FIDELITY D & D BANCORP INC

FIDELITY D & D BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of operations and critical accounting policies

Nature of operations

Fidelity D & D Bancorp, Inc. (the Company) is a bank holding company and the parent of The Fidelity Deposit and Discount Bank (the Bank). The Bank is a commercial bank and trust company chartered under the laws of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of the Company. Having commenced operations in1903, the Bank is committed to provide superior customer service, while offering a full range of banking products and financial and trust services to both our consumer and commercial customers from our main office located in Dunmore and other branches located throughout Lackawanna, Northampton and Luzerne Counties and Wealth Management offices in Schuylkill and Lebanon Counties.

Principles of consolidation

The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to this Form10-Q and Rule8-03 of Regulation S-X. Accordingly, they donot include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included. All significant inter-company balances and transactions have been eliminated in consolidation.

For additional information and disclosures required under U.S. GAAP, refer to the Company’s Annual Report on Form10-K for the year ended* December 31, 2023*.

Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report. Management prepared the unaudited financial statements in accordance with U.S. GAAP. In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls. These systems and controls are designed to provide reasonable butnot absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company.

In the opinion of management, the consolidated balance sheets as of* March 31, 2024* and* December 31, 2023* and the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for thethree months ended* March 31, 2024and2023* present fairly the financial condition and results of operations of the Company. All material adjustments required for a fair presentation have been made. These adjustments are of a normal recurring nature.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after* March 31, 2024* through the date these consolidated financial statements were issued.

This Quarterly Report on Form10-Q should be read in conjunction with the Company’s audited financial statements for the year ended* December 31, 2023*, and the notes included therein, included within the Company’s Annual Report filed on Form10-K.

Critical accounting policies

The preparation of financial statements in conformity with 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 reported periods. Actual results could differ from those estimates.

A material estimate is the calculation of fair values of the Company’s investment securities. Fair values of investment securities are determined by pricing provided by athird-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services. Accordingly, when buying or selling investment securities, price quotes* maybe obtained from more thanone* source. All of the Company’s debt securities are classified as available-for-sale (AFS) or held-to-maturity (HTM). AFS debt securities are carried at fair value on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Debt securities, for which the Company has the positive intent and ability to hold to maturity, are reported at amortized cost. On occasion, the Company* may*transfer securities from AFS to HTM at fair value on the date of transfer.

Another material estimate that is particularly susceptible to significant change relates to the determination of the allowance for credit losses. Management believes that the allowance for credit losses at* March 31, 2024* is adequate and reasonable to cover expected losses. Given the subjective nature of identifying and estimating loan losses, it is reasonably possible that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount. While management uses available information to recognize losses on loans, changes in current economic conditions and reasonable and supportable forecasts* maynecessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may*require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.

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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.

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.

For individually evaluated assets, an ACL is determined separately for each financial asset. 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.

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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.

2. New accounting pronouncements

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 this reporting period withno* impacts 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.

3. Accumulated other comprehensive income

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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4. Investment securities

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* March 31, 2024and December 31, 2023,accrued interest receivable for investment securities totaled $3.0 million and $3.4 million, respectively, and is included in accrued interest receivable line in the consolidated balance sheets. The amortized cost and fair value of investment securities at March 31, 2024* and* December 31, 2023* are summarized 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* March 31, 2024* by contractual maturity are summarized below:

There was a $0.3 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* March 31, 2024* had a carrying amount of $404.8 million and were pledged to secure public deposits, trust client deposits, borrowings and derivative instruments.

The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of* March 31, 2024* and* December 31, 2023*:

There were $0.6 million and $2.2 million increases to the carrying value of AFS securities resulting from the interest rate swap that increased the unrealized loss position at* March 31, 2024and December 31, 2023that werenot* included in the table above.

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The Company had 418 debt securities in an unrealized loss position at* March 31, 2024*, including 46 agency-GSE securities,135 MBS – GSE residential securities and 237 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at* March 31, 2024*:11.03% for agency - GSE,15.45% for total MBS-GSE residential; and 13.44% for municipals. Management hasno intent to sell any securities in an unrealized loss position as of* March 31, 2024.*

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, is being accreted into interest income from 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.

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.

5. Loans and leases

The classifications of loans and leases at* March 31, 2024* and* December 31, 2023* are summarized as follows:

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

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The Company excludes accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of* March 31, 2024* and* December 31, 2023*, accrued interest receivable for loans totaled $6.4 million and $5.7 million, respectively, and is included in the 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 $479.3 million as of* March 31, 2024* and $477.7 million as of* December 31, 2023*. Mortgage servicing rights amounted to $1.4 million and $1.5 million as of* March 31, 2024* and* December 31, 2023*, respectively, and is included in other assets in the consolidated balance sheets.

Non-accrual loans

Non-accrual loans and loans past due over89 days still accruing, segregated by class, at* March 31, 2024* and* December 31, 2023*, 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 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 tables present the amortized cost basis of loans at* March 31, 2024* and* March 31, 2023* that were both experiencing financial difficulty and modified during thethree months ended* March 31, 2024and2023*, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below:

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

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 previous12 months:

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for thethree months ended* March 31, 2024and2023*:

There wereno financing receivables that had a payment default during thethree months ended* March 31, 2024and2023* 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 $2.1 million.(3) Includes net deferred loan costs of $5.0 million.

(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.

Credit Quality Indicators

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.

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.

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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.

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The following table presents loans including $5.0 million and $4.9 million of deferred costs, segregated by class and vintage, categorized into the appropriate credit quality indicator category as of* March 31, 2024* and* December 31, 2023*, respectively:

Commercial credit exposure

Credit risk profile by creditworthiness category

As of March 31, 2024**

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Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

As of March 31, 2024**

(1)Net of unearned lease revenue of $2.1 million.

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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**

(2) Net of unearned lease revenue of $2.0 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 foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the financial asset is expected 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* March 31, 2024and 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.

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

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Unfunded commitments

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. The Company's activity in the allowance for credit losses on unfunded commitments for the period was as follows:

Direct finance leases

The Company originates direct finance leases throughthree automobile dealerships. The amortized cost of the Company’s lease receivables, net of unearned income, was $5.8 million and $6.1 million as of* March 31, 2024* and* December 31, 2023*, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to $24.2 million and $25.1 million at* March 31, 2024* and* December 31, 2023*, respectively, and are included inthe amortized cost of direct finance leases. As of* March 31, 2024,there was also $478 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:

6. Earnings per share

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 thethree* months ended* March 31, 2024*, there was 9,199 potentially dilutive shares related to issued and unexercised SSARs compared to 20,188 for the same2023 period. The calculation didnot include 46,423 weighted average unexercised SSARs that could potentially dilute earnings per share but their effect was antidilutive as of thethree months ended* March 31, 2024*. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were 30,190 potentially dilutive shares related to unvested restricted share grants as of thethree months ended* March 31, 2024* compared to 22,292 for the same2023 period.

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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 periods indicated:

7. Stock plans

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.

As delineated in the following table, during thefirst quarter of2024, the Company approved a LTIP and awarded 12,429 shares of restricted stock to senior officers and managers in* February 2024based on2023* performance.

As delineated in the following table, during thefirst quarter of2023, the Company approved a LTIP and awarded 17,684 shares of restricted stock to senior officers and managers in* February 2023based on2022* performance.

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The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended* March 31, 2024and2023* under the2022 stock incentive plan:

(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 in2024 and2023 was calculated using the grant date closing stock price.

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* March 31, 2024*, all SSARs vested and were exercisable.

During thefirst three months of2024 and2023, there wereno SSARs exercised.

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 thethree months ended* March 31, 2024and2023* and the unrecognized stock-based compensation expense as of* March 31, 2024*:

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The unrecognized stock-based compensation expense as of* March 31, 2024* will be recognized ratably over the periods ended* February 2025,** February 2025and February 2027for 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* March 31, 2024*,108,591 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.

8. Fair value measurements

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 as of the periods indicated:

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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.

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

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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* March 31, 2024* and* December 31, 2023*, respectively.

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 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:

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.

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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* March 31, 2024* and* December 31, 2023*, the range of liquidation expenses and other valuation adjustments applied to individually evaluated, collateral dependent loans ranged from -25.18% to -34.02% and from -31.47% to -31.47%, respectively. The weighted average of liquidation expenses and other valuation adjustments applied to individually evaluated, collateral dependent loans amounted to -27.29% as of* March 31, 2024* and -31.47% as of* December 31, 2023*, 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.

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 March 31, 2024* and* December 31, 2023*, the discounts applied to the appraised values of ORE ranged from -29.23% to -77.60% and from -77.60% to -77.60%, respectively. As of* March 31, 2024* and* December 31, 2023*, the weighted average of discount to the appraisal values of ORE amounted to -29.84% and -77.60%, respectively.

At* March 31, 2024* and* December 31, 2023*, there wereno other repossessed assets. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.

9. Employee Benefits

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 $54.9 million and $54.6 million, respectively, as of* March 31, 2024* and* December 31, 2023* 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 thethree months ended* March 31, 2024and2023*, the Company has recorded income of $0.3 million and $0.3 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* March 31, 2024*, the policies had total death benefits of $54.9 million of which $8.8 million would be paid to the officer’s beneficiaries and the remaining $46.1 million wouldbe 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* March 31, 2024* and* December 31, 2023*, the Company had a balance in accrued expenses of $376 thousand and $352 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 March 31, 2024* and* December 31, 2023*, the Company had a balance in accrued expenses of $4.5 million and $4.4 million in connection with these SERPs.

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10. Revenue Recognition

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

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* March 31, 2024* and* December 31, 2023*, 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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11. Leases

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* March 31, 2024*, ten of the Company’s branch properties,one future branch property 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* March 31, 2024*:

As of* March 31, 2024*, 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. During2024, the Company recorded a new lease for a future branch relocation which is under construction in Easton. 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.

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The following describes lease cost and other information about leases where the Company is the lessee as of the periods indicated:

During thefirst quarter of2024, $268 thousand of the total lease cost was included in premises and equipment expense and $6 thousand was included in other expenses on the consolidated statements of income. During thefirst quarter of2023, $290 thousand of the total lease cost was included in premises and equipment expense and $6 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* March 31, 2024* are as follows:

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 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.

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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:

12. 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.

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 thethree months ended* March 31, 2024*, there was $89 thousand in interest income investment securities - U.S. government agencies and corporations and $89 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.

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* March 31, 2024*.