CITIZENS FINANCIAL SERVICES INC

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, 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.

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 and six months ended June 30, 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, 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.

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 HVBC acquisition, we 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

The banking industry in the Bank’s service areas continue to be extremely competitive for loans and deposits, both among commercial banks and with other financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions, agricultural cooperatives and internet entities. Competition in our north central Pennsylvania market has increased as a result of other financial institutions expanding looking to expand into new markets. With larger population centers in our central, south central and south east Pennsylvania markets, as well as in our Delaware market, we experience more competition to gather deposits and to make loans. Mortgage banking firms, financial companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms and even government agencies provide additional competition for loans, deposits and other financial services. Fintech and blockchain entities offering crypto services are also increasing competition for the Company’s financial services. The Bank is generally competitive with all competing financial institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.

Current wording

The banking industry in the Bank’s service areas continue to be extremely competitive for loans and deposits, both among commercial banks and with other financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions, agricultural cooperatives and internet entities. Competition in our north central Pennsylvania market has increased as a result of other financial institutions expanding or looking to expand into new markets. With larger population centers in our central, south central and south east Pennsylvania markets, as well as in our Delaware market, we experience more competition to gather deposits and to make loans. Mortgage banking firms, financial companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms and even government agencies provide additional competition for loans, deposits and other financial services. Fintech and blockchain entities offering crypto services are also increasing competition for the Company’s financial services. The Bank is generally competitive with all competing financial institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.

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 March 31, 2025 and December 31, 2024, the Trust Department had $178.0 million and $180.7 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 June 30, 2025 and December 31, 2024, the Trust Department had $188.8 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 $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.

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 $419.9 million at June 30, 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 $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.

Current wording

The Company had net income of $16,084,000 for the first six months of 2025 compared to $12,299,000 for last year’s comparable period, an increase of $3,785,000, or 30.8%, primarily due to an increase in net interest income after the provision for credit losses of $5,804,000. Basic earnings per share for the first six months of 2025 was $3.35, compared to $2.56 for last year’s comparable period, representing a 30.9% increase. Annualized return on assets and return on equity for the six months of 2025 were 1.07% and 10.44%, respectively, compared with 0.83% and 8.67% for last year’s comparable period.

Previous 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.

Current wording

Net interest income for the first six months of 2025 was $46,650,000, an increase of $4,392,000, or 10.4%, compared to the same period in 2024. For the first six months of 2025 the provision for credit losses was $1,375,000. The provision for the first six months of 2024 was $2,787,000. Consequently, net interest income after the provision for credit losses was $45,275,000 in the first six months of 2025 compared to $39,471,000 during the first six 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 months ended March 31, 2025 and 2024 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 six months ended June 30, 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 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):

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 six months ended June 30, 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 June 30, 2025 and 2024 (in thousands):

Previous 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.

Current wording

Tax equivalent net interest income increased from $42,753,000 for the six month period ended June 30, 2024 to $47,154,000 for the six month period ended June 30, 2025, an increase of $4,401,000. This increase was a result of an increase of $867,000 due to a change in volume as average interest-bearing assets increased $49.5 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 24 basis points from 2.99% to 2.75% resulting in a decrease in interest expense of $2,811,000. The tax equivalent net interest margin increased from 3.09% for the first six months of 2024 to 3.36% 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 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.

Current wording

Total tax equivalent interest income for the 2025 six month period increased $1,937,000 as compared to the 2024 six month period. This increase was a result of an increase of $1,214,000 due to a change in volume as average interest-bearing assets increased $49.5 million. The yield on interest earning assets increased from 5.52% to 5.58% resulting in an increase in interest income of $723,000.

Previous 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.

Current wording

Total interest expense decreased $2,464,000 for the six months ended June 30, 2025 compared with the comparative period last year as a result of a decrease in rate on interest-bearing liabilities. Interest expense increased $347,000 due to volume as a result of an increase in interest bearing liabilities of $28.8 million. The average rate paid on interest-bearing liabilities decreased from 2.99% to 2.75%. The decrease was driven by the Federal Reserve interest rate cuts in the second half of 2024, which caused interest expense to decrease $2,811,000.

Previous 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%.

Current wording

Tax equivalent investment income for the three months ended June 30, 2025 increased $834,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 58 basis points to 2.93%.

Previous 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.

Current wording

Total loan interest income increased $154,000 for the three months ended June 30, 2025 compared to the same period last year, as a result of higher volume.

Previous wording

For the three months ended March 31, 2025, we recorded a provision for credit losses of $625,000, which represents a decrease of $160,000. The decrease in the provision was due to a decrease in specific reserves for non-performing loans when comparing 2025 to 2024. It should be noted that as in the prior year, loss drivers were updated which including updating prepayment and curtailment speeds as well as additional information. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

Current wording

For the six month period ended June 30, 2025, we recorded a provision for credit losses of $1,375,000, which represents a decrease of $1,412,000 from the $2,787,000 provision recorded in the corresponding six months of last year. The decrease in the provision in 2025 compared to 2024 was due to the amount of non-performing other commercial loans that were originated by HVBC that subsequent to the acquisition deteriorated in 2024. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

Previous wording

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

Current wording

The following table shows the breakdown of non-interest income for the three and six months ended June 30, 2025 and 2024 (dollars in thousands):

Previous wording

Non-interest income for the three months ended March 31, 2025 totaled $3,427,000, a decrease of $1,544,000 when compared to the same period in 2024. During the first three months of 2025, net equity security losses amounted to $11,000 as a result of market losses associated with general bank stock market losses compared with a $55,000 gain in the comparable 2024 period associated with market conditions for that period.

Current wording

Non-interest income for the six months ended June 30, 2025 totaled $7,092,000, a decrease of $1,215,000 when compared to the same period in 2024. For the three months ended June 30, 2025, non-interest income increased $329,000 to $3,665,000. During the first six months of 2025, net equity security gains amounted to $22,000 as a result of market gains associated with general banking stock gains compared with a $32,000 loss in the comparable 2024 period associated with market conditions for that period. There were no sales of available for sale securities during the first six months of 2025 or 2024.

Previous 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.

Current wording

The increase in gains on loans sold for the three and six month periods ended June 30, 2025 compared to 2024 is attributable higher market prices on the loans sold in 2025 compared to 2024. The decrease in earnings on bank owned life insurance for the six month period is due to 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 months ended March 31, 2025 and 2024 (dollars in thousands):

Current wording

The following tables reflect the breakdown of non-interest expense for the three and six months ended June 30, 2025 and 2024 (dollars in thousands):

Previous wording

Non-interest expenses decreased $215,000 for the three months ended March 31, 2025 compared to the same period in 2024. Salaries and employee benefits remained flat at $10.3 million. Full time equivalent employees (FTE) decreased 14.3 or 3.6% when comparing 2025 to 2024. This decrease in headcount helped to offset the increase in salary and benefit expense due to merit increases, increased profit sharing and other retirement expenses.

Current wording

Non-interest expenses decreased $314,000 for the six months ended June 30, 2025 compared to the same period in 2024. Salaries and employee benefits increased $358,000 or 1.8%. Full time equivalent employees (FTE) decreased 11.4 or 2.9% when comparing 2025 to 2024. This decrease in headcount helped to offset the increase in salary and benefit expense due to merit increases, increased profit sharing, vacation expenses, healthcare and other retirement expenses.

Previous wording

Professional fees decreased due to various legal matters in 2024, of which $201,000 was related to the sale of Braavo. The decrease in FDIC insurance is due to an increase in the Bank’s leverage ratio. The increase in ORE expenses was due to the sale of an OREO property in 2024 that generated a gain in of $138,000.

Current wording

Professional fees decreased due to various legal matters in 2024, of which $201,000 was related to the sale of then Braavo division. The decrease in FDIC insurance is due to an increase in the Bank’s leverage ratio, which provided for a lower rate in determining the expense. The increase in ORE expenses was due to the sale of an OREO property in 2024 that generated a gain of $138,000.

Previous 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%.

Current wording

The provision for income taxes was $3,708,000 for the six month period ended June 30, 2025 compared to $2,590,000 for the same period in 2024. The increase is primarily attributable to the increase in income before the provision for income taxes of $4,903,000 for the comparable periods due increase in net interest income after the provision for credit losses. 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 six 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. 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.

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 $7.4 million of tax credits over the next 11 years.

Previous 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.

Current wording

Total assets were $2.97 billion at June 30, 2025, a decrease of $58.5 million from $3.03 billion at December 31, 2024, due primarily to a decrease in student loans. Cash and cash equivalents increased $7.3 million to $49.5 million. Available for sale securities increased $5.7 million. Total loans decreased $71.9 million, while loans held for sale increased $5.9 million. Total deposits decreased $89.4 million to $2.29 billion since year-end 2024, while borrowed funds increased $15.5 million to $313.2 million.

Previous 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.

Current wording

Cash and cash equivalents totaled $49.5 million at June 30, 2025 compared to $42.2 million at December 31, 2024. The increase is due to an increase 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 $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.

Current wording

Our investment portfolio increased by $5.8 million, or 1.3%, from December 31, 2024 to June 30, 2025. During 2025, we purchased $33.4 million of mortgage-backed securities in U.S government sponsored entities, $900,000 of state and political subdivision bonds and $1.0 million of corporate obligations. We experienced $11.4 million of principal repayments and $22.0 million of calls and maturities. As a result of decreases in market interest rates, the unrealized loss on available for sale investment portfolio decreased $4.4 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, 2025 yielded 2.89%, compared to 2.32% in the comparable period in 2024, on a tax equivalent basis.

Previous 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.

Current wording

The investment strategy for 2025 has been to utilize cashflows from the investment portfolio to repurchase investments primarily in mortgage backed securities. 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

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.

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 service 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

Loan activity remained steady in the first quarter of 2025 with growth experienced across most markets even after some large pay-offs primarily in Delaware and our south east Pennsylvania market.

Current wording

Loan activity remained steady in the first half of 2025 with growth experienced across most markets even after some large pay-offs primarily in Delaware and our south east Pennsylvania market. The decrease in consumer loans is due to the seasonal nature of our student loan portfolio. This portfolio grows in the third and fourth quarter of a year as students begin their college year and the portfolio then decreases in the first two quarters of a year as we prepare for growth for the next school year.

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 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.

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 June 30, 2025, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 303.6% of consolidated risk based capital. Construction, land and land development loans represented 47.3% of consolidated risk based capital as of June 30, 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 June 30, 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

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):

Current wording

The following table provides a breakdown of our construction loan portfolio by collateral type as of June 30, 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 $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):

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 $22,109,000 or 0.99% of total loans as of June 30, 2025 as compared to $21,699,000 or 0.94% of loans as of December 31, 2024. The $410,000 increase is a result of a $1,137,000 provision for credit losses – loans less net charge-offs of $727,000. Net charge-offs for 2024 are driven by loans acquired as part of the HVBC acquisition due to collateral value deterioration and non-payment. 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, 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 three months ended March 31, 2025 and the year ended December 31, 2024 (dollars in thousands).

Current wording

The following table provides information related to credit loss experience and loan quality for the six months ended June 30, 2025 and the year ended December 31, 2024 (dollars in thousands).

Previous wording

The credit loss expense for the first quarter of 2025 was driven by the annual update of the loss driver analysis. This update includes revising prepayment and curtailment speeds. In addition, loss rates are updated to include the most recent completed year of 2024. For residential loans, the historical loss rate increased, while the prepayment speed slowed resulting in an increased provision. For other commercial loans the historical loss rate decreased in the annual update resulting in a decrease in the provision for 2025. These changes in credit loss expense drove the change in the allowance to total loans by segment when compared to December 31, 2024 as net-charge offs for these segments were mininmal for 2025.

Current wording

The credit loss expense for the first half of 2025 was driven by an increase in past due loans and the annual update of the loss driver analysis. This update includes revising prepayment and curtailment speeds. In addition, loss rates are updated to include the most recent completed year of 2024. For residential loans, the historical loss rate increased, while the prepayment speed slowed resulting in an increased provision. For other commercial loans the historical loss rate decreased in the annual update resulting in a decrease in the provision for 2025. These changes in credit loss expense drove the change in the allowance to total loans by segment when compared to December 31, 2024 as net-charge offs for these segments were minimal for 2025.

Previous wording

The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2024 to March 31, 2025 in non-performing loans (in thousands). Non-performing loans include those accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.

Current wording

The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2024 to June 30, 2025 in non-performing loans (in thousands). Non-performing loans include accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management’s assessment of its ultimate ability to collect principal and interest.

Previous wording

Nonperforming loans decreased $1.0 million during 2025. During the first three months of 2025, one large construction relationship was placed on non-accrual status and one large commercial relationship and a large agricultural relationship were removed from non-accrual status, which accounts for the majority of the change in non-performing loans since year-end. All non-performing commercial agricultural and construction loans are reviewed on an individual basis to determine the need for a specific reserve at quarter end. In addition, non-performing residential loans with a balance in excess of $150,000 are individually evaluated. The specific reserves for these non-performing loans as of March 31, 2025 was $606,000. In addition, the Bank policy is to reserve 100% of all non-performing student loans. The reserve for these loans was $978,000 as of March 31, 2025.

Current wording

Nonperforming loans decreased $1.0 million during the first six months of 2025. During the first six months of 2025, one construction loan relationship was placed on non-accrual status and one commercial relationship and one agricultural relationship were removed from non-accrual status, which accounts for the majority of the change in non-performing loans since year-end. All non-performing commercial agricultural and construction loans are reviewed on an individual basis to determine the need for a specific reserve at quarter end. In addition, non-performing residential loans with a balance in excess of $150,000 are individually evaluated. The specific reserves for these non-performing loans as of June 30, 2025 was $477,000. In addition, the Bank policy is to reserve 100% of all non-performing student loans. The reserve for these loans was $782,000 as of June 30, 2025.

Previous wording

Management believes that the allowance for credit losses - loans at March 31, 2025 was adequate at that date, which was based on the following factors:

Current wording

Management believes that the allowance for credit losses - loans June 30, 2025 was adequate at that date, which was based on the following factors:

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 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.

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 June 30, 2025, and December 31, 2024, the cash surrender value of the life insurance was $50.8 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 $701,000 and $996,000 for the six month periods ended June 30, 2025 and 2024, respectively. During the six months of 2025 and 2024, the Company received proceeds of $272,000 and $1,147,000, respectively, which included death benefits of $326,000 during 2024 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 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.

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 June 30, 2025 and December 31, 2024, included in other liabilities on the Consolidated Balance Sheet was a liability of $521,000 and $514,000, respectively, for the obligation under the split-dollar benefit agreements.

Previous 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.

Current wording

Premises and equipment increased $381,000 to $21.8 million as of June 30, 2025 from December 31, 2024 as a result of purchases of equipment.