CZFS 10-Q Quarterly Report Sept. 30, 2024 | Alphaminr
CITIZENS FINANCIAL SERVICES INC
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CZFS 10-Q Quarter ended Sept. 30, 2024

Balance Sheet
Cash Flow
Income Statement
CITIZENS FINANCIAL SERVICES INC
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024
Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from_____________________ to ___________________

Commission file number 0-13222

CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

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

15 South Main Street
Mansfield , Pennsylvania 16933
(Address of principal executive offices)(Zip Code)

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

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

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

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

Name of Each Exchange
on Which Registered

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

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

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

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

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

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

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

Citizens Financial Services, Inc.
Form 10-Q

INDEX

PAGE
Part I
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited):
1
2
3
4
5
6-33
Item 2.
34-60
Item 3.
60
Item 4.
60
Part II
OTHER INFORMATION
Item 1.
61
Item 1A.
61
Item 2.
61
Item 3.
62
Item 4.
62
Item 5.
62
Item 6.
62
63

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

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

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

1
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

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

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

2
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)

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

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

3
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)

Common Stock
Additional
Paid-in
Retained
Accumulated
Other
Comprehensive
Treasury
(in thousands, except share data)
Shares
Amount
Capital
Earnings
(Loss)
Stock
Total
Balance, June 30, 2024
5,207,343
$
5,207
$
144,985
$
178,588
$
( 25,932
)
$
( 16,378
)
$
286,470
Comprehensive income:
Net income
7,536
7,536
Net other comprehensive income
7,016
7,016
Purchase of treasury stock ( 1,131 shares)
( 59 ) ( 59 )
Restricted stock, executive and Board of Director awards ( 1,384 shares)
( 98 ) 81 ( 17 )
Restricted stock vesting
40 40
Cash dividends, $ 0.490 per share
( 2,332
)
( 2,332
)
Balance, September 30, 2024
5,207,343
$
5,207
$
144,927
$
183,792
$
( 18,916
)
$
( 16,356
)
$
298,654
Balance, December 31, 2023
5,160,754
$
5,161
$
143,233
$
172,975
$
( 24,911
)
$
( 16,792
)
$
279,666
Comprehensive income:
Net income
19,835
19,835
Net other comprehensive income
5,995
5,995
Stock dividend 46,589 46 2,001 ( 2,047 )
Purchase of treasury stock ( 2,907 shares) ( 140 ) ( 140 )
Restricted stock, executive and Board of Director awards ( 9,052 shares)
( 515
)
576
61
Restricted stock vesting
208
208
Cash dividends, $ 1.460 per share
( 6,971
)
( 6,971
)
Balance, September 30, 2024
5,207,343
$
5,207
$
144,927
$
183,792
$
( 18,916
)
$
( 16,356
)
$
298,654
Balance, June 30, 2023
5,160,754
$
5,161
$
143,351
$
162,499
$
( 30,980
)
$
( 16,803
)
$
263,228
Comprehensive income:
Net income
7,548
7,548
Net other comprehensive loss
( 5,663
)
( 5,663
)
Purchase of treasury stock ( 2,772 shares)
( 264 ) ( 264 )
Restricted stock, executive and Board of Director awards ( 2,167 shares)
( 86
)
168
82
Restricted stock vesting
34
34
Sale of treasury stock to employees ( 410 shares)

28 28
Forfeited restricted stock ( 120 shares)
3 ( 3 )
Cash dividends, $ 0.485 per share
( 2,307
)
( 2,307
)
Balance, September 30, 2023
5,160,754
$
5,161
$
143,302
$
167,740
$
( 36,643
)
$
( 16,874
)
$
262,686
Balance, December 31, 2022
4,427,687
$
4,428
$
80,911
$
164,922
$
( 33,141
)
$
( 16,973
)
$
200,147
Comprehensive income:
Net income
10,271
10,271
Net other comprehensive loss
( 3,502
)
( 3,502
)
Stock dividend 39,209 39 2,982 ( 3,021 )
Issuance of Common stock 693,858 694 59,443 60,137
Purchase of treasury stock ( 2,772 shares)
( 264 ) ( 264 )
Restricted stock, executive and Board of Director awards ( 2,242 shares)
( 231
)
348
117
Restricted stock vesting
184
184
Sale of treasury stock to employees ( 410 shares)

28 28
Forfeited restricted stock
13 ( 13 )
Change in Accounting policy for allowance for credit losses
1,766
1,766
Cash dividends, $ 1.435 per share
( 6,198
)
( 6,198
)
Balance, September 30, 2023
5,160,754
$
5,161
$
143,302
$
167,740
$
( 36,643
)
$
( 16,874
)
$
262,686

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

4
CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

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

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

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

5
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Basis of Presentation


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


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


In the opinion of management of the Company, the accompanying interim consolidated financial statements at September 30, 2024 and for the periods ended September 30, 2024 and 2023 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and of revenues and expenses for the periods covered by the Consolidated Statement of Income. The financial performance reported for the Company for the nine month period ended September 30, 2024 is not necessarily indicative of the results to be expected for the full year.  This information should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2023.

Accounting Pronouncements Adopted in 2023


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


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


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

6

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


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


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



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



Modified Loans



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



Allowance for Credit Losses – Loans and Leases



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


7

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



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



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



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



Probability of Default (PD)



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



Loss Given Default (LGD)



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



Prepayment and Curtailment Rates



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



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


Reasonable and Supportable Economic Forecasts

8

The forecast data used in the DCF model is obtained via a subscription to a widely recognized and relied upon company who publishes various forecast scenarios. Management evaluates the various scenarios to determine a reasonable and supportable scenario.



Forecast Reversion Period



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



Expected Recoveries on Charged-off Loans



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



Discount Rate



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



Individual Evaluation



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


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



Accrued Interest Receivable on Loans and Leases



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



Reserve for Unfunded Commitments



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

Note 2 – Revenue Recognition


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

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

9
•
Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction.

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

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


The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the three and nine months ended September 30, 2024 and 2023 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

Three Months Ended
Nine Months Ended
September 30,
September 30 ,
Revenue stream
2024
2023
2024
2023
Service charges on deposit accounts
Overdraft fees
$
404

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

10
Note 3 – Earnings per Share


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

Three months ended
September 30,
Nine months ended
September 30 ,
2024
2023
2024
2023
Net income applicable to common stock
$
7,536 ,000
$
7,548 ,000

$
19,835 ,000
$
10,271 ,000
Basic earnings per share computation
Weighted average common shares outstanding
4,749,679
4,746,541
4,748,988
4,321,848
Earnings per share - basic
$
1.59
$
1.59
$
4.18
$
2.38
Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share
4,749,679
4,746,541
4,748,988
4,321,848
Add: Dilutive effects of restricted stock
1,545
-
4,939
-
Weighted average common shares outstanding for dilutive earnings per share
4,751,224
4,746,541
4,753,927
4,321,848
Earnings per share - diluted
$
1.59
$
1.59
$
4.17
$
2.38


For the three months ended September 30, 2024 and 2023, there were 3,025 and 5,535 shares, respectively, related to the restricted stock plan that were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had per share prices ranging from $ 60.16 -$ 83.38 for the three month period ended September 30, 2024 and per share prices ranging from $ 44.93 -$ 83.38 for the three month period ended September 30, 2023. For the nine months ended September 30, 2024 and 2023, 3,025 and 5,535 shares, respectively, related to the restricted stock plan were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had prices ranging from $ 60.16 -$ 83.38 for the nine month period ended September 30, 2024 and prices ranging from $ 44.93 -$ 83.38 for the nine month period ended September 30, 2023.

Note 4 – Investments


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

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

December 31, 2023





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

11

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time, which individual securities have been in a continuous unrealized loss position, at September 30, 2024 and December 31, 2023 (in thousands). As of September 30, 2024, the Company owned 301 securities whose fair value was less than their cost basis.

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

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


Allowance for Credit Losses – Available for Sale Securities


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


The allowance for credit losses on available-for-sale debt securities is included within Investment securities available-for-sale on the consolidated balance sheet. Changes in the allowance for credit losses are recorded within Provision for credit losses on the consolidated statement of income. Losses are charged against the allowance when the Company believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.



Accrued interest receivable on available-for-sale debt securities totaled $ 1,947 ,000 and $ 2,202 ,000 at September 30, 2024 and December 31,2023 and is included within accrued interest receivable on the consolidated balance sheet. This amount is excluded from the estimate of expected credit losses. Available-for-sale debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed.

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



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

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


The following table presents the net gains (losses) on the Company’s equity investments recognized in earnings during the three and nine month periods ended September 30, 2024 and  2023, and the portion of unrealized gains for the period that relates to equity investments held at September 30, 2024 and 2023(in thousands):

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

13

Investment securities with an approximate carrying value of $ 367.0 million and $ 353.3 million at September 30, 2024 and December 31, 2023, respectively, were pledged to secure public funds, certain other deposits and borrowing lines.


Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.   The amortized cost and fair value of debt securities at September 30, 2024, by contractual maturity, are shown below (in thousands):

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

Note 5 – Loans


The Company originates commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central and south central Pennsylvania, southern New York and Wilmington and Dover, Delaware. The HVBC acquisition expanded our lending market further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey. Although the Company had a diversified loan portfolio at September 30, 2024 and December 31, 2023, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for credit losses - loans as of September 30, 2024 and December 31, 2023 (in thousands):


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


Allowance for Credit Losses, effective January 1, 2023

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

14

Under CECL, loans individually evaluated for impairment consist of non-accrual commercial loans and recently modified loans that were experiencing financial difficulty at the time of the modification.


The allowance for credit losses related to loans consists of loans evaluated collectively and individually for expected credit losses. It represents an estimate of credit losses over the expected life of the loans as of the balance sheet date and is recorded as a reduction to net loans. The allowance for credit losses for off-balance sheet credit exposures includes estimated losses on unfunded loan commitments, letters of credit and other off-balance sheet credit exposures. The total allowance for credit losses is increased by charges to expense, through the provision for credit losses, and decreased by charge-offs, net of recoveries.

The following table presents the components of the allowance for credit losses as of September 30, 2024 and December 31, 2023 (in thousands):

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


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

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

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

15
Allowance for Credit
Losses - Loans
Allowance for Credit Losses - Off-
Balance Sheet Credit Exposure
Total
Balance at June 30, 2023
$
21,652
$
1,391
$
23,043
Loans charged-off
( 808
)
-
( 808
)
Recoveries of loans previously charged-off
10
-
10
Net loans charged-off
( 798
)
-
( 798
)
Provision for credit losses
601
( 126
)
475
Balance at September 30, 2023
$
21,455
$
1,265
$
22,720

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


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


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

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

16
For the three months ended September 30, 2023
Balance at
June 30, 2023
Charge-offs
Recoveries
Provision
Balance at
September 30, 2023
Real estate loans:
Residential
$
2,675
$
-
$
-
$
( 110
)
$
2,565
Commercial
9,274
-
2
( 91
)
9,185
Agricultural
3,579
-
-
( 104
)
3,475
Construction
1,667
-
-
166
1,833
Consumer
1,259
( 45
)
3
503
1,720
Other commercial loans
2,477
( 763
)
5
353
2,072
Other agricultural loans
268
-
-
( 39
)
229
State and political subdivision loans
52
-
-
( 4
)
48
Unallocated
401
-
-
( 73
)
328
Total
$
21,652
$
( 808
)
$
10
$
601
$
21,455

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


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


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

17

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

Non-performing Loans



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


The following table reflects the non-performing loan receivables, as well as those on non-accrual status as of September 30, 2024 and December 31, 2023, respectively. The balances are presented by class of loan receivable (in thousands):

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


As of September 30, 2024, there were $ 16.5 million of non-accrual loans that did not have a related allowance for credit losses. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to the realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.


18

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

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

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

Credit Quality Information


For commercial real estate loans, agricultural real estate loans, construction loans, other commercial loans, other agricultural loans, and state and political subdivision loans, management uses an internal risk rating system to monitor and assess credit quality. During the third quarter of 2023, this rating system was expanded from a nine grade rating system to a ten grade rating system. The first six categories under the revised system are considered not criticized and are aggregated as “Pass” rated. Under the prior system, the first five categories were considered not criticized and aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:


•
Pass (Grades 1 - 6) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.


•
Special Mention (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.


•
Substandard (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.


•
Doubtful ( Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.


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

19

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


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

Revolving
Revolving
Loans
Loans
Amortized
Converted
September 30, 2024
2024
2023
2022
2021
2020
Prior
Cost Basis
to Term
Total
Commercial real estate
Risk Rating
Pass
$
38,080
$
87,934
$
348,635
$
204,747
$
113,932
$
232,156
$
29,762
$
1,821
$
1,057,067
Special Mention
-
813
10,395
3,361
1,384
8,573
1,917
-
26,443
Substandard
-
572
13,832
545
545
10,784
356
404
27,038
Doubtful
- - - - - - - - -
Total
$
38,080
$
89,319
$
372,862
$
208,653
$
115,861
$
251,513
$
32,035
$
2,225
$
1,110,548
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Agricultural real estate
Risk Rating
Pass
$
26,932
$
25,900
$
47,419
$
26,858
$
30,231
$
132,022
$
14,143
$
117
$
303,622
Special Mention
2,883
140
10,072
241
-
6,102
1,960
28
21,426
Substandard
249
39
334
1,027
-
3,868
747
422
6,686
Doubtful
- - - - - - - - -
Total
$
30,064
$
26,079
$
57,825
$
28,126
$
30,231
$
141,992
$
16,850
$
567
$
331,734
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Construction

Risk Rating
Pass
$
30,661
$
54,158
$
73,526
$
5,829
$
3,487
$
-
$
1,120
$
-
$
168,781
Special Mention
-
-
4,614
2,951
-
-
-
-
7,565
Substandard
-
-
412
1,948
-
-
-
-
2,360
Doubtful
- - - - - - - - -
Total
$
30,661
$
54,158
$
78,552
$
10,728
$
3,487
$
-
$
1,120
$
-
$
178,706
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Other commercial loans

Risk Rating
Pass
$
32,035
$
22,623
$
7,487
$
6,676
$
2,339
$
3,758
$
47,044
$
78
$
122,040
Special Mention
330
-
1,848
1,384
-
65
5,189
33
8,849
Substandard
178
-
27
-
257
911
345
1,662
3,380
Doubtful
-
-
-
-
-
-
-
16
16
Total
$
32,543
$
22,623
$
9,362
$
8,060
$
2,596
$
4,734
$
52,578
$
1,789
$
134,285
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
2,502
$
-
$
2,502
Other agricultural loans

Risk Rating
Pass
$
4,051
$
2,127
$
992
$
4,391
$
457
$
268
$
9,148
$
-
$
21,434
Special Mention
626
-
372
365
-
-
760
-
2,123
Substandard
220
356
85
10
-
167
125
17
980
Doubtful
- - - - - - - - -
Total
$
4,897
$
2,483
$
1,449
$
4,766
$
457
$
435
$
10,033
$
17
$
24,537
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
State and political subdivision loans

Risk Rating
Pass
$
-
$
1,458
$
13,497
$
10,664
$
5,357
$
23,898
$
-
$
-
$
54,874
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
- - - - - - - - -
Total
$
-
$
1,458
$
13,497
$
10,664
$
5,357
$
23,898
$
-
$
-
$
54,874
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total

Risk Rating
Pass
$
131,759
$
194,200
$
491,556
$
259,165
$
155,803
$
392,102
$
101,217
$
2,016
$
1,727,818
Special Mention
3,839
953
27,301
8,302
1,384
14,740
9,826
61
66,406
Substandard
647
967
14,690
3,530
802
15,730
1,573
2,505
40,444
Doubtful
-
-
-
-
-
-
-
16
16
Total
$
136,245
$
196,120
$
533,547
$
270,997
$
157,989
$
422,572
$
112,616
$
4,598
$
1,834,684
Total current period gross charge-offs
$
- $
- $
- $
- $
- $
- $
2,502 $
- $
2,502

20
Revolving
Revolving
Loans
Loans
Amortized
Converted
December 31, 2023
2023
2022
2021
2020
2019
Prior
Cost Basis
to Term
Total
Commercial real estate
Risk Rating
Pass
$
90,068
$
333,710
$
224,873
$
122,560
$
81,557
$
180,799
$
28,360
$
1,140
$
1,063,067
Special Mention
672
7,963
227
1,552
7,442
8,159
96
60
26,171
Substandard
-
1,302
6
-
158
1,444
317
422
3,649
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
90,740
$
342,975
$
225,106
$
124,112
$
89,157
$
190,402
$
28,773
$
1,622
$
1,092,887
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Agricultural real estate
Risk Rating
Pass
$
22,632
$
47,479
$
28,990
$
32,058
$
25,406
$
118,700
$
10,495
$
460
$
286,220
Special Mention
574
9,165
1,499
-
962
7,038
3,535
-
22,773
Substandard
-
-
-
-
102
5,394
75
238
5,809
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
23,206
$
56,644
$
30,489
$
32,058
$
26,470
$
131,132
$
14,105
$
698
$
314,802
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Construction

Risk Rating
Pass
$
54,973
$
102,562
$
22,508
$
-
$
-
$
-
$
839
$
1,166
$
182,048
Special Mention
1,574
5,432
4,415
-
-
-
-
-
11,421
Substandard
-
-
2,357
-
-
-
-
-
2,357
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
56,547
$
107,994
$
29,280
$
-
$
-
$
-
$
839
$
1,166
$
195,826
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Other commercial loans

Risk Rating
Pass
$
31,493
$
11,407
$
9,016
$
4,793
$
4,758
$
3,530
$
63,285
$
93
$
128,375
Special Mention
51
52
1,510
184
223
629
1,652
36
4,337
Substandard
52
97
-
-
149
967
502
1,667
3,434
Doubtful
-
-
-
-
-
-
-
22
22
Total
$
31,596
$
11,556
$
10,526
$
4,977
$
5,130
$
5,126
$
65,439
$
1,818
$
136,168
Current period gross charge-offs
$
200
$
-
$
-
$
763
$
-
$
-
$
-
$
-
$
963
Other agricultural loans

Risk Rating
Pass
$
3,902
$
1,520
$
6,448
$
1,046
$
532
$
305
$
15,331
$
-
$
29,084
Special Mention
-
473
16
42
-
-
488
29
1,048
Substandard
-
-
207
-
4
255
44
31
541
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
3,902
$
1,993
$
6,671
$
1,088
$
536
$
560
$
15,863
$
60
$
30,673
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
State and political subdivision loans

Risk Rating
Pass
$
1,623
$
14,171
$
10,841
$
5,235
$
-
$
25,294
$
10
$
-
$
57,174
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
1,623
$
14,171
$
10,841
$
5,235
$
-
$
25,294
$
10
$
-
$
57,174
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total

Risk Rating
Pass
$
204,691
$
510,849
$
302,676
$
165,692
$
112,253
$
328,628
$
118,320
$
2,859
$
1,745,968
Special Mention
2,871
23,085
7,667
1,778
8,627
15,826
5,771
125
65,750
Substandard
52
1,399
2,570
-
413
8,060
938
2,358
15,790
Doubtful
-
-
-
-
-
-
-
22
22
Total
$
207,614
$
535,333
$
312,913
$
167,470
$
121,293
$
352,514
$
125,029
$
5,364
$
1,827,530
Current period gross charge-offs
$
200 $
- $
- $
763 $
- $
- $
- $
- $
963
21



For residential real estate mortgage loans, home equity loans, and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail above, and all loans past due 90 or more days and still accruing. The following tables present the recorded investment in those loan classes based on payment activity, by origination year, as of September 30, 2024 and December 31, 2023 (in thousands):


Revolving
Revolving
Loans
Loans
Amortized
Converted
September 30, 2024
2024
2023
2022
2021
2020
Prior
Cost Basis
to Term
Total
Residential real estate
Payment Performance
Performing
$
7,235
$
22,622
$
90,094
$
46,422
$
28,023
$
106,310
$
-
$
-
$
300,706
Nonperforming
-
-
382
860
468
1,063
-
-
2,773
Total
$
7,235
$
22,622
$
90,476
$
47,282
$
28,491
$
107,373
$
-
$
-
$
303,479
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
4
$
-
$
-
$
4
Home equity

Payment Performance
Performing
$
2,300
$
3,628
$
2,508
$
1,582
$
1,663
$
8,517
$
28,985
$
444
$
49,627
Nonperforming
-
-
-
-
66
82
-
-
148
Total
$
2,300
$
3,628
$
2,508
$
1,582
$
1,729
$
8,599
$
28,985
$
444
$
49,775
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Consumer

Payment Performance
Performing
$
1,696
$
1,060
$
650
$
440
$
342
$
2,627
$
135,381
$
1
$
142,197
Nonperforming
-
4
2
-
6
855
-
-
867
Total
$
1,696
$
1,064
$
652
$
440
$
348
$
3,482
$
135,381
$
1
$
143,064
Current period gross charge-offs
$
-
$
10
$
25
$
-
$
-
$
5
$
22
$
-
$
62
Total

Payment Performance
Performing
$
11,231
$
27,310
$
93,252
$
48,444
$
30,028
$
117,454
$
164,366
$
445
$
492,530
Nonperforming
-
4
384
860
540
2,000
-
-
3,788
Total
$
11,231
$
27,314
$
93,636
$
49,304
$
30,568
$
119,454
$
164,366
$
445
$
496,318
Current period gross charge-offs
$
- $
10 $
25 $
- $
- $
9 $
22 $
- $
66

22
Revolving
Revolving
Loans
Loans
Amortized
Converted
December 31, 2023
2023
2022
2021
2020
2019
Prior
Cost Basis
to Term
Total
Residential real estate
Payment Performance
Performing
$
19,082
$
93,706
$
47,774
$
29,940
$
18,923
$
97,813
$
-
$
-
$
307,238
Nonperforming
-
399
766
396
-
1,400
-
-
2,961
Total
$
19,082
$
94,105
$
48,540
$
30,336
$
18,923
$
99,213
$
-
$
-
$
310,199
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
1
$
-
$
-
$
1
Home equity

Payment Performance
Performing
$
3,877
$
3,008
$
1,886
$
1,954
$
2,462
$
7,883
$
28,219
$
363
$
49,652
Nonperforming
-
-
-
-
-
72
67
-
139
Total
$
3,877
$
3,008
$
1,886
$
1,954
$
2,462
$
7,955
$
28,286
$
363
$
49,791
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Consumer

Payment Performance
Performing
$
1,803
$
979
$
539
$
477
$
557
$
2,988
$
53,254
$
5
$
60,602
Nonperforming
-
21
-
-
-
693
-
-
714
Total
$
1,803
$
1,000
$
539
$
477
$
557
$
3,681
$
53,254
$
5
$
61,316
Current period gross charge-offs
$
-
$
-
$
-
$
-
$
1
$
341
$
23
$
-
$
365
Total

Payment Performance
Performing
$
24,762
$
97,693
$
50,199
$
32,371
$
21,942
$
108,684
$
81,473
$
368
$
417,492
Nonperforming
-
420
766
396
-
2,165
67
-
3,814
Total
$
24,762
$
98,113
$
50,965
$
32,767
$
21,942
$
110,849
$
81,540
$
368
$
421,306
Current period gross charge-offs
$
- $
- $
- $
- $
1 $
342 $
23 $
- $
366

Aging Analysis of Past Due Loan Receivables


Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loan receivables as of September 30, 2024 and December 31, 2023 (in thousands):

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

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


Modifications to Borrowers Experiencing Financial Difficulty



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



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



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


Foreclosed Assets Held For Sale


Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of September 30, 2024 and December 31, 2023, included within other assets are $ 2,486 ,000 and $ 474 ,000, respectively, of foreclosed assets. As of September 30, 2024, included within the foreclosed assets are $ 127 ,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2024, the Company had initiated formal foreclosure proceedings on $ 831 ,000 of residential mortgage loans, the collateral properties which have not yet been transferred into foreclosed assets.

24
Note 6 – Goodwill and Other Intangible Assets


The following table provides the gross carrying value and accumulated amortization of intangible assets as of September 30, 2024 and December 31, 2023 (in thousands):

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


The following table provides the current year and estimated future amortization expense for amortized intangible assets for the next five years (in thousands). The Company based its projections of amortization expense shown below on existing asset balances at September 30, 2024. Future amortization expense may vary from these projections:

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

Note 7 – Employee Benefit Plans


For additional detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 11 of the Company’s Audited Consolidated Financial Statements included in the 2023 Annual Report on Form 10-K.


Noncontributory Defined Benefit Pension Plan


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


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


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


25

The following sets forth the components of net periodic benefit costs of the Pension Plan and the line item on the Consolidated Statement of Income where such amounts are included, for the three and nine months ended September 30, 2024 and 2023, respectively (in thousands):

Three Months Ended
September 30,
Nine Months Ended
September 30 ,

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


The Bank does no t expect to contribute to the Pension Plan during 2024 .


Restricted Stock Plan


The Company maintains a Restricted Stock Plan (the “Plan”) whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements.  Awards granted under the Plan are in the form of the Company’s common stock and are subject to certain vesting requirements including continuous employment or service with the Company.  In April 2016, the Company’s stockholders authorized a total of 150,000 shares of the Company’s common stock to be made available under the Plan. As of September 30, 2024, 104,672 shares remain available to be issued under the Plan.  The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation.


The following table details the vesting, awarding and forfeiting of restricted stock during the three and nine months ended September 30, 2024:


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


Compensation expense related to restricted stock is recognized, based on the market price of the stock at the grant date, over the vesting period. Compensation expense related to restricted stock was $ 191 ,000 and $ 178 ,000 for the nine months ended September 30, 2024 and 2023, respectively. For the three months ended September 30, 2024 and 2023 , compensation expense totaled $ 69 ,000 and $ 62 ,000, respectively. At September 30, 2024, the total compensation cost related to nonvested awards that had not yet been recognized was $ 625 ,000 , which is expected to be recognized over the next three years .

26
Note 8 – Accumulated Other Comprehensive Loss


The following tables present the changes in accumulated other comprehensive loss by component, net of tax, for the three and nine months ended September 30, 2024 and 2023 (in thousands):

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

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


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

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

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

27

The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2024 and 2023 (in thousands):

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

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

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

28
Note 9 – Fair Value Measurements


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

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

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

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


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


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

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


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

29

The following tables present the assets and liabilities reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of September 30, 2024 and December 31, 2023 by level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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

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


The following tables represent the change in the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2024 and for the three and nine months ended September 30, 2023 (in thousands):



IRLC-
Asset
Balance: December 31, 2023
$
324
Total unrealized losses:
Included in other comprehensive loss
-
Total losses included in earnings and held at reporting date
78
Transfers in and/or out of Level 3
-
Ending Balance: September 30, 2024
$
402
Change in unrealized (losses) for the period included in earnings (or changes in net assets) for assets held as of September 30, 2024
$
78
Beginning Balance: June 30, 2024
$
494
Total unrealized losses:
Included in other comprehensive loss
-
Total losses included in earnings and held at reporting date
( 92
)
Transfers in and/or out of Level 3
-
Ending Balance: September 30, 2024
$
402
Change in unrealized (losses) for the period included in earnings (or changes in net assets) for assets held as of September 30, 2024
$
( 92
)

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

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


At September 30, 2024 and December 31, 2023, the Company had classified as Level 3 $ 402 ,000 and $ 324 ,000, respectively, of net derivative assets and liabilities related to IRLC. The fair value of IRLCs is based on prices obtained for loans with similar characteristics from third parties, adjusted by the pull-through rate, which represents the Company’s best estimate of the probability that a committed loan will fund. The weighted average pull-through rates applied ranged from 73.500 % to 95.88 % at September 30, 2024.

30

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


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

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


Assets measured at fair value on a nonrecurring basis as of September 30, 2024 and December 31, 2023 are included in the table below ( in thousands) :

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


•
Collateral – Dependent Loans (in accordance with ASC 326) – The Company records nonrecurring adjustments of collateral-dependent loans held for investment. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures that include recent sales prices for comparable properties and cost of construction. Periodically, in cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized in the form of a charge-off. The fair values above excluded estimated selling costs of $ 207 ,000 and $ 396 ,000 at September 30, 2024 and December 31, 2023, respectively.


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

31

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


Quantitative Information about Level III Fair Value Measurements
September 30 , 2024
Fair
Value
Valuation Technique(s)
Unobservable input
Range
Weighted
average
Collateral-dependent loans
$
2,825
Appraised Collateral Values
Discount for time since appraisal
0 - 100
%
36.46
%
Selling costs
4 %- 10
%
7.31
%
Holding period
0 - 12 months
5.88 months
Other real estate owned
2,486 Appraised Collateral Values Discount for time since appraisal 20 - 31.8 % 31.51 %
December 31, 2023
Fair
Value
Valuation Technique(s)
Unobservable input
Range
Weighted
average
Collateral-dependent loans
3,885
Appraised Collateral Values
Discount for time since appraisal
0 - 100
%
29.32
%
Selling costs
8 %- 12
%
10.20
%
Holding period
3 - 12 months
6.65 months
Other real estate owned
97
Appraised Collateral Values
Discount for time since appraisal
32 %
32.00
%

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


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

September 30, 2024
Carrying
Amount
Fair Value
Level I
Level II
Level III
Financial assets:
Interest bearing time deposits with other banks
$
3,820
$
3,820
$
-
$
-
$
3,820
Net loans
2,309,307
2,240,903
-
-
2,240,903
Financial liabilities:
Deposits
2,450,149
2,448,108
1,863,812
-
584,296
Borrowed funds
231,732
221,607
-
-
221,607
December 31, 2023

Carrying
Amount

Fair Value
Level I
Level II
Level III
Financial assets:
Interest bearing time deposits with other banks
$
4,070
$
4,070
$
-
$
-
$
4,070
Net loans
2,227,683
2,126,237
-
-
2,126,237
Financial liabilities:
Deposits
2,321,481
2,315,374
1,902,007
-
413,367
Borrowed funds
322,036
313,217
-
-
313,217


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

32
Note 10 – Recent Accounting Pronouncements


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


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


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


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


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

33
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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


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

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

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

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

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

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

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

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

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

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

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

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

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

34
Additional factors that may affect our results are discussed under “Part II – Item 1A – Risk Factors” in this report and in the Company’s 2023 Annual Report on Form 10-K under “Item 1.A/ Risk Factors.”  Except as required by applicable law and regulation, we assume no obligation to update or revise any forward-looking statements after the date on which they are made.

Critical Accounting Policies

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

Introduction

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

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

Risk Management

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

35
Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction, frequency and magnitude of changes in market interest rates.  Interest rate risk results from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company.  The Company uses its asset/liability and funds management policy to control and manage interest rate risk.

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

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

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

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

Competition

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

Trust and Investment Services; Oil and Gas Lease Services

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

36
Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc.  The assets associated with these products are not included in the Consolidated Balance Sheets since such assets are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank’s Investment Representatives increased from $329.4 million at December 31, 2023 to $388.6 million at September 30, 2024. Fee income from the sale of these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central, south central and south eastern Pennsylvania markets.

Results of Operations

Overview of the Income Statement

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

Net income for the three months ended September 30, 2024 was $7,536,000 compared to $7,548,000 in the comparable 2023 period, a decrease of $12,000. Basic earnings per share for the three months ended September 30, 2024 and 2023 were %1.59. Annualized return on assets and return on equity for the quarter ended September 30, 2024 was 1.00% and 9.53%, respectively, compared with 1.02% and 10.10% for the same 2023 period.

Net Interest Income

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

Net interest income for the first nine months of 2024 was $63,582,000, an increase of $5,177,000, or 8.9%, compared to the same period in 2023.  For the first nine months of 2024 the provision for credit losses was $2,587,000. The provision for the first nine months of 2023 was $5,328,000, which included $4,591,000 for non-PCD loans acquired as part of the acquisition. Excluding the $4,591,000 related to the acquisition, the provision for credit losses increased $1,850,000. Consequently, net interest income after the provision for credit losses was $60,995,000 in the first nine months of 2024 compared to $53,077,000 during the first nine months of 2023.

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

37
The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets, liabilities and stockholders’ equity, the related rates, net interest income and interest rate spread created for the three and nine months ended September 30, 2024 and 2023 on a tax equivalent basis (dollars in thousands):

Analysis of Average Balances and Interest Rates
Nine Months Ended
September 30, 2024
September 30, 2023
Average
Average
Average
Average
Balance (1)
Interest
Rate
Balance (1)
Interest
Rate
(dollars in thousands)
$

$

%
$

$

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

(1)
Averages are based on daily averages.
(2)
Includes loan origination and commitment fees.
(3)
Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 21%.
(4)
Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
(5)
Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

38
Analysis of Average Balances and Interest Rates
Three Months Ended
September 30, 2024
September 30, 2023
Average
Average
Average
Average
Balance (1)
Interest
Rate
Balance (1)
Interest
Rate
(dollars in thousands)

$
$

%

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

(1)
Averages are based on daily averages.
(2)
Includes loan origination and commitment fees.
(3)
Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using a statutory federal income tax rate of 21%.
(4)
Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
(5)
Interest rate spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.

Tax exempt revenue is shown on a tax-equivalent basis (non-GAAP) for proper comparison using a federal statutory income tax rate of 21% for the three and nine months ended September 30, 2024 and 2023.  For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company’s Federal statutory rate during the corresponding period. The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended September 30, 2024 and 2023 (in thousands):

39
For the Three Months
For the Nine Months
Ended September
Ended September
2024
2023
2024
2023

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

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

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

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

Tax equivalent net interest income increased from $59,207,000 for the nine month period ended September 30, 2023 to $64,324,000 for the nine month period ended September 30, 2024, an increase of $5,117,000. The acquisition of HVBC had a substantial impact on the increase. The tax equivalent net interest margin decreased from 3.23% for the first nine months of 2023 to 3.09% for the comparable period in 2024. The decrease is primarily caused by the increase in the cost of interest-bearing liabilities due to higher market interest rates in 2024 compared to 2023.
40
Total tax equivalent interest income for the 2024 nine month period increased $25,858,000 as compared to the 2023 nine month period. This increase was a result of an increase of $17,630,000 due to a change in volume as average interest-bearing assets increased $345.6 million. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 0.63% from 4.91% to 5.54% resulting in an increase in interest income of $8,228,000.
Tax equivalent investment income for the nine months ended September 30, 2024 increased $23,000 over the same period last year. The primary cause of the increase was due to the increase in yield on investment securities of 18 basis points to 2.36%.

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

•
The average balance of tax-exempt securities decreased $8.6 million, which resulted in a decrease in investment income of $161,000. The yield on taxable securities decreased 5 basis points from 2.55% to 2.50%. This resulted in a decrease in investment income of $41,000. For a discussion of the Company’s current investment strategy, see the “Financial Condition – Investments”.
Total loan interest income increased $25,602,000 for the nine months ended September 30, 2024 compared to the same period last year, as a result of higher volume and yields.

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

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

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

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

•
The average balance of other loans increased $14.5 million as a result of outstanding student loans. This resulted in an increase of $861,000 on total interest income due to volume. The average yield of other loans increased 67 basis points to 8.10% due to the higher rate environment resulting in an increase in income of $442,000.
Total interest expense increased $20,741,000 for the nine months ended September 30, 2024 compared with the comparative period last year as a result of an increase in the volume of interest-bearing liabilities and an increase in rate on interest-bearing liabilities. Interest expense increased $6,975,000 due to volume as a result of an increase in interest bearing liabilities of $346.1 million. The average rate paid on interest-bearing liabilities increased from 1.83% to 3.02%. The increase was driven by the Federal Reserve interest rate increases in 2022 and 2023, which caused interest expense to increase $13,766,000.

41

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

•
The average balance of other borrowed funds increased $22.0 million. This resulted in an increase in interest expense of $775,000. There was an increase in the average rate paid on other borrowed funds from 4.49% to 4.91% due to the interest rate increases by the Federal Reserve that increased borrowings costs resulting in an increase in interest expense of $1,034,000.
Tax equivalent net interest income for the three months ended September 30, 2024 was $21,570,000 which compares to $22,668,000 for the same period last year.  This represents a decrease of $1,098,000, or 4.8% and was primarily caused by an increase in the volume of interest earning assets due to the HVBC acquisition.
Total tax equivalent interest income was $38,935,000 for the three month period ended September 30, 2024, compared to $36,953,000 for the comparable period last year, an increase of $1,982,000. This increase was a result of an increase of $1,225,000 due to a change in volume as average interest-bearing assets increased $39.4 million due to organic growth primarily in our Delaware and Southeast Pennsylvania markets. As a result of the higher market interest rate environment, the yield on average interest earning assets increased 22 basis points from 5.36% to 5.58% resulting in an increase in interest income of $757,000.
Total loan interest income increased $2,075,000 for the three months ended September 30, 2024 compared to the same period last year, primarily due to organic growth in our Delaware and Sotuheast Pennsylvania markets.


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

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

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

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

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

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

42

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

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

Provision for Credit Losses

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

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

Non-interest Income

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

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

43
Three months ended September 30,
Change
2024
2023
Amount
%
Service charges
$
1,636
$
1,692
$
(56
)
(3.3
)
Trust
184
172
12
7.0
Brokerage and insurance
545
473
72
15.2
Gains on loans sold
752
460
292
63.5
Equity security gains, net
159
69
90
130.4
Available for sale security gains, net
-
-
-
NA
Earnings on bank owned life insurance
338
489
(151
)
(30.9
)
Other
141
307
(166
)
(54.1
)
Total
$
3,755
$
3,662
$
93
2.5

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

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

Non-interest Expense

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

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

44
Three months ended September 30,
Change
2024
2023
Amount
%
Salaries and employee benefits
$
9,715
$
10,005
$
(290
)
(2.9
)
Occupancy
1,215
1,221
(6
)
(0.5
)
Furniture and equipment
260
255
5
2.0
Professional fees
620
506
114
22.5
FDIC insurance
555
375
180
48.0
Pennsylvania shares tax
226
297
(71
)
(23.9
)
Amortization of intangibles
136
157
(21
)
(13.4
)
Merger and acquisition
-
623
(623
)
(100.0
)
Software expenses
500
551
(51
)
(9.3
)
ORE expenses (recovery)
84
111
(27
)
(24.3
)
Other
2,718
2,343
375
16.0
Total
$
16,029
$
16,444
$
(415
)
(2.5
)

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

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

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

Provision for Income Taxes

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

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

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

45
Financial Condition

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

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

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

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

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

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

46
The investment strategy for 2024 has been to utilize cashflows from the investment portfolio to repay overnight borrowings, while reinvesting certain balances. We continually monitor interest rate trading ranges and seek to time investment security purchases when rates are in the top third of the trading range. The Company believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, including a rising rate environment, while providing sufficient cashflows to meet liquidity needs.

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

Loans Held for Sale

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

Loans

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

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

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

47
Lending efforts have historically been focused in north central Pennsylvania, the south central Pennsylvania counties of Lebanon, Schuylkill, Berks and Lancaster, the central Pennsylvania counties of Clinton and Centre, and southern New York. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities in central Pennsylvania. In April 2020, we completed the MidCoast acquisition, which expanded our markets into the State of Delaware with activity centered around the cities of Wilmington and Dover, Delaware. Since the MidCoast acquisition, we have opened two additional branches in the Delaware market to better serve customers in the Wilmington market, as well as the surrounding area of Chester County, Pennsylvania. In June 2023, we completed the HVBC acquisition, which expanded our markets into south east Pennsylvania, including the counties of Montgomery, Bucks and Philadelphia. It also includes a Mortgage production office in Mount Laurel, New Jersey. In the fourth quarter of 2023, we opened an office in Williamsport, Pennsylvania, to further our efforts in central Pennsylvania. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships our lending teams have with their customers and our lenders expertise in certain areas, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank’s website.  The Bank offers a variety of loans although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans.  All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors.

Loan activity picked up slightly during the third quarter of 2024. The decrease in construction loans was due to the underlying projects being completed and transferred to the commercial and agricultural real estate portfolios. As part of the Braavo sale, we sold $6.1 million of other commercial loans. Due to timing, student loans increased in the first half of 2024 resulting in an increase in consumer loans.
The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. As of September 30, 2024, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 301.5% of consolidated risk based capital. Construction, land and land development loans represented 62.8% of consolidated risk based capital as of September 30, 2024. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital and may adversely affect shareholder returns. The Company has an extensive Capital Policy and Capital Plan, which includes pro-forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well capitalized ratios. The Company continues to refine information reviewed related to commercial real estate and to implement additional monitoring and testing of commercial real estate loans. As of September 30, 2024, management believes that it has implemented appropriate risk management practices, including risk assessments, board-approved underwriting policies and related procedures, which include monitoring loan portfolio performance and stressing of the commercial real estate portfolio under adverse economic conditions.

48
Given the significance of commercial real estate (“CRE”) loans to our total loan portfolio, the following table further disaggregates these loans by occupied status and by collateral type as of September 30, 2024 (dollars in thousands):

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

The following table provides a breakdown of our construction portfolio by collateral type as of September 30, 2024 (dollars in thousands):
Construction
Amount
%
Residential
$
53,989
30.21
%
Multifamily
59,820
33.47
%
Office
9,934
5.56
%
Retail
13,947
7.80
%
Self Storage
10,589
5.93
%
Industrial/Flex/Warehouse
13,442
7.52
%
Mixed Use
6,912
3.87
%
Hotel/Motel
623
0.35
%
Schools/Higher Ed/Vocational
1,414
0.79
%
Specialty
131
0.07
%
Land and agricultural
5,759
3.22
%
Other
2,146
1.20
%
Total
$
178,706
100.00
%
The Company obtains an appraisal of the real estate collateral securing a CRE loan prior to originating the loan. The appraised value is used to calculate the ratio of the outstanding loan balance to the value of the real estate collateral, or loan-to-value ratio ("LTV"). The original appraisal is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons, including but not limited to payment delinquency, additional loan requests using the same collateral, and loan modifications. The following table presents the ranges in the LTVs of our CRE loans at September 30, 2024 (dollars in thousands):
LTV Range
Number of Loans
Amount
%
0%-25%

857
$
146,371
13.18
%
25.01%-50%

541
304,675
27.43
%
50.01%-60%

298
205,120
18.47
%
60.01%-70%

359
290,361
26.15
%
70.01%-75%

178
111,032
10.00
%
75.01%-80%

54
43,157
3.89
%
>80%

8
9,832
0.89
%
Total
2,295
$
1,110,548
100.00
%
49
While the Company lends to companies that service companies that explore for natural gas in our market area, the Company has not originated any loans to companies performing the actual drilling and exploration activities. Loans made by the Company are to service industry customers which include trucking companies, stone quarries and other support businesses, favoring customers that have had a relationship with the Company prior to supporting the exploration for natural gas. We also have originated loans to businesses and individuals for restaurants, hotels and apartment rentals that have been developed and expanded to meet the housing and living needs of the gas industry workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities have been originated in accordance with specific policies and procedures for lending to these entities, which include more stringent loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.
For loans sold on the secondary market, the Company recognizes fee income for servicing certain sold loans, which is included in non-interest income.

Allowance for Credit Losses - Loans

The allowance for credit losses - loans is maintained at a level which, in management’s judgment, is adequate to absorb losses in the loan portfolio. The provision for credit losses - loans is charged against current income.  Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance.  The allowance for credit losses - loans was $21,695,000 or 0.93% of total loans as of September 30, 2024 as compared to $21,153,000 or 0.94% of loans as of December 31, 2023. The $542,000 increase is a result of a $3,086,000 provision for credit losses – loans less net charge-offs of $2,544,000. Net charge-offs for 2024 are driven by loans acquired as part of the HVBC acquisition due to collateral issues. The following table shows the distribution of the allowance for credit losses - loans and the percentage of loans compared to total loans by loan category as of September 30, 2024 and December 31, 2023 (dollars in thousands):
September 30,
December 31
2024
2023
Amount
%
Amount
%
Real estate loans:
Residential
$
1,986
15.2
$
2,354
16.0
Commercial
9,287
47.6
9,178
48.6
Agricultural
3,815
14.2
3,264
14.0
Construction
1,471
7.7
1,950
8.7
Consumer
1,367
6.1
1,496
2.7
Other commercial loans
1,824
5.8
2,229
6.1
Other agricultural loans
116
1.1
270
1.4
State & political subdivision loans
63
2.3
45
2.5
Unallocated
1,766
N/A
367
N/A
Total allowance for credit losses
$
21,695
100.0
$
21,153
100.0

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

50
September 30, 2024
Credit Loss
Expense
(Benefit)
Net (charge-
offs)
Recoveries
Average
Loans
Ratio of net
(charge-offs)
recoveries to
Average loans
Allowance
to total
loans
Non-
accrual
loans as a
percent of
loans
Allowance to
total non-
accrual
loans
Real estate:
Residential
$
(364
)
$
(4
)
$
357,089
0.00
%
0.56
%
0.75
%
74.52
%
Commercial
109
-
1,106,699
0.00
%
0.84
%
0.97
%
85.85
%
Agricultural
551
-
323,145
0.00
%
1.15
%
0.73
%
157.91
%
Construction
(479
)
-
185,832
0.00
%
0.82
%
1.09
%
75.51
%
Consumer
(83
)
(46
)
96,942
-0.05
%
0.96
%
0.60
%
159.88
%
Other commercial loans
2,089
(2,494
)
133,726
-1.87
%
1.36
%
1.46
%
92.97
%
Other agricultural loans
(154
)
-
25,774
0.00
%
0.47
%
0.79
%
59.79
%
State & political subdivision loans
18
-
56,116
0.00
%
0.11
%
0.00
%
NA
Unallocated
1,399
-
-
NA
NA
NA
NA
Total
$
3,086
$
(2,544
)
$
2,285,323
-0.11
%
0.93
%
0.89
%
104.01
%

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

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

Management believes it uses the best information available to make such determinations and that the allowance for credit losses - loans is adequate as of September 30, 2024. However, future adjustments could be required if circumstances differ substantially from assumptions and estimates used in making the initial determination.  A prolonged downturn in the economy, changes in the economies of various segments of our agricultural and commercial portfolios, high unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, credit loss provisions and reduction in income.  Additionally, bank regulatory agencies periodically examine the Bank’s allowance for credit losses.  The banking agencies could require the recognition of additions to the allowance for credit losses - loans based upon their judgment of information available to them at the time of their examination.

51
On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports.  Based on data surrounding the collection process of each identified loan, the loan may be added or deleted from the monthly watch list.  The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may choose to include.  Watch list loans are continually monitored going forward until satisfactory conditions exist that allow management to upgrade and remove the loan from the watchlist.  In certain cases, loans may be placed on non-accrual status or charged-off based upon management’s evaluation of the borrower’s ability to pay.  All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans, other commercial loans and other agricultural loans, on non-accrual are evaluated quarterly for impairment.

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

The following table is a summary of our non-performing assets as of September 30, 2024 and December 31, 2023.
September 30,
December 31,
(dollars in thousands)
2024
2023
Non-performing loans:
Non-accruing loans
$
20,858
$
12,187
Accrual loans - 90 days or more past due
701
516
Total non-performing loans
21,559
12,703
Foreclosed assets held for sale
2,486
474
Total non-performing assets
$
24,045
$
13,177
The increase in foreclosed assets held for sale is primarily due to a commercial construction loan that was foreclosed on during the second quarter of 2024.
The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2023 to September 30, 2024 in non-performing loans (in thousands).  Non-performing loans include those accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans.  Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.
September 30, 2024
December 31, 2023
Non-Performing Loans
Non-Performing Loans
30 - 89 Days
30 - 89 Days
Past Due
90 Days Past
Non-
Total Non-
Past Due
90 Days Past
Non-
Total Non-
(in thousands)
Accruing
Due Accruing
accrual
Performing
Accruing
Due Accruing
accrual
Performing
Real estate:
Residential
$
624
$
256
$
2,665
$
2,921
$
3,061
$
18
$
3,082
$
3,100
Commercial
5,288
353
10,818
11,171
1,396
404
1,135
1,539
Agricultural
637
28
2,416
2,444
73
75
2,670
2,745
Construction
-
-
1,948
1,948
4,795
-
2,357
2,357
Consumer
164
12
855
867
298
13
701
714
Other commercial loans
509
52
1,962
2,014
826
6
1,750
1,756
Other agricultural loans
200
-
194
194
7
-
492
492
Total nonperforming loans
$
7,422
$
701
$
20,858
$
21,559
$
10,456
$
516
$
12,187
$
12,703

52
Change in Non-Performing Loans
September 30, 2024 /December 31, 2023
(in thousands)
Amount
%
Real estate:
Residential
$
(179
)
(5.8
)
Commercial
9,632
625.9
Agricultural
(301
)
(11.0
)
Construction
(409
)
(17.4
)
Consumer
153
21.4
Other commercial loans
258
14.7
Other agricultural loans
(298
)
(60.6
)
Total nonperforming loans
$
8,856
69.7

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

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

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

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

53

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

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

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

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

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

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

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

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

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

54
Bank Owned Life Insurance

The Company owns bank owned life insurance policies to offset future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits.  As of September 30, 2024, and December 31, 2023, the cash surrender value of the life insurance was $50.1 million and $49.9 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $1,334,000 and $941,000 for the nine month periods ended September 30, 2024 and 2023, respectively. During the first quarter of 2024, the Company received proceeds of $1,147,000, which included death benefits of $326,000 on a former employee of the Company. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers’ credit ratings.

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

Premises and Equipment

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

Other assets

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

Deposits

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

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

55
September 30, 2024/
December 31, 2023
Change
Amount
%
Non-interest-bearing deposits
$
24,434
4.7
Interest bearing demand deposits
15,011
NA
NOW accounts
(102,193
)
(15.2
)
Savings deposits
(17,147
)
(5.6
)
Money market deposit accounts
56,711
14.2
Certificates of deposit
151,852
36.2
Total
$
128,668
5.5

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

Borrowed Funds

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

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

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

56
Stockholders’ Equity

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

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

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

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

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy.  Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. There is a two quarter grace period for a qualifying community bank to return to 9% as long as the CBLR is least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply. At September 30, 2024, the Bank leverage ratio under the CBLR framework was 8.96%, which is less than 9.0% requirement to be considered “well-capitalized” under the CBLR. As such, as of September 30, 2024, and going forward, the Bank reverted to the prompt corrective action framework and will no  longer utilize the CBLR framework until such time as the CBLR exceeds 9%. The following table provides the Bank’s computed risk‑based capital ratios as of September 30, 2024, which reflects the Bank being “well capitalized” on that date (dollars in thousands):

57
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
September 30, 2024
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total Capital (to Risk Weighted Assets):
Company
$
278,944
11.55
%
$
193,129
8.00
%
$
241,411
10.00
%
Bank
$
283,172
11.75
%
$
192,854
8.00
%
$
241,068
10.00
%
Tier 1 Capital (to Risk Weighted Assets):
Company
$
237,796
9.85
%
$
144,847
6.00
%
$
193,129
8.00
%
Bank
$
261,297
10.84
%
$
144,641
6.00
%
$
192,854
8.00
%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Company
$
230,296
9.54
%
$
108,635
4.50
%
$
156,917
6.50
%
Bank
$
261,297
10.84
%
$
108,481
4.50
%
$
156,694
6.50
%
Tier 1 Capital (to Average Assets):
Company
$
237,796
8.15
%
$
115,584
4.00
%
$
144,480
5.00
%
Bank
$
261,297
8.96
%
$
116,664
4.00
%
$
145,830
5.00
%

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

Off-Balance Sheet Activities

Some financial instruments, such as loan commitments, credit lines, and letters of credit, are issued to meet customer financing needs but are not recorded on the Company’s balance sheet.  The contractual amount of financial instruments with off-balance sheet risk was as follows at September 30, 2024 and December 31, 2023 (in thousands):

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

We also offer limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing. Overdraft charges as a result of ATM withdrawals and one-time point of sale (non-recurring) transactions require prior approval of the customer. The non-contractual amount of financial instruments with off-balance sheet risk at September 30, 2024 and December 31, 2023 was $13,025,000 and $13,121,000, respectively. The Company reserves the right to discontinue this service without prior notice.

Liquidity

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

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

58
The Company's use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is presented.  Other uses of funds include purchasing stock from the Federal Home Loan Bank (FHLB) of Pittsburgh, as well as capital expenditures.  Capital expenditures (including software purchases), during the first nine months of 2024 were $852,000 compared to $2,308,000 during the same time period in 2023.

Short-term debt from the FHLB supplements the Bank’s availability of funds.  The Bank achieves liquidity primarily from temporary or short‑term investments in the Federal Reserve and the FHLB.  The Bank had a maximum borrowing capacity at the FHLB of approximately $1.07 billion, of which $384.8 million was outstanding, at September 30, 2024. The Bank also has two federal funds line with third party providers for $34.0 million as of September 30, 2024, which are unsecured and were undrawn upon as of September 30, 2024. The Company also has a borrower in custody line with the Federal Reserve Bank of approximately $14.2 million, which also was not drawn upon as of September 30, 2024. The Company has a $15.0 million line of credit with a New York community bank, of which $9.6 million was utilized as of September 30, 2024. The Company continues to evaluate its liquidity needs and as necessary finds additional sources.

Citizens Financial Services, Inc. is a separate legal entity from the Bank and must provide for its own liquidity.  In addition to its operating expenses, Citizens Financial Services, Inc. is responsible for paying any dividends declared to its shareholders.  Citizens Financial also has repurchased shares of its common stock.  Citizens Financial Services, Inc.’s primary source of income is dividends received from the Bank.  Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. In particular, the Bank may not, as a state-chartered bank which is a member of the Federal Reserve System, declare a dividend without approval of the Federal Reserve, unless the dividend to be declared by the Bank’s Board of Directors does not exceed the total of:  (i) the Bank’s net profits for the current year to date, plus (ii) its retained net profits for the preceding two current years, less any required transfers to surplus.  The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions.  The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends, because banks which are not classified as well capitalized or adequately capitalized may not pay dividends and no dividend may be paid which would make the Bank undercapitalized after the dividend.  At September 30, 2024, Citizens Financial Services, Inc. (on an unconsolidated basis) had liquid assets of approximately $4.2 million.

Interest Rate and Market Risk Management

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

Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, because we have no trading portfolio, we are not subject to trading risk. At September 30, 2024, the Company has equity securities that represent only 0.06% of its total assets and, therefore, equity risk is not significant.

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

59
Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on our Company's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures.  In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels.  We have not experienced the kind of earnings volatility that might be indicated from gap analysis.

The Company currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management and asset liability management processes that we believe will effectively identify, measure, and monitor the Company’s risk exposure.  In this analysis, the Company examines the results of movements in interest rates with additional assumptions made concerning prepayment speeds on mortgage loans and mortgage securities.   Shock scenarios, which assume a parallel shift in interest rates and is instantaneous, typically have the greatest impact on net interest income. The following is a rate shock analysis and the impact on net interest income as of September 30, 2024 (dollars in thousands):
Change In
% Change In
Prospective One-Year
Prospective
Prospective
Changes in Rates
Net Interest Income
Net Interest Income
Net Interest Income
-400 Shock
$
97,156
$
5,469
5.96
-300 Shock
95,505
3,818
4.16
-200 Shock
94,681
2,994
3.27
-100 Shock
93,644
1,957
2.13
Base
91,687
-
-
+100 Shock
89,418
(2,269
)
(2.47
)
+200 Shock
86,642
(5,045
)
(5.50
)
+300 Shock
84,345
(7,342
)
(8.01
)
+400 Shock
82,068
(9,619
)
(10.49
)

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

Item 3
Quantitative and Qualitative Disclosure about Market Risk

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

Item 4
Control and Procedures

(a) Disclosure Controls and Procedures

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

60
(b) Changes to Internal Control over Financial Reporting

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

PART II ‑ OTHER INFORMATION

Item 1
Legal Proceedings

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

Item 1A
Risk Factors

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

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

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

(1)
On April 22, 2023, the Company announced that the Board of Directors authorized the Company to repurchase up to an additional 150,000 shares at an aggregate purchase price not to exceed $15.0 million over a period of 36 months. The repurchases will be conducted through open-market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors.  No time limit was placed on the duration of the share repurchase program.  Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.
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Item 3
Defaults Upon Senior Securities

Not applicable .

Item 4
Mine Safety Disclosure

Not applicable .

Item 5
Other Information

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

Item 6 ‑ Exhibits

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

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

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

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

(4)
Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on November 23, 2022
(5)
Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the Commission on March 10, 2023.

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Signatures

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

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


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