CZFS 10-K & 10-Q changes, risk factors and insider trading

Our allowance for credit losses amounted to $21.7$22.8 million, or 0.94%0.97% of total loans outstanding and 84.4%85.7% of nonperforming loans, aton December 31, 2024.2025. Our allowance for credit losses at December 31, 31, 20242025 may not be sufficient to cover future credit losses. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would decrease our earnings.

At December 31, 2024,2025, our agricultural loans, consisting primarily of agricultural real estate loans and other agricultural loans, totaled $357.4$377.7 million, representing 15.5%16.1% of our total loan portfolio. The primary activities of our agricultural customers include dairy and beef farms, poultry and swine operations, crops and support businesses. Agricultural markets are highly sensitive to real and perceived changes in the supply and demand of agricultural products. Weaker prices could reduce the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land, animals and equipment that serves as collateral for certain of our loans. At December 31, 2024,2025, the Company had loans to the dairy industry totaling $111,924,000,$114.6 million, or 4.9% of total loans and 30.3% of total agricultural loans compared to 4.8% of total loans and 31.3% of total agricultural loans at comparedDecember 31, 2024. As of December 31, 2025, we have loans to 5.3%poultry producers for layers, broilers and turkeys totaling $110.2 million, or 4.7% of total loans and 34.3%29.2% of total agricultural loans at December 31, 2023.loans.

The Bank’s primary market area consists of the Pennsylvania Counties of Bradford, Clinton, Lycoming, Potter, and Tioga in north central Pennsylvania, Lebanon, Schuylkill, Berks and Lancaster in south south central, Pennsylvania, Centre and Clinton in central Pennsylvania, and Allegany, Steuben, Chemung and Tioga Counties in southern New York. WithIn the acquisition of MidCoast,Delaware, we consider the cities and surrounding areas of Wilmington and Dover, Delaware, as well as Kennett Square, Pennsylvania in Chester County, as primary market areas. With the acquisition of HVBC, we have expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey through the acquisition of five full service branches, four mortgage centers and one business banking facility. The majority of the Bank’s loanloans and deposits come from households and businesses whose primary address is located in the Bank’s primary market areas. Because of the Bank’s concentration of business activities in its market area, the Company’s financial condition and results of operations depend upon economic conditions in its market areas. Adverse economic conditions in our market areas could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates and short money supply and other factors beyond our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the States of Pennsylvania, New York, New Jersey and Delaware could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

The Bank faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for the Bank to make new loans and at times has forced the Bank to offer offer higher deposit rates. Price competition for loans and deposits might result in the Bank earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to increase the volume of our loan and deposit portfolios. As of June 30, 2024,2025, which is the most recent date for which information is available,made available by the FDIC, we held 35.4%34.1% of the FDIC insured deposits in Bradford, Potter and Tioga Counties, Pennsylvania, which was the second largest share of deposits out of eight financial institutions with offices in the area, and 6.1% of the FDIC insured deposits in Allegany County, New York, which was the third largest share of deposits out of three financial institutions with offices offices in this area. As of June 30, 2024,2025, we held 7.9%9.1% of the FDIC insured deposits in Lebanon County, Pennsylvania, which was the fourth largest share out of the 12 financial institutions with offices in the County. As of June 30, 2024,2025, we held 3.6% 3.7% of the FDIC insured deposits in Clinton County, Pennsylvania, which was the eighth largest share out of the eight financial institutions with offices in the County. Our offices in Berks, Centre, Chester, Lancaster, Lycoming, Schuylkill, Montgomery, Bucks and Philadelphia Counties of Pennsylvania and our offices in Wilmington and Dover, Delaware and Burlington, New Jersey all have less than 3% of the FDIC insured deposits of the corresponding County as of June 30, 2024.2025. This data does not include deposits held by credit unions. Competition also makes it more difficult to hire employees and more expensive to retain experienced employees. Some of the institutions with which the Bank competes have substantially greater resources and lending limits than the Bank has and may offer services that the Bank does not provide. Management expects competition to increase in the future as a result of legislative, regulatory and technological changes (fintech) and the continuing trend of consolidation in the financial services industry. The Bank’s profitability depends upon its continued ability to compete successfully in its market area.

The Company engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Lycoming, Bradford and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New YorkYork. andIn withDelaware, the MidCoastprimary acquisition,areas are the Cities of Wilmington and Dover,Dover Delaware.and the surrounding area. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. With the recently completed HVBC acquisition, we have expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey through the acquisition of five full service branches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 48 47 banking facilities, 3839 of which operate as bank branches. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, Williamsport, Plumsteadville, Philadelphia, two branches near the city of Lebanon and two branches in Huntington Valley. The Company has limited branch offices located in Winfield, Pennsylvania and Georgetown, Delaware. In New York, our office is in Wellsville. In Delaware, we have three branches in Wilmington and one in Dover. The mortgage centers acquired as part of the acquisition are located in Montgomeryville, PA, Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. In the fourth quarter of 2023, we opened a branch in Williamsport, Pennsylvania. During 2024, the Montgomeryville, PA mortgage office was closed and the Georgetown office was opened.

Our Investment and Trust Division is committed to helping our customers meet their financial goals. The Trust Division offers professional trust administration, investment management services, estate estate planning and administration, custody of securities and individual retirement accounts. 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 Bank in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Bank. As of December 31, 2024,2025, and 2023,2024, assets owned and invested by customers of the Bank through the Bank’s investment representatives totaled $395.9 million$317,895,000 and $329.4$395,869,000 million, respectively. Additionally, as summarized in the table below, the Trust Department had assets under management as of December 31, 20242025 and 20232024 of $180.7 million$194,841,000 and $167.9 million,$180,710,000, respectively. During the year ended December 31, 2024,2025, $2.2 million$3,918,000 of new trust accounts were opened, $10.2 million$8,312,000 of additional contributions to trust accounts were made, $11.0 million$15,622,000 was distributed from trust accounts, and $4.0 million$2,081,000 of accounts were closed. As a result of market fluctuations, the fair value of the trust accounts increased approximately $15.4 million$19,604,000 during the year ended December 31, 2024.2025. The following table reflects trust accounts by investment type and structure:

Net income for the year ended December 31, 2025 was $36,572,000, which represents an increase of $8,754,000, or 31.5%, when compared to 2024 primarily due to an increase in net interest income after the provision for credit losses of $11,758,000. Net income for the year ended December 31, 2024 was $27,818,000, which represents an increase of $10,007,000, or 56.2%, when compared to 2023 due primarily to the absence of one-time costs associated with the HVBC acquisition that were recognized in 2023. Net income for the year ended December 31, 2023 was $17,811,000, which represents a decrease of $11,249,000, or 38.7%, when compared to 2022 due primarily to the one-time costs associated with the HVBC acquisition. Basic earnings per share were $5.86,$7.62, $4.02$5.80 and $7.17$3.98 for 2024,2025, 20232024 and 2022,2023, respectively, while diluted earnings per share were $5.85,$7.62, $4.02$5.79 and $7.17$3.98 for 2024,2025, 20232024 and 2022, 2023, respectively.

Total tax equivalent interest income from investment securities increased $426,000 in 2024 from 2023. The average balance of investment securities decreased $31.2 million,$31,182,000, which had an effect of decreasing interest income by $632,000 due to volume. During 2024, the Bank had limited investment activity in the first half of the year and used investment cashflows to fund loan activity, as well as to offset seasonal deposit fluctuations. The average tax-effected yield on our investment portfolio increased from 2.20% in 2023 to 2.44% in 2024. The increase in the tax-effected yield is attributable to purchases made during 2023 and 2024, which were made in a higher market interest rate environment. As a result of the yield on investment securities increasing 24 basis points (bps) to 2.44%, interest income on investment securities increased $1,058,000, with the increase related to taxable securities. The investment strategy for 2024 was similar to 2023 in that cashflows from the investment portfolio were used to repay overnight borrowings as well as fund loan growth. The decrease in the average balance of the investment portfolio was due to investment repayments and maturities. During 2024, the investment purchases made were primarily in mortgage-backed securities that provided the widest spread to treasuries, which were primarily purchased at a discount. 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.

In total, loan interest income increased $26,594,000 in 2024 from 2023. The average balance of our loan portfolio increased by $290.8 million$290,770,000 in 2024 compared to 2023, which resulted in an increase in interest income of $18,552,000$18,538,000 due to volume, primarily due to the HVBC acquisition completed in June 2023 being included in the Company’s results for the entirety of 2024 and an increase in the average balance of student loans. The average tax-effected yield on our loan portfolio was 6.24% for 2024 compared to 5.81% for 2023 resulting in an increase in loan interest income of $8,042,000.$8,056,000. The tax-effected yield increased during 2024 due to a rise in market interest rates.

Average interest-bearing liabilities increased $260.6 million$260,614,000 in 2024, with average interest-bearing deposits increasing $263.8 million$263,782,000 and average other borrowings decreasing $3.2 million.$3,168,000. As a result of the increase in average deposits, interest expense increased $7,799,000$7,599,000 as a result of the change in volume. Increases in average deposits, which were primarily driven by the HVBC acquisition, included NOW accounts of $98.9 million$90,184,000 and money market accounts of $33.6 million. $33,557,000. Certificates of deposits increased $153.4 million$153,309,000 due to the acquisition, an increase in brokered CD’s and conversion of non-maturity deposits to term products. During 2024, a new business interest bearing checking account was created that had an average balance $8,756,000. The average balance of other borrowed funds decreased $3.2 million$3,168,000 due to the maturity of several borrowings, which corresponds to a decrease in interest expense of $151,000.

Our tax equivalent net interest margin for 2024 was 3.13% compared to 3.21% for 2023, with the change attributable to the yield of interest-earning assets increasing less than the cost from interest-bearing liabilities during 2024. Interest rates continued to increase during the first half of 2024 due to the increases in market interest rates and competitive pressure for deposits. With inflation decreasing, the Federal Reserve did start start decreasing rates, but rates still remainremained high in relation to recentprevious years. TheDuring year began with2024, inflation remainingremained above the Federal Reserve’s targets, but had decreased enough that allowed the Federal Reserve to lower rates, but not to the extent the market had forecast at the beginning of 2024. The yield curve remained inverted for the majority of 2024, but some positive slope did return to the curve during the 4th quarter of 2024 due to a decrease in short term rates as well as an increase in long term interest rates.

Gains on loans sold increased $864,000 compared to 2023. The increase in gains on loans sold is attributable to the HVBC acquisition and its 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 and accounts for the majority of the change in other income of $441,000. The increase in earnings on bank owned life insurance is due to the HVBC acquisition as well as death proceeds from the passing of former employees in 2024 exceeding those received in 2023. During the first quarter of 2024, the Company completed the sale of certain assets acquired as part of the HVBC acquisition, which included loans and accrued interest, 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.

The increases in occupancy, furniture and fixtures, software expenses and amortization expenses was due to the HVBC acquisition and additional branches acquired as part of it. FDIC insurance expense increased $521,000 due to the Company’s increased size and the Bank’s lower leverage capital ratio during the first half of 2024 compared to 2023. Professional fees increased due to increased legal expenses, of which $201,000 was related to the sale of certain Braavo assets. Pennsylvania shares tax increased due to the increased size of the Bank. 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 HVBC acquisition, other expenses increased due to insurance reimbursementreimbursements received in 2023 to cover amounts previously charged-off through expense. Merger and acquisition costs for the HVBC acquisition totaled $9,269,000 in 2023 and included professional and consulting fees, printing, travel, contract termination payments and severance-related expenses.

The decreaseincrease in income tax expense of $2,731,000$2,301,000 in 20232024 compared to 20222023 was due to the decreaseincrease of $13,980,000$12,168,000 in income before the provision for income taxes, which accounts for aan decreaseincrease in tax expense of $2,936,000$2,555,000 at a 21% tax rate.

We are involved in seven limited partnership agreements that operate low-income housing projects in our market areas, two of which we entered into during 2022.areas. During 2025 and 2024 we recognized credits on three of the seven projects, while in 2023 we recognized credits related to two projects, and in 2022 we recognized credits related to one project.projects. Tax credits associated with four of the partnerships were fully utilized by December 2022. We started recognizing credits on two of the partnerships during 2023 and on one partnership in 2024. We anticipate recognizing an aggregate of $6.9 million of tax credits over the next twelveeleven years.

Cash and cash equivalents totaled $42.2 million$34,291,000 at December 31, 20242025 compared to $52.8 million$42,202,000 at December 31, 2023.2024. The decrease is due to a decrease in the cash held at the Federal Reserve. Management actively measures and evaluates the Company’s liquidity through our Asset – Liability Committee and believes its liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, 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.

The Company’s investment portfolio increased during 20242025 by $8.1 million.$18,897,000. This increase was fueled by $70.4 million$82,406,000 of purchases made during 2024,2025, which offset the maturities and calls that took place in 2024.2025. During 2024,2025, $60.9$58,301,000, million $23,105,000 and $9.5 million$1,000,000 of mortgage backed securitiessecurities, obligations of political subdivisions and UScorporate Treasuriessecurities were purchased, respectively. The purchases in 20242025 were offset by $13.3 million$25,346,000 of principal repayments and $49.5 million$53,460,000 of calls and maturities. The fair value of our investment portfolio increased approximately $2.1 million$15,847,000 in 20242025 due to decreases in market interest rates during 2024 and a shortening of the portfolio duration.2025. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve, the effective yield on our investment portfolio for 20242025 was 2.44%3.06% compared to 2.20%2.44% for 20232024 on a tax equivalent basis.

Loans held for sale increaseddecreased $228,000$214,000 to $9,607,000$9,393,000 as of December 31, 20242025 from December 31, 2023.2024. The higher rate environment infor 20242025 continuecontinued to place pressure on refinancing activity as well as new home purchases.

The Bank’s lending efforts have historically focused on the north central Pennsylvania and southern New York. With the acquisitioncounties of FNBTioga, Bradford and thePotter, openingsouth central Pennsylvania counties of offices in Lancaster County, this focus has grown to include the Lebanon, Schuylkill, Berks and Lancaster Countyand marketsAllegheny, Steuben and Tioga counties of southsouthern central,New Pennsylvania.York. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities, and offices in State College andCollege, Mill Hall and Williamsport to support commercial opportunities in central Pennsylvania, especially CentreCentre, Clinton and ClintonLycoming Counties. DuringThe 2023,Williamsport thebranch Bankwas opened a full-service branch in Williamsport, Pennsylvania to serve Lycoming County and surrounding areas.2023. The MidCoast acquisition expanded our markets into the State of Delaware with activity centered around the cities of Wilmington and Dover, Delaware, which was further supported by branch openings in Kennett Square, Pennsylvania and Greenville, Delaware. During 2024, the Bank opened a limited production office in Georgetown, Delaware, to primarily support agricultural customers in the Delaware market. 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.

The Bank primarily offers fixed rate residential mortgage loans with terms of up to 25 years and adjustable rate mortgage loans (with amortization schedules up to 30 years) with interest rates and payments that adjust based on one, three, five and fifteenyearfifteen year fixed periods. Loan to value ratios are usually 80% or less with exceptions for individuals with excellent credit and low debt to income and/or high net worth. Adjustable rate mortgages are tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate. Home equity loans are written with terms of up to 15 years at fixed rates. Home equity lines of credit are variable rate loans tied to the Prime Rate generally with a ten year draw period followed by a ten year repayment period. Home equity loans are typically written with a maximum 80% loan to value.

Commercial real estate loan terms are generally 20 years or less, with one to five year adjustable interest rates. The adjustable rates are typically tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate with a typical loan to value ratio of 80% or less. During 2025, 2024 and 2023, the Bank offered certain customers derivative contracts that allowed the customer to obtain a fixed interest rate for a period up to 10 years. Where feasible, the Bank participates in the United States Department of Agriculture’s (USDA) and Small Business Administration (“SBA”) guaranteed loan programs to offset credit risk and to further promote economic growth in our market area.

The Bank, as part of its commitment to the communities it serves, is an active lender for projects by our local municipalities and school districts. These loans range from short term bridge financing to 20 year term loans for specific projects. These loans are typically written at rates that adjust at least every five years. Due to the size of certain municipal loans, we have developed participation lending relationships with other community banks that allow us to meet regulatory compliance issues, while meeting the needs of the customer. At December 31, 2024,2025, the aggregate balance of our participation loans, in which a portion was sold to other lenders totaled $353.6 million,$334,913,000, of which $165.7 million $149,344,000 was sold.

Total loans grew $64.4 million$37,380,0000 in 20242025 and total $2.31 billion$2,350,622,000 at the end of 2024.2025. The primary driver of growth during 20242025 was increases in consumerreal estate lending and specificallyother studentcommercial loans.

Residential real estate loans decreased $8.6 million$10,426,000 primarily due to the high interest rate environment that lessened demand. During 2024,2025, $155.4 million$153,519,000 of residential real estate loans were originated for sale on the secondary market, which compares to $87.3 million$155,379,000 for 2023 and is due to the acquisition and the residential division acquired as part of the acquisition being in place for all of 2024. For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income. During 2025, the Bank originated and added to its residential real estate portfolio $13,909,000 of loans.

The following table presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of loans in accordance with changes in the interest rate index that mature after December 31, 2025.2026 (in thousands).

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 December 31, 2024,2025, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 297.4%287.0% of consolidated risk based capital. Construction, land and land development loans represented 57.3%30.5% of consolidated risk based capital as of December 31, 2024.2025. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital and may adversely affect shareholder returns. The Company has an extensive Capital Policy and Capital Plan, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. The Company continuesDue to refinethe informationconcentration reviewed related toin commercial real estate and toloans, implementthe additionalCompany has implemented enhanced monitoring and testingrisk assessment ofprocedures commercialwith real estate loans. The Company continuesrespect to refinethis information reviewed related to commercial real estate and to implement additional monitoring and testing of commercial real estate loans.portfolio. As of December 31, 2024,2025, management believes that it has implemented appropriate risk management practices, including risk assessments, board-approved underwriting policies and related procedures, which include monitoring loan portfolio performance and stressing of the commercial real estate portfolio under adverse economic conditions.

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 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 December 31, 2025 and 2024 (dollars in thousands):

The allowance for credit losses – loans is maintained at a level which, in management’s judgment, is adequate to absorb probable future credit losses inherent in the loan portfolio. The provision for credit losses 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 $21,699,000$22,806,000 or 0.94%0.97% of total loans as of December 31, 20242025 as compared to $21,153,000$21,699,000 or 0.94% of loans as of December 31, 2023.2024. The $546,000$1,107,000 increase is a result of a $3,176,000$1,888,000 provision for credit losses – loans, less net charge-offs of $2,630,000.$781,000. Net charge-offs for 20242025 are driven by loans acquired as part of the HVBC acquisition due to collateral issues.issues and the acquired medical student loan portfolio from HVBC.

The adequacy of the allowance for credit losses – loans is subject to a formal, quarterly analysis by management of the Company. In order to better analyze the risks associated with the loan portfolio, the entire portfolio is divided into several categories. As stated above, commercial loans on non-accrual status are specifically reviewed and given a specific reserve, if appropriate. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors. For further information on the allowance for credit losses on loans, Note 1, "“Summary of Significant Accounting Policies,"” and Note 5, " “Loans,"” in the consolidated financial statements provides additional disclosure on the allowance for credit losses. AsThe aCompany result of the adoption ofadopted ASC 326 effective January 1, 2023, there is a lack of comparability in provision for credit losses for the periods presented prior to 2023. Results for reporting periods beginning after January 1, 2023 are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior fiscal years. Note 1, "“Summary of Significant Accounting Policies,"” in the consolidated financial statements provides additional disclosure on the adoption of ASC 326.

The following tables presents the activity in the allowance for credit losses – loans, by portfolio segment, for 2025, 2024 and 2023 (in thousands).

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, 2025, which could materially affect our business, financial condition or future results. At MarchJune 31,30, 2026, the risk factors of the Company have not changed materially from those reported in our 2025 Annual Report on Form 10-K. However, the 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, business, financial condition and/or operating results.

The following is management'smanagement’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 financial statements for the Company. Our consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Management’s discussion and analysis should be read in conjunction with the preceding financial statements presented under Part I and the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025. The results of operations for the three and six months ended MarchJune 31,30, 2026 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, Lycoming, Bradford and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New York, and the Cities of Wilmington and Dover, Delaware. We also have limited branch offices in Union county, Pennsylvania and Georgetown Delaware, which primarily serve agricultural and commercial customers in those markets. With the HVBC acquisition in 2023, we expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties Counties as well as Burlington County, New Jersey through the acquisition of five full service branches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 47 banking facilities, 37 of which operate as bank branches. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, Williamsport, Plumsteadville, Philadelphia, two branches near the city of Lebanon and two branches in Huntington Valley. The Company has limited branch offices located in Winfield, Pennsylvania and Georgetown, Delaware. In New York, our office is in Wellsville. In Delaware, we have three branches in Wilmington and one in Dover. The mortgage centers acquired as part of the acquisition are located in Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. During the first quarter half of 2026, the Williamsport branch moved to a new location and we have received regulatory approval to move the business banking facility located in Philadelphia moved to a new location.locations.

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 in the Consolidated Statement of Income. As of MarchJune 31,30, 2026 and December 31, 2025, the Trust Department had $191.6$207.6 million and $194.8 million of assets under management, respectively.

Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc. The assets associated with these products are not included in the Consolidated Balance Sheets since such assets are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank’s Investment Representatives increased from $317.9 million at December 31, 2025 to $319.5$347.8 million at MarchJune 31,30, 2026 with the increase due to an increase in market values. Fee income from the sale of these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central, south south central and south eastern Pennsylvania and Delaware markets.

The Company had net income of $10,376,000$20,563,000 for the first threesix months of 2026 compared to $7,621,000$16,084,000 for last year’s comparable period, an increase of $2,755,000,$4,479,000, or 36.2%,27.9%, primarily due to an increase in net interest income after the provision for credit losses of $3,236,000.$5,532,000. Basic earnings per share for the first threesix months of 2026 was $2.16,$4.29, compared to $1.59$3.35 for last year’s comparable period, representing a 35.9%28.1% increase. Annualized return on assets and return on equity for the threesix months of 2026 were 1.34%1.33% and 12.03%,11.84%, respectively, compared with 1.00%1.07% and 10.00%10.44% for last year’s comparable period.

Net interest income for the first threesix months of 2026 was $26,113,000,$51,807,000, an increase of $3,111,000,$5,157,000, or 13.5%,11.1%, compared to the same period in 2025. For the first threesix months of 2026 the provision for credit losses was was $500,000.$1,000,000. The provision for the first threesix months of 2025 was $625,000.$1,375,000. Consequently, net interest income after the provision for credit losses was $25,613,000$50,807,000 in the first threesix months of 2026 compared to $22,377,000$45,275,000 during the first three six months of 2025.

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 and interest rate spread created for the three and six months ended MarchJune 31,30, 2026 and 2025 on a tax equivalent basis (dollars in thousands):

Tax exempt revenue is shown on a tax-equivalent basis (non-GAAP) for proper comparison using a federal statutory income tax rate of 21% for the three and six months ended MarchJune 31,30, 2026 and 2025. For purposes of the 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 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 MarchJune 31,30, 2026 and 2025 (in thousands):

Tax equivalent net interest income increased from $23,250,000$47,154,000 for the threesix month period ended MarchJune 31,30, 2025 to $26,483,000$52,620,000 for the threesix month period ended MarchJune 31,30, 2026, an increase of $3,233,000.$5,466,000. This increase was primarilya result of an increase of $546,000 due to rate.a Assetchange yieldsin volume as average interest-earning assets increased 14$44,441,000 basisdue pointsto (bps),organic increasingloan growth throughout our market areas and investment purchases. As a result of the lower market interest income $1,187,000, whilerates, the costyield ofon average interest bearing liabilities decreased 31 basis points from 2.80%2.75% to 2.46%,2.44% resulting in a decrease in interest expense of $2,138,000.$3,328,000. The tax equivalent net interest margin increased from 3.30%3.36% for the first threesix months of 2025 to 3.72%3.69% for the comparable period in 2026. The increase was primarily caused by the decrease in the cost of interest-bearing liabilities due to lower market interest rates in 2026 compared to 2025.

Total tax equivalent interest income for the 2026 threesix month period increased $1,385,000$2,328,000 as compared to the 2025 threesix month period. This increase was a result of an increase of $1,187,000$736,000 due to an increasea change in thevolume as average interest-earning assets increased $44,441,000. The yield on interest earning assets increased from 5.57%5.58% to 5.71%. Average interest earning assets increased $26,386,0005.66% resulting in an increase in interest income due to volume of $198,000.$1,592,000.

Tax equivalent investment income for the threesix months ended MarchJune 31,30, 2026 increased $584,000$1,481,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 5059 basis points to 3.35%.3.48%.

Total loan interest income increased $841,000$930,000 for the threesix months ended MarchJune 31,30, 2026 compared to the same period last year.year, as a result of higher volume.

Total interest expense decreased $1,848,000$3,138,000 for the threesix months ended MarchJune 31,30, 2026 compared with the comparativesame period last year as a result of a decrease in rate on interest-bearing liabilities. Interest expense increased $290,000$190,000 due to volume as a result of an increase in interest bearing liabilities of $8,109,000.$29,578,000. The average rate paid on interest-bearing liabilities decreased from 2.80%2.75% to 2.46%.2.44%. The decrease was driven by the Federal Reserve cutting interest rate cuts in the second half of 2025, which caused interest expense to decrease $2,138,000.$3,328,000.

For the threesix month period ended MarchJune 31,30, 2026, we recorded a provision for credit losses of $500,000,$1,000,000, which represents a decrease of $125,000$375,000 from the $625,000$1,375,000 provision recorded in the corresponding threesix months months of last year. The decrease in the provision is due to the updated loss driver analysis completed in the first quarter of 2026 offset by increases in qualitative factors related international and national economic conditions related to the Iran conflict and the Iranimpact warit thatmay startedhave on agricultural loans due to higher diesel and fertilizer prices and an increase in the firstqualitative quarterfactor for changes in the volume and severity of 2026.past due loans for commercial relationships due to the increase in non-accrual loans. (see “Financial Condition – Allowance for Credit Losses and Credit Quality Risk”).

The following table shows the breakdown of non-interest income for the three and six months ended MarchJune 31,30, 2026 and 2025 (dollars in thousands):

Non-interest income for the threesix months ended MarchJune 31,30, 2026 totaled $3,690,000,$7,704,000, an increase of $263,000$612,000 when compared to the same period in 2025. For the three months ended June 30, 2026, non-interest income increased $349,000 to $4,014,000. During the first threesix months of 2026, net equity security gains amounted to $19,000$115,000 as a result of market gains associated with general banking stock gains compared with ana $11,000$21,000 lossgain in the comparable 2025 period associated with market conditions for that period. There were no sales of available for sale securities during the first threesix months of 2026 or 2025.

The decrease in gains on loans sold for the three and six month periods ended June 30, 2026 compared to 2025 is attributable to a decrease in volume and lower market prices on the loans sold in 2026 compared to 2025. The increase in earnings on bank owned life insurance for the three and six month periods is due to purchasing $22.0 million of additional insurance in January of 2026.2026 and death benefits received in the second quarter of 2026 upon the passing of a former employee. The decrease in brokerage and insurance commissions for the six month period was due to the resignation of a broker in the third quarter of 2025.

The following tables reflect the breakdown of non-interest expense for the three and six months ended MarchJune 31,30, 2026 and 2025 (dollars in thousands):

Non-interest expenses increased $223,000$893,000, or 2.7% for the threesix months ended MarchJune 31,30, 2026 compared to the same period in 2025. Salaries and employee benefits decreasedincreased $13,000$283,000 or 0.1%.1.4%. Full time equivalent equivalent employees (FTE) increased 6.78.3 or 1.8%2.2% when comparing 2026 to 2025. This increase in headcount in addition to merit increases resulted in payroll and payroll taxes increasing by $120,000.$494,000. Due to actuarial assumptions, post retirement benefits benefits decreased $50,000.$84,000. As a result of the decrease in brokerage and insurance commissions due to the resignation of a broker in the third quarter of 2025, commission expense decreased $96,000.$131,000.

The provision for income taxes was $2,326,000$4,480,000 for the threesix month period ended MarchJune 31,30, 2026 compared to $1,805,000$3,708,000 for the same period in 2025. The increase is primarily attributable to the increase in income before the provision for income taxes of $3,276,000$5,251,000 for the comparable periods due to an increase in net interest income after the provision for credit losses. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate. Our effective tax rate was 18.3%17.9% and 19.2%19.1% for the first threesix months of 2026 and 2025, respectively, compared to the federal statutory rate of 21%.

We are invested in seveneight limited partnerships that have established low-income housing projects in our market areas, with our most recent investments made in the second halfquarter of 2022.2026. We are currently recognizing credits on three projects. projects and expect to recognize credits on the most recent investment in 2027. The remaining four partnership credits are fully utilized as of December 31, 2024. We anticipate recognizing an aggregate of $6.6$7.4 million of tax credits over the next 11 years.

Total assets were $3.03$3.19 billion at MarchJune 31,30, 2026, aan decreaseincrease of $38.1$127.6 million from $3.06 billion at December 31, 2025, due primarily to aan decreaseincrease in outstandinginvestments studentand loans. Cash and cash equivalents decreased $1.2increased $5.1 million to $33.1 $39.4 million. Available for sale securities increased $3.5$46.6 million. TotalNet loans decreasedincreased $52.5$43.7 million, while loans held for sale decreasedincreased $3.5$1.0 million. Total deposits increased $64.2$17.6 million to $2.44$2.39 billion since year-end 2025, while borrowed funds decreasedincreased $110.7$84.6 million to $198.7$394.0 million.

Cash and cash equivalents totaled $33.1$39.4 million at MarchJune 31,30, 2026 compared to $34.3 million at December 31, 2025. The decreaseincrease is due to aan decreaseincrease 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.

The following table shows the composition of the investment portfolio (including debt and equity securities) as of MarchJune 31,30, 2026 and December 31, 2025 (dollars in thousands):

Our investment portfolio increased by $3.6$46.7 million, or 0.8%,10.5%, from December 31, 2025 to MarchJune 31,30, 2026. During 2026, we purchased $13.9$68.3 million of mortgage-backed securities in U.S government sponsored entities and and $12.3$20.5 million of state and political subdivision bonds. We experienced $8.3$15.2 million of principal repayments and $11.5$26.0 million of calls and maturities. As a result of increases in market interest rates, the unrealized loss on the available for sale investment portfolio increased $2.8$1.1 million. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the threesix month period ended June March 31,30, 2026 yielded 3.35%, 3.48%, compared to 2.85%2.89% in the comparable period in 2025, on a tax equivalent basis.

The investment strategy for 2026 has been to utilize cashflows from the investment portfolio to repurchase investmentsinvestments, as well as a leverage investment strategy to purchase primarily in mortgage backed and municipal securities. This strategy has focused on increasing the yield of the investment portfolio as investment yields are near the top of the trading range compared to recent historical averages. We continually monitor interest rate trading 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, environments, including a rising rate environment, while providing sufficient cashflows to meet liquidity needs.

Loans held for sale decreasedincreased $3.5$1.0 million to $5.9$10.4 million as of MarchJune 31,30, 2026 from December 31, 2025 due to the firstsecond quarter typically beinghaving more residential real estate sales than the slowestfourth quarter for residential home sales.quarter. For loans sold on the secondary market, the Company recognizes fee income for servicing certain sold loans, which is included in non-interest income.

The following table shows the composition of the loan portfolio as of MarchJune 31,30, 2026 and December 31, 2025 (dollars in thousands):

Loan activity remained steadyincreased in the firstsecond monthsquarter of 2026 with growth experienced across most markets even after a large pay-offspay-off in our Delaware market. TheThis activity offset the seasonal decrease in consumer loans was driven by the seasonality of that portfoliois with the expected pay-offsanticipated in the first or second quarter of a year.

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 MarchJune 31,30, 2026, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 294.7%297.2% of consolidated risk risk based capital. Construction, land and land development loans represented 27.2%29.6% of consolidated risk based capital as of MarchJune 31,30, 2026. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. We may be required to maintain higher levels of capital as a result of our commercial real estate 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 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 estate and to implement additional monitoring and testing of commercial real estate loans. As of MarchJune 31,30, 2026, management believes that it has implemented appropriate risk management practices, including risk assessments, board-approved underwriting policies and related procedures, which include monitoring loan portfolio performance and stressing of the commercial real estate portfolio under adverse economic conditions.

Given the significance of commercial real estate (“CRE”) loans to our total loan portfolio, the following table further disaggregates these loans by owner occupied status and by non-owner occupied status as of June March 31,30, 2026 and December 31, 2025 (dollars in thousands):

The following table provides a breakdown of our construction loan portfolio by collateral type as of MarchJune 31,30, 2026 and December 31, 2025 (dollars in thousands):

The Company obtains an independent appraisal of the real estate collateral securing a CRE loan prior to originating the loan. The appraised value is used to calculate the ratio of the outstanding loan balance to the value of the real estate collateral, or loan-to-value ratio (“LTV”). The original appraisal is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons, including but not limited to payment delinquency, additional loan requests using the same collateral, and loan modifications. The following table presents the ranges in the LTVs of our CRE loans at MarchJune 31,30, 2026 and December 31, 2025 (dollars in thousands):

The allowance for credit losses - loans is maintained at a level which, in management’s judgment, is adequate to absorb losses in the loan portfolio. The provision for credit losses - loans is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for credit losses - loans was $22,894,000$23,559,000 or 1.00%0.98% of total loans as of MarchJune 31,30, 2026 as compared to $22,806,000 or 0.97% of loans as of December 31, 2025. The $88,000$753,000 increase is a result of a $144,000$722,000 provision for credit losses – loans lessplus net charge-offsrecoveries of $56,000.$31,000. The following table shows the distribution of the allowance for credit losses - loans and the percentage of loans compared to total loans by loan category as of March 31June 30, 2026 and December 31, 2025 (dollars in thousands):

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

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

Management believes it uses the best information available to make such determinations and that the allowance for credit losses - loans is adequate as of MarchJune 31,30, 2026. However, future adjustments could be required 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, 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.

The following table is a summary of our non-performing assets as of MarchJune 31,30, 2026 and December 31, 2025.

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, 2025 to MarchJune 31,30, 2026 in non-performing loans (in thousands). Non-performing loans include accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management’s assessment of its ultimate ability to collect principal and interest.

Nonperforming loans increased $10.9$14.2 million during the first threesix months of 2026. DuringThe theincrease firstfrom threeDecember months31, of2025 2026,is fourprimarily due to six commercial real estate loan relationships with aand cumulativeone balanceconstruction asreal ofestate Marchloan 31,relationship, 2026that oftotal $11.7approximately million$12.2 weremillion, being placed on non-accrual status,status which accounts forduring the majorityfirst half of the2026 increasedue into non-performingbecoming loans.more than 90 days past due. All non-performing commercial, agricultural and construction loans are reviewed on an individual basis to determine the need for a specific reserve at quarter end. In addition, non-performing residential loans with a balance in excess of $150,000 are individually evaluated. The specific reserves for these non-performing loans as of MarchJune 31,30, 2026 and December 31, 2025 was $940,000$1,413,000 and $1,039,000, respectively. In addition, the Bank policy is to reserve 100% of all non-performing student loans. The reserve for these loans was $920,000$1,010,000 and $770,000 as of MarchJune 31,30, 2026 and December 31, 2025, respectively.

Management believes that the allowance for credit losses - loans Marchat 31,June 30, 2026 was adequate at that date, which was based on the following factors:

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 MarchJune 31,30, 2026, and December 31, 2025, the cash surrender value of the life insurance was $74.1$74.5 million and $51.5 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $570,000$1,357,000 and $346,000$701,000 for the the threesix month periods ended MarchJune 31,30, 2026 and 2025, respectively. During the six months of 2026 and 2025, the Company received proceeds of $393,000 and $272,000, respectively, which included death benefits of $137,000 during 2026 on a former employee of the Company. During the first quarter of 2026, the Bank purchased $22.0 million of additional bank owned life insurance policies. During the first three months of 2025, the Company received proceeds of $108,000 upon the passing of a former director of the First National Bank of Fredericksburg. There were no proceeds received in 2026. The Company evaluates annually the risks associated with the life insurance policies, including limits limits on the amount of coverage and an evaluation of the various carriers’ credit ratings.

The Company policies that were purchased directly from insurance companies and acquired as part of the HVBC acquisition are structured so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The net amount at risk is the total death benefit payable less the cash surrender value of the policy as of the date of death. The policies acquired as part of an acquisition in 2015 provide a fixed split-dollar benefit for the beneficiary’s estate, which is dependent on several factors including whether the covered individual was a former Director of First National Bank of Fredericksburg (“FNB”) or a former employee of FNB and their salary level. As of MarchJune 31,30, 2026 and December 31, 2025, included in other liabilities on the Consolidated Balance Sheet was a liability of $533,000$537,000 and $529,000, respectively, for the obligation under the split-dollar benefit agreements.

Premises and equipment decreased $283,000$338,000 to $20,715,000$20,660,000 as of MarchJune 31,30, 2026 from December 31, 2025 as a result of depreciation.

Other assets decreasedincreased $7.8$9.2 million to $45.3$62.3 million as of MarchJune 31,30, 2026 from December 31, 2025. The primary drivers of the decreaseincrease waswere a reductionparticipation receivable of $7.5 million related to a loan that closed on June 30, 2026 and an increase of $873,000 in FHLB stock held due to thean decreaseincrease in outstanding borrowings and a reduction in the right of use asset for leases.borrowings.

The following table shows the composition of deposits as of MarchJune 31,30, 2026 and December 31, 2025 (dollars in thousands):

Deposits increased $64.2$17.6 million since December 31, 2025. The increase in deposits was driven by an increase in brokeredcertificates of deposits sinceas yearcustomers end of $52.8 million that were utilizedlook to offsetmaximize seasonaltheir municipalinterest return, which continues the depositpattern outflows and pay-down outstanding borrowings. We continue to seeof customer funds being transferred to higher-yielding investment alternatives. Brokered deposits totaled $112.8$56.5 million and $60.01$60.0 million as of MarchJune 31,30, 2026 and December 31, 2025, respectively. At March 31,June 30, 2026, the Bank estimates that balances held by customers in excess of the FDIC insurance limit ($250,000 per insured account) totaled $1.17$1.11 billion, or 47.9% 46.5% 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 $593.7$547.1 million, or 24.3%22.8% of the Bank’s total deposits, as of March 31,June 30, 2026.

Borrowed funds were $198.7$394.0 million and $309.4 million as of MarchJune 31,30, 2026 and December 31, 2025, respectively. The decreaseincrease in borrowed funds was due to the increase in investments, loans and bank owned life insurance exceeding deposit levelsgrowth through MarchJune 31,30, 2025 due to the increase in brokered deposits and the decrease in outstanding consumer loans.2026.