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 and nine months ended September 30, 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, 2025. The results of operations for the three months ended March 31, 2026 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 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 47 banking facilities, 37 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 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 the Cities of Wilmington and Dover, Delaware. We also have limited branch offices in Union county, Pennsylvania and Georgetown Delaware, which primarily serve agricultural and commercial customers in those markets. With the HVBC acquisition in 2023, 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 47 banking facilities, 37 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 Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. During the first quarter of 2026, the Williamsport branch moved to a new location and we have received regulatory approval to move the business banking facility located in Philadelphia to a new location.

Previous wording

Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, liquidity, reputational and regulatory risk.

Current wording

Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate risk, credit risk, liquidity risk and regulatory and compliance risk.

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, 2025 and December 31, 2024, the Trust Department had $194.3 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 March 31, 2026 and December 31, 2025, the Trust Department had $191.6 million and $194.8 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 decreased from $395.9 million at December 31, 2024 to $341.5 million at September 30, 2025 with the decrease due to the resignation of a former employee. 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 $317.9 million at December 31, 2025 to $319.5 million at March 31, 2026 with the increase due to an increase in market values. 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 and Delaware markets.

Previous wording

The Company had net income of $26,089,000 for the first nine months of 2025 compared to $19,835,000 for last year’s comparable period, an increase of $6,254,000, or 31.5%, primarily due to an increase in net interest income after the provision for credit losses of $8,920,000. Basic earnings per share for the first nine months of 2025 was $5.44, compared to $4.14 for last year’s comparable period, representing a 31.4% increase. Annualized return on assets and return on equity for the nine months of 2025 were 1.16% and 11.15%, respectively, compared with 0.89% and 9.23% for last year’s comparable period.

Current wording

The Company had net income of $10,376,000 for the first three months of 2026 compared to $7,621,000 for last year’s comparable period, an increase of $2,755,000, or 36.2%, primarily due to an increase in net interest income after the provision for credit losses of $3,236,000. Basic earnings per share for the first three months of 2026 was $2.16, compared to $1.59 for last year’s comparable period, representing a 35.9% increase. Annualized return on assets and return on equity for the three months of 2026 were 1.34% and 12.03%, respectively, compared with 1.00% and 10.00% for last year’s comparable period.

Previous wording

Net interest income for the first nine months of 2025 was $71,790,000, an increase of $8,208,000, or 12.9%, compared to the same period in 2024. For the first nine months of 2025 the provision for credit losses was $1,875,000. The provision for the first nine months of 2024 was $2,587,000. Consequently, net interest income after the provision for credit losses was $69,915,000 in the first nine months of 2025 compared to $60,995,000 during the first nine months of 2024.

Current wording

Net interest income for the first three months of 2026 was $26,113,000, an increase of $3,111,000, or 13.5%, compared to the same period in 2025. For the first three months of 2026 the provision for credit losses was $500,000. The provision for the first three months of 2025 was $625,000. Consequently, net interest income after the provision for credit losses was $25,613,000 in the first three months of 2026 compared to $22,377,000 during the first three months of 2025.

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, 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 months ended March 31, 2026 and 2025 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, 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 September 30, 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 months ended March 31, 2026 and 2025. 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, 2026 and 2025 (in thousands):

Previous wording

Tax equivalent net interest income increased from $64,324,000 for the nine month period ended September 30, 2024 to $72,580,000 for the nine month period ended September 30, 2025, an increase of $8,256,000. This increase was a result of an increase of $849,000 due to a change in volume as average interest-bearing assets increased $39,854,000 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 30 basis points from 3.02% to 2.72% resulting in a decrease in interest expense of $4,715,000. The tax equivalent net interest margin increased from 3.09% for the first nine months of 2024 to 3.44% 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 $23,250,000 for the three month period ended March 31, 2025 to $26,483,000 for the three month period ended March 31, 2026, an increase of $3,233,000. This increase was primarily due to rate. Asset yields increased 14 basis points (bps), increasing interest income $1,187,000, while the cost of interest bearing liabilities decreased from 2.80% to 2.46%, resulting in a decrease in interest expense of $2,138,000. The tax equivalent net interest margin increased from 3.30% for the first three months of 2025 to 3.72% for the comparable period in 2026.

Previous wording

Total tax equivalent interest income for the 2025 nine month period increased $3,541,000 as compared to the 2024 nine month period. This increase was a result of an increase of $874,000 due to a change in volume as average interest-bearing assets increased $39,854,0000. The yield on interest earning assets increased from 5.54% to 5.63% resulting in an increase in interest income of $2,667,000.

Current wording

Total tax equivalent interest income for the 2026 three month period increased $1,385,000 as compared to the 2025 three month period. This increase was a result of an increase of $1,187,000 due to an increase in the yield on interest earning assets from 5.57% to 5.71%. Average interest earning assets increased $26,386,000 resulting in an increase in interest income due to volume of $198,000.

Previous wording

Tax equivalent investment income for the three months ended September 30, 2025 increased $1,121,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 74 basis points to 3.17%.

Current wording

Tax equivalent investment income for the three months ended March 31, 2026 increased $584,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 50 basis points to 3.35%.

Previous wording

Total loan interest income increased $1,126,000 for the nine months ended September 30, 2025 compared to the same period last year.

Current wording

Total loan interest income increased $841,000 for the three months ended March 31, 2026 compared to the same period last year.

Previous wording

Total interest expense decreased $4,715,000 for the nine months ended September 30, 2025 compared with the comparative period last year as a result of a decrease in rate on interest-bearing liabilities. Interest expense increased $25,000 due to volume as a result of an increase in interest bearing liabilities of $14,993,000. The average rate paid on interest-bearing liabilities decreased from 3.02% to 2.72%. The decrease was driven by the Federal Reserve interest rate cuts in the second half of 2024, which caused interest expense to decrease $4,740,000.

Current wording

Total interest expense decreased $1,848,000 for the three months ended March 31, 2026 compared with the comparative period last year as a result of a decrease in rate on interest-bearing liabilities. Interest expense increased $290,000 due to volume as a result of an increase in interest bearing liabilities of $8,109,000. The average rate paid on interest-bearing liabilities decreased from 2.80% to 2.46%. The decrease was driven by the Federal Reserve interest rate cuts in the second half of 2025, which caused interest expense to decrease $2,138,000.

Previous wording

For the nine month period ended September 30, 2025, we recorded a provision for credit losses of $1,875,000, which represents a decrease of $712,000 from the $2,587,000 provision recorded in the corresponding nine 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 were reserved for or charged-off during 2024. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

Current wording

For the three month period ended March 31, 2026, we recorded a provision for credit losses of $500,000, which represents a decrease of $125,000 from the $625,000 provision recorded in the corresponding three months of last year. The decrease in the provision is due to the updated loss driver analysis completed in the first quarter of 2026 and the Iran war that started in the first quarter of 2026. (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 and nine months ended September 30, 2025 and 2024 (dollars in thousands):

Current wording

The following table shows the breakdown of non-interest income for the three months ended March 31, 2026 and 2025 (dollars in thousands):

Previous wording

Non-interest income for the nine months ended September 30, 2025 totaled $10,946,000, a decrease of $1,116,000 when compared to the same period in 2024. For the three months ended September 30, 2025, non-interest income increased $99,000 to $3,854,000. During the first nine months of 2025, net equity security gains amounted to $56,000 as a result of market gains associated with general banking stock gains compared with a $127,000 gain in the comparable 2024 period associated with market conditions for that period. There were no sales of available for sale securities during the first nine months of 2025 or 2024.

Current wording

Non-interest income for the three months ended March 31, 2026 totaled $3,690,000, an increase of $263,000 when compared to the same period in 2025. During the first three months of 2026, net equity security gains amounted to $19,000 as a result of market gains associated with general banking stock gains compared with an $11,000 loss in the comparable 2025 period associated with market conditions for that period. There were no sales of available for sale securities during the first three months of 2026 or 2025.

Previous wording

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

Current wording

The following tables reflect the breakdown of non-interest expense for the three months ended March 31, 2026 and 2025 (dollars in thousands):

Previous wording

Non-interest expenses decreased $209,000 for the nine months ended September 30, 2025 compared to the same period in 2024. Salaries and employee benefits increased $567,000 or 1.9%. Full time equivalent employees (FTE) decreased 12.3 or 3.1% 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.

Current wording

Non-interest expenses increased $223,000 for the three months ended March 31, 2026 compared to the same period in 2025. Salaries and employee benefits decreased $13,000 or 0.1%. Full time equivalent employees (FTE) increased 6.7 or 1.8% when comparing 2026 to 2025. This increase in headcount in addition to merit increases resulted in payroll and payroll taxes increasing by $120,000. Due to actuarial assumptions, post retirement benefits decreased $50,000. As a result of the decrease in brokerage and insurance commissions due to the resignation of a broker in the third quarter of 2025, commission expense decreased $96,000.

Previous wording

The provision for income taxes was $6,063,000 for the nine month period ended September 30, 2025 compared to $4,304,000 for the same period in 2024. The increase is primarily attributable to the increase in income before the provision for income taxes of $8,013,000 for the comparable periods due to an 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 18.9% and 17.8% for the first nine months of 2025 and 2024, respectively, compared to the statutory rate of 21%.

Current wording

The provision for income taxes was $2,326,000 for the three month period ended March 31, 2026 compared to $1,805,000 for the same period in 2025. The increase is primarily attributable to the increase in income before the provision for income taxes of $3,276,000 for the comparable periods due to an 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 18.3% and 19.2% for the first three months of 2026 and 2025, respectively, compared to the federal 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 $7.8 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, 2024. We anticipate recognizing an aggregate of $6.6 million of tax credits over the next 11 years.

Previous wording

Total assets were $3.06 billion at September 30, 2025, an increase of $30.7 million from $3.03 billion at December 31, 2024, due primarily to an increase in available for sale securities. Cash and cash equivalents decreased $11.1 million to $31.1 million. Available for sale securities increased $25.4 million. Total loans increased $21.4 million, while loans held for sale increased $3.9 million. Total deposits increased $29.2 million to $2.41 billion since year-end 2024, while borrowed funds decreased $18.1 million to $279.6 million.

Current wording

Total assets were $3.03 billion at March 31, 2026, a decrease of $38.1 million from $3.06 billion at December 31, 2025, due primarily to a decrease in outstanding student loans. Cash and cash equivalents decreased $1.2 million to $33.1 million. Available for sale securities increased $3.5 million. Total loans decreased $52.5 million, while loans held for sale decreased $3.5 million. Total deposits increased $64.2 million to $2.44 billion since year-end 2025, while borrowed funds decreased $110.7 million to $198.7 million.

Previous wording

Cash and cash equivalents totaled $31.1 million at September 30, 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 $33.1 million at March 31, 2026 compared to $34.3 million at December 31, 2025. 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 $25.5 million, or 6.0%, from December 31, 2024 to September 30, 2025. During 2025, we purchased $46.3 million of mortgage-backed securities in U.S government sponsored entities, $21.1 million of state and political subdivision bonds and $1.0 million of corporate obligations. We experienced $17.3 million of principal repayments and $37.9 million of calls and maturities. As a result of decreases in market interest rates, the unrealized loss on available for sale investment portfolio decreased $12.7 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, 2025 yielded 2.98%, compared to 2.36% in the comparable period in 2024, on a tax equivalent basis.

Current wording

Our investment portfolio increased by $3.6 million, or 0.8%, from December 31, 2025 to March 31, 2026. During 2026, we purchased $13.9 million of mortgage-backed securities in U.S government sponsored entities and $12.3 million of state and political subdivision bonds. We experienced $8.3 million of principal repayments and $11.5 million of calls and maturities. As a result of increases in market interest rates, the unrealized loss on available for sale investment portfolio increased $2.8 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, 2026 yielded 3.35%, compared to 2.85% in the comparable period in 2025, on a tax equivalent basis.

Previous 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.

Current wording

The investment strategy for 2026 has been to utilize cashflows from the investment portfolio to repurchase investments primarily in mortgage backed and municipal 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

For loans sold on the secondary market, the Company recognizes fee income for servicing certain sold loans, which is included in non-interest income.

Current wording

Loans held for sale decreased $3.5 million to $5.9 million as of March 31, 2026 from December 31, 2025 due to the first quarter typically being the slowest quarter for residential home sales. For loans sold on the secondary market, the Company recognizes fee income for servicing certain sold loans, which is included in non-interest income.

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 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.

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 Lycoming, 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. 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 months 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 months of 2026 with growth experienced across most markets even after a large pay-offs in our Delaware market. The decrease in consumer loans was driven by the seasonality of that portfolio with the expected pay-offs in the first or second quarter of a 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 September 30, 2025, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 290.0% of consolidated risk based capital. Construction, land and land development loans represented 36.0% of consolidated risk based capital as of September 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 September 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.

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, 2026, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 294.7% of consolidated risk based capital. Construction, land and land development loans represented 27.2% of consolidated risk based capital as of March 31, 2026. 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, 2026, 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, 2025 and December 31, 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 owner occupied status and by non-owner occupied status as of March 31, 2026 and December 31, 2025 (dollars in thousands):

Previous wording

The Company obtains an independent appraisal of the real estate collateral securing a CRE loan prior to originating the loan. The independent appraised value is used to calculate the ratio of the outstanding loan balance to the value of the real estate collateral, or loan-to-value ratio ("LTV"). The original appraisal is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons, including but not limited to payment delinquency, additional loan requests using the same collateral, and loan modifications. The following table presents the ranges in the LTVs of our CRE loans at September 30, 2025 (dollars in thousands):

Current wording

The Company obtains an independent appraisal of the real estate collateral securing a CRE loan prior to originating the loan. The appraised value is used to calculate the ratio of the outstanding loan balance to the value of the real estate collateral, or loan-to-value ratio (“LTV”). The original appraisal is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons, including but not limited to payment delinquency, additional loan requests using the same collateral, and loan modifications. The following table presents the ranges in the LTVs of our CRE loans at March 31, 2026 and December 31, 2025(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 $22,454,000 or 0.96% of total loans as of September 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 September 30, 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 $22,894,000 or 1.00% of total loans as of March 31, 2026 as compared to $22,806,000 or 0.97% of loans as of December 31, 2025. The $88,000 increase is a result of a $144,000 provision for credit losses – loans less net charge-offs of $56,000. 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 30, 2026 and December 31, 2025 (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, 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 three months ended March 31, 2026 and the year ended December 31, 2025 (dollars in thousands).

Previous wording

The credit loss expense for the first nine months of 2025 was driven by the economic forecast 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.

Current wording

The credit loss expense for the first three months of 2026 was driven by the economic forecast and the annual update of the loss driver analysis, as well as the Iran war. This update includes revising prepayment and curtailment speeds. In addition, loss rates are updated to include the most recent completed year of 2025.

Previous wording

Nonperforming loans decreased $5.4 million during the first nine months of 2025. During the first nine months of 2025, one construction loan relationship was placed on non-accrual status and two commercial relationship and two agricultural relationships were removed from non-accrual status. Additionally, three loans that were on non-accrual status paid off during 2025, which also contributed to the decrease in non-performing loans. 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 September 30, 2025 was $592,000. In addition, the Bank policy is to reserve 100% of all non-performing student loans. The reserve for these loans was $778,000 as of September 30, 2025.

Current wording

Nonperforming loans increased $10.9 million during the first three months of 2026. During the first three months of 2026, four commercial real estate relationships with acumulative balance as of March 31, 2026 of $11.7 million were placed on non-accrual status, which accounts for the majority of the increase in non-performing loans. 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, 2026 and December 31, 2025 was $940,000 and $1,039,000, respectively. In addition, the Bank policy is to reserve 100% of all non-performing student loans. The reserve for these loans was $920,000 and $770,000 as of March 31, 2026 and December 31, 2025, respectively.

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, 2025, and December 31, 2024, the cash surrender value of the life insurance was $51.1 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 $1,064,000 and $1,334,000 for the nine month periods ended September 30, 2025 and 2024, respectively. During the nine 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.

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, 2026, and December 31, 2025, the cash surrender value of the life insurance was $74.1 million and $51.5 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 $570,000 and $346,000 for the three month periods ended March 31, 2026 and 2025, respectively. During the first quarter of 2026, the Bank purchased $22.0 million of additional bank owned life insurance policies. During the first three months of 2025, the Company received proceeds of $108,000 upon the passing of a former director of the First National Bank of Fredericksburg. There were no proceeds received in 2026. 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 September 30, 2025 and December 31, 2024, included in other liabilities on the Consolidated Balance Sheet was a liability of $525,000 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 March 31, 2026 and December 31, 2025, included in other liabilities on the Consolidated Balance Sheet was a liability of $533,000 and $529,000, respectively, for the obligation under the split-dollar benefit agreements.

Previous wording

Premises and equipment increased $113,000 to $21,508,000 as of September 30, 2025 from December 31, 2024 as a result of purchases of equipment.

Current wording

Premises and equipment decreased $283,000 to $20,715,000 as of March 31, 2026 from December 31, 2025 as a result of depreciation.

Previous wording

Other assets decreased $4.7 million to $50.0 million as of September 30, 2025 from December 31, 2024. The primary drivers of the decrease was the receipt of payment related to a loan participation and a decrease in taxes receivable.

Current wording

Other assets decreased $7.8 million to $45.3 million as of March 31, 2026 from December 31, 2025. The primary drivers of the decrease was a reduction in FHLB stock held due to the decrease in outstanding borrowings and a reduction in the right of use asset for leases.

Previous wording

Deposits increased $29.24 million since December 31, 2024. The increase in deposits was driven by increases in state and political organizations that collected real estate taxes in the third quarter of 2025, that were deposited into money market and NOW accounts, offset by decreases in brokered deposits. We continue to see customer funds being transferred to higher-yielding investment alternatives. Brokered deposits totaled $60.0 million and $93.1 million as of September 30, 2025 and December 31, 2024, respectively. At September 30, 2025, the Bank estimates that balances held by customers in excess ofthe FDIC insurance limit ($250,000 per insured account)totaled $1.17 billion, or 48.5% 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$681.4 million, or 28.3% of the Bank’s total deposits, as of September 30, 2025.

Current wording

Deposits increased $64.2 million since December 31, 2025. The increase in deposits was driven by an increase in brokered deposits since year end of $52.8 million that were utilized to offset seasonal municipal deposit outflows and pay-down outstanding borrowings. We continue to see customer funds being transferred to higher-yielding investment alternatives. Brokered deposits totaled $112.8 million and $60.01 million as of March 31, 2026 and December 31, 2025, respectively. At March 31, 2026, the Bank estimates that balances held by customers in excess ofthe FDIC insurance limit ($250,000 per insured account)totaled $1.17 billion, or 47.9% 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$593.7 million, or 24.3% of the Bank’s total deposits, as of March 31, 2026.