CITIZENS FINANCIAL SERVICES INC (CZFS)

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., First Citizens Community Bank, First Citizens Insurance Agency, Inc. 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:

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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 2025 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.

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, 2025.  The results of operations for the
three months ended March 31, 2026 are not necessarily indicative of the results you may expect for the full year.

The Company engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Lycoming, Bradford and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill,
Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New York, and the Cities of Wilmington and Dover, Delaware. We also have limited branch offices in Union county, Pennsylvania and Georgetown Delaware,
which primarily serve agricultural and commercial customers in those markets. With the HVBC acquisition in 2023, we expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties
as well as Burlington County, New Jersey through the acquisition of five full service branches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 47
banking facilities, 37 of which operate as bank branches.  In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome,
the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, Williamsport, Plumsteadville, Philadelphia, two branches
near the city of Lebanon and two branches in Huntington Valley. The Company has limited branch offices located in Winfield, Pennsylvania and Georgetown, Delaware. In New York, our office is in Wellsville. In Delaware, we have three branches in
Wilmington and one in Dover. The mortgage centers acquired as part of the acquisition are located in Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. During the first
quarter of 2026, the Williamsport branch moved to a new location and we have received regulatory approval to move the business banking facility located in Philadelphia to a new location.

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 risk,
credit risk, liquidity risk and regulatory and compliance risk.

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.

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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.

Operational risk arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected
losses. We expend significant resources on our operational systems and any breach or malfunction in operational systems could adversely impact our business and customers and our financial condition and earnings.

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 or looking to expand into new markets. With larger population centers in our central, south central and south east Pennsylvania markets, as well as in our Delaware market, we experience more competition to gather deposits and
to make loans. Mortgage banking firms, financial companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms and even government agencies provide additional competition for loans, deposits and other
financial services. Fintech and blockchain entities offering crypto services are also increasing competition for the Company’s financial services. The Bank is generally competitive with all competing financial in

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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY STATEMENT

We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of operations of the Company, the Bank, First Citizens Insurance, Realty or the Company on a consolidated basis. When we use words such as “believes,” “expects,” “anticipates,” or similar
expressions, we are making forward-looking statements. Forward-looking statements may prove inaccurate. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements:

Additional factors are discussed in this Annual Report on Form 10-K under “Item 1A. Risk Factors.” These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect
circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

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INTRODUCTION

The following is management’s discussion and analysis of the significant changes in financial condition, the results of operations, capital resources and liquidity presented in the accompanying
consolidated financial statements for the Company. The Company’s 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 audited consolidated financial statements and related notes. Except as noted, tabular information is presented in thousands of dollars.

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. In Delaware, the primary areas are the Cities of Wilmington and Dover 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 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 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, 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 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.

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.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in 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 policies 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 purchasing of securities. 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, which could include identify theft, or theft of customer information through third parties. 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 risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company and its subsidiary. We cannot predict what
legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.

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Readers should carefully review the risk factors described in other documents the Company files with the SEC, including the annual reports on Form 10-K, the quarterly reports on Form 10-Q and any
current reports on Form 8-K filed by us.

TRUST AND INVESTMENT SERVICES; OIL AND GAS SERVICES

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
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, 2025, and 2024, assets owned and invested by customers of the Bank through the Bank’s investment representatives totaled $317,895,000 and $395,869,000 million, respectively. Additionally, as summarized in the table below,
the Trust Department had assets under management as of December 31, 2025 and 2024 of $194,841,000 and $180,710,000, respectively. During the year ended December 31, 2025, $3,918,000 of new trust accounts were opened, $8,312,000 of additional
contributions to trust accounts were made, $15,622,000 was distributed from trust accounts, and $2,081,000 of accounts were closed. As a result of market fluctuations, the fair value of the trust accounts increased approximately $19,604,000 during
the year ended December 31, 2025. The following table reflects trust accounts by investment type and structure:

Our financial consultants offer full service brokerage and financial planning services throughout the Bank’s market areas. Appointments can be made at any Bank branch. Products such as mutual funds,
annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc.

RESULTS OF OPERATIONS

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. Basic earnings per share were $7.62, $5.80 and $3.98 for 2025, 2024 and 2023, respectively, while
diluted earnings per share were $7.62, $5.79 and $3.98 for 2025, 2024 and 2023, respectively.

Net income is influenced by five key components: net interest income, provision for credit losses, non-interest income, non-interest expenses, and the provision for income taxes.

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Net Interest Income

The most significant source of revenue is net interest income; the amount by which interest earned on interest-earning assets exceeds interest paid on interest-bearing liabilities. Factors that
influence net interest income are changes in volume of interest-earning assets and interest-bearing liabilities as well as changes in the associated interest rates.

The following table sets forth the Company’s average balances of, and the interest earned or incurred on, each principal category of assets, liabilities and stockholders’ equity, the related rates,
net interest income and rate “spread” created.

Analysis of Average Balances and Interest Rates

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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 Federal statutory rate for the corresponding year. Accordingly, tax equivalent adjustments for investments and loans have been made
accordingly to the previous table for the years ended December 31, 2025, 2024 and 2023, respectively (in thousands):

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

Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis

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2025 vs. 2024

Tax equivalent net interest income for 2025 was $99,109,000 compared to $87,446,000 for 2024, an increase of $11,663,000 or 13.3%. Total interest income increased $4,968,000, as loan interest income
increased $1,718,000, and total investment income increased $3,250,000. Interest expense decreased $6,695,000 from 2024.

Total tax equivalent interest income from investment securities increased $3,599,000 in 2025 from 2024. The average balance of investment securities increased $22,647,000, which had an effect of
increasing interest income by $574,000 due to volume. During 2025, the Bank made purchases to replace maturing securities, as well as making purchases to increase the size of the investment portfolio for pledging purposes, as well as enhancing yield.
The average tax-effected yield on our investment portfolio increased from 2.44% in 2024 to 3.06% in 2025. The increase in the tax-effected yield is attributable to purchases made during 2024 and 2025, which were made in a higher market interest rate
environment. As a result of the yield on investment securities increasing 62 basis points (bps) to 3.06%, interest income on investment securities increased $3,025,000, with the increase related to taxable securities. The investment strategy for 2025
used cashflow from the investment portfolio to increase convexity and improve yield as opportunities became available. As the rate cycle continues to progress, the bank will seek investments to improve portfolio yield while monitoring interest rate
risk exposure under various rate environments and providing cash flow to meet liquidity needs as they arise. During 2025, the investment purchases made were primarily in mortgage-backed securities that provided the widest spread to treasuries and
municipal securities that provided convexity to the Bank’s investment portfolio. 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.

Loan interest income increased $1,718,000 in 2025 from 2024. The average balance of our loan portfolio increased by $19,425,000 in 2025 compared to 2024, which resulted in an increase in interest
income of $829,000 due to volume. The increase in average loans for 2025 was due to an increase in the average balance of outstanding student loans and an increase in agricultural loans. The average tax-effected yield on our loan portfolio was 6.26%
for 2025 compared to 6.24% for 2024 resulting in an increase in loan interest income of $889,000.

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Total interest expense decreased $6,695,000 in 2025 compared to 2024.  The majority of the decrease was due to a decrease in the average rate paid on interest bearing liabilities of 31 basis points to
2.69%, resulting in interest expense of $6,764,000. The decrease in rates was driven by the Federal Reserve decreasing the Fed Fund target rate in 2024 and 2025. The average rate on money markets decreased from 3.14% to 2.85%, resulting in a
decrease in interest expense of $840,000. The average rate paid on savings accounts decreased 5 bps and resulted in a decrease in interest expense of $46,000. The average rate paid on NOW accounts decreased from 2.53% to 2.14% resulting in a
decrease in interest expense of $2,820,000.  The average rate paid on certificates of deposits decreased from 3.97% to 3.67% resulting in a decrease in interest expense of $1,400,000. The average rate paid on other borrowed funds decreased from
4.80% to 4.33% resulting in a decrease in interest expense of $1,545,000.

Average interest-bearing liabilities increased $10,418,000 million in 2025, with average interest-bearing deposits increasing $7,801,000 million and average other borrowings increasing $2,617,000. While
there was an overall increase in average deposits, average NOW accounts and certificates of deposits decreased in total $50,081,000, decreasing interest expense $1,388,000, which offset the increase in interest expense of $1,277,000 from the
average balance of money market accounts increasing $55,603,000. The increase in average deposits was due to organic growth across all regions of the Company and helped offset a decrease in average brokered deposits of $51,216,000. We continue to
see customers exchange non-interest bearing deposits for interest bearing products that are both non-maturity and term. The average balance of other borrowed funds increased $2,617,000 which corresponds to an increase in interest expense of
$126,000.

Our tax equivalent net interest margin for 2025 was 3.50% compared to 3.13% for 2024, with the change attributable to the yield of interest-earning assets increasing and the cost from interest-bearing liabilities
decreasing during 2025. The yield on interest-earning assets increased primarily due to investment securities purchased during 2025 replacing investment cashflows from purchases made prior to 2023 in a much lower rate environment. Due to the
Federal Reserve decreasing the Fed Fund target rate in late 2024 and in 2025. We experienced a decrease in the cost of interest-bearing deposits and borrowings. Inflation levels remain above the Fed’s target but the committee believes sufficient
progress has been made to bring overnight rates down to what they consider the upper band of neutral in response to some weakening in employment.  The yield curve has a positive slope but flatter relative to long term averages.

2024 vs. 2023

Tax equivalent net interest income for 2024 was $87,446,000 compared to $81,315,000 for 2023, an increase of $6,131,000 or 7.5%. Total interest income increased $27,135,000, as loan interest income
increased $26,594,000, and total investment income increased $541,000. Interest expense increased $21,004,000 from 2023.

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Total tax equivalent interest income from investment securities increased $426,000 in 2024 from 2023. The average balance of investment securities decreased $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.

In total, loan interest income increased $26,594,000 in 2024 from 2023. The average balance of our loan portfolio increased by $290,770,000 in 2024 compared to 2023, which resulted in an increase in
interest income of $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 $8,056,000. The tax-effected yield increased during 2024 due to a rise in market interest rates.

Total interest expense increased $21,004,000 in 2024 compared to 2023. The majority of the increase was due to an increase in the average rate paid on interest bearing liabilities of 66 basis points
to 3.00%. This increase resulted in an increase in interest expense of $13,356,000. The increase in rates was driven by the Federal Reserve’s response to inflation during 2022 and 2023 by increasing interest rates, which were not offset by the rate
cuts made in the second half of 2024. The average rate on money markets increased from 2.39% to 3.14% resulting in an increase in interest expense of $2,915,000. The average rate paid on savings accounts increased 11 bps and resulted in an increase
in interest expense of $308,000. The average rate paid on NOW accounts increased from 2.01% to 2.53% resulting in an increase in interest expense of $3,747,000. The average rate paid on certificates of deposits increased from 2.52% to 3.97% resulting
in an increase in interest expense of $5,970,000. The average rate paid on other borrowed funds increased from 4.64% to 4.80% resulting in an increase in interest expense of $528,000.

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Average interest-bearing liabilities increased $260,614,000 in 2024, with average interest-bearing deposits increasing $263,782,000 and average other borrowings decreasing $3,168,000. As a result of the increase in
average deposits, interest expense increased $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 $90,184,000 and money market accounts of
$33,557,000. Certificates of deposits increased $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 $3,168,000 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
decreasing rates, but rates still remained high in relation to previous years. During 2024, inflation remained 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.

PROVISION FOR CREDIT LOSSES

For the year ended December 31, 2025, we recorded a provision for credit losses of $2,375,000, which represents a decrease of $212,000 from the $2,587,000 provision recorded in 2024. The provision
for 2025 was driven by the current economic forecasts and specific reserves for non-accrual loans at December 31, 2025. The provision for 2024 was driven by other commercial loans that were originated by HVBC that subsequent to the acquisition
deteriorated and were charged-off during 2024. The provision in 2024 was also impacted by 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 also “Financial Condition – Allowance for Credit Losses - Loans and Credit Quality Risk”).

For the year ended December 31, 2024, we recorded a provision for credit losses of $2,587,000, which represents a decrease of $2,941,000 from the $5,528,000 provision recorded in 2023. 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 $1,650,000 more
than 2023 and is due to other commercial loans that were originated by HVBC that subsequent to the acquisition have deteriorated and were charged-off during 2024. 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 also “Financial Condition – Allowance for Credit Losses - Loans and Credit Quality Risk”).

NON-INTEREST INCOME

The following table reflects non-interest income by major category for the years ended December 31 (dollars in thousands):

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2025 vs. 2024

Non-interest income decreased $1,057,000 in 2025 from 2024, or (6.9%). There were no sales of available for sale securities during 2025 or 2024. During 2025, net equity security gains
amounted to $67,000 as a result of market conditions experienced in 2025 compared to gains of $145,000 in 2024.

Gains on loans sold decreased $26,000 compared to 2024. The decrease in gains on loans sold is attributable to a slight decrease in the amount of loans of $1,417,000, or (1.0%). The decrease in
earnings on bank owned life insurance is due to death proceeds from the passing of former employees in 2024. 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 increase in other income is due to derivative income earned by offering customers a product similar to a back to back swap.

2024 vs. 2023

Non-interest income increased $3,796,000 in 2024 from 2023, or 32.7%. There were no sales of available for securities during 2024. During 2023, we experienced a $51,000 net loss on available for sale
securities. During 2023, we sold $10.0 million of municipal securities for a pre-tax loss of $51,000. Additionally, $76.5 million of securities obtained as part of the HVBC acquisition were sold for no gain or loss during the second quarter of 2023.
During 2024, net equity security gains amounted to $145,000 as a result of market conditions experienced in 2024 compared to losses of $144,000 in 2023.

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.

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Non-interest Expenses

The following tables reflect the breakdown of non-interest expense by major category for the years ended December 31 (dollars in thousands):

2025 vs. 2024

Non-interest expenses for 2025 totaled $64,732,000, which represents a decrease of $654,000 compared to 2024 expenses of $65,386,000. Salary and benefit costs increased $55,000, or 0.1%,
due to due to additional healthcare expenses and post-employment benefits. There were 12 fewer full-time equivalent employees FTEs in 2025 compared to 2024.

The decrease in professional fees and software costs is due to the sale of the Braavo division in 2024. The decrease in FDIC insurance expense is due to an increase in the Bank’s leverage ratio
experienced during 2025. Pennsylvania shares tax decreased due to an increase in tax credits obtained through charitable contributions that are included in other expenses. Occupancy expenses increased due to an increase in depreciation associated
with the Company’s decision to relocate its branch in the City of Williamsport that is expected to occur in the first half of 2026 that shortened the useful life of the current location. The increase in furniture and fixture expense is due to
depreciation associated with purchases made in 2025 and 2024.

2024 vs. 2023

Non-interest expenses for 2024 totaled $65,386,000, which represents an increase of 624,000, compared to 2023 expenses of $64,762,000. Salary and benefit costs increased $4,357,000, or 12.5%, due to an additional 34.3 full-time equivalent
employees (FTE) as a result of the HVBC acquisition, merit increases for 2024, as well as an increase in health insurance costs due to additional headcount and claims.

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 reimbursements 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.

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Provision for Income Taxes

The provision for income taxes was $8,666,000, $6,065,000 and $3,764,000 for 2025, 2024 and 2023, respectively. The effective tax rates for 2025, 2024 and 2023 were 19.2%, 17.9% and 17.5%, respectively.

The increase in income tax expense of $2,601,000 in 2025 compared to 2024 was due to the increase of $11,405,000 in income before the provision for income taxes, which accounts for an increase in tax expense of $2,395,000 at a 21% tax rate.

The increase in income tax expense of $2,301,000 in 2024 compared to 2023 was due to the increase of $12,168,000 in income before the provision for income taxes, which accounts for an increase in tax expense of $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. During 2025 and 2024 we recognized credits on three of the seven projects, while
in 2023 we recognized credits related to two 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 eleven years.

FINANCIAL CONDITION

The following table presents ending balances (dollars in millions), the dollar amount of change and the percentage change during the past year:

Cash and Cash Equivalents

Cash and cash equivalents totaled $34,291,000 at December 31, 2025 compared to $42,202,000 at December 31, 2024. The decrease is due to a decrease in the cash held at the Federal Reserve. Management
actively measures and evaluates the Company’s liquidity 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.

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Investments

The following table shows the year-end composition of the investment portfolio, at fair value, for the two years ended December 31 (dollars in thousands):

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

In related to activity by the Federal Reserve, there were similarities between 2024 and 2025 in that there was elevated volatility and, after a long pause, the Fed cut rates the last few
months of each year.   A new Presidential administration introduced tariffs as a negotiation strategy which caused big market swings in the first half of the year. As the year progressed the Fed became comfortable with the effect of tariffs and the
two mandates of full employment and stable prices were sufficiently in balance to permit them to lower rates to the top end of what the FOMC considered a neutral rate. This also provided a measure of cushion in response to a weakening employment
market. At the end of the year, officials became increasingly divided with each move, leading to another call for a pause after the December rate decision. The record-long government shutdown distorted and delayed many key economic reports
officials use to assess the economy’s trajectory. After 175 bps of easing over the cycle, policy was back within a range of neutral estimates. Importantly, economic growth remained resilient, inflation remained above target, and a run of data
fostered a quippy catch phrase of low-hiring, low-firing labor conditions. These rate cuts allowed the yield curve to steepen with the 2-year to 10-year US Treasury spread increasing from 30bps at the start of the year to 69bps at the end of the
year.   Even so, the very short end of the yield curve remained inverted.   The Bank’s investment strategy used cashflow from the investment portfolio to increase convexity and improve yield as opportunities became available.  As the rate cycle
continues to progress, the Bank will seek investments to improve portfolio yield while monitoring interest rate risk exposure under various rate environments and providing cash flow to meet liquidity needs as they arise.

At December 31, 2025, the Company did not own any securities, other than government-sponsored and government-guaranteed mortgage-backed securities, that had an aggregate book value in excess of 10%
of its consolidated stockholders’ equity at that date.

The expected principal repayments at amortized cost and average weighted yields for the investment portfolio (excluding equity securities) as of December 31, 2025, are shown below (dollars in
thousands). Expected principal repayments, which include prepayment speed assumptions for mortgage-backed securities, are significantly different than the contractual maturities detailed in Note 4 of the consolidated financial statements. Yields on
tax-exempt securities are presented on a fully taxable equivalent basis, assuming a 21% tax rate, which was the rate in effect at December 31, 2025.

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At December 31, 2025, approximately 68.3% of the amortized cost of debt securities is expected to mature, call or pre-pay within five years or less. The Company expects that earnings from operations,
the levels of cash held at the Federal Reserve and other correspondent banks, the high liquidity level of the available-for-sale securities, growth of deposits and the availability of borrowings from the Federal Home Loan Bank and other third-party
banks will be sufficient to meet future liquidity needs.

Loans Held for Sale

Loans held for sale decreased $214,000 to $9,393,000 as of December 31, 2025 from December 31, 2024. The rate environment for 2025 continued to place pressure on refinancing activity as well as new
home purchases.

Loans

The Bank’s lending efforts have historically focused on the north central Pennsylvania counties of Tioga, Bradford and Potter, south central Pennsylvania counties of Lebanon, Schuylkill, Berks and
Lancaster and Allegheny, Steuben and Tioga counties of southern New 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, Mill Hall and
Williamsport to support commercial opportunities in central Pennsylvania, especially Centre, Clinton and Lycoming Counties. The Williamsport branch was opened in 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.

We originate loans primarily to our existing customer base, with new customers generated through the strong relationships that our lending teams have with their customers, 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. As of December 31, 2025, approximately 85.1% of our loan portfolio consisted of real estate loans. All lending is governed by a lending policy that is developed and
administered by management and approved by the Board of Directors.

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 fifteen 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.

Agriculture is an important industry throughout our market areas. Therefore, the Bank has not only developed an agriculture lending team with significant experience that has a thorough understanding
of this industry, but also continually looks for additional employees with a thorough understanding of agriculture. We have an agricultural loan policy to assist in underwriting agricultural loans. Agricultural loans are made to a diversified
customer base that include dairy, swine and poultry farmers and their support businesses. Agricultural loans focus on character, cash flow and collateral, while also considering the particular risks of the industry. 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 of less than 80%. We evaluate the
financial strength of the integrators we have exposure to with our poultry and swine agricultural customers. The Bank is a preferred lender under the USDA’s Farm Service Agency (FSA) and participates in the FSA guaranteed loan program.

The Bank believes that a secondary education can provide individuals with upward mobility. As such, the Bank has partnered with industry leaders to provide individuals with private student loans
that can undergraduate, graduate and parent loans that can cover up to the cost of attendance of college or university. In addition, prior student loans can also be refinanced. Our partners assist in ensuring that the application, approval and
servicing processes are best in class.  Loans are offered with either fixed or variable rates and terms typically range from five to fifteen years, but depending on the program can be up to twenty years. Payments options include deferral until
after graduation, interest only while enrolled in school, a flat payment and full principal and interest.

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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, 2025, the aggregate balance of our participation loans, in which a portion was sold to other lenders totaled $334,913,000, of which
$149,344,000 was sold.

Activity associated with exploration for natural gas continued in 2024 in the Company’s north central Pennsylvania market. Certain entities drilled new wells and created new pad sites and pipelines,
while other companies only maintained their existing wells. While the Bank has loaned to companies that service the exploration activities, the Bank has not originated any loans to companies performing the actual drilling and exploration activities.
Loans made by the Company were to service industry customers which included trucking companies, stone quarries and other support businesses. We also originated loans to businesses and individuals for restaurants, hotels and apartment rentals that
were developed and expanded to meet the housing and living needs of the gas workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities were originated in a prudent and cautious manner
and were subject to specific policies and procedures for lending to these entities, which included lower loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.

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

Total loans grew $37,380,0000 in 2025 and total $2,350,622,000 at the end of 2025. The primary driver of growth during 2025 was increases in real estate lending and other commercial loans.

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Residential real estate loans decreased $10,426,000 primarily due to the interest rate environment that lessened demand. During 2025, $153,519,000 of residential real estate loans were originated for
sale on the secondary market, which compares to $155,379,000 for 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 maturity distribution of our loan portfolio as of December 31, 2025 (in thousands). The table does not include any estimate of prepayments which significantly shorten
the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

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, 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, 2025, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 287.0% of consolidated risk based capital.
Construction, land and land development loans represented 30.5% of consolidated risk based capital as of December 31, 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. Due to the concentration in commercial real estate loans, the Company has implemented enhanced monitoring and risk
assessment procedures with respect to this portfolio. As of December 31, 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.

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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
December 31, 2025 (dollars in thousands):