UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from_____________________ to ___________________

Commission file number 0-13222

CITIZENS FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA	23-2265045
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

15 South Main Street

Mansfield, Pennsylvania 16933

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code: (570) 662‑2121

N/A

(Former Name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, Par value $1.00 per share	CZFS	The Nasdaq Stock Market, LLC
Title of Each Class	Trading Symbol (s)	Name of Each Exchange on Which Registered

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     ☐	Accelerated filer     ☐
Non-accelerated filer     ☒	Smaller reporting company     ☒
Emerging growth company     ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No  ☒

The number of outstanding shares of the Registrant’s Common Stock, as of November 1, 2024, was 4,759,730.

Citizens Financial Services, Inc.

Form 10-Q

INDEX

		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheet as of September 30, 2024 and December 31, 2023	1
	Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2024 and 2023	2
	Consolidated Statement of Comprehensive Income for the Three and Nine Months ended September 30, 2024 and 2023	3
	Consolidated Statement of Changes in Stockholders’ Equity for the Three and Nine Months ended September 30, 2024 and 2023	4
	Consolidated Statement of Cash Flows for the Nine Months ended September 30, 2024 and 2023	5
	Notes to Consolidated Financial Statements	6-33
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34-60
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4.	Controls and Procedures	60
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	61
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	62
	Signatures	63

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(in thousands except share data)	September 30, 2024			December 31, 2023
ASSETS:
Cash and due from banks:
Noninterest-bearing	$	26,780		$	37,733
Interest-bearing		9,983			15,085
Total cash and cash equivalents		36,763			52,818
Interest bearing time deposits with other banks		3,820			4,070
Equity securities		1,730			1,938
Available-for-sale securities		419,190			417,601
Loans held for sale		13,520			9,379
Loans (net of allowance for credit losses: 2024 - $21,695 and 2023 - $21,153)		2,309,307			2,227,683
Premises and equipment		21,237			21,384
Accrued interest receivable		10,803			11,043
Goodwill		85,758			85,758
Bank owned life insurance		50,084			49,897
Other intangibles		3,083			3,650
Fair value of derivative instruments		8,993			13,687
Deferred tax asset		14,449			17,339
Other assets		47,731			59,074
TOTAL ASSETS	$	3,026,468		$	2,975,321
LIABILITIES:
Deposits:
Noninterest-bearing	$	548,218		$	523,784
Interest-bearing		1,901,931			1,797,697
Total deposits		2,450,149			2,321,481
Borrowed funds		231,732			322,036
Accrued interest payable		5,549			4,298
Fair value of derivative instruments - liability		4,763			7,922
Other liabilities		35,621			39,918
TOTAL LIABILITIES		2,727,814			2,695,655
STOCKHOLDERS’ EQUITY:
Preferred Stock
$1.00 par value; authorized 3,000,000 shares at September 30, 2024 and December 31, 2023; none issued in 2024 or 2023		-			-
Common stock
$1.00 par value; authorized 25,000,000 shares at September 30, 2024 and December 31, 2023; issued 5,207,343 at September 30, 2024 and 5,160,754 at December 31, 2023		5,207			5,161
Additional paid-in capital		144,927			143,233
Retained earnings		183,792			172,975
Accumulated other comprehensive loss		(18,916	)		(24,911	)
Treasury stock, at cost: 447,613 shares at September 30, 2024 and 453,760 shares at December 31, 2023		(16,356	)		(16,792	)
TOTAL STOCKHOLDERS’ EQUITY		298,654			279,666
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,026,468		$	2,975,321

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

1

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share and per share data)	2024			2023		2024		2023
INTEREST INCOME:
Interest and fees on loans	$	35,858		$	33,772	$	106,058	$	80,438
Interest-bearing deposits with banks		190			264		695		462
Investment securities:
Taxable		1,736			1,734		5,023		4,973
Nontaxable		517			540		1,569		1,729
Dividends		388			379		1,179		1,004
TOTAL INTEREST INCOME		38,689			36,689		114,524		88,606
INTEREST EXPENSE:
Deposits		13,475			10,100		38,451		19,519
Borrowed funds		3,890			4,185		12,491		10,682
TOTAL INTEREST EXPENSE		17,365			14,285		50,942		30,201
NET INTEREST INCOME		21,324			22,404		63,582		58,405
(Negative) provision for credit losses		(200	)		475		2,587		737
Provision for credit losses - acquisition day 1 non-PCD		-			-		-		4,591
NET INTEREST INCOME AFTER (NEGATIVE) PROVISION FOR CREDIT LOSSES		21,524			21,929		60,995		53,077
NON-INTEREST INCOME:
Service charges		1,636			1,692		4,393		4,196
Trust		184			172		629		583
Brokerage and insurance		545			473		1,773		1,429
Gains on loans sold		752			460		1,648		674
Equity security gains (losses), net		159			69		127		(223	)
Available for sale security losses, net		-			-		-		(51	)
Gain on sale of Braavo division		-			-		1,102		-
Earnings on bank owned life insurance		338			489		1,334		941
Other		141			307		1,056		567
TOTAL NON-INTEREST INCOME		3,755			3,662		12,062		8,116
NON-INTEREST EXPENSES:
Salaries and employee benefits		9,715			10,005		29,622		25,598
Occupancy		1,215			1,221		3,805		2,870
Furniture and equipment		260			255		791		568
Professional fees		620			506		2,021		1,274
FDIC insurance		555			375		1,589		1,000
Pennsylvania shares tax		226			297		866		893
Amortization of intangibles		136			157		432		219
Merger and acquisition		-			623		-		9,269
Software expenses		500			551		1,508		1,274
OREO expenses		84			111		246		126
Other		2,718			2,343		8,038		5,811
TOTAL NON-INTEREST EXPENSES		16,029			16,444		48,918		48,902
Income before provision for income taxes		9,250			9,147		24,139		12,291
Provision for income taxes		1,714			1,599		4,304		2,020
NET INCOME	$	7,536		$	7,548	$	19,835	$	10,271
PER COMMON SHARE DATA:
Net Income - Basic	$	1.59		$	1.59	$	4.18	$	2.38
Net Income - Diluted	$	1.59		$	1.59	$	4.17	$	2.38
Cash Dividends Paid	$	0.490		$	0.485	$	1.460	$	1.435
Number of shares used in computation - basic		4,749,679			4,746,541		4,748,988		4,321,848
Number of shares used in computation - diluted		4,751,224			4,746,541		4,753,927		4,321,848

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

2

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended, September 30,
(in thousands)	2024			2023			2024			2023
Net income	$	7,536		$	7,548		$	19,835		$	10,271
Other comprehensive income (loss):
Change in unrealized gains (losses) on available for sale securities		10,342			(7,627	)		9,177			(4,645	)
Income tax effect		(2,172	)		1,602			(1,927	)		976
Change in unrecognized pension cost		8			7			24			21
Income tax effect		(2	)		(1	)		(5	)		(4	)
Change in unrealized (loss) gain on interest rate swaps		(1,469	)		450			(1,613	)		140
Income tax effect		309			(94	)		339			(29	)
Less:  Reclassification adjustment for investment security gains included in net income		-			-			-			51
Income tax effect		-			-			-			(12	)
Other comprehensive income (loss), net of tax		7,016			(5,663	)		5,995			(3,502	)
Comprehensive income	$	14,552		$	1,885		$	25,830		$	6,769

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

3

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

	Common Stock				Additional Paid-in			Retained			Accumulated Other Comprehensive			Treasury
(in thousands, except share data)	Shares		Amount		Capital			Earnings			(Loss)			Stock			Total
Balance, June 30, 2024		5,207,343	$	5,207	$	144,985		$	178,588		$	(25,932	)	$	(16,378	)	$	286,470
Comprehensive income:
Net income									7,536									7,536
Net other comprehensive income												7,016						7,016
Purchase of treasury stock (1,131 shares)															(59	)		(59	)
Restricted stock, executive and Board of Director awards (1,384 shares)						(98	)								81			(17	)
Restricted stock vesting						40												40
Cash dividends, $0.490 per share									(2,332	)								(2,332	)
Balance, September 30, 2024		5,207,343	$	5,207	$	144,927		$	183,792		$	(18,916	)	$	(16,356	)	$	298,654
Balance, December 31, 2023		5,160,754	$	5,161	$	143,233		$	172,975		$	(24,911	)	$	(16,792	)	$	279,666
Comprehensive income:
Net income									19,835									19,835
Net other comprehensive income												5,995						5,995
Stock dividend		46,589		46		2,001			(2,047	)
Purchase of treasury stock (2,907 shares)															(140	)		(140	)
Restricted stock, executive and Board of Director awards (9,052 shares)						(515	)								576			61
Restricted stock vesting						208												208
Cash dividends, $1.460 per share									(6,971	)								(6,971	)
Balance, September 30, 2024		5,207,343	$	5,207	$	144,927		$	183,792		$	(18,916	)	$	(16,356	)	$	298,654
Balance, June 30, 2023		5,160,754	$	5,161	$	143,351		$	162,499		$	(30,980	)	$	(16,803	)	$	263,228
Comprehensive income:
Net income									7,548									7,548
Net other comprehensive loss												(5,663	)					(5,663	)
Purchase of treasury stock (2,772 shares)															(264	)		(264	)
Restricted stock, executive and Board of Director awards (2,167 shares)						(86	)								168			82
Restricted stock vesting						34												34
Sale of treasury stock to employees (410 shares)															28			28
Forfeited restricted stock (120 shares)						3									(3	)
Cash dividends, $0.485 per share									(2,307	)								(2,307	)
Balance, September 30, 2023		5,160,754	$	5,161	$	143,302		$	167,740		$	(36,643	)	$	(16,874	)	$	262,686
Balance, December 31, 2022		4,427,687	$	4,428	$	80,911		$	164,922		$	(33,141	)	$	(16,973	)	$	200,147
Comprehensive income:
Net income									10,271									10,271
Net other comprehensive loss												(3,502	)					(3,502	)
Stock dividend		39,209		39		2,982			(3,021	)
Issuance of Common stock		693,858		694		59,443												60,137
Purchase of treasury stock (2,772 shares)															(264	)		(264	)
Restricted stock, executive and Board of Director awards (2,242 shares)						(231	)								348			117
Restricted stock vesting						184												184
Sale of treasury stock to employees (410 shares)															28			28
Forfeited restricted stock						13									(13	)
Change in Accounting policy for allowance for credit losses									1,766									1,766
Cash dividends, $1.435 per share									(6,198	)								(6,198	)
Balance, September 30, 2023		5,160,754	$	5,161	$	143,302		$	167,740		$	(36,643	)	$	(16,874	)	$	262,686

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

4

CITIZENS FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
(in thousands)	2024			2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	19,835		$	10,271
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		2,587			5,328
Depreciation and amortization		1,381			1,022
Amortization and accretion of loans and other assets		(3,157	)		(2,392	)
Amortization and accretion of investment securities		1,111			1,197
Deferred income taxes		1,296			355
Investment securities (gains) losses, net		(127	)		274
Earnings on bank owned life insurance		(1,334	)		(941	)
Vesting of restricted stock		208			184
Originations of loans held for sale		(120,486	)		(53,510	)
Proceeds from sales of loans held for sale		117,904			51,428
Realized gains on loans sold		(1,648	)		(674	)
Realized gains on sale of Braavo		(1,102	)		-
Decrease (increase) in accrued interest receivable		240			(769	)
Gain on sale of foreclosed assets held for sale		(93	)		(98	)
Increase in accrued interest payable		1,251			609
Other, net		4,833			(1,955	)
Net cash provided by operating activities		22,699			10,329
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales		-			86,504
Proceeds from maturity and principal repayments		42,699			18,847
Purchase of securities		(36,222	)		(10,246	)
Proceeds from sale of equity securities		335			127
Purchase of interest bearing time deposits with other banks		(100	)		-
Proceeds from matured interest bearing time deposits with other banks		350			1,489
Proceeds from life insurance		1,147			1,097
Proceeds from redemption of regulatory stock		23,870			19,936
Purchase of regulatory stock		(19,552	)		(22,105	)
Net increase in loans		(88,325	)		(42,162	)
Purchase of premises and equipment		(852	)		(2,308	)
Investments in low income housing partnerships		-			(616	)
Proceeds from sale of foreclosed assets held for sale		567			314
Proceeds from sale of Braavo assets		7,185			-
Acquisition, net of cash paid		-			4,905
Net cash (used in) provided by investing activities		(68,898	)		55,782
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		128,669			(42,438	)
Proceeds from long-term borrowings		-			20,000
Repayments of long-term borrowings		(10,000	)		-
Net decrease in short-term borrowed funds		(81,351	)		(20,115	)
Purchase of treasury and restricted stock		(204	)		(264	)
Sale of treasury stock to employees		-			28
Dividends paid		(6,970	)		(6,197	)
Net cash provided by (used in) financing activities		30,144			(48,986	)
Net (decrease) increase in cash and cash equivalents		(16,055	)		17,125
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		52,818			26,211
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	36,763		$	43,336
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	49,690		$	28,707
Income taxes paid	$	1,500		$	4,600
Loans transferred to foreclosed property	$	2,486		$	147
Right of use asset and liability	$	306		$	5
Stock Dividend	$	2,047		$	3,021
CECL adjustment	$	-		$	3,300

Acquisition of	HV Bancorp, Inc.
Non-cash assets acquired
Available-for-sale securities	$	79,248
Interest bearing time deposits with other banks		-
Loans held for sale		10,750
Loans		475,338
Premises and equipment		2,310
Accrued interest receivable		2,226
Bank owned life insurance		10,387
Intangibles		2,972
Deferred tax asset		8,392
Other assets		18,213
Goodwill		53,382
		663,218
Liabilities assumed
Noninterest-bearing deposits		197,549
Interest-bearing deposits		335,816
Accrued interest payable		885
Borrowed funds		58,647
Other liabilities		11,674
		604,571
Net non-cash assets acquired		58,647
Cash and cash equivalents acquired	$	18,017

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

5

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 its wholly owned subsidiary is CZFS Acquisition Company, LLC. CZFS Acquisition Company, LLC is the holding company of its wholly owned subsidiary, First Citizens Community Bank (the “Bank”), and of the Bank’s wholly owned subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1^st Realty of PA LLC (“Realty”).

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, 2024 and for the periods ended September 30, 2024 and 2023 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 nine month period ended September 30, 2024 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, 2023.

Accounting Pronouncements Adopted in 2023

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequent related updates. This ASU replaces the incurred loss methodology for recognizing credit losses and requires businesses and other organizations to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans and held-to-maturity securities, net investments in leases, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASC 326 requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell. This guidance became effective on January 1, 2023 for the Company. The results reported for periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable accounting standards.

The Company adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans and held-to-maturity debt securities, available-for-sale debt securities and unfunded commitments. On January 1, 2023, the Company recorded a cumulative effect increase to retained earnings of $1.8 million, net of tax, of which $3.3 million related to loans and ($1.1) million related to unfunded commitments.

The Company adopted the provisions of ASC 326 related to financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30 using the prospective transition approach. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption.

6

The Company expanded the pooling utilized under the legacy incurred loss method to include additional segmentation based on risk. The impact of the change from the incurred loss model to the current expected credit loss model is detailed below (in thousands):

	January 1, 2023
	Pre-adoption		Adoption Impact			As Reported
Assets
Allowance for credit losses - loans
Real estate loans:
Residential	$	1,056	$	79		$	1,135
Commercial		10,120		(3,070	)		7,050
Agricultural		4,589		(1,145	)		3,444
Construction		801		(103	)		698
Consumer		135		1,040			1,175
Other commercial loans		1,040		(328	)		712
Other agricultural loans		489		(219	)		270
State and political subdivision loans		322		(280	)		42
Unallocated		-		726			726
Total	$	18,552	$	(3,300	)	$	15,252
Liabilities
Allowance for Credit Losses - Off-Balance Sheet credit Exposure	$	165	$	1,064		$	1,229

The Company adopted the provisions of ASC 326 related to presenting other-than-temporary impairment on available-for-sale debt securities prior to January 1, 2023 using the prospective transition approach, though no such charges had been recorded on the securities held by the Company as of the date of adoption.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted CECL and enhance the disclosure requirements for modifications of receivables made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investment in leases in the existing vintage disclosures. This ASU became effective on January 1, 2023 for the Corporation. The adoption of this ASU resulted in updated disclosures within our consolidated financial statements but otherwise did not have a material impact on the Company’s consolidated financial statements.

Modified Loans

 A loan is classified as a modified loan to a borrower experiencing financial difficulty when a contractual loan modification in the form of principal forgiveness, an interest rate reduction, an other-than-significant payment delay or a term extension (or a combination thereof) has been granted to an existing borrower experiencing financial difficulties. The goal when modifying a credit is to establish a reasonable period of time to provide cash flow relief to customers experiencing cash flow difficulties. Accruing modified loans to borrowers experiencing financial difficulty are primarily comprised of loans on which interest is being accrued under the modified terms, and the loans are current or less than 90 days past due.

Allowance for Credit Losses – Loans and Leases

The allowance for credit losses (ACL) on loans and leases is a valuation account that is used to present the net amount expected to be collected on a loan or lease. The ACL for loans and leases is adjusted through provision for credit losses as a charge against, or credit to, earnings. Loans and leases deemed to be uncollectible are charged against the ACL on loans and leases, and any subsequent recoveries are credited to the ACL. Management evaluates the ACL on a quarterly basis. When changes in the reserve are necessary, an adjustment is made.

7

Depending on the nature of the pool of financial assets with similar risk characteristics, the models utilized by the Company to estimate expected credit losses include a discounted cash flow (“DCF”) model that discounts instrument-level contractual cash flows, adjusted for prepayments and curtailments, incorporating loss expectations, and a weighted average remaining maturity model which contemplates expected losses at a pool-level, utilizing historic loss information. The Company’s models for  estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Management compares the results of this calculation to the amortized cost basis to determine its allowance for credit loss balance.

Management uses relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts in calculating its ACL. Historical credit loss experience provides the basis for the estimation of expected credit losses. Management determines whether there is a need to make qualitative adjustments to historical loss information by monitoring certain factors including differences in current loan-specific risk characteristics as well as for changes in external or environmental conditions, or other relevant factors.

The contractual term used in projecting the cash flows of a loan is based on the maturity date of a loan, and is adjusted for prepayment or curtailment assumptions which may shorten that contractual time period. Options to extend are considered by management in determining the contractual term.

The key inputs to the DCF model are (1) probability of default, (2) loss given default, (3) prepayment and curtailment rates, (4) reasonable and supportable economic forecasts, (5) forecast reversion period, (6) expected recoveries on charged off loans, and (7) discount rate.

Probability of Default (PD)

In order to incorporate economic factors into forecasting within the DCF model, management elected to use the Loss Driver method to generate the PD rate inputs. The Loss Driver method analyzes how one or more economic factors change the default rate using a statistical regression analysis. Management selected economic factors that had strong correlations to historical default rates.

Loss Given Default (LGD)

Management elected to use the Frye Jacobs parameter for determining the LGD input, which is an estimation technique that derives a LGD input from segment specific risk curves that correlates LGD with PD.

Prepayment and Curtailment Rates

Prepayment Rates: Loan level transaction data is used to calculate a semi-annual prepayment rate. Those semi-annual rates are annualized and the average of the annualized rates is used in the DCF calculation for fixed payment or term loans. Rates are calculated for each pool.

Curtailment Rates: Loan level transaction data is used to calculate annual curtailment rates using any available historical loan level data. The average of the historical rates is used in the DCF model for interest only payment or line of credit type loans. Rates are calculated for each pool.

Reasonable and Supportable Economic Forecasts

8

The forecast data used in the DCF model is obtained via 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.

Forecast Reversion Period

Management uses forecasts to predict how economic factors will perform and has determined to use a four quarter forecast period as well as a four quarter straight-line reversion period to historical averages (also commonly referred to as the mean reversion period).

Expected Recoveries on Charged-off Loans

Management performs an analysis to estimate recoveries that could be reasonably expected based on historical experience in order to account for expected recoveries on loans that have already been fully charged-off and are not included in the ACL calculation.

Discount Rate

The effective interest rate of the underlying loans and leases of the Company serves as the discount rate applied to the expected periodic cash flows. Management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

Individual Evaluation

Management evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. Instruments will not be included in both collective and individual analyses. Individual analysis will establish a specific reserve for instruments in scope.

Management considers a financial asset as collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral, based on management’s assessment as of the reporting date.

Accrued Interest Receivable on Loans and Leases

Accrued interest receivable on loans held for investment totaled $8.5 million at September 30, 2024 and December 31, 2023, and is included within Accrued interest receivable. This amount is excluded from the estimate of expected credit losses.

Reserve for Unfunded Commitments

The Company maintains a reserve in other liabilities for off-balance sheet credit exposures such as unfunded commitments that are currently unfunded in categories with historical loss experience. Management calculates funding rates annually using loan level data history at the portfolio level. The applicable pool level loss rates are then applied to calculate the reserve for unfunded commitments liability each period.

Note 2 – Revenue Recognition

In accordance with ASC 606, Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold, earnings on bank owned life insurances, gains and losses from derivative instruments and changes in the fair of loans held for sale are not within the scope of ASC 606. The main types of noninterest income within the scope of the standard are as follows:

• Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.

9

• Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction.

• Gains and losses on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.

• Brokerage and insurance – Fees include commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Fees for these services are billed monthly and are recorded as revenue at the end of the month for which the wealth management service has been performed. Other performance obligations (such as the delivery of account statements to customers) are generally considered immaterial to the overall transaction price.

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, 2024 and 2023 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Revenue stream	2024		2023		2024		2023
Service charges on deposit accounts
Overdraft fees	$	404		408	$	1,202	$	1,138
Statement fees		46		47		132		153
Interchange revenue		1,051		1,008		2,606		2,469
ATM income		37		35		103		107
Other service charges		98		194		350		329
Total Service Charges		1,636		1,692		4,393		4,196
Trust		184		172		629		583
Brokerage and insurance		545		473		1,773		1,429
Other		145		260		517		494
Total	$	2,510	$	2,597	$	7,312	$	6,702

10

Note 3 – Earnings per Share

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

	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
Net income applicable to common stock	$	7,536,000	$	7,548,000	$	19,835,000	$	10,271,000
Basic earnings per share computation
Weighted average common shares outstanding		4,749,679		4,746,541		4,748,988		4,321,848
Earnings per share - basic	$	1.59	$	1.59	$	4.18	$	2.38
Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share		4,749,679		4,746,541		4,748,988		4,321,848
Add: Dilutive effects of restricted stock		1,545		-		4,939		-
Weighted average common shares outstanding for dilutive earnings per share		4,751,224		4,746,541		4,753,927		4,321,848
Earnings per share - diluted	$	1.59	$	1.59	$	4.17	$	2.38

For the three months ended September 30, 2024 and 2023, there were 3,025 and 5,535 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 $60.16-$83.38 for the three month period ended September 30, 2024 and per share prices ranging from $44.93-$83.38 for the three month period ended September 30, 2023. For the nine months ended September 30, 2024 and 2023, 3,025 and 5,535 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 $60.16-$83.38 for the nine month period ended September 30, 2024 and prices ranging from $44.93-$83.38 for the nine month period ended September 30, 2023.

Note 4 – Investments

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at September 30, 2024 and December 31, 2023 were as follows (in thousands):

September 30, 2024	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Allowance for Credit Losses		Fair Value
Available-for-sale securities:
U.S. agency securities	$	59,579	$	5	$	(3,970	)	$	-	$	55,614
U.S. treasury securities		128,637		-		(5,333	)		-		123,304
Obligations of state and political subdivisions		104,005		25		(6,588	)		-		97,442
Corporate obligations		13,436		290		(1,085	)		-		12,641
Mortgage-backed securities in government sponsored entities		140,099		390		(10,300	)		-		130,189
Total available-for-sale securities	$	445,756	$	710	$	(27,276	)	$	-	$	419,190

December 31, 2023
Available-for-sale securities:
U.S. agency securities	$	66,569	$	1	$	(5,799	)	$	-	$	60,771
U.S. treasury securities		152,485		-		(9,197	)		-		143,288
Obligations of state and political subdivisions		107,945		32		(6,190	)		-		101,787
Corporate obligations		13,394		245		(1,236	)		-		12,403
Mortgage-backed securities in government sponsored entities		112,950		7		(13,605	)		-		99,352
Total available-for-sale securities	$	453,343	$	285	$	(36,027	)	$	-	$	417,601

11

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, 2024 and December 31, 2023 (in thousands). As of September 30, 2024, the Company owned 301 securities whose fair value was less than their cost basis.

September 30, 2024	Less than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. agency securities	$	-	$	-		$	53,597	$	(3,970	)	$	53,597	$	(3,970	)
U.S. treasury securities		-		-			123,304		(5,333	)		123,304		(5,333	)
Obligations of state and political subdivisions		877		(1	)		87,875		(6,587	)		88,752		(6,588	)
Corporate obligations		345		(28	)		9,200		(1,057	)		9,545		(1,085	)
Mortgage-backed securities in government sponsored entities		345		(1	)		88,359		(10,299	)		88,704		(10,300	)
Total securities	$	1,567	$	(30	)	$	362,335	$	(27,246	)	$	363,902	$	(27,276	)

December 31, 2023
U.S. agency securities	$	-	$	-		$	58,753	$	(5,799	)	$	58,753	$	(5,799	)
U.S. treasury securities		-		-			143,288		(9,197	)		143,288		(9,197	)
Obligations of states and political subdivisions		-		-			93,535		(6,190	)		93,535		(6,190	)
Corporate obligations		1,487		(265	)		8,320		(971	)		9,807		(1,236	)
Mortgage-backed securities in government sponsored entities		9,203		(31	)		88,553		(13,574	)		97,756		(13,605	)
Total securities	$	10,690	$	(296	)	$	392,449	$	(35,731	)	$	403,139	$	(36,027	)

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. 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.

Accrued interest receivable on available-for-sale debt securities totaled $1,947,000 and $2,202,000 at September 30, 2024 and December 31,2023 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.

12

There were no sales of available for sale securities during the three and nine months ended September 30, 2024. There were no sales of available for sale securities during the three months ended September 30, 2023. Proceeds from sales of securities available-for-sale for the nine months ended September 30, 2023 were $86,504,000.

The gross gains and losses were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Gross gains on available for sale securities	$	-	$	-	$	-	$	38
Gross losses on available for sale securities		-		-		-		(89	)
Net losses	$	-	$	-	$	-	$	(51	)

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, 2024 and  2023, and the portion of unrealized gains for the period that relates to equity investments held at September 30, 2024 and 2023(in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
Equity securities	2024		2023		2024			2023
Net gains (losses) recognized in equity securities during the period	$	159	$	69	$	127		$	(223	)
Less: Net gains (losses) realized on the sale of equity securities during the period		-		9		(4	)		14
Net unrealized  gains (losses)	$	159	$	60	$	131		$	(237	)

13

Investment securities with an approximate carrying value of $367.0 million and $353.3 million at September 30, 2024 and December 31, 2023, 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, 2024, by contractual maturity, are shown below (in thousands):

	Amortized Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	49,528	$	48,725
Due after one year through five years		139,662		132,784
Due after five years through ten years		79,848		73,511
Due after ten years		176,718		164,170
Total	$	445,756	$	419,190

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 and Dover, Delaware. The HVBC 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, 2024 and December 31, 2023, 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, 2024 and December 31, 2023 (in thousands):

	September 30, 2024		December 31, 2023
Real estate loans:
Residential	$	353,254	$	359,990
Commercial		1,110,548		1,092,887
Agricultural		331,734		314,802
Construction		178,706		195,826
Consumer		143,064		61,316
Other commercial loans		134,285		136,168
Other agricultural loans		24,537		30,673
State and political subdivision loans		54,874		57,174
Total		2,331,002		2,248,836
Allowance for credit losses - loans		21,695		21,153
Net loans	$	2,309,307	$	2,227,683

Allowance for Credit Losses, effective January 1, 2023

As discussed in Note 1 “Basis of Presentation”, the Company adopted CECL effective January 1, 2023. CECL requires estimated credit losses on loans to be determined based on an expected life of loan model, as compared to an incurred loss model (in effect for periods prior to 2023). Accordingly, allowance for credit losses disclosures subsequent to January 1, 2023 are not always comparable to prior dates. In addition, certain new disclosures required under CECL are not applicable to prior periods. See Note 1, “Basis of Presentation”, for a summary of the impact of adopting CECL on January 1, 2023.

14

Under CECL, loans individually evaluated for impairment 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 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. 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, 2024 and December 31, 2023 (in thousands):

	September 30, 2024		December 31, 2023
Allowance for Credit Losses - Loans	$	21,695	$	21,153
Allowance for Credit Losses - Off-Balance Sheet credit Exposure		766		1,265
Total allowance for credit losses	$	22,461	$	22,418

The following table presents the activity in the allowance for credit losses for the three and nine months ended September 30, 2024 and 2023 (in thousands):

	Allowance for Credit Losses - Loans			Allowance for Credit Losses - Off- Balance Sheet Credit Exposure			Total
Balance at June 30, 2024	$	22,797		$	1,066		$	23,863
Loans charged-off		(1,212	)		-			(1,212	)
Recoveries of loans previously charged-off		10			-			10
Net loans charged-off		(1,202	)		-			(1,202	)
Provision for credit losses		100			(300	)		(200	)
Balance at September 30, 2024	$	21,695		$	766		$	22,461

	Allowance for Credit Losses - Loans			Allowance for Credit Losses - Off- Balance Sheet Credit Exposure			Total
Balance at December 31, 2023	$	21,153		$	1,265		$	22,418
Loans charged-off		(2,568	)		-			(2,568	)
Recoveries of loans previously charged-off		24			-			24
Net loans charged-off		(2,544	)		-			(2,544	)
Provision for credit losses		3,086			(499	)		2,587
Balance at September 30, 2024	$	21,695		$	766		$	22,461

15

	Allowance for Credit  Losses - Loans			Allowance for Credit Losses - Off- Balance Sheet Credit Exposure			Total
Balance at June 30, 2023	$	21,652		$	1,391		$	23,043
Loans charged-off		(808	)		-			(808	)
Recoveries of loans previously charged-off		10			-			10
Net loans charged-off		(798	)		-			(798	)
Provision for credit losses		601			(126	)		475
Balance at September 30, 2023	$	21,455		$	1,265		$	22,720

	Allowance for Credit  Losses - Loans			Allowance for Credit Losses - Off- Balance Sheet Credit Exposure		Total
Balance at December 31, 2022	$	18,552		$	165	$	18,717
Impact of adopting CECL		(3,300	)		1,064		(2,236	)
Allowance for credit loss on PCD acquired loans		1,689			-		1,689
Loans charged-off		(819	)		-		(819	)
Recoveries of loans previously charged-off		41			-		41
Net loans charged-off		(778	)		-		(778	)
Provision for credit losses - acquisition day 1 non-PCD		4,591			-		4,591
Provision for credit losses		701			36		737
Balance at September 30, 2023	$	21,455		$	1,265	$	22,720

The following tables presents the activity in the allowance for credit losses – loans, by portfolio segment, for the three and nine months ended September 30, 2024 and 2023 (in thousands):

	For the three months ended September 30, 2024
	Balance at June 30, 2024		Charge-offs			Recoveries		Provision			Balance at September 30, 2024
Real estate loans:
Residential	$	2,355	$	(4	)	$	-	$	(365	)	$	1,986
Commercial		10,283		-			-		(996	)		9,287
Agricultural		3,770		-			-		45			3,815
Construction		1,627		-			-		(156	)		1,471
Consumer		1,211		(25	)		6		175			1,367
Other commercial loans		3,256		(1,183	)		4		(253	)		1,824
Other agricultural loans		206		-			-		(90	)		116
State and political subdivision loans		63		-			-		-			63
Unallocated		26		-			-		1,740			1,766
Total	$	22,797	$	(1,212	)	$	10	$	100		$	21,695

	For the nine months ended September 30, 2024
	Balance at December 31, 2023		Charge-offs			Recoveries		Provision			Balance at September 30, 2024
Real estate loans:
Residential	$	2,354	$	(4	)	$	-	$	(364	)	$	1,986
Commercial		9,178		-			-		109			9,287
Agricultural		3,264		-			-		551			3,815
Construction		1,950		-			-		(479	)		1,471
Consumer		1,496		(62	)		16		(83	)		1,367
Other commercial loans		2,229		(2,502	)		8		2,089			1,824
Other agricultural loans		270		-			-		(154	)		116
State and political subdivision loans		45		-			-		18			63
Unallocated		367		-			-		1,399			1,766
Total	$	21,153	$	(2,568	)	$	24	$	3,086		$	21,695

16

	For the three months ended September 30, 2023
	Balance at June 30, 2023		Charge-offs			Recoveries		Provision			Balance at September 30, 2023
Real estate loans:
Residential	$	2,675	$	-		$	-	$	(110	)	$	2,565
Commercial		9,274		-			2		(91	)		9,185
Agricultural		3,579		-			-		(104	)		3,475
Construction		1,667		-			-		166			1,833
Consumer		1,259		(45	)		3		503			1,720
Other commercial loans		2,477		(763	)		5		353			2,072
Other agricultural loans		268		-			-		(39	)		229
State and political subdivision loans		52		-			-		(4	)		48
Unallocated		401		-			-		(73	)		328
Total	$	21,652	$	(808	)	$	10	$	601		$	21,455

	For the nine months ended September 30, 2023
	Balance at December 31, 2022		Impact of adopting CECL			Allowance for credit loss on PCD acquired loans		Charge-offs			Recoveries		Provision			Balance at September 30, 2023
Real estate loans:
Residential	$	1,056	$	79		$	108	$	(1	)	$	-	$	1,323		$	2,565
Commercial		10,120		(3,070	)		39		-			2		2,094			9,185
Agricultural		4,589		(1,145	)		37		-			-		(6	)		3,475
Construction		801		(103	)				-			-		1,135			1,833
Consumer		135		1,040			677		(55	)		30		(107	)		1,720
Other commercial loans		1,040		(328	)		828		(763	)		9		1,286			2,072
Other agricultural loans		489		(219	)		-		-			-		(41	)		229
State and political subdivision loans		322		(280	)		-		-			-		6			48
Unallocated		-		726			-		-			-		(398	)		328
Total	$	18,552	$	(3,300	)	$	1,689	$	(819	)	$	41	$	5,292		$	21,455

The following table presents the allowance for credit losses – loans and amortized cost basis of loans under CECL methodology as of September 30, 2024 and December 31, 2023:

	Allowance for Credit Losses - Loans						Loans
September 30, 2024	Collectively evaluated		Individually evaluated		Total Allowance for Credit Losses - Loans		Collectively evaluated		Individually evaluated		Total Loans
Real estate loans:
Residential	$	1,947	$	39	$	1,986	$	351,748	$	1,506	$	353,254
Commercial		9,188		99		9,287		1,098,389		12,159		1,110,548
Agricultural		3,813		2		3,815		329,318		2,416		331,734
Construction		1,471		-		1,471		176,758		1,948		178,706
Consumer		510		857		1,367		142,107		957		143,064
Other commercial loans		1,313		511		1,824		132,323		1,962		134,285
Other agricultural loans		116		-		116		24,343		194		24,537
State and political subdivision loans		63		-		63		54,874		-		54,874
Unallocated		1,766		-		1,766		-		-		-
Total	$	20,187	$	1,508	$	21,695	$	2,309,860	$	21,142	$	2,331,002

17

	Allowance for Credit Losses - Loans						Loans
December 31, 2023	Collectively evaluated		Individually evaluated		Total Allowance for Credit Losses - Loans		Collectively evaluated		Individually evaluated		Total Loans
Real estate loans:
Residential	$	2,285	$	69	$	2,354	$	358,358	$	1,632	$	359,990
Commercial		9,033		145		9,178		1,090,217		2,670		1,092,887
Agricultural		3,247		17		3,264		311,500		3,302		314,802
Construction		1,664		286		1,950		193,469		2,357		195,826
Consumer		557		939		1,496		60,377		939		61,316
Other commercial loans		1,713		516		2,229		134,472		1,696		136,168
Other agricultural loans		270		-		270		30,388		285		30,673
State and political subdivision loans		45		-		45		57,174		-		57,174
Unallocated		367		-		367		-		-		-
Total	$	19,181	$	1,972	$	21,153	$	2,235,955	$	12,881	$	2,248,836

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, 2024 and December 31, 2023, respectively. The balances are presented by class of loan receivable (in thousands):

	September 30, 2024								December 31, 2023
	Nonaccrual With a related allowance		Nonaccrual Without a related allowance		90 days or greater past due and accruing		Total non- performing loans		Nonaccrual With a related allowance		Nonaccrual Without a related allowance		90 days or greater past due and accruing		Total non-performing loans
Real estate loans:
Mortgages	$	166	$	2,351	$	256	$	2,773	$	315	$	2,646	$	-	$	2,961
Home Equity		-		148		-		148		-		121		18		139
Commercial		1,230		9,588		353		11,171		256		879		404		1,539
Agricultural		166		2,250		28		2,444		181		2,489		75		2,745
Construction		-		1,948		-		1,948		2,357		-		-		2,357
Consumer		855		-		12		867		701		-		13		714
Other commercial loans		1,946		16		52		2,014		588		1,162		6		1,756
Other agricultural loans		-		194		-		194		-		492		-		492
	$	4,363	$	16,495	$	701	$	21,559	$	4,398	$	7,789	$	516	$	12,703

As of September 30, 2024, there were $16.5 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.

18

The following table presents, by class of loans and leases, the amortized cost basis of collateral-dependent nonaccrual loans and leases and type of collateral as of  September 30, 2024 and December 31, 2023 (in thousands):

September 30, 2024	Real Estate		Business Assets		None		Total
Real estate loans:
Mortgages	$	2,517	$	-	$	-	$	2,517
Home Equity		148		-		-		148
Commercial		10,818		-		-		10,818
Agricultural		2,416		-		-		2,416
Construction		1,948		-		-		1,948
Consumer		-		-		855		855
Other commercial loans		-		1,962		-		1,962
Other agricultural loans		-		194		-		194
	$	17,847	$	2,156	$	855	$	20,858

December 31, 2023	Real Estate		Business Assets		None		Total
Real estate loans:
Mortgages	$	2,961	$	-	$	-	$	2,961
Home Equity		121		-		-		121
Commercial		1,135		-		-		1,135
Agricultural		2,670		-		-		2,670
Construction		2,357		-		-		2,357
Consumer		-		-		701		701
Other commercial loans		-		1,750		-		1,750
Other agricultural loans		-		492		-		492
	$	9,244	$	2,242	$	701	$	12,187

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 an internal risk rating system to monitor and assess credit quality. During the third quarter of 2023, this rating system was expanded from a nine grade rating system to a ten grade rating system. The first six categories under the revised system are considered not criticized and are aggregated as “Pass” rated. Under the prior system, the first five categories were considered not criticized and 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.

• 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.

19

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.

The following tables represent credit exposures by internally assigned grades, by origination year, as of September 30, 2024 and December 31, 2023 (in thousands):

													Revolving		Revolving
													Loans		Loans
													Amortized		Converted
September 30, 2024	2024		2023		2022		2021		2020		Prior		Cost Basis		to Term		Total
Commercial real estate
Risk Rating
Pass	$	38,080	$	87,934	$	348,635	$	204,747	$	113,932	$	232,156	$	29,762	$	1,821	$	1,057,067
Special Mention		-		813		10,395		3,361		1,384		8,573		1,917		-		26,443
Substandard		-		572		13,832		545		545		10,784		356		404		27,038
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	38,080	$	89,319	$	372,862	$	208,653	$	115,861	$	251,513	$	32,035	$	2,225	$	1,110,548
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Agricultural real estate
Risk Rating
Pass	$	26,932	$	25,900	$	47,419	$	26,858	$	30,231	$	132,022	$	14,143	$	117	$	303,622
Special Mention		2,883		140		10,072		241		-		6,102		1,960		28		21,426
Substandard		249		39		334		1,027		-		3,868		747		422		6,686
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	30,064	$	26,079	$	57,825	$	28,126	$	30,231	$	141,992	$	16,850	$	567	$	331,734
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Construction
Risk Rating
Pass	$	30,661	$	54,158	$	73,526	$	5,829	$	3,487	$	-	$	1,120	$	-	$	168,781
Special Mention		-		-		4,614		2,951		-		-		-		-		7,565
Substandard		-		-		412		1,948		-		-		-		-		2,360
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	30,661	$	54,158	$	78,552	$	10,728	$	3,487	$	-	$	1,120	$	-	$	178,706
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Other commercial loans
Risk Rating
Pass	$	32,035	$	22,623	$	7,487	$	6,676	$	2,339	$	3,758	$	47,044	$	78	$	122,040
Special Mention		330		-		1,848		1,384		-		65		5,189		33		8,849
Substandard		178		-		27		-		257		911		345		1,662		3,380
Doubtful		-		-		-		-		-		-		-		16		16
Total	$	32,543	$	22,623	$	9,362	$	8,060	$	2,596	$	4,734	$	52,578	$	1,789	$	134,285
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	2,502	$	-	$	2,502
Other agricultural loans
Risk Rating
Pass	$	4,051	$	2,127	$	992	$	4,391	$	457	$	268	$	9,148	$	-	$	21,434
Special Mention		626		-		372		365		-		-		760		-		2,123
Substandard		220		356		85		10		-		167		125		17		980
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	4,897	$	2,483	$	1,449	$	4,766	$	457	$	435	$	10,033	$	17	$	24,537
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
State and political subdivision loans
Risk Rating
Pass	$	-	$	1,458	$	13,497	$	10,664	$	5,357	$	23,898	$	-	$	-	$	54,874
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	-	$	1,458	$	13,497	$	10,664	$	5,357	$	23,898	$	-	$	-	$	54,874
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Total
Risk Rating
Pass	$	131,759	$	194,200	$	491,556	$	259,165	$	155,803	$	392,102	$	101,217	$	2,016	$	1,727,818
Special Mention		3,839		953		27,301		8,302		1,384		14,740		9,826		61		66,406
Substandard		647		967		14,690		3,530		802		15,730		1,573		2,505		40,444
Doubtful		-		-		-		-		-		-		-		16		16
Total	$	136,245	$	196,120	$	533,547	$	270,997	$	157,989	$	422,572	$	112,616	$	4,598	$	1,834,684
Total current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	2,502	$	-	$	2,502

20

													Revolving		Revolving
													Loans		Loans
													Amortized		Converted
December 31, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Commercial real estate
Risk Rating
Pass	$	90,068	$	333,710	$	224,873	$	122,560	$	81,557	$	180,799	$	28,360	$	1,140	$	1,063,067
Special Mention		672		7,963		227		1,552		7,442		8,159		96		60		26,171
Substandard		-		1,302		6		-		158		1,444		317		422		3,649
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	90,740	$	342,975	$	225,106	$	124,112	$	89,157	$	190,402	$	28,773	$	1,622	$	1,092,887
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Agricultural real estate
Risk Rating
Pass	$	22,632	$	47,479	$	28,990	$	32,058	$	25,406	$	118,700	$	10,495	$	460	$	286,220
Special Mention		574		9,165		1,499		-		962		7,038		3,535		-		22,773
Substandard		-		-		-		-		102		5,394		75		238		5,809
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	23,206	$	56,644	$	30,489	$	32,058	$	26,470	$	131,132	$	14,105	$	698	$	314,802
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Construction
Risk Rating
Pass	$	54,973	$	102,562	$	22,508	$	-	$	-	$	-	$	839	$	1,166	$	182,048
Special Mention		1,574		5,432		4,415		-		-		-		-		-		11,421
Substandard		-		-		2,357		-		-		-		-		-		2,357
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	56,547	$	107,994	$	29,280	$	-	$	-	$	-	$	839	$	1,166	$	195,826
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Other commercial loans
Risk Rating
Pass	$	31,493	$	11,407	$	9,016	$	4,793	$	4,758	$	3,530	$	63,285	$	93	$	128,375
Special Mention		51		52		1,510		184		223		629		1,652		36		4,337
Substandard		52		97		-		-		149		967		502		1,667		3,434
Doubtful		-		-		-		-		-		-		-		22		22
Total	$	31,596	$	11,556	$	10,526	$	4,977	$	5,130	$	5,126	$	65,439	$	1,818	$	136,168
Current period gross charge-offs	$	200	$	-	$	-	$	763	$	-	$	-	$	-	$	-	$	963
Other agricultural loans
Risk Rating
Pass	$	3,902	$	1,520	$	6,448	$	1,046	$	532	$	305	$	15,331	$	-	$	29,084
Special Mention		-		473		16		42		-		-		488		29		1,048
Substandard		-		-		207		-		4		255		44		31		541
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	3,902	$	1,993	$	6,671	$	1,088	$	536	$	560	$	15,863	$	60	$	30,673
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
State and political subdivision loans
Risk Rating
Pass	$	1,623	$	14,171	$	10,841	$	5,235	$	-	$	25,294	$	10	$	-	$	57,174
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total	$	1,623	$	14,171	$	10,841	$	5,235	$	-	$	25,294	$	10	$	-	$	57,174
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Total
Risk Rating
Pass	$	204,691	$	510,849	$	302,676	$	165,692	$	112,253	$	328,628	$	118,320	$	2,859	$	1,745,968
Special Mention		2,871		23,085		7,667		1,778		8,627		15,826		5,771		125		65,750
Substandard		52		1,399		2,570		-		413		8,060		938		2,358		15,790
Doubtful		-		-		-		-		-		-		-		22		22
Total	$	207,614	$	535,333	$	312,913	$	167,470	$	121,293	$	352,514	$	125,029	$	5,364	$	1,827,530
Current period gross charge-offs	$	200	$	-	$	-	$	763	$	-	$	-	$	-	$	-	$	963

21

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, 2024 and December 31, 2023 (in thousands):

													Revolving		Revolving
													Loans		Loans
													Amortized		Converted
September 30, 2024	2024		2023		2022		2021		2020		Prior		Cost Basis		to Term		Total
Residential real estate
Payment Performance
Performing	$	7,235	$	22,622	$	90,094	$	46,422	$	28,023	$	106,310	$	-	$	-	$	300,706
Nonperforming		-		-		382		860		468		1,063		-		-		2,773
Total	$	7,235	$	22,622	$	90,476	$	47,282	$	28,491	$	107,373	$	-	$	-	$	303,479
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	4	$	-	$	-	$	4
Home equity
Payment Performance
Performing	$	2,300	$	3,628	$	2,508	$	1,582	$	1,663	$	8,517	$	28,985	$	444	$	49,627
Nonperforming		-		-		-		-		66		82		-		-		148
Total	$	2,300	$	3,628	$	2,508	$	1,582	$	1,729	$	8,599	$	28,985	$	444	$	49,775
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Consumer
Payment Performance
Performing	$	1,696	$	1,060	$	650	$	440	$	342	$	2,627	$	135,381	$	1	$	142,197
Nonperforming		-		4		2		-		6		855		-		-		867
Total	$	1,696	$	1,064	$	652	$	440	$	348	$	3,482	$	135,381	$	1	$	143,064
Current period gross charge-offs	$	-	$	10	$	25	$	-	$	-	$	5	$	22	$	-	$	62
Total
Payment Performance
Performing	$	11,231	$	27,310	$	93,252	$	48,444	$	30,028	$	117,454	$	164,366	$	445	$	492,530
Nonperforming		-		4		384		860		540		2,000		-		-		3,788
Total	$	11,231	$	27,314	$	93,636	$	49,304	$	30,568	$	119,454	$	164,366	$	445	$	496,318
Current period gross charge-offs	$	-	$	10	$	25	$	-	$	-	$	9	$	22	$	-	$	66

22

													Revolving		Revolving
													Loans		Loans
													Amortized		Converted
December 31, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Residential real estate
Payment Performance
Performing	$	19,082	$	93,706	$	47,774	$	29,940	$	18,923	$	97,813	$	-	$	-	$	307,238
Nonperforming		-		399		766		396		-		1,400		-		-		2,961
Total	$	19,082	$	94,105	$	48,540	$	30,336	$	18,923	$	99,213	$	-	$	-	$	310,199
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	1	$	-	$	-	$	1
Home equity
Payment Performance
Performing	$	3,877	$	3,008	$	1,886	$	1,954	$	2,462	$	7,883	$	28,219	$	363	$	49,652
Nonperforming		-		-		-		-		-		72		67		-		139
Total	$	3,877	$	3,008	$	1,886	$	1,954	$	2,462	$	7,955	$	28,286	$	363	$	49,791
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Consumer
Payment Performance
Performing	$	1,803	$	979	$	539	$	477	$	557	$	2,988	$	53,254	$	5	$	60,602
Nonperforming		-		21		-		-		-		693		-		-		714
Total	$	1,803	$	1,000	$	539	$	477	$	557	$	3,681	$	53,254	$	5	$	61,316
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	1	$	341	$	23	$	-	$	365
Total
Payment Performance
Performing	$	24,762	$	97,693	$	50,199	$	32,371	$	21,942	$	108,684	$	81,473	$	368	$	417,492
Nonperforming		-		420		766		396		-		2,165		67		-		3,814
Total	$	24,762	$	98,113	$	50,965	$	32,767	$	21,942	$	110,849	$	81,540	$	368	$	421,306
Current period gross charge-offs	$	-	$	-	$	-	$	-	$	1	$	342	$	23	$	-	$	366

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, 2024 and December 31, 2023 (in thousands):

September 30, 2024	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	529	$	250	$	1,927	$	2,706	$	300,773	$	303,479	$	256
Home Equity		89		18		148		255		49,520		49,775		-
Commercial		2,413		2,906		10,655		15,974		1,094,574		1,110,548		353
Agricultural		1,409		357		195		1,961		329,773		331,734		28
Construction		-		-		1,948		1,948		176,758		178,706		-
Consumer		158		6		867		1,031		142,033		143,064		12
Other commercial loans		309		200		1,894		2,403		131,882		134,285		52
Other agricultural loans		200		-		11		211		24,326		24,537		-
State and political subdivision loans		-		-		-		-		54,874		54,874		-
Total	$	5,107	$	3,737	$	17,645	$	26,489	$	2,304,513	$	2,331,002	$	701
Loans considered non-accrual	$	1,274	$	148	$	16,944	$	18,366	$	2,492	$	20,858
Loans still accruing		3,833		3,589		701		8,123		2,302,021		2,310,144
Total	$	5,107	$	3,737	$	17,645	$	26,489	$	2,304,513	$	2,331,002

23

December 31, 2023	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	2,682	$	360	$	2,240	$	5,282	$	304,917	$	310,199	$	-
Home Equity		145		67		71		283		49,508		49,791		18
Commercial		1,151		245		1,380		2,776		1,090,111		1,092,887		404
Agricultural		72		-		1,440		1,512		313,290		314,802		75
Construction		4,407		388		2,357		7,152		188,674		195,826		-
Consumer		16		282		23		321		60,995		61,316		13
Other commercial loans		670		366		319		1,355		134,813		136,168		6
Other agricultural loans		108		362		-		470		30,203		30,673		-
State and political subdivision loans		-		-		-		-		57,174		57,174		-
Total	$	9,251	$	2,070	$	7,830	$	19,151	$	2,229,685	$	2,248,836	$	516
Loans considered non-accrual	$	199	$	666	$	7,314	$	8,179	$	4,008	$	12,187
Loans still accruing		9,052		1,404		516		10,972		2,225,677		2,236,649
Total	$	9,251	$	2,070	$	7,830	$	19,151	$	2,229,685	$	2,248,836

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.

There were no loan modifications made during the nine months ended September 30, 2024, for borrowers experiencing financial difficulty.

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, 2024 and December 31, 2023, included within other assets are $2,486,000 and $474,000, respectively, of foreclosed assets. As of September 30, 2024, included within the foreclosed assets are $127,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2024, the Company had initiated formal foreclosure proceedings on $831,000 of residential mortgage loans, the collateral properties 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, 2024 and December 31, 2023 (in thousands):

	September 30, 2024							December 31, 2023
	Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
Amortized intangible assets (1):
MSRs	$	2,546	$	(1,726	)	$	820	$	2,457	$	(1,502	)	$	955
Core deposit intangibles		4,713		(2,450	)		2,263		4,713		(2,018	)		2,695
Total amortized intangible assets	$	7,259	$	(4,176	)	$	3,083	$	7,170	$	(3,520	)	$	3,650
Unamortized intangible assets:
Goodwill	$	85,758						$	85,758

(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, 2024. Future amortization expense may vary from these projections:

	MSRs		Core deposit intangibles		Total
Three months ended September 30, 2024 (actual)	$	70	$	136	$	206
Nine months ended September 30, 2024 (actual)		224		432		656
Three months ended September 30, 2023 (actual)		80		157		237
Nine months ended September 30, 2023 (actual)		228		219		447
Estimate for year ending December 31,
Remaining 2024		69		132		201
2025		244		478		722
2026		193		395		588
2027		136		339		475
2028		89		284		373
Thereafter		89		635		724
Total	$	820	$	2,263	$	3,083

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 2023 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.

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.

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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, 2024 and 2023, respectively (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023			Affected line item on the Consolidated Statement of Income
Service cost	$	82		$	75		$	247		$	230		Salary and Employee Benefits
Interest cost		106			104			317			324		Other Expenses
Expected return on plan assets		(198	)		(183	)		(593	)		(577	)	Other Expenses
Net amortization and deferral		8			17			24			31		Other Expenses
Net periodic benefit cost	$	(2	)	$	13		$	(5	)	$	8

The Bank does not expect to contribute to the Pension Plan during 2024.

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, 2024, 104,672 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, 2024:

	Three months						Nine months
	Unvested Shares			Weighted Average Market Price			Unvested Shares			Weighted Average Market Price
Outstanding, beginning of period		10,220		$	55.81			6,707		$	71.94
Granted		1,961			48.44			7,891			44.46
Vested		(571	)		(70.81	)		(2,988	)		(69.76	)
Outstanding, end of period		11,610		$	53.82			11,610		$	53.82

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 $191,000 and $178,000 for the nine months ended September 30, 2024 and 2023, respectively. For the three months ended September 30, 2024 and 2023, compensation expense totaled $69,000 and $62,000, respectively. At September 30, 2024, the total compensation cost related to nonvested awards that had not yet been recognized was $625,000, which is expected to be recognized over the next three years.

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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, 2024 and 2023 (in thousands):

	Three months ended September 30, 2024
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Unrealized loss on interest rate swap (a)			Total
Balance as of June 30, 2024	$	(29,158	)	$	(959	)	$	4,185		$	(25,932	)
Other comprehensive income (loss) before reclassifications (net of tax)		8,170			-			(657	)		7,513
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		-			6			(503	)		(497	)
Net current period other comprehensive income (loss)		8,170			6			(1,160	)		7,016
Balance as of September 30, 2024	$	(20,988	)	$	(953	)	$	3,025		$	(18,916	)

	Nine months ended September 30, 2024
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Unrealized loss on interest rate swap (a)			Total
Balance as of December 31, 2023	$	(28,238	)	$	(972	)	$	4,299		$	(24,911	)
Other comprehensive income (loss) before reclassifications (net of tax)		7,250			-			230			7,480
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		-			19			(1,504	)		(1,485	)
Net current period other comprehensive income (loss)		7,250			19			(1,274	)		5,995
Balance as of September 30, 2024	$	(20,988	)	$	(953	)	$	3,025		$	(18,916	)

	Three months ended September 30, 2023
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Unrealized loss on interest rate swap (a)			Total
Balance as of June 30, 2023	$	(35,119	)	$	(1,045	)	$	5,184		$	(30,980	)
Other comprehensive income (loss) before reclassifications (net of tax)		(6,025	)		-			823			(5,202	)
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		-			6			(467	)		(461	)
Net current period other comprehensive income (loss)		(6,025	)		6			356			(5,663	)
Balance as of September 30, 2023	$	(41,144	)	$	(1,039	)	$	5,540		$	(36,643	)

	Nine months ended September 30, 2023
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Unrealized loss on interest rate swap (a)			Total
Balance as of December 31, 2022	$	(37,514	)	$	(1,056	)	$	5,429		$	(33,141	)
Other comprehensive income (loss) before reclassifications (net of tax)		(3,669	)		-			1,352			(2,317	)
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		39			17			(1,241	)		(1,185	)
Net current period other comprehensive income (loss)		(3,630	)		17			111			(3,502	)
Balance as of September 30, 2023	$	(41,144	)	$	(1,039	)	$	5,540		$	(36,643	)

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

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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, 2024 and 2023 (in thousands):

Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated comprehensive income (loss) (a)						Affected line item in the Consolidated Statement of Income
	Three Months Ended September 30,
	2024			2023
Unrealized gains and losses on available for sale securities
	$	-		$	-		Available for sale securities gains, net
		-			-		Provision for income taxes
	$	-		$	-		Net of tax
Defined benefit pension items
	$	(8	)	$	(7	)	Other expenses
		2			1		Provision for income taxes
	$	(6	)	$	(6	)	Net of tax
Unrealized gain (loss) on interest rate swap	$	636		$	591		Interest expense
		(133	)		(124	)	Provision for income taxes
	$	503		$	467		Net of tax
Total reclassifications	$	497		$	461

Nine Months Ended September 30,
	2024			2023
Unrealized gains and losses on available for sale securities
	$	-		$	(51	)	Available for sale securities losses, net
		-			12		Provision for income taxes
	$	-		$	(39	)	Net of tax
Defined benefit pension items
	$	(24	)	$	(21	)	Other expenses
		5			4		Provision for income taxes
	$	(19	)	$	(17	)	Net of tax
Unrealized gain (loss) on interest rate swap	$	1,904		$	1,571		Interest expense
		(400	)		(330	)	Provision for income taxes
	$	1,504		$	1,241		Net of tax
Total reclassifications	$	1,485		$	1,185

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

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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.

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.

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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, 2024 and December 31, 2023 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.

September 30, 2024	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	1,730	$	-		$	-	$	1,730
Available for sale securities:
U.S. Agency securities		-		55,614			-		55,614
U.S. Treasury securities		123,304		-			-		123,304
Obligations of state and political subdivisions		-		97,442			-		97,442
Corporate obligations		-		12,641			-		12,641
Mortgage-backed securities in government sponsored entities		-		130,189			-		130,189
Loans held for sale		-		13,520			-		13,520
Other Assets
Derivative instruments		-		8,591			402		8,993
Liabilities
Derivative instruments		-		(4,763	)		-		(4,763	)

December 31, 2023	Level I		Level II			Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	1,938	$	-		$	-	$	1,938
Available for sale securities:
U.S. Agency securities		-		60,771			-		60,771
U.S. Treasuries securities		143,288		-			-		143,288
Obligations of state and political subdivisions		-		101,787			-		101,787
Corporate obligations		-		12,403			-		12,403
Mortgage-backed securities in government sponsored entities		-		99,352			-		99,352
Loans held for sale		-		9,379			-		9,379
Other Assets
Derivative instruments		-		13,363			324		13,687
Liabilities
Derivative instruments		-		(7,922	)		-		(7,922	)

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, 2024 and for the three and nine months ended September 30, 2023 (in thousands):

	IRLC- Asset
Balance: December 31, 2023	$	324
Total unrealized losses:
Included in other comprehensive loss		-
Total losses included in earnings and held at reporting date		78
Transfers in and/or out of Level 3		-
Ending Balance: September 30, 2024	$	402
Change in unrealized (losses) for the period included in earnings (or changes in net assets) for assets held as of September 30, 2024	$	78

Beginning Balance: June 30, 2024	$	494
Total unrealized losses:
Included in other comprehensive loss		-
Total losses included in earnings and held at reporting date		(92	)
Transfers in and/or out of Level 3		-
Ending Balance: September 30, 2024	$	402
Change in unrealized (losses) for the period included in earnings (or changes in net assets) for assets held as of September 30, 2024	$	(92	)

	IRLC- Asset
Balance: June 30, 2023	$	529
Total unrealized losses:
Included in other comprehensive loss		-
Total losses included in earnings and held at reporting date		(92	)
Purchases, sales and settlements		-
Transfers in and/or out of Level 3		-
Ending Balance: September 30, 2023	$	437
Change in unrealized (losses) for the period included in earnings (or changes in net assets) for assets held as of September 30, 2023	$	(92	)

Beginning Balance: June 16, 2023	$	657
Total unrealized losses:
Included in other comprehensive loss		-
Total losses included in earnings and held at reporting date		(220	)
Purchases, sales and settlements		-
Transfers in and/or out of Level 3		-
Ending Balance: September 30, 2023	$	437
Change in unrealized (losses) for the period included in earnings (or changes in net assets) for assets held as of September 30, 2023	$	(220	)

At September 30, 2024 and December 31, 2023, the Company had classified as Level 3 $402,000 and $324,000, 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 73.500% to 95.88% at September 30, 2024.

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Significant unobservable inputs for assets measured at fair value on a recurring basis at September 30, 2024 and December 31, 2023 (dollars in thousands):

	Quantitative Information about Level 3 Fair Value Measurements
September 30, 2024	Fair Value		Valuation Technique	Significant Unobservable Input	Range			Weighted Average
Measured at Fair Value on a Recurring Basis:
Net derivative asset and liability:
IRLC	$	402	Discounted cash flows	Pull-through rates		73.50%-95.88	%		88.11	%
	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2023	Fair Value		Valuation Technique	Significant Unobservable Input	Range			Weighted Average
Measured at Fair Value on a Recurring Basis:
Net derivative asset and liability:
IRLC	$	324	Discounted cash flows	Pull-through rates		63.63%-94.24	%		85.43	%

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, 2024 and December 31, 2023 are included in the table below (in thousands):

September 30, 2024	Level I		Level II		Level III		Total
Collateral-dependent loans	$	-	$	-	$	2,825	$	2,825
Other real estate owned		-		-		2,486		2,486
December 31, 2023	Level I		Level II		Level III		Total
Collateral-dependent loans	$	-	$	-	$	3,885	$	3,885
Other real estate owned		-		-		97		97

• Collateral–Dependent Loans (in accordance with ASC 326) – 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 cost to sell, an impairment charge is recognized in the form of a charge-off. The fair values above excluded estimated selling costs of $207,000 and $396,000 at September 30, 2024 and December 31, 2023, respectively.

• 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.

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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).

Quantitative Information about Level III Fair Value Measurements
September 30, 2024	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Collateral-dependent loans	$	2,825	Appraised Collateral Values	Discount for time since appraisal		0-100	%		36.46	%
				Selling costs		4%-10	%		7.31	%
				Holding period	0 - 12 months			5.88 months
Other real estate owned		2,486	Appraised Collateral Values	Discount for time since appraisal		20-31.8	%		31.51	%

December 31, 2023	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Collateral-dependent loans		3,885	Appraised Collateral Values	Discount for time since appraisal		0-100	%		29.32	%
				Selling costs		8%-12	%		10.20	%
				Holding period	3 - 12 months			6.65 months
Other real estate owned		97	Appraised Collateral Values	Discount for time since appraisal		32	%		32.00	%

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):

September 30, 2024	Carrying Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	3,820	$	3,820	$	-	$	-	$	3,820
Net loans		2,309,307		2,240,903		-		-		2,240,903
Financial liabilities:
Deposits		2,450,149		2,448,108		1,863,812		-		584,296
Borrowed funds		231,732		221,607		-		-		221,607
December 31, 2023	Carrying Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	4,070	$	4,070	$	-	$	-	$	4,070
Net loans		2,227,683		2,126,237		-		-		2,126,237
Financial liabilities:
Deposits		2,321,481		2,315,374		1,902,007		-		413,367
Borrowed funds		322,036		313,217		-		-		313,217

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.

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Note 10 – Recent Accounting Pronouncements

In March 2023, the FASB issued ASU No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)”. The ASU allows entities to elect the proportional amortization method, on a tax-credit-program-by-tax-credit-program basis, for all equity investments in tax credit programs meeting the eligibility criteria in Accounting Standards Codification (ASC) 323-740-25-1. While the ASU does not significantly alter the existing eligibility criteria, it does provide clarifications to address existing interpretive issues. It also prescribes specific information reporting entities must disclose about tax credit investments each period. This ASU is effective for reporting periods beginning after December 15, 2023, for public business entities, or January 1, 2024 for the Corporation. The Corporation does not expect the adoption of this ASU to have a material impact on the Corporation’s financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, requires the amount of net income taxes paid for federal, state, and foreign taxes, as well as the amount paid to any jurisdiction that net taxes exceed a 5% quantitative threshold.  The amendments will require the disclosure of pre-tax income disaggregated between domestic and foreign, as well as income tax expense disaggregated by federal, state, and foreign.  The amendment also eliminates certain disclosures related to unrecognized tax benefits and certain temporary differences.  This ASU is effective for fiscal years beginning after December 15, 2024.  Early adoption is permitted in any annual period where financial statements have not yet been issued.  The amendments should be applied on a prospective basis but retrospective application is permitted.  The Company does not expect adoption of the standard to have a material impact on its Consolidated Financial Statements.

In March 2024, the FASB issued ASU 2024-01, Compensation – Stock Compensation (Topic 718), amended the guidance in ASC 718 to add an example showing how to apply the scope guidance to determine whether profits interest and similar awards should be accounted for as share-based payment arrangements.  For public business entities, the guidance is effective for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years.  For all other entities, it is effective for fiscal years beginning after December 15, 2025, and interim periods within those fiscal years.  This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2024, the FASB issued ASU 2024-02, Codification Improvements—Amendments to Remove References to the Concepts Statements. This ASU removes various references to the FASB’s Concepts Statements from the FASB’s Accounting Standards Codification. The FASB does not expect these updates to have a significant effect on current accounting practice. That is because in most cases the amendments to the Codification remove references to Concept Statements that are extraneous and not required to understand or apply the guidance. However, the FASB has provided transition guidance if applying the updated guidance results in accounting changes for some entities. The amendments in ASU 2024-02 are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025.  This Update is not expected to have a significant impact on the Company’s 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

Forward-Looking Statements

We have made forward-looking statements in this document, and in documents that we may incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or expected future results of operations of Citizens Financial Services, Inc., CZFS Acquisition Company, LLC, First Citizens Community Bank, First Citizens Insurance Agency, Inc., 1^st Realty of PA LLC or the combined Company. When we use words such as “believes,” “expects,” “anticipates,” or similar expressions, we are making forward-looking statements. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements.  The Company cautions readers that the following important factors, among others, could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement:

• Interest rates could change more rapidly or more significantly than we expect or the yield curve could remain inverted for a longer period than anticipated.

• The economy could change significantly in an unexpected way, which would cause the demand for new loans and the ability of borrowers to repay outstanding loans to change in ways that our models do not anticipate.

• The financial markets could suffer a significant disruption, which may have a negative effect on our financial condition and that of our borrowers, and on our ability to raise money by issuing new securities.

• It could take us longer than we anticipate implementing strategic initiatives, including expansions, designed to increase revenues or manage expenses, or we may be unable to implement those initiatives at all.

• Acquisitions and dispositions of assets and companies could affect us in ways that management has not anticipated.

• We may become subject to new legal obligations or the resolution of litigation may have a negative effect on our financial condition or operating results.

• We may become subject to new and unanticipated accounting, tax, regulatory or compliance practices or requirements. Failure to comply with any one or more of these requirements could have an adverse effect on our operations.

• We could experience greater loan delinquencies than anticipated, adversely affecting our earnings and financial condition.

• We could experience greater losses than expected due to the ever-increasing volume of information theft and fraudulent scams impacting our customers and the banking industry.

• We could lose the services of some or all of our key personnel, which would negatively impact our business because of their business development skills, financial expertise, lending experience, technical expertise and market area knowledge.

• The agricultural economy is subject to extreme swings in both the costs of resources and the prices received from the sale of products as a result of weather, government regulations, international trade agreements and consumer tastes, which could negatively impact certain of our customers.

• Loan concentrations in certain industries could negatively impact our results, if financial results or economic conditions deteriorate.

• Companies providing support services related to the exploration and drilling of the natural gas reserves in our market area may be affected by federal, state and local laws and regulations such as restrictions on production, permitting, changes in taxes and environmental protection, which could negatively impact our customers and, as a result, negatively impact our loan and deposit volume and loan quality. Additionally, the activities the companies providing support services related to the exploration and drilling of the natural gas reserves may be dependent on the market price of natural gas.  As a result, decreases in the market price of natural gas could also negatively impact these companies, our customers.

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Additional factors that may affect our results are discussed under “Part II – Item 1A – Risk Factors” in this report and in the Company’s 2023 Annual Report on Form 10-K under “Item 1.A/ Risk Factors.”  Except as required by applicable law and regulation, we assume no obligation to update or revise any forward-looking statements after the date on which they are made.

Critical Accounting Policies

See Note 1, "Basis of Presentation" for additional information on the adoption of ASC 326, which changes the methodology under which management calculates its reserve for loans and investment securities, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy.

Introduction

The following is management's discussion and analysis of the Company’s consolidated financial condition and results of operations at the dates and for the periods presented in the accompanying consolidated financial statements for the Company.  Our consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with the preceding financial statements presented under Part I and the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.  The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results you may expect for the full year.

The Company engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Bradford, Lycoming and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New York and with the MidCoast acquisition, the Cities of Wilmington and Dover, Delaware. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. With the HVBC acquisition, we have expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey through the acquisition of five full service branaches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 47 banking facilities, 39 of which operate as bank branches.  In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Williamsport,  Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, Plumsteadville, Philadelphia, two branches near the city of Lebanon and two branches in Huntington Valley. The limited branch office is located in Winfield, Pennsylvania. In New York, our office is in Wellsville. In Delaware, we have three branches in Wilmington and one in Dover. The mortgage centers acquired as part of the acquisition are located in Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. The Company received regulatory approval to open a limited purpose banking office in Georgetown, Delaware that was opened in the fourth quarter of 2024.  During the third quarter of 2024, the mortgage center located in Montgomeryville, PA was closed.

Risk Management

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

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Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction, frequency and magnitude of changes in market interest rates.  Interest rate risk results from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company.  The Company uses its asset/liability and funds management policy to control and manage interest rate risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms.  Credit risk results from loans with customers and the purchase of securities from an issuer.  The Company’s primary credit risk is in the loan portfolio.  The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for credit losses.  Also, the investment policy limits the amount of credit risk that may be taken in the investment portfolio.

Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors.  The Company has established guidelines within its asset/liability and funds management policy to manage liquidity risk.  These guidelines include, among other things, contingent funding alternatives.

Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion, could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information, including fraudulent activity outside the Company’s control. We expend significant resources to comply with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers, and adversely impact our earnings and liquidity.

Regulatory and compliance risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company. We cannot predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.

Competition

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

Trust and Investment Services; Oil and Gas Lease Services

Our Investment and Trust Services Division offers professional trust administration, investment management services, estate planning and administration, and custody of securities.  In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the Consolidated Balance Sheets since such items are not assets of the Company.  Revenues and fees of the Trust Department are reflected in trust income in the Consolidated Statement of Income. As of September 30, 2024 and December 31, 2023, the Trust Department had $181.1 million and $167.9 million of assets under management, respectively.

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Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc.  The assets associated with these products are not included in the Consolidated Balance Sheets since such assets are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank’s Investment Representatives increased from $329.4 million at December 31, 2023 to $388.6 million at September 30, 2024. Fee income from the sale of these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central, south central and south eastern Pennsylvania markets.

Results of Operations

Overview of the Income Statement

The Company had net income of $19,835,000 for the first nine months of 2024 compared to $10,271,000 for last year’s comparable period, an increase of $9,564,000, or 93.1%, primarily due to the absence in the current period of one-time costs associated with the HVBC acquisition and a decrease in the provision for credit losses. Basic earnings per share for the first nine months of 2024 were $4.18, compared to $2.38 for last year’s comparable period, representing a 75.6% increase.  Annualized return on assets and return on equity for the nine months of 2024 were 0.88% and 8.45%, respectively, compared with 0.53% and 6.56% for last year’s comparable period.

Net income for the three months ended September 30, 2024 was $7,536,000 compared to $7,548,000 in the comparable 2023 period, a decrease of $12,000. Basic earnings per share for the three months ended September 30, 2024 and 2023 were %1.59. Annualized return on assets and return on equity for the quarter ended September 30, 2024 was 1.00% and 9.53%, respectively, compared with 1.02% and 10.10% for the same 2023 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 2024 was $63,582,000, an increase of $5,177,000, or 8.9%, compared to the same period in 2023.  For the first nine months of 2024 the provision for credit losses was $2,587,000. The provision for the first nine months of 2023 was $5,328,000, which included $4,591,000 for non-PCD loans acquired as part of the acquisition. Excluding the $4,591,000 related to the acquisition, the provision for credit losses increased $1,850,000. Consequently, net interest income after the provision for credit losses was $60,995,000 in the first nine months of 2024 compared to $53,077,000 during the first nine months of 2023.

For the three months ended September 30, 2024, net interest income was $21,324,000 compared to $22,404,000, a decrease of $1,080,000, or 4.8%, over the comparable period in 2023. The provision for credit losses in the third quarter of 2024 was ($200,000) compared to $475,000 in 2023. Consequently, net interest income after the provision for credit losses was $21,524,000 for the quarter ended September 30, 2024 compared to $21,929,000 in 2023.

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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, 2024 and 2023 on a tax equivalent basis (dollars in thousands):

	Analysis of Average Balances and Interest Rates
	Nine Months Ended
	September 30, 2024							September 30, 2023
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
(dollars in thousands)	$			$		%		$			$		%
ASSETS
Short-term investments:
Interest-bearing deposits at banks		29,242		605		2.76			21,772		333		2.04
Total short-term investments		29,242		605		2.76			21,772		333		2.04
Interest bearing time deposits at banks		3,898		90		3.08			5,540		129		3.11
Investment securities:
Taxable		356,871		6,202		2.32			385,246		5,977		2.07
Tax-exempt (3)		105,734		1,986		2.50			114,307		2,188		2.55
Total investment securities		462,605		8,188		2.36			499,553		8,165		2.18
Loans (2)(3)(4):
Residential mortgage loans		357,089		15,612		5.84			268,562		10,797		5.38
Construction		185,832		10,331		7.43			114,386		5,831		6.82
Commercial Loans		1,240,425		59,196		6.37			1,039,006		45,079		5.80
Agricultural Loans		348,919		13,703		5.25			344,079		12,759		4.96
Loans to state & political subdivisions		56,116		1,659		3.95			60,183		1,736		3.86
Other loans		96,942		5,882		8.10			82,405		4,579		7.43
Loans, net of discount		2,285,323		106,383		6.22			1,908,621		80,781		5.66
Total interest-earning assets		2,781,068		115,266		5.54			2,435,486		89,408		4.91
Cash and due from banks		9,379							8,709
Bank premises and equipment		21,068							19,340
Other assets		184,561							126,075
Total non-interest earning assets		215,008							154,124
Total assets		2,996,076							2,589,610
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts		767,406		14,557		2.53			616,103		8,052		1.75
Savings accounts		298,450		1,165		0.52			320,227		897		0.37
Money market accounts		389,655		9,131		3.13			352,055		5,802		2.20
Certificates of deposit		460,890		13,598		3.94			303,825		4,768		2.10
Total interest-bearing deposits		1,916,401		38,451		2.68			1,592,210		19,519		1.64
Other borrowed funds		340,132		12,491		4.91			318,180		10,682		4.49
Total interest-bearing liabilities		2,256,533		50,942		3.02			1,910,390		30,201		2.11
Demand deposits		382,340							380,638
Other liabilities		44,303							35,566
Total non-interest-bearing liabilities		426,643							416,204
Stockholders' equity		312,900							263,016
Total liabilities & stockholders' equity		2,996,076							2,589,610
Net interest income				64,324							59,207
Net interest spread (5)						2.52	%						2.80	%
Net interest income as a percentage of average interest-earning assets						3.09	%						3.25	%
Ratio of interest-earning assets to interest-bearing liabilities						123	%						127	%

(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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	Analysis of Average Balances and Interest Rates
	Three Months Ended
	September 30, 2024							September 30, 2023
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
(dollars in thousands)		$	$			%			$	$			%
ASSETS
Short-term investments:
Interest-bearing deposits at banks		18,374		160		3.44			24,096		225		3.70
Total short-term investments		18,374		160		3.44			24,096		225		3.70
Interest bearing time deposits at banks		3,820		30		3.12			4,579		39		3.38
Investment securities:
Taxable		352,377		2,124		2.41			386,806		2,113		2.19
Tax-exempt (3)		104,342		653		2.50			108,959		683		2.51
Total investment securities		456,719		2,777		2.43			495,765		2,796		2.26
Loans (2)(3)(4):
Residential mortgage loans		355,551		5,322		5.95			357,388		4,925		5.47
Construction		183,521		3,473		7.53			166,204		3,339		7.97
Commercial Loans		1,234,951		19,522		6.29			1,196,675		18,983		6.29
Agricultural Loans		356,105		4,816		5.38			342,499		4,285		4.96
Loans to state & political subdivisions		55,418		553		3.97			60,820		611		3.99
Other loans		111,717		2,282		8.13			88,710		1,750		7.83
Loans, net of discount		2,297,263		35,968		6.23			2,212,296		33,893		6.08
Total interest-earning assets		2,776,176		38,935		5.58			2,736,736		36,953		5.36
Cash and due from banks		9,119							10,696
Bank premises and equipment		20,864							21,401
Other assets		197,275							190,431
Total non-interest earning assets		227,258							222,528
Total assets		3,003,434							2,959,264
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts		736,449		4,559		2.46			789,513		4,468		2.25
Savings accounts		293,990		387		0.52			326,452		426		0.52
Money market accounts		406,363		3,366		3.30			403,628		2,682		2.64
Certificates of deposit		502,226		5,163		4.09			347,783		2,524		2.88
Total interest-bearing deposits		1,939,028		13,475		2.76			1,867,376		10,100		2.15
Other borrowed funds		319,909		3,890		4.84			347,326		4,185		4.78
Total interest-bearing liabilities		2,258,937		17,365		3.06			2,214,702		14,285		2.56
Demand deposits		393,632							408,531
Other liabilities		34,487							37,118
Total non-interest-bearing liabilities		428,119							445,649
Stockholders' equity		316,378							298,913
Total liabilities & stockholders' equity		3,003,434							2,959,264
Net interest income				21,570							22,668
Net interest spread (5)						2.52	%						2.80	%
Net interest income as a percentage of average interest-earning assets						3.09	%						3.29	%
Ratio of interest-earning assets to interest-bearing liabilities						123	%						124	%

(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, 2024 and 2023.  For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company’s Federal statutory rate during the corresponding period. The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended September 30, 2024 and 2023 (in thousands):

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	For the Three Months				For the Nine Months
	Ended September				Ended September
	2024		2023		2024		2023
Interest and dividend income from investment securities and interest bearing deposits at banks (non-tax adjusted)	$	2,831	$	2,917	$	8,466	$	8,168
Tax equivalent adjustment		136		143		417		459
Interest and dividend income from investment securities and interest bearing deposits at banks (tax equivalent basis)	$	2,967	$	3,060	$	8,883	$	8,627
Interest and fees on loans (non-tax adjusted)	$	35,858	$	33,772	$	106,058	$	80,438
Tax equivalent adjustment		110		121		325		343
Interest and fees on loans (tax equivalent basis)	$	35,968	$	33,893	$	106,383	$	80,781
Total interest income	$	38,689	$	36,689	$	114,524	$	88,606
Total interest expense		17,365		14,285		50,942		30,201
Net interest income		21,324		22,404		63,582		58,405
Total tax equivalent adjustment		246		264		742		802
Net interest income (tax equivalent basis)	$	21,570	$	22,668	$	64,324	$	59,207

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

	Three months ended September 30, 2024 vs 2023 (1)									Nine months ended September 30, 2024 vs 2023 (1)
	Change in			Change			Total			Change in			Change			Total
	Volume			in Rate			Change			Volume			in Rate			Change
Interest Income:
Short-term investments:
Interest-bearing deposits at banks	$	(51	)	$	(14	)	$	(65	)	$	135		$	137		$	272
Interest bearing time deposits at banks		(6	)		(3	)		(9	)		(38	)		(1	)		(39	)
Investment securities:
Taxable		(72	)		83			11			(355	)		580			225
Tax-exempt		(29	)		(1	)		(30	)		(161	)		(41	)		(202	)
Total investments		(101	)		82			(19	)		(516	)		539			23
Loans:
Residential mortgage loans		(38	)		435			397			3,817			998			4,815
Construction		297			(163	)		134			3,937			563			4,500
Commercial Loans		553			(14	)		539			9,361			4,756			14,117
Agricultural Loans		163			368			531			194			750			944
Loans to state & political subdivisions		(55	)		(3	)		(58	)		(121	)		44			(77	)
Other loans		463			69			532			861			442			1,303
Total loans, net of discount		1,383			692			2,075			18,049			7,553			25,602
Total Interest Income		1,225			757			1,982			17,630			8,228			25,858
Interest Expense:
Interest-bearing deposits:
NOW accounts		(246	)		337			91			2,302			4,203			6,505
Savings accounts		(44	)		5			(39	)		(55	)		323			268
Money Market accounts		11			673			684			678			2,651			3,329
Certificates of deposit		1,352			1,287			2,639			3,275			5,555			8,830
Total interest-bearing deposits		1,073			2,302			3,375			6,200			12,732			18,932
Other borrowed funds		(344	)		49			(295	)		775			1,034			1,809
Total interest expense		729			2,351			3,080			6,975			13,766			20,741
Net interest income	$	496		$	(1,594	)	$	(1,098	)	$	10,655		$	(5,538	)	$	5,117

(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 $59,207,000 for the nine month period ended September 30, 2023 to $64,324,000 for the nine month period ended September 30, 2024, an increase of $5,117,000. The acquisition of HVBC had a substantial impact on the increase. The tax equivalent net interest margin decreased from 3.23% for the first nine months of 2023 to 3.09% for the comparable period in 2024. The decrease is primarily caused by the increase in the cost of interest-bearing liabilities due to higher market interest rates in 2024 compared to 2023.

40

Total tax equivalent interest income for the 2024 nine month period increased $25,858,000 as compared to the 2023 nine month period. This increase was a result of an increase of $17,630,000 due to a change in volume as average interest-bearing assets increased $345.6 million. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 0.63% from 4.91% to 5.54% resulting in an increase in interest income of $8,228,000.

Tax equivalent investment income for the nine months ended September 30, 2024 increased $23,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 18 basis points to 2.36%.

• The average balance of taxable securities decreased $28.4 million, which resulted in a decrease in investment income of $355,000. The yield on taxable securities increased 25 basis points from 2.07% to 2.32% as a result of lower yielding securities maturing and purchases made in a higher rate environment. This resulted in an increase in investment income of $580,000.

• The average balance of tax-exempt securities decreased $8.6 million, which resulted in a decrease in investment income of $161,000. The yield on taxable securities decreased 5 basis points from 2.55% to 2.50%. This resulted in a decrease in investment income of $41,000. For a discussion of the Company’s current investment strategy, see the “Financial Condition – Investments”.

Total loan interest income increased $25,602,000 for the nine months ended September 30, 2024 compared to the same period last year, as a result of higher volume and yields.

• Interest income on residential mortgage loans increased $4,815,000. The change due to rate was an increase of $998,000 as the average yield on residential mortgages increased from 5.38% to 5.84% as a result of the higher interest rate environment during the second half of 2023 and all of 2024. The average balance of residential mortgage loans increased $88.5 million primarily due to the HVBC acquisition and additional organic growth. This resulted in an increase of $3,817,000 on total interest income due to volume.

• The average balance of construction loans increased $71.4 million as a result of projects in our Delaware market and the southeast Pennsylvania market as part of the HVBC acquisition. This resulted in an increase of $3,937,000 on total interest income due to volume. The change due to rate was an increase of $563,000 as the average yield on construction loans increased from 6.82% to 7.43% as a result of the higher interest rate environment during the second half of 2023 and all of 2024.

• The average balance of commercial loans increased $201.4 million from a year ago. The growth was primarily attributable to the HVCB acquisition. This had a positive impact of $9,361,000 on total interest income due to volume. The yield increased 0.57% to 6.37% as a result of the higher rate environment during the second half of 2023 and all of 2024, which increased loan interest income $4,756,000.

• Interest income on agricultural loans increased $944,000 from 2023 to 2024. The yield increased 29 basis points to 5.25% as a result of the higher rate environment during the second half of 2023 and all of 2024, which increased loan interest income $750,000.

• The average balance of other loans increased $14.5 million as a result of outstanding student loans. This resulted in an increase of $861,000 on total interest income due to volume. The average yield of other loans increased 67 basis points to 8.10% due to the higher rate environment resulting in an increase in income of $442,000.

Total interest expense increased $20,741,000 for the nine months ended September 30, 2024 compared with the comparative period last year as a result of an increase in the volume of interest-bearing liabilities and an increase in rate on interest-bearing liabilities. Interest expense increased $6,975,000 due to volume as a result of an increase in interest bearing liabilities of $346.1 million. The average rate paid on interest-bearing liabilities increased from 1.83% to 3.02%. The increase was driven by the Federal Reserve interest rate increases in 2022 and 2023, which caused interest expense to increase $13,766,000.

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• The average balance of interest bearing deposits increased $346.1 million from September 30, 2023 to September 30, 2024. The increase was due to the HVBC acquisition. The effect of these volume changes was an increase in interest expense of $6,200,000. The average rate paid on interest bearing deposits was 2.68% for the first nine months of 2024 and 1.64% for the comparable period in 2023. This resulted in an increase in interest expense of $12,732,000. The increase was due to the Federal Reserve increasing interest rates during 2022 and 2023.

• The average balance of other borrowed funds increased $22.0 million. This resulted in an increase in interest expense of $775,000. There was an increase in the average rate paid on other borrowed funds from 4.49% to 4.91% due to the interest rate increases by the Federal Reserve that increased borrowings costs resulting in an increase in interest expense of $1,034,000.

Tax equivalent net interest income for the three months ended September 30, 2024 was $21,570,000 which compares to $22,668,000 for the same period last year.  This represents a decrease of $1,098,000, or 4.8% and was primarily caused by an increase in the volume of interest earning assets due to the HVBC acquisition.

Total tax equivalent interest income was $38,935,000 for the three month period ended September 30, 2024, compared to $36,953,000 for the comparable period last year, an increase of $1,982,000. This increase was a result of an increase of $1,225,000 due to a change in volume as average interest-bearing assets increased $39.4 million due to organic growth primarily in our Delaware and Southeast Pennsylvania markets. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 22 basis points from 5.36% to 5.58% resulting in an increase in interest income of $757,000.

Total loan interest income increased $2,075,000 for the three months ended September 30, 2024 compared to the same period last year, primarily due to organic growth in our Delaware and Sotuheast Pennsylvania markets.

• Interest income on residential mortgage loans increased $397,000. The change due to rate was an increase of $435,000 as the average yield on residential mortgages increased from 5.47% to 5.95% as a result of the higher rate environment during the second half of 2023 and all of 2024.

• The average balance of construction loans increased $17.3 million primarily as a result of projects in our southeast Pennsylvania market. This resulted in an increase of $297,000 on total interest income due to volume. The change due to rate was a decrease of $163,000 as the average yield on construction loans decreased from 7.97% to 7.53%.

• The average balance of commercial loans increased $38.3 million from a year ago. The growth was primarily attributable to growth in the Delaware market and the southeast Pennsylvania market. This had a positive impact of $553,000 on total interest income due to volume.

• The average yield of agricultural loans increased 42 basis points to 5.38% due to the higher rate environment resulting in an increase in income of $163,000. The average balance of agricultural loans increased $13.6 million from a year ago. This had a positive impact of $368,000 on total interest income due to volume.

• The average balance of other loans increased $23.0 million as a result of outstanding student loans. This resulted in an increase of $463,000 on total interest income due to volume. The average yield on other loans increased 30 basis points to 8.13% due to the rate earned on the student loans, resulting in an increase in interest income of $69,000.

Total interest expense increased $3,080,000 for the three months ended September 30, 2024 compared with the comparative period last year as a result of an increase in the volume of interest-bearing liabilities and an increase in rate on interest-bearing liabilities. Interest expense increased $729,000 due to volume as a result of an increase in interest bearing liabilities of $44.2 million. The average rate paid on interest-bearing liabilities increased from 2.56% to 3.06%. The increase was driven by the Federal Reserve interest rate increases in 2022 and 2023, which caused interest expenses to increase $2,351,000.

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• The average balance of interest bearing deposits increased $71.7 million from September 30, 2023 to September 30, 2024 primarily due to increases in brokered certificates of deposits and in increase in municipal deposits. The effect of these volume changes was an increase in interest expense of $1,073,000. The average rate paid on interest bearing deposits was 2.76% for the three months ended September 30 2024 and 2.15% for the comparable period in 2023. This resulted in an increase in interest expense of $2,302,000. The increase was due to the Federal Reserve increasing interest rates during 2022 and 2023.

• The average balance of other borrowed funds decreased $27.4 million. This resulted in a decrease in interest expense of $344,000. There was an increase in the average rate paid on other borrowed funds from 4.78% to 4.84% due to the interest rate increases by the Federal Reserve that increased borrowings costs resulting in an increase in interest expense of $49,000.

Provision for Credit Losses

For the nine month period ended September 30, 2024, we recorded a provision for credit losses of $2,587,000, which represents a decrease of $2,741,000 from the $5,328,000 provision recorded in the corresponding nine months of last year. The provision for 2023 includes $4,591,000 associated with the HVBC acquisition and $162,000 as a provision for off-balance sheet items, which is also primarily attributable to the HVBC acquisition. Excluding these items, the provision for 2024 is $1,850,000 more than the comparable period in 2023 and is due to an increase in non-performing other commercial loans that were originated by HVBC that subsequent to the acquisition have deteriorated. The provision in 2024 is also higher due to an increase in past due and non-accrual loans, the vast majority of which were acquired as part of the HVBC acquisition, and an increase in classified loans. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

For the three months ended September 30, 2024, we recorded a provision for credit losses of ($200,000), which represents a decrease of $675,000 from the $475,000 provision recorded in the corresponding three months of last year.

Non-interest Income

The following table shows the breakdown of non-interest income for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):

	Nine months ended September 30,					Change
	2024		2023			Amount		%
Service charges	$	4,393	$	4,196		$	197		4.7
Trust		629		583			46		7.9
Brokerage and insurance		1,773		1,429			344		24.1
Gains on loans sold		1,648		674			974		144.5
Equity security gains (losses), net		127		(223	)		350		(157.0	)
Available for sale security losses, net		-		(51	)		51		(100.0	)
Gain on sale of Braavo division		1,102		-			1,102	NA
Earnings on bank owned life insurance		1,334		941			393		41.8
Other		1,056		567			489		86.2
Total	$	12,062	$	8,116		$	3,946		48.6

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	Three months ended September 30,				Change
	2024		2023		Amount			%
Service charges	$	1,636	$	1,692	$	(56	)		(3.3	)
Trust		184		172		12			7.0
Brokerage and insurance		545		473		72			15.2
Gains on loans sold		752		460		292			63.5
Equity security gains, net		159		69		90			130.4
Available for sale security gains, net		-		-		-		NA
Earnings on bank owned life insurance		338		489		(151	)		(30.9	)
Other		141		307		(166	)		(54.1	)
Total	$	3,755	$	3,662	$	93			2.5

Non-interest income for the nine months ended September 30, 2024 totaled $12,062,000, an increase of $3,946,000 when compared to the same period in 2023. For the three months ended September 30, 2024, non-interest income increased $93,000 to $3,755,000.  During the first nine months of 2024, net equity security gains amounted to $127,000 as a result of market gains associated with general banking stock gains compared with a $223,000 loss in the comparable 2023 period associated with market conditions for that period. There were no sales of available for sale securities during the first nine months of 2024. During the nine months ended September 30, 2023, there were $51,000 of losses from the sale of $10.0 million available for sale municipal securities. Additionally, $76.5 million of securities obtained as part of the acquisition were sold for no gain or loss during the second quarter of 2023.

The increase in gains on loans sold for the nine month periods ended September 30, 2024 compared to 2023 is attributable the HVBC acquisition and their residential lending model, which focused on originating and selling residential mortgage loans, which includes the use of interest rate locks and other derivative activities, which is included in other income. The increase in earnings on bank owned life insurance is due to the HVBC acquisition. During the first quarter of 2024, the Company completed the sale of certain assets acquired as part of the HVB acquisition, which included loans and accrued interest, and software, as well as transferring certain contracts, processes and employees of a division internally known as Braavo. The proceeds from the sale totaled approximately $7.2 million and generated a pre-tax gain of approximately $1.1 million.

Non-interest Expense

The following tables reflect the breakdown of non-interest expense for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):

	Nine months ended September 30,				Change
	2024		2023		Amount			%
Salaries and employee benefits	$	29,622	$	25,598	$	4,024			15.7
Occupancy		3,805		2,870		935			32.6
Furniture and equipment		791		568		223			39.3
Professional fees		2,021		1,274		747			58.6
FDIC insurance		1,589		1,000		589			58.9
Pennsylvania shares tax		866		893		(27	)		(3.0	)
Amortization of intangibles		432		219		213			97.3
Merger and acquisition		-		9,269		(9,269	)		(100.0	)
Software expenses		1,508		1,274		234			18.4
ORE expenses		246		126		120			95.2
Other		8,038		5,811		2,227			38.3
Total	$	48,918	$	48,902	$	16			0.0

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	Three months ended September 30,				Change
	2024		2023		Amount			%
Salaries and employee benefits	$	9,715	$	10,005	$	(290	)		(2.9	)
Occupancy		1,215		1,221		(6	)		(0.5	)
Furniture and equipment		260		255		5			2.0
Professional fees		620		506		114			22.5
FDIC insurance		555		375		180			48.0
Pennsylvania shares tax		226		297		(71	)		(23.9	)
Amortization of intangibles		136		157		(21	)		(13.4	)
Merger and acquisition		-		623		(623	)		(100.0	)
Software expenses		500		551		(51	)		(9.3	)
ORE expenses (recovery)		84		111		(27	)		(24.3	)
Other		2,718		2,343		375			16.0
Total	$	16,029	$	16,444	$	(415	)		(2.5	)

Non-interest expenses increased $16,000 for the nine months ended September 30, 2024 compared to the same period in 2023. Salaries and employee benefits increased $4,024,000 or 15.7%. The increase was due to merit increases effective at the beginning of 2024, additional full time equivalent employees (FTE) of 48.0, which is an increase of 13.9%, and an increase in health care expenses due to higher claims on the Company’s partially self-funded plan and the additional headcount.   

The decrease in merger and acquisition expenses was due to the absence in the current period of fees associated with the acquisition of HVB that closed in June 2023 and includes severance costs, change in control payments, contract termination payments and various professional and consulting fees. The increase in occupancy, furniture and fixtures, amortization of intangibles, and software expenses was due to the HVBC acquisition. The increase in FDIC insurance is due to the acquisition and organic growth. Other expenses increased primarily due to the acquisition, with increases experienced in subscriptions, marketing and advertising, postage, printing, data communication expenses and FHLB letter of credit fees. Independent of the acquisition, other expenses increased due to insurance reimbursement received in 2023 to cover amounts previously charged-off.

For the three months ended September 30, 2024, non-interest expenses decreased $415,000 when compared to the same period in 2023. Salaries and benefits decreased $290,000 due to a decrease in headcount of 4.4 FTEs and commission expense for the comparable periods. The changes in merger and acquisition expenses, FDIC insurance and other expenses correspond to the changes for the nine month period.

Provision for Income Taxes

The provision for income taxes was $4,304,000 for the nine month period ended September 30, 2024 compared to $2,020,000 for the same period in 2023. The increase is primarily attributable to the increase in income before the provision for income taxes of $11,848,000 for the comparable periods due to the one-time costs associated with the HVBC acquisition.  Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate.  Our effective tax rate was 17.8% and 16.4% for the first nine months of 2024 and 2023, respectively, compared to the statutory rate of 21%.

For the three months ended September 30, 2024, the provision for income taxes was $1,714,000 compared to $1,599,000 for the same period in 2023. The increase is attributable to an increase in income before income tax of $103,000 and earnings on bank owned life insurance being exempt from Federal income tax. Our effective tax rate was 18.5% and 17.5% for the three months ended September 30, 2024 and 2023, respectively.

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

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Financial Condition

Total assets were $3.03 billion at September 30, 2024, an increase of $51.1 million from $2.98 billion at December 31, 2023, due primarily to increases in loans. Cash and cash equivalents decreased $16.1 million to $36.8 million. Available for sale securities increased $1.6 million. Total deposits increased $128.7 million to $2.45 billion since year-end 2023, while borrowed funds decreased $90.3 million to $231.7 million.

Cash and Cash Equivalents

Cash and cash equivalents totaled $36.8 million at September 30, 2024 compared to $52.8 million at December 31, 2023. The decrease is due to a decrease in the cash held at the Federal Reserve.  Management actively measures and evaluates the Company’s liquidity position through our Asset–Liability Committee and believes the Company’s liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources including the Bank’s core deposits, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year.  Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.

Investments

The following table shows the composition of the investment portfolio (including debt and equity securities) as of September 30, 2024 and December 31, 2023 (dollars in thousands):

	September 30, 2024				December 31, 2023
	Amount		%		Amount		%
Debt securities:
U. S. Agency securities	$	55,614		13.2	$	60,771		14.5
U. S. Treasury notes		123,304		29.3		143,288		34.1
Obligations of state & political subdivisions		97,442		23.1		101,787		24.3
Corporate obligations		12,641		3.0		12,403		3.0
Mortgage-backed securities in government sponsored entities		130,189		30.9		99,352		23.6
Equity securities		1,730		0.5		1,938		0.5
Total	$	420,920		100.0	$	419,539		100.0

	September 30, 2024/
	December 31, 2023
	Change
	Amount			%
Debt securities:
U. S. Agency securities	$	(5,157	)		(8.5	)
U. S. Treasury notes		(19,984	)		(13.9	)
Obligations of state & political subdivisions		(4,345	)		(4.3	)
Corporate obligations		238			1.9
Mortgage-backed securities in
government sponsored entities		30,837			31.0
Equity securities		(208	)		(10.7	)
Total	$	1,381			0.3

Our investment portfolio increased by $1.4 million, or 0.3%, from December 31, 2023 to September 30, 2024. During 2024, we purchased $36.2 million of mortgage-backed securities in U.S government sponsored entities. We experienced $8.9 million of principal repayments and $33.8 million of calls and maturities. As a result of decreases in market interest rates, the unrealized loss on available for sale investment portfolio decreased $9.2 million. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the nine month period ended September 30, 2024 yielded 2.36%, compared to 2.18% in the comparable period in 2023, on a tax equivalent basis.

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

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 $4.1 million to $13.5 million as of September 30, 2024 from December 31, 2023 due to the third quarter typically being more active for residential home sales than the fourth quarter.

Loans

The following table shows the composition of the loan portfolio as of September 30, 2024 and December 31, 2023 (dollars in thousands):

	September 30,				December 31,
	2024				2023
	Amount		%		Amount		%
Real estate:
Residential	$	353,254		15.2	$	359,990		16.0
Commercial		1,110,548		47.6		1,092,887		48.6
Agricultural		331,734		14.2		314,802		14.0
Construction		178,706		7.7		195,826		8.7
Consumer		143,064		6.1		61,316		2.7
Other commercial loans		134,285		5.8		136,168		6.1
Other agricultural loans		24,537		1.1		30,673		1.4
State & political subdivision loans		54,874		2.3		57,174		2.5
Total loans		2,331,002		100.0		2,248,836		100.0
Less allowance for credit losses		21,695				21,153
Net loans	$	2,309,307			$	2,227,683

	September 30, 2024/
	December 31, 2023
	Change
	Amount			%
Real estate:
Residential	$	(6,736	)		(1.9	)
Commercial		17,661			1.6
Agricultural		16,932			5.4
Construction		(17,120	)		(8.7	)
Consumer		81,748			133.3
Other commercial loans		(1,883	)		(1.4	)
Other agricultural loans		(6,136	)		(20.0	)
State & political subdivision loans		(2,300	)		(4.0	)
Total loans	$	82,166			3.7

47

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

Loan activity picked up slightly during the third quarter of 2024. The decrease in construction loans was due to the underlying projects being completed and transferred to the commercial and agricultural real estate portfolios. As part of the Braavo sale, we sold $6.1 million of other commercial loans. Due to timing, student loans increased in the first half of 2024 resulting in an increase in consumer loans.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. As of September 30, 2024, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 301.5% of consolidated risk based capital. Construction, land and land development loans represented 62.8% of consolidated risk based capital as of September 30, 2024. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital and may adversely affect shareholder returns. The Company has an extensive Capital Policy and Capital Plan, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. The Company continues to refine information reviewed related to commercial real estate and to implement additional monitoring and testing of commercial real estate loans. As of September 30, 2024, management believes that it has implemented appropriate risk management practices, including risk assessments, board-approved underwriting policies and related procedures, which include monitoring loan portfolio performance and stressing of the commercial real estate portfolio under adverse economic conditions.

48

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

	Owner Occupied					Non-Owner Occupied					Total
Commercial Real Estate	Amount		%			Amount		%			Amount		%
Residential Rental	$	4,484		0.40	%	$	176,309		15.88	%	$	180,793		16.28	%
Multifamily Rental		2,281		0.21	%		170,105		15.32	%		172,386		15.52	%
Student Housing		-		0.00	%		47,898		4.31	%		47,898		4.31	%
Office		9,268		0.83	%		55,062		4.96	%		64,330		5.79	%
Medical office		9,811		0.88	%		7,155		0.64	%		16,966		1.53	%
Retail		46,258		4.17	%		115,635		10.41	%		161,893		14.58	%
Self Storage		1,981		0.18	%		9,864		0.89	%		11,845		1.07	%
Industrial/Flex/Warehouse		17,716		1.60	%		65,153		5.87	%		82,869		7.46	%
Mixed Use		17,579		1.58	%		65,984		5.94	%		83,563		7.52	%
Hotel/Motel		42,699		3.84	%		63,338		5.70	%		106,037		9.55	%
Healthcare/Hospitals		7,264		0.65	%		-		0.00	%		7,264		0.65	%
Schools/Higher Ed/Vocational		661		0.06	%		8,087		0.73	%		8,748		0.79	%
Amusement/Entertainment		16,681		1.50	%		5,246		0.47	%		21,927		1.97	%
Specialty		24,743		2.23	%		25,060		2.26	%		49,803		4.48	%
Land		2,548		0.23	%		45,971		4.14	%		48,519		4.37	%
Senior Living		-		0.00	%		2,935		0.26	%		2,935		0.26	%
Other		24,252		2.18	%		18,520		1.67	%		42,772		3.85	%
Total	$	228,226		20.55	%	$	882,322		79.45	%	$	1,110,548		100.00	%

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

Construction	Amount		%
Residential	$	53,989		30.21	%
Multifamily		59,820		33.47	%
Office		9,934		5.56	%
Retail		13,947		7.80	%
Self Storage		10,589		5.93	%
Industrial/Flex/Warehouse		13,442		7.52	%
Mixed Use		6,912		3.87	%
Hotel/Motel		623		0.35	%
Schools/Higher Ed/Vocational		1,414		0.79	%
Specialty		131		0.07	%
Land and agricultural		5,759		3.22	%
Other		2,146		1.20	%
Total	$	178,706		100.00	%

The Company obtains an appraisal of the real estate collateral securing a CRE loan prior to originating the loan. The appraised value is used to calculate the ratio of the outstanding loan balance to the value of the real estate collateral, or loan-to-value ratio ("LTV"). The original appraisal is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons, including but not limited to payment delinquency, additional loan requests using the same collateral, and loan modifications. The following table presents the ranges in the LTVs of our CRE loans at September 30, 2024 (dollars in thousands):

LTV Range	Number of Loans		Amount		%
0%-25%		857	$	146,371		13.18	%
25.01%-50%		541		304,675		27.43	%
50.01%-60%		298		205,120		18.47	%
60.01%-70%		359		290,361		26.15	%
70.01%-75%		178		111,032		10.00	%
75.01%-80%		54		43,157		3.89	%
>80%		8		9,832		0.89	%
Total		2,295	$	1,110,548		100.00	%

49

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 $21,695,000 or 0.93% of total loans as of September 30, 2024 as compared to $21,153,000 or 0.94% of loans as of December 31, 2023. The $542,000 increase is a result of a $3,086,000 provision for credit losses – loans less net charge-offs of $2,544,000. Net charge-offs for 2024 are driven by loans acquired as part of the HVBC acquisition due to collateral issues. The following table shows the distribution of the allowance for credit losses - loans and the percentage of loans compared to total loans by loan category as of September 30, 2024 and December 31, 2023 (dollars in thousands):

	September 30,				December 31
	2024				2023
	Amount		%		Amount		%
Real estate loans:
Residential	$	1,986		15.2	$	2,354		16.0
Commercial		9,287		47.6		9,178		48.6
Agricultural		3,815		14.2		3,264		14.0
Construction		1,471		7.7		1,950		8.7
Consumer		1,367		6.1		1,496		2.7
Other commercial loans		1,824		5.8		2,229		6.1
Other agricultural loans		116		1.1		270		1.4
State & political subdivision loans		63		2.3		45		2.5
Unallocated		1,766		N/A		367		N/A
Total allowance for credit losses	$	21,695		100.0	$	21,153		100.0

The following table provides information related to credit loss experience and loan quality for the nine months ended September 30, 2024 and the year ended December 31, 2023 (dollars in thousands).

50

September 30, 2024	Credit Loss Expense (Benefit)			Net (charge- offs) Recoveries			Average Loans		Ratio of net (charge-offs) recoveries to Average loans			Allowance to total loans			Non- accrual loans as a percent of loans			Allowance to total non- accrual loans
Real estate:
Residential	$	(364	)	$	(4	)	$	357,089		0.00	%		0.56	%		0.75	%		74.52	%
Commercial		109			-			1,106,699		0.00	%		0.84	%		0.97	%		85.85	%
Agricultural		551			-			323,145		0.00	%		1.15	%		0.73	%		157.91	%
Construction		(479	)		-			185,832		0.00	%		0.82	%		1.09	%		75.51	%
Consumer		(83	)		(46	)		96,942		-0.05	%		0.96	%		0.60	%		159.88	%
Other commercial loans		2,089			(2,494	)		133,726		-1.87	%		1.36	%		1.46	%		92.97	%
Other agricultural loans		(154	)		-			25,774		0.00	%		0.47	%		0.79	%		59.79	%
State & political subdivision loans		18			-			56,116		0.00	%		0.11	%		0.00	%	NA
Unallocated		1,399			-			-	NA			NA			NA			NA
Total	$	3,086		$	(2,544	)	$	2,285,323		-0.11	%		0.93	%		0.89	%		104.01	%

December 31, 2023	Credit Loss Expense (Benefit)			Net (charge- offs) Recoveries			Average Loans		Ratio of net (charge-offs) recoveries to Average loans			Allowance to total loans			Non- accrual loans as a percent of loans			Allowance to total non- accrual loans
Real estate:
Residential	$	1,112		$	(1	)	$	290,971		0.00	%		0.65	%		0.86	%		76.38	%
Commercial		2,089			-			986,188		0.00	%		0.84	%		0.10	%		808.63	%
Agricultural		(217	)		-			312,423		0.00	%		1.04	%		0.85	%		122.25	%
Construction		1,252			-			135,315		0.00	%		1.00	%		1.20	%		82.73	%
Consumer		(31	)		(325	)		94,519		(0.34	%)		2.44	%		1.14	%		213.41	%
Other commercial loans		1,643			(954	)		95,300		(1.00	%)		1.64	%		1.29	%		127.37	%
Other agricultural loans		-			-			30,557		0.00	%		0.88	%		1.60	%		54.88	%
State & political subdivision loans		3			-			59,308		0.00	%		0.08	%		0.00	%	NA
Unallocated		(359	)		-			-	NA			NA			NA			NA
Total	$	5,492		$	(1,280	)	$	2,004,581		(0.06	%)		0.94	%		0.54	%		173.57	%

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

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, 2024. 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.

51

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, 2024 and December 31, 2023.

	September 30,		December 31,
(dollars in thousands)	2024		2023
Non-performing loans:
Non-accruing loans	$	20,858	$	12,187
Accrual loans - 90 days or more past due		701		516
Total non-performing loans		21,559		12,703
Foreclosed assets held for sale		2,486		474
Total non-performing assets	$	24,045	$	13,177

The increase in foreclosed assets held for sale is primarily due to a commercial construction loan that was foreclosed on during the second quarter of 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, 2023 to September 30, 2024 in non-performing loans (in thousands).  Non-performing loans include those accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans.  Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.

	September 30, 2024								December 31, 2023
			Non-Performing Loans								Non-Performing Loans
	30 - 89 Days								30 - 89 Days
	Past Due		90 Days Past		Non-		Total Non-		Past Due		90 Days Past		Non-		Total Non-
(in thousands)	Accruing		Due Accruing		accrual		Performing		Accruing		Due Accruing		accrual		Performing
Real estate:
Residential	$	624	$	256	$	2,665	$	2,921	$	3,061	$	18	$	3,082	$	3,100
Commercial		5,288		353		10,818		11,171		1,396		404		1,135		1,539
Agricultural		637		28		2,416		2,444		73		75		2,670		2,745
Construction		-		-		1,948		1,948		4,795		-		2,357		2,357
Consumer		164		12		855		867		298		13		701		714
Other commercial loans		509		52		1,962		2,014		826		6		1,750		1,756
Other agricultural loans		200		-		194		194		7		-		492		492
Total nonperforming loans	$	7,422	$	701	$	20,858	$	21,559	$	10,456	$	516	$	12,187	$	12,703

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	Change in Non-Performing Loans
	September 30, 2024 /December 31, 2023
(in thousands)	Amount			%
Real estate:
Residential	$	(179	)		(5.8	)
Commercial		9,632			625.9
Agricultural		(301	)		(11.0	)
Construction		(409	)		(17.4	)
Consumer		153			21.4
Other commercial loans		258			14.7
Other agricultural loans		(298	)		(60.6	)
Total nonperforming loans	$	8,856			69.7

Nonperforming loans increased $8.9 million during 2024. During the first nine months of 2024, the Bank placed five large commercial relationships and one large construction relationship on non-accrual status, while also foreclosing on one construction loan that was transferred to foreclosed assets held for sale, which accounts for the majority of the change in non-performing loans since year-end. At September 30, 2024, approximately $15.7 million, or 72.8%, of the Bank’s non-performing loans are associated with the following nine customer relationships:

• A commercial loan relationship with $559,000 outstanding, and additional letters of credit of $1.2 million available, secured by undeveloped land, stone quarries and equipment, was on non-accrual status as of September 30, 2024. The Company services the natural gas industry, as well as local municipalities. As a result, the reduced exploration for natural gas in north central Pennsylvania has significantly impacted the cash flows of the customer, who provides excavation services and stone for pad construction related to these activities. During 2020, the Company had the underlying equipment collateral appraised and in the first quarter of 2022, the Company had the quarry appraised. The appraisals indicated a decrease in collateral values compared to the appraisal ordered for the loan origination, however, the loan was still considered well secured on a loan to value basis at September 30, 2024. In 2022 and 2023, the customer liquidated some excess equipment and the funds have been utilized to pay down a portion of the loans. Management determined that no specific reserve was required as of September 30, 2024.

• An agricultural loan customer with a total loan relationship of $1.3 million, secured by real estate, equipment and cattle, was on non-accrual status as of September 30, 2024. The customer declared bankruptcy during the fourth quarter of 2018 and developed a workout plan that was approved by the bankruptcy court in the fourth quarter of 2019 and resulted in monthly payments resuming in late 2019 that continued through 2023. The customer did miss a portion of required payments in 2023, however, in January 2024 the customer modified the bankruptcy plan to account for these missed payments. The customer will exit bankruptcy during the fourth quarter of 2024. Included within these loans to this customer are loans which are subject to Farm Service Agency guarantees in excess of $700,000. Depressed milk prices created cash flow difficulties for this customer.  Absent a sizable and sustained increase in milk prices, which is not assured, we will need to rely upon the collateral for repayment of interest and principal. During 2023, the Company had the underlying collateral appraised. Management determined that no specific reserve was required as of September 30, 2024.

• An agricultural loan customer with a total loan relationship of $1.1 million, secured by real estate was on non-accrual status as of September 30, 2024. The customer filed bankruptcy in the first quarter of 2023 with the plan approved in the second quarter of 2024. The first payment under the plan was received in the second quarter of 2024 with additional payments received in the third quarter. We expect that we will need to rely upon the collateral for repayment of interest and principal. During 2023, the Company had the underlying collateral appraised.  Management reviewed the collateral and determined that no specific reserve was required as of September 30, 2024.

53

• A commercial construction loan customer with a total loan relationship of $1.9 million, secured by partially developed real estate, was on non-accrual status as of September 30, 2024. The customer has experienced delays in developing the real estate for resale resulting in financing difficulties. Management reviewed the collateral and determined that no specific reserve was required as of September 30, 2024.

• A commercial and residential real estate customer with a total relationship of $1.2 million secured by a restaurant and residence was on non-accrual status as of September 30, 2024. The customer has experienced a slow-down in business at the restaurant as well as higher operating costs creating cashflow difficulties. Management reviewed the collateral and determined that a specific reserve of $60,000 was required as of September 30, 2024.

• A commercial loan relationship with $1.7 million outstanding secured by residential and commercial real estate, a car collection and gun collection was on non-accrual status as of September 30, 2024. The Company lost a contract and has gone out of business. We expect that we will need to rely upon the collateral for repayment of interest and principal. Management reviewed the collateral and determined that a specific reserve of $355,000 was required as of September 30, 2024.

• A commercial real estate customer with a total relationship of $3.9 million secured by commercial real estate was on non-accrual status as of September 30, 2024. The loan to the customer matured during the second quarter of 2024 and no interest payments were made on the loan through September 30, 2024. During the fourth quarter of 2024, a new loan was underwritten and approved for the customer, which required the payment of all past due payments of principal and interest. Management reviewed the collateral and determined that no specific  reserve was required as of September 30, 2024.

• A commercial real estate customer with a total relationship of $2.9 million secured by commercial real estate was on non-accrual status as of September 30, 2024. The loan to the customer matured during the second quarter of 2024. The customer has a signed sales agreement that is expected to close in the fourth quarter of 2024. Management reviewed the collateral and determined that no specific reserve was required as of September 30, 2024.

• A commercial real estate customer with a total relationship of $1.2 million secured by commercial real estate was on non-accrual status as of September 30, 2024. The loan to the customer matured during the second quarter of 2024. An extension for this loan is under consideration and being negotiated with the customer that would require the payment of all past due payments of principal and interest and an extending the maturity date. Management reviewed the collateral and determined that no specific reserve was required as of September 30, 2024.

Management believes that the allowance for credit losses - loans at September 30, 2024 was adequate at that date, which was based on the following factors:

• Nine loan relationships comprise 72.8% of the non-performing loan balance, which required a specific reserve of $415,000 as of September 30, 2024.

• The Company has a history of low charge-offs, which were 0.15% of average loans on an annualized basis for 2024 and 0.09% for 2023.

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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, 2024, and December 31, 2023, the cash surrender value of the life insurance was $50.1 million and $49.9 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $1,334,000 and $941,000 for the nine month periods ended September 30, 2024 and 2023, respectively. During the first quarter of 2024, the Company received proceeds of $1,147,000, which included death benefits of $326,000 on a former employee of the Company. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers’ credit ratings.

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

Premises and Equipment

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

Other assets

Other assets decreased $11.3 million to $47.7 million. The primary driver of the decrease was an investment security that matured, but did not settle as of December 31, 2023. It subsequently settled in 2024.

Deposits

The following table shows the composition of deposits as of September 30, 2024 and December 31, 2023 (dollars in thousands):

	September 30,				December 31,
	2024				2023
	Amount		%		Amount		%
Non-interest-bearing deposits	$	548,218		22.4	$	523,784		22.6
Interest bearing demand deposits		15,011		0.6		-		-
NOW accounts		568,519		23.2		670,712		28.9
Savings deposits		290,210		11.8		307,357		13.2
Money market deposit accounts		456,865		18.6		400,154		17.2
Certificates of deposit		571,326		23.2		419,474		18.1
Total	$	2,450,149		99.8	$	2,321,481		100.0

55

	September 30, 2024/
	December 31, 2023
	Change
	Amount			%
Non-interest-bearing deposits	$	24,434			4.7
Interest bearing demand deposits		15,011		NA
NOW accounts		(102,193	)		(15.2	)
Savings deposits		(17,147	)		(5.6	)
Money market deposit accounts		56,711			14.2
Certificates of deposit		151,852			36.2
Total	$	128,668			5.5

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

Borrowed Funds

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

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

The Company’s current strategy for borrowings is to consider terms and structures to manage interest rate risk and liquidity in a declining 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.

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

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

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 categories will apply. At September 30, 2024, the Bank leverage ratio under the CBLR framework was 8.96%, which is less than 9.0% requirement to be considered “well-capitalized” under the CBLR. As such, as of September 30, 2024, and going forward, the Bank reverted to the prompt corrective action framework and will no  longer utilize the CBLR framework until such time as the CBLR exceeds 9%. The following table provides the Bank’s computed risk‑based capital ratios as of September 30, 2024, which reflects the Bank being “well capitalized” on that date (dollars in thousands):

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	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
September 30, 2024	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets):
Company	$	278,944		11.55	%	$	193,129		8.00	%	$	241,411		10.00	%
Bank	$	283,172		11.75	%	$	192,854		8.00	%	$	241,068		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Company	$	237,796		9.85	%	$	144,847		6.00	%	$	193,129		8.00	%
Bank	$	261,297		10.84	%	$	144,641		6.00	%	$	192,854		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Company	$	230,296		9.54	%	$	108,635		4.50	%	$	156,917		6.50	%
Bank	$	261,297		10.84	%	$	108,481		4.50	%	$	156,694		6.50	%
Tier 1 Capital (to Average Assets):
Company	$	237,796		8.15	%	$	115,584		4.00	%	$	144,480		5.00	%
Bank	$	261,297		8.96	%	$	116,664		4.00	%	$	145,830		5.00	%

At December 31, 2023, the Bank leverage ratio under the CBLR framework was 8.54%. This ratio allowed the Bank to fall within the grace period of the CBLR as of December 31, 2023.

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, 2024 and December 31, 2023 (in thousands):

	September 30, 2024		December 31, 2023
Commitments to extend credit	$	421,048	$	546,006
Standby letters of credit		15,444		18,682
	$	436,492	$	564,688
Allowance for Credit Losses - Off-Balance Sheet credit Exposure	$	766	$	938

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, 2024 and December 31, 2023 was $13,025,000 and $13,121,000, 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.

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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 2024 were $852,000 compared to $2,308,000 during the same time period in 2023.

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 $1.07 billion, of which $384.8 million was outstanding, at September 30, 2024. The Bank also has two federal funds line with third party providers for $34.0 million as of September 30, 2024, which are unsecured and were undrawn upon as of September 30, 2024. The Company also has a borrower in custody line with the Federal Reserve Bank of approximately $14.2 million, which also was not drawn upon as of September 30, 2024. The Company has a $15.0 million line of credit with a New York community bank, of which $9.6 million was utilized as of September 30, 2024. 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, 2024, 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, 2024, 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 help by local governments, which are paid current market interest rates).

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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.

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, 2024 (dollars in thousands):

			Change In			% Change In
	Prospective One-Year		Prospective			Prospective
Changes in Rates	Net Interest Income		Net Interest Income			Net Interest Income
-400 Shock	$	97,156	$	5,469			5.96
-300 Shock		95,505		3,818			4.16
-200 Shock		94,681		2,994			3.27
-100 Shock		93,644		1,957			2.13
Base		91,687		-			-
+100 Shock		89,418		(2,269	)		(2.47	)
+200 Shock		86,642		(5,045	)		(5.50	)
+300 Shock		84,345		(7,342	)		(8.01	)
+400 Shock		82,068		(9,619	)		(10.49	)

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 noted above are in line with Company policy for interest rate risk.

Item 3 Quantitative and Qualitative Disclosure about Market Risk

In the normal course of conducting business activities, the Company is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary.  Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments and was discussed previously in this Form 10-Q.  Management and a committee of the Board of Directors manage interest rate risk (see also “Interest Rate and Market Risk Management”).

Item 4 Control and Procedures

(a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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(b) Changes to Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

PART II ‑ OTHER INFORMATION

Item 1 Legal Proceedings

Management is not aware of any pending or threatened litigation that would have a material adverse effect on the consolidated financial position of the Company.  Any pending proceedings are ordinary, routine litigation incidental to the business of the Company and its subsidiaries.  In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company and its subsidiaries by government authorities.

Item 1A Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1.A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect our business, financial condition or future results. At September 30, 2024, the risk factors of the Company have not changed materially from those reported in our 2023 Annual Report on Form 10-K.  However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2 – Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares (or units Purchased)		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans of Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
7/1/24 to 7/31/24		-	$	0.00		-		148,231
8/1/24 to 8/31/24		-	$	0.00		-		148,231
9/1/24 to 9/30/24		1,141	$	50.47		1,141		147,090
Total		1,141	$	42.02		1,141		147,090

(1) On April 22, 2023, the Company announced that the Board of Directors authorized the Company to repurchase up to an additional 150,000 shares at an aggregate purchase price not to exceed $15.0 million over a period of 36 months. The repurchases will be conducted through open-market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors.  No time limit was placed on the duration of the share repurchase program.  Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.

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Item 3 Defaults Upon Senior Securities

Not applicable.

Item 4 Mine Safety Disclosure

Not applicable.

Item 5 Other Information

During the three months ended September 30, 2024, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of the Company’s securities that was intended to satisfy the affirmative defense conditions of SEC Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as such term is defined in Item 408 of SEC Regulation S-K).

Item 6 ‑ Exhibits

(a)  The following documents are filed as a part of this report:

3.1	Restated Articles of Incorporation of Citizens Financial Services, Inc. (1)
3.2	Articles of Amendment of Restated Articles of Incorporation of Citizens Financial Services, Inc. (2)
3.3	Bylaws of Citizens Financial Services, Inc. (3)
3.4	Amendment No. 1 to Amended and Restated Bylaws of Citizens Financial Services, Inc. (4)
4.1	Form of Common Stock Certificate. (5)
10.1	Amended and Restated First Citizens Community Bank Annual Incentive Plan
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended  June 30, 2024, formatted in XBRL (Extensible Business Reporting Language): (i) The Consolidated Balance Sheet (unaudited), (ii) the Consolidated Statement of Income (unaudited), (iii) the Consolidated Statement of Comprehensive Income (unaudited), (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows (unaudited) and (vi) related notes (unaudited).
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

⁽¹⁾ Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended June 30, 2018, as filed with the Commission on August 9, 2018.

⁽²⁾ Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on April 26, 2021.

⁽³⁾ Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on December 17, 2020.

⁽⁴⁾ Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on November 23, 2022

⁽⁵⁾ Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the Commission on March 10, 2023.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Citizens Financial Services, Inc. (Registrant)
November 7, 2024	/s/	Randall E. Black
	By:	Randall E. Black
	President and Chief Executive Officer
	(Principal Executive Officer)
November 7, 2024	/s/	Stephen J. Guillaume
	By:	Stephen J. Guillaume
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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