Citizens Financial Services, Inc. CZFS Form 10-Q filing Q3 FY2025

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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The accompanying notes are an integral part of these unaudited consolidated financial statements.

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The accompanying notes are an integral part of these unaudited consolidated financial statements.

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The accompanying notes are an integral part of these unaudited consolidated financial statements.

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The accompanying notes are an integral part of these unaudited consolidated financial statements.

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CITIZENS FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

Citizens Financial Services, Inc. (individually and collectively with its direct and indirect subsidiaries, the “Company”) is a Pennsylvania corporation and the holding company of its wholly owned subsidiary, First Citizens Community Bank (the “Bank”), and of the Bank’s wholly owned subsidiary, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”). During 2024, the Company and Bank began the process to terminate the corporate existence of CZFS Acquisition Company, LLC, a wholly-owned subsidiary of the Company, and 1st Realty of PA LLC, a wholly-owned subsidiary of the Bank.

The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with U.S. generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. Certain of the prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income or stockholders’ equity. All material inter‑company balances and transactions have been eliminated in consolidation.

In the opinion of management of the Company, the accompanying interim consolidated financial statements at September 30, 2025 and for the periods ended September 30, 2025 and 2024 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and of revenues and expenses for the periods covered by the Consolidated Statement of Income. The financial performance reported for the Company for the three and nine month periods ended September 30, 2025 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2024.

Note 2 – Revenue Recognition

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the three and nine months ended September 30, 2025 and 2024 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

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Note 3 - Earnings per Share

The following table sets forth the computation of earnings per share.

For the three months ended September 30, 2025 and 2024, there were 1,372 and 3,025 shares, respectively, related to the restricted stock plan that were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had per share prices ranging from $61.98-$83.38 for the three month period ended September 30, 2025 and per share prices ranging from $60.16-$83.38 for the three month period ended September 30, 2024. For the nine months ended September 30, 2025 and 2024, 1,372 and 3,025 shares, respectively, related to the restricted stock plan were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had prices ranging from $61.98-$83.38 for the nine month period ended September 30, 2025 and prices ranging from $60.16-$83.38 for the nine month period ended September 30, 2024.

Note 4 – Investments

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at September 30, 2025 and December 31, 2024 were as follows (in thousands):

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The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time, which individual securities have been in a continuous unrealized loss position, at September 30, 2025 and December 31, 2024 (in thousands). As of September 30, 2025, the Company owned 272 securities whose fair value was less than their cost basis.

Allowance for Credit Losses – Available for Sale Securities

The Company measures expected credit losses on available-for-sale debt securities when the Company does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis, which may be maturity. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Economic forecast data is utilized to calculate the present value of expected cash flows. The Company obtains its forecast data through a subscription to a widely recognized and relied upon company who publishes various forecast scenarios. Management evaluates the various scenarios to determine a reasonable and supportable scenario, and utilizes a single scenario in the model. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

The allowance for credit losses on available-for-sale debt securities is included within investment securities available-for-sale on the consolidated balance sheet. Changes in the allowance for credit losses are recorded within Provision for credit losses on the consolidated statement of income. Losses are charged against the allowance when the Company believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met. There was no allowance for credit losses for available for sale securities as of September 30, 2025 and December 31, 2024.

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Accrued interest receivable on available-for-sale debt securities totaled $2,183,000 and $2,135,000 at September 30, 2025 and December 31, 2024 and is included within accrued interest receivable on the consolidated balance sheet. This amount is excluded from the estimate of expected credit losses. Available-for-sale debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed.

There were no sales of available for sale securities during the three and nine months ended September 30, 2025 and 2024.

The following table presents the net gains (losses) on the Company’s equity investments recognized in earnings during the three and nine month periods ended September 30, 2025 and 2024, and the portion of unrealized gains for the period that relates to equity investments held at September 30, 2025 and 2024 (in thousands):

Investment securities with an approximate carrying value of $378.6 million and $340.4 million at September 30, 2025 and December 31, 2024, respectively, were pledged to secure public funds, certain other deposits and borrowing lines.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and fair value of debt securities at September 30, 2025, by contractual maturity, are shown below (in thousands):

Note 5 – Loans

The Company originates commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central and south central Pennsylvania, southern New York, and Wilmington, Dover and Georgetown, Delaware. The most recent acquisition expanded our lending market further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey. Although the Company had a diversified loan portfolio at September 30, 2025 and December 31, 2024, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for credit losses - loans as of September 30, 2025 and December 31, 2024 (in thousands):

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Allowance for Credit Losses - Loans

The allowance for credit losses related to loans consists of loans evaluated collectively and individually for expected credit losses. It represents an estimate of credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. Loans individually evaluated consist of non-accrual commercial loans and recently modified loans that were experiencing financial difficulty at the time of the modification. The allowance for credit losses for off-balance sheet credit exposures includes estimated losses on unfunded loan commitments, letters of credit and other off-balance sheet credit exposures. The total allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The following table presents the components of the allowance for credit losses as of September 30, 2025 and December 31, 2024 (in thousands):

The following table presents the activity in the allowance for credit losses for the three and nine months ended September 30, 2025 and 2024 (in thousands):

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The following tables present the activity in the allowance for credit losses – loans, by portfolio segment, for the three and nine months ended September 30, 2025 and 2024 (in thousands):

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The provision for the first nine months of 2025 was driven by changes in economic forecasts 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.

The provision for the first nine months of 2024 was driven by the annual update of the loss driver analysis and recording specific reserves for certain other commercial loans. This update includes revising prepayment and curtailment speeds. In addition, loss rates are updated to include the most recent completed year of 2023.

The following table presents the allowance for credit losses – loans and amortized cost basis of loans as of September 30, 2025 and December 31, 2024 (in thousands):

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Non-performing Loans

Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days. Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans, or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the non-performing loan receivables, as well as those on non-accrual status as of September 30, 2025 and December 31, 2024, respectively. The balances are presented by class of loan receivable (in thousands):

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As of September 30, 2025, there were $18.4 million of non-accrual loans that did not have a related allowance for credit losses. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to the realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

The following table presents, by class of loans receivable, the amortized cost basis of collateral-dependent nonaccrual loans and type of collateral as of September 30, 2025 and December 31, 2024 (in thousands):

Credit Quality Information

For commercial real estate loans, agricultural real estate loans, construction loans, other commercial loans, other agricultural loans, and state and political subdivision loans, management uses a ten grade internal risk rating system to monitor and assess credit quality. The first six grades under the revised system are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

• Pass (Grades 1-6) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.
• Special Mention (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.
• Substandard (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
• Doubtful (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

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• Loss (Grade 10) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial, agricultural and state and political relationships over $500,000 are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to: 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) a large sample of relationships in aggregate over $1,000,000, 3) selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 4) such other loans which management or the consultant deems appropriate.

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The following tables represent credit exposures by internally assigned grades, by origination year, as of September 30, 2025 and December 31, 2024 (in thousands):

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For residential real estate mortgage loans, home equity loans, and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail above, and all loans past due 90 or more days and still accruing. The following tables present the recorded investment in those loan classes based on payment activity, by origination year, as of September 30, 2025 and December 31, 2024 (in thousands):

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Aging Analysis of Past Due Loan Receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loan receivables as of September 30, 2025 and December 31, 2024 (in thousands):

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Modifications to Borrowers Experiencing Financial Difficulty

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The following table shows the amortized cost basis by class of loans receivable, information regarding nonaccrual modified loans to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2025 (dollars in thousands). There were no loan modifications made during the three and nine months ended September 30, 2024, for borrowers experiencing financial difficulty.

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The following table shows, by class of loans receivable, information regarding the financial effect on nonaccrual modified loans to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2025:

• Three months ended September 30, 2025
• Term Extension
• Loan Type Number of loans Financial Effect
• Accruing Modified Loans to Borrowers Experiencing Financial Difficulty
• Real estate loans:
• Commercial 7 Extended the loan maturity one year
• Total 7

There were no accrual or nonaccrual modified loans to borrowers experiencing financial difficulty for which there were payment defaults after the modification date for the three and nine months ended September 30, 2025.

The following presents, by class of loans, the amortized cost and payment status of accruing and nonaccrual modified loans to borrowers experiencing financial difficulty at September 30, 2025 (in thousands):

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of September 30, 2025 and December 31, 2024, included within other assets are $2,434,000 and $2,635,000, respectively, of foreclosed assets. As of September 30, 2025, included within the foreclosed assets are $76,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu of foreclosure transaction prior to the period end. As of September 30, 2025, the Company had initiated formal foreclosure proceedings on $797,000 of residential mortgage loans, the collateral properties of which have not yet been transferred into foreclosed assets.

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Note 6 – Goodwill and Other Intangible Assets

The following table provides the gross carrying value and accumulated amortization of intangible assets as of September 30, 2025 and December 31, 2024 (in thousands):

(1) Excludes fully amortized intangible assets

The following table provides the current year and estimated future amortization expense for amortized intangible assets for the next five years (in thousands). The Company based its projections of amortization expense shown below on existing asset balances at September 30, 2025. Future amortization expense may vary from these projections:

Note 7 - Employee Benefit Plans

For additional detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 11 of the Company's Audited Consolidated Financial Statements included in the 2024 Annual Report on Form 10-K.

Noncontributory Defined Benefit Pension Plan

The Bank sponsors a trusteed noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all employees and officers hired prior to January 1, 2007. The Bank’s funding policy is to make annual contributions, if needed, based upon the funding formula developed by the plan’s actuary. Any employee with a hire date of January 1, 2007 or later is not eligible to participate in the Pension Plan.

In lieu of the Pension Plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting certain length of service requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee’s base compensation. The contribution amount, if any, is placed in a separate account within the 401(k) plan and is subject to a vesting requirement.

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For employees who are eligible to participate in the Pension Plan, the Pension Plan requires benefits to be paid to eligible employees based primarily upon age and compensation rates during employment. Upon retirement or other termination of employment, employees can elect either an annuity benefit or a lump sum distribution of vested benefits in the Pension Plan.

The following sets forth the components of net periodic benefit costs of the Pension Plan and the line item on the Consolidated Statement of Income where such amounts are included, for the three and nine months ended September 30, 2025 and 2024, respectively (in thousands):

The Bank does not expect to contribute to the Pension Plan during 2025.

Restricted Stock Plan

The Company maintains a Restricted Stock Plan (the “Plan”) whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements. Awards granted under the Plan are in the form of the Company’s common stock and are subject to certain vesting requirements including continuous employment or service with the Company. In April 2016, the Company’s stockholders authorized a total of 150,000 shares of the Company’s common stock to be made available under the Plan. As of September 30, 2025, 100,778 shares remain available to be issued under the Plan. The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation.

The following table details the vesting, awarding and forfeiting of restricted stock during the three and nine months ended September 30, 2025:

Compensation expense related to restricted stock is recognized, based on the market price of the stock at the grant date, over the vesting period. Compensation expense related to restricted stock was $220,000 and $191,000 for the nine months ended September 30, 2025 and 2024, respectively. For the three months ended September 30, 2025 and 2024, compensation expense totaled $73,000 and $69,000, respectively. At September 30, 2025, the total compensation cost related to nonvested awards that had not yet been recognized was $434,000, which is expected to be recognized over the next three years.

Note 8 – Accumulated Other Comprehensive Loss

The following tables present the changes in accumulated other comprehensive loss by component, net of tax, for the three and nine months ended September 30, 2025 and 2024 (in thousands):

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(a) Amounts in parentheses indicate debits on the Consolidated Balance Sheet.

The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2025 and 2024 (in thousands):

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(a) Amounts in parentheses indicate expenses and other amounts indicate income on the Consolidated Statement of Income

Note 9 – Fair Value Measurements

The Company has established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The fair values of equity securities and securities available for sale are determined by quoted prices in active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities and classified as Level II. The fair values consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The following tables present the assets and liabilities reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of September 30, 2025 and December 31, 2024 by level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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The following tables represent the change in the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2025 and 2024 for interest rate lock commitments (IRLC) (in thousands):

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At September 30, 2025 and December 31, 2024, the Company had classified as Level 3 $425,000 and $317,000, respectively, of net derivative assets and liabilities related to IRLC. The fair value of IRLCs is based on prices obtained for loans with similar characteristics from third parties, adjusted by the pull-through rate, which represents the Company’s best estimate of the probability that a committed loan will fund. The weighted average pull-through rates applied ranged from 76.76% to 97.57% at September 30, 2025.

Significant unobservable inputs for assets measured at fair value on a recurring basis at September 30, 2025 and December 31, 2024 (dollars in thousands):

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis as of September 30, 2025 and December 31, 2024 are included in the table below (in thousands):

• Collateral-Dependent Loans - The Company records nonrecurring adjustments of collateral-dependent loans held for investment. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures that include recent sales prices for comparable properties and cost of construction. Periodically, in cases where the carrying value exceeds the fair value of the collateral less estimated cost to sell, an impairment charge is recognized in the form of a charge-off. The fair values above excluded estimated selling costs of $88,000 and $253,000 at September 30, 2025 and December 31, 2024, respectively.

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• Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value, less estimated costs to sell, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as a Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing Level III techniques (dollars in thousands).

Financial Instruments Not Required to be Measured or Reported at Fair Value

The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows (in thousands):

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The carrying amounts for cash and due from banks, bank owned life insurance, regulatory stock, accrued interest receivable and payable approximate fair value and are considered Level I measurements.

Note 10 - Segment Reporting

The Company's reportable segment is determined by the Chief Executive Officer, who is the designated the chief operating decision maker, based upon information provided about the Company's products and services offered, primarily banking operations. The segment is also distinguished by the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business such as branches, which are then aggregated if operating performance, products/services, and customers are similar. The chief operating decision maker will evaluate the financial performance of the Company's business components such as by evaluating revenue streams, significant expenses, and budget to actual results in assessing the Company's segment and in the determination of allocating resources. The chief operating decision maker uses revenue streams to evaluate product pricing and significant expenses to assess performance and evaluate return on assets. The chief operating decision maker uses consolidated net income to benchmark the Company against its competitors. The benchmarking analysis coupled with monitoring of budget to actual results are used in assessment performance and in establishing compensation. Loans, investments, and deposits provide the revenues in the banking operation. Interest expense, provisions for credit losses, payroll, and occupancy expenses provide the significant expenses in the banking operation. All operations are domestic.

The measure of segment assets is reported on the balance sheet as total consolidated assets. Segment performance is evaluated using consolidated net income. Information reported internally for performance assessment by the chief operating decision maker follows, inclusive of reconciliations of significant segment totals to the consolidated financial statements (in thousands):

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Note 11 – Recent Accounting Pronouncements

In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures. This ASU requires disclosure in the notes to financial statements of specified information about certain costs and expenses. Specific disclosures are required for (a) purchases of inventory, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, and (e) depreciation, depletion, and amortization recognized as part of oil and gas producing activities. The amendments in this Update do not change or remove current expense disclosure requirements. However, the amendments affect where this information appears in the notes to financial statements because entities are required to include certain current disclosures in the same tabular format disclosure as the other disaggregation requirements in the amendments. The amendments in ASU 2024-03 apply only to public business entities and are effective for fiscal years beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of this new guidance on its financial statements.

In December 2024, the FASB issued ASU 2024-04, Debt – Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. This new guidance clarifies the assessment of whether a transaction should be accounted for as an induced conversion or extinguishment of convertible debt when changes are made to conversion features as part of an offer to settle the instrument. The ASU requires entities to apply a preexisting contract approach. To qualify for induced conversion accounting under this approach, the inducement offer is required to preserve the form of consideration and result in an amount of consideration that is no less than that issuable pursuant to the preexisting conversion privileges. The guidance is effective for fiscal years beginning after December 15, 2025, with early adoption permitted, and it can be adopted either on a prospective or retrospective basis. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2025, the FASB issued ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40), which revises the effective date of ASU 2024-03 (on disclosures about disaggregation of income statement expenses) “to clarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027.” Entities within the ASU’s scope are permitted to early adopt the ASU. The Company is currently evaluating the impact of this new guidance on its financial statements.

In January 2025, the FASB issued ASU 2025-02, Liabilities (405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 122. This ASU was issued pursuant to SEC Staff Accounting Bulletin No. 122, which rescinds the interpretive guidance included in Section FF of Topic 5 in the Staff Accounting Bulletin series entitled Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for its Platform Users. This ASU has no impact on non-public business entities and is effective for fiscal years beginning after December 15, 2024. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2025, the FASB issued ASU 2025-03, Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity, which revises the guidance in ASC 805 on identifying the accounting acquirer in a business combination in which the legal acquiree is a variable interest entity (VIE). The reporting entity can determine that a transaction in which the legal acquiree is a VIE represents a reverse acquisition in which the legal acquirer is identified as the acquiree for accounting purposes. ASU 2025-03 is effective for fiscal years beginning after December 15, 2026, including interim periods within those fiscal years. Early adoption is permitted. The amendments in ASU 2025-03 must be applied prospectively to any business combination that occurs after the initial adoption date. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2025, the FASB issued ASU 2025-04, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts With Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer, which clarifies the accounting for share-based consideration payable to a customer under ASC 718 and ASC 606. The amendments refine key aspects of the guidance, including the definition of “performance condition” as well as the measurement requirements and the treatment of forfeitures. The amendments will be effective for annual reporting periods beginning after December 15, 2026, including interim periods within those annual periods. Early adoption is permitted for financial statements that have not yet been issued. The Company is currently evaluating the impact of this new guidance on its financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Results of Operations

Overview of the Income Statement

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.

Net income for the three months ended September 30, 2025 was $10,005,000 compared to net income of $7,536,000 in the comparable 2024 period, an increase of $2,469,000. Basic earnings per share for the three months ended September 30, 2025 were $2.09, compared to $1.57 for last year’s comparable period, representing a 33.1% increase due to an increase in net interest income after the provision for credit losses of $3,116,000. Annualized return on assets and return on equity for the quarter ended September 30, 2025 was 1.33% and 12.52%, respectively, compared with 1.01% and 10.31% for the same 2024 period.

Net Interest Income

Net interest income, the most significant component of the Company’s earnings, is the amount by which interest income generated from interest-earning assets exceeds interest expense paid on interest-bearing liabilities.

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.

For the three months ended September 30, 2025, net interest income was $25,140,000 compared to $21,324,000, an increase of $3,816,000, or 17.9%, over the comparable period in 2024. The provision for credit losses in the third quarter of 2025 was $500,000 compared to a credit of $200,000 in 2024. Consequently, net interest income after the provision for credit losses was $24,640,000 for the quarter ended September 30, 2025 compared to $21,524,000 in 2024.

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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):

(1) Averages are based on daily averages.

(2) Includes loan origination and commitment fees.

(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 21%.

(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.

(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

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(1) Averages are based on daily averages.

(2) Includes loan origination and commitment fees.

(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 21%.

(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.

(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

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):

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The following table shows the tax-equivalent effect of changes in volume and rate on interest income and expense (in thousands):

(1) The portion of the total change attributable to both volume and rate changes, which can not be separated, has been allocated proportionally to the change due to volume and the change due to rate prior to allocation.

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.

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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.

Tax equivalent investment income for the nine months ended September 30, 2025 increased $2,716,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 62 basis points to 2.98%.

• The average balance of taxable securities increased $24,729,000, which resulted in an increase in investment income of $462,000. The yield on taxable securities increased 75 basis points from 2.32% to 3.07% as a result of lower yielding securities maturing and purchases made in a higher market interest rate environment. This resulted in an increase in investment income of $1,943,000.
• The average balance of tax-exempt securities decreased $257,000, which resulted in a decrease in investment income of $8,000. The yield on taxable securities increased 28 basis points from 2.50% to 2.90%. This resulted in an increase in investment income of $319,000. For a discussion of the Company’s current investment strategy, see the “Financial Condition – Investments”.

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

• Interest income on residential mortgage loans decreased $73,000. The change due to rate was an increase of $481,000 as the average yield on residential mortgages increased from 5.84% to 5.99%. The average balance of residential mortgage loans decreased $10,018,000. This resulted in a decrease of $554,000 on total interest income due to volume.
• The average balance of construction loans decreased $36,327,000 as a result of projects in our Delaware market and the southeast Pennsylvania market being completed and the related construction loans either transferring to other portfolios or being paid off. This resulted in a decrease of $1,961,000 on total interest income due to volume. The change due to rate was a decrease of $360,000 as the average yield on construction loans decreased from 7.43% to 7.16% as a result of a decrease in market interest rates in the last quarter of 2024 and the first half of 2025.
• The average balance of commercial loans increased $37,416,000 from a year ago. The growth was primarily attributable to completed construction projects converting to permanent financing. This had a positive impact of $1,738,000 on total interest income due to volume. The yield decreased 0.01% to 6.40%, which decreased loan interest income $69,000.
• Interest income on agricultural loans increased $1,245,000 from 2024 to 2025. The yield increased 31 basis points to 5.56% as a result of lower yielding loans maturing and repricing at higher rates, which increased loan interest income $837,000. The average balance of agricultural loans increased $10,225,000 from a year ago, resulting in an increase in interest income of $408,000.
• The average balance of other loans increased $22,039,000 as a result of outstanding student loans. This resulted in an increase of $1,109,000 on total interest income due to volume. The average yield of other loans decreased 86 basis points to 7.21% as a result of a decrease in market interest rates in the last quarter of 2024 and the first nine months of 2025 resulting in a decrease in income of $393,000.

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.

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• The average balance of interest bearing deposits increased $22,815,000 from September 30, 2024 to September 30, 2025. The increase was due to organic growth across all regions of the Company’s market areas. The effect of these volume changes was an increase in interest expense of $306,000. The average rate paid on interest bearing deposits was 2.43% for the first nine months of 2025 and 2.68% for the comparable period in 2024. This resulted in a decrease in interest expense of $3,513,000. The decrease was due to the Federal Reserve decreasing interest rates during the second half of 2024.
• The average balance of other borrowed funds decreased $7,822,000. This resulted in a decrease in interest expense of $281,000. There was a decrease in the average rate paid on other borrowed funds from 4.91% to 4.42% due to the interest rate decreases by the Federal Reserve in the second half of 2024 that decreased borrowings costs resulting in a decrease in interest expense of $1,227,000.

Tax equivalent net interest income for the three months ended September 30, 2025 was $25,425,000 which compares to $21,570,000 for the same period last year. This represents an increase of $3,855,000, or 17.9% and was primarily caused by a decrease in the rate paid on interest-bearing liabilities due the rate cuts made by the Federal Reserve in the second half of 2024.

Total tax equivalent interest income was $40,539,000 for the three month period ended September 30, 2025, compared to $38,935,000 for the comparable period last year, an increase of $1,604,000. This increase was a result of an increase of $1,607,000 due to lower yielding investments and loans maturing and investment security purchases, which resulted in the yield on average interest earning assets increasing 16 basis points from 5.58% to 5.74%.

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%.

• The average balance of taxable securities increased $28,659,000, which resulted in an increase in investment income of $183,000. The yield on taxable securities increased 77 basis points from 2.41% to 3.18% as a result of lower yielding securities maturing and purchases made in a higher market interest rate environment. This resulted in an increase in investment income of $726,000.
• The average balance of tax-exempt securities increased $6,296,000, which resulted in an increase in investment income of $40,000. The yield on tax-exempt securities increased 63 basis points from 2.50% to 3.13%. This resulted in an increase in investment income of $172,000.

Total loan interest income increased $554,000 for the three months ended September 30, 2025 compared to the same period last year, as a result of higher volume.

• Interest income on residential mortgage loans decreased $95,000. The change due to rate was an increase of $73,000 as the average yield on residential mortgages increased from 5.95% to 6.03%. The average balance of residential mortgage loans decreased $11,631,000. This resulted in a decrease of $168,000 on total interest income due to volume.
• The average balance of construction loans decreased $63,029,000 as a result of projects in our Delaware and southeast Pennsylvania markets being completed and the related construction loans either transferring to other portfolios or being paid off. This resulted in a decrease of $1,115,000 on total interest income due to volume. The change due to rate was a decrease of $236,000 as the average yield on construction loans decreased from 7.53% to 6.99% as a result of a decrease in market interest rates in the last quarter of 2024 and the first nine months of 2025.

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• The average balance of commercial loans increased $80,451,000 from a year ago. The growth was primarily attributable to construction loans being replaced with permanent financing. This had a positive impact of $1,382,000 on total interest income due to volume. The yield increased 0.25% to 6.57% primarily due to the pay-offs of three relationships that at some point in their life were on non-accrual status, which increased loan interest income $803,000.
• Interest income on agricultural loans increased $436,000 from 2024 to 2025. The yield increased 37 basis points to 5.75% as a result of lower yielding loans maturing and renewing at a higher yield, which increased loan interest income $338,000. The average balance of agricultural loans increased $6,155,000 from a year ago, resulting in an increase in interest income of $98,000.
• The average balance of other loans decreased $20,844,000 as a result of outstanding student loans. This resulted in a decrease of $387,000 on total interest income due to volume. The average yield of other loans decreased 96 basis points to 7.14% due to the lower market interest rate environment in the first nine months of 2025, resulting in a decrease in income of $195,000.

Total interest expense decreased $2,251,000 for the three months ended September 30, 2025 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 3.06% to 2.67%. The decrease was driven by the Federal Reserve interest rate decreases in 2024, which caused interest expense to decrease $2,077,000.

• The average balance of interest bearing deposits decreased $13,961,000 from September 30, 2024 to September 30, 2025 due to a decrease in brokered certificates of deposit. The effect of these volume changes was a decrease in interest expense of $208,000 due to decreases in NOW accounts and certificates of deposits, which were offset by increases in money market accounts. The average rate paid on interest bearing deposits was 2.37% for the third quarter of 2025 and 2.76% for the comparable period in 2024. This resulted in a decrease in interest expense of $1,766,000, driven by decreases in NOW accounts, money market accounts and certificates of deposits. The decreased rates were due to the Federal Reserve decreasing interest rates during the second half of 2024.
• The average balance of other borrowed funds increased $1,723,000. This resulted in an increase in interest expense of $34,000. There was a decrease in the average rate paid on other borrowed funds from 4.84% to 4.46% due to the interest rate decreases by the Federal Reserve that decreased borrowings costs resulting in a decrease in interest expense of $311,000.

Provision for Credit Losses

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”).

For the three months ended September 30, 2025, we recorded a provision for credit losses of $500,000, which represents an increase of $700,000 from the ($200,000) provision recorded in the corresponding three months of last year. The change in the provision is due to the economic forecasts utilized in the calculation.

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Non-interest Income

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):

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.

The increase in gains on loans sold for the nine month periods ended September 30, 2025 compared to 2024 is attributable higher market prices on the loans sold in 2025 compared to 2024. The decrease for the three month period is due a decrease in volume between the comparable periods. The decrease in earnings on bank owned life insurance for the nine month period is due to death benefits received upon the passing of a former employee in 2024. During the first quarter of 2024, the Company completed the sale of certain assets acquired as part of the HVB acquisition, which included loans and accrued interest, and software, as well as transferring certain contracts, processes and employees of a division internally known as Braavo. The proceeds from the sale totaled $7.2 million and generated a pre-tax gain of $1.1 million.

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Non-interest Expense

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):

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.

Professional fees decreased due to various legal matters in 2024 not continuing into 2025, of which $201,000 was related to the sale of the Braavo division. The decrease in FDIC insurance is due to an increase in the Bank’s leverage ratio, which provided for a lower rate in determining the expense. The decrease in ORE expenses is due to the recovery of expenses upon the pay-offs of certain non-accrual loans.

For the three months ended September 30, 2025, non-interest expenses increased $105,000 when compared to the same period in 2024. The changes in professional FDIC insurance and ORE expenses correspond to the changes for the nine month period. The increase in shares tax is due to timing of tax credit activities.

Provision for Income Taxes

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%.

For the three months ended September 30, 2025, the provision for income taxes was $2,355,000 compared to $1,714,000 for the same period in 2024. The increase is primarily attributable to the increase in income before the provision for income taxes of $3,110,000 for the comparable periods due to the increase in net interest income. Our effective tax rate was 19.1% and 18.5% for the three months ended September 30, 2025 and 2024, respectively.

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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.

Financial Condition

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.

Cash and Cash Equivalents

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.

Investments

The following table shows the composition of the investment portfolio (including debt and equity securities) as of September 30, 2025 and December 31, 2024 (dollars in thousands):

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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.

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.

Management continues to monitor the earnings performance and the liquidity of the investment portfolio on a regular basis. Through active balance sheet management and analysis of the investment portfolio, the Company believes it maintains sufficient liquidity to satisfy depositor withdrawal requirements and various credit needs of its customers.

Loans Held for Sale

Loans held for sale increased $3.9 million to $13.5 million as of September 30, 2025 from December 31, 2024 due to the third quarter typically having more residential real estate sales than the fourth quarter.

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Loans

The following table shows the composition of the loan portfolio as of September 30, 2025 and December 31, 2024 (dollars in thousands):

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.

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.

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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.

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):

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The following table provides a breakdown of our construction loan portfolio by collateral type as of September 30, 2025 and December 31, 2024 (dollars in thousands):

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):

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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.

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

Allowance for Credit Losses - Loans

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):

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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).

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.

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

Management believes it uses the best information available to make such determinations and that the allowance for credit losses - loans is adequate as of September 30, 2025. However, future adjustments could be required if circumstances differ substantially from assumptions and estimates used in making the initial determination. A prolonged downturn in the economy, changes in the economies of various segments of our agricultural and commercial portfolios, high unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, credit loss provisions and reduction in income. Additionally, bank regulatory agencies periodically examine the Bank’s allowance for credit losses. The banking agencies could require the recognition of additions to the allowance for credit losses - loans based upon their judgment of information available to them at the time of their examination.

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On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports. Based on data surrounding the collection process of each identified loan, the loan may be added or deleted from the monthly watch list. The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may choose to include. Watch list loans are continually monitored going forward until satisfactory conditions exist that allow management to upgrade and remove the loan from the watchlist. In certain cases, loans may be placed on non-accrual status or charged-off based upon management’s evaluation of the borrower’s ability to pay. All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans, other commercial loans and other agricultural loans, on non-accrual are evaluated quarterly for impairment.

See also “Note 5 – Loans and Related Allowance for Credit Losses - Loans” to the consolidated financial statements.

The following table is a summary of our non-performing assets as of September 30, 2025 and December 31, 2024.

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

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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.

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

• Specific reserves for non-performing loans total $1,370,000.
• The Company has a history of low charge-offs, which were 0.05% of average loans on an annualized basis for 2025 and 0.11% for 2024, which included the charge-offs related to the Braavo loans.

Bank Owned Life Insurance

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.

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.

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Premises and Equipment

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.

Other assets

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.

Deposits

The following table shows the composition of deposits as of September 30, 2025 and December 31, 2024 (dollars in thousands):

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 of the 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 items was $681.4

million, or 28.3% of the Bank’s total deposits, as of September 30, 2025.

Borrowed Funds

Borrowed funds were $279.6 million and $297.7 million as of September 30, 2025 and December 31, 2024, respectively. The decrease in borrowed funds was due to the increase in deposit levels through September 30, 2025.

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The Company’s current strategy for borrowings is to consider terms and structures to manage interest rate risk and liquidity in a declining market interest rate environment. The Company's daily cash requirements or short-term investments are primarily met by using the financial instruments available through the Federal Home Loan Bank of Pittsburgh.

Stockholders’ Equity

We evaluate stockholders’ equity in relation to total assets and the risks associated with those assets. The greater the capital resource, the more likely a corporation will meet its cash obligations and absorb unforeseen losses. For these reasons, capital adequacy has been, and will continue to be, of paramount importance to the Company. As such, the Company has implemented policies and procedures to ensure that it has adequate capital levels. As part of this process, we routinely stress test our capital levels and identify potential risk and alternative sources of additional capital should the need arise.

Total stockholders’ equity was $327,682,000 at September 30, 2025 compared to $299,734,000 at December 31, 2024, an increase of $27,948,000, or 9.3%. Excluding accumulated other comprehensive loss, stockholders’ equity increased $19,077,000, or 5.9%. The accumulated comprehensive loss decreased $8,871,000, which was primarily the result of the increase in fair value of the Company’s available for sale investment portfolio caused by the decrease in longer term market interest rates. For the first nine months of 2025, the Company had net income of $26,089,000 and declared cash dividends of $7,146,000, or $1.48 per share, representing a cash dividend payout ratio of 27.4%.

All of the Company’s debt investment securities are classified as available-for-sale, making this portion of the Company’s balance sheet more sensitive to the changing market value of investments due to changes in market interest rates. As a result of decreases in longer term market interest rates, accumulated other comprehensive loss decreased approximately $8,871,000 from December 31, 2024.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. There is a two quarter grace period for a qualifying community bank to return to 9% as long as the CBLR is least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categorie44ill apply. At September 30, 2025, the Bank leverage ratio under the CBLR framework was 9.44%, which meets the 9.0% requirement to be considered “well-capitalized” under the CBLR. The Bank leverage ratio as of December 31, 2024 was 8.99%, which did not meet the ratio to be considered “well-capitalized” under the CBLR as of December 31, 2024. As such, the following table provides the Bank’s computed risk‑based capital ratios as of December 31, 2024, which reflects the Bank being well capitalized at that date (dollars in thousands):

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Off-Balance Sheet Activities

Some financial instruments, such as loan commitments, credit lines, and letters of credit, are issued to meet customer financing needs but are not recorded on the Company’s balance sheet. The contractual amount of financial instruments with off-balance sheet risk was as follows at September 30, 2025 and December 31, 2024 (in thousands):

We also offer limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing. Overdraft charges as a result of ATM withdrawals and one-time point of sale (non-recurring) transactions require prior approval of the customer. The non-contractual amount of financial instruments with off-balance sheet risk at September 30, 2025 and December 31, 2024 was $12,509,000 and $13,006,000, respectively. The Company reserves the right to discontinue this service without prior notice.

Liquidity

Liquidity is a measure of the Company's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. To maintain proper liquidity, we use funds management policies, which include liquidity target ratios, along with our investment policies to assure we can meet our financial obligations to depositors, credit customers and stockholders. Liquidity is needed to meet depositors' withdrawal demands, extend credit to meet borrowers' needs, provide funds for normal operating expenses and cash dividends, and to fund other capital expenditures.

Cash generated by operating activities, investing activities and financing activities influences liquidity management. Our Company's historical activity in this area can be seen in the Consolidated Statement of Cash Flows. The most important source of funds is core deposits. Repayment of principal on outstanding loans and cash flows created from the investment portfolio are also factors in liquidity management. Other sources of funding include brokered certificates of deposit and the sale of loans or investments, if needed.

The Company's use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is presented. Other uses of funds include purchasing stock from the Federal Home Loan Bank (FHLB) of Pittsburgh, as well as capital expenditures. Capital expenditures (including software purchases), during the first nine months of 2025 were $1,225,000 compared to $852,000 during the same time period in 2024.

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Short-term debt from the FHLB supplements the Bank’s availability of funds. The Bank achieves liquidity primarily from temporary or short‑term investments in the Federal Reserve and the FHLB. The Bank had a maximum borrowing capacity at the FHLB of approximately $1.09 billion, of which $455.8 million was outstanding, at September 30, 2025. The Bank also has two federal funds line with third party providers for $34.0 million as of September 30, 2025, which are unsecured and were undrawn upon as of September 30, 2025. The Company also has a borrower in custody line with the Federal Reserve Bank of approximately $14.4 million, which also was not drawn upon as of September 30, 2025. The Company has a $15.0 million line of credit with a New York community bank, which also was not drawn upon as of September 30, 2025. The Company continues to evaluate its liquidity needs and as necessary finds additional sources.

Citizens Financial Services, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Citizens Financial Services, Inc. is responsible for paying any dividends declared to its shareholders. Citizens Financial also has repurchased shares of its common stock. Citizens Financial Services, Inc.’s primary source of income is dividends received from the Bank. Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. In particular, the Bank may not, as a state-chartered bank which is a member of the Federal Reserve System, declare a dividend without approval of the Federal Reserve, unless the dividend to be declared by the Bank’s Board of Directors does not exceed the total of: (i) the Bank’s net profits for the current year to date, plus (ii) its retained net profits for the preceding two current years, less any required transfers to surplus. The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends, because banks which are not classified as well capitalized or adequately capitalized may not pay dividends and no dividend may be paid which would make the Bank undercapitalized after the dividend. At September 30, 2025, Citizens Financial Services, Inc. (on an unconsolidated basis) had liquid assets of approximately $4.2 million.

Interest Rate and Market Risk Management

The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities.

Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, because we have no trading portfolio, we are not subject to trading risk. At September 30, 2025, the Company has equity securities that represent only 0.06% of its total assets and, therefore, equity risk is not significant.

The primary components of interest-sensitive assets include adjustable-rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of interest-sensitive liabilities include maturing certificates of deposit, IRA certificates of deposit and short-term borrowings. Savings deposits, NOW accounts and money market investor accounts are considered core deposits and are not short-term interest sensitive (except for the top-tier money market investor accounts, typically held by local governments, which are paid current market interest rates).

Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on our Company's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis.

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The Company currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management and asset liability management processes that we believe will effectively identify, measure, and monitor the Company’s risk exposure. In this analysis, the Company examines the results of movements in interest rates with additional assumptions made concerning prepayment speeds on mortgage loans and mortgage securities. Shock scenarios, which assume a parallel shift in interest rates and is instantaneous, typically have the greatest impact on net interest income. The following is a rate shock analysis and the impact on net interest income as of September 30, 2025 (dollars in thousands):

The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage backed securities, call activity of other investment securities, and deposit selection, re-pricing and maturity structure. Because of these assumptions, actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change on net interest income. Additionally, the changes above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. The changes in net interest income disclosed in the above table are in line with Company policy for interest rate risk.