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, 2024, 2023 and 2022. The information at December 31, 2024 and 2023, and for the years ended December 31, 2024 and 2023 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, 2022 and for the year ended December 31, 2022 is derived in part from audited financial statements that are not included in this Report. December 31, 2024 2023 2022 (Dollars in Thousands) Selected Financial Condition Data: Assets $ 1,481,564 $ 1,456,091 $ 1,408,938 Cash and Due From Banks 49,572 68,223 103,700 Securities 262,153 207,095 190,058 Loans, Net 1,082,821 1,100,689 1,037,054 Deposits 1,283,517 1,267,159 1,268,503 Short-Term Borrowings — — 8,060 Other Borrowed Funds 34,718 34,678 14,638 Stockholders’ Equity 147,378 139,834 110,155 Year Ended December 31, 2024 2023 2022 (Dollars in Thousands) Selected Operating Data: Interest and Dividend Income $ 76,131 $ 62,225 $ 47,716 Interest Expense 30,063 17,672 4,781 Net Interest and Dividend Income 46,068 44,553 42,935 Provision (Recovery) for Credit Losses - Loans 379 (284) 3,784 Provision (Recovery) for Credit Losses - Unfunded Commitments 191 (218) — Net Interest and Dividend Income After Net Provision (Recovery) for Credit Losses 45,498 45,055 39,151 Noninterest Income 5,494 24,012 9,820 Noninterest Expense 35,649 38,782 34,891 Income Before Income Tax Expense 15,343 30,285 14,080 Income Tax Expense 2,749 7,735 2,833 Net Income $ 12,594 $ 22,550 $ 11,247 27 At or For the Year Ended December 31, 2024 2023 2022 Per Common Share Data: Earnings Per Common Share - Basic $ 2.45 $ 4.41 $ 2.19 Earnings Per Common Share - Diluted 2.38 4.40 2.18 Dividends Per Common Share 1.00 1.00 0.96 Dividend Payout Ratio (1) 42.02 % 22.73 % 44.04 % Book Value Per Common Share $ 28.71 $ 27.32 $ 21.60 Common Shares Outstanding 5,132,654 5,118,713 5,100,189 At or For the Year Ended December 31, 2024 2023 2022 Selected Financial Ratios: Return on Average Assets 0.84 % 1.60 % 0.80 % Return on Average Equity 8.77 19.42 9.56 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 134.78 141.85 148.00 Average Equity to Average Assets 9.56 8.25 8.36 Net Interest Rate Spread (2) 2.47 2.73 3.07 Net Interest Rate Spread (Non-GAAP) (2)(4) 2.48 2.74 3.08 Net Interest Margin (3) 3.19 3.28 3.24 Net Interest Margin (Non-GAAP) (3)(4) 3.20 3.29 3.25 Net Charge-offs (Recoveries) to Average Loans 0.03 (0.05) 0.25 Noninterest Expense to Average Assets 2.37 2.76 2.48 Efficiency Ratio (5) 69.14 56.56 66.14 Asset Quality Ratios: Allowance for Credit Losses to Total Loans 0.90 % 0.87 % 1.22 % Allowance for Credit Losses to Nonperforming Loans 548.07 433.35 221.06 Allowance for Credit Losses to Nonaccrual Loans 548.07 433.35 320.64 Delinquent and Nonaccrual Loans to Total Loans 0.72 0.62 0.81 Nonperforming Loans to Total Loans 0.16 0.20 0.55 Nonperforming Loans to Total Assets 0.12 0.15 0.41 Nonperforming Assets to Total Assets 0.12 0.16 0.41 Capital Ratios: Common Equity Tier 1 Capital to Risk-Weighted Assets (6) 14.78 % 13.64 % 12.33 % Tier 1 Capital to Risk-Weighted Assets (6) 14.78 13.64 12.33 Total Capital to Risk-Weighted Assets (6) 15.79 14.61 13.58 Tier 1 Leverage Capital to Adjusted Total Assets (6) 9.98 10.19 8.66 Other: Number of Branch Offices 12 13 13 Number of Full-Time Equivalent Employees 160 161 197 (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 replaced 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 $3.9 million at December 31, 2024 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 $1.7 million, at December 31, 2024 and is excluded from the estimate of credit losses. 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. 30 The Company attempts to maximize observable inputs and limit the use of unobservable inputs when developing fair value measurements, Fair value measurements for assets where there exists limited or no observable market data and that are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors. 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 segments – Community Banking segment and Insurance Brokerage Services segment. The Company has assigned 100% of the goodwill to the Community Banking segment. 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 31 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. 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, 2024 and December 31, 2023. 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, 2024 and 2023 Assets. Total assets increased $25.5 million, or 1.8%, to $1.48 billion at December 31, 2024, compared to $1.46 billion at December 31, 2023. Cash and Due From Banks. Cash and due from banks decreased $18.7 million, or 27.3%, to $49.6 million at December 31, 2024, compared to $68.2 million at December 31, 2023. The change is primarily related to net funding of loans. Securities. Securities increased $55.1 million, or 26.6%, to $262.2 million at December 31, 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 $15.4 million of repayments on amortizing securities. 32 Securities Portfolio. The following table sets forth the composition of our securities portfolio at the dates indicated. 2024 2023 December 31, Amortized Cost Fair Value Amortized Cost Fair Value (Dollars in Thousands) Available-for-Sale Debt Securities: U.S. Government Agencies $ 4,996 $ 3,945 $ 4,995 $ 3,949 Obligations of States and Political Subdivisions 3,496 3,347 3,481 3,373 Mortgage-Backed Securities - Government-Sponsored Enterprises 53,628 50,363 57,377 54,532 Collateralized Mortgage Obligations - Government-Sponsored Enterprises 111,076 94,957 120,655 105,130 Collateralized Loan Obligations 98,741 98,779 29,862 29,804 Corporate Debt 9,479 8,123 9,484 7,719 Total Available-for-Sale Debt Securities $ 281,416 $ 259,514 $ 225,854 $ 204,507 Equity Securities: Mutual Funds 879 888 Other 1,760 1,700 Total Equity Securities 2,639 2,588 Total Securities $ 262,153 $ 207,095 Securities Portfolio Maturities and Yields. The composition and maturities of the debt securities portfolio at December 31, 2024, 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 $ — — % $ — — % $ 3,945 1.26 % $ — — % $ 3,945 1.26 % Obligations of States and Political Subdivisions — — 576 3.58 2,771 3.94 — — 3,347 3.88 Mortgage Backed Securities - Government-Sponsored Enterprises — — 122 1.99 9,668 5.10 40,573 3.64 50,363 3.90 Collateralized Mortgage Obligations - Government-Sponsored Enterprises — — — — — — 94,957 2.57 94,957 2.57 Collateralized Loan Obligations — — — — 30,934 6.49 67,845 6.41 98,779 6.44 Corporate Debt Securities — — — — 3,723 3.31 4,400 7.05 8,123 5.27 Total Debt Securities $ — — % $ 698 3.30 % $ 51,041 5.33 % $ 207,775 4.02 % $ 259,514 4.26 % 33 Loans. Total loans decreased $17.8 million, or 1.6%, to $1.09 billion at December 31, 2024 compared to $1.11 billion at December 31, 2023. The change was driven by decreases in consumer loans and residential mortgage loans of $41.1 million and $9.8 million, respectively, partially offset by increases in commercial real estate loans, construction real estate loans, other loans and commercial and industrial loans of $18.4 million, $11.6 million, $2.5 million and $769,000, 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. Excluding the $41.5 million decrease in indirect automobile loans, total loans increased $23.7 million, or 1.1%. Average loans, net for the year ended December 31, 2024 decreased $3.3 million compared to the year ended December 31, 2023. Loan Portfolio Composition. The following table sets forth the composition of the Company’s loan portfolio by type of loan at the dates indicated. 2024 2023 December 31, Amount Percent Amount Percent (Dollars in Thousands) Real Estate: Residential $ 337,990 30.9 % $ 347,808 31.3 % Commercial 485,513 44.4 467,154 42.1 Construction 54,705 5.0 43,116 3.9 Commercial and Industrial 112,047 10.3 111,278 10.0 Consumer 70,508 6.5 111,643 10.1 Other 31,863 2.9 29,397 2.6 Total Loans 1,092,626 100.0 % 1,110,396 100.0 % Allowance for Credit Losses (9,805) (9,707) Loans, Net $ 1,082,821 $ 1,100,689 The Company's loan portfolio is a mix of consumer and commercial credits. Overall credit exposure and portfolio compensation is managed via a credit concentration policy. The policy designates specific loan types, collateral types and loan structures to be formally tracked and assigned maximum exposure limits as a percentage of capital. Commercial lending by asset class, specific limits for Commercial Real Estate ("CRE") project types, loans secured by residential real estate, large dollar exposures and designated high risk loan categories represent examples of specifically tracked components of our concentration management process. There are no identified concentrations that exceed the assigned exposure limits. Our concentration management policy is approved by the Company's Board of Directors and is used to ensure a high-quality, well diversified portfolio that is consistent with our overall objective of maintaining an acceptable level of risk. The Company's CRE portfolio totaled $485.5 million at December 31, 2024, an increase of $18.4 million, or 3.9%, compared to December 31, 2023. CRE loans are concentrated in the Pittsburgh metropolitan area. 34 The tables below provide further detail of the composition of the CRE portfolio as of December 31, 2024: (Dollars in thousands) CRE Nonowner Occupied Loans Outstanding Balance Percent Average Loan Size Average LTV (1) Retail Space $ 91,602 24.51 % $ 1,272 71.83 % Multifamily 89,142 23.86 % 768 78.27 % Warehouse Space 60,460 16.18 % 1,440 60.37 % Office Space 48,867 13.08 % 888 67.80 % Manufacturing 22,371 5.99 % 1,721 60.51 % Medical Facilities 19,167 5.13 % 1,065 63.66 % Senior Housing 13,877 3.71 % 1,388 59.85 % Hotels 3,357 0.90 % 3,357 43.00 % Oil & Gas 3,296 0.88 % 1,648 51.66 % Other 21,533 5.76 % 718 61.31 % Total Nonowner Occupied CRE $ 373,672 100.00 % $ 1,041 68.40 % (1) Based on collateral value at the time of loan origination. (Dollars in Thousands) CRE Owner Occupied Loans Outstanding Balance Percent Average Loan Size Average LTV (1) Retail Space $ 31,326 28.01 % $ 681 77.70 % Warehouse Space 19,680 17.60 % 562 53.68 % Medical Facilities 9,064 8.11 % 697 76.69 % Office Space 8,258 7.38 % 318 86.86 % Hotels 5,943 5.31 % 1,981 27.31 % Manufacturing 3,404 3.04 % 309 57.44 % Oil & Gas 1,962 1.75 % 392 71.50 % Other 32,204 28.80 % 374 54.91 % Total Owner Occupied CRE $ 111,841 100.00 % $ 486 64.26 % (1) Based on collateral value at the time of loan origination. 35 Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2024. 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 $ 18,425 7.30 % $ 11,926 6.10 % $ 11,772 6.84 % $ 24,554 7.34 % After One Year Through Five Years 10,331 5.21 138,344 6.23 21,020 7.11 50,942 6.28 After Five Years Through 15 Years 117,662 4.99 331,344 5.56 21,127 7.04 36,548 5.66 After 15 Years 191,572 4.06 3,899 3.86 786 7.00 3 8.00 Total $ 337,990 4.59 % $ 485,513 5.75 % $ 54,705 7.02 % $ 112,047 6.31 % Consumer Other Total Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in Thousands) One Year or Less $ 6,781 7.93 % $ 633 6.90 % $ 74,091 7.10 % After One Year Through Five Years 59,754 5.03 606 5.14 280,997 6.02 After Five Years Through 15 Years 2,778 7.68 24,101 3.93 533,560 5.44 After 15 Years 1,195 9.05 6,523 3.31 203,978 4.04 Total $ 70,508 5.43 % $ 31,863 3.88 % $ 1,092,626 5.44 % The following table sets forth at December 31, 2024, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2025. Due After December 31, 2025 Fixed Adjustable Total (Dollars in Thousands) Real Estate: Residential $ 262,607 $ 56,958 $ 319,565 Commercial 265,003 208,584 473,587 Construction 29,356 13,577 42,933 Commercial and Industrial 78,041 9,452 87,493 Consumer 63,627 100 63,727 Other 28,832 2,398 31,230 Total Loans $ 727,466 $ 291,069 $ 1,018,535 Liabilities. Total liabilities increased $17.9 million, or 1.4%, to $1.33 billion at December 31, 2024 compared to $1.32 billion at December 31, 2023. Deposits. Total deposits increased $16.4 million, or 1.3%, to $1.28 billion as of December 31, 2024 compared to $1.27 billion at December 31, 2023. Time deposits increased $66.2 million and money market deposits increased $30.4 million, while interest-bearing demand deposits decreased $46.2 million, savings deposits decreased $24.2 million and non interest-bearing demand deposits decreased $9.9 million. The current interest rate environment has resulted in a shift in deposit products to 36 higher priced money market and time deposits. Brokered time deposits totaled $39.0 million as of December 31, 2024, compared to $29.0 million at December 31, 2023, all of which mature within three months and were utilized to fund the purchase of floating rate CLO securities. FDIC insured deposits totaled approximately 62.5% of total deposits while an additional 15.9% 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. 2024 2023 Year Ended December 31, Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate (Dollars in Thousands) Noninterest-Bearing Demand Accounts $ 270,528 20.7 % — % $ 326,408 26.0 % — % Interest-Bearing Demand Accounts 326,073 24.9 2.27 354,060 28.2 1.90 Money Market Accounts 215,864 16.5 3.11 199,962 15.9 2.28 Savings Accounts 180,647 13.8 0.11 220,146 17.5 0.09 Time Deposits 314,510 24.1 4.49 156,310 12.4 3.16 Total Deposits $ 1,307,622 100.0 % 2.17 % $ 1,256,886 100.0 % 1.31 % The following table sets forth time deposits classified by interest rate as of the dates indicated. December 31, 2024 2023 (Dollars in Thousands) Less than 0.25% $ 1,493 $ 8,009 0.25% to 0.49% 3,707 5,512 0.50% to 0.99% 2,489 5,139 1.00% to 1.49% 2,932 4,316 1.50% to 1.99% 6,001 3,626 2.00% to 2.49% 9,753 6,220 2.49% to 2.99% 1,056 146 3.00% to 3.99% 16,475 604 4.00% to 4.99% 224,230 145,475 5.00% or Greater 28,733 51,594 Total Time Deposits $ 296,869 $ 230,641 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, 2024 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% $ 1,058 $ 392 $ 43 $ — $ — $ — $ 1,493 0.5 % 0.25% to 0.49% 425 1,617 1,665 — — — 3,707 1.2 0.50% to 0.99% 1,978 13 75 185 61 177 2,489 0.8 1.00% to 1.49% 1,694 747 217 — — 274 2,932 1.0 1.50% to 1.99% 3,984 1,052 849 116 — — 6,001 2.0 2.00% to 2.49% 2,436 2,759 448 2,309 1,638 163 9,753 3.3 2.49% to 2.99% — 1,018 38 — — — 1,056 0.4 3.00% to 3.99% 14,083 1,606 786 — — — 16,475 5.6 4.00% to 4.99% 217,429 6,801 — — — — 224,230 75.5 5.00% or Greater 28,729 4 — — — — 28,733 9.7 Total $ 271,816 $ 16,009 $ 4,121 $ 2,610 $ 1,699 $ 614 $ 296,869 100.0 % As of December 31, 2024 and 2023, 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 $272.0 million and $314.7 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, 2024, an estimated $40.8 million are uninsured time deposits and the following table sets forth their maturity. December 31, 2024 (Dollars in Thousands) Three Months or Less $ 13,190 Over Three Months to Six Months 16,932 Over Six Months to One Year 8,601 Over One Year 2,047 Total $ 40,770 Borrowed Funds • Short-term borrowings. There were no short-term borrowings at December 31, 2024 or December 31, 2023. • Other borrowed funds. Other borrowed funds increased $40,000 to $34.72 million at December 31, 2024, compared to $34.68 million at December 31, 2023. Borrowings for each period consisted of $20.0 million of FHLB advances entered into during 2023 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 and $14.7 million related to the Company's unsecured subordinated debt obligation. Stockholders’ Equity. Stockholders’ equity increased $7.5 million, or 5.4%, to $147.4 million at December 31, 2024, compared to $139.8 million at December 31, 2023. • Key factors positively impacting stockholders’ equity included $12.6 million of net income for the current period, partially offset by the payment of $5.1 million in dividends since December 31, 2023 and a $488,000 change in accumulated other comprehensive loss. • Book value per share was $28.71 at December 31, 2024 compared to $27.32 at December 31, 2023, an increase of $1.39. Tangible book value per share (Non-GAAP) increased $1.59, or 6.3%, to $26.82 at December 31, 2024 compared to $25.23 at December 31, 2023. Refer to “Explanation of Use of Non-GAAP Financial Measures” at the end of this section. 38 Comparison of Operating Results for the Years Ended December 31, 2024 and 2023 Overview. 2024 and 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 2024, the Company recognized an additional gain of $138,000 following the final settlement of all liabilities and an earn-out payment of $708,000. • 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. • Provision for credit losses totaled $570,000 for 2024 and was primarily due to growth in construction and land development loans, while the Bank recorded a recovery for credit losses of $502,000 for 2023 as the Bank recovered $750,000 related to the prior year $2.7 million charged-off commercial and industrial loan. Net Interest Income. Net interest income increased $1.5 million, or 3.4%, to $46.1 million for the year ended December 31, 2024 compared to $44.6 million for the year ended December 31, 2023. Net interest margin (Non-GAAP) decreased 9 bps to 3.20% for the year ended December 31, 2024 compared to 3.29% the year ended December 31, 2023. Net interest margin (GAAP) decreased to 3.19% for the year ended December 31, 2024 compared to 3.28% for the year ended December 31, 2023. Interest and dividend income increased $13.9 million, or 22.3%, to $76.1 million for the year ended December 31, 2024 compared to $62.2 million for the year ended December 31, 2023. This increase was largely due to a 69 basis point increase in the yield on interest-earning assets to 5.28% for the year ended December 31, 2024 compared to 4.59% for the year ended December 31, 2023, contributing an additional $11.0 million to interest income. • Interest income on loans increased $4.7 million, or 8.7%, to $59.4 million for the year ended December 31, 2024 compared to $54.7 million for the year ended December 31, 2023. Average loans decreased $3.3 million while the loan yield increased 46 bps to 5.55% for the year ended December 31, 2024 compared to 5.09% for the year ended December 31, 2023. • Interest income on taxable investment securities increased $7.5 million, or 187.1%, to $11.5 million for the year ended December 31, 2024 compared to $4.0 million for the year ended December 31, 2023. Average investment securities increased $60.1 million and there was a 236 bps increase in average yield. • Interest from other interest-earning assets, which primarily consists of interest-earning cash, increased $1.8 million, or 54.9%, to $5.1 million for the year ended December 31, 2024 compared to $3.3 million for the year ended December 31, 2023. Average interest bearing deposits at other banks increased $34.8 million, primarily related to changes in deposits and loans, and there was a 1 bps increase in average yield due to an increase in Fed interest rates. Interest expense increased $12.4 million, or 70.1%, to $30.1 million for the year ended December 31, 2024 compared to $17.7 million for the year ended December 31, 2023. This increase was largely due to an 86 basis point increase in the cost of interest-bearing liabilities to 2.24% for the year ended December 31, 2024 compared to 1.38% for the year ended December 31, 2023, adding an additional $9.9 million to interest expense. • Interest expense on deposits increased $12.0 million, or 73.1%, to $28.4 million for the year ended December 31, 2024 compared to $16.4 million for the year ended December 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 and interest-bearing demand and savings deposits to money market and time deposits resulted in a 97 bps increase in average cost compared to the year ended December 31, 2023., adding $9.9 million to interest expense. Additionally, average interest-bearing deposits increased $106.6 million, adding $2.1 million to interest expense. • Interest expense on other borrowed funds increased $415,000, or 34.4%, to $1.6 million for the year ended December 31, 2024 compared to $1.2 million for the year ended December 31, 2023 primarily due to an $8.4 million increase in average balances due to $20.0 million of FHLB long-term advances added during the second quarter of 2023. Provision (Recovery) for Credit Losses. The provision for credit losses was $570,000 for the year ended December 31, 2024, compared to a $502,000 recovery for the year ended December 31, 2023. The provision for loan losses in 2024 was primarily due to growth in construction and land development loans. Net charge-offs for the year ended December 31, 2024 were $281,000 while 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. 39 Noninterest Income . The breakdown of noninterest income for the year ended December 31, 2024 compared to year ended December 31, 2023 is as follows: Year Ended December 31, 2024 2023 Dollar Change Percent Change (Dollars in Thousands) Service Fees $ 1,680 $ 1,819 $ (139) (7.6) % Insurance Commissions 6 5,839 (5,833) (99.9) % Other Commissions 251 521 (270) (51.8) % Net Gain on Sales of Loans 52 — 52 — % Net Gain (Loss) on Securities 51 (10,199) 10,250 100.5 % Net Gain on Purchased Tax Credits 49 29 20 69.0 % Gain on Sale of Subsidiary 138 24,578 (24,440) (99.4) % Net Gain on Disposal of Premises and Equipment 274 11 263 2390.9 % Income from Bank-Owned Life Insurance 594 576 18 3.1 % Net Gain from Bank-Owned Life Insurance Claims 915 303 612 202.0 % Other Income 1,484 535 949 177.4 % Total Noninterest Income $ 5,494 $ 24,012 $ (18,518) (77.1) % Noninterest income decreased $18.5 million, or 77.1%, to $5.5 million for the year ended December 31, 2024, compared to $24.0 million for the year ended December 31, 2023. • 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. During 2024, the Company recognized an additional gain of $138,000 following the final settlement of all liabilities. • Net gain on securities was $51,000 for the year ended December 31, 2024, compared to a loss of $10.2 million for the year ended December 31, 2023. 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 gain in value of $51,000 for the current period compared to a loss of $110,000 in value in the prior period primarily from a change in market value of these securities. • Insurance commissions decreased $5.8 million due to the sale of EU during the year ended December 31, 2023. • Other income for the year ended December 31, 2024 includes a $708,000 earn-out payment related to EU. • The Company recorded a $274,000 net gain on disposal of fixed assets in the current year related to the sale of one branch location, compared to a $11,000 gain in the prior year. 40 Noninterest Expense. The breakdown of noninterest expense for the year ended December 31, 2024 compared to the year ended December 31, 2023 is as follows: Year Ended December 31, 2024 2023 Dollar Change Percent Change (Dollars in Thousands) Salaries and Employee Benefits $ 18,821 $ 21,903 $ (3,082) (14.1) % Occupancy 3,096 2,998 98 3.3 % Equipment 1,155 1,064 91 8.6 % Data Processing 3,308 3,014 294 9.8 % Federal Deposit Insurance Corporation Assessment 639 754 (115) (15.3) % Pennsylvania Shares Tax 1,161 889 272 30.6 % Contracted Services 1,623 1,166 457 39.2 % Legal and Professional Fees 985 1,182 (197) (16.7) % Advertising 484 426 58 13.6 % Other Real Estate Owned (Income) 50 (115) 165 (143.5) % Amortization of Intangible Assets 958 1,766 (808) (45.8) % Other 3,369 3,735 (366) (9.8) % Total Noninterest Expense $ 35,649 $ 38,782 $ (3,133) (8.1) % Noninterest expense decreased $3.1 million, or 8.1%, to $35.6 million for the year ended December 31, 2024 compared to $38.8 million for the year ended December 31, 2023. • Salaries and employee benefits decreased $3.1 million to $18.8 million for the year ended December 31, 2024 compared to $21.9 million for the year ended December 31, 2023. The decrease was primarily due to no expense related to EU for the year ended December 31, 2024, compared to $3.1 million for year ended December 31, 2023. • Amortization of intangible assets decreased $808,000 to $958,000 for the year ended December 31, 2024 compared to $1.8 million for the year ended December 31, 2023 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 year ended December 31, 2024 compared to $174,000 of expense recognized for the year ended December 31, 2023. • Other noninterest expense decreased $366,000 to $3.4 million for the year ended December 31, 2024 compared to $3.7 million for the year ended December 31, 2023. The decrease was primarily due to no expense related to EU for the year ended December 31, 2024, compared to $422,000 for year ended December 31, 2023 • Contracted services increased $457,000 to $1.6 million for the year ended December 31, 2024 compared to $1.2 million for the year ended December 31, 2023 due primarily to costs associated with cybersecurity support, website administration, equity compensation management and product consulting. • Data processing expense increased $294,000 to $3.3 million for the year ended December 31, 2024 compared to $3.0 million for the year ended December 31, 2023. The increase was primarily related to costs related to the implementation of a new loan origination system and a financial dashboard program. • Pennsylvania shares tax expense increased $272,000 to $1.2 million for the year ended December 31, 2024 compared to $889,000 for the year ended December 31, 2023 due to an increase in the Bank's taxable base resulting from the increase in equity from the sale of EU. Income Tax Expense. Income tax expense decreased $5.0 million to $2.7 million for the year ended December 31, 2024, compared to $7.7 million for the year ended December 31, 2023 and is primarily attributed to the decrease 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. 2024 2023 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) $ 1,073,601 $ 59,544 5.55 % $ 1,076,928 $ 54,763 5.09 % Securities Taxable 268,604 11,533 4.29 208,472 4,017 1.93 Tax Exempt — — — 5,821 199 3.42 Equity Securities 2,693 110 4.08 2,693 106 3.94 Interest-Earning Deposits at Other Banks 96,474 4,831 5.01 61,638 3,084 5.00 Other Interest-Earning Assets 3,142 274 8.72 3,027 211 6.97 Total Interest-Earning Assets 1,444,514 76,292 5.28 1,358,579 62,380 4.59 Noninterest-Earning Assets 57,986 48,448 Total Assets $ 1,502,500 $ 1,407,027 Liabilities and Stockholders' equity: Interest-Bearing Liabilities: Interest-Bearing Demand Deposits $ 326,073 $ 7,414 2.27 % $ 354,060 $ 6,741 1.90 % Money Market 215,864 6,706 3.11 199,962 4,554 2.28 Savings 180,647 202 0.11 220,146 202 0.09 Time Deposits 314,510 14,119 4.49 156,310 4,936 3.16 Total Interest-Bearing Deposits 1,037,094 28,441 2.74 930,478 16,433 1.77 Short-term Borrowings — — — 931 32 3.44 Other Borrowed Funds 34,697 1,622 4.67 26,328 1,207 4.58 Total Interest-Bearing Liabilities 1,071,791 30,063 2.80 957,737 17,672 1.85 Noninterest-Bearing Demand Deposits 270,528 326,408 Total Funding and Cost of Funds 1,342,319 2.24 1,284,145 1.38 Other Liabilities 16,559 6,764 Total Liabilities 1,358,878 1,290,909 Stockholders' Equity 143,622 116,118 Total Liabilities and Stockholders' Equity $ 1,502,500 $ 1,407,027 Net Interest Income (Non-GAAP) (2) $ 46,229 $ 44,708 Net Interest Rate Spread (Non-GAAP) (2)(3) 2.48 2.74 Net Interest-Earning Assets (4) $ 372,723 $ 400,842 Net Interest Margin (Non-GAAP) (2)(5) 3.20 3.29 Return on Average Assets 0.84 1.60 Return on Average Equity 8.77 19.42 Average Equity to Average Assets 9.56 8.25 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 134.78 141.85 (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 2.47% and 2.73% for the year ended December 31, 2024 and 2023, 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 3.19% and 3.28% for the year ended December 31, 2024 and 2023, 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, 2024 Compared To Year Ended December 31, 2023 Increase (Decrease) Due to Volume Rate Total (Dollars in Thousands) Interest and Dividend Income: Loans, net $ (158) $ 4,939 $ 4,781 Securities: Taxable 1,448 6,068 7,516 Tax-Exempt (100) (99) (199) Equity Securities — 4 4 Interest-Earning Deposits at Other Banks 1,741 6 1,747 Other Interest-Earning Assets 8 55 63 Total Interest-Earning Assets 2,939 10,973 13,912 Interest Expense: Deposits 2,127 9,881 12,008 Short-Term Borrowings (16) (16) (32) Other Borrowed Funds 391 24 415 Total Interest-Bearing Liabilities 2,502 9,889 12,391 Change in Net Interest Income $ 437 $ 1,084 $ 1,521 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 the dates indicated. December 31, 2024 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 $ 1,388 $ — $ — $ 1,388 Commercial 188 — — 188 Consumer 213 — — 213 Total Nonaccrual Loans $ 1,789 $ — $ — 1,789 Other Real Estate Owned: Residential — Total Other Real Estate Owned — Total Nonperforming Assets $ 1,789 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 Total Other Real Estate Owned 162 Total Nonperforming Assets $ 2,402 At December 31, 2024 and December 31, 2023, we had no loans 90 days or more past due that were still accruing interest. At December 31, 2024 and December 31, 2023, 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 $613,000 to $1.8 million at December 31, 2024, compared to $2.4 million at December 31, 2023. Nonperforming loans decreased $451,000 to $1.8 million at December 31, 2024 compared to $2.2 million at December 31, 2023. The respective decreases are primarily attributable to the sale of a $162,000 other real estate owned residential property in the current year, the payoff of a commercial non-owner occupied purchased participation loan for $358,000 and a $316,000 commercial and industrial loan that was placed back on accrual status based on consistent timely loan payments. This was partially offset by a $175,000 commercial non-owner occupied loan moved to nonaccrual status during the year and increases of $72,000 in nonaccrual personal consumer loans and $52,000 in nonaccrual indirect loans in the current year. 44 The following table presents the components of the ratio of nonaccrual loans to total loans at the dates indicated. 2024 2023 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 $ 1,388 $ 337,990 0.41 % $ 1,476 $ 347,808 0.42 % Commercial 188 485,513 0.04 360 467,154 0.08 Construction — 54,705 — — 43,116 — Commercial and Industrial — 112,047 — 316 111,278 0.28 Consumer 213 70,508 0.30 88 111,643 0.08 Other — 31,863 — — 29,397 — Total $ 1,789 $ 1,092,626 0.16 % $ 2,240 $ 1,110,396 0.20 % 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 nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first five categories are not considered criticized and are aggregated as one to four “pass” and five "pass-watch" rated. The Company moved to the nine-point internal risk rating system in the current year, which aligned the Company with risk rating systems that are common to community banking peers. 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, 2024 and 2023. December 31, 2024 2023 (Dollars in Thousands) Special Mention $ 33,543 $ 54,978 Substandard 6,854 14,457 Doubtful — — Loss — — Total $ 40,397 $ 69,435 The total amount of special mention and classified loans decreased $29.0 million, or 41.8%, to $40.4 million at December 31, 2024, compared to $69.4 million at December 31, 2023. The decrease of $21.4 million in the special mention loan category is primarily due to loan risk rating upgrades due to the receipt of borrowers' current financial information. The 45 decrease of $7.6 million in the substandard category is primarily due to a substantial principal reduction in loans for one commercial borrower previously secured by a pledge of revenues and commercial real estate with the remaining principal balance being refinanced into loans fully secured with commercial real estate. 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. 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, 2024 2023 (Dollars in Thousands) Balance at Beginning of Year $ 9,707 $ 12,819 Impact of ASC 326 - Loans — (3,385) Provision (Recovery) for Loan Losses 379 (284) Charge-offs: Real Estate: Residential (28) (219) Commercial and Industrial (12) — Consumer (485) (370) Total Charge-offs (652) (589) Recoveries: Real estate: Residential 14 43 Commercial — 32 Commercial and Industrial 175 876 Consumer 182 195 Total Recoveries 371 1,146 Net (Charge-offs) Recoveries (281) 557 Balance at End of Year $ 9,805 $ 9,707 Allowance for Credit Losses to Total Loans 0.90 % 0.87 % Allowance for Credit Losses to Nonaccrual Loans 548.07 433.35 Allowance for Credit Losses to Nonperforming Loans 548.07 433.35 Net (Recoveries) Charge-offs to Average Loans 0.03 (0.05) The allowance for credit losses increased $98,000, or 1.0%, to $9.8 million at December 31, 2024, compared to $9.7 million at December 31, 2023. Allowance for credit losses to total loans increased 3 basis points to 0.90% at December 31, 2024 compared to 0.87% at December 31, 2023. The increase in the allowance for credit losses was primarily due to specific reserves for individually analyzed loans of $331,000 for a commercial and industrial loan relationship and two CRE non-owner occupied loans of $68,000 at December 31, 2024. This was mainly offset by a recovery in the allowance for credit losses of $301,000 due to a decrease in historical loss rates, partially offset by an increase in qualitative factors related to growth in the 46 loan portfolio. This compared to $284,000 in recovery for credit losses for the year ended December 31, 2023 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 548.07% at December 31, 2024, compared to 433.35% at December 31, 2023. Nonaccrual loans decreased $451,000 to $1.8 million at December 31, 2024 compared to $2.2 million at December 31, 2023. Nonaccrual commercial real estate loans decreased $172,000 to $188,000 at December 31, 2024 compared to $360,000 at December 31, 2023 primarily related to the payoff of a commercial non-owner occupied purchased participation loan for $358,000 and a $316,000 commercial and industrial loan that was placed back on accrual status based on consistent timely loan payments. This was partially offset by a $175,000 commercial non-owner occupied loan moved to nonaccrual status during the year and increases of $72,000 in nonaccrual personal consumer loans and $52,000 in nonaccrual indirect loans in the current year. Net charge-offs for the year ended December 31, 2024 were $281,000 primarily due to charge-offs of $357,000 for consumer indirect, $127,000 for CRE non-owner occupied and $114,000 for consumer revolving lines of credit. This was partially offset by recoveries of $175,000 for commercial and industrial and $133,000 for consumer indirect loans. 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. The following table presents the ratio of net charge-offs (recoveries) as a percent of average loans for the periods indicated. Year Ended December 31, 2024 2023 Real Estate: Residential — % 0.05 % Commercial 0.03 (0.01) Construction — — Commercial and Industrial (0.15) (0.89) Consumer 0.35 0.14 Other — — Total Loans 0.03 % (0.05) % 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. 2024 2023 December 31, Amount Percent of Total Loans Amount Percent of Total Loans (Dollars in Thousands) Real Estate: Residential $ 2,926 30.9 % $ 3,129 31.3 % Commercial 3,103 44.4 2,630 42.1 Construction 1,264 5.0 639 3.9 Commercial and Industrial 1,584 10.3 1,693 10.0 Consumer 687 6.5 1,367 10.1 Other 241 2.9 249 2.6 Total Allocated Allowance 9,805 100.0 9,707 100.0 Unallocated — — — — Total Allowance for Credit Losses $ 9,805 100.0 % $ 9,707 100.0 % 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. 47 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, 2024 2023 (Dollars in Thousands) Interest Income per Consolidated Statements of Income (GAAP) $ 76,131 $ 62,225 Adjustment to FTE Basis 161 155 Interest Income (Non-GAAP) 76,292 62,380 Interest Expense per Consolidated Statements of Income (GAAP) 30,063 17,672 Net Interest Income (Non-GAAP) $ 46,229 $ 44,708 Net Interest Income (GAAP) $ 46,068 $ 44,553 Divided by : Average Interest-Earning Assets $ 1,444,514 $ 1,358,579 Net Interest Margin (GAAP) 3.19 % 3.28 % Adjustment to FTE Basis 0.01 0.01 Net Interest Margin (Non-GAAP) 3.20 % 3.29 % Net Interest Rate Spread (GAAP) 2.47 % 2.73 % Adjustment to FTE Basis 0.01 0.01 Net Interest Rate Spread (Non-GAAP) 2.48 % 2.74 % 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, 2024 2023 (Dollars in Thousands, Except Share and Per Share Data) Stockholders' Equity (GAAP) (Numerator) $ 147,378 $ 139,834 Goodwill and Other Intangible Assets, Net (9,732) (10,690) Tangible Common Equity or Tangible Book Value (Non-GAAP) (Numerator) $ 137,646 $ 129,144 Common Shares Outstanding (Denominator) 5,132,654 5,118,713 Book Value per Common Share (GAAP) $ 28.71 $ 27.32 Tangible Book Value per Common Share (Non-GAAP) $ 26.82 $ 25.23 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, 2024, 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 $49.6 million at December 31, 2024. Unpledged securities, which provide an additional source of liquidity, totaled $86.0 million. In addition, the Bank maintains a credit 48 arrangement with the FHLB with a maximum borrowing limit of approximately $489.5 million and available borrowing capacity of $467.6 million as of December 31, 2024. At December 31, 2024, there were no standby letters of credit 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 $695.5 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 $84.0 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $108.3 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, 2024. At December 31, 2024, the Bank had funding commitments totaling $167.6 million, consisting primarily of commitments to originate loans, unused lines of credit and letters of credit. At December 31, 2024, certificates of deposit due within one year of that date totaled $271.8 million, or 91.6% of total certificates of deposit. While liquidity levels at December 31, 2024 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, 2024 the Bank had net loan originations of $17.6 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, 2024, the Company (on an unconsolidated basis) had liquid assets of $16.2 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, 2024. 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 $ 296,869 $ 271,816 $ 20,130 $ 4,309 $ 614 Other Borrowed Funds 34,718 20,000 — — 14,718 Operating Lease Obligations 3,761 481 809 664 1,807 Total $ 335,348 $ 292,297 $ 20,939 $ 4,973 $ 17,139 Capital Resources At December 31, 2024 and 2023, respectively, the Bank was considered "well capitalized" under the regulatory framework for prompt corrective action. 49 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. 2024 2023 December 31, Amount Ratio Amount Ratio (Dollars in Thousands) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Actual $ 152,238 14.78 % $ 143,654 13.64 % For Capital Adequacy Purposes 46,366 4.50 47,385 4.50 To Be Well Capitalized 66,973 6.50 68,445 6.50 Tier I Capital (to Risk-Weighted Assets) Actual 152,238 14.78 143,654 13.64 For Capital Adequacy Purposes 61,821 6.00 63,180 6.00 To Be Well Capitalized 82,428 8.00 84,240 8.00 Total Capital (to Risk-Weighted Assets) Actual 162,733 15.79 153,861 14.61 For Capital Adequacy Purposes 82,428 8.00 84,240 8.00 To Be Well Capitalized 103,035 10.00 105,300 10.00 Tier I Leverage Capital (to Adjusted Total Assets) Actual 152,238 9.98 143,654 10.19 For Capital Adequacy Purposes 60,996 4.00 56,385 4.00 To Be Well Capitalized 76,245 5.00 70,481 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.