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, 2024 Versus Year Ended December 31, 2023 Net income decreased to a net loss of $13,203,000 for the year ended December 31, 2024, as compared to net income of $5,560,000 for the prior year, a decrease of $18,763,000 which was primarily due to the Corporation recognizing a full goodwill impairment charge of $19,133,000 during the first quarter of 2024. Earnings per share, both basic and diluted, for 2024 was $(2.14) as compared to $0.91 in 2023. Dividends per share for 2024 and 2023 were $1.12. The Corporation’s return on average assets was (0.93)% in 2024 and 0.42% in 2023. Return on average equity decreased to (12.04)% in 2024 from 4.55% in 2023. Total interest income in 2024 amounted to $71,422,000, an increase of $14,434,000 or 25.3% from 2023. The increase in interest income is due to increased interest rates, growth in real estate loans secured by commercial properties, and increased interest income earned on securities. Total interest expense of $39,143,000 increased $11,271,000 or 40.4% from 2023. 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 long-term borrowings through the Federal Home Loan Bank due to increases in both average volume and rate of borrowings in 2024 over 2023. 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, ​ ​ 2024 2023 2022 2021 2020 ​ SELECTED FINANCIAL DATA AT YEAR END: ​ ​ ​ ​ ​ ​ Total assets ​ $ 1,428,583 ​ $ 1,415,870 ​ $ 1,329,194 ​ $ 1,320,350 ​ $ 1,179,047 ​ Total securities ​ 391,875 ​ 394,450 ​ 375,143 ​ 439,878 ​ 368,357 ​ Net loans ​ 940,779 ​ 904,153 ​ 850,195 ​ 744,161 ​ 712,677 ​ Total deposits ​ 1,045,880 ​ 980,439 ​ 993,499 ​ 1,077,969 ​ 937,488 ​ Total long-term borrowings ​ 106,000 ​ 122,000 ​ 25,000 ​ 35,000 ​ 45,000 ​ Total stockholders’ equity ​ 106,782 ​ 121,615 ​ 120,386 ​ 148,555 ​ 144,242 ​ SELECTED OPERATING DATA: ​ ​ ​ ​ ​ ​ Interest income ​ $ 71,422 ​ $ 56,988 ​ $ 46,413 ​ $ 42,048 ​ $ 39,567 ​ Interest expense ​ 39,143 ​ 27,872 ​ 8,913 ​ 5,148 ​ 6,360 ​ Net interest income ​ 32,279 ​ 29,116 ​ 37,500 ​ 36,900 ​ 33,207 ​ (Credit) provision for credit losses ​ 1,640 ​ (217) ​ (264) ​ 860 ​ 1,200 ​ Net interest income after (credit) provision for credit losses ​ 30,639 ​ 29,333 ​ 37,764 ​ 36,040 ​ 32,007 ​ Non-interest income ​ 6,697 ​ 6,156 ​ 5,331 ​ 7,323 ​ 6,012 ​ Non-interest expense ​ 50,584 ​ 29,245 ​ 26,777 ​ 26,354 ​ 24,605 ​ Income before income tax expense ​ (13,248) ​ 6,244 ​ 16,318 ​ 17,009 ​ 13,414 ​ Income tax expense ​ (45) ​ 684 ​ 2,294 ​ 2,321 ​ 1,577 ​ Net (loss) income ​ $ (13,203) ​ $ 5,560 ​ $ 14,024 ​ $ 14,688 ​ $ 11,837 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ PER SHARE DATA: ​ ​ ​ ​ ​ ​ Net (loss) income ​ $ (2.14) ​ $ 0.91 ​ $ 2.35 ​ $ 2.49 ​ $ 2.03 ​ Dividends ​ 1.12 ​ 1.12 ​ 1.12 ​ 1.12 ​ 1.08 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ PERFORMANCE RATIOS: ​ ​ ​ ​ ​ ​ Return on average assets ​ (0.93) % 0.42 % 1.07 % 1.15 % 1.09 % 23 Table of Contents Return on average equity ​ (12.04) % 4.55 % 10.75 % 9.93 % 8.61 % Dividend payout ​ (52.34) % 121.90 % 47.70 % 45.05 % 53.29 % Average equity to average assets ​ 7.69 % 9.22 % 9.92 % 11.57 % 12.72 % Net interest income, as indicated below in Table 2, increased by $3,163,000 or 10.9% to $32,279,000 for the year ended December 31, 2024. The Corporation’s net interest income on a fully tax equivalent basis increased by $2,907,000, or 9.9% to $32,297,000 in 2024 as compared to $29,390,000 in 2023. Table 2 — Reconciliation of Taxable Equivalent Net Interest Income (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2024/2023 ​ ​ Increase/(Decrease) ​ 2024 Amount % 2023 Interest Income ​ $ 71,422 ​ $ 14,434 25.3 ​ $ 56,988 Interest Expense ​ 39,143 ​ 11,271 40.4 ​ 27,872 Net Interest Income ​ 32,279 ​ 3,163 10.9 ​ 29,116 Tax Equivalent Adjustment ​ 18 ​ (256) (93.4) ​ 274 Net Interest Income (fully tax equivalent) ​ $ 32,297 ​ $ 2,907 9.9 ​ $ 29,390 ​ 24 Table of Contents Table 3 — Average Balances, Rates and Interest Income and Expense (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2024 2023 ​ ​ Average ​ ​ ​ ​ Yield/ ​ Average ​ ​ ​ ​ Yield/ ​ ​ ​ Balance ​ Interest ​ Rate ​ Balance ​ Interest ​ Rate ​ Interest Earning Assets: ​ ​ ​ ​ ​ Loans: ​ ​ ​ ​ ​ Commercial, net 1,2,4 ​ $ 89,153 ​ $ 4,808 5.39 % $ 88,806 ​ $ 4,338 4.88 % Real Estate 1,2 ​ 826,665 ​ 44,611 5.40 % 779,177 ​ 37,239 4.78 % Consumer, net 4 ​ 6,028 ​ 539 8.94 % 5,694 ​ 481 8.45 % Fees on Loans and fair value adjustment ​ 2 ​ 1,235 — % ― ​ 768 — % Total Loans 5 ​ 921,848 ​ 51,193 5.55 % 873,677 ​ 42,826 4.90 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Securities: ​ ​ ​ ​ ​ Taxable ​ 365,552 ​ 17,939 4.91 % 304,627 ​ 12,416 4.08 % Tax-Exempt 1,3 ​ 40,952 ​ 948 2.31 % 45,297 ​ 1,312 2.90 % Total Securities ​ 406,504 ​ 18,887 4.65 % 349,924 ​ 13,728 3.92 % Restricted Investment in Bank Stocks ​ 10,576 ​ 928 8.77 % 8,319 ​ 669 8.04 % Interest-Bearing Deposits in Other Banks ​ 9,610 ​ 432 4.50 % 1,659 ​ 39 2.31 % Total Other Interest Earning Assets ​ 20,186 ​ 1,360 6.74 % 9,978 ​ 708 7.09 % Total Interest Earning Assets ​ 1,348,538 ​ 71,440 5.30 % 1,233,579 ​ 57,262 4.64 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-Interest Earning Assets: ​ ​ ​ ​ ​ Cash and Due From Banks ​ 10,024 ​ ​ 10,320 ​ ​ Allowance for Credit Losses ​ (7,400) ​ ​ (7,071) ​ ​ Premises and Equipment ​ 21,378 ​ ​ 21,193 ​ ​ Other Assets ​ 53,149 ​ ​ 67,249 ​ ​ Total Non-Interest Earning Assets ​ 77,151 ​ ​ 91,691 ​ ​ Total Assets ​ $ 1,425,689 ​ ​ $ 1,325,270 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest Bearing Liabilities: ​ ​ ​ ​ ​ Savings, NOW, Money Markets and Interest Checking ​ $ 470,816 ​ $ 11,349 2.41 % $ 524,616 ​ $ 11,003 2.10 % Time Deposits ​ 329,660 ​ 13,927 4.22 % 222,131 ​ 6,105 2.75 % Securities Sold U/A to Repurchase ​ 29,627 ​ 1,289 4.35 % 19,131 ​ 627 3.28 % Short-Term Borrowings ​ 129,601 ​ 6,430 4.96 % 154,625 ​ 8,147 5.27 % Long-Term Borrowings ​ ​ 115,792 ​ ​ 5,053 ​ 4.36 % ​ 32,235 ​ ​ 896 ​ 2.78 % Subordinated Debentures ​ 25,000 ​ 1,094 4.37 % 25,000 ​ 1,094 4.38 % Total Interest Bearing Liabilities ​ 1,100,496 ​ 39,142 3.56 % 977,738 ​ 27,872 2.85 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-Interest Bearing Liabilities: ​ ​ ​ ​ ​ Demand Deposits ​ 202,450 ​ ​ 216,004 ​ ​ Other Liabilities ​ 13,087 ​ ​ 9,393 ​ ​ Stockholders’ Equity ​ 109,656 ​ ​ 122,135 ​ ​ Total Liabilities/Stockholders’ Equity ​ $ 1,425,689 ​ ​ $ 1,325,270 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income Tax Equivalent ​ ​ $ 32,298 ​ ​ $ 29,390 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Spread ​ ​ 1.74 % ​ 1.79 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Margin ​ ​ 2.40 % ​ 2.38 % 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 $5,000 and $79,000 for years 2024 and 2023, respectively. 3 Includes tax equivalent adjustments on tax-free municipal securities of $13,000 and $195,000 for years 2024 and 2023, 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 2024 and 2023. The yield on earning assets was 5.30% in 2024 and 4.64% in 2023. The rate paid on interest bearing liabilities was 3.56% in 2024 and 2.85% in 2023. This resulted in a decrease in our net interest spread to 1.74% in 2024, as compared to 1.79% in 2023. As Table 3 illustrates, net interest margin, which is interest income less interest expense divided by average earning assets, was 2.40% in 2024 as compared to 2.38% in 2023. Net interest margins are presented on a tax-equivalent basis. In 2024. the yield on earning assets increased by 0.66% and the rate paid on interest bearing liabilities increased by 0.71%. Yields increased for a majority of interest earning assets and interest bearing liabilities during 2024, mainly as a result of the current high interest rate environment. The yield on loans increased from 4.90% in 2023 to 5.55% in 2024 mainly due to loans originating and repricing at higher interest rates during the latter part of 2023 and 2024. The securities portfolio yield increased to 4.65% in 2024 as compared to 3.92% in 2023. The increase was mainly the result of the elevated rate environment impacting variable rate securities and purchases of higher yielding securities in 2024. The average rate paid on short-term borrowings decreased 0.31% from 5.27% in 2023 to 4.96% in 2024. The rate paid on savings, NOW, money market, and interest checking accounts increased 0.31% from 2.10% to 2.41% and the average rate paid on time deposits increased 1.47% from 2.75% to 4.22%. Interest income exempt from federal tax was $1,352,000 in 2024 and $1,570,000 in 2023. Interest income exempt from federal tax decreased due to the maturity of tax-exempt municipal securities in 2024. Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 21%. The increase in net interest margin at December 31, 2024 compared to December 31, 2023 was primarily due to increased yields on loans and securities in 2024, as compared to 2023. Fully tax equivalent net interest income increased by $2,907,000 or 9.9% to $32,297,000 at December 31, 2024 compared to $29,390,000 at December 31, 2023. During 2024, the Federal Reserve decreased the federal-funds rate by 1.00%, resulting in a target range of 4.25% - 4.50%. The Corporation could experience a decrease in net interest income if market rates remain static or 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 debt securities available-for-sale, and two were cash flow interest rate swaps with a combined notional amount of $100,000,000, hedging specific short-term wholesale funding positions. The Corporation entered into one additional swap contract effective September 4, 2024 with a notional amount of $75,000,000, hedging a specified pool of the Bank’s fixed-rate loans. See Note 12 – Derivative Instruments and Hedging Activities on page 92 for further analysis. The Corporation will continue to evaluate the potential impact of short-term rate fluctuations in 2025, 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 2024, the increase in net interest income on a fully tax equivalent basis of $2,907,000 resulted from an increase in volume of $1,911,000 and an increase of $996,000 due to changes in rate. Table 4 — Rate/Volume Analysis (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2024 COMPARED TO 2023 ​ VOLUME RATE NET Interest Income: ​ ​ ​ ​ Loans, Net ​ $ 2,361 ​ $ 6,006 ​ $ 8,367 Taxable Securities ​ 2,483 ​ 3,040 ​ 5,523 Tax-Exempt Securities ​ (126) ​ (238) ​ (364) Restricted Investment in Bank Stocks ​ 182 ​ 77 ​ 259 Other ​ 187 ​ 206 ​ 393 Total Interest Income ​ $ 5,087 ​ $ 9,091 ​ $ 14,178 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest Expense ​ ​ ​ Savings, NOW and Money Markets ​ $ (1,128) ​ $ 1,474 ​ $ 346 Time Deposits ​ 2,955 ​ 4,867 ​ 7,822 Securities Sold U/A to Repurchase ​ 344 ​ 318 ​ 662 Short-Term Borrowings ​ (1,318) ​ (399) ​ (1,717) Long-Term Borrowings ​ ​ 2,323 ​ ​ 1,835 ​ ​ 4,158 Subordinated Debentures ​ — ​ — ​ — Total Interest Expense ​ 3,176 ​ 8,095 ​ 11,271 Net Interest Income ​ $ 1,911 ​ $ 996 ​ $ 2,907 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, 2024, the provision for credit losses resulted in a balance of $1,640,000, compared to a credit balance of $217,000 for the year ended December 31, 2023. The increase in the provision for credit losses in 2024 as compared to 2023 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, 2024 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 $893,000 and $13,000 for the years ended December 31, 2024 and 2023, respectively. See Analysis of Allowance for Credit Losses table on page 37 for further discussion. The allowance for credit losses as a percentage of average loans outstanding was 0.83% as of December 31, 2024 and 0.79% as of December 31, 2023. 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. 27 Table of Contents 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, 2024 was $6,697,000, an increase of 8.8%, or $541,000, from 2023. The increase was due to net securities gains realized in 2024 compared to net securities losses realized in 2023 and increased trust department income in 2024. During 2024, net securities gains (losses) increased $223,000 to a net gain of $105,000. The increase was due to the Corporation recognizing $105,000 in net gains on held equity securities in 2024 vs recognizing $217,000 in net losses on held equity securities offset by $99,000 in net gains on sold debt securities in 2023. Gains on sales of mortgage loans amounted to a net gain of $80,000 in 2024 as compared to a net gain of $65,000 in 2023. The increase in net gains on sales of mortgage loans in 2024 was due to more individual loans sold in 2024. 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 $33,000 or 1.5% in 2024 as compared to 2023 due to increased debit card interchange fees as the result of an increase in debit card transaction volume in 2024. Income related to an increase in cash surrender value of life insurance increased by $48,000 or 7.7% mainly as a result of increased interest rates on the related policies. Other income, consisting primarily of income from the sale of retail non-deposit investment products, safe deposit box rentals, and miscellaneous fees, increased $60,000, or 23.3% in 2024 as compared to 2023 as the Corporation recognized more income from retail investment annuities in 2024. 28 Table of Contents Table 5 — Non-Interest Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ 2024/2023 ​ ​ Increase/(Decrease) ​ 2024 Amount % ​ 2023 Trust department ​ $ 1,051 ​ $ 120 12.9 ​ $ 931 Service charges and fees ​ 2,247 ​ 42 1.9 ​ 2,205 Increase in cash surrender value of life insurance ​ 669 ​ 48 7.7 ​ 621 ATM fees and debit card income ​ 2,228 ​ 33 1.5 ​ 2,195 Net gains (losses) on sales of mortgage loans ​ 80 ​ 15 23.1 ​ 65 Other ​ 317 ​ 60 23.3 ​ 257 Subtotal ​ 6,592 ​ 318 5.1 ​ 6,274 Net securities losses ​ 105 ​ 223 189.0 ​ (118) Total ​ $ 6,697 ​ $ 541 8.8 ​ $ 6,156 ​ NON-INTEREST EXPENSE Total non-interest expense amounted to $50,584,000, an increase of $21,339,000, or 73.0% in 2024. The Company recognized goodwill impairment in the amount of $19,133,000 during the first quarter of 2024. This was the result of goodwill impairment testing performed due to the decrease of the Company’s stock price during the first quarter of 2024 as a triggering event. The goodwill impairment has no impact on regulatory capital ratios, liquidity or the Company’s cash balances. Aside from the one-time goodwill impairment charge recognized in 2024, expenses associated with employees (salaries and employee benefits) continue to be the largest non-interest expenditure. Salaries and employee benefits amounted to $17,228,000 or 34.1% of total non-interest expense in 2024 and $16,055,000 or 54.9% in 2023. Salaries and employee benefits increased $1,173,000, or 7.3% in 2024. The increase in 2024 was mainly due to a $592,000 increase in salaries in an effort to offer more competitive wages in our various markets, increase retention and support the Corporation’s growth, plus increased costs associated with employee health insurance which were $357,000 greater in 2024. The number of full-time equivalent employees was 209 as of December 31, 2024 and 215 as of December 31, 2023. Net occupancy, furniture and equipment and computer expense increased $18,000, or 0.4% in 2024 compared to 2023. Professional services increased $177,000, or 12.3% in 2024 as compared to 2023. The higher expense was the result of increases in annual audit fees and audit expenses relating to the adoption of CECL as well as goodwill impairment. Pennsylvania shares tax expense increased $209,000, or 24.3% in 2024 as compared to 2023. This increase was mainly due to the Corporation recording a true-up for Pennsylvania shares tax expense for the 2023 shares tax return in the third quarter of 2024 which resulted in $70,000 net expense, as compared to receiving a shares tax refund of $52,000 in 2023 for the 2022 tax return, along with a $163,000 expense true up for the 2024 tax year. FDIC insurance expense increased $394,000, or 56.0% in 2024 as compared to 2023. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates. ATM and debit card fees expense decreased $143,000, or 12.5% in 2024 as compared to 2023. The decrease was the result of lower electronic funds transfer expenses, decreased ATM fraud and the application of vendor credits in 2024. Data processing fees decreased $282,000, or 21.6% in 2024 as compared to 2023. This decrease was the result of lower internet banking expenses as the result of a new vendor relationship for online banking and the application of vendor relationship credits in 2024 resulting from contract negotiations, along with implementation fees recognized in 2023. 29 Table of Contents Advertising expense increased $32,000, or 6.1% in 2024 as compared to 2023 as the result of the Corporation marketing the new full-service Bethlehem branch, along with utilizing more television, billboard, digital and social media advertising in 2024. Other non-interest expense increased $628,000, or 21.8% in 2024 as compared to 2023. Other non-interest expense was higher in 2024 mainly as the result of monthly amortization of a new low income housing partnership that began in the fourth quarter of 2023. Table 6 — Non-Interest Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2024/2023 ​ ​ Increase/(Decrease) ​ 2024 Amount % 2023 Salaries and employee benefits ​ $ 17,228 ​ $ 1,173 7.3 ​ $ 16,055 Occupancy, net ​ 2,191 ​ 72 3.4 ​ 2,119 Furniture and equipment ​ 676 ​ 39 6.1 ​ 637 Computer expense ​ 1,478 ​ (93) (5.9) ​ 1,571 Professional services ​ 1,617 ​ 177 12.3 ​ 1,440 Pennsylvania shares tax ​ 1,070 ​ 209 24.3 ​ 861 FDIC Insurance ​ 1,097 ​ 394 56.0 ​ 703 ATM and debit card fees ​ 1,003 ​ (143) (12.5) ​ 1,146 Data processing fees ​ 1,022 ​ (282) (21.6) ​ 1,304 Advertising ​ 560 ​ 32 6.1 ​ 528 Goodwill impairment ​ ​ 19,133 ​ ​ 19,133 ​ 100.0 ​ ​ — Other ​ 3,509 ​ 628 21.8 ​ 2,881 Total ​ $ 50,584 ​ $ 21,339 73.0 ​ $ 29,245 ​ Management of the Corporation believes that investors’ understanding of the Corporation’s performance is enhanced by disclosing non-GAAP financial measures without the effects of the impairment as a reasonable basis for comparison of the Corporation’s ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The following Non-GAAP Reconciliation Schedule provides a reconciliation of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP. ​ NON-GAAP RECONCILIATION SCHEDULE FIRST KEYSTONE AND SUBSIDIARY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, ​ December 31, ​ ​ 2024 ​ 2023 Net interest income after provision for credit losses ​ $ 30,639 ​ $ 29,333 Total non-interest income ​ ​ 6,697 ​ ​ 6,156 Total non-interest expense ​ (50,584) ​ (29,245) Income tax benefit (expense) ​ 45 ​ (684) Net (loss) income ​ ​ (13,203) ​ ​ 5,560 ​ ​ ​ ​ ​ ​ ​ Adjustments ​ ​ ​ ​ ​ ​ Other expense: ​ ​ ​ ​ ​ ​ Goodwill impairment ​ ​ 19,133 ​ ​ — Income tax expense ​ ​ (258) ​ ​ — After tax adjustment to GAAP ​ ​ 18,875 ​ ​ — Adjusted net income ​ $ 5,672 ​ $ 5,560 ​ ​ ​ ​ ​ ​ ​ Adjusted return on average assets ​ ​ 0.39% ​ ​ 0.42% Adjusted return on average equity ​ ​ 4.57% ​ ​ 4.55% 30 Table of Contents ​ ​ INCOME TAX EXPENSE Income tax resulted in a benefit for the year ended December 31, 2024 of $45,000 as compared to income tax expense of $684,000 for the year ended December 31, 2023. The effective income tax rate was (0.3)% in 2024 and 11.0% in 2023. The decrease in the effective tax rate for 2024 was mainly due to a federal income tax benefit at the statutory 21% rate generated due to the net loss that resulted from the full goodwill impairment charge recorded effective March 31, 2024, along with more low-income housing tax credits, offset by an increase in the effective tax rate to add back the impact of the portion of the full goodwill impairment charge that is non-deductible for tax purposes. The Corporation recognized $840,000 and $484,000 of tax credits from low-income housing partnerships for the years ended December 31, 2024 and 2023, respectively included in tax expense. The Corporation expects to carry forward $328,000 and $0 of low-income housing tax credits as of December 31, 2024 and December 31, 2023, respectively, which will begin to expire in the year 2044. FINANCIAL CONDITION GENERAL Total assets increased to $1,428,583,000 at year-end 2024, an increase of 0.9% from year-end 2023. Total debt securities available-for-sale decreased $2,680,000 or 0.7% to $390,288,000 as of December 31, 2024. The decrease was mainly due to $65,459,000 in securities purchased during 2024 as part of the execution of a balance sheet leverage strategy, offset by principal paydowns, maturities, and calls of $69,878,000 completed during the same period. Net loans increased in 2024 from $904,153,000 to $940,779,000, a 4.1% increase. Loan demand grew in 2024 as the Bank has realized an increase in loan originations, primarily commercial real estate loans. The cash surrender value of bank owned life insurance totaled $26,679,000 at December 31, 2024, an increase of $669,000 or 2.6% from 2023. This increase represents tax-free income included in non-interest income on the consolidated statements of income. Investments in low-income housing partnerships were $5,152,000 at year-end 2024, a decrease of 13.6% from year-end 2023. The decrease is mainly the result of $819,000 in amortization recognized during the year ended December 31, 2024 on two low-income housing partnerships in which the Corporation is a limited partner, offset by a final capital contribution payment of $10,000 that was made in 2024 in relation to a new real estate venture in which the Corporation became a limited partner in 2021. 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, 2024, total deposits amounted to $1,045,880,000, an increase of 6.7% from 2023. The increase is mainly due to a $40,100,000 increase in CDs as the Corporation has experienced a shift from transactional deposits to term deposits and a $33,899,000 increase in Brokered CDs. 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 decreased $35,042,000 from $275,468,000 in 2023 to $240,426,000 in 2024 mainly due to the maturity of a $20,000,000 long-term note in the third quarter of 2024, along with increased deposits in 2024. Total stockholders’ equity decreased to $106,782,000 at December 31, 2024, a decrease of $14,833,000, primarily due to a decrease in retained earnings due to the full goodwill impairment charge. 31 Table of Contents 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 94.6% for 2024 compared to 93.1% for 2023. 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 decreased $2,680,000 or 0.7% to $390,288,000 in 2024. At December 31, 2024, the net unrealized loss, net of the tax effect, on these securities was $24,454,000 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. Table 7 — Securities ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Available-For-Sale ​ December 31, 2024 December 31, 2023 U.S. Treasury securities ​ $ 7,151 ​ $ 7,041 U. S. Government corporations and agencies ​ 141,830 ​ 145,624 Other mortgage-backed debt securities ​ 46,273 ​ 34,050 Obligations of state and political subdivisions ​ 83,485 ​ 87,703 Asset-backed securities ​ 73,867 ​ 82,162 Corporate debt securities ​ 37,682 ​ 36,388 Total ​ $ 390,288 ​ $ 392,968 ​ The amortized cost and fair value of securities, by contractual maturity, are shown below at December 31, 2024. 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. 32 Table of Contents Table 8 — Securities Maturity Table ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, 2024 ​ ​ 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 ​ $ — ​ $ — ​ $ 1,022 ​ $ 9,946 ​ $ — ​ $ — Fair value ​ — ​ — ​ 1,016 ​ 9,895 ​ — ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1 - 5 Years: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized cost ​ 7,911 ​ 6,392 ​ 4,937 ​ 8,469 ​ — ​ 2,246 Fair value ​ 7,151 ​ 6,358 ​ 4,913 ​ 8,187 ​ — ​ 2,186 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 5 - 10 Years: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized cost ​ — ​ 3,856 ​ 1,156 ​ 29,149 ​ 3,047 ​ 33,669 Fair value ​ — ​ 3,915 ​ 1,171 ​ 25,267 ​ 3,058 ​ 31,265 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ After 10 Years: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized cost ​ — ​ 145,831 ​ 41,221 ​ 46,245 ​ 70,959 ​ 5,224 Fair value ​ — ​ 131,557 ​ 39,173 ​ 40,136 ​ 70,809 ​ 4,231 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total: ​ ​ ​ ​ ​ ​ Amortized cost ​ $ 7,911 ​ $ 156,079 ​ $ 48,336 ​ $ 93,809 ​ $ 74,006 ​ $ 41,139 Fair value ​ 7,151 ​ 141,830 ​ 46,273 ​ 83,485 ​ 73,867 ​ 37,682 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, 2024 and 2023, the Corporation had $1,587,000 and $1,482,000, respectively, in equity securities recorded at fair value, an increase of $105,000 or 7.1%. LOANS Total loans increased to $948,451,000 as of December 31, 2024, compared to a balance of $911,078,000 as of December 31, 2023. Table 9 provides data relating to the composition of the Corporation’s loan portfolio on the dates indicated. Total loans increased $37,373,000, or 4.1% in 2024 compared to an increase of $52,609,000, or 6.1% in 2023. The Real Estate portfolio increased $40,308,000 or 5.0% from $811,493,000 at December 31, 2023 to $851,801,000 at December 31, 2024. The increase in the Real Estate portfolio for the year ended December 31, 2024 was mainly the result of $103,734,000 in new loan originations and an increase of $5,264,000 in utilization of existing real estate lines of credit, which were offset by loan payoffs of $41,336,000, along with regular principal payments and other typical fluctuations in the Real Estate portfolio. The Agricultural portfolio increased $268,000 or 39.9% from $671,000 at December 31, 2023 to $939,000 at December 31, 2024. The increase in the Agricultural portfolio for the year ended December 31, 2024 was mainly the result of four loans totaling $275,000 that were reclassed from the Commercial and Industrial portfolio to the Agricultural portfolio during the year ended December 31, 2024 and an increase of $15,000 in utilization of existing agricultural lines of credit, offset with regular principal payments and other typical fluctuations in the Agricultural portfolio. During the year ended December 31, 2024, there was two new agricultural loans originated with an aggregate balance of $59,000 and one agricultural loan paid off with a balance of $46,000. The Commercial and Industrial portfolio increased $196,000 or 0.3% from $66,909,000 at December 31, 2023 to $67,105,000 at December 31, 2024. The increase was attributable to $8,363,000 in new loan originations, which were offset by a decrease of $5,484,000 in utilization of existing commercial and industrial lines of credit and loan payoffs of $3,292,000, as well as regular principal payments and other typical amortization in the Commercial and Industrial portfolio. The Consumer portfolio increased $635,000 or 10.9% from $5,824,000 at December 31, 2023 to $6,459,000 at 33 Table of Contents December 31, 2024. The increase is mainly attributable to new loan originations of $3,071,000 and an increase of $10,000 in utilization of existing consumer lines of credit, offset by loan payoffs of $1,078,000 and regular principal payments. The State and Political Subdivisions portfolio decreased $4,034,000 or 15.4% from $26,181,000 at December 31, 2023 to $22,147,000 at December 31, 2024. The decrease is mainly the result of regular principal payments on state and political subdivisions loans and a $1,825,000 payoff on one state and political loan, which were offset by an increase in the balance of an existing state and political subdivision line of credit resulting from draws of $950,000 completed during the year ended December 31, 2024. 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 $919,729,000 or 97.1% of gross loans are graded Pass; $1,540,000 or 0.1% are graded Special Mention; $26,294,000 or 2.8% 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 $27,834,000 at December 31, 2024, as compared to $24,092,000 at December 31, 2023. Real Estate non-pass grades increased $3,987,000 or 17.1% to $27,371,000 as of December 31, 2024 compared to $23,384,000 as of December 31, 2023. Commercial and Industrial non-pass grades decreased $193,000 or 29.7% to $457,000 as of December 31, 2024 compared to $650,000 as of December 31, 2023. Consumer non-pass grades decreased $52,000 or 89.7% to $6,000 as of December 31, 2024 compared to $58,000 as of December 31, 2023. There were no Agricultural or State and Political Subdivision non-pass grades as of December 31, 2024 or December 31, 2023. The increase in Real Estate non-pass grades from December 31, 2023 to December 31, 2024 is mainly the result of the downgrade of a loan to the owner of a commercial property which carried a balance of $4,529,000 at December 31, 2024. The loan was downgraded to substandard status during the fourth quarter of 2024 due to the loss of a large tenant. 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, ​ ​ 2024 2023 Real Estate ​ $ 851,801 $ 811,493 ​ Agricultural ​ ​ 939 ​ ​ 671 ​ Commercial and Industrial ​ 67,105 ​ 66,909 ​ Consumer ​ 6,459 ​ 5,824 ​ State and Political Subdivisions ​ 22,147 ​ 26,181 ​ Total Loans ​ $ 948,451 ​ $ 911,078 ​ 34 Table of Contents ​ 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, 2024 (Dollars in thousands) ​ One Year ​ After One Year ​ After ​ ​ ​ ​ and Less Through Five Years Five Years Total Real Estate ​ $ 46,432 $ 62,714 $ 742,655 $ 851,801 Agricultural ​ 674 ​ 105 ​ 160 ​ 939 Commercial and Industrial ​ ​ 23,278 ​ ​ 20,496 ​ ​ 23,331 ​ ​ 67,105 Consumer ​ 1,750 ​ 4,396 ​ 313 ​ 6,459 State and Political Subdivisions ​ 8 ​ 2,820 ​ 19,319 ​ 22,147 Total ​ $ 72,142 ​ $ 90,531 ​ $ 785,778 ​ $ 948,451 The above data represents the amount of loans receivable at December 31, 2024 which, based on remaining scheduled repayments of principal, are due in the periods indicated. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans by Repricing ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2024 (Dollars in thousands) ​ One Year ​ After One Year ​ After ​ ​ ​ ​ and Less Through Five Years Five Years Total Real Estate ​ $ 165,120 $ 528,359 $ 158,322 $ 851,801 Agricultural ​ 674 ​ 105 ​ 160 ​ 939 Commercial and Industrial ​ ​ 25,483 ​ ​ 35,880 ​ ​ 5,742 ​ ​ 67,105 Consumer ​ 1,750 ​ 4,406 ​ 303 ​ 6,459 State and Political Subdivisions ​ 8 ​ 7,824 ​ 14,315 ​ 22,147 Total ​ $ 193,035 ​ $ 576,574 ​ $ 178,842 ​ $ 948,451 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans with a fixed interest rate ​ $ 19,266 ​ $ 49,731 ​ $ 165,442 ​ $ 234,439 Loans with a variable interest rate ​ 173,769 ​ 526,843 ​ 13,400 ​ 714,012 Total ​ $ 193,035 ​ $ 576,574 ​ $ 178,842 ​ $ 948,451 The above data represents the amount of loans receivable at December 31, 2024 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, 2024, the allowance for credit losses was $7,672,000 as compared to $6,925,000 as of December 31, 2023. 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. 35 Table of Contents 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 Corporation’s allowance for credit losses and various adjustments are made to these factors as deemed necessary at the time of evaluation. During the first quarter of 2024, qualitative factors related to delinquency trends were decreased by eight basis points related to loans (a) secured by first liens, (b) secured by owner-occupied, non-farm, non-residential properties, and (c) other revolving credit plans. Qualitative factors related to volume trends were increased by eight basis points related to loans secured by junior liens and decreased by eight basis points related to other revolving credit plans. Qualitative factors related to collateral values were also increased by four basis points related to commercial and industrial loans during the first quarter of 2024. During the second quarter of 2024, qualitative factors related to delinquency trends were increased by four basis points related to (a) loans secured by first liens and (b) loans secured by owner occupied, non-farm, non-residential properties, as well as increased by sixteen basis points related to (c) loans secured by other non-farm, non-residential properties. Qualitative factors related to volume trends were also decreased by four basis points related to (a) other revolving credit plans and (b) automobile loans during the second quarter of 2024. During the third quarter of 2024, qualitative factors related to delinquency trends were increased by four basis points related to (a) revolving open-end loans and (b) other revolving credit plans and increased by eight basis points related to (c) automobile loans. Qualitative factors related to delinquency trends were decreased by four basis points related to (a) loans secured by multifamily residential properties, (b) loans for agricultural production and other loans to farmers, (c) commercial and industrial loans, and (d) other consumer loans. Qualitative factors related to volume trends decreased by four basis points related to (a) loans secured by farmland, (b) loans secured by other non-farm, non-residential properties, (e) other revolving credit plans, and (f) automobile loans. During the fourth quarter of 2024, qualitative factors related to delinquency trends were decreased by eight basis points related to (a) construction land development and other land loans, (b) residential construction loans, (c) loans for agribusiness farmland, or secured by farmland, and (d) loans secured by other non-farm, non-residential properties. Qualitative factors related to delinquency trends were decreased by four basis points related to (a) revolving open-end loans, (b) loans for agricultural production and other loans to farmers, (c) commercial and industrial loans, (d) other revolving credit plans, (e) automobile loans, and (f) obligation of state and political subdivisions. Qualitative factors related to delinquency trends were increased by four basis points related to loan’s secured by multifamily residential properties. Qualitative factors related to loan volume trends increased by twelve basis points related to (a) loans for agribusiness, farmland, or secured by farmland, (b) loans secured by other non-farm, non-residential properties, and (c) automobile loans. Qualitative factors decreased by eight basis points related to loan volume trends related to (a) other revolving credit plans. Table 11 contains an analysis of the allowance for credit losses indicating charge-offs and recoveries by year. In 2024 and 2023, net charge-offs as a percentage of average loans amounted to 0.097% and 0.001% respectively. Net charge-offs amounted to $893,000 in 2024 and $13,000 in 2023. Net charge-offs were higher in 2024 than in 2023, mainly due to $741,000 in aggregate charge-offs completed on four loans to a plastic processing company focusing on non-post-consumer recycling that were completed during the third quarter of 2024, as the business ceased operations as a result of financial difficulties. During the fourth quarter of 2024, a charge-off of $67,000 was also completed on an owner-occupied, non-farm, non-residential loan to a non-profit civic organization, as the non-profit no longer uses the property, along with a charge-off of $41,000 on a loan to an individual borrower secured by 1-4 family residential real estate. For the year ended December 31, 2024, the provision for credit losses resulted in a balance of $1,640,000, as compared to a credit balance of $217,000 for the year ended December 31, 2023. The net effect of the provision and net charge-offs resulted in the year-end allowance for credit losses of $7,672,000 of which 94.04% was attributed to the Real Estate component, 0.03% was attributed to the Agricultural component, 4.08% was attributed to the Commercial and Industrial component, 1.28% was attributed to the Consumer component, and 0.57% was attributed to the State and Political Subdivisions component (refer to the activity in Note 3 — Loans and Allowance for Credit Losses on page 77.) The Corporation determined that the provision for credit losses made during 2024 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, 2024. 36 Table of Contents Table 11 Analysis of Allowance for Credit Losses ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ As of and for the year ended: 2024 2023 Balance at prior year-end ​ $ 6,925 $ 8,274 CECL adoption adjustment ​ ​ — ​ ​ (1,119) ​ Beginning balance ​ ​ 6,925 ​ ​ 7,155 ​ ​ ​ ​ ​ ​ ​ ​ ​ Charge-offs: ​ ​ ​ Real Estate ​ 345 ​ — ​ Agricultural ​ — ​ — ​ Commercial and Industrial ​ ​ 524 ​ ​ — ​ Consumer ​ 69 ​ 57 ​ State and Political Subdivisions ​ — ​ — ​ ​ ​ 938 ​ 57 ​ Recoveries: ​ ​ ​ Real Estate ​ 21 ​ 37 ​ Agricultural ​ — ​ — ​ Commercial and Industrial ​ ​ 19 ​ ​ 2 ​ Consumer ​ 5 ​ 5 ​ State and Political Subdivisions ​ — ​ — ​ ​ ​ 45 ​ 44 ​ ​ ​ ​ ​ ​ ​ ​ ​ Net charge-offs ​ 893 ​ 13 ​ Provision (credit) charged to operations ​ 1,640 ​ (217) ​ Balance at end of period ​ $ 7,672 ​ $ 6,925 ​ ​ ​ ​ ​ ​ ​ ​ ​ Ratio of net charge-offs during the period to average loans outstanding during the period ​ 0.097 % 0.001 % Allowance for credit losses to average loans outstanding during the period ​ 0.832 % 0.793 % ​ 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 recoveries along with additions to the reserve from the provision out of operations, the allowance for credit losses as a percentage of average loans amounted to 0.832% in 2024 and 0.793% in 2023. Table 12 sets forth the allocation of the Corporation’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 37 Table of Contents may occur within the loan category, since the total credit loss allowance is a valuation reserve applicable to the entire loan portfolio. Table 12 Allocation of Allowance for Credit Losses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, 2024 %* ​ December 31, 2023 ​ %* Real Estate ​ $ 7,215 94.04 ​ $ 6,539 ​ 94.42 Agricultural ​ 2 ​ 0.03 ​ 1 ​ 0.01 Commercial and Industrial ​ 313 ​ 4.08 ​ 265 ​ 3.83 Consumer ​ 98 ​ 1.28 ​ 78 ​ 1.13 State and Political Subdivisions ​ 44 ​ 0.57 ​ 42 ​ 0.61 ​ ​ $ 7,672 ​ 100.0 ​ $ 6,925 ​ 100.0 ​ 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 $4,970,000 as of December 31, 2024, as compared to $5,681,000 as of December 31, 2023. The economic growth for the fourth quarter of 2024 was higher than expected. Consumer spending remains at high levels. The inflation rate rose in December to 2.9%, above the Federal Reserve Board’s desired rate of 2.0%. Business sentiment saw a slight rise as rates were lowered during the fourth quarter. Many economists and influential thinkers still believe that the economy is moving forward in spite of certain forecasts and predictors. The concern of a recession, however, has lessened. Inflation was receding, although it has seen a slight but steady rise in the last few months. This has the Federal Reserve looking very cautiously at their next move. This will all depend on which direction the inflation rate trends and the unemployment landscape. The war between Ukraine and Russia continues to deeply pierce the landscape of the world. The heightened conflict with Israel and Palestine has caused much hostility throughout the world. The continuing dispute 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. Although there would seem to be a dynamic shift in the automobile industry where inventories are increasing and sales are slowing, this may lead to a reduced profit margin. 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. These forces have had a direct effect on the Corporation’s non-performing assets. The Corporation is closely monitoring all segments of its loan portfolio because of the current economic environment. Non-accrual loans totaled $4,214,000 as of December 31, 2024 as compared to $4,616,000 as of December 31, 2023. There were no foreclosed assets held for resale as of December 31, 2024 or December 31, 2023. There were six loans past-due 90 days or more and still accruing interest as of December 31, 2024 which carried an aggregate balance of $756,000, compared to December 31, 2023 when there were five loans past-due 90 days or more and still accruing interest totaling $1,065,000. The loans past-due 90 days or more and still accruing interest as of December 31, 2024 consisted of four loans secured by commercial real estate and two loans secured by residential real estate, all of which were well secured and in the process of collection. Non-performing assets to total loans was 0.52% for December 31, 2024 and 0.62% for December 31, 2023. Non-performing assets to total assets was 0.35% for December 31, 2024 and 0.40% for December 31, 2023. The 38 Table of Contents allowance for credit losses to total non-performing assets was 154.37% as of December 31, 2024 as compared to 121.90% as of December 31, 2023. Additional detail can be found in Table 13 – Non-Performing Assets and Individually Evaluated 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 $22,080,000 at December 31, 2024 and $19,418,000 at December 31, 2023. Individually evaluated loans were $4,523,000 at December 31, 2024, compared to $4,925,000 at December 31, 2023. The largest individually evaluated loan relationship at December 31, 2024 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate. At December 31, 2024, the loan carried a balance of $1,603,000, net of $1,989,000 that had been charged off to date. The second largest individually evaluated loan relationship at December 31, 2024 consisted two non-performing loans granted to an individual for the purpose of renovating a multi-use property slated to be converted into apartments and a retail storefront. Both loans are secured by commercial real estate and carried an aggregate balance of $1,441,000 at December 31, 2024. The third largest individually evaluated loan relationship at December 31, 2024 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, 2024, the loan carried a balance of $582,000. The Corporation determines 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 $4,523,000 in individually evaluated loans at December 31, 2024, none were located outside the Corporation’s primary market area. The outstanding recorded investment of modified loans to borrowers experiencing financial difficulty as of December 31, 2024 amounted to $10,193,000, with $10,019,000 classified in the Real Estate portfolio and $174,000 classified in the Commercial and Industrial portfolio. There were no loan modifications completed with respect to borrowers experiencing financial difficulty during the year ended December 31, 2023. The loan modifications to borrowers experiencing financial difficulty during the year ended December 31, 2024 consisted of term modifications on two loans which allowed an extension of the maturity date for each respective loan, one payment modification which allowed a period of interest only payments on one loan, and one loan experienced the release of a piece of collateral securing the loan. There were no unfunded commitments related to modified loans to borrowers experiencing financial difficulty and all modified loans to borrowers experiencing financial difficulty were in compliance with restructure terms as of December 31, 2024. Of the modifications of loans to borrowers experiencing financial difficulty that were completed during the twelve months preceding December 31, 2024, two loans experienced payment defaults during the year ended December 31, 2024. One loan carrying a post modification recorded investment of $9,455,000 experienced a payment default during the first quarter of 2024 and a loan carrying a post modification recorded investment of $120,000 experienced a payment default during the fourth quarter of 2024. Both loans were paid current as of December 31, 2024. 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. 39 Table of Contents 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 2025. Excluding the assets disclosed in Table 13 – Non-Performing Assets and Individually Evaluated Loans and the Non-Performing Assets table in Note 3 — Loans and Allowance for Credit Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination. The economic climate remains unstable. The war between Ukraine and Russia continues on into its third year and the Israeli conflict in the Gaza strip has intensified and incited worldwide hostilities. Inflationary pressures remain elevated and have seen an uptick in the last few months. This continues to create much debate and concern regarding the appropriate steps to be taken to overcome the effects of monetary policy adjustments that have been and will be made to affect the change. Intense political turmoil, commodity prices remaining high, gas prices fluctuating widely from week to week, small businesses closing, larger corporations cutting jobs, unprecedented weather conditions seen around the world, and the uncertainty of where the Federal Reserve may go from here in regard to rates have 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 worldwide discord, 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, 2024 and 2023 management is of the opinion that there were no loan concentrations exceeding 10% of total loans. 40 Table of Contents Table 13 Non-Performing Assets and Individually Evaluated Loans ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ December 31, ​ ​ December 31, ​ ​ 2024 ​ 2023 Non-performing assets ​ ​ ​ Non-accrual loans ​ $ 4,214 ​ ​ $ 4,616 ​ Foreclosed assets held for resale ​ — ​ ​ — ​ Loans past-due 90 days or more and still accruing interest ​ 756 ​ ​ 1,065 ​ Total non-performing assets ​ $ 4,970 ​ ​ $ 5,681 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Individually evaluated loans ​ ​ ​ ​ Non-accrual loans ​ $ 4,214 ​ ​ $ 4,616 ​ Other Individually Evaluated loans ​ ​ 309 ​ ​ ​ 309 ​ Total individually evaluated loans ​ 4,523 ​ ​ 4,925 ​ Allocated allowance for credit losses ​ — ​ ​ — ​ Net investment in individually evaluated loans ​ $ 4,523 ​ ​ $ 4,925 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Individually evaluated loans with a valuation allowance ​ $ — ​ ​ $ — ​ Individually evaluated loans without a valuation allowance ​ 4,523 ​ ​ 4,925 ​ Total individually evaluated loans ​ $ 4,523 ​ ​ $ 4,925 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Allocated valuation allowance as a percent of individually evaluated loans ​ — % ​ — % Individually evaluated loans to total loans ​ 0.48 % ​ 0.54 % Non-performing assets to total loans ​ 0.52 % ​ 0.62 % Non-performing assets to total assets ​ 0.35 % ​ 0.40 % Allowance for credit losses to individually evaluated loans ​ 169.62 % ​ 140.61 % Allowance for credit losses to total non-performing assets ​ 154.37 % ​ 121.90 % ​ Real estate mortgages comprised 89.8% of the loan portfolio as of December 31, 2024 and 89.1% as of December 31 2023, 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. Deposits increased by $65,441,000, or 6.7% for the year ending December 31, 2024 as compared to December 31, 2023. The increase in deposits in 2024 can be attributed to increases in non-interest bearing demand accounts, interest bearing demand accounts and time deposits, while savings accounts decreased. The decrease in savings deposits in 2024 can be attributed to many customers moving money into higher rate CD offerings. 41 Table of Contents The following schedule reflects the remaining maturities of time deposits and other time open deposits of $100,000 or more at December 31, 2024. ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) ​ Time Other Time Open ​ ​ Deposits ​ Deposits ​ ≥$100,000 ≥$100,000 Less than or equal to 3 months ​ $ 38,526 ​ $ 855 Over 3 months through 6 months ​ 38,007 ​ — Over 6 months through 12 months ​ 40,187 ​ — Over 12 months ​ 8,973 ​ — ​ ​ $ 125,693 ​ $ 855 ​ Total borrowings were $240,426,000 as of December 31, 2024, compared to $275,468,000 at December 31, 2023. During 2024, long-term borrowings decreased to $106,000,000 from $122,000,000. The decrease in long-term borrowings in 2024 was mainly the result of increased deposits in 2024. Short-term debt decreased from $153,468,000 in 2023 to $134,426,000 as of December 31, 2024. The decrease was mainly the result of increased deposits in 2024. 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, 2024 and 2023. Table 14 — Short-Term Borrowings (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2024 ​ ​ ​ ​ ​ ​ ​ ​ Maximum ​ ​ ​ ​ Period End ​ Average ​ Month End ​ Average ​ Balance Balance Balance Rate Federal funds purchased ​ $ — $ 1 $ — 6.56 % Securities sold under agreements to repurchase ​ 32,932 ​ 29,626 ​ 32,932 ​ 4.34 % Federal Discount Window ​ — ​ 806 ​ 4,920 ​ 5.46 % Federal Home Loan Bank ​ 101,494 ​ 128,795 ​ 150,000 ​ 5.60 % ​ ​ $ 134,426 ​ $ 159,228 ​ $ 187,852 ​ 5.37 % ​ (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 % ​ The rapid increase in interest rates throughout 2022 and 2023 created a significant earnings challenge for the industry. As liability costs outpaced asset yield growth, negative earnings was a plausible scenario shown in many models if no action was taken. Due to the stress this placed on the Corporation, an action plan strategy was put into effect in 2023 that included disciplined loan pricing, fair value and interest rate swaps/hedges and a leverage of the balance sheet consisting of securities and brokered CD purchases and long-term borrowings. This action plan strategy 42 Table of Contents was the key part of the Corporation’s decision to utilize targeted long-term borrowings over high-rate short-term borrowings and the decision to take on more brokered CDs in 2023. As a continuation of this strategy, in 2024, the Corporation purchased additional brokered CDs and entered into an additional hedge agreement against a specified pool of the Bank’s loans. 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) income, may increase or decrease total equity capital. The total net decrease in capital was $14,833,000 in 2024 after an increase of $1,229,000 in 2023. The decrease in equity capital in 2024 was due to the impairment of Goodwill amounting to $19,133,000 offset by issuance of new shares through the Corporation’s Dividend Reinvestment Program (“DRIP”) amounting to $1,264,000 and an improvement in accumulated other comprehensive (loss) income amounting to $4,015,000. The Corporation had 231,611 shares of common stock as of December 31, 2024 and December 31, 2023, 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 (12.04)% for 2024 and 4.55% for 2023. 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 10.24% at December 31, 2024 and 10.38% December 31, 2023. 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. Table 15 — Capital Ratios At December 31, 2024, 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, 2024 and December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum Capital ​ ​ December 31, ​ December 31, ​ Adequacy with ​ ​ 2024 2023 Capital Buffer Tier 1 leverage ratio (to average assets) 10.24 % 10.38 % 4.00 % Common Equity Tier 1 capital ratio (to risk-weighted assets) 14.92 % 14.94 % 7.00 % Tier 1 risk-based capital ratio (to risk-weighted assets) 14.92 % 14.94 % 8.50 % Total risk-based capital ratio 15.69 % 15.68 % 10.50 % ​ 43 Table of Contents 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, 2024, 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; ● Correspondent bank borrowings on various overnight credit lines, notes, etc., with various levels of capacity; ● Securities sold under agreements to repurchase; and ● Brokered CDs. At December 31, 2024, the Corporation had $521,112,000 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 $16,733,000. 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 $32,932,000 at December 31, 2024. 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 $8,168,000 and $5,905,000 as of December 31, 2024 and December 31, 2023, respectively. Net loss amounted to $13,203,000 for the year ended December 31, 2024 compared to net income of $5,560,000 for the year ended December 31, 2023. The provision for credit losses resulted in a balance of $1,640,000 for the year ended December 31, 2024 compared to a credit balance of $217,000 for the year ended December 31, 2023. Goodwill impairment amounted to $19,133,000 at December 31, 2024 and $0 at December 31, 2023. During the years ended December 31, 2024 and 2023, net premium amortization on securities amounted to $273,000 and $1,519,000, respectively. Net gains on sales of mortgage loans were $80,000 for the year ended December 44 Table of Contents 31, 2024, compared to $65,000 for the year ended December 31, 2023. Originations of mortgage loans originated for resale exceeded proceeds (including gains) from sales of mortgage loans originated for resale by $446,000 and $77,000 for the years ended December 31, 2024 and 2023, respectively. Net securities gains were $105,000 for the year ended December 31, 2024, compared to net securities losses of $118,000 for the year ended December 31, 2023. Accrued interest receivable decreased by $208,000 during the year ended December 31, 2024 and increased by $810,000 during the year ended December 31, 2023. Accrued interest payable decreased by $671,000 during the year ended December 31, 2024 and increased by $2,260,000 during the year ended December 31, 2023. Other assets increased by $812,000 during the year ended December 31, 2024 and decreased by $661,000 during the year ended December 31, 2023. Other liabilities decreased by $20,000 and $5,429,000 during the years ended December 31, 2024 and 2023, respectively. Amortization of investment in low-income housing partnerships amounted to $819,000 for the year ended December 31, 2024, compared to $231,000 for the year ended December 31, 2023. Investing activities used cash of $33,158,000 and $76,833,000 during the years ended December 31, 2024 and 2023, respectively. Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) provided cash of $4,419,000 during the year ended December 31, 2024 and used cash of $16,533,000 during the year ended December 31, 2023. Net change in restricted investment in bank stocks provided cash of $1,901,000 during the year ended December 31, 2024 and used cash of $3,749,000 during the year ended December 31, 2023. Net cash used to originate loans amounted to $37,740,000 and $52,480,000 during the years ended December 31, 2024 and 2023, respectively. Purchase of premises and equipment used cash of $1,728,000 and $1,656,000 during the years ended December 31, 2024 and 2023, respectively. Purchase of investment in real estate ventures used cash of $10,000 and $2,415,000 during the years ended December 31, 2024 and 2023, respectively. Financing activities provided cash of $25,231,000 and $77,203,000 during the years ended December 31, 2024 and 2023, respectively. Deposits increased by $65,441,000 during the year ended December 31, 2024 and decreased by $13,060,000 during the year ended December 31, 2023. Short-term borrowings decreased by $19,042,000 during the year ended December 31, 2024 and increased by $50,000 during the year ended December 31, 2023. Proceeds from long-term borrowings amounted to $4,000,000 for the year ended December 31, 2024, compared to $100,000,000 for the year ended December 31, 2023. Repayment of long-term borrowings used cash of $20,000,000 during the year ended December 31, 2024 and $3,000,000 during the year ended December 31, 2023. Dividends paid amounted to $5,168,000 for the year ended December 31, 2024, compared to $6,780,000 for the year ended December 31, 2023. 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 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, 2024. 45 Table of Contents Table 16 — Contractual Obligations (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than 1 - 3 4 -5 Over ​ December 31, 2024 ​ 1 Year ​ Years ​ Years ​ 5 Years ​ Total Time deposits ​ $ 245,238 ​ $ 96,990 ​ $ 20,390 ​ $ 5,500 ​ $ 368,118 Securities sold under agreement to repurchase ​ 32,932 ​ — ​ — ​ — ​ 32,932 Short-term borrowings ​ 101,494 ​ — ​ — ​ — ​ 101,494 Long-term borrowings ​ — ​ 64,000 ​ 42,000 ​ — ​ 106,000 Subordinated debentures ​ ​ — ​ ​ — ​ ​ — ​ ​ 25,000 ​ ​ 25,000 Operating lease obligations ​ ​ 175 ​ ​ 294 ​ ​ 314 ​ ​ 2,160 ​ ​ 2,943 ​ ​ $ 379,839 ​ $ 161,284 ​ $ 62,704 ​ $ 32,660 ​ $ 636,487 ​ 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, 2024, the Corporation had outstanding unfunded commitments to extend credit of $111,793,000 and outstanding standby letters of credit of $8,195,000. 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, 2024. Several techniques are used for measuring interest rate sensitivity. Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a given time period, referred to as a rate sensitivity gap. 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. 46 Table of Contents 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, 2024 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, 2024. Table 17 — Interest Rate Sensitivity Analysis (Dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2024 ​ One 1 - 5 Beyond Not Rate ​ ​ ​ Year ​ Years ​ 5 Years ​ Sensitive ​ Total Assets ​ $ 192,688 ​ $ 617,807 ​ $ 565,885 ​ $ 52,203 ​ $ 1,428,583 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities/Stockholders’ Equity ​ $ 594,040 ​ $ 245,651 ​ $ 446,413 ​ $ 142,479 ​ $ 1,428,583 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest Rate Sensitivity Gap ​ $ (401,352) ​ $ 372,156 ​ $ 119,472 ​ $ (90,276) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cumulative Gap ​ $ (401,352) ​ $ (29,196) ​ $ 90,276 ​ $ — ​ ​ ​ 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. 47 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 2.58%, 4.82% and 6.69% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would increase 0.77% in the 100 basis point decreasing rate scenario presented and decrease 1.44% and 3.26% in the 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 425-450 basis point range and many deposit accounts still lagging at markedly lower rates. Results of the decreasing basis point declining scenarios are affected by the fact that many of the Corporation’s interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points. However, the Corporation’s interest-sensitive assets are able to decline by these amounts. For the years ended December 31, 2024 and 2023, the cost of interest-bearing liabilities averaged 3.56% and 2.85%, respectively, and the yield on average interest-earning assets, on a fully taxable equivalent basis, averaged 5.30% and 4.64%, 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, 2024, net present value is projected to decrease 1.12%, 4.56%, and 9.35% 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 0.99%, 7.09% and 20.34%, 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 ​ ​ ​ ​ ​ December 31, 2024: Projected Change Effect on Net Interest Income ​ ​ ​ 1-Year Net Interest Income Simulation Projection ​ +300 bp Shock vs. Stable Rate (6.69) % +200 bp Shock vs. Stable Rate (4.82) % +100 bp Shock vs. Stable Rate (2.58) % Flat rate ​ ‒100 bp Shock vs. Stable Rate 0.77 % ‒200 bp Shock vs. Stable Rate (1.44) % ‒300 bp Shock vs. Stable Rate ​ (3.26) % ​ ​ ​ ​ Effect on Net Present Value of Balance Sheet ​ Static Net Present Value Change ​ +300 bp Shock vs. Stable Rate (9.35) % +200 bp Shock vs. Stable Rate (4.56) % +100 bp Shock vs. Stable Rate (1.12) % Flat rate ​ ‒100 bp Shock vs. Stable Rate (0.99) % ‒200 bp Shock vs. Stable Rate (7.09) % ‒300 bp Shock vs. Stable Rate (20.34) % 48 Table of Contents Table 19 shows the quarterly results of operations for the Corporation for the years ended December 31, 2024 and 2023: Table 19 — Quarterly Results of Operations (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands, except per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended 2024 March 31 June 30 September 30 December 31 Interest income ​ $ 16,946 ​ $ 17,593 ​ $ 18,242 ​ $ 18,641 Interest expense ​ 9,471 ​ 9,592 ​ 10,088 ​ 9,992 Net interest income ​ 7,475 ​ 8,001 ​ 8,154 ​ 8,649 Provision for credit losses ​ 264 ​ 510 ​ 718 ​ 148 Non-interest income ​ 1,344 ​ 1,621 ​ 1,860 ​ 1,872 Non-interest expense ​ 27,145 ​ 7,666 ​ 7,820 ​ 7,953 (Loss) Income before income tax (benefit) expense ​ (18,590) ​ 1,446 ​ 1,476 ​ 2,420 Income tax (benefit) expense ​ (213) ​ 66 ​ ​ (31) ​ 133 Net (loss) income ​ $ (18,377) ​ $ 1,380 ​ $ 1,507 ​ $ 2,287 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and diluted (losses) earnings per share ​ $ (3.00) ​ $ 0.23 ​ $ 0.25 ​ $ 0.38 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (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 ​ 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. 49 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. Based on an interim goodwill impairment test completed during the first quarter of 2024 for which a decrease in the Corporation’s stock price was a triggering event, it was determined, more likely than not, that the fair value of the Corporation’s goodwill was less than it’s carrying value. Based on the results of the impairment test, the Corporation recorded a full goodwill impairment charge of $19,133,000 effective March 31, 2024. ​ ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required. ​ ​