Orrstown Financial Services Inc: Form 10-Q for the period ended Jun 30, 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 June 30, 2026, the Company had total assets of $5.6 billion, total liabilities of $5.0 billion and total shareholders’ equity of $621.7 million as reported in the unaudited consolidated balance sheet.

For the three and six months ended June 30, 2026, the Company had net income of $21.2 million and $43.0 million, respectively, compared to net income of $19.4 million and $37.5 million for the three and six months ended June 30, 2025, respectively. Diluted earnings per share was $1.09 and $1.01 for the three months ended June 30, 2026 and 2025, respectively. Diluted earnings per share was $2.21 and $1.94 for the six months ended June 30, 2026 and 2025, respectively. For the three and six months ended June 30, 2025, the Company incurred merger-related expenses of $968 thousand and $2.6 million, respectively. The Company did not incur merger-related expenses during the three and six months ended June 30, 2026. 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 1.5% on an annualized basis for the second quarter of 2026, which was a decrease from 2.1% during the first quarter of 2026 and from 3.0% during the second quarter of 2025. The decrease during the second quarter of 2026 was primarily due to an increase in imports and decrease in government spending, partially offset by an increase in consumer spending and investments. The increase in imports, which reduces GDP, was primarily impacted by capital goods, which includes industrial equipment and semiconductors. Nondefense spending declined due to an increase in sales of crude oil. The increase in consumer spending was primarily driven by nondurable goods, including personal healthcare, motor vehicles and furniture. Investment in intellectual property products continues to rise.

The personal consumption expenditures ("PCE") price index increased by 5.1% in the second quarter of 2026 compared to an increase of 4.6% for the first quarter of 2026 and 2.1% during the second quarter of 2025. Excluding food and energy prices, the PCE price index increased by 3.4% in the second quarter of 2026, 4.4% in the first quarter of 2025 and 2.5% in the second quarter of 2025. The increase in the PCE price index reflects the rising costs from energy prices, which have been impacted by the geopolitical conflict in the Middle East, and pass-through costs on goods impacted by tariffs. Despite the inflationary pressures, consumer demand has allowed for prices to hold.

The national unemployment rate was 4.2% in June 2026 compared to 4.3% in March 2026 and 4.1% in June 2025. During the second quarter of 2026, there continued to be job gains in healthcare, professional services and social assistance; however, there was a decline in employment within leisure and hospitality. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 4.1% in June 2026 compared to 4.3% in March 2026 and 4.3% in June 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.

During 2025, the FOMC implemented rate cuts of 25 basis points in September 2025, October 2025 and December 2025, reducing the target range to 3.50% to 3.75%. These changes were based on the FOMC's assessment of inflation, the unemployment rate and jobs report. There have been no rate changes in 2026.

At June 30, 2026, the 10-year Treasury bond yield was 4.44%, an increase from 4.30% at March 31, 2026 and 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. There is some belief that the current geopolitical conflict could result in an increase in the Federal Funds rate later in 2026.

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 June 30, 2026 compared with three months ended June 30, 2025

Summary

Net income totaled $21.2 million for the three months ended June 30, 2026 compared to net income of $19.4 million for the same period in 2025. Diluted earnings per share for the three months ended June 30, 2026 totaled $1.09 compared to $1.01 for the three months ended June 30, 2025. For the three months ended June 30, 2026 and 2025, the Company incurred merger-related expenses of zero and $968 thousand, respectively, which were included in non-interest expenses of the unaudited condensed consolidated statements of income. For the three months ended June 30, 2025, excluding these non-recurring expenses, net income and diluted earnings per share totaled $20.2 million and $1.04, respectively. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Net interest income totaled $48.8 million for the three months ended June 30, 2026 compared to $49.5 million for the three months ended June 30, 2025.

Net provision for credit losses on loans and unfunded loan commitments totaled $338 thousand and $109 thousand for the three months ended June 30, 2026 and 2025, respectively.

Noninterest income totaled $13.8 million for the three months ended June 30, 2026 compared to $12.9 million for the three months ended June 30, 2025.

Noninterest expenses totaled $37.7 million for the three months ended June 30, 2026 compared to $37.6 million for the three months ended June 30, 2025.

Income tax expense was $3.5 million for the three months ended June 30, 2026 compared to $5.3 million for the three months ended June 30, 2025. The Company's effective tax rate was 14.2% for the three months ended June 30, 2026 compared to 21.3% for the three months ended June 30, 2025.

Net Interest Income

Net interest income decreased by $681 thousand from $49.5 million for the three months ended June 30, 2025 to $48.8 million for the three months ended June 30, 2026. Interest income on loans increased by $279 thousand from $63.0 million for the three months ended June 30, 2025 to $63.3 million for the three months ended June 30, 2026. Interest income on investment securities increased by $464 thousand from $10.3 million for the three months ended June 30, 2025 to $10.7 million for the three months ended June 30, 2026. Total interest expense increased by $550 thousand from $25.3 million for the three months ended June 30, 2025 to $25.9 million for the three months ended June 30, 2026. Interest expense on deposits decreased by $1.2 million from $22.9 million for the three months ended June 30, 2025 to $21.7 million for the three months ended June 30, 2026. Interest expense on borrowings increased by $1.7 million to $4.2 million for the three months ended June 30, 2026 compared to $2.5 million for the three months ended June 30, 2025.

The following table presents net interest income, net interest spread and net interest margin for the three months ended June 30, 2026 and 2025 on a taxable-equivalent basis:

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(in thousands)

Net interest income on a taxable-equivalent basis decreased by $659 thousand to $49.4 million for the three months ended June 30, 2026 from $50.1 million for the three months ended June 30, 2025. The Company's net interest spread decreased by 21 basis points from 3.49% for the three months ended June 30, 2025 to 3.28% for the three months ended June 30, 2026.

Taxable-equivalent net interest margin decreased by 20 basis points to 3.87% for the three months ended June 30, 2026 from 4.07% for the three months ended June 30, 2025. During the three months ended June 30, 2026, the Company redeemed the subordinated notes and accelerated the amortization of the related fair value mark of $1.6 million to interest expense, which reduced net interest margin by 13 basis points. Excluding the accelerated amortization of the fair value mark on the redeemed subordinated notes, net interest margin was 4.00% in the second quarter of 2026. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

The taxable-equivalent yield on interest-earning assets decreased by 23 basis points from 6.13% for the three months ended June 30, 2025 to 5.90% for the three months ended June 30, 2026 due primarily to the impact of the decline in the Fed Funds rate during the fourth quarter of 2025 and the decrease in the net accretion income recognized on purchase accounting marks for acquired loans and securities, partially offset by the increase in average loans and investment securities. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $3.2 million during the three months ended June 30, 2026 compared to $5.2 million during the three months ended June 30, 2025. The decrease in the purchase accounting marks was primarily due to the accelerated amortization expense of the remaining fair value mark of $1.6 million on the subordinated notes redeemed on June 30, 2026. Offsetting the impact from the redeemed subordinated notes, net interest margin benefited from a decrease of 13 basis points in the cost of deposits from 2.01% for the three months ended June 30, 2025 to 1.88% for the three months ended June 30, 2026, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits.

Average loans increased by $180.3 million from $3.9 billion for the three months ended June 30, 2025 to $4.1 billion for the three months ended June 30, 2026. Average investment securities increased by $67.8 million from $904.1 million for the three months ended June 30, 2025 to $971.9 million for the three months ended June 30, 2026. Average interest-bearing liabilities increased by $117.5 million to $4.0 billion for the three months ended June 30, 2026 from $3.8 billion for the three months ended June 30, 2025.

The yield on loans decreased by 27 basis points to 6.25% for the three months ended June 30, 2026 compared to 6.52% for the three months ended June 30, 2025. Taxable-equivalent interest income earned on loans increased by $296 thousand primarily due to the impact of a decline in the Fed Funds rate during the fourth quarter of 2025 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 $106.0 million to $3.2 billion for the three months ended June 30, 2026 from $3.1 billion for the three months ended June 30, 2025. Average residential mortgage loans increased by $43.3 million from $473.0 million during the three months ended June 30, 2025 to $516.3 million during the three months ended June 30, 2026. Average home equity loans increased by $34.9 million from $290.1 million for the three months ended June 30, 2025 to $325.0 million for the three months ended June 30, 2026. Average installment and other consumer loans decreased by $3.9 million from $43.9 million for the three months ended June 30, 2025 to $40.0 million for the three months ended June 30, 2026.

Accretion of purchase accounting adjustments on loans included in interest income was $4.3 million and $4.9 million for the three months ended June 30, 2026 and 2025, respectively. Accelerated accretion on loans totaled $731 thousand and $1.3 million for the three months ended June 30, 2026 and 2025, respectively. Prepayment fee income on loans decreased from $507 thousand for the three months ended June 30, 2025 to $343 thousand for the three months ended June 30, 2026.

Interest income on investment securities on a tax-equivalent basis increased by $470 thousand to $11.1 million for the three months ended June 30, 2026 from $10.6 million for the three months ended June 30, 2025, with the taxable equivalent yield decreasing from 4.70% for the three months ended June 30, 2025 to 4.57% for the three months ended June 30, 2026. The 13 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 $698 thousand for the three months ended June 30, 2026 compared to $795 thousand for the three months ended June 30, 2025. The average balance of investment securities increased by $67.8 million to $971.9 million for the three months ended June 30, 2026 from $904.1 million for the three months ended June 30, 2025 due primarily to investment security purchases. During the three months ended June 30, 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 $874 thousand to $639 thousand for the three months ended June 30, 2026 from $1.5 million for the three months ended June 30, 2025. The average balance of federal funds sold and interest-bearing bank balances decreased by $66.3 million from $136.1 million for the three months ended June 30, 2025 to $69.8 million for the three months ended June 30, 2026, which was impacted by the increase in average loans and investment securities. This decrease was partially offset by the increase in average interest-bearing liabilities. The FOMC cut the Federal Funds rate by 75 basis points from September 2025 to December 2025.

Interest expense on interest-bearing liabilities increased by $550 thousand from $25.3 million for the three months ended June 30, 2025 to $25.9 million for the three months ended June 30, 2026. The cost of interest-bearing liabilities decreased by two basis points from 2.64% for the three months ended June 30, 2025 to 2.62% for the three months ended June 30, 2026, reflecting the impact of deposit rate reductions and the runoff of higher rate time deposits, partially offset by the increase in the average balance of interest-bearing deposits and FHLB advances and other borrowings and the accelerated amortization of $1.6 million from the redemption of subordinated notes. Excluding the impact of the subordinated notes redemption, the cost of interest-bearing liabilities was 2.45% for the three months ended June 30, 2026, a decrease of 17 basis points, from 2.62% during the three months ended June 30, 2025.

Interest expense on deposits was $21.7 million for the three months ended June 30, 2026 compared to $22.9 million for the three months ended June 30, 2025. The cost of deposits was 1.88% for the three months ended June 30, 2026 compared to 2.01% for the three months ended June 30, 2025. The average balance of interest-bearing deposits increased by $91.9 million to $3.7 billion for the three months ended June 30, 2026 from $3.6 billion for the three months ended June 30, 2025. Average interest-bearing demand deposits increased by $114.2 million to $2.6 billion for the three months ended June 30, 2026 from $2.5 billion for the three months ended June 30, 2025. Average time deposits decreased by $13.7 million to $900.4 million for the three months ended June 30, 2026 from $914.1 million for the three months ended June 30, 2025. Average savings deposits decreased by $8.6 million to $260.7 million for the three months ended June 30, 2026 from $269.3 million for the three months ended June 30, 2025. Amortization of fair value marks on acquired time deposits was $25 thousand for the three months ended June 30, 2026 compared to $254 thousand for the three months ended June 30, 2025.

Interest expense on borrowings was $4.2 million for the three months ended June 30, 2026 compared to $2.5 million for the three months ended June 30, 2025. The cost of borrowings was 7.48% for the three months ended June 30, 2026 compared to 4.97% for the three months ended June 30, 2025. The redemption of subordinated notes resulted in the accelerated amortization of remaining fair value mark totaling $1.6 million for the three months ended June 30, 2026. Excluding the impact of the subordinated note redemption, the cost of borrowings was 4.57% for the three months ended June 30, 2026, a decrease of 40 basis points from 4.97% during the three months ended June 30, 2025.

Average borrowings increased by $25.5 million from $198.9 million for the three months ended June 30, 2025 to $224.4 million for the three months ended June 30, 2026. Average borrowings included average FHLB advances and other borrowings of $175.7 million for the three months ended June 30, 2026, an increase of $71.7 million, from an average of $104.1 million for the three months ended June 30, 2025. The increase was due to higher utilization of borrowings primarily to fund loan and investment growth.

The cost of the Company's subordinated notes, excluding the fair value mark, was 7.92% for the three months ended June 30, 2026 compared to 6.46% for the three months ended June 30, 2025, which was due to the interest rate on the $31.0 million subordinated notes, assumed from the Company's merger with Codorus Valley, converting to a variable rate on December 30, 2025. For the three months ended June 30, 2026 and 2025, the cost of the variable-rate trust preferred debt, excluding the fair value mark, was 5.70% and 6.30%, respectively. Amortization of fair value marks on acquired borrowings was $1.8 million and $150 thousand for the three months ended June 30, 2026 and 2025, respectively, which increased due to the redemption of the subordinated notes in 2026.

Provision for Credit Losses

The ACL to total loan ratio was 1.13% at June 30, 2026 and 1.22% at June 30, 2025. The Company recorded a net provision for credit losses on loans and unfunded loan commitments of $338 thousand for the three months ended June 30, 2026 compared to $109 thousand for the same period in 2025. There was no change in the reserve for unfunded loan commitments during the three months ended June 30, 2026.

Net charge-offs for the three months ended June 30, 2026 totaled $1.2 million compared to net charge-offs of $115 thousand for the three months ended June 30, 2025. The increase in net charge-offs during the second quarter of 2026 included charge-offs of $668 thousand for a commercial and land development loan and $349 thousand for a commercial and industrial loan. Nonaccrual loans were 0.58% of gross loans at June 30, 2026, compared with 0.57% of gross loans at June 30, 2025.

For the three months ended June 30, 2026, the provision for credit losses on loans reflects loan growth of $51.7 million during the second quarter of 2026, partially offset by adjustments to certain qualitative factors as a result of improvements in the underlying criteria. The qualitative factor for Collateral Valuation Trends, which was at a minor level at March 31, 2026, was reduced to no risk level for the commercial real estate segment based on improved trends in collateral valuations as supposed by the FRB's Financial Stability Report. The qualitative factor for Concentrations of Credit and Changes within Credit Concentrations, which was at a minor level at March 31, 2026, was reduced to no risk level for the acquisition and development loan segment as the concentration as a percentage of total risk-based capital was below the Bank's risk indicator for consecutive periods. A qualitative factor for Other External Factors was increased to a minor level for all loan classes based on the potential impact to loan performance from the uncertainty stemming from the geopolitical conflict in the Middle East and inflationary pressures.

For the three months ended June 30, 2025, the provision for credit losses increased primarily due to an increase in loans of $55.4 million, partially offset by the removal of the Other External Factors qualitative factor for all loan classes during the second quarter of 2025. This qualitative factor was added at a minor level for all loan classes during the first quarter of 2025 based on the uncertainty on the impact from changes in U.S. economic policy, which included tariffs.

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

Noninterest Income

The following table compares noninterest income for the three months ended June 30, 2026 and 2025:

Noninterest income increased by $921 thousand from $12.9 million for the three months ended June 30, 2025 to $13.8 million for the three months ended June 30, 2026. The following were significant components of the change in this line item:

• Interchange income increased by $161 thousand due to an increase in card transactions from consumer spending activity.
• Wealth management income, which includes trust and investment management income and brokerage income, increased by $679 thousand due to improvement in market performance combined with new account generation driving an increase in managed assets.
• Other line items within noninterest income showed fluctuations attributable to normal business operations.

Noninterest Expenses

The following table compares noninterest expenses for the three months ended June 30, 2026 and 2025:

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Noninterest expenses increased by $52 thousand from $37.6 million for the three months ended June 30, 2025 to $37.7 million for the three months ended June 30, 2026. The following were additional significant components of the change in this line item:

• Salaries and employee benefits expense increased by $865 thousand due to staff additions that filled vacancies, thereby reducing use of third-party consultants, and merit salary increases effective in May.
• Furniture and equipment expense decreased by $536 thousand due primarily to post-merger efficiencies created over the past year.
• Data processing expenses increased by $738 thousand due to investments in technology as the Company focuses on the evolving needs of its clients.
• Automated teller machine and interchange fee expense increased by $552 thousand due to an increase in debit card activity and costs incurred for enhanced ATM services.
• Professional services expense decreased by $814 thousand due to the reduced use of consultants and other third-party service providers since the prior year.
• During the second quarter of 2025, the Company incurred merger-related expenses of $968 thousand, which included software conversion costs incurred in connection with the Merger.
• Other line items within noninterest expense showed fluctuations attributable to normal business operations.

Income Tax Expense

Income tax expense totaled $3.5 million, an effective tax rate of 14.2%, for the three months ended June 30, 2026 compared to income tax expense of $5.3 million and an effective tax rate of 21.3% for the three months ended June 30, 2025. The Company’s effective tax rate is less than the 21% federal statutory rate primarily due to the purchase of federal income tax credits, which reduced income tax expense by $1.6 million. In addition, the effective tax rate was impacted by 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.

Six months ended June 30, 2026 compared with six months ended June 30, 2025

Summary

Net income totaled $43.0 million for the six months ended June 30, 2026 compared to $37.5 million for the same period in 2025. Diluted earnings per share for the six months ended June 30, 2026 totaled $2.21 compared to $1.94 for the six months ended June 30, 2025. For the six months ended June 30, 2026 and 2025, the Company incurred merger-related expenses of zero and $2.6 million, respectively, which were included in non-interest expenses of the unaudited condensed consolidated statements of income. For the six months ended June 30, 2025, excluding these non-recurring expenses, net income and diluted earnings per common share totaled $39.5 million and $2.04, respectively. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Net interest income totaled $97.8 million for the six months ended June 30, 2026 compared to $98.3 million for the six months ended June 30, 2025.

Net provision for credit losses on loans and unfunded loan commitments included an expense of $690 thousand and a recovery of $445 thousand for the six months ended June 30, 2026 and 2025, respectively.

Noninterest income totaled $29.4 million and $24.5 million for the six months ended June 30, 2026 and 2025, respectively.

Noninterest expenses totaled $74.4 million and $75.8 million for the six months ended June 30, 2026 and 2025, respectively.

Income tax expense totaled $9.2 million and $10.0 million for the six months ended June 30, 2026 and 2025, respectively. The Company's effective tax rate was 17.6% for the six months ended June 30, 2026 compared to 21.0% for the six months ended June 30, 2025.

Net Interest Income

Net interest income decreased by $437 thousand from $98.3 million for the six months ended June 30, 2025 to $97.8 million for the six months ended June 30, 2026. Interest income on loans decreased by $158 thousand from $126.5 million for the six months ended June 30, 2025 to $126.3 million for the six months ended June 30, 2026. Interest income on investment securities increased by $1.4 million from $20.1 million for the six months ended June 30, 2025 to $21.5 million for the six months ended June 30, 2026. Total interest expense decreased by $849 thousand from $52.1 million for the six months ended June 30, 2025 to $51.2 million for the six months ended June 30, 2026. Interest expense on deposits decreased by $3.4 million from $47.1 million for the six months ended June 30, 2025 to $43.7 million for the six months ended June 30, 2026. Interest expense on borrowings increased by $2.6 million from $5.0 million in the six months ended June 30, 2025 to $7.6 million for the six months ended June 30, 2026.

The following table presents net interest income, net interest spread and net interest margin for the six months ended June 30, 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 six months ended June 30, 2025 compared to the six months ended June 30, 2026:

Net interest income on a taxable-equivalent basis decreased by $396 thousand to $99.0 million for the six months ended June 30, 2026 from $99.4 million for the six months ended June 30, 2025. The Company's net interest spread decreased by 14 basis points from 3.45% for the six months ended June 30, 2025 to 3.31% for the six months ended June 30, 2026.

Taxable-equivalent net interest margin decreased by 15 basis points to 3.89% for the six months ended June 30, 2026 from 4.04% for the six months ended June 30, 2025. During the six months ended June 30, 2026, the Company redeemed the subordinated notes and accelerated the amortization of the related fair value mark of $1.6 million to interest expense, which reduced net interest margin by six basis points. Excluding the accelerated amortization of the fair value mark on the redeemed subordinated notes, net interest margin was 3.95% for the six months ended June 30, 2026. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

The taxable-equivalent yield on interest-earning assets decreased by 25 basis points from 6.15% for the six months ended June 30, 2025 to 5.90% for the six months ended June 30, 2026 due primarily to the impact of the decline in the Fed Funds rate during the fourth quarter of 2025 and the decrease in the accretion income recognized on purchase accounting marks for acquired loans and securities. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $7.9 million during the six months ended June 30, 2026 compared to $12.1 million during the six months ended June 30, 2025. The decrease was partially due to the accelerated amortization of the fair value mark of $1.6 million on the subordinated notes redeemed on June 30, 2026. Offsetting the impact from the redeemed subordinated notes, the net interest margin benefited from the decrease of 16 basis points in the cost of deposits from 2.08% for the six months ended June 30, 2025 to 1.92% for the six months ended June 30, 2026, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits.

Average loans increased by $170.8 million to $4.1 billion for the six months ended June 30, 2026 from $3.9 billion for the six months ended June 30, 2025. Average investment securities increased by $93.3 million to $978.0 million for the six months ended June 30, 2026 from $884.7 million for the six months ended June 30, 2025. Average interest-bearing liabilities increased by $101.2 million to $4.0 billion for the six months ended June 30, 2026 from $3.9 billion for the six months ended June 30, 2025.

The average yield on loans decreased by 29 basis points to 6.27% for the six months ended June 30, 2026 compared to 6.56% for the six months ended June 30, 2025. Taxable-equivalent interest income earned on loans decreased by $126 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 $101.1 million from $3.1 billion for the six months ended June 30, 2025 to $3.2 billion for the six months ended June 30, 2026. Average residential mortgage loans increased by $44.7 million from $467.4 million during the six months ended June 30, 2025 to $512.1 million during the six months ended June 30, 2026. Average home equity loans increased by $29.3 million from $289.4 million for the six months ended June 30, 2025 to $318.7 million for the six months ended June 30, 2026. Average installment and other consumer loans decreased by $4.3 million from $44.9 million for the six months ended June 30, 2025 to $40.6 million for the six months ended June 30, 2026.

Accretion of purchase accounting adjustments on loans included in interest income was $8.5 million and $11.5 million for the six months ended June 30, 2026 and 2025, respectively, which included accelerated accretion totaling $1.7 million and $2.7 million during the six months ended June 30, 2026 and 2025, respectively. Prepayment fee income on loans increased from $807 thousand for the six months ended June 30, 2025 to $922 thousand for the six months ended June 30, 2026.

Interest income on investment securities on a tax-equivalent basis increased by $1.4 million to $22.2 million for the six months ended June 30, 2026 from $20.8 million for the six months ended June 30, 2025, with the taxable equivalent yield decreasing from 4.70% for the six months ended June 30, 2025 to 4.54% for the six months ended June 30, 2026. The 16 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 $1.4 million for the six months ended June 30, 2026 compared to $1.6 million for the six months ended June 30, 2025. The average balance of investment securities increased by $93.3 million to $978.0 million for the six months ended June 30, 2026 from $884.7 million for the six months ended June 30, 2025 due primarily to investment security purchases. During the six months ended June 30, 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 $2.5 million to $1.3 million for the six months ended June 30, 2026 from $3.8 million for the six months ended June 30, 2025. The average balance of federal funds sold and interest-bearing bank balances decreased by $99.6 million from $169.5 million for the six months ended June 30, 2025 to $69.9 million for the six months ended June 30, 2026, which was impacted by the increase in average loans and investment securities. This decrease was partially offset by the increase in average interest-bearing liabilities. The FOMC cut the Federal Funds rate by 75 basis points from September 2025 to December 2025.

Interest expense on interest-bearing liabilities decreased by $849 thousand from $52.1 million for the six months ended June 30, 2025 to $51.2 million for the six months ended June 30, 2026. The cost of interest-bearing liabilities decreased by 11 basis points from 2.70% for the six months ended June 30, 2025 to 2.59% for the six months ended June 30, 2026 reflecting the impact of deposit rate reductions and the runoff of higher rate time deposits, partially offset by the increase in the average balance of interest-bearing deposits and FHLB advances and other borrowings and the accelerated amortization of $1.6 million from the redemption of subordinated notes. Excluding the impact of the subordinated notes redemption, the cost of interest-bearing liabilities was 2.51% for the six months ended June 30, 2026, a decrease of 19 basis points from 2.70% during the six months ended June 30, 2025.

Interest expense on deposits was $43.7 million for the for the six months ended June 30, 2026 compared to $47.1 million for the six months ended June 30, 2025. The cost of deposits was 1.92% for the six months ended June 30, 2026 compared to 2.08% for the six months ended June 30, 2025. Average interest-bearing demand deposits increased by $87.6 million and totaled $2.6 billion for the six months ended June 30, 2026 compared to $2.5 billion for the six months ended June 30, 2025. The average balance of interest-bearing deposits increased by $37.9 million and totaled $3.7 billion for the six months ended June 30, 2026 from the six months ended June 30, 2025. Average time deposits decreased by $38.8 million to $903.6 million for the three months ended June 30, 2026 from $942.4 million for the three months ended June 30, 2025. Average savings deposits decreased by $10.9 million to $260.2 million for the six months ended June 30, 2026 from $271.1 million for the three months ended June 30, 2025. Amortization of fair value marks on acquired time deposits was $63 thousand for the six months ended June 30, 2026 compared to $707 thousand for the six months ended June 30, 2025.

Interest expense on borrowings increased by $2.6 million to $7.6 million for the six months ended June 30, 2026 from $5.0 million for the six months ended June 30, 2025. The cost of borrowings was 5.72% for the six months ended June 30, 2026 compared to 4.92% for the six months ended June 30, 2025. The redemption of subordinated notes resulted in the accelerated amortization of the remaining fair value mark totaling $1.6 million. Excluding the impact of the subordinated notes redemption, the cost of borrowings was 4.49% for the six months ended June 30, 2026, a decrease of 43 basis points from 4.92% during the six months ended June 30, 2025.

Average borrowings increased by $63.3 million from $203.3 million for the six months ended June 30, 2025 to $266.6 million for the six months ended June 30, 2026. Average borrowings included average FHLB advances and other borrowings of

$211.8 million for the six months ended June 30, 2026, an increase of $103.4 million, from an average of $108.4 million for the six months ended June 30, 2025. The increase was due to higher utilization of borrowings primarily to fund loan and investment growth.

The cost of the Company's subordinated notes, excluding the fair value mark, was 8.04% for the six months ended June 30, 2026 compared to 6.38% for the six months ended June 30, 2025, which was due to the interest rate on the $31.0 million subordinated notes, assumed from the Company's merger with Codorus Valley, converting to a variable rate on December 30, 2025. For the six months ended June 30, 2026 and 2025, the cost of the variable-rate trust preferred debt, excluding the fair value mark, was 5.71% and 6.34%, respectively. Amortization of fair value marks on acquired borrowings was $1.9 million and $302 thousand for the six months ended June 30, 2026 and 2025, respectively, which increased due to the redemption of the subordinated notes in 2026.

Provision for Credit Losses

The ACL to total loan ratio was 1.13% at June 30, 2026 compared to 1.22% at June 30, 2025. The Company recorded a provision for credit losses on loans and unfunded commitments of $1.1 million for the six months ended June 30, 2026 compared to a recovery of $345 thousand for the same period in 2025. The recovery of credit losses on unfunded loan commitments was zero and $100 thousand during the six months ended June 30, 2026 and 2025, respectively.

Net charge-offs for the six months ended June 30, 2026 totaled $2.1 million compared to net charge-offs of $446 thousand for the six months ended June 30, 2025. The increase in net charge-offs during the six months ended June 30, 2026 included charge-offs of $1.0 million between two commercial and industrial loans and $753 thousand for a commercial and land development loan. Nonaccrual loans were 0.58% of gross loans at June 30, 2026 compared with 0.57% of gross loans at June 30, 2025.

For the six months ended June 30, 2026, the provision for credit losses on loans reflects loan growth of $92.3 million, partially offset by adjustments to certain qualitative factors as a result of improvements in the underlying criteria. During the first quarter of 2026, the provision for credit losses was impacted by an update 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, which were partially offset by an improvement in the gross domestic product forecast.

During the second quarter of 2026, the qualitative factor for Collateral Valuation Trends, which was at a minor level March 31, 2026 and December 31, 2025, was reduced to no risk level for the commercial real estate segment based on improved trends in collateral valuations as supposed by the FRB's Financial Stability Report. The qualitative factor for Concentrations of Credit and Changes within Credit Concentrations, which was at a minor level at March 31, 2026, was reduced to no risk level for the acquisition and development loan segment as the concentration as a percentage of total risk-based capital was below the Bank's risk indicator for consecutive periods. A qualitative factor for Other External Factors was increased to a minor level for all loan classes based on the potential impact to loan performance from the uncertainty stemming from the geopolitical conflict in the Middle East and inflationary pressures.

During the first quarter of 2026, 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 six months ended June 30, 2025, the provision for credit losses was primarily impacted by the changes in certain qualitative factors as loan balances were relatively flat over that period. During the first quarter of 2025, 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. The Delinquency and Classified Loan Trends qualitative factor was added for the home equity loan class at a moderate level. The addition of the Economic Conditions qualitative factor was based on current market interest rates and prepayment speeds, and the addition of the Delinquency and Classified Loan Trends was based on delinquencies and downgrades within the aforementioned loan classes. During the second quarter of 2025, the Other External Factors qualitative factor was removed for all loan classes as the impact from the changes in U.S. economic policy was then reflected in the macroeconomic conditions within the quantitative ACL model.

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

Noninterest Income

The following table compares noninterest income for the six months ended June 30, 2026 and 2025:

Noninterest income increased by $4.9 million from $24.5 million for the six months ended June 30, 2025 to $29.4 million for the six months ended June 30, 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 $360 thousand and $220 thousand, respectively, due to an increase in cash management services and other deposit fees.
• Swap fee income increased by $927 thousand due to higher swap volume.
• Wealth management income, which includes trust and investment management income and brokerage income, increased by $821 thousand due to improvement in market performance combined with new account generation driving an 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 recognized during 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 six months ended June 30, 2026 and 2025:

Noninterest expenses decreased by $1.4 million from $75.8 million for the six months ended June 30, 2025 to $74.4 million for the six months ended June 30, 2026. The following were additional significant components of the change in this line item:

• Salaries and employee benefits expense increased by $1.6 million due to staff additions that filled vacancies, thereby reducing use of third-party consultants, in addition to increases in merit-based compensation effective in May.
• Furniture and equipment expense decreased by $1.1 million due primarily to post-merger efficiencies over the past year.
• Data processing expense increased by $1.4 million due to investments in technology as the Company focuses on the evolving needs of its clients.
• ATM and interchange fee expense increased by $1.0 million due to an increase in debit card activity and costs incurred for enhanced ATM services.
• FDIC insurance expense decreased by $315 thousand due primarily to a decrease in the assessment rate caused by improvements in profitability and the capital adequacy factors.
• Professional services expense decreased by $1.4 million due to the reduced use of consultants and other third-party service providers since the prior year.
• During the first half of 2025, the Company incurred merger-related expenses of $2.6 million, which included software conversion costs and professional fees, including external audit, incurred in connection with the Merger.
• Other operating expenses decreased by $298 thousand primarily due to a decrease in credit valuation adjustments on non-hedging derivatives of $446 thousand, partially offset by a decrease in the sales tax credits received from the Commonwealth of Pennsylvania. During the six months ended June 30, 2026, the Bank received sales tax credits of $368 thousand, a decrease of $193 thousand, compared to $561 thousand received during the six months ended June 30, 2025.
• Other line items within noninterest expense showed fluctuations attributable to normal business operations.

Income Tax Expense

Income tax expense totaled $9.2 million, an effective tax rate of 17.6%, for the six months ended June 30, 2026 compared with $10.0 million and an effective tax rate of 21.0% for the six months ended June 30, 2025. The Company’s effective tax rate is less than the 21% federal statutory rate primarily due to the purchase of federal income tax credits, which reduced income tax expense by $1.6 million. In addition, the effective tax rate is impacted by 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 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 June 30, 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 June 30, 2026 and December 31, 2025.

At June 30, 2026, AFS securities totaled $949.3 million, a decrease of $3.4 million from $952.7 million at December 31, 2025. During the six months ended June 30, 2026, paydowns totaled $51.6 million. Net unrealized losses increased by $5.0 million to $24.4 million at June 30, 2026 compared to net unrealized losses of $19.4 million at December 31, 2025 due to higher market interest rates and widening of spreads. During the six months ended June 30, 2026, the Bank purchased $51.5 million of investment securities, consisting of $29.7 million of agency mortgage backed securities and collateralized mortgage obligations, $20.7 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 of $2.9 million and calls totaling $1.3 million recorded on the investment securities during the first half of 2026. The overall duration of the Company's investment securities portfolio was 4.5 years at June 30, 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 June 30, 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 June 30, 2026 and December 31, 2025:

Total loans increased by $92.3 million from December 31, 2025 to June 30, 2026. Commercial loans increased by $50.5 million from December 31, 2025 to June 30, 2026. Residential mortgages increased by $42.9 million, which includes an increase of $23.1 million in home equity lines of credit, from December 31, 2025 to June 30, 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 June 30, 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 $27.5 million at June 30, 2026, a decrease of $2.8 million from $30.3 million at December 31, 2025. Nonaccrual loans decreased by $4.3 million from December 31, 2025 to June 30, 2026 due primarily to repayments of $5.0 million, charge offs of $2.3 million and upgrades to accrual status of $1.4 million, partially offset by transfers to nonaccrual status. For the six months ended June 30, 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 June 30, 2026, the Company had $7.0 million in loan modifications meeting the FDM criteria compared to $6.3 million at December 31, 2025. There were $4.9 million and $5.0 million in FDM loans, modified in the prior twelve months, in nonaccrual status at June 30, 2026 and December 31, 2025, respectively. During the six months ended June 30, 2026, the Company extended modifications totaling $5.7 million to four borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan.

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 from $108.3 million at December 31, 2025 to $111.3 million at June 30, 2026. During the six months ended June 30, 2026, there were net downgrades of $21.9 million partially offset by repayments of $19.1 million. Classified loans totaled $49.2 million at June 30, 2026, or 1.2% 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 $25.3 million at June 30, 2026, a decrease of $4.9 million from $30.2 million at December 31, 2025 due primarily to net upgrades of $3.8 million and repayments of $1.1 million. The Substandard-IEL category decreased by $4.3 million from $28.2 million at December 31, 2025 to $23.9 million at June 30, 2026, primarily due to repayments of $9.5 million, partially offset by net downgrades of $6.6 million and the remainder in charge offs.

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at June 30, 2026 and December 31, 2025. At June 30, 2026 and December 31, 2025, there was a nominal specific reserve on a nonaccrual loan, excluding the ACL recorded on acquired PCD loans.

The following table presents our exposure to relationships that are individually evaluated and the partial charge-offs taken to date and specific reserves established on those relationships at June 30, 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 June 30, 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 and six months ended June 30, 2026 and 2025:

The ACL totaled $46.6 million at June 30, 2026, a decrease of $1.3 million from $47.9 million at June 30, 2025. The ACL as a percentage of the total loan portfolio was 1.13% at June 30, 2026 compared to 1.22% at June 30, 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 $5.9 million, had cumulative partial charge-offs to the ACL totaling $2.5 million as of June 30, 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 $91.2 million and totaled $4.6 billion at June 30, 2026 compared to $4.5 billion at December 31, 2025. Non-interest bearing demand deposits, interest-bearing demand deposits and money market deposits increased by $49.9 million, $48.4 million and $16.8 million, respectively, from December 31, 2025 to June 30, 2026. Time deposits and savings deposits decreased by $18.3 million and $5.6 million, respectively, from December 31, 2025 to June 30, 2026. The Bank continues to focus on shifting its deposit mix to include more lower cost deposits and managing deposit pricing.

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 increased by $100 thousand to $274.5 million at June 30, 2026 compared to $274.4 million at December 31, 2025. The Bank seeks to maintain sufficient liquidity to ensure client needs can be addressed in a timely basis.

On June 30, 2026, the Company redeemed its $31.0 million outstanding 4.50% fixed-to-floating rate subordinated notes, which were assumed from the Merger. The subordinated notes had a fixed rate of interest equal to 4.50% until December 30, 2025. After that date, the variable rate of interest equaled the three-month CME term SOFR rate plus 4.04%. At June 30, 2026 and December 31, 2025, the interest rates on the subordinated 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 six months ended June 30, 2026 and 2025, the cost of the variable-rate trust preferred debt, excluding the fair value mark, was 5.71% and 6.34%, 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 $621.7 million at June 30, 2026, an increase of $30.2 million from $591.5 million at December 31, 2025. The increase was primarily attributable to net income of $43.0 million and share-based compensation activity of $1.5 million, partially offset by dividends paid of $11.8 million and other comprehensive losses of $2.6 million for the six months ended June 30, 2026. Other comprehensive losses included an after-tax increase of $3.9 million from net unrealized losses on investment securities, partially offset by $1.3 million in net unrealized gains from interest rate swaps designated as cash flow hedges. For the six months ended June 30, 2026, total comprehensive income totaled $40.3 million, an increase of $1.0 million from total comprehensive income of $39.3 million for the same period in 2025. The increase was due primarily to an increase in net income of $5.5 million and an increase in after-tax net unrealized gains on interest rate swaps designated as cash flow hedges of $2.3 million, partially offset by an increase in after-tax net unrealized losses on investment securities of $6.8 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 during 2026.

At June 30, 2026, book value per common share was $31.60 compared to $30.32 at December 31, 2025. Tangible book value per share increased from $25.21 at December 31, 2025 to $26.71 at June 30, 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 June 30, 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 June 30, 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 June 30, 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 5.2% and 5.1%, respectively, 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 June 30, 2026, cash and cash equivalents totaled $144.8 million compared to $149.8 million at December 31, 2025. The decrease of $5.0 million primarily reflects the increase in loans of $92.3 million and the decrease in total borrowings, excluding the amortization of the fair value marks on the subordinated notes, of $47.8 million, partially offset by an increase in deposits of $91.2 million and net income of $43.0 million for the six months ended June 30, 2026.

Unencumbered debt securities totaled $300.4 million at June 30, 2026 compared to $396.2 million at December 31, 2025. At June 30, 2026 and December 31, 2025, the Company had $84.7 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 $63.6 million and was $2.0 billion at both June 30, 2026 and December 31, 2025, of which $274.5 million and $275.0 million in FHLB advances and letters of credit were outstanding at these same periods, respectively.

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 June 30, 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 $103.3 million and $107.7 million at June 30, 2026 and December 31, 2025, respectively. The Company did not incur merger-related expenses during the three and six months ended June 30, 2026. For the three and six months ended June 30, 2025, the Company incurred merger-related expenses of $968 thousand and $2.6 million, respectively.

On June 30, 2026, the Company redeemed its $31.0 million outstanding 4.50% fixed-to-floating rate subordinated notes, which were assumed from the Company's merger with Codorus Valley. During the three and six months ended June 30, 2026, the Company amortized the remaining fair value mark of $1.6 million to interest expense as a result of the redemption, which reduced net interest margin.

Tangible book value per common share and the impact of the accelerated amortization of fair value marks on net interest margin and 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 June 30, 2026 is primarily due to net income of $43.0 million, partially offset by dividends paid of $11.8 million and other comprehensive loss, net of taxes, of $2.6 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.

Adjusted Net Income and Adjusted Diluted Earnings Per Share

83

84

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 June 30, 2026, the Bank is slightly 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. The Bank is less asset sensitive at June 30, 2026 than December 31, 2025 due to steps taken by management through balance sheet swaps to reduce interest rate risk in a decreasing rate environment.

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 June 30, 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 June 30, 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 June 30, 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 six months ended June 30, 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.