Norwood Financial Corp: Form 10-Q for the period ended Jun 30, 2024

Forward-Looking Statements

This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may”, “will”, “believe”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations. This includes statements regarding general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses. Additional potential factors include changes in interest rates, the rate of inflation, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices, instability in the banking system, and the potential for a recessionary economy. Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.

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.

Our operations are subject to risks and uncertainties surrounding our exposure to changes in the interest rate environment. Earnings and liquidity depend to a great extent on our interest rates. Interest rates are highly sensitive to many factors beyond our control, including competition, general economic conditions, geopolitical tensions and monetary and fiscal policies of various governmental and regulatory authorities, including the Federal Reserve. Conditions such as inflation, deflation, recession, unemployment and other factors beyond our control may also affect interest rates. The nature and timing of any changes in interest rates or general economic conditions and their effect on us cannot be controlled and are difficult to predict. If the rate of interest we pay on our interest-bearing liabilities increases more than the rate of interest we receive on our interest-earning assets, our net interest income, and therefore our earnings, could contract and be materially adversely affected. Our earnings could also be materially adversely affected if the rates on interest-earning assets fall more quickly than those on our interest-bearing liabilities. Changes in interest rates could also create competitive pressures, which could impact our liquidity position.

Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

Note 2 to the Company’s consolidated financial statements for the fiscal year ended December 31, 2023 (included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2023) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, and the determination of goodwill impairment. Please refer to the discussion of the allowance for credit losses calculation under “Changes in Financial Condition - Loans” below.

In connection with the acquisition of North Penn in 2011, we recorded goodwill in the amount of $9.7 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. In connection with the acquisition of Delaware in 2016, we recorded goodwill in the amount of $1.6 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. In connection with the acquisition of UpState New York Bancorp, Inc. in July 2020, we recorded goodwill in the amount of $17.9 million, representing the excess of amounts paid over the fair value of the net assets of the institution acquired at the date of acquisition. Goodwill is tested annually and deemed impaired when the carrying value of goodwill exceeds its implied fair value.

Changes in Financial Condition

General

Total assets as of June 30, 2024 were $2.235 billion compared to $2.201 billion as of December 31, 2023. The increase was due primarily to a $37.7 million increase in gross loans outstanding.

Securities

The fair value of securities available for sale as of June 30, 2024 was $397.6 million compared to $406.3 million as of December 31, 2023. In Management’s opinion the unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. The Company concluded that the decrease in the value of these securities was not indicative of a credit loss. The Company did not recognize any credit losses on these available for sale debt securities for the six months ended June 30, 2024, or the six months ended June 30, 2023. The Company does not have the intent to sell the securities and it is more likely than not that it will not have to sell the securities before recovery of its cost basis.

Loans

Loans receivable totaled $1.624 billion at June 30, 2024 compared to $1.585 billion as of December 31, 2023. The $38.9 million increase in net loans receivable during the six months ended June 30, 2024, was due primarily to a $10.1 million increase in commercial real estate loans, a $8.1 million increase in commercial loans and a $25.6 million increase in consumer loans, partially offset by a $6.0 million decrease in residential, agricultural and construction loans, net.

The allowance for credit losses totaled $17,806,000 as of June 30, 2024, and represented 1.08% of total loans outstanding, compared to $18,968,000, or 1.18% of total loans outstanding, at December 31, 2023. The Company had net charge-offs for the six months ended June 30, 2024 of $834,000, compared to $548,000 in the corresponding period in 2023. The Company’s management assesses the adequacy of the allowance for credit losses on a quarterly basis. Based on management’s best judgement, the qualitative factors are applied to the final adjusted loss rate each quarter. Management considers the allowance for credit losses adequate at June 30, 2024 based on the Company’s criteria. However, there can be no assurance that the allowance for credit losses will be adequate to cover significant losses, if any, which might be incurred in the future.

As of June 30, 2024, non-performing loans totaled $7,641,000 or 0.47% of total loans compared to $7,622,000, or 0.48%, of total loans at December 31, 2023. At June 30, 2024, non-performing assets totaled $7,641,000, or 0.34%, of total assets, compared to $7,719,000, or 0.35%, of total assets at December 31, 2023.

The following table sets forth information regarding non-performing loans and foreclosed real estate at the dates indicated:

(dollars in thousands)

Deposits

During the six-months ended June 30, 2024, total deposits increased $16.0 million due primarily to a $33.7 million increase in certificates of deposit, partially offset by a $17.7 million decrease in other all other deposit categories, net. The increase in certificates of deposit was due to a migration from lower yielding demand deposits into higher yielding time deposits, as well as growth from to deposit promotions.

The following table sets forth deposit balances as of the dates indicated:

(dollars in thousands)

Borrowings

Short-term borrowings decreased $11.8 million to $62.3 million at June 30, 2024, compared to $74.1 million at December 31, 2023, due primarily to an decrease in overnight borrowings.

Other borrowings as of June 30, 2024, were $148.1 million compared to $124.2 million as of December 31, 2023. Federal Reserve Bank borrowings increased $30.0 million during the six-months ended June 30, 2024, contributing to the increase. Federal Home Loan Bank borrowings decreased $6.1 million during the period.

Other borrowings consisted of the following:

(dollars in thousands)

Stockholders’ Equity and Capital Ratios

As of June 30, 2024, total stockholders’ equity was $182.2 million, compared to $181.1 million as of December 31, 2023. Total stockholders’ equity increased $8.6 million due to net income, offset partially by $4.9 million of dividends declared and a decrease of $2.5 million in the fair value of securities in the available-for-sale portfolio, net of tax. The decrease in fair value of securities is the result of a change in interest rates and spreads, which may impact the value of the securities. Because of interest rate volatility, the Company’s accumulated other comprehensive income could materially fluctuate for each interim and year-end period.

Regulatory Capital Requirements. The Federal Reserve has adopted regulatory capital rules pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act (“BHCA”). The Federal Reserve’s capital rules are similar to those imposed on the Bank by the FDIC. The Federal Reserve’s Small Bank Holding Company Policy Statement, however, exempts from the regulatory capital requirements bank holding companies with less than $3.0 billion in consolidated assets that are not engaged in significant non-banking or off-balance sheet activities and that do not have a material amount of debt or equity securities registered with the SEC. As long as their bank subsidiaries are well capitalized, such bank holding companies need only maintain a pro forma debt to equity ratio of less than 1.0 in order to pay dividends and repurchase stock and to be eligible for expedited treatment on applications.

A comparison of the Company’s consolidated regulatory capital ratios is as follows:

The Bank is required to comply with applicable capital adequacy rules adopted by the FDIC and other federal bank regulatory agencies (the “Basel III Capital Rules”). The Basel III Capital Rules apply to all depository institutions as well as to all top-tier bank and savings and loan holding companies that are not subject to the Federal Reserve Small Bank Holding Company Policy Statement.

Under the Basel III Capital Rules, banks are required to meet four minimum capital standards: (1) a “Tier 1” or “core” capital leverage ratio equal to at least 4% of total adjusted assets; (2) a common equity Tier 1 capital ratio equal to 4.5% of risk-weighted assets; (3) a Tier 1 risk-based ratio equal to 6% of risk-weighted assets; and (4) a total capital ratio equal to 8% of total risk-weighted assets. Common equity Tier 1 capital is defined as common stock instruments, retained earnings, any common equity Tier 1 minority interest and, unless the bank has made an “opt-out” election, accumulated other comprehensive income, net of goodwill and certain other intangible assets. Tier 1 or core capital is defined as common equity Tier 1 capital plus certain qualifying subordinated interests and grandfathered capital instruments. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, qualifying subordinated instruments and certain grandfathered capital instruments. An institution’s risk-based capital requirements are measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. Risk weightings range from 0% for cash to 100% for property acquired through foreclosure, commercial loans, and certain other assets to 150% for exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property.

In addition to the above minimum requirements, the Basel III Capital Rules require banks and covered financial institution holding companies to maintain a capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement effectively raises the minimum required risk-based capital ratios to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital on a fully phased-in basis. The Company and the Bank were in compliance with all applicable regulatory capital requirements as of June 30, 2024.

In December 2018, the Federal Reserve announced that a banking organization that experiences a reduction in retained earnings due to the CECL adoption as of the beginning of the fiscal year in which CECL is adopted may elect to phase in the regulatory capital impact of adopting CECL. Transitional amounts are calculated for the following items: retained earnings, temporary difference deferred tax assets and credit loss allowances eligible for inclusion in regulatory capital. When calculating regulatory capital ratios, 25% of the transitional amounts are phased in during the first year. An additional 25% of the transitional amounts are phased in over each of the next two years and at the beginning of the fourth year, the day-one effects of CECL are completely reflected in regulatory capital.

The Company adopted the transition guidance applied these effects to regulatory capital in the first quarter of 2023 upon adoption of CECL.

Liquidity

As of June 30, 2024, the Company had cash and cash equivalents of $69.4 million in the form of cash, due from banks and short-term deposits with other institutions. In addition, the Company had total securities available for sale of $397.6 million which could be used for liquidity needs. Total liquidity of $467.0 million as of June 30, 2024, represents 20.9% of total assets, compared to $472.4 million and 21.5% of total assets as of December 31, 2023. The Company also monitors other liquidity measures, all of which were within the Company’s policy guidelines as of June 30, 2024 and December 31, 2023. Based upon these measures, the Company believes its liquidity is adequate.

Capital Resources

The Company has a line of credit commitment from Atlantic Community Bankers Bank for $7,000,000 which expires June 30, 2025. There were no borrowings under this line as of June 30, 2024 and December 31, 2023.

The Company has a line of credit commitment available which has no stated expiration date from PNC Bank for $10,000,000. There were no borrowings under this line as of June 30, 2024 and December 31, 2023.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank was approximately $681,302,000 as of June 30, 2024, of which $88,087,000 was outstanding in the form of borrowings as of June 30, 2024. As of December 31, 2023, the maximum borrowing capacity was $682,417,000, of which $114,236,000 of borrowings was outstanding as of December 31, 2023. Additionally, as of June 30, 2024, the Bank had secured Letters of Credit from the Federal Home Loan Bank in the amount of $168,425,000 as collateral for specific municipal deposits. These Letters of Credit reduce the availability under the maximum borrowing capacity. As of December 31, 2023, there was $136,650,000 outstanding in the form of Letters of Credit. Advances and Letters of Credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

Non-GAAP Financial Measures

This report contains or references fully taxable-equivalent (fte) interest income and net interest income, which are non-GAAP financial measures. Interest income (fte) and net interest income (fte) are derived from GAAP interest income and net interest income using an assumed tax rate of 21%. We believe the presentation of interest income (fte) and net interest income (fte) ensures comparability of interest income and net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income (fte) and Net interest income (fte) is reconciled to GAAP interest income and net interest income on pages 40 and 44. Fully taxable equivalent interest income and net interest income is also reflected in the table on pages 41 and 45. Although the Company believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP measures.

Results of Operations

Consolidated Average Balance Sheets with Resultant Interest and Rates

dollars in thousands)

(1) Interest and yields are presented on a tax-equivalent basis using a marginal tax rate of 21%.

(2) Average balances have been calculated based on daily balances.

(3) Annualized

(4) Loan balances include non-accrual loans and are net of unearned income.

(5) Loan yields include the effect of amortization of deferred fees, net of costs.

Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense. Changes in net interest income that could not be specifically identified as either a rate or volume change were allocated proportionately to changes in volume and changes in rate.

(dollars in thousands)

Comparison of Operating Results for the Three Months Ended June 30, 2024 to June 30, 2023

General

For the three months ended June 30, 2024, net income totaled $4,213,000 compared to net income of $6,503,000 in the three months ended June 30, 2023. The decrease in net income for the three months ended June 30, 2024, was due primarily to a $717,000 decrease in net interest income, and a $2,097,000 increase in the provision for credit losses. Earnings per share for the three-months ended June 30, 2024 were $0.52 per share for basic shares and fully diluted shares, compared to $0.81 per share for basic shares and for fully diluted shares for the three months ended June 30, 2023. The resulting annualized return on average assets and annualized return on average equity for the three months ended June 30, 2024 were 0.75% and 9.41%, respectively, compared to 1.23% and 14.72%, respectively, for the same period in 2023.

The following table sets forth changes in net income:

(dollars in thousands)

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the three months ended June 30, 2024 totaled $15,124,000 which was $705,000 lower than the comparable period in 2023. The decrease in net interest income was due primarily to a $5,152,000 increase in total interest expense, which was partially offset by a $4,447,000 increase in total interest income (fte). The (fte) net interest spread and net interest margin were 2.05% and 2.79%, respectively, for the three months ended June 30, 2024 compared to 2.56% and 3.09%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” described above beginning on page 38.

For the three-months ended June 30, 2024, interest income (fte) totaled $27,870,00, with a yield on average earning assets of 5.14% compared to $23,423,000 and 4.57% for the three months ended June 30, 2023. Average loans increased $70.0 million during the three-months ended June 30, 2024, over the comparable period of 2023, while average securities decreased $15.9 million compared to the three months ended June 30, 2023. Average earning assets totaled $2.169 billion for the three months ended June 30, 2024, an increase of $119.4 million, over average earning assets for the same period in 2023. See “Non-GAAP Financial Measures” described above beginning on page 38.

Interest expense for the three months ended June 30, 2024 totaled $12,746,000, at an average cost of 3.09%, compared to $7,594,000, at an average cost of 2.01% for the same period in 2023. The increase in interest expense during the three-months ended June 30, 2024 reflects the overall higher level of market interest rates. During the three months ended June 30, 2024, the average cost of time deposits, which is the most significant component of funding costs, increased 126 basis points compared to the same three-month period of last year, while interest-bearing demand and money market costs increased 113 basis points and short-term borrowing costs decreased 101 basis points compared to the same three-month period of 2023.

Provision for Credit Losses

The Company had a provision for credit losses of $347,000 during the three months ended June 30, 2024, compared to a release of provision for credit loss expense of $1,750,000 for the three months ended June 30, 2023. The Company makes provisions for, or releases of credit loss expense in an amount necessary to maintain the allowance for credit losses at an acceptable level under the current expected credit loss methodology analysis. The Company recorded a net charge-off of $511,000 for the quarter ended June 30, 2024, compared to a net charge-off of $228,000 for the similar period in 2023. At June 30, 2024, the allowance for credit losses related to loans receivable was 1.08% of loans receivable. Additionally, at June 30, 2024, the allowance for credit losses related to loans receivable represented 233% of non-performing loans.

Other Income

Other income totaled $2,207,000 for the three months ended June 30, 2024, compared to $1,783,000 for the same period in 2023. The increase was due primarily to an increased level of service charges and fees, along with a decrease in the losses on sales of securities. All other categories of other income increased $61,000, net, during the three months ended June 30, 2024.

Other Expense

Other expense for the three months ended June 30, 2024 totaled $11,444,000, which was $506,000, or 4.6%, higher than the same period of 2023, due primarily to a $202,000 increase in data processing expense, a $185,000 increase in professional fees, and a $112,000 increase in salaries and employee benefits during the three months ended June 30, 2024. All other categories of other expense increased $7,000, net, during the three months ended June 30, 2024.

Income Tax Expense

Income tax expense totaled $1,128,000 for an effective tax rate of 21.1% for the three months ended June 30, 2024 compared to $1,734,000 for an effective tax rate of 21.0% for the three months ended June 30, 2023.

Results of Operations

Consolidated Average Balance Sheets with Resultant Interest and Rates

dollars in thousands)

44

Rate/Volume Analysis. The following table shows the fully taxable equivalent effect of changes in volumes and rates on interest income and interest expense.

(dollars in thousands)

Comparison of Operating Results for the Six Months Ended June 30, 2024 to June 30, 2023

General

For the six months ended June 30, 2024, net income totaled $8,646,000 compared to net income of $12,285,000 in the six months ended June 30, 2023. The decrease in net income for the six months ended June 30, 2024 was due primarily to a $2,100,000 decrease in net interest income and an increase of $1,801,000 in operating expenses. Earnings per share for the six-months ended June 30, 2024 were $1.07 per share for basic shares and fully diluted shares, compared to $1.52 per share for basic shares and $1.51 for fully diluted shares for the six months ended June 30, 2023. The resulting annualized return on average assets and annualized return on average equity for the six months ended June 30, 2024 were 0.78% and 9.59%, respectively, compared to 1.18% and 14.17%, respectively, for the same period in 2023.

The following table sets forth changes in net income:

(dollars in thousands)

Net Interest Income

Net interest income on a fully taxable equivalent basis (fte) for the six months ended June 30, 2024 totaled $30,029,000 which was $2,075,000 lower than the comparable period in 2023. The decrease in net interest income was due primarily to a $11,762,000 increase in total interest expense, which was partially offset by a $9,686,000 increase in total interest income (fte). The (fte) net interest spread and net interest margin were 2.06% and 2.79%, respectively, for the six months ended June 30, 2024 compared to 2.69% and 3.17%, respectively, for the same period in 2023. See “Non-GAAP Financial Measures” described above beginning on page 38.

For the six-months ended June 30, 2024, interest income (fte) totaled $55,002,000, with a yield on average earning assets of 5.11% compared to $45,316,000 and 4.47% for the six months ended June 30, 2023. Average loans increased $87.4 million during the six-months ended June 30, 2024, over the comparable period of 2023, while average securities decreased $18.3 million compared to the six months ended June 30, 2023. Average earning assets totaled $2.153 billion for the six months ended June 30, 2024, an increase of $126.6 million, over average earning assets for the same period in 2023. See “Non-GAAP Financial Measures” described above beginning on page 38.

Interest expense for the six months ended June 30, 2024, totaled $24,973,000, at an average cost of 3.05%, compared to $13,212,000, at an average cost of 1.78% for the same period in 2023. The increase in interest expense during the six-months ended June 30, 2024 reflects the overall higher level of market interest rates. During the six months ended June 30, 2024, the average cost of time deposits, which is the most significant component of funding costs, increased 149 basis points compared to the same six-month period of last year, while short-term borrowing costs decreased 88 basis points and other borrowing costs decreased 11 basis points compared to the same six-month period of 2023.

Provision for Credit Losses

The Company had a release of provision for credit loss expense of $276,000 during the six months ended June 30, 2024, compared to a release of provision for credit loss expense of $1,450,000 for the six months ended June 30, 2023. The Company makes provisions for, or releases of credit loss expense in an amount necessary to maintain the allowance for credit losses at an acceptable level under the current expected credit loss methodology analysis. The Company had net charge-offs for the six months ended June 30, 2024, of $834,000, compared to $548,000 in the corresponding period in 2023. At June 30, 2024, the allowance for credit losses related to loans receivable was 1.08% of loans receivable. Additionally, at June 30, 2024, the allowance for credit losses related to loans receivable represented 233% of non-performing loans.

Other Income

Other income totaled 4,213,000 for the six months ended June 30, 2024, compared to $3,695,000 for the same period in 2023. The increase was due primarily to an increased level of service charges and fees, along with an decrease in losses on sales of securities. All other categories of other income increased $127,000, net, during the six months ended June 30, 2024.

Other Expense

Other expense for the six months ended June 30, 2024 totaled $23,175,000, which was $1,801,000 or 8.4%, higher than the same period of 2023, due primarily to a $280,000 increase in salaries and employee benefits, a $484,000 increase in professional fees, a $225,000 increase in FDIC insurance, and a $456,000 increase in data processing expenses during the six months ended June 30, 2024. All other categories of other expense increased $356,000, net, during the six months ended June 30, 2024.

Income Tax Expense

Income tax expense totaled $2,303,000 for an effective tax rate of 21.0% for the six months ended June 30, 2024 compared to $3,221,000 for an effective tax rate of 20.8% for the six months ended June 30, 2023.

Market Risk

Interest rate sensitivity and the repricing characteristics of assets and liabilities are managed by the Asset and Liability Management Committee (ALCO). The principal objective of ALCO is to maximize net interest income within acceptable levels of risk, which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates.

Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates and the relationship of different interest rates. To manage the impact of the rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. The Company uses net interest simulation to assist in interest rate risk management. The process includes simulating various interest rate environments and their impact on net interest income. As of June 30, 2024, the level of net interest income at risk in a rising or declining 200 basis point change in interest rates was within the Company’s policy limits. The Company’s policy allows for a decrease of no more than 10% of net interest income for a ± 200 basis point shift in interest rates.

Imbalances in repricing opportunities at a given point in time reflect interest-sensitivity gaps measured as the difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL). These are static gap measurements that do not take into account any future activity, and as such are principally used as early indications of potential interest rate exposures over specific intervals.

As of June 30, 2024, the Company had a negative 90-day interest sensitivity gap of $61.8 million or 2.76% of total assets, compared to a $43.6 million negative interest sensitivity gap, or 1.98% of total assets, as of December 31, 2023. At June 30, 2024, rate-sensitive assets repricing within 90 days increased $10.1 million since December 31, 2023 due to a $2.3 million increase in interest-bearing deposits with banks, and a $8.6 million increase in loans repricing. Rate-sensitive liabilities repricing within 90 days increased $28.3 million since year end due primarily to a $98.7 million increase in time deposits. A negative gap indicates that the balance sheet has a higher level of rate-sensitive liabilities (RSL) than rate-sensitive assets (RSA) at the time interval. This would indicate that in an increasing rate environment, the cost of interest-bearing liabilities would increase faster than the yield on interest-earning assets in the 90-day period. The repricing intervals are managed by ALCO strategies, including adjusting the average life of the investment portfolio, pricing of deposit liabilities to attract longer term time deposits, loan pricing to encourage variable rate products and evaluation of loan sales of long-term fixed rate mortgages.

Certain interest-bearing deposits with no stated maturity dates are included in the interest-sensitivity table below. The balances allocated to the respective time periods represent an estimate of the total outstanding balance that has the potential to migrate through withdrawal or transfer to time deposits, thereby impacting the interest-sensitivity position of the Company. The estimates were derived from an independently prepared non-maturity deposit study for the Bank which addressed the various deposit types and their pricing sensitivity to movements in market interest rates. The process involved analyzing correlations between product rates and market rates over a ten-year period. The Company believes the study provides pertinent data to support the assumptions used in modeling non-maturity deposits.

June 30, 2024

Rate Sensitivity Table

(dollars in thousands)

The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “Commission”) rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.