What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-29 compared with 2023-03-15 · 327 added, 252 removed, 544 unchanged (52% of the section changed)

8 unchanged sentences

The Corporation’s return on average assets was 0.42% in 2023 and 1.07% in 2022.

Return on average equity increased to 10.75% in 2022 from 9.93% in 2021.

Return on average equity decreased to 4.55% in 2023 from 10.75% in 2022.

Total interest income in 2023 amounted to $56,988,000, an increase of $10,575,000 or 22.8% from 2022.

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.

The increase in interest income is due to increased interest rates, growth in real estate loans secured by commercial properties and Commercial and Industrial loans, and increased interest income earned on securities, offset by a $317,000 decrease in Paycheck Protection Program loan fees due to the discontinuation of the SBA program.

Total interest expense of $27,872,000 increased $18,959,000 or 212.7% from 2022.

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.

The majority of this increase is related to increases in interest paid to depositors to retain and grow deposit relationships and increases in interest paid on short-term and long-term borrowings primarily through the Federal Home Loan Bank due to increases in volume and rate of borrowings.

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

11 unchanged sentences

Net interest income

(Credit) provision for loan losses

Net interest income after (credit) provision for loan losses

(Credit) provision for credit losses

Net interest income after (credit) provision for credit losses

Non-interest income

8 unchanged sentences

Average equity to average assets

Net interest income, as indicated below in Table 2, increased by $600,000 or 1.6% to $37,500,000 for the year ended December 31, 2022.

The Corporation’s net interest income on a fully tax equivalent basis increased by $569,000, or 1.5% to $39,369,000 in 2022 as compared to $38,800,000 in 2021.

Net interest income, as indicated below in Table 2, decreased by $8,384,000 or 22.4% to $29,116,000 for the year ended December 31, 2023.

The Corporation’s net interest income on a fully tax equivalent basis decreased by $9,979,000, or 25.3% to $29,390,000 in 2023 as compared to $39,369,000 in 2022.

Table 2 — Reconciliation of Taxable Equivalent Net Interest Income

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Tax-Exempt 1,3

Total Investment Securities

Total Securities

Restricted Investment in Bank Stocks

4 unchanged sentences

Cash and Due From Banks

Allowance for Loan Losses

Allowance for Credit Losses

Premises and Equipment

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In addition, the volume of non-performing loans affects interest income.

The amount of interest expense varies with the amount of funds needed to support earning assets, interest rates paid on deposits and borrowed funds, and finally, the level of interest free deposits.

The amount of interest expense varies with the amount of funds needed to support earning assets, interest rates paid on deposits and borrowed funds, and finally, the level of non-interest bearing deposits.

Table 3 on the preceding page provides a summary of average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and interest expense as well as average tax equivalent rates earned and paid as of year-end 2023 and 2022.

6 unchanged sentences

Yields increased for a majority of interest earning assets and interest bearing liabilities during 2023, 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 Federal Open Market Committee (FOMC) raised the fed funds target rate 11 times for a total of 525 basis points between March 2022 and July 2023, it has remained at the target rate of 5.25% to 5.5% through December 31, 2023.

The yield on loans increased from 4.41% in 2022 to 4.90% in 2023 mainly due to loans originating and repricing at higher interest rates during 2023.

The securities portfolio yield increased to 3.92% in 2023 as compared to 2.99% in 2022.

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%.

The increase was mainly the result of the elevated rate environment impacting variable rate securities and purchases of higher yielding securities in 2023.

The average rate paid on short-term borrowings increased 2.45% from 2.82% in 2022 to 5.27% in 2023 due to higher interest rates paid on a significantly higher average overnight borrowing balance.

The rate paid on savings, NOW, money market, and interest checking accounts increased 1.46% from 0.64% to 2.10% and the average rate paid on time deposits increased 2.00% from 0.75% to 2.75%.

Interest income exempt from federal tax was $1,570,000 in 2023 and $3,771,000 in 2022.

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

Interest income exempt from federal tax decreased due to the sales of tax-exempt municipal securities in 2023.

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, 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.

The decrease in net interest margin at December 31, 2023 compared to December 31, 2022 was primarily due to increased yields on deposits and borrowings in 2023, as compared to 2022.

Fully tax equivalent net interest income decreased by $9,979,000 or 25.3% to $29,390,000 at December 31, 2023 compared to $39,369,000 at December 31, 2022.

During 2023, the Federal Reserve increased the federal-funds rate by 1.00%, resulting in a target range of 5.25% - 5.50%.

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.

To negate the potential impact of a decreasing net interest margin, the Corporation will continue to focus on attracting organic loan growth and 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-up environment.

The Corporation also entered into four rate swap contracts effective September 20, 2023.

Of the four swaps, two were fair value interest rate swaps with a combined notional amount of $50,000,000, hedging fixed-rate available-for-sale debt securities, and two were cash flow interest rate swaps with a combined notional amount of $100,000,000, hedging specific short-term wholesale funding positions.

See Note 12 – Derivative Instruments and Hedging Activities on page 93 for further analysis.

The Corporation will continue to evaluate the potential impact of short-term rate fluctuations in 2024, as well as the slope and position of the yield curve.

1 unchanged sentence

Information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by prior rate);

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

(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 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.

In 2023, the decrease in net interest income on a fully tax equivalent basis of $9,979,000 resulted from a decrease in volume of $2,100,000 and a decrease of $7,879,000 due to changes in rate.

Table 4 — Rate/Volume Analysis

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Interest income on non-accrual loans is not included.

PROVISION FOR LOAN LOSSES

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.

See Allowance for Loan Losses on page 35 for further discussion.

PROVISION FOR CREDIT LOSSES

For the year ended December 31, 2023, the provision for credit losses resulted in a credit balance of $217,000, compared to a credit balance of $264,000 for the year ended December 31, 2022.

The increase in the provision for credit losses in 2023 as compared to 2022 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 credit losses for the year ended December 31, 2023 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 credit losses resulted in net charge-offs of $13,000 and $142,000 for the years ended December 31, 2023 and 2022, respectively.

See Analysis of Allowance for Credit Losses (Post-Adoption of ASU No.

2016-13) and Analysis of Allowance for Loan Losses (Pre-Adoption of ASU No.

2016-13) tables on pages 37 and 38 for further discussion.

Gross charge-offs amounted to $57,000 at December 31, 2023, as compared to $206,000 at December 31, 2022.

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.

The allowance for loan losses as a percentage of average loans outstanding was 1.03% as of December 31, 2022 and 1.18% as of December 31, 2021.

On a quarterly basis, management performs, and the Corporation’s Audit Committee and the Board of Directors review a detailed analysis of the adequacy of the allowance for loan losses.

The decreased level of charge-offs for the year ended December 31, 2023 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 ceased operations as a result of financial difficulties;

however, the circumstances were not suggestive of a regional industry issue.

This charge-off contributed to the increased balance of net charge-offs in 2022 compared to 2023 but was not indicative of a significant change in asset quality in the overall loan portfolio.

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

The allowance for credit losses as a percentage of average loans outstanding was 0.79% as of December 31, 2023 and 1.03% as of December 31, 2022.

The decrease in the allowance for credit losses as a percentage of average loans outstanding is mainly the result of a decrease of $1,349,000 in the balance of the allowance for credit losses from $8,274,000 at December 31, 2022 to $6,925,000 at December 31, 2023, mainly due to the one-time-cumulative adjustment which was made upon the adoption of the CECL model in the first quarter of 2023, decreasing the allowance for credit losses by $1,119,000.

Total average loans outstanding also increased by $66,508,000 from $807,169,000 at December 31, 2022 to $873,677,000 at December 31, 2023 which further contributed to the decrease in the allowance for credit losses as a percentage of average loans at December 31, 2023 as compared to December 31, 2022.

On a quarterly basis, management performs, and the Corporation’s Audit Committee and the Board of Directors review a detailed analysis of the adequacy of the allowance for credit losses.

This analysis includes an evaluation of credit risk concentration, delinquency trends, past loss experience, current economic conditions, composition of the loan portfolio, classified loans and other relevant factors.

The Corporation will continue to monitor its allowance for loan losses and make future adjustments to the allowance through the provision for loan losses as conditions warrant.

Although the Corporation believes that the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio, there can be no assurance that future losses will not exceed the estimated amounts or that additional provisions will not be required in the future.

The Corporation will continue to monitor its allowance for credit losses and make future adjustments to the allowance through the provision for credit losses as conditions warrant.

Although the Corporation believes that the allowance for credit losses is adequate to provide for losses inherent in the loan portfolio, there can be no assurance that future losses will not exceed the estimated amounts or that additional provisions will not be required in the future.

The Corporation is subject to periodic regulatory examination by the Pennsylvania Department of Banking and Securities and the FDIC.

As part of the examination, the regulators will assess the adequacy of the Corporation’s allowance for loan losses and may include factors not considered by the Corporation.

In the event that a regulatory examination results in a conclusion that the Corporation’s allowance for loan losses is not adequate, the Corporation may be required to increase its provision for loan losses.

As part of the examination, the regulators will assess the adequacy of the Corporation’s allowance for credit losses and may include factors not considered by the Corporation.

In the event that a regulatory examination results in a conclusion that the Corporation’s allowance for credit losses is not adequate, the Corporation may be required to increase its provision for credit losses.

NON-INTEREST INCOME

2 unchanged sentences

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, 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.

Non-interest income through December 31, 2023 was $6,156,000, an increase of 15.5%, or $825,000, from 2022.

The increase was due to less net securities losses and increased net gains (losses) on sales of mortgage loans in 2023.

During 2023, net securities losses decreased $728,000 to a net loss of $118,000.

The decrease was due to the Corporation recognizing $99,000 in net gains on the sales of debt securities in 2023 as compared to $753,000 in net losses on the sales of debt securities in 2022.

The Corporation then recognized $217,000 in net losses on held equity securities in 2023, due to market valuation fluctuations, as compared to recognizing $94,000 in net losses on held equity securities in 2022.

Gains (losses) on sales of mortgage loans amounted to a net gain of $65,000 in 2023 as compared to a net loss of $7,000 in 2022.

The increase in net gains (losses) on sales of mortgage loans in 2023 was due to more individual loans sold in 2023 along with many of the loans sold in 2022 being sold at a loss due to rapid upward movement in interest rates.

The Corporation continues to service the majority of mortgages which are sold, through maturity of the loans.

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

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

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.

ATM fees and debit card income increased by $49,000 or 2.3% in 2023 as compared to 2022 due to increased debit card interchange fees as the result of an increase in debit card transaction volume in 2023.

Income related to an increase in cash surrender value of life insurance increased by $24,000 or 4.0% mainly as a result of increased interest rates on the related policies.

Other income, consisting primarily of income from the sale of retail non-deposit investment products, safe deposit box rentals, and miscellaneous fees, decreased $16,000, or 5.9% in 2023 as compared to 2022 as the Corporation recognized less rental income from leased properties in 2023 as there was an agreement with a new tenant at one location for one year free of rent.

Table 5 — Non-Interest Income

5 unchanged sentences

ATM fees and debit card income

Net (losses) gains on sales of mortgage loans

Net securities (losses) gains

Net gains (losses) on sales of mortgage loans

Net securities losses

NON-INTEREST EXPENSE

3 unchanged sentences

Salaries and employee benefits increased $1,501,000, or 10.3% in 2023.

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

The increase in 2023 was due to increased salaries to offer more competitive wages in an effort to increase retention and support the Corporation’s growth, new hires related to the new full-service branch, and bonuses paid to all employees in January 2023.

The number of full-time equivalent employees was 215 as of December 31, 2023 and 201 as of December 31, 2022.

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

Net occupancy expense increased $183,000, or 9.5% in 2023 as compared to 2022 as the result of increased bank building and leasehold improvement costs as the result of purchasing and renovating new branch locations in 2023.

Net furniture and equipment and computer expense increased $121,000, or 5.8% in 2023 compared to 2022.

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

The increase in 2023 was mainly due to higher software costs as the Corporation upgraded internal IT systems and implemented a new accounting system in 2023.

Professional services increased $170,000, or 13.4% in 2023 as compared to 2022.

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 higher expense was the result of increases in annual audit expenses along with additional audit expenses relating to year end 2022, primarily due to newly adopted ACL methodology and securities valuation costs, and higher consulting fees associated with implementing new internal systems contracts in 2023.

Pennsylvania shares tax expense decreased $377,000, or 30.5% in 2023 as compared to 2022.

This was mainly due to the unrealized loss position of the Corporation’s debt securities portfolio at December 31, 2022 resulting in lower equity.

FDIC insurance expense increased $213,000, or 43.5% in 2023 as compared to 2022.

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

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.

ATM and debit card fees expense increased $247,000, or 27.5% in 2023 as compared to 2022.

The increase was the result of third-party pricing increases, increased debit card transaction volume and increased ATM fraud in 2023.

Data processing fees increased $389,000, or 42.5% in 2023 as compared to 2022.

This increase was the result of third party pricing increases, credits used to lower third party costs in 2022 and increased costs associated with the preparation for and implementation of the Corporation’s new online and mobile banking platforms.

Advertising expense increased $139,000, or 35.7% in 2023 as compared to 2022 as the result of the Corporation marketing the new full-service Bethlehem branch, along with utilizing more television, billboard, digital and social

media advertising in 2023.

Other non-interest expense decreased $118,000, or 3.9% in 2023 as compared to 2022.

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.

Other non-interest expense was higher in 2022 mainly due to a fraud reimbursement to one customer and a fraud settlement related to another customer’s deposit relationship.

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).

12 unchanged sentences

Data processing fees

Foreclosed assets held for resale

INCOME TAX EXPENSE

1 unchanged sentence

The effective income tax rate was 11.0% in 2023 and 14.1% in 2022.

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

The decrease in the effective tax rate for 2023 was due to lower pre-tax earnings in relation to the amount of tax-exempt income earned on securities and more low-income housing tax credits.

The Corporation recognized $484,000 and $249,000 of tax credits from low-income housing partnerships for the years ended December 31, 2023 and 2022, respectively.

1 unchanged sentence

Total assets increased to $1,415,870,000 at year-end 2023, an increase of 6.5% from year-end 2022.

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

Total debt securities available-for-sale increased $19,524,000 or 5.2% to $392,968,000 as of December 31, 2023.

The increase was mainly due to the purchase of several securities in the combined amount of $81,463,000, offset by the sales of tax-exempt municipals in the combined amount of $23,131,000, principal paydowns, and calls and maturities during 2023.

Net loans increased in 2023 from $850,195,000 to $904,153,000, a 6.3% increase.

Loan demand grew in 2022 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

Loan demand grew in 2023 as the Bank has realized an increase in loan originations, primarily commercial real estate and commercial and industrial loans.

The cash surrender value of bank owned life insurance totaled $26,010,000 at December 31, 2023, an increase of $621,000 or 2.4% from 2022.

2 unchanged sentences

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.

In 2023, capital contributions and other payments in the combined amount of $2,429,000 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, 2023, total deposits amounted to $980,439,000, a decrease of 1.3% from 2022.

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.

The decrease is due to a decrease in non-interest bearing deposits and a decrease in municipal deposits, offset by an increase in interest bearing deposits including a $40,250,000 increase in Brokered CDs.

The Corporation has also experienced a shift from transactional deposits to term deposits due to higher CD rate offerings.

The Corporation continues to maintain and manage its asset growth.

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

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.

Short and long-term borrowings increased in 2023 by $97,050,000, mainly due to the execution of a balance sheet leverage strategy that included $100,000,000 in new long-term borrowings to fund increases in the securities portfolio.

Total stockholders’ equity increased to $121,615,000 at December 31, 2023, an increase of $1,229,000, primarily due to an increase in surplus.

SEGMENT REPORTING

9 unchanged sentences

No securities were established in a trading account.

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.

Debt securities available-for-sale increased $19,524,000 or 5.2% to $392,968,000 in 2023.

At December 31, 2023, the net unrealized loss, net of the tax effect, on these securities was $26,073,000 and was included in stockholders’ equity as accumulated other comprehensive loss.

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

6 unchanged sentences

Realized gains and losses are reflected in the results of operations on the Corporation’s Consolidated Statements of Income.

As of December 31, 2022, the securities portfolio does not contain any off-balance sheet derivatives or trust preferred investments.

Table 7 — Securities

31 unchanged sentences

Total loans increased $52,609,000, or 6.1% in 2023 compared to an increase of $105,628,000, or 14.0% in 2022.

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) 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 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.

Continued demand for borrowing by businesses accounted for the 6.1% increase in the loan portfolio from December 31, 2022 to December 31, 2023.

The Real Estate portfolio increased $46,613,000 or 6.1% from $764,880,000 at December 31, 2022 to $811,493,000 at December 31, 2023.

The increase in the Real Estate portfolio for the year ended December 31, 2023 was mainly the result of $110,819,000 in new loan originations, which were offset by loan payoffs of $39,675,000 and a decrease of $8,886,000 in utilization of existing real estate lines of credit, along with regular principal payments and other typical fluctuations in the Real Estate portfolio.

The Agricultural portfolio decreased $189,000 or 22.0% from $860,000 at December 31, 2022 to $671,000 at December 31, 2023.

The decrease in the Agricultural portfolio for the year ended December 31, 2023 was mainly the result of an increase of $6,000 in utilization of existing agricultural lines of credit, offset with regular principal payments and other typical fluctuations in the Agricultural portfolio.

There were no new agricultural loans originated during the year ended December 31, 2023 and payoffs of agricultural loans for the year ended December 31, 2023 did not have a material impact on the change in the portfolio balance.

Overall, the Commercial and Industrial portfolio increased $10,832,000 or 19.3% from $56,077,000 at December 31, 2022 to $66,909,000 at December 31, 2023.

The increase in the Commercial and Industrial portfolio during the year ended December 31, 2023 was mainly attributable to the portion of the Commercial and Industrial portfolio, excluding PPP loans, which increased $10,945,000 during the year ended December 31, 2023.

The increase was attributable to $12,592,000 in new loan originations along with an increase of $1,824,000 in utilization of existing commercial and industrial lines of credit offset by loan payoffs of $1,556,000, as well as regular principal payments and other typical amortization in the Commercial and Industrial portfolio.

The portion of the Commercial and Industrial portfolio attributable to PPP loans decreased $113,000 from December 31, 2022 to December 31, 2023 with all PPP loans paid off or forgiven as of December 31, 2023.

Consumer loans increased $117,000 or 2.1% from $5,707,000 at December 31, 2022 to $5,824,000 at December 31, 2023.

The increase is mainly attributable to new loan originations of $2,545,000, offset by loan payoffs of $1,082,000 and a decrease of $4,000 in utilization of existing consumer lines of credit, along with regular principal payments.

The State and Political Subdivisions portfolio decreased $4,764,000 or 15.4% from $30,945,000 at December 31, 2022 to $26,181,000 at December 31, 2023.

The decrease is mainly the result of $2,420,000 in loan payoffs for the year ended December 31, 2023 along with regular principal payments, offset by $731,000 in new loan originations.

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.

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The Corporation continues its efforts to lend to creditworthy borrowers.

Management believes that the loan portfolio is well diversified.

The total commercial portfolio was $698,548,000 at December 31, 2022.

Of total loans, $611,549,000 or 71.3% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings.

The Corporation continues to monitor these portfolios.

Management believes the loan portfolio is well diversified.

All loan relationships in excess of $1,500,000 are reviewed internally and/or externally through a loan review process on an annual basis.

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

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

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.

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

Overall, non-pass grades increased to $24,092,000 at December 31, 2023, as compared to $20,935,000 at December 31, 2022.

Real Estate non-pass grades increased $3,174,000 or 15.7% to $23,384,000 as of December 31, 2023 compared to $20,210,000 as of December 31, 2022.

Commercial and Industrial non-pass grades decreased $75,000 or 10.3% to $650,000 as of December 31, 2023 compared to $725,000 as of December 31, 2022.

Consumer non-pass

grades increased to $58,000 as of December 31, 2023 compared to $0 at December 31, 2022.

There were no Agricultural or State and Political non-pass grades as of December 31, 2023 or December 31, 2022.

The increase in Real Estate non-pass grades from December 31, 2022 to December 31, 2023 is mainly the result of the downgrade of a loan to the owner of a hotel and restaurant which carried a balance of $3,661,000 at December 31, 2023.

The loan was downgraded to substandard status during the fourth quarter of 2023 due to the protracted timeframe of over two years which has transpired to complete the necessary renovations to the hotel following a fire.

The hotel has exhausted all insurance and stimulus funds and now has to finance any deficits in profitability through other revenue streams, savings, or owner contributions.

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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Commercial and Industrial

Commercial Real Estate

Residential Real Estate

State and Political Subdivisions

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

6 unchanged sentences

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

State and Political Subdivisions

The above data represents the amount of loans receivable at December 31, 2023 which, based on remaining scheduled repayments of principal, are due in the periods indicated.

5 unchanged sentences

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

State and Political Subdivisions

Loans with a fixed interest rate

2 unchanged sentences

The fixed and variable portions of the amounts of loans receivable due or repricing in the periods indicated are also summarized above.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio.

As of December 31, 2022, the allowance for loan losses was $8,274,000 as compared to $8,680,000 as of December 31, 2021.

The allowance for loan losses is established through a provision for loan losses charged to expenses.

Loans are charged against the allowance for possible loan losses when management believes that the collectability of the principal is unlikely.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses constitutes the amount available to absorb losses within the loan portfolio.

As of December 31, 2023, the allowance for credit losses was $6,925,000 as compared to $8,274,000 as of December 31, 2022.

The allowance for credit losses is established through a provision for credit losses charged to expenses.

Loans are charged against the allowance for possible credit losses when management believes that the collectability of the principal is unlikely.

The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry.

Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Management performs a quarterly analysis to determine the adequacy of the allowance for loan losses.

The methodology in determining adequacy incorporates specific and general allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process.

Management performs a quarterly analysis to determine the adequacy of the allowance for credit losses.

The methodology in determining adequacy incorporates quantitative and qualitative allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process.

This assessment results in an allocated allowance.

Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority.

Management considers, based upon its methodology, that the allowance for loan losses is adequate to cover foreseeable future losses.

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.

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

Management considers, based upon its methodology, that the allowance for credit losses is adequate to cover foreseeable future losses.

However, there can be no assurance that the allowance for credit losses will be adequate to

cover significant losses, if any, that might be incurred in the future.

On a quarterly basis, management evaluates the

qualitative factors utilized in the calculation of the Company’s allowance for credit losses and various adjustments are made to these factors as deemed necessary at the time of evaluation.

Upon adoption of ASU No.

2016-13 in the first

quarter of 2023, the qualitative factors used in the allowance calculation were adjusted from five loan pools utilized under previous methodology to fifteen loan segmentation pools aligning with the segmentation of the quarterly call report.

There were no material increases or decreases in the qualitative factors arising from the realigning of the

qualitative factor pools/segments and no additional qualitative factor adjustments were deemed necessary for the first quarter of 2023.

During the second quarter of 2023, qualitative factors related to delinquency trends were increased by four basis points for each of the following loan segmentation pools:

(a) revolving, open-end, 1-4 family residential properties (and extended under lines of credit) and (b) secured by multifamily (5 or more) residential properties.

these loan segmentation pools are included in the Real Estate component of the loan portfolio.

During the third quarter

of 2023, various qualitative factor decreases were implemented across multiple loan segmentation pools.

trends were decreased by twelve basis points for each of the following loan segmentation pools:

(a) construction, land development, and other land loans, (b) residential construction (loans to build homes, both speculative and owner-occupied, and 1-4 family lot loans), (c) agribusiness, farmland, or secured by farmland, (d) loans secured by junior liens,

and (e) loans secured by other non-farm, non-residential properties.

All of these loan segmentation pools are included in

the Real Estate component of the loan portfolio.

Additionally, delinquency trends were decreased by eight basis points and volume trends were decreased by twelve basis points across all three loan segmentation pools in the Consumer portfolio, volume trends for Commercial and Industrial loans were decreased by eight basis points, and delinquency trends for Agricultural loans were decreased by eight basis points during the third quarter of 2023.

During the fourth quarter of 2023, qualitative factors related to economic trends were decreased by four basis points across all loan segments and qualitative factors related to collateral values were increased by four basis points related to loans to finance agricultural production and other loans for farmers in the Agricultural portfolio, commercial and industrial loans in the Commercial and Industrial portfolio, and automobile loans in the Consumer portfolio.

Additionally, qualitative factors related to delinquency trends were decreased by sixteen basis points related to revolving, open-end 1-4 family residential properties in the Real Estate portfolio and automobile loans in the Consumer portfolio and increased by eight basis points related to loans secured by other non-farm, non-residential properties in the Real Estate portfolio and other revolving credit plans in the Consumer portfolio.

Qualitative factors related to volume trends were increased by four basis points for each of the following loan segmentation pools:

(a) construction, land development, and other land loans, (b) agribusiness, farmland, or secured by farmland, (c) secured by multi-family (5 or more) residential properties, (d) loans secured by owner-occupied non-farm, non-residential properties, and (e) loans secured by other non-farm, non-residential properties.

Qualitative factors related to volume trends were decreased by four basis points for each of the following loan segmentation pools:

(a) residential construction (loans to build homes, both speculative and owner-occupied, and 1-4 family lot loans), (b) revolving, open-end 1-4 family residential properties, (c) loans secured by first liens, and (d) loans secured by junior liens.

All of the loan segmentation pools impacted by qualitative factor adjustments for volume trends are included in the Real Estate component of the loan portfolio.

Qualitative factors related to external factors were increased by four basis points for each of the following loan segmentation pools in the Real Estate portfolio:

Qualitative factors related to external factors were also increased by four basis points for loans to finance agricultural production and other loans to farmers in the Agricultural portfolio, commercial and industrial loans in the Commercial and Industrial portfolio, other revolving credit plans, automobile loans, and other consumer loans in the Consumer portfolio, and obligations (other than securities or leases) of state and political subdivisions in the US in the State and Political Subdivisions portfolio.

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

In 2023 and 2022, net charge-offs as a percentage of average loans amounted to 0.001% and 0.018% respectively.

Net charge-offs amounted to $13,000 in 2023 and $142,000 in 2022.

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

Net charge-offs were higher in 2022 than in 2023, 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, as the business ceased operations as a result of financial difficulties.

For the year ended December 31, 2023, the provision for credit losses resulted in a credit balance of $217,000, as compared to a credit balance of $264,000 for the year ended December 31, 2022.

The net effect of the credit balance of the provision and net charge-offs resulted in the year-end allowance for credit losses of $6,925,000 of which 94.42% was attributed to the Real Estate component, 0.01% was attributed to the Agricultural component, 3.83% was attributed to the Commercial and Industrial component, 1.13% was attributed to the Consumer component, and 0.61% was attributed to the State and Political Subdivisions component (refer to the activity in Note 3 — Loans and Allowance for Credit Losses on page 79.) The Corporation determined that the provision for credit losses made during 2023 was sufficient to maintain the allowance for credit losses at a level necessary for the probable losses inherent in the loan portfolio as of December 31, 2023.

Analysis of Allowance for Credit Losses (Post-Adoption of ASU No.

(Dollars in thousands)

As of and for the year ended:

Balance at prior year-end

CECL adoption adjustment

Beginning balance

Commercial and Industrial

State and Political Subdivisions

Commercial and Industrial

State and Political Subdivisions

Net charge-offs

Credits charged to operations

Balance at end of period

Ratio of net charge-offs during the period to average loans outstanding during the period

Allowance for credit losses to average loans outstanding during the period

Analysis of Allowance for Loan Losses (Pre-Adoption of ASU No.

(Dollars in thousands)

Years Ended December 31,

As of and for the nine months ended:

Beginning balance

6 unchanged sentences

Net charge-offs

Additions (credited) charged to operations

(Credits) additions charged to operations

Balance at end of period

2 unchanged sentences

It is the policy of management and the Corporation’s Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio.

A provision for loan losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio.

A provision for credit losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio.

This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.

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

A detailed quarterly analysis to determine the adequacy of the 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 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.

The portion of the allowance for loan losses allocated to each loan category does not represent the total available for future losses that may occur within the loan category, since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.

Table 12 — Allocation of Allowance for Loan Losses

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

With the Bank’s manageable level of net charge-offs and a decrease to the reserve from the credit balance of the provision, the allowance for credit losses as a percentage of average loans amounted to 0.793% in 2023 and 1.025% in 2022.

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

The portion of the allowance for credit losses allocated to each loan category does not represent the total available for future losses that may occur within the loan category, since the total credit loss allowance is a valuation reserve applicable to the entire loan portfolio.

Allocation of Allowance for Credit Losses (Post-Adoption of ASU No.

(Dollars in thousands)

December 31, 2023

Commercial and Industrial

State and Political Subdivisions

Allocation of Allowance for Loan Losses (Pre-Adoption of ASU No.

(Dollars in thousands)

Commercial and Industrial

Commercial Real Estate

2 unchanged sentences

NON-PERFORMING ASSETS

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

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

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

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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 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.

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

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 $5,681,000 as of December 31, 2023, as compared to $5,359,000 as of December 31, 2022.

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.

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

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

The economy remains unstable.

Consumer spending remains at high levels, allowing the inflation rate to continue to remain higher than desired levels.

Business sentiment is downbeat and business investment has slowed.

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

Inflation was receding earlier in 2023, at 3% as of June 2023;

however, it rose to 3.7% as of September 2023 and then dropped slightly to 3.4% as of December 2023.

The Federal Reserve’s target rate of inflation is 2%.

The war between Ukraine and Russia continues to produce worldwide consternation.

The heightened conflict with Israel and Palestine has caused much hostility throughout the world.

The constant disputing over whether to continue US support of Ukraine and Israel in ongoing efforts has been a strain on the economy.

Values of new and used homes and automobiles have remained high.

Higher interest rates have added to the curtailed borrowing.

Consumer savings is dwindling, and credit balances are growing.

Supply chains are back up and running efficiently in many areas.

Labor continues to remain costly and unpredictable.

The Federal Reserve has noted they will cease rate hikes and has indicated a plan to potentially begin reducing rates in 2024.

These forces have had a direct effect on the Corporation’s nonperforming assets.

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

Non-accrual loans totaled $4,616,000 as of December 31, 2023 as compared to

$5,051,000 as of December 31, 2022.

There were no foreclosed assets held for resale as of December 31, 2023 or December 31, 2022.

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.

Non-performing assets to total assets was 0.40% as of December 31, 2022 compared to 0.54% at December 31, 2021.

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.

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.

Performing substandard loans which are not deemed to be impaired have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future.

Performing substandard loans not deemed to be impaired amounted to $10,776,000 at December 31, 2022 and $10,463,000 at December 31, 2021.

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, 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 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 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.

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

There were five loans past-due 90 days or more and still accruing interest as of December 31, 2023 which carried an aggregate balance of $1,065,000, compared to December 31, 2022 when there were three 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, 2023 consisted of four loans secured by commercial real estate and one loan secured by residential real estate, all of which were well secured and in the process of collection.

Non-performing assets to total loans was 0.62% for both December 31, 2023 and 2022.

Non-performing assets to total assets was 0.40% for both December 31, 2023 and 2022.

The allowance for credit losses to total non-performing assets was 140.61% as of December 31, 2023 as compared to 154.39% as of December 31, 2022.

Additional detail can be found in Table 13 – Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No.

2016-13) and Non-Performing Assets and Impaired Loans (Pre-Adoption of ASU No.

2016-13) and the Non-Performing Assets table in Note 3 — Loans and Allowance for Credit Losses.

Performing substandard loans, which have not been designated for individual evaluation to determine expected credit losses, have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future.

Performing substandard loans not designated for individual evaluation amounted to $19,418,000 at December 31, 2023 and $10,776,000 at December 31, 2022.

Individually evaluated loans were $4,925,000 at December 31, 2023, compared to impaired loans of $11,207,000 at December 31, 2022.

The largest individually evaluated loan relationship at December 31, 2023 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate.

At December 31, 2023, the loan carried a balance of $1,990,000, net of $1,989,000 that had been charged off to date.

The second largest individually evaluated loan relationship at December 31, 2023 consisted of five non-performing loans to a plastic processing company focused on non-post-consumer recycling.

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

The loans carried an aggregate balance of $975,000 at December 31, 2023.

The third largest individually evaluated loan relationship at December 31, 2023 consisted of a non-performing loan to the owner of a golf course and catering venue which is secured by commercial real estate.

At December 31, 2023, the loan carried a balance of $582,000.

The Corporation estimates the need for individual evaluation of loans based on its analysis of the cash flows or collateral estimated at fair value less cost to sell.

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

Of the $11,207,000 in impaired loans at December 31, 2022, none were located outside the Corporation’s primary market area.

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, 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.

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, 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 $4,925,000 in individually evaluated loans at December 31, 2023, none were located outside the Corporation’s primary market area.

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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The Corporation actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in 2024.

Excluding the assets disclosed in Table 13 – Non-Performing Assets and Impaired Loans and the Troubled Debt Restructurings section in Note 3 — Loans and Allowance for Loan Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

Excluding the assets disclosed in Table 13 – Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No.

2016-13) and Non-Performing Assets and Impaired Loans (Pre-Adoption of ASU No.

2016-13) and the Non-Performing Assets table in Note 3 — Loans and

Allowance for Credit Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses.

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

The economic climate remains in a 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 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.

The economic climate remains in a state of flux.

The war between Ukraine and Russia moves into its third year and the Israeli conflict in the Gaza strip has intensified and incited worldwide hostilities.

Inflationary pressures have eased but the effects of monetary policy adjustments made to affect the change remain.

The looming Presidential election and the legal issues that permeate the leading Presidential candidates, commodity prices remaining high even as inflationary pressures have eased, gas prices fluctuating widely from week to week, small businesses closing, larger corporations cutting jobs, unprecedented weather conditions seen around the world, and the fears recession may still be looming have all exacerbated the difficulties in the national and state economy.

Experts at all levels continue to ascertain the intermediate or long term effects of such issues.

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

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

The extent of the impact of these stressors on the Corporation’s operational and financial performance will depend on certain developments including reactions to inflationary controls enacted, the labor force, the longevity of the wars, the ongoing political landscape, and the looming threat of a recession, and any after-effects of these factors.

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

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

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

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

As of December 31, 2023 and 2022 management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Table 13 — Non-Performing Assets and Impaired Loans

Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No.

(Dollars in thousands)

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Total non-performing assets

Individually evaluated loans

Non-accrual loans

Other Individually Evaluated loans

Total individually evaluated loans

Allocated allowance for credit losses

Net investment in individually evaluated loans

Individually evaluated loans with a valuation allowance

Individually evaluated loans without a valuation allowance

Total individually evaluated loans

Allocated valuation allowance as a percent of individually evaluated loans

Individually evaluated loans to total loans

Non-performing assets to total loans

Non-performing assets to total assets

Allowance for credit losses to individually evaluated loans

Allowance for credit losses to total non-performing assets

Non-Performing Assets and Impaired Loans (Pre-Adoption of ASU No.

(Dollars in thousands)

Non-performing assets

Non-accrual loans

Foreclosed assets held for resale

Loans past-due 90 days or more and still accruing interest

Total non-performing assets

Impaired loans

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Total impaired loans

Allocated allowance for loan losses

Allocated allowance for credit losses

Net investment in impaired loans

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Non-performing assets to total assets

Allowance for loan losses to impaired loans

Allowance for loan losses to total non-performing assets

Real estate mortgages comprise 89.2% of the loan portfolio as of December 31, 2022, as compared to 88.3% as of December 31, 2021.

Real estate mortgages consist of both residential and commercial real estate loans.

Allowance for credit losses to impaired loans

Allowance for credit losses to total non-performing assets

Real estate mortgages comprised 89.1% of the loan portfolio as of December 31, 2023 and 2022, respectively.

Real estate mortgages consist of both loans secured by residential and commercial real estate.

The Real Estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities.

Also, the residential real estate loan portfolio is largely comprised of fixed rate mortgages.

The real estate loans are concentrated primarily in the Corporation’s market area and are subject to risks associated with the local economy.

The commercial real estate loans typically reprice approximately every three to five years and are also concentrated in the Corporation’s market area.

The Corporation’s loss exposure on its impaired loans continues to be mitigated by collateral positions on these loans.

The allocated allowance for loan losses associated with impaired loans is generally computed based upon the related collateral value of the loans.

Also, the residential component of the Real Estate loan portfolio is largely comprised of fixed rate mortgages.

The real estate loans are concentrated in the Corporation’s market area and are subject to risks associated with the local economy.

The loans secured by commercial real estate typically reprice approximately every three to five years and are also concentrated in the Corporation’s market area.

The Corporation’s loss exposure on its individually evaluated loans continues to be mitigated by collateral positions on these loans.

The allocated allowance for credit losses associated with individually evaluated loans is generally computed based upon the related collateral value of the loans.

The collateral values are determined by recent appraisals or Certificates of Inspection, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation, and management’s expertise and knowledge of the borrower and the borrower’s business.

DEPOSITS, OTHER BORROWED FUNDS AND SUBORDINATED DEBT

Consumer and commercial retail deposits are attracted primarily by the Corporation’s eighteen full service office locations, one loan production office, and through its internet banking presence.

Consumer and commercial retail deposits are attracted primarily by the Corporation’s nineteen full service office locations and through its internet banking presence.

The Corporation offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products.

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Deposits decreased by $13,060,000, or 1.3% for the year ending December 31, 2023 as compared to December 31, 2022.

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 decrease in deposits in 2023 can be attributed to decreases in non-interest bearing demand, interest bearing demand and savings accounts while time deposits increased due to higher rate CD offerings in 2023.

The decrease in deposits was mainly the result of a $60,884,000 decrease in municipal deposits offset by an increase of $40,250,000 in brokered CDs, along with other normal fluctuations in deposits during 2023.

The following schedule reflects the remaining maturities of time deposits and other time open deposits of $100,000 or more at December 31, 2023.

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Total borrowings were $275,468,000 as of December 31, 2023, compared to $178,418,000 at December 31, 2022.

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

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.

During 2023, long-term borrowings increased to $122,000,000 from $25,000,000.

The increase in long-term borrowings in 2023 was the result of increased securities and loans and decreased deposits in 2023.

Short-term debt increased from $153,418,000 in 2022 to $153,468,000 as of December 31, 2023.

The small increase was the result of the Corporation taking more long-term debt in 2023 to offset increased securities and loans and decreased deposits in 2023.

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

Short-term borrowings from FHLB are commonly used to offset seasonal fluctuations in deposits.

Short-term borrowings from FHLB are commonly used to offset balance sheet fluctuations.

In connection with FHLB borrowings, Federal Discount Window, and securities sold under agreements to repurchase, the Corporation maintains certain eligible assets as collateral.

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Federal Home Loan Bank

The rapid increase in interest rates has created a significant earnings challenge for the industry.

As liability costs have outpaced asset yield growth, negative earnings is a plausible scenario shown in many models if no action is taken.

Due to the stress this puts on the Corporation, an action plan strategy was put into effect in 2023 that includes disciplined loan pricing, interest rate swaps and a leverage of the balance sheet consisting of securities and brokered CD purchases and long-term borrowings.

This action plan strategy was the key part of the Corporation’s decision to utilize more targeted long-term borrowings over high-rate short-term borrowings and the decision to take on more brokered CDs in 2023.

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the “2020 Notes”).

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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 (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.

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

The total net increase in capital was $1,229,000 in 2023 after a decrease of $28,169,000 in 2022.

The increase in equity capital in 2023 was due to the issuance of new shares through the Corporation’s Dividend Reinvestment Program (“DRIP”) amounting to $1,768,000 offset by a decrease of $452,000 in retained earnings.

There was a one-time cumulative effect adjustment that increased retained earnings by $768,000 upon the adoption of ASU No.

The Corporation had 231,611 shares of common stock as of December 31, 2023 and December 31, 2022, 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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Table 15 reflects risk-based capital ratios and the leverage ratio for the Bank.

The Bank’s leverage ratio was 10.38% at December 31, 2022 and 10.14% at December 31, 2021.

The Bank’s leverage ratio was 10.38% at December 31, 2023 and December 31, 2022.

The Bank has consistently maintained regulatory capital ratios at or above the “well capitalized” standards.

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The following table presents the Bank’s capital ratios as of December 31, 2023 and December 31, 2022:

Corrective Action

Minimum Capital

Adequacy with

Capital Buffer

Tier 1 leverage ratio (to average assets)

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

Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing deposits.

Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing and core deposits.

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

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Net income amounted to $5,560,000 for the year ended December 31, 2023 and $14,024,000 for the year ended December 31, 2022.

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.

The (credit) provision for credit losses resulted in a credit balance of $217,000 for the year ended December 31, 2023 and a credit balance of $264,000 for the year ended December 31, 2022.

During the years ended December 31, 2023 and 2022, net premium amortization on securities amounted to $1,519,000 and $3,008,000, respectively.

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.

Net gains on sales of mortgage loans were $65,000 for the year ended December 31, 2023, compared to net losses of $7,000 for the year ended December 31, 2022.

Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $77,000 and $2,168,000 for the years ended December 31, 2023 and 2022, respectively.

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.

Net securities losses were $118,000 for the year ended December 31, 2023, compared to $846,000 for the year ended December 31, 2022.

Accrued interest payable increased by $2,260,000 during the year ended December 31, 2023 and $312,000 during the year ended December 31, 2022.

Other assets decreased by $661,000 and increased by $342,000 during the years ended December 31, 2023 and 2022, respectively.

Other liabilities decreased by $5,429,000 during the year ended December 31, 2023, compared to an increase of $429,000 during the year ended December 31, 2022.

Investing activities used cash of $76,833,000 and $93,634,000 during the years ended December 31, 2023 and 2022, respectively.

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 activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $16,533,000 during the year ended December 31, 2023 and provided cash of $19,295,000 during the year ended December 31, 2022.

Net change in restricted investment in bank stocks used cash of $3,749,000 during the year ended December 31, 2023 and $5,217,000 during the year ended December 31, 2022.

Net cash used to originate loans amounted to $52,480,000 and $103,609,000 during the years ended December 31, 2023 and 2022, respectively.

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Financing activities provided cash of $77,203,000 and $24,871,000 during the years ended December 31, 2023 and 2022, respectively.

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.

Deposits decreased by $13,060,000 during the year ended December 31, 2023 and $84,470,000 during the year ended December 31, 2022.

Short-term borrowings increased by $50,000 during the year ended December 31, 2023 and increased by $126,041,000 during the year ended December 31, 2022.

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

Proceeds from long-term borrowings amounted to $100,000,000 for the year ended December 31, 2023, compared to $0 for the year ended December 31, 2022.

Repayment of long-term borrowings used cash of $3,000,000 during the year ended December 31, 2023 and $10,000,000 during the year ended December 31, 2022.

Dividends paid amounted to $6,780,000 for the year ended December 31, 2023, compared to $6,690,000 for the year ended December 31, 2022.

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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 utilizing 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, 2023.

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Operating lease obligations

Financing lease obligations

Off-Balance Sheet Arrangements

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Several techniques are used for measuring interest rate sensitivity.

Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a given time period, referred to as a rate sensitivity gap.

Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a

given time period, referred to as a rate sensitivity gap.

If more assets than liabilities mature or reprice within the time frame, the Corporation is asset sensitive.

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In addition, the earnings simulation model projects net interest income would increase 0.62%, 2.97% and 4.99% in the 100, 200 and 300 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)%.

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 interest rate environment with federal funds trading in the 525-550 basis point range and many deposit accounts still lagging at markedly lower rates.

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At December 31, 2023, net present value is projected to decrease 3.92%, 9.07%, and 15.22% 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.

Additionally, the 100, 200 and 300 basis point immediate decreases in rates are estimated to affect net present value with a decrease of 3.22%, 11.76% and 31.05%, respectively.

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

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Effect on Net Interest Income

1-Year Net Income Simulation Projection

1-Year Net Interest Income Simulation Projection

+300 bp Shock vs.

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‒200 bp Shock vs.

‒300 bp Shock vs.

Effect on Net Present Value of Balance Sheet

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‒200 bp Shock vs.

‒300 bp Shock vs.

Table 19 shows the quarterly results of operations for the Corporation for the years ended December 31, 2023 and 2022:

5 unchanged sentences

Net interest income

Provision (credit) for loan losses

Provision (credit) for credit losses

Non-interest income

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Net interest income

Provision for loan losses

Provision (credit) for loan losses

Non-interest income

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accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions and judgments.

The Corporation considers three accounting policies to be critical because they involve the most significant judgments and estimates used in preparation of its consolidated financial statements.

The three policies are the determination of other-than-temporary impairment of securities, the determination of the allowance for loan losses, and the assessment of goodwill for possible impairment.

Other-Than-Temporary Impairment of Securities.

Valuations for the securities portfolio are determined using quoted market prices, where available.

If quoted market prices are not available, securities valuation is based on pricing models, quotes for similar securities, and observable yield curves and spreads.

In addition to valuation, management must assess whether there are any declines in value below the carrying value of the securities that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of the loss in the Corporation’s Consolidated Statements of Income.

Allowance for Loan Losses.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio.

Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.

The Corporation considers four accounting policies to be critical because they involve the most significant judgments and estimates used in preparation of its consolidated financial statements.

The four policies are the determination of allowance for securities losses, the assessment of possible impairment of equity securities, the determination of the allowance for credit losses, and the assessment of goodwill for possible impairment.

Allowance for Securities Losses.

The allowance for securities losses represents management’s estimate of probable credit losses inherent in the securities portfolio.

Management evaluates debt securities for impairment where there has been a decline in fair value below the amortized cost basis of a debt security to determine whether there is a credit loss associated with the decline in fair value.

The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses on securities.

Impairment of Equity Securities.

Valuations for the equity securities portfolio are determined using quoted market prices, where available.

If quoted market prices are not available, the equity securities valuation is based on cost less any impairment.

In addition to valuation, management must assess whether there are any declines in value below the carrying value of the securities that would require an adjustment in carrying value and recognition of the loss in the Corporation’s Consolidated Statements of Income.

Allowance for Credit Losses.

The allowance for credit losses represents management’s estimate of losses arising from borrowers’ inability to make loan payments as required.

Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to specific expectations for the future economic environment, the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may impact the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral (if the loan is collateral dependent), the composition of the portfolio, and other relevant factors.

The loan portfolio also represents the largest asset type on the Corporation’s Consolidated Balance Sheets.

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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