# Orrstown Financial Services Inc: Form 10-Q for the period ended Jun 30, 2024

- Company: [Orrstown Financial Services Inc](/companies/orrf.md) (CIK 826154)
- Form: 10-Q
- Filed: 2024-08-08
- Accepted by EDGAR: Aug 8, 2024, 12:00 ET
- Period: 2024-06-30
- Accession: 0000826154-24-000191
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/826154/000082615424000191/orrf-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/826154/000082615424000191/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $17.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $32.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $2.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $4.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $7.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | $16.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.73 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | $1.55 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.74 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | $1.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 10,553,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 10,517,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $19.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $100.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2024-01-01 to 2024-06-30 | $4.3m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2024-01-01 to 2024-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2024-06-30 | $3.20bn | us-gaap:Assets |
| Total liabilities | at 2024-06-30 | $2.92bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-06-30 | $278.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 117,953 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 Harrisburg, 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 June 30, 2024, the Company had total assets of $3.2 billion, total liabilities of $2.9 billion and total shareholders’ equity of $278.4 million.

For the three months ended June 30, 2024 and 2023, the Company had net income of $7.7 million and $9.8 million, respectively. For the six months ended June 30, 2024 and 2023, the Company had net income of $16.3 million and $19.0 million, respectively. Diluted earnings per share were $0.73 and $0.94 for the three months ended June 30, 2024 and 2023, respectively. Diluted earnings per share were $1.55 and $1.82 for the six months ended June 30, 2024 and 2023, respectively. The Company is focused on limiting net interest margin compression in an elevated interest rate environment while generating prudent growth. For the three and six months ended June 30, 2024, the Company incurred merger-related expenses of $1.1 million and $1.8 million, respectively, 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; 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; the possibility that the anticipated benefits of the merger with Codorus Valley (the “Merger”) are not realized when expected or at all; the possibility that the Merger may be more expensive to complete and integrate than anticipated; the possibility that revenues following the Merger may be lower than expected; potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the Merger; the ability to complete the integration of the two companies successfully; the dilution caused by the Company’s issuance of additional shares of its capital stock in connection with the Merger; 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 second quarter of 2024 increased 2.8% on an annualized basis, which represents an increase from 1.4% during the first quarter of 2024 and an increase from 2.1% during the second quarter of 2023. The increase in preliminary GDP during the second quarter of 2024 compared to the first quarter of 2024 reflected increases in consumer spending, wholesale and retail trade and nonresidential fixed investment, specifically within equipment and intellectual property. The notable drivers to the increase in consumer spending were health care, housing, utilities and recreational services and goods and purchases of motor vehicles and household equipment. 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 2.6% in the second quarter of 2024 compared to an increase of 3.4% for first quarter of 2024 and 3.0% for the second quarter of 2023. Excluding food and energy prices, the PCE price index increased by 2.9% in the second quarter of 2024 compared to 3.7% in the first quarter of 2024 and 4.2% in the second quarter of 2023.

The national unemployment rate increased to 4.1% in June 2024 compared to 3.8% in March 2024 and 3.6% in June 2023. Within the Company's geographic footprint, the unemployment rate decreased in Pennsylvania from 3.8% in June 2023 to 3.4% in June 2024. The unemployment rate increased in Maryland from 2.0% in June 2023 to 2.8% in June 2024; however, it remains significantly below the national level. These 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 second quarter of 2024.

At June 30, 2024, the 10-year Treasury bond yield was 4.36%, a considerable increase from 3.88% at December 31, 2023 and 3.81% at June 30, 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 June of 2024, the FOMC signaled that job gains and the low unemployment rate have demonstrated progress towards its 2.0% target; however, economic concerns persist due to inflationary risks. The Fed Funds rate remains unchanged during 2024 as the FOMC does not believe it is appropriate yet to reduce the 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 income tax 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 June 30, 2024 compared with three months ended June 30, 2023

### Summary

Net income totaled $7.7 million for the three months ended June 30, 2024 compared to $9.8 million for the same period in 2023. Diluted earnings per share for the three months ended June 30, 2024 totaled $0.73 compared to $0.94 for the three months ended June 30, 2023. For the three months ended June 30, 2024, the Company incurred merger-related expenses of $1.1 million, which were included in non-interest expenses of the unaudited condensed consolidated statement of income. Excluding the merger-related expenses incurred during the second quarter of 2024, net income and diluted earnings per share totaled $8.7 million and $0.83, respectively, for the three months ended June 30, 2024. For the three months ended June 30, 2023, the Company recorded a gain of $1.2 million from the sale of the Bank's Path Valley branch. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Net interest income totaled $26.1 million for the three months ended June 30, 2024 compared to $26.4 million for the three months ended June 30, 2023.

The provision for credit losses on loans and off-balance sheet reserves totaled $812 thousand and $399 thousand for the three months ended June 30, 2024 and 2023, respectively.

Noninterest income totaled $7.2 million for both the three months ended June 30, 2024 and 2023. There was an increase of $14 thousand during the second quarter of 2024 due to an increase in wealth management income of $490 thousand and an increase in swap fee income of $179 thousand. During the second quarter of 2023, other income increased primarily due to the impact from the sale of the Path Valley branch of $1.2 million.

Noninterest expenses totaled $22.6 million for the three months ended June 30, 2024 compared to $20.7 million for the three months ended June 30, 2023. The increase of $1.9 million is primarily due to merger-related expenses of $1.1 million.

Income tax expense totaled $2.1 million and $2.5 million for the three months ended June 30, 2024 and 2023, respectively. The Company's effective tax rate was 21.2% for the three months ended June 30, 2024 compared to 20.6% for the three months ended June 30, 2023.

### Net Interest Income

Net interest income decreased by $272 thousand from $26.4 million for the three months ended June 30, 2023 to $26.1 million for the three months ended June 30, 2024. Interest income on loans increased by $4.3 million, from $31.2 million to $35.5 million. Interest income on investment securities increased by $600 thousand, from $5.3 million to $5.9 million, for the three months ended June 30, 2024 compared to the same period in the prior year. Total interest expense increased by $6.7 million from $10.5 million for the three months ended June 30, 2023 to $17.2 million for the three months ended June 30, 2024. Interest expense on deposits increased by $6.7 million from $8.6 million for the three months ended June 30, 2023 to $15.3 million for the three months ended June 30, 2024. Interest expense on borrowings was relatively flat at $1.9 million for both the three months ended June 30, 2024 and 2023.

The following table presents net interest income, net interest spread and net interest margin for the three months ended June 30, 2024 and 2023 on a taxable-equivalent basis:

| Assets | Three Months Ended June 30, 2024 Average Balance | Taxable- Equivalent Interest | Taxable- Equivalent Rate | Three Months Ended June 30, 2023 Average Balance | Taxable- Equivalent Interest | Taxable- Equivalent Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Federal funds sold & interest-bearing bank balances | **$142,868** | **$1,864** | **5.25%** | $37,895 | $418 | 4.42% |
| Investment securities (1)(2) | **538,451** | **6,114** | **4.54** | 526,225 | 5,510 | 4.19 |
| Loans (1)(3)(4) | **2,324,942** | **35,690** | **6.17** | 2,233,312 | 31,329 | 5.63 |
| Total interest-earning assets | **3,006,261** | **43,668** | **5.84** | 2,797,432 | 37,257 | 5.34 |
| Other assets | **204,863** |  |  | 191,983 |  |  |
| Total | **$3,211,124** |  |  | $2,989,415 |  |  |
| **Liabilities and Shareholders’ Equity** |  |  |  |  |  |  |
| Interest-bearing demand deposits | **$1,649,753** | **10,118** | **2.47** | $1,511,468 | 6,273 | 1.66 |
| Savings deposits | **165,467** | **140** | **0.34** | 204,584 | 135 | 0.26 |
| Time deposits | **481,721** | **5,007** | **4.18** | 326,034 | 2,200 | 2.71 |
| Total interest-bearing deposits | **2,296,941** | **15,265** | **2.67** | 2,042,086 | 8,608 | 1.69 |
| Securities sold under agreements to repurchase and federal funds purchased | **13,412** | **27** | **0.81** | 13,685 | 28 | 0.82 |
| FHLB advances and other borrowings | **115,000** | **1,152** | **4.03** | 132,094 | 1,386 | 4.21 |
| Subordinated notes | **32,118** | **734** | **9.19** | 32,049 | 504 | 6.29 |
| Total interest-bearing liabilities | **2,457,471** | **17,178** | **2.81** | 2,219,914 | 10,526 | 1.90 |
| Noninterest-bearing demand deposits | **423,037** |  |  | 476,123 |  |  |
| Other liabilities | **57,828** |  |  | 50,851 |  |  |
| Total liabilities | **2,938,336** |  |  | 2,746,888 |  |  |
| Shareholders’ equity | **272,788** |  |  | 242,527 |  |  |
| Total | **$3,211,124** |  |  | $2,989,415 |  |  |
| Taxable-equivalent net interest income / net interest spread |  | **26,490** | **3.02%** |  | 26,731 | 3.44% |
| Taxable-equivalent net interest margin |  |  | **3.54%** |  |  | 3.83% |
| Taxable-equivalent adjustment |  | **(387)** |  |  | (356) |  |
| Net interest income |  | **$26,103** |  |  | $26,375 |  |

| 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. |

51

The following table presents changes in net interest income on a taxable-equivalent basis for the three months ended June 30, 2024 and 2023 by rate and volume components.

*(in thousands)*

| Interest Income | Three Months Ended June 30, 2024 Versus 2023 Increase (Decrease) Due to Change In Average Volume | Average Rate | Total |
| --- | ---: | ---: | ---: |
| Federal funds sold and interest-bearing bank balances | **$1,154** | **$292** | **$1,446** |
| Taxable securities | **157** | **427** | **584** |
| Tax-exempt securities | **(22)** | **42** | **20** |
| Loans | **1,226** | **3,135** | **4,361** |
| Total interest income | **2,515** | **3,896** | **6,411** |
| **Interest Expense** |  |  |  |
| Interest-bearing demand deposits | **649** | **3,196** | **3,845** |
| Savings deposits | **(26)** | **31** | **5** |
| Time deposits | **1,048** | **1,759** | **2,807** |
| Total interest-bearing deposits | **1,671** | **4,986** | **6,657** |
| Securities purchases under agreements to repurchase and federal funds purchased | **(1)** | **—** | **(1)** |
| FHLB advances and other borrowings | **(179)** | **(55)** | **(234)** |
| Subordinated notes | **1** | **229** | **230** |
| Total interest expense | **1,492** | **5,160** | **6,652** |
| **Taxable-Equivalent Net Interest Income** | **$1,023** | **$(1,264)** | **$(241)** |

Net interest income on a taxable-equivalent basis decreased by $241 thousand to $26.5 million for the three months ended June 30, 2024 from $26.7 million for the three months ended June 30, 2023. The Company's net interest spread decreased by 42 basis points from 3.44% for the three months ended June 30, 2023 to 3.02% for the three months ended June 30, 2024 primarily due to the increase in cost of funds.

Taxable-equivalent net interest margin decreased by 29 basis points to 3.54% for the three months ended June 30, 2024 from 3.83% for the three months ended June 30, 2023. The taxable-equivalent yield on interest-earning assets increased by 50 basis points from 5.34% for the three months ended June 30, 2023 to 5.84% for the three months ended June 30, 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 91 basis points in the cost of interest-bearing liabilities from 1.90% to 2.81% due to increased funding costs on deposits from higher market interest rates and competitive pressures.

Average loans increased by $91.6 million to $2.3 billion for the three months ended June 30, 2024 compared to $2.2 billion for the three months ended June 30, 2023. Average investment securities increased by $12.2 million from $526.2 million for the three months ended June 30, 2023 to $538.5 million for the three months ended June 30, 2024. Average interest-bearing liabilities increased by $237.6 million to $2.5 billion for the three months ended June 30, 2024 from $2.2 billion for the three months ended June 30, 2023.

The yield on loans increased by 54 basis points to 6.17% for the three months ended June 30, 2024 compared to 5.63% for the three months ended June 30, 2023. Taxable-equivalent interest income earned on loans increased by $4.4 million due to higher interest rates, which increased interest income by $3.1 million, and an increase in the average balances of loans resulted in an increase to interest income by $1.2 million.

The average balance of commercial loans, excluding SBA PPP loan forgiveness activity, increased by $51.5 million from the three months ended June 30, 2023 to the three months ended June 30, 2024. SBA PPP loans, net of deferred fees and costs, averaged $9.1 million for the three months ended June 30, 2023 compared to $5.3 million for the three months ended June 30, 2024. This decrease was due to forgiveness of SBA PPP loans.

Average residential mortgage loans increased by $39.0 million from $237.7 million during the three months ended June 30, 2023 to $276.7 million during the three months ended June 30, 2024, primarily due to mortgages originated for the portfolio. Average home equity loans increased by $9.0 million from $188.1 million for the three months ended June 30, 2023 to $197.1 million for the three months ended June 30, 2024. Average installment and other consumer loans decreased by $4.1 million from $20.3 million for the three months ended June 30, 2023 to $16.2 million for the three months ended June 30, 2024.

Accretion of purchase accounting adjustments included in interest income was $152 thousand and $215 thousand for the three months ended June 30, 2024 and 2023, respectively. The decrease in accretion was primarily due to a decline in accelerated accretion from acquired loan payoffs or significant loan repayments. Accelerated accretion totaled $72 thousand and $138 thousand for the three months ended June 30, 2024 and 2023, respectively. For the three months ended June 30, 2024, interest income on loans included $12 thousand of interest and net deferred fee income associated with SBA PPP loans compared to $66 thousand of such interest and fee income for the three months ended June 30, 2023.

Interest income on investment securities on a tax-equivalent basis increased by $604 thousand to $6.1 million for the three months ended June 30, 2024 from $5.5 million for the three months ended June 30, 2023, with the taxable equivalent yield increasing from 4.19% for the three months ended June 30, 2023 to 4.54% for the three months ended June 30, 2024. The 35 basis point increase primarily reflected the impact from the higher interest rates. The average balance of investment securities increased by $12.2 million to $538.5 million for the three months ended June 30, 2024 from $526.2 million for the three months ended June 30, 2023 due primarily to purchase activity.

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $1.4 million to $1.9 million for the three months ended June 30, 2024 from $418 thousand for the three months ended June 30, 2023. The average balance of federal funds sold and interest-bearing bank balances increased by $105.0 million from $37.9 million for the three months ended June 30, 2023 to $142.9 million, which resulted in an increase in interest income of $1.2 million. Since June 30, 2023, the FOMC increased the Federal Funds rate by 25 basis points, which contributed to the increase in interest income on federal funds sold and interest-bearing bank balances by $292 thousand during the three months ended June 30, 2024.

Interest expense on interest-bearing liabilities increased by $6.7 million from $10.5 million for the three months ended June 30, 2023 to $17.2 million for the three months ended June 30, 2024. The cost of interest-bearing liabilities increased by 91 basis points from 1.90% for the three months ended June 30, 2023 to 2.81% for the three months ended June 30, 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 $254.9 million to $2.3 billion for the three months ended June 30, 2024 from $2.0 billion for the three months ended June 30, 2023. Average time deposits increased by $155.7 million and average interest-bearing demand deposits increased by $138.3 million for the three months ended June 30, 2024 compared to the prior period due to strong deposit gathering efforts by the Bank's sales teams. These increases were partially offset by a decrease in average savings deposits of $39.1 million between the three months ended June 30, 2024 and 2023 as clients sought higher-yielding products during the rising interest rate environment.

Interest expense on borrowings was $1.9 million for both the three months ended June 30, 2024 and 2023. The cost of borrowings increased by 47 basis points to 4.79% for the three months ended June 30, 2024 from 4.32% for the three months ended June 30, 2023. The interest rate increased on the Company's outstanding subordinated notes of $32.1 million, which converted from a fixed rate to a floating rate on December 30, 2023. The contractual interest rate on the subordinated notes was 8.72% at June 30, 2024 compared to 6.00% at June 30, 2023. Average borrowings decreased by $17.3 million from $177.8 million for the three months ended June 30, 2023 to $160.5 million for the three months ended June 30, 2024 due to repayment of overnight funds.

### Provision for Credit Losses

The Company recorded a provision for credit losses of $812 thousand for the three months ended June 30, 2024 compared to $399 thousand for the same period in 2023. For the three months ended June 30, 2024, the provision for credit losses increased primarily due to loan growth and the slowing in prepayment speed assumptions within the quantitative model based on current economic conditions. The impact of these factors was partially offset by a decrease in the *Economic Conditions* qualitative factor for the residential mortgage segment based on the stabilization in real estate collateral valuations and housing demand and overall portfolio performance, which is reflected in the provision for credit losses noted above. This resulted in a decrease to the ACL of $228 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 was 1.27% at both June 30, 2023 and June 30, 2024. For the three months ended June 30, 2023, the provision for credit losses was driven by an increase in commercial loans and an increase in the *Delinquency and Classified Loan Trends* qualitative factor for the commercial & industrial and owner-occupied commercial real estate loan classes. The change in this qualitative factor was based on a recent trend of increases in loans downgraded to the special mention risk rating, which is reflected in the provision for credit losses noted above. In addition, the provision for credit losses was impacted by the change in expected loss rates under CECL. Favorable published trends in unemployment and GDP rates impacted the extent of provisioning required in the second quarter of 2023.

Net charge-offs for the three months ended June 30, 2024 totaled $113 thousand compared to net charge-offs of $380 thousand for the three months ended June 30, 2023. Nonaccrual loans were 0.36% of gross loans at June 30, 2024, compared with 0.94% of gross loans at June 30, 2023. Nonaccrual loans decreased by $12.7 million from $21.1 million at June 30, 2023 to $8.4 million at June 30, 2024, primarily due to the payoff of one owner-occupied commercial real estate loan with a balance of $14.8 million at June 30, 2023, partially offset by an addition of one owner-occupied commercial real estate loan with a balance of $1.2 million at June 30, 2024.

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

### Noninterest Income

The following table compares noninterest income for the three months ended June 30, 2024 and 2023:

|  | Three Months Ended June 30, 2024 | 2023 | $ Change 2024-2023 | % Change 2024-2023 |
| --- | ---: | ---: | ---: | ---: |
| Service charges on deposit accounts | **$1,018** | $984 | **$34** | **3.5%** |
| Interchange income | **961** | 993 | **(32)** | **(3.2)%** |
| Other service charges, commissions and fees | **265** | 267 | **(2)** | **(0.7)%** |
| Swap fee income | **375** | 196 | **179** | **91.3%** |
| Trust and investment management income | **2,132** | 1,927 | **205** | **10.6%** |
| Brokerage income | **1,180** | 895 | **285** | **31.8%** |
| Mortgage banking activities | **369** | 112 | **257** | **229.5%** |
| Income from life insurance | **646** | 645 | **1** | **0.2%** |
| Other income | **238** | 1,141 | **(903)** | **(79.1)%** |
| Investment securities losses | **(12)** | (2) | **(10)** | **(500.0)%** |
| Total noninterest income | **$7,172** | $7,158 | **$14** | **0.2%** |

Noninterest income increased by $14 thousand from $7.2 million for the three months ended June 30, 2023 to $7.2 million for the three months ended June 30, 2024. The following were significant components in this line item:

- Wealth management income, which includes trust and investment management income and brokerage income, increased by $490 thousand due to strong market performance and growth in managed assets.
- Mortgage banking income increased by $257 thousand. Mortgage loans sold totaled $8.4 million in the second quarter of 2024 compared to $5.1 million in the second quarter of 2023. In addition, the fair value mark on the mortgage loans held-for-sale increased by $151 thousand from a negative fair value mark of $138 thousand for the three months ended June 30, 2023 to a positive fair value mark of $13 thousand for the three months ended June 30, 2024.
- Swap fee income increased by $179 thousand as swap fee income will fluctuate based on market conditions and client demand.
- Other income decreased by $903 thousand due primarily to a gain of $1.2 million from the sale of the Bank's Path Valley branch recorded during the second quarter of 2023.
- 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 June 30, 2024 and 2023:

|  | Three Months Ended June 30, 2024 | 2023 | $ Change 2024-2023 | % Change 2024-2023 |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | **$13,195** | $13,054 | **$141** | **1.1%** |
| Occupancy | **1,178** | 1,054 | **124** | **11.8%** |
| Furniture and equipment | **1,527** | 1,212 | **315** | **26.0%** |
| Data processing | **1,237** | 1,201 | **36** | **3.0%** |
| Automated teller machine and interchange fees | **341** | 308 | **33** | **10.7%** |
| Advertising and bank promotions | **774** | 919 | **(145)** | **(15.8)%** |
| FDIC insurance | **419** | 519 | **(100)** | **(19.3)%** |
| Professional services | **801** | 504 | **297** | **58.9%** |
| Directors' compensation | **272** | 221 | **51** | **23.1%** |
| Taxes other than income | **49** | 3 | **46** | **1533.3%** |
| Intangible asset amortization | **215** | 239 | **(24)** | **(10.0)%** |
| Merger-related expenses | **1,135** | — | **1,135** | **100.0%** |
| Other operating expenses | **1,496** | 1,515 | **(19)** | **(1.3)%** |
| Total noninterest expenses | **$22,639** | $20,749 | **$1,890** | **9.1%** |

Noninterest expense increased by $1.9 million from $20.7 million for the three months ended June 30, 2023 to $22.6 million for the three months ended June 30, 2024. The following were significant components in this line item:

- Merger-related expenses totaled $1.1 million related to the merger with Codorus Valley.
- Furniture and equipment expense increased by $315 thousand due primarily to an increase in software maintenance and services to support technology improvements.
- Professional services expense increased by $297 thousand due primarily to increases in audit-related and consulting fees.
- Salaries and employee benefits expense increased by $141 thousand due primarily to increases in incentive compensation and other employee benefit costs.
- Occupancy expense increased by $124 thousand due to additional building maintenance expenses and operating lease expenses from a new lease agreement entered into during the second quarter of 2023.
- Advertising and bank promotions expense decreased by $145 thousand as the timing of promotions, advertising, and sponsorships can vary.
- FDIC insurance expense decreased by $100 thousand due primarily to a decrease in the assessment rate caused by a decrease in the loan mix index factor and a decrease in nonaccrual loans.
- Other line items within noninterest expenses showed fluctuations attributable to normal business operations.

### Income Tax Expense

Income tax expense totaled $2.1 million, an effective tax rate of 21.2%, for the three months ended June 30, 2024 compared with $2.5 million and an effective tax rate of 20.6% for the three months ended June 30, 2023. The Company’s effective tax rate is greater than the 21% federal statutory rate due to disallowed interest expenses and the impact of nondeductible merger-related costs, partially offset by tax-exempt income, including interest earned on tax-exempt loans and investment securities, income from life insurance policies and tax credits. The increase in the effective tax rate from the three months ended June 30, 2023 to the three months ended June 30, 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.

### Six months ended June 30, 2024 compared with six months ended June 30, 2023

### Summary

Net income totaled $16.3 million for the six months ended June 30, 2024 compared to $19.0 million for the same period in 2023. Diluted earnings per share for the six months ended June 30, 2024 totaled $1.55 compared to $1.82 for the six months ended June 30, 2023. For the six months ended June 30, 2024, the Company incurred merger-related expenses of $1.8 million, which were included in non-interest expenses of the unaudited condensed consolidated statement of income. Excluding the merger-related expenses incurred during the period, net income and diluted earnings per common share totaled $17.9 million and $1.71, respectively, for the six months ended June 30, 2024. For the six months ended June 30, 2023, the Company recorded a gain of $1.2 million from the sale of the Bank's Path Valley branch. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Net interest income totaled $53.0 million for the six months ended June 30, 2024 compared to $52.7 million for the six months ended June 30, 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 six months ended June 30, 2024, partially offset by the impact of an increase in cost of funds and an increase in average interest-bearing liabilities.

The provision for credit losses on loans and off-balance sheet reserves totaled $1.1 million for both the six months ended June 30, 2024 and 2023.

Noninterest income totaled $13.8 million and $13.2 million for the six months ended June 30, 2024 and 2023, respectively. The increase of $566 thousand was due to an increase in wealth management income of $845 thousand, an increase in swap fee income of $378 thousand and an increase in mortgage banking income of $237 thousand. These increases were offset by the gain of $1.2 million recorded to other income from the sale of the Path Valley branch during the second quarter of 2023.

Noninterest expenses totaled $45.1 million and $41.0 million for the six months ended June 30, 2024 and 2023, respectively. The increase of $4.1 million is primarily due to merger-related expenses of $1.8 million and an increase in salaries and employee benefits expense of $1.7 million.

Income tax expense totaled $4.3 million and $4.8 million for the six months ended June 30, 2024 and 2023, respectively. The Company's effective tax rate was 20.9% for the six months ended June 30, 2024 compared to 20.1% for the six months ended June 30, 2023 due primarily to the impact of non-deductible merger-related expenses in 2024.

### Net Interest Income

Net interest income increased by $315 thousand from $52.7 million for the six months ended June 30, 2023 to $53.0 million for the six months ended June 30, 2024. Interest income on loans increased by $11.9 million, from $59.9 million to $71.8 million. Interest income on investment securities increased by $826 thousand, from $10.5 million to $11.3 million, for the six months ended June 30, 2024 compared to the same period in the prior year. Total interest expense increased by $14.4 million from $18.5 million for the six months ended June 30, 2023 to $32.9 million for the six months ended June 30, 2024. Interest expense on deposits increased by $14.0 million from $14.8 million for the six months ended June 30, 2023 to $28.8 million for the six months ended June 30, 2024. Interest expense on borrowings increased by $467 thousand from $3.7 million from the six months ended June 30, 2023 to $4.2 million for the six months ended June 30, 2024.

The following table presents net interest income, net interest spread and net interest margin for the six months ended June 30, 2024 and 2023 on a taxable-equivalent basis:

| Assets | Six Months Ended June 30, 2024 Average Balance | Taxable- Equivalent Interest | Taxable- Equivalent Rate | Six Months Ended June 30, 2023 Average Balance | Taxable- Equivalent Interest | Taxable- Equivalent Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Federal funds sold & interest-bearing bank balances | **$108,695** | **$2,820** | **5.22%** | $33,770 | $716 | 4.27% |
| Investment securities (1)(2) | **529,151** | **11,808** | **4.47** | 525,957 | 10,975 | 4.19 |
| Loans (1)(3)(4)(5) | **2,316,522** | **72,072** | **6.25** | 2,206,914 | 60,173 | 5.49 |
| Total interest-earning assets | **2,954,368** | **86,700** | **5.90** | 2,766,641 | 71,864 | 5.23 |
| Other assets | **200,580** |  |  | 194,786 |  |  |
| Total | **$3,154,948** |  |  | $2,961,427 |  |  |
| **Liabilities and Shareholders’ Equity** |  |  |  |  |  |  |
| Interest-bearing demand deposits | **$1,610,188** | **19,310** | **2.41** | $1,507,467 | 11,135 | 1.49 |
| Savings deposits | **167,736** | **284** | **0.34** | 211,955 | 268 | 0.25 |
| Time deposits | **455,082** | **9,187** | **4.06** | 301,095 | 3,407 | 2.28 |
| Total interest-bearing deposits | **2,233,006** | **28,781** | **2.59** | 2,020,517 | 14,810 | 1.48 |
| Securities sold under agreements to repurchase and federal funds purchased | **12,711** | **52** | **0.83** | 13,776 | 53 | 0.77 |
| FHLB advances and other borrowings | **126,253** | **2,626** | **4.18** | 119,335 | 2,638 | 4.46 |
| Subordinated notes | **32,109** | **1,488** | **9.32** | 32,041 | 1,008 | 6.29 |
| Total interest-bearing liabilities | **2,404,079** | **32,947** | **2.76** | 2,185,669 | 18,509 | 1.71 |
| Noninterest-bearing demand deposits | **420,253** |  |  | 485,789 |  |  |
| Other liabilities | **60,078** |  |  | 51,736 |  |  |
| Total liabilities | **2,884,410** |  |  | 2,723,194 |  |  |
| Shareholders’ equity | **270,538** |  |  | 238,233 |  |  |
| Total | **$3,154,948** |  |  | $2,961,427 |  |  |
| Taxable-equivalent net interest income / net interest spread |  | **53,753** | **3.14%** |  | 53,355 | 3.52% |
| Taxable-equivalent net interest margin |  |  | **3.65%** |  |  | 3.88% |
| Taxable-equivalent adjustment |  | **(769)** |  |  | (686) |  |
| Net interest income |  | **$52,984** |  |  | $52,669 |  |

| 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 during the six months ended June 30, 2024. |

58

The following table presents changes in net interest income on a taxable-equivalent basis for the six months ended June 30, 2024 and 2023 by rate and volume components.

*(in thousands)*

| Interest Income | Six Months Ended June 30, 2024 Versus 2023 Increase (Decrease) Due to Change In Average Volume | Average Rate | Total |
| --- | ---: | ---: | ---: |
| Federal funds sold and interest-bearing bank balances | **$1,597** | **$507** | **$2,104** |
| Taxable securities | **172** | **626** | **798** |
| Tax-exempt securities | **(23)** | **58** | **35** |
| Loans | **3,778** | **8,121** | **11,899** |
| Total interest income | **5,524** | **9,312** | **14,836** |
| **Interest Expense** |  |  |  |
| Interest-bearing demand deposits | **881** | **7,294** | **8,175** |
| Savings deposits | **(56)** | **72** | **16** |
| Time deposits | **1,752** | **4,028** | **5,780** |
| Total interest-bearing deposits | **2,577** | **11,394** | **13,971** |
| Securities purchases under agreements to repurchase and federal funds purchased | **(4)** | **3** | **(1)** |
| FHLB advances and other borrowings | **154** | **(166)** | **(12)** |
| Subordinated notes | **4** | **476** | **480** |
| Total interest expense | **2,731** | **11,707** | **14,438** |
| **Taxable-Equivalent Net Interest Income** | **$2,793** | **$(2,395)** | **$398** |

Net interest income on a taxable-equivalent basis increased by $398 thousand to $53.8 million for the six months ended June 30, 2024 from $53.4 million for the six months ended June 30, 2023. The Company's net interest spread decreased by 38 basis points from 3.52% for the six months ended June 30, 2023 to 3.14% for the six months ended June 30, 2024 primarily due to the increase in cost of funds.

Taxable-equivalent net interest margin decreased by 23 basis points to 3.65% for the six months ended June 30, 2024 from 3.88% for the six months ended June 30, 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 10 basis points to the Company's net interest margin during the six months ended June 30, 2024. The taxable-equivalent yield on interest-earning assets increased by 67 basis points from 5.23% for the six months ended June 30, 2023 to 5.90% for the six months ended June 30, 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 105 basis points in the cost of interest-bearing liabilities from 1.71% to 2.76% due to increased funding costs on deposits due to higher market interest rates and competitive pressures and an increase in the interest rate on subordinated notes, which converted from a fixed rate to a floating rate on December 30, 2023.

Average loans increased by $109.6 million to $2.3 billion for the six months ended June 30, 2024 compared to $2.2 billion for the six months ended June 30, 2023. Average investment securities increased by $3.2 million from $526.0 million for the six months ended June 30, 2023 to $529.2 million for the six months ended June 30, 2024. Average interest-bearing liabilities increased by $218.4 million to $2.4 billion for the six months ended June 30, 2024 from $2.2 billion for the six months ended June 30, 2023.

The yield on loans increased by 76 basis points to 6.25% for the six months ended June 30, 2024 compared to 5.49% for the six months ended June 30, 2023. Taxable-equivalent interest income earned on loans increased by $11.9 million due to higher interest rates, which increased interest income by $8.1 million, and an increase in the average balances of loans resulted in an increase to interest income of $3.8 million.

The average balance of commercial loans, excluding SBA PPP loan forgiveness activity, increased by $73.2 million from the six months ended June 30, 2023 to the six months ended June 30, 2024. SBA PPP loans, net of deferred fees and costs, averaged $10.7 million for the six months ended June 30, 2023 compared to $5.5 million for the six months ended June 30,

2024\. This decrease was due to forgiveness of SBA PPP loans. Average residential mortgage loans increased by $39.6 million from $235.5 million during the six months ended June 30, 2023 to $275.1 million during the six months ended June 30, 2024, primarily due to mortgages originated for the portfolio. Average home equity loans increased by $7.1 million from $187.5 million for the six months ended June 30, 2023 to $194.6 million for the six months ended June 30, 2024. Average installment and other consumer loans decreased by $4.1 million from $20.9 million for the six months ended June 30, 2023 to $16.8 million for the six months ended June 30, 2024.

Accretion of purchase accounting adjustments included in interest income was $147 thousand and $454 thousand for the six months ended June 30, 2024 and 2023, respectively. The decrease in accretion was primarily due to a decline in loan repayments and payoffs. Accelerated accretion totaled $138 thousand and $182 thousand during the six months ended June 30, 2024 and 2023, respectively. Prepayment income on commercial loans decreased by $17 thousand from $274 thousand for the six months ended June 30, 2023 to $257 thousand for the six months ended June 30, 2024. For the six months ended June 30, 2024, interest income on loans includes $26 thousand of interest and net deferred fee income associated with SBA PPP loans compared to $146 thousand of such interest and fee income for the six months ended June 30, 2023.

Interest income on investment securities on a tax-equivalent basis increased by $833 thousand to $11.8 million for the six months ended June 30, 2024 from $11.0 million for the six months ended June 30, 2023, with the taxable equivalent yield increasing from 4.19% for the six months ended June 30, 2023 to 4.47% for the six months ended June 30, 2024. The 28 basis point increase reflected the impact from the higher interest rates. The average balance of investment securities increased by $3.2 million to $529.2 million for the six months ended June 30, 2024 from $526.0 million for the six months ended June 30, 2023 due primarily to net purchase activity.

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $2.1 million to $2.8 million for the six months ended June 30, 2024 from $716 thousand for the six months ended June 30, 2023. The average balance of federal funds sold and interest-bearing bank balances increased by $74.9 million from $33.8 million for the six months ended June 30, 2023 to $108.7 million for the six months ended June 30, 2024, which resulted in an increase in interest income of $1.6 million. Since June 30, 2023, the FOMC increased the Federal Funds rate by 25 basis points, which contributed to the increase in interest income on federal funds sold and interest-bearing bank balances by $507 thousand during the six months ended June 30, 2024.

Interest expense on interest-bearing liabilities increased by $14.4 million from $18.5 million for the six months ended June 30, 2023 to $32.9 million for the six months ended June 30, 2024. The cost of interest-bearing liabilities increased by 105 basis points from 1.71% for the six months ended June 30, 2023 to 2.76% for the six months ended June 30, 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 $212.5 million to $2.2 billion for the six months ended June 30, 2024 from $2.0 billion for the six months ended June 30, 2023. Average time deposits increased by $154.0 million and average interest-bearing demand deposits increased by $102.7 million for the six months ended June 30, 2024 in relation to the comparable prior period. These increases were partially offset by a decrease in average savings deposits of $44.2 million between the six months ended June 30, 2024 and 2023 as clients sought higher-yielding products during the rising interest rate environment.

Interest expense on borrowings increased by $467 thousand to $4.2 million for the six months ended June 30, 2024 from $3.7 million for the six months ended June 30, 2023 as the cost of borrowings increased by 39 basis points to 4.90% for the six months ended June 30, 2024 from 4.51% for the six months ended June 30, 2023. Average borrowings increased by $5.9 million from $165.2 million for the six months ended June 30, 2023 to $171.1 million for the six months ended June 30, 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 contractual interest rate on the subordinated notes was 8.72% at June 30, 2024 compared to 6.00% at June 30, 2023.

### Provision for Credit Losses

The Company recorded a provision for credit losses of $1.1 million for the six months ended June 30, 2024 compared to $1.1 million 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 six months ended June 30, 2024. For the six months ended June 30, 2024, the provision for credit losses was primarily based on loan growth and the slowing 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 decreases in certain qualitative factors. The *Collateral Valuation Trends* qualitative factor was reduced for the residential mortgage and installment and other loan segments and the *Economic Factors* qualitative factor was reduced for the residential mortgage segment based on the stabilization in real estate collateral valuations and housing demand, which is reflected in the provision for credit losses noted above. 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 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 remained at 1.27% at June 30, 2023 and June 30, 2024. The provision expense recorded in the six months ended June 30, 2023 was due to commercial loan growth and overall increase in expected loss rates under CECL, which was adopted on January 1, 2023.

Net charge-offs for the six months ended June 30, 2024 totaled $71 thousand compared to net charge-offs of $346 thousand for the six months ended June 30, 2023. Nonaccrual loans were 0.36% of gross loans at June 30, 2024, compared with 0.94% of gross loans at June 30, 2023. Nonaccrual loans decreased by $12.7 million from $21.1 million at June 30, 2023 to $8.4 million at June 30, 2024, primarily due to the payoff of one owner-occupied commercial real estate loan with a balance of $14.8 million at June 30, 2023, partially offset by an addition of one owner-occupied commercial real estate loan with a balance of $1.2 million at June 30, 2024.

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

### Noninterest Income

The following table compares noninterest income for the six months ended June 30, 2024 and 2023:

|  | Six Months Ended June 30, 2024 | 2023 | $ Change 2024-2023 | % Change 2024-2023 |
| --- | ---: | ---: | ---: | ---: |
| Service charges on deposit accounts | **$2,023** | $1,946 | **$77** | **4.0%** |
| Interchange income | **1,872** | 1,958 | **(86)** | **(4.4)%** |
| Other service charges, commissions and fees | **460** | 462 | **(2)** | **(0.4)%** |
| Swap fee income | **574** | 196 | **378** | **192.9%** |
| Trust and investment management income | **4,156** | 3,815 | **341** | **8.9%** |
| Brokerage income | **2,258** | 1,754 | **504** | **28.7%** |
| Mortgage banking activities | **827** | 590 | **237** | **40.2%** |
| Income from life insurance | **1,280** | 1,235 | **45** | **3.6%** |
| Other income | **369** | 1,290 | **(921)** | **(71.4)%** |
| Investment securities losses | **(17)** | (10) | **(7)** | **(70.0)%** |
| Total noninterest income | **$13,802** | $13,236 | **$566** | **4.3%** |

Noninterest income increased by $566 thousand from $13.2 million for the six months ended June 30, 2023 to $13.8 million for the six months ended June 30, 2024. The following were significant components in this line item:

- Wealth management income, which includes trust and investment management income and brokerage income, increased by $845 thousand due to strong market performance and growth in managed assets.
- Swap fee income increased by $378 thousand as swap fee income will fluctuate based on market conditions and client demand.
- Mortgage banking income increased by $237 thousand. Mortgage loans sold totaled $23.1 million in the six months ended June 30, 2024, which included a $7.2 million portfolio sold to another institution in the three months ended March 31, 2024, compared to $14.7 million in the first half of 2023.
- Other income decreased by $921 thousand due primarily to a gain of $1.2 million from the sale of the Bank's Path Valley branch during the second quarter of 2023.
- Other line items within noninterest income showed fluctuations attributable to normal business operations.

### Noninterest Expenses

The following table compares noninterest expenses for the six months ended June 30, 2024 and 2023:

|  | Six Months Ended June 30, 2024 | 2023 | $ Change 2024-2023 | % Change 2024-2023 |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | **$26,947** | $25,250 | **$1,697** | **6.7%** |
| Occupancy | **2,379** | 2,160 | **219** | **10.1%** |
| Furniture and equipment | **2,965** | 2,439 | **526** | **21.6%** |
| Data processing | **2,502** | 2,418 | **84** | **3.5%** |
| Automated teller machine and interchange fees | **692** | 606 | **86** | **14.2%** |
| Advertising and bank promotions | **1,172** | 1,324 | **(152)** | **(11.5)%** |
| FDIC insurance | **860** | 1,023 | **(163)** | **(15.9)%** |
| Professional services | **1,432** | 1,238 | **194** | **15.7%** |
| Directors' compensation | **523** | 468 | **55** | **11.8%** |
| Taxes other than income | **543** | 460 | **83** | **18.0%** |
| Intangible asset amortization | **440** | 489 | **(49)** | **(10.0)%** |
| Merger-related expenses | **1,807** | — | **1,807** | **100.0%** |
| Other operating expenses | **2,846** | 3,129 | **(283)** | **(9.0)%** |
| Total noninterest expenses | **$45,108** | $41,004 | **$4,104** | **10.0%** |

Noninterest expense increased by $4.1 million from $41.0 million for the six months ended June 30, 2023 to $45.1 million for the six months ended June 30, 2024. The following were significant components in this line item:

- Merger-related expenses totaled $1.8 million during the first half of 2024 related to the merger with Codorus Valley compared to none in the first half of 2023.
- Salaries and employee benefits expense increased by $1.7 million due primarily to increases in merit-based and incentive compensation.
- Furniture and equipment expense increased by $526 thousand due primarily to an increase in software maintenance and services to support technology improvements.
- Occupancy expense increased by $219 thousand due to additional building maintenance expenses and operating lease expenses from a new lease agreement entered into during the second quarter of 2023.
- Professional services expense increased by $194 thousand due primarily to an increase in audit-related fees.
- FDIC insurance expense decreased by $163 thousand due primarily to a decrease in the assessment rate caused by a decrease in the loan mix index factor and a decrease in nonaccrual loans.
- Other operating expenses decreased by $283 thousand due primarily to a decrease in credit valuation adjustments on derivatives of $236 thousand.
- Other line items within noninterest expenses showed fluctuations attributable to normal business operations.

### Income Tax Expense

Income tax expense totaled $4.3 million, an effective tax rate of 20.9%, for the six months ended June 30, 2024 compared with $4.8 million and an effective tax rate of 20.1% for the six months ended June 30, 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, state income taxes and nondeductible merger-related expenses. The increase in the effective tax rate from the six months ended June 30, 2023 to the six months ended June 30, 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 nondeductible 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/liability 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 security portfolio into three categories: “securities available-for-sale,” “trading securities” and “securities held-to-maturity.” At June 30, 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 investment security prior to recovery, or it expects to be able to hold the investment 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 June 30, 2024 and December 31, 2023.

At June 30, 2024, AFS securities totaled $529.1 million, an increase of $15.6 million, from $513.5 million at December 31, 2023. During the six months ended June 30, 2024, the Company purchased $50.3 million of AFS securities, which included $48.0 million of agency MBS and CMO securities, $1.5 million of non-agency CMO securities and $788 thousand of investment securities issued by state and political subdivisions. The purchases were partially offset by calls of non-agency CMO securities totaling $12.9 million and paydowns of $19.4 million. The balance of investment securities included net unrealized losses of $37.3 million at June 30, 2024 compared to net unrealized losses of $35.6 million at December 31, 2023 for an increase of $1.8 million. This increase in net unrealized losses was primarily due to higher treasury rates and wider credit spreads compared to December 31, 2023. The overall duration of the Company's investment securities portfolio was 4.2 years at June 30, 2024 compared to 4.3 years at December 31, 2023. 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 security portfolio is appropriately aligned with the rest of the balance sheet to protect against volatile interest rate environments, to provide a source of liquidity and to generate steady earnings.

The following table summarizes the credit ratings and collateral associated with the Company's investment security portfolio, excluding equity securities, at June 30, 2024:

| Sector | Portfolio Mix | Amortized Book Value | Fair Value | Credit Enhancement | AAA | AA | A | BBB | NR | Collateral / Guarantee Type |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | --- |
| Unsecured ABS | 1% | $3,330 | $3,022 | 26% | —% | —% | —% | —% | 100% | Unsecured Consumer Debt |
| Student Loan ABS | 1 | 4,662 | 4,558 | 27 | — | — | — | — | 100 | Seasoned Student Loans |
| Federal Family Education Loan ABS | 16 | 89,830 | 89,516 | 10 | 7 | 80 | — | 13 | — | Federal Family Education Loan (1) |
| PACE Loan ABS | — | 2,231 | 1,945 | 6 | 100 | — | — | — | — | PACE Loans |
| Non-Agency CMBS | 3 | 14,180 | 14,185 | 25 | — | — | — | — | 100 |  |
| Non-Agency RMBS | 3 | 17,195 | 14,201 | 16 | 100 | — | — | — | — | Reverse Mortgages (2) |
| Municipal - General Obligation | 18 | 102,548 | 93,339 |  | 10 | 83 | 7 | — | — |  |
| Municipal - Revenue | 21 | 118,856 | 107,107 |  | — | 82 | 12 | — | 6 |  |
| SBA ReRemic | — | 2,662 | 2,639 |  | — | 100 | — | — | — | SBA Guarantee (3) |
| Small Business Administration | 1 | 7,222 | 7,662 |  | — | 100 | — | — | — | SBA Guarantee (3) |
| Agency MBS | 32 | 183,546 | 173,086 |  | — | 100 | — | — | — | Residential Mortgages (3) |
| U.S. Treasury securities | 4 | 20,050 | 17,713 |  | — | 100 | — | — | — | U.S. Government Guarantee (3) |
|  | 100% | $566,312 | $528,973 |  | 6% | 83% | 4% | 2% | 5% |  |
| (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, ACL and FDM 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 June 30, 2024 and December 31, 2023:

| Commercial real estate: | June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Owner occupied | **$371,301** | $373,757 |
| Non-owner occupied | **710,477** | 694,638 |
| Multi-family | **151,542** | 150,675 |
| Non-owner occupied residential | **89,156** | 95,040 |
| Acquisition and development: |  |  |
| 1-4 family residential construction | **32,439** | 24,516 |
| Commercial and land development | **129,883** | 115,249 |
| Commercial and industrial | **374,976** | 367,085 |
| Municipal | **10,594** | 9,812 |
| Residential mortgage: |  |  |
| First lien | **271,153** | 266,239 |
| Home equity - term | **4,633** | 5,078 |
| Home equity - lines of credit | **192,736** | 186,450 |
| Installment and other loans | **8,713** | 9,774 |
|  | **$2,347,603** | $2,298,313 |

Total loans increased by $49.3 million from December 31, 2023 to June 30, 2024. This increase is due to continued portfolio growth in the commercial loans segment of $39.6 million and residential mortgage segment of $10.8 million during the six months ended June 30, 2024. During the first half of 2024, there were payoffs of three commercial real estate loans with outstanding balances exceeding $1.0 million on nonaccrual status at December 31, 2023 totaling $14.7 million and payoffs of four other criticized loans with outstanding balances exceeding $1.0 million within the commercial and industrial and commercial loan classes totaling $12.1 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 June 30, 2024 and December 31, 2023.

|  | June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Nonaccrual loans | **$8,363** | $25,527 |
| OREO | **—** | — |
| Total nonperforming assets | **8,363** | 25,527 |
| FDMs still accruing | **—** | 9 |
| Loans past due 90 days or more and still accruing | **187** | 66 |
| Total nonperforming and other risk assets ("total risk assets") | **$8,550** | $25,602 |
| Loans 30-89 days past due and still accruing | **$6,511** | $8,111 |
| Asset quality ratios: |  |  |
| Total nonperforming loans to total loans | **0.36%** | 1.11% |
| Total nonperforming assets to total assets | **0.26%** | 0.83% |
| Total nonperforming assets to total loans and OREO | **0.36%** | 1.11% |
| Total risk assets to total loans and OREO | **0.36%** | 1.11% |
| Total risk assets to total assets | **0.27%** | 0.84% |
| ACL to total loans | **1.27%** | 1.25% |
| ACL to nonperforming loans | **357.10%** | 112.44% |
| ACL to nonperforming loans and FDMs still accruing | **357.10%** | 112.40% |
| Net 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 $8.6 million at June 30, 2024, a decrease of $17.1 million from $25.6 million at December 31, 2023. Nonaccrual loans decreased by $17.1 million from December 31, 2023 to June 30, 2024 due primarily to the payoffs of two commercial real estate loans with outstanding balances totaling $14.7 million with no charge-offs recorded on these relationships. During 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 June 30, 2024 and December 31, 2023. At June 30, 2024, there was a specific reserve of $3 thousand on nonaccrual loans compared to $49 thousand at December 31, 2023.

| Commercial real estate: | June 30, 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 | **$—** | **$3,450** | **$3,450** | **$—** | $— | $15,786 | $15,786 | $— |
| Non-owner occupied | **—** | **—** | **—** | **—** | — | 240 | 240 | — |
| Multi-family | **—** | **312** | **312** | **—** | — | 1,233 | 1,233 | — |
| Non-owner occupied residential | **—** | **266** | **266** | **—** | — | 2,572 | 2,572 | — |
| Acquisition and development: |  |  |  |  |  |  |  |  |
| Commercial and land development | **—** | **—** | **—** | **—** | — | 1,361 | 1,361 | — |
| Commercial and industrial | **—** | **29** | **29** | **—** | 68 | 604 | 672 | — |
| Residential mortgage: |  |  |  |  |  |  |  |  |
| First lien | **—** | **2,871** | **2,871** | **187** | — | 2,309 | 2,309 | 66 |
| Home equity – term | **—** | **2** | **2** | **—** | — | 3 | 3 | — |
| Home equity – lines of credit | **—** | **1,415** | **1,415** | **—** | — | 1,312 | 1,312 | — |
| Installment and other loans | **3** | **15** | **18** | **—** | 3 | 36 | 39 | — |
| Total | **$3** | **$8,360** | **$8,363** | **$187** | $71 | $25,456 | $25,527 | $66 |

During the first half of 2024, two commercial real estate loans on nonaccrual status totaling $14.7 million were paid off.

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 June 30, 2024 and December 31, 2023.

| June 30, 2024 | # of Relationships | Individually Evaluated Loans | Partial Charge-offs to Date | Specific Reserves |
| --- | ---: | ---: | ---: | ---: |
| Relationships greater than $1,000,000 | **2** | **$3,126** | **$—** | **$—** |
| Relationships greater than $500,000 but less than $1,000,000 | **—** | **—** | **—** | **—** |
| Relationships greater than $250,000 but less than $500,000 | **2** | **570** | **—** | **—** |
| Relationships less than $250,000 | **80** | **4,836** | **214** | **35** |
|  | **84** | **$8,532** | **$214** | **$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 June 30, 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 unaudited condensed 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 June 30, 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 half of 2024, commercial and land development loans totaling $14.5 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 totaling $3.6 million were recharacterized to a permanent 1-4 family residential mortgage upon the completion of construction.

| As of June 30, 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 | $16,172 | $54,321 | $99,774 | $68,370 | $20,368 | $78,843 | $5,518 | $— | $343,366 |
| Special mention | — | — | — | 1,370 | 1,154 | 508 | 165 | — | 3,197 |
| Substandard - Non-IEL | — | 704 | 10,000 | 2,957 | 5,994 | 1,538 | 95 | — | 21,288 |
| Substandard - IEL | — | — | — | 1,239 | — | 2,211 | — | — | 3,450 |
| Total owner-occupied loans | $16,172 | $55,025 | $109,774 | $73,936 | $27,516 | $83,100 | $5,778 | $— | $371,301 |
| Current period gross charge offs - owner-occupied | $— | $— | $— | $— | $— | $12 | $— | $— | $12 |
| continued |  |  |  |  |  |  |  |  |  |

69

| As of June 30, 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 | $38,792 | $79,834 | $99,324 | $227,068 | $82,064 | $176,728 | $643 | $— | $704,453 |
| Special mention | — | — | — | 341 | — | 2,124 | — | — | 2,465 |
| Substandard - Non-IEL | — | — | — | — | — | 2,697 | — | 862 | 3,559 |
| Substandard - IEL | — | — | — | — | — | — | — | — | — |
| Total non-owner occupied loans | $38,792 | $79,834 | $99,324 | $227,409 | $82,064 | $181,549 | $643 | $862 | $710,477 |
| Current period gross charge offs - non-owner occupied | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Multi-family:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $5,844 | $2,823 | $61,840 | $28,489 | $12,511 | $38,021 | $346 | $— | $149,874 |
| Special mention | — | — | 1,119 | — | — | 237 | — | — | 1,356 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | 312 | — | — | 312 |
| Total multi-family loans | $5,844 | $2,823 | $62,959 | $28,489 | $12,511 | $38,570 | $346 | $— | $151,542 |
| Current period gross charge offs - multi-family | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Non-owner occupied residential:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $2,901 | $10,156 | $20,153 | $16,307 | $6,810 | $31,235 | $399 | $— | $87,961 |
| Special mention | — | — | — | — | — | 504 | — | — | 504 |
| Substandard - Non-IEL | — | — | — | — | — | 425 | — | — | 425 |
| Substandard - IEL | — | 2 | — | 185 | — | 79 | — | — | 266 |
| Total non-owner occupied residential loans | $2,901 | $10,158 | $20,153 | $16,492 | $6,810 | $32,243 | $399 | $— | $89,156 |
| Current period gross charge offs - non-owner occupied residential | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Acquisition and development:** |  |  |  |  |  |  |  |  |  |
| **1-4 family residential construction:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $13,971 | $17,179 | $865 | $— | $— | $— | $— | $129 | $32,144 |
| Special mention | 74 | 221 | — | — | — | — | — | — | 295 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | — | — | — | — |
| Total 1-4 family residential construction loans | $14,045 | $17,400 | $865 | $— | $— | $— | $— | $129 | $32,439 |
| Current period gross charge offs - 1-4 family residential construction | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Commercial and land development:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $15,213 | $39,209 | $43,482 | $5,455 | $9,826 | $1,567 | $5,533 | $8,818 | $129,103 |
| Special mention | — | — | — | — | 780 | — | — | — | 780 |
| Substandard - Non-IEL | — | — | — | — | — | — | — | — | — |
| Substandard - IEL | — | — | — | — | — | — | — | — | — |
| Total commercial and land development loans | $15,213 | $39,209 | $43,482 | $5,455 | $10,606 | $1,567 | $5,533 | $8,818 | $129,883 |
| Current period gross charge offs - commercial and land development | $— | $23 | $— | $— | $— | $— | $— | $— | $23 |
| continued |  |  |  |  |  |  |  |  |  |

70

| As of June 30, 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 | $30,700 | $60,734 | $63,069 | $57,202 | $21,753 | $26,589 | $95,701 | $3,249 | $358,997 |
| Special mention | — | — | — | 31 | 7 | 946 | 320 | — | 1,304 |
| Substandard - Non-IEL | — | — | — | 5,861 | — | 217 | 8,568 | — | 14,646 |
| Substandard - IEL | — | 12 | — | — | 2 | — | 15 | — | 29 |
| Total commercial and industrial loans | $30,700 | $60,746 | $63,069 | $63,094 | $21,762 | $27,752 | $104,604 | $3,249 | $374,976 |
| Current period gross charge offs - commercial and industrial | $— | $— | $54 | $— | $— | $6 | $— | $— | $60 |
| **Municipal:** |  |  |  |  |  |  |  |  |  |
| Risk rating |  |  |  |  |  |  |  |  |  |
| Pass | $1,577 | $— | $— | $3,124 | $— | $5,893 | $— | $— | $10,594 |
| Total municipal loans | $1,577 | $— | $— | $3,124 | $— | $5,893 | $— | $— | $10,594 |
| Current period gross charge offs - municipal | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Residential mortgage:** |  |  |  |  |  |  |  |  |  |
| **First lien:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $18,111 | $44,351 | $65,479 | $33,167 | $7,856 | $98,520 | $— | $630 | $268,114 |
| Nonperforming | — | — | 248 | 232 | — | 2,559 | — | — | 3,039 |
| Total first lien loans | $18,111 | $44,351 | $65,727 | $33,399 | $7,856 | $101,079 | $— | $630 | $271,153 |
| Current period gross charge offs - first lien | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Home equity - term:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $183 | $473 | $674 | $71 | $390 | $2,840 | $— | $— | $4,631 |
| Nonperforming | — | — | — | — | — | 2 | — | — | 2 |
| Total home equity - term loans | $183 | $473 | $674 | $71 | $390 | $2,842 | $— | $— | $4,633 |
| Current period gross charge offs - home equity - term | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| **Home equity - lines of credit:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $— | $— | $— | $— | $— | $— | $190,786 | $535 | $191,321 |
| Nonperforming | — | — | — | — | — | — | 1,199 | 216 | 1,415 |
| Total residential real estate - home equity - lines of credit loans | $— | $— | $— | $— | $— | $— | $191,985 | $751 | $192,736 |
| Current period gross charge offs - home equity - lines of credit | $— | $— | $— | $— | $— | $— | $50 | $— | $50 |
| **Installment and other loans:** |  |  |  |  |  |  |  |  |  |
| Payment performance |  |  |  |  |  |  |  |  |  |
| Performing | $593 | $568 | $316 | $281 | $78 | $848 | $6,011 | $— | $8,695 |
| Nonperforming | — | 3 | — | — | — | 15 | — | — | 18 |
| Total Installment and other loans | $593 | $571 | $316 | $281 | $78 | $863 | $6,011 | $— | $8,713 |
| Current period gross charge offs - installment and other | $74 | $12 | $— | $— | $— | $18 | $14 | $— | $118 |

71

| 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 |  |  |  |  |  |  |  |  |  |

72

| 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 |  |  |  |  |  |  |  |  |  |

73

| 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 $14.3 million from $24.2 million at December 31, 2023 to $9.9 million at June 30, 2024 due to repayments, including $7.2 million from one commercial and industrial client and $3.2 million from two commercial real estate clients.

Classified loans totaled $48.7 million at June 30, 2024, or 2.1% of total loans outstanding, reflecting a decrease from $55.0 million, or 2.4% of total 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 $40.2 million at June 30, 2024, an increase of $10.9 million, compared to $29.3 million at December 31, 2023, due primarily to the downgrades of two commercial clients with an outstanding balance totaling $9.0 million. The Substandard-IEL category decreased from $25.7 million to $8.5 million from December 31, 2023 to June 30, 2024, respectively, primarily due to the payoff of loans to three commercial real estate clients with an outstanding balance of $16.4 million at December 31, 2023.

The following table presents the activity in the ACL for the three and six months ended June 30, 2024 and 2023:

| Three Months Ended June 30, 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 | **$17,975** | **$2,233** | **$5,389** | **$164** | **$25,761** | **$3,193** | **$211** | **$3,404** | **$—** | **$29,165** |
| Provision for credit losses | **236** | **423** | **267** | **(3)** | **923** | **(126)** | **15** | **(111)** | **—** | **812** |
| Charge-offs | **(12)** | **(23)** | **(14)** | **—** | **(49)** | **(50)** | **(65)** | **(115)** | **—** | **(164)** |
| Recoveries | **4** | **1** | **10** | **—** | **15** | **6** | **30** | **36** | **—** | **51** |
| Balance, end of period | **$18,203** | **$2,634** | **$5,652** | **$161** | **$26,650** | **$3,023** | **$191** | **$3,214** | **$—** | **$29,864** |
| **June 30, 2023** |  |  |  |  |  |  |  |  |  |  |
| Balance, beginning of period | $16,697 | $3,217 | $5,787 | $177 | $25,878 | $2,278 | $208 | $2,486 | $— | $28,364 |
| Impact of adopting CECL | $— | $— | $— | $— | $— | $— | $— | $— | $— | $— |
| Provision for loan losses | 246 | (451) | 440 | (10) | 225 | 64 | 110 | 174 | — | 399 |
| Charge-offs | (12) | — | (395) | — | (407) | (98) | (67) | (165) | — | (572) |
| Recoveries | 65 | 1 | 22 | — | 88 | 63 | 41 | 104 | — | 192 |
| Balance, end of period | $16,996 | $2,767 | $5,854 | $167 | $25,784 | $2,307 | $292 | $2,599 | $— | $28,383 |
| **Six Months Ended** |  |  |  |  |  |  |  |  |  |  |
| **June 30, 2024** |  |  |  |  |  |  |  |  |  |  |
| Balance, beginning of period | **$17,873** | **$2,241** | **$5,806** | **$157** | **$26,077** | **$2,424** | **$201** | **$2,625** | **$—** | **$28,702** |
| Provision for credit losses | **314** | **414** | **(194)** | **4** | **538** | **637** | **58** | **695** | **—** | **1,233** |
| Charge-offs | **(12)** | **(23)** | **(60)** | **—** | **(95)** | **(50)** | **(118)** | **(168)** | **—** | **(263)** |
| Recoveries | **28** | **2** | **100** | **—** | **130** | **12** | **50** | **62** | **—** | **192** |
| Balance, end of period | **$18,203** | **$2,634** | **$5,652** | **$161** | **$26,650** | **$3,023** | **$191** | **$3,214** | **$—** | **$29,864** |
| **June 30, 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 | 508 | (236) | 852 | (26) | 1,098 | (76) | 106 | 30 | — | 1,128 |
| Charge-offs | (12) | — | (481) | — | (493) | (98) | (123) | (221) | — | (714) |
| Recoveries | 85 | 3 | 50 | — | 138 | 158 | 72 | 230 | — | 368 |
| Balance, end of period | $16,996 | $2,767 | $5,854 | $167 | $25,784 | $2,307 | $292 | $2,599 | $— | $28,383 |

The ACL totaled $29.9 million at June 30, 2024, an increase of $1.2 million from December 31, 2023, resulting primarily from the provision for credit losses of $1.2 million and net charge-offs of $71 thousand during the six months ended June 30, 2024. The ACL as a percentage of the total loan portfolio was 1.27% at both June 30, 2024 and June 30, 2023. For the six months ended June 30, 2024, the provision for credit losses was primarily based on loan growth and the slowing 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 decreases in certain qualitative factors. The *Collateral Valuation Trends* qualitative factor was reduced for the residential mortgage and installment and other loan segments and the *Economic Factors* qualitative factor was reduced for the residential mortgage segment based on the stabilization in real estate collateral valuations and housing demand and overall portfolio performance, which reduced provision expense by $596 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 remaining change in the ACL is due to normal fluctuations from the changes in loan balances and loss rates by loan segment.

For the six months ended June 30, 2023, the provision for credit losses was driven by the increase of $83.5 million in commercial loans, excluding SBA PPP loan forgiveness activity, the increase in the loss reserve rates under the CECL methodology and an increase in the *Delinquency and Classified Loan Trends* qualitative factor for the commercial & industrial and owner-occupied commercial real estate loan classes.

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, five loans, with aggregate outstanding principal balances of $160 thousand, had cumulative partial charge-offs to the ACL totaling $214 thousand through June 30, 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 $144.1 million to $2.7 billion at June 30, 2024 from $2.6 billion at December 31, 2023. In the first half of 2024, time deposits increased by $83.0 million, money market deposits increased by $67.4 million and interest-bearing demand deposits increased by $8.6 million. These increases were partially offset by decreases in non-interest bearing deposits of $5.7 million and savings deposits of $9.3 million. The increase in interest-bearing demand deposits reflects some seasonal public funds activity. 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 June 30, 2024, deposits that are uninsured and not collateralized totaled $422.3 million, or 16% 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 June 30, 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, three-month CME term SOFR rate plus 3.16%, through maturity. At June 30, 2024, the contractual interest rate on the subordinated debt was 8.72%.

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 remaining “well-capitalized” under applicable banking regulations.

Shareholders’ equity totaled $278.4 million at June 30, 2024, an increase of $13.3 million, from $265.1 million at December 31, 2023. The increase was primarily attributable to net income of $16.3 million, partially offset by dividends paid of $4.3 million, and other comprehensive income of $72 thousand for the six months ended June 30, 2024. Other comprehensive income included $1.4 million in net unrealized gains from cash flow hedges partially offset by after-tax declines of $1.4 million from net unrealized losses on investment securities. For the six months ended June 30, 2024, total comprehensive income totaled $16.3 million, a decrease of $8.4 million, from total comprehensive losses of $24.7 million for the same period in 2023 due primarily to an increase in after-tax net unrealized losses on investment securities of $6.0 million and the decrease in net income of $2.7 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 half of 2024.

At June 30, 2024, book value per common share was $25.97 compared to $24.98 at December 31, 2023. Tangible book value per share also increased from $23.03 at December 31, 2023 to $24.08 at June 30, 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 June 30, 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 June 30, 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 June 30, 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 investment 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 June 30, 2024, cash and cash equivalents totaled $132.5 million compared to $65.2 million at December 31, 2023, which reflects the increase in deposits of $144.1 million and net income of $16.3 million, partially offset by the decrease in borrowings of $22.5 million for the six months ended June 30, 2024. Unencumbered investment securities totaled $48.3 million at June 30, 2024 compared to $73.7 million at December 31, 2023. At June 30, 2024, the Company had $16.4 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 $118.2 million and $138.7 million in advances and letters of credit were outstanding at June 30, 2024 and December 31, 2023, respectively. In addition, the Company had $20.0 million in available unsecured lines of credit with other banks at June 30, 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 $20.7 million and $21.1 million at June 30, 2024 and December 31, 2023, respectively. During the three and six months ended June 30, 2024, the Company incurred merger-related expenses of $1.1 million and $1.8 million, respectively, in connection with the 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 June 30, 2024 is primarily due to net income of $16.3 million, partially offset by dividends paid of $4.3 million and other comprehensive income, net of taxes, of $72 thousand due to net unrealized gains on interest rate swaps designated as hedging instruments partially offset by net unrealized losses on AFS securities.

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 | June 30, 2024 |
| --- | ---: |
| Shareholders' equity (most directly comparable GAAP-based measure) | **$278,376** |
| Less: Goodwill | **18,724** |
| Other intangible assets | **1,974** |
| Related tax effect | **(415)** |
| **Tangible common equity (non-GAAP)** | **$258,093** |
| Common shares outstanding | **10,720** |
| Book value per share (most directly comparable GAAP based measure) | **$25.97** |
| Intangible assets per share | **1.89** |
| **Tangible book value per share (non-GAAP)** | **$24.08** |

78

*Adjusted Net Income and Adjusted Diluted Earnings Per Share*

*(dollars and shares in thousands)*

|  | Three Months Ended June 30 2024 | June 30 2023 | Six Months Ended June 30 2024 | June 30 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net income (most directly comparable GAAP based measure) | $7,738 | $9,838 | $16,269 | $18,994 |
| Plus: Merger-related expenses | 1,135 | — | 1,807 | — |
| Less: Related tax effect | (139) | — | (140) | — |
| **Adjusted net income (non-GAAP)** | $8,734 | $9,838 | $17,936 | $18,994 |
| Weighted average shares - diluted (most directly comparable GAAP-based measure) | 10,553 | 10,421 | 10,517 | 10,458 |
| Diluted earnings per share (most directly comparable GAAP-based measure) | $0.73 | $0.94 | $1.55 | $1.82 |
| Weighted average shares - diluted (non-GAAP) | 10,553 | 10,421 | 10,517 | 10,458 |
| **Diluted earnings per share, adjusted (non-GAAP)** | $0.83 | $0.94 | $1.71 | $1.82 |

## Market risk

As filed, 7,319 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 investment 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 investment 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 June 30, 2024, the projected decrease in modeled net interest income in the falling interest rate scenario is due to an assumed lag in the repricing of interest-bearing liabilities in relation to the anticipated decline in yields on interest-earning assets. If interest-bearing liabilities reprice faster than modeled, the pressure on net interest income may be reduced. In the rising rate scenarios, net interest income increases due to floating rate loans and 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 June 30, 2024 | December 31, 2023 | Economic Value Change in Market Interest Rates (basis points) | % Change in Market Value June 30, 2024 | December 31, 2023 |
| ---: | ---: | ---: | ---: | ---: | ---: |
| **(200)** | **(7.1)%** | (5.9)% | **(200)** | **(9.0)%** | (15.6)% |
| **(100)** | **(4.0)%** | (3.6)% | **(100)** | **(2.1)%** | (4.3)% |
| **100** | **1.2%** | 0.1% | **100** | **0.2%** | 0.1% |
| **200** | **1.4%** | (1.0)% | **200** | **(1.4)%** | (2.2)% |

## Controls and procedures

As filed, 830 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 June 30, 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 June 30, 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 six months ended June 30, 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 Aug 8, 2024.
Source: SEC EDGAR, the filing index for accession 0000826154-24-000191. Last ingested by Listed: Oct 24, 2026, 14:57 ET. No prices; not investment advice.