Management’s Discussion and Analysis 2025 versus 2024
Management’s Discussion and Analysis appearing on the following pages should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis 2024 versus 2023 contained in this Item 7.
Critical Accounting Estimates:
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during those reporting periods.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the consolidated financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made considering facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. Management is required to make subjective and/or complex judgments about matters that are inherently uncertain and could be subject to revision as new information becomes available. Critical estimates that are particularly susceptible to material change within future periods relate to the determination of ACL and impairment of goodwill. Actual amounts could differ from those estimates.
ACL
The ACL represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost. Loans receivable are carried at amortized cost basis, which is comprised of the unpaid principal balance of the loan, unamortized deferred loan origination fees and costs and, if applicable, unamortized acquired premiums or discounts less any write-downs. The measurement of expected credit losses also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The methodology for determining the ACL is considered a critical accounting estimate by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded ACL.
We monitor the adequacy of the allowance quarterly and adjust the allowance as necessary through normal operations. The allowance is established through a provision for credit losses that is charged against income. Management cannot ensure that charge-offs in future periods will not exceed the ACL or that additional increases in the ACL will not be required, resulting in an adverse impact on our financial condition and operating results.
The ACL decreased $2.8 million to $39.0 million at December 31, 2025, from $41.8 million at the end of 2024. During the year ended December 31, 2024, an additional allowance of $14.3 million related to acquired non-PCD loans associated with the merger with FNCB Bancorp, Inc, and updated economic assumptions, additional qualitative factors related to the equipment financing portfolio and risk rating migrations lead to higher model loss rates and a higher provision when excluding the impact of one-time merger items. The ACL is calculated using an advanced probability of default model which exhibits the highest sensitivity to delinquencies, nonperforming loans, net charge-offs, recovery rates and variables within the economic forecast. The economic forecast is based on many of the components utilized within the Dodd-Frank Act stress test (“DFAST”) base-case scenarios.
Also included in the ACL on loans are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis described above. Qualitative factors that the
Table of Contents
Company considers include changes in lending policies and procedures, changes in management, changes in the quality of the loan review process, the existence of any concentrations of credit and other external factors. In addition to these factors, the Company also considers specialty lending and the unseasoned nature of the portfolio as qualitative factors in evaluating the equipment financing loan segment. Qualitative loss factors are applied to each portfolio segment with the amounts judgmentally determined by the relative risk to the adverse stress credit loss scenarios using regulatory stress testing scenarios.
At December 31, 2025, the pooled portion of the ACL consisted of $15.9 million in quantitative and $21.8 million in qualitative components as compared to $15.5 million and $25.3 million, respectively at December 31, 2024. The portion of the ACL related to loans that were individually evaluated was $1.3 million at December 31, 2025, and $1.0 million at December 31, 2024.
Goodwill
Goodwill is evaluated at least annually for impairment or more frequently if conditions indicate potential impairment exists. Any impairment losses arising from such testing are reported in the income statement in the current period as a separate line item within operations. Goodwill totaled $76.0 million at December 31, 2025. At December 31, 2025, we completed a qualitative goodwill impairment test to determine if it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the Company is less than its carrying value, including goodwill, as described by the GAAP methodology. Based on this analysis, we concluded it is more likely than not that the fair value of the Company, as of December 31, 2025, is higher than its carrying value, and, therefore, goodwill is not considered impaired and no further testing is required. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as pandemics, political instability and conflicts, or natural disasters) may occur from time to time, often with , and may materially impact the fair value of publicly traded financial institutions and could result in an charge at a future date.
Review of Financial Position:
Total assets, loans and deposits were $5.3 billion, $4.1 billion and $4.4 billion, respectively, at December 31, 2025.
The loan portfolio consisted of $3.2 billion of business loans, including commercial, equipment financing, and commercial real estate loans, $713.5 million in retail loans, including residential mortgage and consumer loans, and $202.3 million in loans to municipal entities at December 31, 2025. Total investment securities were $587.2 million at December 31, 2025, including $512.6 million of investment securities classified as available for sale, $72.0 million classified as held to maturity, and $2.6 million in equity securities. Total deposits consisted of $954.5 million in noninterest-bearing deposits and $3.5 billion in interest-bearing deposits at December 31, 2025.
Stockholders’ equity equaled $519.8 million, or $52.01 per share, at December 31, 2025, an increase of $50.8 million, or $5.07 per share, from $469.0 million, or $46.94 per share, at December 31, 2024. The increase in equity was primarily due to net income of $59.2 million, coupled with a $16.0 million reduction in accumulated other comprehensive loss. Our equity to asset ratio was 9.86 percent at December 31, 2025, and 9.21 percent at December 31, 2024. Dividends declared for the year ended December 31, 2025, amounted to $2.47 per share representing 41.6 percent of net income and an increase of $0.41 per share, or 19.9 percent from $2.06 per share for the year ended December 31, 2024.
Nonperforming assets equaled $12.1 million or 0.23 percent of total assets at December 31, 2025, compared to $23.0 million or 0.45 percent at December 31, 2024. The ACL equaled $39.0 million or 0.96 percent of loans, net, at December 31, 2025, compared to $41.8 million or 1.05 percent at year-end 2024. Loans charged-off, net of recoveries equaled $2.9 million or 0.07 percent of average loans in 2025, compared to $1.1 million or 0.03 percent of average loans in 2024.
Table of Contents
Investment Portfolio:
Our investment portfolio provides a source of liquidity to meet expected loan demand and generates a reasonable return in order to increase our profitability. Additionally, we use the investment portfolio to meet pledging requirements and reduce income taxes. At December 31, 2025, our portfolio included short-term U.S. Treasury and government agency securities, which provide a source of liquidity; mortgage-backed securities issued by U.S. government-sponsored agencies, private collateralized mortgage obligations, asset backed securities and corporate bonds to provide income and intermediate-term, tax-exempt state and municipal obligations, which mitigate our tax burden.
Our investment portfolio is subject to various risk elements that may negatively impact our liquidity and profitability. The greatest risk element affecting our portfolio is market risk or interest rate risk (“IRR”). Understanding IRR, along with other inherent risks and their potential effects, is essential in effectively managing the investment portfolio.
Market risk or IRR relates to the inverse relationship between bond prices and market yields. It is defined as the risk that increases in general market interest rates will result in market value depreciation. A marked reduction in the value of the investment portfolio could subject us to liquidity strains and reduction in earnings if we are unable or unwilling to sell investments at a loss. Moreover, the inability to liquidate these investments could require us to seek alternative funding, which may further reduce profitability and expose us to greater risk in the future. In addition, since the majority of our investment portfolio is designated as available for sale and carried at estimated fair value, with net unrealized gains and losses reported as a separate component of stockholders’ equity, market value depreciation could negatively impact our capital position.
Our investment portfolio consists primarily of fixed-rate bonds. As a result, changes in the velocity and magnitude of market rates can significantly influence the fair value of our portfolio. Specifically, the parts of the yield curve most closely related to our investments include the 2-year and 10-year U.S. Treasury securities. The yield on the 2-year U.S. Treasury note affects the values of our U.S. Treasury and government agency securities, whereas the 10-year U.S. Treasury note influences the value of tax-exempt and taxable state and municipal obligations.
The net unrealized holding losses included in our available for sale investment portfolio were $29.2 million at December 31, 2025, compared to a loss of $49.0 million at December 31, 2024. We reported net unrealized holding losses, included as a separate component of stockholders’ equity of $22.8 million, net of income taxes of $6.4 million, at December 31, 2025, and an unrealized holding loss of $38.3 million, net of income taxes of $10.7 million, at December 31, 2024.
Increases in interest rates could negatively impact the market value of our investments and our capital position. In order to monitor the potential effects a rise in interest rates could have on the value of our investments, we perform stress test modeling on the portfolio. Stress tests conducted on our portfolio at December 31, 2025, indicated that should general market rates increase immediately by 100, 200 or 300 basis points, we would anticipate declines of 5.3 percent, 10.7 percent and 15.8 percent in the market value of our available for sale portfolio.
Investment securities decreased $19.7 million, to $587.2 million at December 31, 2025, from $606.9 million at December 31, 2024. At December 31, 2025, the investment portfolio consisted of $512.6 million of investment securities classified as available for sale, $2.6 million in equity investments carried at fair value, and $72.0 million classified as held to maturity. Securities purchased during 2025 totaled $168.5 million. In 2024, $421.9 of investments were acquired in our merger with FNCB Bancorp, Inc. Repayments of investment securities totaled $132.9 million in 2025 and $64.7 million in 2024.
We completed a strategic repositioning of a portion of our investment securities portfolio at the end of the fourth quarter of 2025. As part of the repositioning, we sold $78.6 million of lower-yielding, U.S. treasury bonds with a weighted average yield of 1.18% and realized an after-tax loss of approximately $1.8 million. The net proceeds of approximately $76.1 million from the sale were used to purchase higher-yielding investment securities that have been classified as AFS including $38.2 million of U.S. agency mortgage-backed securities and $37.9 million of tax-exempt municipal bonds. The purchased securities have a weighted average book yield of approximately 4.67%. We expect to recover the after-tax loss recorded on the sale within approximately ten months for the completion of the repositioning.
Table of Contents
As a result of the repositioning, U.S. treasury securities represented 5.3 percent of our total portfolio at year end 2025 compared to 27.7 percent at the end of 2024, while U.S. government agency and U.S. government sponsored enterprise residential and commercial mortgage-backed securities increased to 45.5 percent of the portfolio at year-end 2025 compared to 32.6 percent at year-end 2024. Tax-exempt municipal obligations increased as a percentage of the total portfolio to 23.3 percent at year-end 2025 from 12.7 percent at the end of 2024. Taxable municipals remained relatively flat at 10.5 percent at year-end 2025 from 11.4 percent at the end of 2024. The remaining portfolio, which is comprised of a combination of privately collateralized mortgage obligations, asset backed securities, corporate debt securities and negotiable certificates of deposit remained relatively flat at 15.4 percent of the portfolio at December 31, 2025, compared with 15.6 percent at December 31, 2024.
The average life of the investment portfolio increased to 7.5 years at December 31, 2025, from 5.6 years at year end 2024, reflecting the repositioning into municipal securities with longer average lives. Similarly, the effective duration of the investment portfolio increased to 5.3 years at December 31, 2025, from 4.8 years at December 31, 2024.
There were no impairment charges recognized for each of the three years ended December 31, 2025, 2024, and 2023. For additional information related to impairment charges refer to Note 3 entitled “Investment securities” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on form 10-K, which is incorporated in this item by reference.
Investment securities averaged $641.3 million and equaled 13.6 percent of average earning assets in 2025, compared to $617.2 million and 14.8 percent of average earning assets in 2024. The tax-equivalent yield on the investment portfolio increased 72 basis points to 3.15 percent in 2025 from 2.43 percent in 2024. The increase in the tax-equivalent yield is due to runoff of low yielding U.S. treasuries and the addition of higher yielding replacements.
At December 31, 2025, and 2024, there were no securities of any individual issuer, except for U.S. government agency mortgage-backed securities, that exceeded 10.0 percent of stockholders’ equity.
The maturity distribution based on the carrying value and weighted-average, tax-equivalent yield of the investment debt security portfolio at December 31, 2025, is summarized as follows. The weighted-average yield, based on amortized cost, has been computed for tax-exempt state and municipals on a tax-equivalent basis using the prevailing federal statutory tax rate of 21.0 percent. The distributions are based on contractual maturity. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
After one but
After five but
(Dollars in thousands,
Within one year
within five years
within ten years
After ten years
Total
except percents)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
U.S. Treasury securities
State and municipals:
Taxable
Tax-exempt
Residential mortgage-backed securities:
U.S. government agencies
U.S. government-sponsored enterprises
Commercial mortgage-backed securities:
U.S. government-sponsored enterprises
Private collateralized mortgage obligations
Asset backed securities
Corporate debt securities
Negotiable certificates of deposit
Total
Table of Contents
Loan Portfolio:
Economic factors and how they affect loan demand are important to the Company and to the overall banking industry, as lending is a primary business activity. Loans are the most significant component of earning assets and they generate the greatest amount of revenue. Similar to the investment portfolio, there are risks inherent in the loan portfolio that must be understood and considered in managing the lending function. These risks include IRR, credit concentrations and fluctuations in demand. Changes in economic conditions and interest rates affect these risks which influence loan demand, the composition of the loan portfolio and profitability of the lending function.
Overall, total loans increased $73.4 million in 2025 to $4.1 billion at December 31, 2025, from $4.0 billion at December 31, 2024. The loan balances reflected increases in real estate loans, commercial and industrial loans, municipal loans and other consumer loans, partially offset by reductions in indirect automobile loans and equipment financing.
Real estate loans increased $70.9 million to $2.9 billion at December 31, 2025 from $2.8 billion at December 31, 2024. Residential real estate loans increased $50.9 million to $602.3 million at December 31, 2025 from $551.4 million at December 31, 2024, which reflected strong demand for and utilization of home equity lines of credit. Commercial real estate loans increased $20.0 million and were $2.3 billion at both December 31, 2025 and 2024.
Comparing December 31, 2025 and 2024, commercial and industrial loans increased $19.9 million, while municipal loans increased $14.4 million, Equipment financing originated through the Bank’s subsidiary, 1 st Equipment Finance, decreased $10.1 million to $169 thousand at December 31, 2025 from $179.1 million at December 31, 2024, as management tightened underwriting standards and focused on improving asset quality within this product line.
Consumer loans decreased $21.7 million to $111.2 million at December 31, 2025 from $132.9 million at December 31, 2024. The decrease in consumer loans was due to a reduction in demand for indirect automobile loans partially offset by an increase in other consumer loans.
The following table summarizes the Company’s loan portfolio at December 31, 2025, and December 31, 2024.
(Dollars in thousands)
December 31, 2025
December 31, 2024
Commercial and industrial
Municipal
Real estate
Commercial
Residential
Total
Consumer
Indirect auto
Consumer other
Total
Equipment financing
Total
Loans averaged $4.0 billion in 2025, compared to $3.5 billion in 2024. Taxable loans averaged $3.7 billion, while tax-exempt loans averaged $273.4 million in 2025. The loan portfolio continues to play the prominent role in our earning asset mix. As a percentage of earning assets, average loans equaled 84.9 percent in 2025, an increase from 83.1 percent in 2024.
The tax-equivalent yield on our loan portfolio increased 37 basis points to 5.99 percent in 2025 from 5.62 percent in 2024 due to higher yields on newer loan originations and loans assumed in the FNCB merger which included the impact of the accretion of purchase accounting marks. The yield on the loan portfolio may decrease as repayments on loans are replaced with new originations at current market rates and floating and adjustable-rate loans continue to reprice downward.
Table of Contents
The following table sets forth the contractual maturity of our loan portfolio by major loan category at December 31, 2025. The amounts shown represent outstanding principal balances. Loans having no stated maturity and overdrafts are reported as being due within one year. Balances do not include prepayments or scheduled principal payments.
Within one
After one but
After five but
After
(Dollars in thousands)
year
within five years
within fifteen years
fifteen years
Total
Maturity schedule:
Commercial and industrial
Municipal
Real estate:
Commercial
Residential
Consumer
Equipment financing
Total
The following table sets forth the outstanding principal balance of loans at December 31, 2025 that have fixed interest rates or that have floating or adjustable interest rates by major loan category.
Fixed
Floating or
(Dollars in thousands)
Rates
Adjustable Rates
Total
Commercial and industrial
Municipal
Real estate:
Commercial
Residential
Consumer
Equipment financing
Total
As previously mentioned, there are numerous risks inherent in the loan portfolio. We manage the portfolio by employing sound credit policies and utilizing various modeling techniques in order to limit the effects of such risks. In addition, we utilize private mortgage insurance (“PMI”), as well as guaranteed U.S Department of Agriculture, SBA and FHLB loan programs to mitigate credit risk in the loan portfolio.
In an attempt to limit IRR and improve liquidity, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. Fixed-rate loans represented 44.4 percent of the loan portfolio at December 31, 2025, compared to floating or adjustable-rate loans at 55.6 percent.
Additionally, our secondary market mortgage banking program provides us with an additional source of liquidity and a means to limit our exposure to IRR. Through this program, we are able to competitively price conforming one-to-four family residential mortgage loans without taking on IRR which would result from retaining these long-term, low fixed-rate loans on our books. The loans originated are subsequently sold in the secondary market, with the sales price locked in at the time of commitment, thereby greatly reducing our exposure to IRR.
Loan concentrations are considered to exist when the total amount of loans to any one borrower, or a multiple number of borrowers engaged in similar business activities or having similar characteristics, exceeds 25.0 percent of capital outstanding in any one category. We provide deposit and loan products and other financial services to individual and corporate customers in our current market area. There are no significant concentrations of credit risk from any individual counterparty or groups of counterparties, except for geographic concentrations in our market area.
Table of Contents
Credit risk is the principal risk associated our outstanding loans, commitments to extend credit, lines of credit and standby letters of credits. Our involvement and exposure to credit loss in the event that the instruments are fully drawn upon and the customer defaults is represented by the contractual amounts of these instruments. In order to control credit risk associated with entering into commitments and issuing letters of credit, we employ the same credit quality and collateral policies in making commitments that we use in other lending activities. We evaluate each customer’s creditworthiness on a case-by-case basis, and if deemed necessary, obtain collateral. The amount and nature of the collateral obtained is based on our credit evaluation.
Asset Quality:
We are committed to developing and maintaining sound quality assets through our credit risk management policies and procedures. Credit risk is the risk to earnings or capital which arises from a borrower’s failure to meet the terms of their loan obligations. We manage credit risk by diversifying the loan portfolio and applying policies and procedures designed to foster sound lending practices. These policies include certain standards that assist lenders in making judgments regarding the character, capacity, cash flow, capital structure and collateral of the borrower.
To manage our exposure to credit risk and protect against general devaluations in real estate values, we have established maximum loan-to-value ratios for commercial mortgage loans not to exceed 80.0 percent of the appraised value. With regard to residential mortgages, customers with loan-to-value ratios in excess of 80.0 percent are generally required to obtain PMI. PMI is used to protect us from loss in the event loan-to-value ratios exceed 80.0 percent and the customer defaults on the loan. Appraisals are performed by an independent appraiser engaged by us, not the customer, who is either state certified or state licensed depending upon collateral type and loan amount.
With respect to lending procedures, lenders and our credit underwriters must determine the borrower’s ability to repay their loans based on prevailing and expected market conditions prior to requesting approval for the loan. The Bank’s Board of Directors establishes and reviews, at least annually, the lending authority for certain senior officers, loan underwriters and branch personnel. Credit approvals beyond the scope of these individual authority levels are forwarded to a loan committee. This committee, comprised of certain members of senior management, review credits to monitor the quality of the loan portfolio through careful analysis of credit applications, adherence to credit policies and the examination of outstanding loans and delinquencies. These procedures assist in the early detection and timely follow-up of problem loans.
Credit risk is also managed by monthly internal reviews of individual credit relationships in our loan portfolio by credit administration and the asset quality committee. These reviews aid us in identifying deteriorating financial conditions of borrowers and allows us the opportunity to assist customers in remedying these situations.
Nonperforming assets consist of nonperforming loans and foreclosed assets. Nonperforming loans include nonaccrual loans and accruing loans past due 90 days or more. For a discussion of our policy regarding nonperforming assets and the recognition of interest income on impaired loans, refer to the notes entitled, “Summary of significant accounting policies — Nonperforming assets,” and “Loans, net and allowance for credit losses” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K which are incorporated in this item by reference.
Information concerning nonperforming assets at December 31, 2025, and 2024 is summarized as follows. The table includes credits classified for regulatory purposes and all material credits that cause us to have serious doubts as to the borrower’s ability to comply with present loan repayment terms.
Table of Contents
(Dollars in thousands, except percents)
December 31, 2025
December 31, 2024
Nonaccrual loans
Accruing loans past due 90 days or more:
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Total loans held for investment
Allowance for credit losses
Allowance for credit losses as a percentage of loans held for investment
Allowance for credit losses as a percentage of nonaccrual loans
Allowance for credit losses as a percentage of nonperforming loans
Nonaccrual loans as a percentage of loans held for investment
Nonperforming loans as a percentage of loans, net
Nonperforming assets as a percentage of total assets
We experienced an improvement in our asset quality during 2025 as evidenced by a $10.9 million reduction in nonperforming assets to $12.1 million at December 31, 2025, from $23.0 million at December 31, 2024. Additionally, our nonperforming assets as a percentage of total assets decreased to 0.23 percent at December 31, 2025, from 0.45 percent at December 31, 2024, and our nonperforming loans as a percentage of loans, net decreased to 0.28 percent from 0.58 percent at December 31, 2024. The reduction in nonperforming assets was largely due to an $11.7 million decrease in nonaccrual loans following the resolution of several large commercial credit relationships.
At December 31, 2025, there was one foreclosed asset recorded at $750 thousand compared to one foreclosed property recorded at $27 thousand at December 31, 2024. The property that was outstanding at the end of 2024 was sold during 2025, and the Company acquired one commercial property with a recorded investment of $750 thousand through foreclosure. Loans past due ninety days and accruing increased $66 thousand and includes three residential mortgages and two commercial loans. For a further discussion of assets classified as nonperforming assets and potential problem loans, refer to Note 4, “Loans, net and the allowance for credit losses,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on form 10-K, which is incorporated in this item by reference.
Past due loans not satisfied through repossession, foreclosure or related actions are evaluated individually to determine if all or part of the outstanding balance should be charged against the ACL. Any subsequent recoveries are credited to the ACL. Net loans charged off increased $1.8 million to $2.9 million in 2025 from $1.1 million in 2024. The elevated charge-offs are due in part to a $0.8 million valuation adjustment related to a commercial property foreclosure. Net charge-offs, as a percentage of average loans outstanding, equaled 0.07 percent in 2025 and 0.03 percent in 2024.
Table of Contents
The following table presents average loans and loan loss experience for the years indicated.
(Dollars in thousands, except percents)
Average loans
Net Charge-offs (Recoveries)
Net Charge-offs (Recoveries) to Average Loans
Commercial and industrial (1)
Real estate:
Commercial
Residential
Consumer
Equipment financing
Total
(Dollars in thousands, except percents)
Average loans
Net Charge-offs (Recoveries)
Net Charge-offs (Recoveries) to Average Loans
Commercial and industrial (1)
Real estate:
Commercial
Residential
Consumer
Equipment financing
Total
(Dollars in thousands, except percents)
Average loans
Net Charge-offs (Recoveries)
Net Charge-offs (Recoveries) to Average Loans
Commercial and industrial (1)
Real estate:
Commercial
Residential
Consumer
Total
(1) Information for municipal loans is included with amounts provided for commercial and industrial loans.
The ACL decreased $2.8 million to $39.0 million at December 31, 2025, from $41.8 million at the end of 2024. During the year ended December 31, 2025, net charge-offs were $2.9 million and the provision for credit losses totaled $98 thousand. The 2025 provision was due primarily to improvement in qualitative factors driven by a reduction in commercial real estate concentration levels and a seasoning of the equipment financing portfolio, while overall model loss rates were substantially unchanged. During the year ended December 31, 2024, $14.3 million was recorded to the provision for credit losses related to acquired non-PCD loans associated with the merger with FNCB Bancorp, Inc. In addition to the merger related provision, a provision of $4.8 million was recorded due to the impact of various factors such as updated economic assumptions as well as additional qualitative factors for the equipment financing portfolio, risk rating migration, additional charge-offs during the last six months of 2024, and higher delinquencies.
The ACL, as a percentage of loans, net of unearned income, was 0.96 percent at December 31, 2025, and 1.05 percent at December 31, 2024. The coverage ratio, the ACL, as a percentage of nonperforming loans, is an industry ratio used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The coverage ratio was 344.6 percent at December 31, 2025, and 182.0 percent at December 31, 2024. We believe that our allowance was adequate to absorb probable credit losses at December 31, 2025.
Table of Contents
The allocation of the ACL at December 31, 2025, and 2024 is summarized as follows:
December 31, 2025
December 31, 2024
(Dollars in thousands, except percents)
Amount
Amount
Individually evaluated:
Commercial and industrial
Municipal
Real Estate:
Commercial
Residential
Consumer
Equipment financing
Total individually evaluated
Pooled:
Commercial and industrial
Municipal
Real Estate:
Commercial
Residential
Consumer
Equipment financing
Total pooled
Total allowance for credit losses
The ACL account decreased $2.8 million to $39.0 million at December 31, 2025, compared to $41.8 million at December 31, 2024. The individually evaluated portion of the allowance for credit losses increased $0.3 million to $1.3 million at December 31, 2025, from $1.0 million at December 31, 2024, and the portion of the allowance for credit losses collectively evaluated decreased $3.1 million to $37.7 million at December 31, 2025, from $40.8 million at December 31, 2024.
Deposits:
Our deposit base is the primary source of funds to support our operations. We offer a variety of deposit products to meet the needs of our individual, commercial and municipal customers.
The following is a breakdown of the Company’s deposit portfolio at December 31, 2025, and December 31, 2024.
(Dollars in thousands)
December 31, 2025
December 31, 2024
Interest-bearing deposits:
Money market accounts
Interest-bearing demand and NOW accounts
Savings accounts
Time deposits less than $250
Time deposits $250 or more
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits
Table of Contents
Total deposits grew $26.5 million or 0.6 percent to $4.4 billion at the end of 2025, which primarily reflected cyclical deposit trends of larger commercial and municipal customers, partially offset by a reduction in brokered deposits. The growth in deposits comparing December 31, 2025 and 2024 was due to a $40.8 million increase in commercial deposits, a $17.8 million increase in retail deposits and a $72.1 million increase in municipal deposits. Partially offsetting these increases was a $104.2 million reduction in brokered deposits, as the Company sought to reduce these higher-costing deposits. Noninterest-bearing deposits increased $19.0 million or 2.0 percent while interest-bearing deposits increased $7.5 million or 0.2 percent in 2025.
At December 31, 2025, total brokered deposits were $152.2 million, or 3.4 percent of total deposits as compared to $256.4 million or 5.8 percent of total deposits at December 31, 2024. As part of strategic balance sheet management initiatives, the Company reduced its higher rate brokered CD portfolio by $104.2 million during 2025. The Company maintains a brokered deposit to total asset policy limit of 15.0 percent. At December 31, 2025, brokered deposits represented 2.9 percent of total assets.
Noninterest-bearing deposits represented 21.5 percent of total deposits while interest-bearing deposits accounted for 78.5 percent of total deposits at December 31, 2025. Comparatively, noninterest-bearing deposits and interest-bearing deposits represented 21.2 percent and 78.8 percent of total deposits at year end 2024. Interest bearing deposits are comprised of 20.3 percent time deposits and 79.7 percent non-maturing deposits, compared with 23.2 percent time and 76.8 percent non-maturing at year end 2024.
The average amount of, and the rate paid on, the major classifications of deposits for the past three years are summarized as follows:
Average
Average
Average
Average
Average
Average
(Dollars in thousands, except percents)
Balance
Rate
Balance
Rate
Balance
Rate
Interest-bearing deposits:
Money market accounts
Interest bearing demand and NOW
Savings accounts
Time deposits
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits
Total deposits averaged $4.3 billion in 2025 and $3.8 billion in 2024, increasing $460.7 million or 12.0 percent comparing 2025 to 2024. Average noninterest-bearing deposits increased $183.2 million, while average interest-bearing accounts grew $277.5 million. Average interest-bearing non-maturing deposits, including demand deposits, money market and interest-bearing demand and NOW accounts, and savings accounts, increased $316.1 million while average total time deposits decreased $38.6 million when comparing 2025 and 2024. Deposit averages from 2023 to 2024 were primarily affected by the merger with FNCB Bancorp, Inc. on July 1, 2024, and its associated deposit product realignments. Additionally, average balances for 2024 reflect only six months of combined Company results following the July 1, 2024 merger.
Our cost of interest-bearing deposits decreased 43 basis points to 2.39 percent in 2025 compared to 2.82 percent in 2024. Specifically, the cost of money market accounts decreased 186 basis points to 2.91 percent from 4.77 percent and savings accounts decreased 69 basis points to 0.31 percent in 2025 from 1.00 percent in 2024, while interest-bearing demand and NOW accounts increased 20 basis points to 2.08 percent from 1.88 percent in the year ago period. Volatile deposits, time deposits of $100 thousand or more, averaged $362.3 million in 2025, an increase of $70.8 million or 24.3 percent from $291.5 million in 2024. Our average cost of these funds decreased 52 basis points to 3.55 percent in 2025, from 4.07 percent in 2024. This type of funding is susceptible to withdrawal by the depositor as they are particularly price sensitive and are therefore not considered to be a strong source of liquidity.
Table of Contents
At December 31, 2025, and 2024, the Company had $1.5 billion and $1.4 billion in uninsured deposits in excess of the FDIC insurance limit of $250,000.
At December 31, 2025, and 2024, the Company had $230.0 million and $184.0 million, respectively, in time deposits in excess of $250,000 maturing as disclosed in the table below. Brokered deposits in the amount of $152.2 million at December 31, 2025, and $256.5 million at December 31, 2024, are not included in time deposits more than $250,000.
(Dollars in thousands)
Within three months
After three months but within six months
After six months but within twelve months
After twelve months
Total
In addition to deposit gathering, we have a secondary source of liquidity through existing credit arrangements with the FHLB, FRB and other correspondents. At December 31, 2025, our maximum borrowing capacity with the FHLB was $1.7 billion of which $158.3 million was outstanding in borrowings and $498.8 million outstanding in the form of irrevocable standby letters of credit. Depending upon deposit activity and loan growth in 2026, we may utilize these credit arrangements. For a further discussion of our borrowings and their terms, refer to the notes entitled, “Short-term borrowings” and “Long-term debt,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Subordinated Debt:
On June 30, 2025, the Company redeemed $33.0 million aggregate principal amount of its 5.375% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2020 Notes”) which were sold to accredited investors on June 1, 2020. The 2020 Notes qualified as Tier 2 capital for regulatory capital purposes. The 2020 Notes bore interest at a rate of 5.375% per year for the first five years and then floated based on a benchmark rate. The interest rate on the 2020 Notes adjusted to 9.08% on June 1, 2025.
On June 6, 2025, the Company entered into Subordinated Note Purchase Agreements (collectively, the “Subordinated Note Purchase Agreements”) with certain qualified institutional buyers and institutional accredited investors (collectively, the “Subordinated Note Purchasers”) pursuant to which the Company issued and sold $85.0 million in aggregate principal amount of its 7.75% Fixed-to-Floating Rate Subordinated Notes due 2035, (the “Subordinated Notes”) at a price equal to 100 percent of the principal amount. The Subordinated Note Purchase Agreements include customary representations, warranties, and covenants. The Subordinated Notes mature on June 15, 2035, and bear interest at an initial fixed annual rate of 7.75%, payable semi-annually in arrears, to but excluding June 15, 2030. From and including June 15, 2030, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum initially equal to the then-current three-month SOFR plus 411 basis points, payable quarterly in arrears. The Company is entitled to redeem the Subordinated Notes, in whole or in part, any time on or after June 15, 2030, on any interest payment date, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required. The Subordinated Notes were issued under an Indenture, dated June 6, 2025 (the “Indenture”), by and between the Company and U.S. Bank Trust Company, National Association, as trustee. The Subordinated Notes are not subject to any sinking fund and are not convertible into or, other than with respect to the Exchange Notes, exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Company only and are not obligations of, and are not guaranteed by, any subsidiary of the Company. The Subordinated Notes rank junior in right to payment to the Company’s current and future senior indebtedness. The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes. In connection with the issuance and sales of the Subordinated Notes, the Company entered into registration rights agreements with the Subordinated Notes Purchasers, pursuant to which the Company exchanged most of the Subordinated Notes for subordinated notes that are registered under the Securities Act and have substantially the same terms as the Subordinated Notes.
Table of Contents
At December 31, 2025, subordinated debentures were $83.2 million, net of unamortized debt issuance costs of $1.8 million, and $33.0 million, net of no debt issuance costs, at December 31, 2024.
On July 1, 2024, the Company assumed $10.3 million of floating rate junior subordinated deferrable interest debentures due December 15, 2036 (“Debentures”) as a result of the FNCB merger at a fair market value of $8.0 million. The Debentures are held by First National Community Statutory Trust I, a Delaware statutory trust (the “Trust”). The Debentures and corresponding trust preferred securities (the “Trust Securities”) have a variable interest rate which resets quarterly to 3-month CME Term SOFR plus a spread adjustment of 0.26161% and a margin of 1.67%. The Debentures are unsecured and rank subordinate and junior in right to all indebtedness, liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. The Trust Securities may be prepaid at the election of the Company. The Company’s investment in the Trust is reflected on a deconsolidated basis. At December 31, 2025, the Debentures totaling $8.1 million, have been reflected in borrowed funds in the consolidated balance sheets under the caption “Junior Subordinated Debentures” and interest expense of $745 thousand on the Debentures is in its consolidated statements of income and comprehensive income.
Table of Contents
Liquidity:
Liquidity management is essential to our continuing operations as it gives us the ability to meet our financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Our financial obligations include, but are not limited to, the following:
Funding new and existing loan commitments;
Payment of deposits on demand or at their contractual maturity;
Repayment of borrowings as they mature;
Payment of lease obligations; and
Payment of operating expenses.
Our liquidity position is impacted by several factors which include, among others, loan origination volumes, loan and investment maturity structure and cash flows, demand for core deposits and certificate of deposit maturity structure and retention. We manage these liquidity risks daily, thus enabling us to monitor fluctuations in our position and to adapt our position according to market influence and balance sheet trends. We also forecast future liquidity needs and develop strategies to ensure adequate liquidity at all times.
Historically, core deposits have been our primary source of liquidity because of their stability and lower cost, in general, than other types of funding. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale. As a final source of liquidity, we have available borrowing arrangements with various financial intermediaries, including the FHLB. At December 31, 2025, our maximum borrowing capacity with the FHLB was $1.7 billion of which $658.6 million was outstanding in borrowings and letters of credit. We believe our liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.
We maintain a contingency funding plan to address liquidity in the event of a funding crisis. Examples of some of the causes of a liquidity crisis include, among others, natural disasters, pandemics, war, events causing reputational harm and severe and prolonged asset quality problems. The plan recognizes the need to provide alternative funding sources in times of crisis that go beyond our core deposit base. As a result, we have created a funding program that ensures the availability of various alternative wholesale funding sources that can be used whenever appropriate. Identified alternative funding sources include:
FHLB Pittsburgh liquidity contingency line of credit;
Federal Reserve discount window;
Internet certificates of deposit;
Brokered deposits;
Institutional Deposit Corporation deposits;
Repurchase agreements;
Correspondent bank lines of credit and
Federal funds purchased.
To further supplement our borrowing capacity, we also maintain a borrower-in-custody of collateral arrangement at the Federal Reserve that enables us to pledge certain loans, not being used as collateral at the FHLB, as collateral for borrowings at the Federal Reserve. At December 31, 2025, our borrowing capacity at the Federal Reserve related to this program was $339.4 million and there were no amounts outstanding. At December 31, 2025, eligible securities pledged at the FRB discount window totaled $9.6 million. For additional information, see Note 12 “Short-term borrowings”.
We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to illustrate our reliance on noncore funds to fund our investments and loans maturing after 2025. At December 31, 2025, our noncore funds consisted of time deposits in denominations of $100 thousand or more, brokered deposits, short-term borrowings, and long-term and subordinated debt. Large denomination time deposits are particularly not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered to be highly volatile. At December 31, 2025, our net noncore funding dependence ratio, the difference between noncore
Table of Contents
funds and short-term investments to long-term assets, was 11.2 percent. Our net short-term noncore funding dependence ratio, noncore funds maturing within one year, less short-term investments to long-term assets equaled 6.4 percent. Comparatively, our ratios equaled 12.7 percent and 6.6 percent at the end of 2024, which indicates decreased reliance on our noncore funds in 2025 with an improved ability to offset them with more liquid assets. Our basic liquidity surplus ratio, defined as liquid assets less short-term potentially volatile liabilities as a percentage of total assets, increased to 6.0 percent at December 31, 2025, from 5.8 percent at December 31, 2024, which primarily reflected a $133.1 million increase in cash and cash equivalents. We will continue to focus on increasing liquidity in the coming year through implementation of competitive deposit pricing strategies and monitoring of investment and loan cash flows.
The Consolidated Statements of Cash Flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents consist of cash on hand, cash items in the process of collection, noninterest-bearing and interest-bearing deposits with other banks and federal funds sold. Cash and cash equivalents increased $133.1 million for the year ended December 31, 2025, which reflected net cash increases from operating and financing activities, partially offset by net cash outflows related to investing activities. For the year ended December 31, 2024, cash and cash equivalents decreased $51.5 million.
Operating activities provided net cash of $54.3 million in 2025 and $34.7 million in 2024. Net income, adjusted for the effects of noncash expenses such as depreciation, amortization and accretion of tangible and intangible assets and investment securities, and the provision for credit losses, is the primary source of funds from operations.
Net cash provided by financing activities equaled $103.3 million in 2025. Net cash used in financing activities was $472.6 million in 2024. Deposit gathering, which is our predominant financing activity, increased in 2025 versus 2024 and resulted in a net cash inflow in 2025 of $25.8 million and an outflow of $299.8 million in 2024. Net short-term borrowing increased net cash by $16.8 million in 2025 and decreased cash by $131.4 million in 2024. Long term borrowings resulted in a net inflow of $35.3 million in 2025, and net outflow of $23.3 million in 2024. The issuance of new subordinated debt combined with the cancellation of the Company’s existing subordinated debt resulted in an increase of $50.0 million. Dividends paid also resulted in outflows of $24.6 million in 2025 versus $18.1 million in 2024.
Our primary investing activities involve transactions related to our investment and loan portfolios. Net cash used in investing activities totaled $24.4 million in 2025 and provided $386.3 million in 2024. Sales, maturities, calls and repayments of available for sale, held to maturity and equity investments provided $209.3 million in 2025 and $307.4 million in 2024, while purchases used $168.5 million in 2025 and $4.8 million in 2024. Net cash used in lending activities was $60.7 million in 2025 and provided $61.7 million in 2024. Investment activity during the year ended December 31, 2025, included management’s strategic partial repositioning of the portfolio from lower-yielding U.S. Treasury bonds to higher yielding U.S. agency mortgage-backed securities and tax-exempt municipal bonds. Our continued growth in our expansion markets coupled with our mature markets is expected to continue to produce loan demand throughout 2026. We expect to fund such demand through deposit gathering initiatives, more relationship lending with deposits, payments and prepayments on loans and investments and advances from the FHLB. However, we cannot predict the economic climate or the savings habits of consumers. Should economic conditions decline, deposit gathering may be negatively impacted. Regardless of economic conditions and stock market fluctuations, we believe that through constant monitoring and adherence to our liquidity plan, we will have the means to provide adequate cash to fund our normal operations in 2026.
Cash Requirements:
The Company has cash requirements for various financial obligations, including contractual obligations and commitments that require cash payments. The most significant contractual obligation, in both the under and over one-year time period, is for the Bank to repay time deposits. The Company anticipates meeting these obligations by using on-balance sheet liquidity and continuing to provide convenient depository and cash management services through its branch network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market. The Company may also use borrowings and brokered deposits to meet its obligations.
Table of Contents
Commitments to extend credit are the Company's most significant commitment in both the under and over one-year time periods. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.
Capital Adequacy:
We believe a strong capital position is essential to our continued growth and profitability. We strive to maintain a relatively high level of capital to provide our depositors and stockholders with a margin of safety. In addition, a strong capital base allows us to take advantage of profitable opportunities, support future growth and provide protection against any unforeseen losses.
The Bank’s Asset Liability Committee (“ALCO”) reviews our capital position, generally, quarterly. As part of its review, the ALCO considers: (i) the current and expected capital requirements, including the maintenance of capital ratios in excess of minimum regulatory guidelines; (ii) potential changes in the market value of our securities due to interest rates changes and effect on capital; (iii) projected organic and inorganic asset growth; (iv) the anticipated level of net earnings and capital position, taking into account the projected asset/liability position and exposure to changes in interest rates; (v) significant deteriorations in asset quality; and (vi) the source and timing of additional funds to fulfill future capital requirements.
Based on the recent regulatory emphasis placed on banks to assure capital adequacy, our Board of Directors annually reviews and approves a capital plan. Among other specific objectives, this comprehensive plan: (i) attempts to ensure that we and the Bank remain well capitalized under the regulatory framework for prompt corrective action; (ii) evaluates our capital adequacy exposure through a comprehensive risk assessment; (iii) incorporates periodic stress testing in accordance with the Federal Reserve Board’s Supervisory Capital Assessment Program (“SCAP”); (iv) establishes event triggers and action plans to ensure capital adequacy; and (v) identifies realistic and readily available alternative sources for augmenting capital if higher capital levels are required.
Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance. The Company and the Bank’s risk-based capital ratios have consistently exceeded the minimum regulatory capital ratios required for adequately capitalized institutions. The Company’s ratio of Tier 1 capital to risk-weighted assets and off-balance sheet items was 11.28 percent and 10.41 percent at December 31, 2025, and 2024, respectively. The Company’s Total capital ratio was 14.31 percent and 12.34 percent at December 31, 2025, and 2024, respectively. The common equity Tier I capital to risk-weighted assets ratios for the Company were 11.03 percent at December 31, 2025, and 10.16 percent at December 31, 2024. The Company’s leverage ratio, which was 8.84 percent at December 31, 2025, and 7.97 percent at December 31, 2024, exceeded the minimum of 4.0 percent for capital adequacy purposes. The Bank reported Tier 1 capital, Total capital common equity Tier 1 and leverage ratios of 13.06 percent, 14.01 percent, 13.06 percent and 10.22 percent at December 31, 2025, and 10.95 percent, 12.04 percent, 10.95 percent and 8.37 percent at December 31, 2024. Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at December 31, 2025. There are no conditions or events since this notification that we believe have changed the Bank’s category. For a further discussion of these risk-based capital standards and supervisory actions for , refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated in this item by reference.
Stockholders’ equity was $519.8 million or $52.01 per share at December 31, 2025, and $469.0 million or $46.94 per share at December 31, 2024. The $50.8 million increase in capital surplus was due to net income in 2025 and by a $16.0 million decrease in accumulated other comprehensive loss (“AOCL”) at December 31, 2025, resulting from a reduction in the unrealized loss on available for sale securities, partially offset by dividends paid to shareholders.
We declared dividends of $2.47 per share in 2025, $2.06 per share in 2024, and $1.64 per share in 2023. The dividend payout ratio, dividends declared as a percentage of net income, equaled 41.6 percent in 2025, 212.9 percent in 2024 and 42.6 percent in 2023. Our Board of Directors intends to continue paying cash dividends in the future and has declared a cash dividend in the first quarter of 2026 of $0.6250 per share. Our ability to declare and pay dividends in the future is
Table of Contents
based on our operating results, financial and economic conditions, capital and growth objectives, dividend restrictions and other relevant factors. We rely on dividends received from our subsidiary, the Bank, for payment of dividends to stockholders. The Bank’s ability to pay dividends is subject to federal and state regulations. For a further discussion on our ability to declare and pay dividends in the future and dividend restrictions, refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Since 2014, our Board of Directors has adopted various common stock repurchase plans whereby we were authorized to repurchase shares of our outstanding common stock through open market purchases. During 2025 and 2024, other than shares delivered by participants in the Company’s equity incentive plans to pay withholding tax liabilities incident to the vesting of restricted stock awards, there were no shares repurchased. We purchased and retired 131,686 shares for $5.9 million during 2023.
Review of Financial Performance:
Net income for the year ended December 31, 2025, totaled $59.2 million or $5.88 per diluted share compared to $8.5 million or $0.99 per diluted share for the comparable period of 2024. Net income for year ended December 31, 2025, increased $50.7 million when compared to the year ended December 31, 2024, primarily due to a full year of combined operations following the merger with FNCB Bancorp, Inc. on July 1, 2024, coupled with a reduction in the provision for credit losses. Additionally, net income in 2024 included $16.2 million of acquisition expenses and a $14.3 million provision for credit losses on non-PCD loans acquired in the merger.
Fully tax-equivalent (“FTE”) net interest income, a non-GAAP measure, for the twelve months ended December 31, increased $50.4 million to $168.7 million in 2025 from $118.4 million in 2024. The increase in FTE net interest income was primarily the result of higher levels of earning assets such as loans and investments and an additional $7.2 million from accretion of purchase accounting marks on acquired loans, combined with a reduction in funding costs that outweighed increases in their respective average balances. Non-interest expenses were $115.4 million for the year ended December 31, 2025, an increase of $8.7 million from $106.7 million for the year ended December 31, 2024, and non-interest income was $21.7 million for the year ended December 31, 2025, an increase of $3.4 million from $18.3 million for the year ended December 31, 2024. Both noninterest income and noninterest expenses were also influenced primarily by the merger with FNCB Bancorp, Inc. Notable increases to noninterest income were $2.8 million in services charges and other fees, $0.8 million in wealth management income, $0.5 million in bank owned life insurance cash surrender value and $0.4 million higher merchant services income, partially offset by a net loss on the sale of available for sale investment securities of $2.2 million resulting from the Company’s partial investment portfolio repositioning. Noninterest expenses saw increases of $10.6 million in salaries and employee benefits, $5.2 million in occupancy expenses and $3.0 million additional amortization of intangible assets. Partially offsetting increases to noninterest expenses was a decrease of $16.0 million in merger-related expenses.
Our productivity is measured by the efficiency ratio, a non-GAAP measure, defined as noninterest expense less amortization of intangible assets and acquisition related expenses divided by the total of tax-equivalent net interest income and noninterest income less gains and/or losses on debt security sales and gains on sale of assets. Our efficiency ratio improved to 56.5 percent in 2025 from 63.8 percent in 2024, as we continued to realize synergies from the merger with FNCB.
Non-GAAP Financial Measures:
The following are non-GAAP financial measures, which provide useful insight to the reader of the consolidated financial statements, but should be supplemental to GAAP used to prepare Peoples’ financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, Peoples’ non-GAAP measures may not be comparable to non-GAAP measures of other companies. The tax rate used to calculate the FTE adjustment was 21 percent for 2025, 2024, and 2023.
Table of Contents
The following table reconciles the non-GAAP financial measures of FTE net interest income for the years ended 2025, 2024 and 2023:
(Dollars in thousands)
Year Ended December 31
Interest income (GAAP)
Adjustment to FTE
Interest income adjusted to FTE (non-GAAP)
Interest expense
Net interest income adjusted to FTE (non-GAAP)
The non-GAAP efficiency ratio is noninterest expenses, less amortization of intangible assets and acquisition related expenses, as a percentage of FTE net interest income plus noninterest income less gains and/or losses on debt security sales and gains on sale of assets. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP for the years ended 2025, 2024, and 2023:
(Dollars in thousands, except percents)
Year Ended December 31
Efficiency ratio (non-GAAP):
Noninterest expense (GAAP)
Less: amortization of intangible assets expense
Less: acquisition related expenses
Noninterest expense adjusted (non-GAAP)
Net interest income (GAAP)
Plus: taxable equivalent adjustment
Noninterest income (GAAP)
Less: net gains on equity securities
Less: (Losses) gains on sale of available for sale securities
Less: net gains on sale of fixed assets
Net interest income (FTE) plus noninterest income (non-GAAP)
Efficiency ratio (non-GAAP)
Net Interest Income:
Net interest income is the fundamental source of earnings for commercial banks. Moreover, fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits and borrowings comprise interest-bearing liabilities. 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 nonperforming assets.
Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of average earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pretax yields lower than their taxable counterparts. Therefore, in order to make the net interest margin analysis more comparable, tax-exempt income and yields are reported in this analysis on a tax-equivalent basis using the prevailing federal statutory tax rate.
Table of Contents
Similar to all banks, we consider the maintenance of an adequate net interest margin to be of primary concern. The current economic environment has been changing, with slow declines in interest rates. This is in contrast to prior years where the impact of the pandemic pushed interest rates to historical lows, followed by multiple increases in interest rates to help reduce inflation indicators. In addition to market rates and competition, nonperforming asset levels are of particular concern for the banking industry and may place additional pressure on net interest margins. Nonperforming assets may change, given the uncertainty of the national and global economies, particularly the labor markets. No assurance can be given as to how general market conditions will change or how such changes will affect net interest income.
The Federal Open Market Committee (“FOMC”), which seeks to achieve maximum employment and inflation at 2.0% over the longer term, maintained the target rate for federal funds at 4.50% from December 31, 2024, through mid-September 2025. At its meeting on September 17, 2025, the FOMC shifted to an accommodative policy stance by lowering the federal funds target rate 25 basis points to 4.25%, citing continued risk to unemployment and economic uncertainty. The federal funds target rate had been at 4.50% since December 18, 2024. Citing similar reasons, the FOMC lowered the federal funds target rate another 50 basis points during the remainder of 2025 in 25 basis point increments at each of its next two meetings on October 29, 2025, and December 10, 2025. At December 31, 2025, the federal funds target rate was 3.75%. Following the FOMC actions, the national prime rate also decreased and was 6.75% at December 31, 2025. We expect uncertainty with respect to economic conditions to remain elevated, which may result in future FOMC actions. Any additional rate actions by the FOMC to further ease monetary policy could reduce net interest income and result in net interest margin contraction.
We analyze interest income and interest expense by segregating rate and volume components of earning assets and interest-bearing liabilities. The impact changes in the interest rates earned and paid on assets and liabilities, along with changes in the volumes of earning assets and interest-bearing liabilities, have on net interest income are summarized as follows. The net change or mix component, attributable to the combined impact of rate and volume changes within earning assets and interest-bearing liabilities’ categories, has been allocated proportionately to the change due to rate and the change due to volume.
Table of Contents
Net interest income changes due to rate and volume
Increase (decrease)
Increase (decrease)
attributable to
attributable to
(Dollars in thousands)
Total
Rate
Volume
Total
Rate
Volume
Interest income:
Loans:
Taxable
Tax-exempt
Investments:
Taxable
Tax-exempt
Interest-bearing deposits
Federal funds sold
Total interest income
Interest expense:
Money market accounts
Interest-bearing demand and NOW accounts
Savings accounts
Time deposits less than $100
Time deposits $100 or more
Short-term borrowings
Long-term debt
Subordinated debt
Junior subordinated debt
Total interest expense
FTE net interest income changes (non-GAAP)
FTE net interest income, a non-GAAP measure, increased $50.3 million to $168.7 million in 2025 from $118.4 million in 2024. A positive rate variance, coupled with a positive volume variance contributed to the increase. A rate variance resulted in an increase in tax-equivalent net interest income, a non-GAAP measure, of $32.7 million as earning assets repriced higher and interest-bearing liabilities lower. The growth in average interest-earning assets exceeded that of interest-bearing liabilities and resulted in additional tax-equivalent net interest income of $17.6 million.
With regard to the favorable rate variance occurred, the tax-equivalent yield on earning assets increased 43 basis points to 5.57 percent in 2025 from 5.14 percent in 2024 resulting in an increase in tax-equivalent interest income of $16.2 million. The tax-equivalent yield on the loan portfolio increased 37 basis points to 5.99 percent in 2025 from 5.62 percent in 2024 and resulted in an increase to interest income of $13.0 million. Additionally, the tax-equivalent yield on the investment portfolio increased 72 basis points to 3.15 percent in 2025 from 2.43 percent in 2024, which caused an increase in tax-equivalent interest income of $4.6 million.
A favorable rate variance was also experienced with respect to our cost of funds. The Company experienced decreases in the rates paid on most major categories of interest-bearing liabilities. These decreases resulted in a decrease in interest expense of $16.5 million. Specifically, the average rate paid for money market accounts decreased 186 basis points and resulted in a corresponding decrease to interest expense of $14.2 million. Additionally, the average rate paid on savings accounts decreased 69 basis points, resulting in a corresponding reduction in interest expense of $3.4 million. The average rate paid for time deposits less than $100 thousand decreased 5 basis points while time deposits $100 thousand or more decreased 52 basis points, which together resulted in a $1.9 million decrease in interest expense. The average rate paid on short-term borrowings decreased 108 basis points in 2025 when compared to 2024, causing a $0.4 million decrease in interest expense. Interest expense decreased $0.1 million from a 16-basis point decrease in the average rate paid on long-term debt. Subordinated debt increased interest expense by $1.0 million from a 239-basis point increase in 2025 compared to 2024. Interest expense decreased $48 thousand on a decrease of 109 basis points to the average rate paid on Junior subordinated debt.
Table of Contents
Average earning assets increased $545.8 million to $4.7 billion in 2025 from $4.2 billion in 2024 and accounted for a $32.4 million increase in interest income. Average loans increased $541.4 million, which caused interest income to increase $32.2 million. Average taxable investments increased $15.1 million when comparing 2025 and 2024, which resulted in increased interest income of $0.4 million while average tax-exempt investments increased $9.0 million, which resulted in an increase to interest income of $0.2 million. Average federal funds sold decreased $20.2 million, which resulted in a decrease to interest income of $0.4 million.
Average interest-bearing liabilities grew $354.8 million to $3.6 billion in 2025 from $3.3 billion in 2024 resulting in an increase in interest expense of $14.7 million. Non maturing deposit accounts grew $316.1 million, which in aggregate caused an $11.7 million increase in interest expense. Large denomination time deposits averaged $70.8 million more in 2025 and caused interest expense to increase $2.6 million. A decrease of $109.4 million in average time deposits less than $100 thousand resulted in a corresponding decrease to interest expense of $4.1 million. Short-term borrowings averaged $7.8 million less and decreased interest expense $0.4 million while long-term debt averaged $50.2 million more and increased interest expense by $2.4 million comparing 2025 and 2024. Subordinated debt increased $30.9 million and increased interest expense by $2.2 million, comparing 2025 and 2024. Junior subordinated debt averaged $4.1 million higher in 2025 and resulted in an increase to interest expense of $0.4 million.
The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Averages for earning assets include nonaccrual loans. Investment averages include available for sale securities at amortized cost. Income on tax-free investment securities and loans is adjusted to a tax-equivalent basis, a non-GAAP measure, using the prevailing federal statutory tax rate of 21.0 percent in 2025, 2024 and 2023.
Table of Contents
Summary of net interest income
Year ended
December 31, 2025
December 31, 2024
Average
Interest Income/
Yield/
Average
Interest Income/
Yield/
(Dollars in thousands, except percents)
Balance
Expense
Rate
Balance
Expense
Rate
Assets:
Earning assets:
Loans:
Taxable
Tax-exempt
Total loans
Investments:
Taxable
Tax-exempt
Total investments
Interest-bearing deposits
Federal funds sold
Total interest-earning assets
Less: allowance for credit losses
Other assets
Total assets
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Money market accounts
Interest-bearing demand and NOW accounts
Savings accounts
Time deposits less than $100
Time deposits $100 or more
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Subordinated debt
Junior subordinated debt
Total borrowings
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income/spread
Net interest margin (non-GAAP)
Tax-equivalent adjustments:
Loans
Investments
Total adjustments
Note: Average balances were calculated using average daily balances. Interest income on loans includes fees of $0.9 million in 2025, $0.9 million in 2024 and $0.4 million in 2023. The decrease in 2023 is primarily due to lower origination fees.
Table of Contents
Average
Average
Interest Income/
Interest
(Dollars in thousands, except percents)
Balance
Expense
Rate
Assets:
Earning assets:
Loans:
Taxable
Tax-exempt
Total loans
Investments:
Taxable
Tax-exempt
Total investments
Interest-bearing deposits
Federal funds sold
Total interest-earning assets
Less: allowance for loan losses
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts
NOW accounts
Savings accounts
Time deposits less than $100
Time deposits $100 or more
Total interest-bearing deposits
Short-term borrowings
Long-term debt
Subordinated debt
Total borrowings
Total interest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income/spread
Net interest margin (non-GAAP)
Tax-equivalent adjustments:
Loans
Investments
Total adjustments
Provision for Credit Losses:
For the year ended December 31, 2025, a provision for credit losses of $98 thousand was recorded compared to a prior year provision of $19.1 million. The prior year provision included a non-recurring, Day 1 provision of $14.3 million for non-PCD loans acquired in the FNCB merger. The 2025 provision was due primarily to improvement in qualitative factors driven by a reduction in commercial real estate concentration levels and a seasoning of the equipment financing portfolio, while overall model loss rates were substantially unchanged. Specific reserves on individually evaluated loans increased $384 thousand.
Table of Contents
Noninterest Income:
Our noninterest income for 2025 was $21.7 million compared with $18.3 million for 2024, an increase of $3.4 million. The higher level of noninterest income was primarily due to the increased size and scale of the Company following the FNCB merger. The year ended December 31, 2025, brought about increases in service charges and fees of $2.8 million, wealth management income of $0.8 million, interest rate swap income of $0.8 million, bank owned life insurance increased cash surrender value income of $0.5 million and merchant services income of $0.4 million. Increases were partially offset by a net loss on the sale of available for sale of investment securities of $2.2 million resulting from the Company’s partial investment portfolio repositioning.
On January 17, 2025, the Company executed a sale/leaseback of its former corporate headquarters in Scranton, Pennsylvania. The net proceeds from the sale were $3.6 million and resulted in a pre-tax gain of $0.6 million that is included in net losses on the sale of fixed assets in the consolidated statements of income and comprehensive income.
On December 4, 2025, the Company sold two buildings, five parking lots and a piece of vacant land that were part of FNCB’s former corporate campus located in Dunmore, Pennsylvania for $3.7 million. The properties had an aggregate net book value of $4.3 million, and the Company recognized a loss of $0.6 million on the sale, which is included in net losses on the sale of fixed assets in the consolidated statements of income and comprehensive income.
Noninterest Expense:
In general, our noninterest expense is categorized into three main groups, including employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income and utility costs. Other expenses include general operating expenses such as marketing, other taxes, stationery and supplies, contractual services, insurance, including FDIC assessment and loan collection costs. During 2025 and 2024, we incurred non-recurring expenses related to our merger with FNCB Bancorp, Inc., such as legal and consulting costs. Some of our noninterest costs and expenses are variable while the remainder is fixed. We utilize budgets and other related strategies in an effort to control the variable expenses. The major components of noninterest expense for the past three years are summarized as follows:
(Dollars in thousands)
Salaries and employee benefits expense:
Salaries and payroll taxes
Employee benefits
Salaries and employee benefits expense
Occupancy and equipment expenses:
Occupancy expense
Equipment expense
Occupancy and equipment expenses
Acquisition related expenses
Amortization of intangible assets
Other expenses:
Professional fees and outside services
FDIC insurance and assessments
Donations
Other taxes
Advertising
Stationery and supplies
Net loss (gain) on sale of other real estate owned
Other
Other expenses
Total noninterest expense
Table of Contents
Salaries and employee benefits constitute most of our noninterest expenses, accounting for 48.8 percent of the total noninterest expense. Salaries and employee benefits increased $10.6 million to $56.3 million in 2025 from $45.7 million in 2024. Salaries and payroll taxes increased $8.5 million and employee benefits expense increased $2.1 million. The higher salary and benefits expense in 2025 was due primarily to the addition of staff associated with the FNCB merger.
Occupancy and equipment expense increased $5.1 million to $27.4 million in 2025 from $22.3 million in 2024, due to increased technology costs related to system integration, increased account and transaction volumes, and higher facilities costs, including costs associated with relocating executive, administrative and operational units to a new corporate center.
On February 28. 2025, the Company executed a lease for a new corporate headquarters located at 30 E D Preate Drive, Moosic, Pennsylvania. The lease has a fifteen-year term expiring March 31, 2040, with two five-year renewal options. Subsequently, on June 23, 2025, the Bank entered into a Purchase and Sale Agreement (the “Agreement”) to purchase this property. The purchase price for the property is $19.5 million, subject to customary adjustments, prorations and credits as outlined in the Agreement. In addition to the purchase price, the Bank has paid the seller $3.0 million for certain repairs and improvements to the property and $500 thousand for certain office fit out costs. The closing on the property is anticipated for the second quarter of 2026 and no later than June 30, 2026. As a result of the purchase and sale agreement, the lease was modified and the remaining lease term was reduced to 12 months, which meets the definition of a short-term lease under ASC 842. Future lease payments will be recognized as lease expenses on a straight-line basis over the remaining term. The Bank has relocated its corporate headquarters and executive offices, as well as a majority of its administrative and operational units to the new facility and is currently leasing a portion of the property until the purchase closes. At closing, any and all leases for the property will be assigned to and assumed by the Bank. The Company does not expect the purchase of the corporate center to have a material effect on future operating results, as additional facility costs are expected to be offset with rental income and common area maintenance fees.
Amortization of intangible assets increased $3.0 million to $6.4 million in 2025 compared to $3.4 million due primarily to twelve months of core deposit intangible amortization in 2025, recognized as a result of the merger with FNCB, versus six months of amortization in 2024.
Partially offsetting these increases was a decrease of $16.0 million in merger related expenses to $0.2 million for the year ended December 31, 2025, from $16.2 million for the year ended December 31, 2024.
Other expenses, which consist of professional fees and outside services, FDIC insurance and assessments, donations, other taxes, advertising, stationery and supplies and all other expenses increased $5.8 million, due primarily to increased professional services, other taxes, donations, and advertising. Expenses in 2024 reflect six months of pre-merger operations of a smaller Company and therefore are lower in all categories.
Income Taxes:
Our income tax expense was $13.0 million, and our effective tax rate was 18.1 percent for the year ended December 31, 2025, an increase from an income tax benefit of $30 thousand and an effective tax rate of 0.4 percent for the year ended December 31, 2024. The increase in 2025 was primarily due to higher income.
We utilize loans and investments in tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable by the federal government. The tax benefit of tax-exempt income was 2.2 percent of pre-tax income in 2025 and 14.6 percent in 2024.
The effective tax rate in 2025 and 2024 was also influenced by the recognition of investment tax credits related to our limited partnership investments in elderly and low- to- moderate-income residential housing programs which allow us to mitigate our tax burden. By utilizing these credits, we reduced our income tax expense by $1.3 million in 2025 and $631 thousand in 2024.
Table of Contents
Tax exempt bank owned life insurance income reduced our income tax expense by $429 thousand and 0.59 percent of pre-tax income compared to $360 thousand and 4.25 percent in 2025 and 2024, respectively.
Management’s Discussion and Analysis 2024 versus 2023
Review of Financial Position:
Total assets, loans and deposits were $5.1 billion, $4.0 billion and $4.4 billion, respectively, at December 31, 2024. Assets, loans and deposits acquired at the completion of the FNCB merger on July 1, 2024, were $1.8 billion, $1.2 billion and $1.4 billion, respectively.
The loan portfolio consisted of $3.1 billion of business loans, including commercial, equipment financing, and commercial real estate loans, $684.3 million in retail loans, including residential mortgage and consumer loans, and $187.9 million in loans to municipal entities at December 31, 2024. Total investment securities were $606.9 million at December 31, 2024, including $526.3 million of investment securities classified as available for sale, $78.2 million classified as held to maturity, and $2.4 million in equity securities. Total deposits consisted of $935.5 million in noninterest-bearing deposits and $3.5 billion in interest-bearing deposits at December 31, 2024.
Stockholders’ equity equaled $469.0 million, or $46.94 per share, at December 31, 2024, and $340.4 million, or $48.35 per share, at December 31, 2023. Our equity to asset ratio was 9.21 percent and 9.10 percent at those respective period ends. Dividends declared for the year ended December 31, 2024, amounted to $2.06 per share representing 208.1 percent of net income.
Nonperforming assets equaled $23.0 million or 0.45 percent of total assets at December 31, 2024, compared to $4.9 million or 0.13 percent at December 31, 2023. The ACL equaled $41.8 million or 1.05 percent of loans, net, at December 31, 2024, compared to $21.9 million or 0.77 percent at year-end 2023. Loans charged-off, net of recoveries equaled $1.1 million or 0.03 percent of average loans in 2024, compared to $2.9 million or 0.10 percent of average loans in 2023.
Investment Portfolio:
Investment securities increased $123.0 million, to $606.9 million at December 31, 2024, from $483.9 million at December 31, 2023. Investments acquired in the FNCB merger totaled $421.9 million, with $241.7 million being sold subsequent to the merger as the Company used the proceeds to pay-down borrowings and add to its cash position. At December 31, 2024, the investment portfolio consisted of $526.3 million of investment securities classified as available for sale, $2.4 million in equity investments carried at fair value, and $78.2 million classified as held to maturity. Securities purchased during 2024 totaled $5.0 million. There were no investment purchases in 2023. Repayments of investment securities totaled $64.7 million in 2024 and $31.5 million in 2023.
Investment securities averaged $617.2 million and equaled 14.8 percent of average earning assets in 2024, compared to $559.3 million and 16.0 percent of average earning assets in 2023. The tax-equivalent yield on the investment portfolio increased 66 basis points to 2.43 percent in 2024 from 1.77 percent in 2023. The increase in the tax-equivalent yield is due to the investments acquired in the merger being booked at the then current market rates.
Loan Portfolio:
Economic factors and how they affect loan demand are of extreme importance to us and the overall banking industry, as lending is a primary business activity. Loans are the most significant component of earning assets and they generate the greatest amount of revenue for us. Similar to the investment portfolio, there are risks inherent in the loan portfolio that must be understood and considered in managing the lending function. These risks include IRR, credit concentrations and fluctuations in demand. Changes in economic conditions and interest rates affect these risks which influence loan demand, the composition of the loan portfolio and profitability of the lending function.
Table of Contents
Overall, total loans increased $1.1 billion in 2024 to $4.0 billion at December 31, 2024 due primarily to the $1.2 billion in loans acquired in the FNCB merger.
Loans averaged $3.5 billion in 2024, compared to $2.8 billion in 2023. Taxable loans averaged $3.2 billion, while tax-exempt loans averaged $0.3 billion in 2024. The loan portfolio continues to play the prominent role in our earning asset mix. As a percentage of earning assets, average loans equaled 83.1 percent in 2024, an increase from 81.0 percent in 2023.
The tax-equivalent yield on our loan portfolio increased 81 basis points to 5.62 percent in 2024 from 4.81 percent in 2023 due to higher yields on new loan originations and loans assumed in the FNCB merger which included the impact of the accretion of purchase accounting marks. The yield on the loan portfolio may decrease as repayments on loans are replaced with new originations at current market rates and floating and adjustable-rate loans continue to reprice downward.
Asset Quality:
Nonperforming assets consist of nonperforming loans and foreclosed assets. Nonperforming loans include nonaccrual loans and accruing loans past due 90 days or more. For a discussion of our policy regarding nonperforming assets and the recognition of interest income on impaired loans, refer to the Note 1 entitled, “Summary of significant accounting policies — Nonperforming assets,” and “Loans, net and allowance for credit losses” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K which are incorporated in this item by reference.
Nonperforming assets increased $18.1 million to $23.0 million at year-end 2024. Additionally, our nonperforming assets as a percentage of total assets increased to 0.45 percent at December 31, 2024, from 0.13 percent at December 31, 2023, and our nonperforming loans as a percentage of loans, net increased to 0.58 percent from 0.17 percent at December 31, 2023. Loans on nonaccrual status, excluding modified loans for borrowers experiencing difficulty, increased $18.6 million and included $8.5 million of loans acquired in the FNCB merger, of which, $6.4 million were PCD loans.
At December 31, 2024, there was one foreclosed asset recorded at $27 thousand compared to no foreclosed properties at December 31, 2023. Loans past due ninety days and accruing decreased $0.5 million and includes two residential mortgages and three consumer loans. For a further discussion of assets classified as nonperforming assets and potential problem loans, refer to Note 4, “Loans, net and the allowance for credit losses,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K which is incorporated in this item by reference.
Past due loans not satisfied through repossession, foreclosure or related actions are evaluated individually to determine if all or part of the outstanding balance should be charged against the ACL account. Any subsequent recoveries are credited to the allowance account. Net loans charged-off decreased $1.8 million to $1.1 million in 2024 from $2.9 million in 2023. The elevated charge-offs in the prior year was due primarily due to the partial charge-off of a commercial real estate loan as the market value declined significantly as a result of the impending vacancy of the property by its single “anchor” tenant. Net charge-offs, as a percentage of average loans outstanding, equaled 0.03 percent in 2024 and 0.10 percent in 2023.
Effective January 1, 2023, the Company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The standard replaces the incurred loss methodology we previously used to maintain the allowance for loan losses. Upon adoption, the Company decreased its ACL by $3.3 million to $24.1 million and increased its reserve for losses of unfunded commitments by $270 thousand to $449 thousand. The current standard measures the estimated amount of allowance necessary to cover lifetime losses inherent in financial assets at the balance sheet date. The Company estimates the ACL on loans via a quantitative analysis which considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. Also included in the allowance are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts utilized. The Company applies the analysis to loans on a collective, or pooled basis
Table of Contents
for groups of loans which share similar risk characteristics and will either assign loans to a different pool or evaluate a loan individually if its risk characteristics change and no longer align with its currently assigned pool of loans. For additional information, refer to Note 1 entitled, “Summary of significant accounting policies - Allowance for credit losses” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K which is incorporated in this item by reference.
The ACL increased $19.9 million to $41.8 million at December 31, 2024, from $21.9 million at the end of 2023. During the year ended December 31, 2024, net charge-offs were $1.1 million and the provision for credit losses totaled $19.1 million. As of the Acquisition Date, $14.3 million was recorded to the provision for credit losses related to acquired non-PCD loans. In addition to the merger related provision, a provision of $4.8 million was recorded due to the impact of various factors such as updated economic assumptions as well as additional qualitative factors for the equipment financing portfolio, risk rating migration, additional charge-offs during the last six months of 2024 and higher delinquencies.
The ACL, as a percentage of loans, net of unearned income, was 1.05 percent at the end of 2024 and 0.77 percent at the end of 2023, respectively. The coverage ratio, the ACL, as a percentage of nonperforming loans, is an industry ratio used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The coverage ratio was 182.0 percent at December 31, 2024, and 442.5 percent at December 31, 2023. We believe that our allowance was adequate to absorb probable credit losses at December 31, 2024.
Deposits:
Our deposit base is the primary source of funds to support our operations. We offer a variety of deposit products to meet the needs of our individual, commercial and municipal customers.
A total of $1.4 million in deposits were acquired in the merger with FNCB. Total deposits grew $1.1 billion or 34.4 percent to $4.4 billion at the end of 2024. Noninterest-bearing deposits increased $290.8 million or 45.1 percent while interest-bearing deposits increased $837.7 million or 31.8 percent in 2024. The increase in deposits was due to a $442.2 million increase in commercial deposits, a $421.2 million increase in retail deposits and a $269.5 million increase in municipal deposits, partially offset by $4.4 million in reduced brokered deposits.
At December 31, 2024, total brokered deposits were $256.4 million or 5.8 percent of total deposits as compared to $261.0 million or 8.0 percent of total deposits at December 31, 2023. During the fourth quarter of 2024, the Company called $100.7 million of high rate brokered CDs to reduce overall funding costs and has the option to call $140.8 million of the total yearend balance at any time. The Company maintains a brokered deposit to total asset policy limit of 15 percent. At December 31, 2024, brokered deposits represented 5.0 percent of total assets.
Noninterest-bearing deposits represented 21.2 percent of total deposits while interest-bearing deposits accounted for 78.8 percent of total deposits at December 31, 2024. Comparatively, noninterest-bearing deposits and interest-bearing deposits represented 19.7 percent and 80.3 percent of total deposits at year end 2023. Interest bearing deposits are comprised of 23.2 percent time deposits and 76.8 percent non-maturing deposits, compared with 23.8 percent time and 76.2 percent non-maturing at year end 2023.
Total deposits averaged $3.8 billion in 2024 and $3.2 billion in 2023, increasing $614.9 million or 19.1 percent comparing 2024 to 2023. Average noninterest-bearing deposits increased $16.1 million, while average interest-bearing accounts grew $598.8 million. Average interest-bearing non-maturing deposits, including demand deposits, money market and interest-bearing demand and NOW accounts, and savings accounts, increased $377.3 million while average total time deposits increased $221.5 million when comparing 2024 and 2023.
Our cost of interest-bearing deposits increased to 2.82 percent in 2024 compared to 2.32 percent in 2023. Specifically, the cost of money market accounts increased 160 basis points to 4.77 percent from 3.17 percent and savings accounts increased 79 basis points to 1.00 percent in 2024 from 0.21 percent in 2023, while interest-bearing demand and NOW accounts decreased 12 basis points to 1.88 percent from 2.00 percent in the year ago period. Volatile deposits, time deposits $100 thousand or more, averaged $291.5 million in 2024, an increase of $90.7 million or 45.2 percent from
Table of Contents
$200.7 million in 2023. Our average cost of these funds increased 111 basis points to 4.07 percent in 2024, from 2.96 percent in 2023. This type of funding is susceptible to withdrawal by the depositor as they are particularly price sensitive and are therefore not considered to be a strong source of liquidity.
Liquidity:
We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to illustrate our reliance on noncore funds to fund our investments and loans maturing after 2024. At December 31, 2024, our noncore funds consisted of time deposits in denominations of $100 thousand or more, brokered deposits, short-term borrowings, and long-term and subordinated debt. Large denomination time deposits are particularly not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered to be highly volatile. At December 31, 2024, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 12.7 percent. Our net short-term noncore funding dependence ratio, noncore funds maturing within one year, less short-term investments to long-term assets equaled 6.6 percent. Comparatively, our ratios equaled 12.1 percent and 4.7 percent at the end of 2023, which indicates an increased reliance on our noncore funds in 2024 with an improved ability to offset them with more liquid assets. Our basic liquidity surplus ratio, defined as liquid assets less short-term potentially volatile liabilities as a percentage of total assets, decreased to 5.8 percent at December 31, 2024, from 9.7 percent at December 31, 2023, due in part to utilizing a portion of our federal funds sold balances to call and payoff $100.7 million of brokered CDs to net interest income. We will continue to focus on increasing liquidity in the coming year through implementation of competitive deposit pricing strategies and monitoring of investment and loan cash flows.
The Consolidated Statements of Cash Flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents consist of cash on hand, cash items in the process of collection, noninterest-bearing and interest-bearing deposits with other banks and federal funds sold. Cash and cash equivalents decreased $51.5 million for the year ended December 31, 2024, primarily due to loan growth outpacing deposit growth and the repayment of borrowings. For the year ended December 31, 2023, cash and cash equivalents increased $149.5 million.
Operating activities provided net cash of $34.7 million in 2024 and $33.3 million in 2023. Net income, adjusted for the effects of noncash expenses such as depreciation, amortization and accretion of tangible and intangible assets and investment securities, and the provision for credit losses, is the primary source of funds from operations.
Net cash used by financing activities equaled $472.6 million in 2024. Net cash provided by financing activities was $142.0 million in 2023. Deposit gathering, which is our predominant financing activity, decreased in 2024 versus 2023 and resulted in a net cash outflow in 2024 of $299.8 million and an inflow of $232.4 million in 2023. Short-term borrowing repayments decreased net cash by $131.4 million in 2024 and decreased cash by $97.3 million in 2023. Long term borrowings resulted in a net outflow of $23.3 million in 2024, and net inflow of $24.4 million in 2023. Dividends also resulted in outflows of $18.1 million in 2024 versus $11.7 million in 2023.
Our primary investing activities involve transactions related to our investment and loan portfolios. Net cash provided in investing activities totaled $386.3 million in 2024 and used $25.8 million and 2023. Net cash provided from lending activities was $61.7 million in 2024 and used $123.3 million in 2023.
Capital Adequacy:
Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance. Our and the Bank’s risk-based capital ratios have consistently exceeded the minimum regulatory capital ratios required for adequately capitalized institutions. Our ratio of Tier 1 capital to risk-weighted assets and off-balance sheet items was 10.41 percent and 12.10 percent at December 31, 2024, and 2023, respectively. Our Total capital ratio was 12.34 percent and 14.16 percent at December 31, 2024, and 2023, respectively. Our and the Bank’s common equity Tier I capital to risk-weighted assets ratios were 10.16 percent and 10.95 percent at December 31, 2024, and 12.10 percent and 13.30 percent at December 31, 2023. Our Leverage ratio, which equaled 7.97 percent at December 31, 2024, and 8.50 percent at December 31, 2023, exceeded the minimum of 4.0 percent for capital
Table of Contents
adequacy purposes. The Bank reported Tier 1 capital, Total capital and Leverage ratios of 10.95 percent, 12.04 percent and 8.37 percent at December 31, 2024, and 13.30 percent, 14.12 percent and 9.34 percent at December 31, 2023. Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at December 31, 2024. There are no conditions or events since this notification that we believe have changed the Bank’s category. For a further discussion of these risk-based capital standards and supervisory actions for noncompliance, refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K which is incorporated in this item by reference.
Stockholders’ equity was $469.0 million or $46.94 per share at December 31, 2024, and $340.4 million or $48.35 per share at December 31, 2023. The $128.6 million increase in capital surplus due to the merger, partially offset by retained earnings as dividends paid exceeded net income in 2024 and by a $3.7 million decrease in accumulated other comprehensive loss (“AOCL”) at December 31, 2024, resulting from a reduction in the unrealized loss on available for sale securities.
Review of Financial Performance:
Net income for the twelve months ended December 31, 2024, totaled $8.5 million or $0.99 per diluted share compared to $27.4 million or $3.83 per diluted share for the comparable period of 2023. Net income for the current period decreased $18.9 million when compared to the twelve months ended December 31, 2023 due to $30.5 million of non-recurring charges, including $16.2 million of acquisition expenses and a $14.3 million provision for credit losses on non-PCD loans acquired in the merger, which were partially offset by higher interest income due to increased levels of earning assets.
Fully tax-equivalent (“FTE”) net interest income, a non-GAAP measure for the twelve months ended December 31, increased $29.7 million to $118.4 million in 2024 from $88.7 million in 2023. The increase in FTE net interest income was primarily the result of higher loan interest income due to increased volume and rates on new loans acquired through the FNCB merger and an additional $9.0 million from accretion of purchase accounting marks on loans. Higher operating expenses of $38.9 million, including an increase of $14.4 million of acquisition related expenses, and an increased provision for credit losses of $18.6 million were partially offset by a $4.2 million increase in noninterest income.
Net Interest Income :
FTE net interest income, a non-GAAP measure, was $118.4 million in 2024 and $88.7 million in 2023. There was a positive volume variance and a positive rate variance. The growth in average interest-earning assets exceeded that of interest-bearing liabilities and resulted in additional tax-equivalent net interest income, a non-GAAP measure, of $17.7 million. A rate variance resulted in an increase in net interest income of $12.0 million as assets repriced quicker than liabilities.
Average earning assets increased $666.2 million to $4.2 billion in 2024 from $3.5 billion in 2023 and accounted for a $34.4 million increase in interest income. Average loans increased $625.1 million, which caused interest income to increase $33.4 million. Average taxable investments increased $61.2 million comparing 2024 and 2023, which resulted in increased interest income of $1.1 million while average tax-exempt investments decreased $3.3 million, which resulted in a decrease to interest income of $75 thousand. Average federal funds sold decreased $19.8 million, which resulted in a decrease to interest income of $0.2 million.
Average interest-bearing liabilities grew $650.6 million to $3.3 billion in 2024 from $2.6 billion in 2023 resulting in a net increase in interest expense of $16.7 million. In addition, interest-bearing transaction accounts, including money market, interest-bearing demand and NOW and savings accounts grew $377.3 million, which in aggregate caused a $5.8 million increase in interest expense. Large denomination time deposits averaged $90.7 million more in 2024 and caused interest expense to increase $3.2 million. An increase of $130.7 million in average time deposits less than $100 thousand increased interest expense by $4.9 million. Short-term borrowings averaged $1.2 million less and decreased interest expense $64 thousand while long-term debt averaged $49.0 million more and increased interest expense by $2.4 million comparing 2024 and 2023. Subordinated debt was unchanged, comparing 2024 and 2023. Junior subordinated debt
Table of Contents
averaged $4.0 million in 2024 and resulted in an increase in interest expense of $0.4 million in 2024, compared to none in 2023.
A favorable rate variance occurred, as the tax-equivalent yield on earning assets increased 80 basis points and there was 51 basis points increase in the cost of funds. Tax-equivalent net interest income increased $29.7 million comparing 2024 and 2023. The tax-equivalent yield on earning assets was 5.14 percent in 2024 compared to 4.34 percent in 2023 resulting in an increase in interest income of $27.7 million. With the tax-equivalent yield on the investment portfolio increasing 66 basis points to 2.43 percent in 2024 from 1.77 percent in 2023, interest income increased $4.0 million. The tax-equivalent yield on the loan portfolio increased 81 basis points to 5.62 percent in 2024 from 4.81 percent in 2023 and resulted in an increase to interest income of $24.7 million.
An unfavorable rate variance was experienced in the cost of funds. We experienced increases in the rates paid on most major categories of interest-bearing liabilities. Specifically, the cost of non-maturity deposit accounts increased 48 basis points comparing 2024 and 2023. These increases resulted in an increase in interest expense of $12.9 million. The average rate paid for time deposits less than $100 thousand decreased 4 basis points while time deposits $100 thousand or more increased 111 basis points, which together resulted in an $2.5 million increase in interest expense. The average rate paid on short-term borrowings increased 47 basis points in 2024 when compared to 2023, causing a $175 thousand increase in interest expense. Interest expense increased $0.1 million from a 52 basis point increase in the average rate paid on long-term debt. Subordinated debt remained unchanged in both rate and the amount of interest paid in 2024 compared to 2023. Junior subordinated debt, acquired in the FNCB merger, added $0.4 million in interest expense.
Provision for Credit Losses:
The ACL increased $19.9 million to $41.8 million at December 31, 2024, from $21.9 million at the end of 2023. The current year includes an additional $14.3 million adjustment for non-PCD loans related to the merger with FNCB. In 2023, the Company transitioned to ASU 2016-13 Financial Instruments – Credit Losses (Topic 326), commonly referred to as CECL. The transition resulted in a decrease of $3.3 million to the ACL at adoption, and a net provision of $0.6 million.
Noninterest Income:
Our noninterest income for 2024 was $18.3 million compared with $14.1 million for the year ago period, an increase of $4.2 million. The increase was primarily due to an increase in service charges, fees and commissions of $3.1 million due to increased transaction and account volume from the FNCB merger. In addition, wealth management income increased $0.5 million, Bank Owned Life Insurance income increased $0.5 million and gains on equity securities increased $0.1 million while interest rate swap revenue decreased $0.1 million on lower origination volume and market value adjustments.
Noninterest Expense:
Noninterest expense was $106.7 million for the year ended December 31, 2024, compared to $67.8 million for the year ended December 31, 2023.
Salaries and employee benefits expense constitute the majority of our noninterest expenses accounting for 42.9 percent of the total noninterest expense. Salaries and employee benefits expense increased $10.4 million to $45.7 million in 2024 from $35.3 million in 2023. Salaries and payroll taxes increased $8.9 million and employee benefits expense increased $1.5 million. The higher salary and benefits expense in 2024 was due primarily to the addition of 195 full time equivalent employees from FNCB at the time of the FNCB merger.
Occupancy and equipment expense increased $5.2 million to $22.3 million in 2024 from $17.1 million in 2023, due to higher technology costs related to system integration, increased account and transaction volumes, and increased facility expenses from the FNCB merger.
Acquisition related expenses totaled $16.2 million and $1.8 million in 2024 and 2023, respectively.
Table of Contents
Amortization of intangible assets totaled $3.4 million in 2024 compared to $105 thousand and $363 thousand in 2023 and 2022, respectively. The increase was due primarily to amortization of the core deposit intangible created at the merger.
Other expenses, which consist of, professional fees and outside services, FDIC insurance and assessments, donations, other taxes, advertising, stationary and supplies, net gains on the sale of other real estate and all other expenses increased $5.6 million comparing the years ended December 31, 2024 and 2023, due primarily to increased FDIC insurance assessments of $1.0 million, an $0.8 million write-down of a former community bank office, higher check losses of $0.6 million and higher other expenses due to the larger financial institution.
Income Taxes:
Our income tax benefit was $30 thousand and our effective tax rate was 0.36 percent for the year ended December 31, 2024, a decrease from income tax expense of $5.1 million and an effective tax rate of 15.8 percent for the year ended December 31, 2023. The decrease in 2024 was primarily due to lower pretax income and higher levels of tax adjustments such as tax-exempt interest income, investment tax credits and Bank Owed Life Insurance income.
We utilize loans and investments in tax-exempt organizations to mitigate our tax burden, as interest revenue from these sources is not taxable by the federal government. The tax benefit of tax-exempt income was 14.6 percent of pre-tax income in 2024 and 3.3 percent in 2023.
The effective tax rate in 2024 and 2023 was also influenced by the recognition of investment tax credits related to our limited partnership investments in elderly and low- to- moderate-income residential housing programs which allow us to mitigate our tax burden. By utilizing these credits, we reduced our income tax expense by $631 thousand in 2024 and $755 thousand in 2023.
Tax exempt Bank Owned Life Insurance income reduced our income tax expense by $360 thousand and 4.25 percent of pre-tax income compared to $221 thousand and 0.68 percent in 2024 and 2023, respectively.
Table of Contents
