CITIZENS FINANCIAL SERVICES INC

Previous wording

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

Current wording

D ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Previous wording

The Company engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Bradford and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New York and with the MidCoast acquisition, the Cities of Wilmington and Dover, Delaware. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. With the recently completed HVBC acquisition, we have expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey through the acquisition of five full service branches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 48 banking facilities, 39 of which operate as bank branches. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, 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 Montgomeryville, PA, Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. In the fourth quarter of 2023, we opened a branch in Williamsport, Pennsylvania.

Current wording

The Company engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Lycoming, Bradford and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill, Lancaster and Chester counties in south central Pennsylvania and Allegany County in southern New York and with the MidCoast acquisition, the Cities of Wilmington and Dover, Delaware. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. With the recently completed HVBC acquisition, we have expanded further into southeast Pennsylvania, including Montgomery, Bucks and Philadelphia Counties as well as Burlington County, New Jersey through the acquisition of five full service branches, four mortgage centers and one business banking facility. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 48 banking facilities, 38 of which operate as bank branches. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, Ephrata, Fivepointville, State College, Kennett Square, Warrington, Williamsport, Plumsteadville, Philadelphia, two branches near the city of Lebanon and two branches in Huntington Valley. The Company has limited branch offices located in Winfield, Pennsylvania and Georgetown, Delaware. In New York, our office is in Wellsville. In Delaware, we have three branches in Wilmington and one in Dover. The mortgage centers acquired as part of the acquisition are located in Montgomeryville, PA, Huntington Valley, PA, Philadelphia, PA and Mount Laurel, NJ. The business banking facility is located in Philadelphia, PA. In the fourth quarter of 2023, we opened a branch in Williamsport, Pennsylvania. During 2024, the Montgomeryville, PA mortgage office was closed and the Georgetown office was opened.

Previous wording

Our Investment and Trust Division is committed to helping our customers meet their financial goals. The Trust Division offers professional trust administration, investment management services, estate planning and administration, custody of securities and individual retirement accounts. In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. Assets held by the Bank in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Bank. As of December 31, 2023, and 2022, assets owned and invested by customers of the Bank through the Bank’s investment representatives totaled $329.4 million and $283.5 million, respectively. Additionally, as summarized in the table below, the Trust Department had assets under management as of December 31, 2023 and 2022 of $167.9 million and $150.0 million, respectively. During the year ended December 31, 2023, $1.4 million of new trust accounts were opened, $7.9 million of additional contributions to trust accounts, $10.1 million distributed from trust accounts, and $8.1 million of accounts were closed. As a result of market fluctuations, the fair value of the trust accounts increased approximately $26.0 million during the year ended December 31, 2023. The following table reflects trust accounts by investment type and structure:

Current wording

Our Investment and Trust Division is committed to helping our customers meet their financial goals. The Trust Division offers professional trust administration, investment management services, estate planning and administration, custody of securities and individual retirement accounts. In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. Assets held by the Bank in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Bank. As of December 31, 2024, and 2023, assets owned and invested by customers of the Bank through the Bank’s investment representatives totaled $395.9 million and $329.4 million, respectively. Additionally, as summarized in the table below, the Trust Department had assets under management as of December 31, 2024 and 2023 of $180.7 million and $167.9 million, respectively. During the year ended December 31, 2024, $2.2 million of new trust accounts were opened, $10.2 million of additional contributions to trust accounts were made, $11.0 million was distributed from trust accounts, and $4.0 million of accounts were closed. As a result of market fluctuations, the fair value of the trust accounts increased approximately $15.4 million during the year ended December 31, 2024. The following table reflects trust accounts by investment type and structure:

Previous wording

Net income for the year ended December 31, 2023 was $17,811,000, which represents a decrease of $11,249,000, or 38.7%, when compared to 2022 due primarily to the one-time costs associated with the HVBC acquisition. Net income for the year ended December 31, 2022 was $29,060,000, which represents a decrease of $58,000, or 0.2%, when compared to 2021. Basic and diluted earnings per share were $4.06, $7.25 and $7.24 for 2023, 2022 and 2021, respectively.

Current wording

Net income for the year ended December 31, 2024 was $27,818,000, which represents an increase of $10,007,000, or 56.2%, when compared to 2023 due primarily to the absence of one-time costs associated with the HVBC acquisition that were recognized in 2023. Net income for the year ended December 31, 2023 was $17,811,000, which represents a decrease of $11,249,000, or 38.7%, when compared to 2022 due primarily to the one-time costs associated with the HVBC acquisition. Basic earnings per share were $5.86, $4.02 and $7.17 for 2024, 2023 and 2022, respectively, while diluted earnings per share were $5.85, $4.02 and $7.17 for 2024, 2023 and 2022, respectively.

Previous wording

Tax equivalent net interest income for 2022 was $73,137,000 compared to $67,035,000 for 2021, an increase of $6,102,000 or 9.1%. Total interest income increased $10,220,000, as loan interest income increased $7,907,000, and total investment income increased $2,313,000. Interest expense increased $4,118,000 from 2021.

Current wording

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

Previous wording

Total tax equivalent interest income from investment securities increased $2,360,000 in 2022 from 2021. The average balance of investment securities increased $136.2 million, which had an effect of increasing interest income by $2,424,000 due to volume. The majority of the increase in volume was in taxable securities, which experienced an increase in the average balance of $120.0 million. The average tax-effected yield on our investment portfolio decreased from 1.96% in 2021 to 1.90% in 2022. The decrease in the tax-effected yield is attributable to purchases made prior to 2022, which were made in a lower rate environment. As a result of the yield on investment securities decreasing 6 basis points (bps) to 1.90%, interest income on investment securities decreased $64,000, with the decrease related to tax-exempt securities. The investment strategy for 2022 was to utilize excess cash, cashflows from the investment portfolio and deposit inflows to purchase U.S. treasury securities, due to a limited spread between US treasuries and agencies, mortgage backed securities issued by government sponsored entities and obligations of state and political securities. The increase in the investment portfolio was in response to the deposit inflows that occurred in 2021 and the first half of 2022.

Current wording

Total tax equivalent interest income from investment securities increased $426,000 in 2024 from 2023. The average balance of investment securities decreased $31.2 million, which had an effect of decreasing interest income by $632,000 due to volume. During 2024, the Bank had limited investment activity in the first half of the year and used investment cashflows to fund loan activity, as well as to offset seasonal deposit fluctuations. The average tax-effected yield on our investment portfolio increased from 2.20% in 2023 to 2.44% in 2024. The increase in the tax-effected yield is attributable to purchases made during 2023 and 2024, which were made in a higher market interest rate environment. As a result of the yield on investment securities increasing 24 basis points (bps) to 2.44%, interest income on investment securities increased $1,058,000, with the increase related to taxable securities. The investment strategy for 2024 was similar to 2023 in that cashflows from the investment portfolio were used to repay overnight borrowings as well as fund loan growth. The decrease in the average balance of the investment portfolio was due to investment repayments and maturities. During 2024, the investment purchases made were primarily in mortgage-backed securities that provided the widest spread to treasuries, which were primarily purchased at a discount. We continually monitor interest rate trading ranges and seek to time investment security purchases when rates are in the top third of the trading range. The Company believes its investment strategy has appropriately mitigated its interest rate risk exposure for various rate environments, including a rising rate environment, while providing sufficient cashflows to meet liquidity needs.

Previous wording

Total interest expense increased $4,118,000 in 2022 compared to 2021. The majority of the increase was due to an increase in the average rate paid on interest bearing liabilities of 20 basis points to 0.69%. This increase resulted in an increase in interest expense of $2,708,000. The increase in rates was driven by the Federal Reserve’s response to inflation during 2022 by increasing interest rates. The average rate on money markets increased from 0.27% to 0.58% resulting in an increase in interest expense of $1,035,000. The average rate paid on savings accounts increased 2 bps and resulted in an increase in interest expense of $59,000. The average rate paid on NOW accounts increased from 0.30% to 0.47% resulting in an increase in interest expense of $823,000. The average rate paid on other borrowed funds increased from 1.50% to 2.61% resulting in an increase in interest expense of $1,296,000. The average rate on certificates of deposit decreased from 0.98% to 0.82% resulting in a decrease in interest expense of $505,000.

Current wording

Total interest expense increased $21,004,000 in 2024 compared to 2023. The majority of the increase was due to an increase in the average rate paid on interest bearing liabilities of 66 basis points to 3.00%. This increase resulted in an increase in interest expense of $13,356,000. The increase in rates was driven by the Federal Reserve’s response to inflation during 2022 and 2023 by increasing interest rates, which were not offset by the rate cuts made in the second half of 2024. The average rate on money markets increased from 2.39% to 3.14% resulting in an increase in interest expense of $2,915,000. The average rate paid on savings accounts increased 11 bps and resulted in an increase in interest expense of $308,000. The average rate paid on NOW accounts increased from 2.01% to 2.51% resulting in an increase in interest expense of $3,635,000. The average rate paid on certificates of deposits increased from 2.52% to 3.97% resulting in an increase in interest expense of $5,970,000. The average rate paid on other borrowed funds increased from 4.64% to 4.80% resulting in an increase in interest expense of $528,000.

Previous wording

Average interest-bearing liabilities increased $195.5 million in 2022, with average interest-bearing deposits increasing $130.5 million and average other borrowings increasing $65.0 million. As a result of the increase in average deposits, interest expense increased $67,000 as result of the change in volume. Increases in average deposits, which were primarily driven by organic growth across all markets of the Bank, included NOW accounts of $63.7 million, savings accounts of $33.6 million and money market accounts of $85.4 million. Certificates of deposits decreased $52.2 million as maturing balances were not placed into term products. The average balance of other borrowed funds increased $60.5 million due to funding loan growth, which corresponds to an increase in interest expense of $1,343,000.

Current wording

Average interest-bearing liabilities increased $260.6 million in 2024, with average interest-bearing deposits increasing $263.8 million and average other borrowings decreasing $3.2 million. As a result of the increase in average deposits, interest expense increased $7,799,000 as result of the change in volume. Increases in average deposits, which were primarily driven by the HVBC acquisition, included NOW accounts of $98.9 million and money market accounts of $33.6 million. Certificates of deposits increased $153.4 million due to the acquisition, an increase in brokered CD’s and conversion of non-maturity deposits to term products. The average balance of other borrowed funds decreased $3.2 million due to the maturity of several borrowings, which corresponds to a decrease in interest expense of $151,000.

Previous wording

Our tax equivalent net interest margin for 2023 was 3.21% compared to 3.41% for 2022, with the change attributable to the yield of interest-earning assets increasing less than the cost from interest-bearing liabilities during 2023. Interest rates continued to increase during the first half of 2023 as the Federal Reserve continued to respond to inflation and to aggressively tighten monetary policy. The year began with inflation remaining significantly above the Federal Reserve’s targets and ended with inflation decreasing but remaining above the target of 2%. The yield curve remained inverted throughout 2023 with some of the highest inversion seen in decades. In the second of half of 2023, the market expected the Federal reserve to start decreasing rates in the first half of 2024. As a result, U.S. Treasury yields ended the year well below the peak.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Our tax equivalent net interest margin for 2022 was 3.41% compared to 3.52% for 2021, with the change attributable to the yield of interest-earning assets increasing less than the cost from interest-bearing liabilities during 2022. Interest rates increased dramatically in 2022 in response to historically high inflation forcing the Federal Reserve to aggressively tighten monetary policy at a pace and levels not seen in decades.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Non-interest income decreased $2,567,000 in 2022 from 2021, or 20.9%. We experienced a $14,000 net loss on available for sale securities in 2022 compared to net gains totaling $212,000 in 2021. During 2022, we sold$7.5 million of US Agency securities for a pre-tax loss of $14,000. During 2021, we sold$17.2 million of US treasury securities for a pre-tax gain of $177,000 and $12.0 million of US Agency securities for a pre-tax gain of $35,000 to take advantage of market conditions at the time of the sales. During 2022, net equity security losses amounted to $247,000 as a result of market conditions experienced in 2022 compared to gains of $339,000 last year.

Current wording

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

Previous wording

Non-interest income increased $1,867,000 in 2023 from 2022, or 19.2%. We experienced a $51,000 net loss on available for sale securities in 2023 compared to net loss totaling $14,000 in 2022. During 2023, we sold$10.0 million of municipal securities for a pre-tax loss of $51,000. Additionally, $76.5 million of securities obtained as part of the HVBC acquisition were sold for no gain or loss during the second quarter of 2023. During 2022, we sold$7.5 million of US Agency securities for a pre-tax loss of $14,000. During 2023, net equity security losses amounted to $144,000 as a result of market conditions experienced in 2023 compared to losses of $247,000 last year.

Current wording

Non-interest income increased $1,867,000 in 2023 from 2022, or 19.2%. We experienced a $51,000 net loss on available for sale securities in 2023 compared to net losses totaling $14,000 in 2022. During 2023, we sold$10.0 million of municipal securities for a pre-tax loss of $51,000. Additionally, $76.5 million of securities obtained as part of the HVBC acquisition were sold for no gain or loss during the second quarter of 2023. During 2022, we sold$7.5 million of US Agency securities for a pre-tax loss of $14,000. During 2023, net equity security losses amounted to $144,000 as a result of market conditions experienced in 2023 compared to losses of $247,000 in 2022.

Previous wording

Gains on loans sold increased $1,194,000 compared to last year. The increase in gains on loans sold is attributable to the HVBC acquisition and activity acquired as part of the acquisition. The increase in service charges of $293,000 for 2023 is attributable to an increase in customer spending in 2022 compared to 2021. The increase in earnings on bank owned life insurance is due to the HVBC acquisition and the passing of a former employee of the Company during 2023.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

The provision for income taxes was $3,704,000, $6,435,000 and $6,199,000 for 2023, 2022 and 2021, respectively. The effective tax rates for 2023, 2022 and 2021 were 17.2%, 18.1% and 17.6%, respectively.

Current wording

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

Previous wording

The increase in income tax expense of $236,000 in 2022 was due earnings on bank owned life insurance being excluded from taxable income, which was higher in 2021 than 2022, which accounts for an increase in income taxes of $205,000 at a 21% tax rate.

Current wording

The increase in income tax expense of $2,161,000 in 2024 compared to 2023 was due to the increase of $12,168,000 in income before the provision for income taxes, which accounts for an increase in tax expense of $2,555,000 at a 21% tax rate.

Previous wording

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

Current wording

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

Previous wording

We are involved in seven limited partnership agreements that operate low-income housing projects in our market areas, two of which we entered into during 2022. During 2023 we recognized credits on two of the seven projects. During 2022 and 2021, we recognized tax credits related to one of the seven partnerships. Tax credits associated with four of the partnerships were fully utilized by December 2022. We started recognizing credits on two of the partnerships during 2023 and expect to recognized credits on the remaining project in 2024. We anticipate recognizing an aggregate of $9.0 million of tax credits over the next twelve years.

Current wording

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

Previous wording

Cash and cash equivalents totaled $52.8 million at December 31, 2023 compared to $26.2 million at December 31, 2022. Management actively measures and evaluates the Company’s liquidity through our Asset – Liability committee and believes its liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.

Current wording

Cash and cash equivalents totaled $42.2 million at December 31, 2024 compared to $52.8 million at December 31, 2023. The decrease is due to a decrease in the cash held at the Federal Reserve. Management actively measures and evaluates the Company’s liquidity through our Asset – Liability Committee and believes its liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.

Previous wording

The Company’s investment portfolio decreased during 2023 by $22.2 million. This decreased was fueled by maturities and calls being used to repay borrowings from the FHLB during 2023. As part of the HVBC acquisition, $79.2 million of available for sale securities were acquired. Excluding the acquisition, $10.3 million of mortgage backed securities were purchased during 2023. During 2023, we experienced $12.4 million of principal repayments and $22.6 million of calls and maturities. We sold $86.6 million of securities to deleverage the balance sheet during 2023 that included a loss of $51,000. The majority of the securities sold were acquired as part of the HVBC acquisition. The fair value of our investment portfolio increased approximately $11.7 million in 2023 due to decreases in market interest rates in the fourth quarter of 2023 and a shortening of the portfolio duration. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve, the effective yield on our investment portfolio for 2023 was 2.20% compared to 1.90% for 2022 on a tax equivalent basis.

Current wording

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

Previous wording

At December 31, 2023, approximately 63.3% of the amortized cost of debt securities is expected to mature, call or pre-pay within five years or less. The Company expects that earnings from operations, the levels of cash held at the Federal Reserve and other correspondent banks, the high liquidity level of the available-for-sale securities, growth of deposits and the availability of borrowings from the Federal Home Loan Bank and other third-party banks will be sufficient to meet future liquidity needs.

Current wording

At December 31, 2024, approximately 66.7% of the amortized cost of debt securities is expected to mature, call or pre-pay within five years or less. The Company expects that earnings from operations, the levels of cash held at the Federal Reserve and other correspondent banks, the high liquidity level of the available-for-sale securities, growth of deposits and the availability of borrowings from the Federal Home Loan Bank and other third-party banks will be sufficient to meet future liquidity needs.

Previous wording

Loans held for sale increased $8.7 million to $9,379,000 as of December 31, 2023 from December 31, 2022. The increase in loans held for sale is primarily attributable to the HVBC acquisition and the mortgage division acquired as part of the acquisition. The higher rate environment in 2023 continue to place pressure on refinancing activity as well as new home purchases.

Current wording

Loans held for sale increased $228,000 to $9,607,000 as of December 31, 2024 from December 31, 2023. The higher rate environment in 2024 continue to place pressure on refinancing activity as well as new home purchases.

Previous wording

The Bank’s lending efforts have historically focused on north central Pennsylvania and southern New York. With the acquisition of FNB and the opening of offices in Lancaster County, this focus has grown to include Lebanon, Schuylkill, Berks and Lancaster County markets of south central, Pennsylvania. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities and offices in State College and Mill Hall to support commercial opportunities in central Pennsylvania, especially Centre and Clinton Counties. 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. In November of 2020, we opened a branch in Kennett Square, Pennsylvania, to further serve customers obtained as part of the MidCoast acquisition, as well as to expand operations into Chester County, Pennsylvania. During 2022, expansion efforts continued in both Lancaster, Pennsylvania with the opening of an office in Ephrata, Pennsylvania and in Delaware with the opening of an office in Greenville, Delaware, which is near Wilmington, Delaware. 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 in Mount Laurel, New Jersey. The Bank has also opened a full-service branch in Williamsport, Pennsylvania in the fourth quarter of 2023.

Current wording

The Bank’s lending efforts have historically focused on north central Pennsylvania and southern New York. With the acquisition of FNB and the opening of offices in Lancaster County, this focus has grown to include the Lebanon, Schuylkill, Berks and Lancaster County markets of south central, Pennsylvania. We have a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities, and offices in State College and Mill Hall to support commercial opportunities in central Pennsylvania, especially Centre and Clinton Counties. During 2023, the Bank opened a full-service branch in Williamsport, Pennsylvania to serve Lycoming County and surrounding areas. The MidCoast acquisition expanded our markets into the State of Delaware with activity centered around the cities of Wilmington and Dover, Delaware, which was further supported by branch openings in Kennett Square, Pennsylvania and Greenville, Delaware. During 2024, the Bank opened a limited production office in Georgetown, Delaware, to primarily support agricultural customers in the Delaware market. In June 2023, we completed the HVBC acquisition, which expanded our markets into south east Pennsylvania, including the counties of Montgomery, Bucks and Philadelphia. It also includes a Mortgage production office in Mount Laurel, New Jersey.

Previous wording

We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships that our lending teams have with their customers, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank’s website. The Bank offers a variety of loans, although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans. As of December 31, 2023, approximately 87.3% of our loan portfolio consisted of real estate loans. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors.

Current wording

We originate loans primarily to our existing customer base, with new customers generated through the strong relationships that our lending teams have with their customers, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank’s website. The Bank offers a variety of loans, although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans. As of December 31, 2024, approximately 85.0% of our loan portfolio consisted of real estate loans. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors.

Previous wording

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

Current wording

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

Previous wording

The Bank, as part of its commitment to the communities it serves, is an active lender for projects by our local municipalities and school districts. These loans range from short term bridge financing to 20 year term loans for specific projects. These loans are typically written at rates that adjust at least every five years. Due to the size of certain municipal loans, we have developed participation lending relationships with other community banks that allow us to meet regulatory compliance issues, while meeting the needs of the customer. At December 31, 2023, the aggregate balance of our participation loans, in which a portion was sold to other lender’s totaled $387.4 million, of which $206.0 million was sold.

Current wording

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

Previous wording

Total loans grew $523.8 million in 2023 and total $2.25 billion at the end of 2023. The primary driver of growth during 2023 was the HVBC acquisition. Organic growth for 2023 was $44.0 million and was driven by growth in construction real estate. This growth was offset by a decrease in consumer loans due to a decrease in student loans as of the end of the year.

Current wording

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

Previous wording

Residential real estate loans increased $149.8 million primarily due to the acquisition of HVBC. During 2023, $91.1 million of residential real estate loans were originated for sale on the secondary market, which compares to $10.0 million for 2022 and is due to the acquisition and the residential division acquired. For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income.

Current wording

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

Previous wording

The allowance for credit losses – loans is maintained at a level which, in management’s judgment, is adequate to absorb probable future loan losses inherent in the loan portfolio. The provision for credit losses is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for credit losses - loans was $21,153,000 or 0.94% of total loans as of December 31, 2023 as compared to $18,552,000 or 1.08% of loans as of December 31, 2022. During the first quarter of 2023, the Company adopted CECL, which resulted in a decrease in the allowance for credit losses – loans of $3.3 million. As a result of the acquisition, the Bank recorded a provision for credit losses for non-PCD loans of $4,591,000 and an allowance of $1,689,000 for PCD loans. An additional $901,000 of provision for credit losses-loans was recorded in 2023. Net charge-offs for 2023 totaled $1,280,000, which was primarily associated with PCD loans acquired as part of the HVBC acquisition that were fully reserved for at the time of the acquisition.

Current wording

The allowance for credit losses – loans is maintained at a level which, in management’s judgment, is adequate to absorb probable future credit losses inherent in the loan portfolio. The provision for credit losses is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The allowance for credit losses - loans was $21,699,000 or 0.94% of total loans as of December 31, 2024 as compared to $21,153,000 or 0.94% of loans as of December 31, 2023. The $546,000 increase is a result of a $3,176,000 provision for credit losses – loans, less net charge-offs of $2,630,000. Net charge-offs for 2024 are driven by loans acquired as part of the HVBC acquisition due to collateral issues.

Previous wording

The adequacy of the allowance for credit losses – loans is subject to a formal, quarterly analysis by management of the Company. In order to better analyze the risks associated with the loan portfolio, the entire portfolio is divided into several categories. As stated above, commercial loans on non-accrual status are specifically reviewed and given a specific reserve, if appropriate. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors. For further information on the allowance for credit losses on loans, Note 1, "Summary of Significant Accounting Policies," and Note 6, "Loans," in the consolidated financial statements provides additional disclosure on the allowance for credit losses. As a result of the adoption of ASC 326 effective January 1, 2023, there is a lack of comparability in both the allowance and provision for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2023 are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior fiscal years. Note 1, "Summary of Significant Accounting Policies," in the consolidated financial statements provides additional disclosure on the adoption of ASC 326.

Current wording

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

Previous wording

Prior to January 1, 2023, the Company calculated the allowance for loan losses using the probable incurred methodology. The activity in our allowance for loan losses was as follows during the years ended December 31, 2022 and 2021:

Current wording

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

Previous wording

As a result of previous loss experiences and other risk factors utilized in determining the allowance, the Bank’s allocation of the allowance does not directly correspond to the actual balances of the loan portfolio. While commercial and agricultural real estate loans total 62.6% of the loan portfolio at December 31 2023, 58.8% of the allowance is assigned to these portions of the loan portfolio. Residential real estate loans comprise 16.0% of the loan portfolio as of December 31, 2023 and 11.1% of the allowance is assigned to this segment.

Current wording

As a result of previous loss experiences and other risk factors utilized in determining the allowance, the Bank’s allocation of the allowance does not directly correspond to the actual balances of the loan portfolio. While commercial and agricultural real estate loans total 62.7% of the loan portfolio at December 31 2024, 58.5% of the allowance is assigned to these portions of the loan portfolio. Residential real estate loans comprise 15.2% of the loan portfolio as of December 31, 2024 and 8.94% of the allowance is assigned to this segment. Other commercial loans comprise 5.7% of the loan portfolio as of December 31, 2024 and 17.05% of the allowance is assigned to this segment.

Previous wording

The Company holds bank owned life insurance policies to offset current and 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 December 31, 2023, and 2022, the cash surrender value of the life insurance was $49.9 million and $39.4 million, respectively. The primary cause of the increase was related to the HVBC acquisition, which increased the balance by $10.4 million. 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 $1,254,000, $852,000 and $1,828,000 in 2023, 2022 and 2021, respectively with the increase in 2023 due to the HVBC acquisition and death benefits received in 2023 upon the passing of a former employee and the decrease in 2022 due to the death benefits received in 2021 upon the passing of two former employees. 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.

Current wording

The Company holds bank owned life insurance policies to offset current and 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 December 31, 2024, and 2023, the cash surrender value of the life insurance was $50.3 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 $1,684,000, $1,254,000 and $852,000 in 2024, 2023 and 2022, respectively with the increase in 2024 due to the HVBC acquisition being outstanding for the entire year versus a partial year in 2023. The increase from 2022 to 2023 was due to the acquisition and death benefits received in 2023 upon the passing of a former employee. 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.

Previous wording

Effective January 1, 2015, the Company restructured its agreements 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 the restructured agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The policies acquired as part of the acquisition of MidCoast are only for the benefit of the Bank. 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 dollar benefit for the beneficiary’s’ estate, which is dependent on several factors including whether the covered individual was a Director of FNB or an employee of FNB and their salary level. As of December 31, 2023, and 2022, included in other liabilities on the Consolidated Balance sheet is a liability of $610,000 and $660,000, respectively, for the obligation under the split-dollar benefit agreements.

Current wording

Effective January 1, 2015, the Company restructured its agreements 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 the restructured agreements, the employee’s beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The policies acquired as part of the acquisition of MidCoast are only for the benefit of the Bank. 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 dollar benefit for the beneficiary’s’ estate, which is dependent on several factors including whether the covered individual was a Director of FNB or an employee of FNB and their salary level. As of December 31, 2024, and 2023, included in other liabilities on the Consolidated Balance sheet is a liability of $514,000 and $610,000, respectively, for the obligation under the split-dollar benefit agreements.

Previous wording

The Company holds derivative instruments to hedge interest rate risk, to offer customers longer term fixed rate loans through a program similar to a back to back swap, which results in both a derivative asset and liability on the Consolidated Balance Sheet, and through the residential lending platform through interest rate locks. (See Note 19 for additional information). As of December 31, 2023, and 2022, the fair value for the derivatives instruments was $13.7 million and $16.6 million, respectively. The change in the fair value of financial instruments was due to the changes in market interest rates during 2023 and the time to maturity of the various instruments. The effective portion of changes in the fair value of the cash flow interest hate hedge derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.

Current wording

The Company holds derivative instruments to hedge interest rate risk, to offer customers longer term fixed rate loans through a program similar to a back to back swap, which results in both a derivative asset and liability on the Consolidated Balance Sheet, and through the residential lending platform through interest rate locks. (See Note 18 for additional information). As of December 31, 2024, and 2023, the fair value for the derivative instruments was $10.4 million and $13.7 million, respectively. The change in the fair value of financial instruments was due to the changes in market interest rates during 2024, the time to maturity of the various instruments and the maturity or early termination of certain instruments. The effective portion of changes in the fair value of the cash flow interest hate hedge derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.

Previous wording

Deferred tax assets are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period. (See Note 13 for additional information)As of December 31, 2023 and 2022, the balance for deferred tax assets was $17.3 million and $12.9 million, respectively. The change was due to the HVBC acquisition and the deferred taxes acquired as part of the acquisition.

Current wording

Deferred tax assets are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period. (See Note 12 for additional information)As of December 31, 2024 and 2023, the balance for deferred tax assets was $15.2 million and $17.3 million, respectively. The change was due to the amortization of various credit and interest rate marks associated with acquisitions and the usage of net operating losses acquired from acquisitions.