FIDELITY D & D BANCORP INC

Previous wording

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.

Current wording

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of June 30, 2026 compared to December 31, 2025 and a comparison of the results of operations for the three and six months ended June 30, 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.

Previous wording

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.

Current wording

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 June 2026 was 4.2%, down 0.2 percentage points compared to December 2025. 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 June 30, 2026 were 4.7% in market area north and 4.1% in market area south, respectively, an increase of 0.4 percentage points and 0.2 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 1.4% and 3.2% 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 1.8% 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.

Previous wording

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.

Current wording

For the six months ended June 30, 2026, net income was $15.3 million, or $2.64 basic earnings per share and $2.63 diluted earnings per share, a 19% increase, compared to $12.9 million, or $2.24 basic earnings per share and $2.23 diluted earnings per share, for the six months ended June 30, 2025.

Previous wording

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.

Current wording

As of June 30, 2026 and June 30, 2025, book value per share was $43.54 and $37.78, and tangible common book value per share (non-GAAP) was $40.08 and $34.25(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.

Previous wording

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.

Current wording

In addition to the challenging and competitive economic environment in which we operate, the regulatory 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.

Previous wording

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.

Current wording

Net income for the quarter ended June 30, 2026 was $7.8 million, or $1.34 earnings per share and $1.33 per diluted share, compared to $6.9 million, or $1.20 earnings per share and $1.20 per diluted share, for the quarter ended June 30, 2025. The $0.9 million, or 13%, increase in net income resulted primarily from a $2.9 million increase in net interest income coupled with a $0.1 million increase in non-interest income. This was partially offset by a $1.3 million increase in non-interest expense and a $0.4 million increase in the provision for credit losses due to the growth of loans and unfunded commitments. For the six months ended June 30, 2026, net income was $15.3 million, or $2.64 earnings per share and $2.63 diluted earnings per share, compared to $12.9 million, or $2.24 earnings per share and $2.23 diluted earnings per share, for the six months ended June 30, 2025. The $2.4 million, or 19%, increase in net income stemmed from the $5.2 million increase in net interest income and $0.4 million increase in non-interest income. This was partially offset by a $1.9 million increase in non-interest expense and a $1.0 million increase in the provision for credit losses on loans and unfunded commitments.

Previous wording

three months ended March 31, 2026 and 2025

Current wording

Return on average assets (ROA) were 1.11% and 1.04% for the second quarters of 2026 and 2025, respectively, and 1.09% and 0.98% for the six months ended June 30, 2026 and 2025, respectively. The increase in ROA was primarily the result of an increase in net income during the second quarter of 2026 and year-to-date 2026, compared to the same periods of 2025. Return on average shareholders’ equity (ROE) was 12.68% and 13.02% for the second quarters of 2026 and 2025, respectively, and 12.55% and 12.35% for the six months ended June 30, 2026 and 2025, respectively. The increase ROE year-to-date 2026 was primarily the result of an increase in net income, compared to year-to-date 2025. The decrease in ROE during the second quarter of 2026, compared to the same 2025 quarter, was primarily due to a 17% increase in average total equity compared to a 13% increase in net income. Pre-provision net revenue to average assets (non-GAAP) was 1.45% and 1.28% for the three months ended June 30, 2026 and 2025, respectively, and 1.41% and 1.22% for the six months ended June 30, 2026 and 2025, respectively. The increases were due to an increase in income before taxes quarter-over-quarter and year-over-year.

Previous wording

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.

Current wording

Net interest income was $20.8 million for the second quarter of 2026, representing a 16% increase over the $17.9 million earned for the second quarter of 2025. The $2.9 million increase in net interest income resulted from the increase of $1.9 million in interest income primarily due to a $113.1 million increase in the average balance of interest-earning assets and a 9 basis points increase in fully-taxable equivalent ("FTE") (non-GAAP measurement) yields. The loan portfolio had the most significant impact, producing a $3.2 million increase in FTE interest income from $208.2 million in higher quarterly average balances and an increase of 5 basis points in FTE loan yields. The increase in interest income was coupled with a $0.9 million decrease in interest expense on deposits due to a 28 basis points decrease in rates paid on interest-bearing deposits which more than offset the increase from $82.1 million in higher average balances compared to the second quarter of 2025.

Previous wording

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.

Current wording

The FTE yield on interest-earning assets was 4.86% for the second quarter of 2026, an increase of 9 basis points from 4.77% for the second quarter of 2025. The overall cost of interest-bearing liabilities was 2.24% for the second quarter of 2026, a decrease of 28 basis points from the 2.52% for the second quarter of 2025. The cost of funds decreased 22 basis points from 1.95% to 1.73% for the second quarters of 2025 and 2026, respectively. The Company’s FTE net interest spread was 2.62% for the second quarter of 2026, an increase of 37 basis points from 2.25% recorded for the second quarter of 2025. FTE net interest margin increased to 3.22% for the three months ended June 30, 2026 from 2.92% for the same period of 2025. Future margin performance will continue to be influenced by competitive deposit pricing, market interest rate changes, loan growth, funding mix, and overall balance sheet management strategies.

Previous wording

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.

Current wording

For the remainder of 2026, the Company currently expects to operate in an uncertain interest rate environment with little change in short-term rates. Management’s outlook is informed primarily by the Federal Open Market Committee’s (FOMC) published statements and economic projections. Future changes in short-term rates remain uncertain and dependent on incoming economic information and an evolving outlook. 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. Changes in market interest rates, whether upward or downward, may cause earning asset yields and funding costs to reprice at different speeds and magnitudes, which could positively or negatively affect NIM. Management expects that the effects of rate movements on NIM may be moderated through active pricing and balance sheet management across both earning assets and funding sources. 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.

Previous wording

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.

Current wording

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 and the Pricing Committee 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 the Pricing Committee, 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.

Previous wording

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.

Current wording

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 June 30, 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 second quarters of 2026 and 2025, respectively, and $0.4 million and $0.4 million during the six months ended June 30, 2026 and 2025, respectively, are included in interest income from loans. Purchase accounting adjustments of $0.2 million and $0.3 million are included in interest income from loans and $1 thousand and $1 thousand reduced interest expense on deposits and borrowings for the three months ended June 30, 2026 and 2025. Purchase accounting adjustments of $0.5 million and $0.6 million are included in interest income from loans and $2 thousand and $2 thousand reduced interest expense on deposits and borrowings for the six months ended June 30, 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.

Previous wording

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.

Current wording

For the three months ended June 30, 2026, the provision for credit losses on loans was $400 thousand and the provision for credit losses on unfunded commitments was $340 thousand, compared to a $300 thousand provision for credit losses on loans and a $20 thousand provision for credit losses on unfunded loan commitments for the three months ended June 30, 2025.

Previous wording

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.

Current wording

For the six months ended June 30, 2026, the increase in the provision for credit losses on loans compared to the prior year period was due to higher loan growth. For the six months ended June 30, 2026, the increase in the provision for unfunded commitments compared to the prior period was due to growth in originations within the portfolio, specifically in commercial construction commitments.

Previous wording

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.

Current wording

The provision for credit losses derives from the reserve required from the allowance for credit losses calculation. The Company continued provisioning for six months ended June 30, 2026 to maintain an allowance level that management deemed adequate.

Previous wording

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.

Current wording

Total non-interest income for the six months ended June 30, 2026 was $10.7 million, an increase of $0.4 million, or 3%, from $10.3 million for the six months ended June 30, 2025. The increase was primarily due to $0.7 million growth in wealth management revenue. Additionally, the Company saw increases of $0.4 million in fees from commercial loans with interest rate hedges and $0.2 million in commercial loan late fees due to two substandard loans that were paid off during the first half of 2026. Partially offsetting the increase in non-interest income was a decrease of $0.7 million in gains from sold loans primarily due to a $0.5 million gain on the sale of a commercial loan during the first half of 2025.

Previous wording

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.

Current wording

Non-interest expenses increased $1.3 million, or 9%, for the second quarter of 2026 to $16.0 million from $14.7 million for the same quarter of 2025. The increase in non-interest expenses was primarily attributed to added salaries and benefits expense of $0.8 million mostly due to an increase in the number of bankers quarter-over-quarter. Additionally, the Company experienced an increase of $0.2 million in professional services expenses and $0.1 million in premises and equipment expenses primarily due to costs for software and subscriptions. These increases were partially offset by a decrease of $0.2 million in advertising costs primarily due to less spending on promotions.

Previous wording

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.

Current wording

The provision for income taxes increased $0.3 million during the three months ended June 30, 2026 compared to the same period in 2025 primarily due to a $1.3 million increase in income before taxes. The provision for income taxes increased $0.2 million during the six months ended June 30, 2026 compared to the same period in 2025 primarily due to a $2.6 million increase in income before taxes. Partially offsetting the increase in the provision for income taxes was a $0.5 million discount recognized in the provision from utilizing/applying purchased renewable energy tax credits. The Company's effective tax rate was 14.7% at June 30, 2026 compared to 15.8% at June 30, 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 half of 2026 along with the effect of tax-exempt income in ration to the level of pre-tax income.

Previous wording

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.

Current wording

The Company’s total assets had a balance of approximately $3.0 billion as of June 30, 2026, an increase of $223.1 million from December 31, 2025. The increase resulted from $174.9 million of net growth in the loans and leases portfolio as of June 30, 2026 compared to December 31, 2025. Cash and cash equivalents increased $59.6 million over the same period. Asset growth was offset by a decrease of $14.9 million in the investment portfolio. Deposit growth of $91.3 million and short-term borrowings of $119.8 million were utilized to fund loan growth.

Previous wording

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.

Current wording

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 six months ended June 30, 2026, AOCI improved by $2.9 million primarily due to the change in fair value of the Company's investment securities along with the amortization of the discount recognized on the transfer of HTM securities.

Previous wording

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.

Current wording

As of June 30, 2026, the carrying value of held-to-maturity securities was $228.1 million, net of $11.0 million in remaining transferred discount.

Previous wording

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.

Current wording

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 June 30, 2026, the Company recorded the fair value of the swap of $0.2 million in accrued interest payable and other liabilities on the consolidated balance sheet offset by a $0.2 million increase to the carrying value of designated investment securities.

Previous wording

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).

Current wording

As of June 30, 2026, the carrying value of investment securities amounted to $509.0 million, or 17% of total assets, compared to $523.9 million, or 19% of total assets, as of December 31, 2025. On June 30, 2026, 31% 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).

Previous wording

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.

Current wording

The Company’s municipal (obligations of states and political subdivisions) portfolio is comprised of tax-free municipal bonds with a carrying value of $180.1 million ($166.4 million including the remaining net unrealized loss transferred on HTM securities) and taxable municipal bonds with a carrying value of $81.7 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.

Previous wording

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.

Current wording

As of June 30, 2026, the carrying value of total investments decreased $14.9 million, or 3%. The decline was primarily due to $10.5 million in paydowns and the sale of $5.8 million in available-for-sale securities. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile, to the extent possible.

Previous wording

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.

Current wording

The AFS securities were recorded with a net unrealized loss of $33.9 million and $36.4 million as of June 30, 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.

Previous wording

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.

Current wording

As of June 30, 2026, the Company had $365.3 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 June 30, 2026, the balance of pledged securities required was $383.5 million, or 75% of total securities.

Previous wording

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.

Current wording

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 six months ended June 30, 2026, the Company did not incur any credit losses on debt securities from its investment securities portfolio.

Previous wording

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.

Current wording

During the first half 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.

Previous wording

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.

Current wording

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 $9.4 million and $4.3 million as of June 30, 2026 and December 31, 2025, respectively. The dividends received from the FHLB totaled $165 thousand and $152 thousand for the six months ended June 30, 2026 and 2025, respectively. Atlantic Community Bankers Bank (ACBB) stock totaled $82 thousand as of June 30, 2026 and December 31, 2025.

Previous wording

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.

Current wording

As of June 30, 2026 and December 31, 2025, loans HFS consisted of residential mortgages with carrying amounts of $1.6 million and $0.6 million, respectively, which approximated their fair values. During the six months ended June 30, 2026, residential mortgage loans with principal balances of $21.9 million were sold into the secondary market and the Company recognized net gains of $0.3 million, compared to $32.0 million and $0.5 million, respectively, during the six months ended June 30, 2025.

Previous wording

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.

Current wording

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 June 30, 2026 and December 31, 2025, the servicing portfolio balance of sold residential mortgage loans was $508.1 million and $513.6 million, respectively, with mortgage servicing rights of $1.0 million and $1.1 million for the same periods, respectively.

Previous wording

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.

Current wording

As of June 30, 2026, the Company had gross loans and leases totaling $2.1 billion, an increase of $175.8 million, or 9%, compared to $1.9 billion at December 31, 2025.

Previous wording

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.

Current wording

During the six months ended June 30, 2026, the growth in the portfolio was attributed primarily to a $190.2 million increase in the commercial portfolio and a $5.2 million increase in the residential portfolio, which was partially offset by the $19.6 million reduction in the consumer portfolio attributed to a strategic reduction in the auto portfolio.

Previous wording

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.

Current wording

As of June 30, 2026, the commercial portfolio increased by $190.2 million, or 16%, to $1.3 billion compared to the December 31, 2025 balance of $1.2 billion. The increase was due to growth of $148.9 million in commercial real estate loans and $41.3 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.

Previous wording

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.

Current wording

For the six months ended June 30, 2026, commercial and industrial (non-municipal) loans increased $32.2 million, or 15%, from $220.5 million at December 31, 2025 to $252.7 million at June 30, 2026, which was due to a single origination totaling $12.4 million and two originations to a single borrower totaling $5.2 million during the first quarter, a single origination totaling $4.0 million during the second quarter, and standard originations and advances outpacing scheduled payments and curtailments.

Previous wording

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.

Current wording

For the six months ended June 30, 2026, municipal loans increased $9.1 million, or 8%, from $120.6 million at December 31, 2025, to $129.7 million at June 30, 2026, which was attributed to a single origination to a municipal borrower totaling $2.3 million during the first quarter, two loans to a single municipal borrower totaling $2.9 million during the second quarter, and standard portfolio growth.

Previous wording

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.

Current wording

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 June 30, 2026, the commercial real estate portfolio was 46% of total loans outstanding compared to 43% at December 31, 2025.

Previous wording

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.

Current wording

For the six months ended June 30, 2026, owner occupied commercial real estate loans increased $37.0 million, or 11%, from $340.8 million on December 31, 2025, to $377.8 million at June 30, 2026, due to three originations to three separate commercial real estate owner occupied borrowers totaling $11.2 million during the first quarter, a single origination totaling $6.6 million during the second quarter, a $8.0 million construction loan that stabilized during the second quarter, and was converted to owner occupied commercial real estate, and general portfolio growth.

Previous wording

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.

Current wording

For the six months ended June 30, 2026, non-owner occupied commercial real estate loans increased $111.3 million, or 27%, from $416.5 million on December 31, 2025, to $527.8 million on June 30, 2026. The increase is primarily driven by the origination of a $37 million loan in the first quarter, of which $15 million was sold to a participating bank in the second quarter, a $19.6 million loan to a single borrower in the first quarter, six originations to six separate commercial real estate non owner occupied borrowers totaling $36.8 million during the second quarter, $17.5 million in construction loans that stabilized and were converted to non-owner occupied commercial real estate, and standard portfolio growth.