Orrstown Financial Services Inc: Form 10-Q for the period ended Mar 31, 2026

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, 2025, included in our Annual Report on Form 10-K filed with the SEC on March 12, 2026. 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. All dollar amounts presented in the tables, except per share amounts, are in thousands.

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 March 31, 2026, the Company had total assets of $5.6 billion, total liabilities of $5.0 billion and total shareholders’ equity of $603.2 million as reported in the unaudited consolidated balance sheets.

For the three months ended March 31, 2026 and 2025, the Company had net income of $21.8 million and $18.1 million, respectively. Diluted earnings per share were $1.12 and $0.93 for the three months ended March 31, 2026 and 2025, respectively. For the three months ended March 31, 2026 and 2025, the Company incurred merger-related expenses of zero and $1.6 million, respectively. The merger-related expenses are included in non-interest expenses in the unaudited 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, 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: interest rate changes or volatility; 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; 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, and evolving interpretations of, existing and future 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; the impact of tariffs; geopolitical tensions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; expenses associated with litigation and legal proceedings; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, 2025, 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 increased at a rate of 2.0% on an annualized basis for the first quarter of 2026, which was an increase from 1.4% during the fourth quarter of 2025 and an increase from contraction of 0.3% during the first quarter of 2025. The increase during the first quarter of 2026 was primarily due to the rise in investment, which includes business spending and inventories, in addition to consumer spending and government spending, following the government shutdown at the end of 2025. Key contributors to investment presently are intellectual property and information processing equipment. An offsetting factor influencing the GDP rate was the increase in imports, which includes parts for information processing.

The personal consumption expenditures ("PCE") price index increased by 4.5% in the first quarter of 2026 compared to an increase of 2.9% for the fourth quarter of 2025 and 2.3% during the first quarter of 2025. Excluding food and energy prices, the PCE price index increased by 4.3% in the first quarter of 2026, 2.7% in the fourth quarter of 2025 and 2.3% in the first quarter of 2025. The increase in the PCE price index reflects rising service sector costs and inflationary pressures. Rising costs include energy prices, which have been impacted by the geopolitical conflict in the Middle East, and pass-through costs on goods impacted by tariffs.

The national unemployment rate was 4.3% in March 2026 compared to 4.4% in December 2025. During the first quarter of 2026, there were job gains reported in healthcare, construction, transportation and warehousing. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 4.3% in March 2026 compared to 3.7% in December 2025. The unemployment rate in Maryland increased from 4.2% in December 2025 to 4.3% in March 2026. The unemployment rates in Pennsylvania and Maryland both remain aligned with 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.

Following a 25 basis point increase in July 2023, the Federal Funds rate remained unchanged until September 2024, when the FOMC cut the Federal Funds rate by 50 basis points. The FOMC subsequently implemented additional rate cuts of 25 basis points in December 2024, September 2025, October 2025 and December 2025. These changes were based on the FOMC's assessment of inflation, the unemployment rate and jobs report.

At March 31, 2026, the 10-year Treasury bond yield was 4.30%, an increase from 4.14% at December 31, 2025. Contributing factors for the increase include geopolitical conflict, which has caused energy prices to rise and created concerns with inflationary pressure. Despite the recent FOMC rate cuts, the current geopolitical conflict could result in a pause or increase in the Federal Funds rate.

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, the interest rate environment, geopolitical tensions, uncertainty related to the impact of tariffs, the scope and timing of changes to fiscal, regulatory and trade policies.

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 business combinations, accounting for credit losses and accounting for income taxes.

Business Combinations

The Company accounts for its mergers and acquisitions using the acquisition method of accounting under the provisions of FASB ASC Topic 805 ("ASC 805"), Business Combinations. Under ASC 805, the assets acquired, including identified intangible assets such as core deposit intangibles and customer relationship intangibles, and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the merger consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.

The valuations are based upon management’s assumptions of future growth rates, future attrition, discount rates and other relevant factors, which involves a significant level of estimation and uncertainty. In addition, management engaged independent third-party specialists to assist in the development of the fair values of the acquired assets and assumed liabilities. The preliminary estimates of fair values may be adjusted for a period of time subsequent to the acquisition date if new information is obtained about facts and circumstances that existed as of the merger date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments would be recorded to goodwill during the current reporting period. Examples of the impacted acquired loans and assumed liabilities includes loans, deposits, identifiable intangible assets, borrowings and certain other assets and liabilities.

For acquired loans at the merger date, management evaluated and classified loans based upon whether the loans had experienced a more-than-insignificant amount of credit deteriorating since origination. To determine the fair value of the loans, significant estimates and assumptions were applied, including projected cash flows, discount rates, repayment speeds, credit loss severity rates, default rates and realizable collateral values. At acquisition, the allowance on PCD loans is booked directly to the ACL using the Company’s existing ACL methodology, but there is no initial impact to net income. Subsequent to acquisition, future changes in estimates of expected credit losses on PCD loans are recognized as provision expense (or reversal of provision expense). The ACL for non-PCD loans is recognized as a provision for credit losses in the same reporting period as the business acquisition, using the Company’s existing ACL methodology.

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, 2025. 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, 2025.

Accounting for Credit Losses - Loans

The ACL represents the amount that, in management’s judgment, appropriately reflects credit losses inherent in the loan portfolio at the balance sheet date. A provision for credit losses is recorded to adjust the level of the ACL as determined by management. The CECL methodology requires an organization to measure all expected credit losses over the contractual term for financial assets measured at amortized cost based on historical credit loss experience, current conditions, and reasonable and supportable forecasts.

Determining the ACL inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and trends, all of which may undergo material changes, including expected probabilities of default, expected loss given default, the timing of expected future cash flows including the impact from unexpected changes in prepayment speeds, estimated losses based on historical credit loss experience and forecasted economic conditions. To the extent actual results differ from management's estimates, additional provisions for credit losses may be required that could adversely impact results of operations and regulatory capital in future periods.

The ACL is maintained at a level considered appropriate to absorb credit losses over the expected life of the loan. The ACL for expected credit losses is determined based on a quantitative assessment of two categories of loans: collectively evaluated loans and individually evaluated loans. In addition, the ACL also includes a qualitative component, which adjusts the CECL model results for risk factors that are not considered within the CECL model, but are relevant in assessing the expected credit losses within the loan classes.

The ACL on loans is measured on a collective basis when similar risk characteristics exist within the Company's loan segments between commercial and consumer. Each of these loan segments are broken down into multiple loan classes, which are characterized by loan type, collateral type, risk attributions and the manner in which management monitors the performance of the borrower. The risks associated with lending activities differ and are subject to the impact of changes in interest rates, market conditions, the collateral securing the loans, and general economic conditions.

The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model that considers historical loss performance and past events in addition to forecasts of future economic conditions. Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider if an additional or reduced reserve is warranted and make adjustments through qualitative risk factors based on current and expected conditions. Management uses the best available information to complete these evaluations; however, future adjustments to the ACL may be necessary if conditions significantly differ from the assumptions used in making the evaluations.

The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model under the vendor's neutral scenario that considers historical loss performance and past events in addition to forecasts of future economic conditions. The Company elected to use the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default to future cash flows, using a loss driver model and loss given default factors, and then adjusts to the net present value to derive the required reserve. The probability of default estimates are derived through the application of reasonable and supportable economic forecasts to the regression models, which incorporates the Company's and peer loss-rate data, unemployment rate and GDP and can be obtained from the Federal Reserve Economic Database. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows. The model incorporates an annualized prepayment rate and a twelve-month rate for curtailment based on a "statistical tendency to repay." Changes in the prepayment and curtailment speeds that vary from the current model inputs could result in inaccurate expected credit losses. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates, which a four-quarter forecast period followed by a four-quarter straight-line reversion period were applied.

Management incorporates the national unemployment rate and GDP as the drivers of the quantitative portion of collectively evaluated reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling, which represents a significant judgment in determining the ACL; however, changes in the macroeconomic forecast could significantly impact the calculated ACL. For the consumer loan segment, the quantitative reserve was calculated using the remaining life methodology where the average historical bank-specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans. The estimated remaining life is calculated using historical bank-specific loan attrition data.

See 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."

Accounting for Income Taxes

The Company is subject to federal and state income taxes in the jurisdictions in which it operates. Due to the complexity of the tax laws, management may make judgments in computing income tax expense, which are subject to varying interpretations by management and the taxing authorities, and could result in changes upon final determination. Income tax expense is based upon income before taxes, adjusted for the effect of certain tax-exempt income, non-deductible expenses and credits. Temporary differences may occur as a result of certain income and expense items being reported in different periods for financial reporting and tax purposes. Deferred taxes are calculated, using the applicable enacted marginal tax rate, based on the differences between the tax basis and carrying value of the asset or liability on the financial statement. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of income. Under FASB ASC 740, Income Taxes, the Company must apply a more likely than not probability threshold on its tax positions before a financial statement benefit is recognized. A valuation allowance would be recognized if any deferred tax assets were determined to be more likely than not unrecoverable.

Readers of the Company's consolidated financial statements should be aware that the estimates and assumptions used may need to be updated in future financial presentations for changes in circumstances, business or economic conditions, in order to fairly represent the condition of the Company at that time.

RESULTS OF OPERATIONS

Three months ended March 31, 2026 compared with three months ended March 31, 2025

Summary

Net income totaled $21.8 million for the three months ended March 31, 2026 compared to $18.1 million for the same period in 2025. Diluted earnings per share for the three months ended March 31, 2026 totaled $1.12 compared to $0.93 for the three months ended March 31, 2025. For the three months ended March 31, 2026 and 2025, the Company incurred merger-related expenses of zero and $1.6 million, respectively, which were included in non-interest expenses of the unaudited condensed consolidated statements of income. For the three months ended March 31, 2025, excluding these non-recurring expenses, net income and diluted earnings per common share totaled $19.3 million and $1.00, respectively. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Net interest income totaled $49.0 million for the three months ended March 31, 2026 compared to $48.8 million for the three months ended March 31, 2025.

The net provision for credit losses on loans and unfunded loan commitments included expense of $352 thousand and a recovery of $554 thousand for the three months ended March 31, 2026 and 2025, respectively.

Noninterest income totaled $15.6 million and $11.6 million for the three months ended March 31, 2026 and 2025, respectively.

Noninterest expenses totaled $36.7 million and $38.2 million for the three months ended March 31, 2026 and 2025, respectively.

Income tax expense totaled $5.7 million and $4.7 million for the three months ended March 31, 2026 and 2025, respectively. The Company's effective tax rate was 20.7% for both the three months ended March 31, 2026 and 2025.

Net Interest Income

Net interest income increased by $244 thousand from $48.8 million for the three months ended March 31, 2025 to $49.0 million for the three months ended March 31, 2026. Interest income on loans decreased by $437 thousand from $63.4 million for the three months ended March 31, 2025 to $63.0 million for the three months ended March 31, 2026. Interest income on investment securities increased by $913 thousand from $9.8 million for the three months ended March 31, 2025 to $10.7 million for the three months ended March 31, 2026. Total interest expense decreased by $1.4 million from $26.8 million for the three months ended March 31, 2025 to $25.4 million for the three months ended March 31, 2026. Interest expense on deposits decreased by $2.3 million from $24.3 million for the three months ended March 31, 2025 to $22.0 million for the three months ended March 31, 2026. Interest expense on borrowings increased by $875 thousand from $2.5 million in the three months ended March 31, 2025 to $3.4 million for the three months ended March 31, 2026.

The following table presents net interest income, net interest spread and net interest margin for the three months ended March 31, 2026 and 2025 on a taxable-equivalent basis:

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The following table presents the impact of rate and volume on the change in taxable-equivalent net interest income for the three months ended March 31, 2025 compared to the three months ended March 31, 2026:

Net interest income on a taxable-equivalent basis increased by $368 thousand to $49.6 million for the three months ended March 31, 2026 from $49.2 million for the three months ended March 31, 2025. The Company's net interest spread decreased by six basis points from 3.41% for the three months ended March 31, 2025 to 3.35% for the three months ended March 31, 2026.

Taxable-equivalent net interest margin decreased by 10 basis points to 3.90% for the three months ended March 31, 2026 from 4.00% for the three months ended March 31, 2025. The taxable-equivalent yield on interest-earning assets decreased by 26 basis points from 6.17% for the three months ended March 31, 2025 to 5.91% for the three months ended March 31, 2026 due primarily to the impact of the decline in the Fed Funds rate and the decrease in the accretion income recognized on fair value marks to acquired loans and securities. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $4.7 million during the three months ended March 31, 2026 compared to $6.9 million in net accretion during the three months ended March 31, 2025. The net interest margin benefited from the decrease of 20 basis points in the cost of interest-bearing liabilities from 2.76% to 2.56%, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits and money market balances.

Average loans increased by $161.2 million to $4.1 billion for the three months ended March 31, 2026 from $3.9 billion for the three months ended March 31, 2025. Average investment securities increased by $119.0 million to $984.1 million for the three months ended March 31, 2026 from $865.1 million for the three months ended March 31, 2025. Average interest-bearing liabilities increased by $84.8 million to $4.0 billion for the three months ended March 31, 2026 from $3.9 billion for the three months ended March 31, 2025.

The average yield on loans decreased by 30 basis points to 6.29% for the three months ended March 31, 2026 compared to 6.59% for the three months ended March 31, 2025. Taxable-equivalent interest income earned on loans decreased by $427 thousand primarily due to the impact of a decline in the Fed Funds rate and the decrease in the accretion income recognized on fair value marks to acquired loans, partially offset by an increase in the average loan balances.

The average balance of commercial loans increased by $96.1 million from $3.1 billion for the three months ended March 31, 2025 to $3.2 billion for the three months ended March 31, 2026. Average residential mortgage loans increased by $46.2 million from $461.8 million during the three months ended March 31, 2025 to $508.0 million during the three months ended March 31, 2026. Average home equity loans increased by $23.6 million from $288.7 million for the three months ended March 31, 2025 to $312.3 million for the three months ended March 31, 2026. Average installment and other consumer loans decreased by $4.7 million from $45.9 million for the three months ended March 31, 2025 to $41.2 million for the three months ended March 31, 2026.

Accretion of purchase accounting adjustments on loans included in interest income was $4.2 million and $6.6 million for the three months ended March 31, 2026 and 2025, respectively, which included accelerated accretion totaling $1.0 million and $1.4 million during the three months ended March 31, 2026 and 2025, respectively. Prepayment income on loans increased from $300 thousand for the three months ended March 31, 2025 to $579 thousand for the three months ended March 31, 2026.

Interest income on investment securities on a tax-equivalent basis increased by $1.0 million to $11.1 million for the three months ended March 31, 2026 from $10.1 million for the three months ended March 31, 2025, with the taxable equivalent yield decreasing from 4.65% for the three months ended March 31, 2025 to 4.51% for the three months ended March 31, 2026. The 14 basis point decrease reflects the impact from the decline in the market interest rates and the decrease in the accretion recognized on fair value marks to acquired securities. Accretion on acquired investment securities was $678 thousand for the three months ended March 31, 2026 compared to $839 thousand for the three months ended March 31, 2025. The average balance of investment securities increased by $119.0 million to $984.1 million for the three months ended March 31, 2026 from $865.1 million for the three months ended March 31, 2025 due primarily to investment security purchases. During the three months ended March 31, 2026 and 2025, the Company did not sell any investment securities.

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis decreased by $1.6 million to $637 thousand for the three months ended March 31, 2026 from $2.3 million for the three months ended March 31, 2025. The average balance of federal funds sold and interest-bearing bank balances decreased by $133.2 million from $203.3 million for the three months ended March 31, 2025 to $70.1 million for the three months ended March 31, 2026, which was derived from the increase in average loans and decrease in average deposits. The FOMC has cut the Federal Funds rate by 75 basis points since September 2025.

Interest expense on interest-bearing liabilities decreased by $1.4 million from $26.8 million for the three months ended March 31, 2025 to $25.4 million for the three months ended March 31, 2026. The cost of interest-bearing liabilities decreased by 20 basis points from 2.76% for the three months ended March 31, 2025 to 2.56% for the three months ended March 31, 2026 reflecting the impact of deposit rate reductions and the runoff of higher rate time deposits and money market balances. The average balance of interest-bearing deposits decreased by $16.7 million and totaled $3.7 billion for the three months ended March 31, 2026 from three months ended March 31, 2025. Average time deposits decreased by $63.7 million to $906.9 million for the three months ended March 31, 2026 from $970.6 million for the three months ended March 31, 2025. Average savings deposits decreased by $13.7 million to $259.6 million for the three months ended March 31, 2026 from $273.3 million for the three months ended March 31, 2025. Average interest-bearing demand deposits increased by $60.7 million and totaled $2.5 billion for both the three months ended March 31, 2026 and 2025. Amortization of fair value marks on acquired time deposits was $38 thousand for the three months ended March 31, 2026 compared to $452 thousand for the three months ended March 31, 2025.

Interest expense on borrowings increased by $875 thousand to $3.4 million for the three months ended March 31, 2026 from $2.5 million for the three months ended March 31, 2025. The cost of borrowings increased by 46 basis points to 4.42% for the three months ended March 31, 2026 from 4.88% for the three months ended March 31, 2025. Average borrowings increased by $101.4 million from $207.8 million for the three months ended March 31, 2025 to $309.2 million for the three months ended March 31, 2026. Average borrowings included average FHLB advances and other borrowings of $248.4 million for the three months ended March 31, 2026, an increase of $135.5 million, from an average of $112.9 million for the three months ended March 31, 2025. The cost of the Company's subordinated notes, excluding the fair value mark, was 8.16% for the three months ended March 31, 2026 compared to 6.16% for the three months ended March 31, 2025, which was due to the interest rate converting to a variable rate on December 30, 2025. For the three months ended March 31, 2026 and 2025, the cost of the variable-rate trust preferred debt, excluding the fair value mark, was 5.72% and 6.37%, respectively. Amortization of fair value marks on acquired borrowings was $152 thousand for both the three months ended March 31, 2026 and 2025. Funding costs were elevated in the first half of the quarter in 2026 due to seasonal deposit declines, which increased borrowing balances temporarily. Significant deposit inflow in the back half of the quarter in 2026 enabled the Bank to significantly reduce its borrowing levels, but the average balance was still higher than the prior quarter.

Provision for Credit Losses

The ACL as a percentage of the total loan portfolio was 1.17% at March 31, 2026 compared to 1.23% at March 31, 2025. The Company recorded a provision for credit losses on loans of $728 thousand for the three months ended March 31, 2026 compared to a recovery of $554 thousand for the same period in 2025. The recovery of credit losses on unfunded loan commitments was $376 thousand and zero during the three months ended March 31, 2026 and 2025, respectively.

For the three months ended March 31, 2026, the provision for credit losses was impacted by loan growth of $40.6 million, refinement to the Bank's peer group and loss driver factors, in addition to a reduction in prepayment speed assumptions, within the quantitative model due to current economic conditions partially offset by an improvement in the gross domestic product forecast and changes in certain qualitative factors. The qualitative factor for Delinquency and Classified Loan Trends was reduced from a moderate to a minor level for the commercial and industrial and commercial real estate owner-occupied loan classes. The change was based on reduced levels of delinquencies and migration to classified risk ratings over consecutive periods. The qualitative factor for the Quality of Loan Review System was reduced from a minor level to no risk level for the commercial loan classes. The change was supported by strong ratings in the Bank's risk assessment, credit administration and credit risk supervision processes, as reported in the third-party loan reviews for multiple consecutive periods. The qualitative factor for Concentrations of Credit and Changes within Credit Concentrations was removed for the commercial real estate non-owner occupied loan class, which was based on the continuous decline in the commercial real estate concentration as a percentage of total risk-based capital.

For the three months ended March 31, 2025, the provision for credit losses was primarily impacted by the decrease in loans, partially offset by increases in certain qualitative factors. A qualitative factor was added for Other External Factors at a minor level for all loan classes due to the uncertainty created within the global and domestic markets from changes in U.S. economic policy, including the recently implemented tariffs;, the Economic Conditions qualitative factor at a minor level and the Delinquency and Classified Loan Trends qualitative factor at a moderate level were added for the residential senior liens loan class; and the Delinquency and Classified Loan Trends qualitative factor at a moderate level was added for the home equity loan class. An adjustment to the Economic Conditions qualitative factor was based on current market interest rates and prepayment speeds, and the adjustment to Delinquency and Classified Loan Trends was based on delinquencies and downgrades within the aforementioned loan classes.

Net charge-offs for the three months ended March 31, 2026 totaled $946 thousand compared to net charge-offs of $331 thousand for the three months ended March 31, 2025. Nonaccrual loans were 0.74% of gross loans at March 31, 2026 compared with 0.59% of gross loans at March 31, 2025.

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

Noninterest Income

The following table compares noninterest income for the three months ended March 31, 2026 and 2025:

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Noninterest income increased by $4.0 million from $11.6 million for the three months ended March 31, 2025 to $15.6 million for the three months ended March 31, 2026. The following were significant components of the change in this line item:

• Service charges on deposits and other service charges, commissions and fees increased by $339 thousand and $137 thousand, respectively, due to an increase in cash management services and other deposit fees.
• Swap fee income increased by $945 thousand due to higher swap volume.
• Wealth management income, which includes trust and investment management income and brokerage income, increased by $142 thousand due to improvement in market performance and increase in managed assets.
• The increase of $2.5 million in income from life insurance was due primarily to $2.4 million of death benefits from life insurance contracts for the three months ended March 31, 2026.
• Other line items within noninterest income showed fluctuations attributable to normal business operations.

Noninterest Expenses

The following table compares noninterest expenses for the three months ended March 31, 2026 and 2025:

Noninterest expense decreased by $1.5 million from $38.2 million for the three months ended March 31, 2025 to $36.7 million for the three months ended March 31, 2026. The following were additional significant components of the change in this line item:

• Salaries and employee benefits expense increased by $769 thousand due to staff additions that filled vacancies, in addition to increases in merit-based compensation.
• Furniture and equipment expense decreased by $546 thousand due primarily to post-merger efficiencies over the past year.
• Data processing expense increased by $613 thousand due to investments in technology as the Company focuses on the evolving needs of its clients.
• ATM and interchange fee expense increased by $462 thousand due to an increase in debit card activity and costs incurred for enhanced ATM services.
• Professional services expense decreased by $605 thousand due to the reduced reliance on consultants and other third-party service providers since the prior year.
• During the first quarter of 2025, the Company incurred merger-related expenses of $1.6 million, which included software conversion costs and professional fees, including external audit, associated with the conversion.
• Other operating expenses decreased by $392 thousand primarily due to sales tax credits from the Commonwealth of Pennsylvania and a decrease in credit valuation adjustments on non-hedging derivatives of $175 thousand.
• Other line items within noninterest expense showed fluctuations attributable to normal business operations.

Income Tax Expense

Income tax expense totaled $5.7 million, an effective tax rate of 20.7%, for the three months ended March 31, 2026 compared with $4.7 million and an effective tax rate of 20.7% for the three months ended March 31, 2025. The Company’s effective tax rate is less than the 21% federal statutory rate primarily due to tax-exempt income, including interest earned on tax-exempt loans and securities and non-taxable income from life insurance policies and tax credits partially offset by the disallowed portion of interest expense against earnings in association with the Bank's tax-exempt investments under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") and other nondeductible items.

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 and liquidity, enhance income through interest and dividend income and collateralize certain deposits and borrowings.

The Company has established investment policies and an asset management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management’s strategy to respond to changes in interest rates, liquidity, pledges to secure deposits and repurchase agreements and other factors while trying to maximize return on the investments. The Company may segregate its investment security portfolio into three categories: “securities held-to-maturity,” “trading securities” and “securities available-for-sale.” At March 31, 2026 and December 31, 2025, 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 on the AFS securities did not require an ACL at March 31, 2026 and December 31, 2025.

At March 31, 2026, AFS securities totaled $947.0 million, a decrease of $5.7 million from $952.7 million at December 31, 2025. During the three months ended March 31, 2026, paydowns totaled $23.4 million. Net unrealized losses increased by $6.8 million to $26.2 million at March 31, 2026 compared to net unrealized losses of $19.4 million at December 31, 2025 due to higher market interest rates and widening of spreads at the end of the first quarter of 2026. During the three months ended March 31, 2026, the Bank purchased $23.1 million of investment securities, consisting of $15.1 million of agency mortgage backed securities and collateralized mortgage obligations, $6.9 million of non-agency collateralized mortgage obligations and $1.1 million of securities issued by state and political subdivisions. The remaining change in investment securities is due to net accretion recorded on the investment securities during the first quarter of 2026. The overall duration of the Company's investment securities portfolio was 4.7 years at March 31, 2026 compared to 4.6 years at December 31, 2025. 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 March 31, 2026:

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 March 31, 2026 and December 31, 2025:

Total loans increased by $40.6 million from December 31, 2025 to March 31, 2026. Commercial loans increased by $31.6 million and residential mortgages increased by $10.1 million from December 31, 2025 to March 31, 2026, partially offset by a decrease in installment and other loans of $1.1 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.

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

The following table presents the Company’s risk elements and relevant asset quality ratios at March 31, 2026 and December 31, 2025:

(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 $32.5 million at March 31, 2026, an increase of $2.2 million from $30.3 million at December 31, 2025. Nonaccrual loans increased by $2.0 million from December 31, 2025 to March 31, 2026 due primarily to additions to nonaccrual status of $5.9 million, which included $4.2 million for one commercial and land development loan and $835 thousand for one commercial and industrial loan. This increase was partially offset by repayments totaling $2.3 million, net charge offs of $930 thousand and an upgrade returning one commercial loan of $720 thousand to accruing status. For the three months ended March 31, 2026, OREO increased by $1.1 million, which included a commercial real estate property of $847 thousand and a residential mortgage loan of $208 thousand. At March 31, 2026, the Company had $5.9 million in loan modifications meeting the FDM criteria compared to $6.3 million at December 31, 2025. There were $5.0 million in FDM loans in nonaccrual status at both March 31, 2026 and December 31, 2025. There were no new loan modifications during the three months ended March 31, 2026. During the three months ended March 31, 2026, the change in FDM loans was due to repayments.

To monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss."

Special Mention loans increased by $2.3 million from $108.3 million at December 31, 2025 to $110.6 million at March 31, 2026 due to net downgrades of $12.3 million, consisting primarily of commercial loans, partially offset by repayments totaling $10.0 million. Classified loans totaled $57.6 million at March 31, 2026, or 1.4% of total loans outstanding, reflecting a decrease from $58.4 million, or 1.5% of total loans outstanding, at December 31, 2025.

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 $27.4 million at

March 31, 2026, a decrease of $2.8 million from $30.2 million at December 31, 2025 due primarily to net upgrades of $2.2 million and repayments of $617 thousand. The Substandard-IEL category increased by $2.0 million from $28.2 million at December 31, 2025 to $30.2 million at March 31, 2026, primarily due to net downgrades of $5.2 million, partially offset by repayments of $2.3 million and charge-offs totaling $930 thousand.

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at March 31, 2026 and December 31, 2025. At March 31, 2026, there was a specific reserve of $1 thousand on a nonaccrual loan, excluding the ACL recorded on acquired PCD loans, compared to $2 thousand at December 31, 2025.

The following table presents our exposure to relationships that are individually evaluated and the partial charge-offs taken to date and specific reserves established on those relationships at March 31, 2026 and December 31, 2025:

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 $2.0 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 and the Board 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 reserves include an evaluation of the outstanding loan balance and the related collateral securing the credit. Through a combination of collateral securing the loans and partial charge-offs taken to date, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships at March 31, 2026. 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 on Loans

The Company maintains the ACL at a level deemed adequate by management for expected credit losses. The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the unaudited condensed consolidated statements 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 regularly 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 Board and Management ERM Committees.

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 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 activity in the ACL for the three months ended March 31, 2026 and 2025:

The ACL totaled $47.5 million at March 31, 2026, a decrease of $341 thousand from $47.8 million at March 31, 2025. The ACL as a percentage of the total loan portfolio was 1.17% at March 31, 2026 compared to 1.23% at March 31, 2025.

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. In addition to the specific reserve allocations on individually evaluated loans noted previously, 18 loans, with aggregate outstanding principal balances of $6.6 million, had cumulative partial charge-offs to the ACL totaling $1.9 million as of March 31, 2026. 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 $98.7 million and totaled $4.6 billion at March 31, 2026 compared to $4.5 billion at December 31, 2025. Interest-bearing demand deposits, non-interest demand deposits, time deposits and money market deposits increased by $73.2 million, $11.7 million, $8.8 million and $7.6 million, respectively, from December 31, 2025 to March 31, 2026. Savings deposits decreased by $2.6 million from December 31, 2025 to March 31, 2026. Efforts to drive deposit generation were successful in the first quarter of 2026.

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 decreased by $68.0 million to $206.4 million at March 31, 2026 compared to $274.4 million at December 31, 2025. The decrease was due to net repayments during the first quarter of 2026 as the Bank utilized available liquidity from deposits to fund the Company's operations. The Bank seeks to maintain sufficient liquidity to ensure client needs can be addressed in a timely basis.

The Company has unsecured subordinated notes of $31.0 million. The subordinated notes had a fixed rate of interest equal to 4.50% until December 30, 2025. After that term, the variable rate of interest is equal to the three-month CME term SOFR rate plus 4.04%. At March 31, 2026 and December 31, 2025, the interest rates on the subordinate notes were 7.72% and 8.06%, respectively.

The Company also has junior subordinated trust preferred debt of $10.3 million. In June 2006, Codorus Valley formed CVB Statutory Trust No. II, a wholly-owned special purpose entity whose sole purpose was to facilitate a pooled trust preferred debt issuance of $7.2 million with a stated maturity of July 7, 2036 and a variable rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 1.54% through maturity. In November 2004, Codorus Valley formed CVB Statutory Trust No. I to facilitate a pooled trust preferred debt issuance of $3.1 million with a stated maturity of December 15, 2034 and a variable rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 2.02% through maturity. For the three months ended March 31, 2026 and 2025, the cost of the variable-rate trust preferred debt, excluding the fair value mark, was 5.72% and 6.37%, respectively.

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 $603.2 million at March 31, 2026, an increase of $11.7 million from $591.5 million at December 31, 2025. The increase was primarily attributable to net income of $21.8 million, partially offset by dividends paid of $5.9 million and other comprehensive loss of $4.5 million for the three months ended March 31, 2026. Other comprehensive loss included an after-tax increase of $5.3 million from net unrealized losses on investment securities, partially offset by $754 thousand in net unrealized gains from interest rate swaps designated as cash flow hedges. For the three months ended March 31, 2026, total comprehensive income totaled $17.3 million, a decrease of $3.0 million from total comprehensive income of $20.3 million for the same period in 2025. The decrease was due primarily to an increase in after-tax net unrealized losses on investment securities of $8.3 million, partially offset by an increase in net income of $3.8 million and an increase in after-tax net unrealized gains on interest rate swaps designated as cash flow hedges of $1.5 million between the comparative periods. The increase in net unrealized losses on investment securities was primarily caused by an increase in market rates and widening of spreads at the end of the first quarter of 2026.

At March 31, 2026, book value per common share was $30.76 compared to $30.32 at December 31, 2025. Tangible book value per share increased from $25.21 at December 31, 2025 to $25.76 at March 31, 2026, primarily as a result of the increase in shareholders' equity from net income. See “Supplemental Reporting of Non-GAAP Measures.”

The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. At March 31, 2026 and December 31, 2025, the Bank was considered well-capitalized under applicable banking regulations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.

Note 11, Shareholders' Equity and Regulatory Capital, to the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at March 31, 2026 and December 31, 2025.

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, 2025, Item 1 - Business, under the topic Basel III Capital Rules. At March 31, 2026, the Company's and the Bank's capital conservation buffers, based on the most restrictive Total Capital to risk weighted assets capital ratio, were both 5.5%, which are above the regulatory requirement of 2.50%.

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 March 31, 2026, cash and cash equivalents totaled $161.1 million compared to $149.8 million at December 31, 2025. The increase of $11.4 million primarily reflects the increase in deposits of $98.7 million and net income of $21.8 million, partially offset by the decrease in FHLB advances and other borrowings and repurchase agreements of $73.3 million and the increase in loans of $38.5 million for the three months ended March 31, 2026.

Unencumbered debt securities totaled $281.2 million at March 31, 2026 compared to $396.2 million at December 31, 2025. At March 31, 2026 and December 31, 2025, the Company had $86.6 million and $88.8 million, respectively, of investment securities pledged at the FRB Discount Window, with no associated borrowings outstanding. The Company's maximum borrowing capacity from the FHLB of Pittsburgh increased by $14.5 million and was $2.0 billion at both March 31, 2026 and December 31, 2025, of which $207.0 million and $275.0 million in FHLB advances and letters of credit were outstanding at these same periods, respectively. The decrease in FHLB advances was due to repayments during the first quarter of 2026 based on liquidity available from deposits to fund the Company's operations.

The Company’s ability to borrow from the FHLB is dependent on having sufficient qualifying collateral, which consists of loans primarily secured by real estate. In addition, the Company had $10.0 million in available unsecured lines of credit with other banks at both March 31, 2026 and December 31, 2025. The Bank regularly tests its various sources of funding to ensure accessibility.

Supplemental Reporting of Non-GAAP Measures

Management believes providing certain “non-GAAP” 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 $105.5 million and $107.7 million at March 31, 2026 and December 31, 2025, respectively. During the three months ended March 31, 2026 and 2025, the Company incurred merger-related expenses of zero and $1.6 million, respectively.

Tangible book value per common share and the impact of the merger-related expenses on net income and associated ratios, as used by the Company in this supplemental reporting presentation, are determined by methods other than in accordance with GAAP. While the Company's management believes this information is a useful supplement to the GAAP-based measures reported in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, 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, 2025 to March 31, 2026 is primarily due to net income of $21.8 million, partially offset by dividends paid of $5.9 million and other comprehensive loss, net of taxes, of $4.5 million. Other comprehensive loss increased due to net unrealized losses on AFS securities partially offset by net unrealized gains on interest rate swaps designated as cash flow hedges.

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

72

Adjusted Net Income and Adjusted Diluted Earnings Per Share

73

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 represents the potential impact of changes in market interest rates on the Bank’s net interest income over the short term and on the economic value of its balance sheet over the longer term. This risk arises primarily from differences in the timing and magnitude of repricing between interest‑earning assets and interest‑bearing liabilities, as well as from customer behaviors such as loan prepayments and deposit repricing sensitivity.

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 assuming a measured level of interest rate risk is inherent to banking and necessary to support sustainable profitability. Accordingly, the Bank seeks to balance earnings stability with acceptable exposure to changes in market interest rates, rather than eliminate interest rate risk entirely. 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 manages its interest rate risk through a combination of balance sheet structure and selective use of funding and hedging instruments, including the composition and duration of the investment securities portfolio, the maturity structure of FHLB advances, interest rate swaps and brokered deposits. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives.

We use simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of our interest rate risk exposure. These analyses require numerous assumptions including, but not limited to, changes in balance sheet mix, prepayment rates on loans and securities, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates, but may not accurately reflect actual results under certain changes in interest rate 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 analytical tools and methodologies, we can determine changes that may need to be made to the asset and liability mixes to mitigate the change in net interest income under various interest rate scenarios. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to inform the committee on the selection of investment securities. Regulatory authorities also monitor our interest rate risk position along with other liquidity ratios.

Net Interest Income Sensitivity

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

The simulation analysis results are presented in the table below. At March 31, 2026, the Bank is asset sensitive, meaning that, over the modeled twelve‑month horizon, changes in market interest rates are expected to affect interest‑earning assets more rapidly than interest‑bearing liabilities. As a result, increases in market interest rates are projected to have a favorable impact on net interest income, while decreases in rates are projected to reduce net interest income. Funding costs in the down‑rate scenarios are modeled to decline more slowly than in prior rate‑reduction cycles, reflecting competitive deposit pricing dynamics. If funding costs were to reprice downward more rapidly than assumed, the negative impact on net interest income in declining rate scenarios would be mitigated. Should those costs come down faster than modeled, improved performance in the rates down scenarios would be expected.

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.

The results at March 31, 2026 and December 31, 2025 reflect the impact of the FOMC's interest rate changes in effect at the end of each period. Funding cost, the level of interest rates, infrastructure cost and repricing speed will continue to be factors 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 for both periods. To improve 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.

Based on the evaluation required by Exchange Act Rules 13a-15(b) and 15d-15(b), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), at March 31, 2026. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at March 31, 2026.

There were no significant changes made to the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting during the three months ended March 31, 2026.

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, 2025.