FIDELITY D & D BANCORP INC

Previous wording

A 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 December 31, 2023 is adequate and reasonable to cover expected losses. Given the subjective nature of identifying and estimating loan losses, it is likely 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 economic conditions and reasonable and supportable forecasts may necessitate 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. On January 1, 2023, the company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (or CECL) methodology.

Current wording

A 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 December 31, 2024 is adequate and reasonable to cover expected losses. Given the subjective nature of identifying and estimating loan losses, it is likely 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 economic conditions and reasonable and supportable forecasts may necessitate 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.

Previous wording

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be considered supplemental to GAAP used to prepare the Company’s financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company’s tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% at December 31, 2023, 2022, 2021, 2020 and 2019.

Current wording

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be considered supplemental to GAAP used to prepare the Company’s financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company’s tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% as of December 31, 2024 and 2023.

Previous wording

Nationally, the unemployment rate rose from 3.5% at December 31, 2022 to 3.7% at December 31, 2023. The unemployment rates in the Scranton - Wilkes-Barre - Hazleton (market area north) and the Allentown – Bethlehem - Easton (market area south) Metropolitan Statistical Areas (local) decreased with both at a lower level than the national unemployment rate. According to the U.S. Bureau of Labor Statistics, the local unemployment rates at December 31, 2023 were 3.5% in the market area north and 3.3% in the market area south, respectively, a decrease of 1.0 and 0.4 percentage points from the 4.5% and 3.7%, resp ectively, at December 31, 2022. The rising rate environment and historically low inventory has reduced the amount of home purchases from 2022 levels. The median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro each increased 5.9% and 6.3% from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, and values are expected to grow 5.8% and 5.4% in the next year. In light of these expectations, we are uncertain if real estate values could continue to increase at these levels with the current elevated rate environment, however we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

Current wording

Nationally, the unemployment rate rose from 3.7% at December 31, 2023 to 4.1% at December 31, 2024. The unemployment rates in the Scranton - Wilkes-Barre - Hazleton (market area north) and the Allentown – Bethlehem - Easton (market area south) Metropolitan Statistical Areas (local) increased with both at a lower level than the national unemployment rate. According to the U.S. Bureau of Labor Statistics, the local unemployment rates at December 31, 2024 were 3.8% in the market area north and 3.4% in the market area south, respectively, an increase of 0.3 and 0.1 percentage points from the 3.5% and 3.3%, respectively, at December 31, 2023. The median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro each increased 7.0% and 5.4% from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, and values are expected to grow 1.8% and 2.8% in the next year. In light of these expectations, we believe the real estate values could continue to increase at these levels with the declining rate environment. Management will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

Previous wording

Due to volatility in the levels of borrowings during October 2023 and the increasing expected dependency on borrowing capacity from experiencing deposit fluctuations while funding loan growth, the Company evaluated a liquidity strategy to deleverage the reliance on short-term borrowings. As a result of this evaluation, in November 2023, the Company sold certain available-for-sale securities with a carrying value of $35.6 million for a $6.5 million loss recognized in gain (loss) on sale of available-for-sale debt securities. The $29.1 million in proceeds received were used to pay down short-term borrowings that replenished available borrowing capacity at that time, while eliminating 425 basis points in negative spread as one means to improve future earnings.

Current wording

In 2024, the Company experienced an increase in net income partially due to the effects from deleveraging from the sale of securities in the fourth quarter of 2023. Due to volatility in the levels of borrowings during October 2023 and the increasing expected dependency on borrowing capacity from experiencing deposit fluctuations while funding loan growth, the Company evaluated a liquidity strategy to deleverage the reliance on short-term borrowings. As a result of this evaluation, in November 2023, the Company sold certain available-for-sale securities with a carrying value of $35.6 million for a $6.5 million loss recognized in gain (loss) on sale of available-for-sale debt securities. The $29.1 million in proceeds received were used to pay down short-term borrowings that replenished available borrowing capacity at that time, while eliminating 425 basis points in negative spread as one means to improve future earnings.

Previous wording

For the years ended December 31, 2023 and 2022, tangible common book value per share (non-GAAP) was $29.57 and $25.18, respectively, an increase of 17.4%. The increase in tangible book value was due primarily to an increase in retained earnings from net income and improvements in accumulated other comprehensive income. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located above within this management’s discussion and analysis.

Current wording

For the years ended December 31, 2024 and 2023, tangible common book value per share (non-GAAP) was $31.98 and $29.57(1), respectively, an increase of 8.2%. The increase in tangible book value was due primarily to an increase in retained earnings from net income. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located above within this management’s discussion and analysis.

Previous wording

During 2023, the Company’s assets grew by 5% primarily from growth in the loan portfolio. In 2024, we expect total loans to increase and a decline in the investment portfolio. The increase in the loan portfolio is expected to be funded primarily by deposit growth supplemented by short-term borrowings, when necessary. No long-term FHLB advances are currently expected to be used in 2024.

Current wording

During 2024, the Company’s assets grew by 3% primarily as a result of growth in the loan portfolio. In 2025, we expect total loans to increase and a decline in the investment portfolio due to cash flow being utilized to fund loan growth. The increase in the loan portfolio is expected to be funded primarily by cashflow produced from the investment portfolio and deposit growth, supplemented by short-term borrowings, when necessary. No long-term FHLB advances are currently expected to be used in 2025.

Previous wording

Non-performing assets represented 0.13% of total assets as of December 31, 2023, up from 0.12% at the prior year end. Non-performing assets to total assets were higher during 2023 mostly due to the amount (or dollar value) of non-performing assets increasing to a lesser extent than the growth in total assets.

Current wording

Non-performing assets represented 0.30% of total assets as of December 31, 2024, up from 0.13% at the prior year end. Non-performing assets to total assets were higher during 2024 mostly due to the percentage change of non-performing assets increasing to a greater extent compared to the growth in total assets.

Previous wording

During 2024, the Company currently expects to operate in a modestly declining interest rate environment during the second half of the year. Management is primarily reliant on the Federal Open Market Committee's statements and forecast. The Company’s net interest income performance has been reduced by asset yields being outpaced by higher cost of funds compressing net interest spread. Although expectations are for the FOMC to reduce rates in the second half of 2024, the Company may continue to experience pressure to further increase rates paid on deposits in the near future. For 2024, the Company currently expects to maintain net interest margin at the same level as 2023.

Current wording

During 2025, the Company currently expects to operate in a moderately declining interest rate environment throughout the year. Management is primarily reliant on the Federal Open Market Committee's statements and forecast. Management is aware the Company may continue to experience pressure to maintain higher rates on interest-bearing deposits due to the competitive nature of deposits in our market area. To help mitigate any impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships and generate new loan volumes. The Company’s net interest income performance has been reduced by asset yields being outpaced by higher cost of funds compressing net interest spread. For 2025, the Company currently expects to improve net interest margin compared to 2024.

Previous wording

The following table is a comparison of condensed balance sheet data as of December 31:

Current wording

The following table provides a comparison of condensed balance sheet data as of December 31:

Previous wording

The Company is a community based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 21 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law. Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market and non-interest bearing checking (DDA). The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years. Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.

Current wording

The Company is a community-based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 21 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law. Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market; non-interest bearing checking (DDA). The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years. Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.

Previous wording

The following table represents the components of total deposits as of December 31:

Current wording

The following table represents the components of total deposits as of the date indicated:

Previous wording

Total deposits decreased $8.5 million, or less than 1%, to $2.2 billion at December 31, 2023 from $2.2 billion at December 31, 2022. Non-interest bearing checking accounts decreased $66.5 million primarily due to declines in personal and business checking accounts attributed to increases in consumer spending due to inflation, ongoing post-pandemic demand and the move to interest-bearing products. Money market accounts decreased $48.7 million primarily due to the transfer of trust sweep accounts with a balance of $69.2 million at the end of 2022 to interest-bearing checking accounts in 2023. Excluding this transfer, money market balances increased primarily due to a new relationship with an insurance company. Savings and club accounts also decreased $34.7 million primarily due to personal savings declines and shifts to CDs and money market accounts. Interest-bearing checking accounts increased $45.7 million during 2023 primarily due to the transfer of trust sweep accounts from a money market product to interest-bearing checking. Declines in other interest-bearing checking balances stemmed primarily from expected outflow of public funds from municipalities withdrawing American Rescue Plan Act funds along with personal and business account decreases. The Company focuses on obtaining a full-banking relationship with existing core operating checking account customers as well as forming new customer relationships. The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop targeted programs for its customers to maintain and grow core deposits. For 2023, the Company experienced deposit balance declines as clients transferred their deposits to investments to earn higher interest and pay down debts and consumer spending. We currently expect this trend of cash usage, due to the impact of inflation on consumer and business spending and deposit mix shifts caused by the highly competitive interest rate environment, to continue throughout 2024. Seasonal public deposit fluctuations are expected to remain volatile and at times may partially offset future deposit growth.

Current wording

Total deposits increased $182.4 million, or 8%, to $2.3 billion as of December 31, 2024 from $2.2 billion as of December 31, 2023. CDs increased $125.9 million, or 59%, as of December 31, 2024 primarily due to promotional rates throughout the second half of 2024 and one relationship which transferred approximately $45 million from interest-bearing checking accounts to IntraFi's Certificate of Deposit Account Registry Service (CDARS). Money market accounts increased $110.4 million primarily driven by maintaining a highly competitive rate offer for both new accounts and retention of the product. During 2024, two accounts to one public customer with a balance of $12.2 million at the end of 2023 were transferred from non-interest bearing to interest-bearing checking accounts. Excluding the transfer, non-interest bearing checking accounts would have increased $10.0 million due to an increase in business checking balances. Despite the purchase of $24.6 million in Insured Cash Sweep (ICS) one-way buy deposits at the end of 2024, interest-bearing checking accounts decreased $37.8 million primarily due to the aforementioned transfer to CDARS; although, excluding the ICS one-way buy and the transfer to CDARS, interest-bearing checking would have grown $24.6 million. Savings and club accounts also decreased $13.9 million primarily due to personal savings declines and shifts to CDs and money market accounts, even though the number of accounts in each product grew throughout 2024. We currently expect this trend of cash usage, due to the impact of inflation on consumer and business spending and deposit mix shifts caused by the highly competitive interest rate environment, to continue through the first half of 2025, offset by new relationships and account growth. For 2024, the Company experienced average checking and savings account balance declines as clients transferred their deposits to investments to earn higher interest and pay down debts along with increased consumer spending. The Company focuses on obtaining a full-banking relationship with existing core operating checking account customers as well as forming new customer relationships. The Company will continue to execute its relationship development and client segment strategy, explore the demographics within its marketplace and develop targeted programs for its customers to maintain and grow core deposits. Seasonal public deposit fluctuations are expected to remain volatile and at times may partially offset future deposit growth. The Company will continue to closely monitor the competitive rate environment to align relationship retention and growth.

Previous wording

The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program and Insured Cash Sweep (ICS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum insured amount of $250,000. The Company had $1.4 million and $0 in CDARs as of December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, ICS reciprocal deposits represented $151.4 million and $26.3 million, or 7% and 1%, of total deposits which are included in interest-bearing checking accounts in the table above. The $125.1 million increase in ICS deposits is primarily due to several large business relationships that transferred deposits to ICS accounts from other interest-bearing checking and money market accounts held at the bank.

Current wording

The Company utilizes the CDARS reciprocal program and the ICS reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum insured amount of $250,000. The Company had $49.4 million and $1.4 million in CDARs as of December 31, 2024 and 2023, respectively. As of December 31, 2024 and 2023, ICS reciprocal deposits represented $150.6 million and $151.4 million, or 6% and 7%, respectively, of total deposits which are included in interest-bearing checking accounts in the table above.

Previous wording

As of December 31, 2023, total uninsured deposits were estimated to be $820.6 million, or 38% of total deposits. The estimate of uninsured deposits is based on the same methodologies and assumptions used for regulatory reporting requirements. The Company aggregates deposit products by taxpayer identification number and classifies into ownership categories to estimate amounts over the FDIC insurance limit. As of December 31, 2023, the ratio of uninsured and non-collateralized deposits to total deposits was approximately 23%. Collateralized deposits totaled $321.7 million, or 15%, of total deposits as of December 31, 2023.

Current wording

As of December 31, 2024, total uninsured deposits were estimated to be $883.6 million, or 38% of total deposits. The estimate of uninsured deposits is based on the same methodologies and assumptions used for regulatory reporting requirements. The Company aggregates deposit products by taxpayer identification number and classifies them into ownership categories to estimate amounts over the FDIC insurance limit. As of December 31, 2024, the total of uninsured and non-collateralized deposits to total deposits was $562.2 million, or 24% of deposits. Collateralized deposits totaled $321.4 million, or 14% of total deposits as of December 31, 2024.

Previous wording

The maturity distribution of certificates of deposit that meet or exceed the FDIC limit, by account, at December 31, 2023 is as follows:

Current wording

The maturity distribution of certificates of deposit that meet or exceed the FDIC limit, by account, as of December 31, 2024 is as follows:

Previous wording

Approximately 77% of the CDs, with a weighted-average interest rate of 3.56%, are scheduled to mature in 2024 and an additional 20%, with a weighted-average interest rate of 3.60%, are scheduled to mature in 2025. Renewing CDs are currently expected to re-price to higher market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. The Company plans to continue to address repricing CDs in the ordinary course of business on a relationship pricing basis and is prepared to match rates when prudent to maintain relationships. The Company will continue to develop CD promotional programs when the Company deems that it is economically feasible to do so or when demand exists. The Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company.

Current wording

Approximately 96% of the CDs, with a weighted-average interest rate of 4.36%, are scheduled to mature in 2025 and an additional 2%, with a weighted-average interest rate of 1.20%, are scheduled to mature in 2026. Renewing CDs are currently expected to reprice to lower market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. The Company continues to address maturing CDs on a relationship pricing basis, with both CD retention and promotional programs and a rate match when prudent to maintain relationships. For the fiscal year of 2024, CD retention is over 85%. The Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company. Additionally, the Company utilized IntraFi's ICS One-way buy to purchase $24.6 million at year-end 2024 compared to no balance at December 31, 2023.

Previous wording

Short-term borrowings may include overnight balances with FHLB's line of credit and/or correspondent bank’s federal funds lines which the Company may require to fund daily liquidity needs such as deposit outflow, loan demand and operations. The Company used $117.0 million in short-term borrowings to fund loan growth and an increase in interest-bearing cash balances for 2023. The short-term borrowings included $57.0 million borrowed through the Federal Reserve Bank Term Funding Program (BTFP) up to one year with a weighted average rate of 4.49% by pledging $57.0 million in securities. As of December 31, 2023, the short-term borrowings also included $60.0 million from the Federal Reserve borrower-in-custody program. As of December 31, 2023, the Company had the ability to borrow an additional $70.4 million from the Federal Reserve borrower-in-custody program, full availability of $145.9 million in overnight borrowings with the FHLB open-repo line of credit and $20.0 million from lines of credit with correspondent banks.

Current wording

Short-term borrowings may include overnight balances with FHLB's line of credit and/or correspondent banks federal funds lines which the Company may require to fund daily liquidity needs such as deposit outflow, loan demand and operations. As of December 31, 2024, the Company did not use any short-term borrowings to fund loan growth. As of December 31, 2024, the Company had the ability to borrow $157.3 million from the Federal Reserve borrower-in-custody program, full availability of $150.0 million in overnight borrowings with the FHLB open-repo line of credit and $20.0 million from lines of credit with correspondent banks.

Previous wording

As of December 31, 2023 and 2022, the Company had 8 secured borrowing agreements with third parties with a carrying value of $7.4 million and $7.6 million, respectively, related to certain sold loan participations that did not qualify for sales treatment acquired from Landmark. Secured borrowings are expected to decrease for 2024 from scheduled amortization and, when possible, early pay-offs.

Current wording

As of December 31, 2024, the Company had 5 secured borrowing agreements with third parties with a carrying value of $6.2 million compared to 8 secured borrowing agreements with third parties with a carrying value of $7.4 million as of December 31, 2023, related to certain sold loan participations that did not qualify for sales treatment. Secured borrowings are expected to decrease throughout 2025 from scheduled amortization and, when possible, early pay-offs.

Previous wording

The Company had no FHLB advances as of December 31, 2023 and 2022. As of December 31, 2023, the Company had the ability to borrow up to $656.8 million from the FHLB, net of any overnight borrowings utilized. The Company does not expect to have any FHLB advances in 2024.

Current wording

The Company had no FHLB advances as of December 31, 2024 and 2023. As of December 31, 2024, the Company had the ability to borrow up to $733.2 million from the FHLB, net of any overnight borrowings utilized. The Company does not expect to have any FHLB advances in 2025.

Previous wording

The Company’s investment policy is designed to complement its lending activities, provide monthly cash flow, manage interest rate sensitivity and generate a favorable return without incurring excessive interest rate and credit risk while managing liquidity at acceptable levels. In establishing investment strategies, the Company considers its business, growth strategies or restructuring plans, the economic environment, the interest rate sensitivity position, the types of securities in its portfolio, permissible purchases, credit quality, maturity and re-pricing terms, call or average-life intervals and investment concentrations. The Company’s policy prescribes permissible investment categories that meet the policy standards and management is responsible for structuring and executing the specific investment purchases within these policy parameters. Management buys and sells investment securities from time-to-time depending on market conditions, business trends, liquidity needs, capital levels and structuring strategies. Investment security purchases provide a way to quickly invest excess liquidity in order to generate additional earnings. The Company generally earns a positive interest spread by assuming interest rate risk using deposits or borrowings to purchase securities with longer maturities.

Current wording

The Company’s investment policy is designed to complement its lending activities, provide monthly cash flow, manage interest rate sensitivity and generate a favorable return without incurring excessive interest rate and credit risk while managing liquidity at acceptable levels. In establishing investment strategies, the Company considers its business, growth strategies or restructuring plans, the economic environment, the interest rate sensitivity position, the types of securities in its portfolio, permissible purchases, credit quality, maturity and re-pricing terms, call or average-life intervals and investment concentrations. The Company’s policy prescribes permissible investment categories that meet the policy standards and management is responsible for structuring and executing the specific investment purchases within these policy parameters. Management buys and sells investment securities periodically depending on market conditions, business trends, liquidity needs, capital levels and structuring strategies. Investment security purchases provide a way to quickly invest excess liquidity in order to generate additional earnings. The Company generally earns a positive interest spread by assuming interest rate risk using deposits or borrowings to purchase securities with longer maturities.

Previous wording

At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. Some of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Debt securities AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity. For the year ended December 31, 2023, AOCI improved by $14.7 million primarily due to the change in fair value of the Company's investment securities.

Current wording

At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. Some of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Debt securities designated as AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity. For the year ended December 31, 2024, AOCI improved by $0.9 million primarily due to amortization of unrealized losses on securities transferred from AFS to HTM.

Previous wording

On April 1, 2022, the Company transferred agency and municipal bonds with a book value of $245.5 million from AFS to HTM in order to apply the accounting for securities HTM to mitigate the effect AFS accounting has on the balance sheet. The bonds that were transferred had the highest price volatility and consisted of fixed-rate securities representing 70% of the agency portfolio, 70% of the taxable municipal portfolio each laddered out on the short to intermediate part of the yield curve and 35% of the tax-exempt municipal portfolio on the long end of the yield curve were identified as the best candidates given the Company’s ability to hold those bonds to maturity. 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, recorded discount will be accreted into interest income, offset by the amortization of previously recognized losses in AOCI, over the life of the bonds. As of December 31, 2023, the carrying value of held-to-maturity securities was $224.2 million, net of $15.7 million in remaining transferred discount.

Current wording

As of December 31, 2024, the carrying value of held-to-maturity securities was $225.8 million, net of $13.8 million in remaining transferred discount.

Previous wording

During September 2023, the Company entered into a $100 million interest rate swap with a third-party financial institution to limit the risk to the investment portfolio of rising interest rates. The interest rate swap was designated as a fair value hedge and utilized a pay fixed interest rate swap to hedge the change in fair value attributable to the movement in the Secured Overnight Financing Rate ("SOFR"). The Company designated $50 million of the swap's notional balance as a hedge against the closed portfolio of 20-year mortgage-backed securities and $50 million as a hedge against the closed portfolio of tax-free municipal bonds. As of December 31, 2023, the Company recorded the fair value of the swap of $2.2 million in accrued interest payable and other liabilities on the consolidated balance sheet offset by a $2.2 million increase to the carrying value of designated investment securities.

Current wording

During September 2023, the Company entered into a $100 million interest rate swap with a third-party financial institution to limit the risk to the investment portfolio of rising interest rates. The interest rate swap was designated as a fair value hedge and utilized a pay fixed interest rate swap to hedge the change in fair value attributable to the movement in the Secured Overnight Financing Rate ("SOFR"). The Company designated $50 million of the swap's notional balance as a hedge against the closed portfolio of 20-year mortgage-backed securities and $50 million as a hedge against the closed portfolio of tax-free municipal bonds. As of December 31, 2024, the Company recorded the fair value of the swap as $1.0 million in accrued interest payable and other liabilities on the consolidated balance sheet offset by a $1.0 million increase to the carrying value of designated investment securities.

Previous wording

As of December 31, 2023, the carrying value of investment securities amounted to $568.3 million, or 23% of total assets, compared to $643.6 million, or 27% of total assets, as of December 31, 2022. On December 31, 2023, 34% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations. The mortgage-backed securities portfolio includes only pass-through bonds issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (GNMA).

Current wording

As of December 31, 2024, the carrying value of investment securities amounted to $557.2 million, or 22% of total assets, compared to $568.3 million, or 23% of total assets, as of December 31, 2023. On December 31, 2024, 33% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations. The mortgage-backed securities portfolio includes only pass-through bonds issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (GNMA).

Previous wording

The Company’s municipal (obligations of states and political subdivisions) portfolio is comprised of tax-free municipal bonds with a book value of $201.7 million ($182.8 million including the remaining net unrealized loss transferred on HTM securities) and taxable municipal bonds with a book value of $92.0 ($82.8 million including the remaining net unrealized loss transferred on HTM securities) million. The overall credit ratings of these municipal bonds was as follows: 36% AAA, 63% AA, and 1% A. For municipal securities HTM, the Company utilized a third-party model to analyze whether a credit loss reserve is needed for these bonds. The amount of the credit loss reserve calculated was immaterial because of the underlying strong credit quality of the municipal portfolio.

Current wording

The Company’s municipal (obligations of states and political subdivisions) portfolio is comprised of tax-free municipal bonds with a book value of $198.6 million ($179.2 million including the remaining net unrealized loss transferred on HTM securities) and taxable municipal bonds with a book value of $91.6 million ($83.4 million including the remaining net unrealized loss transferred on HTM securities). The overall credit ratings of these municipal bonds was as follows: 37% AAA, 61% AA, and 1% A. For HTM municipal securities, the Company utilized a third-party model to analyze whether a credit loss reserve is needed for these bonds. The amount of the credit loss reserve calculated was immaterial because of the underlying strong credit quality of the municipal portfolio.

Previous wording

During 2023, the carrying value of total investments decreased $75.3 million, or 12%. The decline was primarily due to the sale of investment securities with an amortized cost of $66.8 million during 2023. Additionally, principal reductions during 2023 totaled $25.0 million. Partially offsetting these decreases, there was an improvement in the unrealized loss position of $16.3 million in the AFS portfolio. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile, to the extent possible.

Current wording

During 2024, the carrying value of total investments decreased $11.1 million, or 2%. The decline was primarily due to principal reductions totaling $22.8 million coupled with a $1.2 million decline in the unrealized loss position in the AFS portfolio. Partially offsetting these decreases was $15.4 million in purchase of MBS - GSE residential or mortgage-backed securities throughout 2024. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile, to the extent possible.

Previous wording

Investment securities were comprised of AFS and HTM securities as of December 31, 2023 and December 31, 2022. The AFS securities were recorded with a net unrealized loss of $51.6 million and a net unrealized loss of $67.9 million as of December 31, 2023 and 2022, respectively. Of the $16.3 million net improvement; $10.6 million was attributable to municipal securities; $4.8 million was attributable to mortgage-backed securities and $0.9 million was attributable to agency securities. During 2022, securities with net unrealized losses totaling $23.9 million were transferred to HTM, of which $2.3 million and $1.7 million was accreted into other comprehensive income for the years ended December 31, 2023 and 2022. The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve rise, especially at the intermediate and long end, the values of debt securities tend to decline. Whether or not the value of the Company’s investment portfolio will change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates decline, the market values of the Company’s debt securities portfolio could be subject to market value increases.

Current wording

The AFS securities were recorded with a net unrealized loss of $52.8 million and $51.6 million as of December 31, 2024 and 2023, respectively. Of the $1.2 million net decline: $1.3 million was attributable to mortgage-backed securities and $0.5 million was attributable to municipal securities. This decrease was offset by a $0.6 million improvement in agency securities. The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve rise, especially at the intermediate and long end, the values of debt securities tend to decline. Whether or not the value of the Company’s investment portfolio will change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates decline, the market values of the Company’s debt securities portfolio could be subject to market value increases.

Previous wording

As of December 31, 2023, the Company had $294.8 million in public deposits, or 14% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on public and trust deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. The Company also pledges securities for derivative instruments and certain borrowed funds. As of December 31, 2023, the balance of pledged securities required was $380.7 million, or 67% of total securities.

Current wording

As of December 31, 2024, the Company had $287.1 million in public deposits, or 12% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on public and trust deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. The Company also pledges securities for derivative instruments and certain borrowed funds. As of December 31, 2024, the balance of pledged securities required was $322.1 million, or 58% of total securities.

Previous wording

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether credit losses on debt securities exist. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security has credit losses. If a decline in value is deemed to be a credit loss, 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. During the year ended December 31, 2023, the Company did not incur any credit losses on debit securities from its investment securities portfolio.

Current wording

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether credit losses on debt securities exist. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security has credit losses. If a decline in value is deemed to be a credit loss, 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. During the year ended December 31, 2024, the Company did not incur any credit losses on debt securities from its investment securities portfolio.

Previous wording

During January 2023 with the 10-year U.S. Treasury yield declining, $31.2 million of securities were able to be sold yielding 3.62% (FTE yield of 4.33%) at a breakeven level. These proceeds were used to pay down FHLB overnight borrowings costing 4.80% at that time. Due to volatility in the levels of borrowings during October 2023 and the increasing expected dependency on borrowing capacity from experiencing deposit fluctuations while funding loan growth, the Company evaluated a liquidity strategy to deleverage the reliance on short-term borrowings. As a result of this evaluation, in November 2023, the Company sold longer term available-for-sale general market tax-free municipal securities with a carrying value of $35.6 million with a weighted average yield of 1.28% with a 13.5 year weighted average maturity as part of a liquidity and net interest margin enhancement strategy for a $6.5 million loss recognized in gain (loss) on sale of available-for-sale debt securities. The $29.1 million in proceeds received were used to retire short-term borrowings with a cost of approximately 5.50%. While the Company has ample funding sources available, management felt it prudent to create additional capacity for the borrowings over the near term should the banking industry again experience funding pressures as it did in March of this past year. In addition, since the municipal securities sold were purchased in a much lower rate environment, there is an immediate improvement in net interest margin (NIM) of over 5 bps as a result of paying down the borrowing with the sale proceeds. The sale removes a 422 basis point negative spread and will contribute towards incrementally improving net interest income, earnings per share and NIM every year starting in 2024. The cost savings from paying down the advances with the sale of low yielding bonds will also allow the pre-tax loss of $6.5 million realized on the sale to be fully recouped prior to the term of the bonds sold.

Current wording

During January 2023 with the 10-year U.S. Treasury yield declining, $31.2 million of securities were sold yielding 3.62% (FTE yield of 4.33%) at a breakeven level. These proceeds were used to pay down FHLB overnight borrowings costing 4.80% at that time. Due to volatility in the levels of borrowings during October 2023 and the increasing expected dependency on borrowing capacity from experiencing deposit fluctuations while funding loan growth, the Company evaluated a liquidity strategy to deleverage the reliance on short-term borrowings. As a result of this evaluation, in November 2023, the Company sold longer term available-for-sale general market tax-free municipal securities with a carrying value of $35.6 million with a weighted average yield of 1.28% with a 13.5 year weighted average maturity as part of a liquidity and net interest margin enhancement strategy for a $6.5 million loss recognized in gain (loss) on sale of available-for-sale debt securities. The $29.1 million in proceeds received were used to retire short-term borrowings with a cost of approximately 5.50%. While the Company has ample funding sources available, management felt it prudent to create additional capacity for the borrowings over the near term should the banking industry again experience funding pressures. In addition, since the municipal securities sold were purchased in a much lower-rate environment, there is an immediate improvement in net interest margin (NIM) of over 5 bps as a result of paying down the borrowing with the sale proceeds. The sale removes a 422 basis point negative spread and will contribute toward incrementally improving net interest income, earnings per share and NIM every year starting in 2024. The cost savings from paying down the advances with the sale of low yielding bonds will also allow the pre-tax loss of $6.5 million realized on the sale to be fully recouped prior to the term of the bonds sold.

Previous wording

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaled $82 thousand as of December 31, 2023 and 2022. The balance in FHLB stock was $3.8 million and $5.2 million as of December 31, 2023 and 2022, respectively. The dividends received from the FHLB totaled $298 thousand and $164 thousand for the years ended December 31, 2023 and 2022, respectively.

Current wording

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. The balance in FHLB stock was $3.9 million and $3.8 million as of December 31, 2024 and 2023, respectively. The dividends received from the FHLB totaled $304 thousand and $298 thousand for the years ended December 31, 2024 and 2023, respectively. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaled $82 thousand as of December 31, 2024 and 2023.

Previous wording

As of December 31, 2023 and 2022, loans HFS consisted of residential mortgages with carrying amounts of $1.5 million and $1.6 million, respectively, which approximated their fair values. During the year ended December 31, 2023, residential mortgage loans with principal balances of $52.0 million were sold into the secondary market and the Company recognized net gains of $1.0 million, compared to $78.8 million and $1.6 million, respectively, during the year ended December 31, 2022.

Current wording

As of December 31, 2024 and 2023, loans HFS consisted of residential mortgages with carrying amounts of $2.1 million and $1.5 million, respectively, which approximated their fair values. During the year ended December 31, 2024, residential mortgage loans with principal balances of $59.3 million were sold into the secondary market and the Company recognized net gains of $1.0 million, compared to $52.0 million and $0.9 million, respectively, during the year ended December 31, 2023.

Previous wording

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster relationships. At December 31, 2023 and 2022, the servicing portfolio balance of sold residential mortgage loans was $477.7 million and $465.7 million, respectively, with mortgage servicing rights of $1.5 million and $1.6 million for the same periods, respectively.

Current wording

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster relationships. As of December 31, 2024 and 2023, the servicing portfolio balance of sold residential mortgage loans was $495.4 million and $477.7 million, respectively, with mortgage servicing rights of $1.3 million and $1.5 million for the same periods, respectively.

Previous wording

As of December 31, 2023, the Company had gross loans and leases totaling $1.7 billion, an increase of $121.2 million, or 8%, compared to almost $1.6 billion at December 31, 2022.

Current wording

As of December 31, 2024, the Company had gross loans and leases totaling $1.8 billion, an increase of $113.6 million, or 7%, compared to $1.7 billion at December 31, 2023.

Previous wording

During the twelve months ended December 31, 2023, the growth in the portfolio was primarily attributed to a $62.1 million increase in the commercial portfolio due to 3 originations totaling $40 million and standard portfolio growth and a $61.2 million increase in the residential portfolio, the result of a higher percentage of adjustable-rate mortgages recorded as held-for-investment during this period.

Current wording

The Company also experienced a $23.8 million increase in the residential portfolio, the result of a higher percentage of adjustable-rate mortgages recorded as held-for-investment during this period. This growth was offset by the $31.6 million reduction in the consumer portfolio attributed to a strategic reduction to not fully reinvest roll-off from the auto portfolio.

Previous wording

For the twelve months ended December 31, 2023, the Company originated $531.0 million loans and lines of credit, a reduction of $103.4 million, or 16%, compared to the twelve months ended December 31, 2022.

Current wording

For the twelve months ended December 31, 2024, the Company originated $560.6 million loans and lines of credit, an increase of $29.6 million, or 6%, compared to the twelve months ended December 31, 2023.

Previous wording

The Company originated $337.6 million total loans in 2023, which was $33.9 million less than in 2022. Commercial and industrial loan origination increased by $18.1 million in 2023 compared to 2022, with growth attributed to municipal loans. Loan originations decreased in commercial real estate (both owner-occupied and non-owner occupied CRE) by $4.5 million to $73.0 million, consumer loans by $31.1 million to $70.3 million and residential loans by $16.4 million to $106.5 million. Rising interest rates impacted loan demand and reduced loan originations for these loan categories.

Current wording

The Company originated $303.4 million total loans in 2024, which was $34.2 million less than in 2023. Commercial real estate loan originations (both owner-occupied and non-owner occupied CRE) increased by $38.3 million in 2024 compared to 2023, with growth attributed to non-owner occupied loans. Loan originations decreased in consumer loans by $37.3 million to $33.0 million, commercial and industrial by $22.2 million to $65.6 million, and residential loans by $12.9 million to $93.6 million. Rising interest rates impacted loan demand and reduced loan originations for these loan categories.

Previous wording

The Company originated $193.4 million total lines of credit in 2023, which was $69.5 million less than in 2022. Commercial line of credit origination decreased by $44.2 million to $141.5 million, residential construction by $17.3 million to $25.4 million and home equity and other consumer by $8.1 million to $26.5 million. Rising interest rates impacted loan demand and reduced line of credit originations.

Current wording

The Company originated $257.2 million total lines of credit in 2024, which was $63.8 million more than originations in 2023. Line of credit originations increased in commercial by $42.4 million to $183.9 million, residential construction by $12.3 million to $37.7 million, and home equity and other consumer by $9.1 million to $35.6 million.

Previous wording

A comparison of loans and related percentage of gross loans, at December 31, for the five previous periods is as follows:

Current wording

A comparison of loans and related percentage of gross loans, as of December 31, is as follows:

Previous wording

As of December 31, 2023, the commercial portfolio increased by $62.1 million, or 7%, to $903.2 million compared to the December 31, 2022 balance of $841.1 million due to growth of $33.3 million in total commercial and industrial loans and $28.8 million in growth in commercial real estate loans.

Current wording

As of December 31, 2024, the commercial portfolio increased by $121.4 million, or 13%, to $1.0 billion compared to the December 31, 2023 balance of $903.2 million due to growth of $27.2 million in total commercial and industrial loans and $94.2 million in growth in commercial real estate loans.