CB Financial Services, Inc. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited consolidated financial statements, which appear in this Report. You should read the information in this section in conjunction with the business and financial information the Company provided in this Report. Cautionary Statement Concerning Forward-Looking Statements See the first page of this Report for information regarding forward-looking statements. Selected Financial Data The following tables set forth selected historical financial and other data of the Company at and for the years ended December 31, 2023, 2022 and 2021. The information at December 31, 2023 and 2022, and for the years ended December 31, 2023 and 2022 is derived in part from, and should be read together with, the Company's audited consolidated financial statements and notes included in this Report and should be read together therewith. The information at December 31, 2021 and for the year ended December 31, 2021 is derived in part from audited financial statements that are not included in this Report. December 31, 2023 2022 2021 (Dollars in Thousands) Selected Financial Condition Data: Assets $ 1,456,091 $ 1,408,938 $ 1,425,479 Cash and Due From Banks 68,223 103,700 119,674 Securities 207,095 190,058 224,974 Loans, Net 1,100,689 1,037,054 1,009,214 Deposits 1,267,159 1,268,503 1,226,613 Short-Term Borrowings — 8,060 39,266 Other Borrowed Funds 34,678 14,638 17,601 Stockholders’ Equity 139,834 110,155 133,124 Year Ended December 31, 2023 2022 2021 (Dollars in Thousands) Selected Operating Data: Interest and Dividend Income $ 62,225 $ 47,716 $ 43,557 Interest Expense 17,672 4,781 3,405 Net Interest and Dividend Income 44,553 42,935 40,152 (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 Before Income Tax Expense 30,285 14,080 14,695 Income Tax Expense 7,735 2,833 3,125 Net Income $ 22,550 $ 11,247 $ 11,570 27 At or For the Year Ended December 31, 2023 2022 2021 Per Common Share Data: 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 Dividend Payout Ratio (1) 22.73 % 44.04 % 44.65 % Book Value Per Common Share $ 27.31 $ 21.60 $ 25.31 Common Shares Outstanding 5,119,543 5,100,189 5,260,672 At or For the Year Ended December 31, 2023 2022 2021 Selected Financial Ratios: Return on Average Assets 1.60 % 0.80 % 0.79 % Return on Average Equity 19.42 9.56 8.66 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 141.85 148.00 145.44 Average Equity to Average Assets 8.25 8.36 9.12 Net Interest Rate Spread (2) 2.73 3.07 2.81 Net Interest Rate Spread (Non-GAAP) (2)(4) 2.74 3.08 2.82 Net Interest Margin (3) 3.28 3.24 2.92 Net Interest Margin (Non-GAAP) (3)(4) 3.29 3.25 2.94 Net (Recoveries) Charge-offs to Average Loans (0.05) 0.25 0.01 Noninterest Expense to Average Assets 2.76 2.48 2.93 Efficiency Ratio (5) 56.56 66.14 75.95 Asset Quality Ratios: 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 Nonperforming Loans to Total Loans 0.20 0.55 0.71 Nonperforming Loans to Total Assets 0.15 0.41 0.51 Nonperforming Assets to Total Assets 0.16 0.41 0.51 Capital Ratios: Common Equity Tier 1 Capital to Risk-Weighted Assets (6) 13.64 % 12.33 % 11.95 % Tier 1 Capital to Risk-Weighted Assets (6) 13.64 12.33 11.95 Total Capital to Risk-Weighted Assets (6) 14.61 13.58 13.18 Tier 1 Leverage Capital to Adjusted Total Assets (6) 10.19 8.66 7.76 Other: Number of Branch Offices 13 13 14 Number of Full-Time Equivalent Employees 161 197 200 (1) Represents dividends per share divided by net income per share. (2) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities. (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%. 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. (5) Represents noninterest expense divided by the sum of net interest income and noninterest income. (6) Capital ratios are for Community Bank only. 28 Critical Accounting Policies and Use of Critical Accounting Estimates 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. 29 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. Additions are made to the allowance through periodic provisions charged to income and recovery of principal and interest on loans previously charged-off. Losses of principal are charged directly to the allowance when a loss occurs or when a determination is made that the specific loss is probable. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. The allowance consists of specific and general components. 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 30 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. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The maximum period without payment that typically can occur before a loan is considered for impairment is 90 days. Impairment is measured based on the present value of expected future cash flows discounted at a loan’s effective interest rate, or as a practical expedient, the observable market price, or, if the loan is collateral dependent, the fair value of the underlying collateral. When the measurement of an impaired loan is less than the recorded investment in the loan, the impairment is recorded in a specific valuation allowance. This specific valuation allowance is periodically adjusted for significant changes in the amount or timing of expected future cash flows, observable market price or fair value of the collateral. The specific valuation allowance, or allowance for impaired loans, is part of the total allowance for loan losses. Cash payments received on impaired loans that are considered nonaccrual are recorded as a direct reduction of the recorded investment in the loan. When the recorded investment has been fully collected, receipts are recorded as recoveries to the allowance for loan losses until the previously charged-off principal is fully recovered. Subsequent amounts collected are recognized as interest income. If no charge-off exists, then once the recorded investment has been fully collected, any future amounts collected would be recognized as interest income. Impaired loans are not returned to accrual status until all amounts due, both principal and interest, are current and a sustained payment history has been demonstrated. The general allowance component covers pools of homogeneous loans by loan class. Management determines historical loss experience for each segment of loans using the five-year rolling average of the net charge-off data within each segment. Qualitative and environmental factors are also considered that are likely to cause estimated credit losses associated with the Bank’s existing portfolio to differ from historical loss experience, and include levels and trends in delinquency and impaired loans; levels and trends in net charge-offs, trends in volume and terms of loans; change in underwriting, policies, procedures, practices and key personnel; national and local economic trends; industry conditions, and effects of changes in high-risk credit circumstances. The qualitative and environmental factors are reviewed on a quarterly basis to ensure they are reflective of current conditions in the portfolio and economy. An unallocated component, which is a part of the general allowance component, is maintained to cover uncertainties that could affect the Company’s estimate of probable losses. Our allowance is sensitive to a number of inputs, most notably the qualitative factors and historical loss experience by loan segment. Given the dynamic relationship between the inputs, it is difficult to estimate the impact of a change in any one individual variable on the allowance. Although management believes that it uses the best information available to establish the allowance, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral value cannot be predicted with certainty, there can be no assurance that the existing allowance is adequate or that increases will not be necessary should the quality of assets deteriorate as a result of the factors discussed previously. Any increase in the allowance may adversely affect our financial condition and results of operations. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Fair Value Measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A three-level of fair value hierarchy prioritizes the inputs used to measure fair value: Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. 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. 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. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques. This hierarchy requires the use of observable market data when available. 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 31 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. Additionally, there may be inherent weaknesses in any calculation technique where changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations. Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Deemed to have an indefinite life and not subject to amortization, goodwill is instead tested for impairment at the reporting unit level at least annually on October 31 or more frequently if triggering events occur or impairment indicators exist. The Company operates two reporting units – Community Banking segment and Insurance Brokerage Services segment. The Company has assigned 100% of the goodwill to the Community Banking reporting unit. Determining the fair value of a reporting unit under the goodwill impairment test is judgmental and often involves the use of significant estimates and assumptions. The Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a step one impairment test is unnecessary. An entity also has the option to bypass the qualitative assessment for any reporting unit and proceed directly to the first step of impairment testing. Two basic approaches to determine the fair value of an entity are the income approach and market approach or a combination of the two. The income approach uses valuation techniques to convert future earnings or cash flows to present value to arrive at a value that is indicated by market expectations about future amounts. The market approach uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities. The fair value measure is based on the value that those transactions indicate. 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 analysis. The income approach relies on Level 3 inputs along with a market-derived cost of capital when measuring fair value. Fair value is determined by converting anticipated benefits into a present single value. Once the benefit or benefits are selected, an appropriate discount or capitalization rate is applied to each benefit. These rates are calculated using the appropriate measure for the size and type of company, using financial models and market data as required. A discount rate may be derived based on a modified capital asset pricing model. which is comprised of a risk-free rate of return, an equity risk premium, a size premium and a factor covering the systemic market risk and a company specific risk premium. The values for the factors applied are determined primarily using external sources of 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 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. These ratios provide an objective basis for measuring the market’s perception of a stock’s fair value. Value ratios generally reflect the trends in growth, performance and stability of the financial results of operations. In this way, the business and financial risks exhibited by an industry or group of companies can be viewed in relation to market values. Value ratios also reflect the market’s outlook for the economy as a whole. Guideline companies provide a reasonable basis for comparison to the relative investment characteristics of the company being valued. The Company analyzes the relationships between the guideline companies' asset size, profitability, asset quality and capital ratios and applies a control premium to the selected guideline company multiples. 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 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. The weighting is judgmental and is based on the perceived level of appropriateness of the valuation methodology. Estimating the fair value involves the use of estimates and significant judgments that are based on a number of factors including actual operating results. If current conditions change from those expected, it is reasonably possible that the judgments and estimates described above could change in future periods and require management to further evaluate goodwill for impairment. 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. 32 Deferred Taxes. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. 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. Recent Accounting Pronouncements and Developments 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. Explanation of Use of Non-GAAP Financial Measures In addition to traditional measures presented in accordance with generally accepted accounting principles (“GAAP”), we use, and this Report contains or references, certain Non-GAAP financial measures. We believe these Non-GAAP financial measures provide useful information in understanding our underlying results of operations or financial position and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although we believe that these Non-GAAP financial measures enhance the understanding of our business and performance, these Non-GAAP financial measures should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with Non-GAAP measures which may be presented by other companies. Where Non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein. Refer to the "Reconciliations of Non-GAAP Financial Measures to GAAP" within this Item 7 for further information. Comparison of Financial Condition at December 31, 2023 and 2022 Assets. 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. Cash and due from banks decreased $35.5 million, or 34.2%, to $68.2 million at December 31, 2023, compared to $103.7 million at December 31, 2022. The change is primarily related to net funding of loans. Securities. 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%. 33 Securities Portfolio. The following table sets forth the composition of our securities portfolio at the dates indicated. 2023 2022 December 31, Amortized Cost Fair Value Amortized Cost Fair Value (Dollars in Thousands) Available-for-Sale Debt Securities: U.S. Government Agencies $ 4,995 $ 3,949 $ 53,993 $ 44,634 Obligations of States and Political Subdivisions 3,481 3,373 14,053 13,342 Mortgage-Backed Securities - Government-Sponsored Enterprises 57,377 54,532 46,345 41,427 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 Total Available-for-Sale Debt Securities $ 225,854 $ 204,507 $ 220,808 $ 187,360 Equity Securities: Mutual Funds 888 875 Other 1,700 1,823 Total Equity Securities 2,588 2,698 Total Securities $ 207,095 $ 190,058 Securities Portfolio Maturities and Yields. The composition and maturities of the debt securities portfolio at December 31, 2023, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. The weighted average yield for each security category is determined by the security's book yield and calculating the interest earned divided by the carrying value. For tax free obligations of states and political subdivision, the book yield is the tax free yield. One Year or Less More than One Year Through Five Years More than Five Years Through Ten Years More than Ten Years Total Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield (Dollars in Thousands) U.S. Government Agencies $ — — % $ — — % $ 3,949 1.26 % $ — — % $ 3,949 1.26 % Obligations of States and Political Subdivisions — — 573 3.58 2,800 3.94 — — 3,373 3.88 Mortgage Backed Securities - Government-Sponsored Enterprises — — 217 2.00 9,791 5.09 44,524 3.66 54,532 3.90 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 Total Debt Securities $ — — % $ 790 3.14 % $ 42,029 5.49 % $ 161,688 3.37 % $ 204,507 3.78 % 34 Loans. 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. 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. The following table sets forth the composition of the Company’s loan portfolio by type of loan at the dates indicated. The Company did not have loans held for sale at the dates indicated below. 2023 2022 December 31, Amount Percent Amount Percent (Dollars in Thousands) Real Estate: Residential $ 347,808 31.3 % $ 330,725 31.5 % Commercial 467,154 42.1 436,805 41.6 Construction 43,116 3.9 44,923 4.3 Commercial and Industrial 111,278 10.0 70,044 6.7 Consumer 111,643 10.1 146,927 14.0 Other 29,397 2.6 20,449 1.9 Total Loans 1,110,396 100.0 % 1,049,873 100.0 % Allowance for Credit Losses (9,707) (12,819) Loans, Net $ 1,100,689 $ 1,037,054 35 Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2023. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. For construction-to-permanent loans in the construction category, the maturity date is the date the loan matures once it is in permanent repayment status. Consumer loans consist primarily of indirect automobile loans whereby a portion of the rate is prepaid to the dealer and accrued in a prepaid dealer reserve account. Therefore, the true yield for the consumer loan portfolio is significantly less than the note rate disclosed below. Real Estate Residential Commercial Construction Commercial and Industrial Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in Thousands) One Year or Less $ 15,033 8.50 % $ 20,475 7.86 % $ 10,443 7.82 % $ 42,193 7.41 % After One Year Through Five Years 9,170 4.81 96,259 5.77 19,038 8.35 43,355 6.10 After Five Years Through 15 Years 120,212 4.62 344,300 5.53 10,562 7.12 25,728 4.63 After 15 Years 203,393 3.97 6,120 4.44 3,073 5.58 2 8.50 Total $ 347,808 4.41 % $ 467,154 5.67 % $ 43,116 7.72 % $ 111,278 6.25 % Consumer Other Total Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in Thousands) One Year or Less $ 6,848 8.71 % $ 863 7.95 % $ 95,855 7.82 % After One Year Through Five Years 84,275 4.65 424 4.57 252,521 5.62 After Five Years Through 15 Years 19,302 6.43 23,165 3.98 543,269 5.29 After 15 Years 1,218 10.50 4,945 3.31 218,751 3.99 Total $ 111,643 5.23 % $ 29,397 4.00 % $ 1,110,396 5.33 % The following table sets forth at December 31, 2023, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2024. Due After December 31, 2024 Fixed Adjustable Total (Dollars in Thousands) Real Estate: Residential $ 276,724 $ 56,051 $ 332,775 Commercial 259,033 187,646 446,679 Construction 20,480 12,193 32,673 Commercial and Industrial 60,603 8,482 69,085 Consumer 104,759 36 104,795 Other 25,986 2,548 28,534 Total Loans $ 747,585 $ 266,956 $ 1,014,541 Liabilities. 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. Deposits. 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 36 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. 2023 2022 Year Ended December 31, Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate (Dollars in Thousands) 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 Total Deposits $ 1,256,886 100.0 % 1.31 % $ 1,239,777 100.0 % 0.32 % The following table sets forth time deposits classified by interest rate as of the dates indicated. December 31, 2023 2022 (Dollars in Thousands) Less than 0.25% $ 8,009 $ 43,516 0.25% to 0.49% 5,512 10,732 0.50% to 0.99% 5,139 7,721 1.00% to 1.49% 4,316 5,929 1.50% to 1.99% 3,626 4,717 2.00% to 2.49% 6,220 7,379 2.49% to 2.99% 146 12,779 3.00% to 3.99% 604 16,210 4.00% to 4.99% 145,475 143 5.00% or Greater 51,594 — Total Time Deposits $ 230,641 $ 109,126 37 The following table sets forth, by interest rate ranges and scheduled maturity, information concerning our time deposits at the date indicated. Period to Maturity December 31, 2023 Less Than Or Equal to One Year More Than One to Two Years More Than Two to Three Years More Than Three to Four Years More Than Four to Five Years More Than Five Years Total Percent of Total (Dollars in Thousands) Less than 0.25% $ 6,309 $ 928 $ 711 $ 61 $ — $ — $ 8,009 3.3 % 0.25% to 0.49% 652 512 2,440 1,908 — — 5,512 2.4 0.50% to 0.99% 807 2,699 13 91 196 1,333 5,139 2.2 1.00% to 1.49% 1,423 1,194 1,383 42 — 274 4,316 1.9 1.50% to 1.99% 708 750 1,125 936 107 — 3,626 1.6 2.00% to 2.49% 1,585 1,556 2 339 2,455 283 6,220 2.7 2.49% to 2.99% 146 — — — — — 146 0.1 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 Total $ 136,016 $ 79,649 $ 6,951 $ 3,377 $ 2,758 $ 1,890 $ 230,641 100.0 % As of December 31, 2023 and 2022, the aggregate estimated amount of outstanding deposits in amounts uninsured by the FDIC, or that were not secured by the Bank through the pledging of securities, FHLB letters of credit or other means, was approximately $314.7 million and $368.1 million, respectively. The estimates are based on the same methodologies and assumptions used for the Bank's regulatory reporting requirements. Of the amount at December 31, 2023, an estimated $23.2 million are uninsured time deposits and the following table sets forth their maturity. December 31, 2023 (Dollars in Thousands) Three Months or Less $ 2,681 Over Three Months to Six Months 5,732 Over Six Months to One Year 5,086 Over One Year 9,695 Total $ 23,194 Borrowed Funds ◦ Short-term borrowings. 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 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 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 38 $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. Comparison of Operating Results for the Years Ended December 31, 2023 and 2022 Overview. 2023 Annual Results were impacted by the following significant items: • 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. 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%, resulting in a pre-tax loss of $10.1 million. • 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) 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. 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 $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 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. 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. 39 • 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 $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 . The breakdown of noninterest income for the year ended December 31, 2023 compared to year ended December 31, 2022 is as follows: Year Ended December 31, 2023 2022 Dollar Change Percent Change (Dollars in Thousands) Service Fees $ 1,819 $ 2,160 $ (341) (15.8) % Insurance Commissions 5,839 5,934 (95) (1.6) % Other Commissions 521 669 (148) (22.1) % 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 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 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. 40 Noninterest Expense. The breakdown of noninterest expense for the year ended December 31, 2023 compared to the year ended December 31, 2022 is as follows: Year Ended December 31, 2023 2022 Dollar Change Percent Change (Dollars in Thousands) Salaries and Employee Benefits $ 21,903 $ 18,469 $ 3,434 18.6 % Occupancy 2,998 3,047 (49) (1.6) % Equipment 1,064 739 325 44.0 % Data Processing 3,014 2,152 862 40.1 % 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) % Legal and Professional Fees 1,182 1,237 (55) (4.4) % Advertising 426 527 (101) (19.2) % Other Real Estate Owned (Income) (115) (151) 36 (23.8) % Amortization of Intangible Assets 1,766 1,782 (16) (0.9) % Other 3,735 3,844 (109) (2.8) % Total Noninterest Expense $ 38,782 $ 34,891 $ 3,891 11.2 % 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 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. 41 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%. All average balances are daily average balances. 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. 2023 2022 Year Ended December 31, Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/ Cost (Dollars in Thousands) Assets: Interest-Earning Assets: Loans, Net (1) $ 1,076,928 $ 54,763 5.09 % $ 1,019,124 $ 42,010 4.12 % Securities Taxable 208,472 4,017 1.93 220,818 3,852 1.74 Tax Exempt 5,821 199 3.42 8,383 270 3.22 Equity Securities 2,693 106 3.94 2,693 91 3.38 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 Total Interest-Earning Assets 1,358,579 62,380 4.59 1,324,875 47,850 3.61 Noninterest-Earning Assets 48,448 81,553 Total Assets $ 1,407,027 $ 1,406,428 Liabilities and Stockholders' equity: Interest-Bearing Liabilities: Interest-Bearing Demand Deposits $ 354,060 $ 6,741 1.90 % $ 282,850 $ 1,362 0.48 % 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 Total Interest-Bearing Deposits 930,478 16,433 1.77 850,224 4,025 0.47 Short-term Borrowings 931 32 3.44 27,360 63 0.23 Other Borrowed Funds 26,328 1,207 4.58 17,609 693 3.94 Total Interest-Bearing Liabilities 957,737 17,672 1.85 895,193 4,781 0.53 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 Total Liabilities 1,290,909 1,288,818 Stockholders' Equity 116,118 117,610 Total Liabilities and Stockholders' Equity $ 1,407,027 $ 1,406,428 Net Interest Income (Non-GAAP) (2) $ 44,708 $ 43,069 Net Interest Rate Spread (Non-GAAP) (2)(3) 2.74 3.08 Net Interest-Earning Assets (4) $ 400,842 $ 429,682 Net Interest Margin (Non-GAAP) (2)(5) 3.29 3.25 Return on Average Assets 1.60 0.80 Return on Average Equity 19.42 9.56 Average Equity to Average Assets 8.25 8.36 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 141.85 148.00 (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. (3) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. Net interest rate spread (GAAP) was 2.73% and 3.07% for the year ended December 31, 2023 and 2022, respectively. (4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average total interest-earning assets. Net interest margin (GAAP) was 3.28% and 3.24% for the year ended December 31, 2023 and 2022, respectively. 42 Rate/Volume Analysis The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. 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. Year Ended December 31, 2023 Compared To Year Ended December 31, 2022 Increase (Decrease) Due to Volume Rate Total (Dollars in Thousands) Interest and Dividend Income: Loans, net $ 2,415 $ 10,338 $ 12,753 Securities: Taxable (240) 405 165 Tax-Exempt (87) 16 (71) Equity Securities — 15 15 Interest-Earning Deposits at Other Banks (210) 1,821 1,611 Other Interest-Earning Assets (4) 61 57 Total Interest-Earning Assets 1,874 12,656 14,530 Interest Expense: Deposits 346 12,062 12,408 Short-Term Borrowings (116) 85 (31) Other Borrowed Funds 387 127 514 Total Interest-Bearing Liabilities 617 12,274 12,891 Change in Net Interest Income $ 1,257 $ 382 $ 1,639 Asset Quality Nonperforming Assets and Delinquent Loans. The Company reviews its loans on a regular basis and generally places loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest, principal or both. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Loans that are 90 days or more past due may still accrue interest if they are well secured and in the process of collection. Payments received on nonaccrual loans are applied against principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, and current and future payments are reasonably assured. 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 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. We have an experienced chief credit officer, collections and credit departments that monitor the loan portfolio and seek to prevent any deterioration of asset quality. Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold. When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan, or its fair market value, less estimated selling expenses. Any further write-down of real estate owned is charged against earnings. 43 Nonaccrual Loans and Nonperforming Assets. 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: Real Estate: Residential $ 1,476 $ — $ — $ 1,476 Commercial 360 — — 360 Commercial and Industrial 316 — — 316 Consumer 88 — — 88 Total Nonaccrual Loans $ 2,240 $ — $ — 2,240 Other Real Estate Owned: Residential 162 Commercial — Total Other Real Estate Owned 162 Total Nonperforming Assets $ 2,402 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. December 31, 2022 (Dollars in Thousands) Nonaccrual Loans: Real Estate: Residential $ 1,649 Commercial 1,814 Commercial and Industrial 415 Consumer 120 Total Nonaccrual Loans 3,998 Accruing Loans Past Due 90 Days or More: Total Accruing Loans Past Due 90 Days or More — Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More 3,998 Troubled Debt Restructurings, Accruing: Real Estate Residential 534 Commercial 1,260 Commercial and Industrial 7 Total Troubled Debt Restructurings, Accruing 1,801 Total Nonperforming Loans 5,799 Total Nonperforming Assets $ 5,799 44 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 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. 2023 2022 December 31, Nonaccrual Loans Total Loans Nonaccrual Loans to Total Loans Nonaccrual Loans Total Loans Nonaccrual Loans to Total Loans (Dollars in Thousands) Real Estate: Residential $ 1,476 $ 347,808 0.42 % $ 1,649 $ 330,725 0.50 % Commercial 360 467,154 0.08 1,814 436,805 0.42 Construction — 43,116 — — 44,923 — Commercial and Industrial 316 111,278 0.28 415 70,044 0.59 Consumer 88 111,643 0.08 120 146,927 0.08 Other — 29,397 — — 20,449 — Total $ 2,240 $ 1,110,396 0.20 % $ 3,998 $ 1,049,873 0.38 % 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 $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. Federal regulations provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the “distinct possibility” that the Company will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets is not warranted. The Company designates an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. The Company uses an eight-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are not considered criticized and are aggregated as “pass” rated. The criticized rating categories used by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are below average quality, resulting in an undue credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as loss are considered uncollectible and of such little value that continuance as an asset is not warranted. As part of the periodic exams of the Bank by the FDIC and the Pennsylvania Department of Banking and Securities, the staff of such agencies reviews our classifications and determines whether such classifications are adequate. Such agencies have, in the past, and may in the future require us to classify certain assets which management has not otherwise classified or require a classification more severe than established by management. The following table shows the principal amount of special mention and classified loans at December 31, 2023 and 2022. 45 December 31, 2023 2022 (Dollars in Thousands) Special Mention $ 54,978 $ 43,804 Substandard 14,457 14,499 Doubtful — 415 Loss — — Total $ 69,435 $ 58,718 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. 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. Losses of principal are charged directly to the allowance when a loss occurs or when a determination is made that the specific loss is probable. 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 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. 46 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 (Dollars in Thousands) Balance at Beginning of Year $ 12,819 $ 11,582 Impact of ASC 326 - Loans (3,385) — (Recovery) Provision for Loan Losses (284) 3,784 Charge-offs: Real Estate: Residential (219) (32) Commercial and Industrial — (2,712) Consumer (370) (151) Total Charge-offs (589) (2,895) Recoveries: Real estate: Residential 43 145 Commercial 32 — Commercial and Industrial 876 117 Consumer 195 86 Total Recoveries 1,146 348 Net Recoveries (Charge-offs) 557 (2,547) Balance at End of Year $ 9,707 $ 12,819 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. 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. 47 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 Real Estate: Residential 0.05 % (0.03) % Commercial (0.01) — Construction — — Commercial and Industrial (0.89) 3.90 Consumer 0.14 0.04 Other — — Total Loans (0.05) % 0.25 % 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. 2023 2022 December 31, Amount Percent of Total Loans Amount Percent of Total Loans (Dollars in Thousands) Real Estate: Residential $ 3,129 31.3 % $ 2,074 31.5 % Commercial 2,630 42.1 5,810 41.6 Construction 639 3.9 502 4.3 Commercial and Industrial 1,693 10.0 2,313 6.7 Consumer 1,367 10.1 1,517 14.0 Other 249 2.6 — 1.9 Total Allocated Allowance 9,707 100.0 12,216 100.0 Unallocated — — 603 — 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. 48 Interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a fully tax-equivalent (“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. The following table reconciles net interest income, net interest spread and net interest margin on a FTE basis for the periods indicated: Year Ended December 31, 2023 2022 (Dollars in Thousands) Interest Income per Consolidated Statements of Income (GAAP) $ 62,225 $ 47,716 Adjustment to FTE Basis 155 134 Interest Income (Non-GAAP) 62,380 47,850 Interest Expense per Consolidated Statements of Income (GAAP) 17,672 4,781 Net Interest Income (Non-GAAP) $ 44,708 $ 43,069 Net Interest Income (GAAP) $ 44,553 $ 42,935 Divided by : Average Interest-Earning Assets $ 1,358,579 $ 1,324,875 Net Interest Margin (GAAP) 3.28 % 3.24 % Adjustment to FTE Basis 0.01 0.01 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 (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. Tangible common equity to tangible assets is a Non-GAAP measure and is calculated based on tangible common equity divided by tangible assets. We believe these Non-GAAP measures serve as useful tools to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company’s total value. December 31, 2023 2022 (Dollars in Thousands, Except Share and Per Share Data) Stockholders' Equity (GAAP) (Numerator) $ 139,834 $ 110,155 Goodwill and Other Intangible Assets, Net (10,690) (13,245) Tangible Common Equity or Tangible Book Value (Non-GAAP) (Numerator) $ 129,144 $ 96,910 Common Shares Outstanding (Denominator) 5,119,543 5,100,189 Book Value per Common Share (GAAP) $ 27.31 $ 21.60 Tangible Book Value per Common Share (Non-GAAP) $ 25.23 $ 19.00 Liquidity Liquidity is the ability to meet current and future financial obligations of a short-term nature. 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 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. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities. The Bank believes that it had sufficient liquidity at December 31, 2023, to satisfy its short- and long-term liquidity needs at that date. The Bank’s most liquid assets are cash and due from banks, which totaled $68.2 million at December 31, 2023. Unpledged securities, which provide an additional source of liquidity, totaled $49.8 million. In addition, the Bank maintains a credit 49 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. The Bank also maintains a Borrower-In-Custody of Collateral line of credit agreement with the FRB for $103.8 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $142.9 million of commercial and consumer indirect auto loans. The Bank also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of December 31, 2023. At December 31, 2023, the Bank had funding commitments totaling $146.1 million, consisting primarily of commitments to originate loans, unused lines of credit and letters of credit. At December 31, 2023, certificates of deposit due within one year of that date totaled $136.0 million, or 59.0% of total certificates of deposit. While liquidity levels at December 31, 2023 are currently sufficient, if these certificates of deposit do not remain with the Bank, the Bank may be required to seek other sources of funds. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than it currently pays on these certificates of deposit. The Bank believes, however, based on past experience that a significant portion of its certificates of deposit will remain with it, either as certificates of deposit or as other deposit products. The Bank can attract and retain deposits by adjusting the interest rates offered. The Bank’s primary investing activities are the origination of loans. For the year ended December 31, 2023 the Bank had net loan originations of $63.5 million. The Company is a separate legal entity from the Bank and must provide for its own liquidity to pay dividends to stockholders, to pay principal and interest on its subordinated debt and for other corporate purposes. At December 31, 2023, the Company (on an unconsolidated basis) had liquid assets of $16.0 million. We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily and anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. Commitments. As a financial services provider, the Company routinely is a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, commitments under unused lines of credit, and commitments under letters of credit. While these contractual obligations represent potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans the Company makes. In addition, the Company enters into commitments to sell mortgage loans. Contractual Obligations. In the ordinary course of its operations, the Company enters into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments. The following tables present certain of our contractual obligations at December 31, 2023. Payment Due by Period Total Less Than Or Equal to One Year More Than One to Three Years More Than Three to Five Years More Than Five Years (Dollars in Thousands) Certificates of deposit $ 230,641 $ 136,016 $ 86,600 $ 6,135 $ 1,890 Other Borrowed Funds 34,678 — 20,000 — 14,678 Operating Lease Obligations 1,981 355 505 437 684 Total $ 267,300 $ 136,371 $ 107,105 $ 6,572 $ 17,252 Capital Resources At December 31, 2023 and 2022, respectively, the Bank was considered "well capitalized" under the regulatory framework for prompt corrective action. 50 The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized at the dates indicated. 2023 2022 December 31, Amount Ratio Amount Ratio (Dollars in Thousands) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Actual $ 143,654 13.64 % $ 121,188 12.33 % For Capital Adequacy Purposes 47,385 4.50 44,221 4.50 To Be Well Capitalized 68,445 6.50 63,875 6.50 Tier I Capital (to Risk-Weighted Assets) Actual 143,654 13.64 121,188 12.33 For Capital Adequacy Purposes 63,180 6.00 58,961 6.00 To Be Well Capitalized 84,240 8.00 78,615 8.00 Total Capital (to Risk-Weighted Assets) Actual 153,861 14.61 133,478 13.58 For Capital Adequacy Purposes 84,240 8.00 78,615 8.00 To Be Well Capitalized 105,300 10.00 98,269 10.00 Tier I Leverage Capital (to Adjusted Total Assets) Actual 143,654 10.19 121,188 8.66 For Capital Adequacy Purposes 56,385 4.00 55,969 4.00 To Be Well Capitalized 70,481 5.00 69,962 5.00 Impact of Inflation and Changing Price The consolidated financial statements and related notes of the Company have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, the Company’s assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.