What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-29 compared with 2023-03-15 · 729 added, 422 removed, 976 unchanged (54% of the section changed)

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Keystone Corporation and Subsidiary (Company) as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements).

We have audited the accompanying consolidated balance sheets of First Keystone Corporation and Subsidiary (“Company”) as of December 31, 2023, and 2022, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2023, due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.

Our opinion is not modified with respect to this matter.

Basis for Opinion

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The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Qualitative Factor Adjustments – Refer to Notes 1 and 3 to the consolidated financial statements

Allowance for Credit Losses – Qualitative Factors

Critical Audit Matter Description

As disclosed in Note 3 to the Company's consolidated financial statements, the Company’s loan portfolio totaled $858M as of December 31, 2022, and the related allowance for loan losses was $8.3M.

As described in Note 1, the allowance for loan losses consists of specific and general reserve components in order to estimate losses that have been incurred as of the consolidated balance sheet date.

In calculating the general reserve component, management considers historical loss experience based on loan type and qualitative factor adjustments for changes not reflected in the historical loss experience.

The determination of the qualitative factor adjustments involves significant estimates based on subjective assumptions that require a high degree of management judgment about the following internal or external factors:

changes in lending policies and procedures;

changes in macroeconomic conditions;

changes in the nature and volume of the loan portfolio;

changes in the experience and ability of lending management;

changes in the volume of past due, nonaccrual, and adversely-classified loans;

changes in the loan review system;

changes in the value of underlying collateral;

existence of any concentrations of credit;

and effect of other external factors, such as competition or the regulatory environment.

Changes in these assumptions could have a material effect on the allowance for loan losses.

The allowance for loan losses is an accounting estimate with significant measurement uncertainty and involves the application of significant judgment by management.

Therefore, a high degree of auditor judgment and significant auditor effort was required in evaluating the audit evidence obtained related to the qualitative factor adjustments used by management in the calculation.

As described in Note 1, the allowance for credit losses (“ACL”) is an estimate of losses arising from borrowers’ inability to make loan payments as required, which is calculated via a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio.

The Company’s ACL is calculated by collectively evaluating and individually evaluating loans.

The Company collectively evaluates applicable loans based on segments according to their homogeneous characteristics, aligned with the segmentation of the FDIC Bank Call Report.

The ACL is maintained at a level estimated by management to be adequate to absorb potential loan losses.

Management’s periodic evaluation of the adequacy of the ACL is based on specific expectations for the future economic environment that are incorporated in the projection, with loss expectations to revert to the long-run historical mean after such time as management can make or obtain a reasonable and supportable forecast.

Management also considers the Company’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), composition of the loan portfolio, and other relevant factors.

This evaluation is inherently subjective as it requires material estimates based on management’s judgment regarding the projection of expected credit losses over the contractual lifetime of the loans.

Modeling of the ACL uses sophisticated statistical techniques to arrive at reasonable and supportable forecasts of expected losses.

The Company has contracted with a third-party vendor to assist in developing models for the ACL related to the Company’s loan portfolio.

The Company has opted to utilize the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL which uses an average annual charge-off rate.

This average annual charge-off rate contains loss content over several vintages and is used as a foundation for estimating the credit loss content for loans by segmented pools at the balance sheet date and is used to determine a historical charge-off rate.

When estimating expected credit losses, the Company considers forward-looking information that is both reasonable, supportable, and relevant to assessing the collectability of cash flows.

Reasonable and supportable forecasts may extend over the entire contractual term of a loan or a period shorter than the contractual term.

Reasonable and supportable forecasts may vary by portfolio segment or individual forecast input.

These forecasts may include data from internal sources, external sources, or a combination of both.

We identified the qualitative factor component of the ACL on loans collectively evaluated for credit loss as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

● Testing the design and operating effectiveness of internal controls relating to the evaluation of the assumptions and inputs used to evaluate the qualitative factors, including controls addressing:

o Management's review of the underlying data inputs used in the determination of qualitative factor adjustments for completeness and accuracy.

o Management’s review of the conclusions reached related to the qualitative and quantitative loss factors and the resulting allocation to the allowance for loan losses.

● Substantively testing the appropriateness of the judgments and assumptions used in management’s estimation process for developing the qualitative factor adjustments, including:

o Assessing whether all relevant factors have been considered that affect the collectability of the loan portfolio.

o Testing the risk grade factor based on the risk rating assigned to each

o Evaluating the completeness, accuracy, and relevance of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroborating these inputs by comparing to the Company’s lending practices, historical loan portfolio performance, and third-party macroeconomic data.

o Testing the mathematical accuracy of the calculation and allocation of qualitative factors to the appropriate loan categories.

Evaluating the appropriateness of management’s methodology for estimating the ACL on loans.

Testing of the completeness and accuracy of data used by management in determining qualitative factor adjustments.

Evaluating the reasonableness of management’s judgments related to the qualitative loss factors to determine if the loss factors are calculated in accordance with management’s policies and were consistently applied from the point of adoption to year end.

/s/ Baker Tilly US, LLP

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Total cash and cash equivalents

Time deposits with other banks

Debt securities available-for-sale, at fair value

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Loans held for sale

Allowance for loan losses

Allowance for credit losses

Premises and equipment, net

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Accrued interest payable

Deferred income taxes

Other liabilities

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Retained earnings

Accumulated other comprehensive (loss) income

Treasury stock, at cost, 231,611 shares as of December 31, 2022 and 231,612 shares as of December 31, 2021

Accumulated other comprehensive loss

Treasury stock, at cost, 231,611 shares as of December 31, 2023 and December 31, 2022

TOTAL STOCKHOLDERS’ EQUITY

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Net interest income

(Credit) provision for loan losses

Net interest income after (credit) provision for loan losses

Credit for credit losses

Net interest income after credit for credit losses

NON-INTEREST INCOME

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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

Total non-interest income

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Data processing fees

Foreclosed assets held for resale expense, net

Total non-interest expense

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FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

Years Ended December 31,

Other comprehensive loss:

Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $( 10,027 ) and $( 1,404 ), respectively

Less reclassification adjustment for net losses (gains) included in net income, net of income taxes of $ 153 and $( 1 ), respectively (a) (b)

Unrealized net holding gains (losses) on debt securities available-for-sale arising during the period, net of income tax expense (benefit) of $ 947 and $( 10,027 ), respectively

Less reclassification adjustment for net (gains) losses included in net income, net of income tax benefit (expense) of $( 21 ) and $ 153 , respectively (a) (b)

Fair value adjustment on derivatives, net of income tax benefit (expense) of $( 950 ) and $ 0 , respectively

Total other comprehensive loss

Total Comprehensive (Loss) Income

Total Comprehensive Income (Loss)

(a) Gross amounts are included in net securities (losses) gains on the consolidated statements of income in non-interest income.

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Balance at December 31, 2022

Cumulative effect of adoption of ASU No.

Other comprehensive loss, net of taxes

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Adjustments to reconcile net income to net cash provided by operating activities:

(Credit) provision for loan losses

Credit for credit losses on loans

Credit for credit losses on unfunded commitments

Depreciation and amortization

Net premium amortization on securities

Deferred income tax expense (benefit)

Net losses (gains) on sales of mortgage loans

Deferred income tax expense

Common stock issued

Net (gains) losses on sales of mortgage loans

Proceeds from sales of mortgage loans originated for sale

Originations of mortgage loans originated for sale

Net securities losses (gains)

(Increase) decrease in accrued interest receivable

Net securities losses

Increase in accrued interest receivable

Increase in cash surrender value of bank owned life insurance

Net losses on disposals of premises and equipment

Increase in other assets

Decrease (increase) in other assets

Amortization of investment in low-income housing partnerships

Increase (decrease) in accrued interest payable

Increase in other liabilities

Increase in accrued interest payable

(Decrease) increase in other liabilities

NET CASH PROVIDED BY OPERATING ACTIVITIES

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Purchase of investment in real estate venture

Proceeds from sales of foreclosed assets held for resale

NET CASH USED IN INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES:

Net (decrease) increase in deposits

Net decrease in deposits

Net increase in short-term borrowings

Repayment of finance lease obligations

Proceeds from long-term borrowings

Repayment of long-term borrowings

Common stock issued

Dividends paid

NET CASH PROVIDED BY FINANCING ACTIVITIES

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

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The accounting policies of First Keystone Corporation and Subsidiary (the “Corporation”) are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to common practices within the banking industry.

The more significant accounting policies follow:

The significant accounting policies follow:

Principles of Consolidation

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The Bank serves a customer base which includes individuals, businesses, governments, and public and institutional customers primarily located in the Northeast Region of Pennsylvania.

The Bank has 18 full service offices, one loan production office, and 19 Automated Teller Machines (“ATM”) located in Columbia, Luzerne, Montour, Monroe, and Northampton counties.

The Bank has 19 full service offices and 20 Automated Teller Machines (“ATM”) located in Columbia, Luzerne, Montour, Monroe, and Northampton counties.

The Corporation must also adhere to certain federal and state banking laws and regulations and are subject to periodic examinations made by various state and federal agencies.

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residing in the portfolio and the observance of minimum rating levels in the investment policy.

Note 3 – Loans and Allowance for Loan Losses summarizes the types of lending in which the Corporation engages.

Note 3 – Loans and Allowance for Credit Losses summarizes the types of lending in which the Corporation engages.

The inherent risks associated with lending activities are mitigated by adhering to established underwriting practices and policies, as well as portfolio diversification and thorough monitoring of the loan portfolio.

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Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant changes include the determination of other-than-temporary impairment (“OTTI”) on securities, the determination of the allowance for loan losses, and the assessment of goodwill for possible impairment.

Material estimates that are particularly susceptible to significant changes include the determination of allowance for securities losses, the assessment of possible impairment of equity securities, the determination of the allowance for credit losses, the assessment of goodwill for possible impairment, and the valuation of deferred taxes.

Subsequent Events

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Federal funds are also included as a cash equivalent because they are generally purchased and sold for one-day periods.

Time Deposits with Other Banks

Time deposits with other banks consist of fully insured certificates of deposit in other banks with maturity dates between one and five years.

The Corporation classifies its securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase.

Securities are accounted for on a trade date basis.

Debt Securities

The Corporation classifies its debt securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase.

Debt securities are accounted for on a trade date basis.

Debt securities are classified as Held-to-Maturity when the Corporation has the ability and positive intent to hold the securities to maturity.

Securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

Debt securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

At December 31, 2023 and 2022, all debt securities held were classified as available-for-sale.

Debt securities not classified as Held-to-Maturity are included in the Available-for-Sale category and are carried at fair value.

The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive (loss) income (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity.

The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive loss (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity.

Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

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The cost of securities sold, redeemed or matured is based on the specific identification method.

The Corporation invests in various forms of agency debt including residential and commercial mortgage-backed securities and callable debt.

The mortgage-backed agency securities are issued by Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”) or Small Business Administration (“SBA”).

The other mortgage-backed securities consist of private (non-agency) residential and commercial mortgage-backed securities.

The municipal securities consist of general obligations and revenue bonds.

Asset-backed securities consist of private (non-agency) student loan pools backed by the

Federal Family Education Loan Program (“FFELP”) which carry a 97% federal government guarantee.

Corporate debt securities consist of senior debt and subordinated debt holdings.

Available-for-sale debt securities are required to be individually evaluated for impairment in accordance with ASC 326, Financial Instruments – Credit Losses.

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 on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby Management compares the present value of expected cash flows with the amortized cost basis of the debt security.

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

Consideration is given to (1) the financial condition and near-term prospects of the issuer, (2) the outlook for receiving the contractual cash flows of the investments, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values.

In analyzing an issuer’s financial condition, management considers whether the debt securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition, and the issuer’s anticipated ability to pay the contractual cash flows of the debt securities.

All issues of U.S.

Treasury and Agency-Backed debt securities have the full faith and credit backing of the United States Government or one of its agencies.

All other debt securities that do not have a zero expected credit loss are evaluated quarterly to determine whether there is a credit loss associated with a decline in fair value.

Equity Securities

In accordance with ASC 825-10, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income.

Equity securities without readily determinable fair values are recorded at cost less impairment, if any.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under Financial Accounting Standards Board (“FASB”) ASC 320, Investments - Debt and Equity Securities .

In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.

The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs on debt securities, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.

If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date.

If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors.

The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements of income.

The amount of the total OTTI related to the other factors shall be recognized in other comprehensive (loss) income, net of applicable taxes.

The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security.

The fair market value of the equity securities tends to fluctuate with the overall equity markets as well as the trends specific to each institution.

The equity securities portfolio is reviewed in a similar manner as that of the debt securities with greater emphasis placed on the length of time the market value has been less than the carrying value and the financial sector outlook.

The Corporation also reviews dividend payment activities, levels of non-performing assets and loan loss reserves.

The starting point for the equity analysis is the length and severity of market value decline.

The realized loss is recognized as impairment charges on securities on the consolidated statements of income.

The previous cost basis less the OTTI recognized in earnings becomes the new cost basis of the investment.

Management evaluates equity securities for impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

Equity securities without readily determinable fair values are generally evaluated for impairment under FASB ASC 321, Equity Securities.

In determining impairment under the FASB ASC 321 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the equity security or more likely than not will be required to sell the equity security before its anticipated recovery.

The assessment of whether an impairment exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

If an impairment loss on an equity security is considered to exist, a loss in the amount of the difference between the cost and fair value of the security is recognized.

Once the impairment is recorded, this becomes the new cost basis of the equity security and cannot be adjusted upward if there is a subsequent recovery in the fair value of the security.

Restricted Investment in Bank Stocks

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Based on the analysis of these factors, management determined that no impairment charge was necessary related to the restricted investment in bank stocks during 2023 or 2022.

Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses.

Interest on loans is recognized as income over the term of each loan, generally, by the accrual method.

Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.

The loans receivable portfolio is segmented into commercial, residential and consumer loans.

Commercial loans consist of the following classes:

Commercial and Industrial and Commercial Real Estate.

Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income

and the allowance for credit losses.

Interest on loans is recognized as income over the term of each loan, generally, by

the accrual method.

Loan origination fees and certain direct loan origination costs have been deferred with the net

amount amortized using the straight line method or the interest method over the contractual life of the related loans as an

interest yield adjustment.

The loans receivable portfolio is segmented into the following segments:

Real Estate (including both

commercial and residential loans), Agricultural, Commercial and Industrial, Consumer, and State and Political

Subdivisions.

Real Estate Lending

The Corporation engages in real estate lending to commercial borrowers in its primary market area and

surrounding areas.

The commercial component of the Corporation’s Real Estate portfolio is secured primarily by

commercial retail space, commercial office buildings, residential housing and hotels.

Generally, these loans have terms that do not exceed twenty years , have loan-to-value ratios of up to eighty percent of the value of the collateral property,

and are typically supported by personal guarantees of the borrowers.

In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the

borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan.

The value of the property is determined by either independent appraisers or internal evaluations performed by Bank officers.

Real estate loans secured by commercial properties generally present a higher level of risk than loans secured by residential real estate.

Repayment of loans secured by commercial real estate is typically dependent upon the

successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

The residential component of the Corporation’s Real Estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit.

These loans are generated by the Corporation’s marketing efforts, its present customers, walk-in customers and referrals.

These loans are originated primarily with customers from the Corporation’s market area.

The Corporation’s one-to-four family residential mortgage originations are secured principally by properties located in its primary market area and surrounding areas.

The Corporation offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction.

Loans with terms of thirty

years are normally held for sale and sold without recourse;

most of the residential mortgages held in the Corporation’s residential real estate portfolio have maximum terms of twenty years .

Generally, the majority of the Corporation’s

residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with private mortgage insurance at ninety-five percent or less.

Home equity term loans are secured by the borrower’s primary residence and

typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years .

In general, home equity

lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years .

In underwriting one-to-four family residential mortgage loans, the Corporation evaluates the borrower’s ability to make monthly payments, the borrower’s prior loan repayment history and the value of the property securing the loan.

The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background.

A majority of the properties securing residential real estate loans made by the

Corporation are appraised by independent appraisers.

The Corporation generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower

level of risk than consumer loans because they are secured by the borrower’s primary residence.

Risk is increased when the Company is in a subordinate position, especially to another lender, for the loan collateral.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors.

These loans are sold without recourse.

Loans held for sale amounted to $ 214,000 and $ 71,000 at December 31, 2023 and 2022, respectively.

Agricultural Lending

The Corporation originates agricultural loans to individuals in the farming industry for funding the production of crops or to purchase or refinance capital assets such as farmland, livestock, machinery, equipment, and farm real estate improvements.

Agricultural loans are typical secured by collateral related to the farming activities.

These loans originate from customers within the Corporation’s primary market area or the surrounding areas.

In underwriting agricultural loans, an analysis is performed regarding the borrower’s ability to repay the loan,

the borrower’s capital and collateral, and the past, present, and future cash flows of the borrower, as well as the

agricultural industry as a whole.

In general, these loans would be secured by cropland, pastureland, orchardland, or

timberland that is committed to ongoing management and agricultural production, with a maximum loan-to-value ratio of 70 % and a maximum term of ten years .

Commercial and Industrial Lending

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Commercial and industrial loans are generally secured with short-term assets;

however, in many cases, additional collateral such as real estate is provided as additional security for the loan.

Loan-to-value maximum thresholds have been established by the Corporation and are specific to the type of collateral.

however, in many cases,

additional collateral such as real estate is provided as additional security for the loan.

Loan-to-value maximum

thresholds have been established by the Corporation and are specific to the type of collateral.

Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals or internal evaluations, etc.

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Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis of the borrower’s ability to repay.

SBA PPP loans that have been issued by the Corporation as a result of the enactment of the CARES Act in response to the economic impact of the COVID-19 pandemic are included in the Corporation’s Commercial and Industrial portfolio and are underwritten pursuant to the PPP as administered by the SBA under the CARES Act.

See the Coronavirus Pandemic Impact on the Loan Portfolio section on page 62 for more information regarding the Corporation’s underwriting of these loans.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

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The loans are sponsored by one of the various government agencies including the SBA, United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”).

Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S.

Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan.

As of December 31, 2022, the Corporation's balance of GGLs was $ 4,631,000 , compared to $ 3,829,000 at December 31, 2021.

Commercial Real Estate Lending

The Corporation engages in commercial real estate lending in its primary market area and surrounding areas.

The Corporation’s commercial real estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels.

Generally, commercial real estate loans have terms that do not exceed twenty years , have loan-to-value ratios of up to eighty percent of the value of the collateral property, and are typically supported by personal guarantees of the borrowers.

In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan.

The value of the property is determined by either independent appraisers or internal evaluations performed by Bank officers.

Commercial real estate loans generally present a higher level of risk than residential real estate secured loans.

Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

Residential Real Estate Lending (Including Home Equity)

The Corporation’s residential real estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit.

These loans are generated by the Corporation’s marketing efforts, its present customers, walk-in customers and referrals.

These loans originate primarily within or with customers from the Corporation’s market area.

The Corporation’s one-to-four family residential mortgage originations are secured principally by properties located in its primary market area and surrounding areas.

The Corporation offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction.

Loans with terms of thirty years are normally held for sale and sold without recourse;

most of the residential mortgages held in the Corporation’s residential real estate portfolio have maximum terms of twenty years .

Generally, the majority of the Corporation’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at ninety-five percent or less.

Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years .

In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years .

The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background.

A majority of the properties securing residential real estate loans made by the Corporation are appraised by independent appraisers.

The Corporation generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence.

Risk is increased when the Corporation is in a subordinate position, especially to another lender, for the loan collateral.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors.

These loans are sold without recourse.

Loans held for sale amounted to $ 71,000 at December 31, 2022 and $ 6,006,000 at December 31, 2021.

As of December 31, 2023, the Company's balance of GGLs was $ 4,470,000 , compared to $ 4,631,000 at December 31, 2022.

Consumer Lending

The Corporation offers a variety of secured and unsecured consumer loans, including vehicle loans, stock loans and loans secured by financial institution deposits.

These loans originate primarily within or with customers from the Corporation’s market area.

The Corporation offers a variety of secured and unsecured consumer loans, including vehicle loans, stock secured loans and loans secured by financial institution deposits.

These loans originate primarily with customers from the Corporation’s market area.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower.

In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability to repay the loan as agreed.

underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability to repay the loan as agreed.

The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial condition and credit background.

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.

In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.

In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances.

Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Coronavirus Pandemic Impact on the Loan Portfolio

As a result of the economic impact of the COVID-19 coronavirus pandemic, the CARES Act was enacted in the United States on March 27, 2020.

The Corporation is approved by the SBA to fund loans under the SBA’s Paycheck Protection Program created as part of the CARES Act.

The PPP loans have 1.00 % interest rates, lender fees, two or five-year terms (depending on date of origination), and may qualify for forgiveness.

These loans funded by the Corporation are subject to the terms and conditions applicable to all loans made pursuant to the PPP, as administered by the SBA under the CARES Act.

The PPP calls for these loans to be fully guaranteed by the SBA.

PPP loan origination fees and certain loan origination costs have been deferred with the net amount accreted using the straight line method over the contractual life of the related loans as an interest yield adjustment.

If a loan is forgiven pursuant to the terms and conditions applicable to the PPP, the remaining origination fees and costs are recognized at the time of forgiveness.

All PPP loans are carried in the Corporation’s Commercial and Industrial loan portfolio.

As of December 31, 2022, the Corporation held 2 PPP loans in its Commercial and Industrial portfolio, which carried an aggregate balance of $ 113,000 which were granted during the first round of PPP issuance and did not qualify for forgiveness.

At December 31, 2021, the Corporation held 122 PPP loans in its Commercial and Industrial portfolio, carrying an aggregate balance of $ 4,894,000 , of which 2 loans carrying an aggregate balance of $ 160,000 were granted during the first round of PPP issuance and 120 loans carrying an aggregate balance of $ 4,734,000 were granted during the second round of PPP issuance.

An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as Troubled Debt Restructurings (“TDRs”), as long as specific criteria are met.

To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of September 30, 2021 or the termination date of the national emergency related to the COVID-19 pandemic as declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019.

In compliance with Section 4013 of the CARES Act, the Corporation has granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments.

Of the loan modifications that have

been granted in compliance with Section 4013 of the CARES Act, there were no loan modifications still actively on deferral as of December 31, 2022, compared to December 31, 2021 when there was 1 loan modification still actively on deferral carrying a balance of $ 9,423,000 .

See page 77 for additional information regarding the Section 4013 CARES Act modifications.

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of

personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.

In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of

repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.

addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances.

Furthermore, the application of various federal and state laws,

including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

State and Political Subdivisions Lending

The Corporation, from time to time, may originate loans to state and political subdivisions that are within the

Corporation’s primary market area or surrounding areas.

These loans may be either taxable or tax-free.

These loans may be issued for the purpose of land improvement, infrastructure changes, bond refinances, or the purchase of equipment.

State and political loans are typically secured by the taxing power of the borrowing entity.

In some cases, the loans may also be secured by the property/item being purchased.

Audited financial statements are required as part of the underwriting for all state and political loans and a full analysis of all components of the audited statements is performed.

If the loan is to be classified as tax-free, a letter from the entity’s solicitor stating such is required, as well.

The risk associated with these types of loans is considerably less than commercial loan transactions.

is based on the full faith, credit, and ability of the borrowing entity to tax and then collect the payments.

Delinquency or

loss on these types of loans is de minimus.

Delinquent Loans

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Delinquent notices are generated automatically when a loan is 10 or 15 days past-due, depending on loan type.

Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan.

Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance

exists for improvement in the status of the loan.

Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and industrial and commercial real estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists.

Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Corporation estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell.

Commercial and industrial loans and real estate loans issued for commercial purpose are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a

collateral deficiency exists.

Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Company estimates the impairment based on its analysis of the cash flows or

collateral estimated at fair value less cost to sell.

Should a GGL default, demand is made to the originating bank for repurchase of the loan.

If the originating bank does not repurchase the loan, demand for repurchase is then made to the appropriate government agency which has provided the guarantee for the loan.

Residential real estate and consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected.

If the originating bank does not repurchase the loan, demand for repurchase is then made to the

appropriate government agency which has provided the guarantee for the loan.

Real estate loans issued for residential purposes and consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected.

At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full.

Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg.

reaffirmation by the borrower with demonstrated repayment ability).

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to

determine whether repayment is likely to occur (e.g.

reaffirmation by the borrower with demonstrated repayment

Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.

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

A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in the process of collection.

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the

contractual payment of principal or interest has become 90 days past due or management has serious doubts about

further collectability of principal or interest.

A loan may remain on accrual status if it is well secured (or supported by a

strong guarantee) and in the process of collection.

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 interest income.

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that is, payments are still being received.

Generally, the payments are applied to principal.

Generally, the payments

are applied to principal.

These loans remain under constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management's judgment regarding the collectability of principal.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income.

Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level estimated by management to be adequate to absorb potential loan losses.

Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors.

This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

The allowance consists of specific, general and unallocated components.

The specific component relates to loans that are individually classified as impaired.

Select loans are not aggregated for collective impairment evaluation, as such;

all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary.

Allowance for Credit Losses

The allowance for credit losses (“ACL”) is an estimate of losses arising from borrowers’ inability to make loan payments as required, which is calculated via a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio.

The Corporation completed a one-time adjustment to decrease the ACL at the adoption of ASU 2016-13 through retained earnings, but all subsequent adjustments will be established through provisions for credit losses charged against income.

Loans deemed to be uncollectible are charged against the ACL and subsequent recoveries, if any, are credited to the allowance.

The ACL is maintained at a level estimated by management to be adequate to absorb potential loan losses.

such time as management can make or obtain a reasonable and supportable forecast.

Management also considers 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), composition of the loan portfolio, and other relevant factors.

Modeling of the ACL uses sophisticated statistical techniques to arrive at reasonable and supportable forecasts of expected losses.

The Corporation has contracted with a third-party vendor to assist in developing models for the ACL related to the Corporation’s loan portfolio under Accounting Standards Update (“ASU”) 2016-13.

The Corporation has opted to utilize the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL which uses an average annual charge-off rate.

This average annual charge-off rate contains loss content over several vintages and is

used as a foundation for estimating the credit loss content for loans by segmented pools at the balance sheet date and is used to determine a historical charge-off rate.

When estimating expected credit losses, the Corporation considers forward-looking information that is both reasonable, supportable, and relevant to assessing the collectability of cash flows.

Reasonable and supportable forecasts may extend over the entire contractual term of a loan or a period shorter than the contractual term.

Reasonable and supportable forecasts may vary by portfolio segment or individual forecast input.

These forecasts may include data from internal sources, external sources, or a combination of both.

When the contractual term of a loan extends beyond the reasonable and supportable period, ASC Topic 326

requires reverting to historical loss information, or an appropriate proxy, for those periods beyond the reasonable and

supportable forecast period (often referred to as the reversion period).

The Corporation may revert to historical loss information for each individual forecast input or based on the entire estimate of loss.

Reversion to historical loss

information may be immediate, occur on a straight-line basis, or use any systematic/rational method.

Management may apply different reversion techniques depending on the economic environment or applicable loan portfolio.

The methodology used to determine the ACL also includes a qualitative component in which the Corporation adjusts expected credit loss estimates for information not already captured in the loss estimation process.

These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses.

Changes in the

level of the Corporation’s ACL may not always be directionally consistent with changes in the level of qualitative factor adjustments due to the incorporation of reasonable and supportable forecasts in estimating expected losses.

considers qualitative factors that are relevant to the Corporation as of the reporting date, which may include but are not

1) changes in lending policies and procedures, including changes in underwriting standards and collection,

charge-off, and recovery practices not considered elsewhere;

2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the

condition of various market segments;

3) changes in the nature and volume of the loan portfolio;

4) changes in the

experience, ability, and depth of management and other relevant staff;

5) changes in the volume and severity of past due

loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

6) changes in the quality of the Corporation’s loan review system;

7) changes in the value of underlying collateral for collateral dependent loans;

8) the existence and effect of any concentrations of credit and changes in the level of such concentrations;

and 9) the effect of other external factors such as competition and legal and regulatory requirements on

the level of estimated credit losses in the Corporation’s existing loan portfolio.

The Corporation’s ACL is calculated by collectively evaluating and individually evaluating loans.

The Corporation collectively evaluates applicable loans based on segments according to their homogeneous characteristics, aligned with the segmentation of the FDIC Bank Call Report.

The Corporation collectively evaluates loans and determines applicable loss rates based on the following segments/classes:

● Construction, land development, and other land loans

● Residential construction (loans to build homes, both speculative and owner-occupied, and 1-4

● family lot loans)

● Agribusiness, farmland, or secured by farmland

● Revolving, open-end, 1-4 family residential properties (and extended under lines of credit)

● Loans secured by first liens

● Loans secured by junior liens

● Secured by multifamily (5 or more) residential properties

● Loans secured by owner occupied, non-farm, non-residential properties

● Loans secured by other non-farm, non-residential properties

● Loans to finance agricultural production and other loans for farmers

Commercial and Industrial

● Commercial and industrial loans

● Other revolving credit plans

● Automobile loans

● Other consumer loans

State and Political Subdivisions

● Obligations (other than securities or leases) of states and political subdivisions in the U.S.

In accordance with ASC 326-20-30-2, the Corporation will evaluate individual loans for expected credit losses when the loans do not share similar risk characteristics with loans evaluated using the collective method.

may evaluate loans on an individual basis even when no specific expectation of collectability is in place.

Loans deemed to be impaired are specifically identified and measured for impairment.

A loan is deemed to be impaired when, based on

current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the loan agreement.

Loans to be considered for impairment include all non-accrual loans or any other selected loans where full collection is unlikely.

Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due.

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Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral.

TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s contractual rate at inception.

If a TDR is considered to be a collateral dependent loan, the loan may be reported at the net realizable value of the collateral.

For TDRs that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers all other loans not identified as impaired (aside from GGLs, which do not require an allowance) and is based on historical losses and qualitative factors.

The historical loss component of the allowance is determined by losses recognized by portfolio segment over an eight quarter lookback period that management has determined best represents the current credit cycle.

Qualitative factors impacting each portfolio segment may include:

delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.

GGLs do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S.

Should a GGL default, the loan will be repurchased by the originating bank or the appropriate government agency that has provided the guarantee for the loan.

Although PPP loans do not require an associated allowance for loan losses due to the program’s call for a full guarantee by the SBA, the Corporation has taken the conservative approach and has calculated a qualitative allocation for the PPP loans under the general component of the allowance for the Commercial and Industrial portfolio.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses.

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Once identified as impaired, the loans are measured individually for impairment based on one of the following methods:

● The present value of expected cash flows, discounted at the loan’s effective interest rate (i.e.

contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan)

● The loan’s observable market price

● The fair value of the collateral if the loan is deemed to be collateral dependent.

A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the liquidation of the

underlying collateral and there are no other available and reliable sources of repayment.

will consider estimated costs to sell, on a discounted basis, in the measurement of impairment if these costs are expected to reduce the cash flows available to repay the loan.

Any portion of the recorded

investment for a collateral dependent loan (including any capitalized accrued interest, net deferred

loan fees or costs, and unamortized premium or discount) exceeding the fair value of the collateral that can be identified as uncollectible is deemed a confirmed loss and will be charged off against the

Loans that have been individually measured for impairment may have a portion of the allowance allocated to

cover the calculated amount of impairment as determined by the methods listed above, referred to as a specific

Loans individually evaluated for impairment may also have a zero specific allocation if the loans are deemed to have no impairment, or if the amount of the impairment will be charged off.

ASU 2022-02, Loan Modifications Experiencing Financial Difficulty, eliminated the accounting guidance for

Troubled Debt Restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and

restructurings by creditors when a borrower is experiencing financial difficulty.

In accordance with the new guidance,

the Corporation no longer evaluates loans with modifications made to borrowers experiencing financial difficulty individually for impairment, nor establishes a related specific reserve for such loans, but rather these loans are included in their respective portfolio segment and evaluated collectively for impairment to establish an allowance for credit

Any modifications of loans to borrowers experiencing financial difficulty that are classified as non-accrual or are otherwise designated as collateral dependent are individually evaluated for determination of expected credit losses.

There were no loan modifications made to borrowers experiencing financial difficulties during the year ended December 31, 2023.

Subsequent to the date of the financial statements, on January 20, 2024, a modification was completed on a loan totaling $ 9,455,000 to a borrower experiencing financial difficulty to allow a period of interest-only payments of six months.

The Corporation has no commitments to lend additional funds to the borrower.

The most common types of concessions granted upon modification of a loan to a borrower experiencing financial difficulties include:

(a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the

maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period

of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or for the

remaining term of the loan.

A less common concession would be forgiveness of a portion of the loan’s principal.

so modified remain collectively evaluated for determination of expected credit losses, unless, during the process of

evaluation, it is determined that the loan should be placed on non-accrual status until the Corporation determines that future collection of principal and interest is reasonably assured or the loan is otherwise deemed to be collateral dependent.

There may be certain types of loans for which the expectation of credit loss is zero after evaluating historical loss information, making necessary adjustments for current conditions and reasonable and supportable forecasts, and

considering any collateral or guarantee arrangements that are not free-standing contracts.

Factors considered by

management when evaluating whether expectations of zero credit loss are appropriate may include, but are not limited to:

1) a long history of zero credit loss;

2) full securitization by cash or cash equivalents;

3) high credit ratings from

rating agencies with no expected future downgrade;

4) principal and interest payments that are guaranteed by the U.S.

5) the issuer, guarantor, or sponsor can print its own currency and the currency is held by other central banks as reserve currency;

and 6) the interest rate on the security is recognized as a risk-free rate.

A loan that is fully secured by cash or cash equivalents, such as a certificate of deposit issued by the lending institution, would likely have zero credit loss expectations.

Similarly, the guaranteed portion of an SBA loan purchased on the secondary market through the SBA’s fiscal and transfer agent would likely have zero credit loss expectations because these financial assets are unconditionally guaranteed by the U.S.

ASC Topic 326 introduces the concept of purchased credit deteriorated (“PCD”) assets.

PCD assets are acquired financial assets that, at acquisition, have experienced more-than-insignificant deterioration in credit quality

since origination, as determined by the Corporation’s assessment.

The Corporation does not possess loans classified as purchased credit deterioration at this time.

Should the Corporation acquire purchased loans, these loans will be evaluated to determine if they are PCD.

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures.

Off-balance sheet credit exposures primarily include undrawn portions of revolving lines of credit and

standby letters of credit.

The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets.

As of December 31, 2022 and 2021 the amount of the reserve for unfunded lending commitments was $ 68,000 and $ 177,000 , respectively.

The Corporation is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the existing loan agreement.

Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash

flows using the loan’s contractual interest rate at inception or the net realizable value of the collateral for certain collateral dependent loans.

From time to time, the Corporation may agree to modify/restructure the contractual terms of a borrower's loan.

The restructuring of a loan is considered a TDR if both the following conditions are met:

(i) the borrower is experiencing financial difficulties, and (ii) the Corporation has granted a concession.

The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan.

A less common concession is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted.

Similarly, the determination of whether a concession has been granted is subjective in nature.

For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

Loans modified in a TDR considered impaired and may or may not be placed on non-accrual status until the Corporation determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months.

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.

See page 77 for further discussion of the Section 4013 CARES Act modifications.

The Corporation utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer loans.

An asset quality rating is assigned using the guidance provided in the Corporation’s loan policy.

As of December 31, 2023 and December 31, 2022, the amount of the reserve for unfunded lending commitments was $ 166,000 and $ 68,000 , respectively.

The Corporation made a policy election to exclude accrued interest receivable from the amortized cost basis of

Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Corporation’s consolidated balance sheet and totaled $ 2,476,000 and $ 1,941,000 as of December 31, 2023 and 2022, respectively.

Accrued interest receivable on loans is excluded from the estimate of credit losses.

The Corporation is subject to periodic examination by its federal and state examiners, and may be required by

such regulators to recognize additions to the ACL based on their assessment of credit information available to them at

the time of their examinations.

The Corporation utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all loans.

An asset quality rating is assigned using the guidance provided in the

Corporation’s loan policy.

Primary responsibility for assigning the asset quality rating rests with the credit department.

The asset quality rating is validated periodically by both an internal and external loan review process.

The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry.

the particular industry.

Primary emphasis is placed on financial condition and trends.

The grade also reflects current economic and industry conditions;

as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

The loan grading system for Residential Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio.

as well as other variables such as liquidity, cash flow, revenue/earnings trends,

management strengths or weaknesses, quality of financial information, and credit history.

The loan grading system for residential real estate secured and consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio.

Risk grade characteristics are as follows:

Risk Grade 1 – MINIMAL RISK through Risk Grade 6 – MANAGEMENT ATTENTION (Pass Grade Categories)

Risk is evaluated via examination of several attributes including but not limited to financial trends, strengths and weaknesses, likelihood of repayment when considering both cash flow and collateral, sources of repayment, leverage position, management expertise, and repayment history.

At the low-risk end of the rating scale, a risk grade of 1 - Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss.

leverage position, management expertise, and repayment history.

At the low-risk end of the rating scale, a risk grade of 1 – Minimal Risk is the grade reserved for loans with

exceptional credit fundamentals and virtually no risk of default or loss.

Loan grades then progress through escalating ratings of 2 through 6 based upon risk.

Risk Grade 2 – Modest Risk are loans with sufficient cash flows;

Risk Grade 3 - Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers;

Risk Grade 4 - Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher;

and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets.

Risk Grade 6 - Management Attention are loans with weaknesses resulting from declining performance trends and the

borrower’s cash flows may be temporarily strained.

Risk Grade 3 –

Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers;

Risk Grade 4 – Acceptable

Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher;

Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets.

Risk Grade 6 – Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained.

Loans in this category are performing according to terms, but present some type of potential concern.

Risk Grade 7 − SPECIAL MENTION (Non-Pass Category)

Assets in this category are adequately collateralized but have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Corporation’s credit position at some future date.

The loans may constitute increased credit risk, but not to the point of justifying a classification of substandard.

No loss of principal or interest is envisioned, but risk is increasing beyond that at which the loan originally would have been granted.

Assets in this category are adequately collateralized but have potential weakness which may, if not checked or

corrected, weaken the asset or inadequately protect the Corporation’s credit position at some future date.

The loans may

constitute increased credit risk, but not to the point of justifying a classification of substandard.

No loss of principal or

interest is envisioned, but risk is increasing beyond that at which the loan originally would have been granted.

Historically, cash flows are inconsistent;

financial trends show some deterioration.

Liquidity and leverage ratios are above industry averages.

Liquidity and leverage are above industry averages.

Financial information could be incomplete or inadequate.

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Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct possibility that the Corporation will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security.

Assets so classified must have “well-defined” weaknesses that jeopardize the full

liquidation of the debt.

These loans are characterized by the distinct possibility that the Corporation will sustain some loss if the

aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security.

Substandard loans have a high probability of payment default and require more intensive supervision by Corporation management.

Risk Grade 9 − DOUBTFUL (Non-Pass Category)

Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable.

The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed.

Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

Premises and Equipment

collection or liquidation in full is deemed to be highly improbable.

The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is

deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed.

Loans are graded doubtful if they contain weaknesses so

serious that collection or liquidation in full is questionable.

Premises and Equipment, net

Premises and equipment are stated at cost less accumulated depreciation computed principally utilizing the straight-line method over the estimated useful lives of the assets.

11 unchanged sentences

The amount of servicing income earned was $ 213,000 and $ 230,000 at December 31, 2023 and 2022, respectively.

Amortization recognized in relation to mortgage servicing rights

was $ 88,000 and $ 120,000 at December 31, 2022 and 2021, respectively.

Amortization recognized in relation to mortgage servicing rights was $ 72,000 and $ 88,000 at December 31, 2023 and 2022, respectively.

Both income and amortization are included in service charges and fees on the consolidated statements of income.

4 unchanged sentences

The Corporation’s accrued liabilities for this benefit agreement as of December 31, 2023 and 2022 which are included in other liabilities in the Corporation’s consolidated balance sheets were $ 62,000 and $ 53,000 , respectively.

The related income (expense) for this benefit agreement amounted to $ 3,000 in 2022 and $( 20,000 ) in 2021.

The related (expense) income for this benefit agreement amounted to $( 9,000 ) in 2023 and $ 3,000 in 2022.

The expense recognized in 2023 was the result of service costs associated with the benefit agreement.

3 unchanged sentences

Under the cost method, the Corporation recognizes tax credits as they are allocated and amortizes the initial cost of the investment over the period that the tax credits are allocated to the Corporation.

The amount of tax credits allocated to the Corporation were $ 249,000 and $ 405,000 in 2022 and 2021, respectively, and the amortization of the investments in the limited partnerships were $ 225,000 and $ 371,000 in 2022 and 2021, respectively.

amount of tax credits allocated to the Corporation were $ 484,000 and $ 249,000 in 2023 and 2022, respectively, and the amortization of the investments in the limited partnerships were $ 231,000 and $ 225,000 in 2023 and 2022, respectively.

During 2021, the Corporation became a limited partner in a real estate venture 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.

The new limited partnership has not begun amortizing and future contributions will be required.

In 2023 and 2022, capital contributions and other fees related to the project in the combined amount of $ 2,429,000 and $ 2,458,000 , respectively, were made in relation to the new real estate venture.

The new limited partnership began amortizing in December 2023.

Goodwill resulted from the acquisition of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed of the branch of another financial institution in Danville, Pennsylvania, in January 2004.

7 unchanged sentences

Goodwill is evaluated for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

Management notes that the emergence of COVID-19 as a global pandemic during 2020 and throughout 2021 has resulted in significant deterioration in general economic conditions and has caused a deterioration in the environment in which the Corporation operates.

The full impact to earnings in the banking industry and to the Corporation specifically, remains uncertain.

The Corporation has evaluated the goodwill included in its consolidated balance sheet at December 31, 2023, and has determined there was no impairment as of that date.

3 unchanged sentences

Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell on the date of foreclosure, establishing a new cost basis.

After foreclosure, valuations are periodically performed and if fair value less cost to sell declines subsequent to foreclosure, a valuation allowance is

recorded through expense.

After foreclosure, valuations are periodically performed and if fair value less cost to sell declines subsequent to foreclosure, a valuation allowance is recorded through expense.

Revenues derived from and costs to maintain the assets and subsequent gains and losses on sales are included in non-interest expense on the consolidated statements of income.

11 unchanged sentences

A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.

The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.

The determination of whether or not a tax

position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.

The Corporation recognizes interest and penalties on income taxes, if any, as a component of income tax expense in the consolidated statements of income.

14 unchanged sentences

Trust Department income is generally recognized on a cash basis and is not materially different than if it were reported on an accrual basis (see Table 5 – Non-Interest Income for details).

Comprehensive (Loss) Income

The Corporation is required to present accumulated other comprehensive (loss) income in a full set of general-purpose financial statements for all periods presented.

Accumulated other comprehensive (loss) income is comprised of net unrealized holding (losses) gains on the debt securities available-for-sale portfolio.

The Corporation has elected to report these effects on the consolidated statements of comprehensive (loss) income.

Comprehensive Income (Loss)

The Corporation is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented.

Accumulated other comprehensive income (loss) is comprised of net unrealized holding (losses) gains on the debt securities available-for-sale and derivative portfolios.

The Corporation has elected to report these effects on the consolidated statements of comprehensive income (loss).

Advertising Costs

It is the Corporation’s policy to expense advertising costs in the period in which they are incurred.

Recent Accounting Standards Updates (“ASU”):

There were no new accounting pronouncements affecting the Corporation during the year ended December 31, 2022 that were not already adopted by the Corporation in previous periods.

Pending ASUs:

In June 2016, the FASB issued ASU No.

Recent Accounting Standards Updates:

In January of 2023, the Corporation adopted ASU No.

2016-13, Financial Instruments-Credit Losses (Topic

Measurement of Credit Losses on Financial Instruments.

2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

The Corporation has taken steps to prepare for the implementation, such as:

2016-13 required financial assets measured at

amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is

deducted from the amortized cost basis.

The measurement of expected credit losses is based on relevant information

about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

The Corporation took steps to prepare for the implementation over the

past several years, such as:

forming an internal committee, gathering pertinent data, consulting with outside professionals, subscribing to a new software system, and running existing and new methodologies concurrently through the period of implementation.

The Corporation has elected to adopt this pronouncement as of January 1, 2023.

The Corporation continues to evaluate the impact the CECL model will have on the accounting for credit losses, and expects to recognize a one-time, cumulative effect adjustment to the allowance for loan losses at the beginning of the first reporting period in which the new standard is effective.

The Corporation is completing its data and model validation analysis and working to finalize policies and control framework related to the adoption process.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures , which eliminates the accounting guidance on troubled debt restructurings (“TDRs”) by creditors that have adopted the current expected credit losses (“CECL”) model and enhances disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty.

The ASU also amends the guidance on “vintage disclosures” to require disclosure of current-period gross charge-offs by year of origination.

For entities that have not yet adopted ASU 2016-13, the amendments in ASU 2022- 02 are effective upon adoption of ASU 2016-13.

Entities may elect to apply the guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively.

If an entity elects to adopt the updated guidance on TDR recognition and measurement prospectively, the guidance should be applied to modifications occurring after the date of

The amendments on TDR disclosures and vintage disclosures should be adopted prospectively.

The Company adopted ASU 2022-02 upon the adoption of ASU 2016-13, and does not anticipate a material impact on the Company’s consolidated financial statements.

The Corporation also completed a data and model validation analysis and prepared policies related to the adoption process.

The Corporation adopted the ASU’s provisions using the modified retrospective method and evaluated the impact the current expected credit loss (“CECL”) model had on the accounting for credit losses, and recognized a one-time, cumulative-effect adjustment to retained earnings at the beginning of the first reporting period in which the new standard became effective.

The cumulative-effect adjustment resulted in an increase to retained earnings of $ 768,000 , an additional reserve for unfunded commitments of $ 147,000 , a decrease in the

allowance for credit losses of $ 1,119,000 , and a decrease in deferred tax assets of $ 204,000 , as outlined in the table on

the next page.

There was no impact on the securities portfolio upon adoption.

This adoption method is considered a

change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

January 1, 2023

As Reported Under ASU

2016-13 Adoption

Allowance For Credit Losses

Deferred Income Taxes

Other Liabilities

Retained Earnings

Effect on deferred tax assets related to the adjustment to the allowance for credit losses and reserve for unfunded lending commitments from the adoption of ASU 2016-13 using a 21 % tax rate

Adjustment to the reserve for unfunded lending commitments related to the adoption of ASU 2016-13

Adjustment to undistributed profits related to the adoption of ASU 2016-13

In January of 2023, the Corporation adopted ASU No.

2022-02, Financial Instruments-Credit Losses (Topic

Troubled Debt Restructurings and Vintage Disclosures, which eliminated the accounting guidance on troubled

debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhances disclosure requirements for

certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty.

also amended the guidance on “vintage disclosures” to require disclosure of current-period gross charge-offs by year of

The Corporation adopted the ASU’s provisions using the modified retrospective method in conjunction with

the CECL adoption.

The adoption of ASU 2022-02 did not have a material impact on the Corporation’s consolidated financial statements.

In March of 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2023-02, Investments Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the

Proportional Amortization Method.

ASU 2023-02 allows for standardization of accounting methodology for tax credit equity investments when certain requirements are met.

The standard provides the ability for both current and

prospective tax credit investors to avoid the complexities of accounting for tax credits outside of the proportional

amortization method.

To qualify for the proportional amortization method, the following conditions must be met:

it is probable that the income tax credits allocable to the investor will be available, 2.

the investor does not have the ability to

exercise significant influence over the operating and financial policies of the underlying project, 3.

substantially all of the projected benefits are from income tax credits and other income tax benefits, 4.

the investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive, and 5.

the investor is a

limited liability investor in the limited liability entity for both legal and tax purposes and the investor’s liability is limited to its capital investment.

The amendments in this ASU will be applied either on a modified retrospective basis or a

retrospective basis.

The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years beginning after December 15, 2023.

Early adoption is permitted for all entities in any interim period.

The Corporation is currently evaluating the provisions of ASU 2023-02 and does not expect the adoption of the standard to have a material impact on the Corporation’s financial statements.

In December of 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.

ASU 2023-09 requires enhanced income tax disclosures related to the rate reconciliation and information related to income taxes paid.

The ASU was issued to enhance transparency and decision usefulness of income tax disclosures.

The standard requires:

consistent categories and greater disaggregation of information in the rate reconciliation, and 2.

income taxes paid, net of refunds received, disaggregated by jurisdiction based on an established threshold.

The amendments in this ASU will be applied on a prospective basis and retrospective application is permitted.

The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years beginning after December 15, 2024.

Early adoption is permitted for all entities in any interim period.

The Corporation is currently evaluating the provisions of ASU 2023-09 and does not expect the adoption of the standard to have a material impact on the Corporation’s financial statements.

Transfer of Financial Assets

8 unchanged sentences

NOTE 2 — SECURITIES

Debt Securities

There was no allowance for credit losses for Available-For-Sale debt securities as of December 31, 2023;

therefore, it is not present in the table below.

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as Available-For-Sale were as follows at December 31, 2023 and 2022:

31 unchanged sentences

Mortgage-backed securities

At December 31, 2022, the Corporation had holdings of securities from one issuer in excess of ten percent of consolidated stockholders’ equity, other than the U.S.

At December 31, 2023 and 2022, the Corporation had holdings of securities from the following issuers in excess of ten percent of consolidated stockholders’ equity (excluding holdings of the U.S.

Government and U.S.

Government Agencies and Corporations).

Holdings in Sallie Mae Bank securities had a fair value of $ 17,362,000 as of December 31, 2022.

There were no aggregate holdings of securities with a single issuer (excluding the U.S.

Government and U.S.

Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at December 31, 2021.

The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch.

The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in debt securities available-for-sale during 2022 and 2021 were $ 58,675,000 and $ 0 , respectively.

Gross gains realized on these sales were $ 221,000 and $ 0 , respectively.

Gross losses on these sales were $ 974,000 and $ 0 , respectively.

There were no impairment losses realized on debt securities available-for-sale during 2022 or 2021.

At December 31, 2022 and 2021, the Corporation had $ 1,699,000 and $ 1,962,000 , respectively, in equity securities recorded at fair value.

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during 2022 and 2021:

(Dollars in thousands)

December 31, 2023:

Sallie Mae Bank

Nelnet Student Loan Trust

Navient Student Loan Trust

(Dollars in thousands)

December 31, 2022:

Net (losses) and gains from market value fluctuations recognized during the period on equity securities

Net gains recognized during the period on equity securities sold during the period

Net (losses) and gains recognized during the reporting period on equity securities still held at the reporting date

The Corporation and its investment advisors monitor the entire portfolio at least quarterly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months.

Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at December 31, 2022 and 2021.

Sallie Mae Bank

Proceeds from sales of investments in debt securities available-for-sale during 2023 and 2022 were $ 23,230,000 and $ 58,675,000 respectively.

Gross gains realized on these sales were $ 447,000 and $ 221,000 respectively.

Gross losses on these sales were $ 348,000 and $ 974,000 respectively.

The summary below shows the gross unrealized losses and fair value of the Corporation’s debt securities, aggregated by investment category, of which individual securities have been in a continuous unrealized loss position for less than 12 months or 12 months or more as of December 31, 2023 and 2022:

25 unchanged sentences

Corporate debt securities

The Corporation invests in various forms of agency debt including residential and commercial mortgage-backed securities and callable debt.

The other mortgage-backed securities consist of private (non-agency) residential and commercial mortgage-backed securities.

The municipal securities consist of general obligations and revenue bonds.

Asset-backed securities consist of private (non-agency) student loan pools backed by the Federal Family Education Loan Program (“FFELP”) which carry a 97% federal government guarantee.

Corporate debt securities consist of senior debt and subordinated debt holdings.

The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the marketplace and credit premiums for various types of agency debt.

These factors change continuously and therefore the market value of these securities may be higher or lower than the Corporation’s carrying value at any measurement date.

Management does not believe any of their 95 debt securities with a less than one year unrealized loss position, or any of their 88 debt securities with a one year or greater unrealized loss position, as of December 31, 2022, represent an other-than-temporary impairment, as these unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Corporation expects to collect principal and interest payments as defined under the original terms as all contracted payments on securities in the portfolio are current as of December 31, 2022.

NOTE 3 — LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table presents the classes of the loan portfolio summarized by risk rating as of December 31, 2022 and 2021:

Commercial and

There were 177 individual debt securities in an unrealized loss position as of December 31, 2023, with a combined decline in value representing 7.75 % of the debt securities portfolio.

There were 183 individual debt securities in an unrealized loss position as of December 31, 2022, with their combined decline in value representing 9.11 % of the debt securities portfolio.

The Corporation made a policy election to exclude accrued interest receivable from the amortized cost basis of debt securities available for sale.

Accrued interest receivable on debt securities available for sale is reported as a component of accrued interest receivable on the Corporation’s consolidated balance sheet and totaled $ 2,487,000 as of December 31, 2023.

Accrued interest receivable on debt securities available for sale is excluded from the estimate of credit losses.

All debt securities available for sale in an unrealized loss position, as of December 31, 2023, continue to perform as scheduled and we do not believe that there is a credit loss or that a provision for credit losses is necessary.

Also, as part of our evaluation of our intent and ability to hold debt securities for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategies, cash flow needs, liquidity position, capital

adequacy and interest rate risk position.

We do not currently intend to sell the debt securities within the portfolio and it is not more-likely-than-not that we will be required to sell the debt securities.

Management continues to monitor all of our debt securities with a high degree of scrutiny.

There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its debt securities may be sold or would require a charge to earnings as a provision for credit losses in such periods.

Equity Securities

At December 31, 2023 and 2022, the Corporation had $ 1,482,000 and $ 1,699,000 , respectively, in equity securities recorded at fair value.

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during 2023 and 2022:

(Dollars in thousands)

Commercial Real Estate

December 31, 2023

December 31, 2022

Net losses from market value fluctuations recognized during the period on equity securities

Net gains recognized during the period on equity securities sold during the period

Net losses recognized during the reporting period on equity securities still held at the reporting date

The Corporation monitors the equity securities portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months.

Based on the factors described above, management did not consider any equity securities to be impaired at December 31, 2023 or 2022.

NOTE 3 — LOANS AND ALLOWANCE FOR CREDIT LOSSES

The following table presents the classes of the loan portfolio summarized by risk rating and year of origination and gross charge offs by loan portfolio summarized by year of origination as of December 31, 2023.

(Dollars in thousands)

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

Residential Real Estate

Including Home Equity

Total Real Estate Loans

Agricultural:

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

Total Agricultural Loans

Commercial and Industrial:

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $ 28,079,000 and $ 1,492,000 at December 31, 2022 and $ 24,647,000 and $ 1,671,000 at December 31, 2021.

Commercial and Industrial loans also included $ 4,631,000 and $ 3,829,000 of GGLs and $ 113,000 and $ 4,894,000 of PPP loans as of December 31, 2022 and 2021, respectively.

Loans held for sale amounted to $ 71,000 at December 31, 2022 and $ 6,006,000 at December 31, 2021.

During the year ended December 31, 2022, $ 7,900,000 in loans that had been previously held for sale were transferred to held for investment status, as the Corporation no longer had the intent to sell these loans.

The activity in the allowance for loan losses, by loan class, is summarized below for the years indicated.

Total Commercial and

Industrial Loans

7 Special Mention

8 Substandard

Unearned discount

Net deferred loan fees and costs

Total Consumer Loans

State and Political Subdivisions:

7 Special Mention

8 Substandard

Unearned discount

Net deferred loan fees and costs

Total State and Political Subdivision Loans

7 Special Mention

8 Substandard

Unearned discount

Net deferred loan fees and costs

Gross Charge Offs:

Commercial and Industrial

State and Political Subdivisions

Total Gross Charge Offs

State and Political Subdivision loans include loans categorized as tax-free in the amount of $ 26,181,000 as of December 31, 2023.

Commercial and Industrial loans include $ 4,470,000 of GGLs as of December 31, 2023.

Loans held for sale are included in the Real Estate loans category and carried a balance of $ 214,000 as of December 31, 2023.

The activity in the allowance for credit losses by loan class (post adoption of ASU No.

2016-13), is summarized below for the year ended December 31, 2023.

(Dollars in thousands)

1 unchanged sentence

As of and for the year ended December 31, 2023:

Allowance for Loan Losses:

Beginning balance

Provision (credit)

Allowance for Credit Losses:

Balance at December 31, 2022

CECL adoption adjustment

Beginning balance January 1, 2023

(Credit) Provision

Ending Balance

3 unchanged sentences

evaluated for impairment

Reserve for Unfunded Lending Commitments

Loans Receivable:

4 unchanged sentences

evaluated for impairment

The Corporation’s activity in the allowance for credit losses on unfunded commitments for the year ended December 31, 2023 was as follows:

(Dollars in thousands)

Balance at December 31, 2022

CECL adoption adjustment

Credit for credit losses on unfunded commitments

Balance at December 31, 2023

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s individually evaluated loans are summarized below at December 31, 2023.

(Dollars in thousands)

December 31, 2023

Commercial and Industrial

The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs.

The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Corporation’s individually evaluated loans are summarized below for the years ended December 31, 2023.

(Dollars in thousands)

Year Ended December 31, 2023

Commercial and Industrial

Of the $ 24,000 in interest income recognized on individually evaluated loans for the year ended December 31, 2023, $ 0 in interest income was recognized with respect to non-accrual loans.

The following table presents the collateral-dependent loans by segment for the year ended December 31, 2023.

(Dollars in thousands)

December 31, 2023

Commercial and Industrial

At December 31, 2023, there were no commitments to lend additional funds with respect to individually evaluated loans.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of December 31, 2023 and 2022 were as follows:

(Dollars in thousands)

Commercial and Industrial

State and Political Subdivisions

Total non-accrual loans

Foreclosed assets held for resale

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

Total non-performing assets

If interest on non-accrual loans had been accrued at original contract rates, interest income would have increased by $ 2,488,000 in 2023 and $ 2,174,000 in 2022.

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

Consumer mortgage loans secured by residential real estate for which the Corporation has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $ 138,000 at December 31, 2023 and $ 41,000 at December 31, 2022.

These balances were not included in foreclosed assets held for resale at December 31, 2023 or December 31, 2022.

The following tables present the classes of the loan portfolio summarized by the past-due status at December 31, 2023 and 2022:

(Dollars in thousands)

December 31, 2023:

Commercial and Industrial

State and Political Subdivisions

(Dollars in thousands)

December 31, 2022:

Commercial and Industrial

State and Political Subdivisions

2016-13 Disclosures:

For periods prior to the adoption of ASU No.

2016-13, when management deemed the collection of contractual cashflows was unlikely for a specific instrument (mainly non-accrual loans and TDRs, then referred to as impaired loans), a specific reserve was calculated under ASC 310-10.

Management further calculated a general reserve for performing assets under its previous methodology, following ASC 450-20 which utilized historical loss experience and qualitative factor adjustments to arrive at a calculated allowance for loan losses.

Upon adoption of ASU No.

2016-13, the classes of the loan portfolio were updated to match the segmentation used under the CECL model and have been updated from Commercial and Industrial, Commercial Real Estate, Residential Real Estate, and Consumer to Real Estate, Agricultural, Commercial and Industrial, Consumer, and State and Political Subdivisions.

Comparative, pre-ASU No.

2016-13 adoption data has not been updated to reflect the new loan classes/segmentation utilized under the CECL model.

The following table presents the classes of the loan portfolio summarized by risk rating as of December 31, 2022:

Commercial and Industrial

Commercial Real Estate

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

Residential Real Estate Including Home Equity

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

7 Special Mention

8 Substandard

Add (deduct):

Unearned discount

Net deferred loan fees and costs

The activity in the allowance for loan losses by loan class (prior to adoption of ASU No.

2016-13), is summarized below for the year ended December 31, 2022.

(Dollars in thousands)

and Industrial

2 unchanged sentences

Beginning balance

(Credit) provision

Provision (Credit)

Ending Balance

9 unchanged sentences

evaluated for impairment

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.

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

During the year ended December 31, 2022, two loans with a combined post modification balance of $ 515,000 were modified as TDRs, compared to the year ended December 31, 2021 when four loans with a combined post modification balance of $ 360,000 were modified as TDRs.

The loan modifications for the year ended December 31, 2022 consisted of two payment modifications, compared to December 31, 2021 when the loan modifications consisted of two term modifications beyond the original stated term and two payment modifications.

The outstanding recorded investment of loans categorized as TDRs as of December 31, 2022 was $ 7,480,000 .

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

During the year ended December 31, 2022, two loans with a combined post modification balance of $ 515,000 were modified as TDRs.

The loan modifications for the year ended December 31, 2022 consisted of two payment modifications.

The following table presents the outstanding recorded investment of TDRs at the dates indicated:

2 unchanged sentences

Accruing TDRs

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.

The following table presents information regarding the loan modifications categorized as TDRs during the year ended December 31, 2022 and 2021.

(Dollars in thousands)

Year Ended December 31, 2022

Pre-Modification

Post-Modification

Commercial Real Estate

The following table presents information regarding the loan modifications categorized as TDRs during the year ended December 31, 2022.

(Dollars in thousands)

3 unchanged sentences

Commercial Real Estate

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the year ended December 31, 2022 and 2021 with the total number of each type of modification performed.

Year Ended December 31, 2022

Commercial Real Estate

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the year ended December 31, 2022 with the total number of each type of modification performed.

Year Ended December 31, 2022

Commercial Real Estate

In the wake of the COVID-19 pandemic, during the second quarter of 2020, the Corporation began granting loan modification requests to defer principal and/or interest payments or modify interest rates.

These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met.

As of December 31, 2022, there were no loan modifications in compliance with Section 4013 of the CARES Act that were still actively on deferral, compared to December 31, 2021 when there was one loan in the amount of $ 9,423,000 that was still actively on deferral, which was returned to normal payment status during the first quarter of 2022.

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below at December 31, 2022 and 2021.

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below at December 31, 2022.

(Dollars in thousands)

December 31, 2022

December 31, 2021

With no related allowance recorded:

Commercial and Industrial

1 unchanged sentence

Residential Real Estate

With an allowance recorded:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Total consists of:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

At December 31, 2022 and 2021, $ 7,480,000 and $ 8,020,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at both December 31, 2022 and December 31, 2021.

At December 31, 2022, $ 7,480,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $ 0 at December 31, 2022.

The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs.

The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the years ended December 31, 2022 and 2021.

(Dollars in thousands)

For the Year Ended

December 31, 2022

December 31, 2021

With no related allowance recorded:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

With an allowance recorded:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Total consists of:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Of the $ 309,000 and $ 357,000 in interest income recognized on impaired loans for the years ended December 31, 2022 and 2021, respectively, $0 and $3,000 in interest income was recognized with respect to non-accrual loans for each respective period.

(Dollars in thousands)

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

Total non-accrual loans

Foreclosed assets held for resale

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

Total non-performing assets

If interest on non-accrual loans had been accrued at original contract rates, interest income would have increased by $ 2,174,000 in 2022 and $ 1,858,000 in 2021.

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

Consumer mortgage loans secured by residential real estate for which the Corporation has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $ 41,000 at both December 31, 2022 and December 31, 2021.

These balances were not included in foreclosed assets held for resale at December 31, 2022 or December 31, 2021.

The following tables present the classes of the loan portfolio summarized by the past-due status at December 31, 2022 and 2021:

(Dollars in thousands)

December 31, 2022:

Commercial and Industrial

Commercial Real Estate

Residential Real Estate

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the year ended December 31, 2022.

(Dollars in thousands)

December 31, 2021:

Year Ended December 31, 2022

Commercial and Industrial

1 unchanged sentence

Residential Real Estate

At December 31, 2022 and 2021 commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit in the amount of $ 1,249,000 that was associated with a loan to a developer of a residential sub-division.

NOTE 4 — PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2022 and 2021 is as follows:

Of the $ 309,000 in interest income recognized on impaired loans for the year ended December 31, 2022, $ 0 in interest income was recognized with respect to non-accrual loans.

NOTE 4 — PREMISES AND EQUIPMENT, NET

Premises and equipment, net at December 31, 2023 and 2022 is as follows:

(Dollars in thousands)

12 unchanged sentences

Total deposits

Total deposits decreased $ 84,470,000 to $ 993,499,000 as of December 31, 2022 due 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.

As of December 31, 2022 and 2021 the Corporation had $ 20,000,000 in brokered deposits (CDs).

Total deposits decreased $ 13,060,000 to $ 980,439,000 as of December 31, 2023 due 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.

As of December 31, 2023 the Corporation had $ 65,250,000 in brokered deposits (CDs) as compared to $ 20,000,000 at December 31, 2022.

The following is a schedule reflecting classification and remaining maturities of time deposits at December 31, 2023:

5 unchanged sentences

(Dollars in thousands)

December 31, 2023

December 31, 2022

Federal funds purchased

11 unchanged sentences

In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty).

interest payment to the counterparty).

The collateral is held by a correspondent bank in the counterparty’s custodial account.

22 unchanged sentences

Due 2024, 1.68 %

Due 2028, 5.14 %

Due 2026, 4.62 % to 4.92 %

Due 2028, 4.46 % to 5.14 %

Total long-term borrowings

4 unchanged sentences

These irrevocable standby letters of credit are supported by an irrevocable and independent guarantee by the FHLB for the Corporation’s pledging obligation to secure public/municipal unit deposits which eliminates the need for the Corporation to pledge collateral in the amount necessary to secure these funds.

The Corporation began utilizing this service offered by the FHLB during the second quarter of 2021.

There were no irrevocable standby letters of credit which could be drawn on through FHLB’s close of business on December 31, 2023 or 2022.

23 unchanged sentences

Bank owned life insurance income

Prior year tax adjustments

Income tax expense and rate

The components of the net deferred tax asset and liability at December 31, 2022 and 2021 are as follows:

The components of the net deferred tax asset at December 31, 2023 and 2022 are as follows:

(Dollars in thousands)

Deferred Tax Assets:

Net unrealized losses on debt securities available-for-sale

Net unrealized losses on debt securities available-for-sale and derivatives

Allowance for loan losses

11 unchanged sentences

Deferred Tax Liabilities:

Net unrealized gains on debt securities available-for-sale

Loan fees and costs

3 unchanged sentences

Mortgage servicing rights

Net Deferred Tax Asset (Liability)

Net Deferred Tax Asset

A valuation allowance for deferred tax assets was recorded in the amount of $ 285,000 and $ 258,000 at December 31, 2023 and 2022, respectively.

2 unchanged sentences

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

The ultimate realization of deferred tax assets is

dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

18 unchanged sentences

Management does not believe the outcome of these actions and proceedings will have a material effect on the consolidated financial position of the Corporation.

The Corporation currently leases three branch banking facilities and one parcel of land under operating leases.

The Corporation currently leases two branch banking facilities and one parcel of land under operating leases.

At December 31, 2023, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $ 1,472,000 and $ 1,976,000 , respectively, in the consolidated balance sheets.

6 unchanged sentences

Cash payments totaled $ 204,000 and $ 177,000 for the years ended December 31, 2023 and 2022, respectively, in the consolidated statements of income.

The Corporation currently has one finance lease for equipment.

The Corporation’s one finance lease for equipment expired as of August 31, 2023.

The equipment will continue to depreciate for an additional two years .

At December 31, 2023, right-of-use assets and lease liabilities were recorded related to this finance lease totaling $ 32,000 and $ 0 , respectively.

Amounts recognized as right-of-use assets related to finance leases are included in premises and equipment, net in the accompanying consolidated balance sheets.

Further options to extend or terminate the lease are not applicable.

options to extend or terminate the lease are not applicable.

No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components.

2 unchanged sentences

Total finance lease costs that were recognized by the Corporation for the years ended December 31, 2023 and 2022 were immaterial.

Cash payments totaled $ 10,000 for the years ended December 31, 2022 and 2021.

Cash payments totaled $ 7,000 and $ 10,000 for the years ended December 31, 2023 and 2022, respectively.

The following table displays the weighted-average term and discount rates for operating and finance leases outstanding as of December 31, 2023 and 2022.

13 unchanged sentences

Total lease liability

NOTE 12 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Corporation uses various financial instruments, including derivatives, to manage its exposure to interest rate risk.

The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash receipts and cash payments principally related to specific assets and short-term wholesale funding positions.

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

Fair Values of Derivative Instruments on the Statement of Financial Condition

The tables below present the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2023, and December 31, 2022:

(Dollars in thousands)

December 31, 2023

Derivative Assets

Derivative Liabilities

Derivatives designated as hedging instruments:

Interest rate swaps

Other Liabilities

(Dollars in thousands)

December 31, 2022

Derivative Assets

Derivative Liabilities

Derivatives designated as hedging instruments:

Interest rate swaps

Other Liabilities

The following table presents the derivative liabilities subject to an enforceable master netting arrangement as of December 31, 2023 and 2022.

of Liabilities

(Dollars in thousands)

December 31, 2023

December 31, 2022

The following table presents the remaining contractual maturity of the master netting arrangements as of December 31, 2023.

Remaining Contractual Maturity of the Agreements

(Dollars in thousands)

December 31, 2023:

Fair Value Hedges of Interest Rate Risk

The Corporation is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates.

The Corporation uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rates.

Interest rate swaps designated as fair

value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Corporation receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

Such derivatives are used to hedge the changes in fair value of certain of its pools of fixed rate assets.

As of December 31, 2023, the Corporation had a total of two interest rate swaps with a combined notional amount of $ 50,000,000 hedging fixed-rate available-for-sale debt securities.

As of December 31, 2023, and December 31, 2022, the following amounts were recorded on the balance sheet related to the cumulative basis adjustment for fair value hedges:

(Dollars in thousands)

Carrying amount of hedged assets:

Closed Portfolio Amount

Available-for-sale - Municipals

Available-for-sale - MBS

Interest rate swaps notional amount

(Dollars in thousands)

Cumulative amount of fair value hedging adjustment included in the carrying amount of assets:

Available-for-sale - Municipals

Available-for-sale - MBS

The table below presents the pre-tax effects of the Corporation’s derivative instruments designated as fair value hedges on the consolidated statements of income for the years ended December 31, 2023, and 2022:

(Dollars in thousands)

Amount of loss recognized in other comprehensive loss

Amount of gain, net of fair value re-measurements, included in interest income

Cash Flow Hedges of Interest Rate Risk

The Corporation uses derivatives to add stability to interest expense and to manage its exposure to interest rate movements.

To accomplish this objective, the Corporation has entered into interest rate swaps as part of its interest rate risk management strategy.

These interest rate products are designated as cash flow hedges.

As of December 31, 2023, the Corporation had a total of two interest rate swaps with a combined notional amount of $ 100,000,000 hedging specific short-term wholesale funding positions.

For derivatives designated as cash flow hedges, the gain or loss on the derivatives is recorded in other comprehensive loss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings.

During the next twelve months, it is estimated that an additional $ 404,000 will be reclassified as a decrease to interest expense.

Interest rate swaps designated as cash flow hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Corporation receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

For cash flow hedges on the Corporation’s short-term wholesale funding positions, amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense

as interest payments are made on the Corporation’s hedged variable rate short-term wholesale funding positions.

During the year ended December 31, 2023, the Corporation reclassified $ 274,000 as a reduction in interest expense.

The table below presents the pre-tax effects of the Corporation’s derivative instruments designated as cash flow hedges on the Consolidated Statements of Income for the years ended December 31, 2023, and 2022:

(Dollars in thousands)

Amount of loss recognized in other comprehensive loss

Amount of gain reclassified from accumulated other comprehensive loss to interest expense

Interest rate swaps notional amount

Credit Risk-Related Contingent Features

The Corporation has agreements with each of its derivative counterparties that contain a provision where if the Corporation defaults on any of its indebtedness, then the Corporation could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty.

The Corporation also has agreements with its derivative counterparties that contain a provision where if the Corporation fails to maintain its status as a well-capitalized institution, then the Corporation could be required to terminate its derivative positions with the counterparty.

As of December 31, 2023, the Corporation’s derivatives were in a net liability position resulting in the Corporation having collateral in the amount of $ 4,650,000 posted with the counterparty at December 31, 2023.

As of December 31, 2022, the Corporation had no derivatives in a net liability position and accordingly did not have to post any collateral.

NOTE 13 — RELATED PARTY TRANSACTIONS

81 unchanged sentences

Financial Instruments with Concentrations of Credit Risk

The Corporation originates primarily commercial and residential real estate loans to customers in northeastern Pennsylvania.

The Corporation originates primarily commercial and residential real estate loans to customers predominately in the Corporation’s five county, Pennsylvania market area.

The ability of the majority of the Corporation’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area.

5 unchanged sentences

In the event of a borrower’s default, the collateral supporting the loan may be seized in order to recoup losses associated with the loan.

The Corporation also establishes an allowance for loan losses that constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.

The Corporation also establishes an allowance for credit losses that constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.

NOTE 16 — STOCKHOLDERS’ EQUITY

68 unchanged sentences

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At December 31, 2022 and 2021, impaired loans measured at fair value on a nonrecurring basis and the valuation methods used are as follows:

Periodically, non-recurring adjustments may be applied to the carrying value of loans based on the fair value measurements for partial charge-offs of the uncollectible portions of these loans.

Nonrecurring adjustments can also include certain specific allocation amounts for individually evaluated collateral-dependent loans as calculated when establishing the allowance for credit losses.

The Corporation’s valuation procedure for any individually evaluated 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.

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

For individually evaluated loans less than $ 250,000 upon classification and annually at year end, the Corporation completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements.

The fair value consists of the individually evaluated loan balances less the valuation allowance and/or charge-offs.

There were no transfers between valuation levels in 2023 and 2022.

Following the adoption of ASU No.

2016-13, at December 31, 2023, individually evaluated loans measured at fair value on a nonrecurring basis were as follows:

(Dollars in thousands)

Assets at December 31, 2023

Impaired loans:

Commercial Real Estate

Residential Real Estate

Total impaired loans

Individually evaluated loans:

Total individually evaluated loans

Prior to the adoption of ASU No.

2016-13, at December 31, 2022, impaired loans measured at fair value on a nonrecurring basis were as follows:

(Dollars in thousands)

4 unchanged sentences

Total impaired loans

The Corporation’s impaired 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.

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

For impaired loans less than $ 250,000 upon classification and annually at year end, the Corporation completes a Certificate of Inspection, which includes an onsite inspection, and considers value indicators such as insured values, tax assessed values, recent sales

comparisons and a review of the previous evaluations.

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements.

The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs.

There were no transfers between valuation levels in 2022 and 2021.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

6 unchanged sentences

Quantitative Information about Level 3 Fair Value Measurements

2016-13 Adoption:

December 31, 2023

1 unchanged sentence

Unobservable Input

Impaired loans - collateral dependent

Individually evaluated loans - collateral dependent

Appraisal of collateral 1,3

3 unchanged sentences

( 5 %) – ( 5 %)

Impaired loans - other

Discounted cash flow

Discount rate

( 4 %) – ( 7 %)

2016-13 Adoption:

December 31, 2022

20 unchanged sentences

Interest-bearing deposits in other banks

Time deposits with other banks

Restricted investment in bank stocks

8 unchanged sentences

Accrued interest payable

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

Derivative Liabilities

(Dollars in thousands)

3 unchanged sentences

Interest-bearing deposits in other banks

Time deposits with other banks

Restricted investment in bank stocks

8 unchanged sentences

Accrued interest payable

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

Derivative Liabilities

NOTE 18 — REVENUE RECOGNITION

7 unchanged sentences

Wealth/Asset/Trust Management Fees

Wealth management services are delivered to individuals, corporations and retirement funds located primarily within our geographic markets.

Wealth management services are delivered to individuals, corporations and retirement funds located primarily within the Corporation’s geographic markets.

The Trust Department of the Corporation conducts the wealth management operations, which provides a broad range of personal and corporate fiduciary services, including the administration of estates.

Assets held in a fiduciary capacity by the Trust Department are not assets of the Corporation and, therefore, are not included in our Consolidated Financial Statements.

Assets held in a fiduciary capacity by the Trust Department are not assets of the Corporation and, therefore, are not included in the Corporation’s consolidated financial statements.

Wealth management fees, which are contractually agreed with each customer, are earned each month and recognized on a cash basis based on average fair value of the trust assets under management.

2 unchanged sentences

Wealth management fees are included within non-interest income in the consolidated statements of income.

As of December 31, 2022 and 2021, the fair value of trust assets under management was $ 111,172,000 and $ 108,339,000 , respectively.

As of December 31, 2023 and 2022, the fair value of trust

assets under management was $ 109,064,000 and $ 111,172,000 , respectively.

The costs of acquiring asset management customers are incremental and recognized within the non-interest expense of the consolidated statements of income.

14 unchanged sentences

Any change in the assumptions utilized to determine the carrying value of goodwill could adversely affect our results of operations.

Management notes that the emergence of COVID-19 as a global pandemic in 2020 and throughout 2021 resulted in significant deterioration in general economic conditions and the environment in which the Company operates.

This uncertainty resulted in significant decreases in the market prices

for the stock of institutions in the financial services industry, including the Company, however, many stock prices recovered throughout 2021 and 2022.

Goodwill was evaluated for impairment at December 31, 2023, and it was determined that goodwill was not impaired.

7 unchanged sentences

Prepaid expenses and other assets

Advances from banking subsidiary

(Receivable) advances from banking subsidiary

Subordinated Debentures

3 unchanged sentences

Retained earnings

Accumulated other comprehensive (loss) income

Accumulated other comprehensive loss

Treasury stock, at cost

5 unchanged sentences

Dividends from subsidiary bank

Net securities (losses) gains

Net securities losses

Interest on subordinated debt

4 unchanged sentences

EQUITY IN UNDISTRIBUTED EARNINGS OF BANKING SUBSIDIARY

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

3 unchanged sentences

Total other comprehensive loss

Total Comprehensive (Loss) Income

Total Comprehensive Income (Loss)

STATEMENTS OF CASH FLOWS

3 unchanged sentences

Adjustments to reconcile net income to net cash provided by operating activities:

Losses (gains) on securities

Deferred income tax (benefit) expense

Losses on securities

Deferred income tax benefit

Equity in undistributed earnings of banking subsidiary

Increase (decrease) in prepaid/accrued expenses and other assets/liabilities

Increase in prepaid/accrued expenses and other assets/liabilities

Decrease in advances from banking subsidiary

7 unchanged sentences

NET CASH USED IN FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING

2 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data