FIRST KEYSTONE CORP

Previous wording

Net income decreased to $5,560,000 for the year ended December 31, 2023, as compared to $14,024,000 for the prior year, a decrease of 60.4%. Earnings per share, both basic and diluted, for 2023 was $0.91 as compared to $2.35 in 2022, a decrease of 61.3%. Dividends per share for 2023 and 2022 were $1.12. The Corporation’s return on average assets was 0.42% in 2023 and 1.07% in 2022. Return on average equity decreased to 4.55% in 2023 from 10.75% in 2022. Total interest income in 2023 amounted to $56,988,000, an increase of $10,575,000 or 22.8% from 2022. The increase in interest income is due to increased interest rates, growth in real estate loans secured by commercial properties and Commercial and Industrial loans, and increased interest income earned on securities, offset by a $317,000 decrease in Paycheck Protection Program loan fees due to the discontinuation of the SBA program. Total interest expense of $27,872,000 increased $18,959,000 or 212.7% from 2022. The majority of this increase is related to increases in interest paid to depositors to retain and grow deposit relationships and increases in interest paid on short-term and long-term borrowings primarily through the Federal Home Loan Bank due to increases in volume and rate of borrowings.

Current wording

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.

Previous wording

Net interest income, as indicated below in Table 2, decreased by $8,384,000 or 22.4% to $29,116,000 for the year ended December 31, 2023. The Corporation’s net interest income on a fully tax equivalent basis decreased by $9,979,000, or 25.3% to $29,390,000 in 2023 as compared to $39,369,000 in 2022.

Current wording

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.

Previous wording

2 Includes tax equivalent adjustments on tax-free municipal loans of $79,000 and $228,000 for years 2023 and 2022, respectively.

Current wording

2 Includes tax equivalent adjustments on tax-free municipal loans of $5,000 and $79,000 for years 2024 and 2023, respectively.

Previous wording

3 Includes tax equivalent adjustments on tax-free municipal securities of $195,000 and $1,641,000 for years 2023 and 2022, respectively.

Current wording

3 Includes tax equivalent adjustments on tax-free municipal securities of $13,000 and $195,000 for years 2024 and 2023, respectively.

Previous wording

The yield on earning assets was 4.64% in 2023 and 3.91% in 2022. The rate paid on interest bearing liabilities was 2.85% in 2023 and 0.95% in 2022. This resulted in a decrease in our net interest spread to 1.79% in 2023, as compared to 2.96% in 2022.

Current wording

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.

Previous wording

As Table 3 illustrates, net interest margin, which is interest income less interest expense divided by average earning assets, was 2.38% in 2023 as compared to 3.19% in 2022. Net interest margins are presented on a tax-equivalent basis. In 2023, the yield on earning assets increased by 0.73% and the rate paid on interest bearing liabilities increased by 1.90%. Yields increased for a majority of interest earning assets and interest bearing liabilities during 2023, mainly as a result of the current high interest rate environment. The Federal Open Market Committee (FOMC) raised the fed funds target rate 11 times for a total of 525 basis points between March 2022 and July 2023, it has remained at the target rate of 5.25% to 5.5% through December 31, 2023. The yield on loans increased from 4.41% in 2022 to 4.90% in 2023 mainly due to loans originating and repricing at higher interest rates during 2023. The securities portfolio yield increased to 3.92% in 2023 as compared to 2.99% in 2022. The increase was mainly the result of the elevated rate environment impacting variable rate securities and purchases of higher yielding securities in 2023. The average rate paid on short-term borrowings increased 2.45% from 2.82% in 2022 to 5.27% in 2023 due to higher interest rates paid on a significantly higher average overnight borrowing balance. The rate paid on savings, NOW, money market, and interest checking accounts increased 1.46% from 0.64% to 2.10% and the average rate paid on time deposits increased 2.00% from 0.75% to 2.75%. Interest income exempt from federal tax was $1,570,000 in 2023 and $3,771,000 in 2022. Interest income exempt from federal tax decreased due to the sales of tax-exempt municipal securities in 2023. Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 21%.

Current wording

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%.

Previous wording

The decrease in net interest margin at December 31, 2023 compared to December 31, 2022 was primarily due to increased yields on deposits and borrowings in 2023, as compared to 2022. Fully tax equivalent net interest income decreased by $9,979,000 or 25.3% to $29,390,000 at December 31, 2023 compared to $39,369,000 at December 31, 2022. During 2023, the Federal Reserve increased the federal-funds rate by 1.00%, resulting in a target range of 5.25% - 5.50%. The Corporation could experience a decrease in net interest income if market rates remain static or continue to increase, as the Corporation’s net interest income continues to be liability sensitive. To negate the potential impact of a decreasing net interest margin, the Corporation will continue to focus on attracting organic loan growth and core deposits such as checking, savings, and money market accounts, thereby further reducing its dependence on higher priced certificates of deposit and short-term borrowings. The Corporation is actively monitoring and restructuring its portfolios to become more asset sensitive, which will allow for better performance in a static or rates-up environment. The Corporation also entered into four rate swap contracts effective September 20, 2023. Of the four swaps, two were fair value interest rate swaps with a combined notional amount of $50,000,000, hedging fixed-rate available-for-sale debt securities, and two were cash flow interest rate swaps with a combined notional amount of $100,000,000, hedging specific short-term wholesale funding positions. See Note 12 – Derivative Instruments and Hedging Activities on page 93 for further analysis. The Corporation will continue to evaluate the potential impact of short-term rate fluctuations in 2024, as well as the slope and position of the yield curve.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

For the year ended December 31, 2023, the provision for credit losses resulted in a credit balance of $217,000, compared to a credit balance of $264,000 for the year ended December 31, 2022. The increase in the provision for credit losses in 2023 as compared to 2022 resulted from the Corporation’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. The provision for credit losses for the year ended December 31, 2023 is also reflective of management’s assessment of the continued risk associated with the uncertainty surrounding geopolitical and economic concerns. Charge-off and recovery activity in the allowance for credit losses resulted in net charge-offs of $13,000 and $142,000 for the years ended December 31, 2023 and 2022, respectively. See Analysis of Allowance for Credit Losses (Post-Adoption of ASU No. 2016-13) and Analysis of Allowance for Loan Losses (Pre-Adoption of ASU No. 2016-13) tables on pages 37 and 38 for further discussion.

Current wording

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.

Previous wording

The allowance for credit losses as a percentage of average loans outstanding was 0.79% as of December 31, 2023 and 1.03% as of December 31, 2022. The decrease in the allowance for credit losses as a percentage of average loans outstanding is mainly the result of a decrease of $1,349,000 in the balance of the allowance for credit losses from $8,274,000 at December 31, 2022 to $6,925,000 at December 31, 2023, mainly due to the one-time-cumulative adjustment which was made upon the adoption of the CECL model in the first quarter of 2023, decreasing the allowance for credit losses by $1,119,000. Total average loans outstanding also increased by $66,508,000 from $807,169,000 at December 31, 2022 to $873,677,000 at December 31, 2023 which further contributed to the decrease in the allowance for credit losses as a percentage of average loans at December 31, 2023 as compared to December 31, 2022.

Current wording

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.

Previous wording

Non-interest income through December 31, 2023 was $6,156,000, an increase of 15.5%, or $825,000, from 2022. The increase was due to less net securities losses and increased net gains (losses) on sales of mortgage loans in 2023.

Current wording

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.

Previous wording

During 2023, net securities losses decreased $728,000 to a net loss of $118,000. The decrease was due to the Corporation recognizing $99,000 in net gains on the sales of debt securities in 2023 as compared to $753,000 in net losses on the sales of debt securities in 2022. The Corporation then recognized $217,000 in net losses on held equity securities in 2023, due to market valuation fluctuations, as compared to recognizing $94,000 in net losses on held equity securities in 2022.

Current wording

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.

Previous wording

Gains (losses) on sales of mortgage loans amounted to a net gain of $65,000 in 2023 as compared to a net loss of $7,000 in 2022. The increase in net gains (losses) on sales of mortgage loans in 2023 was due to more individual loans sold in 2023 along with many of the loans sold in 2022 being sold at a loss due to rapid upward movement in interest rates. The Corporation continues to service the majority of mortgages which are sold, through maturity of the loans. This servicing income provides an additional source of non-interest income on an ongoing basis.

Current wording

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.

Previous wording

ATM fees and debit card income increased by $49,000 or 2.3% in 2023 as compared to 2022 due to increased debit card interchange fees as the result of an increase in debit card transaction volume in 2023. Income related to an increase in cash surrender value of life insurance increased by $24,000 or 4.0% mainly as a result of increased interest rates on the related policies.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

Total non-interest expense amounted to $29,245,000, an increase of $2,468,000, or 9.2% in 2023. Expenses associated with employees (salaries and employee benefits) continue to be the largest non-interest expenditure. Salaries and employee benefits amounted to $16,055,000 or 54.9% of total non-interest expense in 2023 and $14,554,000 or 54.4% in 2022. Salaries and employee benefits increased $1,501,000, or 10.3% in 2023. The increase in 2023 was due to increased salaries to offer more competitive wages in an effort to increase retention and support the Corporation’s growth, new hires related to the new full-service branch, and bonuses paid to all employees in January 2023. The number of full-time equivalent employees was 215 as of December 31, 2023 and 201 as of December 31, 2022.

Current wording

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.

Previous wording

Pennsylvania shares tax expense decreased $377,000, or 30.5% in 2023 as compared to 2022. This was mainly due to the unrealized loss position of the Corporation’s debt securities portfolio at December 31, 2022 resulting in lower equity. FDIC insurance expense increased $213,000, or 43.5% in 2023 as compared to 2022. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

Total assets increased to $1,428,583,000 at year-end 2024, an increase of 0.9% from year-end 2023.

Previous wording

Net loans increased in 2023 from $850,195,000 to $904,153,000, a 6.3% increase. Loan demand grew in 2023 as the Bank has realized an increase in loan originations, primarily commercial real estate and commercial and industrial loans.

Current wording

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.

Previous wording

The cash surrender value of bank owned life insurance totaled $26,010,000 at December 31, 2023, an increase of $621,000 or 2.4% from 2022. This increase represents tax-free income included in non-interest income on the consolidated statements of income.

Current wording

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.

Previous wording

Investments in low-income housing partnerships were $5,961,000 at year-end 2023, an increase of 58.4% from year-end 2022. The Corporation became a limited partner in a new real estate venture during 2021 with an initial investment of $435,000. In 2023, capital contributions and other payments in the combined amount of $2,429,000 were made in relation to the new real estate venture. Investing in low-income housing real estate ventures enables the Corporation to recognize tax credits and satisfy Community Reinvestment Act initiatives.

Current wording

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.

Previous wording

As of December 31, 2023, total deposits amounted to $980,439,000, a decrease of 1.3% from 2022. The decrease is due to a decrease in non-interest bearing deposits and a decrease in municipal deposits, offset by an increase in interest bearing deposits including a $40,250,000 increase in Brokered CDs. The Corporation has also experienced a shift from transactional deposits to term deposits due to higher CD rate offerings.

Current wording

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.

Previous wording

The Corporation continues to maintain and manage its asset growth. The Corporation’s strong equity capital position provides an opportunity to further leverage its asset growth. Short and long-term borrowings increased in 2023 by $97,050,000, mainly due to the execution of a balance sheet leverage strategy that included $100,000,000 in new long-term borrowings to fund increases in the securities portfolio.

Current wording

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.

Previous wording

Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Corporation maximizes income. The earning asset ratio (average interest earning assets divided by average total assets) equaled 93.1% for 2023 compared to 93.8% for 2022. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and securities.

Current wording

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.

Previous wording

The securities portfolio consists of debt securities available-for-sale. No securities were established in a trading account. Debt securities available-for-sale increased $19,524,000 or 5.2% to $392,968,000 in 2023. At December 31, 2023, the net unrealized loss, net of the tax effect, on these securities was $26,073,000 and was included in stockholders’ equity as accumulated other comprehensive loss. Table 7 provides data on the fair value of the Corporation’s securities portfolio on the dates indicated. The vast majority of security purchases are allocated as available-for-sale. This provides the Corporation with increased flexibility should there be a need or desire to liquidate a security.

Current wording

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.

Previous wording

Marketable equity securities consist of common stock investments in other commercial banks and bank holding companies. At December 31, 2023 and 2022, the Corporation had $1,482,000 and $1,699,000, respectively, in equity securities recorded at fair value, a decrease of $217,000 or 12.8%.

Current wording

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%.

Previous wording

Total loans increased to $911,078,000 as of December 31, 2023, compared to a balance of $858,469,000 as of December 31, 2022. Table 9 provides data relating to the composition of the Corporation’s loan portfolio on the dates indicated. Total loans increased $52,609,000, or 6.1% in 2023 compared to an increase of $105,628,000, or 14.0% in 2022.

Current wording

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.

Previous wording

Continued demand for borrowing by businesses accounted for the 6.1% increase in the loan portfolio from December 31, 2022 to December 31, 2023. The Real Estate portfolio increased $46,613,000 or 6.1% from $764,880,000 at December 31, 2022 to $811,493,000 at December 31, 2023. The increase in the Real Estate portfolio for the year ended December 31, 2023 was mainly the result of $110,819,000 in new loan originations, which were offset by loan payoffs of $39,675,000 and a decrease of $8,886,000 in utilization of existing real estate lines of credit, along with regular principal payments and other typical fluctuations in the Real Estate portfolio. The Agricultural portfolio decreased $189,000 or 22.0% from $860,000 at December 31, 2022 to $671,000 at December 31, 2023. The decrease in the Agricultural portfolio for the year ended December 31, 2023 was mainly the result of an increase of $6,000 in utilization of existing agricultural lines of credit, offset with regular principal payments and other typical fluctuations in the Agricultural portfolio. There were no new agricultural loans originated during the year ended December 31, 2023 and payoffs of agricultural loans for the year ended December 31, 2023 did not have a material impact on the change in the portfolio balance. Overall, the Commercial and Industrial portfolio increased $10,832,000 or 19.3% from $56,077,000 at December 31, 2022 to $66,909,000 at December 31, 2023. The increase in the Commercial and Industrial portfolio during the year ended December 31, 2023 was mainly attributable to the portion of the Commercial and Industrial portfolio, excluding PPP loans, which increased $10,945,000 during the year ended December 31, 2023. The increase was attributable to $12,592,000 in new loan originations along with an increase of $1,824,000 in utilization of existing commercial and industrial lines of credit offset by loan payoffs of $1,556,000, as well as regular principal payments and other typical amortization in the Commercial and Industrial portfolio. The portion of the Commercial and Industrial portfolio attributable to PPP loans decreased $113,000 from December 31, 2022 to December 31, 2023 with all PPP loans paid off or forgiven as of December 31, 2023. Consumer loans increased $117,000 or 2.1% from $5,707,000 at December 31, 2022 to $5,824,000 at December 31, 2023. The increase is mainly attributable to new loan originations of $2,545,000, offset by loan payoffs of $1,082,000 and a decrease of $4,000 in utilization of existing consumer lines of credit, along with regular principal payments. The State and Political Subdivisions portfolio decreased $4,764,000 or 15.4% from $30,945,000 at December 31, 2022 to $26,181,000 at December 31, 2023. The decrease is mainly the result of $2,420,000 in loan payoffs for the year ended December 31, 2023 along with regular principal payments, offset by $731,000 in new loan originations.

Current wording

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

Previous wording

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $885,912,000 or 97.35% of gross loans are graded Pass; $58,000 or 0.01% are graded Special Mention; $24,034,000 or 2.64% are graded Substandard; and $0 are graded Doubtful. The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower. See Note 3 — Loans and Allowance for Credit Losses for risk grading tables.

Current wording

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.

Previous wording

Overall, non-pass grades increased to $24,092,000 at December 31, 2023, as compared to $20,935,000 at December 31, 2022. Real Estate non-pass grades increased $3,174,000 or 15.7% to $23,384,000 as of December 31, 2023 compared to $20,210,000 as of December 31, 2022. Commercial and Industrial non-pass grades decreased $75,000 or 10.3% to $650,000 as of December 31, 2023 compared to $725,000 as of December 31, 2022. Consumer non-pass

Current wording

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.

Previous wording

The increase in Real Estate non-pass grades from December 31, 2022 to December 31, 2023 is mainly the result of the downgrade of a loan to the owner of a hotel and restaurant which carried a balance of $3,661,000 at December 31, 2023. The loan was downgraded to substandard status during the fourth quarter of 2023 due to the protracted timeframe of over two years which has transpired to complete the necessary renovations to the hotel following a fire. The hotel has exhausted all insurance and stimulus funds and now has to finance any deficits in profitability through other revenue streams, savings, or owner contributions.

Current wording

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.

Previous wording

The allowance for credit losses constitutes the amount available to absorb losses within the loan portfolio. As of December 31, 2023, the allowance for credit losses was $6,925,000 as compared to $8,274,000 as of December 31, 2022. The allowance for credit losses is established through a provision for credit losses charged to expenses. Loans are charged against the allowance for possible credit losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Current wording

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.

Previous wording

the Real Estate component of the loan portfolio. Additionally, delinquency trends were decreased by eight basis points and volume trends were decreased by twelve basis points across all three loan segmentation pools in the Consumer portfolio, volume trends for Commercial and Industrial loans were decreased by eight basis points, and delinquency trends for Agricultural loans were decreased by eight basis points during the third quarter of 2023. During the fourth quarter of 2023, qualitative factors related to economic trends were decreased by four basis points across all loan segments and qualitative factors related to collateral values were increased by four basis points related to loans to finance agricultural production and other loans for farmers in the Agricultural portfolio, commercial and industrial loans in the Commercial and Industrial portfolio, and automobile loans in the Consumer portfolio. Additionally, qualitative factors related to delinquency trends were decreased by sixteen basis points related to revolving, open-end 1-4 family residential properties in the Real Estate portfolio and automobile loans in the Consumer portfolio and increased by eight basis points related to loans secured by other non-farm, non-residential properties in the Real Estate portfolio and other revolving credit plans in the Consumer portfolio. Qualitative factors related to volume trends were increased by four basis points for each of the following loan segmentation pools: (a) construction, land development, and other land loans, (b) agribusiness, farmland, or secured by farmland, (c) secured by multi-family (5 or more) residential properties, (d) loans secured by owner-occupied non-farm, non-residential properties, and (e) loans secured by other non-farm, non-residential properties. Qualitative factors related to volume trends were decreased by four basis points for each of the following loan segmentation pools: (a) residential construction (loans to build homes, both speculative and owner-occupied, and 1-4 family lot loans), (b) revolving, open-end 1-4 family residential properties, (c) loans secured by first liens, and (d) loans secured by junior liens. All of the loan segmentation pools impacted by qualitative factor adjustments for volume trends are included in the Real Estate component of the loan portfolio. Qualitative factors related to external factors were increased by four basis points for each of the following loan segmentation pools in the Real Estate portfolio: (a) residential construction (loans to build homes, both speculative and owner-occupied, and 1-4 family lot loans), (b) revolving, open-end 1-4 family residential properties, (c) loans secured by first liens, and (d) loans secured by junior liens. Qualitative factors related to external factors were also increased by four basis points for loans to finance agricultural production and other loans to farmers in the Agricultural portfolio, commercial and industrial loans in the Commercial a…

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Current wording

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 ope…

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Previous wording

Table 11 contains an analysis of the allowance for credit losses indicating charge-offs and recoveries by year. In 2023 and 2022, net charge-offs as a percentage of average loans amounted to 0.001% and 0.018% respectively. Net charge-offs amounted to $13,000 in 2023 and $142,000 in 2022. Net charge-offs were higher in 2022 than in 2023, mainly due to a charge-off in the amount of $148,000 that was completed during the third quarter of 2022 on a commercial and industrial loan to a residential construction company, as the business ceased operations as a result of financial difficulties.

Current wording

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.

Previous wording

For the year ended December 31, 2023, the provision for credit losses resulted in a credit balance of $217,000, as compared to a credit balance of $264,000 for the year ended December 31, 2022. The net effect of the credit balance of the provision and net charge-offs resulted in the year-end allowance for credit losses of $6,925,000 of which 94.42% was attributed to the Real Estate component, 0.01% was attributed to the Agricultural component, 3.83% was attributed to the Commercial and Industrial component, 1.13% was attributed to the Consumer component, and 0.61% was attributed to the State and Political Subdivisions component (refer to the activity in Note 3 — Loans and Allowance for Credit Losses on page 79.) The Corporation determined that the provision for credit losses made during 2023 was sufficient to maintain the allowance for credit losses at a level necessary for the probable losses inherent in the loan portfolio as of December 31, 2023.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

Table 12 sets forth the allocation of the Bank’s allowance for credit losses by loan category and the percentage of loans in each category to the total allowance for credit losses at the dates indicated. The portion of the allowance for credit losses allocated to each loan category does not represent the total available for future losses that may occur within the loan category, since the total credit loss allowance is a valuation reserve applicable to the entire loan portfolio.

Current wording

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

Previous wording

Allocation of Allowance for Credit Losses (Post-Adoption of ASU No. 2016-13)

Current wording

Allocation of Allowance for Credit Losses

Previous wording

Total non-performing assets amounted to $5,681,000 as of December 31, 2023, as compared to $5,359,000 as of December 31, 2022. The economy remains unstable. Consumer spending remains at high levels, allowing the inflation rate to continue to remain higher than desired levels. Business sentiment is downbeat and business investment has slowed. Many economists and influential thinkers believe that the economy is moving forward in spite of certain forecasts and predictors. Inflation was receding earlier in 2023, at 3% as of June 2023; however, it rose to 3.7% as of September 2023 and then dropped slightly to 3.4% as of December 2023. The Federal Reserve’s target rate of inflation is 2%. The war between Ukraine and Russia continues to produce worldwide consternation. The heightened conflict with Israel and Palestine has caused much hostility throughout the world. The constant disputing over whether to continue US support of Ukraine and Israel in ongoing efforts has been a strain on the economy. Values of new and used homes and automobiles have remained high. Higher interest rates have added to the curtailed borrowing. Consumer savings is dwindling, and credit balances are growing. Supply chains are back up and running efficiently in many areas. Labor continues to remain costly and unpredictable. The Federal Reserve has noted they will cease rate hikes and has indicated a plan to potentially begin reducing rates in 2024. These forces have had a direct effect on the Corporation’s nonperforming assets. The Corporation is closely monitoring all segments of its loan portfolio because of the current uncertain economic environment. Non-accrual loans totaled $4,616,000 as of December 31, 2023 as compared to

Current wording

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.