What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-13 compared with 2023-03-10 · 250 added, 246 removed, 610 unchanged (45% of the section changed)

18 unchanged sentences

Short-Term Borrowings — 8,060 39,266

Other Borrowings 14,638 17,601 8,000

Other Borrowed Funds 34,678 14,638 17,601

Stockholders’ Equity 139,834 110,155 133,124

5 unchanged sentences

Net Interest and Dividend Income 44,553 42,935 40,152

Provision (Recovery) for Loan Losses 3,784 (1,125) 4,000

Net Interest and Dividend Income After Provision (Recovery) for Loan Losses 39,151 41,277 37,904

(Recovery) Provision for Credit Losses - Loans (284) 3,784 (1,125)

Recovery for Credit Losses - Unfunded Commitments (218) — —

Net Interest and Dividend Income After (Recovery) Provision for Credit Losses 45,055 39,151 41,277

Noninterest Income 24,012 9,820 16,280

Noninterest Expense 38,782 34,891 42,862

Income (Loss) Before Income Tax Expense 14,080 14,695 (9,392)

Income Before Income Tax Expense 30,285 14,080 14,695

Income Tax Expense 7,735 2,833 3,125

Net Income (Loss) $ 11,247 $ 11,570 $ (10,640)

Net Income $ 22,550 $ 11,247 $ 11,570

At or For the Year Ended December 31, 2023 2022 2021

Per Common Share Data:

Earnings (Loss) Per Common Share - Basic $ 2.19 $ 2.15 $ (1.97)

Earnings (Loss) Per Common Share - Diluted 2.18 2.15 (1.97)

Earnings Per Common Share - Basic $ 4.41 $ 2.19 $ 2.15

Earnings Per Common Share - Diluted 4.40 2.18 2.15

Dividends Per Common Share 1.00 0.96 0.96

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3.29 3.25 2.94

Net Charge-Offs to Average Loans 0.25 0.01 0.11

Net (Recoveries) Charge-offs to Average Loans (0.05) 0.25 0.01

Noninterest Expense to Average Assets 2.76 2.48 2.93

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Asset Quality Ratios:

Allowance for Loan Losses to Total Loans 1.22 % 1.13 % 1.22 %

Allowance for Loan Losses to Nonperforming Loans 221.06 159.40 88.15

Allowance for Loan Losses to Nonaccrual Loans 320.64 233.37 117.28

Allowance for Credit Losses to Total Loans 0.87 % 1.22 % 1.13 %

Allowance for Credit Losses to Nonperforming Loans 433.35 221.06 159.40

Allowance for Credit Losses to Nonaccrual Loans 433.35 320.64 233.37

Delinquent and Nonaccrual Loans to Total Loans 0.62 0.81 0.78

16 unchanged sentences

(3) Represents net interest income as a percentage of average interest-earning assets.

(4) Fully taxable-equivalent (FTE) yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for the years ended December 31, 2022, 2021 and 2020.

(4) Fully taxable-equivalent (FTE) yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%.

Refer to Explanation of Use of Non-GAAP Financial Measures in Item 7 of this Report for the calculation of the measure and reconciliation to the most comparable GAAP measure.

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Critical accounting policies are those that involve significant judgments, estimates and assumptions by management and that have, or could have, a material impact on the Company’s income or the carrying value of its assets.

Allowance for Credit Losses (ACL).

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss methodology.

The Company adopted ASU 2016-13 using a modified retrospective approach.

Results for reporting periods beginning after January 1, 2023 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The adoption resulted in a decrease of $3.4 million to the Company’s ACL related to loans receivable (ACL - Loans) and an increase of $718,000 in ACL for unfunded commitments (ACL - Unfunded Commitments).

The net impact resulted in a $2.1 million increase to retained earnings, net of deferred taxes.

The ACL represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date.

The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost.

It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit.

The allowance is established through a provision for credit losses that is charged against income.

The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded ACL.

The ACL is reported separately as a contra-asset on the Consolidated Statement of Financial Condition.

The expected credit loss for unfunded loan commitments is reported on the Consolidated Statement of Financial Condition in other liabilities while the provision for credit losses related to unfunded commitments is reported in provision for credit losses - unfunded commitments in the Consolidated Statements of Income.

ACL on Loans Receivable

The ACL on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected.

Expected losses are evaluated and calculated on a collective, or pooled, basis for those loans which share similar risk characteristics.

At each reporting period, the Company evaluates whether loans within a pool continue to exhibit similar risk characteristics.

If the risk characteristics of a loan change, such that they are no longer similar to other loans in the pool, the Company will evaluate the loan with a different pool of loans that share similar risk characteristics.

If the loan does not share risk characteristics with other loans, the Company will evaluate the loan on an individual basis.

The Company evaluates the pooling methodology at least annually.

Loans are charged off against the ACL when the Company believes the balances to be uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off.

The Company has chosen to segment its portfolio consistent with the manner in which it manages credit risk.

Such segments include residential mortgage, commercial real estate mortgages, construction, commercial business, consumer and other.

For most segments, the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment.

The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount.

The Company estimates the ACL on loans via a quantitative analysis which considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts.

The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts.

After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical losses.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

management has a reasonable expectation at the reporting date that a restructuring will be executed with an individual borrower or the renewal option is included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Also included in the ACL on loans are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above.

Factors that the Company considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and nonaccrual loans, and the effect of external factors such as competition, legal and regulatory requirements, among others.

Furthermore, the Company considers the inherent uncertainty in quantitative models that are built upon historical data.

Individually Evaluated Loans

On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics.

When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable.

If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will charge off the difference between the fair value of the collateral, less estimated costs to sell at the reporting date, and the amortized cost basis of the loan.

ACL on Off-Balance Sheet Commitments

The Company is required to include unfunded commitments that are expected to be funded in the future within the allowance calculation, other than those that are unconditionally cancellable.

To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate.

To determine the expected funding rate, the Company uses a historical utilization rate for each segment.

As noted above, the ACL on unfunded loan commitments is included in other liabilities on the Consolidated Statement of Financial Condition and the related credit expense is recorded in provision for credit losses - unfunded commitments in the Consolidated Statements of Income.

ACL on Available-for-Sale Securities

For available-for-sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For securities available-for-sale that do not meet the above criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating by a rating agency, and adverse conditions related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost.

Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of tax.

The Company elected the practical expedient of zero loss estimates for securities issued by U.S.

government entities and agencies.

These securities are either explicitly or implicitly guaranteed by the U.S.

government, are highly rated by major agencies and have a long history of no credit losses.

Changes in the ACL are recorded as provision for, or reversal of, credit loss expense.

Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued Interest Receivable

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans and available for sale securities.

Accrued interest receivable on loans is reported as a component of accrued interest receivable and other assets on the Consolidated Statement of Financial Condition, totaled $4.1 million at December 31, 2023 and is excluded from the estimate of credit losses.

Accrued interest receivable on available of sale securities, also a component of accrued interest receivable and other assets on the Consolidated Statement of Financial Condition, totaled $947,000, at December 31, 2023 and is excluded from the estimate of credit losses.

Allowance for Loan Losses.

Prior to the adoption of ASU 2016-13, the Company calculated the allowance for loan losses ("allowance"), using an incurred loan loss methodology.

The following policy related to the allowance in prior periods.

The allowance for loan losses (“allowance”) is maintained at a level considered adequate to provide for losses that can be reasonably anticipated.

Management performs a quarterly evaluation of the adequacy of the allowance based on potential losses in the current loan portfolio, which includes an assessment of economic conditions, changes in the nature and volume of the loan portfolio, loan loss experience, volume and severity of past due, classified and nonaccrual loans as well as other loan modifications, quality of the Company’s loan review system, the degree of oversight by the Company’s Board, existence and effect of any concentrations of credit and changes in the level of such concentrations, effect of external factors, such as competition and legal and regulatory requirements, and other relevant factors.

While management uses

the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making evaluations.

While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making evaluations.

Additions are made to the allowance through periodic provisions charged to income and recovery of principal and interest on loans previously charged-off.

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The specific component relates to loans that are classified as impaired.

A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due for principal and interest according to the original contractual terms of the loan agreement.

A loan is considered impaired when, based upon current information and events, it is probable that the Company will

be unable to collect all amounts due for principal and interest according to the original contractual terms of the loan agreement.

Generally, management considers all substandard, doubtful, and loss-rated loans, nonaccrual loans, and TDRs for impairment.

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Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data.

2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.

Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.

Level 3 – Fair value is based on significant unobservable inputs.

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The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

The Company attempts to maximize observable inputs and limit the use of unobservable inputs when developing fair value measurements, Fair value measurements for assets where there exists limited or no observable market data and that are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors.

economic and competitive environment and other such factors.

Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset.

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These approaches involve significant estimates and assumptions.

In the application of the income approach, fair value of a reporting unit is determined using a discounted cash flow (“DCF”) analysis.

In the application of the income approach, fair value of a reporting unit is determined using a discounted cash flow analysis.

The income approach relies on Level 3 inputs along with a market-derived cost of capital when measuring fair value.

5 unchanged sentences

The values for the factors applied are determined primarily using external sources of information.

The DCF model also uses prospective financial information.

The discounted cash flow model also uses prospective financial information.

Estimating future earnings and capital requirements involves judgment and the consideration of past and current performance and overall macroeconomic and regulatory environments.

Under the market approach, Level 1 and 2 inputs are used when measuring fair value.

In the application of the market approach, the Guideline Public Company ("GPC") method of appraisal is based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing a closely held entity.

In the application of the market approach, the Guideline Public Company method of appraisal is based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing a closely held entity.

A value multiple or ratio relates a stock’s market price to the reported accounting data such as revenue, earnings, and book value.

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The control premium is management's estimate of how much a market participant would be willing to pay over the fair market value in consideration of synergies and other benefits that flow from control of the entity.

The GPC method using trading activity of

publicly traded companies that are most similar to the Company may also be considered when the banking industry has a sufficient level of mergers and acquisitions activity

The Guideline Public Company method using trading activity of publicly traded companies that are most similar to the Company may also be considered when the banking industry has a sufficient level of mergers and acquisitions activity

The results of the income and market approaches may be weighted to determine the concluded fair value of the reporting unit.

3 unchanged sentences

If the Company determines a triggering event occurs in the future, changes in the judgments, assumptions and inputs noted above could result in additional goodwill impairment.

Other-Than-Temporary Impairment.

In estimating other-than-temporary impairment of securities, securities are evaluated on at least a quarterly basis to determine whether a decline in their value is other-than-temporary.

In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not the Company intends to sell or expect that it is more likely than not that it will be required to sell the security before an anticipated recovery in fair value.

Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated in (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors.

The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings.

The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive loss.

Deferred Tax Assets.

Deferred Taxes.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.

Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination, the term more likely than not means a likelihood of more than 50%;

the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.

A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.

The determination of whether a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date, and is subject to management’s judgment.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.

A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.

The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.

For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.

The Company did not have a deferred tax asset valuation allowance as of December 31, 2023 and December 31, 2022.

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New accounting pronouncements that were adopted in the current period or will be adopted in a future period are discussed in Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, which is included in Part IV, Item 15 of this Report.

Branch Optimization and Operational Efficiency Initiative

In 2021, the Company announced the implementation of branch optimization and operational efficiency strategic initiatives to improve the Bank’s financial performance and operations in order to position the Bank for continued profitable growth through the optimization of its branch network while expanding technology and infrastructure investments in its remaining locations.

The decision was the result of a comprehensive internal study that measured branch performance by comparing financial and non-financial indicators to growth opportunities, while evolving changes in consumer preferences, largely driven by the global pandemic, led to an acceleration of branch optimization efforts.

The Bank also completed a comprehensive review of its branch network and operating environment to identify solutions to improve operating performance.

This review prioritized profitability, efficiency, infrastructure and client experience improvements, automation in operations, and digital marketing and technology investments and the Bank is in process of implementing operational efficiencies related to individualized processes within its branch network and operating environment.

The Bank has substantially completed these initiatives through the consolidation of six branches that was completed on June 30, 2021.

In addition, CB Financial, Community Bank, and Citizens Bank of West Virginia, Inc.

(“Citizens Bank”) executed a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Citizens Bank agreed to purchase certain loans and other assets, and assume certain deposits and other liabilities, of the branch offices of Community Bank located in Buckhannon, West Virginia, and New Martinsville, West Virginia.

The divestiture of two branches in December 2021 resulted in the sale of $102.8 million of deposits, $6.1 million of loans and $795,000 of premises and equipment and the recognition of a $5.2 million pre-tax gain on sale from a 5.0% premium paid by Citizens Bank on the assumed deposits.

The branch optimization initiative reduced the Bank's branch network to 14 branches.

The Company anticipates $3.0 million of ongoing pre-tax cost savings as a result of the branch optimization initiatives.

COVID-19 Pandemic

Although many health and safety restrictions have been lifted and vaccine distribution has increased, the ongoing COVID-19 pandemic has negatively impacted local, national and global economies and financial markets since March 2020.

Economic activity and demand for goods and services, alongside labor shortages and supply chain complications, has also contributed to rising inflationary pressures.

The extent to which the COVID-19 pandemic continues to impact our business, financial condition, liquidity, and results of operations will depend on future developments, which are highly uncertain and are difficult to predict

In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve took a number of actions that significantly affected the financial markets, including actions intended to result in substantial decreases in market interest rates.

On March 15, 2020, the FRB reduced the target federal funds range by 100 basis points to 0% to 0.25% and have held the target federal funds rate in that range for the remainder of 2020 and throughout 2021.

These reductions in interest rates, among other actions of the FRB and the Federal government generally, adversely affected our net interest income, compressed our margins and impacted our overall profitability.

The reduction of interest rates to near zero in response to the effects of the COVID-19 pandemic were gradually reversed over the course of 2022 with increases totaling 425 bps due to FRB concerns with respect to inflation.

The FRB has indicated it is committed to reducing inflation to its 2% objective.

The magnitude and timing of further interest rate action is unknown.

Explanation of Use of Non-GAAP Financial Measures

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Comparison of Financial Condition at December 31, 2023 and 2022

Total assets decreased $16.5 million, or 1.2%, to $1.41 billion at December 31, 2022, compared to $1.43 billion at December 31, 2021.

Total assets increased $47.2 million, or 3.4%, to $1.46 billion at December 31, 2023, compared to $1.41 billion at December 31, 2022.

Cash and Due From Banks.

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The change is primarily related to net funding of loans.

Securities decreased $34.9 million, or 15.5%, to $190.1 million at December 31, 2022, compared to $225.0 million at December 31, 2021.

The securities balance was negatively impacted by a $32.3 million decrease in market value of the debt securities portfolio, primarily due to the increase in market interest rates.

The current period activity included $26.8 million of purchases, $29.2 million of paydowns, and no sales.

The purchases were made to improve yield on excess cash.

In addition there was a $168,000 loss in market value in the equity securities portfolio, which is primarily comprised of bank stocks.

Securities increased $17.0 million, or 8.9%, to $207.1 million at December 31, 2023, compared to $190.1 million at December 31, 2022.

The securities balance was primarily impacted by the purchase of $29.9 million of collateralized loan obligation securities, partially offset by $15.8 million of repayments on mortgage-backed and collateralized mortgage obligation securities and a $110,000 decrease in the market value in the equity securities portfolio, which is primarily comprised of bank stocks.

During the period, the Bank implemented a balance sheet repositioning strategy of its portfolio of available-for-sale securities.

The Bank sold $69.3 million in market value of its lower-yielding U.S government agency, mortgage-backed and municipal securities with an average yield of 1.89% and purchased $69.3 million of higher-yielding mortgage-backed and collateralized mortgage obligation securities with an average yield of 5.49%.

Securities Portfolio.

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Collateralized Mortgage Obligations - Government-Sponsored Enterprises 120,655 105,130 96,930 79,642

Collateralized Loan Obligations 29,862 29,804 — —

Corporate Debt 9,484 7,719 9,487 8,315

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Collateralized Mortgage Obligations - Government-Sponsored Enterprises — — — — — — 105,130 2.79 105,130 2.79

Collateralized Loan Obligations — — — — 21,895 7.29 7,909 7.68 29,804 7.39

Corporate Debt Securities — — — — 3,594 3.31 4,125 7.76 7,719 5.64

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Total loans increased $60.5 million, or 5.8%, to $1.11 billion at December 31, 2023 compared to $1.05 billion at December 31, 2022.

Excluding the net decline of $24.4 million in PPP loans in the current period, loans increased $53.5 million.

2022 loan growth was experienced through net funding of $44.7 million in commercial real estate loans and $24.8

million in consumer loans, partially offset by the completion of $40.1 million in construction loans .

Average loans for the year ended December 31, 2022 increased $4.7 million compared to the year ended December 31, 2021.

Loan growth was driven by increases in commercial and industrial loans, commercial real estate loans, residential mortgage loans and other loans of $41.2 million, $30.3 million, $17.1 million, and $8.9 million, respectively, partially offset by a decrease in consumer loans of $35.3 million.

The decrease in consumer loans resulted from a reduction in indirect automobile loan production due to rising market interest rates and the discontinuation of this product offering as of June 30, 2023.

This portfolio is expected to continue to decline as resources are allocated and production efforts are focused on more profitable commercial products.

Excluding the $34.9 million decrease in indirect automobile loans, total loans increased $95.4 million, or 9.1%.

Average loans, net for the year ended December 31, 2023 increased $57.8 million compared to the year ended December 31, 2022.

Loan Portfolio Composition.

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Total Loans 1,110,396 100.0 % 1,049,873 100.0 %

Allowance for Loan Losses (12,819) (11,582)

Allowance for Credit Losses (9,707) (12,819)

Loans, Net $ 1,100,689 $ 1,037,054

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Total liabilities increased $17.5 million, or 1.3%, to $1.32 billion at December 31, 2023 compared to $1.30 billion at December 31, 2022.

Total deposits increased $41.9 million to $1.27 billion as of December 31, 2022 compared to $1.23 billion at December 31, 2021.

Noninterest bearing demand deposits, NOW accounts and savings accounts increased $4.6 million, $39.3 million and $8.5 million, respectively, partially offset by a decrease of $27.6 million in time deposits.

The increase in interest-bearing demand deposits is primarily the result of the transition of customer deposits from securities sold under agreements to repurchase product, which are related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase.

Total deposits decreased $1.3 million to $1.267 billion as of December 31, 2023 compared to $1.269 billion at December 31, 2022.

Non interest-bearing demand deposits decreased $112.7 million, savings deposits decreased $53.3 million, and money market deposits decreased $8.1 million, while interest-bearing demand deposits increased $51.2 million and time deposits increased $121.5 million.

The increase in interest-bearing demand deposits was primarily the result of higher interest

rates attracting more customers and additional deposits from existing customers while higher time deposits resulted from the offering of a higher-rate certificate of deposit product and the addition of $29.0 million of brokered certificates of deposit.

The brokered certificates of deposits all mature within three months and were utilized to fund the purchase of floating rate collateralized loan obligation securities.

FDIC insured deposits totaled approximately 59.4% of total deposits while an additional 16.0% of deposits were collateralized with investment securities.

The following table sets forth the distribution of our average deposit accounts, by account type, for the years indicated.

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(Dollars in Thousands)

Non-Interest Bearing Demand Deposits $ 389,553 31.4 % — % $ 378,374 29.8 % — %

NOW Accounts 282,850 22.8 0.48 272,256 21.4 0.09

Savings Accounts 248,334 20.0 0.04 247,864 19.5 0.04

Noninterest-Bearing Demand Accounts $ 326,408 26.0 % — % $ 389,553 31.4 % — %

Interest-Bearing Demand Accounts 354,060 28.2 1.90 282,850 22.8 0.48

Money Market Accounts 199,962 15.9 2.28 194,223 15.7 0.50

Savings Accounts 220,146 17.5 0.09 248,334 20.0 0.04

Time Deposits 156,310 12.4 3.16 124,817 10.1 1.28

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3.00% to 3.99% 604 16,210

4.00% to 4.99% 145,475 143

5.00% or Greater 51,594 —

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3.00% to 3.99% 317 10 277 — — — 604 0.3

4.00% to 4.99% 73,475 71,000 1,000 — — — 145,475 63.1

5.00% or Greater 50,594 1,000 — — — — 51,594 22.4

12 unchanged sentences

◦ Short-term borrowings.

Short-term borrowings decreased $31.2 million, or 79.5%, to $8.1 million at December 31, 2022, compared to $39.3 million at December 31, 2021.

At December 31, 2022 and December 31, 2021, short-term borrowings were comprised entirely of securities sold under agreements to repurchase, which are related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase.

A majority of the decrease was due to accounts that were transitioned into other deposit products and account for most of the interest-bearing demand deposit increase.

Short-term borrowings decreased $8.1 million, or 100.0%, as there were no short-term borrowings at December 31, 2023, compared to $8.1 million at December 31, 2022.

At December 31, 2022, short-term borrowings were comprised entirely of securities sold under agreements to repurchase.

These accounts were transitioned into other deposit products and account for a portion of the interest-bearing demand deposit increase.

◦ Other borrowed funds.

Other borrowed funds decreased $3.0 million to $14.6 million at December 31, 2022 due to $3.0 million of Federal Home Loan Bank borrowings that matured in the current period.

The Company intends to utilize the subordinated debt proceeds to continue to proactively repurchase shares or for other general corporate matters.

Other borrowed funds increased $20.0 million, or 136.6%, to $34.7 million at December 31, 2023, compared to $14.6 million at December 31, 2022.

During the year, the Bank entered into $20.0 million of FHLB advances for a term of 24 months at 4.92%, the proceeds of which were utilized to match fund originations within the Bank’s commercial and industrial loan portfolio.

Stockholders’ Equity.

Stockholders’ equity decreased $23.0 million, or 17.3%, to $110.2 million at December 31, 2022, compared to $133.1 million at December 31, 2021.

• Accumulated other comprehensive loss increased $25.3 million primarily due to market interest rate conditions in the current period on the Bank’s available-for-sale debt securities.

• Net income was $11.2 million for the year ended December 31, 2022.

• The Company paid $4.9 million in dividends to common stockholders in the current year.

• Primarily as part of the Company’s $10.0 million stock repurchase program previously announced in April 2022, and the completion of the $7.5 million repurchase program announced in June 2021, the Company repurchased 195,033 shares of common stock totaling $4.8 million in the current year.

In connection with the current program, the Company purchased a total of 62,178 shares of the Company’s common stock at an average price of $22.47 per share, with $8.6 million remaining in the program.

• Book value per share was $21.60 at December 31, 2022 compared to $25.31 at December 31, 2021, a decrease of $3.71.

Tangible book value per share (Non-GAAP) decreased $3.45, or 15.4%, to $19.00 compared to $22.45 at December 31, 2021.

Stockholders’ equity increased $29.7 million, or 27.0%, to $139.8 million at December 31, 2023, compared to $110.2 million at December 31, 2022.

• Key factors positively impacting stockholders’ equity included $22.6 million of net income for the current period, a $9.5 million change in accumulated other comprehensive loss and a $2.1 million positive adjustment, net of tax, due to the Company’s January 1, 2023 adoption of CECL.

These factors were partially offset by the payment of $5.1 million in dividends since December 31, 2022 and activity under share repurchase programs.

On April 21, 2022, a $10.0 million repurchase program was authorized, with the Company repurchasing 74,656 shares at an average price of

$22.38 per share since the inception of the program.

In total, the Company repurchased $274,000 of common stock since December 31, 2022.

The program expired on May 1, 2023.

• Book value per share was $27.31 at December 31, 2023 compared to $21.60 at December 31, 2022, an increase of $5.71.

Tangible book value per share (Non-GAAP) increased $6.23, or 32.8%, to $25.23 at December 31, 2023 compared to $19.00 at December 31, 2022.

Refer to “Explanation of Use of Non-GAAP Financial Measures” at the end of this section.

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2023 Annual Results were impacted by the following significant items:

• Recurring Fed interest rate increases during 2022 resulted in an increase in net interest income of $2.8 million.

• There was a commercial loan charge off in the second quarter and resulted in a $3.8 million provision.

2021 Annual Results were impacted by the following significant non-recurring items:

• The branch optimization and operational efficiency initiatives resulted in $7.5 million of restructuring-related and other expenses for the year ended December 31, 2021.

The non-recurring expenses include a $2.3 million writedown on premises and equipment and $1.2 million impairment of intangible assets associated with the branch sales.

The Company also incurred $4.1 million of expenses related to contracted services, employee severance costs, branch lease impairment, professional fees, data processing fees, charitable donations, legal and other expenses for the year ended December 31, 2021 related to these initiatives.

• The Company recognized a $5.2 million pre-tax gain on sale of branches related to the 5.0% premium paid by Citizens Bank on the assumed deposits.

• On December 1, 2023, the Company announced that the Bank and EU entered into an Asset Purchase Agreement with World Insurance Associates, LLC ("World") pursuant to which EU sold substantially all of its assets to World for a purchase price of $30.5 million cash plus possible additional earn-out payments.

The sale of assets was completed on December 8, 2023 and resulted in a pre-tax gain of $24.6 million.

• During the fourth quarter of 2023, the Bank executed a balance sheet repositioning strategy of its portfolio of available-for-sale securities.

• Recovery for credit losses totaled $502,000 for 2023 as the Bank experienced net recoveries for the year ended December 31, 2023 of $557,000 primarily due to recoveries totaling $750,000 related to the prior year $2.7 million charged-off commercial and industrial loan.

Net Interest Income.

Net interest income increased $1.6 million, or 3.8%, to $44.6 million for the year ended December 31, 2023 compared to $42.9 million for the year ended December 31, 2022.

Net interest margin (Non-GAAP FTE) increased 31 bps to 3.25% for the year ended December 31, 2022 compared to 2.94% the year ended December 31, 2021.

Net interest margin (Non-GAAP) increased 4 bps to 3.29% for the year ended December 31, 2023 compared to 3.25% the year ended December 31, 2022.

Net interest margin (GAAP) increased to 3.28% for the year ended December 31, 2023 compared to 3.24% for the year ended December 31, 2022.

The net interest margin increased primarily due to the higher interest rate environment increasing yields on loans more than the yield on interest-bearing deposits.

Interest and dividend income increased $14.5 million, or 30.4%, to $62.2 million for the year ended December 31, 2023 compared to $47.7 million for the year ended December 31, 2022.

This increase was largely due to a 98 basis point increase in the yield on interest-earning assets to 4.59% for the year ended December 31, 2023 compared to 3.61% for the year ended December 31, 2022, contributing an additional $12.7 million to interest income.

• Interest income on loans increased $12.7 million, or 30.3%, to $54.7 million for the year ended December 31, 2023 compared to $41.9 million for the year ended December 31, 2022.

Average loans increased $4.7 million while the loan yield for the year ended December 31, 2022 increased 20 bps to 4.12% for the year ended December 31, 2022 compared to 3.92% for the year ended December 31, 2021 due to the increases of market interest rates this year compared to a full year impact of the COVID-19 pandemic-related declines in market interest rates beginning in March 2020.

Interest and fee income on PPP loans was $734,000 for the year ended December 31, 2022 and contributed 5 bps to loan yield, compared to $2.2 million for the year ended December 31, 2021, which contributed loan yield 4 bps in the prior period.

The impact of the accretion of the credit mark on acquired loan portfolios was $239,000 for the year ended December 31, 2022 compared to $468,000 for the year ended December 31, 2021, or 2 bps in the current period compared to 4 bps in the prior period.

Average loans increased $57.8 million while the loan yield increased 97 bps to 5.09% for the year ended December 31, 2023 compared to 4.12% for the year ended December 31, 2022.

• Interest income on taxable investment securities increased $165,000, or 4.3%, to $4.0 million for the year ended December 31, 2023 compared to $3.9 million for the year ended December 31, 2022.

While average investment securities increased $57.8 million, there was a 9 bps decrease in average yield.

There were sales of securities in 2021 that were higher-interest securities, which were replaced by lower-interest securities that decreased the yield year over year.

• Interest income on tax-exempt investment securities decreased $76,000, or 26.3%, to $213,000 for the year ended December 31, 2022 compared to $289,000 for the year ended December 31, 2021 primarily driven by a decrease of $3.4 million in average balance from municipal securities calls.

• Interest from other interest-earning assets, which primarily consists of interest-earning cash, increased $1.1 million, or 232.0% for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Interest and dividend income earned on other interest-earning assets, which is primarily composed of restricted stock, decreased $32,000.

Average interest bearing deposits at other banks decreased $107.0 million, primarily related to funds received from deposit and loan activity, there was however a $1.1 million increase in interest income due to an increase in Fed interest rates that resulted in a 191 bps increase in average yield.

While average investment securities decreased $12.3 million, there was a 19 bps increase in average yield.

• Interest income on tax-exempt investment securities decreased $56,000, or 26.3%, to $157,000 for the year ended December 31, 2023 compared to $213,000 for the year ended December 31, 2022 primarily driven by a decrease of $2.6 million in average balances of municipal securities.

• Interest from other interest-earning assets, which primarily consists of interest-earning cash, increased $1.7 million, or 102.5%, to $3.3 million for the year ended December 31, 2023 compared to $1.6 million for the year ended December 31, 2022.

While average interest bearing deposits at other banks decreased $9.1 million, primarily related to changes in deposits and loans, there was a 292 bps increase in average yield due to an increase in Fed interest rates.

Interest expense increased $12.9 million, or 269.6%, to $17.7 million for the year ended December 31, 2023 compared to $4.8 million for the year ended December 31, 2022.

• Interest expense on deposits increased $900,000, or 28.8%, to $4.0 million for the year ended December 31, 2022 compared to $3.1 million for the year ended December 31, 2021.

While average interest-bearing deposits decreased $42.9 million, interest rate increases for all products driven by post-pandemic Fed interest rate increases resulting in a 12 bps increase in average cost compared to the year ended December 31, 2021.

This increase was largely due to a 132 basis point increase in the cost of interest-bearing liabilities to 1.38% for the year ended December 31, 2023 compared to 0.53% for the year ended December 31, 2022, adding an additional $12.3 million to interest expense.

• Interest expense on deposits increased $12.4 million, or 308.3%, to $16.4 million for the year ended December 31, 2023 compared to $4.0 million for the year ended December 31, 2022.

Rising market interest rates led to the repricing of interest-bearing demand and money market deposits and a shift in deposits from noninterest-bearing to interest-bearing demand and time deposits which resulted in a 130 bps increase in average cost compared to the year ended December 31, 2022.

Additionally, average interest-bearing deposits increased $80.3 million.

• Interest expense on short-term borrowings decreased $31,000, or 49.2%, to $32,000 for the year ended December 31, 2023 compared to $63,000 for the year ended December 31, 2022 primarily due to the transition of sweep accounts into other deposit products.

• Interest expense on other borrowed funds increased $511,000, or 280.8%, to $693,000 for the year ended December 31, 2022 compared to $182,000 for the year ended December 31, 2021 primarily due to the issuance of $15.0 million in subordinated debt, partially offset by a $3.0 million payoff of an FHLB borrowing, which resulted in a $10.4 million increase in average balances.

Provision for Loan Losses.

The provision for loan losses was $3.8 million for the year ended December 31, 2022, compared to a $1.1 million recovery for the year ended December 31, 2021.

Net charge-offs for the year ended December 31, 2022 were $2.5 million primarily from one commercial and industrial loan that impacted the loss history for the category.

The prior year recovery was the result of improvement in overall economic conditions thereby improving corresponding qualitative factors that were previously negatively impacted by the COVID-19 pandemic.

• Interest expense on other borrowed funds increased $514,000, or 74.2%, to $1.2 million for the year ended December 31, 2023 compared to $693,000 for the year ended December 31, 2022 primarily due to an $8.7 million increase in average balances due to $20.0 million of FHLB long-term advances added during the second quarter of 2023.

(Recovery) Provision for Credit Losses.

The recovery for credit losses was $502,000 for the year ended December 31, 2023, compared to a $3.8 million provision for the year ended December 31, 2022 due to improvements in qualitative factors and a decrease in historical loss rates.

Net recoveries for the year ended December 31, 2023 were $557,000 primarily due to recoveries totaling $750,000 related to the prior year $2.7 million charged-off commercial and industrial loan.

Net charge-offs for the year ended December 31, 2022 were $2.5 million.

Noninterest Income .

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Other Commissions 521 669 (148) (22.1) %

Net Gain on Sales of Loans — 1,143 (1,143) (100.0) %

Net (Loss) Gain on Securities (168) 526 (694) (131.9) %

Net Loss on Securities (10,199) (168) (10,031) (5970.8) %

Net Gain on Purchased Tax Credits 29 57 (28) (49.1) %

Gain on Sale of Branches — 5,203 (5,203) (100.0) %

Net Gain (Loss) on Disposal of Fixed Assets 431 (3) 434 14466.7 %

Gain on Sale of Subsidiary 24,578 — 24,578 — %

Net Gain on Disposal of Premises and Equipment 11 431 (420) (97.4) %

Income from Bank-Owned Life Insurance 576 561 15 2.7 %

Net Gain from Bank-Owned Life Insurance Claims 303 — 303 — %

Other Income 535 176 359 204.0 %

Total Noninterest Income $ 24,012 $ 9,820 $ 14,192 144.5 %

Noninterest income decreased $6.5 million, or 39.7%, to $9.8 million for the year ended December 31, 2022, compared to $16.3 million for the year ended December 31, 2021.

• Insurance commissions increased $318,000, or 5.7%, to $5.9 million for the year ended December 31, 2022, compared to $5.6 million for the year ended December 31, 2021 due to an increase in core business, including both personal and commercial lines.

• There was no net gain on sales of loans for the year ended December 31, 2022 compared to $1.1 million for the year ended December 31, 2021 due to a change in strategy to keep all loans made in 2022.

There were no gains from sales of mortgage loans for the year ended December 31, 2022 compared to $1.1 million for the year ended December 31, 2021.

• Net loss on securities was $168,000 for the year ended December 31, 2022, compared to a gain of $526,000 for the year ended December 31, 2021.

There were no sales of securities in the current period compared to sales that resulted in a gain of $231,000 in the prior period.

The Company’s equity securities, which are primarily comprised of bank

stocks, reflected a decline in value of $168,000 for the current period compared to a gain of $295,000 in value in the prior period primarily from a change in market value of these securities as a result of changes in interest rates.

• The Company recorded a $431,000 net gain on disposal of fixed assets in the current year, resulting from the sale of two former branch locations.

• The Company recognized a $5.2 million pre-tax gain on sale of branches in the prior period related to the 5.0% premium paid by Citizens Bank on the assumed deposits.

• There was a $144,000 decrease in other income primarily due to a $99,000 valuation allowance adjustment on mortgage servicing rights in the current period as a result of a decrease in prepayment speeds resulting in an increase in the fair value of the serviced mortgage portfolio.

Noninterest income increased $14.2 million, or 144.5%, to $24.0 million for the year ended December 31, 2023, compared to $9.8 million for the year ended December 31, 2022.

• The Company recorded a $24.6 million pre-tax gain on the sale of EU assets during the year ended December 31, 2023.

On December 1, 2023, the Company announced that the Bank and EU entered into an Asset Purchase Agreement with World pursuant to which EU sold substantially all of its assets to World for a purchase price of $30.5 million cash plus possible additional earn-out payments.

The sale of assets was completed on December 8, 2023.

• Net loss on securities was $10.2 million for the year ended December 31, 2023, compared to a loss of $168,000 for the year ended December 31, 2022.

During 2023, the Company sold $79.4 million in book value of its lower-yielding U.S government agency, mortgage-backed and municipal securities with an average yield of 1.89% and purchased $69.3 million of higher-yielding mortgage-backed and collateralized mortgage obligation securities with an average yield of 5.49%, resulting in a pre-tax loss of $10.1 million.

The Company's equity securities, which are primarily comprised of bank stocks, reflected a loss in value of $110,000 for the current period compared to a loss of $168,000 in value in the prior period primarily from a change in market value of these securities.

• The Company recorded a $11,000 net gain on disposal of fixed assets in the current year, compared to a $431,000 gain in the prior year resulting from the sale of two former branch locations.

Noninterest Expense.

The breakdown of noninterest expense for the year ended December 31, 2022 compared to year ended December 31, 2021 is as follows:

The breakdown of noninterest expense for the year ended December 31, 2023 compared to the year ended December 31, 2022 is as follows:

2023 2022 Dollar Change Percent Change

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Data Processing 3,014 2,152 862 40.1 %

FDIC Assessment 638 1,014 (376) (37.1) %

PA Shares Tax 979 887 92 10.4 %

Federal Deposit Insurance Corporation Assessment 754 638 116 18.2 %

Pennsylvania Shares Tax 889 979 (90) (9.2) %

Contracted Services 1,166 1,628 (462) (28.4) %

3 unchanged sentences

Amortization of Intangible Assets 1,766 1,782 (16) (0.9) %

Intangible Assets and Goodwill Impairment — 1,178 (1,178) (100.0) %

Writedown of Premises and Equipment — 2,293 (2,293) (100.0) %

Other 3,735 3,844 (109) (2.8) %

Total Noninterest Expense $ 38,782 $ 34,891 $ 3,891 11.2 %

Noninterest expense decreased $8.0 million, or 18.6%, to $34.9 million for the year ended December 31, 2022 compared to $42.9 million for the year ended December 31, 2021.

This was primarily impacted by $7.5 million of expenses associated with the branch optimization and operational efficiency initiatives in the prior year, which included writedown on premises and equipment of $2.3 million and intangible asset impairment of $1.2 million.

• Salaries and employee benefits decreased $1.5 million to $18.5 million for the year ended December 31, 2022 compared to $19.9 million for the year ended December 31, 2021.

The decrease was primarily related to the branch optimization that included the consolidation of six branches and the divestiture of two in the prior year.

• Occupancy expense increased $79,000 to remain constant at $3.0 million for the years ended December 31, 2022 and 2021 respectively.

The increase was related to building maintenance costs and utilities, partially offset by the prior year recognition of a $227,000 lease impairment related to the branch optimization initiative.

• Equipment expense decreased $295,000 to $739,000 for the year ended December 31, 2022 compared to $1.0 million for the year ended December 31, 2021 as the result of a decrease in repairs and maintenance.

• FDIC assessment expense decreased $376,000 to $638,000 for the year ended December 31, 2022 compared to $1.0 million for the year ended December 31, 2021.

The decrease in assessment was due to an increase in nonperforming loans negatively impacting the quarterly assessment rates in the prior period.

• Contracted services decreased $2.4 million to $1.6 million for the year ended December 31, 2022 compared to $4.0 million for the year ended December 31, 2021.

The prior period had activity of $2.8 million, and included expense

related to the engagement of a third-party expert to improve workflow as well as implement more effective sales management techniques designed to improve operational efficiencies in the near and long-term and engagement of other third party specialists to assist in core platform improvements and efficiencies..

This was partially offset by $319,000 of employee recruiter fees and $203,000 of core conversion consultant fees.

• Legal fees and professional fees increased $243,000 to $1.2 million for the year ended December 31, 2022 compared to $994,000 for the year ended December 31, 2021 due to increases in consultant services related to regulatory reporting and validation of the CECL model, and the FDICIA control project to strengthen the Company's internal control structure.

• Advertising decreased $222,000 to $527,000 for the year ended December 31, 2022 compared to $749,000 for the year ended December 31, 2021 due to a decrease in marketing initiatives in the prior year during the pandemic.

• Other real estate owned income decreased $32,000 to $151,000 for the year ended December 31, 2022 compared to $183,000 for the year ended December 31, 2021 primarily due to an $80,000 gain on sale of a property sold in the prior period.

• Amortization of intangible assets decreased $144,000 to $1.8 million for the year ended December 31, 2022 compared to $1.9 million for the year ended December 31, 2021 primarily due to current period impairment in core deposit intangible asset from the branch sales, which reduced the remaining amount of intangible assets to amortize.

• Within other noninterest expense, charitable contributions decreased $150,000 due to the prior year donation of a former branch office location.

Loan expenses increased $148,000 primarily due to appraisal fees and credit reports related to an increase in indirect loan volume in the current period.

Noninterest expense increased $3.9 million, or 11.2%, to $38.8 million for the year ended December 31, 2023 compared to $34.9 million for the year ended December 31, 2022.

• Salaries and employee benefits increased $3.4 million to $21.9 million for the year ended December 31, 2023 compared to $18.5 million for the year ended December 31, 2022.

The increase was primarily related to merit increases, revenue producing staff additions and related recruiting costs, severance related to the discontinuation of indirect automobile lending and $691,000 of one-time costs related to the sale of the insurance subsidiary.

• Data processing expense increased $862,000 to $3.0 million for the year ended December 31, 2023 compared to $2.2 million for the year ended December 31, 2022.

The increase was primarily related to increased ongoing costs related to the fourth quarter 2022 core conversion.

• Equipment expense increased $325,000 to $1.1 million for the year ended December 31, 2023 compared to $739,000 for the year ended December 31, 2022 due to costs associated with the implementation and operation of new interactive teller machines.

• FDIC assessment expense increased $116,000 to $754,000 for the year ended December 31, 2023 compared to $638,000 for the year ended December 31, 2022.

The increase in assessment was due to an increase in the uniform amount of the FDIC assessment rate calculation impacting the quarterly assessment rates in the current period.

The uniform amount is the contribution to the assessment rate that is constant across FDIC insured institutions and is adjusted by the FDIC.

• Contracted services decreased $462,000 to $1.2 million for the year ended December 31, 2023 compared to $1.6 million for the year ended December 31, 2022 due primarily to costs associated with project management of strategic initiatives during 2022.

Income Tax Expense.

Income tax expense decreased $292,000 to $2.8 million for the year ended December 31, 2022, compared to $3.1 million for the year ended December 31, 2021 and is primarily attributed to a write down in premises and equipment and intangible assets.

Income tax expense increased $4.9 million to $7.7 million for the year ended December 31, 2023, compared to $2.8 million for the year ended December 31, 2022 and is primarily attributed to the increase in pre-tax income.

Average Balances and Yields.

The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated.

Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2022 and 2021.

Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%.

All average balances are daily average balances.

Non-accrual loans are included in the computation of average balances only.

Nonaccrual loans are included in the computation of average balances only.

The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

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Equity Securities 2,693 106 3.94 2,693 91 3.38

Interest Bearing Deposits at Other Banks 70,765 1,473 2.08 177,768 304 0.17

Interest-Earning Deposits at Other Banks 61,638 3,084 5.00 70,765 1,473 2.08

Other Interest-Earning Assets 3,027 211 6.97 3,092 154 4.98

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Interest-Bearing Demand Deposits $ 354,060 $ 6,741 1.90 % $ 282,850 $ 1,362 0.48 %

Savings 248,334 88 0.04 247,864 98 0.04

Money Market 199,962 4,554 2.28 194,223 976 0.50

Savings 220,146 202 0.09 248,334 88 0.04

Time Deposits 156,310 4,936 3.16 124,817 1,599 1.28

1 unchanged sentence

Short-term Borrowings 931 32 3.44 27,360 63 0.23

Securities Sold Under Agreement to Repurchase 27,360 63 0.23 43,988 98 0.22

Other Borrowed Funds 26,328 1,207 4.58 17,609 693 3.94

1 unchanged sentence

Noninterest-Bearing Demand Deposits 326,408 389,553

Total Funding and Cost of Funds 1,284,145 1.38 1,284,746 0.37

Other Liabilities 6,764 4,072

2 unchanged sentences

Total Liabilities and Stockholders' Equity $ 1,407,027 $ 1,406,428

Net Interest Income (FTE) (Non-GAAP) (2)

Net Interest Income (Non-GAAP) (2)

$ 44,708 $ 43,069

Net Interest Rate Spread (FTE) (Non-GAAP) (2)(3)

Net Interest Rate Spread (Non-GAAP) (2)(3)

Net Interest-Earning Assets (4)

$ 400,842 $ 429,682

Net Interest Margin (FTE) (Non-GAAP) (2)(5)

Net Interest Margin (Non-GAAP) (2)(5)

Return on Average Assets 1.60 0.80

2 unchanged sentences

Average Interest-Earning Assets to Average Interest-Bearing Liabilities 141.85 148.00

PPP Loans $ 5,666 $ 734 12.95 $ 45,905 $ 2,189 4.77

(1) Net of the allowance for loan losses and includes nonaccrual loans with a zero yield

(1) Net of the allowance for credit losses and includes nonaccrual loans with a zero yield

(2) Refer to Explanation of Use of Non-GAAP Financial Measures in this Report for the calculation of the measure and reconciliation to the most comparable GAAP measure.

10 unchanged sentences

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

There were no out of period items that occurred this past year.

Year Ended December 31, 2023

8 unchanged sentences

Equity Securities — 15 15

Interest Bearing Deposits at Other Banks (286) 1,455 1,169

Interest-Earning Deposits at Other Banks (210) 1,821 1,611

Other Interest-Earning Assets (4) 61 57

3 unchanged sentences

Short-Term Borrowings (116) 85 (31)

Securities Sold Under Agreements to Repurchase (39) 4 (35)

Other Borrowed Funds 387 127 514

10 unchanged sentences

Management monitors all past due loans and nonperforming assets.

Such loans are placed under close supervision, with consideration given to the need for additions to the allowance for loan losses and (if appropriate) partial or full charge-off.

Such loans are placed under close supervision, with consideration given to the need for additions to the allowance for credit losses and (if appropriate) partial or full charge-off.

Management believes the volume of nonperforming assets can be partially attributed to unique borrower circumstances as well as the economy in general.

4 unchanged sentences

Nonaccrual Loans and Nonperforming Assets.

The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated.

Included in nonperforming loans and assets are troubled debt restructurings, which are loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.

The following table sets forth the amounts and categories of our nonperforming assets as of December 31, 2023.

December 31, 2023

Nonaccrual With No ACL Nonaccrual With ACL Loans Past Due 90 Days Still Accruing Total Nonperforming Assets

(Dollars in Thousands)

Nonaccrual Loans:

Residential $ 1,649 $ 1,393

Commercial 1,814 2,058

$ 1,476 $ — $ — $ 1,476

Commercial and Industrial

Consumer 120 16

Total Nonaccrual Loans

$ 2,240 $ — $ — 2,240

Other Real Estate Owned:

Total Other Real Estate Owned

Total Nonperforming Assets

The following table sets forth the amounts and categories of nonperforming assets as of December 31, 2022, prior to adoption of ASU 2016-13.

Included in nonperforming loans and assets are TDRs, which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties.

Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section.

(Dollars in Thousands)

Nonaccrual Loans:

Commercial and Industrial

Total Nonaccrual Loans

Accruing Loans Past Due 90 Days or More:

Total Accruing Loans 90 Days or More Past Due — —

Total Nonaccrual Loans and Accruing Loans 90 Days or More Past Due 3,998 4,963

Total Accruing Loans Past Due 90 Days or More

Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More

Troubled Debt Restructurings, Accruing:

Residential 534 613

Commercial 1,260 1,674

Commercial and Industrial

1 unchanged sentence

Total Nonperforming Loans

Real Estate Owned:

Residential — 36

Commercial — —

Total Real Estate Owned — 36

Total Nonperforming Assets

Nonaccrual Loans to Total Loans 0.38 % 0.49 %

Nonperforming Loans to Total Loans 0.55 0.71

Nonperforming Assets to Total Assets 0.41 0.51

At December 31, 2022, we had no loans 90 days or more past due that were still accruing interest.

At December 31, 2022, we had no loans that were not classified as nonaccrual, 90 days past due or troubled debt restructurings where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure as nonaccrual, 90 days past due or troubled debt restructurings.

At December 31, 2023 and December 31, 2022, we had no loans 90 days or more past due that were still accruing interest.

At December 31, 2023 and December 31, 2022, we had no loans that were not classified as nonaccrual or 90 days past due where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure as nonaccrual or 90 days past due.

Nonperforming assets decreased $3.4 million to $2.4 million at December 31, 2023, compared to $5.8 million at December 31, 2022.

Nonperforming loans decreased $3.6 million to $2.2 million at December 31, 2023 compared to $5.8 million at December 31, 2022.

The respective decreases are primarily attributable to the full payoff in the current year of one of the Bank’s larger nonperforming commercial and industrial relationships.

The respective decreases are primarily attributable to ten loans totaling $1.7 million transferred from nonaccrual to accrual status during the period and the repayment of a $1.6 million commercial real estate loan that was previously on nonaccrual status.

The following table presents the components of the ratio of nonaccrual loans to total loans at the dates indicated.

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Nonaccrual loans decreased $1.8 million to $2.2 million at December 31, 2023 compared to $4.0 million at December 31, 2022.

Nonaccrual commercial real estate loans decreased $244,000 to $1.8 million at December 31, 2022 compared to $2.1 million at December 31, 2021 primarily related to the full payoff in the current year of one of the Bank’s nonperforming commercial and industrial relationships.

Loans in Forbearance.

Section 4013 of the CARES Act and regulatory guidance promulgated by federal banking regulators provides temporary relief from accounting and financial reporting requirements for TDRs regarding certain loan modifications related to COVID-19.

Specifically, the CARES Act provides that the Bank may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

As such, the applicable loans are reported as current with regard to payment status and continue to accrue interest during the payment deferral period.

The Company worked with its borrowers impacted by COVID-19 to defer payments.

The Bank provided borrower support and relief through short-term loan forbearance options by primarily allowing:

(a) deferral of three- to six-months of payments;

or (b) for consumer loans not secured by a real estate mortgage, three months of interest-only payments that also extends the maturity date of the loan by three months.

In certain circumstances, additional deferral periods were granted.

There were no loans in forbearance as of December 31, 2022.

At December 31, 2021, there was one loan in forbearance for a $1.9 million commercial real estate loan secured by a hotel, which was considered a troubled debt restructuring upon providing an additional forbearance period and modified payment terms.

The loan was substandard rated at December 31, 2022 and 2021, respectively, and designated as a nonaccrual loan in 2021.

Nonaccrual commercial real estate loans decreased $1.5 million to $360,000 at December 31, 2023 compared to $1.8 million at December 31, 2022 primarily related to the repayment of a $1.6 million commercial real estate loan that was previously on nonaccrual status.

Classified Assets.

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Total $ 69,435 $ 58,718

The total amount of special mention and classified loans decreased $12.4 million, or 17.5%, to $58.7 million at December 31, 2022, compared to $71.2 million at December 31, 2021.

The decrease of $570,000 in the substandard category as of December 31, 2022 compared to December 31, 2021 was mainly from the full payoff in the current year of one of the Bank’s nonperforming commercial and industrial loan relationships.

The decrease of $11.8 million in the special mention loan category is primarily due to commercial real estate and commercial and industrial loan upgrades and payoffs, and a $2.7 million commercial and industrial charge-off.

Allowance for Loan Losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated.

Management performs a quarterly evaluation of the adequacy of the allowance based on losses in the current loan portfolio, which includes an assessment of economic conditions, changes in the nature and volume of the loan portfolio, loan loss experience, volume and severity of past due, classified and nonaccrual loans as well as other loan modifications, quality of the Company’s loan review system, the degree of oversight by the Company’s Board, existence and effect of any concentrations of credit and changes in the level of such concentrations, effect of external factors, such as competition and legal and regulatory requirements and other relevant factors.

The total amount of special mention and classified loans increased $10.7 million, or 18.3%, to $69.4 million at December 31, 2023, compared to $58.7 million at December 31, 2022.

The increase of $11.2 million in the special mention loan category is primarily due to construction loan downgrades.

Allowance for Credit Losses.

The allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated.

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This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available.

Although we maintain our allowance for loan losses at a level that we consider to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts or that we will not be required to make additions to the allowance for loan losses in the future.

Future additions to our allowance for loan losses and changes in the related ratio of the allowance for loan losses to nonperforming loans are dependent upon the economy, changes in real estate values and interest rates, the view of the regulatory authorities toward adequate loan loss reserve levels, and inflation.

Management will continue to periodically review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary.

Analysis of the Allowance for Loan Losses.

The following table summarizes changes in the allowance for loan losses by loan categories for each year indicated and additions to the allowance for loan losses, which have been charged to operations.

Loans acquired in connection with mergers were recorded at their estimated fair value at the acquisition date and did not include a carryover of the pre-merger allowance for loan losses.

Although we maintain our allowance for credit losses at a level that we consider to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts or that we will not be required to make additions to the allowance for credit losses in the future.

Future additions to our allowance for credit losses and changes in the related ratio of the allowance for credit losses to nonperforming loans are dependent upon the economy, changes in real estate values and interest rates, the view of the regulatory authorities toward adequate credit loss reserve levels, and inflation.

Management will continue to periodically review the entire loan portfolio to determine the extent, if any, to which further additional credit loss provisions may be deemed necessary.

Analysis of the Allowance for Credit Losses.

The following table summarizes changes in the allowance for credit losses by loan categories for each year indicated.

Year Ended December 31, 2023 2022

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Balance at Beginning of Year $ 12,819 $ 11,582

Provision for Loan Losses 3,784 (1,125)

Impact of ASC 326 - Loans (3,385) —

(Recovery) Provision for Loan Losses (284) 3,784

Residential (219) (32)

Commercial — (40)

Construction — —

Commercial and Industrial — (2,712)

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Commercial 32 —

Construction — —

Commercial and Industrial 876 117

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Total Recoveries 1,146 348

Net Charge-offs (2,547) (64)

Net Recoveries (Charge-offs) 557 (2,547)

Balance at End of Year $ 9,707 $ 12,819

Allowance for Loan Losses to Total Loans 1.22 % 1.13 %

Allowance for Loan Losses to Nonaccrual Loans 320.64 233.37

Allowance for Loan Losses to Nonperforming Loans 221.06 159.40

Net Charge-offs to Average Loans 0.25 0.01

The allowance for loan losses increased $1.2 million, or 10.7%, to $12.8 million at December 31, 2022, compared to $11.6 million at December 31, 2021.

Allowance for loan losses to total loans increased 9 basis points to 1.22% at December 31, 2022 compared to 1.13% at December 31, 2021.

There was a large charge-off of one loan in the commercial and industrial pool that affected the loss rates, and caused an additional provision to be recorded.

These factors primarily resulted in a $3.8 million of provision for loan losses for the year ended December 31, 2022 compared to a $1.1 million recovery for loan losses for the year ended December 31, 2021.

The ratio of allowance for loan losses to nonaccrual loans ratio increased to 320.64% at December 31, 2022, compared to 233.37% at December 31, 2021.

Allowance for Credit Losses to Total Loans 0.87 % 1.22 %

Allowance for Credit Losses to Nonaccrual Loans 433.35 320.64

Allowance for Credit Losses to Nonperforming Loans 433.35 221.06

Net (Recoveries) Charge-offs to Average Loans (0.05) 0.25

The allowance for credit losses decreased $3.1 million, or 24.3%, to $9.7 million at December 31, 2023, compared to $12.8 million at December 31, 2022.

Allowance for credit losses to total loans decreased 35 basis points to 0.87% at December 31, 2023 compared to 1.22% at December 31, 2022.

The change in the allowance for credit losses was primarily due to the Company's aforementioned adoption of CECL.

At adoption, the Company decreased its allowance for credit losses by $3.4 million.

During the current year, the Company recorded a recovery of credit losses of $284,000 due to improvements in qualitative factors coupled with a decrease in historical loss rates.

This compared to $3.8 million in provision for credit losses for the year ended December 31, 2022 due to a $2.7 million charge-off of one loan in the commercial and industrial pool.

The ratio of allowance for credit losses to nonaccrual loans ratio increased to 433.35% at December 31, 2023, compared to 320.64% at December 31, 2022.

Nonaccrual loans decreased $1.8 million to $2.2 million at December 31, 2023 compared to $4.0 million at December 31, 2022.

Net charge-offs were $2.5 million or 0.25% to average loans, during 2022 compared to $64,000, or 0.01% to average loans, during 2021.

The decrease was primarily related to the $2.9 million commercial and industrial loan charge-off in the current year.

The following table presents the ratio of net charge-offs (recoveries) as a percent of average loans for the periods indicated.

Net recoveries for the year ended December 31, 2023 were $557,000 primarily due to recoveries totaling $750,000 related to the prior year $2.7 million charged-off commercial and industrial loan.

Net charge-offs for the year ended December 31, 2022 were $2.5 million.

The following table presents the ratio of net (recoveries) charge-offs as a percent of average loans for the periods indicated.

Year Ended December 31, 2023 2022

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Total Loans (0.05) % 0.25 %

Allocation of Allowance for Loan Losses.

The following table sets forth the allocation of allowance for loan losses by loan category at the dates indicated.

The table reflects the allowance for loan losses as a percentage of total loans receivable.

Management believes that the allowance can be allocated by category only on an approximate basis.

Allocation of Allowance for Credit Losses.

The following table sets forth the allocation of allowance for credit losses by loan category at the dates indicated.

The table reflects the allowance for credit losses as a percentage of total loans.

The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

December 31, Amount Percent of

Total Loans (1)

Amount Percent of

Total Loans (1)

Total Loans Amount Percent of

(Dollars in Thousands)

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Unallocated — — 603 —

Total Allowance for Loan Losses $ 12,819 100.0 % $ 11,582 100.0 %

(1) Represents percentage of loans in each category to total loans

Total Allowance for Credit Losses $ 9,707 100.0 % $ 12,819 100.0 %

Reconciliations of Non-GAAP Financial Measures to GAAP

Reconciliations of Non-GAAP financial measures discussed in this Report to the most directly comparable GAAP financial measures are included in the following tables.

Interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a FTE basis.

The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory income tax rate of 21 percent.

We believe the presentation of net interest income on a FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a fully tax-equivalent (“FTE”) basis.

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Adjustment to FTE Basis 155 134

Interest Income (FTE) (Non-GAAP) 47,850 43,729

Interest Income (Non-GAAP) 62,380 47,850

Interest Expense per Consolidated Statements of Income (GAAP) 17,672 4,781

Net Interest Income (FTE) (Non-GAAP) $ 43,069 $ 40,324

Net Interest Income (Non-GAAP) $ 44,708 $ 43,069

Net Interest Income (GAAP) $ 44,553 $ 42,935

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Adjustment to FTE Basis 0.01 0.01

Net Interest Margin (FTE) (Non-GAAP) 3.25 % 2.94 %

Net Interest Margin (Non-GAAP) 3.29 % 3.25 %

Net Interest Rate Spread (GAAP) 2.73 % 3.07 %

Adjustment to FTE Basis 0.01 0.01

Net Interest Rate Spread (FTE) (Non-GAAP) 3.08 % 2.82 %

Net Interest Rate Spread (Non-GAAP) 2.74 % 3.08 %

Tangible book value per common share is a Non-GAAP measure and is calculated based on tangible common equity divided by period-end common shares outstanding.

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The Bank’s primary sources of funds consist of deposit inflows, loan repayments, and maturities and sales of securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank 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 securities, and the objectives of its asset/liability management program.

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Unpledged securities, which provide an additional source of liquidity, totaled $49.8 million.

In addition, the Bank maintains a

credit arrangement with the FHLB with a maximum borrowing limit of approximately $435.3 million and available borrowing capacity of $407.4 million as of December 31, 2022.

$26.2 million was utilized toward standby letters of credit to collateralize public deposits in excess of the level insured by the FDIC.

In addition, the Bank maintains a credit

arrangement with the FHLB with a maximum borrowing limit of approximately $478.9 million and available borrowing capacity of $438.3 million as of December 31, 2023.

At December 31, 2023, $18.9 million of standby letters of credit were utilized to collateralize public deposits in excess of the level insured by the FDIC.

This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on $677.2 million of residential and commercial mortgage loans and the Bank’s investment in FHLB stock.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis