Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, represents an overview of the financial condition and results of operations of the Corporation and should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" and Item 1A, "Risk Factors" of Part I to this Annual Report on Form 10-K.
The Corporation is in the business of providing customary retail, commercial banking and financial services to individuals, businesses and local governments through its 22 branch offices operated by Journey Bank, the Corporation’s wholly-owned subsidiary. The Corporation’s 22 branch offices are operated in Clinton, Columbia, Lycoming, Montour and Northumberland counties in Northcentral Pennsylvania.
CAUTIONARY STATEMENT
Certain statements in this section and elsewhere in this Annual Report on Form 10-K, other periodic reports filed by us under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of us may include “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect our current views with respect to future events and financial performance. Such forward looking statements are based on general assumptions and are subject to various risks, uncertainties, and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to:
Our business and financial results are affected by business and economic conditions, primarily in the Northcentral Pennsylvania market in which we operate.
Changes in interest rates and valuations in the debt, equity and other financial markets.
Disruptions in the liquidity and other functioning of financial markets, including such disruptions in the market for real estate and other assets commonly securing financial products.
Actions by the Federal Reserve Board and other government agencies, including those that impact money supply and market interest rates.
Changes in our customers’ and suppliers’ performance in general and their creditworthiness in particular.
Changes in customer preferences and behavior, whether as a result of changing business and economic conditions or other factors.
A downturn in significant segments of the United States or global financial markets could impact our performance, both directly by affecting our revenues and the value of our assets and liabilities and indirectly by affecting our customers and suppliers and the economy generally.
Our business and financial performance could be impacted as the financial industry restructures in the current environment by changes in the competitive landscape.
Given current economic and financial market conditions, our forward-looking statements are subject to the risk that these conditions will be substantially different than we are currently expecting.
Legal, regulatory and governmental developments could have an impact on our ability to operate our businesses, our financial condition, results of operations, our competitive position or reputation. Reputational impacts, in turn, could affect matters such as business generation and retention, our ability to attract and retain management, liquidity and funding. These legal and regulatory developments could include: (a) the unfavorable resolution of legal proceedings or regulatory and other governmental inquiries; (b) increased litigation risk from recent regulatory and other governmental developments; (c) the results of the regulatory examination process, and regulators’ future use of supervisory and enforcement tools; (d) legislative and regulatory reforms, including changes to laws and regulations involving tax, pension, education and mortgage lending, the protection of confidential customer information, and other aspects of the financial institution industry; and (e) changes in accounting policies and principles.
A deterioration of the credit rating for United States long-term sovereign debt or the impact of uncertain or changing political conditions, including federal government shutdowns and uncertainty regarding United States fiscal debt, deficit and budget matters.
The impacts of tariffs, sanctions and other trade policies of the United States and its global trading counterparts and the resulting impact on the our business and our customers.
Our business and operating results are affected by our ability to identify and effectively manage risks inherent in our businesses, including, where appropriate, through the effective use of third-party insurance and capital management techniques.
Our ability to anticipate and respond to technological changes can have an impact on our ability to respond to customer needs and to meet competitive demands.
Our ability to implement our business initiatives and strategies could affect our financial performance over the next several years.
Competition can have an impact on customer acquisition, growth and retention, as well as on our credit spreads and product pricing, which can affect market share, deposits and revenues.
Our business and operating results can also be affected by widespread natural disasters, terrorist activities or international hostilities, either as a result of the impact on the economy, capital and other financial markets generally, or on us or our customers and suppliers.
The words “believe,” “expect,” “anticipate,” “project” and similar expressions signify forward looking statements. Readers are cautioned not to place undue reliance on any forward looking statements made by or on behalf of us. Any such statement speaks only as of the date the statement was made. We undertake no obligation to update or revise any forward looking statements.
The following discussion and analysis should be read in conjunction with the detailed information and consolidated financial statements, including notes thereto, included elsewhere in this report. Our consolidated financial condition and results of operations are essentially those of our subsidiary, Journey Bank. Therefore, the analysis that follows is directed to the performance of the Bank.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Corporation’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and conform to general practices within the banking industry. In the preparation of its financial statements, the Corporation is required to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The Corporation’s critical accounting policies are fundamental to understanding this MD&A and are more fully described in Note 1 (“Summary of Significant Accounting Policies”) within the Corporation’s Notes to the Consolidated Financial Statements which are included in Part II of this Annual Report on Form 10-K .
The Corporation defines its critical accounting policies in accordance with U.S. GAAP. U.S. GAAP requires the Corporation to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on its financial condition and results of operations, as well as the specific manner in which those principles are applied. Application of assumptions different than those used by the Corporation could result in material changes in the Corporation’s financial position or results of operations. The Corporation believes its policies governing the determination of the allowance for credit losses, the fair value of available-for-sale debt securities and the fair values of assets acquired and liabilities assumed in business combinations are critical accounting policies. The Corporation’s management has reviewed and approved these critical accounting policies and has discussed these policies with its Audit Committee. The Corporation believes the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments are as follows:
Allowance for Credit Losses (ACL) – Loans
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326, Financial Instruments – Credit Losses , provides guidance on the accounting for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASC 326 requires consideration of a broad range of reasonable and supportable information to form credit loss estimates in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. Commonly referred to as Current Expected Credit Losses (“CECL”), ASC 326 requires a financial asset (or a group of financial assets) to be measured at an amortized cost basis and presented at the net amount expected to be collected. ASC 326 affects financial assets and net investment in leases that are not accounted for at fair value through net income, including such financial assets as loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.
Management evaluates the credit quality of the Corporation’s loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ACL on a quarterly basis. The ACL is established through a provision for credit losses charged to earnings and is maintained at a level that management considers to be an estimate of the lifetime expected credit losses of the portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ACL, while recoveries of amounts previously charged off are credited to the ACL.
Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows, estimated losses on pools of homogeneous loans based on historical loss experience and reasonable and supportable forecasts, as well as consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their examination of the Corporation, also review the ACL, and may require, based on information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ACL. Additionally, the ACL is determined, in part, by the composition and size of the loan portfolio.
The ACL consists of two components, a specific component and a general component. The specific component relates to loans that are individually analyzed for impairment. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience as adjusted for qualitative factors. The general reserve component of the ACL is based on pools of performing loans segregated by loan segment. Historical loss factors are applied based on historical losses in each risk rating category to determine the appropriate reserve related to those loans.
Although the Corporation’s management uses the best information available, the level of the ACL remains an estimate which is subject to significant judgment and short-term change which could have a significant impact on the Corporation’s financial condition or results of operations. From January 1, 2025 to December 31, 2025, the level of the ACL increased from $9.9 million to $10.0 million and the ACL to total loans decreased from 0.88% to 0.85%. The Corporation’s ACL is highly sensitive to the methods, assumptions and estimates underlying its calculation. See Note 4 “Loans and Allowance for Credit Losses” within the Corporation’s Notes to the Consolidated Financial Statements which are included in Part II of this Annual Report on Form 10-K for additional qualitative and quantitative information about the Corporation’s ACL.
Fair Value of Available-For-Sale Debt Securities
Another material estimate is the calculation of fair values of the Corporation’s debt securities. For the Corporation’s debt securities, the Corporation receives estimated fair values from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers compare securities that have similar maturities, coupon rates, and credit ratings. Estimated fair values of debt securities may vary among brokers and other valuation services.
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized but is periodically evaluated for impairment. Impairment testing is performed using either a qualitative or quantitative approach. The Corporation has selected September 30 as the date to perform the annual goodwill impairment test. Additionally, a goodwill impairment evaluation is performed on an interim basis when events or circumstances indicate impairment potentially exists. Based on the annual goodwill impairment tests completed September 30, 2025 and 2024, no impairment was noted. No assurance can be given that future impairment tests will not result in a charge to earnings.
The Corporation’s other intangible assets consist primarily of core deposit intangibles. The calculation of core deposit intangibles are based on significant judgements. Core deposit intangibles are calculated using a discounted cash flow model based on various factors including discount rate, attrition rate, interest rate, cost of alternative funds and net maintenance costs. Core deposit intangibles are amortized over the expected life of each acquired core deposit type, discounted at a long-term market oriented after-tax rate of return. Core deposit intangibles are reviewed for impairment when indicators of impairment are present. Indicators of impairment may include significant runoff or attrition. Management is not aware of any indicators of impairment related to core deposit intangibles as of December 31, 2025 or 2024.
FINANCIAL CONDITION
Total assets at December 31, 2025 amounted to $1.673 billion, an increase of $77.2 million, or 4.8% from $1.596 billion at December 31, 2024. The change in total assets primarily reflected increases in cash and cash equivalents, available-for-sale debt securities, and loans receivable, partially offset by a decrease in deferred tax assets, net. Cash and cash equivalents increased $31.2 million, available-for-sale debt securities increased $4.0 million and loans receivable, not held for sale, increased by $51.6 million. Deferred tax assets, net, decreased $4.0 million. Total liabilities at December 31, 2025, were $1.481 billion, an increase of $51.1 million, or 3.6% from $1.430 billion at December 31, 2024. Deposit balances increased by $120.3 million, short-term borrowings decreased $55.9 million and long-term borrowings decreased $15.0 million since December 31, 2024.
Total average assets increased 2.0% from $1.593 billion for the year ended December 31, 2024, to $1.625 billion for the year ended December 31, 2025. Average earning assets were $1.517 billion for the year ended December 31, 2025 and $1.491 billion for the year ended December 31, 2024. Average interest-bearing liabilities were $1.159 billion for each of the years ended December 31, 2025 and 2024.
Cash and cash equivalents increased $31.2 million or 179.3% from $17.4 million at December 31, 2024 to $48.5 million at December 31, 2025. This increase is primarily related to increased correspondent bank balances resulting from cash flows from available-for-sale debt securities as well as strong deposit growth during the year ended December 31, 2025.
Available-for-sale debt securities increased $4.0 million to $327.2 million at December 31, 2025 from $323.2 million at December 31, 2024. The Corporation received proceeds from sales, paydowns, calls and maturities of available-for-sale debt securities of $94.0 million during the year ended December 31, 2025. Offsetting this activity were purchases of $84.6 million and an increase in fair value of available-for-sale debt securities of $12.5 million for year ended December 31, 2025.
Gross loans not held for sale increased 4.6% to $1.178 billion at December 31, 2025 from $1.126 billion at December 31, 2024. This increase is related to strong loan demand during the year ended December 31, 2025.
Deferred tax assets, net, decreased $4.0 million to $6.0 million at December 31, 2025 from $10.0 million at December 31, 2024. This decrease is primarily related to decreases in deferred tax assets related to unrealized losses on available-for-sale debt securities and purchase accounting adjustments for the year ended December 31, 2025.
Interest-bearing deposits increased $103.0 million to $1.136 billion at December 31, 2025 from $1.033 billion at December 31, 2024. Noninterest-bearing deposits increased 6.7% from $259.7 million at December 31, 2024 to $277.0 million at December 31, 2025. The increase in interest-bearing deposits during the year ended December 31, 2025 was a result of strong organic deposit growth in combination with the continued execution of a strategic initiative to reposition customer repurchase agreements, which are classified as short-term borrowings, into core deposit accounts. The Bank anticipates the completion of this project in 2026 which will assist in optimizing the Bank’s long-term liquidity needs and balance sheet management strategies. The increase in noninterest-bearing deposits was a result of continued growth in overall deposit levels and changes in product mix for the year ended December 31, 2025.
Short-term borrowings decreased $55.9 million to $12.5 million at December 31, 2025 from $68.4 million at December 31, 2024. This change was primarily related to the migration of customer repurchase agreements as discussed above as well as a paydown in short-term FHLB borrowings during the year ended December 31, 2025.
Long-term borrowings were $55.5 million at December 31, 2024 compared to $40.6 million at December 31, 2025. This decrease is primarily related to $15.2 million in long-term borrowing maturities during the year ended December 31, 2025.
Total stockholder’s equity increased by $26.1 million, or 15.7%, from $166.4 million at December 31, 2024, to $192.5 million at December 31, 2025. The increase is primarily attributable to earnings, net of cash dividends, along with a decrease in accumulated other comprehensive loss due to changes in the fair values of available-for-sale debt securities. Accumulated other comprehensive loss amounted to $4.0 million as of December 31, 2025 and $13.9 million as of December 31, 2024.
The loan-to-deposit ratio is a key measurement of liquidity. Our loan-to-deposit ratio decreased from 86.4% as of December 31, 2024 to 82.6% as of December 31, 2025 due to the asset/liability mix changes noted above, and remains within internal policy limits.
It is our opinion that the asset/liability mix and the interest rate risk associated with the balance sheet are within manageable parameters. Constant monitoring using asset/liability reports and interest rate risk scenarios are in place along with quarterly asset/liability management meetings on the committee level by the Bank’s Board of Directors. Additionally, the Bank’s Asset/Liability Committee meets quarterly with an investment consultant and works with independent third parties regularly to review key assumptions and other metrics used in the modeling software.
Securities
The Corporation’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and interest income to increase profitability. Additionally, the investment securities portfolio is used to meet pledging requirements to secure public deposits, customer repurchase agreements and for other purposes. Debt securities are classified as either available-for-sale or held-to-maturity at the time of purchase based on management's intent. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a component of stockholders’ equity in accumulated other comprehensive income (loss), net of tax, while held-to-maturity securities are carried at amortized cost. At December 31, 2025 and December 31, 2024, all debt securities were classified as available-for-sale. Equity securities with readily determinable fair values are carried at fair value, with gains and losses due to fluctuations in market value included in the Consolidated Statements of Income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. Decisions to purchase or sell investment securities are based upon management’s current assessment of long- and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies.
At December 31, 2025, the investment portfolio was comprised principally of available-for-sale debt securities including, fixed-rate, taxable and tax-exempt obligations of state and political subdivisions and fixed-rate and floating-rate securities issued by U.S. government or U.S. government-sponsored agencies, which include agencies, mortgage-backed securities and collateralized mortgage obligations, or CMOs. Additionally, the Corporation holds equity investments in the stock of certain publicly traded bank holding companies. Except for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of stockholders’ equity as of December 31, 2025.
The majority of the Corporation's debt securities are fixed-rate instruments and inherently subject to interest rate risk, as the value of fixed-rate securities fluctuates with changes in interest rates. Generally, a security's value reacts inversely with changes in interest rates. Available-for-sale securities are carried at fair value, with unrealized gains or losses reported in the accumulated other comprehensive income or loss component of stockholder's equity, net of deferred income taxes. At December 31, 2025, the Corporation reported a net unrealized loss, included in accumulated other comprehensive loss, of $4.0 million, net of deferred income taxes of $1.1 million, a decrease of $9.9 million compared to the net unrealized holding loss of $13.9 million, net of deferred income taxes of $3.7 million, at December 31, 2024. Any future changes in interest rates could result in changes in the fair value of the Corporation’s securities portfolio and capital position. However, accumulated other comprehensive income and loss related to available-for-sale debt securities is excluded from regulatory capital and does not have an impact on the Corporation's regulatory capital ratios.
The following table presents the carrying value of available-for-sale debt securities, at fair value at December 31, 2025 and December 31, 2024:
December 31, 2025
December 31, 2024
Amortized
Fair
Amortized
Fair
(In Thousands)
Cost
Value
Cost
Value
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligation of U.S. Government Corporations and Agencies:
Mortgage-backed
Collateralized mortgage obligations
Other
Obligations of state and political subdivisions
Other debt securities
Total available-for-sale debt securities
Aggregate Unrealized Loss
Aggregate Unrealized Loss as a % of Amortized Cost
The following table presents the weighted-average yields on available-for-sale debt securities by major category and maturity period at December 31, 2025. Yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security. Because mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity date, they are not included in the maturity categories in the following summary.
Within
One-
Five-
After
One
Five
Ten
Ten
(Dollars In Thousands)
Year
Yield
Years
Yield
Years
Yield
Years
Yield
Total
Yield
AVAILABLE-FOR-SALE DEBT
SECURITIES:
Obligation of U.S. Government Corporations and Agencies:
Other
Obligations of state and political subdivisions
Other debt securities
Sub-total
Mortgage-backed securities
Collateralized mortgage obligations
Total
Marketable Equity Securities
At December 31, 2025, and December 31, 2024, the Corporation held $1.4 million in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the years ended December 31, 2025 and 2024:
For the Years Ended
December 31,
(In Thousands)
Net gains recognized during the period on marketable equity securities
Less: Net gains recognized during the period on marketable equity securities sold during the period
Unrealized gains recognized during the period on marketable equity securities still held at the reporting date
See Note 3 within the Corporation’s Notes to the Consolidated Financial Statements which are included in this Annual Report on Form 10-K for more information regarding Corporation’s investment portfolio as of December 31, 2025.
Loans
Gross loans receivable increased 4.6% from $1.126 billion at December 31, 2024 to $1.178 billion at December 31, 2025. The percentage distribution in the loan portfolio is shown in the tables below:
December 31, 2025
December 31, 2024
(In Thousands)
Amount
Amount
Commercial and industrial
Commercial real estate:
Commercial mortgages
Student housing
Residential real estate
Consumer and other
Gross loans
Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Our lending activity is heavily concentrated in the geographic market areas we serve. This geographic concentration subjects our loan portfolio to the general economic conditions within the state. The risks created by this concentration have been considered by management and are monitored on an ongoing basis. As of December 31, 2025 and December 31, 2024, there were no concentrations of loans exceeding 10% of total loans other than the categories of loans disclosed in the table above. We believe our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories.
Banking regulators have established guidelines of less than 100% of tier 1 capital plus allowance for credit losses in construction lending and less than 300% of tier 1 capital plus allowance for credit losses in commercial real estate lending that management monitors as part of the risk management process. The construction concentration ratio is a percentage of the outstanding construction and land development loans to total tier 1 capital plus allowance for credit losses. The commercial real estate concentration ratio is a percentage of the outstanding balance of non-owner occupied commercial real estate, multifamily, and construction and land development loans to tier 1 capital plus allowance for credit losses. At December 31, 2025, the Bank’s exposure to commercial real estate was well below these guidelines.
As of December 31, 2025, commercial real estate loans totaled $403.6 million or 34.3% of total gross loans. Of this amount commercial mortgage loans represented $355.6 million or 30.2% of total gross loans and student housing loans represented $48.0 million or 4.1% of total gross loans. The following table presents the distribution of commercial real estate loans and related percentage of the total loan portfolio as of December 31, 2025 and December 31, 2024:
December 31, 2025
December 31, 2024
(In Thousands)
Amount
Amount
Commercial real estate:
Commercial mortgages:
Commercial construction
Multifamily
Owner occupied nonfarm nonresidential
Non-owner occupied nonfarm nonresidential
Other commercial
Student housing
Total commercial real estate
The following table presents the maturity distribution and interest rate information of the loan portfolio by major category as of December 31, 2025:
As of December 31, 2025
Fixed-Rate Loans
Variable- or Adjustable-Rate Loans
All Loans
1 Year
1 Year
(In Thousands)
or Less
Years
Years
Years
Total
or Less
Years
Years
Years
Total
Total
Commercial and industrial
Commercial real estate:
Commercial mortgages
Student housing
Residential real estate
Consumer and other
Total
See Note 4 within the Corporation’s Notes to the Consolidated Financial Statements which are included in this Annual Report on Form 10-K for more information regarding the Corporation’s loan portfolio as of December 31, 2025.
Asset Quality
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of deferred loan fees and costs, and reduced by the allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged to earnings.
The Corporation has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of loan officers, the Chief Credit Officer, the loan review function, as well as oversight from the Board of Directors. Management continually evaluates its credit risk management practices to ensure problems in the loan portfolio are addressed in a timely manner, although, as is the case with any financial institution, a certain degree of credit risk is dependent in part on local and general economic conditions that are beyond management’s control. Under the Corporation’s risk rating system, loans are rated pass, special mention, substandard, doubtful, or loss, with all categories reviewed regularly as part of the risk management practices.
Non-performing loans are monitored on an ongoing basis as part of the Corporation’s loan review process. Additionally, work-outs for non-performing loans and foreclosed assets held for sale are actively monitored through the Bank’s Credit Department. A potential loss on a non-performing asset is generally determined by comparing the outstanding loan balance to the fair market value of the pledged collateral, less estimated cost to sell.
Management actively manages non-performing loans in an effort to mitigate loss to the Corporation by working with customers to develop strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure and other appropriate means. In addition, management monitors employment and economic conditions within its market area, as weakening of conditions could result in real estate devaluations and an increase in loan delinquencies, which could negatively impact asset quality and cause an increase in the provision for credit losses.
The following table presents information about non-performing assets, as of December 31, 2025 and December 31, 2024:
Non-performing Assets
December 31,
December 31,
(dollars in thousands)
Non-accrual loans
Loans past due 90 days or more and still accruing
Total non-performing loans
Foreclosed assets held for sale
Total non-performing assets
Non-performing loans as a percentage of total loans, gross
Non-performing assets as a percentage of total assets
Allowance for credit losses as a percentage of total loans, gross
Allowance for credit losses to non-performing assets
Total non-performing assets amounted to $12.0 million, or 0.72% of total assets at December 31, 2025, as compared to $10.1 million, or 0.63% of total assets at December 31, 2024. For the year ended December 31, 2025, the Corporation experienced increases in non-accrual loans in multiple loan classifications, however, the most significant increase was in residential real estate loans which increased $1.3 million.
Residential real estate non-accrual loans are generally related to a homogenous population of well secured loans collateralized by 1-4 family residential properties. With respect to commercial real estate non-accrual loans, the Corporation has experienced a limited number of large commercial relationships that have required significant monitoring and workout efforts. As a result, these relationships may significantly impact the total amount of allowance required on individual loans and may significantly impact the provision for credit losses and the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of loans requiring individual evaluation for credit loss, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of December 31, 2025. Management continues to closely monitor its loan relationships for credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.
Allowance for Credit Losses
The allowance for credit losses was $10.0 million at December 31, 2025, compared to $9.9 million at December 31, 2024. The allowance equaled 0.85% of total loans, net of unearned fees and costs and unamortized fair value adjustments, at December 31, 2025 as compared to 0.88% of total loans at December 31, 2024. The allowance for credit losses is analyzed quarterly and reviewed by the Corporation’s Board of Directors. No concentration or apparent deterioration in classes of loans or pledged collateral was evident. Regular loan meetings with the Corporation’s Board of Directors reviewed new loans over specified thresholds. Delinquent loans, loan exceptions and certain large loans are addressed by the full Board no less than monthly to determine compliance with policies.
The following tables present the allocation of the allowance for credit losses as of December 31, 2025 and December 31, 2024:
December 31, 2025
December 31, 2024
(dollars in thousands)
Allowance
for Credit
Losses
Percent of
Allowance
Percent
of Loans
Gross
Loans
Allowance
for Credit
Losses
Percent of
Allowance
Percent
of Loans
Gross
Loans
Commercial and industrial
Commercial real estate
Residential real estate
Consumer and other
Total
The most significant changes in the allowance for credit losses on an individual segment basis from December 31, 2024 to December 31, 2025 include an increase in residential real estate loans from $1,850,000, or 18.8% of the total allowance, at December 31, 2024 to $2,556,000, or 25.7% of the total allowance, at December 31, 2025, as well as a decrease in commercial real estate loans from $6,869,000, or 69.7% of the total allowance, at December 31, 2024 to $6,148,000, or 61.7% of the total allowance, at December 31, 2025. The increase for residential real estate loans includes the impact of increases in non-accrual loans which impacted probability of default calculations and levels of individually evaluated loans and related individually evaluated allowance levels as well as changes in qualitative factors related to the nature of the loan portfolio, volume and severity of past due loans, loan grade migration, changes in lending staff, changes in lending policies and procedures and forecasted economic conditions. The decrease for commercial real estate loans includes the impact of lower individually evaluated allowances related to student housing loans due to a decrease in loan balances, an increase in the volume of collateral dependent loans with no allowance required due to higher overall nonperforming commercial real estate loan balances as well as a decrease in allowance levels for commercial construction loans due to decreases in volume and loss rates utilized. The impact of these items was partially offset by changes in qualitative factors consistent with residential real estate loans as noted above.
See Notes 1 and 4 within the Corporation’s Notes to the Consolidated Financial Statements which are included in this Annual Report on Form 10-K for more information regarding the Corporation’s allowance for credit losses as of December 31, 2025.
Deposits
Deposits are the primary source of funds for the Corporation’s lending and investing activities. The Corporation provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts and time deposits. These accounts generally earn interest at rates the Corporation establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Corporation’s primary focus is on establishing customer relationships to attract core deposits, at times, the Corporation may use brokered deposits and other wholesale deposits to supplement its funding sources. As of December 31, 2025, the Corporation held no brokered deposits.
The following tables summarize the average balances outstanding and average interest rates for each major category of deposits for years ended December 31, 2025 and 2024, respectively:
For the Years Ended
December 31, 2025
December 31, 2024
Average
Average
Average
Average
Balance Change
Balance
Rate
Balance
Rate
Amount
(In Thousands)
Non-interest bearing
Savings
Interest-bearing demand deposits
Money market deposits
Time deposits
Total deposits
The Corporation believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the years ended December 31, 2025, and 2024, was 2.22% and 2.30%, respectively. The decreased cost was primarily attributable to decreased market rates during 2024 and 2025.
At December 31, 2025, estimated uninsured deposits, or the portion of deposit accounts which exceeded the Federal Deposit Corporation insurance limit, totaled $383.6 million. Of this amount, $146.9 million was collateralized by securities pledged by the Corporation or letters of credit issued through the Federal Home Loan Bank of Pittsburgh. Time deposits of $250,000 or more totaled approximately $97.0 million at December 31, 2025.
See Note 6 within the Corporation’s Notes to the Consolidated Financial Statements which are included in this Annual Report on Form 10-K for more information regarding the Corporation’s deposits as of December 31, 2025.
Borrowings
Short-term borrowings consist primarily of securities sold under agreements to repurchase and periodic overnight or short-term Federal Home Loan Bank advances. Average short-term borrowings amounted to 2.4% and 10.3% of total interest-bearing liabilities for the years ended December 31, 2025 and 2024, respectively. This change was primarily related to the migration of customer repurchase agreements as well as a paydown in short-term FHLB borrowings during 2025.
Long-term borrowings consist of advances due to the FHLB - Pittsburgh. Under terms of a blanket agreement, the loans are secured by certain qualifying assets of the Bank which consist principally of first mortgage loans. The carrying value of these collateralized items was $856.5 million at December 31, 2025. The Bank has lines of credit with the Federal Reserve Bank Discount Window, FHLB – Pittsburgh, and Atlantic Community Bankers Bank in the aggregate amount of $613.4 million at December 31, 2025. The unused portion of these lines of credit was $557.2 million at December 31, 2025.
See Note 7 within the Corporation’s Notes to the Consolidated Financial Statements which are included in this Annual Report on Form 10-K for more information regarding the Corporation’s borrowings as of December 31, 2025.
Capital Resources
Management believes, as of December 31, 2025, that Journey Bank meets all capital adequacy requirements to which it is subject. Management annually performs stress testing on its regulatory capital levels and expects Journey Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future.
Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, Journey Bank is subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although Muncy Columbia Financial Corporation is not subject to the specific consolidated capital requirements, its ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if it fails to hold sufficient capital commensurate with its overall risk profile.
The following table reflects the Bank’s actual capital amounts and ratios at December 31, 2025 and 2024:
Journey Bank
Minimum Required
For Capital
Adequacy Purposes
Minimum Required For
Capital Adequacy Purposes
with Conservation Buffer
Minimum Required To
Be Well Capitalized
Under Prompt
Corrective Action
Regulations
(Dollars in Thousands)
Amount
Ratio
Ratio
Ratio
Ratio
December 31, 2025
Total capital (to risk-weighted assets)
Tier I capital (to risk-weighted assets)
Tier I common equity (to risk-weighted assets)
Tier I capital (to average assets)
Total risk-weighted assets
Total average assets
Journey Bank
Minimum Required
For Capital
Adequacy Purposes
Minimum Required For
Capital Adequacy Purposes
with Conservation Buffer
Minimum Required To
Be Well Capitalized
Under Prompt
Corrective Action
Regulations
(Dollars in Thousands)
Amount
Ratio
Ratio
Ratio
Ratio
December 31, 2024
Total capital (to risk-weighted assets)
Tier I capital (to risk-weighted assets)
Tier I common equity (to risk-weighted assets)
Tier I capital (to average assets)
Total risk-weighted assets
Total average assets
RESULTS OF OPERATIONS
Net income in 2025 amounted to $24.2 million, or $6.85 per share, an increase of $5.2 million compared to $19.0 million, or $5.33 per share, in 2024. The increase in net income for 2025 compared to 2024 was primarily attributable to a significant increase in net interest income, partially offset by increases in non-interest expense and income tax provision expense.
Net interest income increased $10.1 million, or 20.1% to $60.6 million in 2025, from $50.5 million in 2024. Non-interest income was $10.4 million in both 2025 and 2024. Non-interest expense was $41.0 million in 2025, an increase of $3.4 million, or 8.9%, from $37.7 million in 2024, which was primarily related to increases in salaries and employee benefits, Pennsylvania shares tax and professional fees. Income tax provision expense increased $1.6 million, or 47% to $4.9 million in 2025, from $3.3 million in 2024, due to higher pretax earnings.
The annual return on average assets was 1.49% in 2025 compared to 1.19% in 2024. The annualized return on average equity was 13.57% in 2025 compared to 11.88% in 2024. The Corporation declared and paid dividends to holders of common stock of $2.30 per share in 2025 and $1.76 per share in 2024.
Net Interest Income
Net interest income is the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits and borrowed funds. Net interest income represents the largest component of the Corporation’s operating income and, as such, is the primary determinant of profitability. Net interest income is impacted by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market interest rates and the level of non-performing assets. Interest income is shown on a fully tax-equivalent basis using the corporate statutory tax rate of 21.0% in 2025 and 2024.
Tax-equivalent net interest income increased $10.2 million, or 19.7%, to $61.8 million in 2025 compared to $51.6 million in 2024. The increase in tax-equivalent net interest income was due to an increase in tax-equivalent interest income reflecting higher earning asset volumes and yields, along with a decrease in interest expense which resulted primarily from a significant decrease in average borrowings coupled with a decrease in the average rate paid on total interest-bearing liabilities. Tax-equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-earning assets. The Corporation’s tax-equivalent net interest margin increased 62 basis points to 4.08% in 2025 compared to 3.46% in 2024, which was largely caused by increases in yields on earning assets along with a decrease in total in cost of funds. Additionally, interest rate spread, the difference between the average yield on interest-earning assets, shown on a fully tax-equivalent basis, and the average cost of interest-bearing liabilities, increased 66 basis points to 3.52% in 2025 compared to 2.86% in 2024.
Tax-equivalent interest income increased $6.3 million, or 7.6%, to $89.2 million for the year ended December 31, 2025 from $82.9 million for the same period in 2024, which was largely caused by growth in average earning assets, coupled with an increase in the tax-equivalent yield on average earning assets. Average earning assets increased $25.1 million, or 1.7%, to $1.517 billion for year ended December 31, 2025 from $1.491 billion for the same period in 2024, resulting in a corresponding increase to tax-equivalent interest income of $3.4 million. Specifically, average loans increased $50.2 million, or 4.5%, to $1.166 billion for the year ended December 31, 2025 from $1.116 billion for the same period in 2024, which reflected strong organic loan growth. Total investment securities averaged $331.6 million for the year ended December 31, 2025, a decrease of $38.3 million, or 10.3%, compared to $369.9 million for the same period in 2024, which contributed to a net decrease of $0.7 million in tax-equivalent interest income. The tax-equivalent yield on earning assets increased 32 basis points to 5.88% for the year ended December 31, 2025 from 5.56% for the same period in 2024, which resulted in a corresponding increase in tax-equivalent interest income of $2.9 million. The Corporation's tax-equivalent yield on loans increased 11 basis points to 6.69% for the year ended December 31, 2025 compared to 6.58% for the same period in 2024, resulting in a corresponding increase in tax-equivalent interest income of $1.2 million, due primarily to the origination of new loans at higher yields and the continued repricing of existing variable rate loans in the Corporation’s portfolio. Meanwhile, the tax-equivalent yield on investment securities increased 67 basis points to 3.16% for the year ended December 31, 2025 from 2.49% for the same period in 2024 and caused a corresponding increase to tax-equivalent interest income of $1.9 million.
Interest expense decreased $3.9 million, or 12.3%, to $27.4 million for the year ended December 31, 2025 from $31.3 million for the same period in 2024, which was primarily from a significant decrease in average borrowings, coupled with a lower overall cost of funds. Average borrowed funds, which is largely comprised of customer repurchase agreements and FHLB of Pittsburgh advances, averaged $75.0 million for the year ended December 31, 2025, a decrease of $109.6 million from $184.5 million for the same period in 2024. Lower volumes of average borrowed funds resulted in a corresponding decrease in interest expense of $5.3 million. Total average interest-bearing deposits increased $110.1 million, or 11.3%, to $1.084 billion for the year ended December 31, 2025, compared to $974.1 million for the same period in 2024, which resulted in a corresponding increase in interest expense of $2.7 million. For the year ended December 31, 2025, the Corporation's cost of funds decreased 33 basis points to 2.37% from 2.70% for the same period in 2024. The average rate paid on total borrowings decreased 40 basis points to 4.41% for the year ended December 31, 2025 from 4.81% for the same period in 2024. The average rate paid on total interest-bearing deposits decreased 8 basis points to 2.22% for the year ended December 31, 2025 from 2.30% for the same period in 2024, which resulted in a corresponding decrease in interest expense of $1.0 million.
The following Average Balance Sheet and Rate Analysis tables presents the average assets, actual income or expense and the average yield on assets, liabilities and stockholders' equity for the years ended December 31, 2025 and 2024.
AVERAGE BALANCE SHEET AND RATE ANALYSIS
YEAR ENDED DECEMBER 31,
(In Thousands)
Average Balance
Interest
Average Rate
Average Balance
Interest
Average Rate
ASSETS:
Tax-exempt loans
All other loans
Total loans (2)(3)(4)
Taxable securities
Tax-exempt securities (3)
Total securities
Interest-bearing deposits in other banks
Total interest-earning assets
Other assets
TOTAL ASSETS
LIABILITIES:
Savings
Now deposits
Money market deposits
Time deposits
Total interest-bearing deposits
Short-term borrowings
Long-term borrowings
Total borrowings
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders' equity
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest rate spread (6)
Net interest income/margin (5)
Average volume information was compared using daily averages for interest-earning and bearing accounts.
Interest on loans includes loan fee income.
Tax exempt interest revenue is shown on a tax-equivalent basis using a statutory federal income tax rate of 21 percent for 2025 and 2024.
Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
Net interest margin is computed by dividing annualized tax-equivalent net interest income by total interest earning assets.
Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
Reconcilement of Taxable Equivalent Net Interest Income
For the Years
Ended December 31,
(In Thousands)
Total interest income
Total interest expense
Net interest income
Tax equivalent adjustment
Net interest income
(fully taxable equivalent)
Rate/Volume Analysis
To enhance the understanding of the effects of volumes (the average balance of earning assets and costing liabilities) and average interest rate fluctuations on the Consolidated Balance Sheets as it pertains to net interest income, the table below reflects these changes for the years ended December 31, 2025 versus December 31, 2024:
Years Ended December 31,
Increase (Decrease)
Due to
(In Thousands)
Volume
Rate
Net
Interest income:
Loans, tax-exempt
Loans
Taxable investment securities
Tax-exempt investment securities
Interest bearing deposits
Total interest-earning assets
Interest expense:
Savings
NOW deposits
Money market deposits
Time deposits
Short-term borrowings
Long-term borrowings, FHLB
Total interest-bearing liabilities
Change in net interest income
Provision for Credit Losses
A summary of the provision for credit losses for the years ended December 31, 2025 and 2024, is as follows:
For the Years
Ended December 31,
(In Thousands)
Provision for credit losses:
Loans receivable
Off-balance sheet exposures
Total provision for credit losses
For the year ended December 31, 2025, there was a provision for credit losses of $839,000, an increase of $2,000 in expense compared to a provision for credit losses of $837,000 for the year ended December 31, 2024. The provision for the year ended December 31, 2025 included expense related to loans receivable of $834,000 and expense related to off-balance sheet exposures of $5,000. The provision for the year ended December 31, 2024 included expense related to loans receivable of $847,000 and a credit related to off-balance sheet exposures of $10,000.
The provision amounts for the years ended December 31, 2025 and 2024 primarily reflect an increase in volume in the loan portfolio, increases in non-accrual loans which impacted probability of default calculations and changes in qualitative factors related to the nature of the loan portfolio, volume and severity of past due loans, loan grade migration, changes in lending staff, changes in lending policies and procedures and forecasted economic conditions.
See Notes 1 and 4 within the Corporation’s Notes to the Consolidated Financial Statements which are included in this Annual Report on Form 10-K for more information regarding the Corporation’s allowance for credit losses as of December 31, 2025.
Non-interest Income
Total non-interest income was $10.4 million for each of the years ended December 31, 2025, and 2024. Service charges and fees increased $236,000 due primarily to higher overdraft fee income. Brokerage income and trust income increased $131,000 and $168,000, respectively, due primarily to higher assets under management. These changes were offset by realized losses on available-for-sale debt securities, net, which totaled $422,000 for 2025 compared to $85,000 for 2024. The increase in realized losses on available-for-sale debt securities, net, for 2025 was related to a strategic realignment of the investment portfolio to enhance net interest margin in future years. Additionally, other non-interest income decreased $294,000 due to one-time events in the first quarter 2024 including incentives received in conjunction with the launch of a debit card reissuance project as well as a governmental grant recorded in conjunction with the completion of a solar energy project.
For the Years Ended
December 31, 2025
December 31, 2024
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
Service charges and fees
Interchange fees
Gain on sale of loans
Earnings on bank-owned life insurance
Brokerage
Trust
Gains on marketable equity securities
Realized losses on available-for-sale debt securities, net
Other non-interest income
Total non-interest income
Non-interest Expense
Total non-interest expense increased $3.4 million or 8.9% from $37.7 million for the year ended December 31, 2024, to $41.0 million for the year ended December 31, 2025. Salaries and employee benefits expense of $21.7 million for the year ended December 31, 2025 increased $2.6 million from $19.2 million for the same period of 2024. The Corporation recorded one-time pretax expenses totaling $1.3 million in conjunction with the retirement of its Executive Chairman during the year ended December 31, 2025. Additionally, health insurance expenses associated with the Corporation’s partially self-funded health insurance plan were $704,000 higher in the year ended December 31, 2025 than the same period of 2024. In addition to the increase in salaries and employee benefits expense, Pennsylvania shares tax expense increased $298,000 or 31.7% due to increased capital levels, professional fees increased $417,000, due primarily to higher overall marketing and advertising costs as well as higher foreclosure and loan workout expenses. These increases were partially offset by decreases in merger-related expenses of $241,000 and amortization of intangibles of $179,000 due to lower core deposit intangible amortization in 2025.
One standard to measure non-interest expense is to express annualized non-interest expense as a percentage of average total assets. For the year ended December 31, 2025 this percentage was 2.52% compared to 2.36% for the year ended December 31, 2024.
For the Years Ended
December 31, 2025
December 31, 2024
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
Salaries and employee benefits
Occupancy
Furniture and equipment
Pennsylvania shares tax
Professional fees
Director's fees
Federal deposit insurance
Data processing and telecommunications
Automated teller machine and interchange
Merger-related expenses
Amortization of intangibles
Other non-interest expense
Total non-interest expense
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Bank to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. The Bank’s primary sources of funds are deposits, securities sold under agreements to repurchase, principal repayments of securities and outstanding loans, funds provided from operations, and day-to-day FHLB – Pittsburgh borrowings. In addition, the Bank invests excess funds in short-term interest-earning assets such as overnight deposits or U.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the amortization of loans and securities and short-term investments are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and repayments on loans and mortgage-backed securities.
The Bank strives to maintain sufficient liquidity to fund operations, loan demand and to satisfy fluctuations in deposit levels. The Bank is required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound banking operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The Bank attempts to maintain adequate but not excessive liquidity, and liquidity management is both a daily and long-term function of its business management. The Bank manages its liquidity in accordance with a board of directors-approved asset liability policy and liquidity contingency plan, which are administered by its asset-liability committee (“ALCO”). ALCO reports interest rate sensitivity, liquidity, capital and investment-related matters on a quarterly basis to the Bank’s board of directors.
The Bank reviews cash flow projections regularly and updates them in order to maintain liquid assets at levels believed to meet the requirements of normal operations, including loan commitments and potential deposit outflows from maturing certificates of deposit and savings withdrawals. While deposits and securities sold under agreements to repurchase are its primary source of funds, when needed it is also able to generate cash through borrowings from the FHLB. At December 31, 2025, the Bank had remaining available capacity with FHLB, subject to certain collateral restrictions, of $537.4 million.
Liquidity management is required to ensure that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt service payments, investment commitments, commercial and consumer loan demand, and ongoing operating expenses. Funding sources include principal repayments on loans, sale of assets, growth in time and core deposits, short and long-term borrowings, investment securities coming due, loan prepayments and repurchase agreements. Regular loan payments are a dependable source of funds, while the sale of investment securities, deposit growth and loan prepayments are significantly influenced by general economic conditions and the level of interest rates.
The statement of cash flows presents the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and interest-bearing deposits in other banks, which comprise cash and cash equivalents, are the Corporation’s most liquid assets. Cash and cash equivalents totaled $48.5 million at December 31, 2025, an increase of $31.2 million from $17.4 million at December 31, 2024, as net cash inflows reported from operating and financing activities outpaced net cash outflows from investing activities for the year ended December 31, 2025.
Net cash outflows from investing activities used $33.1 million of cash and cash equivalents during the year ended December 31, 2025. Accounting for the majority of the net cash outflows was a net increase in loans of $43.1 million which was partially offset by a net cash inflow from purchases, proceeds from sales, paydowns, calls and maturities of available-for-sale debt securities of $9.4 million. Financing activities provided $40.9 million in net cash, which resulted primarily from a decrease in short-term borrowings, consisting of customer repurchase agreements and short-term FHLB borrowings, of $55.9 million along with a repayment of long-term borrowings of $15.2 million. These outflows were offset by a $120.0 million increase in deposits. Operating activities include net income, adjusted for the effects of non-cash transactions including, among others, depreciation and amortization and the provision for credit losses, and is the primary source of cash flows from operations. For the year ended December 31, 2025, operating activities provided the Corporation with $23.3 million in net cash, which primarily reflected net income of $24.2 million.
The Corporation regularly analyzes its ability to generate adequate amounts of cash to meet its short and long-term cash requirements and plans. As part of its quarterly asset liability management procedures, the Corporation performs liquidity cash flow forecasts in various base level and stress scenarios to monitor future cash needs. The Corporation has not identified any known demands, commitments, events or uncertainties that would result or that are reasonably likely to result in its liquidity position materially increasing or decreasing over the next 12 months. The Corporation’s long-term cash needs are regularly analyzed through its strategic planning process, which includes a detailed review of liquidity and funding needs.
We manage liquidity on a daily basis. We believe that our liquidity is sufficient to meet present and future financial obligations and commitments on a timely basis. However, see potential liquidity risk factors at Item 1A – Risk Factors and refer to the Consolidated Statements of Cash Flows contained in this Annual Report on Form 10-K.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities. The Bank's net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Bank seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities.
One major objective of the Bank when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Bank's ALCO, which is comprised of senior management and Board members. ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk is a regular part of management of the Bank. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of noncontractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings from shifts in interest rates.
The ratio between assets and liabilities repricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.
To manage the interest sensitivity position, an asset/liability model called "gap analysis" is used to monitor the difference in the volume of the Bank's interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect. The Bank employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest sensitive assets and liabilities in order to determine what impact these rate changes will have upon our net interest spread. At December 31, 2025, our cumulative gap positions were within the internal risk management guidelines.
In addition to gap analysis, the Bank uses net interest income simulations and economic value of equity (“EVE”) simulations as the primary tools in measuring and managing the Bank’s position and considers balance sheet forecasts, the Bank’s liquidity position, the economic environment, anticipated direction of interest rates and the Bank’s earnings sensitivity to changes in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable negative changes in net interest income. Furthermore, as part of its ongoing monitoring, ALCO requires annual back testing of modeling results, which involves after-the-fact comparisons of projections with the Bank’s actual performance to measure the validity of assumptions used in the modeling techniques.
The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +100, +200, +300, -100, -200, and -300 basis points on net interest income and the change in economic value over a one-year time horizon from the December 31, 2025 levels:
Rates +100
Rates +200
Rates +300
Rates -100
Rates -200
Rates -300
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Earnings at risk:
Percent change in net interest income
Economic value at risk:
Percent change in economic value of equity
Model results from the simulation at December 31, 2025 indicated that the Bank was projected to see an increase in net interest income over a one-year horizon in any of the rate shock scenarios, with the exception of the +200 and +300 scenarios, which showed 1.58% and 5.55% decreases, respectively. The percent change in EVE is expected to decrease in all rates up scenarios and increase in all rates down scenarios. All modeled exposures to net interest income and EVE for the next twelve-month horizon are within internal ALCO policy guidelines.
This analysis does not represent a forecast for the Bank and should not be relied upon as being indicative of expected operating results. These simulations are based on numerous assumptions, including but not limited to, the nature and timing of interest rate levels, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacements of asset and liability cash flows, and other factors. While assumptions reflect current economic and local market conditions, the Bank cannot make any assurances as to the predictive nature of these assumptions, including changes in interest rates, customer preferences, competition and liquidity needs, or what actions ALCO might take in responding to these changes.
It is our opinion that the asset/liability mix and the interest rate risk associated with the balance sheet is within manageable parameters. Additionally, the Bank’s ALCO meets quarterly with an asset liability management consultant.
IMPACT OF INFLATION AND CHANGING PRICES
The preparation of financial statements in conformity with U.S. GAAP requires management to measure the Corporation’s financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the Corporation's operations is primarily related to increases in operating expenses. Management considers changes in interest rates to impact our financial condition and results of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. The Corporation manages interest rate risk in several ways. There can be no assurance that the Corporation will not be materially adversely affected by future changes in interest rates, as interest rates are highly sensitive to many factors that are beyond its control. Additionally, inflation may adversely impact the financial condition of the Corporation's borrowers and could impact their ability to repay their loans, which could negatively affect the Corporation's asset quality through higher delinquency rates and increased charge-offs. Management will carefully consider the impact of inflation and rising interest rates on the Corporation’s borrowers in managing credit risk related to the loan portfolio.
