 30, 2024 and December 31, 2023:

of Liabilities

(Dollars in thousands)

June 30, 2024

September 30, 2024

December 31, 2023

The following table presents the remaining contractual maturity of the master netting arrangements as of June 30, 2024:

The following table presents the remaining contractual maturity of the master netting arrangements as of September 30, 2024:

Remaining Contractual Maturity of the Agreements

(Dollars in thousands)

June 30, 2024:

September 30, 2024:

Derivative Assets

Derivative Liabilities

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 June 30, 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 June 30, 2024 and December 31, 2023, the following amounts were recorded on the balance sheet related to the cumulative basis adjustment for fair value hedges:

As of September 30, 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 and one interest rate swap with a notional amount of $ 75,000,000 hedging fixed-rate loans.

As of September 30, 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:

1 unchanged sentence

Closed Portfolio Amount

Fixed Rate Loans

Available-for-sale - Municipals

2 unchanged sentences

(Dollars in thousands)

September 30,

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

Fixed Rate Loans

Available-for-sale - Municipals

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 year-to-date periods ended June 30, 2024 and 2023:

(Dollars in thousands)

September 30,

Amount of loss recognized in other comprehensive loss

4 unchanged sentences

These interest rate products are designated as cash flow hedges.

As of June 30, 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.

As of September 30, 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.

During the next twelve months, it is estimated that an additional $ 639,000 will be reclassified as a decrease to interest expense.

During the next twelve months, it is estimated that an additional $ 435,000 will be reclassified as interest expense.

Interest rate swaps designated as cash flow hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

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-to-date period ended June 30, 2024, the Company reclassified $ 502,000 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 June 30, 2024 and 2023:

During the year-to-date period ended September 30, 2024, the Company reclassified $ 757,000 as a reduction in interest expense.

(Dollars in thousands)

September 30,

Amount of loss recognized in other comprehensive loss

3 unchanged sentences

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty.

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 June 30, 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 $ 1,240,000 posted with the counterparty at June 30, 2024 and collateral in the amount of $ 4,650,000 posted with the counterparty at December 31, 2023.

counterparty.

As of September 30, 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 $ 6,570,000 posted with the counterparty at September 30, 2024 and collateral in the amount of $ 4,650,000 posted with the counterparty at 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 June 30, 2024 and December 31, 2023 were as follows:

The contract or notional amounts at September 30, 2024 and December 31, 2023 were as follows:

(Dollars in thousands)

June 30, 2024

September 30, 2024

December 31, 2023

13 unchanged sentences

Financial Instruments with Concentrations of Credit Risk

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

The Company originates primarily commercial and residential real estate loans to customers predominately in the Company’s primary, 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 June 30, 2024, the Company had $ 824,217,000 in loans secured by real estate, which represented 89.4 % of total loans.

At September 30, 2024, the Company had $ 836,213,000 in loans secured by real estate, which represented 89.5 % 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 June 30, 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 of September 30, 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 June 30, 2024 and December 31, 2023, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

At September 30, 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)

June 30, 2024

September 30, 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.

Individually evaluated loans measured at fair value on a nonrecurring basis as of June 30, 2024 and December 31, 2023 are as follows:

Individually evaluated loans measured at fair value on a nonrecurring basis as of September 30, 2024 and December 31, 2023 are as follows:

(Dollars in thousands)

Assets at June 30, 2024

Assets at September 30, 2024

Individually evaluated loans:

Commercial and Industrial

Total individually evaluated loans

2 unchanged sentences

Individually evaluated loans:

Commercial and Industrial

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 June 30, 2024 and December 31, 2023.

There were no foreclosed assets held for resale measured at fair value on a nonrecurring basis at September 30, 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

June 30, 2024

September 30, 2024

Valuation Technique

20 unchanged sentences

(Dollars in thousands)

Fair Value Measurements at June 30, 2024

Fair Value Measurements at September 30, 2024

FINANCIAL ASSETS:

4 unchanged sentences

Accrued interest receivable

Derivative Assets

FINANCIAL LIABILITIES:

37 unchanged sentences

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

As of June 30, 2024 and December 31, 2023, the fair value of trust

assets under management was $ 115,340,000 and $ 109,064,000 , respectively.

As of September 30, 2024 and December 31, 2023, the fair value of

trust assets under management was $ 117,696,000 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.

9 unchanged sentences

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 June 30, 2024 and 2023, there were no potential common shares outstanding.

At September 30, 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.

1 unchanged sentence

Three Months Ended

Net (loss) income

September 30,

Weighted-average common shares outstanding

Basic and diluted (losses) earnings per share

Basic and diluted earnings per share

(In thousands, except earnings per share)

Six Months Ended

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 $ 0 at June 30, 2024 and $ 19,133,000 at December 31, 2023.

Goodwill totaled $ 0 at September 30, 2024 and $ 19,133,000 at December 31, 2023.

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

3 unchanged sentences

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.

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.

42 unchanged sentences

RESULTS OF OPERATIONS

Quarter ended June 30, 2024 compared to quarter ended June 30, 2023

First Keystone Corporation realized earnings for the three months ended June 30, 2024 of $1,380,000, an increase of $241,000 from the second quarter of 2023.

The increase in net income for the three months ended June 30, 2024 was primarily due to an increase in income from interest and fees on loans and interest and dividend income on securities.

On a per share basis, for the three months ended June 30, 2024, net income was $0.23 versus earnings of $0.19 for the same three month period of 2023.

Quarterly regular cash dividends amounted to $0.28 per share for the three months ended June 30, 2024 and 2023.

Quarter ended September 30, 2024 compared to quarter ended September 30, 2023

First Keystone Corporation realized earnings for the three months ended September 30, 2024 of $1,507,000, an increase of $224,000 from the third quarter of 2023.

The increase in net income for the three months ended September 30, 2024 was primarily due to an increase in income from interest and fees on loans and interest and dividend income on securities.

On a per share basis, for the three months ended September 30, 2024, net income was $0.25 versus earnings of $0.21 for the same three month period of 2023.

Quarterly regular cash dividends amounted to $0.28 per share for the three months ended September 30, 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.

In the three months ended June 30, 2024, interest income amounted to $17,593,000, an increase of $3,942,000 or 28.9% from the three months ended June 30, 2023, while interest expense amounted to $9,592,000 in the three months ended June 30, 2024, an increase of $3,049,000 or 46.6% from the three months ended June 30, 2023.

In the three months ended September 30, 2024, interest income amounted to $18,242,000, an increase of $4,005,000 or 28.1% from the three months ended September 30, 2023, while interest expense amounted to $10,088,000 in the three months ended September 30, 2024, an increase of $2,735,000 or 37.2% from the three months ended September 30, 2023.

As a result, net interest income increased $1,270,000 or 18.4% to $8,154,000 from $6,884,000 for the same period in 2023.

The Company’s net interest margin for the three months ended June 30, 2024 and 2023 was 2.38%.

The Company’s net interest margin for the three months ended September 30, 2024 was 2.42% compared to 2.23% for the same period in 2023.

The increase in net interest margin was primarily a result of increased interest and fees on loans and increased income on taxable securities.

PROVISION FOR CREDIT LOSSES

The provision for credit losses for the three months ended June 30, 2024 and 2023 was $510,000 and $34,000, respectively.

The provision for credit losses for the three months ended September 30, 2024 was $718,000, compared to the three months ended September 30, 2023, when the provision carried a credit balance of $370,000.

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 June 30, 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 charge-offs of $19,000 for both the three months ended June 30, 2024 and 2023.

The provision for credit losses for the three months ended September 30, 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 charge-offs of $748,000 and net recoveries of $30,000 for the three months ended September 30, 2024 and 2023, respectively.

The increase in net charge-offs for the three months ended September 30, 2024 was mainly the result of $741,000 in aggregate charge-offs completed on four loans to a plastic processing company focused on non-post-consumer recycling.

See Allowance for Credit Losses on page 54 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $1,621,000 for the three months ended June 30, 2024, as compared to $1,539,000 for the same period in 2023, an increase of $82,000, or 5.3%.

Net securities losses decreased $59,000 to ($10,000) for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.

Net securities losses were the result of recognizing $10,000 in net losses on held equity securities in the second quarter of 2024 compared to $69,000 in net losses on held equity securities during the

same period in 2023.

Trust department income increased $6,000 or 2.4% to $254,000 for the three months ended June 30, 2024 as compared to the same period in 2023.

Service charges and fee income was $568,000 for the second quarter of 2024, a decrease of $3,000 or 0.5% from the second quarter of 2023.

ATM fees and debit card income decreased $1,000 or 0.2% to $565,000 for the three months ended June 30, 2024.

Bank owned life insurance income increased $11,000 or 7.2% for the three months ended June 30, 2024 mainly due to increased interest rates on the related policies.

Net gains on sales of mortgage loans was $17,000 for the second quarter of 2024, remaining the same as the second quarter of 2023.

Other non-interest income increased $10,000 or 18.9% to $63,000 for the three months ended June 30, 2024 due to higher retail investment income as a result of more income from annuities.

Total non-interest income was $1,860,000 for the three months ended September 30, 2024, as compared to $1,476,000 for the same period in 2023, an increase of $384,000, or 26.0%.

Net securities gains (losses) increased $233,000 to $146,000 for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

The increase in net securities gains (losses) was the result of recognizing $146,000 in net gains on held equity securities in the third quarter of 2024 compared to recognizing $87,000 in net losses on held equity securities during the same period in 2023.

Trust department income increased $9,000 or 3.9% to $240,000 for the three months ended September 30, 2024 as compared to the same period in 2023.

Service charges and fee income was $593,000 for the third quarter of 2024, an increase of $37,000 or 6.7% from the third quarter of 2023.

ATM fees and debit card income increased $18,000 or 3.2% to $574,000 for the three months ended September 30, 2024.

Bank owned life insurance income increased $15,000 or 10.0% for the three months ended September 30, 2024 mainly due to increased interest rates on the related policies.

Net gains on sales of mortgage loans was $40,000 for the third quarter of 2024, an increase of $30,000 or 300.0% as compared to the same period in 2023.

The increase was due to more loans sold and at a higher average gain in the third quarter of 2024 as compared to the third quarter of 2023.

Other non-interest income increased $42,000 or 79.2% to $95,000 for the three months ended September 30, 2024 due to higher retail investment income as a result of more income from annuities.

NON-INTEREST EXPENSE

Total non-interest expense was $7,666,000 for the three months ended June 30, 2024, as compared to $7,157,000 for the three months ended June 30, 2023.

Salaries and benefits amounted to $4,153,000 or 54.2% of total non-interest expense for the three months ended June 30, 2024, as compared to $3,733,000 or 52.2% for the three months ended June 30, 2023.

The increase was mainly due to increased salaries in the second 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, plus increased costs associated with employee health insurance.

Net occupancy, furniture and equipment, and computer expense amounted to $1,026,000 for the three months ended June 30, 2024, a decrease of $95,000 or 8.5% which was mainly due to decreased maintenance on software costs in the second quarter of 2024 as the result of software implementation fees recognized in the second quarter of 2023.

Professional services increased $120,000 or 34.7% to $466,000 as of the quarter ended June 30, 2024 versus the same quarter of 2023 mainly as the result of increased audit expenses relating to the adoption of CECL and goodwill impairment.

Pennsylvania shares tax expense amounted to $244,000 for the three months ended June 30, 2024, an increase of $3,000 or 1.2% as compared to the three months ended June 30, 2023.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense amounted to $218,000 for the three months ended June 30, 2024, an increase of $40,000 or 22.5% as compared to the same period in 2023.

Total non-interest expense was $7,820,000 for the three months ended September 30, 2024, as compared to $7,420,000 for the three months ended September 30, 2023.

Salaries and benefits amounted to $4,375,000 or 55.9% of total non-interest expense for the three months ended September 30, 2024, as compared to $4,020,000 or 54.2% for the three months ended September 30, 2023.

The increase was mainly due to increased salaries in the third 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, plus increased costs associated with employee health insurance.

Net occupancy, furniture and equipment, and computer expense amounted to $1,048,000 for the three months ended September 30, 2024, a decrease of $54,000 or 4.9% which was mainly due to decreased maintenance on software costs in the third quarter of 2024 as the result of various software systems no longer being in use in 2024 along with software implementation fees recognized in the third quarter of 2023.

Professional services increased $10,000 or 3.0% to $346,000 as of the quarter ended September 30, 2024 versus the same quarter of 2023.

Pennsylvania shares tax expense amounted to $314,000 for the three months ended September 30, 2024, an increase of $125,000 or 66.1% as compared to the three months ended September 30, 2023.

The increase was mainly due to the Company recording a true-up for Pennsylvania shares tax expense for the 2023 shares tax return in the third quarter of 2024 which resulted in $70,000 net expense, as compared to receiving a shares tax refund of $52,000 for the 2022 tax return in the third quarter of 2023.

Federal Deposit Insurance Corporation (“FDIC”) insurance expense amounted to $271,000 for the three months ended September 30, 2024, an increase of $96,000 or 54.9% 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 $258,000 for the three months ended June 30, 2024, a decrease of $20,000 or 7.2% as compared to the three months ended June 30, 2023.

This decrease was a result of lower call center expenses and the application of vendor credits in the second quarter of 2024 as compared to the same period in 2023.

Data processing expenses amounted to $235,000 for the three months ended June 30, 2024 as compared to $357,000 for the same period of 2023, a decrease of $122,000 or 34.2% mainly due to the implementation of a new vendor relationship for online banking and the application of vendor relationship credits resulting from contract negotiations.

Advertising expense amounted to $163,000 in the second quarter of 2024, an increase of $9,000 or 5.8% as compared to the three months ended June 30, 2023.

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

Other non-interest expense amounted to $903,000 for the three months ended June 30, 2024, an increase of $154,000 or 20.6% as compared to the three months ended June 30, 2023.

ATM and debit card fees expense amounted to $245,000 for the three months ended September 30, 2024, a decrease of $38,000 or 13.4% as compared to the three months ended September 30, 2023.

This decrease was a result of lower electronic funds transfer fees and the application of vendor credits in the third quarter of 2024 as compared to the same period in 2023.

Data processing expenses amounted to $232,000 for the three months ended September 30, 2024 as compared to $544,000 for the same period of 2023, a decrease of $312,000 or 57.4% mainly due to lower internet banking expenses as the result of a new vendor relationship for online banking and the application of vendor relationship credits resulting from contract negotiations.

Advertising expense amounted to $155,000 in the third quarter of 2024, an increase of $3,000 or 2.0% as compared to the three months ended September 30, 2023.

Other non-interest expense amounted to $834,000 for the three months ended September 30, 2024, an increase of $215,000 or 34.7% as compared to the three months ended September 30, 2023.

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

Income tax expense amounted to $66,000 for the three months ended June 30, 2024, as compared to $317,000 for the three months ended June 30, 2023, a decrease of $251,000.

The effective total income tax rate was 4.6% for the three months ended June 30, 2024 as compared to 21.8% for the three months ended June 30, 2023.

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 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 June 30, 2024 and 2023, respectively.

Six months ended June 30, 2024 compared to six months ended June 30, 2023

First Keystone Corporation realized a loss for the six months ended June 30, 2024 of $16,997,000, a decrease of $19,493,000 from the same period in 2023.

The decrease in net income for the six months ended June 30, 2024 was primarily due to the Company recognizing a full goodwill impairment of $19,133,000 in the first quarter of 2024 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, net losses were $2.77 for the six months ended June 30, 2024 versus earnings of $0.41 for the same period in 2023.

Cash dividends amounted to $0.56 per share for the six months ended June 30, 2024 and 2023.

Income tax benefit amounted to $31,000 for the three months ended September 30, 2024, as compared to income tax expense of $27,000 for the three months ended September 30, 2023, a decrease of $58,000.

The effective total income tax rate was (2.1)% for the three months ended September 30, 2024 as compared to 2.1% for the three months ended September 30, 2023.

The decrease in the effective tax rate was mainly due to 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 September 30, 2024 and 2023, respectively.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

First Keystone Corporation realized a loss for the nine months ended September 30, 2024 of $15,490,000, a decrease of $19,269,000 from the same period in 2023.

The decrease in net income for the nine months ended September 30, 2024 was primarily due to the Company recognizing a full goodwill impairment of $19,133,000 in the first quarter of 2024 as well as increases in interest paid on deposits, interest paid on long-term borrowings through the Federal Home Loan Bank, and increases in salaries and benefits expenses.

On a per share basis, net losses were $2.52 for the nine months ended September 30, 2024 versus earnings of $0.62 for the same period in 2023.

Cash dividends amounted to $0.84 per share for the nine months ended September 30, 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 six months ended June 30, 2024, interest income amounted to $34,539,000, an increase of $7,581,000 or 28.1% from the six months ended June 30, 2023, while interest expense amounted to $19,063,000 in the six months ended June 30, 2024 an increase of $7,017,000 or 58.3% from the six months ended June 30, 2023.

For the nine months ended September 30, 2024, interest income amounted to $52,781,000, an increase of $11,586,000 or 28.1% from the nine months ended September 30, 2023, while interest expense amounted to $29,151,000 in the nine months ended September 30, 2024 an increase of $9,752,000 or 50.3% from the nine months ended September 30, 2023.

As a result, net interest income increased $1,834,000 or 8.4% to $23,630,000 from $21,796,000 for the same period in 2023.

The increase was primarily due to growth in commercial real estate loans and the purchase of higher yielding securities, offset by higher levels of interest paid to depositors to retain and grow deposit relationships as well as higher levels of long-term borrowings and brokered CDs leveraged for a balance sheet strategy.

The Company’s net interest margin for the six months ended June 30, 2024 was 2.32% compared to 2.50% for same period in 2023.

The Company’s net interest margin for the nine months ended September 30, 2024 was 2.35% compared to 2.41% for same period in 2023.

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

PROVISION FOR CREDIT LOSSES

The provision for credit losses for the six months ended June 30, 2024 was $774,000, compared to $34,000 for the six months ended June 30, 2023.

The provision for credit losses for the nine months ended September 30, 2024 was $1,492,000, compared to the nine months ended September 30, 2023, when the provision carried a credit balance of $336,000.

The provision for credit losses for the six months ended June 30, 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 charge-offs of $12,000 and $32,000 for the six months ended June 30, 2024 and 2023, respectively.

The provision for credit losses for the nine months ended September 30, 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 charge-offs of $760,000 and $2,000 for the nine months ended September 30, 2024 and 2023, respectively.

The increase in net charge-offs for the nine months ended September 30, 2024 was mainly the result of $741,000 in aggregate charge-offs completed during the third quarter of 2024 on four

loans to a plastic processing company focused on non-post-consumer recycling.

See Allowance for Credit Losses on page 54 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $2,965,000 for the six months ended June 30, 2024, as compared to $2,991,000 for the same period in 2023, a decrease of $26,000, or 0.9%.

ATM fees and debit card income decreased $16,000 or 1.5% to $1,082,000 for the six months ended June 30, 2024 due to decreased ATM interchange fees as compared to the same period in 2023.

Service charges and fee

income decreased $3,000 for the six months ended June 30, 2024.

Gains on sales of mortgage loans decreased $6,000 or 17.6% due to a lower average gain on individual loans sold in the first half 2024 as compared to the first half of 2023.

Trust department income was $498,000 for the six months ended June 30, 2024 an increase of $20,000 or 4.2% as compared to the same period in 2023 due to more estate fees earned and more new account openings in 2024.

Net securities losses increased $69,000 or 55.2% to ($194,000) for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

The increase was due to the Company recognizing $194,000 in net losses on held equity securities in the first half of 2024 as compared to recognizing $224,000 in net losses on held equity securities and $99,000 in net gains on the sales of debt securities in the first half of 2023.

Total non-interest income was $4,825,000 for the nine months ended September 30, 2024, as compared to $4,467,000 for the same period in 2023, an increase of $358,000, or 8.0%.

ATM fees and debit card income increased $2,000 or 0.1% to $1,656,000 for the nine months ended September 30, 2024.

Service charges and fee income increased $34,000 or 2.1% for the nine months ended September 30, 2024.

Gains on sales of mortgage loans increased $24,000 or 54.5% due to more loans sold and at a higher average gain on individual loans sold in the first nine months of 2024 as compared to the same period in 2023.

Trust department income was $738,000 for the nine months ended September 30, 2024 an increase of $29,000 or 4.1% as compared to the same period in 2023 due to more new account openings in 2024.

Net securities gains (losses) increased $164,000 or 77.4% to net losses of $48,000 for the nine months ended September 30, 2024 as compared to net losses of $212,000 for the nine months ended September 30, 2023.

The increase was due to the Company recognizing $48,000 in net losses on held equity securities in the nine months ended September 30, 2024 as compared to recognizing $311,000 in net losses on held equity securities and $99,000 in net gains on the sales of debt securities in the nine months ended September 30, 2023.

NON-INTEREST EXPENSE

Total non-interest expense was $34,811,000 for the six months ended June 30, 2024, as compared to $14,910,000 for the six months ended June 30, 2023.

Total non-interest expense was $42,631,000 for the nine months ended September 30, 2024, as compared to $22,330,000 for the nine months ended September 30, 2023.

Non-interest expense increased $20,301,000 or 90.9%.

Salaries and benefits amounted to $8,707,000 or 25.0% of total non-interest expense for the six months ended June 30, 2024, as compared to $8,119,000 or 54.5% for the six months ended June 30, 2023.

The increase was mainly due to increased salaries in the first half 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, plus increased costs associated with employee health insurance.

Net occupancy, furniture and equipment, and computer expense amounted to $2,112,000 for the six months ended June 30, 2024, a decrease of $52,000 or 2.4%.

The decrease was mainly due to decreased maintenance on software costs in the first half of 2024 as the result of software implementation fees recognized in the first half of 2023.

Professional services increased $118,000 or 15.1% to $899,000 for the six months ended June 30, 2024.

The increase was mainly the result of increased audit expenses relating to the adoption of CECL and goodwill impairment.

Pennsylvania shares tax expense amounted to $450,000 for the six months ended June 30, 2024, a decrease of $32,000 or 6.6% as compared to the six months ended June 30, 2023.

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

FDIC insurance expense increased $52,000 or 14.7% for the six months ended June 30, 2024.

Salaries and benefits amounted to $13,082,000 or 30.7% of total non-interest expense for the nine months ended September 30, 2024, as compared to $12,139,000 or 54.4% for the nine months ended September 30, 2023.

The increase was mainly due to a $481,000 increase in salaries in the first nine months 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, plus increased costs associated with employee health insurance which were $291,000 greater for the nine months ended September 30, 2024, compared to the same period in 2023.

Net occupancy, furniture and equipment, and computer expense amounted to $3,160,000 for the nine months ended September 30, 2024, a decrease of $106,000 or 3.2%.

The decrease was mainly due to decreased maintenance on software costs in the first nine months of 2024 as the result of various software systems no longer being used in 2024 and software implementation fees recognized in the same period of 2023.

Professional services increased $128,000 or 11.5% to $1,245,000 for the nine months ended September 30, 2024.

The increase was mainly the result of increased annual audit fees and audit expenses relating to the adoption of CECL and goodwill impairment.

Pennsylvania shares tax expense amounted to $764,000 for the nine months ended September 30, 2024, an increase of $93,000 or 13.9% as compared to the nine months ended September 30, 2023.

This increase was mainly due to the Company recording a true-up for Pennsylvania shares tax expense for the 2023 shares tax return in the third quarter of 2023 which resulted in $70,000 net expense, as compared to receiving a shares tax refund of $52,000 in 2023 for the 2022 tax return.

FDIC insurance expense increased $148,000 or 28.0% for the nine months ended September 30, 2024.

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 $480,000 for the six months ended June 30, 2024, a decrease of $105,000 or 17.9% as compared to the six months ended June 30, 2023.

This decrease was a result of lower call center expenses, decreased ATM fraud and the application of vendor credits in the first half of 2024 as compared to the same period in 2023.

Data processing expenses amounted to $524,000 for the six months ended June 30, 2024, a decrease of $145,000 or 21.7% as compared to the six months ended June 30, 2023.

This decrease was the result of the implementation of a new vendor relationship for online banking and the application of vendor relationship credits resulting from contract negotiations.

Advertising expense increased $39,000 or 17.1% during the six months ended June 30, 2024.

This increase was mainly due to the Bank marketing the new full-service Bethelehem branch, along with utilizing more television, digital and social media, billboard and radio advertising in the first half of 2024 as compared to the same period of 2023.

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

ATM and debit card fees expense amounted to $725,000 for the nine months ended September 30, 2024, a decrease of $143,000 or 16.5% as compared to the nine months ended September 30, 2023.

This decrease was a result of lower electronic funds transfer expenses, decreased ATM fraud and the application of vendor credits in the first nine months of 2024 as compared to the same period in 2023.

Data processing expenses amounted to $756,000 for the nine months ended September 30, 2024, a decrease of $457,000 or 37.7% as compared to the nine months ended September 30, 2023.

This decrease was the result of lower internet banking expenses as the result of a new vendor

relationship for online banking and the application of vendor relationship credits in 2024 resulting from contract negotiations, along with implementation fees recognized in 2023.

Advertising expense increased $42,000 or 11.1% during the nine months ended September 30, 2024.

This increase was mainly due to the Bank marketing the new full-service Bethelehem branch, along with utilizing more television, digital and social media and billboard advertising in the first nine months of 2024 as compared to the same period of 2023.

The Company recognized goodwill impairment in the amount of $19,133,000 during the first nine months 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 $1,833,000 for the six months ended June 30, 2024, an increase of $305,000 or 20.0% as compared to the six months ended June 30, 2023.

Other non-interest expense amounted to $2,667,000 for the nine months ended September 30, 2024, an increase of $520,000 or 24.2% as compared to the nine months ended September 30, 2023.

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

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(Dollars in thousands)

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

Net interest income after provision for credit losses

8 unchanged sentences

Adjusted net income

Income tax benefit amounted to $147,000 for the six months ended June 30, 2024, as compared to income tax expense of $463,000 for the six months ended June 30, 2023, a decrease of $610,000.

The effective total income tax rate was 0.9% for the six months ended June 30, 2024 as compared to 15.6% for the six months ended June 30, 2023.

Income tax benefit amounted to $178,000 for the nine months ended September 30, 2024, as compared to income tax expense of $490,000 for the nine months ended September 30, 2023, a decrease of $668,000.

The effective total income tax rate was 1.1% for the nine months ended September 30, 2024 as compared to 11.5% for the nine months ended September 30, 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 $420,000 and $116,000 of tax credits from low-income housing partnerships in the six months ended June 30, 2024 and 2023, respectively.

The Company recognized $630,000 and $174,000 of tax credits from low-income housing partnerships in the nine months ended September 30, 2024 and 2023, respectively.

FINANCIAL CONDITION

Total assets increased to $1,418,228,000 as of June 30, 2024, an increase of $2,358,000 from year-end 2023.

Total assets increased to $1,438,693,000 as of September 30, 2024, an increase of $22,823,000 from year-end 2023.

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

Total debt securities available-for-sale increased $10,621,000 or 2.7% to $403,589,000 as of June 30, 2024 from December 31, 2023 mainly due to the execution of a balance sheet leverage strategy.

Total debt securities available-for-sale increased $12,113,000 or 3.1% to $405,081,000 as of September 30, 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 higher yielding securities in the combined amount of $61,439,000 offset by calls, maturities, and principal paydowns during 2024.

Total loans increased $11,416,000 or 1.3% to $922,494,000 as of June 30, 2024 from December 31, 2023.

Real estate loans, the largest segment of the Company’s loan portfolio, increased by $12,724,000 during the six months ended June 30, 2024.

This was offset by a decrease in Commercial and Industrial loans of $1,950,000 during the six months ended June 30, 2024 mainly due to paydowns completed on commercial and industrial lines of credit.

Total deposits increased $3,770,000 or 0.4% to $984,209,000 as of June 30, 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 six months ended June 30, 2024 offset by a $5,208,000 decrease in municipal deposits.

Total loans increased $23,521,000 or 2.6% to $934,599,000 as of September 30, 2024 from December 31, 2023.

Real estate loans, the largest segment of the Company’s loan portfolio, increased by $24,720,000 during the nine months ended September 30, 2024.

This was offset by a decrease in State and Political loans of $1,773,000 during the nine months ended September 30, 2024 mainly due to a large paydown completed on a state and political loan.

Total deposits increased $39,470,000 or 4.0% to $1,019,909,000 as of September 30, 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 nine months ended September 30, 2024 which increased the balance of retail CDs by $33,251,000 and an increase of $4,930,000 in brokered CDs during the nine months ended September 30, 2024.

There was also a $22,277,000 increase in municipal deposits, offset by a decrease of $15,994,000 in savings during the nine months ended September 30, 2024.

The Company continues to maintain and manage its asset growth.

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

Total borrowings increased in the six months ended June 30, 2024 by $21,843,000 to $297,311,000 from $275,468,000 as of December 31, 2023.

Borrowings increased mainly due to increased repurchase agreement balances and higher levels of short-term borrowings necessary to fund growth in the loan and securities portfolios.

Total stockholders’ equity amounted to $101,094,000 at June 30, 2024, a decrease of $20,521,000 or 16.9% from December 31, 2023 due to a decrease in retained earnings as a result of the Company recognizing goodwill impairment of $19,133,000 in the first quarter of 2024.

Total borrowings decreased in the nine months ended September 30, 2024 by $5,993,000 to $269,475,000 from $275,468,000 as of December 31, 2023.

Borrowings decreased mainly due to the maturity of a $20,000,000 long-term note in the third quarter of 2024 offset by higher balances of repurchase accounts which increased by $12,732,000 during the first nine months of 2024.

Total stockholders’ equity amounted to $107,344,000 at September 30, 2024, a decrease of $14,271,000 or 11.7% from December 31, 2023 due to a decrease in retained earnings as a result of the Company recognizing goodwill impairment of $19,133,000 in the first quarter of 2024.

Accumulated other comprehensive loss was $24,122,000 as of September 30, 2024, compared to $29,645,000 at December 31, 2023, an improvement of $5,523,000.

SEGMENT REPORTING

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

The earning asset ratio (average interest earning assets divided by average total assets) equaled 94.2% at June 30, 2024 and 93.2% at June 30, 2023.

The earning asset ratio (average interest earning assets divided by average total assets) equaled 94.4% at September 30, 2024 and 93.1% at September 30, 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 $922,494,000 as of June 30, 2024, up $11,416,000 or 1.3% since year-end 2023.

Our primary earning asset, total loans, increased to $934,599,000 as of September 30, 2024, up $23,521,000 or 2.6% since year-end 2023.

The loan portfolio continues to be well diversified.

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

Total non-performing assets were $5,035,000 as of June 30, 2024, a decrease of $646,000, or 11.4% 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 152.67% as of June 30, 2024 and 121.90% at December 31, 2023.

Total non-performing assets were $5,390,000 as of September 30, 2024, a decrease of $291,000, or 5.1% 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 142.06% as of

September 30, 2024 and 121.90% at December 31, 2023.

See the Non-Performing Assets section on page 56 for more information.

In addition to loans, another primary earning asset is our overall securities portfolio, which increased in size from December 31, 2023 to June 30, 2024 mainly due to the execution of a balance sheet leverage strategy.

Debt securities available-for-sale amounted to $403,589,000 as of June 30, 2024, an increase of $10,621,000 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 $58,439,000, offset by calls and maturities of debt securities in the amount of $14,410,000 and paydowns on debt securities in the amount of $28,109,000 during the first half of 2024.

Interest-bearing deposits in other banks decreased as of June 30, 2024, to $1,979,000 from $7,551,000 at year-end 2023 due to decreased balances due from the Federal Reserve Bank and the Federal Home Loan Bank, and decreased balances held at PNC for derivative margin collateral.

Total loans increased to $922,494,000 as of June 30, 2024 as compared to $911,078,000 as of December 31, 2023.

In addition to loans, another primary earning asset is our overall securities portfolio, which increased in size from December 31, 2023 to September 30, 2024 mainly due to the execution of a balance sheet leverage strategy.

Debt securities available-for-sale amounted to $405,081,000 as of September 30, 2024, an increase of $12,113,000 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 $61,439,000, offset by calls and maturities of debt securities in the amount of $14,855,000 and paydowns on debt securities in the amount of $41,894,000 during the first three quarters of 2024.

Interest-bearing deposits in other banks increased as of September 30, 2024, to $10,087,000 from $7,551,000 at year-end 2023 due to increased balances due from the Federal Reserve Bank and the Federal Home Loan Bank, and increased balances held at PNC for derivative margin collateral.

Total loans increased to $934,599,000 as of September 30, 2024 as compared to $911,078,000 as of December 31, 2023.

The table on page 22 provides data relating to the composition of the Company’s loan portfolio on the dates indicated.

Total loans increased by $23,521,000 or 2.6%.

The Real Estate portfolio increased $12,724,000 or 1.6% from $811,493,000 at December 31, 2023 to $824,217,000 at June 30, 2024.

The increase in the Real Estate portfolio for the six months ended June 30, 2024 was

mainly the result of an increase in utilization of existing real estate lines of credit of $9,127,000 and $43,113,000 in new loan originations, which were offset by loan payoffs of $17,946,000, along with regular principal payments and other typical fluctuations in the Real Estate portfolio.

The Agricultural portfolio increased $319,000 or 47.5% from $671,000 at December 31, 2023 to $990,000 at June 30, 2024.

The increase in the Agricultural portfolio for the six months ended June 30, 2024 was mainly the result of four loans totaling $275,000 that were reclassed from the Commercial and Industrial portfolio to the Agricultural portfolio during the six months ended June 30, 2024 and an increase of $61,000 in utilization of existing agricultural lines of credit, offset with regular principal payments and other typical fluctuations in the Agricultural portfolio.

During the six months ended June 30, 2024, there was one new agricultural loan originated with a balance of $35,000 and one agricultural loan paid off with a balance of $46,000.

The Commercial and Industrial portfolio decreased $1,950,000 or 2.9% from $66,909,000 at December 31, 2023 to $64,959,000 at June 30, 2024.

The Real Estate portfolio increased $24,720,000 or 3.0% from $811,493,000 at December 31, 2023 to $836,213,000 at September 30, 2024.

The increase in the Real Estate portfolio for the nine months ended September 30, 2024 was mainly the result of an increase in utilization of existing real estate lines of credit of $11,425,000 and $73,603,000 in new loan originations, which were offset by loan payoffs of $29,443,000, along with regular principal payments and other typical fluctuations in the Real Estate portfolio.

The Agricultural portfolio increased $337,000 or 50.2% from $671,000 at December 31, 2023 to $1,008,000 at September 30, 2024.

The increase in the Agricultural portfolio for the nine months ended September 30, 2024 was mainly the result of four loans totaling $275,000 that were reclassed from the Commercial and Industrial portfolio to the Agricultural portfolio during the nine months ended September 30, 2024 and an increase of $65,000 in utilization of existing agricultural lines of credit, offset with regular principal payments and other typical fluctuations in the Agricultural portfolio.

During the nine months ended September 30, 2024, there was two new agricultural loans originated with an aggregate balance of $64,000 and one agricultural loan paid off with a balance of $46,000.

The Commercial and Industrial portfolio decreased $105,000 or 0.2% from $66,909,000 at December 31, 2023 to $66,804,000 at September 30, 2024.

The decrease was attributable to a decrease of $4,000,000 in utilization of existing commercial and industrial lines of credit, loan payoffs of $2,735,000, and regular principal payments and other typical amortization in the Commercial and Industrial portfolio, offset by $5,601,000 in new loan originations.

Consumer loans increased $426,000 or 7.3% from $5,824,000 at December 31, 2023 to $6,250,000 at June 30, 2024.

The increase is mainly attributable to new loan originations of $1,740,000, offset by loan payoffs of $489,000 and a decrease of $11,000 in utilization of existing consumer lines of credit, along with regular principal payments.

The State and Political Subdivisions portfolio decreased $103,000 or 0.4% from $26,181,000 at December 31, 2023 to $26,078,000 at June 30, 2024.

The decrease is mainly the result of regular principal payments on state and political subdivisions loans completed during the six months ended June 30, 2024, which were offset by an increase of $123,000 in the balance of an existing state and political subdivision line of credit resulting from a draw of $500,000 net with a paydown of $377,000, both completed during the six months ended June 30, 2024.

The Consumer portfolio increased $342,000 or 5.9% from $5,824,000 at December 31, 2023 to $6,166,000 at September 30, 2024.

The increase is mainly attributable to new loan originations of $2,246,000 and an increase of $9,000 in utilization of existing consumer lines of credit, offset by loan payoffs of $824,000 and regular principal payments.

The State and Political Subdivisions portfolio decreased $1,773,000 or 6.8% from $26,181,000 at December 31, 2023 to $24,408,000 at September 30, 2024.

The decrease is mainly the result of regular principal payments on state and political subdivisions loans completed during the nine months ended September 30, 2024, which were offset by an increase of $123,000 in the balance of an existing state and political subdivision line of credit resulting from a draw of $500,000 net with a paydown of $377,000, both completed during the nine months ended September 30, 2024.

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.

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Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $911,691,000 or 97.6% of gross loans are graded Pass;

$0 are graded Special Mention;

$1,586,000 or 0.2% are graded Special Mention;

$20,361,000 or 2.2% are graded Substandard;

and $0 are graded Doubtful.

The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower.

Bank, credit history and lender knowledge of the borrower.

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

Overall, non-pass grades decreased $772,000 to $23,320,000 at June 30, 2024, as compared to $24,092,000 at December 31, 2023.

Real Estate non-pass grades decreased $730,000 to $22,654,000 as of June 30, 2024 as compared to $23,384,000 as of December 31, 2023.

Commercial and Industrial non-pass grades increased $6,000 to $656,000 as of June 30, 2024 as compared to $650,000 as of December 31, 2023.

Consumer non-pass grades decreased $48,000 to $10,000 as of June 30, 2024 as compared to $58,000 as of December 31, 2023.

There were no Agricultural or State and Political Subdivision non-pass grades at June 30, 2024 or December 31, 2023.

Overall, non-pass grades decreased $2,145,000 to $21,947,000 at September 30, 2024, as compared to $24,092,000 at December 31, 2023.

Real Estate non-pass grades decreased $1,594,000 to $21,790,000 as of September 30, 2024 as compared to $23,384,000 as of December 31, 2023.

Commercial and Industrial non-pass grades decreased $503,000 to $147,000 as of September 30, 2024 as compared to $650,000 as of December 31, 2023.

Consumer non-pass grades decreased $48,000 to $10,000 as of September 30, 2024 as compared to $58,000 as of December 31, 2023.

There were no Agricultural or State and Political Subdivision non-pass grades at September 30, 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 June 30, 2024, the allowance for credit losses was $7,687,000 as compared to $6,925,000 as of December 31, 2023.

As of September 30, 2024, the allowance for credit losses was $7,657,000 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.

13 unchanged sentences

During the second quarter of 2024, qualitative factors related to delinquency trends were increased by four basis points related to (a) loans secured by first liens and (b) loans secured by owner occupied, non-farm, non-residential properties, as well as increased by sixteen basis points related to (c) loans secured by other non-farm, non-residential properties.

Qualitative factors related to volume trends were also decreased by four basis points related to (a) other revolving credit plans and (b) automobile loans during the second 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 six months ended June 30, 2024 and 2023.

Net charge-offs as a percentage of average loans was 0.001% and 0.004% for the six months ended June 30, 2024 and 2023, respectively.

Net charge-offs amounted to $12,000 and $32,000 for the six months ended June 30, 2024 and 2023, respectively.

For the six months ended June 30, 2024, the provision for credit losses was $774,000 as compared to $34,000 for the six months ended June 30, 2023.

Qualitative factors related to volume trends were also decreased by four basis points related to (a) other revolving credit plans and (b) automobile

loans during the second quarter of 2024.

During the third quarter of 2024, qualitative factors related to delinquency trends were increased by 4 basis points related to (a) revolving open-end loans and (b) other revolving credit plans, and increased by 8 basis points related to (c) automobile loans.

Qualitative factors related to delinquency trends were decreased by 4 basis points related to (a) loans secured by multifamily residential properties, (b) loans for agricultural production and other loans to farmers, (c) commercial and industrial loans, and (d) other consumer loans.

Qualitative factors related to volume trends decreased by 4 basis points related to (a) loans secured by farmland, (b) loans secured by junior liens, (c) loans secured by owner occupied, non-farm, non-residential properties, (d) loans secured by other non-farm non-residential properties, (e) other revolving credit plans, and (f) automobile loans.

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, 2024 and 2023.

Net charge-offs as a percentage of average loans was 0.08% and 0.00% for the nine months ended September 30, 2024 and 2023, respectively.

Net charge-offs amounted to $760,000 and $2,000 for the nine months ended September 30, 2024 and 2023, respectively.

The increase in net charge-offs for the nine months ended September 30, 2024 was mainly the result of $741,000 in aggregate charge-offs completed during the third quarter of 2024 on four loans to a plastic processing company focused on non-post-consumer recycling.

For the nine months ended September 30, 2024, the provision for credit losses was $1,492,000, compared to the nine months ended September 30, 2023, when the provision carried a credit balance of $336,000.

The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for credit losses of $7,657,000, of which 93.6% was attributed to the Real Estate component, 0.0% attributed to the Agricultural component, 4.4% attributed to the Commercial and Industrial component, 1.2% attributed to the Consumer component, and 0.8% attributed to the State and Political Subdivisions component (refer to the activity in Note 4 – Loans and Allowance for Credit Losses on page 13).

1 unchanged sentence

(Dollars in thousands)

As of and for the six months ended:

September 30,

As of and for the nine months ended:

Balance at prior year-end

6 unchanged sentences

Net charge-offs

Provision charged to operations

Provision (credit) charged to operations

Balance at end of period

6 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 0.843% and 0.828% at June 30, 2024 and 2023, 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 0.84% and 0.79% at September 30, 2024 and 2023, respectively.

NON-PERFORMING ASSETS

5 unchanged sentences

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

Total non-performing assets amounted to $5,035,000 as of June 30, 2024, as compared to $5,681,000 as of December 31, 2023.

The economic growth for the second quarter of 2024 was higher than expected.

Total non-performing assets amounted to $5,390,000 as of September 30, 2024, as compared to $5,681,000 as of December 31, 2023.

The economic growth for the third quarter of 2024 was higher than expected.

Consumer spending remains at high levels.

The inflation rate dropped slightly to 3.0%, still above the Federal Reserve Board’s desired rate of 2.0%.

Business sentiment remains downbeat and business investment has remained low.

The inflation rate dropped to 2.5%, still above the Federal Reserve Board’s desired rate of 2.0%.

Business sentiment saw a slight rise as rates were lowered during the third quarter.

However, there is still much consternation regarding the looming Presidential election.

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

1 unchanged sentence

Inflation is receding, although not as fast as the Federal Reserve would like.

The general thought is that the Federal Reserve will cut rates twice in the remainder of 2024 by 25 basis points and then continue the rate cuts into 2025.

This will all depend on continued decline of the inflation rate.

The general thought is that the Federal Reserve will cut rates two more times during the remainder of 2024 by 25 basis points and then continue the rate cuts into 2025.

This will all depend on continued decline of the inflation rate, the results of the election, and the unemployment landscape.

The war between Ukraine and Russia continues to deeply pierce the landscape of the world.

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 heightened conflict with Israel and Palestine has caused much hostility throughout the world and is becoming increasingly more volatile.

This has only fueled the college campuses and centers of influence throughout the US with protests that have become heated and violent.

The continuing dispute 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.

Although, there would seem to be a dynamic shift in the automobile industry where inventories are increasing and sales are slowing, this may lead to a reduced profit margin.

Higher interest rates have added to the curtailed borrowing.

5 unchanged sentences

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

Non-accrual loans totaled $4,540,000 as of June 30, 2024, as compared to $4,616,000 as of December 31, 2023.

There were no foreclosed assets held for resale as of June 30, 2024 and December 31, 2023.

There were five loans past-due 90 days or more and still accruing interest at June 30, 2024 that carried a balance of $495,000, 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 June 30, 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 0.55% at June 30, 2024 and 0.62% at December 31, 2023.

Non-performing assets to total assets was 0.36% at June 30, 2024 and 0.40% at December 31, 2023.

The allowance for credit losses to total non-performing assets was 152.67% as of June 30, 2024 as compared to 121.90% as of December 31, 2023.

Non-accrual loans totaled $3,559,000 as of September 30, 2024, as compared to $4,616,000 as of December 31, 2023.

There were no foreclosed assets held for resale as of September 30, 2024 and December 31, 2023.

There were seven loans past-due 90 days or more and still accruing interest at September 30, 2024 that carried a balance of $1,831,000, 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 September 30, 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 0.58% at September 30, 2024 and 0.62% at December 31, 2023.

Non-performing assets to total assets was 0.37% at September 30, 2024 and 0.40% at December 31, 2023.

The allowance for credit losses to total non-performing assets was 142.06% as of September 30, 2024 as compared to 121.90% as of December 31, 2023.

Additional detail can be found on page 59 in the Non-Performing Assets and Individually Evaluated Loans table and page 31 in the Non-Performing Assets table.

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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 $18,780,000 at June 30, 2024 and $19,418,000 at December 31, 2023.

Individually evaluated loans were $4,849,000 at June 30, 2024, compared to $4,925,000 at December 31, 2023.

The largest individually evaluated loan relationship at June 30, 2024 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate.

At June 30, 2024, the loan carried a balance of $1,953,000, net of $1,989,000 that had been charged off to date.

The second largest individually evaluated loan relationship at June 30, 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 $975,000 at June 30, 2024.

The third largest individually evaluated loan relationship at June 30, 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 June 30, 2024, the loan carried a balance of $582,000.

Performing substandard loans not designated for individual impairment amounted to $16,416,000 at September 30, 2024 and $19,418,000 at December 31, 2023.

Individually evaluated loans were $3,868,000 at September 30, 2024, compared to $4,925,000 at December 31, 2023.

The largest individually evaluated loan relationship at September 30, 2024 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate.

At September 30, 2024, the loan carried a balance of $1,953,000, net of $1,989,000 that had been charged off to date.

The second largest individually evaluated loan relationship at September 30, 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 September 30, 2024, the loan carried a balance of $582,000.

third largest individually evaluated loan relationship at September 30, 2024 consisted of a commercial term loan for agriculture purpose which is secured by stock.

At September 30, 2024, the loan carried a balance of $309,000.

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 $4,849,000 in individually evaluated loans at June 30, 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 June 30, 2024 amounted to $9,455,000 and was classified in the Real Estate portfolio.

Of the $3,868,000 in individually evaluated loans at September 30, 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 September 30, 2024 amounted to $9,547,000 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 June 30, 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 June 30, 2024.

There were no payment defaults related to the modification of a loan to a borrower experiencing financial difficulty during the three months ended June 30, 2024 and the loan was paid current as of June 30, 2024.

The loan modifications to borrowers experiencing financial difficulty as of September 30, 2024 consisted of a payment modification which allowed a period of interest-only payments of six months and term modification which allowed the extension of the maturity date of a loan by ten months.

Of the modifications of loans to borrowers experiencing financial difficulty that were completed during the twelve months preceding September 30, 2024, a loan carrying a post modification recorded investment of $9,455,000 experienced a payment default during the nine months ended September 30, 2024, but the loan was paid current by the customer as of September 30, 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.

6 unchanged sentences

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 state of flux.

The economic climate remains unstable.

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 remain 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, along with the intense political turmoil, commodity prices have remained 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 desire for rates to be reduced have all exacerbated the difficulties in the national and state economy.

Inflationary pressures remain elevated;

although they are moving closer to the Federal Reserve’s bench mark rate.

This continues to create 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, along with the intense political turmoil, commodity prices have remained 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 uncertainty of where the Federal Reserve may go from here in regards of rate reductions or increases 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.

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 worldwide discord, 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 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 Presidential election, and the looming worldwide discord, 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 June 30, 2024 and December 31, 2023, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

As of September 30, 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

18 unchanged sentences

Allowance for credit losses to total non-performing assets

Real estate mortgages comprise 89.4% of the loan portfolio as of June 30, 2024, as compared to 89.1% as of December 31, 2023.

Real estate mortgages comprise 89.5% of the loan portfolio as of September 30, 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.

8 unchanged sentences

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 increased $3,770,000 to $984,209,000 as of June 30, 2024 as non-interest bearing deposits increased by $7,435,000 and interest bearing deposits decreased by $3,665,000 from year-end 2023.

The increase in deposits was mainly the result of an increase in time deposits of $18,661,000 as the result of new higher rate CD promotions during the first half of the year offset by a $5,208,000 decrease in municipal deposits and other normal fluctuations.

Total short-term and long-term borrowings increased to $297,311,000 as of June 30, 2024, from $275,468,000 at year-end 2023, an increase of $21,843,000 or 7.9%.

Total borrowings increased due to increases in loans and securities and an increase in the balance of repurchase agreements since year-end.

Total deposits increased $39,470,000 to $1,019,909,000 as of September 30, 2024 as non-interest bearing deposits increased by $13,468,000 and interest bearing deposits increased by $26,002,000 from year-end 2023.

The increase in deposits was mainly the result of an increase in time deposits of $33,251,000 as the result of new higher rate CD promotions during the first nine months of the year and an increase of $4,930,000 in brokered CDs, along with a $22,277,000 increase in municipal deposits.

This was offset by a decrease in savings of $15,994,000 during the first nine months of 2024.

Total short-term and long-term borrowings decreased to $269,475,000 as of September 30, 2024, from $275,468,000 at year-end 2023, a decrease of $5,993,000 or 2.2%.

Total borrowings decreased as a result of increased deposit balances 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”).

3 unchanged sentences

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

During the six months ended June 30, 2024, net loss less dividends paid decreased capital by $20,434,000.

During the nine months ended September 30, 2024, net loss and continued payment of dividends decreased capital by $20,659,000.

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 $30,597,000 at June 30, 2024, a decrease of $952,000.

Accumulated other comprehensive loss stood at $24,122,000 at September 30, 2024, an improvement of $5,523,000.

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 June 30, 2024 and December 31, 2023, respectively.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of June 30, 2024 and December 31, 2023.

Total stockholders’ equity was $101,094,000 as of June 30, 2024, and $121,615,000 as of December 31, 2023.

At June 30, 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 June 30, 2024 and December 31, 2023:

The Company held 231,611 shares of common stock as treasury stock at September 30, 2024 and December 31, 2023, respectively.

This had an effect of reducing our total stockholders’ equity by $5,709,000 as of September 30, 2024 and December 31, 2023.

Total stockholders’ equity was $107,344,000 as of September 30, 2024, and $121,615,000 as of December 31, 2023.

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

Minimum Capital

September 30,

Adequacy with

7 unchanged sentences

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 June 30, 2024, 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 September 30, 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.

5 unchanged sentences

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

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

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

● Securities sold under agreements to repurchase;

● Brokered CDs.

At June 30, 2024 the Company had $532,749,000 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 September 30, 2024 the Company had $517,200,000 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 $17,964,000.

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 $27,109,000 at June 30, 2024.

Securities sold under agreements to repurchase were $32,440,000 at September 30, 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 $5,534,000 and $357,000 for the six months ended June 30, 2024 and 2023.

Net loss amounted to $16,997,000 for the six months ended June 30, 2024, compared to net income of $2,496,000 for the six months ended June 30, 2023.

The goodwill impairment recorded during the first quarter of 2024 was a non-cash charge and amounted to $19,133,000 for the six months ended June 30, 2024;

Net cash flows provided by operating activities were $7,429,000 and $2,812,000 for the nine months ended September 30, 2024 and 2023.

Net loss amounted to $15,490,000 for the nine months ended September 30, 2024, compared to net income of $3,779,000 for the nine months ended September 30, 2023.

The goodwill impairment recorded during the first quarter of 2024 was a non-cash charge and amounted to $19,133,000 for the nine months ended September 30, 2024;

therefore, had no effect on liquidity.

For the six months ended June 30, 2023, there was no goodwill impairment.

During the six months ended June 30, 2024 and 2023, net premium amortization on securities amounted to $285,000 and $799,000, respectively.

Net gains on sales of mortgage loans amounted to $28,000 for the six months ended June 30, 2024 and $34,000 for the six months ended June 30, 2023.

Originations of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $63,000 for the six months ended June 30, 2024, compared to the six months ended June 30, 2023 when proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $105,000.

Net securities losses amounted to $194,000 and $125,000 for the six months ended June 30, 2024 and 2023, respectively.

Accrued interest receivable increased by $127,000 for the six months ended June 30, 2024 and decreased by $218,000 for the six months ended June 30, 2023.

Accrued interest payable increased $875,000 and $608,000 for the six months ended June 30, 2024

and 2023, respectively.

Amortization of investment in real estate ventures amounted to $409,000 for the six months ended June 30, 2024 and $106,000 for the six months ended June 30, 2023.

Other assets decreased $201,000 and increased $87,000 for the six months ended June 30, 2024 and 2023, respectively.

Other liabilities increased $122,000 during the six months ended June 30, 2024, compared to a decrease of $5,188,000 during the six months ended June 30, 2023.

Investing activities used cash of $28,452,000 during the six months ended June 30, 2024, compared to the six months ended June 30, 2023 when investing activities provided cash of $23,778,000.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $15,921,000 during the six months ended June 30, 2024 and provided cash of $41,217,000 during the six months ended June 30, 2023.

Changes in restricted investment in bank stocks used cash of $608,000 and $1,418,000 during the six months ended June 30, 2024 and 2023, respectively.

Net cash used to originate loans amounted to $11,337,000 for the six months ended June 30, 2024 and $12,873,000 for the six months ended June 30, 2023.

Purchases of premises and equipment used cash of $576,000 and $1,251,000 during the six months ended June 30, 2024 and 2023, respectively.

Purchase of investment in real estate ventures used cash of $10,000 and $1,834,000 during the six months ended June 30, 2024 and 2023, respectively.

Financing activities provided cash of $22,176,000 and used cash of $21,098,000 during the six months ended June 30, 2024 and 2023, respectively.

Deposits increased by $3,770,000 during the six months ended June 30, 2024 and decreased by $57,658,000 during the six months ended June 30, 2023.

Short-term borrowings increased by $21,843,000 and $39,941,000 during the six months ended June 30, 2024 and 2023, respectively.

Dividends paid amounted to $3,437,000 for the six months ended June 30, 2024, compared to $3,376,000 for the six months ended June 30, 2023.

For the nine months ended September 30, 2023, there was no goodwill impairment.

During the nine months ended September 30, 2024 and 2023, net premium amortization on securities amounted to $276,000 and $1,196,000, respectively.

Net gains on sales of mortgage loans amounted to

$68,000 for the nine months ended September 30, 2024 and $44,000 for the nine months ended September 30, 2023.

Originations of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $146,000 for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023 when proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $114,000.

Net securities losses amounted to $48,000 and $212,000 for the nine months ended September 30, 2024 and 2023, respectively.

Accrued interest receivable increased by $58,000 and $224,000 for the nine months ended September 30, 2024 and 2023, respectively.

Accrued interest payable decreased by $233,000 for the nine months ended September 30, 2024 and increased by $1,097,000 for the nine months ended September 30, 2023.

Amortization of investment in real estate ventures amounted to $614,000 for the nine months ended September 30, 2024 and $158,000 for the nine months ended September 30, 2023.

Other assets increased $277,000 for the nine months ended September 30, 2024, compared to an increase of $0 for the nine months ended September 30, 2023.

Other liabilities increased $1,079,000 during the nine months ended September 30, 2024, compared to a decrease of $4,848,000 during the nine months ended September 30, 2023.

Investing activities used cash of $30,071,000 during the nine months ended September 30, 2024 and provided cash of $7,007,000 during the nine months ended September 30, 2023.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $4,690,000 during the nine months ended September 30, 2024 and provided cash of $33,337,000 during the nine months ended September 30, 2023.

Changes in restricted investment in bank stocks provided cash of $120,000 and $119,000 during the nine months ended September 30, 2024 and 2023, respectively.

Net cash used to originate loans amounted to $24,067,000 for the nine months ended September 30, 2024 and $22,641,000 for the nine months ended September 30, 2023.

Purchases of premises and equipment used cash of $1,424,000 and $1,442,000 during the nine months ended September 30, 2024 and 2023, respectively.

Purchase of investment in real estate ventures used cash of $10,000 and $2,366,000 during the nine months ended September 30, 2024 and 2023, respectively.

Financing activities provided cash of $29,653,000 and used cash of $7,920,000 during the nine months ended September 30, 2024 and 2023, respectively.

Deposits increased by $39,470,000 during the nine months ended September 30, 2024 and decreased by $1,196,000 during the nine months ended September 30, 2023.

Short-term borrowings increased by $14,007,000 and $1,358,000 during the nine months ended September 30, 2024 and 2023, respectively.

Repayment of long-term borrowings used cash of $20,000,000 and $3,000,000 for the nine months ended September 30, 2024 and 2023, respectively.

Dividends paid amounted to $3,824,000 for the nine months ended September 30, 2024, compared to $5,075,000 for the nine months ended September 30, 2023.

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

10 unchanged sentences

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

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

As a result, increases in interest rates could result in further decreases in the fair value of the Company’s interest-earning

assets, which could adversely affect the Company’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Company’s stockholders’ equity, if retained.

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

3 unchanged sentences

The Company actively manages the interest rate sensitivity of its assets and liabilities.

Several techniques are used

for measuring interest rate sensitivity.

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.

3 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 June 30, 2024.

The Company’s cumulative gap at one year indicates the Company is liability sensitive at September 30, 2024.

Earnings at Risk

22 unchanged sentences

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

For the six months ended June 30, 2024 the cost of interest-bearing liabilities averaged 3.49%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 5.17%.

For the nine months ended September 30, 2024 the cost of interest-bearing liabilities averaged 3.55%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 5.25%.

Net Present Value Estimation

1 unchanged sentence

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

At June 30, 2024, net present value is projected to decrease 3.73%, 7.47%, and 12.36% 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 an increase of 1.22% and decreases of 1.29% and 10.39%, respectively.

At September 30, 2024, net present value is projected to decrease 3.66%, 7.48%, and 12.98% 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 decreases of 4.12%, 12.14%, and 28.09%.

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

22 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