ITEM 1A:RISK FACTORS
An investment in the Company’s common stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.
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Risks Related to the Company’s Business
The short-term and long-term effects of inflation and rising costs may adversely affect the Company’s financial performance.
Inflation, both in the short-term and/or in the long-term, may adversely affect the Company’s business in that it may increase our overall costs even if it does not adversely affect every aspect of our business evenly. The Company employs various strategies to manage its costs but there is no assurance that these strategies will be successful in containing costs as higher rates of inflation may result in increased costs for goods and services, including employee salaries and benefits, which may adversely affect the Company’s results of operation and financial performance. Inflation may also increase the cost of doing business for the Company’s borrowers thereby affecting the creditworthiness of current or prospective customers.
The Company’s business is subject to interest rate risk and variations in interest rates may negatively affect its financial performance.
Changes in the interest rate environment may reduce profits. The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially adversely affect the Company’s net interest spread, asset quality, loan origination volume and overall profitability.
The Company is subject to lending risk.
There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates as well as those across the Commonwealth of Pennsylvania and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company.
Commercial, commercial real estate and real estate construction loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because these loans generally have larger balances than residential real estate loans and consumer loans, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible credit losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations.
The Company is subject to commercial real estate volatility that may result in increases in non-performing loans that could have an adverse impact on our financial condition and results of operations.
The commercial real estate market nationally, regionally, and locally has recently been subject to increased levels of volatility. Many believe that commercial real estate in the commercial office sector is undergoing a fundamental transformation and change that started during the recent pandemic but also continues due to evolving workplace environments. These changes in the marketplace affect the demand for commercial office space which in turn may affect the credit status, profitability, and collectability, of existing and future commercial real estate office sector loans. As explained above in greater detail in the risk factor for Lending Risk, volatility and increases in non-performing loans could have an adverse impact on the Company’s financial condition and results of operations.
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The Company’s allowance for credit losses may be insufficient.
The Company maintains an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, that represents management’s best estimate of probable losses that have been incurred and are expected within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated credit losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions, reasonable and supportable forecasts and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company’s control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review the Company’s allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. Further, if charge-offs in future periods exceed the allowance for credit losses, the Company will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and capital and may have a material adverse effect on the Company’s financial condition and results of operations.
If we conclude that the decline in value of any of our investment securities is a credit loss, we will be required to book a contra-asset.
We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is a credit loss. If a decline in value is deemed to be credit losses, a contra-asset is recorded on both HTM and AFS securities, limited by the amount that the fair value is less than the amortized cost basis.
The Basel III and other regulatory capital requirements may require us to maintain higher levels of capital, which could reduce our profitability.
Basel III targets higher levels of base capital, certain capital buffers and a migration toward common equity as the key source of regulatory capital. Although the new capital requirements are phased in over the next decade and may change substantially before final implementation, Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. The direction of the Basel III implementation activities or other regulatory requirements could require additional capital to support our business risk profile prior to final implementation of the Basel III standards. If the Company and the Bank are required to maintain higher levels of capital, the Company and the Bank may have fewer opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to the Company and the Bank and adversely impact our financial condition and results of operations.
The Company may need, or be compelled, to raise additional capital in the future, but that capital may not be available when it is needed and on terms favorable to current shareholders.
Federal banking regulators require the Company and Bank to maintain adequate levels of capital to support their operations. These capital levels are determined and dictated by law, regulation and banking regulatory agencies. In addition, capital levels are also determined by the Company’s management and board of directors based on capital levels that they believe are necessary to support the Company’s business operations. The Company is evaluating its present and future capital requirements and needs, is developing a comprehensive capital plan and is analyzing capital raising alternatives, methods and options. Even if the Company succeeds in meeting the current regulatory capital requirements, the Company may need to raise additional capital in the near future to support possible loan losses during future periods or to meet future regulatory capital requirements.
Further, the Company’s regulators may require it to increase its capital levels. If the Company raises capital through the issuance of additional shares of its common stock or other securities, it may dilute the ownership interests of current investors and may dilute the per-share book value and earnings per share of its common stock. Furthermore, it may have an adverse impact on the Company’s stock price. New investors may also have rights, preferences and privileges senior to the Company’s current shareholders, which may adversely impact its current shareholders. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. Accordingly, the Company cannot assure you of its ability to raise additional capital on terms and time frames acceptable to it or to raise additional capital at all. If the Company cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect the Company’s operations, financial condition and results of operations.
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The Company is subject to environmental liability risk associated with lending activities.
A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expense and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s profitability depends significantly on economic conditions in the Commonwealth of Pennsylvania and the markets in which it conducts business.
The Company’s success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania and the specific local markets in which the Company operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides banking and financial services to customers primarily in Lackawanna and Luzerne Counties in Northeastern Pennsylvania and Northampton County in Eastern Pennsylvania. The local economic conditions in these areas have a significant impact on the demand for the Company’s products and services as well as the ability of the Company’s customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic occurrences or instability, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Company’s financial condition and results of operations.
There is no assurance that the Company will be able to successfully compete with others for business.
The Company competes for loans, deposits and investment dollars with numerous regional and national banks and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers and private lenders. Many competitors have substantially greater resources than the Company does, and operate under less stringent regulatory environments. The differences in resources and regulations may make it more difficult for the Company to compete profitably, reduce the rates that it can earn on loans and on its investments, increase the rates it must offer on deposits and other funds, and adversely affect its overall financial condition and earnings.
The Company is subject to extensive government regulation and supervision.
The Company, primarily through the Bank, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Federal or commonwealth regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
The Company’s controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.
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New lines of business or new products and services may subject the Company to additional risks.
From time-to-time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company’s future acquisitions could dilute your ownership and may cause it to become more susceptible to adverse economic events.
The Company may use its common stock to acquire other companies or make investments in banks and other complementary businesses in the future. The Company may issue additional shares of common stock to pay for future acquisitions, which would dilute your ownership interest in the Company. Future business acquisitions could be material to the Company, and the degree of success achieved in acquiring and integrating these businesses into the Company could have a material effect on the value of the Company’s common stock. In addition, any acquisition could require it to use substantial cash or other liquid assets or to incur debt. In those events, it could become more susceptible to economic downturns and competitive pressures.
The Company may not be able to attract and retain skilled people.
The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense and the Company may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
The Company’s communications, information and technology systems may experience a failure, interruption or breach in security.
The Company relies heavily on communications, information and technology systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems or result in corruption, loss or compromise of confidential corporate or customer data. The risks are greater if the issue is extensive, long-lasting, or results in financial losses to its customers. Such failures, interruptions or breaches in security may arise from events such as severe weather, acts of vandalism, telecommunications outages, human error, or cyber-attacks.
These risks also arise to the extent the Company’s third-party service providers experience failures, interruptions and breaches in security. The Company is also exposed to the risk of a disruption at a common service provider used by its third-party service providers. Even with attempts to diversify the reliance upon any one third-party, the Company may not be able to mitigate the risk of its vendors’ use of common service providers.
The Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, however there can be no assurance that any such failures, interruptions or security breaches will not occur. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.
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The Company continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.
The operations of our business, including our interaction with customers, are increasingly done via electronic means, and this has increased our risks related to cyber security.
We are exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. We have observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. To combat against these attacks, policies and procedures are in place to prevent, limit, or ameliorate the effect or financial impact of the possible security breach of our information systems and we have insurance against some cyber-risks and attacks. Further, the Company may face unknown or contingent liabilities arising from cybersecurity incidents or data breaches that previously occurred at companies it acquires. Such incidents may not have been discovered, disclosed, or if previously discovered fully-remediated before closing, and the acquired company’s representations, warranties, and indemnities may be limited in scope, duration, or recoverability. As a result, the Company could incur costs or liabilities after an acquisition relating to regulatory investigations, litigation, remediation efforts, reputational harm, or customer and partner claims, which could adversely affect its business, financial condition, and results of operations. While we have not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber-incidents as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks. Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.
The Company may use artificial intelligence (AI) in its business, and challenges with properly managing its use could result in disruption of our internal operations, reputational harm, competitive harm, legal liability and adversely affect our results of operations and stock price.
The Company may incorporate AI solutions into platforms that deliver products and services to its customers, including solutions developed by third parties whose AI is integrated into its products and services. The Company may be exposed to legal liability and reputational risk if the AI the Company uses is or is alleged to be deficient, inaccurate, or biased because the AI algorithms are flawed, insufficient, of poor quality, or reflect unwanted forms of bias, particularly if third party AI integrated with its platforms produces false or “hallucinatory” inferences.
Data practices by the Company or others that result in controversy could impair the acceptance of AI, which could undermine the decisions, predictions, or analysis that AI applications produce. Its customers and potential customers may express adverse opinions concerning its use of AI and machine learning that could result in brand or reputational harm, competitive harm, or legal liability. If the Company develops Generative AI, its content creation may require additional investment as testing for bias, accuracy and unintended, harmful impact is often complex and may be costly. As a result, the Company may need to increase the cost of its products and services which may make it less competitive, particularly if its competitors incorporate AI more quickly or successfully.
Governmental bodies have implemented laws and are considering further regulation of AI (including machine learning), which could negatively impact its ability to use and develop AI. The Company is unable to predict how application of existing laws, including federal and state privacy and data protection laws, and adoption of new laws and regulations applicable to AI will affect it but it is likely that compliance with such laws and regulations will increase its compliance costs, and such increase may be substantial and adversely affect its results of operations. Furthermore, its use of Generative AI and other forms of AI may expose us to risks relating to intellectual property ownership and licensing rights, including copyright of Generative AI and other AI output as these issues have not been fully interpreted by federal courts or been fully addressed by federal or state legislation or regulations.
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The Company is subject to claims and litigation pertaining to fiduciary responsibility.
From time-to-time, customers make claims and take legal action pertaining to the Company’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Company’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
Pennsylvania Business Corporation Law and various anti-takeover provisions under our articles and bylaws could impede the takeover of the Company.
Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquire the Company, even if the acquisition would be advantageous to shareholders. In addition, we have various anti-takeover measures in place under our articles of incorporation and bylaws, including a supermajority vote requirement for mergers, a staggered board of directors, and the absence of cumulative voting. Any one or more of these measures may impede the takeover of the Company without the approval of our board of directors and may prevent our shareholders from taking part in a transaction in which they could realize a premium over the current market price of our common stock.
The Company is a holding company and relies on dividends from its banking subsidiary for substantially all of its revenue and its ability to make dividends, distributions, and other payments.
As a bank holding company, the Company’s ability to pay dividends depends primarily on its receipt of dividends from its subsidiary bank. Dividend payments from the bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by bank regulatory agencies. The ability of the bank to pay dividends is also subject to profitability, financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. There is no assurance that the bank will be able to pay dividends in the future or that the Company will generate cash flow to pay dividends in the future. The Company’s failure to pay dividends on its common stock may have a material adverse effect on the market price of its common stock.
The Company’s banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may adversely affect its earnings.
The Company generally is unable to control the amount of premiums or special assessments that its subsidiary is required to pay for FDIC insurance. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on our results of operations, financial condition, and our ability to continue to pay dividends on our common stock at the current rate or at all.
Severe weather, natural disasters, acts of war or terrorism, global instability, pandemics and other external events could significantly impact the Company’s business.
Severe weather, natural disasters, acts of war or terrorism, global instability, pandemics and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Severe weather or natural disasters, acts of war or terrorism, global instability, pandemics or other adverse external events may occur in the future. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
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The increasing use of social media platforms presents risks and challenges and our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business.
The use of social media platforms, including weblogs (blogs), social media websites, and other forms of Internet-based communications allows individuals access to a broad audience of consumers and other interested persons. Social media practices in the banking industry are continually evolving, which creates uncertainty and risk of noncompliance with regulations applicable to our business. Consumers value readily available information concerning businesses and their goods and services and often act on such information without further investigation and without regard to its accuracy. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity for redress or correction.
Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our business, exposure of personally identifiable information, fraud, out-of-date information, and improper use by employees and customers. The inappropriate use of social media by our customers or employees could result in negative consequences including remediation costs including training for employees, additional regulatory scrutiny and possible regulatory penalties, litigation or negative publicity that could damage our reputation adversely affecting customer or investor confidence.
Risks Associated with the Company’s Common Stock
The Company’s stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things:
● Actual or anticipated variations in quarterly results of operations.
● Recommendations by securities analysts.
● Perceptions in the marketplace regarding the Company and/or its competitors.
● New technology used, or services offered, by competitors.
● Changes in government regulations.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s stock price to decrease regardless of operating results.
The trading volume in the Company’s common stock is less than that of other larger financial services companies.
The Company’s common stock is listed for trading on Nasdaq and the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause the Company’s stock price to fall.
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Furthermore, from time to time, the Company’s common stock may be included in certain and various stock market indices. Inclusion in these indices may positively impact the price, trading volume, and liquidity of the Company’s common stock, in part, because index funds or other institutional investors often purchase securities that are in these indices. Conversely, if the Company’s market capitalization falls below the minimum necessary to be included in any of the indices at any annual reconstitution date, the opposite could occur. Further, the Company’s inclusion in indices may be weighted based on the size of its market capitalization, so even if the Company’s market capitalization remains above the amount required to be included on these indices, if its market capitalization is below the amount it was on the most recent reconstitution date, the Company’s common stock could be weighted at a lower level, holders attempting to track the composition of these indices will be required to sell the Company’s common stock to match the reweighting of the indices.
Risks Associated with the Company’s Industry
Future governmental regulation and legislation could limit the Company’s future growth.
The Company is a registered bank holding company, and its subsidiary bank is a depository institution whose deposits are insured by the FDIC. As a result, the Company is subject to various regulations and examinations by various regulatory authorities. In general, statutes establish the corporate governance and eligible business activities for the Company, certain acquisition and merger restrictions, limitations on inter-company transactions such as loans and dividends, capital adequacy requirements, requirements for anti-money laundering programs and other compliance matters, among other regulations. The Company is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. Compliance with these statutes and regulations is important to the Company’s ability to engage in new activities and consummate additional acquisitions.
In addition, the Company is subject to changes in federal and state tax laws as well as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. The Company cannot predict whether any of these changes may adversely and materially affect it. Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on the Company’s activities that could have a material adverse effect on its business and profitability. While these statutes are generally designed to minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such statutes increases the Company’s expense, requires management’s attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.
The earnings of financial services companies are significantly affected by general business and economic conditions.
The Company’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which the Company operates, all of which are beyond the Company’s control. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for the Company’s products and services, among other things, any of which could have a material adverse impact on the Company’s financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.
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Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.
A protracted government shutdown or issues relating to debt and the deficit may adversely affect the Company.
Extended shutdowns of parts of the federal government could negatively impact the financial performance of certain customers and could impact customers’ future access to certain loan and guarantee programs. As a result, this could impact the Company’s business, financial condition and results of operations.
As a result of past difficulties of the federal government to reach agreement over federal debt and issues connected with the debt ceiling, certain rating agencies placed the United States government's long-term sovereign debt rating on their equivalent of negative watch and announced the possibility of a rating downgrade. The rating agencies, due to constraints related to the rating of the United States, also placed government-sponsored enterprises in which the Company invests and receives lines of credit on a stable outlook and a downgrade of the United States government's credit rating would trigger a similar downgrade in the credit rating of these government-sponsored enterprises. Furthermore, the credit rating of other entities, such as state and local governments, may also be downgraded should the United States government's credit rating be downgraded. The impact that a credit rating downgrade may have on the national and local economy could have an adverse effect on the Company’s financial condition and results of operations.
The regulatory environment for the financial services is being significantly impacted by financial regulatory reform initiatives in the United States and elsewhere, including Dodd-Frank and regulations promulgated to implement it.
The Dodd-Frank Act comprehensively reforms the regulation of financial institutions and their products and services. Dodd-Frank requires various federal regulatory agencies to implement numerous rules and regulations. Because federal agencies are granted broad discretion in drafting these rules and regulations, many of the details and the full impact of Dodd-Frank may not be known for many months or years.
Dodd-Frank, like other financial industry reforms, has had and will continue to have a significant effect on our entire industry. Although it is difficult to predict with certainty the magnitude and extent of these effects at this time, we believe compliance with Dodd-Frank, its interpretive regulations, rules, and initiatives will negatively impact revenue and increase the cost of doing business. Additional expenses associated with compliance with the Act, currently and on an ongoing basis, are likely to continue and the effects of full implementation of the Act may limit our ability to pursue certain business opportunities.
Changes to trade policies and tariffs can have an adverse impact on the Company’s business and its customers.
Changes in trade policies, including the imposition of tariffs or the escalation of a trade war, could negatively impact the economic conditions in the markets the Company serves. The Company’s customers-particularly local businesses engaged in agriculture, manufacturing, and retail-may face higher costs for imported goods and materials, reduced export demand, and supply chain disruptions due to increased tariffs. These challenges could lead to lower revenues, reduced profitability, and potential layoffs, all of which may impair the Company’s customers' ability to meet their financial obligations. Furthermore, prolonged trade tensions and economic uncertainty could lead to market volatility, declining asset values, and weakened consumer confidence. If its customers experience financial stress, the Company could see an increase in loan delinquencies and credit losses, negatively affecting its asset quality and overall financial performance. Additionally, any decline in local economic activity could reduce loan demand, deposit growth, and fee income, which are critical to the Company’s long-term success. While it actively monitors economic and policy developments, the Company cannot predict the outcome of trade negotiations or the full impact of tariffs and trade restrictions on its business, customers, and the broader economy. Any adverse effects from tariffs or a trade war could materially and negatively impact its financial condition, results of operations, and future growth prospects.
ITEM 1B:UNRESOLVED STAFF COMMENTS
None
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ITEM 1C: CYBERSECURITY
Being a financial services company, the Company encounters inherent cybersecurity risks and threats, which also affect its customers, suppliers, and
third-party service providers. Throughout operations, the Company handles and processes data for its customers, employees, partners, and suppliers, understanding that a cybersecurity incident impacting any of these entities could significantly impact its operations and performance. As part of the financial services sector, the Company is held to rigorous regulatory compliance standards. To effectively manage these risks and meet regulatory demands, the Company has implemented a comprehensive, risk-based information security program. This program is designed in alignment with regulatory requirements and the guiding principles of the Federal Financial Institutions Examination Council (FFIEC) handbook and the National Institute of Standards and Technology (NIST) Cybersecurity Framework (CSF).
Information Security Governance and Oversight
The Board of Directors assumes ultimate responsibility for overseeing the Company's information security program. The Company has established an Information Technology Steering Committee (ITSC), comprised of leaders from various departments across the organization, tasked with governing and overseeing the information security program. The ITSC underscores its commitment to treating cybersecurity as a business risk rather than solely a technical concern. The Chief Information Security Officer, reporting to the SVP, Chief Risk Officer, is entrusted with leading the cybersecurity risk assessment process. This includes identifying risks, assessing inherent likelihood and impact, evaluating existing mitigating controls, calculating residual risk scores, and recommending risk responses to both the ITSC and the Board of Directors.
Information Security Program
The Company's program aims to identify, protect, detect, respond, and recover from cyber threats, striving to prevent cybersecurity incidents to the extent feasible. Simultaneously, it enhances our resilience to minimize the impact of a cybersecurity event. The program is designed to be agile, proactive, and responsive to changes in the evolving threat landscape. It employs a layered cybersecurity approach, encompassing the following key elements:
By implementing these measures, the Company strives to maintain a strong cybersecurity posture, safeguarding the organization, customers, and partners from potential threats while ensuring compliance with industry standards and regulations.
Notwithstanding the Company's defensive measures and processes, the threat posed by cyber-attacks is extremely serious. The Company may not be successful in preventing or mitigating all cybersecurity incidents that could have a material adverse effect on the Company. While the Company has not, to date, detected a significant compromise, significant data loss, or any material financial loss related to cybersecurity attacks, our internal systems and those of our customers and third-party service providers are under constant threat. It is possible that the Company could experience a future significant cybersecurity event. The Company expects risks and exposures related to cybersecurity attacks to remain high for the foreseeable future. For further discussion of risks related to cybersecurity, see "Item 1A Risk Factors."
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ITEM 2:PROPERTIES
As of December 31, 2025, the Company and the Bank operated 21 full-service banking offices, of which eleven were owned and ten were leased. The Pittston branch property is subject to a lease with a company of which director, William J. Joyce, Sr., is a partner. With the exception of the Pittston branch, none of the lessors of the properties leased by the Company are affiliated with the Company and all of the properties are located in the Commonwealth of Pennsylvania. The Company is headquartered at its owner-occupied main branch located on the corner of Blakely and Drinker Streets in Dunmore, PA. Executive and administrative, commercial lending, trust and asset management services are located at the Main Branch. The Company also operates a financial center in downtown Scranton, PA which is expected to be sold in 2026 upon the completion of the corporate headquarters. Executive, mortgage and consumer lending, finance, operations and a full-service call center are located in this building. During 2022, the Company purchased the Scranton Electric Building for a future corporate headquarters in Scranton, PA, with the expected completion ready in the second quarter of 2026, see premises and equipment discussion within Item 7. We believe each of our facilities is suitable and adequate to meet our current operational needs and intended purposes.
The Company also operates a wealth management office in Minersville, PA under a short-term lease agreement.
Additionally, the Company has a limited production office in Scranton, PA that is currently leased for certain commercial lenders and credit department employees. This lease will end in 2026 and these employees will move to the corporate headquarters.
The Company acquired a leased building in Scranton from the merger with Landmark Community Bank. The branch in the building was closed in September 2021 and the building was converted into a training center during 2022. This building will become vacant, and the training department will move to the corporate headquarters in 2026.
Foreclosed assets held-for-sale includes other real estate owned (ORE). The Company had one ORE property as of December 31, 2025. Upon possession, foreclosed properties are recorded on the Company’s balance sheet at the lower of cost or fair value. For a further discussion of ORE properties, see “Foreclosed assets held-for-sale”, located in the comparison of financial condition section of managements’ discussion and analysis.
ITEM 3: LEGAL PROCEEDINGS
The nature of the Company’s business generates some litigation involving matters arising in the ordinary course of business. However, in the opinion of the Company after consulting with legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material effect on the Company’s undivided profits or financial condition or results of operations. No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank. In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal actions against the Company or the Bank.
ITEM 4: MINE SAFETY DISCLOSURES
Not Applicable
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PART II
ITEM 5:MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company is listed on Nasdaq and traded on The NASDAQ Global Market under the symbol “FDBC.” Shareholders requesting information about the Company’s common stock may contact:
Salvatore R. DeFrancesco, Jr., Treasurer
Fidelity D & D Bancorp, Inc.
Blakely and Drinker Streets
Dunmore, PA 18512
(570) 342-8281
Dividends are determined and declared by the Board of Directors of the Company. The Company expects to continue to pay regular quarterly cash dividends in the future; however, future dividends are dependent upon earnings, financial condition, capital strength and other factors of the Company. For a further discussion of regulatory capital requirements see Note 15, “Regulatory Matters,” contained within the notes to the consolidated financial statements, incorporated by reference in Part II, Item 8.
The Company offers a dividend reinvestment plan (DRP) for its shareholders. The DRP provides shareholders with a convenient and economical method of investing cash dividends payable on their common stock and the opportunity to make voluntary optional cash payments to purchase additional shares of the Company’s common stock. Participants pay no brokerage commissions or service charges when they acquire additional shares of common stock through the DRP. The administrator may purchase shares directly from the Company, in the open market, in negotiated transactions with third parties or using a combination of these methods.
The Company had approximately 1,536 shareholders at December 31, 2025 and 1,538 shareholders as of February 28, 2026. The number of shareholders is the actual number of distinct shareholders of record. Each security depository is considered a single shareholder for purposes of determining the approximate number of shareholders.
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Performance graph
The following graph and table compare the cumulative total shareholder return on the Company’s common stock against the cumulative total return of the Russell 3000 and KBW NASDAQ Bank index (the KBW NASDAQ index) for the period of five fiscal years commencing January 1, 2021, and ending December 31, 2025. The graph illustrates the cumulative investment return to shareholders, based on the assumption that a $100 investment was made on December 31, 2020, in each of: the Company’s common stock, the Russell 3000 and the KBW NASDAQ index. As of December 31, 2025, the KBW NASDAQ index consisted of 23 banks. A listing of the banks that comprise the KBW NASDAQ index can be found on the Company’s website at www.bankatfidelity.com and then on the bottom of the page clicking on, Investor Relations, Stock Info, The KBW NASDAQ Bank index in the drop-down menu. All cumulative total returns are computed assuming the reinvestment of dividends into the applicable securities. The shareholder return shown on the graph and table below is not necessarily indicative of future performance:
Period Ending
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ITEM 6: [Reserved]
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATION
Critical accounting estimates
The presentation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for credit losses. Management believes that the allowance for credit losses at December 31, 2025 is adequate and reasonable to cover expected losses. Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount. While management uses available information to recognize losses on loans, changes in economic conditions and reasonable and supportable forecasts may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.
All significant accounting policies are contained in Note 1, “Nature of Operations and Summary of Significant Accounting Policies”, within the notes to consolidated financial statements and incorporated by reference in Part II, Item 8.
The following discussion and analysis presents the significant changes in the financial condition and in the results of operations of the Company as of December 31, 2025 and 2024 and for each of the years then ended. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this report.
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 considered supplemental to GAAP used to prepare the Company’s financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company’s tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% as of December 31, 2025 and 2024.
The following table reconciles the non-GAAP financial measures of FTE net interest income:
Net interest income adjusted to FTE (non-GAAP) $ 75,787 $ 64,901
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The efficiency ratio is non-interest expenses as a percentage of FTE net interest income plus non-interest income less gain/(loss) on sales of securities. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP:
Efficiency Ratio (non-GAAP)
Plus: taxable equivalent adjustment 3,116 3,036
Loss on sales of securities 1,190 -
Efficiency ratio (non-GAAP) 60.30 % 66.19 %
The following table provides a reconciliation of the tangible common equity (non-GAAP) and the calculation of tangible book value per share, tangible common equity ratio and adjusted tangible common equity ratio:
Tangible Book Value per Share (non-GAAP)
Tangible Common Book Value per Share (non-GAAP) $ 37.88 $ 31.98
Tangible Common Equity Ratio (non-GAAP) 8.01 % 7.16 %
Adjusted tangible common equity ratio (non-GAAP) 7.31 % 6.19 %
The following table provides a reconciliation of pre-provision net revenue (PPNR) to average assets (non-GAAP):
Pre-Provision Net Revenue to Average Assets
Plus: Provision for credit losses 1,270 1,465
Total pre-provision net revenue (non-GAAP) $ 34,413 $ 25,337
Pre-Provision Net Revenue to Average Assets (non-GAAP) 1.28 % 1.02 %
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Comparison of Financial Condition as of December 31, 2025
and 2024 and Results of Operations for each of the Years then Ended
Executive Summary
The Company generated $28.2 million in net income in 2025, or $4.89 earnings per share, ($4.86 diluted earnings per share) an increase of $7.4 million, or 36%, from $20.8 million, or $3.63 earnings per share, ($3.60 diluted earnings per share) in 2024. The Company’s net interest income performance has increased primarily due to interest income growth. The main driver of the growth in interest income was the average balance increase in the loan and lease portfolio along with improving yields on new originations. Interest expense increased to a lesser extent primarily due to increases in the volume of deposits which replaced short-term borrowings. During 2025, the Federal Open Market Committee (FOMC) decreased the federal funds rate by 75 basis points. Currently, consensus economic forecasts are expecting one to two declines of 25 basis points throughout fiscal year 2026. For 2026, the Company maintains a loan pipeline which is expected to grow the loan portfolio funded by utilizing excess cash holdings and will plan to borrow in the event cash is depleted and there is not enough deposit growth to fund loan growth. The focus remains on enhancing margin by reallocating cash flow to focus growth on specific higher yielding assets, being proactive with loan pricing, and managing deposit costs to maintain a reasonable spread.
Nationally, the unemployment rate rose from 4.1% at December 31, 2024 to 4.4% at December 31, 2025. The unemployment rates in the Scranton - Wilkes-Barre - Hazleton (market area north) and the Allentown – Bethlehem - Easton (market area south) Metropolitan Statistical Areas (local) increased with both at a lower level than the national unemployment rate. According to the U.S. Bureau of Labor Statistics, the local unemployment rates at December 31, 2025 were 4.3% in the market area north and 3.9% in the market area south, respectively, an increase of 0.5 and 0.5 percentage points from the 3.8% and 3.4%, respectively, at December 31, 2024. The median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro each increased 5.1% and 2.8% from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, and values are expected to grow 2.5% and 2.7% in the next year. In light of these expectations, we believe the real estate values could continue to increase at these levels with the declining rate environment. Management will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.
For the years ended December 31, 2025 and 2024, book value per share was $41.39 and $35.56, respectively, an increase of 16%. Over the same periods, tangible common book value per share (non-GAAP) was $37.88 and $31.98 (1), respectively, an increase of 18%. The increase in tangible book value was due primarily to an increase in retained earnings from net income. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located above within this management’s discussion and analysis.
Non-performing assets represented 0.08% of total assets as of December 31, 2025, a decrease from 0.30% at the prior year end. Non-performing assets to total assets decreased during 2025 mostly due to a decline in non-accrual loans.
Branch managers, relationship bankers, mortgage originators and our business service partners are all focused on developing a mutually profitable full banking relationship with our clients. We understand our markets, offer products and services along with financial advice that is appropriate for our community, clients and prospects. The Company continues to focus on the trusted financial advisor model by utilizing the team approach of experienced bankers that are fully engaged and dedicated towards maintaining and growing profitable relationships.
During 2026, the Company currently expects to operate in a moderately declining interest rate environment throughout the year. Management is primarily reliant on the Federal Open Market Committee’s statements and forecast. Management is aware the Company may continue to experience pressure to maintain higher rates on interest-bearing deposits due to the competitive nature of deposits in our market area. Management monitors uninsured deposits which represented approximately 39% of total deposits as of December 31, 2025, primarily within non-personal accounts. Also, as part of the planning process, management incorporates deposit pricing assumptions from its non-maturity deposit study, including estimated beta sensitivity for interest-bearing accounts, and monitors liquidity under multiple stress scenarios through its contingency funding and liquidity risk reporting processes. Accordingly, while competitive funding pressures may continue, management believes its deposit mix, modeled deposit repricing assumptions and liquidity monitoring framework position the Company to manage funding costs and liquidity prudently. Expected loan growth is anticipated to be funded by deposit growth and net interest margin is expected to improve compared to 2025.
(1) See non-GAAP financial measurements reconciliation on page 21.
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Financial Condition
Consolidated assets increased $163.4 million, or 6%, to $2.7 billion as of December 31, 2025 from $2.6 billion as of December 31, 2024. The increase in assets was primarily due to loan portfolio growth. The Company used deposits to fund loan growth.
The following table provides a comparison of condensed balance sheet data as of December 31:
(dollars in thousands)
Liabilities:
Short-term borrowings 20 - - -
A comparison of net changes in selected balance sheet categories as of December 31, are as follows:
Earning Other FHLB
(dollars in thousands) Assets % assets* % Deposits % borrowings % advances %
* Earning assets include interest-bearing deposits with financial institutions, gross loans and leases, loans held-for-sale, available-for-sale and held-to-maturity securities and restricted investments in bank stock excluding loans placed on non-accrual status.
For more information about the Company's capital, see Footnote 15, "Regulatory Matters," of Part II, Item 8 “Financial Statements and Supplementary Data”, which is incorporated herein by reference and the "Capital Resources" section of management’s discussion and analysis contained herein.
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Funds Provided:
Deposits
The Company is a community-based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 21 branch offices and all deposits are insured by the FDIC up to the extent permitted by law. Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market; non-interest bearing checking (DDA). The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years. Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.
The following table represents the components of total deposits as of the date indicated:
(dollars in thousands) Amount % Amount %
Total deposits increased $126.5 million, or 5%, to $2.5 billion as of December 31, 2025 from $2.3 billion as of December 31, 2024. The increase includes: money market $92.8 million, CDs $14.1 million, and interest-bearing checking $2.1 million are driven by new primary checking households, an increase in existing account balances and a retention strategy with targeted marketing in support of building client relationships. Non-interest bearing checking balances increased $18.6 million primarily due to business and personal demand deposit accounts. Savings and club account balances decreased by $1.1 million during 2025 primarily due to shifts to money market accounts and CDs. During 2026, the Company will continue to execute its relationship development strategy to maintain and grow core deposits. Public deposit fluctuations are expected to remain seasonal and at times may partially offset future deposit growth.
The Company utilizes the CDARS reciprocal program and the ICS reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum insured amount of $250,000. The Company had $48.9 million and $49.4 million in CDARS as of December 31, 2025 and 2024, respectively. As of December 31, 2025 and 2024, ICS reciprocal deposits represented $153.1 million and $150.6 million, or 6% and 6%, respectively, of total deposits which are included in interest-bearing checking accounts in the table above.
As of December 31, 2025, total uninsured deposits were estimated to be $954.0 million, or 39% of total deposits. The estimate of uninsured deposits is based on the same methodologies and assumptions used for regulatory reporting requirements. The Company aggregates deposit products by taxpayer identification number and classifies them into ownership categories to estimate amounts over the FDIC insurance limit. As of December 31, 2025, the total of uninsured and non-collateralized deposits to total deposits was $656.5 million, or 27% of deposits. Collateralized deposits totaled $297.5 million, or 12% of total deposits as of December 31, 2025.
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The maturity distribution of certificates of deposit that meet or exceed the FDIC limit, by account, as of December 31, 2025 is as follows:
(dollars in thousands)
Three months or less $ 31,248
More than three months to six months 56,906
More than six months to twelve months 20,365
More than twelve months 1,516
Approximately 96% of the CDs, with a weighted-average interest rate of 3.72%, are scheduled to mature in 2026 and an additional 2%, with a weighted-average interest rate of 2.01%, are scheduled to mature in 2027. Renewing CDs are currently expected to reprice to lower market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. The Company continues to address maturing CDs on a relationship pricing basis, with both CD retention and promotional programs and a rate match when prudent to maintain relationships. For the fiscal year of 2025, 87% of maturing CDs were retained in deposit products within the bank. The Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company.
Short-term borrowings
Borrowings are used as a complement to deposit generation as an alternative funding source whereby the Company will borrow under advances from the FHLB of Pittsburgh and other correspondent banks for asset growth and liquidity needs.
Short-term borrowings may include overnight balances with FHLB's line of credit and/or correspondent banks federal funds lines which the Company may require to fund daily liquidity needs such as deposit outflow, loan demand and operations. As of December 31, 2025, the Company did not use any short-term borrowings to fund loan growth. As of December 31, 2025, the Company had the ability to borrow $145.0 million from the Federal Reserve borrower-in-custody program, full availability of $150.0 million in overnight borrowings with the FHLB open-repo line of credit and $30.0 million from lines of credit with correspondent banks.
Information with respect to the Company’s short-term borrowings' maximum and average outstanding balances and interest rates are contained in Note 8, “Short-term Borrowings,” of the notes to consolidated financial statements incorporated by reference in Part II, Item 8.
Secured borrowings
As of December 31, 2025, the Company had 5 secured borrowing agreements with third parties with a carrying value of $6.0 million compared to 5 secured borrowing agreements with third parties with a carrying value of $6.2 million as of December 31, 2024, related to certain sold loan participations that did not qualify for sales treatment. Secured borrowings are expected to decrease throughout 2026 from scheduled amortization and, when possible, early pay-offs.
FHLB advances
The Company had no FHLB advances as of December 31, 2025 and 2024. As of December 31, 2025, the Company had the ability to borrow up to $812.7 million from the FHLB, net of any overnight borrowings utilized. The Company does not expect to have any FHLB advances in 2026.
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Funds Deployed:
Investment Securities
The Company’s investment policy is designed to complement its lending activities, provide monthly cash flow, manage interest rate sensitivity and generate a favorable return without incurring excessive interest rate and credit risk while managing liquidity at acceptable levels. In establishing investment strategies, the Company considers its business, growth strategies or restructuring plans, the economic environment, the interest rate sensitivity position, the types of securities in its portfolio, permissible purchases, credit quality, maturity and re-pricing terms, call or average-life intervals and investment concentrations. The Company’s policy prescribes permissible investment categories that meet the policy standards and management is responsible for structuring and executing the specific investment purchases within these policy parameters. Management buys and sells investment securities periodically depending on market conditions, business trends, liquidity needs, capital levels and structuring strategies. Investment security purchases provide a way to quickly invest excess liquidity in order to generate additional earnings. The Company generally earns a positive interest spread by assuming interest rate risk using deposits or borrowings to purchase securities with longer maturities.
At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. Some of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Debt securities designated as AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity. For the year ended December 31, 2025, AOCI improved by $14.9 million primarily due to unrealized gains on securities AFS.
As of December 31, 2025, the carrying value of held-to-maturity securities was $227.3 million, net of $11.9 million in remaining transferred discount.
The Company utilized a fair value hedge to designate and swap a portion of the fixed rate AFS portfolio. The Company has an approved Derivative Policy that requires Board pre-approval on such balance sheet hedging activities as well as ongoing reporting to its ALCO Committee. The Board has approved up to $200 million in notional amount of pay-fixed interest rate swap and the Company has executed on $100 million to date.
During September 2023, the Company entered into a $100 million interest rate swap with a third-party financial institution to limit the risk to the investment portfolio of rising interest rates. The interest rate swap was designated as a fair value hedge and utilized a pay fixed interest rate swap to hedge the change in fair value attributable to the movement in the Secured Overnight Financing Rate ("SOFR"). The Company designated $50 million of the swap's notional balance as a hedge against the closed portfolio of 20-year mortgage-backed securities and $50 million as a hedge against the closed portfolio of tax-free municipal bonds. As of December 31, 2025, the Company recorded the fair value of the swap as $0.9 million in accrued interest payable and other liabilities on the consolidated balance sheet offset by a $0.9 million increase to the carrying value of designated investment securities.
As of December 31, 2025, the carrying value of investment securities amounted to $523.9 million, or 19% of total assets, compared to $557.2 million, or 22% of total assets, as of December 31, 2024. On December 31, 2025, 32% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations. The mortgage-backed securities portfolio includes only pass-through bonds issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (GNMA).
The Company’s municipal (obligations of states and political subdivisions) portfolio is comprised of tax-free municipal bonds with a book value of $187.0 million ($170.7 million including the remaining net unrealized loss transferred on HTM securities) and taxable municipal bonds with a book value of $81.9 million ($75.8 million including the remaining net unrealized loss transferred on HTM securities). The overall credit ratings of these municipal bonds was as follows: 35% AAA, 63% AA, and 1% A. For HTM municipal securities, the Company utilized a third-party model to analyze whether a credit loss reserve is needed for these bonds. The amount of the credit loss reserve calculated was immaterial because of the underlying strong credit quality of the municipal portfolio.
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During 2025, the carrying value of total investments decreased $33.3 million, or 6%. The decline was primarily due to the sale of $45.7 million in available-for-sale securities and $23.0 million in paydowns partially offset by $25.1 million in purchases of securities. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile, to the extent possible.
A comparison of total investment securities as of December 31 follows:
HTM securities:
AFS debt securities:
The investment securities portfolio contained no private-label mortgage-backed securities, collateralized mortgage obligations, collateralized debt obligations, or trust-preferred securities. The portfolio had no adjustable-rate instruments as of December 31, 2025 and 2024.
The AFS securities were recorded with a net unrealized loss of $36.4 million and $52.8 million as of December 31, 2025 and 2024, respectively. Of the $16.4 million net improvement: $11.2 million was attributable to mortgage-backed securities, $3.9 million attributable to municipal securities, and $1.3 million was attributable to agency securities. The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve rise, especially at the intermediate and long end, the values of debt securities tend to decline. Whether or not the value of the Company’s investment portfolio will change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates decline, the market values of the Company’s debt securities portfolio could be subject to market value increases.
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As of December 31, 2025, the Company had $266.2 million in public deposits, or 11% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on public and trust deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. The Company also pledges securities for derivative instruments and certain borrowed funds. As of December 31, 2025, the balance of pledged securities required was $299.0 million, or 57% of total securities.
Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether credit losses on debt securities exist. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security has credit losses. If a decline in value is deemed to be a credit loss, a contra-asset is recorded on both HTM and AFS securities, limited by the amount that the fair value is less than the amortized cost basis. During the year ended December 31, 2025, the Company did not incur any credit losses on debt securities from its investment securities portfolio.
During 2025, the Company sold thirty-nine available-for-sale securities with the intention of replacing the holdings with better yielding bonds. The Company recognized a loss of $1.2 million as the amortized cost was $45.7 million compared to the sales proceeds of $44.5 million. These sales were due to the ongoing management strategy of improving margin and focusing on more effective interest earning assets.
Restricted investments in bank stock
Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. The balance in FHLB stock was $4.3 million and $3.9 million as of December 31, 2025 and 2024, respectively. The dividends received from the FHLB totaled $323 thousand and $304 thousand for the years ended December 31, 2025 and 2024, respectively. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaled $82 thousand as of December 31, 2025 and 2024.
Loans held-for-sale
Upon origination, most residential mortgages and certain Small Business Administration (SBA) guaranteed loans may be classified as held-for-sale (HFS). In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market. In declining interest rate environments, the Company would be exposed to prepayment risk as rates on fixed-rate loans decrease, and customers look to refinance loans. Consideration is given to the Company’s current liquidity position and projected future liquidity needs. To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS. Occasionally, residential mortgage and/or business loans may be transferred from the loan portfolio to HFS. The carrying value of loans HFS is based on the lower of cost or estimated fair value. If the fair values of these loans decline below their original cost, the difference is written down and charged to current earnings. Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs.
As of December 31, 2025 and 2024, loans HFS consisted of residential mortgages with carrying amounts of $0.6 million and $2.1 million, respectively, which approximated their fair values. During the year ended December 31, 2025, residential mortgage loans with principal balances of $65.7 million were sold into the secondary market and the Company recognized net gains of $1.0 million, compared to $59.3 million and $1.0 million, respectively, during the year ended December 31, 2024. Additionally, during 2025, the Company sold a commercial loan with a principal balance of $1.3 million and recognized a net gain of $0.5 million.
The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster relationships. As of December 31, 2025 and 2024, the servicing portfolio balance of sold residential mortgage loans was $513.6 million and $495.4 million, respectively, with mortgage servicing rights of $1.1 million and $1.3 million for the same periods, respectively.
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Loans and leases
As of December 31, 2025, the Company had gross loans and leases totaling $1.9 billion, an increase of $111.9 million, or 6%, compared to $1.8 billion at December 31, 2024.
During the twelve months ended December 31, 2025, the growth in the portfolio was attributed to a $130.6 million increase in the commercial portfolio which was heavily impacted by the origination of two commercial & industrial loans to a single borrower totaling $28.0 million; a single origination to a municipal borrower totaling $18.5 million; six commercial real estate owner occupied loans to five independent borrowers totaling $35.5 million; $25.5 million in construction projects that were completed and converted to non-owner commercial real estate loans and a single origination totaling $4.7 million to a commercial real estate non-owner occupied borrower; and general portfolio growth.
The Company also experienced a $5.9 million increase in the residential portfolio, which was offset by the $24.6 million reduction in the consumer portfolio attributed to a strategic reduction in the auto portfolio
As management continues to identify ways to optimize the Company’s balance sheet, the focus is to lend in areas that provide better risk-adjusted returns and improved opportunities to deepen relationships with our customers. This could result in a change in the composition of the loan portfolio in future periods.
A comparison of loan originations, net of participations, is as follows for the periods indicated:
(dollars in thousands) Amount Amount
Loans:
Lines of credit:
For the twelve months ended December 31, 2025, the Company originated $586.5 million in loans and lines of credit, an increase of $25.9 million, or 4%, compared to the twelve months ended December 31, 2024.
The Company originated $320.9 million total loans in 2025, which was $17.5 million more than in 2024. Commercial and industrial loan originations increased by $41.1 million in 2025 compared to 2024, due to enhanced management strategy around the segment. Loan originations decreased in commercial real estate (both owner-occupied and non-owner occupied CRE) by $18.1 million to $93.2 million, residential loans by $4.2 million to $89.4 million, and consumer loans by $1.4 million to $31.6 million.
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The Company originated $265.5 million total lines of credit in 2025, which was $8.3 million more than originations in 2024. Line of credit originations increased in commercial by $17.3 million to $201.2 million in 2025 compared to 2024. Line of credit originations decreased in residential construction by $7.5 million to $30.2 million and home equity and other consumer by $1.5 million to $34.1 million.
A comparison of loans and related percentage of gross loans, as of December 31, is as follows:
(dollars in thousands) Amount % Amount %
Commercial and industrial:
Commercial real estate:
Consumer:
Residential:
Less:
Commercial and industrial (C&I) and commercial real estate (CRE)
As of December 31, 2025, the commercial portfolio increased by $130.6 million, or 13%, to $1.2 billion compared to the December 31, 2024 balance of $1.0 billion due to growth of $66.6 million in total commercial and industrial loans and $64.0 million in growth in commercial real estate loans.
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Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, independent collateral appraisals, etc.
For the twelve months ended December 31, 2025, commercial and industrial (non-municipal) loans increased $47.7 million, or 28%, from $172.8 million as of December 31, 2024 to $220.5 million as of December 31, 2025, which was due to three commercial & industrial loans to two separate borrowers totaling $32.1 million in the third quarter along with the standard originations and advances outpacing scheduled payments and curtailments.
Municipal loans are secured by the full faith and credit of respective local government units located in the Commonwealth of Pennsylvania authorized in accordance with the Local Government Unit Debt Act. These loans have a long history of performance within contractual terms with no defaults noted.
For the twelve months ended December 31, 2025, municipal loans increased $18.9 million, or 19%, from $101.7 million on December 31, 2024, to $120.6 million as of December 31, 2025 which was primarily attributed to a single origination to a municipal borrower totaling $18.5 million.
Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral whose values tend to move inversely with interest rates. These loans are secured with mortgages, or commercial real estate mortgages (CREM) against the subject property. In underwriting commercial real estate construction loans, the Company performs a robust analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers consistent with Uniform Standards of Professional Appraisal Practice (USPAP) standards and compliant with Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).
For the twelve months ended December 31, 2025, owner occupied commercial real estate loans increased $35.9 million, or 12%, from $304.9 million on December 31, 2024, to $340.8 million at December 31, 2025, due to an origination to a single commercial real estate owner occupied borrower totaling $9.3 million during the first quarter, the origination of two loans to a single commercial real estate owner occupied borrower totaling $9.5 million during the second quarter, an origination to a single commercial real estate owner occupied borrower totaling $6.0 million during the third quarter, the origination of two loans to two commercial real estate owner occupied borrowers totaling $10.8 million during the fourth quarter and general portfolio growth.
Owner occupied commercial real estate loans rely on income generated from the respective owners’ businesses. Therefore, underwriting on owner occupied CRE loans emphasizes the owner’s cash flow and financial conditions while the real estate typically represents the owners' primary business location. Since cash flows from operations are the primary source of repayment for owner-occupied commercial real estate loans, this segment has a different risk profile than non-owner occupied lending.
The Company maintains a well-diversified non-owner occupied commercial real estate portfolio with no material concentration to any property type. The chart below describes the purpose for the types of exposure contained within the loan portfolio for non-owner-occupied commercial real estate loans at December 31, 2025 compared to December 31, 2024:
(dollars in thousands) Amount % Amount %
Commercial real estate non-owner occupied:
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For the twelve months ended December 31, 2025, non-owner occupied commercial real estate loans increased $22.3 million, or 6%, from $394.2 million on December 31, 2024, to $416.5 million on December 31, 2025. The increase is due to $25.5 million in construction projects that were completed and converted to non-owner occupied commercial real estate loans and a single origination totaling $4.7 million to a commercial real estate non-owner-occupied borrower, which were partially offset by standard portfolio runoff.
Non-owner occupied CRE loans are commercial loans not occupied by their owners and thus rely on income from third parties, including multi-family residential tenants and commercial tenants representing various industries. Underwriting on non-owner occupied CRE loans evaluates cash flow derived from the respective tenants and the industries they occupy. In keeping with its risk appetite and relationship management strategy, the Company avoids speculative commercial office space and prefers loans for projects with the following characteristics: sufficient equity, or loan to value, and have either S&P rated tenants with long term leases, loans structured with personal guarantees of owners whose personal financial strength provides meaningful cash flow support to supplement rental income volatility, residential projects with stable rents in desirable locations, or projects with sufficient diversity and industries proven to provide lower risk over the long term.
In the table above, office space comprised $47.7 million and special purpose comprised $41.7 million in outstanding amounts as of December 31, 2025. The office segment mainly has suburban medical and suburban professional third-party tenants. The special purpose segment includes self-storage facilities, assisted living facilities, nursing homes, and parking garages; self-storage facilities comprised $20.7 million, or 50%, of the special purpose segment as of December 31, 2025.
Construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans. As of December 31, 2025, the commercial construction portfolio of $56.7 million consisted of $37.4 million, or 66%, of non-owner-occupied loans and $19.2 million, or 34%, of owner-occupied loans.
For the twelve months ended December 31, 2025, commercial construction loans increased $5.8 million, or 11%, from $50.9 million on December 31, 2024 to $56.7 million at December 31, 2025. This increase was attributed to $24.4 million in commercial construction commitments originated during the year and $19.9 million in advances during the year on commercial construction loan availability booked prior to December 31, 2025. This increase was partially offset by $33.4 million in construction projects converting to permanent financing to owner and non-owner commercial real estate loans and $5.1 million in loans that were paid off during the twelve months ended December 31, 2025.
Consumer
The consumer loan portfolio consisted of home equity installment, home equity line of credit, non-recourse auto loans, recourse auto loans, direct finance leases and other consumer loans.
As of December 31, 2025, the total consumer loan portfolio decreased by $24.5 million, or 10%, to $226.3 million compared to the December 31, 2024 balance of $250.8 million, primarily due to a management strategic determination to reduce the indirect auto portfolio based on payoffs with minimal originations, resulting in a $41 million reduction. Offsetting the reduction in the indirect auto portfolio was growth of $12.1 million in the HELOC portfolio due to a sales campaign done during the year and growth of $4.6 million in the consumer other portfolio, which was attributed to $5.6 million loans purchased from the third-party originator BHG Financial during the year.
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Residential
As of December 31, 2025, the residential loan portfolio increased by $5.9 million, or 1%, to $531.2 million compared to the December 31, 2024 balance of $525.3 million due to general portfolio growth.
The residential real estate loan portfolio consisted primarily of held-for-investment residential loans for primary residences, including approximately $410 million in fixed-rate and $105 million in adjustable-rate mortgages as of December 31, 2025.
The Company considers its portfolio segmentation, including the real estate secured portfolio, to be normal and reasonably diversified. The banking industry is affected by general economic conditions including, among other things, the effects of real estate values. The Company ensures that its mortgage lending adheres to standards of secondary market compliance. Furthermore, the Company’s credit function strives to mitigate the negative impact of economic conditions by maintaining strict underwriting principles for all loan types.
The following table sets forth the maturity distribution of commercial and construction components of the loan portfolio at December 31, 2025. The determination of maturities is based on contractual terms. Non-contractual rollovers or extensions are included in one year or less category of the maturity classification. Excluded from the table are residential real estate and consumer loans:
More than More than
One year one year to five years to More than
(dollars in thousands) or less five years fifteen years fifteen years Total
Commercial real estate construction * 56,684 - - - 56,684
Residential real estate construction * 15,685 - - - 15,685
*In the table above, both residential and CRE construction loans are included in the one year or less category since, by their nature, these loans are converted into residential and CRE loans within one year from the date the real estate construction loan was consummated. Upon conversion, the residential and CRE loans would normally mature after five years.
The following table sets forth the total amount of C&I and CRE loans due after one year which have predetermined interest rates (fixed) and floating or adjustable interest rates (variable) as of December 31, 2025:
One to five Five to Over
(dollars in thousands) years fifteen years fifteen years Total
Non-refundable fees and costs associated with all loan originations are deferred. Using either the interest method or straight-line amortization, the deferral is released as credits or charges to loan interest income over the life of the loan.
There are no concentrations of loans or customers to several borrowers engaged in similar industries exceeding 10% of total loans that are not otherwise disclosed as a category in the tables above. There are no concentrations of loans that, if resulted in a loss, would have a material adverse effect on the business of the Company. The Company’s loan portfolio does not have a material concentration within a single industry or group of related industries or customers that is vulnerable to the risk of a near-term severe negative business impact. As of December 31, 2025, approximately 77% of the gross loan portfolio was secured by real estate compared to 77% at December 31, 2024.
Allowance for credit losses
Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for credit losses (ACL) on a quarterly basis. The allowance reflects management’s best estimate of the amount of expected credit losses in the loan portfolio. When estimating the net amount expected to be collected, management considers the effects of past events, current conditions, and reasonable and supportable forecasts of the collectability of the Company’s financial assets. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.
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The methodology to analyze the adequacy of the ACL is based on seven primary components:
o levels of and trends in delinquencies and non-accrual loans;
o levels of and trends in charge-offs and recoveries;
o trends in volume and terms of loans;
o changes in risk selection and underwriting standards;
o changes in lending policies and legal and regulatory requirements;
o experience, ability and depth of lending management;
o national and local economic trends and conditions;
o changes in credit concentrations; and
o changes in underlying collateral.
A key control related to the allowance is the Company’s Special Assets Committee. This committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.
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The following table sets forth the activity in the allowance for credit losses on loans and certain key ratios for the periods indicated:
Charge-offs:
Commercial and industrial (376 ) (399 )
Commercial real estate (56 ) (132 )
Residential (73 ) -
Recoveries:
Commercial and industrial 156 12
Commercial real estate 65 352
Provision for credit losses on loans 1,055 1,325
Allowance for credit losses to total loans 1.06 % 1.09 %
Net charge-offs to average total loans outstanding 0.03 % 0.03 %
Loans 90 days or more past due and accruing $ - $ 32
Allowance for credit losses to non-accrual loans 10.66 x 2.68 x
Allowance for credit losses to non-performing loans 10.66 x 2.67 x
For the twelve months ended December 31, 2025, the allowance increased $0.5 million, or 3%, to $20.2 million from $19.7 million at December 31, 2024. The increase in the allowance was based on the provisioning of $1.1 million partially offset by net charge-offs of $0.6 million.
The allowance for credit losses as a percentage of total loans decreased to 1.06% as of December 31, 2025 compared to 1.09% at December 31, 2024 based on the changes in current year loss factors, a more favorable economic forecast, and reduction in non-performing loans.
Management believes that the current balance in the allowance for credit losses is sufficient to meet the identified potential credit quality issues that may arise and other issues unidentified but inherent to the portfolio. Potential problem loans are those where there is known information that leads management to believe repayment of principal and/or interest is in jeopardy and the loans are currently neither on non-accrual status nor past due 90 days or more.
Key loss driver assumptions used in the allowance estimate included the median FOMC National Gross Domestic Product (GDP) and unemployment rate forecasts, the Federal Housing Finance Agency (FHFA) House Price Index (HPI), prepayment and curtailment rates, and estimated remaining loan lives. Although key loss driver assumptions used in the ACL estimate remained largely stable from the estimate as of December 31, 2024 to the estimate as of December 31, 2025, the ACL on absolute terms increased based on growth in the loan and lease portfolio and changes in the composition of the portfolio along with slower prepayment and curtailment rates offset by more favorable economic forecasts.
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During the second quarter of 2025, management created a separate pool for its consumer loans purchased from the third-party originator, BHG Financial, due to the unique risk characteristics of these loans compared to the consumer loans originated by the Company. The total balance of the BHG consumer loan portfolio was $10.5 million as of December 31, 2025.
Qualitative factors for the ACL estimate as of December 31, 2025, saw a general decrease compared to the prior year based on strong third-party assessments of the Company’s asset quality and improved, local economic conditions.
The allocation of net charge-offs among major categories of loans are as follows for the periods indicated:
Net charge-offs
Commercial and industrial $ (220 ) 41 % $ (387 ) 83 %
Commercial real estate 9 (2 ) 220 (47 )
For the year ended December 31, 2025, net charge-offs against the allowance totaled $0.6 million compared with net charge-offs of $0.5 million for the year ended December 31, 2024, the increase is due to a $0.1 million increase in charge-offs related to residential real estate with two individual borrowers during 2025. Net charge-offs as a percentage of the total loan portfolio were unchanged at 0.03% for the twelve months ended December 31, 2025 and 2024.
For a discussion on the provision for credit losses, see the “Provision for credit losses,” located in the results of operations section of management’s discussion and analysis contained herein.
The allowance for credit losses can generally absorb losses throughout the loan portfolio. However, in some instances an allocation is made for specific loans or groups of loans. Allocation of the allowance for credit losses for different categories of loans is based on the methodology used by the Company, as previously explained. The changes in the allocations from period-to-period are based upon quarter-end reviews of the loan portfolio.
Allocation of the allowance among major categories of loans for the periods indicated, as well as the percentage of loans in each category to total loans, is summarized in the following table. This table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. When present, the portion of the allowance designated as unallocated is within the Company’s guidelines:
% of Category % of Category
Total % of Total % of
(dollars in thousands) Allowance Allowance Loans Allowance Allowance Loans
Category
Unallocated 54 - - 12 - -
As of December 31, 2025, the commercial real estate loan portfolio comprised 44% of the total allowance for credit losses, down 1 percentage point from December 31, 2024. As of December 31, 2025, the commercial real estate loan portfolio was 43% of the total loan and lease portfolio indicative of a higher relative reserve, which is attributed to the longer average duration and inherent risk of the portfolio.
As of December 31, 2025, the commercial and industrial portfolio comprised 14% of the total allowance for credit losses, up 2 percentage points from December 31, 2024. As of December 31, 2025, the commercial and industrial portfolio was 18% of the total loan and lease portfolio indicative of a lower relative reserve, which is attributed to the shorter average duration of this portfolio and lower relative risk, specifically from the municipal portfolio.
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As of December 31, 2025, the consumer portfolio comprised 10% of the total allowance for credit losses, down 3 percentage points from December 31, 2024. As of December 31, 2025, the consumer portfolio is 11% of the total loan and lease portfolio indicative of a comparable, relative reserve.
As of December 31, 2025, the residential portfolio comprised 32% of the total allowance for credit losses, up 2 percentage points from December 31, 2024. As of December 31, 2025, the residential portfolio is 28% of the total loan and lease portfolio indicative of a higher relative reserve, which is attributed to the longer average duration and inherent risk of the portfolio.
As of December 31, 2025, the unallocated reserve, representing the portion of the allowance not specifically identified with a loan or groups of loans, was less than 1% of the total allowance for credit losses, unchanged from December 31, 2024.
Non-performing assets
The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, other real estate owned (ORE) and repossessed assets.
The following table sets forth non-performing assets at December 31:
Loans past due 90 days or more and accruing $ - $ 32
Other real estate owned and repossessed assets 326 430
Total non-performing assets $ 2,218 $ 7,805
Non-accrual loans to total loans 0.10 % 0.41 %
Non-performing loans to total loans 0.10 % 0.41 %
Non-performing assets to total assets 0.08 % 0.30 %
Management continually monitors the loan portfolio to identify loans that are either delinquent or are otherwise deemed by management unable to repay in accordance with contractual terms. Generally, loans of all types are placed on non-accrual status if a loan of any type is past due 90 or more days or if collection of principal and interest is in doubt. Further, unsecured consumer loans are charged-off when the principal and/or interest is 90 days or more past due. Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income.
Non-performing assets represented 0.08% of total assets at December 31, 2025 compared with 0.30% at December 31, 2024. The decrease resulted from a $5.6 million, or 72%, decline in non-performing assets, specifically non-accrual loans, which declined $5.5 million due to the sale of a $1.3 million commercial owner occupied real estate loan to a third-party purchaser during the first quarter of 2025; $0.3 million residential real estate to other real estate owned in the second quarter, and the resolution of a single commercial and industrial loan during the second and third quarters of 2025, which included $2.3 million in payments and a $0.3 million charge off.
On December 31, 2025, there were a total of 24 non-accrual loans to 21 unrelated borrowers with balances that ranged from less than $1 thousand to $0.4 million, or $1.9 million in the aggregate. On December 31, 2024, there were a total of 33 non-accrual loans to 30 unrelated borrowers with balances that ranged from less than $1 thousand to $2.6 million, or $7.3 million in the aggregate.
There were no loans past due 90 days or more accruing as of December 31, 2025, compared to two direct finance leases totaling $32 thousand as of December 31, 2024. All loans were well secured and in the process of collection.
The Company seeks payments from all past due customers through an aggressive customer communication process. Unless well-secured and in the process of collection, past due loans will be placed on non-accrual at the 90-day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts.
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The composition of non-performing loans as of December 31, 2025 is as follows:
Past due
Gross 90 days or Non- Total non- % of
loan more and accrual performing gross
(dollars in thousands) balances still accruing loans loans loans
Commercial and industrial:
Commercial real estate:
Construction 56,684 - - - -
Consumer:
Auto loans-Recourse 10,139 - - - -
Direct finance leases * 18,212 - - - -
Residential:
Construction 15,685 - - - -
Loans held-for-sale 573 - - - -
*Net of unearned lease revenue of $1.5 million.
Payments received from non-accrual loans are recognized on a cost recovery method. Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. If the non-accrual loans that were outstanding as of December 31, 2025 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of $144 thousand.
Foreclosedassets held-for-sale
From December 31, 2024 to December 31, 2025, foreclosed assets held-for-sale decreased from $430 thousand to $326 thousand, a $104 thousand decrease, which was attributed to the sale of two commercial properties totaling $292 thousand and sale of three residential properties totaling $253 thousand. These sales were partially offset by the addition of three properties totaling $442 thousand.
The following table sets forth the activity in the Other real estate (ORE) component of foreclosed assets held-for-sale:
(dollars in thousands) Amount # Amount #
Balance at beginning of period $ 429 3 $ 1 1
Pay downs (2 ) - - -
Write downs - - - -
Transfers - - - -
As of December 31, 2025, the company had one property totaling $324 thousand, which was listed for sale.
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As of December 31, 2025 and 2024, the Company had one other repossessed asset totaling $2 thousand and $1 thousand, respectively, which was a vehicle.
Cash surrender value of bank owned life insurance
The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies. BOLI is classified as a non-interest earning asset. Increases or decreases in the cash surrender value are recorded as components of non-interest income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company. This profitability is used to offset a portion of current and future employee benefit costs. The BOLI cash surrender value build-up can be liquidated if necessary, with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that supports employee benefit cost increases which enhances the Company’s capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value.
Premises and equipment
Net of depreciation, premises and equipment increased $13.0 million during 2025 primarily due to the construction of the new headquarters building. This increase was partially offset by $2.3 million in depreciation expense.
The Company is in the process of corporate headquarters construction which will continue to increase construction in process. On December 23, 2020, the Commonwealth of Pennsylvania authorized the first of three Redevelopment Assistance Capital Program (RACP) grant funding in the amount of $2.0 million, a second on December 6, 2021 in the amount of $2.0 million, and the final grant award on November 1, 2024 in the amount of $4.0 million, bringing the total RACP grant award to $9.0 million. The $9.0 million RACP grants will offset the total construction costs of the renovation and rehabilitation of the historic Scranton Electric Building. As of December 31, 2025, the Company incurred $21.8 million in costs for the corporate headquarters building in downtown Scranton which included planning, engineering, and architectural fees as well as interior demolition and construction. The remaining building costs could range from $7 million to $9 million. This estimated range may expand due to unknown supply chain issues, labor pricing, design changes, or upgrades required to meet current codes. The Company currently estimates furniture and office equipment costs at $2.0 million and technology equipment and infrastructure at $0.6 million. The historic nature of this building has qualified the Company for an estimated $3.4 million in state and federal historic tax credits. The project is expected to be completed in the middle of 2026. During 2025, the Company transferred its current downtown Scranton location to other assets held-for-sale and expects the sale of the current location to be finalized upon completion of the corporate headquarters.
Other assets
During 2025, the $7.1 million increase in other assets was due mostly to a $7.5 million increase in deferred tax assets.
Results of Operation
Earnings Summary
The Company’s earnings depend primarily on net interest income. Net interest income is the difference between interest income and interest expense. Interest income is generated from yields earned on interest-earning assets, which consist principally of loans and investment securities. Interest expense is incurred from rates paid on interest-bearing liabilities, which consist of deposits and borrowings. Net interest income is determined by the Company’s interest rate spread (the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Interest rate spread is significantly impacted by: changes in interest rates and market yield curves and their related impact on cash flows; the composition and characteristics of interest-earning assets and interest-bearing liabilities; differences in the maturity and re-pricing characteristics of assets compared to the maturity and re-pricing characteristics of the liabilities that fund them and by the competition in the marketplace.
The Company’s earnings are also affected by the level of its non-interest income and expenses and by the provisions for credit losses and income taxes. Non-interest income mainly consists of: service charges on the Company’s loan and deposit products; interchange fees; trust and asset management service fees; increases in the cash surrender value of the bank owned life insurance and from net gains or losses from sales of loans and securities. Non-interest expense consists of: compensation and related employee benefit costs; occupancy; equipment; data processing; advertising and marketing; FDIC insurance premiums; professional fees; loan collection; net other real estate owned (ORE) expenses; supplies and other operating overhead.
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Net interest income, net interest rate margin, net interest rate spread and the efficiency ratio are presented in the Management's Discussion & Analysis on a fully-taxable equivalent (FTE) basis. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.
Overview
Net income recorded for the year ended December 31, 2025 was $28.2 million, or $4.89 earnings per share, ($4.86 diluted earnings per share) compared to $20.8 million, or $3.63 earnings per share, ($3.60 diluted earnings per share) for the year ended December 31, 2024. The $7.4 million, or 36% increase in net income resulted primarily from the $10.8 million increase in net interest income and $1.6 million increase in non-interest income partially offset by a $3.3 million increase in non-interest expenses for 2025 compared to 2024.
For the year ended December 31, 2025, return on average assets (ROA) and return on average shareholders’ equity (ROE) were 1.05% and 12.88%, respectively, compared to 0.83% and 10.58% for the same period in 2024. The increase in ROA and ROE was the result of the increase in net income during 2025. Pre-provision net revenue to average assets (non-GAAP) was 1.28% and 1.02% (1) for the years ended December 31, 2025 and 2024, respectively. For more information on the calculation of pre-provision net revenue to average assets, see “Non-GAAP Financial Measures” located above within this management’s discussion and analysis. The increase was primarily due to an improvement in pre-provision net revenue.
Net interest income and interest sensitive assets / liabilities
Net interest income was $72.7 million for the year ended December 31, 2025 compared to $61.9 million for the year ended December 31, 2024. The $10.8 million increase in net interest income resulted from the increase of $12.8 million in interest income primarily due to a $181.6 million increase in the average balance of interest-earning assets and a 17 basis point increase in fully-taxable equivalent ("FTE") (non-GAAP measurement) yield. On the asset side, the loan portfolio interest income growth resulted from producing $10.6 million more in interest income from an increase of 21 basis points in FTE loan yields on $125.3 million higher average balances. Additionally, the Company experienced an increase of $3.0 million in interest earned from interest-bearing deposits with other financial institutions from $74.6 million higher average balances. The increase in interest income was partially offset by a decrease of $0.8 million in interest earned on the investment portfolio due to decreases of 7 basis points in yield and $18.5 million in average balances. On the funding side, total interest expense increased by $2.0 million primarily due to an increase in interest expense paid on deposits of $3.6 million from the $187.0 million larger average balance of interest-bearing deposits, partially offset by a decrease within interest expense on borrowings of $1.6 million for the twelve months ended December 31, 2025 compared to the same period in 2024.
The overall cost of interest-bearing liabilities was 2.49% for the twelve months ended December 31, 2025 compared to 2.60% for the twelve months ended December 31, 2024. The cost of funds decreased 5 basis points to 1.94% for the twelve months ended December 31, 2025 from 1.99% for the same period of 2024. The FTE yield on earning assets was 4.79% for the year ended December 31, 2025, an increase of 17 basis points from the 4.62% for the year ended December 31, 2024. The Company’s FTE net interest spread (non-GAAP measurement) was 2.30% for the twelve months ended December 31, 2025, an increase of 28 basis points from the 2.02% recorded for the same period of 2024. FTE net interest margin (non-GAAP measurement) increased by 23 basis points to 2.95% for the twelve months ended December 31, 2025 from 2.72% for the same 2024 period due to the increase of 17 basis points in FTE yields earned on interest-earning assets along with a decline of 11 basis points in the rates paid on interest-bearing liabilities.
(1) See non-GAAP financial measures reconciliation on page 21.
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For 2026, the Company currently expects to operate in a moderately declining interest rate environment. Management is primarily reliant on the FOMC's statements and forecast. In fiscal year end 2025, the FOMC decreased the federal funds rate by 75 basis points. Consensus economic forecasts are expecting one to two declines of 25 basis points throughout 2026. Throughout 2026, the Company expects to see improvement in net interest margin primarily due to the expected growth in the loan and deposit portfolios. This is coupled with the repricing of deposit rates in the decreasing rate environment.
The Company’s Asset Liability Management (ALM) team meets regularly to discuss among other things, interest rate risk and when deemed necessary adjusts interest rates. ALM is actively addressing the Company's sensitivity to a changing rate environment to ensure interest rate risks are contained within acceptable levels. ALM also discusses revenue enhancing strategies to help combat the potential for a decline in net interest income. The Company’s marketing department, together with ALM, and service-driven branch and relationship managers, continue to develop prudent strategies that will grow the loan portfolio and accumulate relationship driven deposits at costs lower than borrowing costs to improve net interest income performance.
The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the years indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% for 2025 and 2024, to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. See “Non-GAAP Financial Measures” within this management’s discussion and analysis for the FTE adjustments. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans held-for-sale (HFS) and non-accrual loans but exclude the allowance for credit losses. HELOC are included in the residential real estate category since they are secured by real estate. Net deferred loan (cost amortization)/ fee accretion of ($0.9 million) in 2025 and ($0.9 million) in 2024, respectively, are included in interest income from loans. Purchase accounting adjustments of $1.3 million and $1.6 million are included in interest income from loans and $5 thousand and $8 thousand reduced interest expense on deposits and borrowings for 2025 and 2024. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans. Net interest margin is calculated by dividing net interest income-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source:
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Average Yield / Average Yield /
Assets balance Interest rate balance Interest rate
Interest-earning assets
Investments:
Loans and leases:
Liabilities and shareholders' equity
Interest-bearing liabilities
Deposits:
Net interest spread 2.30 % 2.02 %
Net interest margin 2.95 % 2.72 %
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Changes in net interest income are a function of both changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which changes in interest rates and changes in volumes of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by the prior period rate), (2) the changes attributable to changes in interest rates (changes in rates multiplied by prior period volume) and (3) the net change. The combined effect of changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Tax-exempt income was not converted to a tax-equivalent basis on the rate/volume analysis:
Years ended December 31,
Increase (decrease) due to
Volume Rate Total Volume Rate Total
Interest income:
Restricted investments in bank stock 19 (12 ) 7 (19 ) 32 13
Investments:
Loans and leases:
Interest expense:
Deposits:
Savings and clubs (15 ) (7 ) (22 ) (71 ) (3 ) (74 )
Provision for credit losses
The provision for credit losses represents the necessary amount to charge against current earnings, the purpose of which is to adjust the allowance for credit losses to a level that represents management’s best estimate of expected credit losses in the Company’s loan portfolio. Loans determined to be uncollectible are charged off against the allowance. The required amount of the provision for credit losses, based upon the adequate level of the allowance, is subject to the ongoing analysis of the loan portfolio. The Company’s Special Assets Committee meets periodically to review problem loans. The committee is comprised of management, including credit administration officers, loan officers, loan workout officers and collection personnel.
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Management continuously reviews the risks inherent in the loan portfolio. The determination of the amounts of the allowance for credit losses and the provision for credit losses is based on management’s current judgments about the credit quality of the Company’s financial assets and known and expected relevant internal and external factors that significantly affect collectability such as historical loss information, current conditions, and reasonable and supportable forecasts, including significant qualitative factors.
For the year ended December 31, 2025, the provision for credit losses on loans was $1.1 million and the provision for credit losses on unfunded commitments was $0.2 million, compared to a $1.3 million provision for credit losses on loans and a $0.1 million net benefit for the provision for unfunded commitments for the year ended December 31, 2024. For the year ended December 31, 2025, the decrease in the provision for credit losses on loans compared to the prior year period was due to improved asset quality. For the year ended December 31, 2025, the increase in the provision for credit losses on unfunded commitments compared to the prior period was due to originated growth in the portfolio, specifically in commercial construction commitments.
The provision for credit losses derives from the reserve required from the allowance for credit losses calculation. The Company continued provisioning for twelve months ended December 31, 2025 to maintain an allowance level that management deemed adequate.
For a discussion on the allowance for credit losses, see “Allowance for credit losses,” located in the comparison of financial condition section of management’s discussion and analysis contained herein.
Other income
The majority of the Company’s revenues are generated through interest earned on securities and loans. In addition, the Company has other non-interest income streams such as fees associated with mortgage servicing rights which amortized to net mortgage servicing fees within other income, loan service charges, life insurance earnings, rental income and gains/losses on the sale of loans. The other types of contracts with customers that generate non-interest income are:
Total non-interest income for the year ended December 31, 2025 was $20.6 million, an increase of $1.6 million, or 8%, from $19.0 million for the year ended December 31, 2024. The increase was primarily due to increases of $0.6 million in wealth management revenue, $0.3 million in interchange fees, $0.3 million from service charges on commercial loans, and $0.2 million in service charges on deposits. The Company also had $0.2 million more non-interest income resulting from a BOLI death benefit gain. During the twelve months ended December 31, 2025, the Company also recognized gains of $0.5 million on sale of commercial loans and $0.3 million from the sale of a property. Partially offsetting these increases was $1.2 million in losses recognized on the sale of available-for-sale securities.
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Other operating expenses
Non-interest expenses increased to $58.8 million for the year ended December 31, 2025, an increase of $3.3 million, or 6%, from $55.5 million for the year ended December 31, 2024. Salaries and benefits expense increased $2.0 million due to an increase in employees and incentive-based compensation throughout the year ended December 31, 2025. Additionally, furniture, fixtures, and equipment expenses increased $0.8 million over the same period primarily due to an increase in software costs. There were additional increases throughout the period in advertising and marketing expenses of $0.4 million and occupancy expenses of $0.2 million. These increases were partially offset by reductions in professional fees of $0.3 million.
The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were 1.38% and 1.47%, respectively, at December 31, 2025 and 2024. The expense ratio decreased because of increased levels of average assets. The efficiency ratio decreased from 66.19% at December 31, 2024 to 60.30% (1) at December 31, 2025 primarily due to the increase in net interest income in 2025. For more information on the calculation of the efficiency ratio, see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.
The costs of acquiring and maintaining talent may increase salaries and employee benefit expenses, primarily salaries, incentives and group insurance, in 2026. Additionally, the Company's technology platforms continue to evolve and require periodic upgrades. Therefore, the Company continues to devote financial resources and personnel necessary to maintain and improve the information technology systems and platforms for optimal operational efficiency, customer convenience and compliance with applicable laws, regulations and regulatory guidance within a secure environment. Although these costs are expected, the costs of software and software subscriptions continue to rise and may require further investment and expenditures by the Company.
Upon occupancy of the corporate headquarters, the Company does not expect any significant impact to net income. Costs for operating the new headquarters are expected to be offset by the closure of other owned and leased properties near downtown Scranton. The expenses will also be offset by historical tax credit benefits.
Provision for income taxes
The provision for income taxes increased $1.8 million for the year ended December 31, 2025 compared to the same 2024 period due to $9.2 million higher income before taxes. The Company’s effective income tax rate approximated 14.9% in 2025 and 12.9% in 2024. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The increase in the effective tax rate was primarily due to higher pre-tax income. If the federal corporate tax rate decreased, the Company’s net deferred tax liabilities and deferred tax assets will be re-valued upon adoption of the new tax rate. A federal tax rate decrease will decrease net deferred tax assets with a corresponding increase to provision for income taxes.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy. These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments and lease obligations.
Lending commitments include commitments to originate loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
In addition to lending commitments, the Company has contractual obligations related to operating lease and finance lease commitments. Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes. Finance lease commitments are obligations on buildings and equipment.
(1) See non-GAAP financial measures reconciliation on page 21.
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The following table presents, as of December 31, 2025, the Company’s significant determinable contractual obligations and significant commitments by payment date. The payment amounts represent those amounts contractually due to the recipient, excluding interest:
Over one Over three
One year year through years through Over
(dollars in thousands) or less three years five years five years Total
Contractual obligations:
Commitments:
Related Party Transactions
Information with respect to related parties is contained in Note 16, “Related Party Transactions”, within the notes to the consolidated financial statements, and incorporated by reference in Part II, Item 8.
Impact of Accounting Standards and Interpretations
Information with respect to the impact of accounting standards is contained in Note 18, “Recent Accounting Pronouncements”, within the notes to the consolidated financial statements, and incorporated by reference in Part II, Item 8.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of the Company’s financial condition and results of operations in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial businesses, most all of the Company’s assets and liabilities are financial in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation as interest rates do not necessarily move in the same direction or, to the same extent, as the price of goods and services.
Capital Resources
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Since the Company (on a consolidated basis) is currently considered a small bank holding company, it is not subject to regulatory capital requirements.
Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting ratios represent capital as a percentage of total risk-weighted assets and certain off-balance sheet items. The guidelines require all banks and bank holding companies to maintain minimum ratios for capital adequacy purposes. Refer to the information with respect to capital requirements contained in Note 15, “Regulatory Matters”, within the notes to the consolidated financial statements, and incorporated by reference in Part II, Item 8.
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During the year ended December 31, 2025, total shareholders' equity increased $34.9 million, or 17%, from $204.0 million at December 31, 2024. The increase was caused by $18.7 million higher retained earnings from net income of $28.2 million plus a $14.9 million, after tax, improvement in accumulated other comprehensive loss from lower net unrealized losses recorded on available-for-sale securities, partially offset by $9.5 million in cash dividends paid to shareholders. An additional $1.3 million was recorded from the issuance of common stock under the Company’s stock plans and stock-based compensation expense. At December 31, 2025, there were no credit losses on available-for-sale and held-to-maturity debt securities. The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was 33.70% and 42.96% for the years ended December 31, 2025 and 2024, respectively. The balance of earnings is retained to further strengthen the Company’s capital position. The Company’s sources (uses) of capital during the previous five years are indicated below:
Cash Other retained Total DRP Issuance of Changes in
Net dividends earnings earnings and ESPP common stock AOCI and Capital
As of December 31, 2025, the Company reported a net unrealized loss position of $40.7 million, net of tax, from the securities portfolio compared to a net unrealized loss of $55.6 million as of December 31, 2024. The $14.9 million improvement during 2025 was from the amortization of unrealized losses on held-to-maturity securities coupled with improvement in unrealized losses on AFS securities. Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and not in the creditworthiness of the issuers.
Generally, when U.S. Treasury rates rise, investment securities’ pricing declines and fair values of investment securities also decline. While volatility has existed in the yield curve within the past twelve months, a declining rate environment is expected and during the period of declining rates, the Company expects pricing in the bond portfolio to improve. There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of investment securities.
To help maintain a healthy capital position, the Company can issue stock to participants in the Dividend Reinvestment Plan (DRP) and Employee Stock Purchase Plan (the ESPP) plans. The DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants. Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet.
See the section entitled “Supervision and Regulation”, below for a discussion on regulatory capital changes and other recent enactments, including a summary of the federal banking agencies final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
Liquidity
Liquidity management ensures that adequate funds will be available to meet customers’ needs for borrowings, deposit withdrawals and maturities, facility expansion and normal operating expenses. Sources of liquidity are cash and cash equivalents, asset maturities and pay-downs within one year, loans HFS, investments AFS, growth of core deposits, utilization of borrowing capacities from the FHLB, correspondent banks, IntraFi's ICS and One-Way Buy program, the Discount Window of the Federal Reserve Bank of Philadelphia (FRB), Atlantic Community Bankers Bank (ACBB) and proceeds from the issuance of capital stock. Though regularly scheduled investment and loan payments are dependable sources of daily liquidity, sales of both loans HFS and investments AFS, deposit activity and investment and loan prepayments are significantly influenced by general economic conditions including the interest rate environment. During low and declining interest rate environments, prepayments from interest-sensitive assets tend to accelerate and provide significant liquidity that can be used to invest in other interest-earning assets but at lower market rates. Conversely, in periods of high or rising interest rates, prepayments from interest-sensitive assets tend to decelerate causing prepayment cash flows from mortgage loans and mortgage-backed securities to decrease. Rising interest rates may also cause deposit inflow but priced at higher market interest rates or could also cause deposit outflow due to higher rates offered by the Company’s competition for similar products. The Company closely monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities.
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The Company’s contingency funding plan (CFP) sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal. The Company established guidelines for identifying, measuring, monitoring and managing the resolution of potentially serious liquidity crises. The CFP outlines required monitoring tools, acceptable alternative funding sources and required actions during various liquidity scenarios. Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity conditions. At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s Asset/Liability Committee. As of December 31, 2025, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.
During the year ended December 31, 2025, the Company grew cash and cash equivalents by $64.7 million. During the period, the Company’s operations provided approximately $42.4 million mostly from $75.6 million of net cash inflow from the components of net interest income partially offset by net non-interest expense/income related payments of $34.1 million and $4.6 million in purchased tax credits. Additionally, the Company paid $7.2 million to purchase tax credits to be utilized in future periods. Cash inflow from interest-earning assets, deposit growth and loan payments were used to fund the loan portfolio, pay down short-term borrowings, invest in bank premises and equipment and make net dividend payments. The Company received a large amount of public deposits over the past few years. The seasonal nature of deposits from municipalities and other public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of cash outflow from this customer base, including maintaining the requirements to pledge investment securities. Accordingly, the use of short-term overnight borrowings could be used to fulfill funding gap needs. As of December 31, 2025, the Company had $220.9 million in unpledged securities.
During 2021 and 2022, the Company also experienced deposit inflow resulting from businesses and municipalities that received relief from the CARES Act, American Rescue Plan Act ("ARPA") and other government stimulus. As of December 31, 2025, the Company has approximately $16.4 million, an increase of $2.9 million, or 21%, from $13.5 million at the end of 2024, in remaining ARPA balances. The Company expects that the funds will be depleted by year end 2026.
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy. These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments.