FIRST KEYSTONE CORP

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.

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. As a result, net interest income increased $893,000 or 12.6% to $8,001,000 from $7,108,000 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%.

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 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. See Allowance for Credit Losses on page 52 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.

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

INCOME TAXES

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.

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. As a result, net interest income increased $564,000 or 3.8% to $15,476,000 from $14,912,000 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 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 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 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. See Allowance for Credit Losses on page 52 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.

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. Non-interest expense increased $19,901,000 or 133.5%.

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

Management of the Company believes that investors’ understanding of the Company’s performance is enhanced by disclosing non-GAAP financial measures without the effects of the impairment as a reasonable basis for comparison of the Corporation’s ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The following Non-GAAP Reconciliation Schedule provides a reconciliation of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.

NON-GAAP RECONCILIATION SCHEDULE

INCOME TAXES

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. 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.

FINANCIAL CONDITION

SUMMARY

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 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. The increase was mainly due to the purchase of several higher yielding securities in the combined amount of $58,439,000 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.

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.

SEGMENT REPORTING

Currently, management measures the performance and allocates the resources of the Company as a single segment.

EARNING ASSETS

Earning assets are defined as those assets that produce interest income. 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. 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. 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. See the Non-Performing Assets section on page 53 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.

LOANS

Total loans increased to $922,494,000 as of June 30, 2024 as compared to $911,078,000 as of December 31, 2023. The table on page 21 provides data relating to the composition of the Company’s loan portfolio on the dates indicated. Total loans increased by $11,416,000 or 1.3%.

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 decrease was attributable to a decrease of $4,085,000 in utilization of existing commercial and industrial lines of credit, loan payoffs of $2,393,000, and regular principal payments and other typical amortization in the Commercial and Industrial portfolio, offset by $4,945,000 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 Company continues to originate and sell certain long-term fixed rate residential mortgage loans, which conform to secondary market requirements, when the market pricing is favorable. The Company derives ongoing income from the servicing of mortgages sold in the secondary market. The Company continues its efforts to lend to creditworthy borrowers. Management believes that the loan portfolio is well diversified.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $898,109,000 or 97.5% of gross loans are graded Pass; $0 are graded Special Mention; $23,320,000 or 2.5% 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. 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.

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

Total Loans

ALLOWANCE FOR CREDIT LOSSES

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. The allowance for credit losses is established through a provision for credit losses charged to expenses. Loans are charged against the allowance for possible credit losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Management performs a quarterly analysis to determine the adequacy of the allowance for credit losses. The methodology in determining adequacy incorporates quantitative and qualitative allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process. This assessment results in an allocated allowance. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority.

Management considers, based upon its methodology, that the allowance for credit losses is adequate to cover foreseeable future losses. However, there can be no assurance that the allowance for credit losses will be adequate to cover significant losses, if any, that might be incurred in the future. On a quarterly basis, management evaluates the qualitative factors utilized in the calculation of the Company’s allowance for credit losses and various adjustments are made to these factors as deemed necessary at the time of evaluation. During the first quarter of 2024, qualitative factors related to delinquency trends were decreased by eight basis points related to loans (a) secured by first liens, (b) secured by owner-occupied, non-farm, non-residential properties, and (c) other revolving credit plans. Qualitative factors related to volume trends were increased by eight basis points related to loans secured by junior liens and decreased by eight basis points related to other revolving credit plans. Qualitative factors related to collateral values were also increased by four basis points related to commercial and industrial loans during the first quarter of 2024. 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. The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for credit losses of $7,687,000, of which 93.8% was attributed to the Real Estate component, 0.0% attributed to the Agricultural component, 4.2% 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 12).

Analysis of Allowance for Credit Losses

It is the policy of management and the Company’s Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio. A provision for credit losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio. This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.

The loan review process, which is conducted quarterly, is an integral part of the Bank’s evaluation of the loan portfolio. 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.

NON-PERFORMING ASSETS

The table on page 56 details the Company’s non-performing assets and individually evaluated loans as of the dates indicated. Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest. A loan may remain on accrual status if it is in the process of

collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period income. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

Total non-performing assets amounted to $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. 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. Many economists and influential thinkers still believe that the economy is moving forward in spite of certain forecasts and predictors. The thought of a recession, however, has lessened. 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 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 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. Higher interest rates have added to the curtailed borrowing. Consumer savings is dwindling, and credit balances are growing. Supply chains are back up and running efficiently in many areas. Labor continues to remain costly and unpredictable. The pending Presidential election has proven to be very divisive. These forces have had a direct effect on the Corporation’s non-performing assets. 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. Additional detail can be found on page 56 in the Non-Performing Assets and Individually Evaluated Loans table and page 30 in the Non-Performing Assets table. Asset quality is a priority and the Company retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation efforts and engages an annual external loan review.

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.

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

For non-accrual loans less than $250,000 upon classification and typically at year end, the Company completes a Certificate of Inspection, which includes the results of an onsite inspection, and may consider value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.

Improving loan quality is a priority. The Company actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in 2024. Excluding the assets disclosed in the Non-Performing Assets and Individually Evaluated Loans table below, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination.

The economic climate remains in a state of flux. The war between Ukraine and Russia moves into its third year and the Israeli conflict in the Gaza strip has intensified and incited worldwide hostilities. Inflationary pressures 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. Experts at all levels continue to ascertain the intermediate or long term effects of such issues. The Corporation may experience difficulties collecting payments on time from its borrowers, and certain types of loans may need to be modified, which could cause a rise in the level of individually evaluated loans, non-performing assets, charge-offs, and delinquencies. Should such metrics increase, additions to the balance of the Corporation’s allowance for credit losses could be required. The extent of the impact of these stressors on the Corporation’s operational and financial performance will depend on certain developments including reactions to inflationary controls enacted, the labor force, the longevity of the wars, the ongoing political landscape, and the looming 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.

Non-Performing Assets and Individually Evaluated Loans

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 consist of both loans secured by residential and commercial real estate. The real estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities. Also, the residential component of the real estate loan portfolio is largely comprised of fixed rate mortgages. The real estate loans are concentrated primarily in the Company’s market area and are subject to risks associated with the local economy. The loans secured by commercial real estate typically reprice approximately every three to five years and are also concentrated in the Company’s market area. The Company’s loss exposure on its individually evaluated loans continues to be mitigated by collateral positions on these loans. The allocated allowance for credit losses associated with individually evaluated loans is generally computed based upon the related collateral value of the loans. The collateral values are determined by recent appraisals or Certificates of Inspection, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management’s expertise and knowledge of the borrower and the borrower’s business.

DEPOSITS, OTHER BORROWED FUNDS AND SUBORDINATED DEBT

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 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.

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the “2020 Notes”). The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and then float based on a benchmark rate (as defined).

CAPITAL STRENGTH

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. 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. 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:

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement 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 Corporation’s capital ratios are not materially different than those of the Bank.

LIQUIDITY

The Company’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity is needed to provide the funding requirements of depositors’ withdrawals, loan growth, and other operational needs.

Sources of liquidity are as follows:

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); the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $79,246,000.

The Company enters into “Repurchase Agreements” in which it agrees to sell securities subject to an obligation to repurchase the same or similar securities. Because the agreement both entitles and obligates the Company to repurchase the assets, the Company may transfer legal control of the securities while still retaining effective control. 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.

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. The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities. Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing deposits. 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; 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.

Managing liquidity remains an important segment of asset/liability management. The overall liquidity position of the Company is maintained by an active asset/liability management committee. The Company believes that its core deposit base is stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and are measured on a monthly basis. These measurements indicate that liquidity generally remains stable and exceeds the Company’s minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly utilizing new options.

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company’s market risk is composed primarily of interest rate risk. The Company’s interest rate risk results from timing differences in the repricing of assets, liabilities, off-balance sheet instruments, and changes in relationships between rate indices and the potential exercise of explicit or embedded options.

Increases in the level of interest rates also may adversely affect the fair value of the Company’s securities and other earning assets. 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. 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. The Company does not own any trading assets.

Asset/Liability Management

The principal objective of asset/liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Company actively manages the interest rate sensitivity of its assets and liabilities. 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. If more assets than liabilities mature or reprice within the time frame, the Company is asset sensitive. This position would contribute positively to net interest income in a rising rate environment. Conversely, if more liabilities mature or reprice, the Company is liability sensitive. This position would contribute positively to net interest income in a falling rate environment. The Company’s cumulative gap at one year indicates the Company is liability sensitive at June 30, 2024.

Earnings at Risk

The Bank’s Asset/Liability Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Company’s Board of Directors. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet beyond interest rate sensitivity gap. Although the Company continues to measure its interest rate sensitivity gap, the Company utilizes additional modeling for interest rate risk in the overall balance sheet. Earnings at risk and economic values at risk are analyzed.

Earnings simulation modeling addresses earnings at risk and net present value estimation addresses economic value at risk. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk to the Company.

Earnings Simulation Modeling

The Company’s net income is affected by changes in the level of interest rates. Net income is also subject to changes in the shape of the yield curve. For example, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and increased liability rates, while a steepening would result in increased earnings as earning asset and interest-bearing liability yields widen.

Earnings simulation modeling is the primary mechanism used in assessing the impact of changes in interest rates on net interest income. The model reflects management’s assumptions related to asset yields and rates paid on liabilities, deposit sensitivity, size and composition of the balance sheet. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Earnings at risk is the change in net interest income from a base case scenario under various scenarios of rate shock increases and decreases in the interest rate earnings simulation model.

The table below presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates. The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors. The earnings simulation model projects net interest income would decrease 5.66%, 10.48%, and 14.29% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would increase 2.15%, 4.74%, and 6.68% in the 100, 200 and 300 basis point decreasing rate scenarios presented. All of the forecasts in the increasing and decreasing rate scenarios presented are within the Company’s policy guidelines.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current interest rate environment with federal funds trading in the 525-550 basis point range and many deposit accounts still lagging at markedly lower rates. Results of the decreasing basis point declining scenarios are affected by the fact that many of the Company’s interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points. However, the Company’s interest-sensitive assets are able to decline by these amounts. For the 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%.

Net Present Value Estimation

The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. At 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. All scenarios presented are within the Company’s policy limits.

The computation of the effects of hypothetical interest rate changes are based on many assumptions. They should not be relied upon solely as being indicative of actual results, since the computations do not account for actions management could undertake in response to changes in interest rates.

Effect of Change in Interest Rates