What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-14 compared with 2021-03-15 · 169 added, 154 removed, 619 unchanged (34% of the section changed)

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Earnings per share, both basic and diluted, for 2021 was $2.49 as compared to $2.03 in 2020, an increase of 22.7%.

Dividends per share for 2020 and 2019 were $1.08.

Dividends per share for 2021 and 2020 were $1.12 and $1.08, respectively, representing a 3.7% increase.

The Corporation’s return on average assets was 1.15% in 2021 and 1.09% in 2020.

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Total interest income in 2021 amounted to $42,048,000, an increase of $2,481,000 or 6.3% from 2020.

The increase in interest income reflects $610,000 in servicing fees earned from the SBA related to the origination of PPP loans throughout 2020.

The increase in interest income reflects an additional $934,000 in servicing fees earned from the SBA related to the origination of PPP loans for a total of $1,544,000 throughout 2021, plus an increase in interest earned on commercial real estate loans.

Total interest expense of $5,148,000 decreased $1,212,000 or 19.1% from 2020.

The majority of this decrease related to a decrease in interest paid on deposits and short-term borrowings in 2021.

Selected financial data and performance ratios of the Corporation for the past five years are presented below in Table 1.

Table 1 — Selected Financial Data

(Dollars in thousands, except per share data)

For the Year Ended December 31,

SELECTED FINANCIAL DATA AT YEAR END:

Total securities

Total deposits

Total long-term borrowings

Total stockholders’ equity

SELECTED OPERATING DATA:

Interest income

Interest expense

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Non-interest income

Non-interest expense

Income before income tax expense

Income tax expense

PER SHARE DATA:

PERFORMANCE RATIOS:

Return on average assets

Return on average equity

Dividend payout

Average equity to average assets

Net interest income, as indicated below in Table 2, increased by $3,693,000 or 11.1% to $36,900,000 for the year ended December 31, 2021.

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The rate paid on interest bearing liabilities was 0.57% in 2021 and 0.84% in 2020.

This resulted in an increase in our net interest spread to 3.25% in 2020, as compared to 2.95% in 2019.

This resulted in a decrease in our net interest spread to 3.08% in 2021, as compared to 3.25% in 2020.

As Table 3 illustrates, net interest margin, which is interest income less interest expense divided by average earning assets, was 3.22% in 2021 as compared to 3.46% in 2020.

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In 2021, the yield on earning assets decreased by 0.44% and the rate paid on interest bearing liabilities decreased by 0.27%.

Yields decreased across all segments of interest earning assets and interest bearing liabilities during 2020, mainly as a result of the current low interest rate environment precipitated by rate cuts that occurred in 2020 as a result of the COVID-19 pandemic.

The yield on loans decreased from 4.78% in 2019 to 4.63% in 2020 mainly due to loans repaid or refinanced that were reinvested at lower interest rates, as well as the Bank’s origination of SBA Paycheck Protection Program loans that have interest rates of 1.00%.

Yields decreased across all segments of interest earning assets and interest bearing liabilities during 2021, mainly as a result of the current low interest rate environment precipitated by rate cuts that occurred in the latter part of 2020 and into 2021 as a result of the COVID-19 pandemic.

The yield on loans decreased from 4.63% in 2020 to 4.49% in 2021 mainly due to loans repaid or refinanced that were reinvested and new loan volume at lower interest rates, as well as the Bank’s origination of SBA Paycheck Protection Program loans that have interest rates of 1.00%.

The securities portfolio yield decreased to 2.61% in 2021 as compared to 3.02% in 2020.

The decrease was mainly the result of reduced yield on taxable securities which declined from 2.78% in 2019 to 2.33% in 2020 due to maturities, calls, and sales of investment securities that were reinvested at lower rates.

The decrease was mainly the result of reduced yield on tax-exempt securities which declined from 4.37% in 2020 to 3.91% in 2021 due to maturities and calls of securities that were reinvested along with new funding at lower rates.

The average rate paid on short-term borrowings decreased 0.66% from 1.00% in 2020 to 0.34% in 2021.

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Interest income exempt from federal tax was $3,743,000 in 2021 and $3,319,000 in 2020.

Interest income exempt from federal tax decreased due to the sales and calls of tax-exempt securities and payoffs of tax-exempt loans.

Interest income exempt from federal tax increased due to the purchases of tax-exempt securities and originations of tax-exempt loans.

Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 21%.

The increase in net interest margin at December 31, 2020 compared to December 31, 2019 was primarily due to decreased yields on interest bearing liabilities resulting in lower interest expense in 2020, as compared to 2019.

The decrease in net interest margin at December 31, 2021 compared to December 31, 2020 was primarily due to decreased yields on interest bearing assets in 2021, as compared to 2020.

Fully tax equivalent net interest income increased by $3,934,000 or 11.3% to $38,800,000 at December 31, 2021 compared to $34,866,000 at December 31, 2020.

Throughout 2020, the Federal Reserve decreased the federal-funds rate by 1.5%, resulting in a target range of 0.00% - 0.25%.

During 2020, the Federal Reserve decreased the federal-funds rate by 1.5%, resulting in a target range of 0.00% - 0.25%.

The federal-funds rate remained the throughout 2021 at the target range of 0.00% - 0.25%.

The Corporation could experience a decrease in net interest income if market rates remain static or continue to decline, as the Corporation’s net interest income continues to be liability sensitive.

To negate the potential impact of a decreasing net interest margin, the Corporation will continue to focus on attracting lower cost core deposits such as checking, savings, and money market accounts, thereby further reducing its dependence on higher priced certificates of deposit and short-term borrowings.

To negate the potential impact of a decreasing net interest margin, the Corporation will continue to focus on attracting organic loan growth and lower cost core deposits such as checking, savings, and money market accounts, thereby further reducing its dependence on higher priced certificates of deposit and short-term borrowings.

The Corporation is actively monitoring and restructuring its portfolios to become more asset sensitive, which will allow for better performance in a static or rates-down environment.

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and, (iii) changes in rate and volume (changes in average volume multiplied by change in average rate).

In 2020, the increase in net interest income on a fully tax equivalent basis of $4,761,000 resulted from an increase in volume of $4,244,000 and an increase of $517,000 due to changes in rate.

In 2021, the increase in net interest income on a fully tax equivalent basis of $3,934,000 resulted from an increase in volume of $4,500,000 and a decrease of $566,000 due to changes in rate.

Table 4 — Rate/Volume Analysis

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For the year ended December 31, 2021, the provision for loan losses was $860,000 as compared to $1,200,000 for the year ended December 31, 2020.

The increase in the provision for loan losses in 2020 as compared to 2019 resulted from the Corporation’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors.

The provision for loan losses for the year ended December 31, 2020 is also reflective of management’s assessment of the increased risk associated with the economic uncertainty surrounding the COVID-19 pandemic.

The decrease in the provision for loan losses in 2021 as compared to 2020 resulted from the Corporation’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors.

The provision for loan losses for the year ended December 31, 2021 is also reflective of management’s assessment of the continued risk associated with the economic uncertainty surrounding the COVID-19 pandemic.

Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $113,000 and $272,000 for the years ended December 31, 2021 and 2020, respectively.

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Gross charge-offs amounted to $158,000 at December 31, 2021, as compared to $301,000 at December 31, 2020.

The increased level of charge-offs for the year ended December 31, 2020 was mainly due to one charge-off totaling $86,000 completed during the fourth quarter of 2020 on a non-accrual loan to a student housing holding company.

The charge-off was completed to charge the loan balance down to the net realizable value of the supporting collateral less cost to sell, as the underlying value of the collateral was deemed to be insufficient to cover the loan balance.

This charge-off contributed to the increased balance of net charge-offs in 2020 vs.

2019, but was not indicative of a significant change in asset quality in the overall loan portfolio.

The increased level of charge-offs for the year ended December 31, 2020 was mainly due to three charge-offs totaling $137,000 that were completed during the fourth quarter of 2020.

One charge-off in the amount of $86,000 was completed in the Commercial Real Estate portfolio on a loan to a student housing holding company to charge the loan balance down to the net realizable value of the collateral less cost to sell, as the underlying value of the collateral was deemed to be insufficient to cover the loan balance.

Two charge-offs totaling $51,000 were completed in the Commercial and Industrial portfolio on loans to the former owner of a residential investment property, as the property was deemed to be uninhabitable and was sold for less than the amount owed by the borrower on the aggregate balance of all loans related to the project and the borrower failed to pay the outstanding balances due after the sale of the property.

These charge-offs contributed to the increased balance of net charge-offs in 2020 over 2021 but were not indicative of a significant change in asset quality in the overall loan portfolio.

See Table 11 – Analysis of Allowance for Loan Losses for further details.

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NON-INTEREST INCOME

Non-interest income is derived primarily from service charges and fees, ATM and debit card income, trust department revenue, income on bank owned life insurance, gains on sales of mortgage loans and other miscellaneous income.

Non-interest income is derived primarily from service charges and fees, ATM fees and debit card income, trust department revenue, increases in the cash surrender value of bank owned life insurance, gains on sales of mortgage loans and other miscellaneous income.

In addition, net securities gains and losses also impact total non-interest income.

Table 4 provides the yearly non-interest income by category, along with the amount, dollar changes, and percentage of change.

Non-interest income through December 31, 2020 was $6,012,000, a decrease of 13.2%, or $917,000, from 2019.

The decrease was due primarily to a decrease in net securities gains and a decrease in service charges and fees.

Table 4 provides the major categories of non-interest income and each respective change comparing the last two years.

During 2020, net securities gains decreased $969,000 to a net loss of $(58,000).

The decrease was due to the Corporation recognizing $287,000 in net losses on held equity securities in 2020, as compared to recognizing $373,000 in net gains on held equity securities in 2019.

The Corporation also recognized $309,000 less in net gains on the sales of debt securities during 2020 as compared to 2019.

Table 5 provides the yearly non-interest income by category, along with the amount, dollar changes, and percentage of change comparing the last two years.

Non-interest income through December 31, 2021 was $7,323,000, an increase of 21.8%, or $1,311,000, from 2020.

The increase was due to increases in net securities gains, gains on sales of mortgage loans, ATM and debit card fees and service charges and fees.

During 2021, net securities gains increased $381,000 to a net gain of $323,000.

The increase was due to the Corporation recognizing $319,000 in net gains on held equity securities in 2021, as compared to recognizing $287,000 in net losses on held equity securities in 2020.

The Corporation also recognized $229,000 in net gains on the sales of debt and equity securities during 2020 as compared to $4,000 in 2021.

Gains on sales of mortgage loans provided income of $980,000 in 2021 as compared to $604,000 in 2020.

The increase in gains on sales of mortgage loans in 2020 was due to more mortgage loans being sold and higher average gains on individual mortgage loan sales in 2020 as compared to 2019.

In 2020, the Corporation originated $44,485,000 in residential mortgage loans, of which $30,480,000 were originated with the intent to sell.

This compared favorably to 2019 when the Corporation originated $25,592,000 in residential mortgage loans, of which $12,447,000 were originated with the intent to sell.

The increase in gains on sales of mortgage loans in 2021 was due to more mortgage loans being sold in 2021 as compared to 2020.

The Corporation continues to service the majority of mortgages which are sold.

This servicing income provides an additional source of non-interest income on an ongoing basis.

Service charges and fees decreased by $531,000 or 23.9% in 2020 as compared to 2019.

The decrease was mainly due to fewer customers in overdraft status and lower fees earned on deposit accounts, as overdraft fees and several other deposit account service charges were waived during the second quarter of 2020 due to the COVID-19 pandemic.

In addition, there were fewer prepayment penalties earned on commercial loan payoffs during 2020.

ATM fees and debit card income increased by $199,000 or 12.1% in 2020 as compared to 2019 due to an increase in transaction volume.

Other income, consisting primarily of safe deposit box rentals, income from the sale of non-deposit investment products, and miscellaneous fees, increased $42,000, or 15.2% in 2020 as compared to 2019.

Service charges and fees increased by $221,000 or 13.1% in 2021 as compared to 2020.

The increase was mainly due to higher fees earned on deposit accounts, as overdraft fees and several other deposit account service charges were waived during the second quarter of 2020 due to the COVID-19 pandemic.

In addition, there were more prepayment penalties earned on commercial loan payoffs during 2021.

ATM fees and debit card income increased by $334,000 or 18.1% in 2021 as compared to 2020 due to increased debit card interchange fees as the result of increased transaction volume in 2021.

Other income, consisting primarily of safe deposit box rentals, income from the sale of non-deposit investment products, and miscellaneous fees, decreased $1,000, or 0.3% in 2021 as compared to 2020.

Table 5 — Non-Interest Income

3 unchanged sentences

Service charges and fees

Bank owned life insurance income

ATM and debit card income

Increase in cash surrender value of life insurance

ATM fees and debit card income

Gains on sales of mortgage loans

Net securities (losses) gains

Net securities gains (losses)

NON-INTEREST EXPENSE

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Salaries and employee benefits increased $461,000, or 3.4% in 2021.

The increase in 2020 was due to an increase in commissions associated with loan growth and retail non-deposit activity, bonuses paid to all employees for working through the COVID-19 pandemic and increased healthcare costs.

The Corporation experienced a 30.0% increase in healthcare costs for its employees in 2020 as compared to 2019.

The increase in 2021 was due to normal merit increases, new position hires and filling vacant positions.

The number of full-time equivalent employees was 198 as of December 31, 2021 and 195 as of December 31, 2020.

Net occupancy expense increased $190,000, or 10.4% in 2020 as compared to 2019, mainly due to an increase in rent expense associated with the new leasing standard.

Net furniture and equipment and computer expense decreased $109,000, or 6.5% in 2020 compared to 2019.

The decrease in 2020 was due to several software items fully depreciating in 2019 which were still being utilized throughout 2020.

Net occupancy expense decreased $124,000, or 6.2% in 2021 as compared to 2020, mainly due to an increase in 2020 for rent expense associated with the new leasing standard.

Net furniture and equipment and computer expense increased $210,000, or 13.3% in 2021 compared to 2020.

The increase in 2021 was due to several new software contracts that were implemented in late 2020 and early 2021 as the Corporation has continued to invest in new technology.

Professional services increased $69,000, or 7.0% in 2021 as compared to 2020.

The higher expense in 2020 was the result of higher legal fees related to the issuance of subordinated debt and additional consulting and accounting fees related to the review of the Corporation’s goodwill.

The higher expense in 2021 was mainly due to amortization of consulting expense due to broker fees resulting from the Corporation’s subordinated debt issuance.

Pennsylvania shares tax expense increased $335,000, or 38.6% in 2021 as compared to 2020.

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FDIC insurance expense increased $255,000, or 151.8% in 2021 as compared to 2020.

This increase was due to small bank assessment credits received from the FDIC effectively reducing the expense in 2019.

This increase was primarily due to small bank assessment credits received from the FDIC effectively reducing the expense in 2020.

FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense increased $14,000, or 1.6% in 2020 as compared to 2019.

ATM and debit card fees expense increased $185,000, or 20.4% in 2021 as compared to 2020 due to increased electronic funds transfer fees as the result of increased customer transaction volume.

Data processing fees increased $34,000, or 2.9% in 2021 as compared to 2020 as the result of annual contracted pricing increases from our main third-party data processor.

Foreclosed assets held for resale expense amounted to $3,000 in 2021 as compared to $50,000 in 2020, a decrease of $47,000, or 94.0%.

The Corporation incurred costs associated with the maintenance and sales of four foreclosed properties in 2020 and nine foreclosed properties in 2019.

The majority of the decrease was the result of a write down to the agreed upon lead bank repurchase price of a foreclosed asset in 2019.

Advertising expense decreased $259,000, or 42.3% in 2020 as compared to 2019.

The decrease was due to a less aggressive advertising approach in 2020 due to the COVID-19 pandemic, as 2020 saw less newspaper, billboard, digital and civic advertising.

Advertising for 2020 was geared mostly towards social media and keeping customers informed and educated on the events created due to COVID-19.

This advertising was significantly less expensive than

the Bank’s traditional campaign driven messages.

Civic advertising was affected by the COVID-19 pandemic as many events that the Bank would normally sponsor were canceled.

The Corporation incurred costs associated with the maintenance and sale of one foreclosed property in 2021 and four foreclosed properties in 2020.

Advertising expense increased $53,000, or 15.0% in 2021 as compared to 2020.

The increase was due to an increase in digital and social media, business development, radio, civic sponsorships and events, and billboard advertising in 2021 as compared to 2020.

In addition, newspaper advertising was down due to utilizing more digitally focused advertising mediums.

Other non-interest expense increased $318,000, or 11.2% in 2021 as compared to 2020.

The increase in 2020 was primarily due to higher promotional expenses for free appraisals given by the Bank.

This increase included the Corporation pledging $75,000 in donations to local community organizations as well as fraud losses due to an isolated incident and increased check fraud.

The overall level of non-interest expense remains low, relative to the Corporation’s peers (community banks from $500 million to $1 billion in assets).

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The effective income tax rate was 13.6% in 2021 and 11.8% in 2020.

The increase in the effective tax rate for 2020 was due to a net decrease in tax-exempt investments in and loans to state and local units of government, plus higher overall operating income.

The increase in the effective tax rate for 2021 was due to higher overall operating income.

The Corporation recognized $405,000 of tax credits from low-income housing partnerships for the year ended December 31, 2021.

FINANCIAL CONDITION

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Total debt securities available-for-sale increased $71,205,000 or 19.4% to $437,916,000 as of December 31, 2021.

Net loans increased in 2020 from $640,727,000 to $712,677,000, an 11.2% increase.

Loan demand grew in 2020 as the Bank has realized an increase in loan originations, primarily in the commercial real estate and commercial and industrial portfolios.

The increase was partially due to the origination of PPP loans, which carried a balance of $22,976,000 at December 31, 2020.

Interest receivable increased $1,139,000 or 33.5% to $4,544,000 as of December 31, 2020.

This increase was mainly due to the full payment deferrals of several loans that were modified in response to the COVID-19 pandemic under Section 4013 of the CARES act, plus the impact of growth in the loan portfolio.

Net loans increased in 2021 from $712,677,000 to $744,161,000, a 4.4% increase.

Loan demand grew in 2021 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

The cash surrender value of bank owned life insurance totaled $24,792,000 at December 31, 2021, an increase of $598,000 or 2.5% from 2020.

This increase represents tax-free income included in non-interest income on the consolidated statements of income.

Investments in low-income housing partnerships were $1,466,000 at year-end 2020, a decrease of 19.8% from year-end 2019.

The Corporation became a limited partner in a new real estate venture during 2015 with an initial investment of $590,000, a second installment of $1,178,000 in 2016, third and fourth installments in 2017 of $168,000 and $84,000, respectively, and a fifth and final installment of $85,000 in 2019.

Investments in low-income housing partnerships were $1,530,000 at year-end 2021, an increase of 4.4% from year-end 2020.

The Corporation became a limited partner in a new real estate venture during 2021 with an initial

investment of $435,000.

Investing in low-income housing real estate ventures enables the Corporation to recognize tax credits and satisfy Community Reinvestment Act initiatives.

As of December 31, 2021, total deposits amounted to $1,077,969,000, an increase of 15.0% from 2020.

The increase in 2020 was due to many different factors including the deposit of stimulus funds via check or ACH, the deposit of PPP loan proceeds, less consumer spending, an $83,000,000 increase in highly rate sensitive deposits and other normal fluctuations.

The increase in 2021 was due to many different factors including the deposit of stimulus funds via check or ACH, the deposit of PPP loan proceeds, less consumer spending, a $73,000,000 increase in highly rate sensitive deposits and other normal fluctuations.

Core deposits, which include demand deposits and interest bearing demand deposits (NOWs), money market accounts, savings accounts, and time deposits of individuals, continue to be the Corporation’s most significant source of funds.

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

Short and long-term borrowings decreased in 2020 by $45,169,000, mainly due to increased deposit balances.

The Corporation issued $25,000,000 in subordinated debentures in the fourth quarter of 2020.

Total stockholders’ equity increased to $144,242,000 at December 31, 2020, an increase of $15,490,000, primarily due to an increase in accumulated other comprehensive income and retained earnings.

Short and long-term borrowings decreased in 2021 by $2,117,000, mainly due to the maturity of long-term notes with the FHLB.

Total stockholders’ equity increased to $148,555,000 at December 31, 2021, an increase of $4,313,000, primarily due to an increase in retained earnings.

SEGMENT REPORTING

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This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels.

The primary earning assets are loans and investment securities.

The primary earning assets are loans and securities.

The Corporation uses securities to not only generate interest and dividend revenue, but also to help manage interest rate risk and to provide liquidity to meet operating cash needs.

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Marketable equity securities consist of common stock investments in other commercial banks and bank holding companies.

At December 31, 2020 and 2019, the Corporation had $1,646,000 and $1,933,000, respectively, in equity securities recorded at fair value, a decrease of $287,000 or 14.8%.

Total loans increased to $720,610,000 as of December 31, 2020, as compared to a balance of $647,732,000 as of December 31, 2019.

At December 31, 2021 and 2020, the Corporation had $1,962,000 and $1,646,000, respectively, in equity securities recorded at fair value, an increase of $316,000 or 19.2%.

Total loans increased to $752,841,000 as of December 31, 2021, compared to a balance of $720,610,000 as of December 31, 2020.

Table 9 provides data relating to the composition of the Corporation’s loan portfolio on the dates indicated.

Total loans increased $32,231,000, or 4.5% in 2021 compared to an increase of $72,878,000, or 11.3% in 2020.

Steady demand for borrowing by businesses (including loans issued through the Bank’s participation in the SBA’s Paycheck Protection Program) accounted for the 11.3% increase in the loan portfolio from December 31, 2019 to December 31, 2020.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased 6.0% or $5,163,000 to $91,875,000 at December 31, 2020 compared to $86,712,000 at December 31, 2019.

The increase in the Commercial and Industrial portfolio was mainly attributable to originations of Paycheck Protection Program loans which amounted to $22,976,000 as of December 31, 2020.

The portion of the Commercial and Industrial portfolio not attributable to the Paycheck Protection Program loans decreased $17,813,000 during the year ended December 31, 2020.

The decrease was mainly attributable to $11,102,000 in new loan originations offset by a $5,522,000 decrease in utilization of existing Commercial and Industrial lines of credit and loan payoffs of $17,965,000, as well as regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased 17.9% or $70,927,000 to $466,728,000 at December 31, 2020 compared to $395,801,000 at December 31, 2019.

The increase was mainly the result of $117,952,000 in new loan originations net against a $2,067,000 decrease in utilization of existing Commercial Real Estate lines of credit and $38,793,000 in loan payoffs, in addition to regular principal payments and other typical amortization in the Commercial Real Estate portfolio.

Residential Real Estate loans decreased 1.5% or $2,367,000 to $156,983,000 at December 31, 2020 compared to $159,350,000 at December 31, 2019.

The decrease was the result of $33,481,000 in new loan originations and a $206,000 increase in utilization of existing Residential Real Estate (Home Equity) lines of credit, offset by loan payoffs of $24,784,000, net loans sold of $7,019,000 and regular principal payments and other typical amortization in the Residential Real Estate portfolio.

Steady demand for borrowing by businesses accounted for the 4.5% increase in the loan portfolio from December 31, 2020 to December 31, 2021.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) decreased $9,349,000 or 10.2% from $91,875,000 at December 31, 2020 to $82,526,000 at December 31, 2021.

The decrease in the Commercial and Industrial portfolio during the year ended December 31, 2021 was mainly attributable to a reduction of $18,082,000 in the portion of the Commercial and Industrial portfolio attributable to SBA PPP loans, the balance of which decreased from $22,967,000 at December 31, 2020 to $4,894,000 at December 31, 2021 as a result of loan forgiveness.

The $18,082,000 reduction in the balance of SBA PPP loans during the year ended December 31, 2021 was the result of $16,844,000 in new SBA PPP loan originations offset by $34,926,000 in SBA PPP loan forgiveness.

The portion of the Commercial and Industrial portfolio excluding PPP loans increased by $8,733,000 during the year ended December 31, 2021, mainly resulting from $24,317,000 in new loan originations for the year ended December 31, 2021, offset by loan payoffs of $8,337,000 and a decrease in utilization of existing Commercial and Industrial lines of credit of $3,559,000, as well as regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio during the year ended December 31, 2021.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $54,926,000 or 11.8% from $466,728,000 at December 31, 2020 to $521,654,000 at December 31, 2021.

The increase is mainly attributable to $137,056,000 in new loan originations for the year ended December 31, 2021 and an increase of $8,143,000 in utilization of existing Commercial Real Estate lines of credit, offset by $69,177,000 in loan payoffs, in addition to regular principal payments and other typical amortization in the Commercial Real Estate portfolio during the year ended December 31, 2021.

Residential Real Estate loans decreased $13,600,000 or 8.7% from $156,983,000 at December 31, 2020 to $143,383,000 at December 31, 2021.

The decrease was mainly the result of $54,180,000 in new loan originations and an increase of $83,000 in utilization of existing Residential Real Estate (Home Equity) lines of credit, offset by $47,277,000 in loan payoffs, net loans sold of $15,061,000, and regular principal payments and other typical amortization in the Residential Real Estate portfolio during the year ended December 31, 2021.

Net loans sold for the year ended December 31, 2021 consisted of total loans sold during the year ended December 31, 2021 of $29,741,000, offset with loans opened and sold in the same quarter during each quarter of 2021 which amounted to $14,680,000.

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Overall, non-pass grades increased to $24,737,000 at December 31, 2021, as compared to $24,137,000 at December 31, 2020.

Commercial and Industrial non-pass grades decreased to $919,000 as of December 31, 2020,

compared to $1,070,000 as of December 31, 2019.

Commercial and Industrial non-pass grades decreased to $796,000 as of December 31, 2021, compared to $919,000 as of December 31, 2020.

Commercial Real Estate non-pass grades increased to $22,346,000 as of December 31, 2021 as compared to $21,789,000 as of December 31, 2020.

Residential Real Estate and Consumer non-pass grades increased to $1,595,000 as of December 31, 2021, as compared to $1,429,000 as of December 31, 2020.

The increase in the Commercial Real Estate non-pass grade portfolio during the year ended December 31, 2020 was mainly due to the downgrade of various large loans/loan relationships to Special Mention or Substandard during the year.

One Commercial Real Estate loan to a real estate developer that carried a balance of $814,000 as of December 31, 2020 was downgraded to Special Mention during the third quarter of 2020, as the borrower was unable to pay off the loan or refinance through another institution at maturity;

the Bank has agreed to extend the maturity date of the loan for one year in conjunction with a principal paydown that was financed by partial release of the mortgaged premises.

One Commercial Real Estate loan to the owner/operator of a hotel that carried a balance of $9,423,000 as of December 31, 2020 was downgraded to Special Mention during the third quarter of 2020 and subsequently downgraded to Substandard during the fourth quarter of 2020, as occupancy levels have been adversely impacted by the COVID-19 coronavirus pandemic, but the business remains operational.

Four Commercial Real Estate loans to the owners/operators of an indoor family entertainment complex that carried a balance of $792,000 as of December 31, 2020 were downgraded to Special Mention during the third quarter of 2020 and subsequently downgraded to Substandard during the fourth quarter of 2020, as the business was adversely impacted by the COVID-19 coronavirus pandemic.

Net against the large additions to Special Mention and Substandard status, there was also one Commercial Real Estate loan to the owner of a recreation facility that was classified as Substandard and carried a balance of $2,640,000 as of December 31, 2019 which was paid off during the second quarter of 2020.

The increase in the Commercial Real Estate non-pass grade portfolio during the year ended December 31, 2021 is mainly due to the downgrade of one loan to a contractor specializing in modular construction in the amount of $1,000,000.

The loan was downgraded to substandard and placed on non-accrual status during the second quarter of 2021 as a result of the borrower’s inability to make payments as scheduled, as the business has ceased operations and has entered into bankruptcy proceedings.

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

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Residential Real Estate

The Corporation’s maturity and rate sensitivity information related to the loan portfolio is summarized in Table 9.

The Corporation’s maturity and interest rate sensitivity information related to the loan portfolio is summarized in Table 10.

Table 10 — Loan Maturity and Interest Sensitivity

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The qualitative factors relating to the impact of external factors/conditions were increased by two additional basis points across all loan segments during the fourth quarter of 2020.

Modifications granted in compliance with Section 4013 of the CARES Act are highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Corporation’s loan portfolio.

Qualitative factors remained unchanged during the first quarter of 2021.

During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Corporation’s market areas demonstrated marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to increasing market values in the real estate sector.

Qualitative factors remained unchanged during the third quarter of 2021.

During the fourth quarter of 2021, the qualitative factors related to external factors/conditions were increased by one basis point across all loan segments due to current economic uncertainty caused by the COVID-19 pandemic including increased inflation, as well as elevated unemployment levels (although improved from 2020 and early 2021) and the uncertainty of how broad the changes implemented by the Federal Reserve may be, and the qualitative factors

related to collateral values were increased by one basis point across all loan segments, as collateral values have continued to artificially increase as individuals have been willing to pay above-average market prices in all sectors.

Modifications granted in compliance with Section 4013 of the CARES Act were highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Corporation’s loan portfolio.

Table 11 contains an analysis of the allowance for loan losses indicating charge-offs and recoveries by year.

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Net charge-offs amounted to $113,000 in 2021 and $272,000 in 2020.

Net charge-offs were greater in 2020 than in 2019 mainly due to one charge-off totaling $86,000 in the Commercial Real Estate portfolio that was completed during the fourth quarter of 2020 on a non-accrual loan to a student housing holding company.

The charge-off was completed to charge the loan

balance down to the net realizable value of the collateral less cost to sell, as the underlying value of the collateral was deemed insufficient to cover the loan balance.

Net charge-offs were higher in 2020 than in 2021, mainly due to three charge-offs totaling $137,000 that were completed during the fourth quarter of 2020.

Two charge-offs totaling $51,000 were completed in the Commercial and Industrial portfolio on loans to the former owner of a residential investment property, as the property was deemed to be uninhabitable, was sold for less than the amount owed by the borrower on the aggregate balance of all loans related to the project, and the borrower failed to pay the outstanding balances due after the sale of the property.

For the year ended December 31, 2021, the provision for loan losses was $860,000 as compared to $1,200,000 for the year ended December 31, 2020.

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Table 13 details the Corporation’s non-performing assets and impaired loans as of the dates indicated.

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

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

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While unusual, there may be instances of loan principal forgiveness.

Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in Section 4013 of the CARES Act are met.

Any loan modifications made in response to the COVID-19 pandemic are not considered TDRs as long as the criteria set forth in Section 4013 of the CARES Act are met.

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

Total non-performing assets amounted to $7,066,000 as of December 31, 2021, as compared to $7,119,000 as of December 31, 2020.

The economy, in particular, the political unrest both domestic and abroad, the recent presidential election, the partial and full shutdowns of various government offices, the recession resulting from the COVID-19 pandemic, the large unemployment totals, and the continued slowness in the housing industries in our market areas has had a direct effect on the Corporation’s non-performing assets.

The economy is still in flux.

Businesses have reopened to find customers wanting to return, but employees, in many cases, wanting to continue to work from home or remain unemployed.

The work force has dwindled, inflationary pressures have caused prices to increase, the vaccination debate continues, and political unrest has reached an unprecedented level.

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

The Corporation is closely monitoring its Commercial Real Estate portfolio because of the current uncertain economic environment.

Non-accrual loans totaled $7,066,000 as of December 31, 2021 as compared to $7,078,000 as of December 31, 2020.

Foreclosed assets held for resale decreased to $28,000 as of December 31, 2020, compared to $119,000 as of December 31, 2019.

Loans past-due 90 days or more and still accruing interest amounted to $13,000 at December 31, 2020, as compared to $100,000 as of December 31, 2019.

At December 31, 2020, loans past-due 90 days or more and still accruing interest consisted of one Residential Real Estate loan which was well secured and in the process of collection.

The increase in non-accrual loans at December 31, 2020, as compared to December 31, 2019 is mainly due to the addition of several large loans/loan relationships to non-accrual status during the year ended December 31, 2020.

Five loans to a plastic processing company focused on non-post-consumer recycling totaling $1,262,000 were moved to

non-accrual status during the first quarter of 2020 due to strained liquidity and the borrower’s inability to make required payments.

A loan in the amount of $762,000 to a golf course and catering venue was moved to non-accrual status during the first quarter of 2020 due to the borrower’s inability to make monthly payments due to cash flow challenges exacerbated by the seasonality of the industry.

A residential mortgage in the amount of $356,000 to the owner of a manufacturing company was also moved to non-accrual status during the first quarter of 2020, as poor payment performance has led to foreclosure proceedings related to the associated property.

A loan in the amount of $485,000 to an agricultural producer was moved to non-accrual status during the fourth quarter of 2020 due to cash flow challenges that have led to payment delinquency, as well as issues with additional liens on the real estate collateral which are impeding efforts to sell the property and pay off the loan.

There were no foreclosed assets held for resale as of December 31, 2021, compared to $28,000 as of December 31, 2020.

There were no loans past-due 90 days or more and still accruing interest as of December 31, 2021, compared to $13,000 in loans past-due 90 days or more and still accruing interest at December 31, 2020.

Non-performing assets to total loans was 0.94% as of December 31, 2021 compared to 0.99% at December 31, 2020.

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The largest impaired loan relationship at December 31, 2021 consisted of a non-performing loan to a student housing holding company which was secured by commercial real estate.

At December 31, 2020, the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date.

At December 31, 2021, the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged-off to date.

The second largest impaired loan relationship at December 31, 2021 consisted of one performing loan to a student housing holding company, which was classified as a TDR.

The loan was secured by commercial real estate and carried a balance of $2,929,000 as of December 31, 2020, net of $943,000 that had been charged off to date.

The third largest impaired loan relationship at December 31, 2020 consisted of a substandard performing loan to a developer of a residential sub-division in the amount of $1,326,000, which was secured by commercial real estate and classified as a TDR.

The loan was secured by commercial real estate and carried a balance of $2,864,000 as of December 31, 2021, net of $943,000 that had been charged off to date, compared to December 31, 2020 when the loan carried a balance of $2,929,000, net of $943,000 that had been charged-off to date.

The third largest impaired loan relationship at December 31, 2021 consisted of five non-performing loans to a plastic processing company focused on non-post-consumer recycling.

Three loans were classified in the Commercial and Industrial portfolio and modified as TDRs and two loans were secured by commercial real estate.

The loans carried an aggregate balance of $1,176,000 as of December 31, 2021, compared to December 31, 2020 when the loans carried an aggregate balance of $1,262,000.

The Corporation estimates impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell.

For collateral dependent loans, the estimated valuation adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another.

For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another.

Of the $13,673,000 in impaired loans at December 31, 2021, none were located outside the Corporation’s primary market area.

The outstanding recorded investment of loans categorized as TDRs as of December 31, 2021 and December 31, 2020 was $8,020,000 and $9,563,000, respectively.

The increase in TDRs at December 31, 2020 as compared to December 31, 2019 is mainly attributable to eight loans that were modified as TDRs during the year ended December 31, 2020, net against payments, payoffs, and charge-offs on existing TDRs that were completed during the year ended December 31, 2020.

Of the thirty-four restructured loans at December 31, 2020, eight loans were classified in the Commercial and Industrial portfolio, twenty-five loans were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio.

Troubled debt restructurings at December 31, 2020 consisted of thirteen term modifications beyond the original stated term, three interest rate modifications, and seventeen payment modifications.

The decrease in TDRs at December 31, 2021 as compared to December 31, 2020 is mainly attributable to the payoff of a Commercial Real Estate TDR to a real estate holding company which was completed during the third quarter of 2021 in the amount of $1,010,000, as well as regular principal payments on existing TDRs during the year ended December 31, 2021.

Of the thirty-three restructured loans at December 31, 2021, six loans were classified in the Commercial and Industrial portfolio, twenty-six loans were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio.

TDRs at December 31, 2021 consisted of thirteen term modifications beyond the original stated term, three interest rate modifications, and sixteen payment modifications.

At December 31, 2021, there was also one troubled debt restructuring that experienced all three types of modification—payment, rate, and term.

TDRs are separately evaluated for impairment disclosures, and if necessary, a specific allocation is established.

As of December 31, 2020, there were no specific allocations attributable to the TDRs, compared to December 31, 2019 when there were $1,000 in specific allocations attributable to the TDRs.

TDRs are separately evaluated for impairment

disclosures, and if necessary, a specific allocation is established.

As of December 31, 2021 and 2020, there were no specific allocations attributable to the TDRs.

There were no unfunded commitments on TDRs at December 31, 2021 and 2020.

At December 31, 2020, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $745,000, seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $984,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $18,000 were not in compliance with the terms of their restructure, compared to December 31, 2019 when six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $464,000 were not in compliance with the terms of their restructure.

Two Commercial Real Estate loans totaling $57,000 that were modified as TDRs within the twelve months preceding December 31, 2020 experienced payment defaults during the year ended December 31, 2020.

No loans were modified as TDRs within the twelve months preceding December 31, 2019.

At December 31, 2021, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $708,000, ten Commercial Real Estate loans classified as TDRs with a combined recorded investment of $590,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $14,000 were not in compliance with the terms of their restructure, compared to December 31, 2020 when three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $745,000, seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $984,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $18,000 were not in compliance with the terms of their restructure.

Three Commercial Real Estate loans totaling $285,000 that were modified as TDRs within the twelve months preceding December 31, 2021 experienced payment defaults during the year ended December 31, 2021.

Of the loans that were modified as TDRs during the twelve months preceding December 31, 2020, two Commercial Real Estate loans totaling $57,000 experienced payment defaults during the year ended December 31, 2020.

The Corporation’s non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end, unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Corporation.

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They may require additions to allowances based upon their judgments about information available to them at the time of examination.

The economic climate is unclear at this time.

The economic climate is in flux at this time.

The COVID-19 pandemic has caused much upheaval and uncertainty in the national and state economy.

Experts at all levels are uncertain as to the intermediate or long term affects that may arise.

The Corporation may experience difficulties collecting monthly payments on time from its borrowers, property values may decline, and certain types of loans may need to be modified, which could cause a rise in the level of impaired loans, non-performing assets, charge-offs, and delinquencies.

Experts at all levels are attempting to calculate the intermediate or long term affects that may arise.

The Corporation may experience difficulties collecting payments on time from its borrowers, and certain types of loans may need to be modified, which could cause a rise in the level of impaired loans, non-performing assets, charge-offs, and delinquencies.

Should such metrics increase, additions to the balance of the Corporation’s allowance for loan losses could be required.

The extent of the impact of the COVID-19 pandemic on the Corporation’s operational and financial performance will depend on certain developments including the duration and spread of the outbreak.

The extent of the impact of the COVID-19 pandemic on the Corporation’s operational and financial performance will depend on certain developments including inflationary pressures, the labor force, supply bottlenecks, the government’s ability to respond to foreign and domestic issues, and the effectiveness in controlling the spread of the outbreak, etc.

and the after-effects of these factors.

These factors may not immediately impact the Corporation’s operational and financial performance, as the effects of these factors may lag into the future.

The Corporation is also susceptible to the impact of economic and fiscal policy factors that may evolve in the post-pandemic environment.

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

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The increase in deposits in 2021 can be attributed to increases in non-interest bearing, interest bearing and savings deposits.

The increase in deposits was the result of many different factors including the deposit of stimulus funds, PPP loan proceeds, an $83,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during 2020.

The increase in deposits was the result of many different factors including the deposit of stimulus funds, PPP loan proceeds, a $73,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during 2021.

The following schedule reflects the remaining maturities of time deposits and other time open deposits of $100,000 or more at December 31, 2021.

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The decrease in long-term borrowings in 2021 was the result of the maturity of two individual term notes with FHLB.

Short-term debt decreased from $54,663,000 in 2019 to $19,494,000 as of December 31, 2020 as a result of increased deposit balances.

Short-term debt increased from $19,494,000 in 2020 to $27,377,000 as of December 31, 2021 as a result of increased balances of repurchase agreements.

Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, Federal Discount Window and short-term borrowings from FHLB.

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The increase in equity capital in 2021 was due to the retention of $8,071,000 in earnings and the issuance of new shares through the Corporation’s Dividend Reinvestment Program (“DRIP”) amounting to $1,524,000.

Accumulated other comprehensive income increased $8,649,000 in 2020 as a result of market fluctuations in the investment portfolio.

Accumulated other comprehensive income decreased $5,282,000 in 2021 as a result of market fluctuations in the investment portfolio.

The Corporation had 231,612 shares of common stock as of December 31, 2021 and December 31, 2020, at a cost of $5,709,000, as treasury stock, authorized and issued but not outstanding.

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This ratio was 9.93% for 2021 and 8.61% for 2020.

Refer to Performance Ratios on page 24 — Selected Financial Data for a more expanded listing of the ROE.

Adequate capitalization of banks and bank holding companies is required and monitored by regulatory authorities.

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Total risk-based capital ratio

The increase in the Bank’s capital ratios was mainly due to $22,500,000 contributed by the Corporation from proceeds of a $25,000,000 subordinated debt issuance.

In 2020, there was an increase in the Bank’s capital ratios mainly due to $22,500,000 contributed by the Corporation from proceeds of a $25,000,000 subordinated debt issuance.

The subordinated debt is treated as tier 1 capital at the Bank level and tier 2 capital at the Corporation level for regulatory capital purposes.

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Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital buffer

requirement was phased in over three years beginning in 2016.

The capital buffer requirement effectively raises the minimum required common equity tier 1 capital ratio to 7.0%, the tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019.

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

The capital buffer requirement effectively raises the

minimum required common equity tier 1 capital ratio to 7.0%, the tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019.

As of December 31, 2021, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

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● Growth in the core deposit base;

● Proceeds from sales or maturities of investment securities;

● Payments received on loans and mortgage-backed securities;

● Proceeds from sales or maturities of securities;

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

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

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● Brokered CDs.

At December 31, 2020, the Corporation had $402,240,000 in available borrowing capacity at FHLB (which takes into account FHLB long-term notes and FHLB short-term borrowings);

At December 31, 2021, the Corporation had $433,394,000 in available borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes, FHLB short-term borrowings and irrevocable standby letters of credit issued by FHLB);

the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $3,162,000.

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Securities sold under agreements to repurchase were $27,377,000 at December 31, 2021.

Asset liquidity is provided by investment securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks.

Asset liquidity is provided by securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks.

The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities.

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

Net cash flows used in operating activities were $1,957,000 as of December 31, 2020, compared to net cash flows provided by operating activities of $12,539,000 as of December 31, 2019.

Net cash flows provided by operating activities were $15,255,000 as of December 31, 2021, compared to cash used in operating activities of $1,957,000 as of December 31, 2020.

Net income amounted to $14,688,000 for the year ended December 31, 2021 and $11,837,000 for the year ended December 31, 2020.

During the years ended December 31, 2020 and 2019, net premium amortization on investment securities amounted to $2,003,000 and $2,624,000, respectively.

During the years ended December 31, 2021 and 2020, net premium amortization on securities amounted to $2,930,000 and $2,003,000, respectively.

Gains on sales of mortgage loans were $980,000 as of December 31, 2021, compared to $604,000 as of December 31, 2020.

Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $1,404,000 and $15,115,000 for the years ended December 31, 2021 and 2020, respectively.

Net securities losses were $58,000 for the year ended December 31, 2020, compared to net securities gains of $911,000 for the year ended December 31, 2019.

Accrued interest receivable increased by $1,139,000 during the year ended December 31, 2020 and decreased by $636,000 during the year ended December 31, 2019.

Other assets decreased by $550,000 during the year ended December 31, 2020 and increased by $916,000 during the year ended December 31, 2019.

Other liabilities decreased by $867,000 during the year ended December 31, 2020, compared to an increase of $1,667,000 during the year ended December 31, 2019.

Investing activities used cash of $135,264,000 during the year ended December 31, 2020 and provided cash of $11,986,000 during the year ended December 31, 2019.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions net against purchases) used cash of $79,609,000 during the year ended December 31, 2020 and provided cash of $45,660,000 during the year ended December 31, 2019.

Net securities gains were $323,000 for the year ended December 31, 2021, compared to net securities losses of $58,000 for the year ended December 31, 2020.

Accrued interest receivable decreased by $183,000 during the year ended December 31, 2021 and increased by $1,139,000 during the year ended December 31, 2020.

Other assets increased by $1,554,000 during the year ended December 31, 2021 and decreased by $550,000 during the year ended December 31, 2020.

Other liabilities increased by $305,000 during the year ended December 31, 2021 and decreased by $867,000 during the year ended December 31, 2020.

Investing activities used cash of $111,345,000 and $135,264,000 during the years ended December 31, 2021 and 2020, respectively.

Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $80,814,000 during the year ended December 31, 2021, compared to $79,609,000 during the year ended December 31, 2020.

Net cash used to originate loans amounted to $29,960,000 and $57,415,000 during the years ended December 31, 2021 and 2020, respectively.

Financing activities provided cash of $150,677,000 during the year ended December 31, 2020 and used cash of $24,751,000 during the year ended December 31, 2019.

Deposits increased by $175,860,000 and $90,075,000 during the years ended December 31, 2020 and 2019, respectively.

Short-term borrowings decreased by $35,169,000 and $119,782,000 during the years ended December 31, 2020 and 2019, respectively.

There were no proceeds from long-term borrowings during the year ended December 31, 2020, compared to proceeds from long-term borrowings of $30,000,000 for the year ended December 31, 2019.

Repayment of long-term borrowings amounted to $10,000,000 for the year ended December 31, 2020 and $20,000,000 for the year ended December 31, 2019.

Proceeds from issuance of subordinated debentures amounted to $25,000,000 for the year ended December 31, 2020, compared to the year ended December 31, 2019 when there were no issuances of subordinated debentures.

Dividends paid amounted to $6,308,000 and $6,247,000 during the years ended December 31, 2020 and 2019, respectively.

Financing activities provided cash of $133,248,000 and $150,677,000 during the years ended December 31, 2021 and 2020, respectively.

Deposits increased by $140,481,000 during the year ended December 31, 2021 and increased by $175,860,000 during the year ended December 31, 2020.

Short-term borrowings increased by $7,883,000 during the year ended December 31, 2021 and decreased by $35,169,000 during the year ended December 31, 2020.

Repayment of long-term borrowings amounted to $10,000,000 for both the years ended December 31, 2021 and 2020, respectively.

Dividends paid amounted to $6,617,000 for the year ended December 31, 2021, compared to $6,308,000 for the year ended December 31, 2020.

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

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Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way.

Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly exploring new options, such as the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).

Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly exploring new options.

Table 16 represents scheduled maturities of the Corporation’s contractual obligations by time remaining until maturity as of December 31, 2021.

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Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.

Please refer to Note 15 — Financial Instruments with Off-Balance

Sheet Risk and Concentrations of Credit Risk for a discussion of the nature, business purpose, and importance of the Corporation’s off-balance sheet arrangements.

Please refer to Note 14 — Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk for a discussion of the nature, business purpose, and importance of the Corporation’s off-balance sheet arrangements.

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices.

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

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

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

The Corporation does not own any trading assets.

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b) changes in market interest rates do not affect all assets and liabilities to the same extent or at the same time, and c) interest rate sensitivity gaps reflect the Corporation’s position on a single day (December 31, 2021 in the case of the following schedule) while the Corporation continually adjusts its interest sensitivity throughout the year.

The Corporation’s cumulative gap at one year indicates the Corporation is asset sensitive at December 31, 2020.

The Corporation’s cumulative gap at one year indicates the Corporation is liability sensitive at December 31, 2021.

Table 17 — Interest Rate Sensitivity Analysis

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Net income is also subject to changes in the shape of the yield curve.

For example, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and increased liability rates, while a steepening would result in increased earnings as earning asset yields widen.

Earnings simulation modeling is the primary mechanism used in assessing the impact of changes in interest rates on net interest income.

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

At December 31, 2020, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with a decrease of 46.58% and 117.55%, respectively.

Additionally, net present value is projected to increase 26.71%, 40.95%, and 46.03% in the 100, 200 and 300 basis point immediate increase scenarios, respectively.

At December 31, 2021, net present value is projected to increase 12.89%, 16.27%, and 13.25% in the 100, 200 and 300 basis point immediate increase scenarios, respectively.

Additionally, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with a decrease of 29.25% and 84.75%, respectively.

All scenarios presented are within the Corporation’s policy limits, aside from the 100 basis point

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Impairment testing is performed using either a qualitative or quantitative approach.

The Corporation has selected September 30 as the date to perform the annual goodwill impairment test.

The Corporation has selected December 31 as the date to perform the annual goodwill impairment test.

Additionally, a goodwill impairment evaluation is performed on an interim basis when events or circumstances indicate impairment potentially exists.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis