First Keystone Corporation Management's Discussion and Analysis of Financial Condition and Results of Operation

In addition to historical information, this Form 10-Q may contain forward-looking statements. Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, noninterest income, earnings or loss per share, asset mix and quality, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of Management or the Board of Directors, and (c) statements of assumptions, such as economic conditions in the Company's market areas. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "intends", "will", "should", "anticipates", or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy. Forward-looking statements are subject to certain risks and uncertainties such as national, regional and local economic conditions, competitive factors, and regulatory limitations. Actual results may differ materially from those projected in the forward-looking statements.

Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: short-term and long-term effects of inflation and rising costs on the Company, customers and economy; legislative and regulatory changes; banking system instability caused by failures and continuing financial uncertainty of various banks which may adversely impact the Company and its securities and loan values, deposit stability, capital adequacy, financial condition, operations, liquidity, and results of operations; effects of governmental and fiscal policies, as well as legislative and regulatory changes; effects of new laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) and their application with which the Company and its subsidiaries must comply; impacts of the capital and liquidity requirements of the Basel III standards or any similar standards; effects of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters; ineffectiveness of the business strategy due to changes in current or future market conditions; future actions or inactions of the United States government, including the effects of short-term and long-term federal budget and tax negotiations and a failure to increase the government debt limit or a prolonged shutdown of the federal government; effects of economic conditions particularly with regard to the negative impact of any pandemic, epidemic or health-related crisis and the responses thereto on the operations of the Company and current customers, specifically the effect of the economy on loan customers' ability to repay loans; effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; inflation, securities market and monetary fluctuations; risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and interest rate protection agreements, as well as interest rate risks; difficulties in acquisitions and integrating and operating acquired business operations, including information technology difficulties; challenges in establishing and maintaining operations in new markets; effects of technology changes; effects of general economic conditions and more specifically in the Company's market areas; failure of assumptions underlying the establishment of reserves for credit losses and estimations of values of collateral and various financial assets and liabilities; acts of war or terrorism or geopolitical instability; disruption of credit and equity markets; ability to manage current levels of impaired assets; loss of certain key officers; ability to maintain the value and image of the Company's brand and protect the Company's intellectual property rights; continued relationships with major customers; and, potential impacts to the Company from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses.

Management considers subsequent events occurring after the balance sheet date for matters which may require adjustments to, or disclosure in, the consolidated financial statements. We caution readers not to place undue reliance on these forward-looking statements. They only reflect Management's analysis as of this date. The Company does not revise or update these forward-looking statements to reflect events or changed circumstances. Please carefully review the risk

factors described in other documents the Company files from time to time with the SEC, including the Annual Reports on Form 10-K and the Quarterly Reports on Form 10-Q. Please also carefully review any Current Reports on Form 8-K filed by the Company with the SEC.

CRITICAL ACCOUNTING POLICIES

The Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the consolidated financial statements included in the 2024 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Quarter ended September 30, 2025 compared to quarter ended September 30, 2024

First Keystone Corporation realized earnings for the three months ended September 30, 2025 of $2,808,000, an increase of $1,301,000 from the third quarter of 2024. The increase in net income for the three months ended September 30, 2025 was primarily due to increased interest and fees on loans related to growth in commercial real estate loans.

On a per share basis, for the three months ended September 30, 2025, net income was $0.45 compared to earnings of $0.25 per share for the same three month period of 2024. Quarterly regular cash dividends amounted to $0.28 per share for the three months ended September 30, 2025 and 2024.

NET INTEREST INCOME

The major source of operating income for the Company is net interest income, defined as interest and loan fee income less interest expense. In the three months ended September 30, 2025, interest income amounted to $19,760,000, an increase of $1,518,000 or 8.3% from the three months ended September 30, 2024, while interest expense amounted to $10,256,000 in the three months ended September 30, 2025, an increase of $168,000 or 1.7% from the three months ended September 30, 2024. As a result, net interest income increased $1,350,000 or 16.6% to $9,504,000 from $8,154,000 for the same period in 2024.

The Company's net interest margin for the three months ended September 30, 2025 was 2.64% compared to 2.42% for the same period in 2024. The increase in net interest margin was primarily a result of increased interest and fees on loans.

PROVISION FOR CREDIT LOSSES

The provision for credit losses for the three months ended September 30, 2025 and 2024 was $255,000 and $718,000, respectively. The decrease in the provision for credit losses resulted from the Company's analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. Charge-off and recovery activity in the allowance for credit losses resulted in net charge-offs of $17,000 and $748,000 for the three months ended September 30, 2025 and 2024, respectively. The decrease in net charge-offs for the three months ended September 30, 2025 was mainly the result of $741,000 in aggregate charge-offs completed on four loans during the third quarter of 2024 for a plastic processing company focused on non-post-consumer recycling. See Allowance for Credit Losses on page 52 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $1,906,000 for the three months ended September 30, 2025, as compared to $1,860,000 for the same period in 2024, an increase of $46,000, or 2.5%.

Net securities gains decreased $37,000 to $109,000 for the three months ended September 30, 2025 as compared to $146,000 for the three months ended September 30, 2024. The decrease in net securities gains was the result of an decrease in the mark-to-market adjustment on held equity securities during the quarter ended September 30, 2025 compared to the quarter ended September 30, 2024.

Trust department income increased $19,000 or 7.9% to $259,000 for the three months ended September 30, 2025 as compared to the same period in 2024. Service charges and fees income increased $57,000 or 9.6% for the three months ended September 30, 2025 as compared to the same period in 2024. ATM fees and debit card income increased $3,000 or 0.5% to $577,000 for the three months ended September 30, 2025. Gains on sales of mortgage loans increased $19,000 or 47.5% for the three months ended September 30, 2025. The increase was due to more loans sold during the third quarter of 2025 as compared to the same period of 2024. Other non-interest income decreased $15,000 or 15.8% to $80,000 for the three months ended September 30, 2025.

NON-INTEREST EXPENSE

Total non-interest expense was $8,002,000 for the three months ended September 30, 2025, as compared to $7,820,000 for the three months ended September 30, 2024.

Salaries and employee benefits amounted to $4,073,000 or 50.9% of total non-interest expense for the three months ended September 30, 2025, as compared to $4,375,000 or 55.9% of total non-interest expense for the three months ended September 30, 2024. The decrease was mainly due to decreased employee health insurance costs in the third quarter of 2025 as compared to the same period in 2024.

Net occupancy, furniture and equipment, and computer expense amounted to $1,203,000 for the three months ended September 30, 2025, an increase of $155,000 or 14.8% which was mainly due to an increase in expense related to various new software systems that were implemented in 2025. Professional services increased $61,000 or 17.6% to $407,000 as of the quarter ended September 30, 2025 compared to the same quarter of 2024. The increase was due to normal annual increases in accounting audit expenses in the third quarter of 2025 as related to the same period in 2024. Pennsylvania shares tax expense amounted to $352,000 for the three months ended September 30, 2025, an increase of $38,000 or 12.1% as compared to the three months ended September 30, 2024.

Federal Deposit Insurance Corporation ("FDIC") insurance expense amounted to $303,000 for the three months ended September 30, 2025, an increase of $32,000 or 11.8% as compared to the same period in 2024. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

ATM and debit card fees expense amounted to $321,000 for the three months ended September 30, 2025, an increase of $76,000 or 31.0% as compared to the three months ended September 30, 2024. The increase was mainly due to increased electronic funds transfer fees in the third quarter of 2025. Data processing expenses amounted to $366,000 for the three months ended September 30, 2025 as compared to $232,000 for the same period of 2024, an increase of $134,000 or 57.8% mainly due to increases in internet banking and core service fees.

Advertising expense amounted to $97,000 in the third quarter of 2025, a decrease of $58,000 or 37.4% as compared to the three months ended September 30, 2024.

Other non-interest expense amounted to $880,000 for the three months ended September 30, 2025, an increase of $46,000 or 5.5% as compared to the three months ended September 30, 2024.

INCOME TAXES

Income tax expense amounted to $345,000 for the three months ended September 30, 2025, as compared to income tax benefit of $31,000 for the three months ended September 30, 2024, an increase of $376,000. The effective total income tax rate was 10.9% for the three months ended September 30, 2025 as compared to (2.1)% for the three months ended September 30, 2024. The increase in the effective tax rate was mainly due to higher overall operating

income, with minimal change to tax-exempt income. The Company recognized $210,000 of tax credits from low-income housing partnerships during both the three months ended September 30, 2025 and 2024.

Nine months ended September 30, 2025 compared to nine months ended September 30, 2024

First Keystone Corporation realized earnings for the nine months ended September 30, 2025 of $6,775,000, an increase of $22,265,000 from the same period in 2024. The increase in net income for the nine months ended September 30, 2025 was primarily due to the Company recognizing goodwill impairment expense of $19,133,000 during the first quarter of 2024 as well as increased interest and fees on loans related to growth in commercial real estate loans recognized during the nine months ended September 30, 2025.

On a per share basis, net income was $1.09 for the nine months ended September 30, 2025 versus net losses of $2.52 for the same period in 2024. Cash dividends amounted to $0.84 per share for the nine months ended September 30, 2025 and 2024.

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NET INTEREST INCOME

The major source of operating income for the Company is net interest income, defined as interest and loan fee income less interest expense. For the nine months ended September 30, 2025, interest income amounted to $56,854,000, an increase of $4,073,000 or 7.7% from the nine months ended September 30, 2024, while interest expense amounted to $29,075,000 in the nine months ended September 30, 2025 a decrease of $76,000 or 0.3% from the nine months ended September 30, 2024. As a result, net interest income increased $4,149,000 or 17.6% to $27,779,000 from $23,630,000 for the same period in 2024. The increase was primarily due to growth in commercial real estate loans and interest bearing deposits in banks during the nine months ended September 30, 2025, offset by decreases in the balance of taxable securities due to run-off of principal and interest without replacement.

The Company's net interest margin for the nine months ended September 30, 2025 was 2.67% compared to 2.35% for same period in 2024. The increase in net interest margin was primarily a result of increased interest and fees on loans.

PROVISION FOR CREDIT LOSSES

The provision for credit losses for the nine months ended September 30, 2025 and 2024 was $769,000 and $1,492,000, respectively. The decrease in the provision for credit losses resulted from the Company's analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. Charge-off and recovery activity in the allowance for credit losses resulted in net charge-offs of $441,000 and $760,000 for the nine months ended September 30, 2025 and 2024, respectively. The decrease in net charge-offs for the nine months ended September 30, 2025 was mainly the result of $741,000 in aggregate charge-offs completed on four loans during the third quarter of 2024 for a plastic processing company focused on non-post-consumer recycling, offset with charge-offs totaling $182,000 completed on a loan to a trucking transportation business and a charge-off of $245,000 completed on a loan to a manufacturer of hemp-based biodegradable food containers during the nine months ended September 30, 2025. See Allowance for Credit Losses on page 52 for further discussion.

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NON-INTEREST INCOME

Total non-interest income was $5,463,000 for the nine months ended September 30, 2025, as compared to $4,825,000 for the same period in 2024, an increase of $638,000, or 13.2%.

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ATM fees and debit card income increased $40,000 or 2.4% to $1,696,000 for the nine months ended September 30, 2025. Service charges and fee income increased $70,000 or 4.2% for the nine months ended September 30, 2025. Gains on sales of mortgage loans increased $29,000 or 42.6% due to more loans sold and at a higher average gain on individual loans sold in the first nine months of 2025 as compared to the same period in 2024.

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Trust department income was $800,000 for the nine months ended September 30, 2025 an increase of $62,000 or 8.4% as compared to the same period in 2024. Net securities gains (losses) increased $176,000 or 366.7% to net gains of $128,000 for the nine months ended September 30, 2025 as compared to net losses of $48,000 for the nine months ended September 30, 2024. The increase in securities gains (losses) was due to an improvement in the mark-to-market valuation on the Company's held equity securities during the nine months ended September 30, 2025.

NON-INTEREST EXPENSE

Total non-interest expense was $24,912,000 for the nine months ended September 30, 2025, as compared to $42,631,000 for the nine months ended September 30, 2024. Non-interest expense decreased $17,719,000 or 41.6%. The significant decrease in total non-interest expense for the nine months ended September 30, 2025 was mainly the result of the full, one-time, goodwill impairment charge of $19,133,000 that was recorded during the first quarter of 2024.

Salaries and employee benefits amounted to $13,006,000 or 52.2% of total non-interest expense for the nine months ended September 30, 2025, as compared to $13,082,000 or 30.7% for the nine months ended September 30, 2024. The decrease was mainly due to decreased costs associated with employee health insurance which were $163,000 less for the nine months ended September 30, 2025, compared to the same period in 2024.

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Net occupancy, furniture and equipment, and computer expense amounted to $3,607,000 for the nine months ended September 30, 2025, an increase of $447,000 or 14.1%. The increase was mainly due to increased depreciation on furniture and equipment resulting from the replacement of the Bank's ATM fleet, an increase in disaster recovery expense as the Bank put new disaster recovery systems in place in late 2024, and an increase in expense related to various new software systems that were implemented in 2025. Professional services decreased $86,000 or 6.9% to $1,159,000 for the nine months ended September 30, 2025. The decrease in 2025 was mainly the result of increased audit fees and expenses relating to the adoption of CECL and the goodwill impairment analysis in 2024. Pennsylvania shares tax expense amounted to $840,000 for the nine months ended September 30, 2025, an increase of $76,000 or 9.9% as compared to the nine months ended September 30, 2024.

FDIC insurance expense increased $239,000 or 35.3% for the nine months ended September 30, 2025. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

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ATM and debit card fees expense amounted to $874,000 for the nine months ended September 30, 2025, an increase of $149,000 or 20.6% as compared to the nine months ended September 30, 2024. This increase was a result of higher electronic funds transfer expenses for the nine months ended September 30, 2025, as compared to the same period in 2024, as vendor relationship credits resulting from contract negotiations were applied against billings in 2024 which were fully utilized and no longer available in 2025. Data processing expenses amounted to $1,108,000 for the nine months ended September 30, 2025, an increase of $352,000 or 46.6% as compared to the nine months ended September 30, 2024. The increase was the result of increased internet banking expenses and core system fees due to vendor relationship credits that were applied against billings in 2024 which were fully utilized and no longer available in 2025.

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Advertising expense decreased $82,000 or 19.4% during the nine months ended September 30, 2025. This decrease was mainly the result of the Company utilizing less television and radio advertising during the nine months ended September 30, 2025, as compared to the same period in 2024.

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The Company recognized a full, one-time, goodwill impairment in the amount of $19,133,000 during the first quarter of 2024. This was the result of goodwill impairment testing performed due to the decrease of the Company's stock price during the first quarter of 2024 as a triggering event. The goodwill impairment has no impact on regulatory capital ratios, liquidity or the Company's cash balances.

Other non-interest expense amounted to $3,062,000 for the nine months ended September 30, 2025, an increase of $395,000 or 14.8% as compared to the nine months ended September 30, 2024. The increase was mainly the result of a customer-related fraud write-off of $307,000 during the first quarter of 2025.

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Management of the Company believes that investors' understanding of the Company's performance is enhanced by disclosing non-GAAP financial measures without the effects of the impairment as a reasonable basis for comparison of the Corporation's ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The following Non-GAAP Reconciliation Schedule provides a reconciliation of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.

NON-GAAP RECONCILIATION SCHEDULE

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

(Unaudited)

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INCOME TAXES

Income tax expense amounted to $786,000 for the nine months ended September 30, 2025, as compared to income tax benefit of $178,000 for the nine months ended September 30, 2024, an increase of $964,000. The effective total income tax rate was 10.4% for the nine months ended September 30, 2025 as compared to 1.1% for the nine months ended September 30, 2024. The increase in the effective tax rate was mainly due to higher overall operating income with minimal change to tax-exempt income. The Company recognized $630,000 of tax credits from low-income housing partnerships during both the nine months ended September 30, 2025 and 2024.

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FINANCIAL CONDITION

SUMMARY

Total assets increased to $1,582,377,000 as of September 30, 2025, an increase of $153,794,000 from year-end 2024. Total assets as of December 31, 2024 amounted to $1,428,538,000.

Total cash and cash equivalents increased by $130,001,000 to $147,255,000 as of September 30, 2025 from $17,254,000 as of December 31, 2024. The increase was mainly the result of excess cash balances resulting from increased deposit balances and excess cashflows from activity in the debt securities available-for-sale portfolio which were not reinvested during the nine months ended September 30, 2025.

Total debt securities available-for-sale increased $17,482,000 or 4.5% to $407,770,000 as of September 30, 2025 from $390,288,000 at December 31, 2024 mainly due to $41,836,000 in maturities, paydowns, and calls completed during the nine months ended September 30, 2025, offset by $51,918,000 in securities purchased and an improvement of $7,395,000 in unrealized loss on securities during the same period.

Total net loans increased $8,954,000 or 1.0% to $949,733,000 as of September 30, 2025 from $940,779,000 as of December 31, 2024. Real estate loans, the largest segment of the Company's loan portfolio, increased by $15,489,000 during the nine months ended September 30, 2025 and commercial and industrial loans, the second largest segment of the Company's loan portfolio, decreased by $2,718,000 during the nine months ended September 30, 2025.

Total deposits increased $146,614,000 or 14.0% to $1,192,494,000 as of September 30, 2025 from $1,045,880,000 as of December 31, 2024, mainly due to an increase of $135,031,000 in the balance of interest bearing deposits, driven by an increase of $111,919,000 in the balance of retail CDs and an increase of $35,137,000 in brokered CDs.

The Company continues to maintain and manage its asset growth. The Company's strong equity capital position provides an opportunity to further leverage its asset growth. Total borrowings decreased in the nine months ended September 30, 2025 by $1,570,000 to $238,856,000 from $240,426,000 as of December 31, 2024. The decrease in borrowings was mainly the result of a decrease of $1,494,000 in the balance of short-term borrowings held at the FHLB.

Total stockholders' equity amounted to $112,252,000 at September 30, 2025, an increase of $5,470,000 or 5.1% from December 31, 2024 mainly due to an increase in retained earnings of $1,552,000 and an improvement of $3,452,000 in accumulated other comprehensive loss.

SEGMENT REPORTING

Currently, management measures the performance and allocates the resources of the Company as a single segment.

EARNING ASSETS

Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Company maximizes income. The earning asset ratio (average interest earning assets divided by average total assets) equaled 95.1% at September 30, 2025 and 94.4% at September 30, 2024. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and securities.

The Company's primary earning asset, the loans held for investment portfolio, increased to $957,630,000 as of September 30, 2025, up $9,916,000 or 1.0% since year-end 2024. The loan portfolio continues to be well diversified and asset quality has remained consistent. Total non-performing assets were $6,580,000 as of September 30, 2025, an increase of $1,610,000, or 32.4% from $4,970,000 reported in non-performing assets as of December 31, 2024. Total allowance for credit losses to total non-performing assets was 121.58% as of September 30, 2025 and 154.37% at December 31, 2024. See the Non-Performing Assets section on page 54 for more information.

In addition to loans, another primary earning asset is our overall securities portfolio, which increased in size from December 31, 2024 to September 30, 2025 mainly due to a purchase strategy completed during the three months ended September 30, 2025, along with other normal activity in the securities portfolio. Debt securities available-for-sale amounted to $407,770,000 as of September 30, 2025, an increase of $17,482,000 from year-end 2024. The increase in debt securities available-for-sale is mainly due to $41,836,000 in maturities, paydowns, and calls completed during the nine months ended September 30, 2025, offset by $51,918,000 in securities purchased and an improvement of $7,395,000 in unrealized loss on securities during the same period.

Interest-bearing deposits in other banks increased $126,918,000 as of September 30, 2025, to $134,239,000 from $7,321,000 at year-end 2024 mainly due to an increase in cash balances held at the Federal Reserve as a result of increased deposit balances and excess cashflows from activity in the debt securities available-for-sale portfolio which were not reinvested during the nine months ended September 30, 2025.

LOANS

Total loans increased to $957,012,000 as of September 30, 2025 as compared to $946,826,000 as of December 31, 2024. The table on page 20 provides data relating to the composition of the Company's loan portfolio on the dates indicated. Total loans increased by $10,186,000 or 1.1%.

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The Real Estate portfolio increased $15,489,000 or 1.8% from $850,656,000 at December 31, 2024 to $866,145,000 at September 30 2025. The increase in the Real Estate portfolio for the nine months ended September 30, 2025 was mainly the result of an increase of $87,752,000 in new loan originations, which were offset by a decrease in utilization of existing real estate lines of credit of $21,243,000 and loan payoffs of $45,135,000, along with regular principal payments and other typical fluctuations in the Real Estate portfolio. The Agricultural portfolio increased $135,000 or 14.4% from $936,000 at December 31, 2024 to $1,071,000 at September 30, 2025. The increase in the Agricultural portfolio for the nine months ended September 30, 2025 was mainly the result of new loan originations in the amount of $30,000 and two loans totaling $219,000 that were reclassed from the Commercial and Industrial portfolio to the Agricultural portfolio during the nine months ended September 30, 2025, along with an increase of $1,000 in utilization of existing agricultural lines of credit, offset by regular principal payments and other typical fluctuations in the Agricultural portfolio. The Commercial and Industrial portfolio decreased $2,718,000 or 4.1% from $66,706,000 at December 31, 2024 to $63,988,000 at September 30, 2025. The decrease was attributable to $7,893,000 in new loan originations and an increase of $4,357,000 in utilization of existing commercial and industrial lines of credit, offset by loan payoffs of $6,104,000 and regular principal payments and other typical amortization in the Commercial and Industrial portfolio. The Consumer portfolio decreased $944,000 or 14.8% from $6,390,000 at December 31, 2024 to $5,446,000 at September 30, 2025. The decrease is mainly attributable to new loan originations of $1,513,000 and an increase of $3,000 in utilization of existing consumer lines of credit, offset by loan payoffs of $1,236,000 and regular principal payments. The State and Political Subdivisions portfolio decreased $1,776,000 or 8.0% from $22,138,000 at December 31, 2024 to $20,362,000 at September 30, 2025. The decrease is mainly the result of new loan originations totaling $2,615,000, offset by loan payoffs of $2,595,000 and regular principal payments on state and political subdivisions loans completed during the nine months ended September 30, 2025.

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The Company continues to originate and sell certain long-term fixed rate residential mortgage loans, which conform to secondary market requirements, when the market pricing is favorable. The Company derives ongoing income from the servicing of mortgages sold in the secondary market. The Company continues its efforts to lend to creditworthy borrowers. Management believes that the loan portfolio is well diversified.

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Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $925,194,000 or 96.7% of gross loans are graded Pass; $5,959,000 or 0.6% are graded Special Mention; $25,859,000 or 2.7% are graded Substandard; and $0 are graded Doubtful. The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower's financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower. See Note 4 - Loans and Allowance for Credit Losses for risk grading tables. Overall, non-pass grades increased $3,984,000 to $31,818,000 at September 30, 2025, as compared to $27,834,000 at December 31, 2024. Real Estate non-pass grades increased $4,090,000 to $31,461,000 as of September 30, 2025 as compared to $27,371,000 as of December 31, 2024. Commercial and Industrial non-pass grades decreased $139,000 to $318,000 as of September 30, 2025 as compared to $457,000 as of December 31, 2024. Consumer non-pass grades increased $33,000 to $39,000 as of September 30, 2025 as compared to $6,000 as of December 31, 2024. There were no Agricultural or State and Political Subdivision non-pass grades at September 30, 2025 or December 31, 2024.

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The Company continues to internally underwrite each of its loans to comply with prescribed policies and approval levels established by its Board of Directors.

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Total Loans

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ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses constitutes the amount available to absorb losses within the loan portfolio. As of September 30, 2025, the allowance for credit losses was $8,000,000 as compared to $7,672,000 as of December 31, 2024. The allowance for credit losses is established through a provision for credit losses charged to expenses. Loans are charged against the allowance for possible credit losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Management performs a quarterly analysis to determine the adequacy of the allowance for credit losses. The methodology in determining adequacy incorporates quantitative and qualitative allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process. This assessment results in an allocated allowance. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority.

Management considers, based upon its methodology, that the allowance for credit losses is adequate to cover foreseeable future losses. However, there can be no assurance that the allowance for credit losses will be adequate to cover significant losses, if any, that might be incurred in the future. On a quarterly basis, management evaluates the qualitative factors utilized in the calculation of the Company's allowance for credit losses and various adjustments are made to these factors as deemed necessary at the time of evaluation. The following table summarizes the qualitative factor adjustments made during the first three quarters of 2025.

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The Analysis of Allowance for Credit Losses table contains an analysis of the allowance for credit losses indicating charge-offs and recoveries for the nine months ended September 30, 2025 and 2024. Net charge-offs as a percentage of average loans was 0.05% and 0.08% for the nine months ended September 30, 2025 and 2024, respectively. Net charge-offs amounted to $441,000 for the nine months ended September 30, 2025 and $760,000 for the nine months ended September 30, 2024. The decrease in net charge-offs for the nine months ended September 30, 2025 was mainly the result of $741,000 in aggregate charge-offs completed during the third quarter of 2024 on four loans to a plastic processing company focused on non-post-consumer recycling, offset with charge-offs totaling $182,000 completed on a loan to a trucking transportation business and a charge-off of $245,000 completed on a loan to a manufacturer of hemp-based biodegradable food containers during the nine months ended September 30, 2025.

For the nine months ended September 30, 2025, the provision for credit losses was $769,000, compared to the nine months ended September 30, 2024, when the provision for credit losses was $1,492,000. The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for credit losses of $8,000,000, of which 94.0% was attributed to the Real Estate component, 0.1% attributed to the Agricultural component, 4.3% attributed to the Commercial and Industrial component, 1.0% attributed to the Consumer component, and 0.6% attributed to the State and Political Subdivisions component (refer to the activity in Note 4 - Loans and Allowance for Credit Losses on page 13).

Analysis of Allowance for Credit Losses

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It is the policy of management and the Company's Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio. A provision for credit losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio. This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.

The loan review process, which is conducted quarterly, is an integral part of the Bank's evaluation of the loan portfolio. A detailed quarterly analysis to determine the adequacy of the Company's allowance for credit losses is reviewed by the Board of Directors.

With the Bank's manageable level of net charge-offs and recoveries along with the additions to the reserve from the provision out of operations, the allowance for credit losses as a percentage of year-to-date average loans amounted to 0.83% and 0.84% at September 30, 2025 and 2024, respectively.

NON-PERFORMING ASSETS

The table on page 57 details the Company's non-performing assets and individually evaluated loans as of the dates indicated. Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period

income. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

Total non-performing assets amounted to $6,580,000 as of September 30, 2025, as compared to $4,970,000 as of December 31, 2024. The economic growth for the third quarter of 2025 has remained relativey stagnant from the higher-than-expected growth in the first quarter of 2025. Consumer spending remains at high levels. The inflation rate increased from 2.4% in March 2025 to 3.0% in September 2025, above the Federal Reserve Board's desired rate of 2.0%. Inflation has been on the rise in the second and third quarters of 2025, with currently imposed tariffs and threat of higher tariffs leading to the surge and potentially pushing inflation even higher. Additionally, mass layoffs from the federal government increased unemployment levels. Layoffs from large corporations from the public sector have also had an effect. Many economists and influential thinkers still believe that the economy is moving forward in spite of certain forecasts and predictors. The concern of a recession, although lessened this year, is still being discussed. Inflation had been receding in the middle of 2024, although it has seen a slow but steady rise in the last few quarters. This has the Federal Reserve looking very cautiously at their next move. This will all depend on which direction inflation and unemployment rates are trending. The war between Ukraine and Russia continues to deeply pierce the landscape of the world. The heightened conflict with Israel and Palestine has caused much hostility throughout the world. The continuing dispute over whether to continue US support of Ukraine and Israel in ongoing efforts has been a strain on the economy. Values of new and used homes and automobiles have remained high. Although, there would seem to be a dynamic shift in the automobile industry where inventories are increasing and sales are slowing, this may lead to a reduced profit margin. Higher interest rates have added to the curtailed borrowing. Consumer savings is dwindling, and credit balances are growing. Supply chains are back up and running efficiently in many areas. Labor continues to remain costly and unpredictable. These forces have had a direct effect on the Company's non-performing assets. The Company is closely monitoring all segments of its loan portfolio because of the current uncertain economic environment. Non-accrual loans totaled $4,165,000 as of September 30, 2025, as compared to $4,214,000 as of December 31, 2024. There were no foreclosed assets held for resale as of September 30, 2025 and December 31, 2024. There were eight loans past-due 90 days or more and still accruing interest at September 30, 2025 that carried an aggregate balance of $2,415,000, compared to December 31, 2024 when there were six loans past-due 90 days or more and still accruing interest which carried an aggregate balance of $756,000. The loans past-due 90 days or more and still accruing interest as of September 30, 2025 were secured by commercial real estate and residential real estate, all of which were well secured and in the process of collection.

Non-performing assets to total loans was 0.69% at September 30, 2025 and 0.52% at December 31, 2024. Non-performing assets to total assets was 0.42% at September 30, 2025 and 0.35% at December 31, 2024. The allowance for credit losses to total non-performing assets was 121.58% as of September 30, 2025 as compared to 154.37% as of December 31, 2024. Additional detail can be found on page 57 in the Non-Performing Assets and Individually Evaluated Loans table and page 29 in the Non-Performing Assets table. Asset quality is a priority and the Company retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation efforts and engages an annual external loan review.

Performing substandard loans, which have not been designated for individual evaluation to determine expected credit losses, have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future. Performing substandard loans not designated for individual evaluation amounted to $21,694,000 at September 30, 2025 and $20,080,000 at December 31, 2024.

Individually evaluated loans were $4,474,000 at September 30, 2025, compared to $4,523,000 at December 31, 2024. The largest individually evaluated loan relationship at September 30, 2025 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate. At September 30, 2025, the loan carried a balance of $1,603,000, net of $1,989,000 that had been charged off to date. The second largest individually evaluated loan relationship at September 30, 2025 consisted of two non-performing loans granted to an individual for the purpose of renovating a multi-use property slated to be converted into apartments and a retail storefront. Both loans are secured by commercial real estate, and carried an aggregate balance of $1,441,000 at September 30, 2025. The third largest individually evaluated loan relationship at September 30, 2025 consisted of a non-performing loan to a manufacturer of

hemp-based biodegradable plastic food containers and utensils. As of September 30, 2025, the loan carried a balance of $537,000.

The Company determines the need for individual evaluation of loans based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the $4,474,000 in individually evaluated loans at September 30, 2025, none were located outside of the Company's primary market area.

The outstanding recorded investment of modified loans to borrowers experiencing financial difficulty was $107,000 at September 30, 2025, which consisted on one loan classified in the Real Estate portfolio. The outstanding recorded investment of modified loans to borrowers experiencing financial difficulty as of December 31, 2024 amounted to $10,193,000, with $10,019,000 classified in the Real Estate portfolio and $174,000 classified in the Commercial and Industrial portfolio. The modification of a loan to a borrower experiencing financial difficulty as of September 30, 2025 was a payment modification that allowed a period of interest-only payments of eleven months and the modifications of loans to borrowers experiencing financial difficulty as of December 31, 2024 consisted of term modifications on two loans which allowed an extension of the maturity date for each respective loan, one payment modification which allowed a period of interest-only payments on the loan, and one loan experienced a release of a piece of collateral securing the loan. There were no unfunded commitments on modified loans to borrowers experiencing financial difficulty as of September 30, 2025 or December 31, 2024. At September 30, 2025, the modified loan to a borrower experiencing financial difficulty was not in compliance with the terms of its restructure, compared to December 31, 2024 when there were no modifications of loans to borrowers experiencing financial difficulty that were not in compliance with the terms of their restructure.

Of the modifications of loans to borrowers experiencing financial difficulty that were completed during the twelve months preceding September 30, 2025, two loans experienced payment defaults during the nine months ended September 30, 2025. One loan carrying a balance of $421,000 experienced a payment default during the three and nine months ended September 30, 2025 and remained in past due status as of September 30, 2025. One loan carrying a balance of $107,000 experienced a payment default during the three and nine months ended September 30, 2025 and remained in past due status as of September 30, 2025. Of the modifications of loans to borrowers experiencing financial difficulty that were completed during the twelve months preceding September 30, 2024, one loan carrying a balance of $9,427,000 experienced a payment default during the nine months ended September 30, 2024, but the loan was paid current by the customer as of September 30, 2024.

The Company's non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end, unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Company. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.

For non-accrual loans less than $250,000 upon classification and typically at year end, the Company completes a Certificate of Inspection, which includes the results of an onsite inspection, and may consider value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.

Improving loan quality is a priority. The Company actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in 2025. Excluding the assets disclosed in the Non-Performing Assets and Individually Evaluated Loans table below and the Non-Performing Assets table in Note 4 - Loans and Allowance for Credit Losses, management is not aware of any information about borrowers' possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination.

The economic climate remains unstable. The war between Ukraine and Russia continues into its fourth year and the Israeli conflict in the Gaza strip has moved to exploring yet another cease fire attempt. Inflationary pressures remain elevated and have seen an increase in the last few months, exacerbated by recently enacted presidential policies. This continues to create much debate, speculation, and concern regarding the appropriate actions to be taken to overcome the effects of monetary policy adjustments, tariffs, federal government shutdown, and continuing large federal layoffs, that have been and will be made to affect the change. Intense political turmoil, commodity prices remaining high, gas prices fluctuating widely from week to week, small businesses closing, larger corporations cutting jobs, unprecedented weather conditions seen around the world, and the uncertainty of where the Federal Reserve may go from here in regard to rates have all exacerbated the difficulties in the national and state economy. Experts at all levels continue to ascertain the intermediate or long term effects of such issues. The Company may experience difficulties collecting payments on time from its borrowers, and certain types of loans may need to be modified, which could cause a rise in the level of individually evaluated loans, non-performing assets, charge-offs, and delinquencies. Should such metrics increase, additions to the balance of the Company's allowance for credit losses could be required. The extent of the impact of these stressors on the Company's operational and financial performance will depend on certain developments including reactions to inflationary controls enacted, the labor force, the longevity of the wars, the ongoing political landscape, and the looming worldwide discord, and any after-effects of these factors. These factors may not immediately impact the Company's operational and financial performance, as the effects of these factors may lag into the future. The Company is also susceptible to the impact of economic and fiscal policy factors that may evolve in the current economic environment.

A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans. As of September 30, 2025 and December 31, 2024, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

Non-Performing Assets and Individually Evaluated Loans

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Real estate mortgages comprise 90.5% of the loan portfolio as of September 30, 2025, as compared to 89.8% as of December 31, 2024. Real estate mortgages consist of both loans secured by residential and commercial real estate. The Real Estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities. Also, the residential component of the Real Estate loan portfolio is largely comprised of fixed rate mortgages. The real estate loans are concentrated primarily in the Company's market area and are subject to risks associated with the local economy. The loans secured by commercial real estate typically reprice approximately every three to five years and are also concentrated in the Company's market area. The Company's loss exposure on its individually evaluated loans continues to be mitigated by collateral positions on these loans. The allocated allowance for credit losses associated with individually evaluated loans is generally computed based upon the related collateral value of the loans. The collateral values are determined by recent appraisals or Certificates of Inspection, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management's expertise and knowledge of the borrower and the borrower's business.

DEPOSITS, OTHER BORROWED FUNDS AND SUBORDINATED DEBT

Consumer and commercial retail deposits are attracted primarily by the Company's nineteen full service office locations and through its internet banking presence. The Company offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products. The Company regularly reviews competing financial institutions' interest rates, especially when establishing interest rates on certificates of deposit and municipal deposits.

Total deposits increased $146,614,000 to $1,192,494,000 as of September 30, 2025 as non-interest bearing deposits increased by $11,583,000 and interest bearing deposits increased by $135,031,000 from year-end 2024. The overall increase in interest bearing deposits was mainly the result of an increase of $111,919,000 in the balance of retail CDs resulting from new higher rate CD promotions offered during the throughout 2025 along with an increase in brokered CDs of $35,137,000 in 2025. These were offset by a decrease of $12,025,000 in the balance of other interest bearing retail deposit accounts.

Total short-term and long-term borrowings decreased to $238,856,000 as of September 30, 2025, from $240,426,000 at year-end 2024, a decrease of $1,570,000 or 0.7%. The decrease in borrowings during the nine months ended September 30, 2025 was mainly attributable to a decrease of $1,494,000 in short-term borrowings from the Federal Home Loan Bank.

On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the "2020 Notes"). The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and then float based on a benchmark rate (as defined).

CAPITAL STRENGTH

Normal increases in capital are generated by net income, less dividends paid out. During the nine months ended September 30, 2025, net income for the period, net of continued payment of dividends, increased capital by $1,552,000. Accumulated other comprehensive loss derived from net unrealized gains on debt securities available-for-sale and interest rate derivatives also impacts capital. At December 31, 2024 accumulated other comprehensive loss was $25,630,000. Accumulated other comprehensive loss stood at $22,178,000 at September 30, 2025, an improvement of $3,452,000. Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank's securities portfolio, as well as its decision to sell securities at a gain or loss. The fluctuations from net unrealized gains on debt securities available-for-sale and derivatives do not affect regulatory capital, as the Bank elected to opt-out of the inclusion of this item with the filing of the March 31, 2015 Call Report.

The Company held 231,611 shares of common stock as treasury stock at September 30, 2025 and December 31, 2024, respectively. This had an effect of reducing our total stockholders' equity by $5,709,000 as of September 30, 2025 and December 31, 2024.

Total stockholders' equity was $112,252,000 as of September 30, 2025, and $106,782,000 as of December 31, 2024.

At September 30, 2025 the Bank met the definition of a "well-capitalized" institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III. The following table presents the Bank's capital ratios as of September 30, 2025 and December 31, 2024:

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Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis as of January 1, 2019. As of September 30, 2025, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

The Corporation's capital ratios are not materially different than those of the Bank.

LIQUIDITY

The Company's objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity is needed to provide the funding requirements of depositors' withdrawals, loan growth, and other operational needs.

Sources of liquidity are as follows:

At September 30, 2025, the Company had $539,461,000 in maximum borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes, FHLB short-term borrowings, and irrevocable standby letters of credit issued by FHLB); the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $7,271,000.

The Company enters into "Repurchase Agreements" in which it agrees to sell securities subject to an obligation to repurchase the same or similar securities. Because the agreement both entitles and obligates the Company to repurchase the assets, the Company may transfer legal control of the securities while still retaining effective control. As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and

act as an additional source of liquidity. Securities sold under agreements to repurchase were $32,856,000 at September 30, 2025.

Asset liquidity is provided by securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks. The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities. Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing deposits. Also, short-term borrowings provide funds to meet liquidity needs.

Net cash flows provided by operating activities were $9,195,000 for the nine months ended September 30, 2025 and $6,564,000 for the nine months ended September 30, 2024. Net income amounted to $6,775,000 for the nine months ended September 30, 2025, compared to a net loss of $15,490,000 for the nine months ended September 30, 2024. The goodwill impairment recorded during the first quarter of 2024 was a non-cash charge and amounted to $19,133,000 for the nine months ended September 30, 2024; therefore, it had no effect on liquidity. For the nine months ended September 30, 2025, there was no goodwill impairment. During the nine months ended September 30, 2025, net discount accretion on securities amounted to $5,000 compared to net premium amortization of $276,000 for the nine months ended September 30, 2024. Net gains on sales of mortgage loans amounted to $97,000 for the nine months ended September 30, 2025 and $68,000 for the nine months ended September 30, 2024. Proceeds (net of gains/losses) from sales of mortgage loans originated for sale exceeded originations of mortgage loans originated for resale by $721,000 for the nine months ended September 30, 2025 and originations of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for sale by $146,000 for the nine months ended September 30, 2024. Net securities gains amounted to $128,000 for the nine months ended September 30, 2025, compared to net securities losses of $48,000 for the nine months ended September 30, 2024. Accrued interest receivable increased by $82,000 and $58,000 for the nine months ended September 30, 2025 and 2024, respectively. Accrued interest payable increased by $1,023,000 for the nine months ended September 30, 2025 and decreased by $233,000 for the nine months ended September 30, 2024. Amortization of investment in low-income housing partnerships amounted to $614,000 for both the nine months ended September 30, 2025 and 2024, respectively. Other assets increased by $94,000 and $277,000 during the nine months ended September 30, 2025 and 2024, respectively. Other liabilities decreased $749,000 during the nine months ended September 30, 2025, compared to an increase of $1,079,000 during the nine months ended September 30, 2024. A gain from bank-owned life insurance proceeds of $255,000 was recognized during the nine months ended September 30, 2025, compared to the nine months ended September 30, 2024 when no gains were recognized in relation to bank-owned life insurance proceeds.

Investing activities used cash of $19,481,000 and $30,071,000 during the nine months ended September 30, 2025 and 2024, respectively. Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $10,082,000 and $4,690,000 during the nine months ended September 30, 2025 and 2024, respectively. Changes in restricted investment in bank stocks provided cash of $40,000 during the nine months ended September 30, 2025 and provided cash of $120,000 during the nine months ended September 30, 2024. Net cash used to originate loans amounted to $10,347,000 for the nine months ended September 30, 2025, compared $24,067,000 for the nine months ended September 30, 2024. Proceeds from bank-owned life insurance provided cash of $1,237,000 for the nine months ended September 30, 2025, compared to the nine months ended September 30, 2024 when there were no proceeds from bank-owned life insurance. Purchases of premises and equipment used cash of $329,000 and $1,424,000 during the nine months ended September 30, 2025 and 2024, respectively. Purchase of investment in real estate ventures used cash of $0 and $10,000 during the nine months ended September 30, 2025 and 2024, respectively.

Financing activities provided cash of $140,287,000 and $30,518,000 during the nine months ended September 30, 2025 and 2024, respectively. Deposits increased by $146,614,000 during the nine months ended September 30, 2025 and increased by $39,470,000 during the nine months ended September 30, 2024. Short-term borrowings decreased by $1,570,000 during the nine months ended September 30, 2025 and increased by $14,007,000 during the nine months ended September 30, 2024. Dividends paid, net of reinvestment amounted to $4,757,000 for the nine months ended September 30, 2025, compared to $2,959,000 for the nine months ended September 30, 2024.

Managing liquidity remains an important segment of asset/liability management. The overall liquidity position of the Company is maintained by an active asset/liability management committee. The Company believes that its core deposit base is stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and are measured on a monthly basis. These measurements indicate that liquidity generally remains stable and exceeds the Company's minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly utilizing new options.

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company's market risk is composed primarily of interest rate risk. The Company's interest rate risk results from timing differences in the repricing of assets, liabilities, off-balance sheet instruments, and changes in relationships between rate indices and the potential exercise of explicit or embedded options.

Increases in the level of interest rates also may adversely affect the fair value of the Company's securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in further decreases in the fair value of the Company's interest-earning assets, which could adversely affect the Company's results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Company's stockholders' equity, if retained. Under FASB ASC 320-10, Investments - Debt Securities, changes in the unrealized gains and losses, net of taxes, on debt securities classified as available-for-sale are reflected in the Company's stockholders' equity. The Company does not own any trading assets.

Asset/Liability Management

The principal objective of asset/liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Company actively manages the interest rate sensitivity of its assets and liabilities. Several techniques are used for measuring interest rate sensitivity. Interest rate risk arises from the mismatches in the repricing of rates on assets and liabilities within a given time period, referred to as a rate sensitivity gap. If more assets than liabilities mature or reprice within the time frame, the Company is asset sensitive. This position would contribute positively to net interest income in a rising rate environment. Conversely, if more liabilities mature or reprice, the Company is liability sensitive. This position would contribute positively to net interest income in a falling rate environment. The Company's cumulative gap at one year indicates the Company is liability sensitive at September 30, 2025.

Earnings at Risk

The Bank's Asset/Liability Committee ("ALCO") is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Company's Board of Directors. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet beyond interest rate sensitivity gap. Although the Company continues to measure its interest rate sensitivity gap, the Company utilizes additional modeling for interest rate risk in the overall balance sheet. Earnings at risk and economic values at risk are analyzed.

Earnings simulation modeling addresses earnings at risk and net present value estimation addresses economic value at risk. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk to the Company.

Earnings Simulation Modeling

The Company's net income is affected by changes in the level of interest rates. Net income is also subject to changes in the shape of the yield curve. For example, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and increased liability rates, while a steepening would result in increased earnings as earning asset and interest-bearing liability yields widen.

Earnings simulation modeling is the primary mechanism used in assessing the impact of changes in interest rates on net interest income. The model reflects management's assumptions related to asset yields and rates paid on liabilities, deposit sensitivity, size and composition of the balance sheet. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Earnings at risk is the change in net interest income from a base case scenario under various scenarios of rate shock increases and decreases in the interest rate earnings simulation model.

The table below presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates. The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors. The earnings simulation model projects net interest income would increase 1.86%, 4.07%, and 5.92% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would decrease 3.94%, 9.72%, and 14.68% in the 100, 200 and 300 basis point decreasing rate scenarios presented. All of the forecasts in the increasing and decreasing rate scenarios presented are within the Company's policy guidelines.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current interest rate environment with federal funds trading in the 400-425 basis point range and many deposit accounts still lagging at markedly lower rates. Results of the decreasing basis point declining scenarios are affected by the fact that many of the Company's interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points. However, the Company's interest-sensitive assets are able to decline by these amounts. For the nine months ended September 30, 2025 the cost of interest-bearing liabilities averaged 3.40%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 5.45%.

Net Present Value Estimation

The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. At September 30, 2025, net present value is projected to decrease 0.50%, 2.45%, and 5.21% in the 100, 200, and 300 basis point immediate increase scenarios, respectively. Additionally, the 100, 200 and 300 basis point immediate decreases in rates are estimated to affect net present value with decreases of 1.15%, 6.53%, and 16.71%. All scenarios presented are within the Company's policy limits.

The computation of the effects of hypothetical interest rate changes are based on many assumptions. They should not be relied upon solely as being indicative of actual results, since the computations do not account for actions management could undertake in response to changes in interest rates.

Effect of Change in Interest Rates

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