FIRST KEYSTONE CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of Management’s Discussion and Analysis of First Keystone Corporation, a bank holding company (the “Corporation”), and its wholly owned subsidiary, First Keystone Community Bank (the “Bank”), is to assist the reader in reviewing the financial information presented and should be read in conjunction with the consolidated financial statements and other financial data contained herein. Refer to Forward-Looking Statements on page 1 for detailed information. 22 Table of Contents RESULTS OF OPERATIONS Year Ended December 31, 2023 Versus Year Ended December 31, 2022 Net income decreased to $5,560,000 for the year ended December 31, 2023, as compared to $14,024,000 for the prior year, a decrease of 60.4%. Earnings per share, both basic and diluted, for 2023 was $0.91 as compared to $2.35 in 2022, a decrease of 61.3%. Dividends per share for 2023 and 2022 were $1.12. The Corporation’s return on average assets was 0.42% in 2023 and 1.07% in 2022. Return on average equity decreased to 4.55% in 2023 from 10.75% in 2022. Total interest income in 2023 amounted to $56,988,000, an increase of $10,575,000 or 22.8% from 2022. The increase in interest income is due to increased interest rates, growth in real estate loans secured by commercial properties and Commercial and Industrial loans, and increased interest income earned on securities, offset by a $317,000 decrease in Paycheck Protection Program loan fees due to the discontinuation of the SBA program. Total interest expense of $27,872,000 increased $18,959,000 or 212.7% from 2022. The majority of this increase is related to increases in interest paid to depositors to retain and grow deposit relationships and increases in interest paid on short-term and long-term borrowings primarily through the Federal Home Loan Bank due to increases in volume and rate of borrowings. Selected financial data and performance ratios of the Corporation for the past five years are presented below in Table 1. Table 1 — Selected Financial Data ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands, except per share data) ​ For the Year Ended December 31, ​ ​ 2023 2022 2021 2020 2019 ​ SELECTED FINANCIAL DATA AT YEAR END: ​ ​ ​ ​ ​ ​ Total assets ​ $ 1,415,870 ​ $ 1,329,194 ​ $ 1,320,350 ​ $ 1,179,047 ​ $ 1,007,226 ​ Total securities ​ 394,450 ​ 375,143 ​ 439,878 ​ 368,357 ​ 279,861 ​ Net loans ​ 904,153 ​ 850,195 ​ 744,161 ​ 712,677 ​ 640,727 ​ Total deposits ​ 980,439 ​ 993,499 ​ 1,077,969 ​ 937,488 ​ 761,628 ​ Total long-term borrowings ​ 122,000 ​ 25,000 ​ 35,000 ​ 45,000 ​ 55,000 ​ Total stockholders’ equity ​ 121,615 ​ 120,386 ​ 148,555 ​ 144,242 ​ 128,752 ​ SELECTED OPERATING DATA: ​ ​ ​ ​ ​ ​ Interest income ​ $ 56,988 ​ $ 46,413 ​ $ 42,048 ​ $ 39,567 ​ $ 38,527 ​ Interest expense ​ 27,872 ​ 8,913 ​ 5,148 ​ 6,360 ​ 10,243 ​ Net interest income ​ 29,116 ​ 37,500 ​ 36,900 ​ 33,207 ​ 28,284 ​ (Credit) provision for credit losses ​ (217) ​ (264) ​ 860 ​ 1,200 ​ 450 ​ Net interest income after (credit) provision for credit losses ​ 29,333 ​ 37,764 ​ 36,040 ​ 32,007 ​ 27,834 ​ Non-interest income ​ 6,156 ​ 5,331 ​ 7,323 ​ 6,012 ​ 6,929 ​ Non-interest expense ​ 29,245 ​ 26,777 ​ 26,354 ​ 24,605 ​ 23,422 ​ Income before income tax expense ​ 6,244 ​ 16,318 ​ 17,009 ​ 13,414 ​ 11,341 ​ Income tax expense ​ 684 ​ 2,294 ​ 2,321 ​ 1,577 ​ 1,114 ​ Net income ​ $ 5,560 ​ $ 14,024 ​ $ 14,688 ​ $ 11,837 ​ $ 10,227 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ PER SHARE DATA: ​ ​ ​ ​ ​ ​ Net income ​ $ 0.91 ​ $ 2.35 ​ $ 2.49 ​ $ 2.03 ​ $ 1.77 ​ Dividends ​ 1.12 ​ 1.12 ​ 1.12 ​ 1.08 ​ 1.08 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ PERFORMANCE RATIOS: ​ ​ ​ ​ ​ ​ Return on average assets ​ 0.42 % 1.07 % 1.15 % 1.09 % 1.02 % Return on average equity ​ 4.55 % 10.75 % 9.93 % 8.61 % 8.17 % Dividend payout ​ 121.90 % 47.70 % 45.05 % 53.29 % 61.08 % Average equity to average assets ​ 9.22 % 9.92 % 11.57 % 12.72 % 12.42 % ​ 23 Table of Contents Net interest income, as indicated below in Table 2, decreased by $8,384,000 or 22.4% to $29,116,000 for the year ended December 31, 2023. The Corporation’s net interest income on a fully tax equivalent basis decreased by $9,979,000, or 25.3% to $29,390,000 in 2023 as compared to $39,369,000 in 2022. Table 2 — Reconciliation of Taxable Equivalent Net Interest Income (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2023/2022 ​ ​ Increase/(Decrease) ​ 2023 Amount % 2022 Interest Income ​ $ 56,988 ​ $ 10,575 22.8 ​ $ 46,413 Interest Expense ​ 27,872 ​ 18,959 212.7 ​ 8,913 Net Interest Income ​ 29,116 ​ (8,384) (22.4) ​ 37,500 Tax Equivalent Adjustment ​ 274 ​ (1,595) (85.3) ​ 1,869 Net Interest Income (fully tax equivalent) ​ $ 29,390 ​ $ (9,979) (25.3) ​ $ 39,369 ​ 24 Table of Contents Table 3 — Average Balances, Rates and Interest Income and Expense (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2023 2022 ​ ​ Average ​ ​ ​ ​ Yield/ ​ Average ​ ​ ​ ​ Yield/ ​ ​ ​ Balance ​ Interest ​ Rate ​ Balance ​ Interest ​ Rate ​ Interest Earning Assets: ​ ​ ​ ​ ​ Loans: ​ ​ ​ ​ ​ Commercial, net 1,2,4 ​ $ 88,806 ​ $ 4,338 4.88 % $ 85,022 ​ $ 3,047 3.58 % Real Estate 1,2 ​ 779,177 ​ 37,239 4.78 % 716,896 ​ 30,868 4.31 % Consumer, net 4 ​ 5,694 ​ 481 8.45 % 5,251 ​ 416 7.93 % Fees on Loans ​ ― ​ 768 — % ― ​ 1,269 — % Total Loans 5 ​ 873,677 ​ 42,826 4.90 % 807,169 ​ 35,600 4.41 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Securities: ​ ​ ​ ​ ​ Taxable ​ 304,627 ​ 12,416 4.08 % 297,471 ​ 7,449 2.50 % Tax-Exempt 1,3 ​ 45,297 ​ 1,312 2.90 % 117,414 ​ 4,953 4.22 % Total Securities ​ 349,924 ​ 13,728 3.92 % 414,885 ​ 12,402 2.99 % Restricted Investment in Bank Stocks ​ 8,319 ​ 669 8.04 % 4,279 ​ 264 6.17 % Interest-Bearing Deposits in Other Banks ​ 1,659 ​ 39 2.31 % 8,476 ​ 16 0.19 % Total Other Interest Earning Assets ​ 9,978 ​ 708 7.09 % 12,755 ​ 280 2.19 % Total Interest Earning Assets ​ 1,233,579 ​ 57,262 4.64 % 1,234,809 ​ 48,282 3.91 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-Interest Earning Assets: ​ ​ ​ ​ ​ Cash and Due From Banks ​ 10,320 ​ ​ 9,528 ​ ​ Allowance for Credit Losses ​ (7,071) ​ ​ (9,077) ​ ​ Premises and Equipment ​ 21,193 ​ ​ 19,296 ​ ​ Other Assets ​ 67,249 ​ ​ 61,294 ​ ​ Total Non-Interest Earning Assets ​ 91,691 ​ ​ 81,041 ​ ​ Total Assets ​ $ 1,325,270 ​ ​ $ 1,315,850 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest Bearing Liabilities: ​ ​ ​ ​ ​ Savings, NOW, Money Markets and Interest Checking ​ $ 524,616 ​ $ 11,003 2.10 % $ 631,217 ​ $ 4,040 0.64 % Time Deposits ​ 222,131 ​ 6,105 2.75 % 163,525 ​ 1,219 0.75 % Securities Sold U/A to Repurchase ​ 19,131 ​ 627 3.28 % 26,825 ​ 225 0.84 % Short-Term Borrowings ​ 154,625 ​ 8,147 5.27 % 60,735 ​ 1,710 2.82 % Long-Term Borrowings ​ ​ 32,235 ​ ​ 896 ​ 2.78 % ​ 28,890 ​ ​ 628 ​ 2.17 % Subordinated Debentures ​ 25,000 ​ 1,094 4.38 % 25,000 ​ 1,091 4.36 % Total Interest Bearing Liabilities ​ 977,738 ​ 27,872 2.85 % 936,192 ​ 8,913 0.95 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-Interest Bearing Liabilities: ​ ​ ​ ​ ​ Demand Deposits ​ 216,004 ​ ​ 242,010 ​ ​ Other Liabilities ​ 9,393 ​ ​ 7,162 ​ ​ Stockholders’ Equity ​ 122,135 ​ ​ 130,486 ​ ​ Total Liabilities/Stockholders’ Equity ​ $ 1,325,270 ​ ​ $ 1,315,850 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income Tax Equivalent ​ ​ $ 29,390 ​ ​ $ 39,369 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Spread ​ ​ 1.79 % ​ 2.96 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Margin ​ ​ 2.38 % ​ 3.19 % 1 Tax-exempt income has been adjusted to a tax equivalent basis using an incremental rate of 21% and statutory interest expense disallowance. 2 Includes tax equivalent adjustments on tax-free municipal loans of $79,000 and $228,000 for years 2023 and 2022, respectively. 3 Includes tax equivalent adjustments on tax-free municipal securities of $195,000 and $1,641,000 for years 2023 and 2022, respectively. 4 Installment loans are stated net of unearned interest. 5 Average loan balances include non-accrual loans. Interest income on non-accrual loans is not included. ​ 25 Table of Contents NET INTEREST INCOME The major source of operating income for the Corporation is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, including deposits and other borrowings. The amount of interest income is dependent upon both the volume of earning assets and the level of interest rates. In addition, the volume of non-performing loans affects interest income. The amount of interest expense varies with the amount of funds needed to support earning assets, interest rates paid on deposits and borrowed funds, and finally, the level of non-interest bearing deposits. Table 3 on the preceding page provides a summary of average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and interest expense as well as average tax equivalent rates earned and paid as of year-end 2023 and 2022. The yield on earning assets was 4.64% in 2023 and 3.91% in 2022. The rate paid on interest bearing liabilities was 2.85% in 2023 and 0.95% in 2022. This resulted in a decrease in our net interest spread to 1.79% in 2023, as compared to 2.96% in 2022. As Table 3 illustrates, net interest margin, which is interest income less interest expense divided by average earning assets, was 2.38% in 2023 as compared to 3.19% in 2022. Net interest margins are presented on a tax-equivalent basis. In 2023, the yield on earning assets increased by 0.73% and the rate paid on interest bearing liabilities increased by 1.90%. Yields increased for a majority of interest earning assets and interest bearing liabilities during 2023, mainly as a result of the current high interest rate environment. The Federal Open Market Committee (FOMC) raised the fed funds target rate 11 times for a total of 525 basis points between March 2022 and July 2023, it has remained at the target rate of 5.25% to 5.5% through December 31, 2023. The yield on loans increased from 4.41% in 2022 to 4.90% in 2023 mainly due to loans originating and repricing at higher interest rates during 2023. The securities portfolio yield increased to 3.92% in 2023 as compared to 2.99% in 2022. The increase was mainly the result of the elevated rate environment impacting variable rate securities and purchases of higher yielding securities in 2023. The average rate paid on short-term borrowings increased 2.45% from 2.82% in 2022 to 5.27% in 2023 due to higher interest rates paid on a significantly higher average overnight borrowing balance. The rate paid on savings, NOW, money market, and interest checking accounts increased 1.46% from 0.64% to 2.10% and the average rate paid on time deposits increased 2.00% from 0.75% to 2.75%. Interest income exempt from federal tax was $1,570,000 in 2023 and $3,771,000 in 2022. Interest income exempt from federal tax decreased due to the sales of tax-exempt municipal securities in 2023. Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 21%. The decrease in net interest margin at December 31, 2023 compared to December 31, 2022 was primarily due to increased yields on deposits and borrowings in 2023, as compared to 2022. Fully tax equivalent net interest income decreased by $9,979,000 or 25.3% to $29,390,000 at December 31, 2023 compared to $39,369,000 at December 31, 2022. During 2023, the Federal Reserve increased the federal-funds rate by 1.00%, resulting in a target range of 5.25% - 5.50%. The Corporation could experience a decrease in net interest income if market rates remain static or continue to increase, as the Corporation’s net interest income continues to be liability sensitive. To negate the potential impact of a decreasing net interest margin, the Corporation will continue to focus on attracting organic loan growth and core deposits such as checking, savings, and money market accounts, thereby further reducing its dependence on higher priced certificates of deposit and short-term borrowings. The Corporation is actively monitoring and restructuring its portfolios to become more asset sensitive, which will allow for better performance in a static or rates-up environment. The Corporation also entered into four rate swap contracts effective September 20, 2023. Of the four swaps, two were fair value interest rate swaps with a combined notional amount of $50,000,000, hedging fixed-rate available-for-sale debt securities, and two were cash flow interest rate swaps with a combined notional amount of $100,000,000, hedging specific short-term wholesale funding positions. See Note 12 – Derivative Instruments and Hedging Activities on page 93 for further analysis. The Corporation will continue to evaluate the potential impact of short-term rate fluctuations in 2024, as well as the slope and position of the yield curve. Table 4 sets forth changes in interest income and interest expense for the periods indicated for each category of interest earning assets and interest bearing liabilities. Information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by prior rate); (ii) changes in rate (changes in average rate multiplied by 26 Table of Contents prior average volume); and, (iii) changes in rate and volume (changes in average volume multiplied by changes in average rate). In 2023, the decrease in net interest income on a fully tax equivalent basis of $9,979,000 resulted from a decrease in volume of $2,100,000 and a decrease of $7,879,000 due to changes in rate. Table 4 — Rate/Volume Analysis (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2023 COMPARED TO 2022 ​ VOLUME RATE NET Interest Income: ​ ​ ​ ​ Loans, Net ​ $ 2,933 ​ $ 4,293 ​ $ 7,226 Taxable Securities ​ 179 ​ 4,788 ​ 4,967 Tax-Exempt Securities ​ (3,042) ​ (599) ​ (3,641) Restricted Investment in Bank Stocks ​ 249 ​ 156 ​ 405 Other ​ (13) ​ 36 ​ 23 Total Interest Income ​ $ 306 ​ $ 8,674 ​ $ 8,980 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest Expense ​ ​ ​ Savings, NOW and Money Markets ​ $ (682) ​ $ 7,645 ​ $ 6,963 Time Deposits ​ 437 ​ 4,449 ​ 4,886 Securities Sold U/A to Repurchase ​ (65) ​ 467 ​ 402 Short-Term Borrowings ​ 2,643 ​ 3,794 ​ 6,437 Long-Term Borrowings ​ ​ 73 ​ ​ 195 ​ ​ 268 Subordinated Debentures ​ — ​ 3 ​ 3 Total Interest Expense ​ 2,406 ​ 16,553 ​ 18,959 Net Interest Income ​ $ (2,100) ​ $ (7,879) ​ $ (9,979) The change in interest due to both volume and rate has been allocated to change due to volume and change due to rate in proportion to the absolute value of the change in each. Balances on non-accrual loans are included for computational purposes. Interest income on non-accrual loans is not included. PROVISION FOR CREDIT LOSSES For the year ended December 31, 2023, the provision for credit losses resulted in a credit balance of $217,000, compared to a credit balance of $264,000 for the year ended December 31, 2022. The increase in the provision for credit losses in 2023 as compared to 2022 resulted from the Corporation’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. The provision for credit losses for the year ended December 31, 2023 is also reflective of management’s assessment of the continued risk associated with the uncertainty surrounding geopolitical and economic concerns. Charge-off and recovery activity in the allowance for credit losses resulted in net charge-offs of $13,000 and $142,000 for the years ended December 31, 2023 and 2022, respectively. See Analysis of Allowance for Credit Losses (Post-Adoption of ASU No. 2016-13) and Analysis of Allowance for Loan Losses (Pre-Adoption of ASU No. 2016-13) tables on pages 37 and 38 for further discussion. Gross charge-offs amounted to $57,000 at December 31, 2023, as compared to $206,000 at December 31, 2022. The decreased level of charge-offs for the year ended December 31, 2023 was mainly due to a charge-off in the amount of $148,000 that was completed during the third quarter of 2022 on a commercial and industrial loan to a residential home builder. The business ceased operations as a result of financial difficulties; however, the circumstances were not suggestive of a regional industry issue. This charge-off contributed to the increased balance of net charge-offs in 2022 compared to 2023 but was not indicative of a significant change in asset quality in the overall loan portfolio. See Table 11 – Analysis of Allowance for Credit Losses for further details. 27 Table of Contents The allowance for credit losses as a percentage of average loans outstanding was 0.79% as of December 31, 2023 and 1.03% as of December 31, 2022. The decrease in the allowance for credit losses as a percentage of average loans outstanding is mainly the result of a decrease of $1,349,000 in the balance of the allowance for credit losses from $8,274,000 at December 31, 2022 to $6,925,000 at December 31, 2023, mainly due to the one-time-cumulative adjustment which was made upon the adoption of the CECL model in the first quarter of 2023, decreasing the allowance for credit losses by $1,119,000. Total average loans outstanding also increased by $66,508,000 from $807,169,000 at December 31, 2022 to $873,677,000 at December 31, 2023 which further contributed to the decrease in the allowance for credit losses as a percentage of average loans at December 31, 2023 as compared to December 31, 2022. On a quarterly basis, management performs, and the Corporation’s Audit Committee and the Board of Directors review a detailed analysis of the adequacy of the allowance for credit losses. This analysis includes an evaluation of credit risk concentration, delinquency trends, past loss experience, current economic conditions, composition of the loan portfolio, classified loans and other relevant factors. The Corporation will continue to monitor its allowance for credit losses and make future adjustments to the allowance through the provision for credit losses as conditions warrant. Although the Corporation believes that the allowance for credit losses is adequate to provide for losses inherent in the loan portfolio, there can be no assurance that future losses will not exceed the estimated amounts or that additional provisions will not be required in the future. The Corporation is subject to periodic regulatory examination by the Pennsylvania Department of Banking and Securities and the FDIC. As part of the examination, the regulators will assess the adequacy of the Corporation’s allowance for credit losses and may include factors not considered by the Corporation. In the event that a regulatory examination results in a conclusion that the Corporation’s allowance for credit losses is not adequate, the Corporation may be required to increase its provision for credit losses. NON-INTEREST INCOME Non-interest income is derived primarily from service charges and fees, ATM fees and debit card income, trust department revenue, increases in the cash surrender value of bank owned life insurance, gains on sales of mortgage loans and other miscellaneous income. In addition, net securities gains and losses also impact total non-interest income. Table 5 provides the yearly non-interest income by category, along with the amount, dollar changes, and percentage of change comparing the last two years. Non-interest income through December 31, 2023 was $6,156,000, an increase of 15.5%, or $825,000, from 2022. The increase was due to less net securities losses and increased net gains (losses) on sales of mortgage loans in 2023. During 2023, net securities losses decreased $728,000 to a net loss of $118,000. The decrease was due to the Corporation recognizing $99,000 in net gains on the sales of debt securities in 2023 as compared to $753,000 in net losses on the sales of debt securities in 2022. The Corporation then recognized $217,000 in net losses on held equity securities in 2023, due to market valuation fluctuations, as compared to recognizing $94,000 in net losses on held equity securities in 2022. Gains (losses) on sales of mortgage loans amounted to a net gain of $65,000 in 2023 as compared to a net loss of $7,000 in 2022. The increase in net gains (losses) on sales of mortgage loans in 2023 was due to more individual loans sold in 2023 along with many of the loans sold in 2022 being sold at a loss due to rapid upward movement in interest rates. The Corporation continues to service the majority of mortgages which are sold, through maturity of the loans. This servicing income provides an additional source of non-interest income on an ongoing basis. ATM fees and debit card income increased by $49,000 or 2.3% in 2023 as compared to 2022 due to increased debit card interchange fees as the result of an increase in debit card transaction volume in 2023. Income related to an increase in cash surrender value of life insurance increased by $24,000 or 4.0% mainly as a result of increased interest rates on the related policies. 28 Table of Contents Other income, consisting primarily of income from the sale of retail non-deposit investment products, safe deposit box rentals, and miscellaneous fees, decreased $16,000, or 5.9% in 2023 as compared to 2022 as the Corporation recognized less rental income from leased properties in 2023 as there was an agreement with a new tenant at one location for one year free of rent. Table 5 — Non-Interest Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ 2023/2022 ​ ​ Increase/(Decrease) ​ 2023 Amount % ​ 2022 Trust department ​ $ 931 ​ $ (44) (4.5) ​ $ 975 Service charges and fees ​ 2,205 ​ 12 0.5 ​ 2,193 Increase in cash surrender value of life insurance ​ 621 ​ 24 4.0 ​ 597 ATM fees and debit card income ​ 2,195 ​ 49 2.3 ​ 2,146 Net gains (losses) on sales of mortgage loans ​ 65 ​ 72 1,028.6 ​ (7) Other ​ 257 ​ (16) (5.9) ​ 273 Subtotal ​ 6,274 ​ 97 1.6 ​ 6,177 Net securities losses ​ (118) ​ 728 86.1 ​ (846) Total ​ $ 6,156 ​ $ 825 15.5 ​ $ 5,331 ​ NON-INTEREST EXPENSE Total non-interest expense amounted to $29,245,000, an increase of $2,468,000, or 9.2% in 2023. Expenses associated with employees (salaries and employee benefits) continue to be the largest non-interest expenditure. Salaries and employee benefits amounted to $16,055,000 or 54.9% of total non-interest expense in 2023 and $14,554,000 or 54.4% in 2022. Salaries and employee benefits increased $1,501,000, or 10.3% in 2023. The increase in 2023 was due to increased salaries to offer more competitive wages in an effort to increase retention and support the Corporation’s growth, new hires related to the new full-service branch, and bonuses paid to all employees in January 2023. The number of full-time equivalent employees was 215 as of December 31, 2023 and 201 as of December 31, 2022. Net occupancy expense increased $183,000, or 9.5% in 2023 as compared to 2022 as the result of increased bank building and leasehold improvement costs as the result of purchasing and renovating new branch locations in 2023. Net furniture and equipment and computer expense increased $121,000, or 5.8% in 2023 compared to 2022. The increase in 2023 was mainly due to higher software costs as the Corporation upgraded internal IT systems and implemented a new accounting system in 2023. Professional services increased $170,000, or 13.4% in 2023 as compared to 2022. The higher expense was the result of increases in annual audit expenses along with additional audit expenses relating to year end 2022, primarily due to newly adopted ACL methodology and securities valuation costs, and higher consulting fees associated with implementing new internal systems contracts in 2023. Pennsylvania shares tax expense decreased $377,000, or 30.5% in 2023 as compared to 2022. This was mainly due to the unrealized loss position of the Corporation’s debt securities portfolio at December 31, 2022 resulting in lower equity. FDIC insurance expense increased $213,000, or 43.5% in 2023 as compared to 2022. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates. ATM and debit card fees expense increased $247,000, or 27.5% in 2023 as compared to 2022. The increase was the result of third-party pricing increases, increased debit card transaction volume and increased ATM fraud in 2023. Data processing fees increased $389,000, or 42.5% in 2023 as compared to 2022. This increase was the result of third party pricing increases, credits used to lower third party costs in 2022 and increased costs associated with the preparation for and implementation of the Corporation’s new online and mobile banking platforms. Advertising expense increased $139,000, or 35.7% in 2023 as compared to 2022 as the result of the Corporation marketing the new full-service Bethlehem branch, along with utilizing more television, billboard, digital and social 29 Table of Contents media advertising in 2023. Other non-interest expense decreased $118,000, or 3.9% in 2023 as compared to 2022. Other non-interest expense was higher in 2022 mainly due to a fraud reimbursement to one customer and a fraud settlement related to another customer’s deposit relationship. The overall level of non-interest expense remains low, relative to the Corporation’s peers (community banks from $1 billion to $3 billion in assets). The Corporation’s total non-interest expense was 2.21% of average assets in 2023 and 2.04% in 2022, which places the Corporation among the leaders in its peer financial institution categories in controlling non-interest expense. Table 6 — Non-Interest Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2023/2022 ​ ​ Increase/(Decrease) ​ 2023 Amount % 2022 Salaries and employee benefits ​ $ 16,055 ​ $ 1,501 10.3 ​ $ 14,554 Occupancy, net ​ 2,119 ​ 183 9.5 ​ 1,936 Furniture and equipment ​ 637 ​ 43 7.2 ​ 594 Computer expense ​ 1,571 ​ 78 5.2 ​ 1,493 Professional services ​ 1,440 ​ 170 13.4 ​ 1,270 Pennsylvania shares tax ​ 861 ​ (377) (30.5) ​ 1,238 FDIC Insurance ​ 703 ​ 213 43.5 ​ 490 ATM and debit card fees ​ 1,146 ​ 247 27.5 ​ 899 Data processing fees ​ 1,304 ​ 389 42.5 ​ 915 Advertising ​ 528 ​ 139 35.7 ​ 389 Other ​ 2,881 ​ (118) (3.9) ​ 2,999 Total ​ $ 29,245 ​ $ 2,468 9.2 ​ $ 26,777 ​ INCOME TAX EXPENSE Income tax expense for the year ended December 31, 2023, was $684,000 as compared to $2,294,000 for the year ended December 31, 2022. The effective income tax rate was 11.0% in 2023 and 14.1% in 2022. The decrease in the effective tax rate for 2023 was due to lower pre-tax earnings in relation to the amount of tax-exempt income earned on securities and more low-income housing tax credits. The Corporation recognized $484,000 and $249,000 of tax credits from low-income housing partnerships for the years ended December 31, 2023 and 2022, respectively. FINANCIAL CONDITION GENERAL Total assets increased to $1,415,870,000 at year-end 2023, an increase of 6.5% from year-end 2022. Total debt securities available-for-sale increased $19,524,000 or 5.2% to $392,968,000 as of December 31, 2023. The increase was mainly due to the purchase of several securities in the combined amount of $81,463,000, offset by the sales of tax-exempt municipals in the combined amount of $23,131,000, principal paydowns, and calls and maturities during 2023. Net loans increased in 2023 from $850,195,000 to $904,153,000, a 6.3% increase. Loan demand grew in 2023 as the Bank has realized an increase in loan originations, primarily commercial real estate and commercial and industrial loans. The cash surrender value of bank owned life insurance totaled $26,010,000 at December 31, 2023, an increase of $621,000 or 2.4% from 2022. This increase represents tax-free income included in non-interest income on the consolidated statements of income. 30 Table of Contents Investments in low-income housing partnerships were $5,961,000 at year-end 2023, an increase of 58.4% from year-end 2022. The Corporation became a limited partner in a new real estate venture during 2021 with an initial investment of $435,000. In 2023, capital contributions and other payments in the combined amount of $2,429,000 were made in relation to the new real estate venture. Investing in low-income housing real estate ventures enables the Corporation to recognize tax credits and satisfy Community Reinvestment Act initiatives. As of December 31, 2023, total deposits amounted to $980,439,000, a decrease of 1.3% from 2022. The decrease is due to a decrease in non-interest bearing deposits and a decrease in municipal deposits, offset by an increase in interest bearing deposits including a $40,250,000 increase in Brokered CDs. The Corporation has also experienced a shift from transactional deposits to term deposits due to higher CD rate offerings. The Corporation continues to maintain and manage its asset growth. The Corporation’s strong equity capital position provides an opportunity to further leverage its asset growth. Short and long-term borrowings increased in 2023 by $97,050,000, mainly due to the execution of a balance sheet leverage strategy that included $100,000,000 in new long-term borrowings to fund increases in the securities portfolio. Total stockholders’ equity increased to $121,615,000 at December 31, 2023, an increase of $1,229,000, primarily due to an increase in surplus. SEGMENT REPORTING Currently, management measures the performance and allocates the resources of the Corporation as a single segment. EARNING ASSETS Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Corporation maximizes income. The earning asset ratio (average interest earning assets divided by average total assets) equaled 93.1% for 2023 compared to 93.8% for 2022. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and securities. SECURITIES The Corporation uses securities to not only generate interest and dividend revenue, but also to help manage interest rate risk and to provide liquidity to meet operating cash needs. The securities portfolio consists of debt securities available-for-sale. No securities were established in a trading account. Debt securities available-for-sale increased $19,524,000 or 5.2% to $392,968,000 in 2023. At December 31, 2023, the net unrealized loss, net of the tax effect, on these securities was $26,073,000 and was included in stockholders’ equity as accumulated other comprehensive loss. Table 7 provides data on the fair value of the Corporation’s securities portfolio on the dates indicated. The vast majority of security purchases are allocated as available-for-sale. This provides the Corporation with increased flexibility should there be a need or desire to liquidate a security. The securities portfolio includes, U.S. treasuries, U.S. government corporations and agencies, corporate debt obligations, mortgage-backed securities, asset-backed securities, and obligations of state and political subdivisions, both tax-exempt and taxable. Debt securities available-for-sale may be sold as part of the overall asset and liability management process. Realized gains and losses are reflected in the results of operations on the Corporation’s Consolidated Statements of Income. ​ 31 Table of Contents Table 7 — Securities ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Available-For-Sale ​ December 31, 2023 December 31, 2022 U.S. Treasury securities ​ $ 7,041 ​ $ 6,801 U. S. Government corporations and agencies ​ 145,624 ​ 142,855 Other mortgage-backed debt securities ​ 34,050 ​ 33,688 Obligations of state and political subdivisions ​ 87,703 ​ 110,689 Asset-backed securities ​ 82,162 ​ 36,418 Corporate debt securities ​ 36,388 ​ 42,993 Total ​ $ 392,968 ​ $ 373,444 ​ The amortized cost and fair value of securities, by contractual maturity, are shown below at December 31, 2023. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Table 8 — Securities Maturity Table ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, 2023 ​ ​ Debt Securities Available-For-Sale ​ ​ ​ ​ ​ U.S. Government ​ Other ​ Obligations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporations & ​ Mortgage ​ of State ​ Asset ​ Corporate ​ U.S. Treasury Agencies Backed Debt & Political Backed Debt ​ Securities Obligations 1 Securities 1 Subdivisions Securities Securities Within 1 Year: ​ ​ ​ ​ ​ ​ Amortized cost ​ $ — ​ $ — ​ $ 4,666 ​ $ 1,780 ​ $ — ​ $ 7,503 Fair value ​ — ​ — ​ 4,604 ​ 1,758 ​ — ​ 7,524 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1 - 5 Years: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized cost ​ 7,881 ​ 4,028 ​ 1,241 ​ 18,808 ​ — ​ — Fair value ​ 7,041 ​ 3,979 ​ 1,147 ​ 18,159 ​ — ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 5 - 10 Years: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized cost ​ — ​ 9,133 ​ — ​ 25,629 ​ 1,385 ​ 33,144 Fair value ​ — ​ 9,211 ​ — ​ 22,375 ​ 1,382 ​ 28,864 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ After 10 Years: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized cost ​ — ​ 146,909 ​ 30,716 ​ 51,682 ​ 81,467 ​ — Fair value ​ — ​ 132,434 ​ 28,299 ​ 45,411 ​ 80,780 ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total: ​ ​ ​ ​ ​ ​ Amortized cost ​ $ 7,881 ​ $ 160,070 ​ $ 36,623 ​ $ 97,899 ​ $ 82,852 ​ $ 40,647 Fair value ​ 7,041 ​ 145,624 ​ 34,050 ​ 87,703 ​ 82,162 ​ 36,388 1 Mortgage-backed and asset-backed securities are allocated for maturity reporting at their original maturity date. ​ Marketable equity securities consist of common stock investments in other commercial banks and bank holding companies. At December 31, 2023 and 2022, the Corporation had $1,482,000 and $1,699,000, respectively, in equity securities recorded at fair value, a decrease of $217,000 or 12.8%. ​ ​ ​ 32 Table of Contents LOANS Total loans increased to $911,078,000 as of December 31, 2023, compared to a balance of $858,469,000 as of December 31, 2022. Table 9 provides data relating to the composition of the Corporation’s loan portfolio on the dates indicated. Total loans increased $52,609,000, or 6.1% in 2023 compared to an increase of $105,628,000, or 14.0% in 2022. Continued demand for borrowing by businesses accounted for the 6.1% increase in the loan portfolio from December 31, 2022 to December 31, 2023. The Real Estate portfolio increased $46,613,000 or 6.1% from $764,880,000 at December 31, 2022 to $811,493,000 at December 31, 2023. The increase in the Real Estate portfolio for the year ended December 31, 2023 was mainly the result of $110,819,000 in new loan originations, which were offset by loan payoffs of $39,675,000 and a decrease of $8,886,000 in utilization of existing real estate lines of credit, along with regular principal payments and other typical fluctuations in the Real Estate portfolio. The Agricultural portfolio decreased $189,000 or 22.0% from $860,000 at December 31, 2022 to $671,000 at December 31, 2023. The decrease in the Agricultural portfolio for the year ended December 31, 2023 was mainly the result of an increase of $6,000 in utilization of existing agricultural lines of credit, offset with regular principal payments and other typical fluctuations in the Agricultural portfolio. There were no new agricultural loans originated during the year ended December 31, 2023 and payoffs of agricultural loans for the year ended December 31, 2023 did not have a material impact on the change in the portfolio balance. Overall, the Commercial and Industrial portfolio increased $10,832,000 or 19.3% from $56,077,000 at December 31, 2022 to $66,909,000 at December 31, 2023. The increase in the Commercial and Industrial portfolio during the year ended December 31, 2023 was mainly attributable to the portion of the Commercial and Industrial portfolio, excluding PPP loans, which increased $10,945,000 during the year ended December 31, 2023. The increase was attributable to $12,592,000 in new loan originations along with an increase of $1,824,000 in utilization of existing commercial and industrial lines of credit offset by loan payoffs of $1,556,000, as well as regular principal payments and other typical amortization in the Commercial and Industrial portfolio. The portion of the Commercial and Industrial portfolio attributable to PPP loans decreased $113,000 from December 31, 2022 to December 31, 2023 with all PPP loans paid off or forgiven as of December 31, 2023. Consumer loans increased $117,000 or 2.1% from $5,707,000 at December 31, 2022 to $5,824,000 at December 31, 2023. The increase is mainly attributable to new loan originations of $2,545,000, offset by loan payoffs of $1,082,000 and a decrease of $4,000 in utilization of existing consumer lines of credit, along with regular principal payments. The State and Political Subdivisions portfolio decreased $4,764,000 or 15.4% from $30,945,000 at December 31, 2022 to $26,181,000 at December 31, 2023. The decrease is mainly the result of $2,420,000 in loan payoffs for the year ended December 31, 2023 along with regular principal payments, offset by $731,000 in new loan originations. The Corporation continues to originate and sell certain long-term fixed rate residential mortgage loans, which conform to secondary market requirements, when the market pricing is favorable. The Corporation derives ongoing income from the servicing of mortgages sold in the secondary market. The Corporation continues its efforts to lend to creditworthy borrowers. Management believes the loan portfolio is well diversified. All loan relationships in excess of $1,500,000 are reviewed internally and/or externally through a loan review process on an annual basis. Such review is based upon analysis of current financial statements of the borrower, co-borrowers/guarantors, payment history, and economic conditions. Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $885,912,000 or 97.35% of gross loans are graded Pass; $58,000 or 0.01% are graded Special Mention; $24,034,000 or 2.64% are graded Substandard; and $0 are graded Doubtful. The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower. See Note 3 — Loans and Allowance for Credit Losses for risk grading tables. Overall, non-pass grades increased to $24,092,000 at December 31, 2023, as compared to $20,935,000 at December 31, 2022. Real Estate non-pass grades increased $3,174,000 or 15.7% to $23,384,000 as of December 31, 2023 compared to $20,210,000 as of December 31, 2022. Commercial and Industrial non-pass grades decreased $75,000 or 10.3% to $650,000 as of December 31, 2023 compared to $725,000 as of December 31, 2022. Consumer non-pass 33 Table of Contents grades increased to $58,000 as of December 31, 2023 compared to $0 at December 31, 2022. There were no Agricultural or State and Political non-pass grades as of December 31, 2023 or December 31, 2022. The increase in Real Estate non-pass grades from December 31, 2022 to December 31, 2023 is mainly the result of the downgrade of a loan to the owner of a hotel and restaurant which carried a balance of $3,661,000 at December 31, 2023. The loan was downgraded to substandard status during the fourth quarter of 2023 due to the protracted timeframe of over two years which has transpired to complete the necessary renovations to the hotel following a fire. The hotel has exhausted all insurance and stimulus funds and now has to finance any deficits in profitability through other revenue streams, savings, or owner contributions. The Corporation continues to internally underwrite each of its loans to comply with prescribed policies and approval levels established by its Board of Directors. The classes of the Corporation’s loan portfolio net of unearned discount and net deferred loan fees and costs are summarized in Table 9. Table 9 — Loans ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, ​ December 31, ​ ​ 2023 2022 Real Estate ​ $ 811,493 $ 764,880 ​ Agricultural ​ ​ 671 ​ ​ 860 ​ Commercial and Industrial ​ 66,909 ​ 56,077 ​ Consumer ​ 5,824 ​ 5,707 ​ State and Political Subdivisions ​ 26,181 ​ 30,945 ​ Total Loans ​ $ 911,078 ​ $ 858,469 ​ ​ The Corporation’s maturity and interest rate sensitivity information related to the loan portfolio is summarized in Table 10. Table 10 — Loan Maturity and Interest Sensitivity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans by Maturity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 (Dollars in thousands) ​ One Year ​ After One Year ​ After ​ ​ ​ ​ and Less Through Five Years Five Years Total Real Estate ​ $ 36,021 $ 58,874 $ 716,598 $ 811,493 Agricultural ​ 632 ​ 39 ​ — ​ 671 Commercial and Industrial ​ ​ 25,073 ​ ​ 19,213 ​ ​ 22,623 ​ ​ 66,909 Consumer ​ 1,421 ​ 4,190 ​ 213 ​ 5,824 State and Political Subdivisions ​ 15 ​ 4,227 ​ 21,939 ​ 26,181 Total ​ $ 63,162 ​ $ 86,543 ​ $ 761,373 ​ $ 911,078 The above data represents the amount of loans receivable at December 31, 2023 which, based on remaining scheduled repayments of principal, are due in the periods indicated. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 34 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans by Repricing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 (Dollars in thousands) ​ One Year ​ After One Year ​ After ​ ​ ​ ​ and Less Through Five Years Five Years Total Real Estate ​ $ 85,966 $ 581,966 $ 143,561 $ 811,493 Agricultural ​ 632 ​ 39 ​ — ​ 671 Commercial and Industrial ​ ​ 26,427 ​ ​ 30,691 ​ ​ 9,791 ​ ​ 66,909 Consumer ​ 1,421 ​ 4,190 ​ 213 ​ 5,824 State and Political Subdivisions ​ 15 ​ 10,873 ​ 15,293 ​ 26,181 Total ​ $ 114,461 ​ $ 627,759 ​ $ 168,858 ​ $ 911,078 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans with a fixed interest rate ​ $ 10,828 ​ $ 54,146 ​ $ 159,358 ​ $ 224,332 Loans with a variable interest rate ​ 103,633 ​ 573,613 ​ 9,500 ​ 686,746 Total ​ $ 114,461 ​ $ 627,759 ​ $ 168,858 ​ $ 911,078 The above data represents the amount of loans receivable at December 31, 2023 which are due or have the opportunity to reprice in the periods indicated, based on remaining scheduled repayments of principal for fixed rate loans or date of next repricing opportunity for variable rate loans. The fixed and variable portions of the amounts of loans receivable due or repricing in the periods indicated are also summarized above. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses constitutes the amount available to absorb losses within the loan portfolio. As of December 31, 2023, the allowance for credit losses was $6,925,000 as compared to $8,274,000 as of December 31, 2022. The allowance for credit losses is established through a provision for credit losses charged to expenses. Loans are charged against the allowance for possible credit losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees. Management performs a quarterly analysis to determine the adequacy of the allowance for credit losses. The methodology in determining adequacy incorporates quantitative and qualitative allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process. This assessment results in an allocated allowance. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority. Management considers, based upon its methodology, that the allowance for credit losses is adequate to cover foreseeable future losses. However, there can be no assurance that the allowance for credit losses will be adequate to cover significant losses, if any, that might be incurred in the future. On a quarterly basis, management evaluates the qualitative factors utilized in the calculation of the Company’s allowance for credit losses and various adjustments are made to these factors as deemed necessary at the time of evaluation. Upon adoption of ASU No. 2016-13 in the first quarter of 2023, the qualitative factors used in the allowance calculation were adjusted from five loan pools utilized under previous methodology to fifteen loan segmentation pools aligning with the segmentation of the quarterly call report. There were no material increases or decreases in the qualitative factors arising from the realigning of the qualitative factor pools/segments and no additional qualitative factor adjustments were deemed necessary for the first quarter of 2023. During the second quarter of 2023, qualitative factors related to delinquency trends were increased by four basis points for each of the following loan segmentation pools: (a) revolving, open-end, 1-4 family residential properties (and extended under lines of credit) and (b) secured by multifamily (5 or more) residential properties. Both of these loan segmentation pools are included in the Real Estate component of the loan portfolio. During the third quarter of 2023, various qualitative factor decreases were implemented across multiple loan segmentation pools. Delinquency trends were decreased by twelve basis points for each of the following loan segmentation pools: (a) construction, land development, and other land loans, (b) residential construction (loans to build homes, both speculative and owner-occupied, and 1-4 family lot loans), (c) agribusiness, farmland, or secured by farmland, (d) loans secured by junior liens, and (e) loans secured by other non-farm, non-residential properties. All of these loan segmentation pools are included in 35 Table of Contents the Real Estate component of the loan portfolio. Additionally, delinquency trends were decreased by eight basis points and volume trends were decreased by twelve basis points across all three loan segmentation pools in the Consumer portfolio, volume trends for Commercial and Industrial loans were decreased by eight basis points, and delinquency trends for Agricultural loans were decreased by eight basis points during the third quarter of 2023. During the fourth quarter of 2023, qualitative factors related to economic trends were decreased by four basis points across all loan segments and qualitative factors related to collateral values were increased by four basis points related to loans to finance agricultural production and other loans for farmers in the Agricultural portfolio, commercial and industrial loans in the Commercial and Industrial portfolio, and automobile loans in the Consumer portfolio. Additionally, qualitative factors related to delinquency trends were decreased by sixteen basis points related to revolving, open-end 1-4 family residential properties in the Real Estate portfolio and automobile loans in the Consumer portfolio and increased by eight basis points related to loans secured by other non-farm, non-residential properties in the Real Estate portfolio and other revolving credit plans in the Consumer portfolio. Qualitative factors related to volume trends were increased by four basis points for each of the following loan segmentation pools: (a) construction, land development, and other land loans, (b) agribusiness, farmland, or secured by farmland, (c) secured by multi-family (5 or more) residential properties, (d) loans secured by owner-occupied non-farm, non-residential properties, and (e) loans secured by other non-farm, non-residential properties. Qualitative factors related to volume trends were decreased by four basis points for each of the following loan segmentation pools: (a) residential construction (loans to build homes, both speculative and owner-occupied, and 1-4 family lot loans), (b) revolving, open-end 1-4 family residential properties, (c) loans secured by first liens, and (d) loans secured by junior liens. All of the loan segmentation pools impacted by qualitative factor adjustments for volume trends are included in the Real Estate component of the loan portfolio. Qualitative factors related to external factors were increased by four basis points for each of the following loan segmentation pools in the Real Estate portfolio: (a) residential construction (loans to build homes, both speculative and owner-occupied, and 1-4 family lot loans), (b) revolving, open-end 1-4 family residential properties, (c) loans secured by first liens, and (d) loans secured by junior liens. Qualitative factors related to external factors were also increased by four basis points for loans to finance agricultural production and other loans to farmers in the Agricultural portfolio, commercial and industrial loans in the Commercial and Industrial portfolio, other revolving credit plans, automobile loans, and other consumer loans in the Consumer portfolio, and obligations (other than securities or leases) of state and political subdivisions in the US in the State and Political Subdivisions portfolio. Table 11 contains an analysis of the allowance for credit losses indicating charge-offs and recoveries by year. In 2023 and 2022, net charge-offs as a percentage of average loans amounted to 0.001% and 0.018% respectively. Net charge-offs amounted to $13,000 in 2023 and $142,000 in 2022. Net charge-offs were higher in 2022 than in 2023, mainly due to a charge-off in the amount of $148,000 that was completed during the third quarter of 2022 on a commercial and industrial loan to a residential construction company, as the business ceased operations as a result of financial difficulties. For the year ended December 31, 2023, the provision for credit losses resulted in a credit balance of $217,000, as compared to a credit balance of $264,000 for the year ended December 31, 2022. The net effect of the credit balance of the provision and net charge-offs resulted in the year-end allowance for credit losses of $6,925,000 of which 94.42% was attributed to the Real Estate component, 0.01% was attributed to the Agricultural component, 3.83% was attributed to the Commercial and Industrial component, 1.13% was attributed to the Consumer component, and 0.61% was attributed to the State and Political Subdivisions component (refer to the activity in Note 3 — Loans and Allowance for Credit Losses on page 79.) The Corporation determined that the provision for credit losses made during 2023 was sufficient to maintain the allowance for credit losses at a level necessary for the probable losses inherent in the loan portfolio as of December 31, 2023. 36 Table of Contents Table 11 Analysis of Allowance for Credit Losses (Post-Adoption of ASU No. 2016-13) ​ ​ ​ ​ ​ (Dollars in thousands) ​ ​ ​ ​ ​ ​ December 31, ​ As of and for the year ended: 2023 Balance at prior year-end ​ $ 8,274 CECL adoption adjustment ​ ​ (1,119) ​ Beginning balance ​ ​ 7,155 ​ ​ ​ ​ ​ ​ Charge-offs: ​ ​ Real Estate ​ — ​ Agricultural ​ — ​ Commercial and Industrial ​ ​ — ​ Consumer ​ 57 ​ State and Political Subdivisions ​ — ​ ​ ​ 57 ​ Recoveries: ​ ​ Real Estate ​ 37 ​ Agricultural ​ — ​ Commercial and Industrial ​ ​ 2 ​ Consumer ​ 5 ​ State and Political Subdivisions ​ — ​ ​ ​ 44 ​ ​ ​ ​ ​ ​ Net charge-offs ​ 13 ​ Credits charged to operations ​ (217) ​ Balance at end of period ​ $ 6,925 ​ ​ ​ ​ ​ ​ Ratio of net charge-offs during the period to average loans outstanding during the period ​ 0.001 % Allowance for credit losses to average loans outstanding during the period ​ 0.793 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 37 Table of Contents Analysis of Allowance for Loan Losses (Pre-Adoption of ASU No. 2016-13) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Years Ended December 31, ​ ​ ​ 2022 ​ ​ 2021 ​ ​ 2020 ​ ​ 2019 ​ Beginning balance ​ $ 8,680 ​ $ 7,933 ​ $ 7,005 ​ $ 6,745 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Charge-offs: ​ ​ ​ ​ ​ Commercial and Industrial ​ 158 ​ 13 ​ 90 ​ — ​ Commercial Real Estate ​ 3 ​ 29 ​ 141 ​ 64 ​ Residential Real Estate ​ 12 ​ 80 ​ 33 ​ 69 ​ Consumer ​ 33 ​ 36 ​ 37 ​ 71 ​ ​ ​ 206 ​ 158 ​ 301 ​ 204 ​ Recoveries: ​ ​ ​ ​ ​ Commercial and Industrial ​ 3 ​ — ​ 14 ​ 6 ​ Commercial Real Estate ​ 40 ​ 30 ​ — ​ — ​ Residential Real Estate ​ 16 ​ 4 ​ 8 ​ 2 ​ Consumer ​ 5 ​ 11 ​ 7 ​ 6 ​ ​ ​ 64 ​ 45 ​ 29 ​ 14 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net charge-offs ​ 142 ​ 113 ​ 272 ​ 190 ​ (Credits) additions charged to operations ​ (264) ​ 860 ​ 1,200 ​ 450 ​ Balance at end of period ​ $ 8,274 ​ $ 8,680 ​ $ 7,933 ​ $ 7,005 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Ratio of net charge-offs during the period to average loans outstanding during the period ​ 0.018 % 0.015 % 0.040 % 0.031 % Allowance for loan losses to average loans outstanding during the period ​ 1.025 % 1.178 % 1.160 % 1.127 % ​ It is the policy of management and the Corporation’s Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio. A provision for credit losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio. This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors. The loan review process, which is conducted quarterly, is an integral part of the Bank’s evaluation of the loan portfolio. A detailed quarterly analysis to determine the adequacy of the Corporation’s allowance for credit losses is reviewed by the Board of Directors. With the Bank’s manageable level of net charge-offs and a decrease to the reserve from the credit balance of the provision, the allowance for credit losses as a percentage of average loans amounted to 0.793% in 2023 and 1.025% in 2022. Table 12 sets forth the allocation of the Bank’s allowance for credit losses by loan category and the percentage of loans in each category to the total allowance for credit losses at the dates indicated. The portion of the allowance for credit losses allocated to each loan category does not represent the total available for future losses that may occur within the loan category, since the total credit loss allowance is a valuation reserve applicable to the entire loan portfolio. 38 Table of Contents Table 12 Allocation of Allowance for Credit Losses (Post-Adoption of ASU No. 2016-13) ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, 2023 %* Real Estate ​ $ 6,539 94.42 Agricultural ​ 1 ​ 0.01 Commercial and Industrial ​ 265 ​ 3.83 Consumer ​ 78 ​ 1.13 State and Political Subdivisions ​ 42 ​ 0.61 ​ ​ $ 6,925 ​ 100.0 ​ Allocation of Allowance for Loan Losses (Pre-Adoption of ASU No. 2016-13) (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 %* 2021 %* 2020 %* 2019 %* Commercial and Industrial ​ $ 704 8.5 $ 681 8.8 $ 787 10.8 $ 634 9.7 Commercial Real Estate ​ 5,932 ​ 71.7 ​ 5,408 ​ 70.1 ​ 4,762 ​ 65.4 ​ 4,116 ​ 63.0 Residential Real Estate ​ 1,557 ​ 18.8 ​ 1,539 ​ 20.0 ​ 1,643 ​ 22.5 ​ 1,665 ​ 25.5 Consumer ​ 81 ​ 1.0 ​ 84 ​ 1.1 ​ 94 ​ 1.3 ​ 114 ​ 1.8 Unallocated ​ — ​ N/A ​ 968 ​ N/A ​ 647 ​ N/A ​ 476 ​ N/A ​ ​ $ 8,274 ​ 100.0 ​ $ 8,680 ​ 100.0 ​ $ 7,933 ​ 100.0 ​ $ 7,005 ​ 100.0 *Percentage of allocation in each category to total allocations in the Allowance for Loan Loss Analysis, excluding unallocated. NON-PERFORMING ASSETS Table 13 details the Corporation’s non-performing assets and individually evaluated loans as of the dates indicated. Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period income. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure. Total non-performing assets amounted to $5,681,000 as of December 31, 2023, as compared to $5,359,000 as of December 31, 2022. The economy remains unstable. Consumer spending remains at high levels, allowing the inflation rate to continue to remain higher than desired levels. Business sentiment is downbeat and business investment has slowed. Many economists and influential thinkers believe that the economy is moving forward in spite of certain forecasts and predictors. Inflation was receding earlier in 2023, at 3% as of June 2023; however, it rose to 3.7% as of September 2023 and then dropped slightly to 3.4% as of December 2023. The Federal Reserve’s target rate of inflation is 2%. The war between Ukraine and Russia continues to produce worldwide consternation. The heightened conflict with Israel and Palestine has caused much hostility throughout the world. The constant disputing over whether to continue US support of Ukraine and Israel in ongoing efforts has been a strain on the economy. Values of new and used homes and automobiles have remained high. Higher interest rates have added to the curtailed borrowing. Consumer savings is dwindling, and credit balances are growing. Supply chains are back up and running efficiently in many areas. Labor continues to remain costly and unpredictable. The Federal Reserve has noted they will cease rate hikes and has indicated a plan to potentially begin reducing rates in 2024. These forces have had a direct effect on the Corporation’s nonperforming assets. The Corporation is closely monitoring all segments of its loan portfolio because of the current uncertain economic environment. Non-accrual loans totaled $4,616,000 as of December 31, 2023 as compared to 39 Table of Contents $5,051,000 as of December 31, 2022. There were no foreclosed assets held for resale as of December 31, 2023 or December 31, 2022. There were five loans past-due 90 days or more and still accruing interest as of December 31, 2023 which carried an aggregate balance of $1,065,000, compared to December 31, 2022 when there were three loans past-due 90 days or more and still accruing interest. The loans past-due 90 days or more and still accruing interest as of December 31, 2023 consisted of four loans secured by commercial real estate and one loan secured by residential real estate, all of which were well secured and in the process of collection. Non-performing assets to total loans was 0.62% for both December 31, 2023 and 2022. Non-performing assets to total assets was 0.40% for both December 31, 2023 and 2022. The allowance for credit losses to total non-performing assets was 140.61% as of December 31, 2023 as compared to 154.39% as of December 31, 2022. Additional detail can be found in Table 13 – Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No. 2016-13) and Non-Performing Assets and Impaired Loans (Pre-Adoption of ASU No. 2016-13) and the Non-Performing Assets table in Note 3 — Loans and Allowance for Credit Losses. Asset quality is a priority and the Corporation retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation efforts and engages an annual external loan review. Performing substandard loans, which have not been designated for individual evaluation to determine expected credit losses, have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future. Performing substandard loans not designated for individual evaluation amounted to $19,418,000 at December 31, 2023 and $10,776,000 at December 31, 2022. Individually evaluated loans were $4,925,000 at December 31, 2023, compared to impaired loans of $11,207,000 at December 31, 2022. The largest individually evaluated loan relationship at December 31, 2023 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate. At December 31, 2023, the loan carried a balance of $1,990,000, net of $1,989,000 that had been charged off to date. The second largest individually evaluated loan relationship at December 31, 2023 consisted of five non-performing loans to a plastic processing company focused on non-post-consumer recycling. Three loans are classified in the Commercial and Industrial portfolio and two loans are secured by commercial real estate. The loans carried an aggregate balance of $975,000 at December 31, 2023. The third largest individually evaluated loan relationship at December 31, 2023 consisted of a non-performing loan to the owner of a golf course and catering venue which is secured by commercial real estate. At December 31, 2023, the loan carried a balance of $582,000. The Corporation estimates the need for individual evaluation of loans based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the $4,925,000 in individually evaluated loans at December 31, 2023, none were located outside the Corporation’s primary market area. The Corporation’s non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end, unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Corporation. 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 non-accrual loans less than $250,000 upon classification and typically at year end, the Corporation completes a Certificate of Inspection, which includes the results of an onsite inspection, and may consider value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations. Improving loan quality is a priority. The Corporation actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in 2024. Excluding the assets disclosed in Table 13 – Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No. 2016-13) and Non-Performing Assets and Impaired Loans (Pre-Adoption of ASU No. 2016-13) and the Non-Performing Assets table in Note 3 — Loans and 40 Table of Contents Allowance for Credit Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination. The economic climate remains in a state of flux. The war between Ukraine and Russia moves into its third year and the Israeli conflict in the Gaza strip has intensified and incited worldwide hostilities. Inflationary pressures have eased but the effects of monetary policy adjustments made to affect the change remain. The looming Presidential election and the legal issues that permeate the leading Presidential candidates, commodity prices remaining high even as inflationary pressures have eased, gas prices fluctuating widely from week to week, small businesses closing, larger corporations cutting jobs, unprecedented weather conditions seen around the world, and the fears recession may still be looming have all exacerbated the difficulties in the national and state economy. Experts at all levels continue to ascertain the intermediate or long term effects of such issues. The Corporation may experience difficulties collecting payments on time from its borrowers, and certain types of loans may need to be modified, which could cause a rise in the level of individually evaluated loans, non-performing assets, charge-offs, and delinquencies. Should such metrics increase, additions to the balance of the Corporation’s allowance for credit losses could be required. The extent of the impact of these stressors on the Corporation’s operational and financial performance will depend on certain developments including reactions to inflationary controls enacted, the labor force, the longevity of the wars, the ongoing political landscape, and the looming threat of a recession, and any after-effects of these factors. These factors may not immediately impact the Corporation’s operational and financial performance, as the effects of these factors may lag into the future. The Corporation is also susceptible to the impact of economic and fiscal policy factors that may evolve in the current economic environment. A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans. As of December 31, 2023 and 2022 management is of the opinion that there were no loan concentrations exceeding 10% of total loans. 41 Table of Contents Table 13 Non-Performing Assets and Individually Evaluated Loans (Post-Adoption of ASU No. 2016-13) ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, ​ ​ 2023 Non-performing assets ​ Non-accrual loans ​ $ 4,616 ​ Foreclosed assets held for resale ​ — ​ Loans past-due 90 days or more and still accruing interest ​ 1,065 ​ Total non-performing assets ​ $ 5,681 ​ ​ ​ ​ ​ ​ Individually evaluated loans ​ ​ Non-accrual loans ​ $ 4,616 ​ Other Individually Evaluated loans ​ ​ 309 ​ Total individually evaluated loans ​ 4,925 ​ Allocated allowance for credit losses ​ — ​ Net investment in individually evaluated loans ​ $ 4,925 ​ ​ ​ ​ ​ ​ Individually evaluated loans with a valuation allowance ​ $ — ​ Individually evaluated loans without a valuation allowance ​ 4,925 ​ Total individually evaluated loans ​ $ 4,925 ​ ​ ​ ​ ​ ​ Allocated valuation allowance as a percent of individually evaluated loans ​ — % Individually evaluated loans to total loans ​ 0.54 % Non-performing assets to total loans ​ 0.62 % Non-performing assets to total assets ​ 0.40 % Allowance for credit losses to individually evaluated loans ​ 140.61 % Allowance for credit losses to total non-performing assets ​ 121.90 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 42 Table of Contents Non-Performing Assets and Impaired Loans (Pre-Adoption of ASU No. 2016-13) ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, ​ ​ ​ 2022 ​ Non-performing assets ​ ​ ​ Non-accrual loans ​ $ 5,051 ​ Foreclosed assets held for resale ​ — ​ Loans past-due 90 days or more and still accruing interest ​ 308 ​ Total non-performing assets ​ $ 5,359 ​ ​ ​ ​ ​ ​ Impaired loans ​ ​ Non-accrual loans ​ $ 5,051 ​ Accruing TDRs ​ 6,156 ​ Total impaired loans ​ 11,207 ​ Allocated allowance for credit losses ​ — ​ Net investment in impaired loans ​ $ 11,207 ​ ​ ​ ​ ​ ​ Impaired loans with a valuation allowance ​ $ — ​ Impaired loans without a valuation allowance ​ 11,207 ​ Total impaired loans ​ $ 11,207 ​ ​ ​ ​ ​ ​ Allocated valuation allowance as a percent of impaired loans ​ — % Impaired loans to total loans ​ 1.31 % Non-performing assets to total loans ​ 0.62 % Non-performing assets to total assets ​ 0.40 % Allowance for credit losses to impaired loans ​ 73.83 % Allowance for credit losses to total non-performing assets ​ 154.39 % ​ Real estate mortgages comprised 89.1% of the loan portfolio as of December 31, 2023 and 2022, respectively. Real estate mortgages consist of both loans secured by residential and commercial real estate. The Real Estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities. Also, the residential component of the Real Estate loan portfolio is largely comprised of fixed rate mortgages. The real estate loans are concentrated in the Corporation’s market area and are subject to risks associated with the local economy. The loans secured by commercial real estate typically reprice approximately every three to five years and are also concentrated in the Corporation’s market area. The Corporation’s loss exposure on its individually evaluated loans continues to be mitigated by collateral positions on these loans. The allocated allowance for credit losses associated with individually evaluated loans is generally computed based upon the related collateral value of the loans. The collateral values are determined by recent appraisals or Certificates of Inspection, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation, and management’s expertise and knowledge of the borrower and the borrower’s business. DEPOSITS, OTHER BORROWED FUNDS AND SUBORDINATED DEBT Consumer and commercial retail deposits are attracted primarily by the Corporation’s nineteen full service office locations and through its internet banking presence. The Corporation offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products. The Corporation regularly reviews competing financial institutions’ interest rates, especially when establishing interest rates on certificates of deposit. 43 Table of Contents Deposits decreased by $13,060,000, or 1.3% for the year ending December 31, 2023 as compared to December 31, 2022. The decrease in deposits in 2023 can be attributed to decreases in non-interest bearing demand, interest bearing demand and savings accounts while time deposits increased due to higher rate CD offerings in 2023. The decrease in deposits was mainly the result of a $60,884,000 decrease in municipal deposits offset by an increase of $40,250,000 in brokered CDs, along with other normal fluctuations in deposits during 2023. The following schedule reflects the remaining maturities of time deposits and other time open deposits of $100,000 or more at December 31, 2023. ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Time Other Time Open ​ ​ Deposits ​ Deposits ​ ≥$100,000 ≥$100,000 Less than or equal to 3 months ​ $ 27,651 ​ $ 735 Over 3 months through 6 months ​ 20,947 ​ — Over 6 months through 12 months ​ 39,764 ​ — Over 12 months ​ 18,875 ​ — ​ ​ $ 107,237 ​ $ 735 ​ Total borrowings were $275,468,000 as of December 31, 2023, compared to $178,418,000 at December 31, 2022. During 2023, long-term borrowings increased to $122,000,000 from $25,000,000. The increase in long-term borrowings in 2023 was the result of increased securities and loans and decreased deposits in 2023. Short-term debt increased from $153,418,000 in 2022 to $153,468,000 as of December 31, 2023. The small increase was the result of the Corporation taking more long-term debt in 2023 to offset increased securities and loans and decreased deposits in 2023. Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, Federal Discount Window and short-term borrowings from FHLB. Short-term borrowings from FHLB are commonly used to offset balance sheet fluctuations. In connection with FHLB borrowings, Federal Discount Window, and securities sold under agreements to repurchase, the Corporation maintains certain eligible assets as collateral. The following table shows information about the Corporation’s short-term borrowings as of December 31, 2023 and 2022. Table 14 — Short-Term Borrowings (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2023 ​ ​ ​ ​ ​ ​ ​ ​ Maximum ​ ​ ​ ​ Period End ​ Average ​ Month End ​ Average ​ Balance Balance Balance Rate Federal funds purchased ​ $ — $ — $ — 6.57 % Securities sold under agreements to repurchase ​ 19,708 ​ 19,131 ​ 22,013 ​ 3.28 % Federal Discount Window ​ 1 ​ 25 ​ 875 ​ 4.99 % Federal Home Loan Bank ​ 133,759 ​ 154,600 ​ 175,476 ​ 5.45 % ​ ​ $ 153,468 ​ $ 173,756 ​ $ 198,364 ​ 5.21 % ​ 44 Table of Contents (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ ​ ​ ​ ​ ​ ​ ​ Maximum ​ ​ ​ ​ Period End ​ Average ​ Month End ​ Average ​ Balance Balance Balance Rate Federal funds purchased ​ $ — $ 13 $ — — % Securities sold under agreements to repurchase ​ 20,368 ​ 26,825 ​ 30,868 ​ 0.84 % Federal Discount Window ​ ― ​ 3 ​ ― ​ 2.78 % Federal Home Loan Bank ​ 133,050 ​ 60,719 ​ 133,050 ​ 2.82 % ​ ​ $ 153,418 ​ $ 87,560 ​ $ 163,918 ​ 2.21 % ​ The rapid increase in interest rates has created a significant earnings challenge for the industry. As liability costs have outpaced asset yield growth, negative earnings is a plausible scenario shown in many models if no action is taken. Due to the stress this puts on the Corporation, an action plan strategy was put into effect in 2023 that includes disciplined loan pricing, interest rate swaps and a leverage of the balance sheet consisting of securities and brokered CD purchases and long-term borrowings. This action plan strategy was the key part of the Corporation’s decision to utilize more targeted long-term borrowings over high-rate short-term borrowings and the decision to take on more brokered CDs in 2023. On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the “2020 Notes”). The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and then float based on a benchmark rate (as defined). ​ CAPITAL STRENGTH Normal increases in capital are generated by net income, less cash dividends paid out. Also, the net unrealized gains or losses on debt securities available-for-sale and derivatives, net of taxes, referred to as accumulated other comprehensive (loss), may increase or decrease total equity capital. The total net increase in capital was $1,229,000 in 2023 after a decrease of $28,169,000 in 2022. The increase in equity capital in 2023 was due to the issuance of new shares through the Corporation’s Dividend Reinvestment Program (“DRIP”) amounting to $1,768,000 offset by a decrease of $452,000 in retained earnings. There was a one-time cumulative effect adjustment that increased retained earnings by $768,000 upon the adoption of ASU No. 2016-13. The Corporation had 231,611 shares of common stock as of December 31, 2023 and December 31, 2022, at a cost of $5,709,000, as treasury stock, authorized and issued but not outstanding. Return on average equity (“ROE”) is computed by dividing net income by average stockholders’ equity. This ratio was 4.55% for 2023 and 10.75% for 2022. Adequate capitalization of banks and bank holding companies is required and monitored by regulatory authorities. Table 15 reflects risk-based capital ratios and the leverage ratio for the Bank. The Bank’s leverage ratio was 10.38% at December 31, 2023 and December 31, 2022. The Bank has consistently maintained regulatory capital ratios at or above the “well capitalized” standards. To be categorized as “well capitalized”, the Bank must maintain minimum tier 1 risk-based capital, common equity tier 1 risk based capital, total risk-based capital and tier 1 leverage ratios of 8.0%, 6.5%, 10.0% and 5.0%, respectively. For additional information on capital ratios, see Note 14 — Regulatory Matters. The risk-based capital calculation assigns various levels of risk to different categories of bank assets, requiring higher levels of capital for assets with more risk. Also measured in the risk-based capital ratio is credit risk exposure associated with off-balance sheet contracts and commitments. 45 Table of Contents Table 15 — Capital Ratios At December 31, 2023, the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III. The following table presents the Bank’s capital ratios as of December 31, 2023 and December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum Capital ​ ​ December 31, ​ December 31, ​ Adequacy with ​ ​ 2023 2022 Capital Buffer Tier 1 leverage ratio (to average assets) 10.38 % 10.38 % 4.00 % Common Equity Tier 1 capital ratio (to risk-weighted assets) 14.94 % 15.24 % 7.00 % Tier 1 risk-based capital ratio (to risk-weighted assets) 14.94 % 15.24 % 8.50 % Total risk-based capital ratio 15.68 % 16.15 % 10.50 % ​ Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity tier 1 capital ratio to 7.0%, the tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. As of December 31, 2023, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis. The Corporation’s capital ratios are not materially different than those of the Bank. LIQUIDITY MANAGEMENT The Corporation’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity is needed to provide the funding requirements of depositors’ withdrawals, loan growth, and other operational needs. Sources of liquidity are as follows: ● Growth in the core deposit base; ● Proceeds from sales or maturities of securities; ● Payments received on loans and mortgage-backed and asset-backed securities; ● Overnight correspondent bank borrowings on various credit lines, notes, etc., with various levels of capacity; ● Securities sold under agreements to repurchase; and ● Brokered CDs. At December 31, 2023, the Corporation had $517,782,000 in available borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes, FHLB short-term borrowings and irrevocable standby letters of credit issued by FHLB); the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $8,547,000. 46 Table of Contents The Corporation enters into “Repurchase Agreements” in which it agrees to sell securities subject to an obligation to repurchase the same or similar securities. Because the agreement both entitles and obligates the Corporation to repurchase the assets, the Corporation may transfer legal control of the securities while still retaining effective control. As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and act as an additional source of liquidity. Securities sold under agreements to repurchase were $19,708,000 at December 31, 2023. Asset liquidity is provided by securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks. The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities. Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing and core deposits. Also, short-term borrowings provide funds to meet liquidity needs. Net cash flows provided by operating activities were $5,905,000 and $18,163,000 as of December 31, 2023 and December 31, 2022, respectively. Net income amounted to $5,560,000 for the year ended December 31, 2023 and $14,024,000 for the year ended December 31, 2022. The (credit) provision for credit losses resulted in a credit balance of $217,000 for the year ended December 31, 2023 and a credit balance of $264,000 for the year ended December 31, 2022. During the years ended December 31, 2023 and 2022, net premium amortization on securities amounted to $1,519,000 and $3,008,000, respectively. Net gains on sales of mortgage loans were $65,000 for the year ended December 31, 2023, compared to net losses of $7,000 for the year ended December 31, 2022. Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $77,000 and $2,168,000 for the years ended December 31, 2023 and 2022, respectively. Net securities losses were $118,000 for the year ended December 31, 2023, compared to $846,000 for the year ended December 31, 2022. Accrued interest payable increased by $2,260,000 during the year ended December 31, 2023 and $312,000 during the year ended December 31, 2022. Other assets decreased by $661,000 and increased by $342,000 during the years ended December 31, 2023 and 2022, respectively. Other liabilities decreased by $5,429,000 during the year ended December 31, 2023, compared to an increase of $429,000 during the year ended December 31, 2022. Investing activities used cash of $76,833,000 and $93,634,000 during the years ended December 31, 2023 and 2022, respectively. Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $16,533,000 during the year ended December 31, 2023 and provided cash of $19,295,000 during the year ended December 31, 2022. Net change in restricted investment in bank stocks used cash of $3,749,000 during the year ended December 31, 2023 and $5,217,000 during the year ended December 31, 2022. Net cash used to originate loans amounted to $52,480,000 and $103,609,000 during the years ended December 31, 2023 and 2022, respectively. Purchase of premises and equipment used cash of $1,656,000 and $1,892,000 during the years ended December 31, 2023 and 2022, respectively. Purchase of investment in real estate ventures used cash of $2,415,000 and $2,458,000 during the years ended December 31, 2023 and 2022, respectively. Financing activities provided cash of $77,203,000 and $24,871,000 during the years ended December 31, 2023 and 2022, respectively. Deposits decreased by $13,060,000 during the year ended December 31, 2023 and $84,470,000 during the year ended December 31, 2022. Short-term borrowings increased by $50,000 during the year ended December 31, 2023 and increased by $126,041,000 during the year ended December 31, 2022. Proceeds from long-term borrowings amounted to $100,000,000 for the year ended December 31, 2023, compared to $0 for the year ended December 31, 2022. Repayment of long-term borrowings used cash of $3,000,000 during the year ended December 31, 2023 and $10,000,000 during the year ended December 31, 2022. Dividends paid amounted to $6,780,000 for the year ended December 31, 2023, compared to $6,690,000 for the year ended December 31, 2022. Managing liquidity remains an important segment of asset/liability management. The overall liquidity position of the Corporation is maintained by an active asset/liability management committee. The Corporation believes that its core deposit base is stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and measured on a monthly basis. These measurements indicate that liquidity generally remains stable and exceeds the Corporation’s minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Given our financial 47 Table of Contents strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly utilizing new options. Table 16 represents scheduled maturities of the Corporation’s contractual obligations by time remaining until maturity as of December 31, 2023. Table 16 — Contractual Obligations (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than 1 - 3 4 -5 Over ​ December 31, 2023 ​ 1 Year ​ Years ​ Years ​ 5 Years ​ Total Time deposits ​ $ 210,589 ​ $ 55,700 ​ $ 22,329 ​ $ 5,500 ​ $ 294,118 Securities sold under agreement to repurchase ​ 19,708 ​ — ​ — ​ — ​ 19,708 Short-term borrowings ​ 133,760 ​ — ​ — ​ — ​ 133,760 Long-term borrowings ​ 20,000 ​ 60,000 ​ 42,000 ​ — ​ 122,000 Subordinated debentures ​ ​ — ​ ​ — ​ ​ — ​ ​ 25,000 ​ ​ 25,000 Operating lease obligations ​ ​ 175 ​ ​ 280 ​ ​ 311 ​ ​ 2,317 ​ ​ 3,083 ​ ​ $ 384,232 ​ $ 115,980 ​ $ 64,640 ​ $ 32,817 ​ $ 597,669 ​ Off-Balance Sheet Arrangements The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and, to a lesser extent, standby letters of credit. At December 31, 2023, the Corporation had outstanding unfunded commitments to extend credit of $116,954,000 and outstanding standby letters of credit of $5,807,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. Please refer to Note 15 — Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk for a discussion of the nature, business purpose, and importance of the Corporation’s off-balance sheet arrangements. MARKET RISK Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Corporation’s market risk is composed primarily of interest rate risk. The Corporation’s interest rate risk results from timing differences in the repricing of assets, liabilities, off-balance sheet instruments, and changes in relationships between rate indices and the potential exercise of explicit or embedded options. Increases in the level of interest rates also may adversely affect the fair value of the Corporation’s securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Corporation’s interest-earning assets, which could adversely affect the Corporation’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Corporation’s stockholders’ equity, if retained. Under FASB Accounting Standards Codification (“ASC”) 320-10, Investments – Debt Securities , changes in the unrealized gains and losses, net of taxes, on debt securities classified as available-for-sale are reflected in the Corporation’s stockholders’ equity. The Corporation does not own any trading assets. Asset/Liability Management The principal objective of asset/liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Corporation actively manages the interest rate sensitivity of its assets and liabilities. Table 17 presents an interest sensitivity analysis of assets and liabilities as of December 31, 2023. Several techniques are used for measuring interest rate sensitivity. Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a 48 Table of Contents given time period, referred to as a rate sensitivity gap. If more assets than liabilities mature or reprice within the time frame, the Corporation is asset sensitive. This position would contribute positively to net interest income in a rising rate environment. Conversely, if more liabilities mature or reprice, the Corporation is liability sensitive. This position would contribute positively to net interest income in a falling rate environment. Limitations of interest rate sensitivity gap analysis as illustrated in Table 17 include: a) assets and liabilities which contractually reprice within the same period may not, in fact, reprice at the same time or to the same extent; b) changes in market interest rates do not affect all assets and liabilities to the same extent or at the same time, and c) interest rate sensitivity gaps reflect the Corporation’s position on a single day (December 31, 2023 in the case of the following schedule) while the Corporation continually adjusts its interest sensitivity throughout the year. The Corporation’s cumulative gap at one year indicates the Corporation is liability sensitive at December 31, 2023. Table 17 — Interest Rate Sensitivity Analysis (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ​ One 1 - 5 Beyond Not Rate ​ ​ ​ Year ​ Years ​ 5 Years ​ Sensitive ​ Total Assets ​ $ 184,078 ​ $ 620,886 ​ $ 538,512 ​ $ 72,394 ​ $ 1,415,870 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities/Stockholders’ Equity ​ 563,644 ​ 266,122 ​ 432,280 ​ 153,824 ​ 1,415,870 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest Rate Sensitivity Gap ​ $ (379,566) ​ $ 354,764 ​ $ 106,232 ​ $ (81,430) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cumulative Gap ​ $ (379,566) ​ $ (24,802) ​ $ 81,430 ​ — ​ ​ ​ Earnings at Risk The Bank’s Asset/Liability Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Corporation’s Board of Directors. The Corporation recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet beyond interest rate sensitivity gap. Although the Corporation continues to measure its interest rate sensitivity gap, the Corporation utilizes additional modeling for interest rate risk in the overall balance sheet. Earnings at risk and economic values at risk are analyzed. Earnings simulation modeling addresses earnings at risk and net present value estimation addresses economic value at risk. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk to the Corporation. Earnings Simulation Modeling The Corporation’s net income is affected by changes in the level of interest rates. Net income is also subject to changes in the shape of the yield curve. For example, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and increased liability rates, while a steepening would result in increased earnings as earning asset and liability yields widen. Earnings simulation modeling is the primary mechanism used in assessing the impact of changes in interest rates on net interest income. The model reflects management’s assumptions related to asset yields and rates paid on liabilities, deposit sensitivity, size and composition of the balance sheet. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Earnings at risk is the change in net interest income from a base case scenario under various scenarios of rate shock increases and decreases in the interest rate earnings simulation model. 49 Table of Contents Table 18 presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various immediate shock increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates. The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors. The earnings simulation model projects net interest income would decrease 5.84%, 10.38% and 14.05% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would increase 0.62%, 2.97% and 4.99% in the 100, 200 and 300 basis point decreasing rate scenarios presented, respectively. All of these forecasts are within the Corporation’s one year policy guidelines. The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current interest rate environment with federal funds trading in the 525-550 basis point range and many deposit accounts still lagging at markedly lower rates. Results of the decreasing basis point declining scenarios are affected by the fact that many of the Corporation’s interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points. However, the Corporation’s interest-sensitive assets are able to decline by these amounts. For the years ended December 31, 2023 and 2022, the cost of interest-bearing liabilities averaged 2.85% and 0.95%, respectively, and the yield on average interest-earning assets, on a fully taxable equivalent basis, averaged 4.64% and 3.91%, respectively. Net Present Value Estimation The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. At December 31, 2023, net present value is projected to decrease 3.92%, 9.07%, and 15.22% in the 100, 200 and 300 basis point immediate increase scenarios, respectively. Additionally, the 100, 200 and 300 basis point immediate decreases in rates are estimated to affect net present value with a decrease of 3.22%, 11.76% and 31.05%, respectively. All scenarios presented are within the Corporation’s policy limits. The computation of the effects of hypothetical interest rate changes are based on many assumptions. They should not be relied upon solely as being indicative of actual results, since the computations do not account for actions management could undertake in response to changes in interest rates. Table 18 — Effect of Change in Interest Rates ​ ​ ​ ​ ​ ​ Projected Change Effect on Net Interest Income ​ ​ ​ 1-Year Net Interest Income Simulation Projection ​ +300 bp Shock vs. Stable Rate (14.05) % +200 bp Shock vs. Stable Rate (10.38) % +100 bp Shock vs. Stable Rate (5.84) % Flat rate ​ ‒100 bp Shock vs. Stable Rate 0.62 % ‒200 bp Shock vs. Stable Rate 2.97 % ‒300 bp Shock vs. Stable Rate ​ 4.99 % ​ ​ ​ ​ Effect on Net Present Value of Balance Sheet ​ Static Net Present Value Change ​ +300 bp Shock vs. Stable Rate (15.22) % +200 bp Shock vs. Stable Rate (9.07) % +100 bp Shock vs. Stable Rate (3.92) % Flat rate ​ ‒100 bp Shock vs. Stable Rate (3.22) % ‒200 bp Shock vs. Stable Rate (11.76) % ‒300 bp Shock vs. Stable Rate (31.05) % 50 Table of Contents Table 19 shows the quarterly results of operations for the Corporation for the years ended December 31, 2023 and 2022: Table 19 — Quarterly Results of Operations (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended 2023 March 31 June 30 September 30 December 31 Interest income ​ $ 13,307 ​ $ 13,651 ​ $ 14,237 ​ $ 15,793 Interest expense ​ 5,503 ​ 6,543 ​ 7,353 ​ 8,473 Net interest income ​ 7,804 ​ 7,108 ​ 6,884 ​ 7,320 Provision (credit) for credit losses ​ — ​ 34 ​ (370) ​ 119 Non-interest income ​ 1,452 ​ 1,539 ​ 1,476 ​ 1,689 Non-interest expense ​ 7,753 ​ 7,157 ​ 7,420 ​ 6,915 Income before income tax expense ​ 1,503 ​ 1,456 ​ 1,310 ​ 1,975 Income tax expense ​ 146 ​ 317 ​ ​ 27 ​ 194 Net income ​ $ 1,357 ​ $ 1,139 ​ $ 1,283 ​ $ 1,781 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and diluted earnings per share ​ $ 0.22 ​ $ 0.19 ​ $ 0.21 ​ $ 0.29 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended 2022 ​ March 31 ​ June 30 ​ September 30 ​ December 31 Interest income ​ $ 10,629 ​ $ 11,111 ​ $ 11,897 ​ $ 12,776 Interest expense ​ 1,173 ​ 1,330 ​ 2,378 ​ 4,032 Net interest income ​ 9,456 ​ 9,781 ​ 9,519 ​ 8,744 Provision (credit) for loan losses ​ 219 ​ 218 ​ 219 ​ (920) Non-interest income ​ 1,389 ​ 1,514 ​ 1,493 ​ 935 Non-interest expense ​ 6,516 ​ 6,595 ​ 6,711 ​ 6,955 Income before income tax expense ​ 4,110 ​ 4,482 ​ 4,082 ​ 3,644 Income tax expense ​ 567 ​ 660 ​ ​ 578 ​ 489 Net income ​ $ 3,543 ​ $ 3,822 ​ $ 3,504 ​ $ 3,155 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and diluted earnings per share ​ $ 0.60 ​ $ 0.64 ​ $ 0.58 ​ $ 0.53 ​ Critical Accounting Estimates The Corporation has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Corporation has applied those policies in a consistent manner. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America require that the Corporation make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical or other factors believed to be reasonable under the circumstances. The Corporation evaluates these estimates and assumptions on an ongoing basis and may retain outside consultants, lawyers and actuaries to assist in its evaluation. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions and judgments. The Corporation considers four accounting policies to be critical because they involve the most significant judgments and estimates used in preparation of its consolidated financial statements. The four policies are the determination of allowance for securities losses, the assessment of possible impairment of equity securities, the determination of the allowance for credit losses, and the assessment of goodwill for possible impairment. 51 Table of Contents Allowance for Securities Losses. The allowance for securities losses represents management’s estimate of probable credit losses inherent in the securities portfolio. Management evaluates debt securities for impairment where there has been a decline in fair value below the amortized cost basis of a debt security to determine whether there is a credit loss associated with the decline in fair value. The credit loss component would be recognized through the provision for credit losses and the creation of an allowance for credit losses on securities. Impairment of Equity Securities. Valuations for the equity securities portfolio are determined using quoted market prices, where available. If quoted market prices are not available, the equity securities valuation is based on cost less any impairment. In addition to valuation, management must assess whether there are any declines in value below the carrying value of the securities that would require an adjustment in carrying value and recognition of the loss in the Corporation’s Consolidated Statements of Income. Allowance for Credit Losses. The allowance for credit losses represents management’s estimate of losses arising from borrowers’ inability to make loan payments as required. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to specific expectations for the future economic environment, the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may impact the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral (if the loan is collateral dependent), the composition of the portfolio, and other relevant factors. The loan portfolio also represents the largest asset type on the Corporation’s Consolidated Balance Sheets. ​ Goodwill. Goodwill represents the excess purchase consideration over the fair value of net assets acquired in connection with acquisitions. Goodwill is not amortized but is periodically evaluated for impairment. Impairment testing is performed using either a qualitative or quantitative approach. The Corporation has selected December 31 as the date to perform the annual goodwill impairment test. Additionally, a goodwill impairment evaluation is performed on an interim basis when events or circumstances indicate impairment potentially exists. ​ ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required. ​ ​