CITIZENS & NORTHERN CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this section and elsewhere in this Annual Report on Form 10-K are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following: ● changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates ● changes in general economic conditions ● the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses ● the effect of the novel coronavirus (COVID-19) and related events ● legislative or regulatory changes ● downturn in demand for loan, deposit and other financial services in the Corporation’s market area ● increased competition from other banks and non-bank providers of financial services ● technological changes and increased technology-related costs ● information security breach or other technology difficulties or failures ● changes in accounting principles, or the application of generally accepted accounting principles ● failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. 12 Table of Contents ​ CORONAVIRUS (COVID-19) OUTBREAK Loan Payment Deferral Program Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic. On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions that broadly address additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from TDRs established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates. In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the Financial Accounting Standards Board (“FASB”) staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual. To work with clients impacted by COVID-19, the Corporation offered short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to merging with the Corporation on July 1, 2020, Covenant had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower was required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts have been moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at December 31, 2021. Most of the modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. At December 31, 2021, there were no loans in deferral status under the program. In comparison, at December 31, 2020, there were 45 loans in deferral status with a total recorded investment of $37,397,000, including 27 commercial loans with a total recorded investment of $35,002,000. Paycheck Protection Program The Corporation began accepting and processing applications for loans under the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. Under the PPP, the Corporation provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. 13 Table of Contents ​ The maximum term of PPP loans is five years, though the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Fees on PPP loans, net of origination costs and a market rate adjustment on PPP loans acquired from Covenant, are recognized in interest income as a yield adjustment over the term of the loans. The recorded investment in PPP loans at December 31, 2021 was $26.9 million, with contractual principal balances totaling $27.8 million, reduced $0.9 million by the impact of net deferred loan origination fees. The recorded investment in PPP loans at December 31, 2021 decreased $105.4 million from $132.3 million at December 31, 2020, reflecting the impact of loans forgiven and repaid by the SBA. Interest and fees on PPP loans totaled $6.5 million in 2021 and $2.9 million in 2020. Capital Strength While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, Citizens & Northern Bank (“C&N Bank”), entered the crisis from a position of strength. This is especially apparent in the capital ratios, which are at levels that demonstrate the capacity to absorb significant losses if they arise while continuing to meet the requirements to be considered well capitalized. C&N Bank’s leverage ratio (Tier 1 capital to average assets) at December 31, 2021 of 10.52% is significantly higher than the well-capitalized threshold of 5%, an excess capital amount of $125.1 million. Similarly, the total capital to risk-weighted assets ratio at December 31, 2021 is 16.04%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $95.1 million. Additional details regarding the Corporation’s and C&N Bank’s regulatory capital position are provided in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). EARNINGS OVERVIEW Net income for the year ended December 31, 2021 was $30,554,000, or $1.92 per diluted share as compared to 2020 net income of $19,222,000 or $1.30 per share. Effective July 1, 2020, C&N acquired Covenant Financial, Inc. (“Covenant”). C&N incurred pre-tax merger-related expenses related to the Covenant transaction of $7.7 million for the year ended December 31, 2020. In the fourth quarter 2020, C&N incurred a pre-tax loss of $1.6 million on prepayment of long-term borrowings (Federal Home Loan Bank of Pittsburgh advances) with outstanding balances totaling $48.0 million. The borrowings included several advances maturing in 2022 through 2024 with a weighted-average interest rate of 1.77% and a weighted-average duration of 2.3 years. Excluding the impact of merger-related expenses and loss on prepayment of borrowings, adjusted (non-U.S. GAAP) earnings for 2020 would be $26,648,000 or $1.80 per share. The following table provides a reconciliation of the Corporation’s 2021 earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses and loss on prepayment of borrowings. Management believes disclosure of 2021 and 2020 earnings results, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes. 14 Table of Contents ​ RECONCILIATION OF NET INCOME AND DILUTED EARNINGS PER SHARE TO NON-U.S. GAAP MEASURE (Dollars In Thousands, Except Per Share Data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, 2021 Year Ended December 31, 2020 ​ ​ Income ​ ​ ​ ​ ​ Diluted ​ Income ​ ​ ​ ​ ​ ​ ​ Diluted ​ ​ Before ​ ​ ​ ​ ​ Earnings ​ Before ​ ​ ​ ​ ​ ​ Earnings ​ ​ Income ​ Income ​ ​ ​ per ​ Income ​ Income ​ ​ ​ ​ per ​ ​ Tax ​ Tax ​ Net ​ Common ​ Tax ​ Tax ​ Net ​ Common ​ ​ Provision ​ Provision ​ Income ​ Share ​ Provision ​ Provision ​ Income ​ Share Earnings Under U.S. GAAP ​ $ 37,687 ​ $ 7,133 ​ $ 30,554 ​ $ 1.92 ​ $ 23,212 ​ $ 3,990 ​ $ 19,222 ​ $ 1.30 Add: Merger-Related Expenses (1) ​ 0 ​ 0 ​ 0 ​ ​ ​ 7,708 ​ 1,574 ​ 6,134 ​ Add: Loss on Prepayment of Borrowings (1) ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ ​ ​ ​ 1,636 ​ ​ 344 ​ ​ 1,292 ​ ​ ​ Adjusted Earnings (Non-U.S. GAAP) ​ $ 37,687 ​ $ 7,133 ​ $ 30,554 ​ $ 1.92 ​ $ 32,556 ​ $ 5,908 ​ $ 26,648 ​ $ 1.80 (1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision is adjusted for the estimated nondeductible portion of the expenses. ​ Other significant variances were as follows: ● Net interest income was up $10,374,000 (15.4%) in 2021 over 2020, reflecting growth mainly attributable to the Covenant acquisition that closed July 1, 2020. In 2021, annual average outstanding loans totaled $1.597 billion, an increase of $151.7 million over 2020, annual average interest-bearing cash and due from banks of $156.2 million were up $75.6 million, annual average available-for-sale debt securities of $390.2 million were up $61.7 million, and annual average total deposits of $1.905 billion were up $319.0 million, while annual average borrowed funds were lower by $42.4 million. The net interest margin was 3.69% for 2021, unchanged from 2020. The average yield on earning assets in 2021 was down 0.22% from 2020, while the average rate on interest-bearing liabilities was down 0.28% between periods. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $2,659,000 for 2021 as compared to a net positive impact of $3,272,000 for 2020. ● The provision for loan losses of $3,661,000 for 2021 was lower than the 2020 provision by $252,000. In 2021, the provision included the impact of partial charge-offs totaling $1,463,000 on a commercial loan. At December 31, 2021, the recorded investment in this loan was $1,391,000. In total, the provision for 2021 included a net charge of $1,324,000 related to specific loans (net charge-offs of $1,509,000 offset by a net decrease in specific allowances on loans of $185,000), an increase of $2,251,000 in the collectively determined potion of the allowance and an $86,000 increase in the unallocated allowance. The increase in the collectively determined portion of the allowance reflected the impact of an increase in volume of commercial loans, excluding PPP loans. In comparison, the 2020 provision of $3,913,000 included the impact of a charge-off of $2,219,000 on one commercial loan. ● Noninterest income increased $1,513,000, or 6.2% in 2021 over 2020. Significant variances include the following: Ø Trust revenue totaled $7,234,000 in 2021, an increase of $913,000 over 2020, reflecting the impact of growth in average trust assets under management including the impact of market value appreciation. ​ Ø Interchange revenue from debit card transactions totaled $3,855,000, an increase of $761,000 over 2020, reflecting an increase in transaction volumes. ​ Ø Loan servicing fees, net, totaled $694,000, an increase of $755,000 over the 2020 total of negative $61,000 (a decrease in revenue). The net increase reflects growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights decreased $68,000 in 2021 as compared to a reduction in fair value of $576,000 in 2020 mainly due to changes in assumptions related to prepayments of mortgage loans. ​ Ø Service charges on deposit accounts totaled $4,633,000, an increase of $402,000 over 2020, as consumer and business activity increased. ​ 15 Table of Contents ​ Ø Brokerage and insurance revenue totaled $1,860,000, an increase of $374,000 over 2020, due to commissions on higher transaction volume. ​ Ø Other noninterest income totaled $3,580,000, an increase of $225,000 over 2020. Within this category, significant variances included the following: ​ ● Income from realization of tax credits of $772,000 was $268,000 higher in 2021 as compared to 2020 due to higher PA Educational Improvement Tax Credit Program donations. ● Credit card interchange income of $434,000 increased $144,000 due to higher transaction volume. ● Fee income for providing credit enhancement on mortgage loans sold of $348,000 increased $122,000. ● Other noninterest income decreased $272,000 as the Corporation recognized income of $279,000 in the third quarter 2020 from a life insurance arrangement in which benefits were split between the Corporation and heirs of a former employee. ● Dividend income from Federal Home Loan Bank stock of $514,000 decreased $140,000. ​ Ø Net gains from sales of loans totaled $3,428,000, a decrease of $1,975,000 from 2020, reflecting a decrease in volume of mortgage loans sold, resulting mainly from lower refinancing activity and overall market conditions. ​ ● Noninterest expense increased $6,863,000, or 12.3% in 2021 over 2020, excluding merger-related expenses and loss on prepayment of borrowings. Significant variances included the following: Ø Salaries and employee benefits expense totaled $37,603,000, an increase of $4,541,000 over 2020, reflecting the inclusion of the former Covenant operations for twelve months in 2021 as compared to six months in 2020, as well as increases in lending, human resources, information technology and other personnel needed to accommodate growth, and increases in health care expense due to higher claims on the Corporation’s partially self-insured plan. Ø Data processing and telecommunications expenses totaled $5,903,000, an increase of $587,000 over 2020, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs. Ø Professional fees expense totaled $2,243,000, an increase of $551,000 over 2020, mainly due to increases in recruiting services and PPP loan processing professional fees. Ø Net occupancy and equipment expense totaled $4,984,000, an increase of $523,000, primarily reflecting an increase due to the Covenant acquisition. Ø Pennsylvania shares tax expense totaled $1,951,000, an increase of $262,000, reflecting the increase in in C&N Bank’s stockholder’s equity. Ø Automated teller machine and interchange expense totaled $1,433,000, an increase of $202,000, reflecting increased volume of activity. Ø Other noninterest expense totaled $8,355,000, an increase of $197,000 over 2020. Within this category, significant variances included the following: ● FDIC insurance expense of $581,000 increased $258,000. ● Business development expenses of $452,000 increased $220,000, due primarily to an increase in public relations expense. ● Donations expense of $847,000 increased $208,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program. ● Other increases include legal fees and expenses of $83,000, bank insurance of $56,000, accounting and auditing expense of $51,000, and credit card reward redemption expense of $50,000. 16 Table of Contents ​ ● Other operational losses of $199,000 decreased $405,000, including a reduction in charges principally related to Trust Department tax compliance and preparation matters. ● Gains on other real estate properties totaled $100,000 in 2021 as compared to net losses of $146,000 in 2020. ● The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $236,000 in 2021 as compared to a reduction in expense of $70,000 in 2020. ● The income tax provision was $7,133,000 for the year ended December 31, 2021, up from $3,990,000 for the year ended December 31, 2020. Pre-tax income was $14,475,000 higher in 2021 as compared to 2020. The effective tax rate was 18.9% for 2021, higher than the 17.2% effective tax rate for 2020. The tax benefit of tax-exempt interest income was 2.4% of pre-tax income in 2021 as compared to a 3.5% benefit in 2020. More detailed information concerning the Corporation’s earnings results are provided in other sections of Management’s Discussion and Analysis. ACQUISITION OF COVENANT FINANCIAL, INC. The Corporation’s acquisition of Covenant was completed July 1, 2020. Covenant was the parent company of Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into C&N Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. The acquisition of Covenant followed the acquisition of Monument Bancorp, Inc. (“Monument”) on April 1, 2019. Monument was the parent company of Monument Bank, with banking and lending offices in Bucks County, Pennsylvania. The total transaction value of the Monument acquisition was $42.7 million. In connection with the Covenant acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing subject to adjustment for up to one year subsequent to the acquisition. There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition in the year ended December 31, 2021. CRITICAL ACCOUNTING POLICIES The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates. Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. 17 Table of Contents ​ NET INTEREST INCOME The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables I, II and III include information regarding the Corporation’s net interest income in 2021 and 2020. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables. Fully taxable equivalent net interest income was $79,074,000 in 2021, $10,529,000 (15.4%) higher than in 2020. Interest income was $7,496,000 higher in 2021 as compared to 2020; interest expense was lower by $3,033,000 in comparing the same periods. As presented in Table II, the Net Interest Margin was 3.69% in 2021, unchanged from 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.55% in 2021 from 3.49% in 2020. The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and income from the PPP loan program. Accretion and amortization of purchase accounting adjustments related to the Covenant and Monument acquisitions had a positive effect on net interest income in 2021 of $2,659,000, including an increase in income on loans of $1,289,000 and net reductions in interest expense on time deposits and borrowed funds totaling $1,370,000. In comparison, the net positive impact on net interest income of purchase accounting adjustments was $3,272,000 in 2020. The net positive impact to the net interest margin from purchase accounting adjustments was 0.13% in 2021 and 0.18% in 2020. INTEREST INCOME AND EARNING ASSETS Interest income totaled $85,636,000 in 2021, an increase of 9.6% from 2020. Interest and fees on loans receivable increased $7,175,000, or 10.3%, to $76,781,000 in 2021 from $69,606,000 in 2020. Interest and fees on PPP loans totaled $6,530,000 in 2021, an increase of $3,606,000 over the total in 2020. Table III shows the increase in interest on loans including $8,016,000 attributable to an increase in volume and a decrease of $841,000 related to a decrease in average yield. The average balance of loans receivable increased $151,658,000 (10.5%) to $1,596,756,000 in 2021 from $1,445,098,000 in 2020. The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020. The fully taxable equivalent yield on loans in 2021 was 4.81% compared to 4.82% in 2020. In 2021, rates on variable rate loans and rates on most new loan originations decreased, and prepayments of loans increased, consistent with falling market interest rates throughout most of 2020 and 2021. Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before the acquisition. The overall yield on loans in 2021 included a benefit from the acceleration of fees recognized on PPP loans as repayments have been received from the SBA. As shown in Table II, in 2021, the average balance of 1st Draw PPP loans was $44,735,000 with an average yield of 7.77% and the average balance of 2nd Draw PPP loans was $52,917,000 with an average yield of 5.77%. Interest income on available-for-sale debt securities totaled $8,471,000 in 2021, an increase of $268,000 from the total for 2020. As indicated in Table II, average available-for-sale debt securities (at amortized cost) totaled $390,163,000 in 2021, an increase of $61,718,000 (18.8%) from 2020. The average yield on available-for-sale debt securities decreased to 2.17% in 2021 from 2.50% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent, lower market rates. Interest income from interest-bearing deposits in banks totaled $318,000 in 2021, an increase of $67,000 from the total for 2020. The most significant categories of assets within this category include interest-bearing balances held with the Federal Reserve and investments in certificates of deposit issued by other banks. The average balance increased $75,565,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. The average balance of interest-bearing due from banks was 7.3% of average earning assets in 2021 as compared to 4.3% in 2020. The average yield on interest-bearing due from banks fell to 0.20% in 2021 from 0.31% in 2020, due to a decrease in market rates. 18 Table of Contents ​ INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES Interest expense decreased $3,033,000, or 31.6%, to $6,562,000 in 2021 from $9,595,000 in 2020. Table II shows that the overall cost of funds on interest-bearing liabilities decreased to 0.44% in 2021 from 0.72% in 2020. Total average deposit balances (interest-bearing and noninterest-bearing) increased $318,991,000 to $1,905,400,000 in 2021 from $1,586,409,000 in 2020. The increase in average deposits includes the impact of the Covenant acquisition. The average rate on interest-bearing deposits decreased to 0.33% in 2021 from 0.60% in 2020. The decrease in average rate on deposits includes decreases of 0.54% on time deposits, 0.12% on money market accounts, 0.09% on interest checking accounts and 0.02% on saving accounts. The average balance of time deposits fell to 17.2% of average total deposits in 2021 from 25.1% in 2020, further contributing to the reduction in average rate on deposits. Interest expense on short-term borrowings decreased $344,000 to $23,000 in 2021 from $367,000 in 2020. The average balance of short-term borrowings decreased to $6,269,000 in 2021 from $34,212,000 in 2020. The average rate on short-term borrowings decreased to 0.37% in 2021 from 1.07% in 2020. Interest expense on long-term borrowings (FHLB advances) decreased $892,000 to $399,000 in 2021 from $1,291,000 in 2020. The average balance of long-term borrowings was $44,026,000 in 2021, down from an average balance of $83,500,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.91% in 2021 compared to 1.55% in 2020. The reduction in both average balance and rate reflects the prepayment of higher cost borrowings of $48,036,000 in December 2020. Interest expense on the senior notes issued in May 2021 totaled $293,000 in 2021. The average balance of the senior notes was $9,129,000 in 2021 with an average rate of 3.21%. Interest expense on subordinated debt increased $603,000 to $1,309,000 in 2021 from $706,000 in 2020. The average balance of subordinated debt increased to $27,399,000 in 2021 from $11,553,000 in 2020 reflecting the net impact of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020, the new issue of subordinated debt of $24,437,000, net, in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 4.78% in 2021 from 6.11% in 2020. 19 Table of Contents ​ TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ December 31, ​ Increase/ (In Thousands) 2021 2020 (Decrease) INTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ 318 ​ $ 251 ​ $ 67 Available-for-sale debt securities: ​ ​ ​ ​ ​ ​ Taxable ​ 5,114 ​ 5,534 ​ (420) Tax-exempt ​ 3,357 ​ 2,669 ​ 688 Total available-for-sale debt securities ​ 8,471 ​ 8,203 ​ 268 Loans receivable: ​ ​ ​ ​ ​ ​ Taxable ​ 68,019 ​ 64,460 ​ 3,559 Paycheck Protection Program - 1st Draw ​ ​ 3,476 ​ ​ 2,924 ​ ​ 552 Paycheck Protection Program - 2nd Draw ​ ​ 3,054 ​ ​ 0 ​ ​ 3,054 Tax-exempt ​ 2,232 ​ 2,222 ​ 10 Total loans receivable ​ 76,781 ​ 69,606 ​ 7,175 Other earning assets ​ 66 ​ 80 ​ (14) Total Interest Income ​ 85,636 ​ 78,140 ​ 7,496 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ INTEREST EXPENSE ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ Interest checking ​ 897 ​ 948 ​ (51) Money market ​ 1,156 ​ 1,172 ​ (16) Savings ​ 231 ​ 230 ​ 1 Time deposits ​ 2,254 ​ 4,881 ​ (2,627) Total interest-bearing deposits ​ 4,538 ​ 7,231 ​ (2,693) Borrowed funds: ​ ​ ​ ​ ​ ​ Short-term ​ 23 ​ 367 ​ (344) Long-term - FHLB advances ​ 399 ​ 1,291 ​ (892) Senior notes, net ​ ​ 293 ​ ​ 0 ​ ​ 293 Subordinated debt, net ​ 1,309 ​ 706 ​ 603 Total borrowed funds ​ 2,024 ​ 2,364 ​ (340) Total Interest Expense ​ 6,562 ​ 9,595 ​ (3,033) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income ​ $ 79,074 ​ $ 68,545 ​ $ 10,529 (1) Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. (2) Fees on loans are included with interest on loans and amounted to $7,958,000 in 2021 and $4,314,000 in 2020. ​ 20 Table of Contents ​ TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) Year ​ ​ ​ ​ Year ​ ​ ​ ​ ​ Ended ​ Rate of ​ ​ Ended ​ Rate of ​ ​ 12/31/2021 ​ Return/ ​ ​ 12/31/2020 ​ Return/ ​ ​ Average ​ Cost of ​ Average ​ Cost of ​ ​ Balance Funds% ​ Balance Funds% ​ EARNING ASSETS ​ ​ ​ ​ ​ ​ ​ Interest-bearing due from banks $ 156,152 ​ ​ 0.20 % ​ $ 80,587 ​ ​ 0.31 % Available-for-sale debt securities, at amortized cost: ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable 262,880 ​ 1.95 % ​ 238,407 ​ 2.32 % Tax-exempt 127,283 ​ 2.64 % ​ 90,038 ​ 2.96 % Total available-for-sale debt securities 390,163 ​ 2.17 % ​ 328,445 ​ 2.50 % Loans receivable: ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable 1,426,150 ​ 4.77 % ​ 1,285,383 ​ 5.01 % Paycheck Protection Program - 1st Draw ​ 44,735 ​ ​ 7.77 % ​ ​ 98,466 ​ ​ 2.97 % Paycheck Protection Program - 2nd Draw ​ 52,917 ​ ​ 5.77 % ​ ​ 0 ​ ​ 0.00 % Tax-exempt 72,954 ​ 3.06 % ​ 61,249 ​ 3.63 % Total loans receivable 1,596,756 ​ 4.81 % ​ 1,445,098 ​ 4.82 % Other earning assets 2,404 ​ 2.75 % ​ 2,357 ​ 3.39 % Total Earning Assets 2,145,475 ​ 3.99 % ​ 1,856,487 ​ 4.21 % Cash 24,132 ​ ​ ​ 25,439 ​ ​ Unrealized gain on securities 10,676 ​ ​ ​ 12,487 ​ ​ Allowance for loan losses (12,354) ​ ​ ​ (11,018) ​ ​ Bank-owned life insurance ​ 30,373 ​ ​ ​ ​ ​ ​ 24,415 ​ ​ ​ ​ Bank premises and equipment 20,814 ​ ​ ​ ​ 19,826 ​ ​ ​ Intangible assets 56,086 ​ ​ ​ ​ 43,330 ​ ​ ​ Other assets 44,032 ​ ​ ​ ​ 38,859 ​ ​ ​ Total Assets $ 2,319,234 ​ ​ ​ ​ ​ $ 2,009,825 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ INTEREST-BEARING LIABILITIES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest checking $ 399,130 ​ ​ 0.22 % ​ $ 310,782 ​ ​ 0.31 % Money market ​ 433,508 ​ ​ 0.27 % ​ ​ 298,736 ​ ​ 0.39 % Savings ​ 228,411 ​ ​ 0.10 % ​ ​ 189,316 ​ ​ 0.12 % Time deposits ​ 327,816 ​ ​ 0.69 % ​ ​ 397,974 ​ ​ 1.23 % Total interest-bearing deposits 1,388,865 ​ 0.33 % ​ 1,196,808 ​ 0.60 % Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term 6,269 ​ 0.37 % ​ 34,212 ​ 1.07 % Long-term - FHLB advances 44,026 ​ 0.91 % ​ 83,500 ​ 1.55 % Senior notes, net ​ 9,129 ​ 3.21 % ​ 0 ​ ​ 0.00 % Subordinated debt, net 27,399 ​ 4.78 % ​ 11,553 ​ 6.11 % Total borrowed funds 86,823 ​ 2.33 % ​ 129,265 ​ 1.83 % Total Interest-bearing Liabilities. 1,475,688 ​ 0.44 % ​ 1,326,073 ​ 0.72 % Demand deposits ​ 516,535 ​ ​ ​ ​ ​ ​ 389,601 ​ ​ ​ ​ Other liabilities ​ 25,785 ​ ​ ​ ​ ​ ​ 20,800 ​ ​ ​ ​ Total Liabilities ​ 2,018,008 ​ ​ ​ ​ ​ ​ 1,736,474 ​ ​ ​ ​ Stockholders' equity, excluding other comprehensive income ​ 292,683 ​ ​ ​ ​ ​ ​ 263,253 ​ ​ ​ ​ Accumulated other comprehensive income ​ 8,543 ​ ​ ​ ​ ​ ​ 10,098 ​ ​ ​ ​ Total Stockholders' Equity ​ 301,226 ​ ​ ​ ​ ​ ​ 273,351 ​ ​ ​ ​ Total Liabilities and Stockholders' Equity $ 2,319,234 ​ ​ ​ ​ ​ $ 2,009,825 ​ ​ ​ ​ Interest Rate Spread ​ ​ ​ ​ 3.55 % ​ ​ ​ ​ ​ 3.49 % Net Interest Income/Earning Assets ​ ​ ​ ​ 3.69 % ​ ​ ​ ​ ​ 3.69 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total Deposits (Interest-bearing and Demand) $ 1,905,400 ​ ​ ​ ​ ​ $ 1,586,409 ​ ​ ​ ​ (1) Rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. (2) Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. ​ ​ 21 Table of Contents ​ TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) Year Ended 12/31/2021 vs. 12/31/2020 ​ Change in ​ Change in ​ Total ​ Volume Rate Change EARNING ASSETS ​ ​ ​ ​ Interest-bearing due from banks ​ $ 176 ​ $ (109) ​ $ 67 Available-for-sale debt securities: ​ ​ ​ ​ ​ ​ Taxable ​ 532 ​ (952) ​ (420) Tax-exempt ​ 1,008 ​ (320) ​ 688 Total available-for-sale debt securities ​ 1,540 ​ (1,272) ​ 268 Loans receivable: ​ ​ ​ ​ ​ ​ Taxable ​ 6,821 ​ (3,262) ​ 3,559 Paycheck Protection Program - 1st Draw ​ ​ (2,247) ​ ​ 2,799 ​ ​ 552 Paycheck Protection Program - 2nd Draw ​ ​ 3,054 ​ ​ 0 ​ ​ 3,054 Tax-exempt ​ 388 ​ (378) ​ 10 Total loans receivable ​ 8,016 ​ (841) ​ 7,175 Other earning assets ​ 2 ​ (16) ​ (14) Total Interest Income ​ 9,734 ​ (2,238) ​ 7,496 ​ ​ ​ ​ INTEREST-BEARING LIABILITIES ​ ​ ​ Interest-bearing deposits: ​ ​ ​ Interest checking ​ 233 ​ (284) ​ (51) Money market ​ 430 ​ (446) ​ (16) Savings ​ 43 ​ (42) ​ 1 Time deposits ​ (752) ​ (1,875) ​ (2,627) Total interest-bearing deposits ​ (46) ​ (2,647) ​ (2,693) Borrowed funds: ​ ​ ​ ​ ​ ​ Short-term ​ (191) ​ (153) ​ (344) Long-term - FHLB advances ​ (476) ​ (416) ​ (892) Senior notes, net ​ ​ 293 ​ ​ 0 ​ ​ 293 Subordinated debt, net ​ 786 ​ (183) ​ 603 Total borrowed funds ​ 412 ​ (752) ​ (340) Total Interest Expense ​ 366 ​ (3,399) ​ (3,033) ​ ​ ​ ​ ​ ​ ​ Net Interest Income ​ $ 9,368 ​ $ 1,161 ​ $ 10,529 (1) Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. (2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. ​ ​ 22 Table of Contents ​ NONINTEREST INCOME TABLE IV - COMPARISON OF NONINTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Year Ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ $ ​ % ​ 2021 ​ 2020 ​ Change ​ Change Trust revenue ​ $ 7,234 ​ $ 6,321 ​ $ 913 ​ 14.4 % Brokerage and insurance revenue ​ 1,860 ​ ​ 1,486 ​ ​ 374 ​ 25.2 % Service charges on deposit accounts ​ 4,633 ​ ​ 4,231 ​ ​ 402 ​ 9.5 % Interchange revenue from debit card transactions ​ 3,855 ​ ​ 3,094 ​ ​ 761 ​ 24.6 % Net gains from sales of loans ​ 3,428 ​ ​ 5,403 ​ ​ (1,975) ​ (36.6) % Loan servicing fees, net ​ 694 ​ ​ (61) ​ ​ 755 ​ N/M ​ Increase in cash surrender value of life insurance ​ 573 ​ ​ 515 ​ ​ 58 ​ 11.3 % Other noninterest income ​ 3,580 ​ ​ 3,355 ​ ​ 225 ​ 6.7 % Total noninterest income, excluding realized gains on securities, net ​ ​ 25,857 ​ ​ 24,344 ​ ​ 1,513 ​ 6.2 % Realized gains on available-for-sale debt securities, net ​ ​ 24 ​ ​ 169 ​ ​ (145) ​ (85.8) % Total noninterest income ​ $ 25,881 ​ $ 24,513 ​ $ 1,368 ​ 5.6 % ​ Total noninterest income, excluding realized gains and losses on securities, increased $1,513,000 (6.2%) in 2021 compared to 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. NONINTEREST EXPENSE TABLE V - COMPARISON OF NONINTEREST EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Year Ended ​ ​ ​ ​ ​ ​ ​ December 31, ​ $ ​ % ​ ​ 2021 ​ 2020 ​ Change ​ Change Salaries and employee benefits $ 37,603 $ 33,062 $ 4,541 13.7 % Net occupancy and equipment expense ​ 4,984 ​ 4,461 ​ 523 11.7 % Data processing and telecommunications expense ​ 5,903 ​ 5,316 ​ 587 11.0 % Automated teller machine and interchange expense ​ 1,433 ​ 1,231 ​ 202 16.4 % Pennsylvania shares tax ​ 1,951 ​ 1,689 ​ 262 15.5 % Professional fees ​ 2,243 ​ 1,692 ​ 551 32.6 % Other noninterest expense ​ 8,355 ​ 8,158 ​ 197 2.4 % Total noninterest expense, excluding merger-related expenses and loss on prepayment of borrowings ​ 62,472 ​ 55,609 ​ 6,863 12.3 % Merger-related expenses ​ 0 ​ 7,708 ​ (7,708) (100.0) % Loss on prepayment of borrowings ​ ​ 0 ​ ​ 1,636 ​ ​ (1,636) ​ (100.0) % Total noninterest expense ​ $ 62,472 ​ $ 64,953 ​ $ (2,481) (3.8) % ​ Total noninterest expenses decreased $2,481,000 (3.8%) in 2021 as compared to 2020. Total noninterest expenses increased $6,863,000 (12.3%) in 2021 excluding Covenant merger-related expenses and loss on prepayment of borrowings in 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. INCOME TAXES The effective income tax rate was 18.9% of pre-tax income in 2021, up from 17.2% in 2020. The Corporation’s effective tax rates differed from the federal statutory rate of 21% mainly because of the effects of tax-exempt interest income. The higher effective income tax rate in 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income. 23 Table of Contents ​ The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At December 31, 2021, the net deferred tax asset was $5,887,000, up from the balance at December 31, 2020 of $2,705,000. The most significant changes in temporary difference components included a net decrease of $1,826,000 in the deferred tax liability resulting from a reduction in the unrealized gain on available-for-sale debt securities attributable to higher interest rates, as well as fluctuations related to bank premises and equipment, the allowance for loan losses, and acquisition-related adjustments to loans. The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. Further, the value of the benefit from realization of deferred tax assets would be impacted if income tax rates were changed from currently enacted levels. Management believes the recorded net deferred tax asset at December 31, 2021 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings. Additional information related to income taxes is presented in Note 14 to the consolidated financial statements. SECURITIES The objectives of the Corporation’s available-for-sale debt securities (investment) portfolio are to maintain high credit quality, achieve good portfolio balance, support liquidity needs, maximize return on earning assets within reasonable risk parameters, provide an adequate amount of pledgeable securities, support local communities by purchasing securities they issue for public projects and programs, provide a means to hedge the Corporation’s interest rate risk exposure, and minimize taxes. Management continually evaluates the size and mix of securities held in the available-for-sale debt securities portfolio while considering these objectives. Table VI shows the composition of the available-for-sale debt securities portfolio at December 31, 2021 and 2020. The amortized cost of available-for-sale debt securities increased to $511,592,000 at December 31, 2021 from $334,552,000 at December 31, 2020. The increase in the securities portfolio resulted from management’s decision to invest excess funds available from the fast growth in deposits and loan repayments throughout most of 2020 and 2021. At December 31, 2021, the largest categories of securities held as a percentage of total amortized cost, were as follows: (1) tax-exempt and taxable municipal bonds, 42.1%; (2) residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies, including pass-through securities and collateralized mortgage obligations, 27.8%; and (3) commercial mortgage-backed securities issued or guaranteed by U.S. Government sponsored agencies, 17.0%. As reflected in Table VI, the fair value of available-for-sale securities as of December 31, 2021 was $6,087,000, or 1.2% greater than the total amortized cost basis. In comparison, the aggregate unrealized gain position at December 31, 2020 was $14,780,000, or 4.4% of the total amortized cost basis. The unrealized decrease in fair value of the portfolio in 2021 resulted from an increase in interest rates. Management has reviewed the Corporation’s holdings as of December 31, 2021 and concluded that unrealized losses on all of the securities in an unrealized loss position are considered temporary. Note 7 to the consolidated financial statements provides more detail concerning the Corporation’s processes for evaluating securities for other-than-temporary impairment. 24 Table of Contents ​ TABLE VI - INVESTMENT SECURITIES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2021 ​ 2020 ​ ​ Amortized ​ Fair ​ Amortized ​ Fair (In Thousands) Cost Value Cost Value AVAILABLE-FOR-SALE DEBT SECURITIES: ​ ​ ​ ​ Obligations of the U.S. Treasury ​ $ 25,058 ​ $ 24,912 ​ $ 12,184 ​ $ 12,182 Obligations of U.S. Government agencies ​ ​ 23,936 ​ ​ 24,091 ​ ​ 25,349 ​ ​ 26,344 Bank holding company debt securities ​ ​ 18,000 ​ ​ 17,987 ​ ​ 0 ​ ​ 0 Obligations of states and political subdivisions: ​ ​ ​ ​ ​ ​ ​ ​ Tax-exempt ​ 143,427 ​ 148,028 ​ 116,427 ​ 122,401 Taxable ​ 72,182 ​ 72,765 ​ 45,230 ​ 47,452 Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: ​ ​ ​ ​ Residential pass-through securities ​ 98,048 ​ 98,181 ​ 36,853 ​ 38,176 Residential collateralized mortgage obligations ​ 44,015 ​ 44,247 ​ 56,048 ​ 57,467 Commercial mortgage-backed securities ​ 86,926 ​ 87,468 ​ 42,461 ​ 45,310 Total Available-for-Sale Debt Securities ​ $ 511,592 ​ $ 517,679 ​ $ 334,552 ​ $ 349,332 ​ The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2021. Yields on tax-exempt securities are presented on a fully taxable-equivalent basis. For callable securities, yields on securities purchased at a discount are based on yield-to-maturity, while yields on securities purchased at a premium are based on yield to the first call date. Yields on mortgage-backed securities are estimated and include the effects of prepayment assumptions. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Within ​ One- ​ Five- ​ After ​ ​ ​ ​ ​ ​ One ​ ​ ​ Five ​ ​ ​ Ten ​ ​ ​ Ten ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) ​ Year ​ Yield ​ Years ​ Yield ​ Years ​ Yield ​ Years ​ Yield ​ Total ​ Yield AVAILABLE-FOR-SALE DEBT SECURITIES: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Obligations of the U.S. Treasury ​ $ 6,044 ​ 0.12 % $ 7,011 ​ 0.60 % $ 12,003 ​ 1.32 % $ 0 ​ 0.00 % $ 25,058 ​ 0.83 % Obligations of U.S. Government agencies ​ ​ 0 0.00 % ​ 10,000 0.55 % ​ 7,505 2.06 % ​ 6,431 3.41 % ​ 23,936 1.79 % Bank holding company debt securities ​ ​ 0 0.00 % ​ 0 0.00 % ​ 18,000 3.18 % ​ 0 0.00 % ​ 18,000 3.18 % Obligations of states and political subdivisions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tax-exempt ​ 2,365 2.66 % 25,618 2.58 % 24,919 2.92 % 90,525 2.39 % 143,427 2.52 % Taxable ​ 6,045 3.06 % 15,932 1.88 % 17,105 1.95 % 33,100 2.50 % 72,182 2.28 % Sub-total ​ $ 14,454 1.77 % $ 58,561 1.81 % $ 79,532 2.45 % $ 130,056 2.47 % $ 282,603 2.29 % Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: ​ ​ ​ ​ ​ ​ ​ Residential pass-through securities ​ ​ ​ ​ ​ ​ ​ ​ 98,048 1.48 % Residential collateralized mortgage obligations ​ ​ ​ ​ ​ ​ ​ ​ 44,015 1.79 % Commercial mortgage-backed securities ​ ​ ​ ​ ​ ​ ​ ​ 86,926 1.89 % Total ​ ​ ​ ​ ​ ​ ​ ​ $ 511,592 2.02 % ​ The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period. ​ 25 Table of Contents ​ FINANCIAL CONDITION This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at December 31, 2021, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2022. Table VII shows the composition of the loan portfolio as of the end of the years 2017 through 2021. At December 31, 2021, gross loans outstanding totaled $1,564,849,000, a decrease of $79.4 million (4.8%) from December 31, 2020 as the outstanding balance of PPP loans decreased $105.4 million. The total recorded investment in loans at December 31, 2021 was $749.1 million (92%) higher than the total at December 31, 2017, with most of the growth attributable to the Monument acquisition in 2019, Covenant acquisition in 2020 and expansion in Southcentral Pennsylvania, mainly in 2020 and 2021. Over the period 2017-2021, the Corporation has increased the proportion of residential mortgage loans sold into the secondary market. Consistent with these trends, commercial segment loans increased to 63% of the recorded investment in the portfolio at December 31, 2021 from 43% at December 31, 2017, while residential mortgage segment loans decreased to 36% at December 31, 2021 from 55% at December 31, 2017. While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to $54,372,000 at December 31, 2021, down from $65,741,000 at December 31, 2020. At December 31, 2021, the balance of participation loans outstanding includes a total of $30,196,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $7,468,000 at December 31, 2021 and $8,437,000 at December 31, 2020. Table VIII presents loan maturity data as of December 31, 2021. Fixed-rate loans are shown in Table VIII based on their contractually scheduled principal repayments, and variable-rate loans are shown based on the date of the next change in rate. Table VIII presents a well-balanced maturity and repricing mix. Total fixed rate loans maturing within one year and variable or adjustable loans repricing within one year amount to $439,016,000 or 28% of the portfolio. Table VIII shows that fixed-rate loans total approximately 44% of the loan portfolio and approximately 33% of the portfolio are variable-rate loans that re-price after more than one year. Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through December 31, 2021, the Corporation’s activity under the MPF Direct Program has been minimal. For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At December 31, 2021, the total outstanding balance of loans the Corporation has 26 Table of Contents ​ repurchased as a result of identified instances of noncompliance amounted to $1,571,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2020 was $1,714,000. At December 31, 2021, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $334,741,000, including loans sold through the MPF Xtra program of $165,668,000 and loans sold through the Original program of $169,073,000. At December 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original Program of $129,394,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 2021 and December 31, 2020. For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the Corporation has recorded a related allowance for credit losses in the amount of $635,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the related allowance for credit losses was $500,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $348,000 in 2021 and $227,000 in 2020. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $135,000 was recorded in 2021 compared to $167,000 in 2020. The Corporation does not provide a credit enhancement for loans sold through the Xtra program. The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Covenant had also been a participating SBA lender. Pursuant to the Covenant acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the loans originated through the various SBA loan programs acquired from Covenant as of July 1, 2020 and recorded an allowance for SBA claim adjustments of $800,000. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on loans originated by Covenant was $12,856,000 at December 31, 2021 and $17,041,000 at December 31, 2020 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $457,000 at December 31, 2021 and $730,000 at December 31, 2020. In the year ended December 31, 2021, the Corporation recorded charges against the allowance for SBA claims totaling $37,000 and a reduction in other noninterest expense of $236,000 representing amounts realized on SBA claims in excess of prior estimates. In comparison, in 2020, there were no charges against the allowance for SBA claims and the Corporation recognized a reduction in other noninterest expense of $70,000. 27 Table of Contents ​ TABLE VII – Five-year Summary of Loans by Type ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) 2021 % ​ 2020 % ​ 2019 % ​ 2018 % ​ 2017 % Commercial: ​ ​ ​ ​ ​ Commercial loans secured by real estate ​ $ 569,840 36.4 ​ $ 531,810 32.3 ​ $ 301,227 25.5 ​ $ 162,611 19.6 ​ $ 159,266 19.5 Commercial and industrial ​ 159,073 10.2 ​ 159,577 9.7 ​ 126,374 10.7 ​ 91,856 11.1 ​ 88,276 10.8 Paycheck Protection Program - 1st Draw ​ ​ 1,356 ​ 0.1 ​ ​ 132,269 ​ 8.0 ​ ​ 0 ​ 0.0 ​ ​ 0 ​ 0.0 ​ ​ 0 ​ 0.0 Paycheck Protection Program - 2nd Draw ​ ​ 25,508 ​ 1.6 ​ ​ 0 ​ 0.0 ​ ​ 0 ​ 0.0 ​ ​ 0 ​ 0.0 ​ ​ 0 ​ 0.0 Political subdivisions ​ 81,301 5.2 ​ 53,221 3.2 ​ 53,570 4.5 ​ 53,263 6.4 ​ 59,287 7.3 Commercial construction and land ​ 60,579 3.9 ​ 42,874 2.6 ​ 33,555 2.8 ​ 11,962 1.4 ​ 14,527 1.8 Loans secured by farmland ​ 11,121 0.7 ​ 11,736 0.7 ​ 12,251 1.0 ​ 7,146 0.9 ​ 7,255 0.9 Multi-family (5 or more) residential ​ 50,089 3.2 ​ 55,811 3.4 ​ 31,070 2.6 ​ 7,180 0.9 ​ 7,713 0.9 Agricultural loans ​ 2,351 0.2 ​ 3,164 0.2 ​ 4,319 0.4 ​ 5,659 0.7 ​ 6,178 0.8 Other commercial loans ​ 17,153 1.0 ​ 17,289 1.1 ​ 16,535 1.4 ​ 13,950 1.7 ​ 10,986 1.3 Total commercial ​ 978,371 62.5 ​ 1,007,751 61.2 ​ 578,901 49.0 ​ 353,627 42.7 ​ 353,488 43.3 Residential mortgage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage loans - first liens ​ ​ 483,629 30.9 ​ ​ 532,947 32.4 ​ ​ 510,641 43.2 ​ ​ 372,339 45.0 ​ ​ 359,987 44.1 Residential mortgage loans - junior liens ​ 23,314 1.5 ​ 27,311 1.7 ​ 27,503 2.3 ​ 25,450 3.1 ​ 25,325 3.1 Home equity lines of credit ​ 39,252 2.5 ​ 39,301 2.4 ​ 33,638 2.8 ​ 34,319 4.1 ​ 35,758 4.4 1-4 Family residential construction ​ 23,151 1.5 ​ 20,613 1.3 ​ 14,798 1.3 ​ 24,698 3.0 ​ 26,216 3.2 Total residential mortgage ​ 569,346 36.4 ​ 620,172 37.8 ​ 586,580 49.6 ​ 456,806 55.2 ​ 447,286 54.8 Consumer ​ 17,132 1.1 ​ 16,286 1.0 ​ 16,741 1.4 ​ 17,130 2.1 ​ 14,939 1.8 Total ​ 1,564,849 100.0 ​ 1,644,209 100.0 ​ 1,182,222 100.0 ​ 827,563 100.0 ​ 815,713 100.0 Less: allowance for loan losses ​ (13,537) ​ ​ (11,385) ​ ​ (9,836) ​ ​ (9,309) ​ ​ (8,856) Loans, net ​ $ 1,551,312 ​ ​ ​ $ 1,632,824 ​ ​ ​ $ 1,172,386 ​ ​ ​ $ 818,254 ​ ​ ​ $ 806,857 ​ TABLE VIII – LOAN MATURITY DISTRIBUTION ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fixed-Rate Loans ​ ​ Variable- or Adjustable-Rate Loans ​ All Loans ​ ​ 1 Year ​ 1-5 ​ >5 ​ ​ ​ ​ ​ 1 Year ​ 1-5 ​ >5 ​ ​ ​ ​ ​ ​ (In Thousands) or Less Years Years Total or Less Years Years Total ​ ​ Total Commercial: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial loans secured by real estate ​ $ 28,232 ​ $ 114,404 ​ $ 77,419 ​ $ 220,055 ​ ​ $ 153,384 ​ $ 178,051 ​ $ 18,350 ​ $ 349,785 ​ ​ $ 569,840 Commercial and industrial ​ 15,894 ​ 33,420 ​ 4,937 ​ 54,251 ​ ​ 82,969 ​ 21,323 ​ 530 ​ 104,822 ​ ​ ​ 159,073 Paycheck Protection Program - 1st Draw ​ ​ 781 ​ 575 ​ 0 ​ 1,356 ​ ​ 0 ​ 0 ​ 0 ​ 0 ​ ​ ​ 1,356 Paycheck Protection Program - 2nd Draw ​ ​ 0 ​ ​ 25,508 ​ ​ 0 ​ ​ 25,508 ​ ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ ​ 25,508 Political subdivisions ​ ​ 2,164 ​ ​ 5,709 ​ ​ 65,371 ​ ​ 73,244 ​ ​ ​ 1,247 ​ ​ 299 ​ ​ 6,511 ​ ​ 8,057 ​ ​ ​ 81,301 Commercial construction and land ​ ​ 1,287 ​ ​ 3,959 ​ ​ 43,630 ​ ​ 48,876 ​ ​ ​ 8,049 ​ ​ 1,650 ​ ​ 2,004 ​ ​ 11,703 ​ ​ ​ 60,579 Loans secured by farmland ​ ​ 49 ​ ​ 183 ​ ​ 890 ​ ​ 1,122 ​ ​ ​ 2,129 ​ ​ 7,688 ​ ​ 182 ​ ​ 9,999 ​ ​ ​ 11,121 Multi-family (5 or more) residential ​ ​ 1,569 ​ ​ 11,045 ​ ​ 5,980 ​ ​ 18,594 ​ ​ ​ 14,163 ​ ​ 10,339 ​ ​ 6,993 ​ ​ 31,495 ​ ​ ​ 50,089 Agricultural loans ​ ​ 120 ​ ​ 830 ​ ​ 0 ​ ​ 950 ​ ​ ​ 1,214 ​ ​ 187 ​ ​ 0 ​ ​ 1,401 ​ ​ ​ 2,351 Other commercial loans ​ ​ 3 ​ ​ 1,043 ​ ​ 3,009 ​ ​ 4,055 ​ ​ ​ 9,765 ​ ​ 2,977 ​ ​ 356 ​ ​ 13,098 ​ ​ ​ 17,153 Total commercial ​ ​ 50,099 ​ ​ 196,676 ​ ​ 201,236 ​ ​ 448,011 ​ ​ ​ 272,920 ​ ​ 222,514 ​ ​ 34,926 ​ ​ 530,360 ​ ​ ​ 978,371 Residential mortgage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage loans - first liens ​ ​ 10,198 ​ ​ 31,761 ​ ​ 144,308 ​ ​ 186,267 ​ ​ ​ 57,760 ​ ​ 119,418 ​ ​ 120,184 ​ ​ 297,362 ​ ​ ​ 483,629 Residential mortgage loans - junior liens ​ ​ 381 ​ ​ 2,800 ​ ​ 12,825 ​ ​ 16,006 ​ ​ ​ 3,434 ​ ​ 3,455 ​ ​ 419 ​ ​ 7,308 ​ ​ ​ 23,314 Home equity lines of credit ​ ​ 95 ​ ​ 0 ​ ​ 250 ​ ​ 345 ​ ​ ​ 38,815 ​ ​ 0 ​ ​ 92 ​ ​ 38,907 ​ ​ ​ 39,252 1-4 Family residential construction ​ ​ 0 ​ ​ 3,198 ​ ​ 11,488 ​ ​ 14,686 ​ ​ ​ 725 ​ ​ 589 ​ ​ 7,151 ​ ​ 8,465 ​ ​ ​ 23,151 Total residential mortgage ​ ​ 10,674 ​ ​ 37,759 ​ ​ 168,871 ​ ​ 217,304 ​ ​ ​ 100,734 ​ ​ 123,462 ​ ​ 127,846 ​ ​ 352,042 ​ ​ ​ 569,346 Consumer ​ ​ 3,827 ​ ​ 9,754 ​ ​ 2,789 ​ ​ 16,370 ​ ​ ​ 762 ​ ​ 0 ​ ​ 0 ​ ​ 762 ​ ​ ​ 17,132 Total ​ $ 64,600 ​ $ 244,189 ​ $ 372,896 ​ $ 681,685 ​ ​ $ 374,416 ​ $ 345,976 ​ $ 162,772 ​ $ 883,164 ​ ​ $ 1,564,849 ​ 28 Table of Contents ​ PROVISION AND ALLOWANCE FOR LOAN LOSSES The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. The allowance for loan losses was $13,537,000 at December 31, 2021, up from $11,385,000 at December 31, 2020. Table X shows that the collectively determined portion of the allowance increased by a net $2,251,000 across all loan classes, including an increase in the collectively determined portion of the allowance related to commercial loans of $2,008,000. This increase was primarily due to an increase in loan volume, excluding PPP loans. Table X shows total specific allowances on impaired loans decreased $185,000 to $740,000 at December 31, 2021 from $925,000 at December 31, 2020. At December 31, 2021, there were 3 commercial loans with specific allowances. The total recorded investment in these loans at December 31, 2021 was $6,540,000, including 2 loans secured by hotel properties with total recorded investments of $6,468,000. Loans acquired from Covenant that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $6,648,000 at July 1, 2020 and $6,259,000 at December 31, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Covenant are presented net of a discount for credit losses of $3,059,000 at December 31, 2021 and $5,362,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $7,219,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. Loans acquired from Monument that were identified as having a deterioration in credit quality (PCI) were valued at $441,000 at April 1, 2019 and $299,000 at December 31, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $276,000 at December 31, 2021 and $617,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. Table XI shows the allowance for loan losses totaled 0.87% of gross loans outstanding at December 31, 2021, up from 0.69% at December 31, 2020 and 0.83% at December 31, 2019, and down from levels in excess of 1.00% prior to the Covenant and Monument acquisitions from 2017 to 2018. Table XI also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.08% at December 31, 2021, up from 1.05% at December 31, 2020 and 0.93% at December 31, 2019, and in line with ratios from the previous years. The provision for loan losses by segment for 2021 and 2020 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) 2021 2020 Commercial ​ $ 3,427 ​ $ 3,847 Residential mortgage ​ ​ 90 ​ ​ 27 Consumer ​ 58 ​ 39 Unallocated ​ 86 ​ 0 Total ​ $ 3,661 ​ $ 3,913 29 Table of Contents ​ ​ The provision for loan losses is further detailed as follows: ​ Commercial segment ​ ​ ​ ​ ​ ​ ​ (In Thousands) 2021 2020 Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 1,419 ​ $ 2,215 Increase in collectively determined portion of the allowance attributable to: ​ ​ Changes in loan volume ​ 1,879 ​ 432 Changes in historical loss experience factors ​ 129 ​ 831 Changes in qualitative factors ​ 0 ​ 369 Total provision for loan losses - Commercial segment ​ $ 3,427 ​ $ 3,847 ​ Residential mortgage segment ​ ​ ​ ​ ​ ​ ​ (In Thousands) 2021 2020 Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ (157) ​ $ (58) Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ Changes in loan volume ​ 348 ​ (240) Changes in historical loss experience factors ​ (56) ​ (88) Changes in qualitative factors ​ (45) ​ 413 Total provision for loan losses - Residential mortgage segment ​ $ 90 ​ $ 27 ​ Consumer segment ​ ​ ​ ​ ​ ​ ​ (In Thousands) 2021 2020 Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 62 ​ $ 81 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ Changes in loan volume ​ 14 ​ (30) Changes in historical loss experience factors ​ (23) ​ (15) Changes in qualitative factors ​ 5 ​ 3 Total provision for loan losses - Consumer segment ​ $ 58 ​ $ 39 ​ Total – All segments ​ ​ ​ ​ ​ ​ ​ (In Thousands) 2021 ​ 2020 Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 1,324 ​ $ 2,238 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ Changes in loan volume ​ 2,241 ​ 162 Changes in historical loss experience factors ​ 50 ​ 728 Changes in qualitative factors ​ (40) ​ 785 Sub-total ​ 3,575 ​ 3,913 Unallocated ​ 86 ​ 0 Total provision for loan losses - All segments ​ $ 3,661 ​ $ 3,913 ​ For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off. In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to changes in loan volume was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase in loans outstanding (excluding loans specifically evaluated for impairment) for the period. The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding 30 Table of Contents ​ period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment). In 2021, net charge-offs were $1,509,000, including charge-offs of $1,575,000 and recoveries of $66,000. In 2021, the Corporation recorded partial charge-offs totaling $1,463,000 on a commercial loan. At December 31, 2021, the recorded investment in this loan was $1,391,000. In 2020, the Corporation recorded a charge-off of $2,219,000 on one commercial loan for which there was no recorded investment at December 31, 2021 and 2020. Table XII shows the average rate of net charge-offs as a percentage of loans was 0.09% in 2021, with an annual average over the five-year period ended December 31, 2021 of 0.08%, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018. Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 1.36% at December 31, 2021, down from 1.42% at December 31, 2020, and nonperforming assets as a percentage of total assets was 0.94% at December 31, 2021, down from 1.10% at December 31, 2020. Table XI presents data at the end of each of the years ended December 31, 2017 through 2021. Table XI shows that total nonperforming loans as a percentage of loans of 1.36% at December 31, 2021, though up from the low of 0.88% at December 31, 2019, was lower than the corresponding ratio at December 31, 2017, 2018 and 2020. Similarly, the December 31, 2021 ratio of total nonperforming assets as a percentage of assets of 0.94% was up from the low of 0.80% at December 31, 2019, but lower than the corresponding ratio at December 31, 2017, 2018 and 2020. Total impaired loans of $15,734,000 at December 31, 2021 are down $2,084,000 from the corresponding amount at December 31, 2020 of $17,818,000. Table XI shows that while the total balance of impaired loans at December 31, 2021 was lower than the amount at December 31, 2020, it was higher than the amounts over the periods of 2017-2019, which ranged from a low of $5,486,000 in 2019 to the high of $9,774,000 at December 31, 2018. The increase in total impaired loans in 2020 and 2021 includes the impact of purchased credit impaired loans acquired from Covenant and Monument. Total nonperforming assets of $21,902,000 at December 31, 2021 are $2,827,000 lower than the corresponding amount at December 31, 2020, summarized as follows: ● Total nonaccrual loans at December 31, 2021 of $18,999,000 was $2,417,000 lower than the corresponding December 31, 2020 total of $21,416,000. ● Total loans past due 90 days or more and still accruing interest amounted to $2,219,000 at December 31, 2021, an increase of $244,000 from the total at December 31, 2020. ● Foreclosed assets held for sale consisted of real estate, and totaled $684,000 at December 31, 2021, a decrease of $654,000 from $1,338,000 at December 31, 2020. At December 31, 2021, the Corporation held four such properties for sale, with total carrying values of $256,000 related to residential real estate and $428,000 related to commercial real estate. At December 31, 2020, the Corporation held six such properties for sale, with total carrying values of $80,000 related to residential real estate and $1,258,000 related to commercial real estate. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property. As reflected in Table XI, total loans past due 30-89 days and still accruing interest amounted to $5,106,000 at December 31, 2021, down from $5,918,000 at December 31, 2020. This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $4,347,000 at December 31, 2021, down from $5,084,000 at December 31, 2020. Management monitors the status of delinquent residential mortgage loans on an ongoing basis and has considered delinquency trends, which were generally favorable throughout most of 2021, in evaluating the allowance for loan losses at December 31, 2021. Over the period 2017-2021, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans and may significantly impact the amount of total charge-offs reported in any one period. Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as 31 Table of Contents ​ of December 31, 2021. Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate. Tables IX through XII present historical data related to the allowance for loan losses. TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) ​ Years Ended December 31, ​ ​ 2021 2020 2019 2018 2017 Balance, beginning of year ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ Charge-offs: ​ ​ ​ ​ ​ ​ Commercial ​ (1,464) ​ (2,343) ​ (6) ​ (165) ​ (132) ​ Residential mortgage ​ (11) ​ 0 ​ (190) ​ (158) ​ (197) ​ Consumer ​ (100) ​ (122) ​ (183) ​ (174) ​ (150) ​ Total charge-offs ​ (1,575) ​ (2,465) ​ (379) ​ (497) ​ (479) ​ Recoveries: ​ ​ ​ ​ ​ ​ Commercial ​ 22 ​ 16 ​ 6 ​ 317 ​ 4 ​ Residential mortgage ​ 6 ​ 44 ​ 12 ​ 8 ​ 19 ​ Consumer ​ 38 ​ 41 ​ 39 ​ 41 ​ 38 ​ Total recoveries ​ 66 ​ 101 ​ 57 ​ 366 ​ 61 ​ Net charge-offs ​ (1,509) ​ (2,364) ​ (322) ​ (131) ​ (418) ​ Provision for loan losses ​ 3,661 ​ 3,913 ​ 849 ​ 584 ​ 801 ​ Balance, end of period ​ $ 13,537 ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ Net charge-offs as a % of average loans ​ 0.09 % 0.16 % 0.03 % 0.02 % 0.05 % ​ TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ As of December 31, ​ 2021 2020 2019 2018 2017 ASC 310 - Impaired loans - individually evaluated ​ $ 740 ​ $ 925 ​ $ 1,051 ​ $ 1,605 ​ $ 1,279 ASC 450 - Collectively evaluated: ​ ​ ​ ​ ​ Commercial ​ 7,553 ​ 5,545 ​ 3,913 ​ 3,102 ​ 3,078 Residential mortgage ​ 4,338 ​ 4,091 ​ 4,006 ​ 3,870 ​ 3,841 Consumer ​ 235 ​ 239 ​ 281 ​ 233 ​ 159 Unallocated ​ 671 ​ 585 ​ 585 ​ 499 ​ 499 Total Allowance ​ $ 13,537 ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ ​ 32 Table of Contents ​ TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (TDRs) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) ​ As of December 31, ​ 2021 2020 2019 2018 2017 Impaired loans with a valuation allowance ​ $ 6,540 ​ $ 8,082 ​ $ 3,375 ​ $ 4,851 ​ $ 4,100 ​ Impaired loans without a valuation allowance ​ 2,636 ​ 2,895 ​ 1,670 ​ 4,923 ​ 5,411 ​ Purchased credit impaired loans ​ ​ 6,558 ​ ​ 6,841 ​ ​ 441 ​ ​ 0 ​ ​ 0 ​ Total impaired loans ​ $ 15,734 ​ $ 17,818 ​ $ 5,486 ​ $ 9,774 ​ $ 9,511 ​ Total loans past due 30-89 days and still accruing ​ $ 5,106 ​ $ 5,918 ​ $ 8,889 ​ $ 7,142 ​ $ 9,449 ​ Nonperforming assets: ​ ​ ​ ​ ​ ​ Purchased credit impaired loans ​ $ 6,558 ​ $ 6,841 ​ $ 441 ​ $ 0 ​ $ 0 ​ Other nonaccrual loans ​ ​ 12,441 ​ ​ 14,575 ​ ​ 8,777 ​ ​ 13,113 ​ ​ 13,404 ​ Total nonaccrual loans ​ ​ 18,999 ​ ​ 21,416 ​ ​ 9,218 ​ ​ 13,113 ​ ​ 13,404 ​ Total loans past due 90 days or more and still accruing ​ 2,219 ​ 1,975 ​ 1,207 ​ 2,906 ​ 3,724 ​ Total nonperforming loans ​ 21,218 ​ 23,391 ​ 10,425 ​ 16,019 ​ 17,128 ​ Foreclosed assets held for sale (real estate) ​ 684 ​ 1,338 ​ 2,886 ​ 1,703 ​ 1,598 ​ Total nonperforming assets ​ $ 21,902 ​ $ 24,729 ​ $ 13,311 ​ $ 17,722 ​ $ 18,726 ​ Loans subject to troubled debt restructurings (TDRs): ​ ​ ​ ​ ​ ​ Performing ​ $ 288 ​ $ 166 ​ $ 889 ​ $ 655 ​ $ 636 ​ Nonperforming ​ 5,517 ​ 7,285 ​ 1,737 ​ 2,884 ​ 3,027 ​ Total TDRs ​ $ 5,805 ​ $ 7,451 ​ $ 2,626 ​ $ 3,539 ​ $ 3,663 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total nonperforming loans as a % of loans ​ 1.36 % 1.42 % 0.88 % 1.94 % 2.10 % Total nonperforming assets as a % of assets ​ 0.94 % 1.10 % 0.80 % 1.37 % 1.47 % Allowance for loan losses as a % of total loans ​ 0.87 % 0.69 % 0.83 % 1.12 % 1.09 % Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a) ​ ​ 1.08 % ​ 1.05 % ​ 0.93 % ​ 1.12 % ​ 1.09 % Allowance for loan losses as a % of nonperforming loans ​ 63.80 % 48.67 % 94.35 % 58.11 % 51.70 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (a) Credit adjustment on purchased non-impaired loans at end of period ​ $ 3,335 ​ $ 5,979 ​ $ 1,216 ​ $ 0 ​ $ 0 ​ Allowance for loan losses ​ ​ 13,537 ​ ​ 11,385 ​ ​ 9,836 ​ ​ 9,309 ​ ​ 8,856 ​ Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1) ​ $ 16,872 ​ $ 17,364 ​ $ 11,052 ​ $ 9,309 ​ $ 8,856 ​ Total loans receivable ​ $ 1,564,849 ​ $ 1,644,209 ​ $ 1,182,222 ​ $ 827,563 ​ $ 815,713 ​ Credit adjustment on purchased non-impaired loans at end of period ​ ​ 3,335 ​ ​ 5,979 ​ ​ 1,216 ​ ​ 0 ​ ​ 0 ​ Total (2) ​ $ 1,568,184 ​ $ 1,650,188 ​ $ 1,183,438 ​ $ 827,563 ​ $ 815,713 ​ Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2) ​ ​ 1.08 % ​ 1.05 % ​ 0.93 % ​ 1.12 % ​ 1.09 % ​ ​ ​ 33 Table of Contents ​ TABLE XII – FIVE-YEAR HISTORY OF LOAN LOSSES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) 2021 2020 2019 2018 2017 Average Average gross loans ​ $ 1,596,756 ​ $ 1,445,098 ​ $ 1,057,559 ​ $ 822,346 ​ $ 780,640 ​ $ 1,140,480 ​ Year-end gross loans ​ 1,564,849 ​ 1,644,209 ​ 1,182,222 ​ 827,563 ​ 815,713 ​ $ 1,206,911 ​ Year-end allowance for loan losses ​ 13,537 ​ 11,385 ​ 9,836 ​ 9,309 ​ 8,856 ​ $ 10,585 ​ Year-end nonaccrual loans ​ 18,999 ​ 21,416 ​ 9,218 ​ 13,113 ​ 13,404 ​ $ 15,230 ​ Year-end loans 90 days or more past due and still accruing ​ 2,219 ​ 1,975 ​ 1,207 ​ 2,906 ​ 3,724 ​ 2,406 ​ Net charge-offs ​ 1,509 ​ 2,364 ​ 322 ​ 131 ​ 418 ​ 949 ​ Provision for loan losses ​ 3,661 ​ 3,913 ​ 849 ​ 584 ​ 801 ​ 1,962 ​ Earnings coverage of charge-offs ​ 26 x 10 x 76 x 210 x 56 x 29 x Allowance coverage of charge-offs ​ 9 x 5 x 31 x 71 x 21 x 11 x Net charge-offs as a % of provision for loan losses ​ 41.22 % 60.41 % 37.93 % 22.43 % 52.18 % 48.37 % Net charge-offs as a % of average gross loans ​ 0.09 % 0.16 % 0.03 % 0.02 % 0.05 % 0.08 % Income before income taxes on a fully taxable equivalent basis ​ 38,822 ​ 24,192 ​ 24,453 ​ 27,564 ​ 23,350 ​ 27,676 ​ ​ CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS The Corporation’s significant fixed and determinable contractual obligations as of December 31, 2021 include repayment obligations related to time deposits and borrowed funds. Information related to maturities of time deposits is provided in Note 11 to the consolidated financial statements. Information related to maturities of borrowed funds is provided in Note 12 to the consolidated financial statements. The Corporation’s operating lease commitments with terms of one year or less and other commitments at December 31, 2021 are immaterial. Information concerning operating lease commitments with terms greater than one year is provided in Note 17 to the consolidated financial statements. The Corporation’s significant off-balance sheet arrangements include commitments to extend credit and standby letters of credit. Off-balance sheet arrangements are described in Note 16 to the consolidated financial statements. As described in more detail in the Financial Condition section of Management’s Discussion and Analysis, the Corporation sells residential mortgage loans for which the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. At December 31, 2021, outstanding balances of such loans sold totaled $334,741,000. Also, for loans sold under the MPF Original program, the Corporation provides a credit enhancement. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the Corporation has recorded a related allowance for credit losses in the amount of $635,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets. As discussed in the Financial Condition section of Management’s Discussion and Analysis, the Corporation is a participating SBA lender and may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. In some cases, the Corporation may sell the SBA-guaranteed portion of the loan back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. If it is determined that the ongoing compliance requirements are not met, the Corporation could be subject to claim adjustments on SBA guaranteed loans. At December 31, 2021, the Corporation’s total exposure to SBA guarantees was $12,856,000 with a recorded claims adjustment allowance of $457,000, included in accrued interest and other liabilities in the consolidated balance sheets. 34 Table of Contents ​ LIQUIDITY Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At December 31, 2021, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $79,119,000. The Corporation’s cash position throughout 2021 has been elevated in comparison to historical levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash. The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans. The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale securities with a carrying value of $14,034,000 at December 31, 2021. The Corporation’s outstanding, available, and total credit facilities at December 31, 2021 and 2020 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding ​ Available ​ Total Credit (In Thousands) December 31, December 31, December 31, December 31, December 31, December 31, ​ ​ 2021 ​ 2020 ​ 2021 ​ 2020 ​ 2021 ​ 2020 Federal Home Loan Bank of Pittsburgh ​ $ 33,311 ​ $ 72,222 ​ $ 723,557 ​ $ 698,977 ​ $ 756,868 ​ $ 771,199 Federal Reserve Bank Discount Window ​ 0 ​ 0 ​ 13,642 ​ 14,654 ​ 13,642 ​ 14,654 Other correspondent banks ​ 0 ​ 0 ​ 45,000 ​ 45,000 ​ 45,000 ​ 45,000 Total credit facilities ​ $ 33,311 ​ $ 72,222 ​ $ 782,199 ​ $ 758,631 ​ $ 815,510 ​ $ 830,853 ​ At December 31, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $27,727,000 and letters of credit totaling $5,584,000. At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit. Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale debt securities to meet its obligations. At December 31, 2021, the carrying value of available-for-sale debt securities in excess of amounts required to meet pledging or repurchase agreement obligations was $307,387,000. Management believes the Corporation is well-positioned to meet its short-term and long-term obligations. STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY Details concerning capital ratios at December 31, 2021 and December 31, 2020 are presented in Note 18 to the consolidated financial statements. Management believes, as of December 31, 2021, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, the Corporation’s and C&N Bank’s capital ratios at December 31, 2021 and December 31, 2020 exceed the Corporation’s Board policy threshold levels. Management expects C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future. ​ Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability 35 Table of Contents ​ to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold sufficient capital commensurate with its overall risk profile. To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At December 31, 2021, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows: ​ ​ ​ ​ ​ Minimum common equity tier 1 capital ratio 4.5 % Minimum common equity tier 1 capital ratio plus capital conservation buffer 7.0 % Minimum tier 1 capital ratio 6.0 % Minimum tier 1 capital ratio plus capital conservation buffer 8.5 % Minimum total capital ratio 8.0 % Minimum total capital ratio plus capital conservation buffer 10.5 % ​ A banking organization with a buffer greater than 2.5% would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The rule also prohibits a banking organization from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows: ​ ​ ​ ​ ​ Capital Conservation Buffer Maximum Payout (as a % of risk-weighted assets) ​ (as a % of eligible retained income) Greater than 2.5% ​ No payout limitation applies ​ ≤2.5% and >1.875% ​ 60 % ≤1.875% and >1.25% ​ 40 % ≤1.25% and >0.625% ​ 20 % ≤0.625% ​ 0 % ​ At December 31, 2021, C&N Bank’s Capital Conservation Buffer (determined based on the minimum total capital ratio) was 8.04%. The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains on available-for-sale debt securities, net of deferred income tax, amounted to $4,809,000 at December 31, 2021 and $11,676,000 at December 31, 2020. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 7 to the consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at December 31, 2021. Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income related to defined benefit plans, net of deferred income tax, was $217,000 at December 31, 2021 and $119,000 at December 31, 2020. ​ INFLATION Inflation affects the cost of labor, supplies and services used to provide banking services as well as interest rates. After many years of low inflation, disruptions to labor markets and supply chains triggered by the COVID-19 pandemic and government policies have led to an annual inflation rate in 2021, based on changes in the Consumer Price Index, of 7%. 36 Table of Contents ​ The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. In March of 2020, in response to significant concerns about the impact of the COVID-19 pandemic on the U.S. economy, the Federal Reserve lowered the fed funds target rate from 1.75% to 0.25%, which it has maintained through December 31, 2021. Also, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. The Federal Reserve has purchased large amounts of securities in an effort to keep interest rates low and stimulate economic growth. The Federal Open Market Committee (FOMC) has noted in its most recent statement that indicators of economic activity and employment have continued to strengthen and that inflationary concerns may no longer be considered transitory in nature. The Committee noted its desire to achieve maximum employment and inflation at a rate of 2 percent over the longer run and with inflation currently well above that level with a strong labor market, it expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee also decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March of 2022. Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including indicators of inflationary pressures, in managing interest rate and other financial risks. ​ 37 Table of Contents ​