What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-09 compared with 2024-05-10 · 219 added, 78 removed, 228 unchanged (57% of the section changed)

26 unchanged sentences

The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania.

The Bank operates from 10 branches in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania and three offices in Marshall and Ohio Counties in West Virginia.

The Bank operates from nine branches in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania and three offices in Marshall and Ohio Counties in West Virginia.

The Bank also has a loan production office in Allegheny County, a corporate center in Washington County and an operations center in Greene County, all of which are in Pennsylvania.

2 unchanged sentences

It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith.

The detailed discussion focuses on our consolidated financial condition as of March 31, 2024, compared to the consolidated financial condition as of December 31, 2023 and the consolidated results of operations for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The detailed discussion focuses on our consolidated financial condition as of June 30, 2024, compared to the consolidated financial condition as of December 31, 2023

and the consolidated results of operations for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023.

Our results of operations depend primarily on our net interest income.

Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities.

Our results of operations

also are affected by our provision for credit losses, noninterest income and noninterest expense.

Our results of operations also are affected by our provision for credit losses, noninterest income and noninterest expense.

Noninterest income consists primarily of fees and service charges on deposit accounts, income from bank-owned life insurance and other income.

15 unchanged sentences

Three Months Ended

Six Months Ended

June 30, June 30,

2024 2023 2024 2023

(Dollars in thousands)

9 unchanged sentences

Adjustment to FTE Basis

0.02 0.01 0.01 0.01

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

2.46 % 2.79 % 2.56 % 2.96 %

Net Interest Margin (GAAP)

1 unchanged sentence

Adjustment to FTE Basis

0.01 0.01 0.01 0.01

Net Interest Margin (FTE) (Non-GAAP)

3.19 % 3.30 % 3.28 % 3.41 %

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

9 unchanged sentences

Consolidated Statements of Financial Condition Analysis

Total assets increased $17.0 million, or 1.2%, to $1.47 billion at March 31, 2024 compared to $1.46 billion at December 31, 2023.

Total assets increased $104.2 million, or 7.2%, to $1.6 billion at June 30, 2024 compared to $1.5 billion at December 31, 2023.

Cash and Securities

• Cash and due from banks increased $5.5 million, or 8.0%, to $73.7 million at March 31, 2024, compared to $68.2 million at December 31, 2023.

• Securities increased $25.2 million, or 12.2%, to $232.3 million at March 31, 2024, compared to $207.1 million at December 31, 2023.

• Cash and due from banks increased $74.4 million, or 109.0%, to $142.6 million at June 30, 2024, compared to $68.2 million at December 31, 2023.

• Securities increased $61.7 million, or 29.8%, to $268.8 million at June 30, 2024, compared to $207.1 million at December 31, 2023.

The securities balance was primarily impacted by the purchase of $69.8 million of collateralized loan obligation securities, partially offset by $6.8 million of repayments on amortizing securities .

Loans, Allowance for Credit Losses (ACL) and Credit Quality

• Total loans decreased $14.1 million, or 1.3%, to $1.10 billion at March 31, 2024 compared to $1.11 billion at December 31, 2023.

This was driven by decreases in consumer loans and commercial and industrial loans of $11.1 million and $8.0 million, respectively, partially offset by increases in commercial real estate loans, other loans and construction loans of $3.3 million, $1.4 million and $1.2 million, respectively.

• Total loans decreased $31.7 million, or 2.9%, to $1.08 billion at June 30, 2024 compared to $1.11 billion at December 31, 2023.

This was driven by decreases in consumer, commercial real estate and residential real estate loans of $21.3 million, $8.4 million and $5.1 million, respectively, partially offset by increases in commercial and industrial loans, other loans and construction loans of $1.1 million, $1.1 million and $922,000, respectively.

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.

The decrease in commercial and industrial loans was primarily due to the prepayment of a $20.0 million line of credit and a $5.0 million syndicated national credit.

• The allowance for credit losses (ACL) was $9.6 million at March 31, 2024 and $9.7 million at December 31, 2023.

As a result, the ACL to total loans was 0.87% at March 31, 2024 and December 31, 2023.

The provision for credit losses recorded for the three months ended March 31, 2024 was a net recovery of $37,000.

The provision for credit losses - loans was a recovery of $143,000 and was primarily due to a decrease in loan balances while the provision for credit losses - unfunded commitments was $106,000 and was due to an increase in qualitative factors.

• Net recoveries for the three months ended March 31, 2024 were $18,000.

Net recoveries for the three months ended March 31, 2023 were $756,000, or 0.29% of average loans on an annualized basis primarily due to recoveries totaling $750,000 related to a prior year $2.7 million charged-off commercial and industrial loan.

• Nonperforming loans, which includes nonaccrual loans and accruing loans past due 90 days or more, were $2.2 million at March 31, 2024 and December 31, 2023.

Nonperforming loans to total loans ratio was 0.20% at March 31, 2024 and December 31, 2023.

Total liabilities increased $15.2 million, or 1.2%, to $1.33 billion at March 31, 2024 compared to $1.32 billion at December 31, 2023.

• Total deposits decreased $4.7 million to $1.262 billion as of March 31, 2024 compared to $1.267 billion at December 31, 2023.

Non interest-bearing demand deposits decreased $2.6 million, interest-bearing demand deposits decreased $39.9 million and savings deposits decreased $4.5 million, while money market deposits increased $7.3 million and time deposits increased $35.0 million.

Deposit changes were primarily the result of cyclical fluctuations in municipal deposits and the current interest rate environment causing a shift in deposit products to higher priced time deposits.

In total, $62.3 million of loans have paid off since December 31, 2023 .

• The allowance for credit losses (ACL) was $9.5 million at June 30, 2024 and $9.7 million at December 31, 2023.

As a result, the ACL to total loans was 0.88% at June 30, 2024 and December 31, 2023.

The provision for credit losses recorded for the three months ended June 30, 2024 was a net recovery of $36,000.

The provision for credit losses - loans was $12,000 and was primarily due to an increase in the required reserve for individually analyzed loans, partially offset by the impact of a decrease in loan balances while the provision for credit losses - unfunded commitments was $48,000 and was due to a decrease in loss rates.

• Net charge-offs for the three months ended June 30, 2024 were $67,000.

Net charge-offs for the three months ended June 30, 2023 were $96,000, or 0.04% of average loans on an annualized basis primarily due to recoveries totaling $750,000 related to a prior year $2.7 million charged-off commercial and industrial loan.

• Nonperforming loans, which include nonaccrual loans and accruing loans past due 90 days or more, were $1.9 million at June 30, 2024 and $2.2 million at December 31, 2023.

Nonperforming loans to total loans ratio was 0.17% at June 30, 2024 and 0.20% at December 31, 2023.

Total liabilities increased $101.1 million, or 7.7%, to $1.42 billion at June 30, 2024 compared to $1.32 billion at December 31, 2023.

• Total deposits increased $82.6 million to $1.35 billion as of June 30, 2024 compared to $1.27 billion at December 31, 2023.

Time deposits increased $115.4 million and money market deposits increased $28.9 million while interest-bearing demand, savings and non interest-bearing demand deposits decreased $38.3 million, $15.6 million and $7.8 million, respectively.

Deposit changes were primarily the result of the current interest rate environment causing a shift in deposit products to higher priced money market and time deposits.

Additionally, the Bank added $63.1 million of brokered certificates of deposit during the period.

Brokered certificates of deposit totaled $42.0 million as of March 31, 2024 compared to $29.0 million at December 31, 2023, all mature within three months and were utilized to fund the purchase of floating rate collateralized loan obligation securities.

At March 31, 2024, FDIC insured deposits totaled approximately 63.1% of total deposits while an additional 15.0% of deposits were collateralized with investment securities.

Brokered certificates of deposit totaled $92.1 million as of June 30, 2024 compared to $29.0 million at December 31, 2023, all mature within three months and were utilized to fund the purchase of floating rate CLO securities.

At June 30, 2024, FDIC insured deposits totaled approximately 62.6% of total deposits while an additional 15.0% of deposits were collateralized with investment securities.

Accrued Interest Payable and Other Liabilities

• Accrued interest payable and other liabilities increased $19.9 million, or 138.0%, to $34.3 million at March 31, 2024, compared to $14.4 million at December 31, 2023 primarily due to the purchase of $10.6 million of syndicated loans which were unfunded at the end of the period and $10.1 million of securities which were unsettled at the end of the period.

• Accrued interest payable and other liabilities increased $18.5 million, or 128.3%, to $32.9 million at June 30, 2024, compared to $14.4 million at December 31, 2023 primarily due to the purchase of $14.7 million of syndicated loans and $7.6 million of securities which were unsettled at the end of the period.

Stockholders’ Equity

Stockholders’ equity increased $1.8 million, or 1.3%, to $141.6 million at March 31, 2024, compared to $139.8 million at December 31, 2023.

Stockholders’ equity increased $3.0 million, or 2.1%, to $142.9 million at June 30, 2024, compared to $139.8 million at December 31, 2023.

The key factor positively impacting stockholders’ equity was $6.8 million of net income for the current period, partially offset by a $1.6 million increase in accumulated other comprehensive loss and the payment of $2.6 million in dividends since December 31, 2023.

Book value per share (GAAP) was $27.53 at March 31, 2024 compared to $27.32 at December 31, 2023, an increase of $0.21.

Tangible book value per share (Non-GAAP) increased $0.29, or 1.1%, to $25.52 compared to $25.23 at December 31, 2023.

Book value per common share (GAAP) was $27.79 at June 30, 2024 compared to $27.32 at December 31, 2023, an increase of $0.47.

Tangible book value per common share (Non-GAAP) increased $0.60, or 2.4%, to $25.83 compared to $25.23 at December 31, 2023.

Refer to Explanation of Use of Non-GAAP Financial Measures in this Report.

Consolidated Results of Operations for the Three Months Ended March 31, 2024 and 2023

Net income was $4.20 million for the three months ended March 31, 2024, an increase of $40,000 compared to net income of $4.16 million for the three months ended March 31, 2023.

Consolidated Results of Operations for the Three Months Ended June 30, 2024 and 2023

Net income was $2.7 million for the three months ended June 30, 2024, a decrease of $107,000 compared to net income of $2.8 million for the three months ended June 30, 2023.

Net Interest and Dividend Income.

Net interest and dividend income increased $8,000, or 0.1%, to $11.59 million for the three months ended March 31, 2024 compared to $11.58 million for the three months ended March 31, 2023.

Net interest margin (GAAP) decreased to 3.36% for the three months ended March 31, 2024 compared to 3.51% for the three months ended March 31, 2023.

Fully Tax Equivalent (FTE) net interest margin (Non-GAAP) decreased 15 basis points (bps) to 3.37% for the three months ended March 31, 2024 compared to 3.52% for the three months ended March 31, 2023.

Net interest and dividend income increased $350,000, or 3.1%, to $11.5 million for the three months ended June 30, 2024 compared to $11.1 million for the three months ended June 30, 2023.

Net interest margin (GAAP) decreased to 3.18% for the three months ended June 30, 2024 compared to 3.29% for the three months ended June 30, 2023.

Fully Tax Equivalent (FTE) net interest margin (Non-GAAP) decreased 11 basis points (bps) to 3.19% for the three months ended June 30, 2024 compared to 3.30% for the three months ended June 30, 2023.

Interest and Dividend Income

• Interest and dividend income increased $3.7 million, or 26.3%, to $18.0 million for the three months ended March 31, 2024 compared to $14.2 million the three months ended March 31, 2023.

◦ Interest income on loans increased $2.5 million, or 19.9%, to $14.8 million for the three months ended March 31, 2024 compared to $12.4 million for the three months ended March 31, 2023.

• Interest and dividend income increased $3.7 million, or 24.6%, to $18.9 million for the three months ended June 30, 2024 compared to $15.2 million the three months ended June 30, 2023.

◦ Interest income on loans increased $1.2 million, or 9.3%, to $14.7 million for the three months ended June 30, 2024 compared to $13.4 million for the three months ended June 30, 2023.

The average yield on loans increased 50 bps to 5.50% compared to 5.00% resulting in a $1.3 million increase in interest income on loans.

The average balance of loans increased $47.3 million to $1.09 billion from $1.04 billion, generating $694,000 of additional interest income on loans.

The average balance of loans decreased $2.9 million to $1.076 billion from $1.079 billion, causing a $77,000 decrease in interest income on loans.

The increase in loan yield has been driven by a reduction in lower yielding consumer loans due to the discontinuation of the indirect automobile loan product with the redeployment of those funds into higher yielding commercial loan products.

◦ Interest income on taxable investment securities increased $1.3 million, or 138.9%, to $2.3 million for the three months ended March 31, 2024 compared to $964,000 for the three months ended March 31, 2023 driven by a 210 bp increase in average yield coupled with a $22.6 million increase in average balances.

◦ Interest income on taxable investment securities increased $1.9 million, or 199.4%, to $2.8 million for the three months ended June 30, 2024 compared to $950,000 for the three months ended June 30, 2023 driven by a 246 bp increase in average yield coupled with a $56.7 million increase in average balances.

The increase in the average yield was the result of the Bank implementing a balance sheet repositioning strategy of its portfolio of available-for-sale securities during the fourth quarter of 2023.

The Bank sold $69.3 million in market value of its lower yielding U.S.

The Company 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%.

◦ Interest income on interest-earning deposits at other banks decreased $72,000, to $733,000 for the three months ended March 31, 2024 compared to $805,000 for the three months ended March 31, 2023 driven by a $14.3 million decrease in average balances, partially offset by a 58 bp increase in the average yield.

The increase in volume was driven by a $74.3 million increase in the average balance of collateralized loan obligation (“CLO”) securities as the Bank executed a leverage strategy to purchase these assets funded with brokered certificates of deposits.

◦ Interest income on interest-earning deposits at other banks increased $592,000, to $1.3 million for the three months ended June 30, 2024 compared to $721,000 for the three months ended June 30, 2023 driven by a $47.7 million increase in average balances, partially offset by a 19 bp decrease in the average yield.

The volume increase was due in part to $30.5 million in cash received from the December 2023 sale of EU.

Interest Expense

• Interest expense increased $3.7 million, or 140.3%, to $6.4 million for the three months ended March 31, 2024 compared to $2.7 million for the three months ended March 31, 2023.

◦ Interest expense on deposits increased $3.5 million, or 139.3%, to $6.0 million for the three months ended March 31, 2024 compared to $2.5 million for the three months ended March 31, 2023.

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 132 bp, or 116.0%, increase in the average cost of interest-bearing deposits compared to the three months ended March 31, 2023.

• Interest expense increased $3.4 million, or 82.9%, to $7.5 million for the three months ended June 30, 2024 compared to $4.1 million for the three months ended June 30, 2023.

◦ Interest expense on deposits increased $3.2 million, or 83.9%, to $7.1 million for the three months ended June 30, 2024 compared to $3.8 million for the three months ended June 30, 2023.

Rising market interest rates led to the repricing of interest-bearing demand and money market deposits and a shift in deposits from noninterest-bearing and interest-bearing demand and savings deposits into money market and time deposits which resulted in a 109 bp, or 65.8%, increase in the average cost of interest-bearing deposits compared to the three months ended June 30, 2023.

This accounted for a $2.8 million increase in interest expense.

Additionally, interest-bearing deposit balances increased $86.1 million, or 9.6%, to $978.3 million as of March 31, 2024 compared to $892.2 million as of March 31, 2023, accounting for a $298,000 increase in interest expense.

◦ Interest expense on borrowed funds increased $247,000, or 157.3%, to $404,000 for the three months ended March 31, 2024 compared to $157,000 for the three months ended March 31, 2023.

Additionally, interest-bearing deposit balances increased $103.6 million, or 11.1%, to $1.0 billion as of June 30, 2024 compared to $930.1 million as of June 30, 2023, accounting for a $462,000 increase in interest expense.

◦ Interest expense on borrowed funds increased $163,000, or 67.6%, to $404,000 for the three months ended June 30, 2024 compared to $241,000 for the three months ended June 30, 2023.

The average balance of borrowed funds increased $13.2 million due to $20.0 million of FHLB long-term advances added during the second quarter of 2023.

7 unchanged sentences

The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

Three Months Ended March 31,

Three Months Ended June 30,

Balance Interest

33 unchanged sentences

$ 11,511 $ 11,155

Net Interest-Earning Assets (4)

$ 381,247 $ 402,319

Net Interest Rate Spread (FTE) (Non-GAAP) (3)(5)

2.46 % 2.79 %

Net Interest Margin (GAAP) (6)

Net Interest Margin (FTE) (Non-GAAP) (3)(6)

Return on Average Assets (1)

Return on Average Equity (1)

Average Equity to Average Assets 9.36 8.38

Average Interest-Earning Assets to Average Interest-Bearing Liabilities 135.69 142.28

(1) Annualized based on three months ended results.

(2) Net of the allowance for credit losses and includes nonaccrual loans with a zero yield and Loans Held for Sale if applicable.

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

(4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(5) 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.

(6) Net interest margin represents annualized net interest income divided by average total interest-earning assets.

Rate/Volume Analysis .

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated.

FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21.0%.

The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).

The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).

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.

The total column represents the sum of the prior columns.

Three Months Ended June 30, 2024

Three Months Ended June 30, 2023

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands) (Unaudited)

Interest and Dividend Income:

Loans, net $ (77) $ 1,338 $ 1,261

Debt Securities:

Taxable 316 1,578 1,894

Exempt From Federal Tax (26) (27) (53)

Equity Securities — 2 2

Cash at Other Banks 618 (26) 592

Other Interest-Earning Assets 6 40 46

Total Interest-Earning Assets 837 2,905 3,742

Interest Expense:

Deposits 462 2,761 3,223

Short-Term Borrowings (1) (2) (3)

Other Borrowings 159 7 166

Total Interest-Bearing Liabilities 620 2,766 3,386

Change in Net Interest and Dividend Income $ 217 $ 139 $ 356

Provision for Credit Losses.

The provision for credit losses recorded for the three months ended June 30, 2024 was a net recovery of $36,000.

The provision for credit losses - loans was $12,000 and was primarily due to an increase in the required reserve for individually analyzed loans, partially offset by the impact of a decrease in loan balances, while the provision for credit losses - unfunded commitments was a recovery of $48,000 and was due to a decrease in loss rates.

This compared to an $432,000 provision for credit losses recorded for the three months ended June 30, 2023 which was required primarily due to loan growth coupled with a modeled slowdown in loan prepayment speeds.

Noninterest Income .

Noninterest income decreased $1.6 million, or 69.7%, to $688,000 for the three months ended June 30, 2024, compared to $2.3 million for the three months ended June 30, 2023.

This decrease resulted primarily from a $1.5 million decrease in insurance commissions as no income was recognized for the three months ended June 30, 2024 due to the December 2023 sale of Exchange Underwriters ("EU"), compared to a full quarter of income recognized for the three months ended June 30, 2023.

Noninterest Expense.

Noninterest expense decreased $517,000, or 5.4%, to $9.0 million for the three months ended June 30, 2024 compared to $9.5 million for the three months ended June 30, 2023.

Salaries and benefits decreased $806,000, or 15.4%, to $4.4 million primarily due to no expense related to EU recognized for the three months ended June 30, 2024 due to the December 2023 sale, compared to $823,000 of expense recognized for the three months ended June 30, 2023, partially offset by merit increases and revenue producing staff additions.

Intangible amortization decreased $182,000 as a portion of the Bank’s core deposit intangible was fully amortized in February 2024 and EU intangible amortization of $47,000 was realized during the three months ended June 30, 2023.

FDIC assessment expense decreased $63,000 due to a decrease in the assessment rate.

Data processing expense increased $293,000 costs associated with the implementation of a new loan origination system and financial dashboard platform.

Occupancy expenses increased $151,000 due to $192,000 of environmental remediation costs related to a construction project on one of the Bank’s office location, partially offset by $42,000 of EU occupancy expenses realized during the three months ended June 30, 2023.

Pennsylvania shares tax expense increased $102,000 due to a higher taxable base due to

the increase in equity resulting from the sale of EU.

Income Taxes.

Income tax expense was $560,000 for the three months ended June 30, 2024 compared to $699,000 for the three months ended June 30, 2023.

This change was primarily driven by $95,000 reversal of expense due to a prior period over accrual and a decrease in pre-tax income to $3.2 million for the three months ended June 30, 2024 compared to $3.5 million for the three months ended June 30, 2023.

Results of Operations for the Six Months Ended June 30, 2024 and 2023

Net income was $6.8 million for the six months ended June 30, 2024, an decrease of $68,000 compared to $6.9 million for the six months ended June 30, 2023.

Net Interest and Dividend Income.

Net interest and dividend income increased $358,000, or 1.6% to $23.1 million for the six months ended June 30, 2024 compared to $22.7 million for the six months ended June 30, 2023.

Net interest margin (GAAP) decreased to 3.27% for the six months ended June 30, 2024 compared to 3.40% for the six months ended June 30, 2023.

Net interest margin (Non-GAAP FTE) decreased 13 bps to 3.28% for the six months ended June 30, 2024 compared to 3.41% the six months ended June 30, 2023.

Interest and Dividend Income

• Interest and dividend income increased $7.5 million, or 25.4%, to $36.9 million for the six months ended June 30, 2024 compared to $29.4 million for the six months ended June 30, 2023.

◦ Interest income on loans increased $3.7 million, or 14.4%, to $29.5 million during the six months ended June 30, 2024 compared to $25.8 million for the six months ended June 30, 2023.

The average yield on loans increased 58 bps to 5.50% for the six months ended June 30, 2024 compared to 4.92% for the six months ended June 30, 2023 resulting in a $3.1 million increase in interest income on loans.

The average balance of loans increased $22.1 million to $1.08 billion for the six months ended June 30, 2024 compared to $1.06 billion for the six months ended June 30, 2023 resulting in a $635,000 increase in interest income on loans.

◦ Interest income on taxable investment securities increased $3.2 million, or 169.0%, to $5.1 million during the six months ended June 30, 2024 compared to $1.9 million or the six months ended June 30, 2023 driven by a 229 bp increase in the average yield coupled with a $39.7 million increase in average balances.

The increase in the average yield resulted in a $2.8 million increase in interest income on taxable securities and was the result of the Company implementing a balance sheet repositioning strategy of its portfolio of available-for-sale securities during the fourth quarter of 2023.

The Bank sold $69.3 million in market value of its lower yielding U.S.

The increase in volume was driven by a $57.6 million increase in the average balance of CLO securities as the Company executed a leverage strategy to purchase these assets funded with brokered certificates of deposits.

◦ Interest income on interest-earning deposits at other banks increased $519,000, to $2.0 million for the six months ended June 30, 2024 compared to $1.5 million for the six months ended June 30, 2023 as average balances increased $15.6 million and the average yield increased 37 bps.

The volume increase was due in part to $30.5 million in cash received from the December 2023 sale of EU.

Interest Expense

• Interest expense increased $7.1 million, or 105.6%, to $13.9 million for the six months ended June 30, 2024 compared to $6.7 million for the six months ended June 30, 2023.

◦ Interest expense on deposits increased $6.7 million, or 105.7%, to $13.1 million for the six months ended June 30, 2024 compared to $6.3 million for the six months ended June 30, 2023.

Rising market interest rates led to the repricing of interest-bearing demand and money market deposits and a shift in deposits from non interest-bearing and interest-bearing demand and savings deposits to money market and time deposits and resulted in a 121 bp increase in the average cost of interest-bearing deposits compared to the six months ended June 30, 2023.

This accounted for a $6.0 million increase in interest expense.

Additionally, average interest-bearing deposits increased $94.7 million, or 10.4%, accounting for a $718,000 increase in interest expense.

◦ Interest expense on borrowed funds increased $410,000, or 103.0%, to $808,000 or the six months ended June 30, 2024 compared to $398,000 for the six months ended June 30, 2023.

The average balance of borrowed funds increased $15.9 million due to $20.0 million of FHLB long-term advances added during the second quarter of 2023.

The increase in the average balance accounted for a $391,000 increase in interest expense.

Average Balances and Yields.

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs.

Average balances are derived from daily balances over the periods indicated.

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.

FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21% for the periods presented.

As such, amounts will not agree to income as reported in the consolidated financial statements.

The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

Six Months Ended June 30,

Balance Interest

Dividends Yield/

Balance Interest

Dividends Yield/

(Dollars in thousands) (Unaudited)

Interest-Earning Assets:

Loans, Net (2)

$ 1,082,172 $ 29,586 5.50 % $ 1,060,092 $ 25,840 4.92 %

Debt Securities

Taxable 250,912 5,148 4.10 211,213 1,914 1.81

Tax Exempt — — — 6,225 105 3.37

Equity Securities 2,693 54 4.01 2,693 49 3.64

Interest-Earning Deposits at Banks 80,082 2,045 5.11 64,455 1,526 4.74

Other Interest-Earning Assets 3,195 171 10.76 2,709 79 5.88

Total Interest-Earning Assets 1,419,054 37,004 5.24 1,347,387 29,513 4.42

Noninterest-Earning Assets 54,141 50,159

Total Assets $ 1,473,195 $ 1,397,546

Liabilities and Stockholders' Equity:

Interest-Bearing Liabilities:

Interest-Bearing Demand Deposits $ 329,974 3,653 2.23 % $ 344,965 2,773 1.62 %

Savings Accounts 188,194 111 0.12 233,689 90 0.08

Money Market Accounts 209,279 3,159 3.04 203,952 1,972 1.95

Time Deposits 278,538 6,133 4.43 128,659 1,511 2.37

Total Interest-Bearing Deposits 1,005,985 13,056 2.61 911,265 6,346 1.40

Short-Term Borrowings 1 — — 910 5 1.11

Other Borrowings 34,687 808 4.68 17,850 393 4.44

Total Interest-Bearing Liabilities 1,040,673 13,864 2.68 930,025 6,744 1.46

Noninterest-Bearing Demand Deposits 275,485 344,203

Total Funding and Cost of Funds 1,316,158 2.12 1,274,228 1.07

Other Liabilities 16,559 6,959

Total Liabilities 1,332,717 1,281,187

Stockholders' Equity 140,478 116,359

Total Liabilities and Stockholders' Equity $ 1,473,195 $ 1,397,546

Net Interest Income (FTE) (Non-GAAP) (3)

$ 23,140 $ 22,769

Net Interest-Earning Assets (4)

$ 378,381 $ 417,362

Net Interest Rate Spread (FTE) (Non-GAAP) (3)(5)

2.56 % 2.96 %

Net Interest Margin (GAAP) (6)

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Average Interest-Earning Assets to Average Interest-Bearing Liabilities 136.36 144.88

(1) Annualized based on three months ended results.

(1) Annualized based on six months ended results.

(2) Net of the allowance for credit losses and includes nonaccrual loans with a zero yield and Loans Held for Sale if applicable.

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The total column represents the sum of the prior columns.

Three Months Ended March 31, 2024

Three Months Ended March 31, 2023

Six Months Ended June 30, 2024

Six Months Ended June 30, 2023

Increase (Decrease) Due to

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Provision for Credit Losses.

The provision for credit losses recorded for the three months ended March 31, 2024 was a net recovery of $37,000.

This compared to an $80,000 provision for credit losses recorded for the three months ended March 31, 2023.

The provision for credit losses was a recovery of $73,000 for the six months ended June 30, 2024 due to a decrease in loan balances.

This compared to a provision for credit losses of $512,000 for the six months ended June 30, 2023 which was required primarily due to loan growth coupled with a modeled slowdown in loan prepayment speeds.

Noninterest Income.

Noninterest income decreased $894,000, or 31.8%, to $1.9 million for the three months ended March 31, 2024, compared to $2.8 million for the three months ended March 31, 2023.

This decrease resulted primarily from a $1.9 million decrease in insurance commissions as no income was recognized for the three months ended March 31, 2024 due to the December 2023 sale of EU, compared to a full quarter of income recognized for the three months ended March 31, 2023.

This decrease was partially offset by net increases in gains on bank-owned life insurance and gains on the disposal of premises and equipment of $613,000 and $263,000, respectively.

The gain on bank owned life insurance was $915,000 resulting from one death claim during the three months ended March 31, 2024 compared to $302,000 resulting from two death claims during the three months ended March 31, 2023.

The gain on the disposal of premises and equipment was $274,000 resulting from the sale of one branch office building during the three months ended March 31, 2024 compared to $11,000 for the three months ended March 31, 2023.

Noninterest income decreased $2.5 million, or 48.7%, to $2.6 million for the six months ended June 30, 2024, compared to $5.1 million for the six months ended June 30, 2023.

This decrease was primarily related to a $3.4 million, or 99.9%, decrease in insurance commissions to $3,000 for the six months ended June 30, 2024, compared to $3.4 million for the six months ended June 30, 2023 due to the sale of EU.

Additionally, service fees decreased $123,000, or 13.8%, to $769,000 for six months ended June 30, 2024, compared to $892,000 for the six months ended June 30, 2023.

Partially offsetting these decreases, net gain on bank-owned life insurance claims increased $612,000 to $915,000 for the six months ended June 30, 2024 compared to $303,000 for the six months ended June 30, 2023 and net gain on disposal of premises and equipment increased $263,000 to $274,000 for the six months ended June 30, 2024 compared to $11,000 for the six months ended June 30, 2023.

The gain on the disposal of premises and equipment six months ended June 30, 2024 resulted from the sale of one branch office location.

Additionally, the net loss on equity securities decreased $135,000 to $197,000 for the six months ended June 30, 2024 compared to $332,000 for the six months ended June 30, 2023 which was due to a decline of in the market value of equity securities, comprised mainly of bank stocks.

Noninterest Expense.

Noninterest expense decreased $600,000, or 6.6%, to $8.4 million for the three months ended March 31, 2024 compared to $9.0 million for the three months ended March 31, 2023.

Salaries and benefits decreased $503,000, or 9.9%, to $4.6 million primarily due to no expense related to EU recognized for the three months ended March 31, 2024 due to the December 2023 sale, compared to $864,000 of expense recognized for the three months ended March 31, 2023, partially offset by merit increases and revenue producing staff additions.

Data processing expense decreased $165,000 due to additional expenses realized during the three months ended March 31, 2023 related to a 2022 data processing conversion.

Other noninterest expense decreased $164,000 and intangible amortization decreased $104,000 primarily due to EU expenses of $108,000 and $47,000, respectively, realized during the three months ended March 31, 2023.

Partially offsetting these decreases, contracted services, advertising, occupancy and equipment expenses increased $134,000, $50,000, $48,000 and $46,000, respectively.

Noninterest expense decreased $1.1 million, or 6.0%, to $17.4 million for the six months ended June 30, 2024 compared to $18.5 million for the six months ended June 30, 2023.

Salaries and benefits decreased $1.3 million primarily due to no expense related to EU recognized for the six months ended June 30, 2024 due to the December 2023 sale, compared to $1.7 million of expense recognized for the six months ended June 30, 2023, partially offset by merit increases and revenue producing staff additions.

Amortization of intangible assets decreased $286,000 as a component of the Bank’s core deposit intangible was fully amortized in February 2024 and there was no expense related to EU recognized for the six months ended June 30, 2024 compared to $95,000 of expense recognized for the six months ended June 30, 2023.

Partially offsetting these decreases, occupancy expense increased $199,000 due to $192,000 of environmental remediation costs related to a construction project on one of the Bank’s office location, Pennsylvania shares tax expense increased $140,000 due to a higher taxable base due to the increase in equity resulting from the sale of EU and data processing expense increased $128,000 costs associated with the implementation of a new loan origination system and financial dashboard platform.

Income Taxes.

Income tax expense was $920,000 for the three months ended March 31, 2024 compared to $1.1 million for the three months ended March 31, 2023.

This change was primarily driven by a decrease in pre-tax income to $5.1 million for the three months ended March 31, 2024 compared to $5.3 million for the three months ended March 31, 2023.

Income tax expense decreased $347,000 to $1.5 million for the six months ended June 30, 2024 compared to $1.8 million for the six months ended June 30, 2023.

The change between the periods was driven by increase in non-taxable income due to an increase in net gain on bank-owned life insurance claims and a decrease in pre-tax income from $8.3 million for the six months ended June 30, 2024 compared to pre-tax income of $8.7 million for the six months ended June 30, 2023.

Off-Balance Sheet Arrangements.

Other than loan commitments and standby and performance letters of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Refer to Note 7 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of March 31, 2024 and December 31, 2023.

Refer to Note 7 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of June 30, 2024 and December 31, 2023.

Liquidity and Capital Management

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

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

The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and 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 Company believes that it had sufficient liquidity at March 31, 2024 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $73.7 million at March 31, 2024.

The Company believes that it had sufficient liquidity at June 30, 2024 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $142.6 million at June 30, 2024.

The levels of these assets depend on our operating, financing, lending and investing activities during any given period.

Unpledged securities, which provide an additional source of liquidity, totaled $66.5 million at March 31, 2024.

In addition, at March 31, 2024, the Company had the ability to borrow up to $482.0 million from the FHLB of Pittsburgh, of which $460.0 million is available.

The Company also has the ability to borrow up to $97.8 million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of both March 31, 2024 and December 31, 2023, currently these credit arrangements have remained unused.

At March 31, 2024, $201.5 million, or 75.9% of total time deposits mature within one year.

Unpledged securities, which provide an additional source of liquidity, totaled $97.6 million at June 30, 2024.

In addition, at June 30, 2024, the Company had the ability to borrow up to $487.6 million from the FHLB of Pittsburgh, of which $465.6 million was available.

The Company also has the ability to borrow up to $88.1 million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of both June 30, 2024 and December 31, 2023, currently these credit arrangements have remained unused.

At June 30, 2024, $316.5 million, or 91.5% of total time deposits mature within one year.

If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds.

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The Company has the ability to attract and retain deposits by adjusting the interest rates offered.

At March 31, 2024, the Bank's current deposit portfolio is 63.1% insured by the FDIC, and with additional coverage of 15.0% from the Bank's investment securities;

At June 30, 2024, the Bank's current deposit portfolio is 62.6% insured by the FDIC, and with additional coverage of 15.0% from the Bank's investment securities;

of the total deposits held at the Bank only 22.4% are uninsured.

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The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations.

At March 31, 2024, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $16.8 million.

The ability to pay future dividends or conduct stock repurchases may be limited under applicable banking regulations and regulatory policies due to expected losses for future periods and/or the inability to upstream funds from the Bank to the Company as a result of lower income or regulatory capital levels.

At June 30, 2024, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $16.5 million.

The ability to pay future dividends or conduct stock

repurchases may be limited under applicable banking regulations and regulatory policies due to expected losses for future periods and/or the inability to upstream funds from the Bank to the Company as a result of lower income or regulatory capital levels.

Capital Management.

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The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.

At March 31, 2024 and December 31, 2023, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.

At June 30, 2024 and December 31, 2023, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

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 as of the dates indicated.

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

Amount Ratio Amount Ratio

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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-Q

Item 2. Management’s Discussion and Analysis