# PEOPLES FINANCIAL SERVICES CORP. (PFIS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PEOPLES FINANCIAL SERVICES CORP.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1056943/000155837024003373/pfis-20231231x10k.htm
Accession: 0001558370-24-003373
Filing date: 2024-03-15
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PFIS/
All MD&A years: /company/PFIS/mda/
Previous year: /company/PFIS/mda/fy2022/ (FY 2022)
Next year: /company/PFIS/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis 2023 versus 2022

Management’s Discussion and Analysis appearing on the following pages should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis 2022 versus 2021 contained in this Annual Report on Form 10-K.

Critical Accounting Estimates:

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during those reporting periods.

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the consolidated financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made considering facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. Significant estimates that are particularly susceptible to material change within the near term relate to the determination of ACL, and the impairment of goodwill. Actual amounts could differ from those estimates.

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 methodology for determining the ACL is considered a critical accounting estimate 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.

We monitor the adequacy of the allowance quarterly and adjust the allowance as necessary through normal operations. The allowance is established through a provision for credit losses that is charged against income. Management cannot ensure that charge-offs in future periods will not exceed the ACL or that additional increases in the ACL will not be required, resulting in an adverse impact on operating results.

The ACL decreased $5.6 million to $21.9 million at December 31, 2023, from $27.5 million at the end of 2022. In addition to the transition adjustment of $3.3 million, a net provision for credit losses of $0.6 million was recorded during the year ended December 31, 2023. The provision for credit losses of $0.6 million included the $1.1 million adjustment noted above, and a provision of $1.6 million was recorded due to the impact of net charge-offs during the year, various factors such as updated economic assumptions as well as changes in qualitative adjustments, portfolio composition and improved asset quality. At December 31, 2023, the pooled component of the ACL consisted of $5.2 million in quantitative and $16.6 million in qualitative components as compared to $1.3 million and $26.1 million, respectively at December 31, 2022.

 Goodwill is evaluated at least annually for impairment or more frequently if conditions indicate potential impairment exist. Any impairment losses arising from such testing are reported in the income statement in the current period as a separate line item within operations. Goodwill totaled $63.4 million at December 31, 2023. At December 31, 2023, we completed a qualitative goodwill impairment test to determine if it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the Company is less than its carrying value, including goodwill, as described by the GAAP methodology. Based on this analysis, we concluded it is more likely than not that the fair value of the Company, as of December 31, 2023, is higher than its carrying value, and, therefore, goodwill is not considered impaired and no further testing is required. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as global

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pandemics or natural disasters) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

For a further discussion of our critical accounting estimates, refer to Note 1 entitled, “Summary of significant accounting policies,” in the Notes to Consolidated Financial Statements to this Annual Report. Note 1 lists the significant accounting policies used by us in the development and presentation of the consolidated financial statements. This discussion and analysis, the Notes to Consolidated Financial Statements and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for the understanding and evaluation of our financial position, results of operations and cash flows.

Operating Environment:

Most of 2023 has been centered in uncertainty around the lingering possibility of a recession together with existing inflationary conditions and the effects of global conflicts. In addition, the banking industry experienced significant volatility due to high-profile bank failures in the spring of 2023 which resulted in concerns related to liquidity, deposit outflows and unrealized losses on investment securities. A tightening of credit standards and higher deposit rates followed. Entering 2024, the economy appears to be expanding at a solid pace with reduced inflation and strong employment data. As of February 8, 2024, factors supporting this include:

​

[[GREPCENT_TABLE]]
[["","\u25cf","Gross domestic product (\u201cGDP\u201d) \u2013 GDP rose at a 3.3 percent annualized pace in the fourth quarter after increasing 4.9 percent in the third quarter showing a willingness of Americans to spend despite high interest rates and price levels. Real GDP for the year increased 2.5% compared with an increase of 1.9% in 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Core Consumer Price Index (\u201cCPI\u201d) \u2013 Core CPI, which excludes food and energy, was 3.9 percent for the 12 months ending December 31, 2023. When including food and energy, CPI was 3.4 percent as decreases in fuel and gas outpaced increases in food."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Personal Consumption Expenditures Index (\u201cPCE\u201d) - PCE, a measure of the prices that people living in the U.S. pay for goods and services, increased 2.6 percent in December compared to a year ago. Excluding food and energy, PCE increased 2.9 percent."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Tight Labor Market \u2013 The unemployment rate was 3.7 percent in December. While demand continues to exceed the supply of worker, wage growth was nominal and the number of vacancies have declined."]]
[[/GREPCENT_TABLE]]

Concerns over the high inflation rate have resulted in central bankers in the U.S. increasing interest rates seven times in 2022 and an additional four times in 2023 for a total of 525 basis points. Rates have remained constant since late July 2023. While we experienced strong loan growth early in 2023, lending has tempered as higher rates affected borrowers demand for credit. Additionally, the Company has intentionally prioritized increasing liquidity over loan growth. We have seen lower mortgage origination and sales volume as interest rates on mortgage loans have reached 20 year highs during 2023. Conversely, competition and subsequent costs of deposits have increased throughout most of 2023.

While inflation decreased during 2023 from levels of the previous year, they remain above the Federal Open Market Committee’s (“FOMC”) long-term desired 2 percent level for items other than food and energy. The FOMC has stated that they will continue to monitor economic data and will hold the fed funds rate at 5.25 percent to 5.50 percent until inflation is sustainably at 2.0 percent.

​

Review of Financial Position:

Peoples, a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Peoples Bank. The Company services its retail and commercial customers through twenty-eight full-service community banking offices located within the Allegheny, Bucks, Lackawanna, Lebanon, Lehigh, Luzerne, Monroe, Montgomery, Northampton, Susquehanna and Wyoming Counties of Pennsylvania, Middlesex County of New Jersey and Broome County of New York.

Peoples Bank is a state-chartered bank and trust company under the jurisdiction of the Pennsylvania Department of Banking and the FDIC. Peoples Bank’s primary product is loans to small and medium sized businesses. Other lending products include one-to-four family residential mortgages and consumer loans. Peoples Bank primarily funds its loans by

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offering checking accounts and money market accounts to commercial enterprises and individuals. Other deposit product offerings include certificates of deposits and various non-maturity deposit accounts.

The Company faces competition primarily from commercial banks, thrift institutions and credit unions within its Pennsylvania, New Jersey and New York market, many of which are substantially larger in terms of assets and capital. In addition, mutual funds and security brokers compete for various types of deposits, and consumer, mortgage, leasing and insurance companies compete for various types of loans and leases. Principal methods of competing for banking and permitted nonbanking services include price, nature of product, quality of service and convenience of location.

The Company and Peoples Bank are subject to regulations of certain federal and state regulatory agencies, including the Federal Reserve Board, the FDIC, and Pennsylvania Department of Banking, and undergo periodic examinations by such agencies.

Total assets, loans and deposits were $3.7 billion, $2.8 billion and $3.3 billion, respectively, at December 31, 2023. Total assets, loans and deposits grew 5.3 percent, 4.4 percent and 7.6 percent, respectively, compared to 2022 year-end balances.

The loan portfolio consisted of $2.4 billion of business loans, including commercial and commercial real estate loans, and $443.1 million in retail loans, including residential mortgage and consumer loans at December 31, 2023. Total investment securities were $483.9 million at December 31, 2023, including $398.9 million of investment securities classified as available-for sale and $84.9 million classified as held to maturity. Total deposits consisted of $644.7 million in noninterest-bearing deposits and $2.6 billion in interest-bearing deposits at December 31, 2023.

Stockholders’ equity equaled $340.4 million, or $48.35 per share, at December 31, 2023, and $315.4 million, or $44.06 per share, at December 31, 2022. Our equity to asset ratio was 9.1 percent and 8.9 percent at those respective period ends. Dividends declared for the 2023 amounted to $1.64 per share representing 42.8 percent of net income.

Nonperforming assets equaled $4.9 million or 0.13 percent of total assets at December 31, 2023 compared to $4.1 million or 0.12 percent at December 31, 2022. The ACL equaled $21.9 million or 0.77 percent of loans, net, at December 31, 2023, compared to $27.5 million or 1.01 percent at year-end 2022. Loans charged-off, net of recoveries equaled $2.9 million or 0.10 percent of average loans in 2023, compared to $0.5 million or 0.02 percent of average loans in 2022.

 Investment Portfolio:

Primarily, our investment portfolio provides a source of liquidity needed to meet expected loan demand and generates a reasonable return in order to increase our profitability. Additionally, we utilize the investment portfolio to meet pledging requirements and reduce income taxes. At December 31, 2023, our portfolio included short-term U.S. Treasury and government agency securities, which provide a source of liquidity, mortgage-backed securities issued by U.S. government-sponsored agencies to provide income and intermediate-term, tax-exempt state and municipal obligations, which mitigate our tax burden.

Our investment portfolio is subject to various risk elements that may negatively impact our liquidity and profitability. The greatest risk element affecting our portfolio is market risk or interest rate risk (“IRR”). Understanding IRR, along with other inherent risks and their potential effects, is essential in effectively managing the investment portfolio.

Market risk or IRR relates to the inverse relationship between bond prices and market yields. It is defined as the risk that increases in general market interest rates will result in market value depreciation. A marked reduction in the value of the investment portfolio could subject us to liquidity strains and reduced earnings if we are unable or unwilling to sell these investments at a loss. Moreover, the inability to liquidate these assets could require us to seek alternative funding, which may further reduce profitability and expose us to greater risk in the future. In addition, since the majority of our investment portfolio is designated as available for sale and carried at estimated fair value, with net unrealized gains and losses reported as a separate component of stockholders’ equity, market value depreciation could negatively impact our capital position.

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The FOMC, in an attempt to curb inflation, increased the federal funds rate 100 basis points during 2023 to a targeted range of 5.25 percent to 5.50 percent. Our investment portfolio consists primarily of fixed-rate bonds. As a result, changes in the velocity and magnitude of future FOMC actions can significantly influence the fair value of our portfolio. Specifically, the parts of the yield curve most closely related to our investments include the 2-year and 10-year U.S. Treasury security. The yield on the 2-year U.S. Treasury note affects the values of our U.S. Treasury and government agency securities, whereas the 10-year U.S. Treasury note influences the value of tax-exempt and taxable state and municipal obligations. The yield on the 2-year U.S. Treasury decreased in 2023, ending at 425 basis points. The yield on the 10-year U.S. Treasury was flat to 2022, ending at 388 basis points. Since bond prices move inversely to yields, we experienced an increase in the aggregate fair value of our investment portfolio when comparing December 31, 2023 to December 31, 2022 due to lower market rates at year end 2023.

The net unrealized holding losses included in our available for sale investment portfolio were $51.5 million at December 31, 2023 compared to a loss of $66.3 million at December 31, 2022. We reported net unrealized holding losses, included as a separate component of stockholders’ equity of $40.3 million, net of income taxes of $11.3 million, at December 31, 2023, and an unrealized holding loss of $52.0 million, net of income taxes of $14.3 million, at December 31, 2022. Increases in interest rates could negatively impact the market value of our investments and our capital position. In order to monitor the potential effects a rise in interest rates could have on the value of our investments, we perform stress test modeling on the portfolio. Stress tests conducted on our portfolio at December 31, 2023, indicated that should general market rates increase immediately by 100, 200 or 300 basis points, we would anticipate declines of 4.1 percent, 8.2 percent and 12.0 percent in the market value of our available for sale portfolio.

Investment securities decreased $85.1 million, to $483.9 million at December 31, 2023, from $569.0 million at December 31, 2022. At December 31, 2023, the investment portfolio consisted of $398.9 million of investment securities classified as available for sale and $84.9 million classified as held to maturity. There were no security purchases in 2023. Investment purchases in 2022 amounted to $138.7 million. Repayments of investment securities totaled $31.5 million in 2023 and $46.9 million in 2022.

The company engaged in investment sales during the first three months of 2023 to, in part, fund loan growth and repay short-term borrowings. The investment sales totaled $67.4 million in U.S. Treasury, tax-exempt municipals and mortgage-backed securities and were sold at a net gain of $81 thousand. During December of 2022, the Company sold $43.5 million of low-yielding, shorter duration U.S. Treasury securities and immediately re-deployed the proceeds by purchasing higher-yielding, longer duration mortgage-backed securities. The transaction resulted in a realized loss of $2.0 million with the expectation the loss would be earned back over the succeeding fifteen months from higher interest income.

Residential and commercial mortgage backed securities totaled 32.7 percent of the portfolio at year-end 2023 compared to 37.5 percent at year-end 2022. Short-term bullet U.S. Treasury and U.S. government-sponsored enterprise securities comprised 38.5 percent of our total portfolio at year-end 2023 compared to 34.6 percent at the end of 2022. Tax-exempt municipal obligations decreased as a percentage of the total portfolio to 16.2 percent at year-end 2023 from 17.5 percent at the end of 2022. Taxable municipals increased as a percentage of the total portfolio to 11.8 percent at year-end 2023 from 9.7 percent at the end of 2022.

The average life of the investment portfolio decreased to 6.1 years at December 31, 2023 from 7.0 years at year end 2022, while the effective duration of the investment portfolio decreased to 4.4 years at December 31, 2023 from 4.8 years at December 31, 2022.

There were no impairment charges recognized for the year ended December 31, 2023 and no other-than-temporary impairments recognized for the years ended December 31, 2022 and 2021. For additional information related to impairment charges refer to Note 2 entitled “Investment securities” in the Notes to Consolidated Financial Statements to this Annual Report.

Investment securities averaged $559.3 million and equaled 16.0 percent of average earning assets in 2023, compared to $648.6 million and 20.1 percent of average earning assets in 2022. The tax-equivalent yield on the investment portfolio

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increased 10 basis points to 1.77 percent in 2023 from 1.67 percent in 2022. The increase in the tax-equivalent yield is due in part to the sale of lower yielding investments during the three months ended March 31, 2023.

At December 31, 2023 and 2022, there were no securities of any individual issuer, except for U.S. government agency mortgage-backed securities, that exceeded 10.0 percent of stockholders’ equity.

The maturity distribution based on the carrying value and weighted-average, tax-equivalent yield of the investment debt security portfolio at December 31, 2023, is summarized as follows. The weighted-average yield, based on amortized cost, has been computed for tax-exempt state and municipals on a tax-equivalent basis using the prevailing federal statutory tax rate of 21.0 percent. The distributions are based on contractual maturity. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","After one but","\u200b","After five but","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands,","\u200b","Within one year","\u200b","within five years","\u200b","within ten years","\u200b","After ten years","\u200b","Total"],["except percents)","\u200b","Amount","\u200b","Yield","\u200b","Amount","\u200b","Yield","\u200b","Amount","\u200b","Yield","\u200b","Amount","\u200b","Yield","\u200b","Amount","\u200b","Yield"],["U.S. Treasury securities","","$","21,436","","0.78","%","$","162,621","","1.01","%","$","\u200b","\u200b","\u200b","%","$","\u200b","","\u200b","%","$","184,057","","0.99","%"],["U.S. government-sponsored enterprises","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","14","","4.71","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2,138","\u200b","2.25","\u200b","","2,152","","2.27","\u200b"],["State and municipals:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","12,633","","2.38","\u200b","\u200b","27,737","","2.08","\u200b","\u200b","16,730","","2.02","\u200b","","57,100","","2.12","\u200b"],["Tax-exempt","\u200b","","463","","2.50","\u200b","","3,763","","2.19","\u200b","","25,792","","2.06","\u200b","\u200b","48,307","","2.17","\u200b","","78,325","","2.14","\u200b"],["Corporate debt securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","3,730","\u200b","4.19","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","3,730","\u200b","4.19","\u200b"],["Residential mortgage-backed securities:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["U.S. government agencies","\u200b","\u200b","17","\u200b","1.89","\u200b","","20","\u200b","2.10","\u200b","","\u200b","\u200b","\u200b","\u200b","","16,087","\u200b","1.74","\u200b","","16,124","","1.74","\u200b"],["U.S. government-sponsored enterprises","\u200b","\u200b","8","\u200b","1.68","\u200b","\u200b","2,787","\u200b","2.87","\u200b","\u200b","1,351","\u200b","3.35","\u200b","\u200b","126,775","\u200b","1.77","\u200b","\u200b","130,921","\u200b","1.81","\u200b"],["Commercial mortgage-backed securities:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["U.S. government-sponsored enterprises","\u200b","\u200b","5,602","\u200b","2.06","\u200b","\u200b","5,767","\u200b","2.88","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","11,369","\u200b","2.47","\u200b"],["Total","\u200b","$","27,526","","1.07","%","$","187,605","","1.21","%","$","58,610","","2.24","%","$","210,037","","1.89","%","$","483,778","","1.62","%"]]
[[/GREPCENT_TABLE]]

​

Loan Portfolio:

Economic factors and how they affect loan demand are of extreme importance to us and the overall banking industry, as lending is a primary business activity. Loans are the most significant component of earning assets and they generate the greatest amount of revenue for us. Similar to the investment portfolio, there are risks inherent in the loan portfolio that must be understood and considered in managing the lending function. These risks include IRR, credit concentrations and fluctuations in demand. Changes in economic conditions and interest rates affect these risks which influence loan demand, the composition of the loan portfolio and profitability of the lending function.

Overall, total loans increased $119.8 million or 4.4 percent in 2023 to $2.8 billion at December 31, 2023. Business loans, including commercial loans and commercial real estate loans, were $2.4 billion or 84.5 percent of total loans at December 31, 2023, and $2.3 billion or 84.6 percent at year-end 2022. Residential mortgages and consumer loans totaled $443.1 million or 15.5 percent of total loans at year-end 2023 and $421.0 million or 15.4 percent at year-end 2022.

Total loan growth was primarily attributable to increases in our commercial real estate portfolio which grew $153.3 million in 2023 due to continued success of our strategy to expand in larger markets with strong growth potential, and strong organic growth in our legacy markets.

Consumer loans decreased $8.0 million, or 8.9 percent, to $82.3 million at December 31, 2023 compared to $90.3 million at December 31, 2022. Consumer other loans declined $6.9 million due primarily to real estate secured loans being re-classified to residential real estate loans while indirect auto loans decreased $1.1 million during 2023 due to reduced originations.

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Residential real estate loans increased $30.1 million, or 9.1 percent during 2023 due to increased home equity loan activity, the aforementioned reclassification from consumer loans and a higher percentage of loans not eligible to be sold into the secondary market, including jumbo loans.

Loans averaged $2.8 billion in 2023, compared to $2.5 billion in 2022. Taxable loans averaged $2.6 billion, while tax-exempt loans averaged $0.2 billion in 2023. The loan portfolio continues to play the prominent role in our earning asset mix. As a percentage of earning assets, average loans equaled 81.0 percent in 2023, an increase from 78.0 percent in 2022.

The tax-equivalent yield on our loan portfolio increased 77 basis points to 4.81 percent in 2023 from 4.04 percent in 2022 due to higher yields on new loan originations and the repricing of floating and adjustable rate loans due to the increase in market rates beginning during the second quarter of 2022. The yield on the loan portfolio may increase as repayments on loans are replaced with new originations at current market rates and floating and adjustable rate loans continue to reprice upward.

The maturity distribution and sensitivity information of the loan portfolio by major classification at December 31, 2023, is summarized as follows:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Within one","","After one but","","After five but","","After","\u200b","\u200b","\u200b"],["(Dollars in thousands)","\u200b","year","\u200b","within five years","\u200b","within fifteen years","\u200b","fifteen years","","Total"],["Maturity schedule:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial","\u200b","$","120,050","\u200b","$","285,046","\u200b","$","\u200b","\u200b","\u200b","138,619","\u200b","$","543,715","\u200b"],["Real estate:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial","\u200b","","304,847","\u200b","","982,079","\u200b","","511,430","\u200b","","64,762","\u200b","","1,863,118","\u200b"],["Residential","\u200b","","72,459","\u200b","","180,883","\u200b","","95,399","\u200b","","12,062","\u200b","","360,803","\u200b"],["Consumer","\u200b","","34,592","\u200b","","47,066","\u200b","","364","\u200b","","239","\u200b","","82,261","\u200b"],["Total","\u200b","$","531,948","\u200b","$","1,495,074","\u200b","$","607,193","\u200b","$","215,682","\u200b","$","2,849,897","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Predetermined interest rates","\u200b","$","301,481","\u200b","$","861,114","\u200b","$","203,500","\u200b","$","100,071","\u200b","$","1,466,166","\u200b"],["Floating or adjustable interest rates","\u200b","","230,467","\u200b","","633,960","\u200b","","403,693","\u200b","","115,611","\u200b","","1,383,731","\u200b"],["Total","\u200b","$","531,948","\u200b","$","1,495,074","\u200b","$","607,193","\u200b","$","215,682","\u200b","$","2,849,897","\u200b"]]
[[/GREPCENT_TABLE]]

As previously mentioned, there are numerous risks inherent in the loan portfolio. We manage the portfolio by employing sound credit policies and utilizing various modeling techniques in order to limit the effects of such risks. In addition, we utilize private mortgage insurance (“PMI”) and guaranteed SBA and Federal Home Loan Bank of Pittsburgh (“FHLB-Pgh”) loan programs to mitigate credit risk in the loan portfolio.

In an attempt to limit IRR and improve liquidity, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. Fixed-rate loans represented 51.4 percent of the loan portfolio at December 31, 2023, compared to floating or adjustable-rate loans at 48.6 percent.

Additionally, our secondary market mortgage banking program provides us with an additional source of liquidity and a means to limit our exposure to IRR. Through this program, we are able to competitively price conforming one-to-four family residential mortgage loans without taking on IRR which would result from retaining these long-term, low fixed-rate loans on our books. The loans originated are subsequently sold in the secondary market, with the sales price locked in at the time of commitment, thereby greatly reducing our exposure to IRR.

Loan concentrations are considered to exist when the total amount of loans to any one borrower, or a multiple number of borrowers engaged in similar business activities or having similar characteristics, exceeds 25.0 percent of capital outstanding in any one category. We provide deposit and loan products and other financial services to individual and corporate customers in our current market area. There are no significant concentrations of credit risk from any individual counterparty or groups of counterparties, except for geographic concentrations in our market area.

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Credit risk is the principal risk associated with these instruments. Our involvement and exposure to credit loss in the event that the instruments are fully drawn upon and the customer defaults is represented by the contractual amounts of these instruments. In order to control credit risk associated with entering into commitments and issuing letters of credit, we employ the same credit quality and collateral policies in making commitments that we use in other lending activities. We evaluate each customer’s creditworthiness on a case-by-case basis, and if deemed necessary, obtain collateral. The amount and nature of the collateral obtained is based on our credit evaluation.

Asset Quality:

We are committed to developing and maintaining sound, quality assets through our credit risk management policies and procedures. Credit risk is the risk to earnings or capital which arises from a borrower’s failure to meet the terms of their loan obligations. We manage credit risk by diversifying the loan portfolio and applying policies and procedures designed to foster sound lending practices. These policies include certain standards that assist lenders in making judgments regarding the character, capacity, cash flow, capital structure and collateral of the borrower.

With regard to managing our exposure to credit risk in light of general devaluations in real estate values, we have established maximum loan-to-value ratios for commercial mortgage loans not to exceed 80.0 percent of the appraised value. With regard to residential mortgages, customers with loan-to-value ratios in excess of 80.0 percent are generally required to obtain PMI. PMI is used to protect us from loss in the event loan-to-value ratios exceed 80.0 percent and the customer defaults on the loan. Appraisals are performed by an independent appraiser engaged by us, not the customer, who is either state certified or state licensed depending upon collateral type and loan amount.

With respect to lending procedures, lenders and our credit underwriters must determine the borrower’s ability to repay their loans based on prevailing and expected market conditions prior to requesting approval for the loan. The Bank’s Board of Directors establishes and reviews, at least annually, the lending authority for certain senior officers, loan underwriters and branch personnel. Credit approvals beyond the scope of these individual authority levels are forwarded to a loan committee. This committee, comprised of certain members of senior management, review credits to monitor the quality of the loan portfolio through careful analysis of credit applications, adherence to credit policies and the examination of outstanding loans and delinquencies. These procedures assist in the early detection and timely follow-up of problem loans.

Credit risk is also managed by monthly internal reviews of individual credit relationships in our loan portfolio by credit administration and the asset quality committee. These reviews aid us in identifying deteriorating financial conditions of borrowers and allows us the opportunity to assist customers in remedying these situations.

Nonperforming assets consist of nonperforming loans and foreclosed assets. Nonperforming loans include nonaccrual loans and accruing loans past due 90 days or more. For a discussion of our policy regarding nonperforming assets and the recognition of interest income on impaired loans, refer to the notes entitled, “Summary of significant accounting policies — Nonperforming assets,” and “Loans, net and allowance for loan losses” in the Notes to Consolidated Financial Statements to this Annual Report which are incorporated in this item by reference.

Information concerning nonperforming assets for the past two years is summarized as follows. The table includes credits classified for regulatory purposes and all material credits that cause us to have serious doubts as to the borrower’s ability to comply with present loan repayment terms.

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands, except percents)","\u200b","\u200b","December 31, 2023","\u200b","\u200b","December 31, 2022","\u200b"],["Nonaccrual loans","\u200b","$","3,962","\u200b","$","2,035","\u200b"],["Troubled debt restructured loans (including nonaccrual TDR)(1)","\u200b","\u200b","\u200b","\u200b","\u200b","1,351","\u200b"],["Accruing loans past due 90 days or more:","\u200b","\u200b","986","\u200b","\u200b","748","\u200b"],["Total nonperforming loans","\u200b","\u200b","4,948","\u200b","\u200b","4,134","\u200b"],["Foreclosed assets","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total nonperforming assets","\u200b","$","4,948","\u200b","$","4,134","\u200b"],["Loans modified in a TDR:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Performing TDR loans","\u200b","$","\u200b","\u200b","$","1,351","\u200b"],["Total TDR loans","\u200b","$","\u200b","\u200b","$","1,351","\u200b"],["Total loans held for investment","\u200b","$","2,849,897","\u200b","$","2,730,116","\u200b"],["Allowance for credit losses","\u200b","","21,895","\u200b","","27,472","\u200b"],["Allowance for credit losses as a percentage of loans held for investment","\u200b","\u200b","0.77","%","\u200b","1.01","%"],["Allowance for credit losses as a percentage of nonaccrual loans","\u200b","\u200b","552.62","%","","1349.98","%"],["Nonaccrual loans as a percentage of loans held for investment","\u200b","\u200b","0.14","%","\u200b","0.07","%"],["Nonperforming loans as a percentage of loans, net","\u200b","","0.17","%","","0.15","%"],["Nonperforming assets as a percentage of total assets","\u200b","","0.13","%","","0.12","%"],["(1) At December 31, 2023 there were no TDRS as a result of ASU 2022-02","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

Nonperforming assets increased $0.8 million or 19.7 percent when compared to year-end 2022. Additionally, our nonperforming assets as a percentage of total assets increased slightly to 0.13 percent at December 31, 2023 from 0.12 percent at December 31, 2022, and our nonperforming loans as a percentage of loans, net increased to 0.17 percent from 0.15 percent at December 31, 2022. Loans on nonaccrual status, excluding troubled debt restructured nonaccrual loans, increased $0.8 million due primarily to placing a collateral dependent commercial real estate loan on nonaccrual as the primary source of repayment is in doubt and there is limited secondary sources due to bankruptcy.

At December 31, 2023 and 2022, there were no foreclosed properties. Loans past due ninety days and accruing increased $0.2 million and include eight residential mortgages. For a further discussion of assets classified as nonperforming assets and potential problem loans, refer to Note 3, “Loans, net and the allowance for credit losses,” in the Notes to Consolidated Financial Statements to this Annual Report.

Past due loans not satisfied through repossession, foreclosure or related actions are evaluated individually to determine if all or part of the outstanding balance should be charged against the ACL account. Any subsequent recoveries are credited to the allowance account. Net loans charged-off increased $2.4 million to $2.9 million in 2023 from $0.5 million in 2022 due primarily to the partial charge-off of a commercial real estate loans as the market value declined significantly as a result of the impending vacancy of the property by its single “anchor” tenant. Net charge-offs, as a percentage of average loans outstanding, equaled 0.10 percent in 2023 and 0.03 percent in 2022.

​

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The following table presents average loans and loan loss experience for the years indicated.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands, except percents)","\u200b","2023"],["\u200b","\u200b","\u200b","Average loans","\u200b","\u200b","Net Charge-offs (Recoveries)","\u200b","Net Charge-offs (Recoveries) to Average Loans","\u200b"],["Commercial","\u200b","$","590,472","\u200b","$","47","\u200b","0.01","%"],["Real estate:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial","\u200b","\u200b","1,803,695","\u200b","\u200b","2,597","\u200b","0.14","\u200b"],["Residential","\u200b","","349,219","\u200b","","(24)","\u200b","(0.01)","\u200b"],["Consumer","\u200b","\u200b","88,380","\u200b","\u200b","240","\u200b","0.27","\u200b"],["Total","\u200b","$","2,831,766","\u200b","$","2,860","\u200b","0.10","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands, except percents)","\u200b","2022"],["\u200b","\u200b","\u200b","Average loans","\u200b","\u200b","Net Charge-offs (Recoveries)","\u200b","Net Charge-offs (Recoveries) to Average Loans","\u200b"],["Commercial","\u200b","$","595,566","\u200b","$","121","\u200b","0.02","%"],["Real estate:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial","\u200b","\u200b","1,531,383","\u200b","\u200b","174","\u200b","0.01","\u200b"],["Residential","\u200b","","315,975","\u200b","","27","\u200b","0.01","\u200b"],["Consumer","\u200b","\u200b","79,726","\u200b","\u200b","140","\u200b","0.18","\u200b"],["Total","\u200b","$","2,522,650","\u200b","$","462","\u200b","0.02","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands, except percents)","\u200b","2021"],["\u200b","\u200b","\u200b","Average loans","\u200b","\u200b","Net Charge-offs (Recoveries)","\u200b","Net Charge-offs (Recoveries) to Average Loans","\u200b"],["Commercial","\u200b","$","648,192","\u200b","$","403","\u200b","0.06","%"],["Real estate:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial","\u200b","\u200b","1,209,639","\u200b","\u200b","184","\u200b","0.02","\u200b"],["Residential","\u200b","","284,060","\u200b","","17","\u200b","0.01","\u200b"],["Consumer","\u200b","\u200b","78,686","\u200b","\u200b","107","\u200b","0.14","\u200b"],["Total","\u200b","$","2,220,577","\u200b","$","711","\u200b","0.03","%"]]
[[/GREPCENT_TABLE]]

​

Effective January 1, 2023 the Company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The standard replaces the incurred loss methodology we previously used to maintain the allowance for loan losses. Upon adoption, the Company decreased its ACL by $3.3 million to $24.1 million and increased its reserve for losses of unfunded commitments by $270 thousand to $449 thousand. The current standard measures the estimated amount of allowance necessary to cover lifetime losses inherent in financial assets at the balance sheet date. 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. Also included in the allowance 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 utilized. The Company applies the analysis to loans on a collective, or pooled basis for groups of loans which share similar risk characteristics, and will either assign loans to a different pool or evaluate a loan individually if its risk characteristics change and no longer align with its currently assigned pool of loans. For additional information, see Note 1 “Allowance for Credit Losses”.

During the quarter-ended June 30, 2023, the Company became aware that the unaudited consolidated financial statements for the three months ended March 31, 2023 contained an immaterial misstatement. The Company determined that the ACL was overstated by $1.5 million as of March 31, 2023. The adjustment consisted of $1.1 million related to

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the adoption of ASU 2016-13 and a $0.4 million reduction in the first quarter 2023 provision for credit loss requirement. The cumulative impact $1.1 million credit to the provision for credit losses and reduction in the ACL is reflected in the consolidated financial statements for the twelve months ended December 31, 2023. The adjustment did not impact any prior periods. For additional information, see Note 1 “Immaterial Prior Period Adjustment.”

The ACL decreased $5.6 million to $21.9 million at December 31, 2023, from $27.5 million at the end of 2022. In addition to the transition adjustment of $3.3 million, a net provision for credit losses of $0.6 million was recorded. The provision of $0.6 million included the $1.1 million adjustment noted above, and a provision of $1.6 million was recorded due to the impact of various factors such as updated economic assumptions as well as changes in qualitative adjustments, portfolio composition and improved asset quality.

The ACL, as a percentage of loans, net of unearned income, was 0.77 percent at the end of 2023, 1.01 percent at the end of 2022, respectively. The coverage ratio, the ACL, as a percentage of nonperforming loans, is an industry ratio used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The coverage ratio was 442.6 percent at December 31, 2023 and 664.5 percent at December 31, 2022. We believe that our allowance was adequate to absorb probable credit losses at December 31, 2023.

The allocation of the ACL for the past two years is summarized as follows:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","2023","\u200b","\u200b","2022","\u200b"],["(Dollars in thousands, except percents)","\u200b","Amount","\u200b","%","\u200b","\u200b","Amount","\u200b","%","\u200b"],["Individually evaluated:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","$","10","","0.05","%","\u200b","$","19","","0.07","%"],["Municipal","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Real Estate:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial","\u200b","","21","","0.10","\u200b","\u200b","","\u200b","","\u200b","\u200b"],["Residential","\u200b","","\u200b","","\u200b","\u200b","\u200b","","21","","0.08","\u200b"],["Consumer","\u200b","","\u200b","","\u200b","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b"],["Total specific","\u200b","","31","","0.15","\u200b","\u200b","","40","","0.15","\u200b"],["Pooled:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","","2,262","","10.33","\u200b","\u200b","","4,346","","15.82","\u200b"],["Municipal","\u200b","\u200b","788","\u200b","3.60","\u200b","\u200b","\u200b","1,247","\u200b","4.54","\u200b"],["Real Estate:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial","\u200b","","14,132","","64.54","\u200b","\u200b","","17,915","","65.20","\u200b"],["Residential","\u200b","","3,782","","17.27","\u200b","\u200b","","3,051","","11.11","\u200b"],["Consumer","\u200b","","900","","4.11","\u200b","\u200b","","873","","3.18","\u200b"],["Total pooled","\u200b","","21,864","","99.85","\u200b","\u200b","","27,432","","99.85","\u200b"],["Total allowance for credit losses","\u200b","$","21,895","","100.00","%","\u200b","$","27,472","","100.00","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

The ACL account decreased $5.6 million to $21.9 million at December 31, 2023, compared to $27.5 million at December 31, 2022. The specific portion of the allowance for loans individually evaluated decreased $9 thousand to $31 thousand at December 31, 2023, from $40 thousand at December 31, 2022 and the portion of the allowance for loans collectively evaluated decreased $5.6 million to $21.9 million at December 31, 2023, from $27.4 million at December 31, 2022.

Deposits:

Our deposit base is the primary source of funds to support our operations. We offer a variety of deposit products to meet the needs of our individual and commercial customers. Total deposits grew $232.4 million or 7.6 percent to $3.3 billion at the end of 2023. Noninterest-bearing deposits decreased $128.1 million or 16.6 percent while interest-bearing deposits increased $360.5 million or 15.9 percent in 2023. The increase in deposits was due to a $237.4 million net increase in

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brokered deposits, $129.3 million in commercial deposits and a $9.0 million increase in municipal deposits, partially offset by $143.3 million in reduced retail deposits.

During the twelve months ended December 31, 2023, we purchased $259.0 million of brokered certificate of deposits at a weighted average all-in cost of 5.16% and a weighted average original term of 3.6 years.  The majority of the brokered CDs, $249.2 million, were purchased with a call feature.  At December 31, 2023, the Company has the option to call the entire portfolio of callable CDs at any time. These purchases occurred during the first six months of 2023 and were through an approved registered broker, as part of an Asset/Liability Committee (“ALCO”) strategy to increase on-balance sheet liquidity by utilizing a portion of our contingent funding sources and mitigate interest rate exposure to higher rates.  At year end, brokered deposits totaled $261.0 million and represented 8 percent of total deposits. Furthermore, the Company has a brokered deposit to total asset policy limit of 10 percent, and at December 31, 2023 the percentage was 7.0 percent.

Noninterest-bearing deposits represented 19.7 percent of total deposits while interest-bearing deposits accounted for 80.3 percent of total deposits at December 31, 2023. Comparatively, noninterest-bearing deposits and interest-bearing deposits represented 25.4 percent and 74.6 percent of total deposits at year end 2022. The reduction in non-interest bearing deposits is the result of depositors' surplus funds being drawn down in part due to higher costs from elevated levels of inflation, and a shift to interest-bearing deposits offering high yields.

With regard to noninterest-bearing deposits, personal checking accounts decreased $45.2 million or 13.1 percent, while commercial checking accounts decreased $82.9 million or 19.4 percent. The decrease in noninterest-bearing deposits contributes to the overall cost of funds and the pressure on our net interest margin from the increase in short-term market rates.

With regard to interest-bearing deposits, interest-bearing transaction accounts, which include money market accounts and NOW accounts, and savings accounts, increased $25.7 million in 2023. Commercial interest-bearing transaction accounts increased $165.6 million, while personal interest-bearing transaction accounts decreased $44.9 million. Savings accounts decreased $94.9 million during 2023 as customers shifted a portion of their low-rate deposits to higher rate alternative deposit products.

Total time deposits increased $334.8 million to $626.7 million at December 31, 2023 from $291.9 million at December 31, 2022. The increase was due to the addition of callable brokered CDs during 2023 to improve on-balance sheet liquidity.

The average amount of, and the rate paid on, the major classifications of deposits for the past three years are summarized as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","2023","\u200b","2022","\u200b","2021"],["\u200b","\u200b","Average","\u200b","Average","\u200b","Average","\u200b","Average","\u200b","Average","\u200b","Average"],["(Dollars in thousands, except percents)","\u200b","Balance","\u200b","Rate","\u200b","Balance","\u200b","Rate","\u200b","Balance","\u200b","Rate"],["Interest-bearing:","","\u200b","\u200b","","\u200b","","\u200b","\u200b","","\u200b","","\u200b","\u200b","","\u200b","\u200b"],["Money market accounts","\u200b","$","714,940","","3.17","%","$","624,528","","0.80","%","$","549,169","","0.36","%"],["NOW accounts","\u200b","","779,977","","2.00","\u200b","","791,653","","0.57","\u200b","","666,885","","0.33","\u200b"],["Savings accounts","\u200b","","474,028","","0.21","\u200b","","520,770","","0.10","\u200b","","468,851","","0.08","\u200b"],["Time deposits","\u200b","","550,733","","3.50","\u200b","","290,799","","0.92","\u200b","","301,024","","0.92","\u200b"],["Total interest-bearing","\u200b","","2,519,678","","2.32","%","","2,227,750","","0.57","%","","1,985,929","","0.37","%"],["Noninterest-bearing","\u200b","","698,749","\u200b","\u200b","\u200b","","753,399","\u200b","\u200b","\u200b","","684,527","\u200b","\u200b","\u200b"],["Total deposits","\u200b","$","3,218,427","\u200b","\u200b","\u200b","$","2,981,149","\u200b","\u200b","\u200b","$","2,670,456","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

Total deposits averaged $3.2 billion in 2023 and $3.0 billion in 2022, increasing $237.3 million or 8.0 percent comparing 2023 to 2022. Average noninterest-bearing deposits decreased $54.7 million, while average interest-bearing accounts grew $291.9 million. Average interest-bearing transaction deposits, including money market and NOW, and savings accounts, increased $32.0 million while average total time deposits increased $259.9 million when comparing 2023 and 2022.

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Our cost of interest-bearing deposits increased to 2.32 percent in 2023. Specifically, the cost of money market accounts increased 237 basis points to 3.17 percent from 0.80 percent and NOW accounts increased 143 basis points to 2.00 percent. The increases in the cost of our interest-bearing deposits are due to the FOMC rate increases as rate-sensitive customers require higher rates on their deposits along with competitive pressure for deposits. We expect our cost of funds to continue to rise in 2024 but at a slower pace than 2023.

Volatile deposits, time deposits $100 thousand or more, averaged $200.7 million in 2023, an increase of $37.7 million or 23.1 percent from $163.0 million in 2022. Our average cost of these funds increased 212 basis points to 2.96 percent in 2023, from 0.84 percent in 2022. This type of funding is susceptible to withdrawal by the depositor as they are particularly price sensitive and are therefore not considered to be a strong source of liquidity.

At December 31, 2023 and 2022, the Company had $0.9 billion and $1.1 billion in uninsured deposits in excess of the FDIC insurance limit of $250,000.

At December 31, 2023 and 2022, the Company had $121.3 million and $92.7 million, respectively, in time deposits in excess of $250,000 maturing as disclosed in the table below. Brokered deposits in the amount of $261.0 million at December 31, 2023 and $23.6 million at December 31, 2022 are not included in time deposits more than $250,000.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands)","","2023","","2022"],["Within three months","\u200b","$","23,740","\u200b","$","13,695","\u200b","\u200b"],["After three months but within six months","\u200b","","20,165","\u200b","","21,395","\u200b","\u200b"],["After six months but within twelve months","\u200b","","64,582","\u200b","","27,346","\u200b","\u200b"],["After twelve months","\u200b","","12,778","\u200b","","30,295","\u200b","\u200b"],["Total","\u200b","$","121,265","\u200b","$","92,731","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

In addition to deposit gathering, we have a secondary source of liquidity through existing credit arrangements with the FHLB-Pgh. At December 31, 2023, we had no outstanding overnight borrowings at the FHLB and may utilize the credit facility during 2024, depending upon deposit activity and loan growth. For a further discussion of our borrowings and their terms, refer to the notes entitled, “Short-term borrowings” and “Long-term debt,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

Subordinated Debt:

On June 1, 2020, the Company sold $33.0 million aggregate principal amount of Subordinated Notes due 2030 (the “2020 Notes”) to accredited investors. The 2020 Notes are treated as Tier 2 capital for regulatory capital purposes.

The 2020 Notes bear interest at a rate of 5.375 percent per year for the first five years and then float based on a benchmark rate (as defined), provided that the interest rate applicable to the outstanding principal balance during the period the 2020 Notes are floating will at no time be less the 4.75 percent.  Interest is payable semi-annually in arrears on June 1 and December 1 of each year for the first five years after issuance and will be payable quarterly in arrears thereafter on March 1, June 1, September 1, and December 1. The 2020 Notes mature on June 1, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after June 1, 2025 and prior to June 1, 2030. Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 Capital, the Company may redeem, in whole and not in part, at any time upon giving not less than ten days’ notice, an amount equal to one hundred percent (100 percent) of the principal amount outstanding plus accrued but unpaid interest to but excluding the date fixed for redemption.

Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar proceeding by or against the Company.

Market Risk Sensitivity:

Market risk is the risk to our earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily IRR associated

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with our lending, investing and deposit gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect the underlying economic value of our assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value, and provide a basis for the expected change in future earnings related to interest rates. Interest rate changes affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

Market interest rates increased rapidly during 2022 and continued to increase into 2023 as the FOMC has raised the federal funds rate. A total of seven increases for a total of 425 basis points occurred in 2022, and four additional increases totaling 100 basis points have been made in 2023, resulting in a total of 525 basis points since the beginning of the FOMC’s initiative to curb inflation. Due to these factors, IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program, overseen by our Board of Directors and senior management that involves a comprehensive risk management process in order to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in our risk management process or high exposure relative to our capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of our risk management process is a determining factor when evaluating capital adequacy. We believe our risk management practices with regard to IRR were suitable and adequate given the level of IRR exposure at December 31, 2023.

The Asset/Liability Committee (“ALCO”), comprised of members of our bank’s Board of Directors, senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes several computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate sensitive assets (“RSA”), rate sensitive liabilities (“RSL”) and overall operating results and financial position.

With respect to evaluating our exposure to IRR on earnings, we utilize a gap analysis model that considers repricing frequencies of RSA and RSL. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

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Our interest rate sensitivity gap position, illustrating RSA and RSL at their related carrying values, is summarized as follows. The distributions in the table are based on a combination of maturities, call provisions, repricing frequencies and prepayment patterns. Adjustable-rate assets and liabilities are distributed based on the repricing frequency of the instrument. Mortgage instruments are distributed in accordance with estimated cash flows, assuming there is no change in the current interest rate environment.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","\u200b","\u200b","","Due after","","Due after","","\u200b","\u200b","","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","three months","\u200b","one year","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Due within","\u200b","but within","\u200b","but within","\u200b","Due after","\u200b","\u200b","\u200b"],["(Dollars in thousands, except ratios)","\u200b","three months","\u200b","twelve months","\u200b","five years","\u200b","five years","\u200b","Total"],["Rate-sensitive assets:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-bearing deposits in other banks","\u200b","$","9,141","\u200b","$","\u200b","\u200b","$","\u200b","\u200b","$","\u200b","\u200b","$","9,141","\u200b"],["Federal funds sold","\u200b","\u200b","144,700","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","144,700","\u200b"],["Investment securities","\u200b","","8,234","\u200b","\u200b","42,355","\u200b","\u200b","256,858","\u200b","\u200b","176,429","\u200b","","483,876","\u200b"],["Total loans","\u200b","","635,032","\u200b","\u200b","372,548","\u200b","\u200b","1,433,950","\u200b","\u200b","386,472","\u200b","","2,828,002","\u200b"],["Loans held for sale","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","250","\u200b","\u200b","250","\u200b"],["Total rate-sensitive assets","\u200b","$","797,107","\u200b","$","414,903","\u200b","$","1,690,808","\u200b","$","563,151","\u200b","$","3,465,969","\u200b"],["Rate-sensitive liabilities:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Money market accounts","\u200b","$","782,243","\u200b","$","\u200b","\u200b","$","\u200b","\u200b","$","\u200b","\u200b","$","782,243","\u200b"],["NOW accounts","\u200b","","535,541","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","260,885","\u200b","","796,426","\u200b"],["Savings accounts","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b","\u200b","429,011","\u200b","","429,011","\u200b"],["Time deposits less than $100 thousand","\u200b","","19,465","\u200b","\u200b","114,070","\u200b","","270,892","\u200b","\u200b","3,557","\u200b","","407,984","\u200b"],["Time deposits $100 thousand or more","\u200b","","38,402","\u200b","","159,776","\u200b","","20,008","\u200b","","504","\u200b","","218,690","\u200b"],["Short-term borrowings","\u200b","","17,590","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","17,590","\u200b"],["Long-term debt","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","25,000","\u200b","\u200b","\u200b","\u200b","\u200b","25,000","\u200b"],["Subordinated debt","\u200b","","\u200b","\u200b","","\u200b","\u200b","","33,000","\u200b","","\u200b","\u200b","","33,000","\u200b"],["Total rate-sensitive liabilities","\u200b","$","1,393,241","\u200b","$","273,846","\u200b","$","348,900","\u200b","$","693,957","\u200b","$","2,709,944","\u200b"],["Rate-sensitivity gap:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Period","\u200b","$","(596,134)","\u200b","$","141,057","\u200b","$","1,341,908","\u200b","$","(130,806)","\u200b","\u200b","756,025","\u200b"],["Cumulative","\u200b","$","(596,134)","\u200b","$","(455,077)","\u200b","$","886,831","\u200b","$","756,025","\u200b","\u200b","\u200b","\u200b"],["RSA/RSL ratio:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Period","\u200b","","0.57","\u200b","","1.52","\u200b","","4.85","\u200b","","0.81","\u200b","\u200b","\u200b","\u200b"],["Cumulative","\u200b","","0.57","\u200b","","0.73","\u200b","","1.44","\u200b","","1.28","\u200b","","1.28","\u200b"]]
[[/GREPCENT_TABLE]]

At December 31, 2023, we had cumulative one-year RSA/RSL ratio of 0.73, a positive gap. At December 31, 2022, we had cumulative one-year RSA/RSL of 0.69, a positive gap. As previously mentioned, a positive gap indicates that if interest rates increase, our earnings would likely be favorably impacted. The overall focus of ALCO is to maintain a well-balanced IRR position in order to safeguard future earnings during varying volatile interest rate environments. During 2023, as interest rates moved higher due to the FOMC’s attempt to curb inflation, ALCO focused on funding costs and structure of its earning assets.

ALCO will continue to focus efforts on strategies in 2024 to improve asset yields and control funding costs to mitigate expected net interest income compression in an attempt to maintain a positive gap position between RSA and RSL. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.

The change in our cumulative one-year ratio from the previous year-end resulted from a $201.7 million or 20.0 percent increase in RSA partially offset by a $191.1 million or 12.9 percent increase in RSL maturing or repricing within one year. The increase in RSA resulted primarily from a $144.7 million increase in federal funds sold.

With respect to the $191.1 million increase in RSL maturing or repricing within a twelve month time horizon, non-maturity deposits increased $156.1 million due to customers seeking liquid accounts and saving at a higher percentage, while time deposits increased $134.7 million. Short-term borrowings decreased $97.3 million.

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Static gap analysis, although a credible measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a one-day position and variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table. For example, the conservative nature of our Asset/Liability Management Policy assigns personal NOW accounts to the “Due after three months but within twelve months” repricing interval. In reality, these accounts may reprice less frequently and in different magnitudes than changes in general market interest rate levels.

We utilize a simulation model to address the failure of the static gap model to address the dynamic changes in the balance sheet composition or prevailing interest rates and to enhance our asset/liability management. This model creates pro forma net interest income scenarios under various interest rate shocks. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending December 31, 2024, would decrease 0.8 percent from model results using current interest rates.

We will continue to monitor our IRR position in 2024 and anticipate employing deposit and loan pricing strategies and directing the reinvestment of loan and investment payments and prepayments in order to maintain our target IRR position.

Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however, we believe that our exposure to inflation can be mitigated through our asset/liability management program.

Liquidity:

Liquidity management is essential to our continuing operations as it gives us the ability to meet our financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Our financial obligations include, but are not limited to, the following:

[[GREPCENT_TABLE]]
[["","\u25cf","Funding new and existing loan commitments;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Payment of deposits on demand or at their contractual maturity;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Repayment of borrowings as they mature;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Payment of lease obligations; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Payment of operating expenses."]]
[[/GREPCENT_TABLE]]

Our liquidity position is impacted by several factors which include, among others, loan origination volumes, loan and investment maturity structure and cash flows, demand for core deposits and certificate of deposit maturity structure and retention. We manage these liquidity risks daily, thus enabling us to monitor fluctuations in our position and to adapt our position according to market influence and balance sheet trends. We also forecast future liquidity needs and develop strategies to ensure adequate liquidity at all times.

Historically, core deposits have been our primary source of liquidity because of their stability and lower cost, in general, than other types of funding. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale. As a final source of liquidity, we have available borrowing arrangements with various financial intermediaries, including the FHLB-Pgh. At December 31, 2023, our maximum borrowing capacity with the FHLB-Pgh was $1.2 billion of which $25.0 million was outstanding in borrowings and $345.4 million outstanding in the form of irrevocable standby letters of credit. We believe our liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.

We maintain a contingency funding plan to address liquidity in the event of a funding crisis. Examples of some of the causes of a liquidity crisis include, among others, natural disasters, pandemics, war, events causing reputational harm and severe and prolonged asset quality problems. The plan recognizes the need to provide alternative funding sources in times of crisis that go beyond our core deposit base. As a result, we have created a funding program that ensures the

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availability of various alternative wholesale funding sources that can be used whenever appropriate. Identified alternative funding sources include:

[[GREPCENT_TABLE]]
[["","\u25cf","FHLB-Pgh liquidity contingency line of credit;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Federal Reserve discount window and Bank Term Funding Program;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Internet certificates of deposit;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Brokered deposits;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Institutional Deposit Corporation deposits;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Repurchase agreements; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Federal funds purchased."]]
[[/GREPCENT_TABLE]]

To further supplement our borrowing capacity, we also maintain a borrower-in-custody of collateral arrangement at the Federal Reserve that enables us to pledge certain loans, not being used as collateral at the FHLB-Pgh, as collateral for borrowings at the Federal Reserve. At December 31, 2023 our borrowing capacity at the Federal Reserve related to this program was $257.4 million and there were no amounts outstanding. The Company also had availability at the Federal Reserve through the Bank Term Funding Program (“BTFP”). The BTFP allows depository institutions to borrow up to the par value of eligible securities pledged at the Federal Reserve. At December 31, 2023, eligible securities pledged totaled $191.0 million. The Company tested the BTFP borrowing line in 2023 as part of its contingent liquidity plan. At the expiration of the BTFP on March 11, 2024, the Company’s intent is to transfer the eligible securities pledged to the Federal Reserve discount window. For additional information, see Note 9 “Short-term borrowings”.

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to illustrate our reliance on noncore funds to fund our investments and loans maturing after 2023. At December 31, 2023, our noncore funds consisted of time deposits in denominations of $100 thousand or more, brokered deposits, short-term borrowings, and long-term and subordinated debt. Large denomination time deposits are particularly not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered to be highly volatile. At December 31, 2023, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 12.1 percent. Our net short-term noncore funding dependence ratio, noncore funds maturing within one year, less short-term investments to long-term assets equaled 4.7 percent. Comparatively, our ratios equaled 9.6 percent and 8.5 percent at the end of 2022, which indicates an increased reliance on our noncore funds in 2023 with an improved ability to offset them with more liquid assets. Our basic liquidity surplus ratio, defined as liquid assets less short-term potentially volatile liabilities as a percentage of total assets, increased to 9.7 percent at December 31, 2023, from 6.5 percent at December 31, 2022 as our addition of brokered deposits during 2023 coupled with our decision to slow loan growth resulted in higher levels of on-balance sheet liquidity. We will continue to focus on increasing liquidity in the coming year through implementation of competitive deposit pricing strategies and slowing new loan originations as we plan for a possible decline in economic activity or possible stress in commercial real estate credit.

The Consolidated Statements of Cash Flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents consist of cash on hand, cash items in the process of collection, noninterest-bearing and interest-bearing deposits with other banks and federal funds sold. Cash and cash equivalents increased $149.5 million for the year ended December 31, 2023, primarily due to deposit growth outpacing loan growth. For the year ended December 31, 2022, cash and cash equivalents decreased $242.1 million.

 Operating activities provided net cash of $33.3 million in 2023 and $42.4 million in 2022. Net income, adjusted for the effects of noncash expenses such as depreciation, amortization and accretion of tangible and intangible assets and investment securities, and the provision for loan losses, is the primary source of funds from operations.

Net cash provided by financing activities equaled $142.0 million in 2023. Net cash provided by financing activities was $183.4 million in 2022. Deposit gathering, which is our predominant financing activity, increased in both 2023 and 2022 and provided a net cash inflow in 2023 of $232.4 million and $83.2 million in 2022. Short-term borrowing repayments decreased net cash by $97.3 million in 2023 and additional borrowings increased cash by $114.9 million in 2022. Long term borrowings provided a net inflow of $25.0 million in 2023, and none in 2022. Inflows in 2023 were also partially offset by a $0.6 million net decrease due to payments made to our long-term debt as well as cash dividends paid of $11.7

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million and the retirement of common stock of $5.9 million. In 2022, deposit gathering was also partially offset by $2.1 in payments to long term debt, retirement of common stock of $1.3 million, and cash dividends paid of $11.3 million.

Our primary investing activities involve transactions related to our investment and loan portfolios. Net cash used in investing activities totaled $25.8 million and $467.8 million in 2023 and 2022, respectively. Net cash used in lending activities was $123.3 million in 2023, a decrease from $402.7 million in 2022. Activities related to our investment portfolio provided net cash of $98.9 million in 2023 and used net cash of $48.3 million in 2022.

We anticipate a more challenging environment faced by financial institutions in maintaining strong liquidity positions in 2024. Our continued growth in our expansion markets coupled with our mature markets is expected to continue to produce loan demand throughout 2024, albeit at a slower pace. We expect to fund such demand through deposit gathering initiatives, payments and prepayments on loans and investments and advances from the FHLB. However, we cannot predict the economic climate or the savings habits of consumers. Should economic conditions decline, deposit gathering may be negatively impacted. Regardless of economic conditions and stock market fluctuations, we believe that through constant monitoring and adherence to our liquidity plan, we will have the means to provide adequate cash to fund our normal operations in 2024.

Cash Requirements:

The Company has cash requirements for various financial obligations, including contractual obligations and commitments that require cash payments. The most significant contractual obligation, in both the under and over one-year time period, is for Peoples Bank to repay time deposits. The Company anticipates meeting these obligations by utilizing on-balance sheet liquidity and continuing to provide convenient depository and cash management services through its branch network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market. The Company may also use borrowings and brokered deposits to meet its obligations.

Commitments to extend credit are the Company's most significant commitment in both the under and over one-year time periods. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.

Capital Adequacy:

We believe a strong capital position is essential to our continued growth and profitability. We strive to maintain a relatively high level of capital to provide our depositors and stockholders with a margin of safety. In addition, a strong capital base allows us to take advantage of profitable opportunities, support future growth and provide protection against any unforeseen losses.

Our ALCO reviews our capital position, generally, quarterly. As part of its review, the ALCO considers: (i) the current and expected capital requirements, including the maintenance of capital ratios in excess of minimum regulatory guidelines; (ii) potential changes in the market value of our securities due to interest rates changes and effect on capital; (iii) projected organic and inorganic asset growth; (iv) the anticipated level of net earnings and capital position, taking into account the projected asset/liability position and exposure to changes in interest rates; (v) significant deteriorations in asset quality; and (vi) the source and timing of additional funds to fulfill future capital requirements.

Based on the recent regulatory emphasis placed on banks to assure capital adequacy, our Board of Directors annually reviews and approves a capital plan. Among other specific objectives, this comprehensive plan: (i) attempts to ensure that we and Peoples Bank remain well capitalized under the regulatory framework for prompt corrective action; (ii) evaluates our capital adequacy exposure through a comprehensive risk assessment; (iii) incorporates periodic stress testing in accordance with the Federal Reserve Board’s Supervisory Capital Assessment Program (“SCAP”); (iv) establishes event triggers and action plans to ensure capital adequacy; and (v) identifies realistic and readily available alternative sources for augmenting capital if higher capital levels are required.

 Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary

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supervisory actions for noncompliance. Our and Peoples Bank’s risk-based capital ratios are strong and have consistently exceeded the minimum regulatory capital ratios required for adequately capitalized institutions. Our ratio of Tier 1 capital to risk-weighted assets and off-balance sheet items was 12.10 percent and 11.13 percent at December 31, 2023 and 2022, respectively. Our Total capital ratio was 14.16 percent and 12.13 percent at December 31, 2023 and 2022, respectively. Our and Peoples Bank’s common equity Tier I capital to risk-weighted assets ratios were 12.10 percent and 13.30 percent at December 31, 2023 and 11.13 percent and 12.27 percent at December 31, 2022. Our Leverage ratio, which equaled 8.50 percent at December 31, 2023 and 9.03 percent at December 31, 2022, exceeded the minimum of 4.0 percent for capital adequacy purposes. Peoples Bank reported Tier 1 capital, Total capital and Leverage ratios of 13.30 percent, 14.12 percent and 9.34 percent at December 31, 2023, and 12.27 percent, 13.26 percent and 9.69 percent at December 31, 2022. Based on the most recent notification from the FDIC, Peoples Bank was categorized as well capitalized at December 31, 2023. There are no conditions or events since this notification that we believe have changed Peoples Bank’s category. For a further discussion of these risk-based capital standards and supervisory actions for noncompliance, refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements to this Annual Report.

Stockholders’ equity was $340.4 million or $48.35 per share at December 31, 2023, and $315.4 million or $44.06 per share at December 31, 2022. The $25.1 million increase in shareholders equity in 2023 was primarily due to net income and a decrease in accumulated other comprehensive loss resulting from a decrease to the unrealized loss of available for sale securities, partially offset by dividends paid to shareholders and retirement of common stock under our stock buyback plan.

We declared dividends of $1.64 per share in 2023, $1.58 per share in 2022, and $1.50 per share in 2021. The dividend payout ratio, dividends declared as a percent of net income, equaled 42.8 percent in 2023, 29.9 percent in 2022 and 24.9 percent in 2021. Our Board of Directors intends to continue paying cash dividends in the future and has declared a cash dividend in the first quarter of 2024 of $0.41 per share. Our ability to declare and pay dividends in the future is based on our operating results, financial and economic conditions, capital and growth objectives, dividend restrictions and other relevant factors. We rely on dividends received from our subsidiary, Peoples Bank, for payment of dividends to stockholders. Peoples Bank’s ability to pay dividends is subject to federal and state regulations. For a further discussion on our ability to declare and pay dividends in the future and dividend restrictions, refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

Since 2014, our Board of Directors has adopted various common stock repurchase plans whereby we were authorized to repurchase shares of our outstanding common stock through open market purchases. During 2023 we repurchased and retired 131,686 shares for $5.9 million under the then current plan. We purchased and retired 27,733 shares for $1.3 million during 2022 and purchased and retired 54,285 shares for $2.4 million during 2021.

Review of Financial Performance:

Net income for the twelve months ended December 31, 2023, totaled $27.4 million or $3.83 per diluted share, a 28.1 percent decrease when compared to $38.1 million or $5.28 per diluted share for the comparable period of 2022. Net interest income for the current period decreased $9.0 million when compared to the twelve months ended December 31, 2022 as higher interest income due to higher yields on earning assets was more than offset by increased funding costs. Higher operating expenses of $5.1 million, including $1.8 million of acquisition related expenses, and an increased provision for credit losses of $1.0 million were partially offset by a $2.3 million increase in noninterest income. ROAA was 0.74 percent and ROE was 8.32 percent for the year ended December 31, 2023.

Fully tax-equivalent (“FTE”) net interest income, a non-GAAP measure, was $88.7 million in 2023 and $97.7 million in 2022. Our net interest margin equaled 2.54 percent in 2023 and 3.02 percent in 2022. Noninterest income totaled $14.1 million 2023 and $11.8 million in 2022. Noninterest expense was $67.8 million for the year ended December 31, 2023 compared to $62.7 million for the year ended December 31, 2022. Our productivity is measured by the operating efficiency ratio, a non-GAAP measure, defined as noninterest expense less amortization of intangible assets and acquisition related expenses divided by the total of tax-equivalent net interest income and noninterest income. Our operating efficiency ratio was 64.1 percent in 2023 and 55.9 percent in 2022.

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Non-GAAP Financial Measures:

The following are non-GAAP financial measures, which provide useful insight to the reader of the consolidated financial statements, but should be supplemental to GAAP used to prepare Peoples’ financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, Peoples’ non-GAAP measures may not be comparable to non-GAAP measures of other companies. The tax rate used to calculate the FTE adjustment was 21 percent for 2023, 2022, and 2021.

The following table reconciles the non-GAAP financial measures of FTE net interest income for the years ended 2023, 2022 and 2021:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Twelve Months Ended December 31,","","2023","","\u200b","2022","\u200b","\u200b","2021"],["Interest income (GAAP)","\u200b","$","149,851","\u200b","\u200b","$","111,334","\u200b","\u200b","$","94,057"],["Adjustment to FTE","\u200b","","1,917","\u200b","\u200b","","1,901","\u200b","\u200b","\u200b","1,512"],["Interest income adjusted to FTE (non-GAAP)","\u200b","","151,768","\u200b","\u200b","","113,235","\u200b","\u200b","\u200b","95,569"],["Interest expense","\u200b","","63,097","\u200b","\u200b","","15,585","\u200b","\u200b","\u200b","9,422"],["Net interest income adjusted to FTE (non-GAAP)","\u200b","$","88,671","\u200b","\u200b","$","97,650","\u200b","\u200b","$","86,147"]]
[[/GREPCENT_TABLE]]

The efficiency ratio is noninterest expenses, less amortization of intangible assets and acquisition related expenses, as a percentage of FTE net interest income plus noninterest income less gains and/or losses on debt security sales and gains on sale of assets. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP for the years ended 2023, 2022, and 2021:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands, except percents)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Twelve Months Ended December 31,","","2023","","\u200b","2022","","\u200b","2021","\u200b"],["Efficiency ratio (non-GAAP):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Noninterest expense (GAAP)","\u200b","$","67,820","\u200b","\u200b","$","62,677","\u200b","\u200b","$","55,004","\u200b"],["Less: amortization of intangible assets expense","\u200b","","105","\u200b","\u200b","","363","\u200b","\u200b","\u200b","491","\u200b"],["Less: acquisition related expenses","\u200b","\u200b","1,816","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Noninterest expense adjusted (non-GAAP)","\u200b","\u200b","65,899","\u200b","\u200b","\u200b","62,314","\u200b","\u200b","\u200b","54,513","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net interest income (GAAP)","\u200b","\u200b","86,754","\u200b","\u200b","\u200b","95,749","\u200b","\u200b","\u200b","84,635","\u200b"],["Plus: taxable equivalent adjustment","\u200b","\u200b","1,917","\u200b","\u200b","\u200b","1,901","\u200b","\u200b","\u200b","1,512","\u200b"],["Noninterest income (GAAP)","\u200b","\u200b","14,133","\u200b","\u200b","\u200b","11,845","\u200b","\u200b","\u200b","25,636","\u200b"],["Less: net losses on equity securities","\u200b","\u200b","(11)","\u200b","\u200b","\u200b","(31)","\u200b","\u200b","\u200b","2","\u200b"],["Less: gain on sale of Visa Class B shares","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","12,153","\u200b"],["Less: gains (losses) on sale of available for sale securities","\u200b","\u200b","81","\u200b","\u200b","\u200b","(1,976)","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net interest income (FTE) plus noninterest income (non-GAAP)","\u200b","$","102,734","\u200b","\u200b","$","111,502","\u200b","\u200b","$","99,628","\u200b"],["Efficiency ratio (non-GAAP)","\u200b","\u200b","64.1","%","\u200b","\u200b","55.9","%","\u200b","\u200b","54.7","%"]]
[[/GREPCENT_TABLE]]

​

Net Interest Income:

Net interest income is the fundamental source of earnings for commercial banks. Moreover, fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits and borrowings comprise interest-bearing liabilities. Net interest income is impacted by:

[[GREPCENT_TABLE]]
[["","\u25cf","Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Changes in general market interest rates; and"]]
[[/GREPCENT_TABLE]]

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Table of Contents

[[GREPCENT_TABLE]]
[["","\u25cf","The level of nonperforming assets."]]
[[/GREPCENT_TABLE]]

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of average earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pretax yields lower than their taxable counterparts. Therefore, in order to make the net interest margin analysis more comparable, tax-exempt income and yields are reported in this analysis on a tax-equivalent basis using the prevailing federal statutory tax rate.

Similar to all banks, we consider the maintenance of an adequate net interest margin to be of primary concern. The current economic environment has been changing rapidly for most of the current year with steadily rising interest rates. This is in contrast to prior years where impact of the pandemic and interest rates at historical lows were the predominant driving forces. In addition to market rates and competition, nonperforming asset levels are of particular concern for the banking industry and may place additional pressure on net interest margins. Nonperforming assets may change, given the uncertainty of the national and global economies, particularly the labor markets. No assurance can be given as to how general market conditions will change or how such changes will affect net interest income. We anticipate continued margin pressure into the coming year as a result of interest rates remaining elevated as the FOMC tries to curb inflationary pressures, competitors focus on building on-balance sheet liquidity while alternative funding sources become more expensive.

We analyze interest income and interest expense by segregating rate and volume components of earning assets and interest-bearing liabilities. The impact changes in the interest rates earned and paid on assets and liabilities, along with changes in the volumes of earning assets and interest-bearing liabilities, have on net interest income are summarized as follows. The net change or mix component, attributable to the combined impact of rate and volume changes within earning assets and interest-bearing liabilities’ categories, has been allocated proportionately to the change due to rate and the change due to volume.

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Table of Contents

Net interest income changes due to rate and volume

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","2023 vs 2022","\u200b","2022 vs 2021"],["\u200b","\u200b","Increase (decrease)","\u200b","Increase (decrease)"],["\u200b","\u200b","attributable to","\u200b","attributable to"],["(Dollars in thousands)","\u200b","Total","\u200b","Rate","\u200b","Volume","\u200b","Total","\u200b","Rate","\u200b","Volume"],["Interest income:","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","\u200b"],["Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","$","33,508","\u200b","$","20,140","\u200b","$","13,368","\u200b","$","13,012","\u200b","$","3,018","\u200b","$","9,994","\u200b"],["Tax-exempt","\u200b","","688","\u200b","\u200b","394","\u200b","\u200b","294","\u200b","","1,427","\u200b","","(341)","\u200b","","1,768","\u200b"],["Investments:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","","(320)","\u200b","\u200b","801","\u200b","\u200b","(1,121)","\u200b","","2,698","\u200b","","(820)","\u200b","","3,518","\u200b"],["Tax-exempt","\u200b","","(612)","\u200b","\u200b","(160)","\u200b","\u200b","(452)","\u200b","","424","\u200b","","(197)","\u200b","","621","\u200b"],["Interest-bearing deposits","\u200b","","234","\u200b","\u200b","266","\u200b","\u200b","(32)","\u200b","","93","\u200b","","95","\u200b","","(2)","\u200b"],["Federal funds sold","\u200b","","5,035","\u200b","\u200b","4,517","\u200b","\u200b","518","\u200b","","12","\u200b","\u200b","440","\u200b","","(428)","\u200b"],["Total interest income","\u200b","","38,533","\u200b","","25,958","\u200b","","12,575","\u200b","","17,666","\u200b","","2,195","\u200b","","15,471","\u200b"],["Interest expense:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Money market accounts","\u200b","\u200b","17,719","\u200b","\u200b","16,901","\u200b","\u200b","818","\u200b","","3,007","\u200b","","2,705","\u200b","","302","\u200b"],["NOW accounts","\u200b","","11,093","\u200b","\u200b","11,160","\u200b","\u200b","(67)","\u200b","","2,291","\u200b","","1,818","\u200b","","473","\u200b"],["Savings accounts","\u200b","","498","\u200b","\u200b","547","\u200b","\u200b","(49)","\u200b","","114","\u200b","","69","\u200b","","45","\u200b"],["Time deposits less than $100","\u200b","","12,045","\u200b","\u200b","7,381","\u200b","\u200b","4,664","\u200b","","(117)","\u200b","","(111)","\u200b","","(6)","\u200b"],["Time deposits $100 or more","\u200b","","4,574","\u200b","\u200b","4,187","\u200b","\u200b","387","\u200b","","27","\u200b","","105","\u200b","","(78)","\u200b"],["Short-term borrowings","\u200b","","817","\u200b","\u200b","939","\u200b","\u200b","(122)","\u200b","","1,025","\u200b","","655","\u200b","","370","\u200b"],["Long-term debt","\u200b","","766","\u200b","\u200b","(5)","\u200b","\u200b","771","\u200b","","(184)","\u200b","","80","\u200b","","(264)","\u200b"],["Total interest expense","\u200b","","47,512","\u200b","","41,110","\u200b","","6,402","\u200b","","6,163","\u200b","","5,321","\u200b","","842","\u200b"],["FTE net interest income (Non-GAAP)","\u200b","$","(8,979)","\u200b","$","(15,152)","\u200b","$","6,173","\u200b","$","11,503","\u200b","$","(3,126)","\u200b","$","14,629","\u200b"]]
[[/GREPCENT_TABLE]]

FTE net interest income, a non-GAAP measure, was $88.7 million in 2023 and $97.7 million in 2022. There was a positive volume variance that was offset by a negative rate variance. The growth in average interest-earning assets exceeded that of interest-bearing liabilities, and resulted in additional tax-equivalent net interest income, a non-GAAP measure, of $6.2 million. A rate variance resulted in a decrease in net interest income of $15.2 million as liabilities repriced quicker than assets.

Average earning assets increased $263.1 million to $3.5 billion in 2023 from $3.2 billion in 2022 and accounted for a $12.6 million increase in interest income. Average loans increased $309.1 million, which caused interest income to increase $13.7 million. Average taxable investments decreased $69.2 million comparing 2023 and 2022, which resulted in decreased interest income of $1.1 million while average tax-exempt investments decreased $20.2 million, which resulted in a decrease to interest income of $0.5 million. The Company engaged in investment sales during the first three months of 2023 to, in part, fund loan growth and repay short term borrowings. Average federal funds sold increased $45.5 million, which resulted in an increase to interest income of $0.5 million.

Average interest-bearing liabilities grew $305.4 million to $2.6 billion in 2023 from $2.3 billion in 2022 resulting in a net increase in interest expense of $6.4 million. In addition, interest-bearing transaction accounts, including money market, NOW and savings accounts grew $32.0 million, which in aggregate caused a $0.7 million increase in interest expense. Large denomination time deposits averaged $37.7 million more in 2023 and caused interest expense to increase $0.4 million. An increase of $222.2 million in average time deposits less than $100 thousand increased interest expense by $4.7 million, due primarily to an increase in brokered deposits secured as part of the Company’s strategy to improve on-balance sheet liquidity. Short-term borrowings averaged $4.3 million less and decreased interest expense $0.1 million while long-term debt averaged $17.8 million more and increased interest expense by $0.8 million comparing 2023 and 2022.

An unfavorable rate variance occurred, as the tax-equivalent yield on earning assets increased 84 basis points while there was a 174 basis points increase in the cost of funds. As a result, tax-equivalent net interest income decreased $15.2 million comparing 2023 and 2022. The tax-equivalent yield on earning assets was 4.34 percent in 2023 compared to 3.50 percent in 2022 resulting in an increase in interest income of $26.0 million. With the tax-equivalent yield on the investment

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portfolio increasing 10 basis points to 1.77 percent in 2023 from 1.67 percent in 2022, interest income increased $0.6 million. The tax-equivalent yield on the loan portfolio increased 77 basis points to 4.81 percent in 2023 from 4.04 percent in 2022 and resulted in an increase to interest income of $20.5 million.

An unfavorable rate variance was experienced in the cost of funds. We experienced increases in the rates paid on most major categories of interest-bearing liabilities. Specifically, the cost of non-maturity deposit accounts increased 148 basis points comparing 2023 and 2022. These increases resulted in an increase in interest expense of $28.6 million. With regard to time deposits, the average rate paid for time deposits less than $100 thousand increased 279 basis points while time deposits $100 thousand or more increased 212 basis points, which together resulted in an $11.6 million increase in interest expense. The average rate paid on short-term borrowings increased 243 basis points in 2023 when compared to 2022, causing a $0.9 million increase in interest expense. Interest expense decreased $5 thousand from a 32 basis point decrease in the average rate paid on long-term debt.

The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Averages for earning assets include nonaccrual loans. Investment averages include available for sale securities at amortized cost. Income on tax-free investment securities and loans is adjusted to a tax-equivalent basis, a non-GAAP measure, using the prevailing federal statutory tax rate of 21.0 percent in 2023, 2022 and 2021.

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 Summary of net interest income

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended"],["\u200b","\u200b","December 31, 2023","","December 31, 2022"],["\u200b","\u200b","Average","\u200b","Interest Income/","\u200b","Yield/","","Average","\u200b","Interest Income/","\u200b","Yield/"],["(Dollars in thousands, except percents)","","Balance","","Expense","","Rate","","Balance","","Expense","","Rate"],["Assets:","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b"],["Earning assets:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","$","2,605,927","\u200b","$","129,013","","4.95","%","$","2,306,455","\u200b","$","95,505","","4.14","%"],["Tax-exempt","\u200b","","225,839","\u200b","\u200b","7,124","","3.15","\u200b","\u200b","216,195","\u200b","\u200b","6,436","","2.98","\u200b"],["Total loans","\u200b","\u200b","2,831,766","\u200b","\u200b","136,137","\u200b","4.81","\u200b","\u200b","2,522,650","\u200b","\u200b","101,941","\u200b","4.04","\u200b"],["Investments:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","","468,403","\u200b","\u200b","7,916","","1.69","\u200b","\u200b","537,566","\u200b","\u200b","8,236","","1.53","\u200b"],["Tax-exempt","\u200b","","90,897","\u200b","\u200b","2,003","","2.20","\u200b","\u200b","111,083","\u200b","\u200b","2,615","","2.35","\u200b"],["Total investments","\u200b","\u200b","559,300","\u200b","\u200b","9,919","","1.77","\u200b","\u200b","648,649","\u200b","\u200b","10,851","","1.67","\u200b"],["Interest-bearing deposits","\u200b","","6,373","\u200b","\u200b","335","","5.26","\u200b","\u200b","8,536","\u200b","\u200b","101","","1.17","\u200b"],["Federal funds sold","\u200b","\u200b","98,535","\u200b","\u200b","5,377","","5.46","\u200b","\u200b","53,056","\u200b","\u200b","342","","0.65","\u200b"],["Total interest-earning assets","\u200b","","3,495,974","\u200b","","151,768","","4.34","%","","3,232,891","\u200b","","113,235","","3.50","%"],["Less: allowance for credit losses","\u200b","","24,377","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","29,298","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other assets","\u200b","","211,618","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","210,392","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total assets","\u200b","$","3,683,215","\u200b","$","151,768","\u200b","\u200b","\u200b","$","3,413,985","\u200b","$","113,235","\u200b","\u200b","\u200b"],["Liabilities and Stockholders\u2019 Equity:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-bearing liabilities:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Money market accounts","\u200b","$","714,940","\u200b","$","22,686","","3.17","%","$","624,528","\u200b","$","4,967","","0.80","%"],["Interest-bearing demand and NOW accounts","\u200b","","779,977","\u200b","\u200b","15,586","","2.00","\u200b","\u200b","791,653","\u200b","\u200b","4,493","","0.57","\u200b"],["Savings accounts","\u200b","","474,028","\u200b","\u200b","994","","0.21","\u200b","\u200b","520,770","\u200b","\u200b","496","","0.10","\u200b"],["Time deposits less than $100","\u200b","","349,990","\u200b","\u200b","13,344","","3.81","\u200b","\u200b","127,801","\u200b","\u200b","1,299","","1.02","\u200b"],["Time deposits $100 or more","\u200b","","200,743","\u200b","\u200b","5,951","","2.96","\u200b","\u200b","162,998","\u200b","\u200b","1,377","","0.84","\u200b"],["Total interest-bearing deposits","\u200b","\u200b","2,519,678","\u200b","\u200b","58,561","","2.32","\u200b","\u200b","2,227,750","\u200b","\u200b","12,632","","0.57","\u200b"],["Short-term borrowings","\u200b","","38,331","\u200b","\u200b","1,920","","5.01","\u200b","\u200b","42,680","\u200b","\u200b","1,103","","2.58","\u200b"],["Long-term debt","\u200b","","19,448","\u200b","\u200b","842","","4.33","\u200b","\u200b","1,634","\u200b","\u200b","76","","4.65","\u200b"],["Subordinated debt","\u200b","\u200b","33,000","\u200b","\u200b","1,774","","5.38","\u200b","\u200b","33,000","\u200b","\u200b","1,774","","5.38","\u200b"],["Total borrowings","\u200b","\u200b","90,779","\u200b","\u200b","4,536","","5.00","\u200b","\u200b","77,314","\u200b","\u200b","2,953","","3.82","\u200b"],["Total interest-bearing liabilities","\u200b","","2,610,457","\u200b","$","63,097","","2.42","%","\u200b","2,305,064","\u200b","$","15,585","","0.68","%"],["Noninterest-bearing deposits","\u200b","","698,749","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","753,399","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other liabilities","\u200b","","44,786","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","34,517","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Stockholders\u2019 equity","\u200b","","329,223","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","321,005","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total liabilities and stockholders\u2019 equity","\u200b","$","3,683,215","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","3,413,985","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net interest income/spread","\u200b","\u200b","\u200b","\u200b","$","88,671","","1.92","%","\u200b","\u200b","\u200b","$","97,650","","2.82","%"],["Net interest margin (Non-GAAP)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","2.54","%","\u200b","\u200b","\u200b","\u200b","\u200b","","3.02","%"],["Tax-equivalent adjustments:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Loans","\u200b","\u200b","\u200b","\u200b","$","1,496","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","1,352","\u200b","\u200b","\u200b"],["Investments","\u200b","\u200b","\u200b","\u200b","","421","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","549","\u200b","\u200b","\u200b"],["Total adjustments","\u200b","\u200b","\u200b","\u200b","$","1,917","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","1,901","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Note: Average balances were calculated using average daily balances. Interest income on loans includes fees of $0.4 million in 2023, $1.9 million in 2022 and $6.0 million in 2021. The decrease in 2023 is primarily due to lower origination fees.

​

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","2021","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Average","\u200b","\u200b"],["\u200b","\u200b","Average","\u200b","Interest Income/","\u200b","Interest","\u200b","\u200b"],["(Dollars in thousands, except percents)","\u200b","Balance","\u200b","Expense","\u200b","Rate","\u200b","\u200b"],["Assets:","","\u200b","\u200b","","\u200b","\u200b","","\u200b","","\u200b"],["Earning assets:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","$","2,063,168","\u200b","$","82,493","","4.00","%","\u200b"],["Tax-exempt","\u200b","","157,409","\u200b","","5,009","","3.18","\u200b","\u200b"],["Total loans","\u200b","\u200b","2,220,577","\u200b","\u200b","87,502","\u200b","3.94","\u200b","\u200b"],["Investments:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","","313,319","\u200b","","5,538","","1.77","\u200b","\u200b"],["Tax-exempt","\u200b","","85,200","\u200b","","2,191","","2.57","\u200b","\u200b"],["Total investments","\u200b","\u200b","398,519","\u200b","\u200b","7,729","\u200b","1.94","\u200b","\u200b"],["Interest-bearing deposits","\u200b","","11,123","\u200b","","8","","0.07","\u200b","\u200b"],["Federal funds sold","\u200b","","246,891","\u200b","","330","","0.13","\u200b","\u200b"],["Total interest-earning assets","\u200b","","2,877,110","\u200b","$","95,569","","3.32","%","\u200b"],["Less: allowance for loan losses","\u200b","","27,209","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other assets","\u200b","","227,293","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total assets","\u200b","$","3,077,194","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Liabilities and Stockholders\u2019 Equity:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-bearing liabilities:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Money market accounts","\u200b","$","549,169","\u200b","$","1,960","","0.36","%","\u200b"],["NOW accounts","\u200b","","666,885","\u200b","","2,202","","0.33","\u200b","\u200b"],["Savings accounts","\u200b","","468,851","\u200b","","382","","0.08","\u200b","\u200b"],["Time deposits less than $100","\u200b","","128,313","\u200b","","1,416","","1.10","\u200b","\u200b"],["Time deposits $100 or more","\u200b","","172,711","\u200b","","1,350","","0.78","\u200b","\u200b"],["Total interest-bearing deposits","\u200b","\u200b","1,985,929","\u200b","\u200b","7,310","\u200b","0.37","\u200b","\u200b"],["Short-term borrowings","\u200b","","13,973","\u200b","","78","","0.56","\u200b","\u200b"],["Long-term debt","\u200b","","7,948","\u200b","","260","","3.27","\u200b","\u200b"],["Subordinated debt","\u200b","\u200b","33,000","\u200b","\u200b","1,774","\u200b","5.38","\u200b","\u200b"],["Total borrowings","\u200b","","54,921","\u200b","","2,112","","3.85","\u200b","\u200b"],["Total interest-bearing liabilities","\u200b","\u200b","2,040,850","\u200b","$","9,422","\u200b","0.46","%","\u200b"],["Noninterest-bearing deposits","\u200b","","684,527","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other liabilities","\u200b","","25,704","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Stockholders\u2019 equity","\u200b","","326,113","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total liabilities and stockholders\u2019 equity","\u200b","$","3,077,194","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net interest income/spread","\u200b","\u200b","\u200b","\u200b","$","86,147","","2.86","%","\u200b"],["Net interest margin (Non-GAAP)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","","2.99","%","\u200b"],["Tax-equivalent adjustments:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Loans","\u200b","\u200b","\u200b","\u200b","$","1,052","\u200b","\u200b","\u200b","\u200b"],["Investments","\u200b","\u200b","\u200b","\u200b","","460","\u200b","\u200b","\u200b","\u200b"],["Total adjustments","\u200b","\u200b","\u200b","\u200b","$","1,512","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

Provision for Credit Losses:

Effective January 1, 2023 the Company transitioned to ASU 2016-13 Financial Instruments – Credit Losses (Topic 326), commonly referred to as CECL. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and expected losses in the portfolio as of December 31, 2023. Refer to Note 1 “Summary of Significant Accounting Policies” for additional detail on the adoption of CECL.

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The ACL decreased $5.6 million to $21.9 million at December 31, 2023, from $27.5 million at the end of 2022. In addition to the transition adjustment of $3.3 million, a net provision for credit losses of $0.6 million was recorded. The provision of $0.6 million included the $1.1 million adjustment previously noted, and a provision of $1.6 million was recorded due to the impact of various factors such as updated economic assumptions as well as changes in qualitative adjustments, portfolio composition and improved asset quality.

Noninterest Income:

Our noninterest income for 2023 was $14.1 million compared with $11.8 million for the year ago period, an increase of $2.3 million. The increase was primarily due to a $2.0 million loss on the sale of investment securities available for sale in the year ago. The remaining increase was due to an increase in service charges, fees and commissions of $0.7 million, due in part to a $0.4 million increase in consumer and commercial deposit service charges and increased dividends on FHLB stock. Merchant services income decreased $0.3 million on lower transaction volume incentives, and interest rate swap revenue decreased $0.2 million on lower origination volume and market value adjustments.

Noninterest Expense:

In general, our noninterest expense is categorized into three main groups, including employee-related expense, occupancy and equipment expense and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income and utility costs. Other expenses include general operating expenses such as marketing, other taxes, stationery and supplies, contractual services, insurance, including FDIC assessment and loan collection costs. During 2023, we incurred expenses related to our proposed strategic combination with FNCB Bancorp, Inc., such as legal and consulting costs. Some of our noninterest costs and expenses are variable while the remainder is fixed. We utilize budgets and other related strategies in an effort to control the variable expenses. The major components of noninterest expense for the past three years are summarized as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(Dollars in thousands)","","2023","","2022","","2021"],["Salaries and employee benefits expense:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Salaries and payroll taxes","\u200b","$","30,173","\u200b","$","29,308","\u200b","$","25,176","\u200b"],["Employee benefits","\u200b","","5,112","\u200b","","4,245","\u200b","","4,560","\u200b"],["Salaries and employee benefits expense","\u200b","","35,285","\u200b","","33,553","\u200b","","29,736","\u200b"],["Occupancy and equipment expenses:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Occupancy expense","\u200b","","11,114","\u200b","","10,839","\u200b","","8,212","\u200b"],["Equipment expense","\u200b","","6,032","\u200b","","5,739","\u200b","","4,636","\u200b"],["Occupancy and equipment expenses","\u200b","","17,146","\u200b","","16,578","\u200b","","12,848","\u200b"],["Acquisition related expenses","\u200b","\u200b","1,816","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other expenses:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Professional fees and outside services","\u200b","","2,810","\u200b","","2,715","\u200b","","2,137","\u200b"],["FDIC insurance and assessments","\u200b","","2,131","\u200b","","1,300","\u200b","","1,117","\u200b"],["Donations","\u200b","\u200b","1,619","\u200b","\u200b","1,381","\u200b","\u200b","1,435","\u200b"],["Other taxes","\u200b","","1,083","\u200b","","1,559","\u200b","","1,336","\u200b"],["Advertising","\u200b","","545","\u200b","","943","\u200b","","575","\u200b"],["Stationery and supplies","\u200b","","445","\u200b","","431","\u200b","","910","\u200b"],["Amortization of intangible assets","\u200b","","105","\u200b","","363","\u200b","","491","\u200b"],["Net gain on sale of other real estate owned","\u200b","\u200b","(18)","\u200b","\u200b","(478)","\u200b","\u200b","(210)","\u200b"],["Other","\u200b","","4,853","\u200b","","4,332","\u200b","","4,629","\u200b"],["Other expenses","\u200b","","13,573","\u200b","","12,546","\u200b","","12,420","\u200b"],["Total noninterest expense","\u200b","$","67,820","\u200b","$","62,677","\u200b","$","55,004","\u200b"]]
[[/GREPCENT_TABLE]]

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Salaries and employee benefits expense constitute the majority of our noninterest expenses accounting for 52.0 percent of the total noninterest expense. Salaries and employee benefits expense increased $1.7 million or 5.2 percent to $35.3 million in 2023 from $33.6 million in 2022. Salaries and payroll taxes increased $0.9 million or 3.0 percent and employee benefits expense increased $0.9 million or 20.4 percent. The higher salary expense in 2023 was due primarily to lower deferred loan origination costs, which are recorded as a contra-salary expense, of $0.9 million. Benefits saw increases of $1.0 million in health insurance costs and profit-sharing expenses.

Occupancy and equipment expense increased $0.6 million or 3.4 percent to $17.1 million in 2023 from $16.6 million in 2022, due to higher technology costs related to increased account and transaction volumes, and increased facility expenses.

Acquisition related expenses totaled $1.8 million in 2023. There were no comparable expenses in 2022 and 2021.

Other expenses, which consist of, professional fees and outside services, FDIC insurance and assessments, donations, other taxes, advertising,  stationary and supplies, amortization of intangible assets and all other expenses increased $1.0 million, due primarily to increased FDIC insurance assessments of $0.8 million.  The year ago period included a $0.5 million of gains from the sale of other real estate owned, which is included in noninterest expense.  

Income Taxes:

Our income tax expense was $5.1 million and our effective tax rate was 15.8 percent for the year ended December 31, 2023, a decrease from income tax expense of $7.3 million and an effective tax rate of 16.0 percent for the year ended December 31, 2022. The decrease in 2023 was primarily due to lower pretax income.

We also utilize loans and investments in tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable by the federal government. The tax benefit of tax-exempt income was 3.3 percent of pre-tax income in 2023 and 3.1 percent in 2022.

The effective tax rate in 2023 and 2022 was also influenced by the recognition of investment tax credits related to our limited partnership investments in elderly and low- to- moderate-income residential housing programs which allow us to mitigate our tax burden. By utilizing these credits, we reduced our income tax expense by $755 thousand in 2023 and $911 thousand in 2022. We anticipate investment tax credits from these investments to be $627 thousand in 2023.

​

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Management’s Discussion and Analysis 2022 versus 2021

Operating Environment:

2022 has been centered in uncertainty around the lingering effects of COVID-19, high inflation, a tight labor market, fear of recession and the global impact of Russia’s invasion of the Ukraine. As COVID-19 restrictions began to ease and commercial and consumer activity returned to pre-pandemic levels, strong demand driven by low interest rates and government stimulus clashed with weakened supply chains and pandemic-related shortages.

Inflation increased during 2022 to levels well above the Federal Open Market Committee’s (“FOMC”) long-term desired 2 percent level for items other than food and energy and remained elevated at year-end 2022. Core inflation, as measured by the Consumer Price Index (“CPI”), excluding items known for their volatility such as food and energy, was 5.7 percent for the 12 months ending December 31, 2022. When including food and energy, CPI was 6.5 percent due primarily to higher energy costs. The Personal Consumption Expenditures Index (“PCE”), a measure of the prices that people living in the U.S. pay for goods and services, increased 5.0 percent in December compared to a year ago. Excluding food and energy, PCE increased 4.4 percent.

Concerns over the high inflation rate have resulted in central bankers in the U.S. adjusting interest rates to slow economic activity by curbing spending, hiring and investment. The FOMC has increased rates seven times through December 31, 2022 for a total of 425 basis points, 25 basis points in February 2023 and additional increases are expected through the first quarter 2023. Higher rates or maintaining rates at this elevated level may be justified beyond that by still tight labor markets, elevated wage pressures and high inflation.

We saw strong loan growth in 2022 despite these higher rates. However, we have seen lower mortgage origination and sales volume as interest rates on mortgage loans have reached 20 year highs and the housing market cools off. From a funding perspective, the competition for and subsequent costs of deposits and alternative funding sources has increased and likely will continue to increase in 2023 as the FOMC adjusts rates.

The labor market remained strong in 2022 with an unemployment rate of 3.5 percent for December. This along with reduced labor force participation has made it difficult and costly for companies to fill open positions and thus could increase our salaries and benefits expenses. The labor market remains strong going into 2023. Job growth accelerated in the beginning of 2023 as U.S. employers added 517 thousand jobs and pushed the unemployment rate to a 53-year low 3.4 percent in January despite announced corporate lay-offs. Wage growth continued to slow as average hourly earnings grew 4.4 percent in January from a year earlier, down from a revised 4.8 percent in December. Continued strength in the labor market may fuel additional interest rate increases.

Gross domestic product (“GDP”) rose at a 2.9 percent annualized pace in the fourth quarter after increasing 3.2 percent in the third quarter. This reflected increases in inventory investment and consumer spending partially offset by a decrease in housing investment.

​

Review of Financial Position:

Total assets, loans and deposits were $3.6 billion, $2.7 billion and $3.0 billion, respectively, at December 31, 2022. Total assets, loans and deposits grew 5.5 percent, 17.2 percent and 2.8 percent, respectively, compared to 2021 year-end balances.

The loan portfolio consisted of $2.3 billion of business loans, including commercial and commercial real estate loans, and $421.0 million in retail loans, including residential mortgage and consumer loans at December 31, 2022. Total investment securities were $569.0 million at December 31, 2022, including $477.7 million of investment securities classified as available-for sale and $91.2 million classified as held to maturity. Total deposits consisted of $772.8 million in noninterest-bearing deposits and $2.3 billion in interest-bearing deposits at December 31, 2022.

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Stockholders’ equity equaled $315.4 million, or $44.06 per share, at December 31, 2022, and $340.1 million, or $47.44 per share, at December 31, 2021. Our equity to asset ratio was 8.9 percent and 10.1 percent at those respective period ends. Dividends declared for the 2022 amounted to $1.58 per share representing 29.9 percent of net income.

Nonperforming assets equaled $4.1 million or 0.12 percent of total assets at December 31, 2022 compared to $5.0 million or 0.15 percent at December 31, 2021. The allowance for loan losses equaled $27.5 million or 1.01 percent of loans, net, at December 31, 2022, compared to $28.4 million or 1.22 percent at year-end 2021. Loans charged-off, net of recoveries equaled $0.5 million or 0.02 percent of average loans in 2022, compared to $0.7 million or 0.03 percent of average loans in 2021.

Investment Portfolio:

Investment securities decreased $19.7 million, to $569.0 million at December 31, 2022, from $588.7 million at December 31, 2021. At December 31, 2022, the investment portfolio consisted of $477.7 million of investment securities classified as available for sale and $91.2 million classified as held to maturity. Security purchases totaled $138.7 million in 2022. Investment purchases in 2021 amounted to $358.6 million. Repayments of investment securities totaled $46.9 million in 2022 and $60.4 million in 2021

Investment securities averaged $648.6 million and equaled 20.1 percent of average earning assets in 2022, compared to $398.5 million and 13.9 percent of average earning assets in 2021. The tax-equivalent yield on the investment portfolio decreased 27 basis points to 1.67 percent in 2022 from 1.94 percent in 2021. The decrease in the tax-equivalent yield is due to cash flow from maturing and called bonds being reinvested at lower market rates coupled with lower yields on new purchases executed during the first three months of 2022.

Loan Portfolio:

Overall, total loans increased $400.9 million or 17.2 percent in 2022 to $2.7 billion at December 31, 2022. Excluding PPP loans, loan growth totaled $447.5 million or 19.8 percent. Business loans, including commercial loans and commercial real estate loans, were $2.3 billion or 84.6 percent of total loans at December 31, 2022, and $2.0 billion or 84.0 percent at year-end 2021. Residential mortgages and consumer loans totaled $421.0 million or 15.4 percent of total loans at year-end 2022 and $372.5 million or 16.0 percent at year-end 2021. Total loan growth, excluding PPP loans, of $447.5 million was primarily attributable to increases in our commercial real estate portfolio which grew $366.3 million in 2022 due to continued success of our strategy to expand in larger markets with strong growth potential, and strong organic growth in our legacy markets. Our expansion strategy commenced during 2014 in the Lehigh Valley with a community banking office and team of dedicated lenders and has expanded with two additional branch offices and additional teams of experienced lenders and credit professionals. Growth is also due to our presence in the Greater Delaware Valley, first by opening a branch office in King of Prussia in 2016, and during 2020 with the opening of a branch in Doylestown and recruitment of two experienced lenders. Further growth was attained by our entrance into Central Pennsylvania with a branch office in Lebanon, staffed with a team of lending professionals during the middle of 2018. Our most recent expansion during the final six months of 2021 into the Greater Pittsburgh market with a new office and team of experienced lenders and entrance into Central New Jersey with an office in Piscataway, Middlesex County, and team of experienced lenders known in the market has exceeded projections and contributed to the strong loan growth in 2022. Based on the customer service oriented philosophy of our organization along with the commitment of these employees, we continue to be well received in these new markets as we are in our existing markets.

Loans averaged $2.5 billion in 2022, compared to $2.2 billion in 2021. Taxable loans averaged $2.3 billion, while tax-exempt loans averaged $0.2 billion in 2022. The loan portfolio continues to play the prominent role in our earning asset mix. As a percentage of earning assets, average loans equaled 78.0 percent in 2022, an increase from 77.2 percent in 2021.

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Asset Quality:

Nonperforming assets consist of nonperforming loans, which include nonaccrual loans, troubled debt restructured loans and accruing loans past due 90 days or more. For a discussion of our policy regarding nonperforming assets and the recognition of interest income on impaired loans, refer to the notes entitled, “Summary of significant accounting policies — Nonperforming assets,” and “Loans, net and allowance for loan losses” in the Notes to Consolidated Financial Statements to this Annual Report which are incorporated in this item by reference.

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council (“FFIEC”) Interagency Policy Statement, as amended, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB Accounting Standards Codification (“ASC”) 310 for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

The allowance for loan losses decreased $0.9 million to $27.5 million at December 31, 2022, from $28.4 million at the end of 2021. The decrease resulted from a credit to the provision for loan losses of $0.4 million and net loans charged-off of $0.5 million. The release from the allowance for loan losses during the year ended December 31, 2022 was due to application of our allowance for loan losses methodology that included a decline in historical loss factors and overall improvement to the quality of our loan portfolio based on current conditions. The 2021 period includes the total charge-off of a fully allocated small-business line of credit originated in our Greater Delaware Valley market totaling $0.4 million.  During 2020, $0.9 million was charged-off related to small-business lines of credit originated in our Greater Delaware Valley market offset by $0.2 million of recoveries. 

Past due loans not satisfied through repossession, foreclosure or related actions are evaluated individually to determine if all or part of the outstanding balance should be charged against the allowance for loan losses account. Any subsequent recoveries are credited to the allowance account. Net loans charged-off decreased $0.2 million to $0.5 million in 2022 from $0.7 million in 2021. Net charge-offs, as a percentage of average loans outstanding, equaled 0.02 percent in 2022 and 0.03 percent in 2021.

The allowance for loan losses account decreased $0.9 million to $27.5 million at December 31, 2022, compared to $28.4 million at December 31, 2021. The specific portion of the allowance for impairment of loans individually evaluated under FASB ASC 310 decreased $135 thousand to $40 thousand at December 31, 2022, from $175 thousand at December 31, 2021 and the portion of the allowance for loans collectively evaluated for impairment under FASB ASC 450, decreased $776 thousand to $27.4 million at December 31, 2022, from $28.2 million at December 31, 2021. The decrease in the specific portion of the allowance was a result of a decrease in measured impairment for collateral dependent loans, improved credit quality and a decrease to nonperforming loans of $0.3 million. The decrease in the collectively evaluated portion was primarily the result of the roll-off of historical losses within our commercial loan portfolio, improved credit quality and a decrease of nonperforming loans.

The coverage ratio, the allowance for loan losses, as a percentage of nonperforming loans, is an industry ratio used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The coverage ratio was 664.5 percent at December 31, 2022 and 634.5 percent at December 31, 2021. We believe that our allowance was adequate to absorb probable credit losses at December 31, 2022.

Deposits:

Our deposit base is the primary source of funds to support our operations. We offer a variety of deposit products to meet the needs of our individual and commercial customers. Total deposits grew $83.2 million or 2.8 percent to $3.0 billion at the end of 2022. The increase in deposits is due to organic growth of customer relationships throughout all our markets and inflows of municipal deposits. Total deposits include $23.1 million of brokered certificates of deposit. Noninterest-bearing deposits grew $35.0 million or 4.8 percent while interest-bearing deposits increased $48.2 million or 2.2 percent

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in 2022. Noninterest-bearing deposits represented 25.4 percent of total deposits while interest-bearing deposits accounted for 74.6 percent of total deposits at December 31, 2022. Comparatively, noninterest-bearing deposits and interest-bearing deposits represented 24.9 percent and 75.1 percent of total deposits at year end 2021.

With regard to interest-bearing deposits, interest-bearing transaction accounts, which include money market accounts and NOW accounts, and savings accounts, increased $50.8 million in 2022. Commercial interest-bearing transaction accounts increased $29.4 million, while personal interest-bearing transaction accounts increased $21.4 million. Savings accounts increased $32.1 million during 2022 as customers keep a portion of their balances in safe liquid accounts. The strong growth in our non-maturity deposits was due to continuing our strategic initiative to grow our public fund deposits and continued organic growth in all our markets.

Total deposits averaged $3.0 billion in 2022 and $2.7 billion in 2021, increasing $310.7 million or 11.6 percent comparing 2022 to 2021. Average noninterest-bearing deposits increased $68.9 million, while average interest-bearing accounts grew $241.8 million. Average interest-bearing transaction deposits, including money market and NOW accounts, and savings accounts, increased $252.0 million while average total time deposits decreased $10.2 million when comparing 2022 and 2021.

Our cost of interest-bearing deposits increased to 0.57 percent in 2022. Specifically, the cost of money market accounts increased 44 basis points to 0.80 percent from 0.36 percent and NOW accounts increased 24 basis points to 0.57 percent. The increases in the cost of our interest-bearing deposits is due to the FOMC rate increases as rate-sensitive customers require higher rates on their deposits along with competitive pressure for deposits. We expect our cost of funds to continue to rise in 2023 as the FOMC raises rates.

Volatile deposits, time deposits $100 or more, averaged $163.0 million in 2022, a decrease of $9.7 million or 5.6 percent from $172.7 million in 2021. Our average cost of these funds increased 6 basis points to 0.84 percent in 2022, from 0.78 percent in 2021. This type of funding is susceptible to withdrawal by the depositor as they are particularly price sensitive and are therefore not considered to be a strong source of liquidity.

Market Risk Sensitivity:

With respect to evaluating our exposure to IRR on earnings, we utilize a gap analysis model that considers repricing frequencies of RSA and RSL. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

At December 31, 2022, we had cumulative one-year RSA/RSL ratio of 0.69, a positive gap. At December 31, 2021, we had cumulative one-year RSA/RSL of 1.16, a positive gap. As previously mentioned, a positive gap indicates that if interest rates increase, our earnings would likely be favorably impacted. The overall focus of ALCO is to maintain a well-balanced IRR position in order to safeguard future earnings during historical low-rate environment and from potential risk to falling interest rates. During the first six months of 2022, ALCO took steps to reduce our positive gap position and guard against rates unchanged or down through the origination of fixed rate loans and the investment in longer term, fixed rate investment securities. However, as interest rates moved higher due to the FOMC’s attempt to curb inflation, ALCO focused on funding costs and asset yields.

The change in our cumulative one-year ratio from the previous year-end resulted from a $319.6 million or 24.0 percent decrease in RSA offset by a $324.2 million or 28.2 percent increase in RSL maturing or repricing within one year. The decrease in RSA resulted primarily from a $242.4 million decrease in federal funds sold, resulting from an increase in commercial lending.

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With respect to the $324.2 million increase in RSL maturing or repricing within a twelve month time horizon, non-maturity deposits increased $210.1 million due to customers seeking liquid accounts and saving at a higher percentage due to the economic uncertainty of the pandemic. In addition short-term borrowings increased $114.9 million in part to fund loan growth.

Liquidity:

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to illustrate our reliance on noncore funds to fund our investments and loans maturing after 2022. At December 31, 2022, our noncore funds consisted of time deposits in denominations of $100 thousand or more, short-term borrowings, and long-term and subordinated debt. Large denomination time deposits are particularly not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered to be highly volatile. At December 31, 2022, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 9.6 percent. Our net short-term noncore funding dependence ratio, noncore funds maturing within one year, less short-term investments to long-term assets equaled 8.5 percent. Comparatively, our ratios equaled negative 3.0 percent and negative 5.6 percent at the end of 2021, which indicates a significant increase in our reliance on noncore funds in 2022. Our basic liquidity surplus ratio, defined as liquid assets less short-term potentially volatile liabilities as a percentage of total assets, decreased to 6.5 percent at December 31, 2022, from 14.6 percent at December 31, 2021 as our funding of loan demand outpaced our core deposit growth. We anticipate similar circumstances in the coming year and are implementing competitive pricing strategies on deposits and are exploring alternative funding to ensure adequate liquidity to support future growth.

The Consolidated Statements of Cash Flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents consist of cash on hand, cash items in the process of collection, noninterest-bearing and interest-bearing deposits with other banks and federal funds sold. Cash and cash equivalents decreased $242.1 million for the year ended December 31, 2022, primarily due to loan growth outpacing deposit growth. For the year ended December 31, 2021, cash and cash equivalents increased $51.7 million.

  Operating activities provided net cash of $42.4 million in 2022 and $40.8 million in 2021. Net income, adjusted for the effects of noncash expenses such as depreciation, amortization and accretion of tangible and intangible assets and investment securities, and the provision for loan losses, is the primary source of funds from operations.

Net cash provided by financing activities equaled $183.4 million in 2022. Net cash provided by financing activities was $451.1 million in 2021. Deposit gathering, which is our predominant financing activity, increased in both 2022 and 2021 and provided a net cash inflow in 2022 of $83.2 million and $526.3 million in 2021. Short-term borrowings increased net cash by $114.9 million in 2022 and decreased cash by $50.0 million in 2021. Inflows in 2022 were also partially offset by a $2.1 million net decrease due to payments made to our long-term debt as well as cash dividends paid of $11.3 million and the retirement of common stock of $1.3 million. In 2021, deposit gathering was partially offset by a decrease in short term borrowings of $50.0 million, a $12.1 million net decrease in long-term debt, and cash dividends paid of $10.8 million.

Our primary investing activities involve transactions related to our investment and loan portfolios. Net cash used in investing activities totaled $467.8 million and $440.1 million in 2022 and 2021, respectively. Net cash used in lending activities was $402.7 million in 2022, an increase from $152.0 million in 2021. Activities related to our investment portfolio used net cash of $48.3 million in 2022 and used net cash of $298.2 million in 2021.

Capital Adequacy:

Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance. Our and Peoples Bank’s risk-based capital ratios are strong and have consistently exceeded the minimum regulatory capital ratios required for adequately capitalized institutions. Our ratio of Tier 1 capital to risk-weighted assets and off-balance sheet items was 11.1 percent and 12.3 percent at December 31, 2022 and 2021, respectively. Our Total capital ratio was 12.1 percent and 13.6 percent at December 31, 2022 and 2021,

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respectively. Our and Peoples Bank’s common equity Tier I capital to risk-weighted assets ratios were 11.1 percent and 12.3 percent at December 31, 2022 and 12.3 percent and 13.8 percent at December 31, 2021. Our Leverage ratio, which equaled 9.0 percent at December 31, 2022 and 9.2 percent at December 31, 2021, exceeded the minimum of 4.0 percent for capital adequacy purposes. Peoples Bank reported Tier 1 capital, Total capital and Leverage ratios of 12.2 percent, 13.3 percent and 9.7 percent at December 31, 2022, and 13.8 percent, 15.0 percent and 9.6 percent at December 31, 2021. Based on the most recent notification from the FDIC, Peoples Bank was categorized as well capitalized at December 31, 2022. There are no conditions or events since this notification that we believe have changed Peoples Bank’s category. For a further discussion of these risk-based capital standards and supervisory actions for noncompliance, refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements to this Annual Report.

Stockholders’ equity was $315.4 million or $44.06 per share at December 31, 2022, and $340.1 million or $47.44 per share at December 31, 2021. The $24.7 million decline in shareholders equity in 2022 was due to an increase in accumulated other comprehensive loss resulting from an increase to the unrealized loss of available for sale securities and dividends paid to shareholders, partially offset by net income.

Review of Financial Performance:

Net income for the twelve months ended December 31, 2022, totaled $38.1 million or $5.28 per diluted share, a 12.5 percent decrease when compared to $43.5 million or $6.02 per diluted share for the comparable period of 2021.  The decrease in earnings for 2022 is a result of lower noninterest income due to a $2.0 million pre-tax loss on the sale of available for sale securities in the current period and a pre-tax gain of $12.2 million from the sale of Visa Class B shares in 2021, combined with higher noninterest expenses. Higher net interest income and a lower provision for loan losses partially offset the declines. ROAA was 1.12 percent and ROE was 11.86 percent for the year ended December 31, 2022.

Tax-equivalent net interest income, a non-GAAP measure, was $97.7 million in 2022 and $86.1 million in 2021. Our net interest margin equaled 3.02 percent in 2022 and 2.99 percent in 2021. Noninterest income, totaled $11.9 million 2022 and $25.6 million in 2021, which included the pre-tax gain of $12.2 million from the sale of Visa Class B shares. Noninterest expense was $62.7 million for the year ended December 31, 2022 compared to $55.0 million for the year ended December 31, 2021. Our productivity is measured by the operating efficiency ratio, a non-GAAP measure, defined as noninterest expense less amortization of intangible assets divided by the total of tax-equivalent net interest income and noninterest income. Our operating efficiency ratio was 55.9 percent in 2022 and 54.7 percent in 2021.

Visa Class B Common Stock Sale:

On October 8, 2021, Peoples Bank agreed to sell 44,982 shares of the Class B common stock of Visa Inc. for a purchase price of $12.2 million. The shares had no carrying value on Peoples Bank’s balance sheet and, as Peoples Bank had no historical cost basis in the shares, the entire purchase was realized as a pretax gain. The transaction had a positive impact on the Peoples Bank’s regulatory capital, which is being used for capital management and to support the Company’s organic growth.

The Bank received 73,333 Class B shares of Visa Inc. as part of its membership interest in March 2008, and 28,351 shares were redeemed in connection with Visa’s initial public offering in 2008. The sale of the remaining 44,982 Class B shares settled in October, 2021 and was included in our 2021 fourth-quarter and year-end results as an after-tax gain of $9.6 million.

Net Interest Income:

Tax-equivalent net interest income, a non-GAAP measure, was $97.7 million in 2022 and $86.1 million in 2021. Interest and net fees earned on the PPP loans totaled $1.8 million in 2022, down from $7.1 million in 2021. There was a positive volume variance that was partially offset by a negative rate variance. The growth in average earning assets exceeded that of interest-bearing liabilities, and resulted in additional tax-equivalent net interest income, a non-GAAP measure, of

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$14.6 million. A rate variance resulted in a decrease in net interest income of $3.1 million as liabilities repriced quicker than assets.

Average earning assets increased $355.8 million to $3.2 billion in 2022 from $2.9 billion in 2021 and accounted for a $15.5 million increase in interest income. Average loans, net increased $302.1 million, which caused interest income to increase $11.8 million. Average taxable investments increased $224.2 million comparing 2022 and 2021, which resulted in increased interest income of $3.5 million while average tax-exempt investments increased $25.9 million, which resulted in an increase to interest income of $0.6 million.

Average interest-bearing liabilities grew $264.2 million to $2.3 billion in 2022 from $2.0 billion in 2021 resulting in a net increase in interest expense of $0.8 million. In addition, interest-bearing transaction accounts, including money market, NOW and savings accounts grew $252.0 million, which in aggregate caused an $0.8 million increase in interest expense. Large denomination time deposits averaged $9.7 million less in 2022 and caused interest expense to decrease $78 thousand. A decrease of $0.5 million in average time deposits less than $100 thousand decreased interest expense by $6 thousand. Short-term borrowings averaged $28.7 million more and increased interest expense $370 thousand while long-term debt averaged $6.3 million less and decreased interest expense by $264 thousand comparing 2022 and 2021.

An unfavorable rate variance occurred, as the tax-equivalent yield on earning assets increased 18 basis points while there was a 22 basis points increase in the cost of funds. As a result, tax-equivalent net interest income decreased $3.1 million comparing 2022 and 2021. The tax-equivalent yield on earning assets was 3.50 percent in 2022 compared to 3.32 percent in 2021 resulting in a decrease in interest income of $2.2 million. With the tax-equivalent yield on the investment portfolio decreasing 27 basis points to 1.67 percent in 2022 from 1.94 percent in 2021, interest income decreased $1.0 million. The tax-equivalent yield on the loan portfolio increased 10 basis points to 4.04 percent in 2022 from 3.94 percent in 2021 and resulted in an increase to interest income of $2.7 million.

An unfavorable rate variance was experienced in the cost of funds. We experienced increases in the rates paid on most major categories of interest-bearing liabilities. Specifically, the cost of non-maturity deposit accounts increased 25 basis points comparing 2022 and 2021. These increases resulted in an increase in interest expense of $4.6 million. With regard to time deposits, the average rate paid for time deposits less than $100 thousand decreased 8 basis points while time deposits $100 thousand or more increased 6 basis points, which together resulted in a $6 thousand decrease in interest expense. The average rate paid on short-term borrowings increased 202 basis points in 2022 when compared to 2021, causing a $655 thousand increase in interest expense. Interest expense increased $80 thousand from a 138 basis point increase in the average rate paid on long-term debt.

Provision for Loan Losses:

We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, the volume of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at an appropriate level. For the twelve month period ending December 31, 2022, $449 thousand was released from the allowance for loan losses compared to a provision of $1.8 million in 2021. The release in 2022 was due to the overall improvement of credit quality of the loan portfolio based on current conditions, combined with a decline in historical loss factors utilized for our loan loss methodology as of December 31, 2022. The provision in the twelve month period ended December 31, 2021 was reflective of our allowance for loan losses methodology and evaluation of qualitative factors that existed during that time. Based on our most recent evaluation at December 31, 2022, we believe that the allowance was adequate to absorb any known or potential losses in our portfolio as of such date.

Noninterest Income:

Our noninterest income for 2022 was $11.8 million compared with $25.6 million for the year ago period, a decrease of $13.8 million. The decrease was primarily due to a loss of $2.0 million on the sale of investment securities in the current year and a $12.2 million gain the sale of the Visa Class B shares in 2021. Excluding these events, noninterest income

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increased $338 thousand or 2.5 percent. Service charges, fees and commissions increased $907 thousand, due in part to the reversal of an accrual of a $335 thousand bank owned life insurance benefit in the year ago period, higher consumer and commercial deposit service charges and higher revenue related to debit card activity. The increases were partially offset by a decrease of $464 thousand in mortgage banking income on lower sales volume due to higher market rates.

Noninterest Expense:

Noninterest expense was $62.7 million for the year ended December 31, 2022 compared to $55.0 million for the year ended December 31, 2021.

Salaries and employee benefits expense constitute the majority of our noninterest expenses accounting for 53.5 percent of the total noninterest expense. Salaries and employee benefits expense increased $3.8 million or 12.8 percent to $33.6 million in 2022 from $29.7 million in 2021. Salaries and payroll taxes increased $4.1 million or 16.4 percent and employee benefits expense decreased $315 thousand or 6.9 percent. The higher salary expense in 2022 was due to annual merit increases, our investment into our newest expansion markets which operated for an entire twelve month period, additional hires to support our growth and lower deferred loan origination costs, which are initially not expensed but rather deferred and amortized over the life of the loan. Employee benefits expense was lower due to lower health insurance costs and lower pension expense.

Occupancy and equipment expense increased $3.7 million or 29.0 percent to $16.6 million in 2022 from $12.8 million in 2021. Occupancy expenses increased $2.6 million or 32.0 percent to $10.8 million in 2022 from $8.2 million in 2021 as a result of entrance into the Piscataway, New Jersey and Pittsburgh, Pennsylvania markets. Equipment related expense increased $1.1 million or 23.8 percent to $5.7 million in 2022 from $4.6 million in 2021, due to information technology investments related to mobile/digital banking solutions implemented during the second half of 2021.

Other expenses, which consist of FDIC insurance and assessments, professional fees and outside services, other taxes, stationary and supplies, advertising, amortization of intangible assets and all other expenses were relatively flat at $12.5 million in 2022 and $12.4 million in 2021. A gain of $478 thousand on the sale of properties held as other real estate was offset by an increase in professional services costs of $578 thousand. Stationary and supply costs decreased $479 thousand partially due to our digital banking initiatives.  Peoples anticipates that its FDIC insurance and assessment expense will increase approximately $0.7 million in 2023 as a result of the FDIC’s announced assessment rate increases.  

Income Taxes:

Our income tax expense was $7.3 million and our effective tax rate was 16.0 percent for the year ended December 31, 2022, a decrease from income tax expense of $10.0 million and an effective tax rate of 18.7 percent for the year ended December 31, 2021. The decrease in 2022 was primarily due to lower pretax income due in part to a $12.2 million pre-tax Visa Class B shares gain in 2021, combined with a $621 deferred tax adjustment. We also utilize loans and investments of tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable by the federal government. The tax benefit of tax-exempt income was 3.3 percent of pre-tax income in 2022 as compared to a 2.3 percent benefit in 2021.

The effective tax rate in 2022 and 2021 was also influenced by the recognition of investment tax credits related to our limited partnership investments in elderly and low- to- moderate-income residential housing programs which allow us to mitigate our tax burden. By utilizing these credits, we reduced our income tax expense by $911 thousand in 2022 and $1.1 million in 2021. We anticipate investment tax credits from these investments to be $755 thousand in 2023. Over the next two years, we will recognize aggregate tax credits from our investments in these projects of approximately $1.4 million.

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