CNB Financial Corp: Form 10-Q for the period ended Jun 30, 2025

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

GENERAL OVERVIEW

The following discussion and analysis of the condensed consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The terms "we", "us" and "our" refer to CNB Financial Corporation and its subsidiaries. The financial condition and results of operations of the Corporation and its consolidated subsidiaries are not necessarily indicative of future performance.

The Corporation is a financial holding company registered under the BHC Act. It was incorporated under the laws of the Commonwealth of Pennsylvania in 1983 for the purpose of engaging in the business of a financial holding company. The Corporation's subsidiary, the Bank, provides financial services to individuals and businesses. The CNB Bank franchise's primary market areas are the Pennsylvania counties of Blair, Cambria, Centre, Clearfield, Elk, Indiana, Jefferson, and McKean. ERIEBANK, a division of the Bank, operates in the Pennsylvania counties of Crawford, Erie, and Warren and in the Ohio counties of Ashtabula, Cuyahoga, Geauga, Lake, and Lorain. FCBank, a division of the Bank, operates in the Ohio counties of Crawford, Delaware, Franklin, Knox, Marion, Morrow, and Richland. BankOnBuffalo, a division of the Bank, operates in the New York counties of Erie, Niagara, and Ontario. Ridge View Bank, a division of the Bank, operates in the Virginia counties of Botetourt, Craig, Franklin, New River Valley, and Roanoke. ESSA Bank, a division of the Bank, operates in the Pennsylvania counties of Monroe, Northampton, Lehigh, Delaware, Chester, Montgomery, Lackawanna, and Luzerne. Impressia Bank, a division of the Bank, operates in the Bank's primary market areas. Although the Corporation's strategies, through the Bank, are executed based on the divisions discussed above, the Bank is a single Pennsylvania-chartered bank whereby all divisions of the Bank conduct their business on a doing business as basis.

In addition to the Bank, the Corporation has four other subsidiaries. CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities. CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products. CNB Risk Management, Inc., incorporated in Delaware, is a captive insurance company that insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. Holiday Financial Services Corporation, incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics.

The following discussion should be read in conjunction with the Corporation's consolidated financial statements and notes thereto for the year ended December 31, 2024, included the 2024 Form 10-K, and in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this report. Operating results for the three and six months ended June 30, 2025 are not necessarily indicative of the results for the full year ending December 31, 2025, or any future period.

RECENT EVENTS

On July 23, 2025, the Corporation completed its previously announced acquisition of ESSA and its subsidiary bank, ESSA Bank & Trust Company ("ESSA Bank"), pursuant to the definitive merger agreement (the "Merger Agreement") dated as of January 9, 2025. The Corporation's acquisition of ESSA was an all-stock transaction. Under the terms of the Merger Agreement, ESSA merged with and into the Corporation, with the Corporation as the surviving entity, and immediately thereafter, ESSA Bank merged with and into CNB Bank, with CNB Bank as the surviving bank (the "Merger"). Banking offices of ESSA Bank operate under the trade name ESSA Bank, a division of CNB Bank.

The transaction has extended CNB Bank's branch network into the Northeastern Region including the Lehigh Valley of Pennsylvania. With the addition of ESSA's 20 community offices, CNB Bank now has 78 offices comprised of one loan production office, one drive-up office, one mobile office, and 75 full-service offices across its four-state footprint.

Pursuant to the Merger Agreement, each outstanding share of ESSA common stock was converted into the right to receive 0.8547 shares of the Corporation's common stock. The total consideration paid to ESSA shareholders was approximately $202.5 million, comprised of approximately 8,357,157 shares of the Corporation's common stock, valued at approximately $202.5 million based on the July 23, 2025 closing price of $24.23 per share of the Corporation's common stock, and $20 thousand in cash (cash in lieu of fractional shares).

The acquisition of ESSA was completed subsequent to the second quarter of 2025, and as a result ESSA's balance sheet and results of operations are not included in the Corporation's condensed consolidated financial statements for the period ended June 30, 2025. The merger with ESSA will be accounted for as a business combination. The Corporation is currently in the process of completing the purchase accounting and has not made all of the remaining required disclosures, such as the fair value of assets acquired and supplemental pro forma information, which will be disclosed in subsequent filings. As of June 30, 2025, ESSA had approximately $2.2 billion in total assets, $1.8 billion in total loans, and $1.5 billion in total deposits.

NON-GAAP FINANCIAL INFORMATION

This report contains references to financial measures that are not defined in GAAP. Management uses non-GAAP financial information in its analysis of the Corporation's performance. Management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and charges in the periods presented. The Corporation's management believes that investors may use these non-GAAP measures to analyze the Corporation's financial performance without the impact of unusual items or events that may obscure trends in the Corporation's underlying performance. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently.

Non-GAAP measures reflected within the discussion below include:

• Merger costs, net of tax;
• Income available to common (excluding merger costs);
• Tangible book value per share and tangible book value per share (excluding merger costs);
• Tangible common equity/tangible assets and tangible common equity/tangible assets (excluding merger costs);
• Efficiency ratio (fully tax-equivalent basis) and efficiency ratio (fully tax-equivalent basis and excluding merger costs);
• Net interest margin (fully tax-equivalent basis);
• Pre-provision net revenue ("PPNR") and PPNR (excluding merger costs);
• Basic and diluted earnings per share (excluding merger costs);
• Dividend payout ratio (excluding merger costs);
• Return on average assets (excluding merger costs);
• Return on average equity (excluding merge costs); and
• Return on average tangible common equity and return on average tangible common equity (excluding merger costs)

A reconciliation of these non-GAAP financial measures is provided below in the "Non-GAAP Financial Measures" section.

PRIMARY FACTORS USED TO EVALUATE PERFORMANCE

Management considers return on average assets, return on average equity, return on average tangible common equity, earnings per common share, tangible book value per common share, asset quality, net interest margin, and other metrics as key measures of the financial performance of the Corporation. The interest rate environment will continue to play an important role in the future earnings of the Corporation. To address the challenging interest rate and competitive environments, the Corporation continues to evaluate, develop and implement strategies necessary to support its ongoing financial performance objectives and future growth goals. Additionally, management frequently evaluates the potential impact of economic and geopolitical events that may have an impact on the credit risk profile of its customers and develops proactive strategies to mitigate such potential impacts on the Corporation's loan portfolio.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $425.4 million at June 30, 2025, including additional excess liquidity of $332.2 million held at the Federal Reserve, compared to $375.0 million at December 31, 2024. These excess funds, when combined with collective contingent liquidity resources of $4.6 billion including (i) available borrowing capacity from the FHLB and the Federal Reserve, and (ii) available unused commitments from brokered deposit sources and other third-party funding channels, including previously established lines of credit from correspondent banks, result in the total available liquidity sources for the Corporation to be approximately 5.1 times the estimated amount of adjusted uninsured deposit balances.

Management believes the liquidity needs of the Corporation are satisfied primarily by the current balance of cash and cash equivalents, customer and brokered deposits, FHLB financing, the portions of the securities and loan portfolios that mature within one year, and other third-party funding channels. The Corporation expects that these sources of funds will enable it to meet cash obligations and off-balance sheet commitments as they come due. In addition to the above noted liquidity sources, the Corporation maintains access to the Federal Reserve discount window.

SECURITIES

AFS debt securities and equity securities combined totaled $534.1 million and $479.0 million at June 30, 2025 and December 31, 2024, respectively. At June 30, 2025, the total balance of investments classified as HTM debt securities was $270.0 million compared to $306.1 million at December 31, 2024.

The Corporation's objective is to maintain the investment securities portfolio at an appropriate level to balance the earnings and liquidity provided by the portfolio. Note 3, "Securities," to the condensed consolidated financial statements provides more detail concerning the composition of the Corporation's securities portfolio and the process for evaluating securities for impairment.

The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of AFS debt securities as of June 30, 2025. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%. Mortgage-backed securities are included in maturity categories based on their stated maturity date.

The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of HTM debt securities as of June 30, 2025:

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The following table summarizes the weighted average modified duration of AFS securities as of June 30, 2025:

The following table summarizes the weighted average modified duration of securities HTM as of June 30, 2025:

The portfolio contains no holdings of a single issuer that exceeds 10% of shareholders' equity other than U.S. government sponsored entities.

The Corporation generally purchases debt securities over time and does not attempt to "time" its transactions, which allows for more efficient management of fluctuations in the interest rate environment. The Corporation's strategy given the current environment is to focus on lower risk securities and shorter durations that complement the current portfolio investment ladder, coupled with consistent reinvestment of cash flows to replace lower earning assets.

The Corporation monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through meetings of the Asset/Liability Committee ("ALCO"). The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the securities portfolio, a sufficient level of liquidity is maintained to satisfy depositor requirements and various credit needs of our customers.

LOANS RECEIVABLE

Note 4, "Loans Receivable and Allowance for Credit Losses," to the condensed consolidated financial statements provides more detail concerning the loan portfolio of the Corporation.

At June 30, 2025, loans, excluding the impact of syndicated loans, totaled $4.7 billion, representing an increase of $125.4 million, or 2.77% year to date increase (5.58% annualized), from December 31, 2024. The increase in loans for the six months ended June 30, 2025 compared to December 31, 2024 was primarily driven by growth in the ERIEBANK, Ridge View Bank, BankOnBuffalo and the legacy CNB markets, as well as CNB Bank's Private Banking Division.

At June 30, 2025, the Corporation's condensed consolidated balance sheet reflected a decrease in syndicated lending balances of $946 thousand compared to December 31, 2024, primarily resulting from scheduled paydowns of certain syndicated loans. The syndicated loan portfolio totaled $78.9 million, or 1.67% of total loans, at June 30, 2025, compared to $79.9 million, or 1.73% of total loans at December 31, 2024. The Corporation closely manages the level and composition of its syndicated loan portfolio to ensure it continues to provide a high credit quality, profitable use of excess liquidity to complement the Corporation's loan growth from its in-market customer relationships.

Loan Origination/Risk Management

The Corporation has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. The Corporation has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans. Variable rate loans are generally underwritten at the fully indexed rate. Loan underwriting policies and procedures have not changed materially between any periods presented. As discussed more fully above, syndicated loan purchases are underwritten utilizing the same process as the Corporation's originated loans.

The Corporation continues to explore the credit and reputational risks associated with climate change and their potential impact on the foregoing, while closely monitoring regulatory developments on climate risk. This includes, among other things, researching and developing a formalized approach to considering climate change related risks in the Corporation's underwriting processes. This approach will be impacted, in part, by the accessibility and reliability of both customer climate risk data and climate risk data in general. One of the objectives of these efforts is to enable the Corporation to better understand the climate change related risks associated with the Corporation's customers' business activities and to be able to monitor their response to those risks and their ultimate impact on the Corporation's customers.

Loan Portfolio Profile

As part of its lending policy and risk management activities, the Corporation tracks lending exposure by industry classification and type to determine potential risks associated with industry concentrations, and to identify any concentration risk issues that could lead to additional credit loss exposure. An important and recurring part of this process involves the Corporation's continued measurement and evaluation of its exposure to the office, hospitality, and multifamily industries within its commercial real estate portfolio. Even given the Corporation's historically sound underwriting protocols and high credit quality standards for borrowers in the commercial real estate industry segments, the Corporation monitors numerous relevant sensitivity elements, including occupancy, loan-to-value, absorption and cap rates, debt service coverage and covenant compliance, and developer/lessor financial strength both in the project and globally.

At June 30, 2025, the Corporation had the following key metrics related to its office, hospitality and multifamily portfolios:

• Commercial office loans:
• There were 113 outstanding loans, totaling $111.1 million, or 2.35% of total Corporation loans outstanding;
• There were no nonaccrual commercial office loans;
• There were two past due commercial office loans that totaled $209 thousand, or 0.19% of total commercial office loans outstanding; and
• The average outstanding balance per commercial office loan was $983 thousand.
• Commercial hospitality loans:
• There were 156 outstanding loans, totaling $321.2 million, or 6.79% of total Corporation loans outstanding;
• There were no nonaccrual commercial hospitality loans;
• There were no past due commercial hospitality loans; and
• The average outstanding balance per commercial hospitality loan was $2.1 million.
• Commercial multifamily loans:
• There were 223 outstanding loans, totaling $405.4 million, or 8.57% of total Corporation loans outstanding;
• There was one nonaccrual and past due commercial multifamily loan that totaled $199 thousand, or 0.05% of total multifamily loans outstanding; and
• The average outstanding balance per commercial multifamily loan was $1.8 million.

The following table summarizes the geographic region (based upon metropolitan statistical areas) in which the commercial office, hospitality and multifamily loans were originated as of June 30, 2025:

As of June 30, 2025, the Corporation had no commercial office, hospitality or multifamily loan relationships considered by the banking regulators to be high volatility commercial real estate ("HVCRE") credits.

Maturities and Sensitivities of Loans Receivable to Changes in Interest Rate

The following table presents the maturity distribution of the Corporation's loans receivable at June 30, 2025. The table also presents the portion of loans receivable that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

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Loans Receivable Concentration

At June 30, 2025, no industry concentration existed which exceeded 10% of the total loan portfolio.

Loans Receivable Credit Quality

The following table presents information concerning the loan portfolio delinquency and other nonperforming assets at June 30, 2025 and December 31, 2024:

Total nonperforming assets were $30.4 million, or 0.48% of total assets, as of June 30, 2025, compared to $59.5 million, or 0.96% of total assets, as of December 31, 2024. In addition, the allowance for credit losses as a percentage of nonaccrual loans was 169.52% at June 30, 2025, compared to 84.08% at December 31, 2024. The decrease in nonperforming assets for the six months ended June 30, 2025, compared to December 31, 2024 was primarily due to paydowns to workout-related efforts on two larger nonaccrual loan relationships, and resulting charge-offs on these workouts and other smaller problem loans. The most significant charge-offs were $1.5 million for an owner-occupied commercial real estate relationship (balance of approximately $3.8 million with a specific reserve balance of $1.4 million) and a $1.1 million charge-off of a multifamily commercial real estate loan (balance of approximately $20.3 million with a specific reserve balance of $885 thousand).

The Corporation has established written lending policies and procedures that require underwriting standards, loan documentation, and credit analysis standards to be met prior to funding a loan. Subsequent to the funding of a loan, ongoing review of credits is required. Credit reviews are performed quarterly by an outsourced loan review firm and cover approximately 65% of the commercial loan portfolio on an annual basis. In addition, the external independent loan review firm reviews past due loans and all significant classified assets and nonaccrual loans annually.

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of a borrower to continue to comply with contractual repayment terms because of the borrower's potential operating or financial difficulties. Management monitors these "watchlist" loans monthly to determine potential losses within the commercial loan portfolio. The "watchlist" is comprised of all credits risk rated special mention, substandard and doubtful.

ALLOWANCE FOR CREDIT LOSSES

The amount of each allowance for credit losses account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant internal and external factors. While management utilizes its best judgment and information available, the ultimate adequacy of the Corporation's allowance for credit losses account is dependent upon a variety of factors beyond the Corporation's control, including the performance of the Corporation's loan portfolios, the economy, changes in interest rates, and the view of the regulatory authorities toward classification of assets. The adequacy of the allowance for credit losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation. For additional information regarding the Corporation's accounting policies related to credit losses, refer to Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements in the 2024 Form 10-K and Note 4, "Loans Receivable and Allowance for Credit Losses," to these condensed consolidated financial statements elsewhere in this report.

The tables below provide an allocation of the allowance for credit losses on loans receivable by loan portfolio segment at June 30, 2025 and December 31, 2024; however, allocation of a portion of the allowance for credit losses to one segment does not preclude its availability to absorb losses in other segments.

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The allowance for credit losses measured as a percentage of total loans receivable was 1.02% as of June 30, 2025 and 1.03% as of December 31, 2024.

The Corporation's allowance for credit losses is influenced by loan volumes, risk rating migration, delinquency status and other internal and external conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions and other external factors.

For the six months ended June 30, 2025, the allowance for credit losses increased $972 thousand, primarily driven by growth in the Corporation's loan portfolio. Significant uncertainty persists regarding the domestic and global economy due to changes to U.S. tariffs and corresponding policy changes by U.S. trading partners, continued elevated interest rates, fluctuating levels of consumer confidence, and geopolitical conflicts. Management will continue to proactively evaluate its estimate of expected credit losses as new information becomes available.

Note 4, "Loans Receivable and Allowance for Credit Losses," to the condensed consolidated financial statements provides further disclosure of loan balances by portfolio segment as of June 30, 2025 and December 31, 2024.

Additional information related to provision for credit loss expense and net charge-offs and recoveries for the three months ended June 30, 2025 and 2024 is presented in the tables below.

(1) Excludes provision for credit losses related to unfunded commitments. Note 9, "Off-Balance Sheet Commitments and Contingencies," to the condensed consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments of the Corporation.

(1) Excludes provision for credit losses related to unfunded commitments. Note 9, "Off-Balance Sheet Commitments and Contingencies," to the condensed consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments of the Corporation.

(1) Excludes provision for credit losses related to unfunded commitments. Note 9, "Off-Balance Sheet Commitments and Contingencies," to the condensed consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments of the Corporation.

(1) Excludes provision for credit losses related to unfunded commitments. Note 9, "Off-Balance Sheet Commitments and Contingencies," to the condensed consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments of the Corporation.

Provision for credit losses was $4.3 million and $5.9 million for the three and six months ended June 30, 2025, compared to $2.6 million and $3.9 million for the three and six months ended June 30, 2024. Included in the provision for credit losses for the three and six months ended June 30, 2025 was $63 thousand and $180 thousand related to the allowance for unfunded commitments compared to $87 thousand and $63 thousand towards the allowance for unfunded commitments for the three and six months ended June 30, 2024.

DEPOSITS

The Corporation's sources of funds are deposits, borrowings, amortization and repayment of loan principal, interest earned on or maturation of investment securities, and funds provided from operations. The Corporation considers deposits to be its primary source of funding in support of growth in assets.

At June 30, 2025, total deposits were $5.5 billion, reflecting an increase of $95.7 million, or 1.78%, from December 31, 2024. The increase in deposit balances was driven by higher retail and municipal deposits, coupled with growth in retail time deposits.

The following table sets forth the average balances of and the average rates paid on deposits for the periods indicated.

At June 30, 2025, the average deposit balance per account for the Bank was approximately $34 thousand, which has remained stable at this level for an extended period.

The following table presents additional information about our June 30, 2025 and December 31, 2024 deposits:

At June 30, 2025, the total estimated uninsured deposits for the Bank were approximately $1.6 billion, or approximately 28.62% of total Bank deposits. However, when excluding $103.5 million of affiliate company deposits and $509.0 million of pledged-investment collateralized deposits, the adjusted amount and percentage of total estimated uninsured deposits was approximately $982.0 million, or approximately 17.63% of total Bank deposits as of June 30, 2025.

At December 31, 2024, the total estimated uninsured deposits for the Bank were approximately $1.5 billion, or approximately 27.71% of total Bank deposits. However, when excluding affiliate company deposits of $101.9 million and pledged-investment collateralized deposits of $429.0 million, the adjusted amount and percentage of total estimated uninsured deposits was approximately $986.0 million, or approximately 18.01% of total Bank deposits as of December 31, 2024.

Scheduled maturities of time deposits not covered by deposit insurance at June 30, 2025 were as follows:

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity measures an organization's ability to meet its cash obligations as they come due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds.

The Corporation's expected material cash requirements for the twelve months ended June 30, 2026 and thereafter consist of withdrawals by depositors, credit commitments to borrowers, shareholder dividends, share repurchases, operating expenses, and capital expenditures that are pursuant to the Corporation's strategic initiatives. The Corporation expects to satisfy these short-term and long-term cash requirements through deposit growth, principal and interest payments from loans and investment securities, maturing loans and investment securities, as well as by maintaining access to wholesale funding sources.

The objective of the Corporation's liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Corporation's operations and to meet cash obligations and other commitments on a timely basis and at a reasonable cost. The Corporation seeks to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on its balance sheet. The Corporation's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets.

Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, including the Federal Reserve, and AFS debt securities. Liability liquidity is provided by access to funding sources which include core deposits, correspondent banks and other wholesale funding sources.

The Corporation's liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in the Corporation's asset/liability management process. The Corporation regularly models liquidity stress scenarios to assess potential liquidity outflows or potential funding shortfalls resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into the Corporation's contingency funding plan, which provides the basis for the identification of its liquidity needs.

At June 30, 2025, the Corporation's cash and cash equivalents position was approximately $425.4 million, including liquidity of $332.2 million held at the Federal Reserve. These excess funds, when combined with $4.6 billion in (i) available borrowing capacity from the FHLB and the Federal Reserve, and (ii) available unused commitments from brokered deposit sources and other third-party funding channels, including previously established lines of credit from correspondent banks, result in the total available liquidity sources for the Corporation to be approximately 5.1 times the estimated amount of adjusted uninsured deposit balances discussed above.

The following table summarizes the Corporation's net available liquidity and borrowing capacities as of June 30, 2025:

(1) Availability contingent on the FHLB activity-based stock ownership requirement

(2) Includes access to discount window and BIC program

(3) Availability contingent on internal borrowing guidelines

(4) Availability contingent on correspondent bank approvals at time of borrowing

As of June 30, 2025, management is not aware of any events that are reasonably likely to have a material adverse effect on the Corporation's liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on the Corporation.

In the ordinary course of business, the Corporation has entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to condensed consolidated financial statements elsewhere in this report for the expected timing of such payments as of June 30, 2025. The Corporation's material contractual obligations as of June 30, 2025 consisted of (i) long-term borrowings - Note 7, "Borrowings," (ii) operating leases - Note 5, "Leases," (iii) time deposits with stated maturity dates - Note 6, "Deposits," and (iv) commitments to extend credit and standby letters of credit - Note 9, "Off-Balance Sheet Commitments and Contingencies."

Shareholders' Equity, Capital Ratios and Metrics

As of June 30, 2025, the Corporation's total shareholders' equity was $637.3 million, representing an increase of $26.6 million, or 4.35%, from December 31, 2024, primarily due to an increase in the Corporation's retained earnings (net income, partially offset by the common and preferred stock dividends paid) and a decrease in accumulated other comprehensive loss primarily from the after-tax impact of temporary unrealized valuation changes in the Corporation's available-for-sale portfolio.

The Corporation has complied with the standards of capital adequacy mandated by government regulations. Bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category (0% for the lowest risk assets and increasing for each tier of higher risk assets) is assigned to each asset on the balance sheet.

As of June 30, 2025, all of the Corporation's capital ratios exceeded regulatory "well-capitalized" levels. The Corporation's capital ratios and book value per common share at June 30, 2025 and December 31, 2024 were as follows:

(1) Tangible common equity, tangible assets, book value per common share (excluding merger costs), and tangible book value per common share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets and preferred equity from the calculation of shareholders' equity. Tangible assets is calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets. Tangible book value per common share is calculated by dividing tangible common equity by the number of shares outstanding. The Corporation believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. A reconciliation of these non-GAAP financial measures is provided in the "Non-GAAP Financial Measures" section in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

At June 30, 2025, the Corporation's pre-tax net unrealized losses on available-for-sale and held-to-maturity securities totaled approximately $55.6 million, or 8.73% of total shareholders' equity, compared to $74.8 million, or 12.25% of total shareholders' equity at December 31, 2024. The change in unrealized losses was primarily due to changes in the yield curve during the first and second quarter of 2025 compared to 2024, coupled with the Corporation's scheduled bond maturities, which were all realized at par. Importantly, all regulatory capital ratios for the Corporation would exceed regulatory "well-capitalized" levels as of both June 30, 2025 and December 31, 2024 if the net unrealized losses at the respective dates were fully recognized. Additionally, the Corporation continued to maintain excess liquidity totaling approximately $102.2 million of liquid funds at June 30, 2025, which more than covers the $55.6 million in combined available-for-sale and held-to-maturity unrealized losses on investments held primarily in its wholly-owned banking subsidiary, as an immediately available source of contingent capital to be down-streamed to the Bank, if necessary.

AVERAGE BALANCES, INTEREST RATES AND YIELDS

The loans receivable categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans receivable. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. See Note 4, "Loans Receivable and Allowance for Credit Losses," for more information about pooling of loans receivable for the allowance for credit losses.

The following table presents average balances of certain measures of our financial condition and net interest margin for the three months ended June 30, 2025 and 2024:

(1) Includes unamortized discounts and premiums.

(2) Average yields are stated on a fully taxable equivalent basis (calculated using statutory rates of 21%) resulting from tax-free municipal securities in the investment portfolio and tax-free municipal loans in the commercial loan portfolio. The taxable equivalent adjustment to net interest income for the three months ended June 30, 2025 and 2024 was $265 thousand and $214 thousand, respectively.

(3) Average loans receivable outstanding includes the average balance outstanding of all nonaccrual loans. Loans receivable consist of the average of total loans receivable less average unearned income. In addition, loans receivable interest income consists of loans receivable fees, including PPP deferred processing fees.

(4) Average balance is computed using the fair value of AFS securities and amortized cost of HTM securities. Average yield has been computed using amortized cost average balance for AFS and HTM securities. The adjustment to the average balance for securities in the calculation of average yield for the three months ended June 30, 2025 and 2024 was $(42.6) million and $(59.2) million, respectively.

(1) Includes unamortized discounts and premiums.

(2) Average yields are stated on a fully taxable equivalent basis (calculated using statutory rates of 21%) resulting from tax-free municipal securities in the investment portfolio and tax-free municipal loans in the commercial loan portfolio. The taxable equivalent adjustment to net interest income for the six months ended June 30, 2025 and 2024 was $525 thousand and $431 thousand, respectively.

(3) Average loans receivable outstanding includes the average balance outstanding of all nonaccrual loans. Loans receivable consist of the average of total loans receivable less average unearned income. In addition, loans receivable interest income consists of loans receivable fees, including PPP deferred processing fees.

(4) Average balance is computed using the fair value of AFS securities and amortized cost of HTM securities. Average yield has been computed using amortized cost average balance for AFS and HTM securities. The adjustment to the average balance for securities in the calculation of average yield for the six months ended June 30, 2025 and 2024 was $(45.3) million and $(57.2) million, respectively.

VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

The following table presents the change in net interest income for the three months ended June 30, 2025 and 2024:

(1) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to volume changes.

(2) Changes in interest income on tax-exempt securities and loans receivable are presented on a fully taxable-equivalent basis, using the Corporation's marginal federal income tax rate of 21% for the three months ended June 30, 2025 and June 30, 2024.

(3) Includes loans held for sale.

The following table presents the change in net interest income for the six months ended June 30, 2025 and 2024:

(1) Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to volume changes.

(2) Changes in interest income on tax-exempt securities and loans receivable are presented on a fully taxable-equivalent basis, using the Corporation's marginal federal income tax rate of 21% for the six months ended June 30, 2025 and June 30, 2024.

(3) Includes loans held for sale.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2025 and 2024

OVERVIEW

Net income available to common shareholders ("earnings") was $12.9 million, or $0.61 per diluted share, for the three months ended June 30, 2025. Excluding after-tax merger costs, earnings were $13.2 million, or $0.63 per diluted share, for the three months ended June 30, 2025. The Corporation's earnings for the three months ended June 30, 2024 were $11.9 million, or $0.56 per diluted share. Excluding after-tax merger costs, the increase in diluted earnings per share comparing the three months ended June 30, 2025 to the three months ended June 30, 2024 was primarily due to an increase in net interest income and non-interest income, partially offset by increases in non-interest expense and the provision for credit losses.

Annualized return on average equity was 8.83% for the three months ended June 30, 2025. Excluding after-tax merger costs, annualized return on average equity was 9.06% for the three months ended June 30, 2025, compared to 8.94% for the three months ended June 30, 2024. Annualized return on average tangible common equity, a non-GAAP measure, was 9.71% for the three months ended June 30, 2025. Excluding after-tax merger costs, annualized return on average tangible common equity was 9.98% for the three months ended June 30, 2025, compared to 9.93% for the three months ended June 30, 2024.

The Corporation's efficiency ratio was 64.73% for the three months ended June 30, 2025. Excluding merger costs, the efficiency ratio on fully tax-equivalent basis, a non-GAAP measure, was 63.50% for the three months ended June 30, 2025, compared to 65.20% for the three months ended June 30, 2024.

NET INTEREST INCOME

Net interest income was $52.2 million for the three months ended June 30, 2025, compared to $45.7 million for the three months ended June 30, 2024. When comparing the second quarter of 2025 to the second quarter of 2024, the increase in net interest income of $6.5 million, or 14.17%, was primarily due to an increase in the Corporation's interest income as a result of the increase in investments and total loans outstanding quarter over quarter coupled with a decrease in total interest expense as a result of lower interest rates on deposits.

Net interest margin was 3.60% and 3.36% for the three months ended June 30, 2025 and June 30, 2024, respectively. Net interest margin on a fully tax-equivalent basis, a non-GAAP measure, was 3.59% and 3.34% for the three months ended June 30, 2025 and June 30, 2024, respectively.

The yield on earning assets of 5.89% for the three months ended June 30, 2025 was unchanged from June 30, 2024, primarily attributable to the net impact of declining interest rates on variable and floating-rate loans as a result of the Federal Reserve decreases since mid-September 2024, coupled with changes in the yield curve.

PROVISION FOR CREDIT LOSSES

The provision for credit losses was $4.3 million and $2.6 million for the three months ended June 30, 2025 and June 30, 2024, respectively.

Management believes the charges to the provision for credit losses for the three months ended June 30, 2025 were appropriate and the allowance for credit losses was adequate to absorb current expected credit losses in the loan portfolio at June 30, 2025.

NON-INTEREST INCOME

Total non-interest income was $9.0 million for the three months ended June 30, 2025 compared to $8.9 million for the three months ended June 30, 2024. The increase during the three months ended June 30, 2025, compared to the three months ended June 30, 2024, was primarily due to increases in bank owned life insurance (death benefit) and an improvement in unrealized gains on equity securities, partially offset by lower other charges and fees, coupled with lower pass-through income SBICs.

NON-INTEREST EXPENSE

For the three months ended June 30, 2025, total non-interest expense was $39.6 million, compared to $36.0 million for the three months ended June 30, 2024. Excluding merger costs, the increase from the three months ended June 30, 2024 was primarily a result of higher salaries and benefits reflecting increased incentive compensation accruals and retirement plan contributions. Additionally, occupancy expense increased, primarily due to higher rent expense related to three additional full-service office locations, coupled with an increase in card processing and interchange expenses and other non-interest expenses (timing of business development expenses). These increases were partially offset by a decline in legal expenses. In addition, card processing and interchange expense for the second quarter of 2025 was $1.3 million, or 55.00% of card processing and interchange income, compared to $0.9 million, or 40.15% of card processing and interchange income for the second quarter of 2024.

INCOME TAX EXPENSE

Income tax expense was $3.3 million, representing a 19.10% effective tax rate, compared to $3.0 million, representing a 19.03% effective tax rate for the three months ended June 30, 2025 and 2024, respectively.

RESULTS OF OPERATIONS

Six Months Ended June 30, 2025 and 2024

OVERVIEW

Earnings were $23.3 million, or $1.10 per diluted share, for the six months ended June 30, 2025. Excluding after-tax merger costs, earnings were $25.1 million, or $1.19 per diluted share, for the six months ended June 30, 2025, compared to earnings of $23.4 million, or $1.11 per diluted share, for the six months ended June 30, 2024. The year-to-date increase of $1.7 million, or 7.37%, and $0.08 per diluted share, or 7.21% was a result of an increase in net interest income partially offset by a decrease in non-interest income and increases in non-interest expense and the provision for credit losses.

Annualized return on average equity was 8.18% for the six months ended June 30, 2025. Excluding after-tax merger costs, annualized return on average equity was 8.78% for the six months ended June 30, 2025 compared to 8.86% for the six months ended June 30, 2024. Annualized return on average tangible common equity, a non-GAAP measure, was 8.95% for the six months ended June 30, 2025. Excluding after-tax merger costs, annualized return on average tangible common equity was 9.66% for the six months ended June 30, 2025, compared to 9.85% for the six months ended June 30, 2024.

The Corporation's efficiency ratio was 68.27% for the six months ended June 30, 2025, and 67.55% on a fully tax-equivalent basis, a non-GAAP measure. Excluding merger costs, the efficiency ratio on a fully tax-equivalent basis, a non-GAAP measure, was 65.97%, compared to 66.74% for the six months ended June 30, 2024. The year-over-year decrease was primarily driven by higher net interest income, partially offset by higher non-interest expense.

NET INTEREST INCOME

Net interest income was $100.6 million for the six months ended June 30, 2025, compared to $90.9 million for the six months ended June 30, 2024. The increase of $9.7 million, or 10.65%, was due to investment and loan growth, higher average balance of interest-bearing deposits with the Federal Reserve, and a decrease in rates on deposits.

Net interest margin was 3.49% and 3.38% for the six months ended June 30, 2025 and 2024, respectively. Net interest margin on a fully tax-equivalent basis, a non-GAAP measure, was 3.48% and 3.36% for the six months ended June 30, 2025 and 2024, respectively.

The yield on earning assets of 5.81% for the six months ended June 30, 2025 decreased 4 basis points from June 30, 2024, primarily as a result of the lower loan yields on variable and floating-rate loans following the three Federal Reserve rate decreases totaling 100 basis points since mid-September 2024.

PROVISION FOR CREDIT LOSSES

The provision for credit losses was $5.9 million for the six months ended June 30, 2025, compared to $3.9 million for the six months ended June 30, 2024. The $2.0 million increase in the provision expense for six months ended June 30, 2025 compared to the six months ended June 30, 2024 was primarily a result of the increased net loan charge-offs and higher loan growth.

Management believes the charges to the provision for credit losses for the six months ended June 30, 2025 were appropriate and the allowance for credit losses was adequate to absorb current expected credit losses in the loan portfolio at June 30, 2025.

NON-INTEREST INCOME

Total non-interest income was $17.5 million for the six months ended June 30, 2025, compared to $17.8 million for the six months ended June 30, 2024. This decrease was primarily due to lower other charges and fees, coupled with lower pass-through income from SBICs, partially offset by an increase in unrealized gains on equity securities, bank owned life insurance (death benefit) and card processing and interchange income.

NON-INTEREST EXPENSE

For the six months ended June 30, 2025, total non-interest expense was $80.7 million. Excluding merger costs, total non-interest expense was $78.8 million, compared to $73.4 million for the six months ended June 30, 2024. Excluding merger costs, the increase of $5.4 million, or 7.30%, from the six months ended June 30, 2024 was primarily a result of an increase in salaries and benefits, occupancy expense, card processing and interchange expense, state and local taxes and technology expenses, partially offset by a decrease in legal fees, advertising and FDIC insurance premiums. In addition, total non-interest expenses increased primarily due to an increase in personnel costs related to annual merit increases and growth in the Corporation's staff and new offices in its expansion markets, while the increase in occupancy expense was primarily due to higher rent expense related to three additional full-service office locations. Additionally, increases in card processing and interchange expenses and other non-interest expenses were due to timing of business development expenses.

INCOME TAX EXPENSE

Income tax expense was $6.2 million, representing an 19.49% effective tax rate, compared to $5.9 million, representing an 18.70% effective tax rate for the six months ended June 30, 2025 and 2024, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business, the Corporation enters into various transactions, which, in accordance with GAAP, are not included in its condensed consolidated balance sheets. The Corporation enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the condensed consolidated balance sheets. For further information, see Note 9, "Off-Balance Sheet Commitments and Contingencies," to the condensed consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

The Corporation's accounting and reporting policies are in accordance with GAAP and conform to general practices within the financial services industry. Accounting and reporting practices for the allowance for credit losses and the fair value of assets acquired and liabilities assumed in connection with business combinations, including the associated goodwill and intangibles that was recorded, required the use of material estimates. Application of assumptions different than those used by management could result in material changes in the Corporation's financial position or results of operations. Note 1, "Summary of Significant Accounting Policies," and Note 3, "Loans Receivable and Allowance for Credit Losses," of the 2024 Form 10-K provide additional detail with regard to the Corporation's accounting for the allowance for credit losses and loans receivable. There have been no other significant changes in the application of accounting policies since December 31, 2024.

NON-GAAP FINANCIAL MEASURES

The following tables reconcile the non-GAAP financial measures to their most directly comparable measures under GAAP.

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74

NON-GAAP FINANCIAL MEASURES (continued)

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NON-GAAP FINANCIAL MEASURES (continued)

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76

NON-GAAP FINANCIAL MEASURES (continued)

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77

NON-GAAP FINANCIAL MEASURES (continued)

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78

NON-GAAP FINANCIAL MEASURES (continued)

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79

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned "Forward-Looking Statements and Factors that Could Affect Future Results" included in this report, and other cautionary statements set forth elsewhere in this report.

As a financial institution, the Corporation's primary source of market risk exposure is interest rate risk, which influences fluctuations in the Corporation's future earnings due to changes in interest rates. This risk is closely correlated to the repricing characteristics of the Corporation's portfolio of assets and liabilities, with each asset or liability repricing either at maturity or during the instrument's life cycle.

The Corporation's interest rate risk measurement philosophy focuses on maintaining an appropriate balance between the theoretical and the practical, especially given that the primary objective of the Corporation's overall asset/liability management process is to assess the level of interest rate risk in the Corporation's balance sheet. Therefore, the Corporation models a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios. The collective impact of these scenarios is designed to enable the Corporation to understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.

The Corporation has designed its interest rate risk measurement activities to include the following core elements: (i) interest rate ramps and shocks, (ii) parallel and non-parallel yield curve shifts, and (iii) a set of alternative rate scenarios, the nature of which change based upon prevailing market conditions.

The Corporation's primary tools in managing Interest Rate Risk ("IRR") are income simulation models. The income simulation models are utilized to quantify the potential impact of changing interest rates on earnings and to identify expected earnings trends given longer-term rate cycles. Standard gap reports are also utilized to provide supporting detailed information.

The Corporation also recognizes that a sustained environment of higher/lower interest rates will affect the underlying value of the Corporation's assets, liabilities and off-balance sheet instruments since the present value of their future cash flows (and the cash flows themselves) change when interest rates change.

IRR considerations include inherent assumptions and estimates, including the maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturing deposit sensitivity, and loan and deposit pricing. These assumptions are subject to uncertainty due to the timing, magnitude, and frequency of rate changes, market conditions, and management strategies.

The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or "shock," in the yield curve and subjective adjustments in deposit pricing might have on the Corporation's projected net interest income over the next 12 months. This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 months. The changes to net interest income shown below are in compliance with the Corporation's policy guidelines.

At June 30, 2025, the Corporation has approximately $2.5 billion in outstanding loans receivable balances that are rate sensitive balances over the next twelve months.

CONTROLS AND PROCEDURES

The Corporation's management, under the supervision of and with the participation of the Corporation's Principal Executive Officer and Principal Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation's disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, management, including the Principal Executive Officer and Principal Financial Officer, have concluded that, as of the end of such period, the Corporation's disclosure controls and procedures are effective to provide reasonable assurance that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.

There was no significant change in the Corporation's internal control over financial reporting that occurred during the quarter ended June 30, 2025 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION