Fidelity D & D Bancorp Inc: Form 10-Q for the period ended Mar 31, 2026

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of March 31, 2026 compared to December 31, 2025 and a comparison of the results of operations for the three months ended March 31, 2026 and 2025. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s 2025 Annual Report filed on Form 10-K.

Forward-looking statements

Certain of the matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.

The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

• local, regional and national economic conditions and changes thereto;
• the short-term and long-term effects of inflation, and rising costs to the Company, its customers and on the economy;
• the risks of changes and volatility of interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;
• securities markets and monetary fluctuations and volatility;
• disruption of credit and equity markets;
• impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules;
• governmental monetary and fiscal policies, as well as legislative and regulatory changes;
• effects of short- and long-term federal budget and tax negotiations and their effect on economic and business conditions;
• the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
• the impact of new or changes in existing laws and regulations, including laws and regulations concerning taxes, banking, securities and insurance and their application with which the Company and its subsidiaries must comply;
• the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;
• the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;
• the effects of economic conditions of any pandemic, epidemic or other health-related crisis such as COVID-19 and responses thereto on current customers and the operations of the Company, specifically the effect of the economy on loan customers’ ability to repay loans;
• the effects of bank failures, banking system instability, deposit fluctuations, loan and securities value changes;
• technological changes;
• the interruption or breach in security of our information systems, continually evolving cybersecurity and other technological risks and attacks resulting in failures or disruptions in customer account management, general ledger processing and loan or deposit updates and potential impacts resulting therefrom including additional costs, reputational damage, regulatory penalties, and financial losses;
• acquisitions and integration of acquired businesses;
• the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities;
• acts of war, terrorism, or armed conflict; and
• the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

The Company cautions readers not to place undue reliance on forward-looking statements, which reflect analyses only as of the date of this document. The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

Readers should review the risk factors described in other documents that we file or furnish, from time to time, with the Securities and Exchange Commission, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and other current reports filed or furnished on Form 8-K.

Executive Summary

The Company is a Pennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank and trust subsidiary is The Fidelity Deposit and Discount Bank. The Company is headquartered in Dunmore, Pennsylvania. We consider Lackawanna, Northampton and Luzerne Counties of Pennsylvania our primary marketplace, the "market area".

As a leading Northeastern and Eastern Pennsylvania community bank, our goals are to enhance shareholder value while we continue to operate a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses. We continue to implement management strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase the amount of relationship core deposits (see “Funds Provided” section of this management’s discussion and analysis). These strategies include a focus on commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new business prospects. The Bank has a personal and corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand and optimize our franchise footprint, consisting presently of our 21-branch network.

We are impacted by national, regional and market area economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, primarily in Lackawanna and Luzerne counties, and Eastern Pennsylvania, primarily in Northampton county. According to the U.S. Bureau of Labor Statistics, the national unemployment rate for March 2026 was 4.3%, down 0.1 percentage point compared to December 2025. Due to delays in the release of local unemployment data, February 2026 unemployment rates represented the most current data available at the time of filing. The local market unemployment rates in the Scranton – Wilkes-Barre – Hazleton (market area north) and the Allentown – Bethlehem – Easton (market area south) Metropolitan Statistical Areas (local) increased. The local unemployment rates at February 28, 2026 were 5.5% in market area north and 4.9% in market area south, respectively, an increase of 1.2 percentage points and 1.0 percentage points from the 4.3% and 3.9%, respectively, at December 31, 2025. The median home values in the Scranton – Wilkes-Barre – Hazleton metro and Allentown – Bethlehem – Easton metro each increased 2.5% and 2.9% 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 0.9% and 1.9%, respectively, in the next year. In light of these expectations, we continue to monitor housing market conditions, including home price trends and interest rate expectations. Management will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

For the three months ended March 31, 2026, net income was $7.5 million, or $1.29 basic earnings per share and $1.28 diluted earnings per share, a 25% increase, compared to $6.0 million, or $1.04 basic earnings per share and $1.03 diluted earnings per share, for the three months ended March 31, 2025.

As of March 31, 2026 and March 31, 2025, common book value per share was $42.14 and $36.70, and tangible common book value per share (non-GAAP) was $38.67 and $33.16 (1), respectively. 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.

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.

In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years. As described more fully in Part II, Item 1A, “Risk Factors” below, as well as Part I, Item 1A, “Risk Factors,” and in the “Supervision and Regulation” section of management’s discussion and analysis of financial condition and results of operations in our 2025 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us.

Non-GAAP Financial Measures

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare 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% at March 31, 2026 and 2025.

The following table reconciles the non-GAAP financial measures of FTE net interest income:

(dollars in thousands)

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:

(dollars in thousands)

(1) See non-GAAP financial measurements reconciliation on page 33.

The following table provides a reconciliation of tangible common equity (non-GAAP) and the calculations of tangible book value per share and tangible common equity ratio:

(dollars in thousands)

The following table provides a reconciliation of pre-provision net revenue (PPNR) to average assets (non-GAAP):

(dollars in thousands)

General

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.

Net interest income, net interest rate margin, net interest rate spread and the efficiency ratio are presented in the Management's Discussion & Analysis on an 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.

Comparison of the results of operations

three months ended March 31, 2026 and 2025

Overview

Net income for the quarter ended March 31, 2026 was $7.5 million, or $1.29 basic earnings per share and $1.28 per diluted share, compared to $6.0 million, or $1.04 basic earnings per share and $1.03 per diluted share, for the quarter ended March 31, 2025. The $1.5 million, or 25%, increase in net income resulted primarily from a $2.4 million increase in net interest income coupled with a $0.2 million increase in non-interest income. This was partially offset by a $0.6 million increase in non-interest expense and a $0.6 million increase in the provision for credit losses on the growth of loans and unfunded commitments.

Return on average assets (ROA) was 1.08% and 0.93% for the first quarters of 2026 and 2025, respectively. During the same time periods, return on average shareholders’ equity (ROE) was 12.41% and 11.66%, respectively. The increases in ROA and ROE were primarily the result of an increase in net income during the first quarter of 2026, compared to the same period of 2025. Pre-provision net revenue to average assets (non-GAAP) was 1.36% and 1.16% for the three months ended March 31, 2026 and 2025, respectively. The increases were due to an increase in income before taxes quarter-over-quarter.

Net interest income and interest sensitive assets / liabilities

Net interest income was $19.4 million for the first quarter of 2026, representing a 14% increase over the $17.0 million earned for the first quarter of 2025. The $2.4 million increase in net interest income resulted from the increase of $2.2 million in interest income primarily due to a $160.6 million increase in the average balance of interest-earning assets and a 4 basis point increase in fully-taxable equivalent ("FTE") (non-GAAP measurement) yields. The loan portfolio had the most significant impact, producing a $2.0 million increase in FTE interest income from $132.8 million in higher quarterly average balances and an increase of 5 basis points in FTE loan yields. Additionally, the Company experienced an increase of $0.6 million in interest earned from interest-bearing deposits with other financial institutions from $77.3 million in higher average balances. The increase in interest income was coupled with a $0.2 million decrease in interest expense due to a 21 basis points decrease in rates paid on interest-bearing deposits which more than offset the increase from $138.0 million in higher average balances compared to the first quarter of 2025.

The FTE yield on interest-earning assets was 4.77% for the first quarter of 2026, an increase of 4 basis points from 4.73% for the first quarter of 2025. The overall cost of interest-bearing liabilities was 2.27% for the first quarter of 2026, a decrease of 22 basis points from the 2.49% for the first quarter of 2025. The cost of funds decreased 16 basis points from 1.93% to 1.77% for the first quarters of 2025 and 2026, respectively. The Company’s FTE net interest spread was 2.50% for the first quarter of 2026, an increase of 26 basis points from 2.24% recorded for the first quarter of 2025. FTE net interest margin increased to 3.08% for the three months ended March 31, 2026 from 2.89% for the same period of 2025 primarily due to the reduction in rates paid on interest-bearing deposits.

For the remainder of 2026, the Company currently expects to operate in a stable to moderately declining interest rate environment. Management’s outlook is informed primarily by the Federal Open Market Committee’s (FOMC) published statements and economic projections. During the fourth quarter of 2025, the FOMC reduced the federal funds rate by an aggregate of 75 basis points. Based on current consensus economic forecasts, short-term rate stability with the potential for one additional reduction of 25 basis point is presently anticipated over the remaining fiscal year 2026. In this environment, the Company expects loan demand to remain supported by its current pipeline and anticipates continued growth in the loan portfolio, initially funded through available excess cash holdings. If excess cash is depleted and deposit growth is insufficient to fund planned loan growth, the Company expects to utilize wholesale borrowings. Overall changes in market interest rates are expected to impact the Company’s net interest margin (“NIM”) based on the timing and magnitude of repricing across earning assets and interest-bearing liabilities. In a declining-rate environment, yields on variable-rate loans and other earning assets may reprice downward more quickly than funding costs, which could pressure NIM. However, management expects that a portion of this impact may be moderated by the Company’s ability to reduce interest-bearing deposit pricing and, as deposit rates approach more normalized levels, by the potential for a lower deposit beta (i.e., a lower percentage change in deposit rates relative to changes in benchmark market rates). The Company’s actual deposit beta and the resulting effect on NIM will depend on competitive dynamics, changes in deposit mix, and customer behaviors, including the extent to which customers shift balances among non-interest-bearing and interest-bearing accounts or into higher-rate products. Management’s focus remains on enhancing and protecting NIM by reallocating cash flows toward higher-yielding assets, maintaining disciplined and proactive loan pricing (including floors where appropriate), and actively managing deposit costs and product mix to preserve an appropriate spread.

The Company’s cost of interest-bearing liabilities was 2.27% for the three months ended March 31, 2026 compared to 2.49% for the same 2025 period. The declining rates paid on interest-bearing deposits contributed to the lower cost of interest-bearing liabilities.

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 below sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% for March 31, 2026 and 2025 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. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan cost amortization of $0.2 million and $0.2 million during the first quarter of 2026 and 2025, respectively, are included in interest income from loans. Purchase accounting adjustments of $0.3 million and $0.4 million are included in interest income from loans and approximately $1 thousand and $1 thousand reduced interest expense on deposits and borrowings for the three months ended March 31, 2026 and 2025. 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.

(dollars in thousands)

35

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:

(dollars in thousands)

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.

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 three months ended March 31, 2026, the provision for credit losses on loans was $875 thousand and the provision for credit losses on unfunded commitments was $90 thousand, compared to a $455 thousand provision for credit losses on loans and a $85 thousand net benefit in the provision for credit losses on unfunded loan commitments for the three months ended March 31, 2025.

For the three months ended March 31, 2026, the increase in the provision for credit losses on loans compared to the prior year period was due to significantly higher loan growth between the comparable periods.

For the three months ended March 31, 2026, the increase in the provision for credit losses on unfunded commitments compared to the prior period was due to the 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 three months ended March 31, 2026 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

Total non-interest income increased $0.2 million, or 4%, to $5.2 million for the first quarter of 2026 compared to $5.0 million for the first quarter of 2025. The increase in non-interest income was primarily attributed to increases of $0.4 million in fees from commercial loans with interest rate hedges and $0.3 million in wealth management revenue with the largest contributor being personal trust fees. These increases were partially offset by a $0.6 million lower gain on sold loans due to a $0.5 million gain on the sale of a commercial loan during the first quarter of 2025. Additionally, the Company saw an increase of $0.2 million in commercial loan late fees due to two substandard loans that were paid off in the first quarter of 2026.

Operating expenses

Non-interest expenses increased $0.6 million, or 4%, for the first quarter of 2026 to $15.2 million from $14.6 million for the same quarter of 2025. The increase in non-interest expenses was attributed to the increases in salaries and benefits expense of $0.4 million primarily due to an increase in the number of bankers and incentive-based compensation throughout the quarter. Additionally, the Company saw an increase of $0.2 million in advertising and marketing expenses primarily due to an increase in Neighborhood Assistance Program donations from which the Company recognized $0.2 million in additional tax credits causing a corresponding decrease in PA shares tax expense.

Upon occupancy of the new corporate headquarters, the Company does expect the relocation to have an impact on operating costs. Incremental costs associated with operating the new headquarters are expected to be partially offset by efficiencies from the consolidation of certain departments into the corporate center and the closure or disposition of other owned and leased properties, including the sale of our Financial Center building. The Company also expects such costs to be partially offset by available historic tax credit benefits.

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were 1.36% and 1.37% for the three months ended March 31, 2026 and 2025. The expense ratio slightly decreased because of higher average assets. The efficiency ratio (non-GAAP) decreased from 61.67% at March 31, 2025 to 58.53%(1) at March 31, 2026 due to net interest income increasing faster than non-interest expenses.

Provision for income taxes

The provision for income taxes decreased $0.1 million during the three months ended March 31, 2026 compared to the same period in 2025 primarily due to a $0.5 million discount recognized in the provision from utilizing/applying purchased renewable energy tax credits in the first quarter of 2026. The Company's effective tax rate was 11.6% at March 31, 2026 compared to 15.4% at March 31, 2025. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the recognition of this $0.5 million discount in the first quarter of 2026.

Comparison of financial condition at

March 31, 2026 and December 31, 2025

Overview

The Company’s total assets had a balance of $2.9 billion as of March 31, 2026, an increase of $111.2 million from December 31, 2025. The increase resulted from $111.9 million of growth in the loans and leases portfolio during the first three months of 2026. Cash and cash equivalents also increased by $6.9 million and premises and equipment increased $3.8 million over the same time period as the Company sold investment securities with the proceeds maintained in interest-bearing deposits with financial institutions. Deposit growth of $109.1 million was utilized to fund loan growth.

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 three months ended March 31, 2026, AOCI improved by $0.4 million primarily due to the amortization of the discount recognized on the transfer of HTM securities.

As of March 31, 2026, the carrying value of held-to-maturity securities was $227.7 million, net of $11.5 million in remaining transferred discount.

(1) See non-GAAP financial measurements reconciliation on page 32.

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 March 31, 2026, the Company recorded the fair value of the swap of $0.5 million in accrued interest payable and other liabilities on the consolidated balance sheet offset by a $0.5 million increase to the carrying value of designated investment securities.

As of March 31, 2026, the carrying value of investment securities amounted to $512.3 million, or 18% of total assets, compared to $523.9 million, or 19% of total assets, as of December 31, 2025. On March 31, 2026, 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 carrying value of $180.7 million ($173.7 million including the remaining net unrealized loss transferred on HTM securities) and taxable municipal bonds with a carrying value of $81.8 million ($75.9 million including the remaining net unrealized loss transferred on HTM securities). The overall credit ratings of these municipal bonds were as follows: 36% AAA, 62% AA, and 1% A. For municipal securities HTM, 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.

As of March 31, 2026, the carrying value of total investments decreased $11.6 million, or 2%. The decline was primarily due to the sale of $5.8 million in available-for-sale securities and $5.1 million in securities paydowns. 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 investment securities at March 31, 2026 and December 31, 2025 is as follows:

(dollars in thousands)

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 March 31, 2026 and December 31, 2025.

The AFS securities were recorded with a net unrealized loss of $36.5 million and $36.4 million as of March 31, 2026 and December 31, 2025, respectively. 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.

As of March 31, 2026, the Company had $354.9 million in public deposits, or 14% 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 March 31, 2026, the balance of pledged securities required was $393.4 million, or 77% 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 three months ended March 31, 2026, the Company did not incur any credit losses on debt securities from its investment securities portfolio.

During the first three months of 2026, the Company sold five available-for-sale securities with the intention of replacing the holdings with better yielding bonds. The Company recognized a loss of $0.6 million as the amortized cost was $5.8 million compared to the sales proceeds of $5.2 million. These sales were undertaken as part of the ongoing management strategy of improving margin and focusing on more effective interest earning assets.

Restricted investments in bank stock

Investment in 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. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. The balance in FHLB stock was $4.4 million and $4.3 million as of March 31, 2026 and December 31, 2025, respectively. The dividends received from the FHLB totaled $89 thousand and $77 thousand for the three months ended March 31, 2026 and 2025, respectively. Atlantic Community Bankers Bank (ACBB) stock totaled $82 thousand as of March 31, 2026 and December 31, 2025.

Loans held-for-sale (HFS)

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 March 31, 2026 and December 31, 2025, loans HFS consisted of residential mortgages with carrying amounts of $0.6 million and $0.6 million, respectively, which approximated their fair values. During the three months ended March 31, 2026, residential mortgage loans with principal balances of $9.7 million were sold into the secondary market and the Company recognized net gains of $0.2 million, compared to $12.5 million and $0.2 million, respectively, during the three months ended March 31, 2025.

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster relationships and opportunities with those customers. At March 31, 2026 and December 31, 2025, the servicing portfolio balance of sold residential mortgage loans was $508.6 million and $513.6 million, respectively, with mortgage servicing rights of $1.0 million and $1.1 million for the same periods, respectively.

Loans and leases

As of March 31, 2026, the Company had gross loans and leases totaling $2.0 billion, an increase of $111.9 million, or 6%, compared to $1.9 billion at December 31, 2025.

During the three months ended March 31, 2026, the growth in the portfolio was attributed primarily to a $122.3 million increase in the commercial portfolio and a $1.5 million increase in the residential portfolio, which was partially offset by the $12.1 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.

The composition of the loan portfolio at March 31, 2026 and December 31, 2025 is summarized as follows:

(dollars in thousands)

Commercial & industrial (C&I) and commercial real estate (CRE)

As of March 31, 2026, the commercial portfolio increased by $122.3 million, or 11%, to $1.3 billion compared to the December 31, 2025 balance of $1.2 billion. The increase was due to growth of $93.4 million in commercial real estate loans and $28.9 million in commercial and industrial loans. The increased origination growth in the commercial portfolio was attributed to management's balance sheet optimization strategy to grow this segment of the loan and lease portfolio.

For the three months ended March 31, 2026, commercial and industrial (non-municipal) loans increased $19.2 million, or 9%, from $220.5 million at December 31, 2025 to $239.7 million at March 31, 2026, which was due to one loan to a single borrower totaling $12.4 million and two loans to a single borrower totaling $5.2 million 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 minimal defaults noted.

For the three months ended March 31, 2026, municipal loans increased $9.7 million, or 8%, from $120.6 million at December 31, 2025, to $130.3 million at March 31, 2026 which was attributed to a single origination to a municipal borrower totaling $3.0 million and standard portfolio growth.

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). At March 31, 2026, the commercial real estate portfolio was 45% of total loans outstanding compared to 43% at December 31, 2025.

For the three months ended March 31, 2026, owner occupied commercial real estate loans increased $18.8 million, or 6%, from $340.8 million on December 31, 2025, to $359.6 million at March 31, 2026, due to three originations to three separate commercial real estate owner occupied borrowers totaling $11.2 million 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 March 31, 2026 compared to December 31, 2025:

(dollars in thousands)

For the three months ended March 31, 2026, non-owner occupied commercial real estate loans increased $82.9 million, or 20%, from $416.5 million on December 31, 2025, to $499.4 million on March 31, 2026. The increase is primarily driven by the origination of a $37 million loan, of which $15 million is anticipated to be sold to a participating bank, a $19.6 million loan to two separate borrowers, $16.8 million in construction loans that stabilized and were converted to non-owner occupied commercial real estate, and standard portfolio growth.

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. As such, management considers non-owner occupied CRE loans as having a higher risk profile than owner occupied CRE loans. 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 $47.0 million and special purpose comprised $51.2 million in outstanding amounts as of March 31, 2026, respectively. 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.

Construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans. Management prefers lending to well-established developers with a proven track record and strong business and guaranteed with owners’ personal financial conditions. As of March 31, 2026, the commercial real estate construction portfolio had a balance of $48.3 million and consisted of $25.2 million, or 52%, of non-owner-occupied loans and $23.1 million, or 48%, of owner-occupied loans.

For the three months ended March 31, 2026, commercial real estate construction loans decreased $8.4 million, or 15%, from $56.7 million on December 31, 2025 to $48.3 million at March 31, 2026. This decrease was attributed to $16.9 million in projects that stabilized and were converted to owner and non-owner commercial real estate loans during the three months ended March 31, 2026. This decrease was partially offset by $2.7 million in commercial construction commitments originated during the year and $5.8 million increase in commitments booked prior to March 31, 2026.

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.

For the three months ended March 31, 2026, the total consumer loan portfolio decreased by $12.1 million, or 5%, from $226.3 million at December 31, 2025 to $214.2 million at March 31, 2026, primarily due to a management strategic determination to reduce the indirect auto portfolio based on payoffs with minimal originations, resulting in a $9.7 million reduction coupled with a $2.1 million reduction in the consumer other portfolio and a $1.3 million reduction in the home equity installment portfolio. Offsetting these reductions was growth of $1.0 million in the HELOC portfolio.

Residential

For the three months ended March 31, 2026, the residential loan portfolio increased by $1.5 million from $531.2 million at December 31, 2025 to $532.7 million at March 31, 2026 due to general portfolio growth.

The residential loan portfolio consisted primarily of held-for-investment residential loans for primary residences, including $411 million in fixed-rate and $105 million in adjustable-rate mortgages as of March 31, 2026.

The Company considers its portfolio segmentation, including the real estate secured portfolio, to be 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.

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.

The methodology to analyze the adequacy of the ACL is based on seven primary components:

• Data: The quality of the Company’s data is critically important as a foundation on which the ACL estimate is generated. For its estimate, the Company uses both internal and external data with a preference toward internal data where possible. Data is complete, accurate, and relevant, and subjected to appropriate governance and controls.
• Segmentation: Financial assets are segmented based on similar risk characteristics.
• Estimated term of financial assets: The estimated term of financial assets is a significant driver of ACL estimates. Financial assets or pools of financial assets with shorter estimated maturities typically result in a lower reserve than those with longer estimated maturities. As the average life of a financial asset or pool of assets increases, there generally is a corresponding increase to the ACL estimate because the likelihood of default is considered over a longer time frame. As such, pool-based assumptions for a pool’s estimated term (i.e., average life) are based on the contractual maturity of the financial assets within the pool and adjusted in accordance with GAAP, if appropriate. Key assumptions for the estimated term of financial assets are prepayment rates for amortizing financial assets and curtailment rates for non-amortizing financial assets.
• Credit loss measurement method: Multiple measurement methods for estimating ACLs are allowable per Accounting Standards Codification (ASC) Topic 326. The Company applies different estimation methods to different groups of financial assets. The discounted cash flow method is used for the commercial & industrial, commercial real estate non-owner occupied, commercial real estate owner occupied, commercial construction, home equity installment loan, home equity line of credit, residential real estate, and residential construction pools. The weighted average remaining maturity (WARM) method is used for the municipal, non-recourse auto, recourse auto, direct finance lease, and consumer other pools.
• Reasonable and supportable forecasts: ASC Topic 326 requires management to consider reasonable and supportable forecasts that affect expected collectability of financial assets. As such, the Company’s forecasts incorporate anticipated changes in the economic environment that may affect credit loss estimates over a time horizon when management can reasonably support and document expectations. Forward-looking information may reflect positive or negative expectations relative to the current environment. As of the reporting date, management is using the median Federal Open Market Committee (FOMC) National Gross Domestic Product (GDP) and unemployment rate forecasts as well as the Federal Housing Finance Agency (FHFA) House Price Index (HPI) for its reasonable and supportable forecasts. The Company currently uses a 12-month (4 quarter) reasonable and supportable forecast period.
• Reversion period: ASC Topic 326 does not require management to estimate a reasonable and supportable forecast for the entire contractual life of financial assets. Management may apply reversion techniques for the contractual life remaining after considering the reasonable and supportable forecast period, which allows management to apply a historical loss rate to latter periods of the financial asset’s life. The Company currently uses a 12 month (4 quarter) straight-line reversion period.
• Qualitative factor adjustments: The Company’s ACL estimate considers all significant factors relevant to the expected collectability of its financial assets as of the reporting date; Qualitative factors reflect the impact of conditions not captured elsewhere, such as the historical loss data or within the economic forecast. The qualitative considerations can be captured directly within measurement models or as additional components in the overall ACL methodologies. Currently, the Company uses the following qualitative factors:
• levels of and trends in delinquencies and non-accrual loans;
• levels of and trends in charge-offs and recoveries;
• trends in volume and terms of loans;
• changes in risk selection and underwriting standards;
• changes in lending policies and legal and regulatory requirements;
• experience, ability and depth of lending management;
• national and local economic trends and conditions;
• changes in credit concentrations; and
• 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.

The following tables set forth the activity in the allowance for credit losses and certain key ratios for the period indicated:

(dollars in thousands)

For the three months ended March 31, 2026, the allowance increased $0.7 million, or 4%, from $20.2 million at December 31, 2025 to $20.9 million at March 31, 2026. The increase in the allowance was based on the provisioning of $875 thousand partially offset by net charge-offs of $101 thousand.

Management believes that the current balance in the allowance for credit losses is adequate 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 Federal Open Market Committee (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, 2025 to the estimate as of March 31, 2026, the ACL on absolute terms increased based on growth in the loan and lease portfolio, changes in the composition of the portfolio, slower prepayment and curtailment rates, and less favorable economic forecasts.

Qualitative factors for the ACL estimate as of March 31, 2026 saw a general decrease compared to December 31, 2025 based on reduction in the qualitative factor for the improvement in the levels of and trends in delinquencies and non-accrual loans.

The allocation of net charge-offs among major categories of loans are as follows for the periods indicated:

(dollars in thousands)

43

For the three months ended March 31, 2026, net charge-offs against the allowance totaled $101 thousand compared with net charge-offs of $104 thousand for the three months ended March 31, 2025, representing a $3 thousand decrease. Net charge-offs were unchanged as a percentage of the total loan portfolio at 0.02% for the three months ended March 31, 2026 compared to 0.02% for the three months ended March 31, 2025.

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:

(dollars in thousands)

As of March 31, 2026, the commercial real estate loan portfolio comprised 45% of the total allowance for credit losses, up 1 percentage point from December 31, 2025. As of March 31, 2026, the commercial real estate loan portfolio was 45% of the total loan and lease portfolio indicative of a comparable, relative reserve.

As of March 31, 2026, the commercial and industrial portfolio comprised 14% of the total allowance for credit losses, unchanged from December 31, 2025. As of March 31, 2026, 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.

As of March 31, 2026, the consumer portfolio comprised 10% of the total allowance for credit losses, unchanged from December 31, 2025. As of March 31, 2026, the consumer portfolio is 11% 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 indirect recourse and direct finance lease portfolios.

As of March 31, 2026, the residential portfolio comprised 31% of the total allowance for credit losses, down 1 percentage point from December 31, 2025. As of March 31, 2026, the residential portfolio is 26% 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 March 31, 2026, 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, 2025.

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 data as of the period indicated:

(dollars in thousands)

44

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 0.09% of total assets at March 31, 2026 compared with 0.08% at December 31, 2025. The increase resulted from a $225 thousand, or 10%, increase in non-performing assets, specifically non-accrual loans, which increased $545 thousand. This increase was partially offset by a $320 thousand decline in other real estate owned and repossessed assets.

On March 31, 2026, there were a total of 26 non-accrual loans to 23 unrelated borrowers with balances that ranged from less than $1 thousand to $0.5 million, or $2.4 million in the aggregate. 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.

There was one owner occupied commercial real estate loan totaling $15 thousand that was past due 90 days or more and accruing as of March 31, 2026, compared to zero as of December 31, 2025. 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.

The composition of non-performing loans as of March 31, 2026 is as follows:

(dollars in thousands)

*Net of unearned lease revenue of $1.3 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 March 31, 2026 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of $54 thousand.

Foreclosed assets held-for-sale

From December 31, 2025 to March 31, 2026, other real estate owned (ORE) decreased from $324 thousand to zero, a $324 thousand decrease, which was attributed to the sale of one residential property totaling $324 thousand.

The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale:

(dollars in thousands)

As of March 31, 2026, the Company had no properties in ORE.

As of March 31, 2026, the Company had one other repossessed asset totaling $6 thousand which was a vehicle. As of December 31, 2025, the Company had one other repossessed asset totaling $2 thousand 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 $3.8 million during the first three months of 2026 primarily due to construction in the new headquarters building. These increases were partially offset by $0.5 million in depreciation expense.

The Company is in the process of a new historically renovated 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 $8.0 million. The $8.0 million RACP grants will offset the total construction costs of the renovation and rehabilitation of the historic Scranton Electric Building. As of March 31, 2026, the Company incurred $23.4 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. It is currently expected that the remaining building costs could range from $5 million to $6 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 $4.3 million in state and federal historic tax credits. The project is expected to be completed in the second quarter 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.

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 full 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 deposits as of the date indicated:

(dollars in thousands)

Total deposits increased $109.1 million, or 4%, to $2.6 billion as of March 31, 2026, compared to $2.5 billion at December 31, 2025. Growth was driven by expansion in primary consumer and business households and relationships, increased balances within existing relationships, and continued execution of relationship-based retention and growth strategies.

Key drivers of deposit growth include:

• Money Market Accounts: Increased $63.5 million, primarily reflecting growth in business and public account balances.
• Interest-Bearing Checking: Increased $19.6 million, largely attributable to seasonal inflows in public deposit accounts.
• Savings and Club Accounts: Increased $10.6 million, supported by the expansion of personal relationship-based savings products.
• Non-Interest-Bearing Checking: Increased $22.2 million, led by business checking account growth.

These increases were partially offset by a $6.7 million decline in time deposits, reflecting an ongoing shift toward more liquid, interest-bearing deposit products.

Public deposit balances are expected to continue exhibiting seasonal variability, which may periodically moderate overall deposit growth.

The Company utilizes the Certificate of Deposit Account Registry Service (CDARS) reciprocal program and Insured Cash Sweep (ICS) reciprocal program to obtain FDIC insurance protection for clients who have large deposits that at times may exceed the FDIC maximum insured amount of $250,000. The Company had $2.1 million and $48.9 million in CDARS as of March 31, 2026 and December 31, 2025, respectively. As of March 31, 2026 and December 31, 2025, ICS reciprocal deposits represented $138.7 million and $153.1 million, or 5% and 6%, respectively, of total deposits which are included in interest-bearing checking accounts in the table above.

As of March 31, 2026, total uninsured deposits were estimated to be $1.1 billion, or 43% 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 into ownership categories to estimate amounts over the FDIC insurance limit. As of March 31, 2026, the ratio of uninsured and non-collateralized deposits to total deposits was $705.5 million, or 27%. Collateralized deposits totaled $391.4 million, or 15%, of total deposits as of March 31, 2026.

The maturity distribution of certificates of deposit that meet or exceed the FDIC limit, by account, at March 31, 2026 is as follows:

(dollars in thousands)

Approximately 85% of the CDs, with a weighted-average interest rate of 3.64%, are scheduled to mature in 2026 and an additional 13%, with a weighted-average interest rate of 2.81%, 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 three months ended March 31, 2026, 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 March 31, 2026, the Company did not use any short-term borrowings to fund loan growth. As of March 31, 2026, the Company had the ability to borrow $138.0 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.

Secured borrowings

As of March 31, 2026, the Company had 4 secured borrowing agreements with third parties with a carrying value of $4.8 million compared to 5 secured borrowing agreements with third parties with a carrying value of $6.0 million at December 31, 2025, related to certain sold loan participations that did not qualify for sales treatment. Secured borrowings are expected to decrease through the remainder of 2026 from scheduled amortization and, when possible, early pay-offs.

FHLB advances

The Company had no FHLB advances as of March 31, 2026 and December 31, 2025. As of March 31, 2026, the Company had the ability to borrow up to $834.2 million from the FHLB, net of any overnight borrowings utilized. The Company does not expect to have any FHLB advances during 2026.

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.

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 March 31, 2026, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.

During the three months ended March 31, 2026, the Company grew cash and cash equivalents by $6.9 million. During the period, the Company’s operations provided $7.6 million mostly from $18.5 million of net cash inflow from the components of net interest income partially offset by net non-interest expense/income related payments of $11.6 million. Cash inflow from interest-earning assets, deposit growth and loan payments were used to fund the loan portfolio, 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 March 31, 2026, the Company had $114.4 million in unpledged securities.

Subsequent to quarter end through the date of filing, the Company began experiencing a decrease in cash balances to fund deposit outflows. The Company believes these outflows were due to seasonal spending and transfers of funds to wealth management.

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 March 31, 2026, the Company has approximately $21.0 million, an increase of $4.6 million, or 28%, from $16.4 million at the end of 2025, in remaining ARPA balances. The Company expects that the funds will be depleted by year end, as the expenditure deadline is December 31, 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.

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. Unfunded commitments of existing loan facilities totaled $609.4 million, standby letters of credit totaled $32.6 million and the level of uninsured and non-collateralized deposits was $705.5 million at March 31, 2026. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

As of March 31, 2026, the Company maintained $155.0 million in cash and cash equivalents and $285.2 million of investments AFS and loans HFS. Also, as of March 31, 2026, the Company had approximately $834.2 million available borrowing capacity from the FHLB, $30.0 million from correspondent banks, $138.0 million from the FRB, and $412.2 million from the IntraFi Network One-Way Buy program. The combined total of $2.0 billion represented 68% of total assets at March 31, 2026. Management believes this level of liquidity to be strong and adequate to support current operations.

Capital

As of March 31, 2026, total shareholders' equity increased $5.8 million, or 2%, due principally to $4.9 million higher retained earnings from net income of $7.5 million plus a $0.4 million, after tax, improvement in accumulated other comprehensive income. Capital was further enhanced by $0.5 million from the issuance of common stock under the Company’s stock plans and restricted stock activity. Partially offsetting these increases, were $2.5 million of cash dividends paid on the Company’s common stock. The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was 33.69% as of March 31, 2026. The balance of earnings is retained to further strengthen the Company’s capital position.

As of March 31, 2026, the Company reported a net unrealized loss position of $40.3 million, net of tax, from the securities portfolio compared to a net unrealized loss of $40.7 million as of December 31, 2025. The $0.4 million improvement during the first quarter of 2026 was from the amortization of unrealized losses on held-to-maturity securities. Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and market conditions, 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. 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.

The tangible common equity (TCE) ratio (non-GAAP) was 7.91% and 7.11% for the three months ended March 31, 2026 and 2025, respectively. At March 31, 2026 and 2025, the held-to-maturity securities portfolio had $20.5 million and $23.9 million in unrealized losses, net of deferred taxes. If the TCE ratio was adjusted to include the unrealized losses on held-to-maturity securities, the adjusted TCE ratio (non-GAAP) would have been 7.18% and 6.22% (1) at March 31, 2026 and 2025, respectively.

To help maintain a healthy capital position, the Company can issue stock to participants in the DRP and 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.

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 capital ratios represent capital as a percentage of total risk-weighted assets. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. A capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements of 2.50%. As of March 31, 2026 and December 31, 2025, the Bank exceeded all capital adequacy requirements to which it was subject.

(1) See non-GAAP financial measures reconciliation on page 33.

The following table depicts the actual and required capital and related capital ratios of the Company, on a consolidated basis, and the Bank as of March 31, 2026 and December 31, 2025. No amounts were deducted from capital for interest-rate risk in either 2026 or 2025.

(dollars in thousands)

(dollars in thousands)

The Company advises readers to refer to the Supervision and Regulation section of Management’s Discussion and Analysis of Financial Condition and Results of Operation, of its 2025 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.

Management of interest rate risk and market risk analysis.

The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its exposures are critical factors in the regulatory evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy. Management believes the Company’s interest rate risk measurement framework is sound and provides an effective means to measure, monitor, analyze, identify and control interest rate risk in the balance sheet.

The Company is subject to the interest rate risks inherent in its lending, investing and financing activities. Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning assets and interest-bearing liabilities, except for those assets or liabilities with a short-term remaining to maturity. Interest rate risk management is an integral part of the asset/liability management process. The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position. Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations. The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.

Asset/Liability Management. One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO), which is comprised of senior management and members of the board of directors. ALCO meets quarterly to monitor the relationship of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk is a regular part of managing the Company. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of non-contractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the board of directors which includes limits on the impact to earnings from shifts in interest rates.

Interest Rate Risk Measurement. Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings at risk simulation and economic value at risk simulation. While each of the interest rate risk measurements has limitations, collectively, they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company and the distribution of risk along the yield curve, the level of risk through time and the amount of exposure to changes in certain interest rate relationships.

Static Gap. The ratio between assets and liabilities re-pricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.

To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals. A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) indicates the opposite effect. The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO in gauging the effects of interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread. At March 31, 2026, the Company maintained a one-year cumulative gap of positive (asset sensitive) $65.5 million, or 2.3%, of total assets. The effect of this positive gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of falling interest rates. Conversely, in an increasing interest rate environment, net interest income could be positively impacted because more assets than liabilities will re-price upward during the one-year period.

Certain shortcomings are inherent in the method of analysis discussed above and presented in the next table. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table amounts. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The following table reflects the re-pricing of the balance sheet or “gap” position at March 31, 2026:

(dollars in thousands)

(1) Includes restricted investments in bank stock and the net unrealized gains/losses on available-for-sale securities.

(2) Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due. In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization. For amortizing loans and MBS – GSE residential, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products.

(3) The Company’s demand and savings accounts were generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments. The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies.

Earnings at Risk and Economic Value at Risk Simulations. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet that extend beyond static re-pricing gap analysis. Although it will continue to measure its re-pricing gap position, the Company utilizes additional modeling for identifying and measuring the interest rate risk in the overall balance sheet. The ALCO is responsible for focusing on “earnings at risk” and “economic value at risk”, and how both relate to the risk-based capital position when analyzing the interest rate risk.

Earnings at Risk. An earnings at risk simulation measures the change in net interest income and net income should interest rates rise and fall. The simulation recognizes that not all assets and liabilities re-price one-for-one with market rates (e.g., savings rate). The ALCO looks at “earnings at risk” to determine income changes from a base case scenario under an increase and decrease of 200 basis points in interest rate simulation models.

Economic Value at Risk. An earnings at risk simulation measures the short-term risk in the balance sheet. Economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets and liabilities. The ALCO examines this ratio quarterly utilizing an increase and decrease of 200 basis points in interest rate simulation models. The ALCO recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.

The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity). This analysis assumed that the adjusted interest-earning asset and interest-bearing liability levels at March 31, 2026 remained constant. The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the March 31, 2026 levels:

In the scenarios in the above table, the Board-approved policy has the following guidelines: net interest income within +/- 10%, net income within +/- 25%, economic value of equity within +/- 25%, economic value of equity as a percent of total assets within +/-5%.

Economic value has the most meaning when viewed within the context of risk-based capital. Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%. At March 31, 2026, the Company’s risk-based capital ratio was 14.45%.

Given the existing economic and interest rate conditions along with the recent increase in earnings at risk exposure to rising rates, management is evaluating to pursue balance sheet hedging opportunities on both sides of balance sheet with an independent third-party vendor with derivative expertise in response to mitigate these interest rate risks on net interest income. The Company has a derivative policy in place and any balance sheet hedges require Board pre-approval along with quarterly monitoring requirements by the Company's ALCO Committee.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning April 1, 2026, under alternate interest rate scenarios using the income simulation model described above:

(dollars in thousands)

Simulation models require assumptions about certain categories of assets and liabilities. The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date or earliest re-pricing opportunity. MBS – GSE residential securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments. For investment securities, the Company uses a third-party service to provide cash flow estimates in the various rate environments. Savings, money market and interest-bearing checking accounts do not have stated maturities or re-pricing terms and can be withdrawn or re-price at any time. This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff. Management projects the re-pricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity. The model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term at current product interest rates. As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant.

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective. The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended March 31, 2026.

Management of the Company does not believe there have been any material changes to the risk factors that were disclosed in the 2025 Form 10-K filed with the Securities and Exchange Commission on March 13, 2026.