FIDELITY D & D BANCORP INC

To the Shareholders and the Board of Directors of Fidelity D & D Bancorp, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Fidelity D & D Bancorp, Inc. and subsidiary (the Company) as of December 31, 2023, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January, 1, 2023 upon the adoption of Accounting Standards Codification Topic 326,Financial Instruments–* Credit Losses*(ASC 326).

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses–* Collectively Evaluated Loans*

As described in Notes 1 and 5 to the financial statements, the Company has recorded an allowance for credit losses (“ACL”) in the amount of $18.8 million as of December 31, 2023, representing management’s estimate of credit losses over the remaining expected life of the Company’s loan portfolio as of that date. Upon adoption of ASC 326 on January 1, 2023, the Company recorded a cumulative effect adjustment to decrease opening retained earnings and increase the ACL by $1.7 million, net of related deferred income tax effects. Management determined these amounts, and corresponding provision for credit loss expense during the year ended December 31, 2023, pursuant to the application of ASC 326.

The Company’s methodology to determine its ACL incorporates the use of third-party software to arrive at an expected life-of-loan loss amount that incorporates either discounted cash flow or weighted average remaining life methodologies for the Company’s various loan segments. Both of these approaches use both industry-based and Company specific loss history and Company specific prepayment rates that are adjusted based on various current and forecasted economic factors including, as relevant, home price indices, gross domestic product forecasts and national and local unemployment rates which incorporate reasonable and supportable forecasts. The results of these calculations are then qualitatively adjusted by management based on portfolio specific attributes including changes in lending policies and procedures, changes in other economic conditions, changes in the nature and volume of loans, changes in experience of lending personnel, changes in credit quality and loan review results, changes in underlying collateral values, the existence of credit concentrations, and other portfolio relevant information including legal and regulatory changes. We determined that performing procedures relating to these components of the Company’s methodology is a critical audit matter.

The principal considerations for our determination are (i) the application of significant judgment and estimation on the part of management, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures and evaluating audit evidence obtained, and (ii) significant audit effort was necessary in evaluating management’s methodology, significant assumptions and calculations.

How the Critical Audit Matter was addressed in the Audit

Following are some of the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL, including controls over the:

Addressing the above matters involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures also included, among others, reviewing the Company’s model validation ensuring appropriate recalculation of the models used along with management’s review of model validation results, testing various assumptions used in the calculation, testing management’s process for determining the qualitative reserve component, evaluating the appropriateness of management’s methodology relating to the qualitative reserve component and testing the completeness and accuracy of data utilized by management.

/s/Wolf & Company, P.C.

Boston, Massachusetts

March 20, 2024

We have served as the Company's auditor since 2023.

To the Shareholders and the Board of Directors of Fidelity D & D Bancorp, Inc. and Subsidiary

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Fidelity D & D Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows, for the year then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company's auditor from 2015 to 2023.

Blue Bell, Pennsylvania

March 20, 2023

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

Fidelity D & D Bancorp, Inc. and Subsidiary

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

For the years ended December 31, 2023, 2022 and 2021

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (continued)

AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Fidelity D & D Bancorp, Inc. and its wholly-owned subsidiary, The Fidelity Deposit and Discount Bank (the Bank) (collectively, the Company). All significant inter-company balances and transactions have been eliminated in consolidation.

NATURE OF OPERATIONS

The Company provides a full range of banking, trust and financial services to individuals, small businesses and corporate customers. Its primary market areas are Lackawanna, Luzerne and Northampton Counties, Pennsylvania. The Company's primary deposit products are demand deposits and interest-bearing time, money market and savings accounts. It offers a full array of loan products to meet the needs of retail and commercial customers. The Company is subject to regulation by the Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of Banking.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses on loans, the valuation of investment securities, the determination and the amount of impairment in the securities portfolios, and the related realization of the deferred tax assets related to the allowance for credit losses on loans, credit losses on and valuations of investment securities.

In connection with the determination of the allowance for credit losses on loans, management generally obtains independent appraisals for individually evaluated loans, along with discounted cash flow and weighted average remaining maturity models adjusted for qualitative factors for collectively evaluated loans. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans* maybe necessary based on changes in economic conditions and reasonable and supportable forecasts. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies mayrequire the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may*change materially in the near-term. However, the amount of the change that is reasonably possible cannot be estimated.

The Company’s investment securities are comprised of a variety of financial instruments. The fair values of the securities are subject to various risks including changes in the interest rate environment and general economic conditions including illiquid conditions in the capital markets. Due to the increased level of these risks and their potential impact on the fair values of the securities, it is possible that the amounts reported in the accompanying financial statements could materially change in the near-term. If credit losses exist, a contra-asset is recorded on the consolidated balance sheet, limited by the amount that fair value is less than the amortized cost basis. Any impairment that hasnot been recorded through an allowance for credit losses is recognized in other comprehensive income, net of tax.

RECLASSIFICATION

Certain amounts in the prior year consolidated financial statements have been reclassified to conform to current year presentation.

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SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK

The Company originates commercial, consumer, and mortgage loans to customers primarily located in Lackawanna, Luzerne and Northampton Counties of Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic sector in which the Company operates. The loan portfolio doesnot have any significant concentrations fromone industry or customer.

HELD-TO-MATURITY SECURITIES

Debt securities, for which the Company has the positive intent and ability to hold to maturity, are reported at amortized cost. Premiums and discounts are amortized or accreted, as a component of interest income over the life of the related security (or earlier call date for premiums) as an adjustment to yield using the interest method. The Company had held-to-maturity securities with balances of $224.2 million and $222.7 million at* December 31, 2023* and2022, respectively.

TRADING SECURITIES

Debt securities held principally for resale in the near-term, or trading securities, are recorded at their fair values. Unrealized gains and losses are included in other income. The Company didnot have investment securities held for trading purposes during2023 or2022.

AVAILABLE-FOR-SALE SECURITIES

Available-for-sale (AFS) securities consist of debt securities classified as neither held-to-maturity nor trading and are reported at fair value. Premiums and discounts are amortized or accreted as a component of interest income over the life of the related security (or earlier call date for premiums) as an adjustment to yield using the interest method. Unrealized holding gains and losses on AFS securities are reported as a separate component of shareholders’ equity, net of deferred income taxes, until realized. The net unrealized holding gains and losses are a component of accumulated other comprehensive income. Gains and losses from sales of securities AFS are determined using the specific identification method.

FEDERAL HOME LOAN BANK STOCK

The Company is a member of the Federal Home Loan Bank system, and as such is required to maintain an investment in capital stock of the Federal Home Loan Bank of Pittsburgh (FHLB). The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB. Based on redemption provisions of the FHLB, the stock hasno quoted market value and is carried at cost.

LOANS

Originated loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at face value, net of unamortized loan fees and costs and the allowance for credit losses. Interest on residential real estate loans is recorded based on principal pay downs on an actual days basis. Commercial loan interest is accrued on the principal balance on an actual days basis. Interest on consumer loans is determined using the simple interest method.

Acquired loans classified as Purchase Credit Impaired (PCI) loans prior to the effective date of Accounting Standard Update (ASU)2016-13, Financial Instruments–* Credit Losses (Topic326) Measurement of Credit Losses on Financial Instruments (CECL), which was adopted by the Company on January 1, 2023,*were classified as Purchase Credit Deteriorated (PCD) loans as of the effective date. For all loans designated as PCD loans as of the effective date, the Company was required to gross up the balance sheet amount of the financial asset by the amount of its allowance for expected credit losses as of the effective date. Subsequent changes in the allowances for credit losses on PCD loans will be recognized by charges or credits to earnings. The Company will continue to accrete the noncredit discount or premium to interest income based on the effective interest rate on the PCD loans determined after the gross-up for the CECL allowance at adoption.

CECL introduced the concept of PCD financial loans, which replaces PCI loans under previous U.S. GAAP. For PCD loans, the new accounting standard requires institutions to estimate and record an allowance for credit losses for these loans at the time of purchase. This allowance is then added to the purchase price to establish the initial amortized cost basis of the PCD loans, rather than being reported as a credit loss expense. In contrast, for purchased loans within the scope of CECL that arenot PCD loans, an institution is required to measure expected credit losses by a charge to the provision for credit losses (expense) in the period the non-PCD loans are acquired.

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In addition, the definition of PCD loans is broader than the definition of PCI loans in previous accounting standards. CECL defines "purchased financial assets with credit deterioration" as "acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer's assessment.”

Generally, loans are placed on non-accrual status when principal or interest is past due90 days or more. When a loan is placed on non-accrual status, all interest previously accrued butnot collected is charged against current earnings. Any payments received on non-accrual loans are applied,first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of lost interest.

MORTGAGE BANKING OPERATIONS AND MORTGAGE SERVICING RIGHTS

The Company sellsone-to-four family residential mortgage loans on a servicing retained basis. On a loan sold where servicing was retained, the Company determines at the time of sale the value of the retained servicing rights, which represents the present value of the differential between the contractual servicing fee and adequate compensation, defined as the fee a sub-servicer would require to assume the role of servicer, after considering the estimated effects of prepayments. If material, a portion of the gain on the sale of the loan is recognized due to the value of the servicing rights, and a mortgage servicing asset is recorded.

Commitments to sellone-to-four family residential mortgage loans are made primarily during the period between the intent to proceed and the closing of the mortgage loan. The timing of making these sale commitments is dependent upon the timing of the borrower’s election to lock-in the mortgage interest rate and fees prior to loan closing. Most of these sales commitments are made on a best-efforts basis whereby the Company is only obligated to sell the mortgage if the mortgage loan is approved and closed by the Company. Commitments to fund mortgage loans (rate lock commitments) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these derivatives are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these derivatives are included in gains or losses on sales of loans. The fair value of these derivative instruments wasnot significant at* December 31, 2023and2022*.

For sales of mortgage loans originated by the Company, a portion of the cost of originating the loan is allocated to the servicing retained right based on fair value. Servicing assets are reported in other assets and amortized in proportion to and over the period during which estimated servicing income will be received. Servicing loans for others consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures. Loan servicing income is recorded when earned and represents servicing fees from investors and certain charges collected from borrowers, such as late payment fees. The Company has fiduciary responsibility for related escrow and custodial funds.

DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are recognized as assets and liabilities on the consolidated balance sheets, measured at fair value and recorded in other assets and accrued interest payable and other liabilities.

Interest Rate Swap Agreements

For asset/liability management purposes, the Company uses interest rate swap agreements to manage risk to the Company associated with interest rate movements. Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments are based isnot exchanged. These swap agreements are derivative instruments and generally convert a portion of the Company’s fixed rate investment securities to an adjustable rate (fair value hedge) and convert a portion of customers' variable rate loans to fixed rate (no hedge designation).

The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period.

Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that donot meet specified hedging criteria would be recorded at fair value.

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Cash flows resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows of the items being hedged.

LOANS HELD-FOR-SALE

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Unrealized gains are recognized but only to the extent of previous write-downs.

AUTOMOBILE LEASING

Financing of automobiles, provided to customers under lease arrangements of varying terms obtained via an indirect arrangement primarily through a single dealer on a full recourse basis, are accounted for as direct finance leases. Interest on automobile direct finance leasing is determined using the interest method. Generally, the interest method is used to arrive at a level effective yield over the life of the lease. The lease residual and the lease receivable, net of unearned lease income, are recorded within loans and leases on the balance sheet.

ALLOWANCE FOR CREDIT LOSSES

Allowance for Credit Losses on Loans

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for credit losses (ACL) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. When estimating the net amount expected to be collected, management considers the effects of past events, current conditions, and reasonable and supportable forecasts of the collectability of the Company’s financial assets. Those estimates* may*be susceptible to significant change. Credit losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.

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The methodology to analyze the adequacy of the ACL is based onseven primary components:

Assets are evaluated on a collective (or pool) basis or individually, as applicable consistent with ASC Topic326. In accordance with ASC Topic326, the Company will evaluate individual instruments for expected credit losses when those instruments donot share similar risk characteristics with instruments evaluated using a collective (pooled) basis. In contrast to legacy accounting standards, this criterion is broader than the “impairment” concept as management* mayevaluate assets individually even whenno* specific expectation of collectability is in place. Instruments willnot be included in both collective and individual analysis. Individual analysis will establish a specific reserve for instruments in scope.

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For individually evaluated assets, an ACL is determined separately for each financial asset. Management therefore measures the expected credit losses based on an appropriate method per ASC Subtopic326-20, similar to collectively evaluated financial assets. As of the reporting date, the Company is using the collateral and cash flow methods.

ASC Topic326 defines a collateral-dependent asset as a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower, based on Management’s assessment, is experiencing financial difficulty. The ACL for a collateral-dependent loan is measured using the fair value of collateral, regardless of whether foreclosure is probable. The fair value of collateral must be adjusted for estimated costs to sell if repayment or satisfaction of the asset depends on the sale of the collateral. If repayment is dependent only on the operation of the collateral, andnot on the sale of the collateral, the fair value of the collateral wouldnot be adjusted for estimated costs to sell. If the fair value of the collateral, adjusted for costs to sell if applicable, is less than the amortized cost basis of the collateral-dependent asset, the difference is recorded as an ACL.

The Company’s policy is to charge-off unsecured consumer loans when they become90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

If the individually evaluated asset is determined tonot be collateral dependent, the ACL is measured based on the expected cash flows. This measurement is based on the amount and timing of cash flows; the effective interest rate (EIR) is used to discount the cash flows; and the basis for the determination of cash flows, including consideration of past events, current conditions, and reasonable and supportable forecasts about the future. These cash flows are discounted back by the EIR and compared to the amortized cost basis of the asset. If the present value of cash flows is less than the amortized cost, an ACL is recorded. When the present value of cash flows is equal to or greater than the amortized cost,no ACL is recorded.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies.

The risk characteristics of each of the identified portfolio segments are as follows:

Commercial and industrial loans (C&I): C&I loans are primarily based on the identified historic and/or the projected cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower, however, do fluctuate based on changes in the Company’s internal and external environment including management, human and capital resources, economic conditions, competition and regulation. Most C&I loans are secured by business assets being financed such as equipment, accounts receivable, and/or inventory and generally incorporate a secured or unsecured personal guarantee. Unsecured loans* maybe made on a short-term basis. Loans to municipal borrowers, which carry the full faith and credit of each respective local government unit consistent with the PA Local Government Unit Debt Act (LGUDA) as well as loans to municipal authorities are included in C&I loans. The ability of the borrower to collect amounts due from its customers and perform under the terms of its loan may*be affected by its customers’ economic and financial condition.

*Commercial real estate loans (CRE):Commercial real estate loans are made to finance the purchase of real estate, refinance existing obligations and/or to provide capital. These commercial real estate loans are generally secured byfirst lien security interests in the real estate as well as assignment of leases and rents. The real estate mayinclude apartments, hotels, retail stores or plazas and healthcare facilities whether they are owner or non-owner occupied. These loans are typically originated in amounts ofno more than80% of the appraised value of the property. The ability of the borrower to collect amounts due from its customers and perform under the terms of its loan may*be affected by its customers’ or lessees' customers’ economic and financial condition.

Consumer loans: The Company offers home equity installment loans and lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial real estate loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence or an automobile, the borrower’s continued employment is considered the greatest risk to repayment. The Company also offers a variety of loans to individuals for personal and household purposes. These loans are generally considered to have greater risk than mortgages on real estate because they* maybe unsecured, or if they are secured, the value of the collateral may*be difficult to assess and more likely to decrease in value than real estate.

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**Residential mortgage loans:**Residential mortgages are secured by afirst lien position of the borrower’s residential real estate. These loans have varying loan rates depending on the financial condition of the borrower and the loan to value ratio. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is considered the greatest risk to repayment. Residential mortgages have terms up tothirty years with amortizations varying from10 to30 years. The majority of the loans are underwritten according to FNMA and/or FHLB standards.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

In accordance with ASC Topic326, the Company estimates expected credit losses for off-balance-sheet credit exposures over the contractual period during which the Company is exposed to credit risk. The estimate of expected credit losses takes into consideration the likelihood that funding will occur (i.e., funding rate) as well as the amount expected to be collected over the estimated remaining contractual term of the off-balance-sheet credit exposures (i.e., loss rate). The Company doesnot record an estimate of expected credit losses for off-balance-sheet exposures that are unconditionally cancellable. On a quarterly basis, management evaluates expected credit losses for off-balance-sheet credit exposures. The Company's allowance for credit losses on unfunded commitments is recognized as a liability on the consolidated balance sheets, with adjustments to the reserve recognized in the provision for credit losses on unfunded commitments on the consolidated statements of income.

Prior to January 1, 2023**

As further noted in Note18, "Recent Accounting Pronouncements", on* January 1, 2023,the company adopted ASU2016*-13 (Topic326), which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (or CECL) methodology.

Prior to the adoption of ASC326, the allowance represented an amount which, in management’s judgment, would be adequate to absorb losses on existing loans. Management’s judgment in determining the adequacy of the allowance was based on evaluations of the collectability of the loans. These evaluations took into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that* mayaffect the borrower’s ability to pay, collateral value, overall portfolio quality and review of specific loans for impairment. Management appliedtwo* primary components during the estimation process to determine proper allowance levels; a specific loan loss allocation for loans that were deemed impaired and a general loan loss allocation for those loansnot specifically allocated based on historical charge-off history and qualitative factor adjustments for trends or changes in the loan portfolio and economic factors. Delinquencies, changes in lending policies and local economic conditions were some of the items used for the qualitative factor adjustments.

A loan was considered impaired when, based on current information and events, it was probable that the Company would be unable to collect the scheduled payments in accordance with the contractual terms of the loan. Factors considered in determining impairment included payment status, collateral value and the probability of collecting payments when due. The significance of payment delays and/or shortfalls was determined on a case-by-case basis. All circumstances surrounding the loan were taken into account. Such factors included the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment was measured on these loans on a loan-by-loan basis. Impaired loans included non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

Acquired loans were marked to fair value on the date of acquisition and were evaluated on a quarterly basis to ensure the necessary purchase accounting updates were made in parallel with the allowance for loan loss calculation. The carryover of allowance for loan losses related to acquired loans was prohibited as any credit losses in the loans were included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflected only those losses incurred after acquisition and represented the present value of cash flows expected at acquisition that wasno longer expected to be collected. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performed an analysis on acquired loans to determine whether ornot there had been subsequent deterioration in relation to these loans. If deterioration had occurred, the Company would include these loans in the calculation of the allowance for loan losses after the initial valuation and provide accordingly.

For acquired ASC310-30 loans, the Company continued to estimate cash flows expected to be collected. Subsequent decreases to the expected cash flows required the Company to evaluate the need for an additional allowance for loan losses. Subsequent improvement in expected cash flows would have resulted in the reversal of a corresponding amount of the non accretable discount which would be reclassified as an accretable discount that will be recognized in interest income over the remaining life of the loan.

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TRANSFER OF FINANCIAL ASSETS

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company doesnot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The Company accounts for certain participation interests in commercial loans receivable (loan participation agreements) sold as a sale of financial assets pursuant to ASC860, Transfers and Servicing. Loan participation agreements that meet the sale criteria under ASC860 are derecognized from the Consolidated Balance Sheets at the time of transfer. If the transfer of loans doesnot meet the sale criteria or participating interest criteria under ASC860, the transfer is accounted for as a secured borrowing and the loan isnot de-recognized and a participating liability is recorded in the Consolidated Balance Sheets.

LOAN FEES AND COSTS

Nonrefundable loan origination fees and certain direct loan origination costs are recognized as a component of interest income over the life of the related loans as an adjustment to yield. The unamortized balance of the deferred fees and costs are included as components of the loan balances to which they relate.

ACCRUED INTEREST RECEIVABLE

The Company electednot to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is90 days past due, or earlier if the Company believes the collections of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

Accrued interest receivable is presented separately on the consolidated balance sheets.

BANK PREMISES AND EQUIPMENT

Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improved property. The Company leases several branches which are classified as operating leases. The Company also leasestwo stand-alone ATMs which are classified as operating leases and a building and equipment classified as finance leases. In most circumstances, management expects that in the normal course of business, leases will be renewed or replaced by other leases. Rent expense is recognized on the straight-line method over the term of the lease.

BANK OWNED LIFE INSURANCE

The Company maintains bank owned life insurance (BOLI) for a selected group of employees, namely its officers where the Company is the owner and sole beneficiary of the policies. The earnings from the BOLI are recognized as a component of other income in the consolidated statements of income. The BOLI is an asset that can be liquidated, if necessary, with tax consequences. However, the Company intends to hold these policies and, accordingly, the Company hasnot provided for deferred income taxes on the earnings from the increase in the cash surrender value.

EMPLOYEE BENEFITS

The Company holds separate supplemental executive retirement (SERP) agreements for certain officers and an amount is credited to each participant’s SERP account monthly while they are actively employed by the bank until retirement. A deferred tax asset is provided for the non-deductible SERP expense. The Company also entered into separate split dollar life insurance arrangements with four executives providing post-retirement benefits and accrues monthly expense for this benefit. Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on the consolidated statements of income.

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FORECLOSED ASSETS HELD-FOR-SALE

Foreclosed assets held-for-sale are carried at the lower of cost or fair value less cost to sell. Foreclosed assets held-for-sale is primarily other real estate owned, but also includes other repossessed assets. Losses from the acquisition of property in full and partial satisfaction of debt are treated as credit losses. Routine holding costs, gains and losses from sales, write-downs for subsequent declines in value and any rental income received are recognized net, as a component of other real estate owned expense in the consolidated statements of income. Gains or losses are recorded when the properties are sold.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets, including bank premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset* may**not* be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to non-interest expense.

GOODWILL AND INTANGIBLE ASSETS

Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date. Goodwill is recorded at its net carrying value. The goodwill isnot deductible for tax purposes.

Goodwill is reviewed for impairment annually as of* November 30and between annual tests when events and circumstances indicate that impairment mayhave occurred. Goodwill impairment exists when the carrying amount of a reporting unit exceeds its fair value. A qualitative test can be performed to determine whether it is more likely thannot* that the fair value of the Company is less than its carrying amount, including goodwill. In this qualitative assessment, the Company evaluates events and circumstances which include general banking industry conditions and trends, the overall financial performance of the Company, the performance of the Company’s common stock and key financial performance metrics of the Company. If the qualitative review indicates that it isnot more likely thannot that the carrying value exceeds its fair value,no further evaluation needs to be performed. If the results of the qualitative review indicate it is more likely thannot that the fair value is less than the carrying value, then the Company performs a quantitative impairment test. During2023, the Company determined it isnot more likely thannot that the fair value exceeds its carrying value thereforeno quantitative analysis was necessary.

Other acquired intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing.

STOCK PLANS

The Company accounts for stock-based compensation plans under the recognition and measurement accounting principles, which requires the cost of share-based payment transactions be recognized in the financial statements. The stock-based compensation accounting guidance requires that compensation cost for stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. Compensation cost is recognized on a straight-line basis over the requisite service period. When granting stock-settled stock appreciation rights (SSARs), the Company uses Black-Scholes-Merton valuation model to determine fair value on the date of grant.

TRUST AND FINANCIAL SERVICE FEES

Trust and financial service fees are recorded on the cash basis, which isnot materially different from the accrual basis.

ADVERTISING COSTS

Advertising costs are charged to expense as incurred.

LEGAL AND PROFESSIONAL EXPENSES

Generally, the Company recognizes legal and professional fees as incurred and are included as a component of professional services expense in the consolidated statements of income. Legal costs incurred that are associated with the collection of outstanding amounts due from delinquent borrowers are included as a component of loan collection expense in the consolidated statements of income. In the event of litigation proceedings brought about by an employee orthird party against the Company, expenses for damages will be accrued if the likelihood of the outcome against the Company is probable, the amount can be reasonably estimated and the amount would have a material impact on the financial results of the Company.

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INCOME TAXES

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The benefit of a tax position is recognized on the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken arenot offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than50% likely of being realized upon settlement with the applicable taxing authority. For tax positionsnot meeting the more likely thannot threshold,no tax benefit is recorded. Under the more likely thannot threshold guidelines, the Company believesno significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. The Company hadno material unrecognized tax benefits or accrued interest and penalties for the years ended* December 31, 2023* and2022, respectively.

COMPREHENSIVE INCOME (LOSS)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the shareholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income (loss).

CASH FLOWS

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits with financial institutions.

The Company is required by the Federal Reserve Bank to maintain average reserve balances based on a percentage of deposits. There wereno reserve requirements on* December 31, 2023and2022*.

Deposits with anyone financial institution are insured up to $250,000. From time-to-time, the Company* may*maintain cash and cash equivalents with certain other financial institutions in excess of the insured amount.

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The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated:

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Agency– Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions (municipal)

The municipal securities are general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

The Company didnot record any allowance for credit losses on its available-for-sale or held-to-maturity securities. The Company excludes accrued interest receivable from the amortized cost basis of investment securities disclosed throughout this footnote. As of* December 31, 2023and2022,* accrued interest receivable for investment securities totaled $3.4 million and $4.0 million, respectively, and is included in accrued interest receivable line in the consolidated balance sheets. Amortized cost and fair value of investment securities as of the period indicated are as follows:

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Some of the Company’s debt securities are pledged to secure trust funds, public deposits, short-term borrowings, FHLB advances, Federal Reserve Bank of Philadelphia Discount Window borrowings and certain other deposits as required by law.

The amortized cost and fair value of debt securities at* December 31, 2023* by contractual maturity are shown below:

There was a $1.1 million increase to the carrying value of municipal AFS securities resulting from the interest rate swap that wasnot included in the maturity table above.

Actual maturities will differ from contractual maturities because issuers and borrowers* may*have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

Securities pledged at* December 31, 2023* had a carrying amount of $424.0 million and were pledged to secure public deposits, trust client deposits, borrowings and derivative instruments.

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Gross realized gains and losses from sales, determined using specific identification, for the periods indicated were as follows:

The following table presents the fair value and gross unrealized losses of investments aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of the period indicated:

There was a $2.2 million increase to the carrying value of AFS securities resulting from the interest rate swap that increased the unrealized loss position at* December 31, 2023that wasnot* included in the table above.

The Company had 416 debt securities in an unrealized loss position at* December 31, 2023*, including 46 agency-GSE securities,135 MBS – GSE residential securities and 235 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at* December 31, 2023*:9.94% for agency - GSE,13.97% for total MBS-GSE residential; and 12.13% for municipals. Management hasno intent to sell any securities in an unrealized loss position as of* December 31, 2023*.

The Company reassessed classification of certain investments and effective* April 1, 2022,*the Company transferred agency and municipal investment securities with a book value of $245.5 million from available-for-sale to held-to-maturity. The securities were transferred at their fair value. The market value of the securities on the date of the transfer was $221.7 million, after netting unrealized losses totaling $18.9 million. The $18.9 million, net of deferred taxes, will be accreted into other comprehensive income over the life of the bonds. The allowance for credit losses on these securities was evaluated under the accounting policy for HTM debt securities.

Unrealized losses on available-for-sale securities havenot been recognized into income because management believes the cause of the unrealized losses is related to changes in interest rates and isnot directly related to credit quality. Quarterly, management conducts a formal review of investment securities to assess whether the fair value of a debt security is less than its amortized cost as of the balance sheet date. An allowance for credit losses hasnot been recognized on these securities in an unrealized loss position because: (1) the entity doesnot intend to sell the security; (2) more likely thannot the entity willnot be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is sufficient to recover the entire amortized cost. The issuer(s) continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bond(s) approach maturity.

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The Company has U.S. agency bonds and municipal securities classified as held-to-maturity. Management estimatedno credit loss reserve will be necessary for agency bonds HTM given the strong credit history of GSE and other U.S. agency issued bonds and the involvement of the U.S. government. For municipal securities HTM, the Company utilized athird-party model to analyze whether a credit loss reserve is needed for these bonds. The amount of credit loss reserve calculated using this model was immaterial to the Company's financial statements, thereforeno reserve was recorded, but the Company will continue to evaluate these securities on a quarterly basis.

The Company’s credit losses on debt securities evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which* maybe to maturity and other factors when evaluating for the existence of credit losses on debt securities. The guidance requires that if credit losses exist, a contra-asset is recorded on both HTM and AFS securities, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that hasnot* been recorded through an allowance for credit losses is recognized in other comprehensive income.

For all debt securities, as of* December 31, 2023*, the Company applied the criteria provided in the recognition and presentation guidance related to credit losses on debt securities. That is, management hasno intent to sell the securities and nor any conditions were identified by management that, more likely thannot, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there wasno presence of credit losses in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.

The classifications of loans and leases at* December 31, 2023and2022* are summarized as follows:

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Total unamortized net costs and premiums included in loan totals were as follows:

Based on the adoption of ASU2016-13, the Company updated the segmentation of its loan and lease portfolio to ensure that the risk characteristics within these segments were as similar as possible with financial asset type and collateral type as the primary factors used in this evaluation. Consequently, management decided to create a new segment called “Municipal,” which are loans and leases to states and political subdivisions in the U.S. based on the unique risk characteristics of this segment as expected credit losses are minimal. Additionally, the previous segment of “Auto Loans”, which included direct auto loans, indirect non-recourse auto loans, and indirect recourse auto loans, was broken out between “Auto Loans-Recourse” and “Auto Loans-Non-recourse” as substantially all the recourse portfolio is to a high credit quality dealer with the guaranty of the dealership and high net worth principal. Direct auto loans were included in the “Consumer Other” segment. Additionally, during2023, the Company analyzed its commercial portfolio to ensure these loans were in the appropriate segment based on their purpose and collateral. Based on this analysis, a total of $25.4 million of commercial and industrial loans were reclassified to other loan segments including: $5.0 million to municipal, $1.4 million to commercial real estate non-owner occupied, $13.9 million to commercial real estate owner occupied, and $5.1 million to commercial real estate construction. The classifications of loans and leases at* December 31, 2022*were modified retroactively to enhance comparability between periods.

The Company excludes accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of* December 31, 2023and2022,* accrued interest receivable for loans totaled $5.7 million and $4.5 million, respectively, and is included in accrued interest receivable line in the consolidated balance sheets and is excluded from the estimate of credit losses.

Direct finance leases include the lease receivable and the guaranteed lease residual. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method.

The Company services real estate loans for investors in the secondary mortgage market which arenot included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced for others amounted to $477.7 million as of* December 31, 2023* and $465.7 million as of* December 31, 2022*. Mortgage servicing rights amounted to $1.5 million and $1.6 million as of* December 31, 2023and2022*, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades* maybe changed at any time management feels an upgrade or downgrade may*be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

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Non-accrual loans

Non-accrual loans and loans past due over89 days still accruing, segregated by class, at* December 31, 2023*, were as follows:

Non-accrual loans, segregated by class, at* December 31, 2022*were as follows:

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The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at90 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

Loan modifications to borrowers experiencing financial difficulty

Occasionally, the Company modifies loans to borrowers in financial distress by providing lower interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically doesnot forgive principal when modifying loans.

In some cases, the Company provides multiple types of concessions onone loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as lowering the interest rate,* may*be granted. For the loans included in the "combination" columns below, multiple types of modifications have been made on the same loan within the current reporting period.

The following table presents the amortized cost basis of loans at* December 31, 2023* that were both experiencing financial difficulty and modified during thetwelve months ended* December 31, 2023*, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:

The Company hasnot committed to lend additional amounts to the borrowers included in the previous table.

Loans modified to borrowers experiencing financial difficulty are closely monitored to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last12 months:

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The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for thetwelve months ended* December 31, 2023*:

The following table provides the amortized cost basis of financing receivables that had a payment default during thetwelve months ended* December 31, 2023* and were modified in thetwelve months prior to that default to borrowers experiencing financial difficulty:

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. The allowance for credit losses (ACL)* maybe increased, adjustments maybe made in the allocation of the ACL or partial charge-offs may*be taken to further write-down the carrying value of the loan.

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Past due loans

Loans are considered past due when the contractual principal and/or interest isnot received by the due date. For loans reported30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears fortwo payments or billing cycles. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):

(1) Includes non-accrual loans.(2) Net of unearned lease revenue of $2.0 million.(3) Includes net deferred loan costs of $4.9 million.

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(1) Includes non-accrual loans.(2) Net of unearned lease revenue of $1.7 million.(3)Includes net deferred loan costs of $4.6 million.

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Pre-Adoption of ASC326 - Impaired loans**

For periods prior to the adoption of CECL, loans were considered impaired when, based on current information and events, it was probable that the Company would be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls was determined on a case-by-case basis. All circumstances surrounding the loan were considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment was measured on these loans on a loan-by-loan basis. Impaired loans included non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

Impaired loans, segregated by class, as of* December 31, 2022*prior to the adoption of CECL are detailed below:

At* December 31, 2022,impaired loans totaled $3.9 million consisting of $1.4 million in accruing TDRs and $2.5 million in non-accrual loans. The non-accrual loans includedone TDR totaling $0.2 million as of December 31, 2022*.

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans arefirst applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.

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In the table below, average recorded investment refers to thefive quarter average of impaired loans preceding the reporting period.

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Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.

These loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades* maybe changed at any time management feels an upgrade or downgrade may*be warranted.

The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:

Pass

Loans in this category have an acceptable level of risk and are graded in a range ofone to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor orno delinquency experience. Loans with a grade ofone are of the highest quality in the range. Those gradedfive are of marginally acceptable quality.

Special Mention

Loans in this category are graded asix and* maybe protected but are potentially weak. They constitute a credit risk to the Company but havenot* yet reached the point of adverse classification. Some of the following conditions* mayexist: little orno* collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow* may**not* be sufficient to support total debt service requirements.

Substandard

Loans in this category are graded aseven and have a well-defined weakness which* mayjeopardize the ultimate collectability of the debt. The collateral pledged maybe lacking in quality or quantity. Financial statements mayindicate insufficient cash flow to service the debt; and/or donot* reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company* maysustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans90* days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as modifications experiencing financial difficulty can be graded substandard.

Doubtful

Loans in this category are graded aneight and have a better than50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which* maystrengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than aneight* is considered to be uncollectible and charged-off.

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such arenot risk rated. For these portfolios, the Company utilizes payment activity and history in assessing performance. Non-performing loans are comprised of non-accrual loans and loans past due90 days or more and accruing. All loansnot classified as non-performing are considered performing.

The following table presents loans including $4.9 million and $4.6 million of deferred costs, segregated by class and vintage, categorized into the appropriate credit quality indicator category as of* December 31, 2023and2022*, respectively:

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Commercial credit exposure

Credit risk profile by creditworthiness category

As of December 31, 2023**

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Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

As of December 31, 2023**

(1)Net of unearned lease revenue of $2.0 million.

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Commercial credit exposure

Credit risk profile by creditworthiness category

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

(2) Net of unearned lease revenue of $1.7 million.

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Collateral dependent loans

Loans that donot share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where we have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. The following table presents the individually evaluated, collateral dependent loans as of* December 31, 2023*:

Allowance for credit losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for credit losses (ACL) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. For more information on the information management used in developing its current estimate of expected credit losses and management's methodology for developing its ACL, refer to Note1, "Nature of Operations and Summary of Significant Accounting Policies."

Information related to the change in the allowance and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows:

(1) Net of unearned lease revenue of $2.0 million.(2) Includes $4.9 million of net deferred loan costs.

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(1) Net of unearned lease revenue of $1.7 million.(2) Includes $4.6 million of net deferred loan costs.

Unfunded commitments

The Company's allowance for credit losses on unfunded commitments is recognized as a liability on the consolidated balance sheets, with adjustments to the reserve recognized in the provision for credit losses on unfunded commitments on the consolidated statements of income. The Company's activity in the allowance for credit losses on unfunded commitments for the period was as follows:

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Direct finance leases

The Company originates direct finance leases throughtwo automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was $6.1 million and $7.9 million as of* December 31, 2023and2022*, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to $25.1 million and $23.6 million at* December 31, 2023and2022*, respectively, and are included in the carrying value of direct finance leases. As of* December 31, 2023,there was also $389 thousand in deferred lease expense included in the carrying value of direct finance leases that isnot* included in the table below.

The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:

Components of bank premises and equipment are summarized as follows:

Depreciation expense, which includes amortization of leasehold improvements, was $2.5 million, $2.3 million and $2.2 million for the years ended* December 31, 2023,*2022 and2021, respectively. The estimated useful life was 40 years for bank premises,3 to 7 years for furniture and fixtures and for leasehold improvements was the term of the lease.

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The scheduled maturities of certificates of deposit as of* December 31, 2023* were as follows:

Certificates of deposit of*$250,000* or more aggregated $72.6 million and $21.1 million at* December 31, 2023and2022*, respectively.

As of* December 31, 2023and2022*, $0.5 million and $0.3 million of overdraft deposits have been reclassified as loan balances.

As of* December 31, 2023*, available-for-sale investment securities with a combined fair value of $344.0 million and held-to-maturity investment securities with a combined carrying value of $224.2 million were available to be pledged as qualifying collateral to secure public deposits and trust funds. The Company required $321.7 million of the qualifying collateral to secure such deposits as of* December 31, 2023* and the balance of $236.6 million was available for other pledging needs.

The components of short-term borrowings are summarized as follows:

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The maximum and average amounts of short-term borrowings outstanding and related interest rates as of the periods indicated are as follows:

Overnight borrowings* may*include Fed funds purchased from correspondent banks, open repurchase agreements with the FHLB and borrowings at the Discount Window from the Federal Reserve Bank of Philadelphia (FRB).

As of* December 31, 2023,*investment securities with a carrying value of $59.7 million were pledged as qualifying collateral for the Federal Reserve Bank Term Funding Program.

FHLB borrowings are collateralized by a blanket lien on all commercial and residential real estate loans. At* December 31, 2023*, the Company had approximately $656.8 million available to borrow from the FHLB, $20.0 million from correspondent banks and approximately $70.4 million that it could borrow at the FRB.

The Company hadno FHLB advances as of* December 31, 2023and2022*.

As of* December 31, 2023and2022*, the Company had secured borrowings with a carrying value of $7.4 million and $7.6 million related to certain sold loan participations that didnot qualify for sales treatment acquired from Landmark. The carrying value includes a $47 thousand and $53 thousand purchase accounting fair value adjustment as of* December 31, 2023and2022*.

The maturity and weighted-average interest rate of secured borrowings as of the periods indicated is as follows:

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The Company hasone active stock-based compensation plan (the stock compensation plan) from which it can grant stock-based compensation awards and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance. The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. The Company’s stock compensation plan was shareholder-approved and permits the grant of share-based compensation awards to its employees and directors. The Company believes that the stock-based compensation plan will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock. In return, the Company hopes to secure, retain and motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders. In the stock compensation plan, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.

At the2022 annual shareholders' meeting, the Company's shareholders approved and the Company adopted the2022 Omnibus Stock Incentive Plan which replaced the2012 Omnibus Stock Incentive Plan and the2012 Director Stock Incentive Plan (collectively, the2012 stock incentive plans). The2012 stock incentive plans expired in2022. Unless terminated by the Company’s board of directors, the2022 Omnibus Stock Incentive Plan will expire on andno stock-based awards shall be granted after the year2032.

In the2022 Omnibus Stock Incentive Plan, the Company has reserved 500,000 shares of itsno-par common stock for future issuance. The Company recognizes share-based compensation expense over the requisite service or vesting period. Since2019, the Company has approved a Long-Term Incentive Plan (LTIP) each year that awarded restricted stock and/or stock-settled stock appreciation rights (SSARs) to senior officers and managers based on the attainment of performance goals. The SSAR awards have aten-year term from the date of each grant.

During thefirst quarter of2023, the Company approved a LTIP and awarded restricted stock to senior officers and managers in* February 2023based on2022* performance. During thesecond quarter of2023, the Company awarded 1,000 shares of restricted stock toone new employee.

During thefirst quarter of2022, the Company approved a LTIP and awarded restricted stock to senior officers and managers in* February 2022based on2021* performance.

During thefirst quarter of2021, the Company approved a LTIP and awarded restricted stock to senior officers and managers in* Februaryand March 2021based on2020* performance. During thethird quarter of2021, 476 shares of restricted stock were granted toone new employee after the merger.

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during2023,2022 and2021 under the2022 and2012 stock incentive plans:

(1) Vest after 1 year (2) Vest after 3 years – 33% each year (3) Vest fully after 3 years

The fair value of the shares granted in2023,2022 and2021 was calculated using the grant date closing stock price.

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A summary of the status of the Company’s non-vested restricted stock as of and changes during the period indicated are presented in the following table:

A summary of the status of the Company’s SSARs as of and changes during the period indicated are presented in the following table:

Of the SSARs outstanding at* December 31, 2023*, all SSARs vested and were exercisable.

During2023, there were 22,807 SSARs exercised. The intrinsic value recorded for these SSARs was $99,072. The tax deduction realized from the exercise of these SSARs was $495,300 resulting in a tax benefit of $104,013. During2022, there were 3,608 SSARs exercised. The intrinsic value recorded for these SSARs was $15,140. The tax deduction realized from the exercise of these SSARs was $56,424 resulting in a tax benefit of $11,849. During2021, there were 2,932 SSARs exercised. The intrinsic value recorded for these SSARs was $10,190. The tax deduction realized from the exercise of these SSARs was $125,810 resulting in a tax benefit of $26,420.

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Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the years ended* December 31, 2023,2022 and2021 and the unrecognized stock-based compensation expense as of December 31, 2023*:

In addition, during2021 the Company reversed accruals of ($10 thousand) in stock-based compensation expense for restricted stock and SSARs awarded under the2012 Omnibus Stock Incentive Plan.

The unrecognized stock-based compensation expense as of* December 31, 2023* will be recognized ratably over the periods ended* February 2025,** February 2025and June 2026for the2012* Director Stock Incentive Plan,2012 Omnibus Stock Incentive Plan and2022 Omnibus Stock Incentive Plan, respectively.

In addition to the2022 stock incentive plan, the Company established the2002 Employee Stock Purchase Plan (the ESPP) and reserved 165,000 shares of its un-issued capital stock for issuance under the plan. The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company. Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined. As of* December 31, 2023*,101,827 shares have been issued under the ESPP. The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance. The Company recognizes compensation expense on its ESPP on the date the shares are purchased, and it is included as a component of salaries and employee benefits in the consolidated statements of income.

During thesecond quarter of2022, the Company announced that the Board of Directors approved a plan to purchase, in open market and privately negotiated transactions, up to 3% of its outstanding common stock. During2022, the Company repurchased 32,554 shares of common stock at an average price of $38.81 under the treasury stock repurchase plan. The treasury stock repurchase plan ended during2023. All of these treasury shares were re-issued during2023 through the dividend reinvestment plan.

The Company also established the dividend reinvestment plan (the DRP) for its shareholders. The DRP is designed to avail the Company’s stock atno transactional cost to its shareholders. Cash dividends paid to shareholders who are enrolled in the DRP plus voluntary cash deposits received can be used to purchase shares, directly from the Company, from shares that become available in the open market or in negotiated transactions withthird parties. The Company has reserved 750,000 shares of its un-issued capital stock for issuance under the DRP. As of* December 31, 2023*, there were 591,730 shares available for future issuance.

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Pursuant to the accounting guidelines related to income taxes, the Company has evaluated its material tax positions as of* December 31, 2023and2022*. Under the “more-likely-than-not” threshold guidelines, the Company believesno significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. In periods subsequent to* December 31, 2023,determinations of potentially adverse material tax positions will be evaluated to determine whether an uncertain tax position may*have previously existed or has been originated. In the event an adverse tax position is determined to exist, penalty and interest will be accrued, in accordance with the Internal Revenue Service (IRS) guidelines, and will be recorded as a component of other expenses in the Company’s consolidated statements of income.

As of* December 31, 2023*, there wereno unrecognized tax benefits that, if recognized, would significantly affect the Company’s effective tax rate. Also, there wereno penalties and interest recognized in the consolidated statements of income in2023,2022 and2021 as a result of management’s evaluation of whether an uncertain tax position* mayexist nor does the Company foresee a change in its material tax positions that would give rise to the non-recognition of an existing tax benefit during the forthcomingtwelve* months. Tax returns filed with the IRS are subject to review by law under athree-year statute of limitations. The Company hasnot received notification from the IRS regarding adverse tax issues for the current year or from tax returns filed for tax years2022,2021 or2020.

The following temporary differences gave rise to the net deferred tax asset, a component of other assets in the consolidated balance sheets, as of the periods indicated:

The components of the total provision/(benefit) for income taxes for the years indicated are as follows:

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The reconciliation between the expected statutory income tax and the actual provision for income taxes is as follows:

The Company has a defined contribution profit sharing401(k) plan covering substantially all of its employees. The plan is subject to the provisions of the Employee Retirement Income Security Act of1974 (ERISA). Contributions to the plan approximated $1.0 million and $1.0 million in2023 and2022.

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The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements. The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs intothree broad levels as follows:

Level*1*** -**inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level*2*** -**inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that arenot active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

Level*3*** -*inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value. Level3 pricing for securities may*also include unobservable inputs based upon broker-traded transactions.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting. Thus, the Company uses fair value for AFS securities. Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, other real estate owned (ORE) and other repossessed assets.

The following table represents the carrying amount and estimated fair value of the Company’s financial instruments:

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The carrying value of short-term financial instruments, as listed below, approximates their fair value. These instruments generally have limited credit exposure,no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand:

Securities: Fair values on investment securities are determined by prices provided by athird-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

Accruing loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected cash flows discounted at current offering rates for similar loans. Current offering rates consider, among other things, credit risk.

The carrying value that fair value is compared to is net of the allowance for credit losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level3 of the fair value hierarchy.

Non-accrual loans: Loans which the Company has measured as non-accruing are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independentthird-party appraisals of the properties. These loans are classified within Level3 of the fair value hierarchy. The fair value consists of loan balances less the valuation allowance.

Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).

Interest rate swaps: Fair values on derivative instruments are determined by valuations provided by athird-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

**Certificates of deposit:**The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities.

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Secured borrowings: The fair value for these obligations uses an income approach based on expected cash flows on a pooled basis.

The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:

Debt securities in the AFS portfolio are measured at fair value using market quotations provided by athird-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.

There wereno changes in Level3 financial instruments measured at fair value on a recurring basis as of and for the periods ending* December 31, 2023and2022*, respectively.

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The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:

From time-to-time, the Company* may*be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets. The fair value of impaired loans was calculated using the value of the impaired loans with an allowance less the related allowance.

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. Individually evaluated loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for credit losses, and as such are carried at the lower of net recorded investment or the estimated fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.

Valuation techniques for individually evaluated, collateral dependent loans are typically determined through independent appraisals of the underlying collateral or* maybe determined through present value of discounted cash flows. Both techniques include various Level3* inputs which arenot identifiable. The valuation technique* maybe adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate isnot* the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors* may*be utilized to determine fair value.

At* December 31, 2023* and* December 31, 2022*, the range of liquidation expenses and other valuation adjustments applied to individually evaluated, collateral dependent loans ranged from -31.47% to -31.47% and from -19.61% to -29.58%, respectively. The weighted average of liquidation expenses and other valuation adjustments applied to individually evaluated, collateral dependent loans amounted to -31.47% as of* December 31, 2023* and -21.77% as of* December 31, 2022*, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed. Accordingly, fair value estimates for individually evaluated, collateral dependent loans are classified as Level3.

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For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level3 inputs which arenot identifiable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions* mayinclude consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values maybe periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At December 31, 2023* and* December 31, 2022*, the discounts applied to the appraised values of ORE ranged from -77.60% to -77.60% and from -39.07% to -77.60%, respectively. As of* December 31, 2023*, and* December 31, 2022*, the weighted average of discount to the appraisal values of ORE amounted to -77.60% and -39.61%, respectively.

At* December 31, 2023and2022*, there wereno other repossessed assets. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. Because of the nature of these instruments, the fair values of these off-balance sheet items arenot material.

The notional amount of the Company’s financial instruments with off-balance sheet risk was as follows:

Commitments to Extend Credit and Standby Letters of Credit

The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and* mayrequire payment of fees. Since commitments mayexpire without being drawn upon, the total commitment amounts donot* necessarily represent future liquidity requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company on extension of credit, is based on management’s credit assessment of the customer.

Financial standby letters of credit are conditional commitments issued by the Company to guarantee performance of a customer to athird party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The Company’s performance under the guarantee is required upon presentation by the beneficiary of the financial standby letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company wasnot required to recognize any liability in connection with the issuance of these financial standby letters of credit.

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The following table summarizes outstanding financial letters of credit, by maturity, as of* December 31, 2023*:

The Company hasnot incurred losses on its commitments in2023 and2022.

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards. The Company maintainsone active share-based compensation plan that* maygenerate additional potentially dilutive common shares. For granted and unexercised stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued SSARs were exercised and converted into common stock. As of the years ended December 31, 2023and2022*, there were 14,863 and 19,675 potentially dilutive shares related to issued and unexercised SSARs. The calculation didnot include 46,423 weighted average unexercised SSARs that could potentially dilute earnings per share because their effect was antidilutive as of* December 31, 2023*. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were 25,128 and 14,865 potentially dilutive shares related to unvested restricted share grants as of the years ended* December 31, 2023and2022*, respectively. The calculation didnot include 460 weighted average unvested restricted shares that could potentially dilute earnings per share because their effect was antidilutive as of* December 31, 2023*.

In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock. Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock. Proceeds include amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company hasnot yet recognized in earnings. The Company doesnot consider awards from share-based grants in the computation of basic EPS.

The following table illustrates the data used in computing basic and diluted EPS for the years indicated:

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The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Since the Company (on a consolidated basis) is currently considered a small bank holding company, it isnot subject to regulatory capital requirements.

Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. A capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements of 2.50%. As of* December 31, 2023and2022*, the Bank exceeded all capital adequacy requirements to which it was subject.

The following table reflects the actual and required capital and the related capital ratios as of the periods indicated.No amounts were deducted from capital for interest-rate risk in either2023 or2022.

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• The minimums under Basel III increased to include the capital conservation buffer of 2.50%.

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations and Pennsylvania law limit the amount of dividends that* maybe paid from the Bank to the Company without prior approval of regulatory agencies. Accordingly, at December 31, 2023*, approximately $147.3 million was available for dividend distribution from the Bank to the Company in2023.

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During the ordinary course of business, loans are made to executive officers, directors, greater than 5% shareholders and associates of such persons. These transactions are executed on substantially the same terms and at the rates prevailing at the time for comparable transactions with others. These loans donot involve more than the normal risk of collectability or present other unfavorable features. A summary of loan activity with officers, directors, associates of such persons and shareholders who own more than5% of the Company’s outstanding shares is as follows:

As of* December 31, 2023and2022*, deposits from executive officers and directors approximated $27.7 million and $24.8 million, respectively.

The Pittston branch property is subject to a lease with a company of which director, William J. Joyce, Sr., is a partner. With the exception of the Pittston branch,none of the lessors of the properties leased by the Company are affiliated with the Company and all of the properties are located in the Commonwealth of Pennsylvania.

The nature of the Company’s business generates litigation involving matters arising in the ordinary course of business. However, in the opinion of management of the Company after consulting with the Company’s legal counsel,no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material effect on the Company’s shareholders’ equity or results of operations. No legal proceedings are pending other than ordinary routine litigation incident to the business of the Company and the Bank. In addition, to management’s knowledge,no government authorities have initiated or contemplated any material legal actions against the Company or the Bank.

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In* June 2016,the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU)2016-13, Financial Instruments– Credit Losses (Topic326) Measurement of Credit Losses on Financial Instruments (CECL)*. The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under U.S. generally accepted accounting principles (GAAP), an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown.

On* January 1, 2023,the Company adopted ASU2016*-13 and all of the subsequent amendments using the modified-retrospective approach and recorded a cumulative-effect adjustment to retained earnings. The change in this accounting guidance could require the Company to record loan losses more rapidly. The Company has engaged the services of a qualifiedthird-party service provider to assist management in estimating credit allowances under this standard. Starting in the3rd quarter of2022, the Company ran its CECL model parallel to the allowance for loan losses calculation to gain a better understanding of the effects of the change. During thefourth quarter of2022, athird-party service provider ran a model validation withno substantial findings. Results for reporting periods beginning after* January 1, 2023are presented under ASC326* while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $1.3 million as of* January 1, 2023for the cumulative effect of adopting ASC326.* The transition adjustment includes a $0.5 million decrease for the allowance for credit losses on loans (ACL) and a $0.8 million decrease for the reserve for unfunded commitments, net of deferred tax. The Company has also run a quarterly CECL analysis on its held-to-maturity investment securities starting in2023 and the estimated CECL reserve is immaterial. While the CECL model doesnot apply to available-for-sale securities, the ASU does require companies to record an allowance when recognizing credit losses for available-for-sale securities with unrealized losses, rather than reduce the amortized cost of the securities by direct write-offs. The guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than in interest income over time.

The Company adopted the provisions of ASC326 related to financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC310-30 using the prospective transition approach. In accordance with the standard, management didnot reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On* January 1, 2023,*the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.1 million of the ACL.

In* November 2018,the FASB issued ASU2018*-19, Codification Improvements to Topic326**, which clarifies that receivables arising from operating leases arenot within the scope of Topic326. In* December 2018,regulators issued a final rule related to regulatory capital(Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations)* which is intended to provide regulatory capital relief for entities transitioning to CECL. In* April 2019,the FASB issued ASU2019*-04, Codification Improvements to Topic326,* Financial Instruments*–* Credit Losses, Topic815, Derivatives and Hedging and Topic825, Financial Instruments*. As it relates to CECL, this guidance amends certain provisions contained in ASU2016-13, particularly in regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that arenot unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses.

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In* March 2022,the FASB issued ASU2022*-02, Financial Instruments-Credit Losses (Topic326*) Troubled Debt Restructurings and Vintage Disclosures*. The amendments in this update eliminate the accounting guidance for TDRs by creditors in Subtopic310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in this update also require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. The amendments in this update were effective for the Company upon adoption of ASU2016-13. The amendments in this update should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, the Company has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company adopted ASU2022-02 on* January 1, 2023and the adoption required additional quantitative and qualitative disclosures. There wasnot* any significant effect on the Company's financial statements.

In* March 2020,the FASB issued ASU2020*-04, Reference Rate Reform (Topic848*)– Facilitation of the Effects of Reference Rate Reform on Financial Reporting*. The amendments in this update provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in this update are elective and apply to all entities that have contracts that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that doesnot require contract remeasurement at the modification date or reassessment of a previous accounting determination. An optional expedient simplifies accounting for contract modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. The amendments in ASU2020-04 are effective as of* March 12, 2020through December 31, 2022.*

In* December 2022,the FASB issued ASU2022*-06, Reference Rate Reform (Topic848*) - Deferral of the Sunset Date of Topic848**. The amendments in this update defer the sunset date of Topic848* from* December 31, 2022,to December 31, 2024,after which entities willno* longer be permitted to apply the relief in Topic848. The Company expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU2022-06. As of* December 31, 2023,the Companyno* longer had any loans with rates tied to LIBOR.

In* March 2023,the FASB issued ASU2023*-02, Investments - Equity Method and Joint Ventures (Topic323*). The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The amendments are effective for the Company for fiscal years beginning after December 31, 2023,including interim periods within those fiscal years. The adoption isnot* expected to have a material impact on the consolidated financial statements.

In* October 2023,the FASB issued ASU2023*-06, Disclosure Improvements. The amendments in this update are the result of the FASB's decision to incorporate into the Codification certain disclosures referred by the SEC that overlap with, but require incremental information to, generally accepted accounting principles (GAAP). The amendments in this update represent changes to clarify or improve disclosure and presentation requirements of a variety of topics in the Codification. For entities subject to the SEC's existing requirements, the effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The amendments in this update should be applied prospectively. The adoption isnot expected to have a material impact on the consolidated financial statements but could change certain disclosures in SEC filings.

In* December 2023,the FASB issued ASU2023*-09, Income Taxes (Topic840*): Improvements to Income Tax Disclosures*. The amendments in this update require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. The amendments in this update also require that all entities disclose on an annual basis the amount of income taxes paid disaggregated by federal, state, and foreign taxes and the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than5 percent of total income taxes paid. The amendments will require the disclosure of pre-tax income disaggregated between domestic and foreign, as well as income tax expense disaggregated by federal, state, and foreign. The amendment also eliminates certain disclosures related to unrecognized tax benefits and certain temporary differences. This ASU is effective for fiscal years beginning after* December 15, 2024.Early adoption is permitted in any annual period where financial statements havenot* yet been issued. The amendments should be applied on a prospective basis but retrospective application is permitted. The Company doesnot expect adoption of the standard to have a material impact on its consolidated financial statements.

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The following is the condensed financial information for Fidelity D & D Bancorp, Inc. on a parent company only basis as of and for the years indicated:

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Bank-Owned Life Insurance (BOLI)

The Company has purchased single premium BOLI policies on certain officers. The policies are recorded at their cash surrender values. Increases in cash surrender values are included in non-interest income in the consolidated statements of income. The policies’ cash surrender value totaled $54.6 million and $54.0 million, respectively, as of* December 31, 2023and2022* and is reflected as an asset on the consolidated balance sheets. During thefirst quarter of2023, the Company received $0.9 million in proceeds from a BOLI death claim, of which $0.8 million was return of cash surrender value and $0.1 million was additional income which was recorded in fees and other revenue on the consolidated statements of income. For the years ended* December 31, 2023and2022*, the Company has recorded income of $1.3 million and $1.3 million, respectively, due to an increase in cash surrender values.

Officer Life Insurance

The Bank enters into separate split dollar life insurance arrangements (Split Dollar Agreements) with certain officers which provide each officer a specified death benefit should the officer die while in the Bank’s employ. The Bank owns the policies and all cash values thereunder. Upon death of the covered employee, the agreed-upon amount of death proceeds from the policies will be paid directly to the insured’s beneficiary. As of* December 31, 2023*, the policies had total death benefits of $54.6 million of which $8.8 million would have been paid to the officer’s beneficiaries and the remaining $45.8 million would have been paid to the Bank. In addition, four executive officers have the opportunity to retain a split dollar benefit equal totwo times their highest base salary after separation from service if the vesting requirements are met. As of* December 31, 2023and2022*, the Company had a balance in accrued expenses of $352 thousand and $269 thousand, respectively, for the split dollar benefit.

Supplemental Executive Retirement plan (SERP)

On* March 29, 2017,the Bank entered into separate supplemental executive retirement agreements (individually the “SERP Agreement”) with five officers, pursuant to which the Bank will credit an amount to a SERP account established on each participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2017until retirement. On March 20, 2019,the Bank entered into a SERP Agreement withone officer, pursuant to which the Bank will credit an amount to a SERP account established for the participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2019until normal retirement age. As a result of the acquisition of Landmark, the Company acquired a SERP agreement withone former employee. As of December 31, 2023and2022*, the Company had a balance in accrued expenses of $4.4 million and $4.0 million in connection with these SERPs.

The Company adopted ASU2014-09, Revenue from Contracts with Customers (Topic606) and all subsequent ASUs that modified Topic606.

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The majority of the Company’s revenues are generated through interest earned on securities and loans, which is explicitly excluded from the scope of the guidance. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, loan service charges, life insurance earnings, rental income and gains/losses on the sale of loans and securities arenot in the scope of the new guidance. The main types of contracts with customers that are in the scope of the new guidance are:

Contract balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before the payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company typically doesnot enter into long-term revenue contracts with customers, and therefore, doesnot experience significant contract balances. As of* December 31, 2023and2022*, the Company didnot have any significant contract balances.

Remaining performance obligations

The Company’s performance obligations have an original expected duration of less thanone year and follow the relevant guidance for recognizing revenue over time. There isno variable consideration subject to constraint that isnot included in information about transaction price.

Contract acquisition costs

An entity is required to capitalize and subsequently amortize into expense, certain incremental costs of obtaining a contract if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it wouldnot have incurred if the contract hadnot been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized inone year or less.

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ASU2016-02 Leases (Topic842) became effective for the Company on* January 1, 2019.For all operating lease contracts where the Company is lessee, a right-of-use (ROU) asset and lease liability were recorded as of the effective date. The Company assumed all renewal terms will be exercised when calculating the ROU assets and lease liabilities. For leases existing at the transition date, any prepaid or deferred rent was added to the ROU asset to calculate the lease liability. The discount rate used to calculate the present value of future payments at the transition date was the Company’s incremental borrowing rate. The Company used the FHLB fixed rate borrowing rates as the discount rates. For all classes of underlying assets, the Company has electednot* to record short-term leases (leases with a term of12 months or less) on the balance sheet when the Company is lessee. Instead, the Company will recognize the lease payment on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. For all asset classes, the Company has elected, as a lessee,not to separate nonlease components from lease components and instead to account for each separate lease component and nonlease components associated with that lease component as a single lease component.

Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contains a lease, the Company recognizes a ROU asset and a lease liability when the asset is placed in service.

The Company’s operating leases, where the Company is lessee, include property, land and equipment. As of* December 31, 2023*, ten of the Company’s branch properties andone administrative office were leased under operating leases. Infour of the branch leases, the Company leases the land from an unrelatedthird party, and the buildings are the Company’s own capital improvement. The Company also leasestwo standalone ATMs under operating leases. Additionally, the Company hasone property lease andfour equipment leases classified as finance leases.

The following is an analysis of the leased property under finance leases:

The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of* December 31, 2023*:

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As of* December 31, 2023*, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem and Wyoming branches under the terms of operating leases. During2022, the Company entered into a new lease of administrative office space in Scranton. Common area maintenance is included in variable lease payments in the table below. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest and are expensed as incurred. The Easton branch has variable lease payments that increase annually and are expensed as incurred.

During2023, $1.1 million of the total lease cost was included in premises and equipment expense and $23 thousand was included in other expenses on the consolidated statements of income. During2022, $1.2 million of the total lease cost was included in premises and equipment expense and $31 thousand was included in other expenses on the consolidated statements of income. Operating lease expense is recognized on a straight-line basis over the lease term. We recognized both the interest expense and amortization expense for finance leases in premises and equipment expense since the interest expense portion was immaterial.

The future minimum lease payments for the Company’s branch network and equipment under operating leases that have lease terms in excess ofone year as of* December 31, 2023* are as follows:

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The Company leasesone property, where the Company is lessor, under an operating lease to an unrelated party. The undiscounted cash flows to be received on an annual basis for the property are at* December 31, 2023* as follows:

The Company also indirectly originates automobile leases classified as direct finance leases. See Footnote5, “Loans and leases”, for more information about the Company’s direct finance leases.

Lease income recognized from direct finance leases was included in interest income from loans and leases on the consolidated statements of income. Lease income related to operating leases is included in fees and other revenue on the consolidated statements of income. The Company only receives a variable payment for taxes fromone of its lessees, but the amount is immaterial and excluded from rental income. The amount of lease income recognized on the consolidated statements of income was as follows for the periods indicated:

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24. Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations and economic conditions. The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates and to assist customers with their risk management objectives. All derivative instruments are recognized as either assets or liabilities at fair value in the statement of financial position.

Interest rate derivative -no hedge designation

The Company is a party to interest rate derivatives that arenot designated as hedging instruments. The Company enters into interest rate swaps that allow certain commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with athird-party financial institution, such that the Company minimizes its net interest rate risk exposure resulting from such transactions. The interest rate swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities). As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments donot result in an impact to earnings; however there* maybe fair value adjustments related to credit-quality variations between counterparties, which mayimpact earnings as required by FASB ASC820.* There wasno effect on earnings in any periods presented.

The following table summarizes the Company's free-standing derivatives:

Interest rate derivative - fair value hedge designation

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. This interest rate swap is designated as a fair value hedge and limits the risk to the investment portfolio of rising interest rates. The Company entered into an interest rate swap with athird-party financial institution to convert fixed rate investment securities to an adjustable rate to produce a more asset sensitive profile. The Company recorded the fair value of the fair value hedge in other assets and accrued interest payable and other liabilities on the consolidated balance sheet. The hedged items (fixed rate securities available-for-sale) are also recorded at fair value which offsets the adjustment to the fair value hedge. The related gains and losses are reported in interest income investment securities - U.S. government agencies and corporations and interest income investment securities - state and political subdivisions (nontaxable) in the consolidated statements of income. For the year ended* December 31, 2023,*there was $94 thousand in interest income investment securities - U.S. government agencies and corporations and $94 thousand in interest income investment securities - state and political subdivisions (nontaxable). A qualitative assessment of hedge effectiveness was applied at inception of the hedge. Future hedge effectiveness will be determined on a qualitative basis at least annually. The hedge is expected to remain effective as long as the balance of the hedged item is projected to remain at or above the notional amount of the swap.

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The following table presents information pertaining to the Company's interest rate derivatives designated as a fair value hedge:

The Company had investment securities with a book value of $2.8 million pledged as collateral on its interest rate swaps with athird-party financial institution as of* December 31, 2023.*