CITIZENS FINANCIAL SERVICES INC

Previous 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:

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., First Citizens Community Bank, First Citizens Insurance Agency, Inc. 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 nine months ended September 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, 2024. The results of operations for the three months ended March 31, 2025 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 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.

Current wording

The Company engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Lycoming, Bradford 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 recently completed 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 branches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 48 banking facilities, 38 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, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, Williamsport, Plumsteadville, Philadelphia, two branches near the city of Lebanon and two branches in Huntington Valley. The Company has limited branch offices located in Winfield, Pennsylvania and Georgetown, Delaware. 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. In the fourth quarter of 2023, we opened a branch in Williamsport, Pennsylvania. During 2024, the Montgomeryville, PA mortgage office was closed and the Georgetown office was opened.

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 September 30, 2024 and December 31, 2023, the Trust Department had $181.1 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 March 31, 2025 and December 31, 2024, the Trust Department had $178.0 million and $180.7 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 $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.

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 $395.9 million at December 31, 2024 to $397.2 million at March 31, 2025. 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 $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.

Current wording

The Company had net income of $7,621,000 for the first three months of 2025 compared to $7,024,000 for last year’s comparable period, an increase of $597,000, or 8.50%. Basic earnings per share for the first three months of 2025 were $1.60, compared to $1.48 for last year’s comparable period, representing an 8.11% increase. Annualized return on assets and return on equity for the three months of 2025 were 1.00% and 10.00%, respectively, compared with 0.94% and 9.95% for last year’s comparable period.

Previous 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.

Current wording

Net interest income for the first three months of 2025 was $23,002,000, an increase of $2,044,000, or 9.75%, compared to the same period in 2024. For the first three months of 2025 the provision for credit losses was $625,000 compared to a provision of $785,000 for the first three months of 2024. Consequently, net interest income after the provision for credit losses was $22,377,000 in the first three months of 2025 compared to $20,173,000 during the first three months of 2024.

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 nine months ended September 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 months ended March 31, 2025 and 2024 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 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):

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 months ended March 31, 2025 and 2024. 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 March 31, 2025 and 2024 (in thousands):

Previous 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.

Current wording

Tax equivalent net interest income increased from $21,208,000 for the three month period ended March 31, 2024 to $23,250,000 for the three month period ended March 31, 2025, an increase of $2,042,000. This increase was a result of an increase of $348,000 due to a change in volume as average interest-bearing assets increased $58.7 million due to organic growth primarily in our Delaware market. As a result of the lower market interest rates, the yield on average interest earning liabilities decreased 19 basis points from 2.99% to 2.80% resulting in a decrease in interest expense of $963,000. The tax equivalent net interest margin increased from 3.05% for the first three months of 2024 to 3.30% for the comparable period in 2025. The increase was primarily caused by the decrease in the cost of interest-bearing liabilities due to lower market interest rates in 2025 compared to 2024.

Previous 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.

Current wording

Total tax equivalent interest income for the 2025 totaled $39,262,000, an increase of $1,079,000, when compared to the same period in 2024. This increase was a result of an increase of $557,000 due to a change in volume as average interest-bearing assets increased $58.7 million. The yield on interest earning assets increased from 5.48% to 5.57% resulting in an increase in interest income of $522,000.

Previous 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%.

Current wording

Tax equivalent investment income for the three months ended March 31, 2025 increased $762,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 56 basis points to 2.85%.

Previous 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.

Current wording

Total loan interest income increased $417,000 for the three months ended March 31, 2025 compared to the same period last year, as a result of higher volume and yields.

Previous 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.

Current wording

Total interest expense decreased $963,000 for the three months ended March 31, 2025 compared with the comparative period last year as a result of a decrease in rate on interest-bearing liabilities. Interest expense increased $209,000 due to volume as a result of an increase in interest bearing liabilities of $41.2 million. The average rate paid on interest-bearing liabilities decreased from 2.99% to 2.80%. The decrease was driven by the Federal Reserve interest rate decreases in 2024, which caused interest expense to decrease $1,172,000.

Previous 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):

Current wording

The following table shows the breakdown of non-interest income for the three months ended March 31, 2025 and 2024 (dollars in thousands):

Previous 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.

Current wording

The decrease in gains on loans sold for the three month periods ended March 31, 2025 compared to 2024 is attributable to the continued high mortgage rate environment that is limiting the number of sales as well as limiting refinancing opportunities. The decrease in earnings on bank owned life insurance is due to the death benefits received upon the passing of a former employee in 2024. 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 nine months ended September 30, 2024 and 2023 (dollars in thousands):

Current wording

The following tables reflect the breakdown of non-interest expense for the three months ended March 31, 2025 and 2024 (dollars in thousands):

Previous 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%.

Current wording

The provision for income taxes was $1,755,000 for the three month period ended March 31, 2025 compared to $1,477,000 for the same period in 2024. The increase is primarily attributable to the increase in income before the provision for income taxes of $875,000 for the comparable periods due to the increase in net interest income. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate. Our effective tax rate was 18.7% and 17.4% for the first three months of 2025 and 2024, respectively, compared to the statutory rate of 21%.

Previous wording

We are invested in seven limited partnerships that have established low-income housing projects in our market areas, with our most recent investments made in the second half of 2022. Three projects are currently in construction phase with credits being recognized on two of the projects for the first time in 2023 with the expectation that the remaining one will generate credits in the second half of 2024. The remaining four partnership credits are fully utilized as of December 31, 2023. We anticipate recognizing an aggregate of $8.2 million of tax credits over the next 12 years.

Current wording

We are invested in seven limited partnerships that have established low-income housing projects in our market areas, with our most recent investments made in the second half of 2022. We are currently recognizing credits on three projects. The remaining four partnership credits are fully utilized as of December 31, 2023. We anticipate recognizing an aggregate of $7.6 million of tax credits over the next 11 years.

Previous 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.

Current wording

Total assets were $3.02 billion at March 31, 2025, a decrease of $9.4 million from $3.03 billion at December 31, 2024, due primarily to a decrease in loans held for sale and other assets. Cash and cash equivalents decreased $5.4 million to $36.8 million. Available for sale securities increased $4.8 million. Total loans increased $2.0 million. Total deposits decreased $17.2 million to $2.36 billion since year-end 2024, while borrowed funds increased $4.3 million to $302.0 million.

Previous 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.

Current wording

Cash and cash equivalents totaled $36.8 million at March 31, 2025 compared to $42.2 million at December 31, 2024. 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 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.

Current wording

Our investment portfolio increased by $4.8 million, or 1.1%, from December 31, 2024 to March 31, 2025. During 2025, we purchased $14.2 million of mortgage-backed securities in U.S government sponsored entities. We experienced $4.6 million of principal repayments and $14.1 million of calls and maturities. As a result of decreases in market interest rates, the unrealized loss on available for sale investment portfolio decreased $4.9 million. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the three month period ended March 31, 2025 yielded 2.85%, compared to 2.29% in the comparable period in 2024, on a tax equivalent basis.

Previous wording

The investment strategy for 2024 has been to utilize cashflows from the investment portfolio to repay overnight borrowings, while reinvesting certain balances. We continually monitor interest rate trading ranges and seek to time investment security purchases when rates are in the top third of the trading range. The Company believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, including a rising rate environment, while providing sufficient cashflows to meet liquidity needs.

Current wording

The investment strategy for 2025 has been to utilize cashflows from the investment portfolio to repurchase investments. We continually monitor interest rate trading ranges and seek to time investment security purchases when rates are in the top third of the trading range. The Company believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, including a rising rate environment, while providing sufficient cashflows to meet liquidity needs.

Previous 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.

Current wording

Loans held for sale decreased $3.6 million to $6.1 million as of March 31, 2025 from December 31, 2024 due to the first quarter typically being the slowest quarter for residential home sales.

Previous wording

Lending efforts have historically been focused in north central Pennsylvania, the south central Pennsylvania counties of Lebanon, Schuylkill, Berks and Lancaster, the central Pennsylvania counties of Clinton and Centre, and southern New York. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities in central Pennsylvania. In April 2020, we completed the MidCoast acquisition, which expanded our markets into the State of Delaware with activity centered around the cities of Wilmington and Dover, Delaware. Since the MidCoast acquisition, we have opened two additional branches in the Delaware market to better serve customers in the Wilmington market, as well as the surrounding area of Chester County, Pennsylvania. In June 2023, we completed the HVBC acquisition, which expanded our markets into south east Pennsylvania, including the counties of Montgomery, Bucks and Philadelphia. It also includes a Mortgage production office in Mount Laurel, New Jersey. In the fourth quarter of 2023, we opened an office in Williamsport, Pennsylvania, to further our efforts in central Pennsylvania. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships our lending teams have with their customers and our lenders expertise in certain areas, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank’s website. The Bank offers a variety of loans although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors.

Current wording

Lending efforts have historically been focused in north central Pennsylvania, the south central Pennsylvania counties of Lebanon, Schuylkill, Berks and Lancaster, the central Pennsylvania counties of Clinton and Centre, and southern New York. In Delaware, our activity is centered around the cities of Wilmington and Dover, Delaware. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities in central Pennsylvania and a loan production office in Georgetown, Delaware to also support our agricultural initiative. In June 2023, we completed the HVBC acquisition, which expanded our markets into south east Pennsylvania, including the counties of Montgomery, Bucks and Philadelphia. It also includes a Mortgage production office in Mount Laurel, New Jersey. In the fourth quarter of 2023, we opened an office in Williamsport, Pennsylvania, to further our efforts in central Pennsylvania. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships our lending teams have with their customers and our lenders expertise in certain areas, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank’s website. The Bank offers a variety of loans although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors.

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 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.

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 March 31, 2025, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 306.5% of consolidated risk based capital. Construction, land and land development loans represented 57.8% of consolidated risk based capital as of March 31, 2025. 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 March 31, 2025, 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

Given the significance of commercial real estate (“CRE”) loans to our total loan portfolio, the following table further disaggregates these loans by occupied status and by collateral type as of September 30, 2024 (dollars in thousands):

Current wording

Given the significance of commercial real estate (“CRE”) loans to our total loan portfolio, the following table further disaggregates these loans by occupied status and by collateral type as of March 31, 2025 and December 31, 2024 (dollars in thousands):

Previous wording

The following table provides a breakdown of our construction portfolio by collateral type as of September 30, 2024 (dollars in thousands):

Current wording

The following table provides a breakdown of our construction portfolio by collateral type as of March 31, 2025 and December 31, 2024 (dollars in thousands):

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 $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):

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 $22,081,000 or 0.95% of total loans as of March 31, 2025 as compared to $21,699,000 or 0.94% of loans as of December 31, 2024. The $382,000 increase is a result of a $538,000 provision for credit losses – loans less net charge-offs of $156,000. 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 March 31, 2025 and December 31, 2024 (dollars in thousands):

Previous 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).

Current wording

The following table provides information related to credit loss experience and loan quality for the three months ended March 31, 2025 and the year ended December 31, 2024 (dollars in thousands).

Previous wording

The Company believes it utilizes a disciplined and thorough loan review process based upon its internal loan policy approved by the Company’s Board of Directors. The purpose of the review is to assess loan quality, analyze delinquencies, identify problem loans, evaluate potential charge-offs and recoveries, and assess general overall economic conditions in the markets served. An external independent loan review is performed on our commercial portfolio at least semi-annually for the Company. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) a large sample of relationships in aggregate over $1,000,000, 3) selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 4) such other loans which management or the consultant deems appropriate. As part of this review, our underwriting process and loan grading system is evaluated.

Current wording

The Company believes it utilizes a disciplined and thorough loan review process based upon its internal loan policy approved by the Company’s Board of Directors. The purpose of the review is to assess credit quality, analyze delinquencies, identify problem loans, evaluate potential charge-offs and recoveries, and assess general overall economic conditions in the markets served. An external independent loan review is performed on our commercial portfolio at least semi-annually for the Company. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) a large sample of relationships in aggregate over $1,000,000, 3) selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 4) such other loans which management or the consultant deems appropriate. As part of this review, our underwriting process and loan grading system is evaluated.

Previous wording

The Company owns bank owned life insurance policies to offset future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits. As of September 30, 2024, and December 31, 2023, the cash surrender value of the life insurance was $50.1 million and $49.9 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $1,334,000 and $941,000 for the nine month periods ended September 30, 2024 and 2023, respectively. During the first quarter of 2024, the Company received proceeds of $1,147,000, which included death benefits of $326,000 on a former employee of the Company. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers’ credit ratings.

Current wording

The Company owns bank owned life insurance policies to offset future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits. As of March 31, 2025, and December 31, 2024, the cash surrender value of the life insurance was $50.6 million and $50.3 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $346,000 and $668,000 for the three month periods ended March 31, 2025 and 2024, respectively. During the first quarter of 2024, the Company received proceeds of $1,147,000, which included death benefits of $326,000 on a former employee of the Company. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers’ credit ratings.

Previous wording

The Company policies that were purchased directly from insurance companies and acquired as part of the HVBC acquisition are structured so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The net amount at risk is the total death benefit payable less the cash surrender value of the policy as of the date of death. The policies acquired as part of the acquisition of FNB provide a fixed split-dollar benefit for the beneficiary’s estate, which is dependent on several factors including whether the covered individual was a former Director of First National Bank of Fredericksburg (“FNB”) or a former employee of FNB and their salary level. As of September 30, 2024 and December 31, 2023, included in other liabilities on the Consolidated Balance Sheet was a liability of $566,000 and $610,000, respectively, for the obligation under the split-dollar benefit agreements.

Current wording

The Company policies that were purchased directly from insurance companies and acquired as part of the HVBC acquisition are structured so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The net amount at risk is the total death benefit payable less the cash surrender value of the policy as of the date of death. The policies acquired as part of an acquisition in 2015 provide a fixed split-dollar benefit for the beneficiary’s estate, which is dependent on several factors including whether the covered individual was a former Director of First National Bank of Fredericksburg (“FNB”) or a former employee of FNB and their salary level. As of March 31, 2025 and December 31, 2024, included in other liabilities on the Consolidated Balance Sheet was a liability of $518,000 and $514,000, respectively, for the obligation under the split-dollar benefit agreements.

Previous wording

Premises and equipment decreased $147,000 to $21.2 million as of September 30, 2024 from December 31, 2023 as a result of depreciation.

Current wording

Premises and equipment increased $232,000 to $21.6 million as of March 31, 2025 from December 31, 2024 as a result of purchases of equipment.

Previous wording

Deposits increased $128.7 million since December 31, 2023. The increase in deposits was driven by increases in state and political organizations and timing of their tax receipts and an increase in brokered deposits of $32.3 million. We continue to see customer funds being transferred to higher-yielding investment alternatives. Brokered deposits totaled $141.6 million and $109.3 million as of September 30, 2024 and December 31, 2023, respectively. At September 30, 2024, the Bank estimates that balances held by customers in excess ofthe FDIC insurance limit ($250,000 per insured account)totaled $1.24 billion, or 50.5% of the Bank’s total deposits. Included in this balance are balances held through Intrafi, which provides customers with additional FDIC insurance, as well as deposits collateralized by securities or letters of credit (almost exclusively municipal deposits). The total of these itemswas$695.0 million, or 28.4% of the Bank’s total deposits, as of September 30, 2024.

Current wording

Deposits decreased $17.2 million since December 31, 2024. The decrease in deposits was driven by decreases in state and political organizations and timing of their tax receipts and a decrease in brokered deposits of $14.6 million. We continue to see customer funds being transferred to higher-yielding investment alternatives. Brokered deposits totaled $78.4 million and $93.1 million as of March 31, 2025 and December 31, 2024, respectively. At March 31, 2025, the Bank estimates that balances held by customers in excess ofthe FDIC insurance limit ($250,000 per insured account)totaled $1.13 billion, or 47.3% of the Bank’s total deposits. Included in this balance are balances held through Intrafi, which provides customers with additional FDIC insurance, as well as deposits collateralized by securities or letters of credit (almost exclusively municipal deposits). The total of these itemswas$611.7 million, or 25.7% of the Bank’s total deposits, as of March 31, 2025.

Previous wording

Borrowed funds were $231.7 million and $322.0 million as of September 30, 2024 and December 31, 2023, respectively. The decrease in borrowed funds was due to the decrease in loans and the seasonal increase in deposits.

Current wording

Borrowed funds were $302.0 million and $297.7 million as of March 31, 2025 and December 31, 2024, respectively. The increase in borrowed funds was due to the increase in loans and investments and the seasonal decrease in deposits.

Previous wording

In April 2020, the Bank entered into two interest rate swap agreements to convert floating-rate debt to fixed rate debt on notional amounts of $15.0 million and $10.0 million. The interest rate swap instruments involve an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amounts. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on April 1, 2020 and expire on April 1, 2025 and April 1, 2027. In April 2020, the Company entered into an interest rate swap agreement to convert floating-rate debt to fixed rate debt on a notional amounts of $7.5 million. The interest rate swap instrument involves an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on April 13, 2020 and expire on June 17, 2027. In May of 2020, the Bank entered into three two year forward interest rate swaps that will convert floating rate debt to fixed rate debt on notional amounts of $6.0 million each. The interest rate swap instruments involves an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on May 14, 2020 and expire on May 14, 2027, 2029 and 2032. The fair value of the interest rate swaps at September 30, 2024 was $3,828,000 and is included within fair value of derivative instruments on the consolidated balance sheets.

Current wording

In April 2020, the Bank entered into two interest rate swap agreements to convert floating-rate debt to fixed rate debt on notional amounts of $15.0 million and $10.0 million. The interest rate swap instruments involve an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amounts. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on April 1, 2020 and expire on April 1, 2025 and April 1, 2027. In April 2020, the Company entered into an interest rate swap agreement to convert floating-rate debt to fixed rate debt on a notional amounts of $7.5 million. The interest rate swap instrument involves an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on April 13, 2020 and expire on June 17, 2027. In May of 2020, the Bank entered into three two year forward interest rate swaps that will convert floating rate debt to fixed rate debt on notional amounts of $6.0 million each. The interest rate swap instruments involves an agreement to receive a floating rate and pay a fixed rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense in the period. The interest rate swap agreements were entered into on May 14, 2020 and expire on May 14, 2027, 2029 and 2032. The fair value of the interest rate swaps at March 31, 2025 was $3,452,000 and is included within fair value of derivative instruments on the consolidated balance sheets.

Previous wording

Total stockholders’ equity was $298.7 million at September 30, 2024 compared to $279.7 million at December 31, 2023, an increase of $18,988,000, or 6.8%. Excluding accumulated other comprehensive loss, stockholders’ equity increased $13.0 million, or 4.3%. The accumulated comprehensive loss decreased $6.0 million, which was primarily the result of the increase in fair value of the Company’s available for sale investment portfolio caused by the decrease in longer term market interest rates. For the first nine months of 2024, the Company had net income of $19.8 million and declared cash dividends of $7.0 million, or $1.46 per share, representing a cash dividend payout ratio of 35.1%.

Current wording

Total stockholders’ equity was $308.3 million at March 31, 2025 compared to $299.7 million at December 31, 2024, an increase of $8,562,000, or 2.9%. Excluding accumulated other comprehensive loss, stockholders’ equity increased $5.3 million, or 1.6%. The accumulated comprehensive loss decreased $3.3 million, which was primarily the result of the increase in fair value of the Company’s available for sale investment portfolio caused by the decrease in longer term market interest rates. For the first three months of 2025, the Company had net income of $7.6 million and declared cash dividends of $2.4 million, or $0.495 per share, representing a cash dividend payout ratio of 30.9%.

Previous wording

All of the Company’s debt investment securities are classified as available-for-sale, making this portion of the Company’s balance sheet more sensitive to the changing market value of investments due to changes in market interest rates. As a result of decreases in longer term market interest rates, the defined benefit plan obligations and the interest rate swaps entered into during 2020, accumulated other comprehensive loss decreased approximately $6.0 million from December 31, 2023.

Current wording

All of the Company’s debt investment securities are classified as available-for-sale, making this portion of the Company’s balance sheet more sensitive to the changing market value of investments due to changes in market interest rates. As a result of decreases in longer term market interest rates, accumulated other comprehensive loss decreased approximately $3.3 million from December 31, 2024.

Previous wording

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. There is a two quarter grace period for a qualifying community bank to return to 9% as long as the CBLR is least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply. At September 30, 2024, the Bank leverage ratio under the CBLR framework was 8.96%, which is less than 9.0% requirement to be considered “well-capitalized” under the CBLR. As such, as of September 30, 2024, and going forward, the Bank reverted to the prompt corrective action framework and will no longer utilize the CBLR framework until such time as the CBLR exceeds 9%. The following table provides the Bank’s computed risk‑based capital ratios as of September 30, 2024, which reflects the Bank being “well capitalized” on that date (dollars in thousands):

Current wording

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. There is a two quarter grace period for a qualifying community bank to return to 9% as long as the CBLR is least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply. At March 31, 2025, the Bank leverage ratio under the CBLR framework was 9.06%, which meets the 9.0% requirement to be considered “well-capitalized” under the CBLR. The Bank leverage ratio as of December 31, 2024 was 8.99%, which did not meet the ratio to be considered “well-capitalized” under the CBLR as of December 31, 2024. As such, the following table provides the Bank’s computed risk‑based capital ratios as of December 31, 2024, which reflects the Bank being well capitalized at that date (dollars in thousands):