CITIZENS FINANCIAL SERVICES INC

Previous wording

We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or expected future results of operations of Citizens Financial Services, Inc., CZFS Acquisition Company, LLC, First Citizens Community Bank, First Citizens Insurance Agency, Inc., 1 st Realty of PA LLC or the combined Company. When we use words such as “believes,” “expects,” “anticipates,” or similar expressions, we are making forward-looking statements. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements. The Company cautions readers that the following important factors, among others, could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement:

Current wording

We have made forward-looking statements in this document, and in documents that we may incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or expected future results of operations of Citizens Financial Services, Inc., CZFS Acquisition Company, LLC, First Citizens Community Bank, First Citizens Insurance Agency, Inc., 1 st Realty of PA LLC or the combined Company. When we use words such as “believes,” “expects,” “anticipates,” or similar expressions, we are making forward-looking statements. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements. The Company cautions readers that the following important factors, among others, could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement:

Previous wording

The following is management’s discussion and analysis of the Company’s consolidated financial condition and results of operations at the dates and for the periods presented in the accompanying consolidated financial statements for the Company. Our consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with the preceding financial statements presented under Part I and the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results you may expect for the full year.

Current wording

The following is management's discussion and analysis of the Company’s consolidated financial condition and results of operations at the dates and for the periods presented in the accompanying consolidated financial statements for the Company. Our consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with the preceding financial statements presented under Part I and the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results you may expect for the full year.

Previous wording

The Company engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Bradford, Lycoming and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New York and with the MidCoast acquisition, the Cities of Wilmington and Dover, Delaware. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. With the HVBC acquisition, we have expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey through the acquisition of five full service branaches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 48 banking facilities, 39 of which operate as bank branches. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Williamsport, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, Plumsteadville, Philadelphia, two branches near the city of Lebanon and two branches in Huntington Valley. The limited branch office is located in Winfield, Pennsylvania. In New York, our office is in Wellsville. In Delaware, we have three branches in Wilmington and one in Dover. The mortgage centers acquired as part of the acquisition are located in Montgomeryville, PA, Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. The Company has submitted to open a limited purpose banking office in Georgetown, Delaware and is awaiting regulatory authorization.

Current wording

The Company engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Bradford, Lycoming and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New York and with the MidCoast acquisition, the Cities of Wilmington and Dover, Delaware. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. With the HVBC acquisition, we have expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey through the acquisition of five full service branaches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 47 banking facilities, 39 of which operate as bank branches. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Williamsport, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, Plumsteadville, Philadelphia, two branches near the city of Lebanon and two branches in Huntington Valley. The limited branch office is located in Winfield, Pennsylvania. In New York, our office is in Wellsville. In Delaware, we have three branches in Wilmington and one in Dover. The mortgage centers acquired as part of the acquisition are located in Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. The Company received regulatory approval to open a limited purpose banking office in Georgetown, Delaware that was opened in the fourth quarter of 2024. During the third quarter of 2024, the mortgage center located in Montgomeryville, PA was closed.

Previous wording

Our Investment and Trust Services Division offers professional trust administration, investment management services, estate planning and administration, and custody of securities. In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the Consolidated Balance Sheets since such items are not assets of the Company. Revenues and fees of the Trust Department are reflected in trust income in the Consolidated Statement of Income. As of June 30, 2024 and December 31, 2023, the Trust Department had $174.7 million and $167.9 million of assets under management, respectively.

Current wording

Our Investment and Trust Services Division offers professional trust administration, investment management services, estate planning and administration, and custody of securities. In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the Consolidated Balance Sheets since such items are not assets of the Company. Revenues and fees of the Trust Department are reflected in trust income in the Consolidated Statement of Income. As of September 30, 2024 and December 31, 2023, the Trust Department had $181.1 million and $167.9 million of assets under management, respectively.

Previous wording

Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc. The assets associated with these products are not included in the Consolidated Balance Sheets since such assets are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank’s Investment Representatives increased from $329.4 million at December 31, 2023 to $368.4 million at June 30, 2024. Fee income from the sale of these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central, south central and south eastern Pennsylvania markets.

Current wording

Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc. The assets associated with these products are not included in the Consolidated Balance Sheets since such assets are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank’s Investment Representatives increased from $329.4 million at December 31, 2023 to $388.6 million at September 30, 2024. Fee income from the sale of these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central, south central and south eastern Pennsylvania markets.

Previous wording

The Company had net income of $12,299,000 for the first six months of 2024 compared to $2,723,000 for last year’s comparable period, an increase of $9,576,000, or 351.7%, primarily due to the absence in the current period of one-time costs associated with the HVBC acquisition and the provision for credit losses. Basic earnings per share for the first six months of 2024 were $2.59, compared to $0.66 for last year’s comparable period, representing a 292.4% increase. Annualized return on assets and return on equity for the six months of 2024 were 0.82% and 7.91%, respectively, compared with 0.23% and 2.22% for last year’s comparable period.

Current wording

The Company had net income of $19,835,000 for the first nine months of 2024 compared to $10,271,000 for last year’s comparable period, an increase of $9,564,000, or 93.1%, primarily due to the absence in the current period of one-time costs associated with the HVBC acquisition and a decrease in the provision for credit losses. Basic earnings per share for the first nine months of 2024 were $4.18, compared to $2.38 for last year’s comparable period, representing a 75.6% increase. Annualized return on assets and return on equity for the nine months of 2024 were 0.88% and 8.45%, respectively, compared with 0.53% and 6.56% for last year’s comparable period.

Previous wording

Net income for the three months ended June 30, 2024 was $5,275,000 compared to net loss of $4,144,000 in the comparable 2023 period, an increase of $9,419,000. Basic earnings (loss) per share for the three months ended June 30, 2024 were $1.11, compared to ($1.00) for last year’s comparable period, representing a 444.2% increase due to the absence in the current period of one-time costs associated with the acquisition and a decrease in the provision for credit losses. Annualized return on assets and return on equity for the quarter ended June 30, 2024 was 0.71% and 6.73%, respectively, compared with (0.68%) and (6.62%) for the same 2023 period.

Current wording

Net income for the three months ended September 30, 2024 was $7,536,000 compared to $7,548,000 in the comparable 2023 period, a decrease of $12,000. Basic earnings per share for the three months ended September 30, 2024 and 2023 were %1.59. Annualized return on assets and return on equity for the quarter ended September 30, 2024 was 1.00% and 9.53%, respectively, compared with 1.02% and 10.10% for the same 2023 period.

Previous wording

Net interest income for the first six months of 2024 was $42,258,000, an increase of $6,257,000, or 17.4%, compared to the same period in 2023. For the first six months of 2024 the provision for credit losses was $2,787,000. The provision for the first six months of 2023 was $4,853,000, which included $4,591,000 for non-PCD loans acquired as part of the acquisition. Excluding the $4,591,000 related to the acquisition, the provision for credit losses increased $2,525,000. Consequently, net interest income after the provision for credit losses was $39,471,000 in the first six months of 2024 compared to $31,148,000 during the first six months of 2023.

Current wording

Net interest income for the first nine months of 2024 was $63,582,000, an increase of $5,177,000, or 8.9%, compared to the same period in 2023. For the first nine months of 2024 the provision for credit losses was $2,587,000. The provision for the first nine months of 2023 was $5,328,000, which included $4,591,000 for non-PCD loans acquired as part of the acquisition. Excluding the $4,591,000 related to the acquisition, the provision for credit losses increased $1,850,000. Consequently, net interest income after the provision for credit losses was $60,995,000 in the first nine months of 2024 compared to $53,077,000 during the first nine months of 2023.

Previous wording

For the three months ended June 30, 2024, net interest income was $21,300,000 compared to $17,921,000, an increase of $3,379,000, or 18.9%, over the comparable period in 2023. The provision for credit losses in the second quarter of 2024 was $2,002,000 compared to $4,853,000 in 2023, which included $4,591,000 for non-PCD loans acquired as part of the acquisition. Excluding the $4,591,000 related to the acquisition, the provision for credit losses increased $1,740,000. Consequently, net interest income after the provision for credit losses was $19,298,000 for the quarter ended June 30, 2024 compared to $13,068,000 in 2023.

Current wording

For the three months ended September 30, 2024, net interest income was $21,324,000 compared to $22,404,000, a decrease of $1,080,000, or 4.8%, over the comparable period in 2023. The provision for credit losses in the third quarter of 2024 was ($200,000) compared to $475,000 in 2023. Consequently, net interest income after the provision for credit losses was $21,524,000 for the quarter ended September 30, 2024 compared to $21,929,000 in 2023.

Previous wording

The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and interest rate spread created for the three and six months ended June 30, 2024 and 2023 on a tax equivalent basis (dollars in thousands):

Current wording

The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and interest rate spread created for the three and nine months ended September 30, 2024 and 2023 on a tax equivalent basis (dollars in thousands):

Previous wording

Tax exempt revenue is shown on a tax-equivalent basis (non-GAAP) for proper comparison using a federal statutory income tax rate of 21% for the three and six months ended June 30, 2024 and 2023. For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company’s Federal statutory rate during the corresponding period. The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended June 30, 2024 and 2023 (in thousands):

Current wording

Tax exempt revenue is shown on a tax-equivalent basis (non-GAAP) for proper comparison using a federal statutory income tax rate of 21% for the three and nine months ended September 30, 2024 and 2023. For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company’s Federal statutory rate during the corresponding period. The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended September 30, 2024 and 2023 (in thousands):

Previous wording

Tax equivalent net interest income increased from $36,539,000 for the six month period ended June 30, 2023 to $42,753,000 for the six month period ended June 30, 2024, an increase of $6,214,000. The acquisition of HVBC had a substantial impact on the increase. The tax equivalent net interest margin decreased from 3.23% for the first six months of 2023 to 3.09% for the comparable period in 2024. The decrease is primarily caused by the increase in the cost of interest-bearing liabilities due to higher market interest rates in 2024 compared to 2023.

Current wording

Tax equivalent net interest income increased from $59,207,000 for the nine month period ended September 30, 2023 to $64,324,000 for the nine month period ended September 30, 2024, an increase of $5,117,000. The acquisition of HVBC had a substantial impact on the increase. The tax equivalent net interest margin decreased from 3.23% for the first nine months of 2023 to 3.09% for the comparable period in 2024. The decrease is primarily caused by the increase in the cost of interest-bearing liabilities due to higher market interest rates in 2024 compared to 2023.

Previous wording

Total tax equivalent interest income for the 2024 six month period increased $23,875,000 as compared to the 2023 six month period. This increase was a result of an increase of $16,080,000 due to a change in volume as average interest-bearing assets increased $500.7 million. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 0.88% from 4.64% to 5.52% resulting in an increase in interest income of $7,795,000.

Current wording

Total tax equivalent interest income for the 2024 nine month period increased $25,858,000 as compared to the 2023 nine month period. This increase was a result of an increase of $17,630,000 due to a change in volume as average interest-bearing assets increased $345.6 million. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 0.63% from 4.91% to 5.54% resulting in an increase in interest income of $8,228,000.

Previous wording

Tax equivalent investment income for the six months ended June 30, 2024 increased $41,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 18 basis points to 2.32%.

Current wording

Tax equivalent investment income for the nine months ended September 30, 2024 increased $23,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 18 basis points to 2.36%.

Previous wording

Total loan interest income increased $23,527,000 for the six months ended June 30, 2024 compared to the same period last year, as a result of higher volume and yields.

Current wording

Total loan interest income increased $25,602,000 for the nine months ended September 30, 2024 compared to the same period last year, as a result of higher volume and yields.

Previous wording

Total interest expense increased $17,661,000 for the six months ended June 30, 2024 compared with the comparative period last year as a result of an increase in the volume of interest-bearing liabilities and an increase in rate on interest-bearing liabilities. Interest expense increased $5,761,000 due to volume as a result of an increase in interest bearing liabilities of $499.6 million. The average rate paid on interest-bearing liabilities increased from 1.83% to 2.99%. The increase was driven by the Federal Reserve interest rate increases in 2022 and 2023, which caused interest expense to increase $11,900,000.

Current wording

Total interest expense increased $20,741,000 for the nine months ended September 30, 2024 compared with the comparative period last year as a result of an increase in the volume of interest-bearing liabilities and an increase in rate on interest-bearing liabilities. Interest expense increased $6,975,000 due to volume as a result of an increase in interest bearing liabilities of $346.1 million. The average rate paid on interest-bearing liabilities increased from 1.83% to 3.02%. The increase was driven by the Federal Reserve interest rate increases in 2022 and 2023, which caused interest expense to increase $13,766,000.

Previous wording

Tax equivalent net interest income for the three months ended June 30, 2024 was $21,545,000 which compares to $18,189,000 for the same period last year. This represents an increase of $3,356,000, or 18.5% and was primarily caused by an increase in the volume of interest earning assets due to the HVBC acquisition.

Current wording

Tax equivalent net interest income for the three months ended September 30, 2024 was $21,570,000 which compares to $22,668,000 for the same period last year. This represents a decrease of $1,098,000, or 4.8% and was primarily caused by an increase in the volume of interest earning assets due to the HVBC acquisition.

Previous wording

Total tax equivalent interest income was $38,147,000 for the three month period ended June 30, 2024, compared to $27,078,000 for the comparable period last year, an increase of $11,069,000. This increase was a result of an increase of $7,383,000 due to a change in volume as average interest-bearing assets increased $444.8 million due to the HVBC acquisition. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 86 basis points from 4.72% to 5.58% resulting in an increase in interest income of $3,686,000.

Current wording

Total tax equivalent interest income was $38,935,000 for the three month period ended September 30, 2024, compared to $36,953,000 for the comparable period last year, an increase of $1,982,000. This increase was a result of an increase of $1,225,000 due to a change in volume as average interest-bearing assets increased $39.4 million due to organic growth primarily in our Delaware and Southeast Pennsylvania markets. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 22 basis points from 5.36% to 5.58% resulting in an increase in interest income of $757,000.

Previous wording

Total loan interest income increased $11,069,000 for the three months ended June 30, 2024 compared to the same period last year, primarily as a result of the HVBC acquisition.

Current wording

Total loan interest income increased $2,075,000 for the three months ended September 30, 2024 compared to the same period last year, primarily due to organic growth in our Delaware and Sotuheast Pennsylvania markets.

Previous wording

Total interest expense increased $7,713,000 for the three months ended June 30, 2024 compared with the comparative period last year as a result of an increase in the volume of interest-bearing liabilities and an increase in rate on interest-bearing liabilities. Interest expense increased $2,631,000 due to volume as a result of an increase in interest bearing liabilities of $447.2 million. The average rate paid on interest-bearing liabilities increased from 2.00% to 3.00%. The increase was driven by the Federal Reserve interest rate increases in 2022 and 2023, which caused interest expenses to increase $5,082,000.

Current wording

Total interest expense increased $3,080,000 for the three months ended September 30, 2024 compared with the comparative period last year as a result of an increase in the volume of interest-bearing liabilities and an increase in rate on interest-bearing liabilities. Interest expense increased $729,000 due to volume as a result of an increase in interest bearing liabilities of $44.2 million. The average rate paid on interest-bearing liabilities increased from 2.56% to 3.06%. The increase was driven by the Federal Reserve interest rate increases in 2022 and 2023, which caused interest expenses to increase $2,351,000.

Previous wording

For the six month period ended June 30, 2024, we recorded a provision for credit losses of $2,787,000, which represents a decrease of $2,066,000 from the $4,853,000 provision recorded in the corresponding six months of last year. The provision for 2023 includes $4,591,000 associated with the HVBC acquisition and $162,000 as a provision for off-balance sheet items, which is also primarily attributable to the HVBC acquisition. Excluding these items, the provision for 2024 is $2,687,000 more than the comparable period in 2023 and is due to an increase in non-performing other commercial loans that were originated by HVBC that subsequent to the acquisition have deteriorated. The provision in 2024 is also higher due to an increase in past due loans, the vast majority of which were acquired as part of the HVBC acquisition, and an increase in classified loans. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

Current wording

For the nine month period ended September 30, 2024, we recorded a provision for credit losses of $2,587,000, which represents a decrease of $2,741,000 from the $5,328,000 provision recorded in the corresponding nine months of last year. The provision for 2023 includes $4,591,000 associated with the HVBC acquisition and $162,000 as a provision for off-balance sheet items, which is also primarily attributable to the HVBC acquisition. Excluding these items, the provision for 2024 is $1,850,000 more than the comparable period in 2023 and is due to an increase in non-performing other commercial loans that were originated by HVBC that subsequent to the acquisition have deteriorated. The provision in 2024 is also higher due to an increase in past due and non-accrual loans, the vast majority of which were acquired as part of the HVBC acquisition, and an increase in classified loans. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

Previous wording

For the three months ended June 30, 2024, we recorded a provision for credit losses of $2,002,000, which represents a decrease of $2,851,000 from the $4,853,000 provision recorded in the corresponding three months of last year. The provision for 2023 includes $4,591,000 associated with the HVBC acquisition and $162,000 as a provision for off-balance sheet items, which is also primarily attributable to the HVBC acquisition. Excluding these items, the provision for 2024 is $1,902,000 more than the comparable period in 2023 and is due to an increase in non-performing other commercial loans that were originated by HVBC that subsequent to the acquisition have deteriorated. The provision in 2024 is also higher due to an increase in past due loans, the vast majority of which were acquired as part of the HVBC acquisition, and an increase in classified loans.

Current wording

For the three months ended September 30, 2024, we recorded a provision for credit losses of ($200,000), which represents a decrease of $675,000 from the $475,000 provision recorded in the corresponding three months of last year.

Previous wording

The following table shows the breakdown of non-interest income for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

Current wording

The following table shows the breakdown of non-interest income for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):

Previous wording

Non-interest income for the six months ended June 30, 2024 totaled $8,307,000, an increase of $3,853,000 when compared to the same period in 2023. For the three months ended June 30, 2024, non-interest income increased $1,056,000 to $3,336,000. During the first six months of 2024, net equity security losses amounted to $32,000 as a result of market losses associated with general banking stock losses compared with a $292,000 loss in the comparable 2023 period associated with market conditions for that period. There were no sales of available for sale securities during the first six months of 2024. During the six months ended June 30, 2023, there were $51,000 of losses from the sale of $10.0 million available for sale municipal securities. Additionally, $76.5 million of securities obtained as part of the acquisition were sold for no gain or loss during the second quarter of 2023.

Current wording

Non-interest income for the nine months ended September 30, 2024 totaled $12,062,000, an increase of $3,946,000 when compared to the same period in 2023. For the three months ended September 30, 2024, non-interest income increased $93,000 to $3,755,000. During the first nine months of 2024, net equity security gains amounted to $127,000 as a result of market gains associated with general banking stock gains compared with a $223,000 loss in the comparable 2023 period associated with market conditions for that period. There were no sales of available for sale securities during the first nine months of 2024. During the nine months ended September 30, 2023, there were $51,000 of losses from the sale of $10.0 million available for sale municipal securities. Additionally, $76.5 million of securities obtained as part of the acquisition were sold for no gain or loss during the second quarter of 2023.

Previous wording

The increase in gains on loans sold for the three and six month periods ended June 30, 2024 compared to 2023 is attributable the HVBC acquisition and their residential lending model, which focused on originating and selling residential mortgage loans, which includes the use of interest rate locks and other derivative activities, which is included in other income. The increase in earnings on bank owned life insurance is due to the HVBC acquisition, as well as the death benefits received upon the passing of a former employee. During the first quarter of 2024, the Company completed the sale of certain assets acquired as part of the HVB acquisition, which included loans and accrued interest, and software, as well as transferring certain contracts, processes and employees of a division internally known as Braavo. The proceeds from the sale totaled approximately $7.2 million and generated a pre-tax gain of approximately $1.1 million.

Current wording

The increase in gains on loans sold for the nine month periods ended September 30, 2024 compared to 2023 is attributable the HVBC acquisition and their residential lending model, which focused on originating and selling residential mortgage loans, which includes the use of interest rate locks and other derivative activities, which is included in other income. The increase in earnings on bank owned life insurance is due to the HVBC acquisition. During the first quarter of 2024, the Company completed the sale of certain assets acquired as part of the HVB acquisition, which included loans and accrued interest, and software, as well as transferring certain contracts, processes and employees of a division internally known as Braavo. The proceeds from the sale totaled approximately $7.2 million and generated a pre-tax gain of approximately $1.1 million.

Previous wording

The following tables reflect the breakdown of non-interest expense for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

Current wording

The following tables reflect the breakdown of non-interest expense for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):

Previous wording

Non-interest expenses increased $431,000 for the six months ended June 30, 2024 compared to the same period in 2023. Salaries and employee benefits increased $4,314,000 or 27.7%. The increase was due to merit increases effective at the beginning of 2024, additional full time equivalent employees (FTE) of 78.6, which is an increase of 25.1%, and an increase in health care expenses due to higher claims on the Company’s partially self-funded plan and the additional headcount.

Current wording

Non-interest expenses increased $16,000 for the nine months ended September 30, 2024 compared to the same period in 2023. Salaries and employee benefits increased $4,024,000 or 15.7%. The increase was due to merit increases effective at the beginning of 2024, additional full time equivalent employees (FTE) of 48.0, which is an increase of 13.9%, and an increase in health care expenses due to higher claims on the Company’s partially self-funded plan and the additional headcount.

Previous wording

For the three months ended June 30, 2024, non-interest expenses decreased $4,434,000 when compared to the same period in 2023. The changes in salaries and employee benefits, merger and acquisition expenses, occupancy, furniture and equipment, FDIC insurance, amortization of intangibles, software expenses and other expenses correspond to the changes for the six month period.

Current wording

For the three months ended September 30, 2024, non-interest expenses decreased $415,000 when compared to the same period in 2023. Salaries and benefits decreased $290,000 due to a decrease in headcount of 4.4 FTEs and commission expense for the comparable periods. The changes in merger and acquisition expenses, FDIC insurance and other expenses correspond to the changes for the nine month period.

Previous wording

The provision for income taxes was $2,590,000 for the six month period ended June 30, 2024 compared to $421,000 for the same period in 2023. The increase is primarily attributable to the increase in income before the provision for income taxes of $11,745,000 for the comparable periods due to the one-time costs associated with the HVBC acquisition. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate. Our effective tax rate was 17.4% and 13.4% for the first six months of 2024 and 2023, respectively, compared to the statutory rate of 21%.

Current wording

The provision for income taxes was $4,304,000 for the nine month period ended September 30, 2024 compared to $2,020,000 for the same period in 2023. The increase is primarily attributable to the increase in income before the provision for income taxes of $11,848,000 for the comparable periods due to the one-time costs associated with the HVBC acquisition. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate. Our effective tax rate was 17.8% and 16.4% for the first nine months of 2024 and 2023, respectively, compared to the statutory rate of 21%.

Previous wording

For the three months ended June 30, 2024, the provision for income taxes was $1,113,000 compared to a benefit of $1,188,000 for the same period in 2023. The increase is attributable to the increase in income before the provision for income taxes of $11,720,000 for the comparable periods due to the one-time acquisition costs. Our effective tax rate was 17.4% and (22.3)% for the three months ended June 30, 2024 and 2023, respectively.

Current wording

For the three months ended September 30, 2024, the provision for income taxes was $1,714,000 compared to $1,599,000 for the same period in 2023. The increase is attributable to an increase in income before income tax of $103,000 and earnings on bank owned life insurance being exempt from Federal income tax. Our effective tax rate was 18.5% and 17.5% for the three months ended September 30, 2024 and 2023, respectively.

Previous wording

Total assets were $2.95 billion at June 30, 2024, a decrease of $27.8 million from $2.98 billion at December 31, 2023, due primarily to decreases in cash and investments securities. Cash and cash equivalents decreased $14.4 million to $38.4 million. Available for sale securities decreased $14.9 million. Total deposits decreased $48.4 million to $2.27 billion since year-end 2023, while borrowed funds increased $12.8 million to $283.6 million.

Current wording

Total assets were $3.03 billion at September 30, 2024, an increase of $51.1 million from $2.98 billion at December 31, 2023, due primarily to increases in loans. Cash and cash equivalents decreased $16.1 million to $36.8 million. Available for sale securities increased $1.6 million. Total deposits increased $128.7 million to $2.45 billion since year-end 2023, while borrowed funds decreased $90.3 million to $231.7 million.

Previous wording

Cash and cash equivalents totaled $38.4 million at June 30, 2024 compared to $52.8 million at December 31, 2023. The decrease is due to a decrease in the cash held at the Federal Reserve. Management actively measures and evaluates the Company’s liquidity position through our Asset–Liability Committee and believes the Company’s liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources including the Bank’s core deposits, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.

Current wording

Cash and cash equivalents totaled $36.8 million at September 30, 2024 compared to $52.8 million at December 31, 2023. The decrease is due to a decrease in the cash held at the Federal Reserve. Management actively measures and evaluates the Company’s liquidity position through our Asset–Liability Committee and believes the Company’s liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources including the Bank’s core deposits, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.

Previous wording

Our investment portfolio decreased by $15.3 million, or 3.6%, from December 31, 2023 to June 30, 2024. During 2024, we purchased $14.0 million of mortgage-backed securities in U.S government sponsored entities. We experienced $5.6 million of principal repayments and $21.5 million of calls and maturities. As a result of increases in market interest rates, the unrealized loss on available for sale investment portfolio increased $1.2 million. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the six month period ended June 30, 2024 yielded 2.32%, compared to 2.14% in the comparable period in 2023, on a tax equivalent basis.

Current wording

Our investment portfolio increased by $1.4 million, or 0.3%, from December 31, 2023 to September 30, 2024. During 2024, we purchased $36.2 million of mortgage-backed securities in U.S government sponsored entities. We experienced $8.9 million of principal repayments and $33.8 million of calls and maturities. As a result of decreases in market interest rates, the unrealized loss on available for sale investment portfolio decreased $9.2 million. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the nine month period ended September 30, 2024 yielded 2.36%, compared to 2.18% in the comparable period in 2023, on a tax equivalent basis.

Previous wording

Loans held for sale increased $4.8 million to $14.2 million as of June 30, 2024 from December 31, 2023 due to the second quarter typically being more active for residential home sales than the fourth quarter.

Current wording

Loans held for sale increased $4.1 million to $13.5 million as of September 30, 2024 from December 31, 2023 due to the third quarter typically being more active for residential home sales than the fourth quarter.

Previous wording

Loan activity in the first half of 2024 has been limited. The decrease in construction loans was due to the underlying projects being completed and transferred to the commercial and agricultural real estate portfolios. As part of the Braavo sale, we sold $6.1 million of other commercial loans. Due to timing, student loans increased in the first half of 2024 resulting in an increase in consumer loans.

Current wording

Loan activity picked up slightly during the third quarter of 2024. The decrease in construction loans was due to the underlying projects being completed and transferred to the commercial and agricultural real estate portfolios. As part of the Braavo sale, we sold $6.1 million of other commercial loans. Due to timing, student loans increased in the first half of 2024 resulting in an increase in consumer loans.

Previous wording

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. As of June 30, 2024, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 305.2% of consolidated risk based capital. Construction, land and land development loans represented 64.4% of consolidated risk based capital. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital and may adversely affect shareholder returns. The Company has an extensive Capital Policy and Capital Plan, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. The Company continues to refine information reviewed related to commercial real estate and to implement additional monitoring and testing of commercial real estate loans.

Current wording

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. As of September 30, 2024, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 301.5% of consolidated risk based capital. Construction, land and land development loans represented 62.8% of consolidated risk based capital as of September 30, 2024. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital and may adversely affect shareholder returns. The Company has an extensive Capital Policy and Capital Plan, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. The Company continues to refine information reviewed related to commercial real estate and to implement additional monitoring and testing of commercial real estate loans. As of September 30, 2024, management believes that it has implemented appropriate risk management practices, including risk assessments, board-approved underwriting policies and related procedures, which include monitoring loan portfolio performance and stressing of the commercial real estate portfolio under adverse economic conditions.

Previous wording

While the Bank lends to companies that service companies that explore for natural gas in our market area, the Bank has not originated any loans to companies performing the actual drilling and exploration activities. Loans made by the Bank are to service industry customers which include trucking companies, stone quarries and other support businesses, favoring customers that have had a relationship with the Bank prior to supporting the exploration for natural gas. We also have originated loans to businesses and individuals for restaurants, hotels and apartment rentals that have been developed and expanded to meet the housing and living needs of the gas industry workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities have been originated in accordance with specific policies and procedures for lending to these entities, which include more stringent loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.

Current wording

While the Company lends to companies that service companies that explore for natural gas in our market area, the Company has not originated any loans to companies performing the actual drilling and exploration activities. Loans made by the Company are to service industry customers which include trucking companies, stone quarries and other support businesses, favoring customers that have had a relationship with the Company prior to supporting the exploration for natural gas. We also have originated loans to businesses and individuals for restaurants, hotels and apartment rentals that have been developed and expanded to meet the housing and living needs of the gas industry workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities have been originated in accordance with specific policies and procedures for lending to these entities, which include more stringent loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.

Previous wording

The allowance for credit losses - loans is maintained at a level which, in management’s judgment, is adequate to absorb losses in the loan portfolio. The provision for credit losses - loans is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for credit losses - loans was $22,797,000 or 1.01% of total loans as of June 30, 2024 as compared to $21,153,000 or 0.94% of loans as of December 31, 2023. The $1,644,000 increase is a result of a $2,986,000 provision for credit losses – loans less net charge-offs of $1,342,000. Net charge-offs for 2024 are driven by loans acquired as part of the HVBC acquisition due to collateral issues. The following table shows the distribution of the allowance for credit losses - loans and the percentage of loans compared to total loans by loan category as of June 30, 2024 and December 31, 2023 (dollars in thousands):

Current wording

The allowance for credit losses - loans is maintained at a level which, in management’s judgment, is adequate to absorb losses in the loan portfolio. The provision for credit losses - loans is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for credit losses - loans was $21,695,000 or 0.93% of total loans as of September 30, 2024 as compared to $21,153,000 or 0.94% of loans as of December 31, 2023. The $542,000 increase is a result of a $3,086,000 provision for credit losses – loans less net charge-offs of $2,544,000. Net charge-offs for 2024 are driven by loans acquired as part of the HVBC acquisition due to collateral issues. The following table shows the distribution of the allowance for credit losses - loans and the percentage of loans compared to total loans by loan category as of September 30, 2024 and December 31, 2023 (dollars in thousands):

Previous wording

The following table provides information related to credit loss experience and loan quality for the six months ended June 30, 2024 and the year ended December 31, 2023 (dollars in thousands).

Current wording

The following table provides information related to credit loss experience and loan quality for the nine months ended September 30, 2024 and the year ended December 31, 2023 (dollars in thousands).

Previous wording

Nonperforming loans increased $2.5 million during 2024. During the first half of 2024, the Bank placed one large commercial relationship, one large construction relationship and numerous other commercial loans on non-accrual status, while also foreclosing on one construction loan that was transferred to foreclosed assets held for sale, which accounts for the majority of the change in non-performing loans since year-end. At June 30, 2024, approximately 52.3% of the Bank’s non-performing loans are associated with the following six customer relationships:

Current wording

Nonperforming loans increased $8.9 million during 2024. During the first nine months of 2024, the Bank placed five large commercial relationships and one large construction relationship on non-accrual status, while also foreclosing on one construction loan that was transferred to foreclosed assets held for sale, which accounts for the majority of the change in non-performing loans since year-end. At September 30, 2024, approximately $15.7 million, or 72.8%, of the Bank’s non-performing loans are associated with the following nine customer relationships: