What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-15 compared with 2022-03-14 · 168 added, 160 removed, 628 unchanged (34% of the section changed)

4 unchanged sentences

Year Ended December 31, 2022 Versus Year Ended December 31, 2021

Net income increased to $14,688,000 for the year ended December 31, 2021, as compared to $11,837,000 for the prior year, an increase of 24.1%.

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 2021 and 2020 were $1.12 and $1.08, respectively, representing a 3.7% increase.

Net income decreased to $14,024,000 for the year ended December 31, 2022, as compared to $14,688,000 for the prior year, a decrease of 4.5%.

Earnings per share, both basic and diluted, for 2022 was $2.35 as compared to $2.49 in 2021, a decrease of 5.6%.

Dividends per share for 2022 and 2021 were $1.12.

The Corporation’s return on average assets was 1.07% in 2022 and 1.15% in 2021.

1 unchanged sentence

Total interest income in 2022 amounted to $46,413,000, an increase of $4,365,000 or 10.4% from 2021.

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.

The increase in interest income is due to increased interest rates, growth in commercial real estate loans, and increased interest and dividend income earned on securities, offset by a $1,224,000 decrease in PPP loan fees due to the discontinuation of the SBA program.

Total interest expense of $8,913,000 increased $3,765,000 or 73.1% from 2021.

The majority of this increase is related to an increase in interest paid to depositors resulting from increased interest rates and an increase in interest paid on short-term borrowings.

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

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Net interest income

Provision for loan losses

Net interest income after provision for loan losses

(Credit) provision for loan losses

Net interest income after (credit) provision for loan losses

Non-interest income

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Net interest margins are presented on a tax-equivalent basis.

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 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 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.

The rate paid on savings, NOW, money market, and interest checking accounts decreased 0.15% from 0.38% to 0.23% and the average rate paid on time deposits decreased 0.63% from 1.56% to 0.93%.

In 2022, the yield on earning assets increased by 0.26% and the rate paid on interest bearing liabilities increased by 0.38%.

Yields increased for a majority of interest earning assets and interest bearing liabilities during 2022, mainly as a result of the current high interest rate environment.

The yield on loans decreased from 4.49% in 2021 to 4.41% in 2022 mainly due to fewer loan fees earned due to the discontinuation of the SBA PPP program.

The securities portfolio yield increased to 2.99% in 2022 as compared to 2.61% in 2021.

The increase was mainly the result of the elevated rate environment impacting variable rate securities.

The average rate paid on short-term borrowings increased 2.48% from 0.34% in 2021 to 2.82% in 2022 due to higher interest rates paid on a significantly higher overnight borrowing balance.

The rate paid on savings, NOW, money market, and interest checking accounts increased 0.41% from 0.23% to 0.64% and the average rate paid on time deposits decreased 0.18% from 0.93% to 0.75%.

Interest income exempt from federal tax was $3,771,000 in 2022 and $3,743,000 in 2021.

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

Interest income exempt from federal tax increased due to the origination of tax-exempt loans.

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

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.

The decrease in net interest margin at December 31, 2022 compared to December 31, 2021 was primarily due to decreased SBA PPP loan fees and the effect on the yields on total loans and increased yields on deposits and borrowings in 2022, as compared to 2021.

Fully tax equivalent net interest income increased by $569,000 or 1.5% to $39,369,000 at December 31, 2022 compared to $38,800,000 at December 31, 2021.

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.

During 2022, the Federal Reserve increased the federal-funds rate by 4.25%, resulting in a target range of 4.25% - 4.50%.

The Corporation could experience a decrease in net interest income if market rates remain static or continue to increase, 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 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.

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-up environment.

The Corporation will continue to evaluate the potential impact of short-term rate fluctuations in 2023, as well as the slope and position of the yield curve.

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(ii) changes in rate (changes in average rate multiplied by prior average volume);

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

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

In 2022, the increase in net interest income on a fully tax equivalent basis of $569,000 resulted from an increase in volume of $3,137,000 and a decrease of $2,568,000 due to changes in rate.

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Net Interest Income

The change in interest due to both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the absolute value of the change in each.

The change in interest due to both volume and rate has been allocated to change due to volume and change due to rate in proportion to the absolute value of the change in each.

Balances on non-accrual loans are included for computational purposes.

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PROVISION FOR LOAN LOSSES

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 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.

For the year ended December 31, 2022, the provision for loan losses resulted in a credit balance of $264,000 as compared to $860,000 expense for the year ended December 31, 2021.

The decrease in the provision for loan losses in 2022 as compared to 2021 resulted from excess balances exceeding the required allowance for loan losses that were returned to the provision, along with 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, 2022 is also reflective of management’s assessment of the continued risk associated with the uncertainty surrounding geopolitical and economic concerns.

Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $142,000 and $113,000 for the years ended December 31, 2022 and 2021, respectively.

1 unchanged sentence

Gross charge-offs amounted to $206,000 at December 31, 2022, as compared to $158,000 at December 31, 2021.

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.

The increased level of charge-offs for the year ended December 31, 2022 was mainly due to a charge-off in the amount of $148,000 that was completed during the third quarter of 2022 on a commercial and industrial loan to a residential home builder.

The business has ceased operations as a result of financial difficulties;

however, this is not suggestive of a regional industry issue.

This charge-off contributed to the increased balance of net charge-offs in 2022 over 2021 but was 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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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 2021 was due to more mortgage loans being sold in 2021 as compared to 2020.

Non-interest income through December 31, 2022 was $5,331,000, a decrease of 27.2%, or $1,992,000, from 2021.

The decrease was due to decreases in net securities (losses) gains and decreases in net (losses) gains on sales of mortgage loans in 2022.

During 2022, net securities (losses) gains decreased $1,169,000 to a net loss of $846,000.

The decrease was due to the Corporation recognizing $726,000 in net losses on the sales of debt and equity securities in 2022.

The Corporation also recognized $120,000 in net losses on held equity securities in 2022 due to market valuation fluctuations, as compared to recognizing $319,000 in net gains on held equity securities in 2021.

Gains on sales of mortgage loans amounted to a net loss of $7,000 in 2022 as compared to providing income of $980,000 in 2021.

The decrease in net (losses) gains on sales of mortgage loans in 2022 was due to a low number of individual loans sold in 2022 along with many of the loans sold in 2022 being sold at a loss.

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

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

1 unchanged sentence

Service charges and fees increased by $279,000 or 14.6% in 2022 as compared to 2021.

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.

The increase was due to increased overdraft fees on DDA accounts in 2022 as a result of more accounts in overdraft status.

ATM fees and debit card income decreased by $37,000 or 1.7% in 2022 as compared to 2021 due to decreased ATM surcharge fees as the result of decreased transaction volume in 2022.

Other income, consisting primarily of safe deposit box rentals, income from the sale of retail non-deposit investment products, and miscellaneous fees, decreased $44,000, or 13.9% in 2022 as compared to 2021 as the Corporation recognized less annuity income from the sale of retail non-deposit investments in 2022.

Table 5 — Non-Interest Income

5 unchanged sentences

ATM fees and debit card income

Gains on sales of mortgage loans

Net securities gains (losses)

Net (losses) gains on sales of mortgage loans

Net securities (losses) gains

NON-INTEREST EXPENSE

3 unchanged sentences

Salaries and employee benefits increased $406,000, or 2.9% in 2022.

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

The increase in 2022 was due to normal merit increases and new hires, along with an increase in medical insurance costs in 2022.

The number of full-time equivalent employees was 201 as of December 31, 2022 and 198 as of December 31, 2021.

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 occupancy expense increased $51,000, or 2.7% in 2022 as compared to 2021.

Net furniture and equipment and computer expense increased $297,000, or 16.6% in 2022 compared to 2021.

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.

The increase in 2022 was due to the implementation of several new software programs in 2022 to increase data security and efficiency.

Professional services increased $220,000, or 21.0% in 2022 as compared to 2021.

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.

The higher expense in 2022 was mainly due to an increase in consulting expense as the result of strategic planning and consulting services associated with implementing new internal software systems contracts along with normal increases in annual audit expenses.

Pennsylvania shares tax expense increased $36,000, or 3.0% in 2022 as compared to 2021.

The increase was the result of an increase in total equity.

FDIC insurance expense increased $67,000, or 15.8% in 2022 as compared to 2021.

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 $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 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.

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).

ATM and debit card fees expense decreased $192,000, or 17.6% in 2022 as compared to 2021 due to negotiations of new internal systems contracts resulting in some lower fees and vendor relationship credits that were applied to the expenses related to those systems.

Data processing fees decreased $285,000, or 23.8% in 2022 as compared to 2021.

This decrease was also the result of the negotiations of new systems contracts.

Advertising expense decreased $18,000, or 4.4% in 2022 as compared to 2021.

Other non-interest expense decreased $156,000, or 4.9% in 2022 as compared to 2021.

This decrease was due to a reduction in the provision for unfunded loan commitments along with less amortization expense related to a limited partnership that was fully amortized at the beginning of 2022.

The overall level of non-interest expense remains low, relative to the Corporation’s peers (community banks from $1 billion to $3 billion in assets).

The Corporation’s total non-interest expense was 2.04% of average assets in 2022 and 2.06% in 2021, which places the Corporation among the leaders in its peer financial institution categories in controlling non-interest expense.

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The effective income tax rate was 14.1% in 2022 and 13.6% in 2021.

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.

The increase in the effective tax rate for 2022 was due to slightly lower tax-exempt income and fewer tax credits recognized.

The Corporation recognized $249,000 and $405,000 of tax credits from low-income housing partnerships for the years ended December 31, 2022 and 2021, respectively.

FINANCIAL CONDITION

Total assets increased to $1,329,194,000 at year-end 2022, an increase of 0.7% from year-end 2021.

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

Total debt securities available-for-sale decreased $64,472,000 or 14.7% to $373,444,000 as of December 31, 2022.

Net loans increased in 2022 from $744,161,000 to $850,195,000, a 14.2% increase.

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Investments in low-income housing partnerships were $3,763,000 at year-end 2022, an increase of 145.9% from year-end 2021.

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

investment of $435,000.

The Corporation became a limited partner in a new real estate venture during 2021 with an initial investment of $435,000.

In 2022, capital contributions in the combined amount of $2,458,000 were made in relation to the new real estate venture.

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 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.

As of December 31, 2022, total deposits amounted to $993,499,000, a decrease of 7.8% from 2021.

The decrease is due to decreases in both non-interest and interest bearing deposits, primarily due to a $70,297,000 decrease in municipal deposits.

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 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.

Short and long-term borrowings increased in 2022 by $116,041,000, mainly due to an increase in net loans and a decrease in total deposits causing an increase in short-term borrowings.

Total stockholders’ equity decreased to $120,386,000 at December 31, 2022, a decrease of $28,169,000, primarily due to a decrease in the market value of the securities portfolio resulting in an accumulated other comprehensive loss position.

SEGMENT REPORTING

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No securities were established in a trading account.

Debt securities available-for-sale increased $71,205,000 or 19.4% to $437,916,000 in 2021.

At December 31, 2021, the net unrealized gain, net of the tax effect, on these securities was $7,588,000 and was included in stockholders’ equity as accumulated other comprehensive income.

Debt securities available-for-sale decreased $64,472,000 or 14.7% to $373,444,000 in 2022.

At December 31, 2022, the net unrealized loss, net of the tax effect, on these securities was $29,558,000 and was included in stockholders’ equity as accumulated other comprehensive (loss) income.

Table 7 provides data on the fair value of the Corporation’s securities portfolio on the dates indicated.

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Amortized cost

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

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

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

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%.

At December 31, 2022 and 2021, the Corporation had $1,699,000 and $1,962,000, respectively, in equity securities recorded at fair value, a decrease of $263,000 or 13.4%.

Total loans increased to $858,469,000 as of December 31, 2022, compared to a balance of $752,841,000 as of December 31, 2021.

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Steady demand for borrowing by businesses accounted for the 14.0% increase in the loan portfolio from December 31, 2021 to December 31, 2022.

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.

Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased $4,473,000 or 5.4% from $82,526,000 at December 31, 2021 to $86,999,000 at December 31, 2022.

The increase in the Commercial and Industrial portfolio during the year ended December 31, 2022 was attributable to the portion of the Commercial and Industrial portfolio excluding SBA PPP loans which increased $9,254,000 during the year ended December 31, 2022, mainly resulting from $17,072,000 in new loan originations for the year ended December 31, 2022 and an increase in utilization of existing Commercial and Industrial lines of credit of $5,067,000, offset by loan payoffs of $6,238,000 and regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio during the year ended December 31, 2022.

This was offset by a reduction of $4,781,000 in the portion of the Commercial and Industrial portfolio attributable to SBA PPP loans, the balance of which decreased from $4,894,000 at December 31, 2021 to $113,000 at December 31, 2022, as a result of loan forgiveness.

The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $89,895,000 or 17.2% from $521,654,000 at December 31, 2021 to $611,549,000 at December 31, 2022.

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.

The increase is mainly attributable to new loan originations of $162,459,000 for the year ended December 31, 2022, offset by loan payoffs of $58,616,000 and a decrease in utilization of existing Commercial Real Estate lines of credit of $11,778,000, along with regular principal payments and other typical amortization in the Commercial Real Estate portfolio during the year ended December 31, 2022.

Residential Real Estate loans increased $11,123,000 or 7.8% from $143,383,000 at December 31, 2021 to $154,506,000 at December 31, 2022.

The increase was mainly the result of $34,329,000 in new loan originations and an increase in utilization of existing Residential Real Estate (Home Equity) lines of credit of $2,644,000, offset by net loans sold of $3,410,000, loan payoffs of $16,121,000 (of which $4,734,000 was refinanced with the Bank during the year ended December 31, 2022 with new refinanced loan balances included in the new loan origination total), and regular principal payments and other typical amortization in the Residential Real Estate portfolio during the year ended December 31, 2022.

Net loans sold for the year ended December 31, 2022 consisted of total loans sold during the year ended December 31, 2022 of $5,685,000, offset with loans opened and sold in the same quarter during each quarter of 2022 which amounted to $2,275,000.

The Corporation continues to originate and sell certain long-term fixed rate residential mortgage loans which conform to secondary market requirements.

The Corporation continues to originate and sell certain long-term fixed rate residential mortgage loans, which conform to secondary market requirements, when the market pricing is favorable.

The Corporation derives ongoing income from the servicing of mortgages sold in the secondary market.

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See Note 3 — Loans and Allowance for Loan Losses for risk grading tables.

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 $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, 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.

Overall, non-pass grades decreased to $20,935,000 at December 31, 2022, as compared to $24,737,000 at December 31, 2021.

Commercial and Industrial non-pass grades decreased to $725,000 as of December 31, 2022,

compared to $796,000 as of December 31, 2021.

Commercial Real Estate non-pass grades decreased to $19,415,000 as of December 31, 2022 as compared to $22,346,000 as of December 31, 2021.

Residential Real Estate and Consumer non-pass grades decreased to $795,000 as of December 31, 2022, as compared to $1,595,000 as of December 31, 2021.

The decrease in Commercial Real Estate non-pass grades from December 31, 2021 to December 31, 2022 is attributable to various fluctuations that transpired in the Commercial Real Estate non-pass grade portfolio throughout 2022.

A payoff was completed during the second quarter of 2022 on a Substandard non-accrual loan to a contractor specializing in modular construction that carried a balance of $1,000,000 at December 31, 2021.

Additionally, four loans to the owners/operators of an indoor family entertainment complex that were classified as Substandard and carried an aggregate balance of $753,000 at December 31, 2021 and one loan to the owner/operator of a multi-unit apartment building that was classified as Special Mention and carried a balance of $729,000 as of December 31, 2021 were upgraded to pass-grade status during the year ended December 31, 2022.

There were also $750,000 in principal payments/paydowns made during the fourth quarter of 2022 on a non-performing loan to a student housing holding company that was classified as Substandard at both December 31, 2021 and December 31, 2022.

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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However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future.

In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors related to the local/regional economy were increased by two basis points across all loan segments during the first quarter of 2020, and increased by an additional basis point across all loan segments during the second quarter of 2020.

The qualitative factor relating to the impact of external factors/conditions for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of 2020.

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.

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.

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

The uncertain economic climate has played a large role in the qualitative factor adjustments that have been implemented throughout 2021 and 2022.

Qualitative factors remained unchanged during the first quarter of 2021, as the economy and unemployment levels showed marked improvement over the prior quarter.

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 Company’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 an artificial increase in market values in the real estate sector as individuals’ willingness to pay above-average market prices has sparked uncertainty surrounding collateral values in the real estate market.

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.

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 increased inflation rates, 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 would be.

The qualitative factors related to collateral values were also increased by one basis point across all loan segments during the fourth quarter of 2021, as collateral values continued to artificially increase as individuals were willing to pay above-average market prices in all

During the first quarter of 2022, the qualitative factors related to the local/regional economy were increased by one basis point across all loan segments due to ongoing economic uncertainty resulting from supply chain disruptions caused by the COVID-19 pandemic, conflicts in foreign countries causing inflationary pressures due to reductions/disruptions in the production of the commodities controlled by these countries, increased interest rates, and the overall inflation rate continuing to rise.

During the second quarter of 2022, the qualitative factors remained unchanged.

During the third quarter of 2022, the qualitative factors related to the management and review systems components were each decreased by two basis points across all loan segments due to consistency and experience within the Company’s management and satisfactory exam results related to the Company’s loan review process.

During the fourth quarter of 2022, the qualitative factor related to collateral values was decreased by one basis point in the Commercial and Industrial, Tax Free, and Consumer portfolio segments and decreased by two basis points in the Commercial Real Estate and Residential Real Estate portfolio segments, as the artificial increase in market rates related to equipment, commodities, and real estate have begun to subside.

The qualitative factor related to delinquency trends was also decreased by one basis point in the Commercial and Industrial, Commercial Real Estate, and Residential Real Estate portfolio segments, as the Corporation’s levels of past due loans, non-accrual loans, and charge-offs have been lower in these portfolios in the last two years than in previous years.

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 uncertainty related to the lagging economic effects of 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.

In 2021, net charge-offs as a percentage of average loans were 0.02% as compared to 0.04% in 2020.

In 2022 and 2021, net charge-offs as a percentage of average loans was 0.02%, respectively.

Net charge-offs amounted to $142,000 in 2022 and $113,000 in 2021.

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.

The net effect of the provision, charge-offs and recoveries resulted in the year-end allowance for loan losses of $8,680,000 of which 7.8% was attributed to the Commercial and Industrial component, 62.3% attributed to the Commercial Real Estate component, 17.7% attributed to the Residential Real Estate component, 1.0% attributed to the Consumer component, and 11.2% being the unallocated component (refer to the activity in Note 3 — Loans and Allowance for Loan Losses on page 73.) The Corporation determined that the provision for loan losses made during 2021 was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of December 31, 2021.

Net charge-offs were higher in 2022 than in 2021, mainly due to a charge-off in the amount of $148,000 that was completed during the third quarter of 2022 on a commercial and industrial loan to a residential construction company.

The business has ceased operations as a result of financial difficulties.

For the year ended December 31, 2022, the provision for loan losses resulted in a credit balance of $264,000, as compared to $860,000 expense for the year ended December 31, 2021.

The net effect of the credit balance of the provision and net charge-offs resulted in the year-end allowance for loan losses of $8,274,000 of which 8.5% was attributed to the Commercial and Industrial component, 71.7% attributed to the Commercial Real Estate component, 18.8% attributed to the Residential Real Estate component, 1.0% attributed to the Consumer component, and 0% being the unallocated component (refer to the activity in Note 3 — Loans and Allowance for Loan Losses on page 74.) The Corporation determined that the provision for loan losses made during 2022 was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of December 31, 2022.

Table 11 — Analysis of Allowance for Loan Losses

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Years Ended December 31,

Balance at beginning of period

As of and for the nine months ended:

Beginning balance

Commercial and Industrial

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Net charge-offs

Additions charged to operations

Additions (credited) charged to operations

Balance at end of period

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A detailed quarterly analysis to determine the adequacy of the Corporation’s allowance for loan losses is reviewed by the Board of Directors.

With the Bank’s manageable level of net charge-offs and the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.18% in 2021 and 1.16% in 2020.

With the Bank’s manageable level of net charge-offs and the additions to the reserve from the credit balance of the provision, the allowance for loan losses as a percentage of average loans amounted to 1.03% in 2022 and 1.18% in 2021.

Table 12 sets forth the allocation of the Bank’s allowance for loan losses by loan category and the percentage of loans in each category to the total allowance for loan losses at the dates indicated.

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

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession that the Corporation would not otherwise consider.

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession that the Corporation would not otherwise consider.

Modifications to loans classified as TDRs generally include reductions in contractual interest rates, principal deferments and extensions of maturity dates at a stated interest rate lower than the current market for a new loan with similar risk characteristics.

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Total non-performing assets amounted to $5,359,000 as of December 31, 2022, as compared to $7,066,000 as of December 31, 2021.

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.

The economy continues to be unstable.

Inflation has receded but remains at a very high level.

The war between Ukraine and Russia is continuing to cause worldwide turmoil.

The unemployment rate remains at a low level, but the labor force participation rate also remains at a low level.

The need for workers has driven wages up in most sectors.

Inflation is causing extreme concerns in all areas of the economy.

The war abroad and its effects on various commodities continues to have a negative impact on inflation.

Values of new and used homes and automobiles have leveled off.

The Federal Reserve has raised interest rates to not recently seen levels with a commitment for additional increases throughout the coming year until inflation falls back in line with its established guidelines.

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

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Non-accrual loans totaled $5,051,000 as of December 31, 2022 as compared to $7,066,000 as of December 31, 2021.

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.

There were no foreclosed assets held for resale as of December 31, 2022 or December 31, 2021.

There were three loans past-due 90 days or more and still accruing interest as of December 31, 2022 which carried an aggregate balance of $308,000, compared to December 31, 2021 when there were no loans past-due 90 days or more and still accruing interest.

The loans past-due 90 days or more and still accruing interest as of December 31, 2022 consisted of one commercial real estate loan and two residential real estate loans, all of which were well-secured and in the process of collection.

Non-performing assets to total loans was 0.62% as of December 31, 2022 compared to 0.94% at December 31, 2021.

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The allowance for loan losses to total non-performing assets was 154.39% as of December 31, 2022 as compared to 122.84% as of December 31, 2021.

Additional detail can be found in Table 13 – Non-Performing Assets and Impaired Loans and the Loans Receivable on Non-Accrual Status table in Note 3 — Loans and Allowance for Loan Losses.

Additional detail can be found in Table 13 – Non-Performing Assets and Impaired

Loans and the Loans Receivable on Non-Accrual Status table in Note 3 — Loans and Allowance for Loan Losses.

Asset quality is a priority and the Corporation retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation efforts.

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Impaired loans were $11,207,000 at December 31, 2022 and $13,673,000 at December 31, 2021.

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.

The largest impaired loan relationship at December 31, 2022 consisted of a performing loan to a student housing holding company, which was classified as a TDR.

The loan is secured by commercial real estate and carried a balance of $2,797,000 at December 31, 2022, net of $943,000 that had been charged-off to date, compared to December 31, 2021 when the loan carried a balance of $2,864,000, net of $943,000 that had been charged-off to date.

The second largest impaired loan relationship at December 31, 2022 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate.

At December 31, 2022, the loan carried a balance of $2,340,000, net of $1,989,000 that had been charged off to date, compared to December 31, 2021 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 $2,864,000 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, 2022 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.

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

The loans carried an aggregate balance of $1,084,000 as of December 31, 2022, compared to December 31, 2021 when the loans carried an aggregate balance of $1,176,000.

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The outstanding recorded investment of loans categorized as TDRs as of December 31, 2022 and December 31, 2021 was $7,480,000 and $8,020,000, respectively.

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.

The decrease in TDRs at December 31, 2022 as compared to December 31, 2021 is mainly attributable to regular principal payments and paydowns on existing TDRs that were completed during the year ended December 31, 2022.

Of the thirty restructured loans at December 31, 2022, four 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.

TDRs at December 31, 2022 consisted of ten term modifications beyond the original stated term, three interest rate modifications, and sixteen payment modifications.

At December 31, 2022, 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.

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

As of December 31, 2022 and 2021, there were no specific allocations attributable to the TDRs.

There were no unfunded commitments on TDRs at December 31, 2022 and 2021.

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.

At December 31, 2022, three commercial and industrial loans classified as TDRs with a combined recorded investment of $664,000, and five commercial real estate loans classified as TDRs with a combined recorded investment of $684,000 were not in compliance with the terms of their restructure, compared to December 31, 2021 when 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.

Of the loans that were modified as TDRs within the twelve months preceding December 31, 2022, no loans experienced payment defaults during the year ended December 31, 2022.

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 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 attempting to calculate the intermediate or long term affects that may arise.

The economic climate remains in a very frail state.

The war between Ukraine and Russia has exacerbated the difficulties in the national and state economy and experts at all levels are attempting to calculate the intermediate or long term affects.

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 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.

The extent of the impact of these stressors on the Corporation’s operational and financial performance will depend on certain developments including inflationary controls enacted, the labor force, supply bottlenecks, the longevity of the war, and the effectiveness in controlling the lingering effects of the COVID-19 outbreak, etc.

and the after-effects of these factors.

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The Corporation regularly reviews competing financial institutions’ interest rates, especially when establishing interest rates on certificates of deposit.

Deposits increased by $140,481,000, or 15.0% for the year ending December 31, 2021 as compared to December 31, 2020.

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, a $73,000,000 increase in highly rate sensitive deposits and other normal fluctuations in deposits during 2021.

Deposits decreased by $84,470,000, or 7.8% for the year ending December 31, 2022 as compared to December 31, 2021.

The decrease in deposits in 2022 can be attributed to decreases in non-interest bearing, interest bearing, savings and time deposits.

The decrease in deposits was mainly the result of a $70,297,000 decrease in municipal deposits and other normal fluctuations in deposits during 2022.

The following schedule reflects the remaining maturities of time deposits and other time open deposits of $100,000 or more at December 31, 2022.

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During 2022, long-term borrowings decreased from $35,000,000 to $25,000,000.

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

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.

The decrease in long-term borrowings in 2022 was the result of the maturity of one individual term note with FHLB.

Short-term debt increased from $27,377,000 in 2022 to $153,418,000 as of December 31, 2022 as a result of decreased deposit balances and growth in the loan portfolio.

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

Also, the net unrealized gains or losses on debt securities available-for-sale, net of taxes, referred to as accumulated other comprehensive income, may increase or decrease total equity capital.

The total net increase in capital was $4,313,000 in 2021 after an increase of $15,490,000 in 2020.

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 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.

Also, the net unrealized gains or losses on debt securities available-for-sale, net of taxes, referred to as accumulated other comprehensive (loss) income, may increase or decrease total equity capital.

The total net decrease in capital was $28,169,000 in 2022 after an increase of $4,313,000 in 2021.

The decrease in equity capital in 2022 was due to a decrease in accumulated other comprehensive (loss) income of $37,146,000 in 2022 as a result of market fluctuations in the securities portfolio offset by the retention of $7,334,000 in earnings and the issuance of new shares through the Corporation’s Dividend Reinvestment Program (“DRIP”) amounting to $1,643,000.

The Corporation had 231,611 and 231,612 shares of common stock as of December 31, 2022 and December 31, 2021, respectively, at a cost of $5,709,000, as treasury stock, authorized and issued but not outstanding.

Return on average equity (“ROE”) is computed by dividing net income by average stockholders’ equity.

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Total risk-based capital ratio

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.

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule.

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

The capital buffer requirement effectively raises the

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

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, 2022, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

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

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 cash flows provided by operating activities were $16,528,000 and $15,255,000 as of December 31, 2022 and December 31, 2021, respectively.

Net income amounted to $14,024,000 for the year ended December 31, 2022 and $14,688,000 for the year ended December 31, 2021.

The (credit) provision for loan losses resulted in a credit balance of $264,000 for the year ended December 31, 2022 and a provision balance of $860,000 for the year ended December 31, 2021.

During the years ended December 31, 2022 and 2021, net premium amortization on securities amounted to $3,008,000 and $2,930,000, respectively.

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

Net losses on sales of mortgage loans were $7,000 as of December 31, 2022, compared to net gains on sales of mortgage loans of $980,000 as of December 31, 2021.

Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $2,168,000 and $1,404,000 for the years ended December 31, 2022 and 2021, respectively.

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.

Net securities losses were $846,000 for the year ended December 31, 2022, compared to net securities gains of $323,000 for the year ended December 31, 2021.

Accrued interest payable increased by $312,000 during the year ended December 31, 2022 and decreased by $154,000 during the year ended December 31, 2021.

Other assets increased by $342,000 and $1,554,000 during the years ended December 31, 2022 and 2021, respectively.

Other liabilities increased by $321,000 during the year ended December 31, 2022, compared to an increase of $305,000 during the year ended December 31, 2021.

Investing activities used cash of $93,634,000 and $111,345,000 during the years ended December 31, 2022 and 2021, 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 activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) provided cash of $19,295,000 during the year ended December 31, 2022 and used cash of $80,814,000 during the year ended December 31, 2021.

Net change in restricted investment in bank stocks

used cash of $5,217,000 during the year ended December 31, 2022 and provided cash of $328,000 during the year ended December 31, 2021.

Net cash used to originate loans amounted to $103,609,000 and $29,960,000 during the years ended December 31, 2022 and 2021, respectively.

Purchase of premises and equipment used cash of $1,892,000 and $492,000 during the years ended December 31, 2022 and 2021, respectively.

Purchase of investment in real estate ventures used cash of $2,458,000 and $435,000 during the years ended December 31, 2022 and 2021, respectively.

Financing activities provided cash of $26,506,000 and $133,248,000 during the years ended December 31, 2022 and 2021, 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.

Deposits decreased by $87,470,000 during the year ended December 31, 2022 and increased by $140,481,000 during the year ended December 31, 2021.

Short-term borrowings increased by $126,041,000 during the year ended December 31, 2022 and increased by $7,883,000 during the year ended December 31, 2021.

Repayment of long-term borrowings amounted to $10,000,000 for both the years ended December 31, 2022 and 2021, respectively.

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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.

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

Table 16 represents scheduled maturities of the Corporation’s contractual obligations by time remaining until maturity as of December 31, 2022.

4 unchanged sentences

Securities sold under agreement to repurchase

Short-term borrowings

Long-term borrowings

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Earnings at risk is the change in net interest income from a base case scenario under various scenarios of rate shock increases and decreases in the interest rate earnings simulation model.

Table 18 presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates.

Table 18 presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various immediate shock increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates.

The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors.

The earnings simulation model projects net interest income would decrease 13.12%, 25.38% and 36.53% in the 100, 200 and 300 basis point increasing rate scenarios presented.

In addition, the earnings simulation model projects net interest income would decrease 2.06% and 7.72% in the 100 and 200 basis point decreasing rate scenarios presented, respectively.

All of these forecasts are within the Corporation’s one year policy guidelines.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current unprecedented low interest rate environment with federal funds trading in the 0 – 25 basis point range.

In addition, the earnings simulation model projects net interest income would increase 10.96% and 19.00% in the 100 and 200 basis point decreasing rate scenarios presented, respectively.

All of these forecasts are within the Corporation’s one year policy guidelines, aside from the 200 basis point immediate increase scenario at (25.38)% vs.

the policy limit of (20.00)% and the 300 basis point immediate increase scenario at (36.53)% vs.

the policy limit of (25.00)%.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current interest rate environment with federal funds trading in the 425 - 450 basis point range and many deposit accounts still lagging at markedly lower rates.

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

4 unchanged sentences

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, 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

immediate decrease scenario at (29.25)% vs.

a policy limit of (20)% and the 200 basis point immediate decrease scenario at (84.75)% vs.

a policy limit of (30)%.

At December 31, 2022, net present value is projected to decrease 3.99%, 10.65%, and 19.17% 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 1.60% and 13.45%, respectively.

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

The computation of the effects of hypothetical interest rate changes are based on many assumptions.

23 unchanged sentences

Net interest income

Provision for loan losses

Provision (credit) for loan losses

Non-interest income

39 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis