CITIZENS FINANCIAL SERVICES INC (CZFS) FY 2024 MD&A

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.

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.

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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 with the MidCoast acquisition, the Cities of Wilmington and Dover, Delaware. We also have a limited branch office in Union county,
Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. With the 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 banking facilities, 38 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.

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.

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.

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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, 2024, and 2023, assets owned and invested by customers of the Bank through the Bank’s investment representatives totaled $395.9
million and $329.4 million, respectively.  Additionally, as summarized in the table below, the Trust Department had assets under management as of December 31, 2024 and 2023 of $180.7 million and $167.9 million, respectively. During the year ended
December 31, 2024, $2.2 million of new trust accounts were opened, $10.2 million of additional contributions to trust accounts were made, $11.0 million was distributed from trust accounts, and $4.0 million of accounts were closed. As a result of
market fluctuations, the fair value of the trust accounts increased approximately $15.4 million during the year ended December 31, 2024. 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, 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, $4.02 and $7.17 for 2024, 2023 and 2022, respectively, while diluted earnings per share were $5.85, $4.02 and $7.17 for 2024, 2023 and
2022, 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.

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.

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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.

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, 2024, 2023 and 2022, respectively (in thousands):

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

(1) The portion of the total change attributable to both volume and rate changes during the year has been allocated to volume and rate components based upon the absolute dollar amount of the change in each component prior to allocation.

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 $31.2 million, 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 in 2024 compared to 2023, which
resulted in an increase in interest income of $18,552,000 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. The tax-effected yield increased during 2024 due to a rise in market interest
rates.

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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 2.51% resulting in an increase in interest expense of $3,635,000.  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.

Average interest-bearing liabilities increased $260.6 million in 2024, with average interest-bearing deposits increasing $263.8 million and average other borrowings decreasing $3.2
million. As a result of the increase in average deposits, interest expense increased $7,799,000 as 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 and money market accounts of $33.6 million. Certificates of deposits increased $153.4 million due to the acquisition, an increase in brokered CD’s and conversion of non-maturity deposits to term products. The average balance of other
borrowed funds decreased $3.2 million 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 remain high in relation to  recent years. The year began with inflation remaining 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.

2023 vs. 2022

Tax equivalent net interest income for 2023 was $81,315,000 compared to $73,137,000 for 2022, an increase of $8,178,000 or 11.2%. Total interest income increased $43,813,000, as
loan interest income increased $41,912,000, and total investment income increased $1,901,000. Interest expense increased $35,635,000 from 2022.

Total tax equivalent interest income from investment securities increased $1,565,000 in 2023 from 2022. The average balance of investment securities increased $3.0 million, but the
average balance of tax-exempt securities decreased $7.8 million, which had an effect of decreasing interest income by $12,000 due to volume. During 2023, the Bank had limited investment activity, excluding the sales of investments obtained as part
of the HVBC acquisition. The average tax-effected yield on our investment portfolio increased from 1.90% in 2022 to 2.20% in 2023. The increase in the tax-effected yield was attributable to purchases made during 2022 and 2023, which were made in a
higher rate environment. As a result of the yield on investment securities increasing 30 bps to 2.20%, interest income on investment securities increased $1,577,000, with the increase related to taxable securities.  The investment strategy for 2023
was to utilize cashflows from the investment portfolio to repay overnight borrowings. The decrease in the investment portfolio was due to long-term interest rates increasing in the first nine months of 2023 compared to December 31, 2022 and
investment repayments and maturities.

In total, loan interest income increased $41,912,000 in 2023 from 2022.  The average balance of our loan portfolio increased by $410.7 million in 2023 compared to 2022, which
resulted in an increase in interest income of $22,985,000 due to volume, primarily due to the HVBC acquisition completed in June 2023. The average tax-effected yield on our loan portfolio was 5.81% for 2023 compared to 4.68% for 2022 resulting in
an increase in loan interest income of $18,927,000. The tax-effected yield increased during 2023 due to a rise in market interest rates.

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Total interest expense increased $35,635,000 in 2023 compared to 2022.  The majority of the increase was due to an increase in the average rate paid on interest bearing liabilities
of 165 basis points to 2.34%. This increase resulted in an increase in interest expense of $27,607,000. The increase in rates was driven by the Federal Reserve’s response to inflation during 2022 and 2023 by increasing interest rates. The average
rate on money markets increased from 0.58% to 2.39% resulting in an increase in interest expense of $6,579,000. The average rate paid on savings accounts increased 28 bps and resulted in an increase in interest expense of $900,000. The average rate
paid on NOW accounts increased from 0.47% to 2.01% resulting in an increase in interest expense of $10,118,000.  The average rate paid on certificates of deposits increased from 0.82% to 2.52% resulting in an increase in interest expense of
$5,544,000. The average rate paid on other borrowed funds increased from 2.61% to 4.64% resulting in an increase in interest expense of $4,466,000.

Average interest-bearing liabilities increased $367.4 million in 2023, with average interest-bearing deposits increasing $190.5 million and average other borrowings increasing
$176.9 million. As a result of the increase in average deposits, interest expense increased $1,242,000 as result of the change in volume. Increases in average deposits, which were primarily driven by the HVBC acquisition, included NOW accounts of
$145.6 million, money market accounts of $21.1 million and certificates of deposits of $29.4 million. The average balance of other borrowed funds increased $176.9 million due to the HVBC acquisition and funding growth, which corresponds to an
increase in interest expense of $6,786,000.

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Our tax equivalent net interest margin for 2023 was 3.21% compared to 3.41% for 2022, with the change attributable to the yield of interest-earning assets increasing less than the cost from
interest-bearing liabilities during 2023. Interest rates continued to increase during the first half of 2023 as the Federal Reserve continued to respond to inflation and to aggressively tighten monetary policy.

PROVISION FOR CREDIT LOSSES

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”).

For the year ended December 31, 2023, we recorded a provision for credit losses of $5,528,000. The provision for 2023 was $3,845,000, or 228.5%, higher than the provision in 2022.
The provision for 2023 includes $4,591,000 associated with the HVBC acquisition and $36,000 as a provision for off-balance sheet commitments. Excluding these items, the provision for 2023 is $782,000 less than the comparable period in 2022 and is
due to limited organic loan activity in 2023. (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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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 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.

2023 vs. 2022

Non-interest income increased $1,867,000 in 2023 from 2022, or 19.2%.  We experienced a $51,000 net loss on available for sale securities in 2023 compared to net losses totaling $14,000 in 2022.
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 2022, we sold $7.5 million of US Agency securities for a pre-tax loss of $14,000. During 2023, net equity security losses
amounted to $144,000 as a result of market conditions experienced in 2023 compared to losses of $247,000 in 2022.

Gains on loans sold increased $1,194,000 compared to 2022. The increase in gains on loans sold is attributable to the HVBC acquisition and activity acquired as
part of the acquisition. The increase in service charges of $293,000 for 2023 is attributable to an increase in customer spending in 2023 compared to 2022 and the HVBC acquisition. The increase in earnings on bank owned life insurance is due to
the HVBC acquisition and the passing of a former employee of the Company during 2023.

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):

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2024 vs. 2023

Non-interest expenses for 2024 totaled $65,586,000, which represents an increase of 764,000, compared to 2023 expenses of $64,822,000. 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 reimbursement 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.

2023 vs. 2022

Non-interest expenses for 2023 totaled $64,822,000, which represents an increase of $20,128,000, compared to 2022 expenses of $44,694,000. Salaries and employee
benefits increased $7,153,000 or 25.7%. The increase was due to merit increases effective at the beginning of 2023, additional FTEs of 47.8, which is an increase of 15.4%, and an increase in health care expenses due to higher claims on the
Company’s partially self-funded plan and the additional headcount due to the HVBC acquisition.

The increase in merger and acquisition expenses was due to fees associated with the acquisition of HVBC that closed in June 2023 and includes severance costs, change in control
payments, contract termination payments and various professional and consulting fees. The increase in ORE expenses was due to the sales of OREO properties in 2022 for a gain of $481,000. The increase in occupancy, furniture and fixtures,
amortization of intangibles and other expenses was due to the HVBC acquisition. The increase in FDIC insurance is due to the acquisition and organic growth.

Provision for Income Taxes

The provision for income taxes was $5,865,000, $3,704,000 and $6,435,000 for 2024, 2023 and 2022, respectively. The effective tax rates for 2024, 2023 and 2022 were 17.4%, 17.2% and 18.1%,
respectively.

The increase in income tax expense of $2,161,000 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.

The decrease in income tax expense of $2,731,000 in 2023 compared to 2022 was due to the decrease of $13,980,000 in income before the provision for income taxes, which accounts for a decrease in
tax expense of $2,936,000 at a 21% tax rate.

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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. During 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. 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 twelve 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 $42.2 million at December 31, 2024 compared to $52.8 million at December 31, 2023. The decrease is due to a decrease in the
cash held at the Federal Reserve. Management actively measures and evaluates the Company’s liquidity 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.

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 2024 by $8.1 million. This increase was fueled by $70.4 million of purchases made during 2024, which offset the maturities and
calls that took place in 2024. During 2024, $60.9 million and $9.5 million of mortgage backed securities and US Treasuries were purchased, respectively. The purchases in 2024 were offset by $13.3 million of principal repayments and $49.5 million of
calls and maturities. The fair value of our investment portfolio increased approximately $2.1 million in 2024 due to decreases in market interest rates during 2024 and a shortening of the portfolio duration. Excluding our short-term investments
consisting of monies held primarily at the Federal Reserve, the effective yield on our investment portfolio for 2024 was 2.44% compared to 2.20% for 2023 on a tax equivalent basis.

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The Federal Reserve held rates unchanged until September 2024 when they pivoted and began lowering the federal funds rate to 4.50% by the end of the year 2024.  The year began with inflation well
down from levels in 2023 and the trend lower continued but at a much slower pace and stalled by May 2024.  The Federal Reserve moved their outlook to a balance of risks between their two mandates of inflation and full employment.  Nonfarm payrolls
began to decline and dipped below 100,000 for the first time since the end of the 2020 recession. This was the trigger for the Federal Reserve to start lowering interest rates.  Employment levels rebounded but at reduced levels from the prior year
and economic growth continued but also at lower levels than the previous year.  The yield curve un-inverted in September 2024 for the first time since June 2022 ending the longest uninterrupted inversion in history.  The year ended with a 2-year to
10-year Treasury positive spread of 33 basis points.  The election cycle in 2024 resulted in a Republican sweep of the Presidency and both houses of Congress, introducing a range of unexpected policy tailwinds.  The outlook continues to be for a
soft-landing with positive growth without an increase in inflation and solid employment.  The result is likely fewer rate cuts over an extended period.  For 2024 the bank’s strategy was to increase capital and meet liquidity needs in a volatile
market.  As liquidity and capital level permit, the bank’s investment strategy will continue to mitigate its interest rate risk exposure for various rate environments and improve earnings, while providing sufficient cash flows to meet liquidity
needs.

At December 31, 2024, 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, 2024, 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, 2024.

At December 31, 2024, approximately 66.7% 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 increased $228,000 to $9,607,000 as of December 31, 2024 from December 31, 2023. The higher rate environment in 2024 continue to place pressure on refinancing activity as well
as new home purchases.

Loans

The Bank’s lending efforts have historically focused on north central Pennsylvania and southern New York. With the acquisition of FNB and the opening of offices in Lancaster County,
this focus has grown to include the Lebanon, Schuylkill, Berks and Lancaster County markets of south central, Pennsylvania. 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 and Mill Hall to support commercial opportunities in central Pennsylvania, especially Centre and Clinton Counties. During 2023, the Bank opened a full-service branch in Williamsport, Pennsylvania to serve
Lycoming County and surrounding areas. 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.

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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, 2024, approximately 85.0% 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 fifteenyear 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 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, 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, the aggregate balance of our participation loans, in which a portion was sold to other lenders totaled
$353.6 million, of which $165.7 million 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.

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

Total loans grew $64.4 million in 2024 and total $2.31 billion at the end of 2024. The primary driver of growth during 2024 was increases in consumer lending and specifically student loans.

Residential real estate loans decreased $8.6 million primarily due to the high interest rate environment that lessened demand. During 2024, $155.4 million of
residential real estate loans were originated for sale on the secondary market, which compares to $87.3 million 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.

The following table presents the maturity distribution of our loan portfolio as of December 31, 2024 (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.

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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.

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

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, 2024 (dollars in thousands):

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

The Company obtains an appraisal of the real estate collateral securing a CRE loan prior to originating the loan. The appraised value is used to calculate the ratio of the outstanding loan balance
to the value of the real estate collateral, or loan-to-value ratio ("LTV"). The original appraisal is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons, including
but not limited to payment delinquency, additional loan requests using the same collateral, and loan modifications. The following table presents the ranges in the LTVs of our CRE loans at December 31, 2024 (dollars in thousands):

Allowance for Credit Losses – Loans and Credit Quality Risk

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 or 0.94% of total loans as of December
31, 2024 as compared to $21,153,000 or 0.94% of loans as of December 31, 2023. The $546,000 increase is a result of a $3,176,000 provision for credit losses – loans, less net charge-offs of $2,630,000. Net charge-offs for 2024 are driven by loans
acquired as part of the HVBC acquisition due to collateral issues.

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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. As a result of the adoption of 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 table shows the distribution of the allowance for credit losses - loans and the percentage of loans compared to total loans by loan category (dollars in thousands) as of December 31:

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

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Prior to January 1, 2023, the Company calculated the allowance for loan losses using the probable incurred methodology. The activity in our allowance for loan losses was as follows during the year
ended December 31, 2022:

The following table provides information related to credit loss experience and net (charge-offs) recoveries for 2024, 2023 and 2022.