# Orrstown Financial Services Inc: Form 10-Q for the period ended Mar 31, 2024

- Company: [Orrstown Financial Services Inc](/companies/orrf.md) (CIK 826154)
- Form: 10-Q
- Filed: 2024-05-09
- Accepted by EDGAR: May 9, 2024, 16:03 ET
- Period: 2024-03-31
- Accession: 0000826154-24-000096
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/826154/000082615424000096/orrf-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/826154/000082615424000096/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $15.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $2.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $8.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.81 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.82 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 10,482,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $12.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $63.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2024-01-01 to 2024-03-31 | $2.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2024-03-31 | $3.18bn | us-gaap:Assets |
| Total liabilities | at 2024-03-31 | $2.91bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $271.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 90,733 characters.

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of Orrstown and should be read in conjunction with the preceding unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements and notes thereto for the year ended December 31, 2023, included in our Annual Report on Form 10-K filed with the SEC on March 14, 2024. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated.

### Overview

The Company, headquartered in Shippensburg, Pennsylvania, is a one-bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiary, the Bank. At March 31, 2024, the Company had total assets of $3.2 billion, total liabilities of $2.9 billion and total shareholders’ equity of $271.7 million.

For the three months ended March 31, 2024 and 2023, the Company had net income of $8.5 million and $9.2 million, respectively. Diluted earnings per share were $0.81 and $0.87 for the three months ended March 31, 2024 and 2023, respectively. The Company is focused on limiting net interest margin compression in an elevated interest rate environment while generating prudent growth. On December 12, 2023, the Company entered into an agreement and plan to merge with Codorus Valley. For the three months ended March 31, 2024, the Company incurred merger-related expenses of $672 thousand, which were included in non-interest expenses in the unaudited condensed consolidated statements of income.

### Cautionary Note About Forward-Looking Statements

Certain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications, from time to time, that contain such statements. Such forward-looking statements reflect the current views of the Company's management with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are statements that include projections, predictions, expectations, estimates or beliefs about events or results or otherwise are not statements of historical facts, many of which, by their nature, are inherently uncertain and beyond the Company's control, and include, but are not limited to, statements related to new business development, new loan opportunities, growth in the balance sheet and fee-based revenue lines of business, merger and acquisition activity, cost savings initiatives, reducing risk assets, and mitigating losses in the future. Accordingly, the Company cautions you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements and there can be no assurances that the Company will achieve the desired level of new business development and new loans, growth in the balance sheet and fee-based revenue lines of business, successful merger and acquisition activity and cost savings initiatives, and continued reductions in risk assets or mitigate losses in the future. Factors which could cause the actual results to differ from those expressed or implied by the forward-looking statements include, but are not limited to, the following: general economic conditions (including inflation and concerns about liquidity) on a national basis or in the local markets in which the Company operates; ineffectiveness of the Company's strategic growth plan due to changes in current or future market conditions; changes in interest rates; failure to complete the merger with Codorus Valley or unexpected delays related to the merger or either party's inability to satisfy closing conditions required to complete the merger; certain restrictions during the pendency of the proposed transactions with Codorus Valley that may impact the parties' abilities to pursue certain business opportunities or strategic transactions; the diversion of management's attention from ongoing business operations and opportunities; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; changes in consumer behavior due to changing political, business and economic conditions, or legislative or regulatory initiatives; changes in laws and regulations; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; the demand for our products and services; deteriorating economic conditions; geopolitical tensions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; expenses associated with litigation and legal proceedings; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, 2023, and our Quarterly Reports on Form 10-Q under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

and in other filings made with the SEC. The statements are valid only as of the date hereof and we disclaim any obligation to update this information.

### Economic Climate, Inflation and Interest Rates

Preliminary real GDP for the first quarter of 2024 increased 1.6% on an annualized basis, which represents a decline from 3.4% during the fourth quarter of 2023 and an increase from 1.1% during the first quarter of 2023. The decrease in preliminary GDP during the first quarter of 2024 compared to the fourth quarter of 2023 reflected a reduction in consumer spending, exports and government spending partially offset by an increase in demand and spending in residential fixed investments. Fluctuations in real GDP in recent periods, due to inflation, credit conditions and geopolitical tensions, continue to create uncertainty in the current economic environment. The personal consumption expenditures ("PCE") price index increased by 3.4% in the first quarter of 2024 compared to an increase of 1.8% for fourth quarter of 2023 and 4.2% for the first quarter of 2023. Excluding food and energy prices, the PCE price index increased by 3.7% in the first quarter of 2024 compared to 2.0% in the fourth quarter of 2023 and 4.9% in the first quarter of 2023.

The national unemployment rate increased slightly to 3.8% in March 2024 compared to 3.7% in December 2023 and 3.5% in March 2023. Within the Company's geographic footprint, the unemployment rate has decreased considerably in Pennsylvania from 4.2% in March 2023 to 3.4% in March 2024 and decreased in Maryland from 2.7% in March 2023 to 2.5% in March 2024. These decreases in state-wide unemployment rates are consistent with those experienced by the counties in which the Company operates branches and other corporate offices. There were notable job gains nationally in healthcare, construction and government during the first quarter of 2024.

At March 31, 2024, the 10-year Treasury bond yield was 4.62%, a considerable increase from 3.88% at December 31, 2023 and 3.48% at March 31, 2023 due to current economic conditions influenced by the labor market and inflationary pressures. In an attempt to combat the impact of inflation, the current level in the consumer price index and geopolitical tensions, the FOMC has increased the Fed Funds rate by 525 basis points since March 2022. In December of 2023, the FOMC signaled its intention to reduce interest rates in 2024, contingent upon inflation settling at its 2.0% target. However, during the March 2024 meetings, the FOMC stated it is not appropriate yet to reduce the Fed Funds rate until there is greater certainty in the economic outlook and inflation trending towards the 2.0% target.

The majority of the assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.

### Critical Accounting Estimates

The Company’s accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory authorities and general practices within the financial services industry in which it operates. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, and assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date and through the date the financial statements are filed with the SEC. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting estimates include accounting for credit losses and valuation methodologies. Accordingly, these critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023. Significant accounting policies and any changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," in our Annual Report on Form 10-K for the year ended December 31, 2023.

### RESULTS OF OPERATIONS

### Three months ended March 31, 2024 compared with three months ended March 31, 2023

### Summary

Net income totaled $8.5 million for the three months ended March 31, 2024 compared to $9.2 million for the same period in 2023. Diluted earnings per share for the three months ended March 31, 2024 totaled $0.81 compared to $0.87 for the three months ended March 31, 2023. For the three months ended March 31, 2024, the Company incurred merger-related expenses of $672 thousand, which were included in non-interest expenses. Excluding the merger-related expenses incurred during the first quarter of 2024, net income and diluted earnings per share totaled $9.2 million and $0.88, respectively, for the three months ended March 31, 2024. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Net interest income totaled $26.9 million for the three months ended March 31, 2024 compared to $26.3 million for the three months ended March 31, 2023. This increase in net interest income reflected the impact of $1.6 million of interest recovered from the payoff of a commercial real estate loan on nonaccrual status in the three months ended March 31, 2024, partially offset by the impact of an increase in cost of funds and an increase in interest-bearing liabilities.

The provision for credit losses on loans and off-balance sheet reserves totaled $298 thousand and $729 thousand for the three months ended March 31, 2024 and 2023, respectively.

Noninterest income totaled $6.6 million and $6.1 million for the three months ended March 31, 2024 and 2023, respectively. The increase of $552 thousand was due to an increase in wealth management income of $355 thousand and an increase in swap fee income of $199 thousand.

Noninterest expenses totaled $22.5 million for the three months ended March 31, 2024 compared to $20.3 million for the three months ended March 31, 2023. The increase of $2.2 million is primarily due to an increase in salaries and employee benefits expense of $1.6 million and merger-related expenses of $672 thousand.

Income tax expense totaled $2.2 million for both the three months ended March 31, 2024 and 2023, respectively. The Company's effective tax rate was 20.6% for the three months ended March 31, 2024 compared to 19.6% for the three months ended March 31, 2023.

### Net Interest Income

Net interest income increased by $587 thousand from $26.3 million for the three months ended March 31, 2023 to $26.9 million for the three months ended March 31, 2024. Interest income on loans increased by $7.5 million, from $28.7 million to $36.2 million. Interest income on investment securities increased by $226 thousand, from $5.2 million to $5.5 million, for the three months ended March 31, 2024 compared to the same period in the prior year. Total interest expense increased by $7.8 million from $8.0 million for the three months ended March 31, 2023 to $15.8 million for the three months ended March 31, 2024. Interest expense on deposits increased by $7.3 million from $6.2 million for the three months ended March 31, 2023 to $13.5 million for the three months ended March 31, 2024. Interest expense on borrowings increased by $472 thousand from $1.8 million from the three months ended March 31, 2023 to $2.3 million for the three months ended March 31, 2024.

The following table presents net interest income, net interest spread and net interest margin for the three months ended March 31, 2024 and 2023 on a taxable-equivalent basis:

| Assets | Three Months Ended March 31, 2024 Average Balance | Taxable- Equivalent Interest | Taxable- Equivalent Rate | Three Months Ended March 31, 2023 Average Balance | Taxable- Equivalent Interest | Taxable- Equivalent Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Federal funds sold & interest-bearing bank balances | **$74,523** | **$956** | **5.16%** | $29,599 | $298 | 4.08% |
| Investment securities (1)(2) | **519,851** | **5,694** | **4.39** | 525,685 | 5,465 | 4.18 |
| Loans (1)(3)(4)(5) | **2,308,103** | **36,382** | **6.34** | 2,180,224 | 28,844 | 5.36 |
| Total interest-earning assets | **2,902,477** | **43,032** | **5.96** | 2,735,508 | 34,607 | 5.12 |
| Other assets | **196,295** |  |  | 197,620 |  |  |
| Total | **$3,098,772** |  |  | $2,933,128 |  |  |
| **Liabilities and Shareholders’ Equity** |  |  |  |  |  |  |
| Interest-bearing demand deposits | **$1,570,622** | **9,192** | **2.35** | $1,503,421 | 4,862 | 1.31 |
| Savings deposits | **170,005** | **144** | **0.34** | 219,408 | 133 | 0.25 |
| Time deposits | **428,443** | **4,180** | **3.92** | 275,880 | 1,207 | 1.78 |
| Total interest-bearing deposits | **2,169,070** | **13,516** | **2.51** | 1,998,709 | 6,202 | 1.26 |
| Securities sold under agreements to repurchase and federal funds purchased | **12,010** | **25** | **0.85** | 13,868 | 25 | 0.72 |
| FHLB advances and other borrowings | **137,505** | **1,474** | **4.31** | 106,434 | 1,252 | 4.77 |
| Subordinated notes | **32,100** | **754** | **9.45** | 32,033 | 504 | 6.29 |
| Total interest-bearing liabilities | **2,350,685** | **15,769** | **2.70** | 2,151,044 | 7,983 | 1.50 |
| Noninterest-bearing demand deposits | **417,469** |  |  | 495,562 |  |  |
| Other liabilities | **62,329** |  |  | 52,630 |  |  |
| Total liabilities | **2,830,483** |  |  | 2,699,236 |  |  |
| Shareholders’ equity | **268,289** |  |  | 233,892 |  |  |
| Total | **$3,098,772** |  |  | $2,933,128 |  |  |
| Taxable-equivalent net interest income / net interest spread |  | **27,263** | **3.26%** |  | 26,624 | 3.62% |
| Taxable-equivalent net interest margin |  |  | **3.77%** |  |  | 3.94% |
| Taxable-equivalent adjustment |  | **(382)** |  |  | (330) |  |
| Net interest income |  | **$26,881** |  |  | $26,294 |  |

| NOTES TO ANALYSIS OF NET INTEREST INCOME: |  |
| ---: | --- |
| (1) | Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate. |
| (2) | Average balance of investment securities is computed at fair value. |
| (3) | Average balances include nonaccrual loans. |
| (4) | Interest income on loans includes prepayment and late fees, where applicable. |
| (5) | Interest income on loans includes interest recovered of $1.6 million from the payoff of a commercial real estate loan on nonaccrual status in the three months ended March 31, 2024. |

49

The following table presents changes in net interest income on a taxable-equivalent basis for the three months ended March 31, 2024 and 2023 by rate and volume components.

*(in thousands)*

| Interest Income | Three Months Ended March 31, 2024 Versus 2023 Increase (Decrease) Due to Change In Average Volume | Average Rate | Total |
| --- | ---: | ---: | ---: |
| Federal funds sold and interest-bearing bank balances | **$455** | **$203** | **$658** |
| Taxable securities | **(74)** | **288** | **214** |
| Tax-exempt securities | **10** | **5** | **15** |
| Loans | **1,641** | **5,897** | **7,538** |
| Total interest income | **2,032** | **6,393** | **8,425** |
| **Interest Expense** |  |  |  |
| Interest-bearing demand deposits | **263** | **4,067** | **4,330** |
| Savings deposits | **(30)** | **41** | **11** |
| Time deposits | **673** | **2,300** | **2,973** |
| Total interest-bearing deposits | **906** | **6,408** | **7,314** |
| Securities purchases under agreements to repurchase and federal funds purchased | **(3)** | **3** | **—** |
| FHLB advances and other borrowings | **364** | **(142)** | **222** |
| Subordinated notes | **1** | **249** | **250** |
| Total interest expense | **1,268** | **6,518** | **7,786** |
| **Taxable-Equivalent Net Interest Income** | **$764** | **$(125)** | **$639** |

Net interest income on a taxable-equivalent basis increased by $639 thousand to $27.3 million for the three months ended March 31, 2024 from $26.6 million for the three months ended March 31, 2023. The Company's net interest spread decreased by 36 basis points from 3.62% for the three months ended March 31, 2023 to 3.26% for the three months ended March 31, 2024 primarily due to the increase in cost of funds.

Taxable-equivalent net interest margin decreased by 17 basis points to 3.77% for the three months ended March 31, 2024 from 3.94% for the three months ended March 31, 2023. The recognition of interest income previously applied to principal of $1.6 million from the payoff of a commercial real estate loan on nonaccrual status contributed 21 basis points to the Company's net interest margin during the three months ended March 31, 2024. The taxable-equivalent yield on interest-earning assets increased by 84 basis points from 5.12% for the three months ended March 31, 2023 to 5.96% for the three months ended March 31, 2024, reflecting the benefit of both the deployment of cash into higher yielding loans and investment securities and the impact of higher interest rates on these interest-earning assets. This increase in yield on interest earning assets was more than offset by the increase of 120 basis points in the cost of interest-bearing liabilities from 1.50% to 2.70% due to increased funding costs on deposits due to higher market interest rates and competitive pressures.

Average loans increased by $127.9 million to $2.3 billion for the three months ended March 31, 2024 compared to $2.2 billion for the three months ended March 31, 2023. Average investment securities decreased by $5.8 million from $525.7 million for the three months ended March 31, 2023 to $519.9 million for the three months ended March 31, 2024. Average interest-bearing liabilities increased by $199.6 million to $2.4 billion for the three months ended March 31, 2024 from $2.2 billion for the three months ended March 31, 2023.

The yield on loans increased by 98 basis points to 6.34% for the three months ended March 31, 2024 compared to 5.36% for the three months ended March 31, 2023. Taxable-equivalent interest income earned on loans increased by $7.5 million due to higher interest rates, which increased interest income by $5.9 million, and increases in the average balances of loans, which increased interest income by $1.6 million.

The average balance of commercial loans, excluding SBA PPP loan forgiveness activity, increased by $93.5 million from $1.7 billion for the three months ended March 31, 2023 to $1.8 billion for the three months ended March 31, 2024. SBA PPP loans, net of deferred fees and costs, averaged $12.5 million for the three months ended March 31, 2023 compared to $5.6 million for the three months ended March 31, 2024. This decrease was due to forgiveness of SBA PPP loans. Average residential mortgage loans increased by $40.1 million from $233.3 million during the three months ended March 31, 2023 to $273.4 million during the three months ended March 31, 2024, primarily due to mortgages originated for the portfolio. Average home equity loans increased by $5.1 million from $186.9 million for the three months ended March 31, 2023 to $192.0 million for the three months ended March 31, 2024. Average installment and other consumer loans decreased by $4.0 million from $21.4 million for the three months ended March 31, 2023 to $17.4 million for the three months ended March 31, 2024.

Accretion of purchase accounting adjustments included in interest income was $147 thousand and $239 thousand for the three months ended March 31, 2024 and 2023, respectively. The decrease in accretion was partially due to a decline in accelerated accretion from acquired loan payoffs or significant loan repayments. Accelerated accretion, during the three months ended March 31, 2024 and 2023, totaled $66 thousand and $102 thousand, respectively. Prepayment income on commercial loans decreased by $15 thousand from $71 thousand for the three months ended March 31, 2023 to $56 thousand for the three months ended March 31, 2024. For the three months ended March 31, 2024, interest income on loans includes $14 thousand of interest and net deferred fee income associated with SBA PPP loans compared to $81 thousand of such interest and fee income for the three months ended March 31, 2023.

Interest income on investment securities on a tax-equivalent basis increased by $229 thousand to $5.7 million for the three months ended March 31, 2024 from $5.5 million for the three months ended March 31, 2023, with the taxable equivalent yield increasing from 4.18% for the three months ended March 31, 2023 to 4.39% for the three months ended March 31, 2024. The 21 basis point increase reflected the impact from the higher interest rates. The average balance of investment securities decreased by $5.8 million to $519.9 million for the three months ended March 31, 2024 from $525.7 million for the three months ended March 31, 2023 due primarily to paydowns and the call of a non-agency CMO totaling $10.0 million, partially offset by purchase activity.

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $658 thousand to $1.0 million for the three months ended March 31, 2024 from $298 thousand for the three months ended March 31, 2023. The average balance of federal funds sold and interest-bearing bank balances increased by $44.9 million from $29.6 million for the three months ended March 31, 2023 to $74.5 million, which resulted in an increase in interest income of $455 thousand. Since March 31, 2023, the FOMC has increased the Federal Funds rate by 50 basis points, which impacted interest income by $203 thousand during the three months ended March 31, 2024.

Interest expense on interest-bearing liabilities increased by $7.8 million from $8.0 million for the three months ended March 31, 2023 to $15.8 million for the three months ended March 31, 2024. The cost of interest-bearing liabilities increased by 120 basis points from 1.50% for the three months ended March 31, 2023 to 2.70% for the three months ended March 31, 2024 as funding costs increased due to higher market interest rates and competitive pressures on deposit pricing. The average balance of interest-bearing deposits increased by $170.4 million to $2.2 billion for the three months ended March 31, 2024 from $2.0 billion for the three months ended March 31, 2023. Average time deposits increased by $152.6 million and average interest-bearing demand deposits increased by $67.2 million for the three months ended March 31, 2024 compared to the prior period. These increases were partially offset by a decrease in average savings deposits of $49.4 million, between the three months ended March 31, 2024 and 2023 as clients sought higher-yielding products during the rising interest rate environment.

Interest expense on borrowings increased by $472 thousand to $2.3 million for the three months ended March 31, 2024 from $1.8 million for the three months ended March 31, 2023 as the cost of borrowings increased by 27 basis points to 4.99% for the three months ended March 31, 2024 from 4.72% for the three months ended March 31, 2023. Average borrowings increased by $29.3 million from $152.3 million for the three months ended March 31, 2023 to $181.6 million for the three months ended March 31, 2024 as the Bank opted to borrow funds to provide additional liquidity to meet the credit needs of its clients. In addition, the interest rate increased on the Company's outstanding subordinated notes, which converted from a fixed rate to a floating rate on December 30, 2023. The interest rate on the subordinated notes was 8.77% at March 31, 2024.

### Provision for Credit Losses

The Company recorded a provision for credit losses of $298 thousand for the three months ended March 31, 2024 compared to $729 thousand for the same period in 2023, which included a reversal to the provision for credit losses for off-balance sheet credit exposures of $123 thousand for the three months ended March 31, 2024. For the three months ended March 31, 2024, the provision for credit losses increased primarily due to a reduction in prepayment speed assumptions within the quantitative model based on current economic conditions. This was partially offset by the impact of an improvement in the GDP forecast and a decrease in the *Collateral Valuation Trends* qualitative factor for the residential mortgage and installment and other loan segments based on the stabilization in real estate collateral valuations and housing demand, which lowered the reserve requirement by $522 thousand. The favorable published trends in unemployment and GDP rates, which are used in correlation with historical charge-offs to predict defaults and losses, resulted in a decrease to the required ACL. The net impact of the changes in the quantitative model increased the reserve requirement by $760 thousand. The remaining change in the ACL is due to normal fluctuations from the changes in loan balances and loss rates by loan segment. The ACL to total loan ratio decreased from 1.28% at March 31, 2023 to 1.27% at March 31, 2024. The provision expense recorded in the three months ended March 31, 2023 was due to commercial loan growth and overall increase in expected loss rates under CECL, which was adopted on January 1, 2023.

Net recoveries for the three months ended March 31, 2024 totaled $42 thousand compared to net recoveries of $34 thousand for the three months ended March 31, 2023. Nonaccrual loans were 0.56% of gross loans at March 31, 2024, compared with 0.96% of gross loans at March 31, 2023. Nonaccrual loans decreased by $8.4 million from $21.3 million at March 31, 2023 to $12.9 million at March 31, 2024, primarily due to repayments of $18.0 million, including the payoff of one commercial real estate loan with a balance totaling $15.2 million at March 31, 2023, partially offset by additions of $9.4 million which include three commercial real estate clients with loans totaling $6.1 million and one commercial and industrial loan totaling $1.0 million.

Additional information is included in the "Credit Risk Management" section herein.

### Noninterest Income

The following table compares noninterest income for the three months ended March 31, 2024 and 2023:

|  | Three Months Ended March 31, 2024 | 2023 | $ Change 2024-2023 | % Change 2024-2023 |
| --- | ---: | ---: | ---: | ---: |
| Service charges on deposit accounts | **$1,005** | $962 | **$43** | **4.5%** |
| Interchange income | **911** | 965 | **(54)** | **(5.6)%** |
| Other service charges, commissions and fees | **195** | 195 | **—** | **—%** |
| Swap fee income | **199** | — | **199** | **100.0%** |
| Trust and investment management income | **2,024** | 1,888 | **136** | **7.2%** |
| Brokerage income | **1,078** | 859 | **219** | **25.5%** |
| Mortgage banking activities | **458** | 478 | **(20)** | **(4.2)%** |
| Income from life insurance | **634** | 590 | **44** | **7.5%** |
| Other income | **131** | 149 | **(18)** | **(12.1)%** |
| Investment securities losses | **(5)** | (8) | **3** | **37.5%** |
| Total noninterest income | **$6,630** | $6,078 | **$552** | **9.1%** |

Noninterest income increased by $552 thousand from $6.1 million for the three months ended March 31, 2023 to $6.6 million for the three months ended March 31, 2024. The following were significant factors in this increase:

- Swap fee income increased by $199 thousand during the three months ended March 31, 2024, as swap fee income will fluctuate based on market conditions and client demand.
- Wealth management income, which includes trust and investment management income and brokerage income, increased by $355 thousand due to strong market performance and growth in managed assets.
- Other line items within noninterest income showed fluctuations attributable to normal business operations.

### Noninterest Expenses

The following table compares noninterest expenses for the three months ended March 31, 2024 and 2023:

|  | Three Months Ended March 31, 2024 | 2023 | $ Change 2024-2023 | % Change 2024-2023 |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | **$13,752** | $12,196 | **$1,556** | **12.8%** |
| Occupancy | **1,201** | 1,106 | **95** | **8.6%** |
| Furniture and equipment | **1,438** | 1,227 | **211** | **17.2%** |
| Data processing | **1,265** | 1,217 | **48** | **3.9%** |
| Automated teller machine and interchange fees | **351** | 298 | **53** | **17.8%** |
| Advertising and bank promotions | **398** | 405 | **(7)** | **(1.7)%** |
| FDIC insurance | **441** | 504 | **(63)** | **(12.5)%** |
| Professional services | **631** | 734 | **(103)** | **(14.0)%** |
| Directors' compensation | **251** | 247 | **4** | **1.6%** |
| Taxes other than income | **494** | 457 | **37** | **8.1%** |
| Intangible asset amortization | **225** | 250 | **(25)** | **(10.0)%** |
| Merger-related expenses | **672** | — | **672** | **100.0%** |
| Other operating expenses | **1,350** | 1,614 | **(264)** | **(16.4)%** |
| Total noninterest expenses | **$22,469** | $20,255 | **$2,214** | **10.9%** |

Noninterest expense increased by $2.2 million from $20.3 million for the three months ended March 31, 2023 to $22.5 million for the three months ended March 31, 2024. The following were significant factors in this increase:

- Salaries and employee benefits expense increased by $1.6 million due primarily to increases in merit-based and incentive compensation.
- Furniture and equipment expense increased by $211 thousand due primarily to an increase in software maintenance and services to support technology improvements.
- Automated teller machine and interchange fee expense increased by $53 thousand due to an increase in processing charges.
- FDIC insurance expense decreased by $63 thousand due primarily to a decrease in the assessment rate caused by a decrease in the loan mix index and a decrease in nonaccrual loans.
- Professional services expense decreased by $103 thousand due primarily to a reduction in consulting and legal services.
- Merger-related expenses totaled $672 thousand during the first quarter of 2024 related to the pending merger with Codorus Valley.
- Other operating expenses decreased by $264 thousand due primarily to a decrease in credit valuation adjustments on derivatives of $292 thousand.
- Other line items within noninterest expenses showed fluctuations attributable to normal business operations.

### Income Tax Expense

Income tax expense totaled $2.2 million, an effective tax rate of 20.6%, for the three months ended March 31, 2024 compared with $2.2 million and an effective tax rate of 19.6% for the three months ended March 31, 2023. The Company’s effective tax rate is less than the 21% federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and investment securities, income from life insurance policies and tax credits, partially offset by disallowed interest expense and state income taxes. The increase in the effective tax rate from the three months ended March 31, 2023 to the three months ended March 31, 2024 was primarily due to an increase in the portion of interest expense disallowed as a deduction against earnings under the Tax Equity and Fiscal Responsibility Act of 1982, an increase in state taxes as a result of a greater percentage of taxable income earned in a state with a state income tax and the non-deductible merger-related expenses.

### FINANCIAL CONDITION

Management devotes substantial time to overseeing the investment in and costs to fund loans and investment securities through deposits and borrowings, as well as the formulation and adherence to policies directed toward enhancing profitability and managing the risks associated with these investments.

### Investment Securities

The Company utilizes investment securities to manage interest rate risk, enhance income through interest and dividend income and collateralize certain deposits and borrowings.

The Company has established investment policies and an asset management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management’s strategy to respond to changes in interest rates, liquidity, pledges to secure deposits and repurchase agreements and other factors while trying to maximize return on the investments. The Company may segregate its investment portfolio into three categories: “securities available-for-sale,” “trading securities” and “securities held-to-maturity.” At March 31, 2024 and December 31, 2023, management classified the entire investment securities portfolio as AFS, which is accounted for at current market value with non-credit related losses and gains reported in OCI, net of income taxes.

The Company's investment securities portfolio includes debt investments that are subject to varying degrees of credit and market risks, which arise from general market conditions, and factors impacting specific industries, as well as news that may impact specific issues. Management monitors its debt securities, using various indicators in determining whether unrealized losses on debt securities are credit related and require an ACL. These indicators include the amount of time the security has been in an unrealized loss position, the cause and extent of the unrealized loss and the credit quality of the issuer and underlying assets. In addition, management assesses whether it is likely the Company will have to sell the security prior to recovery, or it expects to be able to hold the security until the price recovers. The Company determined that the declines in market value were due to increases in interest rates and market movements, and not due to credit factors. The Company does not intend to sell these securities with unrealized losses and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. Therefore, the Company has concluded that the unrealized losses for the AFS securities did not require an ACL at March 31, 2024 and December 31, 2023.

At March 31, 2024, AFS securities totaled $514.9 million, an increase of $1.4 million, from $513.5 million at December 31, 2023. During the three months ended March 31, 2024, the Company purchased $21.8 million of AFS securities, which included $20.3 million of agency MBS and CMO securities and $1.5 million of non-agency CMO securities. The purchases were partially offset by a call of a non-agency CMO totaling $10.0 million and paydowns of $8.1 million. The balance of investment securities included net unrealized losses of $37.2 million at March 31, 2024 compared to net unrealized losses of $35.6 million at December 31, 2023 for a change of $1.7 million. This increase in net unrealized losses was primarily due to higher treasury rates and wider credit spreads. The overall duration of the Company's investment securities portfolio was 4.4 years at March 31, 2024. The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. Management believes the structure of the Company's investment portfolio is appropriately aligned with the rest of the balance sheet to protect against volatile interest rate environments and to generate steady earnings.

The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at March 31, 2024:

| Sector | Portfolio Mix | Amortized Book Value | Fair Value | Credit Enhancement | AAA | AA | A | BBB | NR | Collateral / Guarantee Type |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | --- |
| Unsecured ABS | 1% | $3,512 | $3,200 | 27% | —% | —% | —% | —% | 100% | Unsecured Consumer Debt |
| Student Loan ABS | 1 | 5,043 | 4,939 | 27 | — | — | — | — | 100 | Seasoned Student Loans |
| Federal Family Education Loan ABS | 17 | 94,553 | 93,677 | 9 | 7 | 80 | — | 13 | — | Federal Family Education Loan (1) |
| PACE Loan ABS | — | 2,277 | 1,973 | 6 | 100 | — | — | — | — | PACE Loans |
| Non-Agency CMBS | 3 | 17,208 | 17,247 | 29 | — | — | — | — | 100 |  |
| Non-Agency RMBS | 3 | 17,539 | 14,314 | 20 | 100 | — | — | — | — | Reverse Mortgages (2) |
| Municipal - General Obligation | 18 | 102,033 | 93,384 |  | 10 | 83 | 7 | — | — |  |
| Municipal - Revenue | 22 | 119,088 | 107,483 |  | — | 82 | 12 | — | 6 |  |
| SBA ReRemic | 1 | 3,293 | 3,260 |  | — | 100 | — | — | — | SBA Guarantee (3) |
| Small Business Administration | 1 | 7,786 | 8,243 |  | — | 100 | — | — | — | SBA Guarantee (3) |
| Agency MBS | 29 | 159,649 | 149,400 |  | — | 100 | — | — | — | Residential Mortgages (3) |
| U.S. Treasury securities | 4 | 20,054 | 17,669 |  | — | 100 | — | — | — | U.S. Government Guarantee (3) |
|  | 100% | $552,035 | $514,789 |  | 7% | 81% | 4% | 2% | 6% |  |
| (1) Minimum of 97% guaranteed by U.S. government |  |  |  |  |  |  |  |  |  |  |
| (2) Non-agency reverse mortgages with current structural credit enhancements |  |  |  |  |  |  |  |  |  |  |
| (3) Guaranteed by U.S. government or U.S. government agencies |  |  |  |  |  |  |  |  |  |  |
| Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Fitch, Morningstar, DBRS and Kroll Bond Rating Agency). Standard & Poor's rates U.S. government obligations at AA+. |  |  |  |  |  |  |  |  |  |  |

### Loan Portfolio

The Company offers a variety of products to meet the credit needs of its borrowers, principally commercial real estate loans, commercial and industrial loans, retail loans secured by residential properties, and, to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.

The risks associated with lending activities differ among loan segments and classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans, and also impact the associated collateral. A further discussion on the Company's loan segments and classes, the related risks, allowance for credit losses and financial difficulty modifications are included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

The following table presents the loan portfolio, excluding residential LHFS, by segment and class at March 31, 2024 and December 31, 2023:

| Commercial real estate: | March 31, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Owner occupied | **$364,280** | $373,757 |
| Non-owner occupied | **707,871** | 694,638 |
| Multi-family | **147,773** | 150,675 |
| Non-owner occupied residential | **91,858** | 95,040 |
| Acquisition and development: |  |  |
| 1-4 family residential construction | **22,277** | 24,516 |
| Commercial and land development | **118,010** | 115,249 |
| Commercial and industrial | **365,524** | 367,085 |
| Municipal | **10,925** | 9,812 |
| Residential mortgage: |  |  |
| First lien | **270,748** | 266,239 |
| Home equity - term | **4,966** | 5,078 |
| Home equity - lines of credit | **189,966** | 186,450 |
| Installment and other loans | **8,875** | 9,774 |
|  | **$2,303,073** | $2,298,313 |

Total loans increased by $4.8 million from December 31, 2023 to March 31, 2024. This increase is due to continued portfolio production in the residential mortgage segment of $7.9 million partially offset by a decrease in the commercial loans segment of $2.3 million during the three months ended March 31, 2024. During the first quarter of 2024, there were payoffs of a commercial real estate loan on nonaccrual status of $13.4 million and a special mention commercial loan of $7.2 million.

### Asset Quality

### Risk Elements

The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is managed through the Company's underwriting standards, on-going credit reviews, and monitoring of asset quality measures. Additionally, loan portfolio diversification, which limits exposure to a single industry or borrower, and collateral requirements also mitigate the Company's risk of credit loss.

The loan portfolio consists principally of loans to borrowers in south central Pennsylvania and the greater Baltimore, Maryland region. As the majority of loans are concentrated in these geographic regions, a substantial portion of the borrowers' ability to honor their obligations may be affected by the level of economic activity in these market areas.

Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, loan modifications to borrowers experiencing financial difficulty and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, the accrual of interest income on loans, including individually evaluated loans, ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.

In accordance with ASU 2022-02, the Company is required to evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and if the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs."

The following table presents the Company’s risk elements and relevant asset quality ratios at March 31, 2024 and December 31, 2023.

|  | March 31, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Nonaccrual loans | **$12,886** | $25,527 |
| OREO | **—** | — |
| Total nonperforming assets | **12,886** | 25,527 |
| FDMs still accruing | **—** | 9 |
| Loans past due 90 days or more and still accruing | **99** | 66 |
| Total nonperforming and other risk assets ("total risk assets") | **$12,985** | $25,602 |
| Loans 30-89 days past due and still accruing | **$7,344** | $8,111 |
| Asset quality ratios: |  |  |
| Total nonperforming loans to total loans | **0.56%** | 1.11% |
| Total nonperforming assets to total assets | **0.40%** | 0.83% |
| Total nonperforming assets to total loans and OREO | **0.56%** | 1.11% |
| Total risk assets to total loans and OREO | **0.56%** | 1.11% |
| Total risk assets to total assets | **0.41%** | 0.84% |
| ACL to total loans | **1.27%** | 1.25% |
| ACL to nonperforming loans | **226.33%** | 112.44% |
| ACL to nonperforming loans and FDMs still accruing | **226.33%** | 112.40% |
| Net (recoveries) charge-offs to total average loans (1) | **(0.01)%** | 0.03% |

(1) Annualized

Nonperforming assets include nonaccrual loans and foreclosed real estate. Risk assets, which include nonperforming assets, FDMs still accruing and loans past due 90 days or more and still accruing, totaled $13.0 million at March 31, 2024, a decrease of $12.6 million from $25.6 million at December 31, 2023. Nonaccrual loans decreased by $12.6 million from December 31, 2023 to March 31, 2024 due primarily to the payoff of one commercial real estate loan with an outstanding balance of $13.4 million at December 31, 2023. For the three months ended March 31, 2024, the Company did not have new loan modifications meeting the FDM criteria under ASU 2022-02.

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at March 31, 2024 and December 31, 2023. At March 31, 2024, there was a specific reserve of $7 thousand on nonaccrual loans compared to $49 thousand at December 31, 2023.

| Commercial real estate: | March 31, 2024 Nonaccrual loans with a related ACL | Nonaccrual loans with no related ACL | Total nonaccrual loans | Loans Past Due 90+ Accruing | December 31, 2023 Nonaccrual loans with a related ACL | Nonaccrual loans with no related ACL | Total nonaccrual loans | Loans Past Due 90+ Accruing |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Owner-occupied | **$—** | **$3,925** | **$3,925** | **$—** | $— | $15,786 | $15,786 | $— |
| Non-owner occupied | **—** | **228** | **228** | **—** | — | 240 | 240 | — |
| Multi-family | **—** | **1,233** | **1,233** | **—** | — | 1,233 | 1,233 | — |
| Non-owner occupied residential | **—** | **2,016** | **2,016** | **—** | — | 2,572 | 2,572 | — |
| Acquisition and development: |  |  |  |  |  |  |  |  |
| Commercial and land development | **—** | **1,306** | **1,306** | **—** | — | 1,361 | 1,361 | — |
| Commercial and industrial | **—** | **1** | **1** | **—** | 68 | 604 | 672 | — |
| Residential mortgage: |  |  |  |  |  |  |  |  |
| First lien | **—** | **2,621** | **2,621** | **24** | — | 2,309 | 2,309 | 66 |
| Home equity – term | **—** | **2** | **2** | **—** | — | 3 | 3 | — |
| Home equity – lines of credit | **—** | **1,526** | **1,526** | **75** | — | 1,312 | 1,312 | — |
| Installment and other loans | **7** | **21** | **28** | **—** | 3 | 36 | 39 | — |
| Total | **$7** | **$12,879** | **$12,886** | **$99** | $71 | $25,456 | $25,527 | $66 |

During the first quarter of 2024, an owner-occupied commercial real estate loan was paid off, which had an outstanding balance of $13.4 million at December 31, 2023.

The following table presents our exposure to relationships that are individually evaluated and the partial charge-offs taken to date and specific reserves established on those relationships at March 31, 2024 and December 31, 2023.

| March 31, 2024 | # of Relationships | Individually Evaluated Loans | Partial Charge-offs to Date | Specific Reserves |
| --- | ---: | ---: | ---: | ---: |
| Relationships greater than $1,000,000 | **4** | **$7,903** | **$—** | **$—** |
| Relationships greater than $500,000 but less than $1,000,000 | **—** | **—** | **—** | **—** |
| Relationships greater than $250,000 but less than $500,000 | **2** | **509** | **—** | **—** |
| Relationships less than $250,000 | **80** | **4,644** | **260** | **35** |
|  | **86** | **$13,056** | **$260** | **$35** |
| **December 31, 2023** |  |  |  |  |
| Relationships greater than $1,000,000 | 4 | $20,363 | $— | $— |
| Relationships greater than $500,000 but less than $1,000,000 | 1 | 616 | 388 | — |
| Relationships greater than $250,000 but less than $500,000 | 1 | 257 | — | — |
| Relationships less than $250,000 | 78 | 4,472 | 214 | 77 |
|  | 84 | $25,708 | $602 | $77 |

The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Specific reserves remain in place if updated appraisals are pending and represent management’s estimate of potential loss.

Internal loan reviews are completed annually on all commercial relationships, secured by commercial real estate, with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.

In its individually evaluated loan analysis, the Company determines the extent of any full or partial charge-offs that may be required, or any reserves that may be needed. The determination of the Company’s charge-offs or specific reserve include an evaluation of the outstanding loan balance and the related collateral securing the credit. Through a combination of collateral securing the loans and partial charge-offs taken to date, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships at March 31, 2024. However, over time, additional information may result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.

### Credit Risk Management

### Allowance for Credit Losses

The Company maintains the ACL at a level deemed adequate by management for expected credit losses. As disclosed in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, on January 1, 2023 the Company implemented CECL and increased the ACL with a cumulative-effect adjustment to the ACL of $2.4 million. In addition, the Company recorded a cumulative-effect adjustment to the ACL for off-balance sheet exposures of $100 thousand. The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the consolidated statement of income. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee and subsequently presented to the Enterprise Risk Management Committee.

The ACL is evaluated based on a review of the collectability of loans in light of historical experience; the nature and volume of the loan portfolio; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A description of the methodology for establishing the allowance and provision for credit losses and related procedures in establishing the appropriate level of reserve is included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class and credit quality as of March 31, 2024. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity. Residential mortgage and installment and other consumer loans are presented below based on payment performance: performing or nonperforming. During the first quarter of 2024, commercial and land development loans totaling $10.6 million were recharacterized to a permanent commercial real estate class upon the completion of construction or receiving a certificate of occupancy. In addition, 1-4 family residential construction loans totaled $2.9 million were recharacterized to a permanent 1-4 family residential mortgage upon the completion of construction.

| As of March 31, 2024 Commercial Real Estate: Owner-occupied: Risk rating | Term Loans Amortized Cost Basis by Origination Year 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans Amortized Basis | Revolving Loans Converted to Term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Pass | $7,004 | $50,993 | $100,503 | $70,796 | $20,786 | $80,037 | $3,867 | $— | $333,986 |
| Special mention | — | — | — | 3,741 | 1,165 | 1,287 | — | — | 6,193 |
| Substandard - Non-IEL | — | 708 | 10,092 | 481 | 6,034 | 2,526 | 335 | — | 20,176 |
| Substandard - IEL | — | — | — | — | — | 3,925 | — | — | 3,925 |
| Total owner-occupied loans | $7,004 | $51,701 | $110,595 | $75,018 | $27,985 | $87,775 | $4,202 | $— | $364,280 |
| Current period gross charge offs - owner-occupied | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| continued |  |  |  |  |  |  |  |  |  |

59

| As of March 31, 2024 Non-owner occupied: Risk rating | Term Loans Amortized Cost Basis by Origination Year 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans Amortized Basis | Revolving Loans Converted to Term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Pass | $17,334 | $82,531 | $107,154 | $231,786 | $82,923 | $179,199 | $534 | $— | $701,461 |
| Special mention | — | — | — | — | 520 | 2,079 | — | — | 2,599 |
| Substandard - Non-IEL | — | — | — | — | — | 2,718 | — | 865 | 3,583 |
| Substandard - IEL | — | — | — | — | — | 228 | — | — | 228 |
| Total non-owner occupied loans | $17,334 | $82,531 | $107,154 | $231,786 | $83,443 | $184,224 | $534 | $865 | $707,871 |
| Current period gross charge offs - non-owner occupied | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Multi-family:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $599 | $2,683 | $62,971 | $28,564 | $12,602 | $38,577 | $126 | $— | $146,122 |
| Special mention | — | — | — | — | — | 418 | — | — | 418 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | 1,233 | — | — | 1,233 |
| Total multi-family loans | $599 | $2,683 | $62,971 | $28,564 | $12,602 | $40,228 | $126 | $— | $147,773 |
| Current period gross charge offs - multi-family | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Non-owner occupied residential:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $887 | $10,189 | $20,822 | $16,626 | $7,689 | $32,400 | $146 | $— | $88,759 |
| Special mention | — | — | — | — | — | 698 | — | — | 698 |
| Substandard - Non-IEL | — | — | — | — | — | 365 | 20 | — | 385 |
| Substandard - IEL | — | 2 | — | 185 | 1,125 | 704 | — | — | 2,016 |
| Total non-owner occupied residential loans | $887 | $10,191 | $20,822 | $16,811 | $8,814 | $34,167 | $166 | $— | $91,858 |
| Current period gross charge offs - non-owner occupied residential | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Acquisition and development:** |  |  |  |  |  |  |  |  |  |
| **1-4 family residential construction:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $2,906 | $17,880 | $1,270 | $— | $— | $— | $— | $— | $22,056 |
| Special mention | — | 221 | — | — | — | — | — | — | 221 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | — | — | — | — |
| Total 1-4 family residential construction loans | $2,906 | $18,101 | $1,270 | $— | $— | $— | $— | $— | $22,277 |
| Current period gross charge offs - 1-4 family residential construction | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Commercial and land development:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $2,504 | $37,248 | $43,572 | $6,111 | $9,869 | $1,225 | $6,689 | $8,202 | $115,420 |
| Special mention | — | — | — | — | 854 | 430 | — | — | 1,284 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | 1,306 | — | — | 1,306 |
| Total commercial and land development loans | $2,504 | $37,248 | $43,572 | $6,111 | $10,723 | $2,961 | $6,689 | $8,202 | $118,010 |
| Current period gross charge offs - commercial and land development | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| continued |  |  |  |  |  |  |  |  |  |

60

| As of March 31, 2024 Commercial and Industrial: Risk rating | Term Loans Amortized Cost Basis by Origination Year 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans Amortized Basis | Revolving Loans Converted to Term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Pass | $13,291 | $64,946 | $65,981 | $62,595 | $23,083 | $29,681 | $88,673 | $1,250 | $349,500 |
| Special mention | — | — | 1,387 | 35 | 9 | 730 | 2,407 | — | 4,568 |
| Substandard - Non-IEL | — | 14 | — | 6,112 | — | 225 | 5,104 | — | 11,455 |
| Substandard - IEL | — | — | 1 | — | — | — | — | — | 1 |
| Total commercial and industrial loans | $13,291 | $64,960 | $67,369 | $68,742 | $23,092 | $30,636 | $96,184 | $1,250 | $365,524 |
| Current period gross charge offs - commercial and industrial | $— | $— | $46 | $— | $— | $— | $— | $— | $46 |
| **Municipal:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $1,580 | $— | $— | $3,160 | $— | $— | $6,185 | $— | $10,925 |
| Total municipal loans | $1,580 | $— | $— | $3,160 | $— | $— | $6,185 | $— | $10,925 |
| Current period gross charge offs - municipal | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Residential mortgage:** |  |  |  |  |  |  |  |  |  |
| **First lien:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $9,076 | $45,888 | $68,632 | $34,357 | $7,925 | $101,445 | $— | $634 | $267,957 |
| Nonperforming | — | — | — | — | — | 2,791 | — | — | 2,791 |
| Total first lien loans | $9,076 | $45,888 | $68,632 | $34,357 | $7,925 | $104,236 | $— | $634 | $270,748 |
| Current period gross charge offs - first lien | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Home equity - term:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $331 | $501 | $692 | $74 | $408 | $2,958 | $— | $— | $4,964 |
| Nonperforming | — | — | — | — | — | 2 | — | — | 2 |
| Total home equity - term loans | $331 | $501 | $692 | $74 | $408 | $2,960 | $— | $— | $4,966 |
| Current period gross charge offs - home equity - term | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Home equity - lines of credit:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $— | $— | $— | $— | $— | $— | $111,751 | $76,689 | $188,440 |
| Nonperforming | — | — | — | — | — | — | 1,308 | 218 | 1,526 |
| Total residential real estate - home equity - lines of credit loans | $— | $— | $— | $— | $— | $— | $113,059 | $76,907 | $189,966 |
| Current period gross charge offs - home equity - lines of credit | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Installment and other loans:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $366 | $626 | $357 | $304 | $96 | $1,178 | $5,920 | $— | $8,847 |
| Nonperforming | — | 3 | — | — | — | 21 | 4 | — | 28 |
| Total Installment and other loans | $366 | $629 | $357 | $304 | $96 | $1,199 | $5,924 | $— | $8,875 |
| Current period gross charge offs - installment and other | $24 | $12 | $— | $— | $— | $17 | $— | $— | $53 |

61

| As of December 31, 2023 Commercial Real Estate: Owner-occupied: Risk rating | Term Loans Amortized Cost Basis by Origination Year 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Basis | Revolving Loans Converted to Term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Pass | $50,829 | $103,192 | $69,888 | $21,232 | $21,251 | $62,634 | $4,941 | $— | $333,967 |
| Special mention | — | — | 2,517 | 1,176 | — | 1,314 | — | — | 5,007 |
| Substandard - Non-IEL | — | 9,923 | — | 6,075 | — | 2,687 | 312 | — | 18,997 |
| Substandard - IEL | — | — | — | 13,366 | — | 2,420 | — | — | 15,786 |
| Total owner-occupied loans | $50,829 | $113,115 | $72,405 | $41,849 | $21,251 | $69,055 | $5,253 | $— | $373,757 |
| Current period gross charge offs - owner-occupied | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Non-owner occupied:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $82,879 | $102,212 | $235,031 | $83,652 | $63,176 | $120,696 | $509 | $— | $688,155 |
| Special mention | — | — | — | 524 | — | 2,112 | — | — | 2,636 |
| Substandard - Non-IEL | — | — | — | — | — | 2,739 | — | 868 | 3,607 |
| Substandard - IEL | — | — | — | — | — | 240 | — | — | 240 |
| Total non-owner occupied loans | $82,879 | $102,212 | $235,031 | $84,176 | $63,176 | $125,787 | $509 | $868 | $694,638 |
| Current period gross charge offs - non-owner occupied | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Multi-family:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $2,701 | $61,805 | $28,541 | $12,694 | $7,437 | $33,895 | $117 | $— | $147,190 |
| Special mention | — | — | — | — | 244 | 2,008 | — | — | 2,252 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | 1,233 | — | — | 1,233 |
| Total multi-family loans | $2,701 | $61,805 | $28,541 | $12,694 | $7,681 | $37,136 | $117 | $— | $150,675 |
| Current period gross charge offs - multi-family | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Non-owner occupied residential:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $10,075 | $20,473 | $16,947 | $7,974 | $6,444 | $28,319 | $1,130 | $— | $91,362 |
| Special mention | — | — | — | — | — | 731 | — | — | 731 |
| Substandard - Non-IEL | — | — | — | — | — | 375 | — | — | 375 |
| Substandard - IEL | 2 | — | 192 | 1,461 | — | 917 | — | — | 2,572 |
| Total non-owner occupied residential loans | $10,077 | $20,473 | $17,139 | $9,435 | $6,444 | $30,342 | $1,130 | $— | $95,040 |
| Current period gross charge offs - non-owner occupied residential | $— | $— | $— | $— | $— | $12 | $— | $— | $12 |
| continued |  |  |  |  |  |  |  |  |  |

62

| As of December 31, 2023 Acquisition and development: 1-4 family residential construction: Risk rating | Term Loans Amortized Cost Basis by Origination Year 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Basis | Revolving Loans Converted to Term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Pass | $18,820 | $5,400 | $— | $— | $— | $— | $— | $— | $24,220 |
| Special mention | 222 | — | 74 | — | — | — | — | — | 296 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | — | — | — | — |
| Total 1-4 family residential construction loans | $19,042 | $5,400 | $74 | $— | $— | $— | $— | $— | $24,516 |
| Current period gross charge offs - 1-4 family residential construction | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Commercial and land development:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $28,829 | $48,453 | $9,847 | $9,927 | $110 | $1,774 | $6,574 | $6,936 | $112,450 |
| Special mention | — | — | — | 1,001 | — | 437 | — | — | 1,438 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | 1,361 | — | — | 1,361 |
| Total commercial and land development loans | $28,829 | $48,453 | $9,847 | $10,928 | $110 | $3,572 | $6,574 | $6,936 | $115,249 |
| Current period gross charge offs - commercial and land development | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Commercial and Industrial:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $67,735 | $69,670 | $67,117 | $24,580 | $10,753 | $20,775 | $86,475 | $1,522 | $348,627 |
| Special mention | — | 4,251 | 4,364 | 11 | 552 | 356 | 2,258 | — | 11,792 |
| Substandard - Non-IEL | — | — | 4,682 | — | 5 | 225 | 1,082 | — | 5,994 |
| Substandard - IEL | — | 69 | — | 7 | — | 455 | 141 | — | 672 |
| Total commercial and industrial loans | $67,735 | $73,990 | $76,163 | $24,598 | $11,310 | $21,811 | $89,956 | $1,522 | $367,085 |
| Current period gross charge offs - commercial and industrial | $— | $161 | $106 | $— | $— | $8 | $473 | $— | $748 |
| **Municipal:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $— | $— | $3,403 | $— | $— | $6,409 | $— | $— | $9,812 |
| Total municipal loans | $— | $— | $3,403 | $— | $— | $6,409 | $— | $— | $9,812 |
| Current period gross charge offs - municipal | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Residential mortgage:** |  |  |  |  |  |  |  |  |  |
| **First lien:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $43,641 | $71,311 | $34,704 | $8,056 | $7,465 | $97,943 | $— | $638 | $263,758 |
| Nonperforming | — | — | — | — | 120 | 2,361 | — | — | 2,481 |
| Total first lien loans | $43,641 | $71,311 | $34,704 | $8,056 | $7,585 | $100,304 | $— | $638 | $266,239 |
| Current period gross charge offs - first lien | $— | $— | $— | $— | $— | $58 | $— | $— | $58 |
| continued |  |  |  |  |  |  |  |  |  |

63

| As of December 31, 2023 Home equity - term: Payment performance | Term Loans Amortized Cost Basis by Origination Year 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Basis | Revolving Loans Converted to Term | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Performing | $607 | $732 | $90 | $426 | $115 | $3,105 | $— | $— | $5,075 |
| Nonperforming | — | — | — | — | — | 3 | — | — | 3 |
| Total home equity - term loans | $607 | $732 | $90 | $426 | $115 | $3,108 | $— | $— | $5,078 |
| Current period gross charge offs - home equity - term | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Home equity - lines of credit:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $— | $— | $— | $— | $— | $— | $107,967 | $77,171 | $185,138 |
| Nonperforming | — | — | — | — | — | — | 1,296 | 16 | 1,312 |
| Total residential real estate - home equity - lines of credit loans | $— | $— | $— | $— | $— | $— | $109,263 | $77,187 | $186,450 |
| Current period gross charge offs - home equity - lines of credit | $— | $— | $— | $— | $— | $— | $40 | $— | $40 |
| **Installment and other loans:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $758 | $413 | $332 | $106 | $670 | $947 | $6,500 | $— | $9,726 |
| Nonperforming | 3 | — | — | — | 33 | 12 | — | — | 48 |
| Total Installment and other loans | $761 | $413 | $332 | $106 | $703 | $959 | $6,500 | $— | $9,774 |
| Current period gross charge offs - installment and other | $181 | $24 | $— | $— | $4 | $10 | $28 | $— | $247 |

The Special Mention classification is intended to be a temporary classification reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Company’s position at some future date. Special Mention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require inquiry by lenders on the cause of the potential weakness and, once evaluated, the loan classification may be downgraded to Substandard or, alternatively, could be upgraded to Pass.

Special Mention loans decreased by $8.2 million from $24.2 million at December 31, 2023 to $16.0 million at March 31, 2024 due to repayments, including $7.2 million from one commercial client.

Classified loans totaled $49.0 million at March 31, 2024, or 2.1% of total loans outstanding, reflecting a decrease from $55.0 million, or 2.4% of loans outstanding, at December 31, 2023.

Non-IEL substandard loans are performing loans, which have characteristics that cause management concern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as nonperforming, or individually evaluated, loans in the future. Generally, management feels that substandard loans that are currently performing and not considered individually evaluated result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan and represent potential problem loans. Non-IEL substandard loans totaled $35.9 million at March 31, 2024, an increase of $6.6 million, compared to $29.3 million at December 31, 2023, due primarily to the downgrade of one commercial client with an outstanding balance totaling $6.3 million. The Substandard-IEL category decreased from $25.7 million to $13.1 million from December 31, 2023 to March 31, 2024, respectively, primarily due to the payoff of one commercial real estate loan with an outstanding balance of $13.4 million at December 31, 2023.

The following table presents the activity in the ACL for the three months ended March 31, 2024 and 2023:

| Three Months Ended March 31, 2024 | Commercial Commercial Real Estate | Acquisition and Development | Commercial and Industrial | Municipal | Total | Consumer Residential Mortgage | Installment and Other | Total | Unallocated | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Balance, beginning of period | **$17,873** | **$2,241** | **$5,806** | **$157** | **$26,077** | **$2,424** | **$201** | **$2,625** | **$—** | **$28,702** |
| Provision for credit losses | **78** | **(9)** | **(461)** | **7** | **(385)** | **763** | **43** | **806** | **—** | **421** |
| Charge-offs | **—** | **—** | **(46)** | **—** | **(46)** | **—** | **(53)** | **(53)** | **—** | **(99)** |
| Recoveries | **24** | **1** | **90** | **—** | **115** | **6** | **20** | **26** | **—** | **141** |
| Balance, end of period | **$17,975** | **$2,233** | **$5,389** | **$164** | **$25,761** | **$3,193** | **$211** | **$3,404** | **$—** | **$29,165** |
| **March 31, 2023** |  |  |  |  |  |  |  |  |  |  |
| Balance, beginning of period | $13,558 | $3,214 | $4,505 | $24 | $21,301 | $3,444 | $188 | $3,632 | $245 | $25,178 |
| Impact of adopting CECL | 2,857 | (214) | 928 | 169 | 3,740 | (1,121) | 49 | (1,072) | (245) | 2,423 |
| Provision for loan losses | 262 | 215 | 412 | (16) | 873 | (140) | (4) | (144) | — | 729 |
| Charge-offs | — | — | (86) | — | (86) | — | (56) | (56) | — | (142) |
| Recoveries | 20 | 2 | 28 | — | 50 | 95 | 31 | 126 | — | 176 |
| Balance, end of period | $16,697 | $3,217 | $5,787 | $177 | $25,878 | $2,278 | $208 | $2,486 | $— | $28,364 |

The ACL totaled $29.2 million at March 31, 2024, an increase of $463 thousand from December 31, 2023, resulting from the provision for credit losses of $421 thousand and net recoveries of $42 thousand during the three months ended March 31, 2024. At March 31, 2024, the ACL as a percentage of the total loan portfolio was 1.27% compared to 1.28% at March 31, 2023. For the three months ended March 31, 2024, the provision for credit losses increased primarily from a reduction in prepayment speed assumptions within the quantitative model due to current economic conditions partially offset by an improvement in the GDP forecast and a decrease in the *Collateral Valuation Trends* qualitative factor for the residential mortgage and installment and other loan segments based on the stabilization in real estate collateral valuations and housing demand. The favorable published trends in unemployment and GDP rates, which are used in correlation with historical charge-offs to predict defaults and losses, resulted in a decrease to the required ACL. The provision expense recorded in the three months ended March 31, 2023 was due to commercial loan growth and overall increase in expected loss rates under CECL, which was adopted on January 1, 2023.

The Company takes partial charge-offs on collateral-dependent loans when the carrying value exceeds the estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Specific reserves remain in place if updated appraisals are pending and represent management's estimate of potential loss. In addition to the specific reserve allocations on individually evaluated loans noted previously, six loans, with aggregate outstanding principal balances of $204 thousand, had cumulative partial charge-offs to the ACL totaling $260 thousand through March 31, 2024. As updated appraisals are received on collateral-dependent loans, partial charge-offs are taken to the extent the loans’ principal balance exceeds their fair value.

Management believes the allocation of the ACL among the various loan classes adequately reflects the life expected credit losses in each loan class and is based on the methodology outlined in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the Consolidated Financial Statements under Part I, Item 1, "Financial Information." Management re-evaluates and makes enhancements to its reserve methodology to better reflect the risks inherent in the different segments of the portfolio, particularly in light of increased charge-offs, with noticeable differences between the different loan classes. Management believes these enhancements to the ACL methodology improve the accuracy of quantifying the expected credit losses inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for credit losses on its overall analysis.

Management believes the Company’s ACL is adequate based on currently available information. Future adjustments to the ACL and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management’s assumptions as to future delinquencies or loss rates.

### Deposits

Total deposits increased by $137.1 million to $2.7 billion at March 31, 2024 from $2.6 billion at December 31, 2023. In the first quarter of 2024, interest-bearing demand deposits increased by $56.9 million, time deposits increased by $50.4 million and money market deposits increased by $48.7 million. These increases were partially offset by decreases in non-interest bearing deposits of $12.4 million and savings deposits of $6.5 million. The increase in interest-bearing demand deposits reflects some seasonal public funds activity in addition to balances that are believed to be short-term in nature. The increase in time deposits was attributable to promotional offerings of up to 18-month terms. The declines in noninterest-bearing deposits and savings deposits were primarily due to clients shifting to higher-yielding products within the Bank. In addition, the increase in money market deposits was partially offset by a decrease in brokered money market deposits of $15.1 million. At March 31, 2024, deposits that are uninsured and not collateralized totaled $413.5 million, or 15% of total deposits, compared to $442.7 million, or 17% of total deposits, at December 31, 2023.

### Borrowings

In addition to deposits, the Company uses borrowing sources to meet liquidity needs and for temporary funding. Sources of short-term borrowings include the FHLB of Pittsburgh, federal funds purchased and the FRB discount window. Short-term borrowings also may include securities sold under agreements to repurchase with deposit clients, in which a client sweeps a portion of a deposit balance into a repurchase agreement, which is a secured borrowing with a pool of securities pledged against the balance.

The Company also utilizes long-term debt, consisting principally of FHLB fixed and amortizing advances, to fund its balance sheet with original maturities greater than one year. Prior to entering into long-term borrowings, the Company evaluates its funding needs, interest rate movements, the cost of options and the availability of attractive structures.

FHLB advances and other borrowings decreased by $22.5 million to $115.0 million at March 31, 2024 compared to $137.5 million at December 31, 2023. The Bank repaid overnight borrowings during the first quarter of 2024 based on available liquidity from deposits.

In December 2018, the Company issued unsecured subordinated notes payable totaling $32.5 million, which mature on December 30, 2028, and the proceeds of which were designated for general corporate use, including funding of cash consideration for mergers and acquisitions. The subordinated notes had a fixed interest rate of 6.0% through December 30, 2023, which then converted to a variable rate, 90-day average fallback SOFR rate plus 3.16%, through maturity. At March 31, 2024, the interest rate on the subordinated debt was 8.77%.

See Note 9, Short-Term Borrowings, and Note 10, Long-Term Borrowings, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description and terms of the Company’s borrowings and access to alternative sources of liquidity.

### Shareholders' Equity, Capital Adequacy and Regulatory Matters

Capital management in a regulated financial services industry must properly balance return on equity to its shareholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company’s capital management strategies have been developed to provide attractive rates of returns to its shareholders, while maintaining a “well-capitalized” position of regulatory strength.

Shareholders’ equity totaled $271.7 million at March 31, 2024, an increase of $6.6 million, from $265.1 million at December 31, 2023. The increase was primarily attributable to net income of $8.5 million, partially offset by dividends paid of $2.1 million, and other comprehensive losses of $192 thousand for the three months ended March 31, 2024. Other comprehensive losses increased due to after-tax declines of $1.3 million from net unrealized losses on investment securities, partially offset by $1.1 million in net unrealized gains from cash flow hedges. For the three months ended March 31, 2024, total comprehensive income totaled $8.3 million, a decrease of $7.9 million, from total comprehensive losses of $16.2 million for the same period in 2023 due primarily to an increase in after-tax net unrealized losses on investment securities of $8.1 million between the comparative periods. The increase in net unrealized losses was primarily caused by a rise in treasury rates and wider credit spreads during the first quarter of 2024.

At March 31, 2024, book value per common share was $25.38 compared to $24.98 at December 31, 2023. Tangible book value per share also increased from $23.03 at December 31, 2023 to $23.47 at March 31, 2024, as a result of the increase in shareholders' equity driven by earnings during 2024. See “Supplemental Reporting of Non-GAAP Measures.”

The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. At March 31, 2024 and December 31, 2023, the Bank was considered well-capitalized under applicable banking regulations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.

Note 11, Shareholders' Equity and Regulatory Capital, to the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at March 31, 2024 and December 31, 2023.

In addition to the minimum capital ratio requirement and minimum capital ratio to be well-capitalized presented in the referenced table in Note 11, the Bank must maintain a capital conservation buffer as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, Item 1 - Business, under the topic Basel III Capital Rules. At March 31, 2024, the Bank's capital conservation buffer, based on the most restrictive Total Capital to risk weighted assets capital ratio, was 5.1%, which is greater than the 2.5% requirement.

### Liquidity

The primary function of asset/liability management is to ensure adequate liquidity and manage the Company’s sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of clients who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company's primary sources of funds consist of deposit inflows, loan repayments, borrowings from the FHLB of Pittsburgh and maturities and prepayments of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities and the objectives of its asset/liability management policy. The Company's most liquid assets are cash and cash equivalents.

At March 31, 2024, cash and cash equivalents totaled $182.7 million compared to $65.2 million at December 31, 2023, which reflects the increase in deposits of $137.1 million and net income of $8.5 million, partially offset by the decrease in borrowings of $20.2 million for the three months ended March 31, 2024. Unencumbered investment securities totaled $66.1 million at March 31, 2024 compared to $73.7 million at December 31, 2023. At March 31, 2024, the Company had $16.8 million of investment securities pledged at the FRB Discount Window, with no associated borrowings outstanding, compared to $17.4 million at December 31, 2023. The Company's maximum borrowing capacity from the FHLB of Pittsburgh is $1.1 billion, of which $140.2 million and $138.7 million in advances and letters of credit were outstanding at March 31, 2024 and December 31, 2023, respectively. In addition, the Company had $20.0 million in available unsecured lines of credit with other banks at March 31, 2024 and December 31, 2023. The Bank tested its various sources of funding during 2024 to ensure accessibility.

See Note 9, Short-Term Borrowings, and Note 10, Long-Term Borrowings, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description and terms of the Company’s borrowings and access to alternative sources of liquidity.

### Supplemental Reporting of Non-GAAP Measures

Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect on recent financial results from non-recurring charges.

As a result of prior acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $20.9 million and $21.1 million at March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024 and December 31, 2023, the Company incurred merger-related expenses of $672 thousand and $1.1 million, respectively, in connection with the pending merger with Codorus Valley.

Tangible book value per share and the impact of the merger-related expenses on net income and diluted earnings per share, as used by the Company in this supplemental reporting presentation, is determined by methods other than in accordance with GAAP. While we believe this information is a useful supplement to GAAP-based measures presented in this Form 10-Q, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP.

The increase in tangible book value per share (non-GAAP) from December 31, 2023 to March 31, 2024 is primarily due to net income of $8.5 million, partially offset by dividends paid of $2.1 million and an increase in other comprehensive losses, net of taxes, of $192 thousand due to net unrealized losses on AFS securities, partially offset by the net unrealized gains on interest rate swaps designated as hedging instruments.

The following table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP-based measure.

*(dollars and shares in thousands)*

| Tangible Book Value per Common Share | March 31, 2024 |
| --- | ---: |
| Shareholders' equity (most directly comparable GAAP-based measure) | **$271,682** |
| Less: Goodwill | **18,724** |
| Other intangible assets | **2,189** |
| Related tax effect | **(460)** |
| **Tangible common equity (non-GAAP)** | **$251,229** |
| Common shares outstanding | **10,705** |
| Book value per share (most directly comparable GAAP based measure) | **$25.38** |
| Intangible assets per share | **1.91** |
| **Tangible book value per share (non-GAAP)** | **$23.47** |

*Adjusted Net Income and Adjusted Diluted Earnings Per Share*

*(dollars and shares in thousands)*

|  | Three Months Ended March 31 2024 | March 31 2023 |
| --- | ---: | ---: |
| Net income (most directly comparable GAAP based measure) | $8,531 | $9,156 |
| Plus: Merger-related expenses | 672 | — |
| Less: Related tax effect | (1) | — |
| **Adjusted net income (non-GAAP)** | $9,202 | $9,156 |
| Weighted average shares - diluted (most directly comparable GAAP-based measure) | 10,482 | 10,496 |
| Diluted earnings per share (most directly comparable GAAP-based measure) | $0.81 | $0.87 |
| Weighted average shares - diluted (non-GAAP) | 10,482 | 10,496 |
| **Diluted earnings per share, adjusted (non-GAAP)** | $0.88 | $0.87 |

## Market risk

As filed, 7,456 characters.

Market risk comprises exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. FRB monetary control efforts, the effects of deregulation, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

### Interest Rate Risk

Interest rate risk is the exposure to fluctuations in the Bank’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that reprice within a specified time period as a result of scheduled maturities, scheduled and unscheduled repayments, the propensity of borrowers and depositors to react to changes in their economic interests, and loan contractual interest rate changes.

We attempt to manage the level of repricing and maturity mismatch through our asset/liability management process so that fluctuations in net interest income are maintained within policy limits across a range of market conditions, while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure the Bank’s profitability. Thus, the goal of interest rate risk management is to evaluate the amount of reward for taking risk and adjusting both the size and composition of the balance sheet relative to the level of reward available for taking risk.

Management endeavors to control the exposure to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The Bank primarily uses its securities portfolio, FHLB advances, interest rate swaps and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives.

We use simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of our interest rate risk exposure. These analyses require numerous assumptions including, but not limited to, changes in balance sheet mix, prepayment rates on loans and securities, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and providing a relative gauge of our interest rate risk position over time.

Our asset/liability committee operates under management policies, approved by the Board of Directors, which define guidelines and limits on the level of risk. The committee meets regularly and reviews our interest rate risk position and monitors various liquidity ratios to ensure a satisfactory liquidity position. By utilizing our analyses, we can determine changes that may need to be made to the asset and liability mixes to mitigate the change in net interest income under various interest rate scenarios. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to inform the committee on the selection of investment securities. Regulatory authorities also monitor our interest rate risk position along with other liquidity ratios.

### Net Interest Income Sensitivity

Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of our short-term interest rate risk. The analysis assumes recent pricing trends in new loan and deposit volumes will continue while balances remain constant. Additional assumptions are applied to modify pricing under the various rate scenarios.

The simulation analysis results are presented in the table below. At March 31, 2024, the projected decrease in net interest income in the falling interest rate scenario is partly a result of long-term fixed rate funding added to the balance sheet in 2023. Additionally, in the model at March 31, 2024, funding pressure is not expected to abate within the first twelve months of a rates falling scenario. Interest bearing liabilities have been repricing faster than interest earning assets, other than cash. If interest bearing liabilities reprice slower than modeled, the pressure on net interest income may be reduced. In the rising rate scenarios, net interest income increases due to excess cash balances, which will reprice quicker than liabilities.

### Economic Value

Net present value analysis provides information on the risk inherent in the balance sheet that might not be considered in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet incorporates the discounted present value of expected asset cash flows minus the discounted present value of expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.

Funding cost and repricing speed will continue to be a factor in the results of the model. The behavior of the business and retail clients also varies across the rate scenarios, which is reflected in the results. To improve the comparability across periods, the Bank strives to follow best practices related to the assumption setting and maintains the size and mix of the period end balance sheet; thus, the results do not reflect actions management may take through the normal course of business that would impact results.

| Net Interest Income Change in Market Interest Rates (basis points) | % Change in Net Interest Income March 31, 2024 | December 31, 2023 | Economic Value Change in Market Interest Rates (basis points) | % Change in Market Value March 31, 2024 | December 31, 2023 |
| ---: | ---: | ---: | ---: | ---: | ---: |
| **(200)** | **(8.2)%** | (5.9)% | **(200)** | **(14.2)%** | (15.6)% |
| **(100)** | **(4.8)%** | (3.6)% | **(100)** | **(4.2)%** | (4.3)% |
| **100** | **1.5%** | 0.1% | **100** | **1.5%** | 0.1% |
| **200** | **1.7%** | (1.0)% | **200** | **0.5%** | (2.2)% |

## Controls and procedures

As filed, 835 characters.

Based on the evaluation required by Exchange Act Rules 13a-15(b) and 15d-15(b), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), at March 31, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at March 31, 2024.

There were no significant changes made to the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting during the three months ended March 31, 2024.

## Risk factors

As filed, 142 characters.

There have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Filed May 9, 2024.
Source: SEC EDGAR, the filing index for accession 0000826154-24-000096. Last ingested by Listed: Nov 10, 2026, 03:33 ET. No prices; not investment advice.