Embassy Bancorp, Inc.: Form 10-Q for the period ended Sep 30, 2025

This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of September 30, 2025 and for the three and nine months ended September 30, 2025 and 2024, respectively. This discussion should be read in conjunction with the preceding consolidated financial statements and related footnotes, as well as with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2024 included in the Company’s Form 10-K filed with the Securities and Exchange Commission. Current performance does not guarantee and may not be indicative of similar performance in the future.

Critical Accounting Policies

Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2024. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for credit losses and the appropriate level of the allowance for credit losses. Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Credit Losses and Reserve for Unfunded Loan Commitments” and “Credit Risk and Loan Quality,” contained on the following pages.

Caution About Forward-looking Statements

This report contains forward-looking statements, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions that, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty.

Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.

No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Company’s operating results include, but are not limited to:

the impact of adverse conditions in the economy and financial markets, including increasing or elevated interest rates, on the performance of the Company's loan portfolio and demand for the Company's products and services;

the potential impact of recent events affecting the financial services industry on the Company, including increased competition for, and costs of, deposits and other funding sources, more stringent regulatory requirements relating to liquidity, interest rate risk management, capital adequacy and increased FDIC insurance expenses;

the effects of actions by the federal government, including those of the Federal Reserve Board and other government agencies, that impact the money supply, the potential effect of tariffs on cost of goods, and market interest rates;

the effects of market interest rates, and the relative balances of interest rate-sensitive assets to interest rate-sensitive liabilities, on net interest margin and net interest income;

the composition of the Company's loan portfolio, including commercial real estate and residential real estate, which collectively represent a majority of the loan portfolio, may expose the Company to increased credit risk;

the effects of changes in interest rates on demand for the Company's products and services;

investment securities gains and losses, including declines in the fair value of securities which may result in changes to earnings or shareholders' equity;

the effects of changes in interest rates or disruptions in liquidity markets on the Company's sources of funding;

capital and liquidity strategies, including the Company's ability to comply with applicable capital and liquidity requirements, and the Company's ability to generate capital internally or raise capital on favorable terms;

the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;

the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;

the loss of, or failure to safeguard, confidential or proprietary information;

the Company's failure to identify and adequately and promptly address cybersecurity risks, including data breaches and cyberattacks;

the impact of third party fraud schemes;

the impact of failures from third-party vendors upon which the Company relies to perform in accordance with contractual arrangements and the effects of concerns about other financial institutions on the Company;

the potential effects of increases in non-performing assets, which may require the Company to increase the allowance for credit losses, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;

the determination of the allowance for credit losses, which depends significantly upon assumptions and judgments with respect to a variety of factors, including the performance of the loan portfolio, the weighted-average remaining lives of different classifications of loans within the loan portfolio and current and forecasted economic conditions, among other factors;

the effects of the extensive level of regulation and supervision to which the Company and Bank are subject;

changes in regulation and government policy, which could result in significant changes in banking and financial services regulation;

the continuing impact of the Dodd-Frank Act on the Company’s business and results of operations;

the potential for negative consequences resulting from regulatory violations, investigations and examinations, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions, the need to undertake remedial actions and possible damage to the Company’s reputation;

the effects of adverse outcomes in litigation and governmental or administrative proceedings;

the effects of changes in U.S. federal, state or local tax laws;

the effects of the significant amounts of time and expense associated with regulatory compliance and risk management;

geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;

public health crises and pandemics and their effects on the economic and business environments in which the Company operates, including on the Company’s credit quality and business operations, as well as the impact on general economic and financial market conditions;

the Company’s ability to achieve its growth plans;

the Company’s ability to attract and retain talented personnel;

the effects of competition from financial service companies and other companies offering bank services;

the Company’s ability to keep pace with technological changes;

the effects of negative publicity on the Company’s reputation; and

other factors that may affect future results of the Company, as well as the risks described in the Company’s Form 10-K for the year ended December 31, 2024 and subsequent filings with the SEC.

OVERVIEW

The Company is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company was formed for purposes of acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow. Embassy Holdings, LLC (the “LLC”) is a wholly-owned subsidiary of the Bank organized to engage in the holding of property acquired by the Bank in satisfaction of debts previously contracted. As such, the consolidated financial statements contained herein include the accounts of the Company, the Bank and the LLC.

The Bank, which is the Company’s primary operating subsidiary, was originally incorporated as a Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area, for the purpose of providing a local community bank to serve Lehigh and Northampton Counties in Pennsylvania.

Since its inception, the Board’s philosophy has been that, by running the Bank with a view toward the long term, only good things will happen for the Bank’s customers, team members, shareholders and the Lehigh Valley community.

At September 30, 2025, the Company continued to be in a strong financial and operational condition. The Bank’s September 30, 2025 capital ratios exceeded the amounts required to be considered “well capitalized” as defined in applicable banking regulations. The Company’s ratio of non-performing loans to total loans at September 30, 2025 was 0.04% and the ratio of non-performing assets to total assets was 0.03%. The Company had its most recent Community Reinvestment Act (“CRA”) examination in 2025 and received a “satisfactory” rating.

The Company’s assets increased by $73.6 million from $1.70 billion at December 31, 2024 to $1.78 billion at September 30, 2025. The increase was due to an increase of $11.5 million in cash and cash equivalents, an increase of $53.5 million in securities available for sale, and an increase of $11.9 million in net loans receivable, offset by a decrease of $3.7 million in other assets. The $11.5 million increase in cash and cash equivalents was due to an increase in deposits of $67.6 million, an increase in securities sold under agreement to repurchase of $7.2 million, $55.4 million in principal pay downs on mortgage-backed securities and maturities within the securities available for sale portfolio, offset by a decrease in short term borrowings of $15.6 million, the net loan growth of $11.9 million, and the purchase of $96.5 million in securities available for sale. The $53.5 million increase in securities was net of a decrease in unrealized losses of $11.5 million. The current unrealized loss position of the securities portfolio is due to the increase in market interest rates in response to economic conditions since purchase and not due to the credit quality of the investment portfolio.

The Company's deposits increased by $67.6 million from $1.55 billion at December 31, 2024 to $1.62 billion at September 30, 2025. The increase in deposits was due to an increase of $82.9 million in interest bearing deposits, offset by a decrease of $15.3 million in non-interest bearing deposits. The Company continues to seek deposits using a highly effective relationship building, sales and marketing effort, which serves to further increase the Company’s overall presence in the market it serves, along with deposit relationships developed as a result of cross-marketing efforts to its loan and other non-depository banking service customers. The Company’s success in attracting new deposit relationships is, in part, due to the increased usage of the Company’s online banking platform, competitively offered rates, and the continued convenience and efficiency of our branch network and branch personnel. The Company continues to take advantage of deposit opportunities created by mergers, name changes, competitive branch hour and service adjustments and/or closures in the Company’s market area, and by attracting new customers looking to relocate to a local, reputable community bank.

Net loans receivable of $1.27 billion and $1.26 billion at September 30, 2025 and December 31, 2024, respectively, reflected an increase of $11.9 million. The market continues to be very competitive and the Company is committed to maintaining a high-quality portfolio that returns a reasonable market rate. While the past and current economic and competitive conditions in the marketplace have created more competition for loans to creditworthy customers, the Company continues to expand its market presence and pipeline, and continues to focus on developing a reputation as being a market leader in both commercial and consumer/mortgage lending. Management believes that this combination of relationship building, cross marketing and responsible underwriting will translate into continued long-term growth of a portfolio of quality loans and core deposit relationships. The Company continues to monitor the interest rate exposure of its interest-bearing assets and liabilities. See the expanded discussion under the Financial Condition: Loans section below.

Net income for the three months ended September 30, 2025 was $3.8 million compared to net income for the three months ended September 30, 2024 of $2.7 million, an increase of $1.1 million, or 39.8%. Basic and diluted earnings per share increased to $0.50 for the three months ended September 30, 2025, as compared to $0.36 for the three months ended September 30, 2024. The difference in net income for the three months ended September 30, 2025 and September 30, 2024 resulted primarily from an increase in interest income of $1.3 million, a decrease in interest expense of $348 thousand, an increase of $34 thousand in non-interest income, offset by an increase of $299 thousand in non-interest expenses and an increase of $57 thousand in the provision for credit losses.

Net income for the nine months ended September 30, 2025 was $10.1 million compared to net income for the nine months ended September 30, 2024 of $7.7 million, an increase of $2.4 million, or 30.7%. Basic and diluted earnings per share increased to $1.32 for the nine months ended September 30, 2025, as compared to $1.02 for the nine months ended September 30, 2024. The difference in net income for the nine months ended September 30, 2025 and September 30, 2024 resulted primarily from an increase in interest income of $4.8 million and an increase of $162 thousand in non-interest income, offset by an increase in interest expense of $460 thousand, an increase of $1.2 million in non-interest expenses, and a decrease of $281 thousand in the credit for credit losses.

RESULTS OF OPERATIONS

Net Interest Income

The Company determines interest rate spread and margin on both a US GAAP and tax equivalent basis. The use of tax equivalent basis in determining interest rate spread and margin is considered a non-US GAAP measure. The Company believes the use of this measure provides meaningful information to the reader of the consolidated financial statements when comparing taxable and nontaxable assets. However, it is supplemental to US GAAP which is used to prepare the Company’s consolidated financial statements and should not be read in isolation or relied upon as a substitute for US GAAP measures. In addition, the non-US GAAP measure may not be comparable to non-US GAAP measures reported by other companies. The tax rate used to calculate the tax equivalent adjustments was 21% for 2025 and 2024.

Total interest income for the three months ended September 30, 2025 increased $1.3 million to $18.3 million, as compared to $16.9 million for the three months ended September 30, 2024. Average earning assets were $1.69 billion for the three months ended September 30, 2025, as compared to $1.63 billion for the three months ended September 30, 2024. The tax equivalent yield on average earning assets was 4.32% for the third quarter of 2025 compared to 4.16% for the third quarter of 2024.

Total interest expense for the three months ended September 30, 2025 decreased $348 thousand to $7.4 million, as compared to $7.8 million for the three months ended September 30, 2024. Average interest bearing liabilities were $1.28 billion for the three months ended September 30, 2025 and $1.23 billion for the three months ended September 30, 2024. The yield on average interest bearing liabilities was 2.30% and 2.51% for the third quarter of 2025 and 2024, respectively. Over the past year the Company has experienced a consistent decrease in the cost of funds with reductions observed in each successive quarter. This downward trend reflects more favorable market conditions and strategic financial management. The Company’s cost of funds was 1.81%, 1.82%, and 1.97% for the three months ended September 30, 2025, June 30, 2025, and September 30, 2024, respectively.

Net interest income for the three months ended September 30, 2025 was $10.9 million, compared to $9.2 million for the three months ended September 30, 2024. The increase in net interest income is, in part, the result of an increase in the average balances of taxable loans and an increase in the average balances of taxable investments, along with an increase in the rates of taxable and non-taxable loans and taxable and non-taxable investments. Also contributing to the increase in net interest income was a decrease in the average balance of NOW accounts, a decrease in the average balance of securities sold under agreement to repurchase, and a decrease in the average balance of other borrowings, along with a decrease in the rates of interest bearing demand deposits, NOW and money markets, savings, certificates of deposits, and securities sold under agreement to repurchase and other borrowings. The increase in net interest income was offset by a decrease in the average balance of non-taxable loans, a decrease in the average balance of non-taxable investments, a decrease in the average balances of interest bearing deposits with banks, an increase in the average balance of money markets, an increase in the average balance of savings, and an increase in the average balance of certificates of deposit, along with a decrease in the rate of fed funds sold and interest bearing deposits with banks. The Company’s net interest margin is 2.54% on a US GAAP basis and 2.58% on a tax equivalent (non-US GAAP) basis for the three months ended September 30, 2025, as compared to 2.24% on a US GAAP basis and 2.27% on a tax equivalent (non-US GAAP) basis for the three months ended September 30, 2024.

Total interest income for the nine months ended September 30, 2025 increased $4.8 million to $52.9 million, as compared to $48.1 million for the nine months ended September 30, 2024. Average earning assets were $1.67 billion for the nine months ended September 30, 2025 as compared to $1.60 billion for the nine months ended September 30, 2024. The tax equivalent yield on average earning assets was 4.27% for the nine months ended September 30, 2025 compared to 4.07% for the nine months ended September 30, 2024.

Total interest expense for the nine months ended September 30, 2025 increased $460 thousand to $21.8 million, as compared to $21.4 million for the nine months ended September 30, 2024. Average interest bearing liabilities were $1.26 billion for the nine months ended September 30, 2025 and $1.20 billion for the nine months ended September 30, 2024. The yield on average interest bearing liabilities was 2.32% and 2.38% for the nine months ended September 30, 2025 and 2024, respectively. The Company’s cost of funds was 1.82% and 1.86% for the nine months ended September 30, 2025 and 2024, respectively.

Net interest income for the nine months ended September 30, 2025 was $31.1 million, compared to $26.8 million for the nine months ended September 30, 2024. The increase in net interest income is, in part, the result of an increase in the average balances of taxable loans, an increase in the average balances of taxable investments, an increase in the average balances of interest bearing deposits with banks and federal funds sold, along with an increase in the rates of taxable and non-taxable loans and taxable and non-taxable investments. Also contributing to the increase in net interest income was a decrease in the average balance of savings, a decrease in the average balance of NOW accounts, a decrease in the average balance of securities sold under agreement to repurchase and other borrowings, along with a decrease in the rates of interest bearing demand deposits, NOW and money markets, certificates of deposits, and securities sold under agreement to repurchase and other borrowings. The increase in net interest income was offset by a decrease in the average balance of non-taxable loans, a decrease in the average balance of non-taxable investments, an increase in the average balance of money markets, and an increase in the average balance of certificates of deposit, along with a decrease in the rate of fed funds sold and interest bearing deposits with banks. The Company’s net interest margin is 2.49% on a US GAAP basis and 2.52% on a tax equivalent (non-US GAAP) basis for the nine months ended September 30, 2025, as compared to 2.24% on a US GAAP basis and 2.28% on a tax equivalent (non-US GAAP) basis for the nine months ended September 30, 2024.

The tables below set forth average balances and corresponding yields for the corresponding periods ended September 30, 2025 and 2024, respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)

(Dollars In Thousands)

(1) Yields on tax exempt assets have been calculated on a fully tax equivalent basis at a tax rate of 21% for the three months ended September 30, 2025 and 2024, respectively.

(2) The average balance of taxable loans includes loans in which interest is no longer accruing.

(3) Non-US GAAP net interest spread and net interest margin calculated on a fully tax equivalent basis at a tax rate of 21% for the three months ended September 30, 2025 and 2024, respectively.

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (year to date)

(Dollars In Thousands)

(1) Yields on tax exempt assets have been calculated on a fully tax equivalent basis at a tax rate of 21% for the nine months ended September 30, 2025 and 2024, respectively.

(2) The average balance of taxable loans includes loans in which interest is no longer accruing.

(3) Non-US GAAP net interest spread and net interest margin calculated on a fully tax equivalent basis at a tax rate of 21% for the nine months ended September 30, 2025 and 2024, respectively.

The table below demonstrates the relative impact on net interest income of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities:

(In Thousands)

Provision for Credit Losses and Reserve for Unfunded Loan Commitments

The allowance for credit losses is established through provisions for credit losses charged against income. Loans deemed to be uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance. The measurement of expected credit losses also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit.

The allowance for credit losses is maintained at a level management considers to be adequate to provide for losses that can be reasonably anticipated over the expected life of the loans. Management’s periodic evaluation of the adequacy of the allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current and forecasted economic conditions and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change.

The allowance consists of a collectively evaluated component and an individually evaluated component. The collectively evaluated component covers non-classified loans and classified loans not considered loans individually evaluated for credit losses, and is based on historical loss experience adjusted for forecasting factors and qualitative factors. The individually evaluated component relates to loans that are classified as loans individually evaluated for credit losses and/or restructured. For loans that are classified as loans individually evaluated for credit losses, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the loans individually evaluated for credit losses is lower than the carrying value of that loan.

For the three months ended September 30, 2025, the provision for credit losses on loans was $36 thousand and the credit for credit losses on unused commitments was $9 thousand, compared to credit for credit losses on loans of $40 thousand and the provision for credit losses on unused commitments of $10 thousand for the three months ended September 30, 2024. In the three months ended September 30, 2025 and September 30, 2024, there were no charge-offs and no recoveries.

For the nine months ended September 30, 2025, the credit for credit losses on loans was $73 thousand and the credit for credit losses on unused commitments was $31 thousand, compared to credit for credit losses on loans of $484 thousand and the provision for credit losses on unused commitments of $99 thousand for the nine months ended September 30, 2024. For the nine months ended September 30, 2025, there were $152 thousand of charge-offs and no recoveries. For the nine months ended September 30, 2024, there were $11 thousand of charge-offs and recoveries of $240 thousand.

The provision for credit losses is a function of the allowance for credit loss methodology that the Company uses to determine the appropriate level of the allowance for inherent credit losses after net charge-offs have been deducted. See the discussion below under “Credit Risk and Loan Quality” regarding the Company’s considerations of its September 30, 2025 allowance for credit loss levels. The allowance for credit losses is $11.9 million as of September 30, 2025, which is 0.93% of total loans receivable, compared to $12.2 million or 0.97% of total loans receivable as of September 30, 2024. At December 31, 2024, the allowance for credit losses was $12.2 million, which represented 0.96% of total loans receivable. Based principally on loan growth, economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Company’s market area, the allowance is believed to be adequate to absorb any losses expected in the portfolio. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for credit losses is adequate, or that material increases will not be necessary should the quality of the loans deteriorate. The Company has not participated in any sub-prime lending activity.

The activity in the allowance for credit losses is shown in the following table, as well as period end loans receivable and the allowance for credit losses as a percent of the total loans receivable portfolio:

3

(In Thousands)

In addition to the allowance for credit losses, the Company maintains a reserve for unfunded commitments at a level that management believes is adequate to absorb probable losses. At September 30, 2025 and December 31, 2024, a $61 thousand and $92 thousand unfunded commitment reserve was reported, respectively, on the Consolidated Balance Sheets in other liabilities.

Non-interest Income

Total non-interest income was $887 thousand for the three months ended September 30, 2025 compared to $853 thousand for the same period in 2024. The increase is, in part, attributable to an increase in other service fees of $15 thousand and an increase of $29 thousand from the gain on the sale of other real estate owned during the third quarter of 2025. Offsetting this increase is a decrease in merchant and credit card processing fees of $17 thousand.

Total non-interest income was $2.5 million for the nine months ended September 30, 2025, compared to $2.3 million for the same period in 2024. The increase is, in part, attributable to an increase in bank owned life insurance of $118 thousand, an increase of $29 thousand from the gain on the sale of other real estate owned during the third quarter of 2025, and an increase in other service fees of $53 thousand primarily due to overdraft fees, certificate of deposit penalty fees, and wire fees. Offsetting this increase is a decrease in merchant and credit card processing fees of $52 thousand.

Non-interest Expense

Non-interest expenses increased $299 thousand from $6.8 million for the three months ended September 30, 2024 to $7.1 million for the three months ended September 30, 2025. The increase in non-interest expenses is, in part, attributable to a $95 thousand increase in salaries and employee benefits due to annual increases in salaries, an increase in health insurance cost, and an increase in contributions to retirement plans, offset by a decrease in stock grant expenses and an increase in deferred loan costs. Additional increases in non-interest expenses are attributable to an increase of $60 thousand in occupancy and equipment in part due to an increase in rent and building maintenance, an increase of $251 thousand in data processing expenses due, in part, to the implementation of a new content management software and general ledger system, offset by a decrease of $20 thousand in advertising and promotion expenses, a decrease of $24 thousand in professional fees, and a decrease of $98 thousand in other expenses. The Company’s efficiency ratio, a non-GAAP measure, was 60.5% and 67.9% for the three months ended September 30, 2025 and 2024, respectively.

Non-interest expenses increased $1.2 million from $20.2 million for the nine months ended September 30, 2024 to $21.4 million for the nine months ended September 30, 2025. The increase in non-interest expenses is, in part, attributable to a $583 thousand increase in salaries and employee benefits due to annual increases in salaries and bonuses, an increase in employer payroll taxes, an increase in contributions to retirement plans, and an increase in health insurance cost, offset by a decrease in stock grant expense and an increase in deferred loan costs. Additional increases in non-interest expenses are attributable to an increase of $133 thousand in occupancy and equipment in part due to an increase in rent and building maintenance, an increase of $499 thousand in data processing expenses due, in part, to the implementation of a new content management software and general ledger system and an increase in maintenance contracts, an increase of $32 thousand in advertising and promotion expenses, an increase of $63 thousand in loan and real estate expenses, and an increase of $36 thousand in charitable contributions, offset by a decrease of $148 thousand in other expenses. The Company’s efficiency ratio, a non-GAAP measure, was 63.8% and 69.4% for the nine months ended September 30, 2025 and 2024, respectively.

A breakdown of other expenses can be found in the Consolidated Statements of Income.

Income Taxes

The provision for income taxes for the three months ended September 30, 2025 totaled $811 thousand, or 17.6% of income before taxes, compared to income taxes for the three months ended September 30, 2024 totaling $531 thousand, or 16.4% of income before taxes. The increase in the tax rate is, in part, the result of the change in the mix of taxable and tax free loans and investments, offset by an increase in income on bank owned life insurance.

The provision for income taxes for the nine months ended September 30, 2025 totaled $2.1 million, or 17.3% of income before taxes, compared to income taxes for the nine months ended September 30, 2024 totaling $1.5 million, or 16.4% of income before taxes. The increase in the tax rate is, in part, the result of the change in the mix of taxable and tax free loans and investments, offset by an increase in income on bank owned life insurance.

On July 4, 2025, the President signed H.R. 1, the “One Big Beautiful Bill Act,” into law. The legislation includes several changes to federal tax law that generally allows for more favorable deductibility of certain business expenses beginning in 2025, including the restoration of immediate expensing of domestic R&D expenditures, reinstatement of 100 percent bonus depreciation, and more favorable rules for determining the limitation on business interest expense. The Company is currently evaluating the impact on future periods.

FINANCIAL CONDITION

Securities

The Company’s securities portfolio continues to be classified, in its entirety, as “available for sale.” Management believes that a portfolio classification of available for sale allows complete flexibility in the investment portfolio. Using this classification, the Company intends to hold these securities for an indefinite amount of time, but not necessarily to maturity. Such securities are carried at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. The portfolio is structured to provide a return on investments while providing a consistent source of liquidity and meeting strict risk standards. Investment securities consist primarily of mortgage-backed securities issued by FHLMC or FNMA, taxable and non-taxable municipal bonds, government agency bonds, and Treasury bonds. The Company holds no high-risk or direct internationally exposed securities or derivatives as of September 30, 2025. The Company has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans. The current liquidity of the portfolio has been impacted by the increase in market interest rates. Selling of securities would not be expected as a primary source of short term liquidity given the unrealized losses currently in the portfolio.

Total securities at September 30, 2025 were $334.3 million compared to $280.8 million at December 31, 2024. The increase in the investment portfolio resulted from the purchase of twenty-five (25) Treasury bonds, six (6) government agency bonds, and three (3) mortgage-backed securities totaling $96.5 million and a decrease in unrealized losses of $11.5 million, offset by principal pay downs on mortgage-backed securities, the maturity of two (2) government agency bonds, and the maturity of ten (10) Treasury bonds totaling $55.4 million. The carrying value of the securities portfolio as of September 30, 2025 includes a net unrealized loss of $52.6 million, which is recorded as accumulated other comprehensive loss in stockholders’ equity net of income tax effect. This compares to a net unrealized loss of $64.1 million at December 31, 2024. The current unrealized loss position of the securities portfolio is due to increasing market interest rates in 2022 through 2023 in response to economic conditions since initial purchase. Management determined the Company does not have the intent to sell, nor is it more likely than not that it will be required to sell, securities in an unrealized loss position at September 30, 2025. Further, management reviewed the Company's securities as of September 30, 2025 and concluded there were no credit-related declines in fair value. The effective duration of the securities portfolio is approximately 5 to 6 years at September 30, 2025. The Company remains focused on strategically assessing and managing the portfolio to address the unrealized losses.

Loans

The loan portfolio comprises a major component of the Company’s earning assets. All of the Company’s loans are to domestic borrowers. Net loans receivable were at $1.27 billion at September 30, 2025 and $1.26 billion at December 31, 2024, with an increase of $11.9 million. The gross loan-to-deposit ratio decreased to 79% at September 30, 2025, compared to 82% at December 31, 2024. The Company’s loan portfolio at September 30, 2025 was comprised of residential real estate and consumer loans of $680.7 million, an increase of $11.5 million from December 31, 2024, and commercial loans of $598.4 million, a decrease of $130 thousand from December 31, 2024. The Company has not originated, nor does it intend to originate, sub-prime mortgage loans.

Credit Risk and Loan Quality

The Company’s allowance for credit losses was $11.9 million and $12.2 million at September 30, 2025 and December 31, 2024, respectively, a decrease of $225 thousand. At September 30, 2025 and December 31, 2024, the allowance for credit losses represented 0.93% and 0.96% of total loans receivable, respectively. The Company’s non-performing loans to total loans receivable were 0.04% at September 30, 2025, compared to 0.10% at September 30, 2024, and 0.04% at December 31, 2024. In the three months ended September 30, 2025 and September 30, 2024, there were no charge-offs and no recoveries. In the nine months ended September 30, 2025, there were charge-offs of $152 thousand and no recoveries. In the nine months ended September 30, 2024, there were charge-offs of $11 thousand and recoveries of $240 thousand. The aggregate balances on non-performing loans are included in the following table.

At September 30, 2025, approximately 96% of the Company’s loan portfolio is collateralized by real estate. Our loan portfolio includes a large amount of commercial real estate loans. Management believes the commercial real estate loan portfolio is well-diversified. At September 30, 2025 and December 31, 2024, high volatility commercial real estate exposures were $6.4 million and $11.0 million, respectively. Commercial real estate loans are originated primarily within Lehigh and Northampton counties, are within the Company’s underwriting criteria, and generally include the guarantee of one or more of the borrowers’ affiliates. At September 30, 2025, the Company’s office space portfolio included no exposure to properties in major metropolitan markets. Commercial real estate loans have drawn the attention of the regulators in recent years as a potential source of risk. The Company monitors these types of loans closely, obtaining updated appraisals on loans when required. As detailed in the Allowance for Credit Losses table, the Company had no charge-offs in this category in 2024, and $136 thousand in commercial real estate charge-offs in 2025. The Company believes it has taken the appropriate steps to implement appropriate risk management practices for its commercial real estate loan portfolio, which are subject to regulatory examination.

The details for non-performing loans and assets are included in the following table:

(In Thousands)

Premises and Equipment

Company premises and equipment, net of accumulated depreciation, decreased $308 thousand from December 31, 2024 to September 30, 2025. This decrease is primarily due to depreciation on existing premises and equipment, offset by new purchases.

Deposits

Total deposits at September 30, 2025 increased by $67.6 million to $1.62 billion from $1.55 billion at December 31, 2024. The increase in the Company’s deposits was due to an increase of $8.2 million in demand, NOW and money market deposits, an increase of $4.6 million in savings, and an increase of $54.8 million in time deposits. Included in the above mentioned increase was a $345 thousand increase in non-interest bearing demand business deposits, offset by a $15.7 million decrease in non-interest bearing demand personal deposits. Included in total deposits at September 30, 2025 were personal deposits of $1.12 billion, business deposits of $401.3 million, and municipal deposits of $100.5 million. Included in total deposits at December 31, 2024 were personal deposits of $1.11 billion, business deposits of $351.9 million, and municipal deposits of $93.4 million. The Company continues to see steady increases in new deposit accounts and customer relationships as bank mergers and sales of branches disrupt the local banking environment. The estimated amount of uninsured assessable deposits, including related interest accrued and unpaid, at September 30, 2025 and December 31, 2024 was $565.1 million and $514.1 million, respectively.

Liquidity

Liquidity represents the Company’s ability to meet the demands required for the funding of loans and to meet depositors’ requirements for use of their funds. The Company’s sources of liquidity are cash balances, due from banks, and federal funds sold. Cash and cash equivalents were $108.0 million at September 30, 2025, compared to $96.5 million at December 31, 2024.

Additional asset liquidity sources include principal and interest payments from the investment security and loan portfolios. Long-term liquidity needs may be met by selling unpledged securities available for sale, selling or participating loans, or raising additional capital. As noted above, selling of securities would not be a primary source of short term liquidity given the unrealized losses currently in the portfolio. At September 30, 2025, the Company had $334.3 million of available for sale securities, compared to $280.8 million at December 31, 2024. At September 30, 2025, the Bank had a maximum borrowing capacity for short-term and long-term FHLB advances of approximately $703.9 million, of which $703.7 million is available for borrowing at September 30, 2025. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. The Bank had an outstanding FHLB letter of credit in the amount of $160 thousand as of September 30, 2025. There were no FHLB short-term or long-term advances outstanding as of September 30, 2025. There were $15.6 million short-term FHLB advances outstanding and no long-term FHLB advances outstanding as of December 31, 2024. All FHLB borrowings are secured by qualifying assets of the Bank.

The Bank has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at September 30, 2025 and December 31, 2024. Advances from this line are unsecured.

The Bank is also eligible to borrow under the Federal Reserve Bank’s discount window borrowing programs.

The Company has a revolving line of credit facility with the ACBB of $7.5 million, of which none was outstanding at September 30, 2025 and December 31, 2024. Advances from this line are unsecured.

The Bank is a member of the Certificate of Deposit Account Registry Services (CDARS) program and the Insured Cash Sweep (ICS) program offered by Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. ICS provides liquidity similar to a money market or savings account. Both programs enable financial institutions to provide customers with full FDIC insurance on deposits over $250 thousand that are placed in the program. The Bank also has access to other brokered deposits as a source of liquidity.

Because of the composition of the Company’s balance sheet, its strong capital base, ability to attract new deposit relationships, access to brokered deposits, and borrowing capacity, the Company believes that it remains well positioned with respect to liquidity. The majority of the Company’s funds are invested in loans with a portion invested in investment securities that generally carry a lower yield. While it is desirable to be liquid, it has the effect of a lower interest margin. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or capital resources.

Off-Balance Sheet Arrangements

The Company’s consolidated financial statements do not reflect the various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk. These off-balance sheet arrangements consist of unfunded loans and commitments, as well as lines of credit made under the same standards as on-balance sheet instruments. These unused commitments totaled $197.6 million and $180.5 million at September 30, 2025 and December 31, 2024, respectively. At September 30, 2025 and December 31, 2024, there was a $61 thousand and $92 thousand allowance for credit losses required for off-balance sheet arrangements, respectively. At September 30, 2025 and December 31, 2024, the Company had letters of credit outstanding of $4.4 million and $6.6 million, respectively. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. Management is of the opinion that the Company’s liquidity is sufficient to meet its anticipated needs.

Capital Resources and Adequacy

Total stockholders’ equity was $122.4 million as of September 30, 2025, representing a net increase of $16.0 million from December 31, 2024. The increase in capital was the result of net income of $10.1 million, an increase in common stock of $20 thousand, an increase in surplus of $383 thousand due to employee stock purchases and stock grants with compensation expense, and a decrease of $9.1 million in accumulated other comprehensive loss, offset by dividends paid of $3.7 million. The accumulated other comprehensive losses are excluded from both the Bank’s and the Company’s Tier 1 regulatory capital calculations.

The Company’s tangible book value per share, calculated as total stockholders’ equity divided by outstanding common stock shares, was $16.01 and $13.96 at September 30, 2025 and December 31, 2024, respectively.

The Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the consolidated financial statements.

The regulations require that banks maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined in the regulations), and Tier 1 capital to average assets (as defined in the regulations). As of September 30, 2025, the Bank met the minimum requirements. In addition, the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios:

Consolidated Bank

(Dollars In Thousands)

Note: Unrealized gains and losses on securities available for sale are excluded from regulatory capital components of risk-based capital and leverage ratios.

In addition to the risk-based capital guidelines, the federal banking regulators established minimum leverage ratio (Tier 1 capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 4%.

The capital ratios to be considered “well capitalized” under the capital rules are:

Common equity of 6.5%;

 Tier 1 leverage of 5%;

 Tier 1 risk-based capital of 8%; and

Total risk-based capital of 10%.

The Company qualifies as a small bank holding company and is not subject to the Federal Reserve’s consolidated capital rules, although an institution that so qualifies may continue to file reports that include such capital amounts and ratios. The Company has elected to continue to report those amounts and ratios.

The following table provides the Company’s risk-based capital ratios and leverage ratios:

Consolidated Corporation

(Dollars In Thousands)

Note: Unrealized gains and losses on securities available for sale are excluded from regulatory capital components of risk-based capital and leverage ratios.

The Company’s primary source of market risk is interest rate risk. A principal objective of the Company’s asset/liability management policy is to minimize the Company’s exposure to changes in interest rates by an ongoing review of the maturity and repricing of interest earning assets and interest bearing liabilities. The Asset Liability Committee (ALCO), included as part of the Board of Directors meetings, oversees this review, which establishes policies to control interest rate sensitivity. Interest rate sensitivity is the volatility of a company’s earnings resulting from a movement in market interest rates. The Company monitors rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity. Beginning in 2022 through 2023, the Federal Reserve raised its key interest rate in an attempt to tame inflation. Conversely, in September 2024 the Federal Reserve decreased its key interest rate by 50 basis point and by 25 basis points in November 2024, December 2024, and September 2025. The Company’s asset/liability management policy, monthly and quarterly financial reports, along with simulation modeling, supplies management with guidelines to evaluate and manage rate sensitivity.

Because income simulations assume that the Company’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that management could implement in response to rate shifts. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Assets and liabilities may react differently than projected 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 rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.

Based on a twelve-month forecast of the balance sheet, the following table sets forth the Company’s interest rate risk profile at September 30, 2025. For income simulation purposes, personal and business savings accounts reprice every two months, personal and business NOW accounts reprice every two months, and personal and business money market accounts reprice every month. Management reviews all assumptions on a periodic basis and believes current assumptions support market conditions. The Company is liability sensitive, which means if interest rates fall, interest income will fall slower than interest expense and interest income will likely increase. The impact on net interest income, illustrated in the following table, would vary if different assumptions were used or if actual experience differs from that indicated by the assumptions.

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2025, and they have concluded that, as of this date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act. There were no significant changes to our internal controls over financial reporting or in the other factors that could significantly affect our internal controls over financial reporting during the quarter ended September 30, 2025, including any corrective actions with regard to significant deficiencies and material weakness.

In addition to the other information set forth in this Quarterly Report, the reader should carefully consider the factors discussed in “Risk Factors” included within the Company’s 2024 Form 10-K and subsequent filings with the SEC. There are no material changes to such risk factors. Such risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results. See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Caution About Forward-looking Statements.”