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, 2025. The results of operations for the three and six months ended June 30, 2026 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 and nine months ended September 30, 2026 are not necessarily indicative of the results you may expect for the full year.

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 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.

Current wording

The banking industry in the Bank’s service areas continues 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 June 30, 2026 and December 31, 2025, the Trust Department had $207.6 million and $194.8 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 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, 2026 and December 31, 2025, the Trust Department had $203.4 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 increased from $317.9 million at December 31, 2025 to $347.8 million at June 30, 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.

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 $354.4 million at September 30, 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 $20,563,000 for the first six months of 2026 compared to $16,084,000 for last year’s comparable period, an increase of $4,479,000, or 27.9%, primarily due to an increase in net interest income after the provision for credit losses of $5,532,000. Basic earnings per share for the first six months of 2026 was $4.29, compared to $3.35 for last year’s comparable period, representing a 28.1% increase. Annualized return on assets and return on equity for the six months of 2026 were 1.33% and 11.84%, respectively, compared with 1.07% and 10.44% for last year’s comparable period.

Current wording

The Company had net income of $32,484,000 for the first nine months of 2026 compared to $26,089,000 for last year’s comparable period, an increase of $6,395,000, or 24.5%, primarily due to an increase in net interest income after the provision for credit losses of $8,149,000. Basic earnings per share for the first nine months of 2026 was $6.77, compared to $5.44 for last year’s comparable period, representing a 24.5% increase. Annualized return on assets and return on equity for the nine months of 2026 were 1.37% and 12.36%, respectively, compared with 1.16% and 11.15% for last year’s comparable period.

Previous wording

Net income for the three months ended June 30, 2026 was $10,187,000 compared to net income of $8,463,000 in the comparable 2025 period, an increase of $1,724,000. Basic earnings per share for the three months ended June 30, 2026 was $2.12, compared to $1.76 for last year’s comparable period, representing a 20.5% increase due to organic growth in net interest income of $2,046,000. Annualized return on assets and return on equity for the quarter ended June 30, 2026 was 1.32% and 11.64%, respectively, compared with 1.13% and 10.88% for the same 2025 period.

Current wording

Net income for the three months ended September 30, 2026 was $11,921,000 compared to net income of $10,005,000 in the comparable 2025 period, an increase of $1,916,000. Basic earnings per share for the three months ended September 30, 2026 was $2.48, compared to $2.09 for last year’s comparable period, representing a 18.7% increase due to organic growth in net interest income after the provision of $2,617,000. Annualized return on assets and return on equity for the quarter ended September 30, 2026 was 1.45% and 13.39%, respectively, compared with 1.33% and 12.52% for the same 2025 period.

Previous wording

Net interest income for the first six months of 2026 was $51,807,000, an increase of $5,157,000, or 11.1%, compared to the same period in 2025. For the first six months of 2026 the provision for credit losses was $1,000,000. The provision for the first six months of 2025 was $1,375,000. Consequently, net interest income after the provision for credit losses was $50,807,000 in the first six months of 2026 compared to $45,275,000 during the first six months of 2025.

Current wording

Net interest income for the first nine months of 2026 was $79,064,000, an increase of $7,274,000, or 10.1%, compared to the same period in 2025. For the first nine months of 2026 the provision for credit losses was $1,000,000. The provision for the first nine months of 2025 was $1,875,000. Consequently, net interest income after the provision for credit losses was $78,064,000 in the first nine months of 2026 compared to $69,915,000 during the first nine months of 2025.

Previous wording

For the three months ended June 30, 2026, net interest income was $25,694,000 compared to $23,648,000, an increase of $2,046,000, or 8.7%, over the comparable period in 2025. The provision for credit losses in the second quarter of 2026 was $500,000 compared to $750,000 in 2025. Consequently, net interest income after the provision for credit losses was $25,194,000 for the quarter ended June 30, 2026 compared to $22,898,000 in 2025.

Current wording

For the three months ended September 30, 2026, net interest income was $27,257,000 compared to $25,140,000, an increase of $2,117,000, or 8.4%, over the comparable period in 2025. There was no provision for credit losses in the third quarter of 2026 compared to $500,000 in 2025. Consequently, net interest income after the provision for credit losses was $27,257,000 for the quarter ended September 30, 2026 compared to $24,640,000 in 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 six months ended June 30, 2026 and 2025 on a tax equivalent basis (dollars in thousands):

Current wording

The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and interest rate spread created for the three and nine months ended September 30, 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 six months ended June 30, 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 June 30, 2026 and 2025 (in thousands):

Current wording

Tax exempt revenue is shown on a tax-equivalent basis (non-GAAP) for proper comparison using a federal statutory income tax rate of 21% for the three and nine months ended September 30, 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 September 30, 2026 and 2025 (in thousands):

Previous wording

Tax equivalent net interest income increased from $47,154,000 for the six month period ended June 30, 2025 to $52,620,000 for the six month period ended June 30, 2026, an increase of $5,466,000. This increase was a result of an increase of $546,000 due to a change in volume as average interest-earning assets increased $44,441,000 due to organic loan growth throughout our market areas and investment purchases. As a result of the lower market interest rates, the yield on average interest bearing liabilities decreased 31 basis points from 2.75% to 2.44% resulting in a decrease in interest expense of $3,328,000. The tax equivalent net interest margin increased from 3.36% for the first six months of 2025 to 3.69% for the comparable period in 2026. The increase was primarily caused by the decrease in the cost of interest-bearing liabilities due to lower market interest rates in 2026 compared to 2025.

Current wording

Tax equivalent net interest income increased from $72,580,000 for the nine month period ended September 30, 2025 to $80,366,000 for the nine month period ended September 30, 2026, an increase of $7,786,000. This increase was a result of an increase of $1,585,000 due to a increase in volume as average interest-earning assets increased $117,181,000 due to organic loan growth throughout our market areas and investment purchases. As a result of the lower market interest rates, the yield on average interest bearing liabilities decreased 24 basis points from 2.72% to 2.48% resulting in a decrease in interest expense of $4,561,000. The tax equivalent net interest margin increased from 3.44% for the first nine months of 2025 to 3.66% for the comparable period in 2026. The increase was primarily caused by the decrease in the cost of interest-bearing liabilities due to lower market interest rates in 2026 compared to 2025.

Previous wording

Total tax equivalent interest income for the 2026 six month period increased $2,328,000 as compared to the 2025 six month period. This increase was a result of an increase of $736,000 due to a change in volume as average interest-earning assets increased $44,441,000. The yield on interest earning assets increased from 5.58% to 5.66% resulting in an increase in interest income of $1,592,000.

Current wording

Total tax equivalent interest income for the 2026 nine month period increased $5,691,000 as compared to the 2025 nine month period. This increase was a result of an increase of $4,051,000 due to a increase in volume as average interest-earning assets increased $117,181,000. The yield on interest earning assets increased from 5.63% to 5.67% resulting in an increase in interest income of $1,640,000.

Previous wording

Tax equivalent investment income for the six months ended June 30, 2026 increased $1,481,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 59 basis points to 3.48%.

Current wording

Tax equivalent investment income for the nine months ended September 30, 2026 increased $2,750,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 61 basis points to 3.59%.

Previous wording

Total loan interest income increased $930,000 for the six months ended June 30, 2026 compared to the same period last year, as a result of higher volume.

Current wording

Total loan interest income increased $3,055,000 for the nine months ended September 30, 2026 compared to the same period last year, as a result of higher volume.

Previous wording

Total interest expense decreased $3,138,000 for the six months ended June 30, 2026 compared with the same period last year as a result of a decrease in rate on interest-bearing liabilities. Interest expense increased $190,000 due to volume as a result of an increase in interest bearing liabilities of $29,578,000. The average rate paid on interest-bearing liabilities decreased from 2.75% to 2.44%. The decrease was driven by the Federal Reserve cutting interest rate in the second half of 2025, which caused interest expense to decrease $3,328,000.

Current wording

Total interest expense decreased $2,095,000 for the nine months ended September 30, 2026 compared with the same period last year as a result of a decrease in rate on interest-bearing liabilities. Interest expense increased $2,466,000 due to volume as a result of an increase in interest bearing liabilities of $103,372,000. The average rate paid on interest-bearing liabilities decreased from 2.72% to 2.48%. The decrease was driven by the Federal Reserve cutting interest rate in the second half of 2025, which caused interest expense to decrease $4,561,000.

Previous wording

Tax equivalent net interest income for the three months ended June 30, 2026 was $26,136,000 which compares to $23,904,000 for the same period last year. This represents an increase of $2,232,000, or 9.3% and was primarily caused by a decrease in the rate paid on interest-bearing liabilities due to the Federal funds target interest rate cuts made by the Federal Reserve in the second half of 2025.

Current wording

Tax equivalent net interest income for the three months ended September 30, 2026 was $27,746,000 which compares to $25,425,000 for the same period last year. This represents an increase of $2,321,000, or 9.1% and was primarily caused by an increase in the volume of interest-earning assets due to organic growth in loans in 2026.

Previous wording

Total tax equivalent interest income was $39,947,000 for the three month period ended June 30, 2026, compared to $39,005,000 for the comparable period last year, an increase of $942,000. This increase was a result of an increase of $694,000 due to a change in volume as average interest-earning assets increased $64,775,000 due to organic loan growth. As a result of lower yielding investments maturing and investment security purchases, the yield on average investment securities increased 67 basis points from 2.93% to 3.60%, which facilitated an overall increase in interest income of $248,000.

Current wording

Total tax equivalent interest income was $43,903,000 for the three month period ended September 30, 2026, compared to $40,539,000 for the comparable period last year, an increase of $3,364,000. This increase was a result of an increase of $2,873,000 due to a change in volume as average interest-earning assets increased $261,417,000 due to organic loan growth and investment purchases. As a result of lower yielding investments maturing and investment security purchases, the yield on average investment securities increased 63 basis points from 3.17% to 3.80%, which contributed to an overall increase in interest income of $491,000.

Previous wording

Tax equivalent investment income for the three months ended June 30, 2026 increased $895,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 67 basis points to 3.60%.

Current wording

Tax equivalent investment income for the three months ended September 30, 2026 increased $1,270,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 63 basis points to 3.80%.

Previous wording

Total loan interest income increased $90,000 for the three months ended June 30, 2026 compared to the same period last year, as a result of higher volume.

Current wording

Total loan interest income increased $2,125,000 for the three months ended September 30, 2026 compared to the same period last year, as a result of higher volume.

Previous wording

Total interest expense decreased $1,290,000 for the three months ended June 30, 2026 compared with the comparative period last year as a result of a decrease in rate on interest-bearing liabilities. The average rate paid on interest-bearing liabilities decreased from 2.73% to 2.41%. The decrease was driven by the Federal Reserve cutting the Federal funds target interest rate in the second half of 2025, which caused interest expense to decrease $1,687,000.

Current wording

Total interest expense increased $1,043,000 for the three months ended September 30, 2026 compared with the comparative period last year as a result of an increase in volume as interest-bearing liabilities increased $248,557,000, which caused interest expense to increase $2,038,000.

Previous wording

For the six month period ended June 30, 2026, we recorded a provision for credit losses of $1,000,000, which represents a decrease of $375,000 from the $1,375,000 provision recorded in the corresponding six months of last year. The decrease in the provision is due to the updated loss driver analysis completed in the first quarter of 2026 offset by increases in qualitative factors related international and national economic conditions related to the Iran conflict and the impact it may have on agricultural loans due to higher diesel and fertilizer prices and an increase in the qualitative factor for changes in the volume and severity of past due loans for commercial relationships due to the increase in non-accrual loans. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

Current wording

For the nine month period ended September 30, 2026, we recorded a provision for credit losses of $1,000,000, which represents a decrease of $875,000 from the $1,875,000 provision recorded in the corresponding nine months of last year. The decrease in the provision is due to the updated loss driver analysis completed in the first quarter of 2026 offset by increases in qualitative factors related international and national economic conditions related to the Iran conflict and the impact it may have on agricultural loans due to higher diesel and fertilizer prices and an increase in the qualitative factor for changes in the volume and severity of past due loans for commercial relationships due to the increase in non-accrual loans. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

Previous wording

For the three months ended June 30, 2026, we recorded a provision for credit losses of $500,000, which represents a decrease of $250,000 from the $750,000 provision recorded in the corresponding three months of last year. The decrease in the provision in 2026 compared to 2025 was due to the same factors impacting the six month change.

Current wording

For the three months ended September 30, 2026, no provision was recorded, which represents a decrease of $500,000 from the $500,000 provision recorded in the corresponding three months of last year. The decrease in the provision for off-balance sheet items was due to a decrease in the reserve associated with the commitment for student loan lending. The on-balance sheet provision for the three months ended September 30, 2026 was impacted by the increase in non-accrual loans and the qualitative factors noted for the nine month period.

Previous wording

The following table shows the breakdown of non-interest income for the three and six months ended June 30, 2026 and 2025 (dollars in thousands):

Current wording

The following table shows the breakdown of non-interest income for the three and nine months ended September 30, 2026 and 2025 (dollars in thousands):

Previous wording

Non-interest income for the six months ended June 30, 2026 totaled $7,704,000, an increase of $612,000 when compared to the same period in 2025. For the three months ended June 30, 2026, non-interest income increased $349,000 to $4,014,000. During the first six months of 2026, net equity security gains amounted to $115,000 as a result of market gains associated with general banking stock gains compared with a $21,000 gain in the comparable 2025 period associated with market conditions for that period. There were no sales of available for sale securities during the first six months of 2026 or 2025.

Current wording

Non-interest income for the nine months ended September 30, 2026 totaled $12,012,000, an increase of $1,066,000 when compared to the same period in 2025. For the three months ended September 30, 2026, non-interest income increased $454,000 to $4,308,000. During the first nine months of 2026, net equity security gains amounted to $373,000 as a result of market gains associated with general banking stock gains compared with a $56,000 gain in the comparable 2025 period associated with market conditions for that period. There were no sales of available for sale securities during the first nine months of 2026 or 2025.

Previous wording

The decrease in gains on loans sold for the three and six month periods ended June 30, 2026 compared to 2025 is attributable to a decrease in volume and lower market prices on the loans sold in 2026 compared to 2025. The increase in earnings on bank owned life insurance for the three and six month periods is due to purchasing $22.0 million of additional insurance in January of 2026 and death benefits received in the second quarter of 2026 upon the passing of a former employee. The decrease in brokerage and insurance commissions for the six month period was due to the resignation of a broker in the third quarter of 2025.

Current wording

The decrease in gains on loans sold for the three and nine month periods ended September 30, 2026 compared to 2025 is attributable to a decrease in volume and lower market prices on the loans sold in 2026 compared to 2025. The increase in earnings on bank owned life insurance for the three and nine month periods is due to purchasing $22.0 million of additional insurance in January of 2026 and death benefits received in the second quarter of 2026 upon the passing of a former employee. The decrease in brokerage and insurance commissions for the nine month period was due to the resignation of a broker in the third quarter of 2025.

Previous wording

The following tables reflect the breakdown of non-interest expense for the three and six months ended June 30, 2026 and 2025 (dollars in thousands):

Current wording

The following tables reflect the breakdown of non-interest expense for the three and nine months ended September 30, 2026 and 2025 (dollars in thousands):

Previous wording

Non-interest expenses increased $893,000, or 2.7% for the six months ended June 30, 2026 compared to the same period in 2025. Salaries and employee benefits increased $283,000 or 1.4%. Full time equivalent employees (FTE) increased 8.3 or 2.2% when comparing 2026 to 2025. This increase in headcount in addition to merit increases resulted in payroll and payroll taxes increasing by $494,000. Due to actuarial assumptions, post retirement benefits decreased $84,000. 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 $131,000.

Current wording

Non-interest expenses increased $1,933,000, or 4.0% for the nine months ended September 30, 2026 compared to the same period in 2025. Salaries and employee benefits increased $992,000 or 3.3%. Full time equivalent employees (FTE) increased 10.1 or 2.7% when comparing 2026 to 2025. This increase in headcount in addition to merit increases resulted in payroll and payroll taxes increasing by $939,000. Due to actuarial assumptions, post retirement benefits decreased $47,000. 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 $182,000. Health insurance associated expenses have increased $247,000 due to higher claims and stop loss insurance rates.

Previous wording

The provision for income taxes was $4,480,000 for the six month period ended June 30, 2026 compared to $3,708,000 for the same period in 2025. The increase is primarily attributable to the increase in income before the provision for income taxes of $5,251,000 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 17.9% and 19.1% for the first six months of 2026 and 2025, respectively, compared to the federal statutory rate of 21%.

Current wording

The provision for income taxes was $7,100,000 for the nine month period ended September 30, 2026 compared to $6,213,000 for the same period in 2025. The increase is primarily attributable to the increase in income before the provision for income taxes of $7,282,000 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 17.9% and 19.2% for the first nine months of 2026 and 2025, respectively, compared to the federal statutory rate of 21%.

Previous wording

For the three months ended June 30, 2026, the provision for income taxes was $2,154,000 compared to $1,953,000 for the same period in 2025. The increase is primarily attributable to the increase in income before the provision for income taxes of $1,925,000 for the comparable periods due to the increase in net interest income. Our effective tax rate was 17.5% and 19.1% for the three months ended June 30, 2026 and 2025, respectively.

Current wording

For the three months ended September 30, 2026, the provision for income taxes was $2,620,000 compared to $2,405,000 for the same period in 2025. The increase is primarily attributable to the increase in income before the provision for income taxes of $2,131,000 for the comparable periods due to the increase in net interest income. Our effective tax rate was 18.0% and 19.4% for the three months ended September 30, 2026 and 2025, respectively.

Previous wording

We are invested in eight limited partnerships that have established low-income housing projects in our market areas, with our most recent investments made in the second quarter of 2026. We are currently recognizing credits on three projects and expect to recognize credits on the most recent investment in 2027. The remaining four partnership credits are fully utilized as of December 31, 2024. We anticipate recognizing an aggregate of $7.4 million of tax credits over the next 11 years.

Current wording

We are invested in eight limited partnerships that have established low-income housing projects in our market areas, with our most recent investments made in the second quarter of 2026. We are currently recognizing credits on three projects and expect to recognize credits on the most recent investment in 2027. The remaining four partnership credits are fully utilized as of December 31, 2024. We anticipate recognizing an aggregate of $7.1 million of tax credits over the next 11 years.

Previous wording

Total assets were $3.19 billion at June 30, 2026, an increase of $127.6 million from $3.06 billion at December 31, 2025, due primarily to an increase in investments and loans. Cash and cash equivalents increased $5.1 million to $39.4 million. Available for sale securities increased $46.6 million. Net loans increased $43.7 million, while loans held for sale increased $1.0 million. Total deposits increased $17.6 million to $2.39 billion since year-end 2025, while borrowed funds increased $84.6 million to $394.0 million.

Current wording

Total assets were $3.41 billion at September 30, 2026, an increase of $348.5 million from $3.06 billion at December 31, 2025, due primarily to an increase in investments and loans. Cash and cash equivalents decreased $6.9 million to $27.4 million. Available for sale securities increased $32.8 million. Loans held for sale increased $169.1 million, while net loans increased $115.4 million. Total deposits increased $132.4 million to $2.51 billion since year-end 2025, while borrowed funds increased $203.0 million to $512.5 million.

Previous wording

Cash and cash equivalents totaled $39.4 million at June 30, 2026 compared to $34.3 million at December 31, 2025. 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.

Current wording

Cash and cash equivalents totaled $27.4 million at September 30, 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 $46.7 million, or 10.5%, from December 31, 2025 to June 30, 2026. During 2026, we purchased $68.3 million of mortgage-backed securities in U.S government sponsored entities and $20.5 million of state and political subdivision bonds. We experienced $15.2 million of principal repayments and $26.0 million of calls and maturities. As a result of increases in market interest rates, the unrealized loss on the available for sale investment portfolio increased $1.1 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, 2026 yielded 3.48%, compared to 2.89% in the comparable period in 2025, on a tax equivalent basis.

Current wording

Our investment portfolio increased by $34.0 million, or 7.6%, from December 31, 2025 to September 30, 2026. During 2026, we purchased $87.9 million of mortgage-backed securities in U.S government sponsored entities and $21.2 million of state and political subdivision bonds. We experienced $23.4 million of principal repayments and $37.6 million of calls and maturities. As a result of increases in market interest rates, the unrealized loss on the available for sale investment portfolio increased $15.3 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, 2026 yielded 3.59%, compared to 2.98% in the comparable period in 2025, on a tax equivalent basis.

Previous wording

The investment strategy for 2026 has been to utilize cashflows from the investment portfolio to repurchase investments, as well as a leverage investment strategy to purchase primarily in mortgage backed and municipal securities. This strategy has focused on increasing the yield of the investment portfolio as investment yields are near the top of the trading range compared to recent historical averages. 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, as well as to engage in a leverage investment strategy to purchase primarily in mortgage backed and municipal securities. This strategy has focused on increasing the yield of the investment portfolio as investment yields are near the top of the trading range compared to recent historical averages. We continually monitor interest rate trading ranges and seek to time investment security purchases when rates are in the top third of the trading range. The Company believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, including a rising rate environment, while providing sufficient cashflows to meet liquidity needs.

Previous wording

Loans held for sale increased $1.0 million to $10.4 million as of June 30, 2026 from December 31, 2025 due to the second quarter typically having more residential real estate sales than the fourth quarter. 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-residential mortgages increased $3.2 million to $12.6 million as of September 30, 2026 from December 31, 2025 due to the third quarter typically having more residential real estate sales than the fourth quarter. 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

Loan activity increased in the second quarter of 2026 with growth experienced across most markets even after a large pay-off in our Delaware market. This activity offset the seasonal decrease in consumer loans that is anticipated in the first or second quarter of a year.

Current wording

Loan activity has increased in 2026 with growth experienced across most markets even after a large pay-off in our Delaware market.

Previous wording

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. As of June 30, 2026, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 297.2% of consolidated risk based capital. Construction, land and land development loans represented 29.6% of consolidated risk based capital as of June 30, 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 June 30, 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.

Current wording

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. As of September 30, 2026, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 293.4% of consolidated risk based capital. Construction, land and land development loans represented 32.0% of consolidated risk based capital as of September 30, 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 equity capital and may dilute 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, 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

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

Current wording

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

Previous wording

The allowance for credit losses - loans is maintained at a level which, in management’s judgment, is adequate to absorb losses in the loan portfolio. The provision for credit losses - loans is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for credit losses - loans was $23,559,000 or 0.98% of total loans as of June 30, 2026 as compared to $22,806,000 or 0.97% of loans as of December 31, 2025. The $753,000 increase is a result of a $722,000 provision for credit losses – loans plus net recoveries of $31,000. 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 June 30, 2026 and December 31, 2025 (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 $23,786,000 or 1.00% of total loans as of September 30, 2026 and December 31, 2025. The $980,000 increase is a result of a $1,088,000 provision for credit losses – loans plus net charge-offs of $108,000. 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 September 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 six months ended June 30, 2026 and the year ended December 31, 2025 (dollars in thousands).

Current wording

The following table provides information related to credit loss experience and loan quality for the nine months ended September 30, 2026 and the year ended December 31, 2025 (dollars in thousands).