UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2022~~2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to______________________

Commission file number: 001-38229

FIDELITY D & D BANCORP, INC.

STATE OF INCORPORATION:	IRS EMPLOYER IDENTIFICATION NO:
Pennsylvania	23-3017653

Address of principal executive offices:

Blakely & Drinker St.

Dunmore, Pennsylvania 18512

TELEPHONE: 570-342-8281

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class	Trading Symbols(s)	Name of each exchange on which registered
Common stock, without par value	FDBC	The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Non-accelerated filer ☒

Accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on October 31, ~~2022,~~2023, the latest practicable date, was ~~5,630,797~~5,696,351 shares.

Table of Contents

(Unaudited)
(dollars in thousands)	*September 30, 2022*			December 31, 2021		*September 30, 2023*			December 31, 2022
Assets:
Cash and due from banks	$	64,980		$	27,317	$	28,431		$	3,542
Interest-bearing deposits with financial institutions		69,062			69,560		82,040			25,549
Total cash and cash equivalents		134,042			96,877		110,471			29,091
Available-for-sale securities		413,413			738,980		352,835			420,862
Held-to-maturity securities (fair value of $182,240 in 2022; $0 in 2021)		222,374			-
Held-to-maturity securities (fair value of $178,012 in 2023; $187,280 in 2022)							223,853			222,744
Restricted investments in bank stock		3,639			3,206		3,800			5,268
Loans and leases, net (allowance for loan losses of $16,779 in 2022; $15,624 in 2021)		1,506,163			1,417,504
Loans held-for-sale (fair value $1,405 in 2022; $32,013 in 2021)		1,386			31,727
Loans and leases, net (allowance for credit losses of $18,757 in 2023; $17,149 in 2022)							1,626,451			1,547,025
Loans held-for-sale (fair value $2,354 in 2023; $1,660 in 2022)							2,345			1,637
Foreclosed assets held-for-sale		103			434		87			168
Bank premises and equipment, net		30,971			29,310		32,625			31,307
Leased property under finance leases, net		1,149			1,307		1,219			1,089
Right-of-use assets		8,806			9,006		8,311			8,642
Cash surrender value of bank owned life insurance		53,711			52,745		54,226			54,035
Accrued interest receivable		7,780			7,526		8,758			8,487
Goodwill		19,628			19,628		19,628			19,628
Core deposit intangible, net		1,636			1,942		1,269			1,540
Other assets		30,967			8,912		30,942			26,849
Total assets	$	2,435,768		$	2,419,104	$	2,476,820		$	2,378,372
Liabilities:
Deposits:
Interest-bearing	$	1,636,389		$	1,579,582	$	1,602,018		$	1,564,305
Non-interest-bearing		616,844			590,283		549,741			602,608
Total deposits		2,253,233			2,169,865		2,151,759			2,166,913
Accrued interest payable and other liabilities		17,675			15,943		16,864			17,434
Allowance for credit losses on off-balance sheet credit exposures							1,009			49
Finance lease obligation		1,169			1,320		1,238			1,110
Operating lease liabilities		9,506			9,627		9,079			9,357
Short-term borrowings		10			-		124,000			12,940
Secured borrowings		7,688			10,620		7,439			7,619
Total liabilities		2,289,281			2,207,375		2,311,388			2,215,422
Shareholders' equity:
Preferred stock authorized 5,000,000 shares with no par value; none issued		-			-		-			-
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 5,630,332 at September 30, 2022; and 5,645,687 at December 31, 2021)		115,337			114,108
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 5,696,351 at September 30, 2023; and 5,630,794 at December 31, 2022)							117,256			115,611
Retained earnings		114,658			97,442		129,976			119,754
Accumulated other comprehensive (loss) income		(82,273	)		179
Treasury stock, at cost (31,945 shares at September 30, 2022 and no shares at December 31, 2021)		(1,235	)		-
Accumulated other comprehensive loss							(81,504	)		(71,152	)
Treasury stock, at cost (7,284 shares at September 30, 2023 and 32,663 shares at December 31, 2022)							(296	)		(1,263	)
Total shareholders' equity		146,487			211,729		165,432			162,950
Total liabilities and shareholders' equity	$	2,435,768		$	2,419,104	$	2,476,820		$	2,378,372

(Unaudited)	Three months ended					Nine months ended					Three months ended						Nine months ended
(dollars in thousands except per share data)	*September 30, 2022*			September 30, 2021		*September 30, 2022*			September 30, 2021		*September 30, 2023*			September 30, 2022			*September 30, 2023*			September 30, 2022
Interest income:
Loans and leases:
Taxable	$	15,828		$	14,950	$	45,237		$	38,759	$	19,766		$	15,828		$	56,760		$	45,237
Nontaxable		492			409		1,358			1,058		736			492			2,463			1,358
Interest-bearing deposits with financial institutions		351			54		464			114		60			351			212			464
Restricted investments in bank stock		56			28		120			96		59			56			240			120
Investment securities:
U.S. government agency and corporations		1,602			1,177		4,725			2,731		1,461			1,602			4,456			4,725
States and political subdivisions (nontaxable)		1,357			1,178		4,126			3,065		1,152			1,357			3,529			4,126
States and political subdivisions (taxable)		449			377		1,348			857		444			449			1,335			1,348
Total interest income		20,135			18,173		57,378			46,680		23,678			20,135			68,995			57,378
Interest expense:
Deposits		1,550			878		3,321			2,583		8,488			1,550			19,713			3,321
Secured borrowings		75			121		109			121		123			75			352			109
Other short-term borrowings		-			-		1			-		428			-			1,784			1
FHLB advances		-			-		-			26
Total interest expense		1,625			999		3,431			2,730		9,039			1,625			21,849			3,431
Net interest income		18,510			17,174		53,947			43,950		14,639			18,510			47,146			53,947
Provision for loan losses		525			450		1,575			1,550
Net interest income after provision for loan losses		17,985			16,724		52,372			42,400
Provision for credit losses on loans												525			525			1,380			1,575
Provision (credit) for credit losses on unfunded loan commitments												(275	)		(6	)		(100	)		(24	)
Net interest income after provision for credit losses												14,389			17,991			45,866			52,396
Other income:
Service charges on deposit accounts		920			705		2,554			1,835		1,039			920			2,962			2,554
Interchange fees		1,095			1,089		3,385			3,192		1,169			1,095			3,588			3,385
Service charges on loans		290			517		1,048			1,546		244			290			826			1,048
Fees from trust fiduciary activities		621			598		1,852			1,634		783			621			2,197			1,852
Fees from financial services		198			273		712			665		169			198			618			712
Fees and other revenue		281			239		972			592		349			281			1,701			972
Earnings on bank-owned life insurance		327			326		965			899		335			327			980			965
Gain (loss) on write-down, sale or disposal of:
Loans		232			188		1,421			3,671		315			232			721			1,421
Available-for-sale debt securities		4			40		4			40		-			4			(1	)		4
Premises and equipment		(57	)		34		(191	)		28		(78	)		(57	)		(243	)		(191	)
Total other income		3,911			4,009		12,722			14,102		4,325			3,911			13,349			12,722
Other expenses:
Salaries and employee benefits		6,802			6,950		20,457			17,542		6,258			6,802			19,203			20,457
Premises and equipment		1,855			1,916		5,673			5,146		2,276			1,855			6,653			5,673
Data processing and communication		663			745		1,994			1,987		765			663			2,141			1,994
Advertising and marketing		753			668		2,023			1,825		461			753			1,831			2,023
Professional services		838			796		2,383			2,563		950			838			2,949			2,383
Merger-related expenses		-			2,201		-			3,143
Automated transaction processing		383			396		1,192			1,065		434			383			1,339			1,192
Office supplies and postage		177			164		534			438		165			177			543			534
PA shares tax		441			365		1,043			780		261			441			553			1,043
Loan collection		115			31		181			112		45			115			105			181
Other real estate owned		6			6		9			25		3			6			6			9
FDIC assessment		152			169		525			404		282			152			843			525
FHLB prepayment fee		-			-		-			369
Other		843			778		2,470			2,093		884			849			2,900			2,494
Total other expenses		13,028			15,185		38,484			37,492		12,784			13,034			39,066			38,508
Income before income taxes		8,868			5,548		26,610			19,010		5,930			8,868			20,149			26,610
Provision for income taxes		1,179			689		3,735			2,788		590			1,179			2,407			3,735
Net income	$	7,689		$	4,859	$	22,875		$	16,222	$	5,340		$	7,689		$	17,742		$	22,875
Per share data:
Net income - basic	$	1.36		$	0.86	$	4.05		$	3.11	$	0.94		$	1.36		$	3.13		$	4.05
Net income - diluted	$	1.36		$	0.85	$	4.03		$	3.09	$	0.93		$	1.36		$	3.11		$	4.03
Dividends	$	0.33		$	0.30	$	0.99		$	0.90	$	0.36		$	0.33		$	1.08		$	0.99

For the Nine Months Ended September 30, 2022 and 2021
For the Nine Months Ended September 30, 2023 and 2022
(Unaudited)									Accumulated																		Accumulated
									other																		other
	Capital stock					Retained			comprehensive			Treasury						Capital stock						Retained			comprehensive			Treasury
(dollars in thousands)	Shares			Amount		earnings			income (loss)			Stock			Total			Shares			Amount			earnings			income (loss)			Stock			Total
Balance, December 31, 2020		4,977,750		$	77,676	$	80,042		$	8,952		$	-		$	166,670
Net income							16,222									16,222
Other comprehensive loss										(8,778	)					(8,778	)
Issuance of common stock through Employee Stock Purchase Plan		4,738			270											270
Issuance of common stock from vested restricted share grants through stock compensation plans		13,209			-											-
Issuance of common stock through exercise of SSARs		2,000														-
Stock-based compensation expense					860											860
Issuance of common stock for acquisition		647,990			35,056											35,056
Cash dividends declared							(4,731	)								(4,731	)
Balance, September 30, 2021		5,645,687		$	113,862	$	91,533		$	174		$	-		$	205,569

Balance, December 31, 2021		5,645,687		$	114,108	$	97,442		$	179		$	-		$	211,729			5,645,687		$	114,108		$	97,442		$	179		$	-		$	211,729
Net income							22,875									22,875									22,875									22,875
Other comprehensive loss										(82,452	)					(82,452	)											(82,452	)					(82,452	)
Issuance of common stock through Employee Stock Purchase Plan		4,891			252											252			4,891			252												252
Forfeited restricted dividend reinvestment shares		(106	)										-			-			(106	)											-			-
Issuance of common stock from vested restricted share grants through stock compensation plans		11,699			-											-			11,699			-												-
Stock-based compensation expense					977											977						977												977
Common stock repurchased		(31,839	)										(1,235	)		(1,235	)		(31,839	)											(1,235	)		(1,235	)
Cash dividends declared							(5,659	)								(5,659	)								(5,659	)								(5,659	)
Balance, September 30, 2022		5,630,332		$	115,337	$	114,658		$	(82,273	)	$	(1,235	)	$	146,487			5,630,332		$	115,337		$	114,658		$	(82,273	)	$	(1,235	)	$	146,487

Balance, December 31, 2022																			5,630,794		$	115,611		$	119,754		$	(71,152	)	$	(1,263	)	$	162,950
Cumulative-effect adjustment for adoption of ASU 2016-13 (Footnote 1)																									(1,326	)								(1,326	)
Net income																									17,742									17,742
Other comprehensive income																												(10,352	)					(10,352	)
Issuance of common stock through Employee Stock Purchase Plan																			7,294			302												302
Re-issuance of common stock through Dividend Reinvestment Plan																			26,765			193									1,035			1,228
Issuance of common stock from vested restricted share grants through stock compensation plans																			24,442			-												-
Issuance of common stock through exercise of SSARs																			8,442			-												-
Stock-based compensation expense																						1,321												1,321
Repurchase of shares to cover withholdings																			(1,386	)		*(171*	)								(68	)		(239	)
Cash dividends declared																									(6,194	)								(6,194	)
Balance, September 30, 2023																			5,696,351		$	117,256		$	129,976		$	(81,504	)	$	(296	)	$	165,432

For the Three Months Ended September 30, 2022 and 2021
For the Three Months Ended September 30, 2023 and 2022
(Unaudited)									Accumulated																		Accumulated
									other																		other
	Capital stock					Retained			comprehensive			Treasury						Capital stock						Retained			comprehensive			Treasury
(dollars in thousands)	Shares			Amount		earnings			income (loss)			Stock			Total			Shares			Amount			earnings			income (loss)			Stock			Total
Balance, June 30, 2021		4,995,713		$	78,473	$	88,381		$	5,331		$	-		$	172,185
Net income							4,859									4,859
Other comprehensive loss										(5,157	)					(5,157	)
Issuance of common stock from vested restricted share grants through stock compensation plans		1,984			-											-
Stock-based compensation expense					333											333
Issuance of common stock for acquisition		647,990			35,056											35,056
Cash dividends declared							(1,707	)								(1,707	)
Balance, September 30, 2021		5,645,687		$	113,862	$	91,533		$	174		$	-		$	205,569

Balance, June 30, 2022		5,651,777		$	115,079	$	108,848		$	(60,920	)	$	(388	)	$	162,619			5,651,777		$	115,079		$	108,848		$	(60,920	)	$	(388	)	$	162,619
Net income							7,689									7,689									7,689									7,689
Other comprehensive loss										(21,353	)					(21,353	)											(21,353	)					(21,353	)
Forfeited restricted dividend reinvestment shares		(58	)										-			-			(58	)											-			-
Issuance of common stock from vested restricted share grants through stock compensation plans		158			-											-			158			-												-
Stock-based compensation expense					258											258						258												258
Common stock repurchased		(21,545	)										(847	)		(847	)		(21,545	)		-									(847	)		(847	)
Cash dividends declared							(1,879	)								(1,879	)								(1,879	)								(1,879	)
Balance, September 30, 2022		5,630,332		$	115,337	$	114,658		$	(82,273	)	$	(1,235	)	$	146,487			5,630,332		$	115,337		$	114,658		$	(82,273	)	$	(1,235	)	$	146,487

Balance, June 30, 2023																			5,681,260		$	116,959		$	126,711		$	(65,268	)	$	(658	)	$	177,744
Net income																									5,340									5,340
Other comprehensive loss																												(16,236	)					(16,236	)
Re-issuance of common stock through Dividend Reinvestment Plan																			9,189			57									362			419
Issuance of common stock from vested restricted share grants through stock compensation plans																			159			-												-
Issuance of common stock through exercise of SSARs																			5,743			-												-
Stock-based compensation expense																						358												358
Repurchase of shares to cover withholdings																			-			(118	)								-			(118	)
Cash dividends declared																									(2,075	)								(2,075	)
Balance, September 30, 2023																			5,696,351		$	117,256		$	129,976		$	(81,504	)	$	(296	)	$	165,432

(Unaudited)	Nine months ended September 30,						Nine months ended September 30,
(dollars in thousands)	*2022*			2021			*2023*			2022

Cash flows from operating activities:
Net income	$	22,875		$	16,222		$	17,742		$	22,875
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		3,692			4,246			4,251			3,692
Provision for loan losses		1,575			1,550
Deferred income tax expense		2,012			137
Provision for credit losses on loans								1,380			1,575
Provision (credit) for credit losses on unfunded loan commitments								(100	)		(24	)
Deferred income tax (benefit) expense								(489	)		2,012
Stock-based compensation expense		977			850			1,321			977
Excess tax benefit from exercise of SSARs		-			26			104			-
Proceeds from sale of loans held-for-sale		68,556			143,159			38,105			68,556
Originations of loans held-for-sale		(56,575	)		(149,614	)		(38,801	)		(56,575	)
Earnings from bank-owned life insurance		(965	)		(899	)		(980	)		(965	)
Gain from bank-owned life insurance claim								(142	)		-
Net gain from sales of loans		(1,421	)		(3,671	)		(721	)		(1,421	)
Net gain from sales of investment securities		(4	)		(40	)
Net loss (gain) from sales of investment securities								1			(4	)
Net gain from sale and write-down of foreclosed assets held-for-sale		(24	)		(34	)		-			(24	)
Net (gain) loss from write-down and disposal of bank premises and equipment		191			(28	)
Net loss from write-down and disposal of bank premises and equipment								243			191
Operating lease payments		79			26			53			79
Change in:
Accrued interest receivable		(255	)		(552	)		(271	)		(255	)
Other assets		(2,166	)		1,005			250			(2,166	)
Accrued interest payable and other liabilities		1,733			1,514			(571	)		1,757
Net cash provided by operating activities		40,280			13,897			21,375			40,280

Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		1,691			40,616			31,208			1,691
Proceeds from maturities, calls and principal pay-downs		32,733			41,939			19,392			32,733
Purchases		(39,183	)		(341,890	)		-			(39,183	)
(Increase) decrease in restricted investments in bank stock		(433	)		678
Net (increase) decrease in loans and leases		(73,412	)		18,712
Decrease (increase) in restricted investments in bank stock								1,468			(433	)
Net increase in loans and leases								(83,220	)		(73,412	)
Principal portion of lease payments received under direct finance leases		4,423			3,689			4,106			4,423
Purchases of bank premises and equipment		(4,614	)		(1,803	)		(4,576	)		(4,614	)
Net cash used in acquisition		-			(3,746	)
Proceeds from death benefits received on bank-owned life insurance								931			-
Proceeds from sale of bank premises and equipment		1,095			299			22			1,095
Proceeds from sale of foreclosed assets held-for-sale		806			302			-			806
Net cash used in investing activities		(76,894	)		(241,204	)		(30,669	)		(76,894	)

Cash flows from financing activities:
Net increase in deposits		83,394			345,477
Net decrease in other borrowings		(2,800	)		(5,958	)
Repayment of FHLB advances		-			(9,602	)
Net (decrease) increase in deposits								(15,130	)		83,394
Net increase (decrease) in other borrowings								110,883			(2,800	)
Repayment of finance lease obligation		(173	)		(103	)		(176	)		(173	)
Purchase of treasury stock		(1,235	)		-			-			(1,235	)
Proceeds from employee stock purchase plan participants		252			270			302			252
Dividends paid		(5,659	)		(4,731	)
Cash paid in lieu of fractional shares		-			(6	)
Repurchase of shares to cover withholdings								(239	)		-
Dividends paid, net of dividends reinvested								(4,966	)		(5,659	)
Net cash provided by financing activities		73,779			325,347			90,674			73,779
Net increase in cash and cash equivalents		37,165			98,040			81,380			37,165
Cash and cash equivalents, beginning		96,877			69,346			29,091			96,877

Cash and cash equivalents, ending	$	134,042		$	167,386		$	110,471		$	134,042

(Unaudited)

Nine months ended September 30,

(dollars in thousands)

2022

2021

Supplemental Disclosures of Cash Flow Information

Cash payments for:

Interest
$ 3,423 $ 2,922
Income tax
1,550 1,900
Supplemental Disclosures of Non-cash Investing Activities:

Net change in unrealized gains (losses) on available-for-sale securities
(81,607 ) (11,111 )
Transfers of securities from available-for-sale to held-to-maturity
245,536 -
Unrealized losses on securities transferred from available-for-sale to held-to-maturity
(22,762 ) -
Transfers from loans to foreclosed assets held-for-sale
450 327
Transfers from/(to) loans to/(from) loans held-for-sale, net
(18,052 ) 9,158
Transfers from premises and equipment to other assets held-for-sale
1,184 1,495
Security settlement pending
- 1,419
Right-of-use asset
141 389
Lease liability
141 389

Transactions related to acquisition

Increase in assets and liabilities:

Securities
$ 49,430
Loans
298,860
Restricted investments in bank stocks
1,186
Premises and equipment
3,405
Investment in bank-owned life insurance
7,233
Goodwill
12,575
Core deposit intangible asset
597
Leased property under finance leases
1,188
Right-of-use assets
756
Other assets
4,127
Non-interest-bearing deposits
(100,472 )
Interest-bearing deposits
(208,057 )
Short-term borrowings
(2,224 )
FHLB advances
(4,602 )
Secured borrowings
(20,619 )
Finance lease obligation
(1,188 )
Operating lease liabilities
(756 )
Other liabilities
(2,631 )
Fair value of common shares issued
(35,056 )

(Unaudited)	Nine months ended September 30,
(dollars in thousands)	2023			2022
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	20,067		$	3,423
Income tax		2,550			1,550
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized losses on available-for-sale securities		(14,821	)		(81,607	)
Transfers of securities from available-for-sale to held-to-maturity		-			245,536
Unrealized losses on securities transferred from available-for-sale to held-to-maturity		-			(22,762	)
Cumulative-effect adjustment for adoption of ASU 2016-13		(1,326	)		-
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity		1,718			1,120
Transfers from/(to) loans to/(from) foreclosed assets held-for-sale		(82	)		450
Transfers from/(to) loans to/(from) loans held-for-sale, net		(205	)		(18,052	)
Transfers from premises and equipment to other assets held-for-sale		739			1,184
Right-of-use asset		303			141
Lease liability		303			141

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 in 1903, 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.

On ~~July 1, 2021,~~ the Company completed its acquisition of Landmark Bancorp, Inc. (Landmark) and its wholly-owned subsidiary, Landmark Community Bank (Landmark Bank). At the time of the acquisition, Landmark merged with and into an acquisition subsidiary of the Company with the acquisition subsidiary Company surviving the merger. In addition, immediately thereafter Landmark Bank merged with and into the Bank with the Bank as the surviving bank.

~~Further discussion of the acquisition of Landmark can be found in Footnote~~ 9, ~~“Acquisition”.~~

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 Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not 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 Form 10-K for the year ended December 31, ~~2021~~2022.

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 but not 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 September 30, ~~2022~~2023 and December 31, ~~2021~~2022 and the related consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of changes in shareholders’ equity for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 and consolidated statements of cash flows for the nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 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. Certain reclassifications have been made to the ~~2021~~2022 financial statements to conform to the ~~2022~~2023 presentation.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, ~~2022~~2023 through the date these consolidated financial statements were issued.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, ~~2021~~2022, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

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 that is particularly susceptible to significant change relates to the determination of the allowance for ~~loan~~credit losses. Management believes that the allowance for ~~loan~~credit losses at September 30, ~~2022~~2023 is adequate and reasonable to cover ~~incurred~~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 current 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 ~~loan~~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.

Another 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 a third-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 selling investment securities, price quotes may be obtained from more than one 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 cost. On occasion, the Company may transfer securities from AFS to HTM at fair value on the date of transfer.

The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB). Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained. On occasion, the Company may transfer loans from the loan portfolio to loans HFS. Under these circumstances, pricing may be obtained from other entities and the residential mortgage loans are transferred at the lower of cost or market value and simultaneously sold. For other loans transferred to HFS, pricing may be obtained from other entities or modeled and the other loans are transferred at the lower of cost or market value and then sold. As of September 30, ~~2022~~2023 and December 31, ~~2021~~2022, loans classified as HFS consisted of residential mortgage loans.

Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases. Interest income on automobile direct finance leasing is determined using the interest method to arrive at a level effective yield over the life of the lease. The lease residual and the lease receivable, net of unearned lease income, are recorded within loans and leases on the balance sheet.

Foreclosed assets held-for-sale includes other real estate acquired through foreclosure (ORE) and may, from time-to-time, include repossessed assets such as automobiles. ORE is carried at the lower of cost (principal balance at date of foreclosure) or fair value less estimated cost to sell. Any write-downs at the date of foreclosure are charged to the allowance for ~~loan~~credit losses. Expenses incurred to maintain ORE properties, subsequent write downs to the asset’s fair value, any rental income received and gains or losses on disposal are included as components of other real estate owned expense in the consolidated statements of income.

The Company accounts for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that management believes to be reasonable.

Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date. Goodwill is recorded at its net carrying value which represents estimated fair value. Goodwill is tested for impairment on at least an annual basis. There was no goodwill impairment as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022. Other acquired intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing.

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The Company accounts for certain participation interests in commercial loans receivable (loan participation agreements) sold as a sale of financial assets pursuant to ASC 860, Transfers and Servicing. Loan participation agreements that meet the sale criteria under ASC 860 are derecognized from the Consolidated Balance Sheets at the time of transfer. If the transfer of loans does not meet the sale criteria or participating interest criteria under ASC 860, the transfer is accounted for as a secured borrowing and the loan is not de-recognized and a participating liability is recorded in the Consolidated Balance Sheets.

The Company holds separate supplemental executive retirement (SERP) agreements for certain officers and an amount is credited to each participant’s SERP account monthly while they are actively employed by the bank until retirement. A deferred tax asset is provided for the non-deductible SERP expense. The Company also entered into separate split dollar life insurance arrangements with four executives providing post-retirement benefits and accrues monthly expense for this benefit. The split dollar life insurance expense is not deductible for tax purposes. Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on the consolidated statements of income.

For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions.

On January 1, 2023, the Company adopted ASU 2016-13 and all of the subsequent amendments using the modified-retrospective approach and recorded a cumulative-effect adjustment to retained earnings. The change in this accounting guidance could require the Company to record loan losses more rapidly. The Company has engaged the services of a qualified third-party service provider to assist management in estimating credit allowances under this standard. Starting in the 3rd quarter of 2022, the Company ran its CECL model parallel to the current allowance for loan losses calculation to gain a better understanding of the effects of the change. During the fourth quarter of 2022, a third-party service provider ran a model validation with no substantial findings. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $1.3 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment includes a $0.5 million decrease for the allowance for credit losses on loans (ACL) and a $0.8 million decrease for the reserve for unfunded commitments, net of deferred tax. The Company has also run a quarterly CECL analysis on its held-to-maturity investment securities starting in 2023 and the estimated CECL reserve is immaterial. While the CECL model does not apply to available-for-sale securities, the ASU does require companies to record an allowance when recognizing credit losses for available-for-sale securities with unrealized losses, rather than reduce the amortized cost of the securities by direct write-offs. The guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than in interest income over time.

The Company adopted the provisions of ASC 326 related to financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30 using the prospective transition approach. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.1 million of the ACL.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (CECL). The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. As it relates to CECL, this guidance amends certain provisions contained in ASU 2016-13, particularly in regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses.

~~The amendments in this update are effective for fiscal years, including interim periods within those fiscal years, beginning after~~ ~~December 15, 2019~~ ~~for public companies. Early adoption is permitted beginning after~~ ~~December 15, 2018,~~ including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption (modified-retrospective approach). Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company to record loan losses more rapidly. On ~~October 16, 2019,~~ ~~the FASB decided to move forward with finalizing its proposal to defer the effective date for ASU~~ ~~2016~~-13 ~~for smaller reporting companies to fiscal years beginning after~~ ~~December 31, 2022,~~ including interim periods within those fiscal periods. Since the Company currently meets the SEC definition of a smaller reporting company, the delay will be applicable to the Company. The Company has engaged the services of a qualified ~~third~~~~-party service provider to assist management in estimating credit allowances under this standard. Starting in the~~ 3^rd ~~quarter of~~ ~~2022,~~ the Company ran its CECL model parallel to the current allowance for loan losses calculation to gain a better understanding of the effects of the change. The Company expects a change in the allowance for loan losses upon adoption of CECL at ~~January 1, 2023~~ and the magnitude of the change will depend on the composition, characteristics and quality of its loan and lease portfolio, as well as economic conditions and forecasts at the time of adoption. The Company continues to work on the process of finalizing the review of the most recent model run and of finalizing certain assumptions, including qualitative adjustments and economic forecasts, which have resulted in adjustments to previous estimates. In the 3^rd ~~quarter of~~ ~~2022,~~ ~~the Company engaged a~~ ~~third~~~~-party service provider to run a model validation, which will commence in the~~ 4^th ~~quarter of~~ ~~2022~~ ~~and conclude in the~~ 1^st ~~quarter of~~ ~~2023.~~ ~~The Company has also run a CECL analysis on its held-to-maturity investment securities as of~~ ~~September 30, 2022~~ ~~and the estimated CECL reserve is immaterial.~~

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in this update also require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. The amendments in this update ~~are~~were effective for the Company upon adoption of ASU 2016-13. The amendments in this update should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, the Company has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company adopted ASU 2022-02 on January 1, 2023 and the adoption required additional quantitative and qualitative disclosures. There was not any significant effect on the Company's financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in this update are elective and apply to all entities that have contracts that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. An optional expedient simplifies accounting for contract modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022.

In December 2022, the FASB issued ASU 2022-06,Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848. The amendments in this update defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.The Company expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU ~~2020~~2022-~~04.~~06. As of September 30, ~~2022~~2023, the Company no longer had ~~approximate~~any~~ly $46 million in~~ loans with rates tied to LIBOR.

In October 2023, the FASB issued ASU 2023-06,Disclosure Improvements. The ~~Company~~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 is ~~working~~not expected to have a material impact on ~~modifying each of these existing contracts.~~the consolidated financial statements but could change certain disclosures in SEC filings.

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:

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.

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 did not record any allowance for credit losses on its available-for-sale or held-to-maturity securities. The amortized cost and fair value of investment securities at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 are summarized as follows:

The amortized cost and fair value of debt securities at September 30, ~~2022~~2023 by contractual maturity are summarized below:

There was a $52 thousand increase to the carrying value of municipal AFS securities resulting from the interest rate swap that was not 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 September 30, 2023 had a carrying amount of $415.9 million and were pledged to secure public deposits and trust client deposits.

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 September 30, ~~2022~~2023 and December 31, ~~2021~~2022:

There was a $104 thousand increase to the carrying value of AFS securities resulting from the interest rate swap that increased the unrealized loss position at September 30, 2023 that was not included in the table above.

The Company had ~~483~~437 debt securities in an unrealized loss position at September 30, ~~2022~~2023, including 5146 agency-GSE securities, ~~143~~135 MBS – GSE residential securities and ~~289~~256 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at September 30, ~~2022~~2023: ~~12.31%~~14.65% for agency - GSE, ~~16.10%~~19.14% for total MBS-GSE residential; and ~~19.62%~~21.45% for municipals. ~~163 of these securities had been in an unrealized loss position in excess of~~ 12 ~~months. Management has~~ no ~~intent to sell any securities in an unrealized loss position as of~~ ~~September 30, 2022~~.

~~During the~~The Company reassessed classification of certain investments and effective ~~second~~April 1, 2022, ~~quarter of~~ ~~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 ~~accounting for~~ securities ~~held-to-maturity on this transfer will mitigate~~were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The market value of the ~~effect~~securities on the date of the transfer was $221.7 million, after netting unrealized losses totaling $18.9 million. The $18.9 million, net of deferred taxes, will be accreted into other comprehensive income ~~(OCI) component~~over the life of ~~stockholders’ equity from~~ the ~~price risk of rising interest rates which will result in further future unrealized~~bonds. The allowance for credit losses inon these securities was evaluated under the ~~available-for-sale portfolio.~~accounting policy for HTM debt securities.

~~Management~~Unrealized losses on available-for-sale securities have not been recognized into income because management believes the cause of the unrealized losses is related to changes in interest rates and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities ~~for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company~~ to assess whether ~~OTTI is present when~~ the fair value of a debt security is less than its amortized cost as of the balance sheet date. ~~Under those circumstances, OTTI is considered to have occurred if:~~An allowance for credit losses has not been recognized on these securities in an unrealized loss position because: (1) the entity ~~has the intent~~does not intend to sell the security; (2) more likely than not 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 ~~not~~sufficient to recover the entire amortized cost. The ~~accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI~~issuer(s) continues to make timely principal and interest payments on ~~securities~~ ~~not~~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 estimated no credit loss reserve will be ~~sold be recognized in OCI. Non-credit-related OTTI~~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 a third-party model to analyze whether a credit loss reserve is ~~based~~needed for these bonds. The amount of credit loss reserve calculated using this model was immaterial to the Company's financial statements, therefore no reserve was recorded, but the Company will continue to evaluate these securities on ~~other factors affecting market value, including illiquidity.~~a quarterly basis.

The Company’s ~~OTTI~~credit losses on debt securities evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of ~~OTTI.~~credit losses on debt securities. The guidance requires that ~~credit-related OTTI be recognized as~~if credit losses exist, a ~~realized loss through earnings when there has been an adverse change in~~contra-asset is recorded on both HTM and AFS securities, limited by the ~~holder’s expected cash flows such~~amount that the ~~full amount (principal and interest) will probably~~fair value is less than the amortized cost basis. Any impairment that has not ~~be received. This requirement~~been recorded through an allowance for credit losses is ~~consistent with the impairment model~~recognized in ~~the guidance for accounting for debt securities.~~other comprehensive income.

For all debt securities, as of September 30, ~~2022~~2023, the Company applied the criteria provided in the recognition and presentation guidance related to ~~OTTI.~~credit losses on debt securities. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of ~~OTTI~~credit losses in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.

The classifications of loans and leases at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 are summarized as follows:

~~As of~~ ~~September 30, 2022~~~~, total loans of $1.5 billion~~Total unamortized net costs and premiums included in loan totals were reflected including deferred loan costs of $4.5 million, comprised of $4.6 million in deferred loan costs partially offset by $0.1 million in deferred fee income from Paycheck Protection Program (PPP) loans. As of ~~December 31, 2021,~~ total loans of $1.4 billion were reflected including deferred loan costs of $3.0 million, comprised of $4.2 million in deferred loan costs partially offset by $1.2 million in deferred fee income from PPP loans.as follows:

~~Commercial~~Based on the adoption of ASU 2016-13, the Company updated the segmentation of its loan and lease portfolio to ensure that the risk characteristics within these segments were as similar as possible with financial asset type and collateral type as the primary factors used in this evaluation. Consequently, management decided to create a new segment called “Municipal,” which are loans and leases to states and political subdivisions in the U.S. based on the unique risk characteristics of this segment as expected credit losses are minimal. Additionally, the previous segment of “Auto Loans”, which included direct auto loans, indirect non-recourse auto loans, and indirect recourse auto loans, was broken out between “Auto Loans-Recourse” and “Auto Loans-Non-recourse” as substantially all the recourse portfolio is to a high credit quality dealer with the guaranty of the dealership and high net worth principal. Direct auto loans were included in the “Consumer Other” segment. Additionally, during 2023, the Company analyzed its commercial portfolio to ensure these loans were in the appropriate segment based on their purpose and collateral. Based on this analysis, a total of $25.4 million of commercial and industrial ~~(C&I)~~loans were reclassified to other loan ~~balances were $221.9~~segments including: $5.0 million at ~~September 30, 2022~~to municipal, $1.4 million to commercial real estate non-owner occupied, $13.9 million to commercial real estate owner occupied, and ~~$236.3~~$5.1 million to commercial real estate construction. The classifications of loans and leases at December 31, ~~2021.~~2022 were modified retroactively to enhance comparability between periods.

The ~~decrease was due to~~Company excludes accrued interest receivable from the ~~decrease in PPP~~amortized cost basis of loans ~~(net of deferred fees) which declined by $38.1 million to $1.8 million at~~ ~~September 30, 2022~~ ~~due to standard forgiveness under the SBA program.~~disclosed throughout this footnote. As of September 30, 2023 and December 31, 2022, accrued interest receivable for loans totaled $5.5 million and $4.5 million, respectively, and is included in accrued interest receivable line in the ~~Company increased~~consolidated balance sheets and is excluded from the ~~balance~~estimate of ~~C&I loans by $23.6 million (excluding PPP loans) primarily from several large C&I loans originated during~~ ~~2022.~~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 are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced for others amounted to ~~$465.5~~$473.0 million as of September 30, ~~2022~~2023 and ~~$430.9~~$465.7 million as of December 31, ~~2021.~~2022. Mortgage servicing rights amounted to ~~$1.7~~$1.5 million ~~both~~and $1.6 million as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be 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~~Board of ~~directors.~~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.

~~The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on~~ ~~March 27, 2020,~~ ~~and provided over~~ ~~$2.0~~ ~~trillion in emergency economic relief to individuals and businesses impacted by the COVID-~~19 ~~pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new~~ 7~~(a) loan program called the Paycheck Protection Program (PPP).~~

~~As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The SBA guaranteed~~ ~~100%~~ of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.

On ~~December 27, 2020,~~ ~~the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted, extending the authority to make PPP loans through~~ ~~May 31, 2021,~~ ~~revising certain PPP requirements, and permitting~~ ~~second~~ ~~draw PPP loans. On~~ ~~March 11, 2021,~~ ~~the American Rescue Plan Act of~~ ~~2021~~ ~~(American Rescue Plan Act) was enacted expanding eligibility for~~ ~~first~~ ~~and~~ ~~second~~ ~~draw PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness.~~

~~Acquired loans are marked to fair value on the date of acquisition. For detailed information on calculating the fair value of acquired loans, see Footnote~~ 9, ~~“Acquisition.”~~

The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no ~~longer expected to be collected.~~

~~The Company reported fair value adjustments regarding the acquired MNB and Landmark loan portfolios. Therefore, the Company did~~ ~~not~~ record an allowance on the acquired non-purchased credit impaired loans. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the calculation of the allowance for loan losses after the initial valuation and provide reserves accordingly.

~~Upon acquisition, in accordance with U.S. GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC~~ ~~310~~-30 deemed as purchased credit impaired (PCI). As part of this process, the Company’s senior management and other relevant individuals reviewed the seller’s loan portfolio on a loan-by-loan basis to determine if any loans met the ~~two~~~~-part definition of an impaired loan as defined by ASC~~ ~~310~~-~~30:~~1~~) Credit deterioration on the loan from its inception until the acquisition date, and~~ 2~~) It is probable that~~ ~~not~~ ~~all contractual cash flows will be collected on the loan.~~

~~With regards to ASC~~ ~~310~~-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value result in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan's acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.

~~Over the life of the acquired ASC~~ ~~310~~-30 loan, the Company continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized after acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life.

~~Acquired ASC~~ ~~310~~-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent if the Company can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Company does ~~not~~ consider acquired contractually delinquent loans to be non-accruing and continues to recognize accretable yield on these loans which is recognized as interest income on a level yield method over the life of the loan.

~~Acquired ASC~~ ~~310~~-20 ~~loans, which are loans that did~~ ~~not~~ meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Company used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, and environment factors to estimate the expected cash flow for each loan pool.

~~Within the ASC~~ ~~310~~-20 loans, the Company identified certain loans that have higher risk. Although performing at the time of acquisition and likely will continue making payments in accordance with contractual terms, management elected a higher credit adjustment on these loans to reflect the greater inherent risk that the borrower will default on payments. Risk factors used to identify these loans included: loans that received COVID-19 ~~related forbearance consistent with the regulatory guidance, loans that were in industries determined to be at greater risk to economic disruption due to COVID-~~~~19,~~ ~~loans that had a prior history of delinquency greater than~~ 60 days at any point in the lifetime of the loan; loans with a Special Mention or Substandard risk rating; and/or loans borrowers in the Gasoline Station industry due to the environmental risk potential of these loans.

~~The following table provides changes in accretable yield for all acquired loans accounted for under ASC~~ ~~310~~-~~30.~~ ~~Loans accounted for under ASC~~ ~~310~~-20 ~~are~~ ~~not~~ ~~included in this table.~~

~~The above table excludes the $269 thousand in non-accretable yield accreted to interest income for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~.

~~During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~~~, management performed an analysis of all loans acquired from mergers, consistent with and applicable to ASC~~ ~~310~~-30 (Purchased Credit Impaired loans – PCI). During this period, the accretable yield increased $205 thousand from $1,088 thousand to $1,293 thousand due to $540 thousand reclassification from non-accretable discount to accretable discount resulting from five loans that had actual payments exceed estimates and one loan that had a positive change in collateral value, which was offset by yield accretion of $335 thousand.

~~During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~, the accretable yield increased $436 thousand from $563 thousand to $999 thousand due to $589 thousand of accretable yield from the Landmark acquisition and $197 thousand reclassification from non-accretable discount to accretable discount resulting from two loans with actual payments exceeding estimates and three loans that had a positive change in collateral value, which was offset by accretion of $350 thousand.

Expected cash flows on acquired loans are estimated quarterly by incorporating several key assumptions. These key assumptions include probability of default and the number of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded ~~first~~ ~~as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured.~~

Non-accrual loans and loans past due over 89 days still accruing, segregated by class, at September 30, ~~2022~~2023 and December 31, ~~2021~~2022, were as follows:

~~The table above excludes $4.7 million and $4.7 million in purchased credit impaired loans, net~~

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 due 90 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 at 90 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

~~Troubled Debt Restructuring (TDR)~~Loan modifications to borrowers experiencing financial difficulty

~~A modification of a loan constitutes a TDR when a borrower is experiencing~~Occasionally, the Company modifies loans to borrowers in financial ~~difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company typically considers the following concessions when modifying a loan, which~~ ~~may~~ ~~include lowering~~distress by providing lower interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when ~~granting a TDR modification.~~modifying loans.

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

The following table presents the amortized cost basis of loans at September 30, 2023 that were ~~no loans~~both experiencing financial difficulty and modified ~~in a TDR for~~during the~~three~~ ~~and~~ nine months ended September 30, ~~2022~~ ~~and~~ ~~2021~~~~. Of the TDRs outstanding as of~~ ~~September 30, 2022~~ ~~and~~ ~~2021~~2023, ~~when~~by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the ~~concessions granted consisted~~amortized cost basis of ~~temporary interest-only payments, extensions~~each class of ~~maturity date, or a reduction~~financing receivable is also presented below:

The Company has not committed to lend additional amounts to the borrowers included in the ~~rate of interest to a below-market rate for a contractual period of time. Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms.~~previous table.

Loans modified ~~in a TDR~~to borrowers experiencing financial difficulty are closely monitored ~~for delinquency as an early indicator~~to understand the effectiveness of ~~possible future default. If~~its modification efforts. None of the loans that have been modified in ~~a TDR subsequently default,~~ the ~~Company evaluates~~last 12 months to borrowers experiencing financial difficulty were past due at September 30, 2023.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for ~~possible further impairment. There were no loans modified as a TDR within~~ the ~~previous~~ ~~twelve~~ ~~months that subsequently defaulted (i.e.~~ 90 ~~days or more past due following a modification) during the~~ ~~three~~ ~~and~~ nine months ended September 30, ~~2022~~ 2023:

There were no loans that had a payment default during the nine months ended September 30, 2023and were modified in the ~~2021~~twelve. 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 ~~loan~~credit losses ~~(allowance)~~(ACL) may be increased, adjustments may be made in the allocation of the ~~allowance~~ACL or partial charge-offs may be taken to further write-down the carrying value of the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance.

~~As of~~ ~~September 30, 2022~~ ~~and~~ ~~2021~~~~, the balance of outstanding TDRs was $1.7 million and $3.1 million, respectively. As of~~ ~~September 30, 2022~~ ~~and~~ ~~2021~~~~, the allowance for impaired loans that have been modified in a TDR was $49 thousand and $0.7 million, respectively.~~

Loans are considered past due when the contractual principal and/or interest is not received by the due date. For loans reported 30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears for two 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):

														Recorded															Recorded
					Past due									investment past						Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days		30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
September 30, 2022	past due		past due		or more (1)		past due		Current		loans (3)			and accruing
September 30, 2023																past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing

Commercial and industrial	$	132	$	2	$	628	$	762	$	221,149	$	221,911		$	-
Commercial and industrial:
Commercial																$	32		37		56	$	125	$	145,060	$	145,185		$	-
Municipal																	-		-		-		-		82,058		82,058
Commercial real estate:
Non-owner occupied		-		-		732		732		314,591		315,323			-		129		593		168		890		310,416		311,306			-
Owner occupied		-		-		1,303		1,303		254,750		256,053			-		183		104		2,069		2,356		289,217		291,573			-
Construction		-		-		-		-		26,015		26,015			-		-		-		-		-		42,773		42,773			-
Consumer:
Home equity installment		232		-		-		232		56,582		56,814			-		158		-		72		230		57,626		57,856			-
Home equity line of credit		51		-		119		170		53,462		53,632			-		74		97		289		460		50,949		51,409			-
Auto loans		243		24		251		518		132,284		132,802			50
Auto loans - Recourse																	73		18		20		111		11,247		11,358			12
Auto loans - Non-recourse																	325		36		59		420		116,846		117,266			-
Direct finance leases		92		37		-		129		30,604		30,733	*(2)*		-		82		38		15		135		31,778		31,913	*(2)*		15
Other		32		7		-		39		7,694		7,733			-		30		4		-		34		14,124		14,158			-
Residential:
Real estate		-		-		37		37		384,456		384,493			-		31		-		532		563		444,453		445,016			248
Construction		-		-		-		-		37,433		37,433			-		-		-		-		-		43,337		43,337			-
Total	$	782	$	70	$	3,070	$	3,922	$	1,519,020	$	1,522,942		$	50	$	1,117	$	927	$	3,280	$	5,324	$	1,639,884	$	1,645,208		$	275

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of ~~$1.8~~$2.0 million. ⁽³⁾ Includes net deferred loan costs of ~~$4.5~~$4.9 million.

														Recorded															Recorded
					Past due									investment past						Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days		30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2021	past due		past due		or more (1)		past due		Current		loans ⁽³⁾			and accruing
December 31, 2022																past due		past due		or more ⁽¹⁾		past due		Current		loans⁽³⁾			and accruing

Commercial and industrial	$	-	$	4	$	154	$	158	$	236,146	$	236,304		$	-
Commercial																$	-	$	-	$	719	$	719	$	140,403	$	141,122		$	-
Municipal																	-		-		-		-		72,996		72,996			-
Commercial real estate:
Non-owner occupied		-		675		478		1,153		311,695		312,848			-		-		-		383		383		317,913		318,296			-
Owner occupied		-		-		1,570		1,570		247,185		248,755			-		42		-		1,066		1,108		283,569		284,677			-
Construction		-		-		-		-		21,147		21,147			-		-		-		-		-		24,005		24,005			-
Consumer:
Home equity installment		87		32		-		119		47,452		47,571			-		239		-		-		239		58,879		59,118			-
Home equity line of credit		-		-		97		97		54,781		54,878			-		110		151		211		472		52,096		52,568			-
Auto loans		410		45		78		533		117,496		118,029			-
Auto loans - Recourse																	152		115		11		278		12,651		12,929			-
Auto loans - Non-recourse																	411		86		158		655		114,254		114,909			16
Direct finance leases		173		38		64		275		24,528		24,803	⁽²⁾		64		186		-		17		203		31,274		31,477	⁽²⁾		17
Other		49		17		-		66		7,947		8,013			-		12		7		-		19		11,690		11,709			-
Residential:
Real estate		-		452		572		1,024		324,837		325,861			-		-		327		3		330		397,806		398,136			-
Construction		-		-		-		-		34,919		34,919			-		-		-		-		-		42,232		42,232			-
Total	$	719	$	1,263	$	3,013	$	4,995	$	1,428,133	$	1,433,128		$	64	$	1,152	$	686	$	2,568	$	4,406	$	1,559,768	$	1,564,174		$	33

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of ~~$1.4~~$1.7 million. ⁽³⁾ Includes net deferred loan costs of ~~$3.0~~$4.6 million.

~~Impaired~~For periods prior to the adoption of CECL, loans ~~segregated by class, as of the period indicated are detailed below:~~

At ~~September 30, 2022~~~~, impaired loans totaled $4.4 million consisting of $1.4 million in accruing TDRs and $3.0 million in non-accrual loans. At~~ ~~December 31, 2021~~~~, impaired loans totaled $5.9 million consisting of $3.0 million in accruing TDRs and $2.9 million in non-accrual loans. As of~~ ~~September 30, 2022~~~~, the non-accrual loans included one TDR totaling $0.4 million compared with three TDRs to~~ ~~two~~ ~~unrelated borrowers totaling $0.6 million as of~~ ~~December 31, 2021~~.

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

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

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

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

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

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

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

Loans in this category have an acceptable level of risk and are graded in a range of one 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 or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.

Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no 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.

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company may sustain 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. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as ~~TDRs~~modifications experiencing financial difficulty can be graded substandard.

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen 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 an eight is considered to be uncollectible and charged-off.

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not 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 due 90 days or more and accruing. All loans not classified as non-performing are considered performing.

The following ~~table presents~~tables present loans including ~~$4.5~~$4.9 million and ~~$3.0~~$4.6 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category and based on year of origination as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022, respectively:

	December 31, 2021
(dollars in thousands)		Pass		Special mention		Substandard		Doubtful		Total	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total

Commercial and industrial	$	233,565	$	339	$	2,400	$	-	$	236,304
Risk Rating
Pass											$	23,909	$	20,144		24,131		5,541		7,329		12,357		48,927	$	-	$	142,338
Special Mention												-		656		315		-		-		61		93		-		1,125
Substandard												-		-		16		21		60		365		1,260		-		1,722
Doubtful												-		-		-		-		-		-		-		-		-
Total commercial and industrial											$	23,909	$	20,800	$	24,462	$	5,562	$	7,389	$	12,783	$	50,280	$	-	$	145,185
Commercial and industrial:
Current period gross write-offs											$	-	$	-	$	300	$	20	$	-	$	-	$	-	$	-	$	320
Commercial and industrial - municipal
Risk Rating
Pass											$	6,568	$	21,737	$	20,129	$	13,427	$	1,448	$	18,749	$	-	$	-	$	82,058
Special Mention												-		-		-		-		-		-		-		-		-
Substandard												-		-		-		-		-		-		-		-		-
Doubtful												-		-		-		-		-		-		-		-		-
Total commercial and industrial - municipal											$	6,568	$	21,737	$	20,129	$	13,427	$	1,448	$	18,749	$	-	$	-	$	82,058
Commercial and industrial - municipal:
Current period gross write-offs											$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied		289,679		16,614		6,555		-		312,848
Risk Rating
Pass											$	27,578	$	36,886	$	72,377		43,449		17,636		91,506	$	8,547	$	-	$	297,979
Special Mention												-		-		1,055		314		-		2,193		-		-		3,562
Substandard												-		65		1,069		132		572		7,927		-		-		9,765
Doubtful												-		-		-		-		-		-		-		-		-
Total commercial real estate - non-owner occupied											$	27,578	$	36,951	$	74,501	$	43,895	$	18,208	$	101,626	$	8,547	$	-	$	311,306
Commercial real estate - non-owner occupied:
Current period gross write-offs											$	-	$	-	$	-	$	-	$	-	$	32	$	-	$	-	$	32
Commercial real estate - owner occupied		230,146		7,089		11,520		-		248,755
Risk Rating
Pass											$	24,145		54,645		47,959		30,854		25,469		85,695	$	8,993	$	-	$	277,760
Special Mention												-		203		559		-		-		304		125		-		1,191
Substandard												698		29		379		28		-		10,879		609		-		12,622
Doubtful												-		-		-		-		-		-		-		-		-
Total commercial real estate - owner occupied											$	24,843	$	54,877	$	48,897	$	30,882	$	25,469	$	96,878	$	9,727	$	-	$	291,573
Commercial real estate - owner occupied:
Current period gross write-offs											$	-	$	-	$	-	$	-	$	-	$	59	$	-	$	-	$	59
Commercial real estate - construction		21,147		-		-		-		21,147
Total commercial	$	774,537	$	24,042	$	20,475	$	-	$	819,054
Risk Rating
Pass											$	7,647	$	29,960	$	856	$	-	$	-	$	2,306	$	2,004	$	-	$	42,773
Special Mention												-		-		-		-		-		-		-		-		-
Substandard												-		-		-		-		-		-		-		-		-
Doubtful												-		-		-		-		-		-		-		-		-
Total commercial real estate - construction											$	7,647	$	29,960	$	856	$	-	$	-	$	2,306	$	2,004	$	-	$	42,773
Commercial real estate - construction:
Current period gross write-offs											$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Loans that do not share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where we have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. The following table presents the individually evaluated, collateral dependent loans as of September 30, 2023:

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. ~~Management’s judgment is based on~~When estimating the ~~evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows~~net amount expected to be ~~received on impaired loans.~~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. ~~Loan~~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.

~~Management applies~~ ~~two~~ ~~primary components during the loan review process to determine proper allowance levels. The~~ ~~two~~ ~~components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans~~ ~~not~~ ~~specifically allocated.~~ The methodology to analyze the adequacy of the ~~allowance for loan losses~~ACL is ~~as follows:~~based on seven primary components:

~~Allocation~~Assets are evaluated on a collective (or pool) basis or individually, as applicable consistent with ASC Topic 326. In accordance with ASC Topic 326, the Company will evaluate individual instruments for expected credit losses when those instruments do not 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 may evaluate assets individually even when no specific expectation of collectability is in place. Instruments will not 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. Management therefore measures the expected credit losses based on an appropriate method per ASC Subtopic 326-20, similar to collectively evaluated financial assets. As of the ~~allowance~~reporting date, the Company is using the collateral and cash flow methods.

ASC Topic 326 defines a collateral-dependent asset as a financial asset for ~~different categories~~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, and not on the sale of the collateral, the fair value of the collateral would not 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 become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

If the individually evaluated asset is determined to not be collateral dependent, the ACL is measured based on the expected cash flows. This measurement is based on the ~~methodology as explained above. A key element~~amount and timing of cash flows; the effective interest rate (EIR) 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 ~~methodology~~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 ~~determine~~or greater than the ~~allowance~~amortized cost, no ACL is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans. C&I and CRE 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 ~~may~~ ~~be changed at any time management feels an upgrade or downgrade~~ ~~may~~ be warranted. The credit risk grades for the C&I and CRE loan portfolios are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. 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.

~~Each quarter, management performs an assessment of~~A key control related to the ~~allowance. The~~allowance is the Company’s Special Assets ~~Committee~~Committee. This committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

~~The Company’s policy is to charge-off unsecured consumer loans when they become~~ 90 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.

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

*As of and for the nine months ended September 30, 2022*
*As of and for the nine months ended September 30, 2023*																			*As of and for the nine months ended September 30, 2023*
	Commercial &			Commercial							Residential									Commercial &			Commercial							Residential
(dollars in thousands)	industrial			real estate			Consumer				real estate		Unallocated			Total				industrial			real estate			Consumer				real estate		Unallocated			Total
Allowance for Loan Losses:
Allowance for Credit Losses:
Beginning balance	$	2,204		$	7,422		$	2,404			$	3,508	$	86		$	15,624			$	2,924		$	7,162		$	2,827			$	4,169	$	67		$	17,149
Impact of adopting ASC 326																					278			756			(547	)			198		(67	)		618
Initial allowance on loans purchased with credit deterioration																					-			126			-				-		-			126
Charge-offs		(323	)		(1	)		(226	)			-		-			(550	)			(320	)		(92	)		(349	)			-		-			(761	)
Recoveries		8			61			59				2		-			130				23			44			148				30		-			245
Provision		785			(320	)		604				512		(6	)		1,575
Provision (credit) for loan losses																					(1,039	)		803			56				1,536		24			1,380
Ending balance	$	2,674		$	7,162		$	2,841			$	4,022	$	80		$	16,779			$	1,866		$	8,799		$	2,135			$	5,933	$	24		$	18,757
Ending balance: individually evaluated for impairment	$	18		$	459		$	25			$	-	$	-		$	502
Ending balance: collectively evaluated for impairment	$	2,656		$	6,703		$	2,816			$	4,022	$	80		$	16,277
Ending balance: individually evaluated																				$	16		$	159		$	52			$	1	$	-		$	228
Ending balance: collectively evaluated																				$	1,850		$	8,640		$	2,083			$	5,932	$	24		$	18,529
Loans Receivables:
Ending balance ⁽²⁾	$	221,911		$	597,391		$	281,714		*(1)*	$	421,926	$	-		$	1,522,942			$	227,243		$	645,652		$	283,960		*(1)*	$	488,353	$	-		$	1,645,208
Ending balance: individually evaluated for impairment	$	628		$	3,382		$	320			$	37	$	-		$	4,367
Ending balance: collectively evaluated for impairment	$	221,283		$	594,009		$	281,394			$	421,889	$	-		$	1,518,575
Ending balance: individually evaluated																				$	86		$	6,536		$	429			$	624	$	-		$	7,675
Ending balance: collectively evaluated																				$	227,157		$	639,116		$	283,531			$	487,729	$	-		$	1,637,533

⁽¹⁾ Net of unearned lease revenue of ~~$1.8~~$2.0 million. ⁽²⁾ Includes ~~$4.5~~$4.9 million of net deferred loan costs.

⁽¹⁾ Net of unearned lease revenue of ~~$1.4~~$1.7 million. ⁽²⁾ Includes ~~$3.0~~$4.6 million of net deferred loan costs.

In accordance with ASC Topic 326, 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 does not 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:

The Company originates direct finance leases through two automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was ~~$8.4~~$6.4 million and ~~$7.7~~$7.9 million as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to ~~$22.3~~$25.2 million and ~~$17.1~~$23.6 million at September 30, ~~2022~~2023 and December 31, ~~2021~~2022, respectively, and are included in the carrying value of direct finance leases. As of September 30, 2023, there was also $317 thousand in deferred lease expense included in the carrying value of direct finance leases that is not included in the table below.

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

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 maintains one active share-based compensation plan that may generate additional potentially dilutive common shares. For granted and unexercised stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued SSARs were exercised and converted into common stock. As of the three and nine months ended September 30, ~~2022~~2023, there were ~~17,996~~11,297 and ~~19,636~~16,469 potentially dilutive shares related to issued and unexercised SSARs compared to ~~26,346~~17,996 and ~~29,378~~19,636 for the same ~~2021~~2022 periods, respectively. The calculation did not include ~~50,014~~46,423 weighted average unexercised SSARs that could potentially dilute earnings per share but their effect was antidilutive as of the three and nine months ended September 30, ~~2022~~2023. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were ~~13,404~~26,406 and ~~12,360~~21,094 potentially dilutive shares related to unvested restricted share grants as of the three and nine months ended September 30, ~~2022~~2023 compared to ~~12,515~~13,404 and ~~11,345~~12,360 for the same ~~2021~~2022 periods, respectively. The calculation did not include ~~31,906 and 27,356~~615 weighted average unvested restricted shares that could potentially dilute earnings per share but their effect was antidilutive as of the ~~three~~ ~~and~~ nine months ended September 30, ~~2022~~2023.

In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock. Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock. Proceeds include amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings. The Company does not 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:

The Company has one 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 the 2022 annual shareholders' meeting, the Company's shareholders approved and the Company adopted the 2022 Omnibus Stock Incentive Plan which replaced the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans). The 2012 stock incentive plans expired in 2022. Unless terminated by the Company’s board of directors, the 2022 Omnibus Stock Incentive Plan will expire on and no stock-based awards shall be granted after the year 2032.

In the 2022 Omnibus Stock Incentive Plan, the Company has reserved 500,000 shares of its no-par common stock for future issuance. The Company recognizes share-based compensation expense over the requisite service or vesting period. Since 2019, 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 a ten-year term from the date of each grant.

During the first quarter of 2023, the Company approved a LTIP and awarded restricted stock to senior officers and managers in February 2023 based on 2022 performance. During the second quarter of 2023, the Company awarded 1,000 shares of restricted stock to one new employee.

During the first quarter of 2022, the Company approved a LTIP and awarded restricted stock to senior officers and managers in February 2022 based on 2021 performance.

~~During the~~ ~~first~~ ~~quarter of~~ ~~2021~~~~, the Company approved a LTIP and awarded restricted stock to senior officers and managers in~~ ~~February~~ ~~and~~ ~~March 2021~~ ~~based on~~ ~~2020~~ ~~performance.~~

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended September 30, ~~2022~~2023 and ~~2021~~2022 under the 2022 and 2012 stock incentive plans:

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

The fair value of the shares granted in ~~2022~~2023 and ~~2021~~2022 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 September 30, ~~2022~~2023, all SSARs vested and were exercisable.

During the firstnine months of 2023, there were 22,807 SSARs exercised. The intrinsic value recorded for these SSARs was $99,072. The tax deduction realized from the exercise of these SSARs was $495,300 resulting in a tax benefit of $104,013. There were no SSARs exercised during the first nine months of 2022. ~~During the~~ ~~first~~~~nine~~ ~~months of~~ ~~2021,~~ there were 2,932 SSARs exercised. The intrinsic value recorded for these SSARs was $10,190. The tax deduction realized from the exercise of these SSARs was $125,810 resulting in a tax benefit of $26,420.

Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 and the unrecognized stock-based compensation expense as of September 30, ~~2022~~2023:

~~In addition, during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~~~, the Company reversed accruals of ($10 thousand) in stock-based compensation expense for restricted stock and SSARs awarded under the~~ ~~2012~~ ~~Omnibus Stock Incentive Plan.~~

The unrecognized stock-based compensation expense as of September 30, ~~2022~~2023 will be recognized ratably over the periods ended February 2025, ~~and~~ February 2025 and June 2026for the 2012 Director Stock Incentive Plan, 2012 Omnibus Stock Incentive Plan and ~~the~~ ~~2012~~2022 Omnibus Stock Incentive Plan, respectively.

In addition to the 2022 stock incentive plan, the Company established the 2002 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 September 30, ~~2022~~2023, ~~94,533 shares~~101,827 shares have been issued under the ESPP. The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance. The Company recognizes compensation expense on its ESPP on the date the shares are purchased, and it is included as a component of salaries and employee benefits in the consolidated statements of income.

During the second quarter of 2022, the Company announced that the Board of Directors approved a plan to purchase, in open market and privately negotiated transactions, up to 3% of its outstanding common stock. As of September 30, 2023, ~~30,~~~~2022,~~the Company had repurchased ~~31,839~~32,554 shares of common stock at an average price of ~~$38.79~~$38.81 under the treasury stock repurchase plan.

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 into three 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 are not 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. Level 3 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:

*September 30, 2022*
*September 30, 2023*											*September 30, 2023*
					*Quoted prices*		*Significant*		*Significant*							*Quoted prices*		*Significant*		*Significant*
					*in active*		*other*		*other*							*in active*		*other*		*other*
	*Carrying*		*Estimated*		*markets*		*observable inputs*		*unobservable inputs*			*Carrying*		*Estimated*		*markets*		*observable inputs*		*unobservable inputs*
(dollars in thousands)	*amount*		*fair value*		*(Level 1)*		*(Level 2)*		*(Level 3)*			*amount*		*fair value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Financial assets:
Cash and cash equivalents	$	134,042	$	134,042	$	134,042	$	-	$	-		$	110,471	$	110,471	$	110,471	$	-	$	-
Held-to-maturity securities		222,374		182,240		-		182,240		-			223,853		178,012		-		178,012		-
Available-for-sale debt securities		413,413		413,413		-		413,413		-			352,835		352,835		-		352,835		-
Restricted investments in bank stock		3,639		3,639		-		3,639		-			3,800		3,800		-		3,800		-
Loans and leases, net		1,506,163		1,393,596		-		-		1,393,596			1,626,451		1,477,587		-		-		1,477,587
Loans held-for-sale		1,386		1,405		-		1,405		-			2,345		2,354		-		2,354		-
Accrued interest receivable		7,780		7,780		-		7,780		-			8,758		8,758		-		8,758		-
Interest rate swaps		213		213		-		213		-			269		269		-		269		-
Financial liabilities:
Deposits with no stated maturities		2,132,227		2,132,227		-		2,132,227		-			1,948,922		1,948,922		-		1,948,922		-
Time deposits		121,006		116,989		-		116,989		-			202,837		199,057		-		199,057		-
Short-term borrowings		10		10		-		10		-			124,000		124,011		-		124,011		-
Secured borrowings		7,688		7,078		-		-		7,078			7,439		7,325		-		-		7,325
Accrued interest payable		163		163		-		163		-			2,229		2,229		-		2,229		-
Interest rate swaps		213		213		-		213		-			374		374		-		374		-

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 a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

~~Originated~~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 ~~using the exit price notion. The discount rate is based upon~~at current offering rates ~~with an additional discount~~ for ~~expected potential charge-offs. Additionally, an environmental general~~similar loans. Current offering rates consider, among other things, credit ~~risk adjustment is subtracted from the net present value to arrive at the total estimated fair value of the accruing loan portfolio.~~risk.

The carrying value that fair value is compared to is net of the allowance for ~~loan~~credit losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 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 independent third-party appraisals of the properties. These loans are classified within Level 3 of the fair value hierarchy. The fair value consists of loan balances less the valuation allowance.

~~Acquired loans:~~ ~~Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level~~ 3 ~~inputs. For more information on the calculation of the fair value of acquired loans, see Footnote~~ 9, ~~“Acquisition.”~~

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 ~~investment securities~~derivative instruments are determined by ~~prices~~valuations provided by a third-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.

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 a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 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 were no changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending September 30, ~~2022~~2023 and December 31, ~~2021~~2022, respectively.

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

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

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

Valuation techniques for ~~impaired~~individually evaluated, collateral dependent loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows. Both techniques include various Level 3 inputs which are not identifiable. The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not 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 September 30, ~~2022~~2023 and December 31, ~~2021~~2022, the range of liquidation expenses and other valuation adjustments applied to ~~impaired~~individually evaluated, collateral dependent loans ranged from ~~-24.06%~~-21.31% and ~~-37.70%~~-21.31% and from ~~-33.08%~~-19.61% to ~~-47.66%~~-29.58%, respectively. The weighted average of liquidation expenses and other valuation adjustments applied to ~~impaired~~individually evaluated, collateral dependent loans amounted to ~~-32.53%~~-21.31% as of September 30, ~~2022~~2023 and ~~-44.50%~~-21.77% as of December 31, ~~2021~~2022, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed. Accordingly, fair value estimates for ~~impaired~~individually evaluated, collateral dependent loans are classified as Level 3.

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not 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 may include 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 may be 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 September 30, ~~2022~~2023 and December 31, ~~2021~~2022, the discounts applied to the appraised values of ORE ranged from ~~-24.61%~~-77.60% to -77.60% and from ~~-20.16%~~-39.07% to -77.60%, respectively. As of September 30, ~~2022~~2023 and December 31, ~~2021~~2022, the weighted average of discount to the appraisal values of ORE amounted to ~~-26.10%~~-77.60% and ~~-28.21%~~-39.61%, respectively.

At September 30, ~~2022~~2023 and December 31, ~~2021~~2022, there were no other repossessed assets. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.

On ~~July 1, 2021,~~ the Company completed its previously announced acquisition of Landmark. Landmark was a one-bank holding company organized under the laws of the Commonwealth of Pennsylvania and was headquartered in Pittston, PA. Its wholly owned subsidiary, Landmark Community Bank, was an independent community bank chartered under the laws of the Commonwealth of Pennsylvania. Landmark Community Bank conducted full-service commercial banking services through five bank centers located in Lackawanna and Luzerne Counties, Pennsylvania. The acquisition expanded Fidelity Deposit and Discount Bank’s full-service footprint in Luzerne County, Pennsylvania. The Company transacted the acquisition to complement the Company’s existing operations, while consistent with the Company’s strategic plan of enhancing long-term shareholder value. The fair value of total assets acquired as a result of the merger totaled $375.5 million (net of cash consideration), loans totaled $298.9 million and deposits totaled $308.5 million. Goodwill recorded in the merger was $12.6 million.

~~In accordance with the terms of the Reorganization Agreement, on~~ ~~July 1, 2021~~ each share of Landmark common stock was converted into the right to receive 0.272 shares of the Company’s common stock and $3.26 in cash. As a result of the acquisition, the Company issued 647,990 shares of its common stock, valued at $35.1 million, and $7.8 million in cash based upon $54.10, the determined market price of the Company’s common stock in accordance with the Reorganization Agreement. The results of the combined entity’s operations are included in the Company’s Consolidated Financial Statements from the date of acquisition. The acquisition of Landmark was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the acquisition date.

~~Effective~~ ~~July 1, 2021,~~ in connection with the acquisition and pursuant to the terms of the Reorganization Agreement, Paul C. Woelkers was appointed as a Class C Director of Fidelity’s Board of Directors. Mr. Woelkers was also appointed as a Director of Fidelity Bank’s Board of Directors.

~~The following table summarizes the consideration paid for Landmark and the fair value of assets acquired, and liabilities assumed as of the acquisition date:~~

~~Pursuant to the accounting requirements, the Company assigned a fair value to the assets acquired and liabilities assumed of Landmark. ASC~~ ~~820~~ ~~defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”~~

The assets acquired and liabilities assumed in the acquisition of Landmark were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to ~~one~~ ~~year after the closing date of the acquisition. While the fair values are~~ ~~not~~ expected to be materially different from the estimates, any material adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition. The items most susceptible to adjustment are the fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition. Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using Level 1 ~~and Level~~ 2 inputs in the fair value hierarchy. The fair values were determined using executable market bids or independent pricing services. The Company’s independent pricing service utilized matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather relying on the security’s relationship to other benchmark quoted prices. Management reviewed the data and assumptions used in pricing the securities.

~~Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level~~ 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Company has prepared ~~three~~ ~~separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC~~ ~~820~~-10 ~~for the acquired loan portfolio. The~~ ~~three~~~~-separate fair valuation methodology employed are:~~ 1~~) an interest rate loan fair value adjustment,~~ 2~~) a general credit fair value adjustment, and~~ 3~~) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC~~ ~~310~~-30 procedures. The acquired loans were recorded at fair value at the acquisition date without carryover of Landmark’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $309.8 million.

The table below illustrates the fair value adjustments made to the amortized cost basis in order to present the fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC ~~310~~-30 ~~and represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan.~~

For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral, and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $1.9 million. Additionally, for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a ~~two~~~~-part credit fair value analysis:~~ 1~~) expected lifetime credit migration losses; and~~ 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed by the Company, Landmark and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents the potential discount which ~~may~~ arise due to general credit and economic factors. A credit fair value discount of $7.9 million was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.

~~The following table presents the acquired purchased credit impaired loans receivable at the acquisition date:~~

~~The Company assumed leases on 2 branch facilities of Landmark. The Company compared the lease contract obligations to comparable market rental rates determined by~~ ~~third~~~~-party licensed appraisers. The Company believed that the leased contract rates were in a reasonable range of market rental rates and concluded that~~ no ~~fair market value adjustment related to leasehold interest was necessary. The fair value of Landmark’s premises, including land, buildings and improvements, was determined based upon independent~~ ~~third~~~~-party appraisals performed by licensed appraisers or sales agreements.~~

The fair value of the core deposit intangible was determined based on a discounted cash flow (present value) analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the higher cost of alternative funding sources available through national brokered CD offering rates and FHLB advance rates. The projected cash flows were developed using projected deposit attrition rates based on the average rate experienced by both institutions. The core deposit intangible will be amortized over ~~ten~~ ~~years using the sum-of-years digits method.~~

The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit premium is being amortized into income on a level yield amortization method over the contractual life of the deposits.

~~The Company identified 19 sold participations acquired from Landmark that did~~ ~~not~~ ~~meet the criteria for sales treatment under ASC~~ ~~860~~-10-40 and should be recorded as obligations from secured borrowing arrangements. The Company has estimated the fair value of these obligations using an income approach based on the expected cash flows method on a pooled basis using Level 3 ~~assumptions.~~

The Company assumed FHLB borrowings in connection with the merger. The fair value of FHLB Borrowings was determined by using FHLB prepayment penalty as a proxy for the fair value adjustment. The Company decided to pay off the borrowing post acquisition date therefore no ~~amortization is warranted.~~

~~The Company did~~ ~~not~~ ~~incur any merger-related expenses for the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~~~. For the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~, the Company incurred $2.2 million and $3.1 million in merger-related expenses related to the merger with Landmark, primarily consisting of data processing, salaries and employee benefits, and professional fee expenses.

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. ~~As a result of the acquisition of Landmark, the Company added BOLI with a value of $7.2 million during~~ ~~2021.~~The policies’ cash surrender value totaled ~~$53.7~~$54.2 million and ~~$52.7~~$54.0 million, respectively, as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 and is reflected as an asset on the consolidated balance sheets. During the first quarter of 2023, the Company received $0.9 million in proceeds from a BOLI death claim, of which $0.8 million was return of cash surrender value and $0.1 million was additional income which was recorded in fees and other revenue on the consolidated statements of income. For the nine months ended September 30, ~~2022~~2023 and ~~2021~~2022, the Company has recorded income of $980 thousand and $965 thousand, ~~and $899 thousand, respectively.~~respectively, due to an increase in cash surrender values.

In 2017, the Bank entered into separate split dollar life insurance arrangements (Split Dollar Agreements) with eleven officers. This plan provides each officer a specified death benefit should the officer die while in the Bank’s employ. The Bank paid the insurance premiums in March 2017 and the arrangements were effective in March 2017. In March 2019, the Bank entered into a new Split Dollar Agreement with one officer. In January 2021, the Bank entered into Split Dollar Agreements with fifteen officers. 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 September 30, ~~2022~~2023, the policies had total death ~~benefits~~benefits of ~~$53.7~~$54.2 million of ~~which $7.8~~which $8.8 million ~~would~~would have been paid to the officer’s beneficiaries and the ~~remaining $45.9~~remaining $45.4 million ~~would~~would have been paid to the Bank. In addition, four executive officers have the opportunity to retain a split dollar benefit equal to two times their highest base salary after separation from service if the vesting requirements are met. As of September 30, ~~2022~~2023 and December 31, ~~2021~~2022, the Company had a balance in accrued expenses of ~~$252~~$331 thousand and ~~$200~~$269 thousand for the split dollar benefit.

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, 2017 until retirement. On March 20, 2019, the Bank entered into a SERP Agreement with one 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, 2019 until normal retirement age. As a result of the acquisition of Landmark, the Company ~~added $1.0 million in accrued~~acquired a SERP ~~expenses to the consolidated balance sheets.~~agreement with one former employee. As of September 30, ~~2022~~2023 and December 31, ~~2021~~2022, the Company had a balance in accrued expenses of ~~$3.9~~$4.3 million and ~~$3.6~~$4.0 million in connection with the SERP.

The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606.

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 are not in the scope of the new guidance. The main types of contracts with customers that are in the scope of the new guidance are:

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 does not enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, ~~2022~~2023 and December 31, ~~2021~~2022, the Company did not have any significant contract balances.

The Company’s performance obligations have an original expected duration of less than one year and follow the relevant guidance for recognizing revenue over time. There is no variable consideration subject to constraint that is not included in information about transaction price.

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 would not have incurred if the contract had not 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 in one year or less.

ASU 2016-02 Leases (Topic 842) 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 elected not to record short-term leases (leases with a term of 12 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 September 30, ~~2022~~2023, ten of the Company’s branch properties and one administrative office ~~and one future branch~~ were leased under operating leases. In four of the branch leases, the Company leases the land from an unrelated third party, and the buildings are the Company’s own capital improvement. The Company also leases ~~three~~two standalone ATMs under operating leases. Additionally, the Company has one property lease and four equipment leases classified as finance leases. ~~The Company acquired a leased property classified as a finance lease with a fair value of $1.2 million from the Landmark merger during~~ ~~2021.~~

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 September 30, ~~2022~~2023:

As of September 30, ~~2022~~2023, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem and Wyoming branches under the terms of operating leases. During ~~2021,~~ ~~the Company entered into a new lease for the Bethlehem branch which will be relocated in~~ ~~2022.~~ ~~During~~ 2022, the Company ~~also~~ entered into a new lease of administrative office space in Scranton. Common area maintenance is included in variable lease payments in the table below. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest and are expensed as incurred. The ~~Bethlehem and~~ Easton ~~branches have~~branch has variable lease payments that increase annually and are expensed as incurred.

During the firstnine months of 2023, $835 thousand of the total lease cost was included in premises and equipment expense and $17 thousand was included in other expenses on the consolidated statements of income. During the first nine months of 2022, $862 thousand of the total lease cost was included in premises and equipment expense and $24 ~~thousand was included in other expenses on the consolidated statements of income. During the~~ ~~first~~~~nine~~ ~~months of~~ ~~2021,~~ ~~$547 thousand of the total lease cost was included in premises and equipment expense and $26~~ 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 of one year as of September 30, ~~2022~~2023 are as follows:

The Company leases ~~several properties,~~one property, where the Company is lessor, under an operating ~~leases~~lease to an unrelated ~~parties.~~party. The undiscounted cash flows to be received on an annual basis for the ~~remaining two properties under long-term operating leases~~property are as follows:

The Company also indirectly originates automobile leases classified as direct finance leases. See Footnote 5, “Loans and leases”, for more information about the Company’s direct finance leases.

Lease income recognized from direct finance leases was included in interest income from loans and leases on the consolidated statements of income. Lease income related to operating leases is included in fees and other revenue on the consolidated statements of income. The Company only receives a variable payment for taxes from one 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:

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.

The Company is a party to interest rate derivatives that are not 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 a third-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 do not result in an impact to earnings; however there may be fair value adjustments related to credit-quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented.

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 a third-party financial institution to convert fixed rate investment securities to adjustable rate to produce a more asset sensitive profile. The Company recorded the fair value of the fair value hedge in other assets and accrued interest payable and other liabilities on the consolidated balance sheet. The hedged items (fixed rate securities available-for-sale) are also recorded at fair value which offsets the adjustment to the fair value hedge. The related gains and losses are reported in interest income investment securities - U.S. government agencies and corporations and interest income investment securities - state and political subdivisions (nontaxable) in the consolidated statements of income. For the nine months ended September 30, 2023, there was $4 thousand in interest income investment securities - U.S. government agencies and corporations and $4 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 each quarter. 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 $1$2 million in investment securities pledged as collateral on its interest rate swaps with a third-party financial institution as of September 30, ~~2022~~~~. There were no interest rate swaps as of~~ ~~December 31, 2021~~2023.

Due to the levels of borrowings during October 2023 and the need to fund 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. This loss will be reflected in and adversely affect the Company’s fourth quarter 2023 operating results. The $29.1 million in proceeds received were used to pay down short-term borrowings that replenished available borrowing capacity at that time.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of September 30, ~~2022~~2023 compared to December 31, ~~2021~~2022 and a comparison of the results of operations for the three and nine months ended September 30, ~~2022~~2023 and ~~2021.~~2022. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s ~~2021~~2022 Annual Report filed on Form 10-K.

Certain of the matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.

The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

The Company cautions readers not to place undue reliance on forward-looking statements, which reflect analyses only as of the date of this document. The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

Readers should review the risk factors described in other documents that we file or furnish, from time to time, with the Securities and Exchange Commission, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and other current reports filed or furnished on Form 8-K.

The Company is a Pennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank and trust company is The Fidelity Deposit and Discount Bank. The Company is headquartered in Dunmore, Pennsylvania. We consider Lackawanna, Northampton, Lehigh and Luzerne Counties our primary marketplace.

As a leading Northeastern and Eastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses. We continue to implement strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase the amount of ~~low-cost~~relationship core deposits (see “Funds Provided” section of this management’s discussion and analysis). These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new business prospects. The Bank has a personal and corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand and optimize our franchise footprint, consisting presently of our 21-branch network.

We are impacted by ~~both~~ national, regional and ~~regional~~market area economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, primarily in Lackawanna and Luzerne counties, and Eastern Pennsylvania, primarily ~~Northampton~~Northampton and Lehigh counties. The Federal Open Market Committee (FOMC) increased interest rates by 25425 basis points ~~in March 2022 in the first “tightening” move since December 2018 followed by increases of 50 basis points and 75 basis points in May~~during 2022 and ~~June 2022, respectively. The FOMC increased interest rates~~ another 7525 basis points each in February, March, May and July 2022, September 2022 and November 2022, totaling 375 basis points increase thus far during 2022, and communicated inflation fighting expectations of further increases during the remainder of this year.2023. According to the U.S. Bureau of Labor Statistics, the national unemployment rate for September ~~2022~~2023 was ~~3.5%~~3.8%, ~~down 0.4~~up 0.3 percentage points from December 2~~021.~~2022. The unemployment rates in the Scranton - Wilkes-Barre – Hazleton (market area north) and the Allentown – Bethlehem – Easton (market area south) Metropolitan Statistical Areas (local) ~~also decreased but the market area north remained at a higher level than~~were in line with the national unemployment rate. The local unemployment rates at September 30, ~~2022~~2023 were ~~4.2%~~3.5% in market area north and ~~3.3%~~3.4% in market area south, respectively, a decrease of ~~1.1~~1.0 percentage points and ~~1.0~~0.3 percentage ~~point~~points from the ~~5.3%~~4.5% and ~~4.3%~~3.7%, respectively, at December 31, ~~2021. T~~he2022. The rising rate environment and historically low inventory has reduced the amount of home purchases below 2022 levels. The median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro increased ~~15.8%~~4.5% and ~~13.3%~~5.2%, respectively, from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media ~~outlets. Values in the markets~~outlets, and values are expected to grow ~~at a slower pace~~1.7% and 2.6% 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 ~~rising~~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.

On July 1, 2021, the Company completed its previously announced acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned bank subsidiary. Non-recurring costs to facilitate the merger and integrate systems of $3.0 million were incurred during 2021.

For the nine months ended September 30, ~~2022,~~2023, net income was ~~$22.9~~$17.7 million, or ~~$4.03~~$3.11 diluted earnings per share, compared to ~~$16.2~~$22.9 million, or ~~$3.09~~$4.03 diluted earnings per share, for the nine months ended September 30, 2021. Non-recurring merger-related costs and Federal Home Loan Bank (FHLB) prepayment penalties incurred are not a part of the Company’s normal operations. If these expenses had not occurred, adjusted net income (non-GAAP) for the nine months ended September 30, 2022 and 2021 would have been $22.9 million and $19.1 million, respectively. Adjusted diluted EPS (non-GAAP) would have been $4.03 and $3.64 for the nine months ended September 30, 2022 and 2021, respectively.2022.

As of September 30, ~~2022~~2023 and ~~December 31, 2021,~~September 30, 2022, tangible common book value per share (non-GAAP) was $25.37 and $22.24, ~~and $32.57,~~ respectively. See reconciliation on page 39. The ~~decrease~~increase in tangible book value was due primarily to the ~~decline~~improvement in ~~tangible common equity resulting within AOCI from the after tax net unrealized losses on available-for-sale securities.~~retained earnings. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located below within this management’s discussion and analysis.

Branch managers, relationship bankers, mortgage originators and our business service partners are all focused on developing a mutually profitable full banking ~~relationship.~~relationship with our clients. We understand our markets, offer products and services along with financial advice that is appropriate for our community, clients and prospects. The Company continues to focus on the trusted financial advisor model by utilizing the team approach of experienced bankers that are fully engaged and dedicated towards maintaining and growing profitable relationships.

In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years. As described more fully in Part II, Item 1A, “Risk Factors” below, as well as Part I, Item 1A, “Risk Factors,” and in the “Supervisory and Regulation” section of management’s discussion and analysis of financial condition and results of operations in our ~~2021~~2022 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us.

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be 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 September 30, ~~2022~~2023 and ~~2021.~~2022.

The following table reconciles the non-GAAP financial measures of FTE net interest income:

The efficiency ratio is non-interest expenses as a percentage of FTE net interest income plus non-interest income. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP:

The following table provides a reconciliation of the tangible common equity (non-GAAP) and the ~~calculation~~calculations of tangible book value per ~~share:~~share and tangible common equity ratio:

The following table provides a reconciliation of pre-provision net revenue (PPNR) to average assets (non-GAAP):

~~The following table provides a reconciliation of the Company’s earnings results under GAAP to comparative non-GAAP results excluding merger-related expenses:~~

The Company’s earnings depend primarily on net interest income. Net interest income is the difference between interest income and interest expense. Interest income is generated from yields earned on interest-earning assets, which consist principally of loans and investment securities. Interest expense is incurred from rates paid on interest-bearing liabilities, which consist of deposits and borrowings. Net interest income is determined by the Company’s interest rate spread (the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Interest rate spread is significantly impacted by: changes in interest rates and market yield curves and their related impact on cash flows; the composition and characteristics of interest-earning assets and interest-bearing liabilities; differences in the maturity and re-pricing characteristics of assets compared to the maturity and re-pricing characteristics of the liabilities that fund them and by the competition in the marketplace.

The Company’s earnings are also affected by the level of its non-interest income and expenses and by the provisions for ~~loan~~credit losses and income taxes. Non-interest income mainly consists of: service charges on the Company’s loan and deposit products; interchange fees; trust and asset management service fees; increases in the cash surrender value of the bank owned life insurance and from net gains or losses from sales of loans and securities. Non-interest expense consists of: compensation and related employee benefit costs; occupancy; equipment; data processing; advertising and marketing; FDIC insurance premiums; professional fees; loan collection; net other real estate owned (ORE) expenses; supplies and other operating overhead.

Net interest income, net interest rate margin, net interest rate spread and the efficiency ratio are presented in the MD&A on a fully-taxable equivalent (FTE) basis. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.

For the third quarter of ~~2022,~~2023, the Company generated net income of ~~$7.7~~$5.3 million, or ~~$1.36~~$0.93 per diluted share, compared to ~~$4.9~~$7.7 million, or ~~$0.85~~$1.36 per diluted share, for the third quarter of ~~2021.~~2022. The ~~$2.8~~$2.4 million, ~~increase~~or 31%, decrease in net income for the comparative quarters was primarily the result of ~~$2.2~~$3.9 million lower net interest income partially offset by a $0.6 million decrease in the provision for income taxes, $0.4 million increase in non-interest income, $0.3 million net benefit in the provision for credit losses on unfunded commitments and $0.3 million lower non-interest expenses and $1.3 million higher net interest income. Non-interest expenses decreased quarter over-quarter due to merger-related expenses incurred during the third quarter of 2021 following the Landmark merger when compared to those incurred in the third quarter of 2022.expenses. In the year-to-date comparison, net income ~~increased~~decreased by ~~$6.7~~$5.1 million to ~~$22.9~~$17.7 million, or $3.11 per diluted share, from $22.8 million, or $4.03 per diluted share ~~from $16.2~~for the comparative period. The decline was primarily caused by a reduction of $6.8 million ~~or $3.09 per diluted share. The $10.0 million growth~~ in net interest income ~~was enough to~~along with an increase of $0.6 million in non-interest expenses. These increases were partially offset ~~$1.4~~by a $1.3 million ~~lower non-interest~~decrease in the provision for income taxes, $0.3 million reduction in provision for credit losses on loans and ~~$1.0~~unfunded commitments and $0.6 million higher non-interest ~~expenses~~income year-over-year.

Return on average assets (ROA) was ~~1.27%~~0.88% and ~~0.82%~~1.27% for the third quarters of ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~1.27%~~0.99% and ~~1.08%~~1.27% for the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively. During the same time periods, return on average shareholders’ equity (ROE) was ~~18.23%~~11.96% and ~~9.07%~~18.23%, respectively, and ~~17.01%~~13.64% and ~~11.88%~~17.01%, respectively. ROA ~~increased~~decreased due to the ~~growth~~decline in net income ~~relative~~for the quarter-over-quarter and year-over-year comparisons. ROE decreased primarily due to the ~~increase in~~net income decreases over the same time periods. Pre-provision net revenue to average assets (non-GAAP) was 1.02% and 1.55% for the ~~quarter~~three months ended September 30, 2023 and ~~year-to-date comparisons. ROE increased~~2022, respectively, and 1.19% and 1.57% for the nine months ended September 30, 2023, respectively. See reconciliation on page 39. The decreases were due to ~~net~~a decline in income ~~growth as well as average equity decreases for the quarter~~before taxes quarter-over-quarter and ~~year-to-date comparisons.~~year-over-year.

For the third quarter of ~~2022,~~2023, net interest income ~~increased $1.3~~decreased $3.9 million, or 8%21%, to ~~$18.5~~$14.6 million from ~~$17.2~~$18.5 million for the third quarter of ~~2021~~2022 due to ~~increased~~interest expense growing faster than interest income. The ~~$2.0~~$3.5 million growth in interest income was produced by the addition of ~~$108.1~~$19.0 million in average interest-earning assets ~~supplemented by~~and the effect of a 2058 basis point increase in FTE yields earned on those assets. The loan portfolio contributed the most to this growth by providing ~~$1.0~~$4.2 million more in FTE interest income, which absorbed ~~$1.3~~$0.5 million ~~lower fees earned under the Paycheck Protection Program (PPP),~~less from fair value purchase accounting adjustment accretion, due to ~~$81.1~~$129.1 million more in average loans and a ~~three~~69 basis point increase in the FTE yields earned thereon. In the investment portfolio, the average balance of total securities ~~grew $90.9~~declined $60.1 million ~~earning 17 basis points higher FTE yields~~from security sales and paydowns on mortgage-backed securities which produced ~~$0.8~~$0.4 million less in ~~additional~~ FTE interest income. ~~Interest income on interest-bearing cash also increased $0.3 million due to an increase in yields.~~ On the liability side, total interest-bearing liabilities grew ~~$79.9~~$30.6 million, on average, with a 14177 basis point increase in rates paid thereon. ~~A $92.4 million higher average balance of interest-bearing deposits and 15~~The 171 basis point increase in rates paid on deposits resulted in ~~$0.7~~$6.9 million more interest expense ~~on deposits~~ for the third quarter of ~~2022~~2023 compared to the ~~2021~~2022 like period. The Company also utilized $37.6 million more in average short-term borrowings during the third quarter of 2023 which added $0.4 million in interest expense.

Net interest income ~~increased $10.0~~decreased $6.8 million, or ~~23%~~13%, from ~~$43.9 million for the nine months ended September 30, 2021 to~~ $53.9 million for the nine months ended September 30, 2022 to $47.1 million for the nine months ended September 30, 2023, due to ~~$10.7~~$18.4 million higher interest ~~income~~expense partially offset by ~~a $0.7~~the $11.6 million increase in interest ~~expense.~~income. Total average interest-earning assets increased ~~$401.9~~$28.0 million ~~with six~~and FTE yields earned on these assets rose 64 basis ~~point higher yields~~points resulting in ~~$11.3~~$11.8 million of growth in FTE interest income. In the loan portfolio, the Company experienced average balance growth of ~~$238.8~~$138.1 million and an additional 71 basis point in FTE yields which had the effect of producing ~~$6.9~~$12.9 million more FTE interest income, despite ~~$3.0~~$1.2 million less in fees earned under the ~~PPP~~Paycheck Protection Program (PPP) and ~~a 7 basis point reduction in FTE yields during the first nine months of 2022. Interest income on loans also included $0.9~~$0.7 million ~~in additional~~less from fair value purchase accounting accretion during the first nine months of ~~2022.~~2023. The average balance of the investment portfolio ~~grew $227.1~~declined $62.9 million ~~supplemented by a 10 basis point increase in yields~~ which resulted in ~~$4.0~~$1.0 million ~~in additional~~lower FTE interest income. On the liability side, total interest-bearing liabilities grew ~~$287.6~~$29.4 million on average with a ~~one~~150 basis point increase in rates paid on these interest-bearing liabilities. ~~Growth in average interest-bearing deposits of $286.2 million supplemented by a two~~The 139 basis point increase in ~~the~~ rates paid on interest-bearing deposits ~~caused this increase~~resulted in interest ~~expense.~~

The FTE net interest rate spread ~~increased~~decreased by 6119 and 586 basis points and margin ~~increased~~decreased by 1069 and 542 basis points, respectively, for the three and nine months ended September 30, ~~2022~~2023 compared to the same ~~2021~~2022 periods. In the quarter-over-quarter and ~~year-to-date~~year-over-year comparisons, the spread and margin ~~increased~~decreased due to ~~the yields earned on interest-earning assets increasing faster than~~ the rise in rates paid on interest-bearing ~~liabilities.~~liabilities which increased faster than the yields earned on interest-earning assets. The overall 29163 and 21133 basis ~~point~~points cost of funds for the three and nine months ended September 30, ~~2022,~~2023, which includes the impact of non-interest bearing deposits, increased 10134 and 1112 basis points compared to the same ~~2021~~2022 periods. The primary reason for the increase was the higher rates paid on deposits compared to the same ~~2021~~2022 periods due to the increases in market interest rates during the periods.

For the remainder of ~~2022,~~2023, the Company ~~expects to operate in a rising~~is uncertain about the expected interest rate environment. ~~A rate environment with rising interest rates positions~~Management is primarily reliant on the ~~Company to improve its~~Federal Open Market Committee's statements and forecast. The Company’s net interest income performance ~~from new and repricing earning assets. For the remainder~~has been reduced by assetyields being outpaced by higher cost of ~~2022, the Company anticipates~~funds compressing net interest ~~income to grow at a slower pace as growth in interest income would likely help mitigate an adverse impact of rate movements on the cost of funds.~~spread. The risk to ~~continuing~~ net interest income improvement is rapid acceleration of deposit rates in the Company's ~~marketplace.~~market area. The FOMC ~~began increasing~~increased the federal funds rate by 425 basis points during 2022 ~~the first moves since they cut rates during the first quarter of 2020,~~and another 100 basis points in 2023, which ~~began to have an~~had a disproportional effect on rates paid on interest-bearing ~~liabilities.~~liabilities in 2023. On the asset side, the ~~prime~~Prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans was also increased ~~300~~425 basis points during ~~the first nine months of~~ 2022 and another 75100 basis points ~~in November 2022.~~through September 2023. Consensus economic forecasts are predicting ~~increases~~no change in short-term rates throughout the rest of ~~2022.~~2023. For the remainder of 2023 into early 2024, the Company currently maintains a loan pipeline which we expect will grow the loan portfolio which will be funded by borrowing capacity until such time deposit growth will be able to pay down these short-term borrowings. The ~~2022~~ focus is to manage net interest income through an elevated forecasted rate cycle by exercising disciplined and ~~control~~proactive loan pricing and managing deposit costs ~~through~~to maintain a ~~rising forecasted~~reasonable spread, to the extent possible, in order to mitigate further margin compression.

Continued growth in the loan portfolios ~~complemented with the achieved investment security growth~~ is expected to boost interest income, and when coupled with a proactive relationship approach to deposit cost setting strategies ~~should~~should help ~~stop~~mitigate spread compression and contain the interest rate margin, preventing further reductions below acceptable levels.

The Company’s cost of interest-bearing liabilities was ~~0.40%~~2.17% and ~~0.29%~~1.79% for the three and nine months ended September 30, ~~2022,~~2023, or 14177 and 1150 basis points higher than the cost for the same ~~2021~~2022 periods. ~~The~~For the month of October 2023, the cost of interest-bearing liabilities was 50 basis points higher than the first nine months of 2023 at 2.29% which shows the higher costs are expected to continue. The increase in interest paid on deposits contributed to the higher cost of interest-bearing ~~liabilities. Management currently believes~~liabilities supplemented by the short-term borrowings utilized during the first nine months of 2023. The FOMC is expected to ~~continue to raise~~hold the federal funds rate in the immediate future, sobut the Company may continue to experience pressure to further increase rates paid on deposits. To help mitigate the 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, and retain and generate higher levels of average non-interest bearing deposit balances.~~volumes. Strategically deploying ~~no- and low-cost~~relationship deposits into interest earning-assets is an effective margin-preserving strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin.

The Company’s Asset Liability Management (ALM) team meets regularly to discuss among other things, interest rate risk and when deemed necessary adjusts interest rates. ALM is actively addressing the Company's sensitivity to a changing rate environment to ensure interest rate risks are contained within acceptable levels. ALM also discusses revenue enhancing strategies to help combat the potential for a decline in net interest income. The Company’s marketing department, together with ALM, and service-driven branch and relationship managers, continue to develop prudent strategies that will grow the loan portfolio and accumulate ~~low-cost~~relationship driven deposits at costs lower than borrowing costs to improve net interest income performance.

The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% for September 30, ~~2022~~2023 and ~~2021~~2022 to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. See “Non-GAAP Financial Measures” within this management’s discussion and analysis for the FTE adjustments. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans held-for-sale (HFS) and non-accrual loans but exclude the allowance for ~~loan~~credit losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan (cost amortization)/fee accretion of ($~~0.2~~0.3 million) and ~~$1.0 million~~($0.2 million) during the third quarters of ~~2022~~2023 and ~~2021 ,~~2022, respectively, and ~~$0.4 million~~($0.7 million) and ~~$3.2~~$0.4 million for the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively, are included in interest income from loans. ~~MNB~~Merchants Bank of Bangor and Landmark Community bank loan fair value purchase accounting adjustments of ~~$0.9~~$0.5 million and $0.9 million are included in interest income from loans and ~~$13~~$7 thousand and ~~$43~~$13 thousand reduced interest expense on deposits and borrowings for the three months ended September 30, ~~2022~~2023 and ~~2021.~~2022. ~~MNB~~Merchants Bank of Bangor and Landmark Community Bank loan fair value purchase accounting adjustments of ~~$2.8~~$2.0 million and ~~$1.8~~$2.8 million are included in interest income from loans and ~~$149~~$27 thousand and ~~$79~~$149 thousand reduced interest expense on deposits and borrowings for the nine months ended September 30, ~~2022~~2023 and ~~2021.~~2022. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans. Net interest margin is calculated by dividing net interest income-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source:

	Three months ended														Three months ended
(dollars in thousands)	September 30, 2022							September 30, 2021							September 30, 2023							September 30, 2022
	Average				Yield /			Average				Yield /			Average				Yield /			Average				Yield /
Assets	balance		Interest		rate			balance		Interest		rate			balance		Interest		rate			balance		Interest		rate

Interest-earning assets
Interest-bearing deposits	$	59,409	$	351		2.34	%	$	123,561	$	54		0.17	%	$	9,278	$	60		2.57	%	$	59,409	$	351		2.34	%
Restricted investments in bank stock		3,645		56		6.06			3,430		28		3.25			3,763		59		6.24			3,645		56		6.06
Investments:
Agency - GSE		116,914		445		1.51			110,131		382		1.37			112,089		407		1.44			116,914		445		1.51
MBS - GSE residential		264,249		1,157		1.74			219,391		795		1.44			234,792		1,054		1.78			264,249		1,157		1.74
State and municipal (nontaxable)		255,736		1,916		2.97			223,571		1,651		2.93			230,129		1,658		2.86			255,736		1,916		2.97
State and municipal (taxable)		86,262		449		2.06			79,084		377		1.89			86,029		444		2.05			86,262		449		2.06
Other		-		-		-			108		-		0.40
Total investments		723,161		3,967		2.18			632,285		3,205		2.01			663,039		3,563		2.13			723,161		3,967		2.18
Loans and leases:
C&I and CRE (taxable)		749,154		9,428		4.99			795,821		9,692		4.83			779,406		11,575		5.89			749,154		9,428		4.99
C&I and CRE (nontaxable)		70,700		620		3.48			53,632		513		3.79			89,290		930		4.13			70,700		620		3.48
Consumer		224,753		2,184		3.85			199,540		2,004		3.98			235,411		2,617		4.41			224,753		2,184		3.85
Residential real estate		466,661		4,216		3.58			381,149		3,254		3.39			536,304		5,574		4.12			466,661		4,216		3.58
Total loans and leases		1,511,268		16,448		4.32			1,430,142		15,463		4.29			1,640,411		20,696		5.01			1,511,268		16,448		4.32
Total interest-earning assets		2,297,483		20,822		3.60	%		2,189,418		18,750		3.40	%		2,316,490		24,378		4.18	%		2,297,483		20,822		3.60	%
Non-interest earning assets		110,404							168,838							91,845							110,404
Total assets	$	2,407,887						$	2,358,256						$	2,408,336						$	2,407,887

Liabilities and shareholders' equity

Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	703,101	$	577		0.33	%	$	674,146	$	464		0.27	%	$	664,391	$	3,269		1.95	%	$	703,101	$	577		0.33	%
Savings and clubs		245,589		59		0.10			222,077		25		0.04			214,078		166		0.31			245,589		59		0.10
MMDA		541,799		801		0.59			467,269		221		0.19			537,334		3,609		2.66			541,799		801		0.59
Certificates of deposit		124,083		113		0.36			158,657		168		0.42			191,990		1,444		2.98			124,083		113		0.36
Total interest-bearing deposits		1,614,572		1,550		0.38			1,522,149		878		0.23			1,607,793		8,488		2.09			1,614,572		1,550		0.38
Secured borrowings		7,708		75		3.85			20,140		121		2.37			7,470		123		6.53			7,708		75		3.85
Short-term borrowings		10		-		0.43			68		-		0.14			37,595		428		4.51			10		-		0.43
FHLB advances		-		-		-			49		-		0.06
Total interest-bearing liabilities		1,622,290		1,625		0.40	%		1,542,406		999		0.26	%		1,652,858		9,039		2.17	%		1,622,290		1,625		0.40	%
Non-interest bearing deposits		589,228							579,629							548,682							589,228
Non-interest bearing liabilities		29,030							23,798							29,638							29,030
Total liabilities		2,240,548							2,145,833							2,231,178							2,240,548
Shareholders' equity		167,339							212,423							177,158							167,339
Total liabilities and shareholders' equity	$	2,407,887						$	2,358,256						$	2,408,336						$	2,407,887
Net interest income - FTE			$	19,197						$	17,751						$	15,339						$	19,197

Net interest spread						3.20	%						3.14	%						2.01	%						3.20	%
Net interest margin						3.32	%						3.22	%						2.63	%						3.32	%
Cost of funds						0.29	%						0.19	%						1.63	%						0.29	%

	Nine months ended														Nine months ended
(dollars in thousands)	September 30, 2022							September 30, 2021							September 30, 2023							September 30, 2022
	Average				Yield /			Average				Yield /			Average				Yield /			Average				Yield /
Assets	balance		Interest		rate			balance		Interest		rate			balance		Interest		rate			balance		Interest		rate

Interest-earning assets
Interest-bearing deposits	$	55,571	$	464		1.12	%	$	119,827	$	114		0.13	%	$	7,548	$	212		3.76	%	$	55,571	$	464		1.12	%
Restricted investments in bank stock		3,472		120		4.62			3,160		96		4.08			4,332		240		7.41			3,472		120		4.62
Investments:
Agency - GSE		118,052		1,309		1.48			80,147		820		1.37			112,267		1,224		1.46			118,052		1,309		1.48
MBS - GSE residential		268,494		3,416		1.70			178,355		1,911		1.43			241,628		3,232		1.79			268,494		3,416		1.70
State and municipal (nontaxable)		260,855		5,811		2.98			188,955		4,271		3.02			233,105		5,066		2.91			260,855		5,811		2.98
State and municipal (taxable)		88,513		1,348		2.04			61,371		857		1.87			86,032		1,335		2.08			88,513		1,348		2.04
Other		-		-		-			36		-		0.40
Total investments		735,914		11,884		2.16			508,864		7,859		2.06			673,032		10,857		2.16			735,914		11,884		2.16
Loans and leases:
C&I and CRE (taxable)		754,781		27,387		4.85			694,274		24,873		4.79			766,197		33,146		5.78			754,781		27,387		4.85
C&I and CRE (nontaxable)		69,555		1,711		3.29			46,185		1,331		3.85			100,873		3,112		4.13			69,555		1,711		3.29
Consumer		211,031		6,070		3.85			174,869		5,126		3.92			236,984		7,630		4.30			211,031		6,070		3.85
Residential real estate		451,880		11,780		3.49			333,167		8,761		3.52			521,251		15,984		4.10			451,880		11,780		3.49
Total loans and leases		1,487,247		46,948		4.22			1,248,495		40,091		4.29			1,625,305		59,872		4.93			1,487,247		46,948		4.22
Total interest-earning assets		2,282,204		59,416		3.48	%		1,880,346		48,160		3.42	%		2,310,217		71,181		4.12	%		2,282,204		59,416		3.48	%
Non-interest earning assets		119,718							134,633							94,883							119,718
Total assets	$	2,401,922						$	2,014,979						$	2,405,100						$	2,401,922

Liabilities and shareholders' equity

Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	713,743	$	1,529		0.29	%	$	569,947	$	1,258		0.30	%	$	652,409	$	7,013		1.44	%	$	713,743	$	1,529		0.29	%
Savings and clubs		245,052		112		0.06			203,109		88		0.06			223,750		506		0.30			245,052		112		0.06
MMDA		507,693		1,346		0.35			407,106		738		0.24			532,786		9,138		2.29			507,693		1,346		0.35
Certificates of deposit		128,893		334		0.35			128,978		499		0.52			167,371		3,056		2.44			128,893		334		0.35
Total interest-bearing deposits		1,595,381		3,321		0.28			1,309,140		2,583		0.26			1,576,316		19,713		1.67			1,595,381		3,321		0.28
Secured borrowings		9,301		109		1.56			6,787		121		2.37			7,515		352		6.26			9,301		109		1.56
Short-term borrowings		72		1		1.06			129		-		0.33			50,322		1,784		4.74			72		1		1.06
FHLB advances		-		-		-			1,134		26		3.07
Total interest-bearing liabilities		1,604,754		3,431		0.29	%		1,317,190		2,730		0.28	%		1,634,153		21,849		1.79	%		1,604,754		3,431		0.29	%
Non-interest bearing deposits		589,581							494,582							567,487							589,581
Non-interest bearing liabilities		27,741							20,607							29,590							27,741
Total liabilities		2,222,076							1,832,379							2,231,230							2,222,076
Shareholders' equity		179,846							182,600							173,870							179,846
Total liabilities and shareholders' equity	$	2,401,922						$	2,014,979						$	2,405,100						$	2,401,922
Net interest income - FTE			$	55,985			��			$	45,430						$	49,332						$	55,985

Net interest spread						3.19	%						3.14	%						2.33	%						3.19	%
Net interest margin						3.28	%						3.23	%						2.86	%						3.28	%
Cost of funds						0.21	%						0.20	%						1.33	%						0.21	%

Changes in net interest income are a function of both changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which changes in interest rates and changes in volumes of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by the prior period rate), (2) the changes attributable to changes in interest rates (changes in rates multiplied by prior period volume) and (3) the net change. The combined effect of changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Tax-exempt income was not converted to a tax-equivalent basis on the rate/volume analysis:

	Nine months ended September 30,																		Nine months ended September 30,
(dollars in thousands)	2022 compared to 2021									2021 compared to 2020									2023 compared to 2022									2022 compared to 2021
	Increase (decrease) due to																		Increase (decrease) due to
	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
Interest income:
Interest-bearing deposits	$	(92	)	$	442		$	350		$	54		$	(36	)	$	18		$	(655	)	$	403		$	(252	)	$	(92	)	$	442		$	350
Restricted investments in bank stock		10			14			24			1			(29	)		(28	)		35			85			120			10			14			24
Investments:
Agency - GSE		415			74			489			665			(53	)		612			(63	)		(21	)		(84	)		415			74			489
MBS - GSE residential		1,098			407			1,505			466			(890	)		(424	)		(353	)		168			(185	)		1,098			407			1,505
State and municipal		1,552			-			1,552			2,705			(551	)		2,154			(464	)		(146	)		(610	)		1,552			-			1,552
Other		-			-			-			(1	)		(2	)		(3	)
Total investments		3,065			481			3,546			3,835			(1,496	)		2,339			(880	)		1			(879	)		3,065			481			3,546
Loans and leases:
Residential real estate		3,096			(77	)		3,019			1,547			(840	)		707			1,957			2,248			4,205			3,096			(77	)		3,019
C&I and CRE		2,925			(110	)		2,815			7,251			609			7,860			1,550			5,313			6,863			2,925			(110	)		2,815
Consumer		1,042			(98	)		944			237			(113	)		124			792			768			1,560			1,042			(98	)		944
Total loans and leases		7,063			(285	)		6,778			9,035			(344	)		8,691			4,299			8,329			12,628			7,063			(285	)		6,778
Total interest income		10,046			652			10,698			12,925			(1,905	)		11,020			2,799			8,818			11,617			10,046			652			10,698

Interest expense:
Deposits:
Interest-bearing checking		309			(38	)		271			563			(337	)		226			(142	)		5,626			5,484			309			(38	)		271
Savings and clubs		19			5			24			32			(28	)		4			(11	)		405			394			19			5			24
Money market		212			396			608			510			(1,062	)		(552	)		70			7,722			7,792			212			396			608
Certificates of deposit		-			(165	)		(165	)		(65	)		(811	)		(876	)		128			2,594			2,722			-			(165	)		(165	)
Total deposits		540			198			738			1,040			(2,238	)		(1,198	)		45			16,347			16,392			540			198			738
Secured borrowings		36			(48	)		(12	)		121			-			121			(25	)		268			243			36			(48	)		(12	)
Overnight borrowings		-			1			1			(185	)		(63	)		(248	)		1,781			2			1,783			-			1			1
FHLB advances		(26	)		-			(26	)		(260	)		18			(242	)		-			-			-			(26	)		-			(26	)
Total interest expense		550			151			701			716			(2,283	)		(1,567	)		1,801			16,617			18,418			550			151			701
Net interest income	$	9,496		$	501		$	9,997		$	12,209		$	378		$	12,587		$	998		$	(7,799	)	$	(6,801	)	$	9,496		$	501		$	9,997

The provision for ~~loan~~credit losses represents the necessary amount to charge against current earnings, the purpose of which is to increase the allowance for ~~loan~~credit losses ~~(the allowance)~~ to a level that represents management’s best estimate of ~~known and inherent~~expected credit losses in the Company’s loan portfolio. Loans determined to be uncollectible are charged off against the allowance. The required amount of the provision for ~~loan~~credit losses, based upon the adequate level of the allowance, is subject to the ongoing analysis of the loan portfolio. The Company’s Special Assets Committee meets periodically to review problem loans. The committee is comprised of management, including credit administration officers, loan officers, loan workout officers and collection personnel. ~~The committee reports quarterly to the Credit Administration Committee of the board of directors.~~

Management continuously reviews the risks inherent in the loan portfolio. ~~Specific factors used to evaluate the adequacy~~The determination of the ~~loan~~amounts of the allowance for credit losses and the provision for credit losses is based on management’s current judgments about the credit quality of the Company’s financial assets and known and expected relevant internal and external factors that significantly affect collectability such as historical loss ~~provision during the formal process include:~~information. current conditions, and reasonable and supportable forecasts, including significant qualitative factors.

~~• specific~~On January 1, 2023, the Company adopted Accounting Standard Update 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (CECL) and recorded an increase of $0.7 million in the allowance for credit losses on loans ~~that could have loss potential;~~

~~• levels~~and an increase of ~~and trends~~$1.1 million in ~~delinquencies and non-accrual loans;~~

~~• levels of and trends~~the allowance for credit losses on unfunded loan commitments. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in ~~charge-offs and recoveries;~~

~~• trends in volume and terms of loans;~~accordance with previously applicable GAAP.

For the three months ended September 30, ~~2022,~~2023, the provision for ~~loan~~credit losses on loans was $0.5 million ~~a $0.1 million increase compared~~due to ~~$0.4 million for~~growth and change in composition of the ~~same period in 2021. The increase~~loan portfolio along with slower prepayment speeds and curtailment rates, which are key assumptions used in the estimate. The provision ~~compared to the three months ended September 30, 2021,~~for credit losses on unfunded loan commitments was a net benefit of $0.3 million due to a reduction in unfunded commitments during the ~~higher provisioning required for loan growth~~quarter along with lower loss rates related to an improved economic forecast and updated probability of default models used in the ~~third quarter of 2022 compared to the year earlier period.~~estimate.

For the nine months ended September 30, ~~2022,~~2023, the provision for credit losses on loans was $1.4 million due to the growth and change in composition of the loan portfolio along with slower prepayment speeds and curtailment rates, which are key assumptions used in the estimate. The provision for credit losses on unfunded loan commitments was ~~$1.6~~a net benefit of $0.1 million ~~relatively unchanged from the same period~~due to a reduction in ~~2021, despite loan growth in 2022 as the increased provisioning needed for higher organic loan growth was offset by a $0.4 million specific reserve incurred~~unfunded commitments during the ~~prior year that was not required~~quarter along with lower loss rates related to an improved economic forecast and updated probability of default models used in the ~~current year.~~estimate.

~~This amount of provisioning was respective~~Due to the ~~loan growth achieved during 2022 and reflected what management deemed necessary to maintain~~Company’s adoption of ASU 2016-13 on January 1, 2023, comparability of the ~~allowance for loan and lease losses at an adequate level.~~prior period provision is not considered relevant.

The provision for ~~loan~~credit losses derives from the reserve required from the allowance for ~~loan~~credit losses calculation. The Company continued provisioning for the three and nine ~~months~~ ended September 30, ~~2022~~2023 to maintain an allowance level that management deemed adequate.

For a discussion on the allowance for ~~loan~~credit losses, see “Allowance for ~~loan~~credit losses,” located in the comparison of financial condition section of management’s discussion and analysis contained herein.

For the third quarter of ~~2022,~~2023, non-interest income amounted to ~~$3.9~~$4.3 million, ~~a decrease~~an increase of ~~$0.1~~$0.4 million, or 2%11%, compared to ~~$4.0~~$3.9 million recorded for the same ~~2021~~2022 period. The ~~decrease~~increase was due to $0.2 million ~~less~~more trust fees, $0.1 million additional service charges on ~~loans from less mortgage activity~~deposits and ~~less commercial~~$0.1 million higher gains on loan late fees during the third quarter of 2022 compared to the third quarter of 2021. There was also a $0.1 million decrease in gains/losses on the write-down, sale or disposal of premises and equipment from various equipment that was disposed of during the third quarter of 2022. Partially offsetting these decreases was $0.2 million in additional deposit service charges from higher overdraft charges as the number of items presented increased.sales.

Non-interest income totaled ~~$12.7~~$13.3 million for the nine months ended September 30, ~~2022, a decrease~~2023, an increase of ~~$1.4~~$0.6 million, or ~~10%~~5%, from the ~~$14.1~~$12.7 million recorded for the nine months ended September 30, ~~2021.~~2022. The ~~decrease~~increase was primarily due to ~~$2.3~~$0.4 million higher deposit service charges, $0.3 million higher trust fiduciary fees, $0.3 million in recoveries from acquired charged-off loans, $0.2 million in additional commercial loans fees from interest rate hedges, $0.2 million more debit card interchange fees and $0.1 million recorded for a death claim on BOLI. Partially offsetting these increases were $0.7 million lower gains on loan sales and ~~$0.5~~$0.2 million less loan service charges due to scaled back demand for ~~mortgages. There was also a $0.2 million decrease in gains/losses~~mortgages and less service fees recorded on the write-down, sale or disposal of premises and equipment from premises and equipment that was disposed of during 2022. Partially offsetting these decreases was $0.7 million in additional deposit service charges, $0.2 million higher fees from trust fiduciary activities and a $0.2 million increase in debit card interchange fees.commercial loans.

For the quarter ended September 30, ~~2022,~~2023, total non-interest expenses were ~~$13.0~~$12.8 million, a decrease of ~~$2.2~~$0.2 million, or ~~14%~~2%, compared to ~~$15.2~~$13.0 million for the same ~~2021~~2022 quarter. ~~Non-interest expenses would have remained flat if the Company had not incurred $2.2 million in merger-related expenses during the third quarter of 2021.~~ Salary and employee benefits declined ~~$0.1~~$0.5 million, or 2%8%, to $6.3 million for the third quarter of 2023 from $6.8 million for the third quarter of ~~2022 from $6.9 million for the third quarter of 2021.~~2022. The decrease was primarily due to ~~less salaries expense from fewer full-time equivalent employees. Data processing~~lower employee incentives and ~~communications expenses decreased $0.1 million, or 11%, primarily due to the integration of systems after the merger with Landmark. These decreases were offset by increases in advertising~~insurance expenses. Advertising and marketing expenses ~~of $0.1~~decreased $0.3 million ~~from an increase in donations and $0.1 million in loan collection expenses~~due to a donation made to Fidelity D & D Charitable Foundation during the third quarter of 2022. Partially offsetting these decreases, premises and equipment expenses increased $0.4 million, or 23%, primarily due to higher equipment maintenance and rental expenses and depreciation from investments in new technology and infrastructure. The FDIC assessment expense increased $0.1 million due to the higher assessment rate for 2023. Other increases in non-interest expenses are as follows: $0.1 million in professional services and $0.1 million in data processing and communications expenses.

For the nine months ended September 30, ~~2022,~~2023, non-interest expenses increased ~~$1.0~~$0.6 million, or 3%1%, compared to the nine months ended September 30, ~~2021,~~2022, from ~~$37.5~~$38.5 million to ~~$38.5~~$39.1 million. ~~Non-interest~~Premises and equipment expenses ~~would have~~ increased ~~$3.5~~$1.0 million, or 17%, due primarily to higher expenses for equipment maintenance and rentals along with higher depreciation expense. Professional service expenses grew $0.6 million due to additional consulting, legal and audit expenses. Fraud losses increased $0.3 million due to more ~~if not for $3.1 million in merger-related expenses and a $0.4 million FHLB prepayment penalty incurred by the Company during the nine months ended September 30, 2021~~. S~~alaries~~counterfeit checks. Partially offsetting these increases, salaries and employee benefit expenses ~~grew $2.9~~declined $1.3 million, or ~~17%~~6%. The ~~increase~~decrease was primarily due to less deferred loan origination costs reducing salaries and employee benefits expense from a lower volume of originations from mortgages and PPP loans. Additionally, salaries and employee benefits were higher from new positions added and merit increases and high~~er group insurance from a larger amount of claims.~~ Premises and equipment expenses increased $0.5 million, or 10%, due to higher expenses for lease payments, real estate taxes and other expenses related to premises and equipment acquired from the merger with Landmark.incentive expense. PA shares tax expense was $0.3 million higher from growth in equity. Advertising and marketing expenses rose $0.2 million from additional advertising costs. Partially offsetting these increases, professional services were $0.2also $0.5 million lower ~~for the first nine months of 2022 compared to the same 2021 period due to less legal expenses and other non-recurring professional fees incurred during the first nine months of 2021.~~from declines in shareholders' equity.

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were 1.43% and ~~1.55%~~1.44% for the nine months ended September 30, ~~2022~~2023 and ~~2021.~~2022. The expense ratio ~~decreased~~was relatively unchanged because ~~of decreased~~the increase in non-interest ~~expenses.~~expenses was offset by a similar increase in non-interest income. The efficiency ratio (non-GAAP) ~~decreased~~increased from ~~62.98% at September 30, 2021 to~~ 56.01% at September 30, 2022 to 62.33% at September 30, 2023 due to ~~revenue~~non-interest expenses increasing ~~faster than expenses.~~as net interest income declined. For more information on the calculation of the efficiency ratio, see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.

The provision for income taxes ~~increased $0.9~~decreased $1.3 million for the nine months ended September 30, ~~2022~~2023 compared to the same ~~2021~~2022 period due to ~~higher pre-tax income.~~tax credits from plug-in hybrid electric vehicles and lower income before taxes. The Company's effective tax rate was 11.9% at September 30, 2023 compared to 14.0% at September 30, ~~2022 compared to 14.7% at September 30, 2021.~~2022. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The decrease in the effective tax rate was primarily due to ~~higher tax-exempt interest income.~~lower pre-tax income and the aforementioned tax credits. Due to challenges relating to current market conditions, the Company may not have the ability to make a reliable estimate of all or part of its ordinary income which could cause volatility in the effective tax rate. If the federal corporate tax rate is increased, the Company’s net deferred tax liabilities and deferred tax assets will be re-valued upon adoption of the new tax rate. A federal tax rate increase will ~~decrease~~increase net deferred tax assets with a corresponding decrease to provision for income taxes.

Consolidated assets increased ~~$16.7~~$98.4 million to ~~$2.4~~$2.5 billion as of September 30, ~~2022 relatively unchanged~~2023 from $2.4 billion as of December 31, ~~2021.~~2022. The increase in assets occurred primarily in the loan portfolio and cash and cash equivalents partially offset by a decline in the investment portfolio. The reduction in the investment portfolio was primarily caused by ~~net unrealized losses which were partially offset by~~ the ~~related deferred tax asset which is a component~~sale of ~~other assets on the consolidated balance sheets.~~securities in order to pay down short-term borrowings. Loan portfolio increases were funded by growth in ~~deposits.~~short-term borrowings.

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 nine months ended September 30, ~~2022,~~2023, AOCI ~~was reduced~~declined by ~~$82.5~~$11.7 million due to the change in fair value of the Company's investment securities.

Effective 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, will be accreted ~~against~~into other comprehensive income over the life of the bonds. As of September 30, 2023, the carrying value of held-to-maturity securities was $223.9 million, net of $16.2 million in remaining transferred after-tax unrealized losses.

The Company utilized a fair value hedge to designate and swap a portion of the fixed rate AFS portfolio. The Company has an approved Derivative Policy that requires Board pre-approval on such balance sheet hedging activates as well as ongoing reporting to its ALCO Committee. The Board has approved up to $200 million in notional amount of pay-fixed interest rate swap and the Company has executed on $100 million to date.

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 September 30, 2023, the Company recorded the fair value of the swap of $104 thousand in accrued interest payable and other liabilities on the consolidated balance sheet offset by a $104 thousand increase to the carrying value of designated investment securities.

As of September 30, ~~2022,~~2023, the carrying value of investment securities amounted to ~~$635.8~~$576.7 million, or ~~26%~~23% of total assets, compared to ~~$739.0~~$643.6 million, or ~~31%~~27% of total assets, as of December 31, ~~2021.~~2022. On September 30, ~~2022, 34%~~2023, 32% 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).

The Company’s municipal (obligations of states and political subdivisions) portfolio is comprised of tax-free municipal bonds with a book value of ~~$254.6~~$238.0 million and taxable municipal bonds with a book value of ~~$86.3~~$92.1 million. The overall credit ratings of these municipal bonds was as follows: ~~37%~~38% AAA, ~~62%~~61% 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.

During the first nine months of ~~2022,~~2023, the carrying value of total investments decreased ~~$103.2~~$66.9 million, or ~~14%~~10%. ~~Purchases for~~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. Additionally, principal reductions during the first nine months of ~~2022~~2023 totaled ~~$39.2~~$19.4 million ~~while principal reductions totaled $32.7 million, the~~and there was a decline in the unrealized ~~gain/~~loss ~~was $81.6~~position of $14.8 million in the AFS ~~portfolio and $23.9 million in unrealized losses were transferred to the HTM~~ portfolio. ~~The purchases were funded principally by cash flow generated from the portfolio and excess overnight liquidity.~~ 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.~~profile, to the extent possible.

A comparison of investment securities at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 is as follows:

The investment securities portfolio contained no private label mortgage-backed securities, collateralized mortgage obligations, collateralized debt obligations, or trust preferred ~~securities, and no off-balance sheet derivatives were in use.~~securities. The portfolio had no adjustable-rate instruments as of September 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

Investment securities were comprised of AFS and HTM securities as of September 30, ~~2022~~2023 and ~~AFS securities as of~~ December 31, ~~2021.~~2022. The AFS securities were recorded with a net unrealized loss of ~~$81.4~~$82.7 million and a net unrealized ~~gain~~loss of ~~$0.2~~$67.9 million as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Of the $14.8 million net ~~declineof $81.6 million in the unrealized gain position; $39.0~~decline; $7.7 million was attributable to municipal securities; ~~$40.3~~$6.9 million was attributable to mortgage-backed securities and ~~$2.3~~$0.2 million was attributable to agency securities. During the second quarter of 2022, securities with net unrealized losses totaling $23.9 million were transferred to HTM ~~of which subsequently $1.1~~and for the nine months ended September 30, 2023 $1.7 million was accreted against other comprehensive income. 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.

As of September 30, ~~2022,~~2023, the Company had ~~$426.8~~$307.1 million in public deposits, or ~~19%~~14% of total deposits. As of September 30, 2023, trust deposits were $102.7 million, or 5% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on ~~these~~ public and trust deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. As of September 30, ~~2022,~~2023, the balance of pledged securities required for public and trust deposits was ~~$468.4~~$415.9 million, or ~~74%~~72% of total securities.

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 ~~impairment exists and whether the impairment is temporary or other-than-temporary.~~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 ~~is other-than-temporarily impaired.~~has credit losses. If a decline in value is deemed to be ~~other-than-temporary,~~credit losses, 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 ~~of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized.~~basis. During the quarter ended September 30, ~~2022,~~2023, the Company did not incur ~~other-than-temporary impairment charges~~any credit losses on debit securities from its investment securities portfolio.

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 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. This loss will be reflected in and adversely affect the Company’s fourth quarter 2023 operating results. The $29.1 million in proceeds received were used to retire short-term borrowings with a cost of approximately 5.50%. Management made the decision to sell these particular securities because they had a weighted average yield of 1.28% with a 13.5 year weighted average maturity. 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 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 incrementally improve 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. The effect of the security sales is expected to reduce regulatory ratios by 25-30 basis points for 2023.

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 September 30, ~~2022~~2023 and December 31, ~~2021.~~2022. The balance in FHLB stock was ~~$3.6~~$3.7 million and ~~$3.1~~$5.2 million as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The dividends received from the FHLB totaled ~~$109~~$229 thousand and ~~$104~~$109 thousand for the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

Upon origination, most residential mortgages and certain Small Business Administration (SBA) guaranteed loans may be classified as held-for-sale (HFS). In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market. In declining interest rate environments, the Company would be exposed to prepayment risk as rates on fixed-rate loans decrease, and customers look to refinance loans. Consideration is given to the Company’s current liquidity position and projected future liquidity needs. To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS. Occasionally, residential mortgage and/or business loans may be transferred from the loan portfolio to HFS. The carrying value of loans HFS is based on the lower of cost or estimated fair value. If the fair values of these loans decline below their original cost, the difference is written down and charged to current earnings. Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs.

As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, loans HFS consisted of residential mortgages with carrying amounts of ~~$1.4~~$2.3 million and ~~$31.7~~$1.6 million, respectively, which approximated their fair values. During the nine months ended September 30, ~~2022,~~2023, residential mortgage loans with principal balances of ~~$68.0~~$37.9 million were sold into the secondary market and the Company recognized net gains of ~~$1.4~~$0.7 million, compared to ~~$140.7~~$68.0 million and ~~$3.6~~$1.4 million, respectively, during the nine months ended September 30, ~~2021.~~

~~Management completed $18.1 million in transfers of mortgages HFS to the held-for-investment portfolio during the first nine months of~~ 2022.

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster personal relationships. At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the servicing portfolio balance of sold residential mortgage loans was ~~$465.5~~$473.0 million and ~~$430.9~~$465.7 million, respectively, with mortgage servicing rights of ~~$1.7~~$1.5 million and ~~$1.7~~$1.6 million for the same periods, respectively.

As of September 30, ~~2022,~~2023, the Company had gross loans and leases ~~including originated and acquired loans and leases,~~ totaling ~~$1.5~~over $1.6 billion, an increase of $81.2 million, or 5%, compared to ~~$1.4~~almost $1.6 billion at December 31, ~~2021, an increase of $90.2 million, or 6%.~~2022.

~~Growth~~During the nine months ended September 30, 2023, the growth in the portfolio was primarily attributed to a $31.8 million increase in the ~~$61.1~~commercial portfolio and a $48.0 million increase in the residential portfolio, ~~including $13 million~~the result of a higher percentage of adjustable rate mortgages recorded as held-for-investment during this period.

As management continues to identify ways to optimize the Company’s balance sheet, the focus is to lend in ~~mortgage loans originated during 2021 as available-for-sale but reclassified~~areas that provide better risk-adjusted returns and improved opportunities to the held-for-investment portfolio during the first quarter 2022. The Company elected to reclassify the mortgage loans, which meet FNMA underwriting guidelines and are considered high quality, to realize the better yields than those alternately available during the first quarter of 2022.deepen relationships with our customers. This ~~growth was supplemented by~~could result in a ~~$28.8 million increase~~change in the ~~consumer~~composition of the loan portfolio ~~during the first nine months of 2022.~~in future periods.

The composition of the loan portfolio at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 is summarized as follows:

As of September 30, ~~2022,~~2023, the commercial ~~loan~~ portfolio increased by ~~$0.2~~$31.8 million, or 4%, to ~~$819.3~~$872.9 million compared to the December 31, ~~2021~~2022 balance of ~~$819.1~~$841.1 million due to ~~the $14.6~~growth of $13.1 million ~~increase~~ in ~~the~~total commercial and industrial loans and $18.7 million in growth in commercial real estate ~~portfolio partially offset~~loans.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the ~~$14.4 million decrease in~~Company and are specific to the ~~commercial and industrial portfolio, which was attributed to a $38.1 million reduction in PPP loans (net~~type of ~~deferred fees). Excluding the reduction in PPP loans during~~collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, independent collateral appraisals, etc.

For the nine months ended September 30, 2023, commercial and industrial loans increased $4.1 million, or 3%, from $141.1 million at December 31, 2022 to $145.2 million at September 30, 2023, which was the ~~commercial portfolio grew $38.3 million~~result of originations and line advances outpacing scheduled payments and line pay-downs/offs.

Municipal loans are secured by the full faith and credit of respective local government units located in the Commonwealth of Pennsylvania authorized in accordance with the ~~growth stemming from the both the C&I and CRE portfolios.~~

~~Excluding PPP~~Local Government Unit Debt Act. These loans ~~C&I loans grew $23.7 million primarily due to four loans originated during the first nine months~~have a long history of 2022 to four unrelated borrowers consisting of one commercial fixed term note and three tax-free municipal loans. Other C&I loan originations in various industries were offset by scheduled and unscheduled paydowns in the portfolio.

~~CRE loans increased $14.6 million~~performance within contractual terms with growth of $7.3 million in owner occupied CRE primarily due to one fixed commercial loan, $4.8 million in commercial construction and $2.5 million in non-owner occupied CRE loan balances. During the first nine months of 2022, the Company experienced growth in fixed commercial real estate loans and reductions in floating commercial real estate loans due to the current interest rate environment.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP).

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans, and during the second and third quarter of 2020, the Company originated 1,551 loans totaling $159 million under the Paycheck Protection Program.

Under the PPP, the entire principal amount of the borrower’s loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount, so long as the employer maintains or quickly rehires employees and maintains salary levels and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

As part of the Economic Relief Act, which became law on December 27, 2020, an additional $284 billion of federal resources was allocated to a reauthorized and revised PPP. On January 19, 2021, the Company began processing and originating PPP loans for this second round, which subsequently ended on May 31, 2021, and during this round, the Company originated 1,022 loans totaling $77 million.no defaults noted.

Beginning in the fourth quarter of 2020 and continuing during 2022, the Company submitted PPP forgiveness applications to the SBA, and through September 30, 2022, the Company received forgiveness or paydowns of $234.7 million, or 99%, of the original PPP loan balances of $236.3 million with $31.6 million occurring duringFor the nine months ended September 30, ~~2022.~~2023, municipal loans increased $9.1 million, or 12%, from $73.0 million at December 31, 2022 to $82.1 million at September 30, 2023, which was attributed to $6.6 million in originations during the year along with advances on loan commitments.

AsCommercial real estate loans generally present a ~~PPP lender,~~higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral whose values tend to move inversely with interest rates. These loans are generally secured with mortgages, or commercial real estate mortgages (CREM) against the subject property. In underwriting commercial real estate construction loans, the Company ~~received fee~~performs a robust analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers consistent with Uniform Standards of Professional Appraisal Practice (USPAP) standards and compliant with Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

Non-owner occupied CRE loans are commercial loans not occupied by their owners and thus rely on income from third parties, including multi-family residential tenants and commercial tenants representing various industries. Underwriting on non-owner occupied CRE loans evaluates cash flow derived from the respective tenants and the industries they occupy. As such, management considers non-owner occupied CRE loans as having a higher risk profile than owner occupied CRE loans. In keeping with its risk appetite and relationship management strategy, the Company avoids speculative commercial office space and prefers loans to projects that have sufficient equity, or loan to value, and have either S&P rated tenants with long term leases, loans structured with personal guarantees of ~~approximately $9.9~~owners whose personal financial strength provides meaningful cash flow support to supplement rental income volatility, residential projects with stable rents in desirable locations, or projects with sufficient diversity and industries proven to provide lower risk over the long term.

For the nine months ended September 30, 2023, non-owner occupied commercial real estate decreased $7.0 million, ~~with $9.8~~or 2%, from $318.3 million ~~recognized~~at December 31, 2022 to ~~date, including $0.7~~$311.3 million ~~recognized during~~at September 30, 2023, which was attributed to scheduled monthly payments.

Owner occupied commercial real estate loans are occupied by their owners which rely on income generated from the ~~first quarter of~~respective owners’ businesses. Therefore, underwriting on owner occupied CRE loans emphasizes the owner’s cash flow and financial conditions while the real estate typically represents the owners' primary business location. As such, management considers owner occupied CRE loans as having a lower risk profile than non-owner occupied CRE loans.

For the nine months ended September 30, 2023, owner occupied commercial real estate increased $6.9 million, or 2%, from $284.7 million at December 31, 2022 ~~$0.5~~to $291.6 million at September 30, 2023, which was attributed to a $10 million CRE loan originated during the second ~~quarter~~quarter.

Construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans. Management prefers lending to well-established developers with a proven track record and strong business and guaranteed with owners’ personal financial conditions.

For the nine months ended September 30, 2023, commercial construction increased $18.8 million, or 78%, from $24.0 million at December 31, 2022 to $42.8 million at September 30, 2023, which was primarily attributable to $12.4 million in fundings on four large construction loans originated prior to December 31, 2022 and $26 thousand recognized during the third quarter of 2022. Unearned fees attributed to PPP loans, net of fees paid to referral sources as prescribed by the SBA under the PPP, were $53 thousand as of September 30, 2022.

~~The PPP~~$7.6 million commercial construction loans originated ~~by size were as follows as of September 30, 2022:~~

~~The table above does not include the $20.3 million in PPP loans acquired because of the merger with Landmark~~ during ~~the third quarter of 2021. As of September 30, 2022, the balance of outstanding acquired PPP loans was $0.3 million.~~2023.

The consumer loan portfolio consisted of home equity installment, home equity line of credit, ~~automobile,~~non-recourse auto loans, recourse auto loans, direct finance leases and other consumer loans.

As of September 30, ~~2022,~~2023, the consumer loan portfolio increased by ~~$28.8~~$1.5 million, or ~~11%~~1%, to ~~$283.5~~$285.9 million compared to the December 31, ~~2021~~2022 balance of ~~$254.7~~$284.4 million, primarily due to growth in the ~~home equity installment,~~non-recourse auto ~~and direct finance lease portfolios. Auto loans grew $14.8 million~~portfolio from continued demand for higher priced automobiles and new dealer relationships. Direct finance leases increased $6.3 million primarily due to higher residual values and more automobile leases added than expired. Home equity installment loans also grew $9.2 million from the spring and fall home equity campaigns.

As of September 30, ~~2022,~~2023, the residential loan portfolio increased by ~~$61.1~~$47.9 million, or ~~17%~~11%, to ~~$421.9~~$488.3 million compared to the December 31, ~~2021~~2022 balance of ~~$360.8~~$440.4 million. The increase was due in part to a strategic reclassification of $13 million in available-for-sale mortgages booked during 2021 to held-for-investment loans during the first quarter of 2022. The remainder of the increase was due to a shift from mortgage loans sold to loans held-for-investment due to increased jumbo loans, ~~and~~ the pricing of loans in the secondary market and $28.9 million more ~~adjustable rate~~adjustable-rate mortgages which are not being sold in the secondary market.

The residential loan portfolio consisted primarily of held-for-investment residential loans for primary ~~residences.~~residences, including approximately $372 million in fixed-rate and $73 million in adjustable-rate mortgages as of September 30, 2023. Management expects the sudden historic rise in interest rates to impact demand for residential mortgages for the remainder of ~~2022.~~2023.

The Company considers its portfolio segmentation, including the real estate secured portfolio, to be normal and reasonably diversified. The banking industry is affected by general economic conditions including, among other things, the effects of real estate values. The Company ensures that its mortgage lending adheres to standards of secondary market compliance. Furthermore, the Company’s credit function strives to mitigate the negative impact of economic conditions by maintaining strict underwriting principles for all loan types.

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for ~~loan~~credit losses ~~(allowance)~~(ACL) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. ~~Management’s judgment is based on~~When estimating the ~~evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows~~net amount expected to be ~~received on impaired loans.~~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. ~~The provision for loan losses represents the amount necessary to maintain an appropriate allowance.~~ Loan 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.

Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the ~~allowance for loan losses~~ACL is ~~as follows:~~based on seven primary components:

A key ~~element of the methodology~~control related to ~~determine~~ the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial loans. Commercial 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 may be changed at any time management determines an upgrade or downgrade may be warranted. The credit risk grades for the commercial loan portfolio are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what management believes to be best practices and within common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.

Acquired loans are initially recorded at their acquisition date fair values with no carryover of the existing related allowance for loan losses. Fair values are based on a discounted cash flow methodology that involves assumptions and judgements as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Upon acquisition, in accordance with GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30. These loans are deemed purchased credit impaired loans and the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount.

Acquired ASC 310-20 loans, which are loans that did not meet the criteria of ASC 310-30, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. These loans are initially recorded at fair value and include credit and interest rate marks associated with purchase accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans after acquisition.

~~Each quarter, management performs an assessment of the allowance for loan losses. The Company’s~~ Special Assets ~~Committee~~Committee. This committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past ~~due.~~due in payment. The assessment process also includes the review of all loans on ~~non-accrual status~~a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

The following tables set forth the activity in the allowance for ~~loan~~credit losses and certain key ratios for the period indicated:

	As of and for the			As of and for the			As of and for the			As of and for the			As of and for the			As of and for the
	nine months ended			twelve months ended			nine months ended			nine months ended			twelve months ended			nine months ended
(dollars in thousands)	September 30, 2022			December 31, 2021			September 30, 2021			September 30, 2023			December 31, 2022			September 30, 2022

Balance at beginning of period	$	15,624		$	14,202		$	14,202		$	17,149		$	15,624		$	15,624

Charge-offs:
Commercial and industrial		(323	)		(130	)		(120	)		(320	)		(371	)		(323	)
Commercial real estate		(1	)		(491	)		(209	)		(92	)		(67	)		(1	)
Consumer		(226	)		(206	)		(110	)		(349	)		(377	)		(226	)
Residential		-			(162	)		(43	)		-			-			-
Total		(550	)		(989	)		(482	)		(761	)		(815	)		(550	)

Recoveries:
Commercial and industrial		8			23			20			23			11			8
Commercial real estate		61			250			241			44			153			61
Consumer		59			138			70			148			74			59
Residential		2			-			-			30			2			2
Total		130			411			331			245			240			130
Net charge-offs		(420	)		(578	)		(151	)		(516	)		(575	)		(420	)
Provision for loan losses		1,575			2,000			1,550
Impact of adopting ASC 326											618			-			-
Initial allowance on loans purchased with credit deterioration											126			-			-
Provision for credit losses on loans											1,380			2,100			1,575
Balance at end of period	$	16,779		$	15,624		$	15,601		$	18,757		$	17,149		$	16,779

Allowance for loan losses to total loans		1.10	%		1.09	%		1.12	%
Allowance for credit losses to total loans											1.14	%		1.10	%		1.13	%
Net charge-offs to average total loans outstanding		0.04	%		0.04	%		0.02	%		0.04	%		0.04	%		0.04	%
Average total loans	$	1,487,247		$	1,299,960		$	1,248,495		$	1,625,305		$	1,500,796		$	1,487,247
Loans 30 - 89 days past due and accruing	$	852		$	1,982		$	1,086		$	2,044		$	1,838		$	852
Loans 90 days or more past due and accruing	$	50		$	64		$	112		$	275		$	33		$	50
Non-accrual loans	$	3,020		$	2,949		$	2,747		$	3,005		$	2,535		$	3,020
Allowance for loan losses to non-accrual loans		5.56	x		5.30	x		5.68	x
Allowance for loan losses to non-performing loans		5.47	x		5.19	x		5.46	x
Allowance for credit losses to non-accrual loans											6.24	x		6.76	x		5.56	x
Allowance for credit losses to non-performing loans											5.72	x		6.68	x		5.47	x

For the nine months ended September 30, 2023, the allowance increased $1.6 million, or 9%, to $18.7 million from $17.1 million at December 31, 2022. The increase in the allowance was based on a $0.7 million adjustment related to the adoption of CECL on January 1, 2023 including a $0.1 million initial allowance on Purchase Credit Deteriorated (PCD) loans related to the reclassification of Purchase Credit Impaired (PCI) loans to PCD along with provisioning of $1.4 million partially offset by net charge-offs of $0.5 million.

The allowance increased $1.2 million, or 7%, to $16.8 million at September 30, 2022 from $15.6 million at December 31, 2021 due to provisioning of $1.6 million partially offset by $0.4 million in net charge-offs. The allowance for ~~loan and lease~~credit losses ~~increased~~ as a percentage of total loans ~~at 1.10%~~increased to 1.14% as of September 30, ~~2022~~2023 compared to ~~1.09% as of~~1.10% at December 31, ~~2021 because~~2022 as the ~~growth~~increase in the allowance ~~(7%~~(9%) outpaced the growth in the ~~total loans (6%) through September 30, 2022.~~

Loans acquired from the Merchants and Landmark mergers (performing and non-performing) were initially recorded at their acquisition-date fair values. Since there is no initial credit valuation allowance recorded under this method, the Company established a post-acquisition allowance for loan ~~losses to record losses which may subsequently arise on the acquired loans.~~

~~PPP loans made to eligible borrowers have a 100% SBA guarantee. Given this guarantee, no allowance for loan and lease losses was recorded for these loans.~~portfolio (5%).

Management believes that the current balance in the allowance for ~~loan~~credit losses is sufficient to meet the identified potential credit quality issues that may arise and other issues unidentified but inherent to the portfolio. Potential problem loans are those where there is known information that leads management to believe repayment of principal and/or interest is in jeopardy and the loans are currently neither on non-accrual status nor past due 90 days or more.

~~During~~Although key loss driver assumptions used in the ~~first quarter~~ACL estimate remained largely stable from the day one estimate to the estimate as of ~~2022, management~~September 30, 2023, the ACL estimate increased based on growth in the ~~qualitative~~loan and lease portfolio and changes in the composition of the portfolio along with slower prepayment and curtailment rates. Key loss driver assumptions included the median Federal Open Market Committee (FOMC) National Gross Domestic Product (GDP) and unemployment rate forecasts, the Federal Housing Finance Agency (FHFA) House Price Index (HPI), prepayment and curtailment rates, and estimated remaining loan lives.

Qualitative factors ~~associated with its commercial, consumer, and residential portfolios~~for the ACL estimate as of September 30, 2023 were largely unchanged compared to the day one estimate as an increase related to higher delinquency in the ~~rise in rates that occurred~~HELOC portfolio during ~~the quarter, and the adverse impact that these increased rates are anticipated to have on estimated credit losses.~~

~~During~~ the second quarter of 2022, management increased the qualitative factors associated with its commercial, consumer, and residential portfolios related to the rise in rates that occurred during the quarter, and the adverse impact that these increased rates are anticipated to have on estimated credit losses. These increases were partiallywas offset by a reduction related to improvement in the ~~qualitative factors for the owner occupied CRE~~experience, depth, and ~~residential RE portfolios related to the historically low delinquency observed in these portfolios.~~

~~During the third quarter~~ability of ~~2022, management decreases the qualitative factors associated with its commercial, consumer, and residential portfolios related to changes~~lending management. average risk rating in the ~~Company’s loan policy that were expected to reduce credit losses.~~

The allocation of net charge-offs among major categories of loans are as follows for the periods indicated:

For the nine months ended September 30, ~~2022,~~2023, net charge-offs against the allowance totaled ~~$420~~$516 thousand compared with net charge-offs of ~~$150~~$420 thousand for the nine months ended September 30, ~~2021,~~2022, representing a ~~$270~~$96 thousand, or 23%, increase ~~which was attributed~~due to ~~a $193 thousand charge off~~an increase in ~~the C&I portfolio to a single borrower~~commercial real estate and ~~increased losses in the~~ consumer ~~portfolio.~~net charge-offs. Net ~~charge offs increased~~charge-offs were unchanged as a percentage of the total loan portfolio at 0.04% for the nine months ended September 30, ~~2022~~2023 compared ~~with~~to 0.04% for the nine months ended September 30, ~~2021.~~2022.

For a discussion on the provision for ~~loan~~credit losses, see the “Provision for ~~loan~~credit losses,” located in the results of operations section of management’s discussion and analysis contained herein.

The allowance for ~~loan~~credit losses can generally absorb losses throughout the loan portfolio. However, in some instances an allocation is made for specific loans or groups of loans. Allocation of the allowance for ~~loan~~credit losses for different categories of loans is based on the methodology used by the Company, as previously explained. The changes in the allocations from period-to-period are based upon quarter-end reviews of the loan portfolio.

Allocation of the allowance among major categories of loans for the periods indicated, as well as the percentage of loans in each category to total loans, is summarized in the following table. This table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. When present, the portion of the allowance designated as unallocated is within the Company’s guidelines:

As of September 30, ~~2022,~~2023, the commercial loan portfolio, consisting of CRE and C&I loans, comprised ~~59%~~57% of the total allowance for ~~loan~~credit losses compared with ~~62%~~59% on December 31, ~~2021.~~2022. The commercial loan allowance allocation ~~declined due~~decreased based on the adoption of CECL and changes in how reserves are estimated compared to the payoff of a commercial real estate loan to a single borrower with a large specific impairment during the first quarter of 2022 and the relative decrease in this loan category, which decreased to 54% as of September 30, 2022 from 57% at December 31, 2021.previous incurred loss methodology.

As of September 30, ~~2022,~~2023, the consumer loan portfolio comprised ~~17%~~11% of the total allowance for ~~loan~~credit losses compared with ~~15%~~17% on December 31, ~~2021.~~2022. The ~~two percentage point increase in the~~ consumer loan allowance allocation ~~was~~decreased based on the ~~result~~adoption of ~~relative growth~~CECL and changes in how reserves are estimated compared to the ~~consumer portfolio, which increased to 19% as of September 30, 2022 from 18% at December 31, 2021.~~previous incurred loss methodology.

As of September 30, ~~2022,~~2023, the residential loan portfolio comprised ~~24%~~32% of the total allowance for ~~loan~~credit losses compared with ~~22%~~24% on December 31, ~~2021.~~2022. The ~~two percentage point increase was~~residential loan allowance allocation increased based on the ~~result~~adoption of CECL and changes in how reserves are estimated compared to the ~~relative increase in this loan category, which increased to 28% as of September 30, 2022 from 25% at December 31, 2021.~~previous incurred loss methodology.

As of September 30, ~~2022,~~2023, the unallocated reserve, representing the portion of the allowance not specifically identified with a loan or groups of loans, was less than 1% of the total allowance for ~~loan~~credit losses, unchanged from December 31, ~~2021.~~2022.

The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, ~~troubled debt restructurings (TDRs),~~ other real estate owned (ORE) and repossessed assets. Based on the Company’s adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, the recognition and measurement guidance related to troubled debt restructurings (TDR) has been eliminated. As such, TDRs were removed from non-performing assets at September 30, 2023, December 31, 2022, and September 30, 2022 in the following table to adhere to this standard and provide better comparability.

The following table sets forth non-performing assets data as of the period indicated:

* In the table above, the amount includes non-accrual TDRs of $0.4 million as of September 30, 2022, $0.6 million as of December 31, 2021 and $0.7 million as of September 30, 2021.

Management ~~routinely reviews~~continually monitors the loan portfolio to identify loans that are either delinquent or are otherwise deemed by management unable to repay in accordance with contractual terms. Generally, loans of all types are placed on non-accrual status if a loan of any type is past due 90 or more days or if collection of principal and interest is in doubt. Further, unsecured consumer loans are charged-off when the principal and/or interest is 90 days or more past due. Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income.

Non-performing assets represented ~~0.19%~~0.14% of total assets at September 30, ~~2022~~2023 compared with ~~0.27%~~0.12% at December 31, ~~2021.~~2022. The ~~improvement~~increase resulted from a ~~$1.9~~$0.6 million, or ~~30%~~23%, ~~decrease~~increase in non-performing ~~assets.~~assets which outpaced the growth in total assets (4%) during this period. Non-performing assets ~~decreased~~increased due to a ~~$1.6~~$0.2 million ~~reduction~~increase in loans past due 90 days or more and accruing ~~troubled debt restructurings and~~along with the recognition of $1.5 million in Purchase Credit Deteriorated (PCD) loans, now classified as non-accrual loans, consistent with the changes in financial reporting under ASC Topic 326 (CECL). This was partially offset by a ~~$0.3~~$1.0 million ~~reduction~~decrease in non-PCD non-accrual loans as well as a $0.1 million decrease in other real estate ~~owned and repossessed assets.~~

From December 31, 2021 to September 30, 2022, non-accrual loans increased $0.1 million, or 2%, from $2.9 million to $3.0 million. The $0.1 million increase in non-accrual loans was primarily the result of $1.7 million in additions and $0.1 million in advances partially offset by $0.9 million in payments, $0.4 million in moves to ORE, $0.3 million in charge offs, and $0.1 million in moves to accrual.owned.

At September 30, 2023, there were a total of 31 non-accrual loans to 26 unrelated borrowers with balances that ranged from less than $1 thousand to $1.3 million, or $3.0 million in the aggregate. At December 31, 2022, there were a total of 39 non-accrual loans to 29 unrelated borrowers with balances that ranged from less than $1 thousand to $0.6 ~~million. At December 31, 2021, there were a total of 31 loans to 28 unrelated borrowers with balances that ranged from less than $1 thousand to $0.7 million.~~million, or $2.5 million in the aggregate.

~~There were two full~~Loans past due 90 days or more accruing totaled $275 thousand, which was comprised of one direct finance lease for $15 thousand, one indirect recourse auto ~~loans totaling $50~~loan for $12 thousand, ~~that were over 90 days past due~~and one residential real estate loan for $248 thousand as of September 30, ~~2022~~2023 compared to ~~two~~one direct finance ~~leases~~lease and one non-recourse auto loan totaling ~~$64~~$33 thousand ~~that were over 90 days past due~~ as of December 31, ~~2021. The delinquent auto~~2022. All loans ~~are fully guaranteed under a formal recourse agreement with~~were well secured and in the ~~originating auto dealer and we are in~~ process of ~~orderly~~ collection.

The Company seeks payments from all past due customers through an aggressive customer communication process. Unless well-secured and in the process of collection, past due loans will be placed on non-accrual at the 90-day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts.

The composition of non-performing loans as of September 30, ~~2022~~2023 is as follows:

Payments received from non-accrual loans are recognized on a cost recovery method. Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. If the non-accrual loans that were outstanding as of September 30, ~~2022~~2023 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of ~~$126~~$228 thousand.

~~The following tables set forth the activity in TDRs for the periods indicated:~~

The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a TDR. TDRs arise when a borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards to maximize the Company’s recovery.

From December 31, 2021 to September 30, 2022, TDRs declined $1.8 million, or 52%, primarily due to the payoff of two commercial real estate TDRs to a single borrower totaling $1.6 million and the payoff of two C&I TDRs to a single borrower totaling $0.1 million. At December 31, 2021, there were a total of 11 TDRs by 8 unrelated borrowers with balances that ranged from $50 thousand to $1.3 million, and at September 30, 2022, there were a total of 7 TDRs by 6 unrelated borrowers with balances that ranged from $89 thousand to $0.5 million.

Loans modified in a TDR may or may not be placed on non-accrual status. At September 30, 2022, there was one TDR totaling $0.4 million that was on non-accrual status compared to three TDRs totaling $0.6 million at December 31, 2021.

From December 31, ~~2021~~2022 to September 30, ~~2022,~~2023, foreclosed assets held-for-sale (ORE) declined from ~~$434~~$168 thousand to ~~$103~~$87 thousand, ~~a $331~~an $81 thousand decrease, which was ~~primarily~~ attributed to ~~two~~one ORE ~~properties totaling $283 thousand that were sold~~property being transferred to non-accrual due to administrative error during the first quarter. One property totaling ~~$437~~$86 thousand was ~~also~~ added to ORE ~~and sold~~ during ~~2022.~~2023.

The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale:

As of September 30, ~~2022,~~2023, ORE consisted of two properties securing loans to two unrelated borrowers totaling ~~$103~~$87 thousand. One property ($~~102~~86 thousand) was added in ~~2021~~2023 and one property ($1 thousand) was added in 2017. ~~Of the two~~Both properties ~~one property is under agreement of sale and one property is~~are listed for sale.

As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had no other repossessed assets held-for-sale.

The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies. BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as components of non-interest income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company. This profitability is used to offset a portion of current and future employee benefit costs. ~~As a result of the Landmark acquisition, the Company acquired $7.2 million in BOLI during the third quarter of 2021.~~ The BOLI cash surrender value build-up can be liquidated if necessary, with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that supports employee benefit cost increases which enhances the Company’s capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value. The Company ~~was notified of~~received a ~~pending~~ death benefit claim on two owned policies and ~~upon completion of proper administration, expects to receive over $0.9~~received $0.8 million in return of cash surrender value and $0.1 million in other income during the ~~upcoming months.~~first quarter of 2023.

Net of depreciation, premises and equipment increased ~~$1.7~~$1.3 million during the first nine months of ~~2022.~~2023. The Company purchased ~~$0.6~~$1.1 million in fixed assets and added ~~$4.0~~$3.4 million in construction in process during the first nine months of ~~2022. The increase in construction in process was primarily due to the purchase of the Scranton Electric Building for a new headquarters in Scranton, PA.~~2023. These increases were partially offset by ~~$1.7~~$1.9 million in depreciation ~~expense~~expense. The Company closed the Hazle Township branch on March 31, 2023 and ~~$1.2~~listed it for sale during the second quarter of 2023 resulting in a transfer of $0.7 million ~~in transfers~~from premises and equipment to other assets held-for-sale. The Company ~~is planning to open~~opened a new branch ~~and administrative office for Luzerne County~~ in Wilkes-Barre in ~~December.~~2023. The Company has recently begun remodeling the Main Branch located in Dunmore, PA and remaining estimated costs for the project are ~~currently $3.9 million.~~approximately $2.0 million and construction is expected to be completed in early 2024. The Company began corporate ~~headquarters planning~~headquarters construction which may continue to increase construction in process and is evaluating its branch network looking for consolidation that makes sense for more efficient operations. The Company recently entered into a branch relocation lease and is currently negotiating a land lease for a de novo branch in the Lehigh Valley. Construction on these leased properties over the upcoming year is expected to increase bank premises and equipment by approximately $2.6 million.

On December 23, 2020, the Commonwealth of Pennsylvania authorized the release of $2.0 million in Redevelopment Assistance Capital Program (RACP) funding for the Company’s headquarters project in Lackawanna County. On December 2, 2021, the Company announced it would be receiving an additional $2.0 million in RACP funding in support of the project. The $4.0 million in total RACP grant funds will be allocated to the renovation and rehabilitation of the historic building located in downtown Scranton which will be used for the new corporate headquarters. The Company currently ~~expects~~estimates net remaining costs for the corporate headquarters t~~o be $15.8~~could range from $15 million overto $20 million. This range estimate may expand because it is subject to supply chain issues, commodities pricing and results of final planning over approximately two years ~~beginning during the fourth quarter of 2022.~~through early 2025. In addition, the Company ~~intends to pursue~~currently is in the process of pursuing a federal historic preservation tax credit which ~~if it qualifies,~~ would provide a 20% tax credit on qualified improvements on the historic property.

During the first nine months of ~~2022,~~2023, the ~~$22.1~~$4.1 million increase in other assets was due mostly to a ~~$21.0~~$3.4 million increase in deferred tax assets primarily from higher net unrealized losses in the investment portfolio and ~~$0.7~~a $0.6 million increase in ~~prepaid dealer reserve.~~other assets held-for-sale.

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.

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

Total deposits ~~increased $83.4~~decreased $15.2 million, or 4%1%, to ~~$2.3~~$2.2 billion at September 30, ~~2022~~2023 from $2.2 billion at December 31, ~~2021. During 2022, the Company accepted various wealth managed trust~~2022. Non-interest bearing checking accounts ~~into a bank pledged money market account which increased total deposits by $42.4 million at September 30, 2022. Money market accounts grew $63.0~~decreased $52.9 million primarily due to ~~the $42.4 million from trust accounts along with a $24.0 million transfer from an interest-bearing checking account. Non-interest bearing~~declines in personal and business checking accounts from shifts to interest-bearing products and increased ~~$26.6 million primarily due to increases in business checking accounts. Savings and clubs also increased $10.5 million due to personal savings growth. Interest-bearing~~spending. Interest-bearing checking accounts ~~increased $1.1~~decreased $31.4 million during the first nine months of ~~2022 as~~2023 primarily from outflow of public funds from municipalities withdrawing American Rescue Plan Act funds and seasonal ~~activity~~decline in public accounts ~~offset the aforementioned $24.0~~along with personal and business account decreases. Savings and club accounts also decreased $27.4 million ~~transfer~~primarily due to personal savings declines and shifts to CDs and money market accounts. Partially offsetting these decreases, money market accounts increased $11.0 million primarily due to a ~~money market account. During the fourth quarter of 2022, one public customer started transitioning interest-bearing deposits totaling $38.4~~$28.6 million ~~at September 30, 2022 out of the bank~~increase in trust sweep accounts and ~~the Company expects most of these deposits to be gone at the end of the year.~~ a new large business relationship. The Company focuses on obtaining a full-banking relationship with existing 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 ~~creative~~targeted programs for its customers to maintain and grow core deposits. For the ~~remainder~~first nine months of ~~2022,~~2023, the Company ~~expects~~experienced deposit ~~balances to wane~~balance declines as clients ~~transfer~~transferred their deposits to investments to earn higher interest and pay down ~~debts.~~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 due to the high interest rate environment to continue throughout the last quarter of 2023. Seasonal public deposit fluctuations are expected to remain volatile and at times may partially offset future deposit growth.

Partially offsetting these non-maturing deposit ~~increases,~~decreases, CDs ~~decreased $17.8~~increased $85.6 million, or 73%, during the first nine months of ~~2022.~~2023. CD balances ~~continue~~started to ~~decline~~increase as ~~rates lagged capital market~~promotional rate ~~increases and CDs with promotional rates reached maturity. The majority of~~offerings expanded. Some maturing CDs were closed as customers could earn higher yields by investing the money ~~elsewhere.~~into other products. The Company will continue to pursue strategies to grow and retain retail and business customers with an emphasis on deepening and broadening existing and creating new relationships.

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 ~~did not have any~~had $1.4 million in CDARs as of September 30, ~~2022~~2023 and no CDARs as of December 31, ~~2021.~~2022. As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, ICS reciprocal deposits represented ~~$26.7~~$78.7 million and ~~$27.6~~$26.3 million, or 4% and 1% ~~each,~~, of total deposits which are included in interest-bearing checking accounts in the table above. The ~~$0.9~~$52.4 million ~~decrease~~increase in ICS deposits is primarily due to one large business ~~deposit transfers from~~relationship that transferred deposits to ICS accounts tofrom other interest-bearing checking accounts.

As of September 30, ~~2022,~~2023, total uninsured deposits were estimated to be ~~$1.1 billion.~~$896.4 million, or 42% 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 September 30, 2023, the ratio of uninsured and non-collateralized deposits to total deposits was approximately 22%. Collateralized deposits totaled $415.9 million, or 19%, of total deposits as of September 30, 2023.

The maturity distribution of certificates of deposit that meet or exceed the FDIC limit, by account, at September 30, ~~2022~~2023 is as follows:

Approximately ~~27%~~11% of the CDs, with a weighted-average interest rate of ~~0.34%~~1.39%, are scheduled to mature in ~~2022~~the last quarter of 2023 and an additional ~~52%~~71%, with a weighted-average interest rate of ~~0.36%~~3.51%, are scheduled to mature in ~~2023.~~2024. Renewing CDs are currently expected to re-price to ~~lower~~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. Growth in CD accounts is challenged by the current and expected rate environment and clients’ preference for short-term rates. 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.

Borrowings are used as a complement to deposit generation as an alternative funding source whereby the Company will borrow under advances from the FHLB of Pittsburgh and other correspondent banks for asset growth and liquidity needs.

Short-term borrowings may include overnight balances with ~~FHLB~~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. ~~If deposit balances decline, the~~The Company ~~may need to us~~eused $124.0 million in short-term borrowings to fund loan growth and an increase in interest-bearing cash balancesfor the ~~fourth quarter~~first nine months of ~~2022.~~2023. The short-term borrowings included $32.0 million borrowed through the Federal Reserve Bank Term Funding Program (BTFP) up to one year costing 4.38% by pledging $32.0 million in securities. As of September 30, ~~2022,~~2023, the Company had the ability to borrow ~~$113.6~~an additional $36.5 million from the Federal Reserve borrower-in-custody program, $145.9 million in overnight borrowings with the FHLB open-repo line of credit and ~~$31.0~~$20.0 million from lines of credit with correspondent banks.

In November 2023, the Company sold securities and used $29.1 million in proceeds received to pay down short-term borrowings that replenished available borrowing capacity at that time.

As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had 98 secured borrowing agreements with third parties with a fair 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 ~~the remainder of 2022~~2023 from scheduled amortization and, when possible, early pay-offs.

The Company had no FHLB advances as of September 30, ~~2022~~2023 and December 31, 2021. During the first quarter of 2021, the Company paid off $5 million in FHLB advances with a weighted average interest rate of 3.07%. During the third quarter of 2021, the Company acquired $4.5 million in FHLB advances from the Landmark merger that was subsequently paid off.2022. As of September 30, ~~2022,~~2023, the Company had the ability to borrow an ~~additional $607.4~~additional $647.4 million from the FHLB, including any overnight borrowings. The Company does not expect to have any FHLB advances in ~~2022.~~the last quarter of 2023.

The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its exposures are critical factors in the regulatory evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy. Management believes the Company’s interest rate risk measurement framework is sound and provides an effective means to measure, monitor, analyze, identify and control interest rate risk in the balance sheet.

The Company is subject to the interest rate risks inherent in its lending, investing and financing activities. Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning assets and interest-bearing liabilities, except for those assets or liabilities with a short term remaining to maturity. Interest rate risk management is an integral part of the asset/liability management process. The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position. Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations. The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.

Asset/Liability Management. One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO), which is comprised of senior management and members of the board of directors. ALCO meets quarterly to monitor the relationship of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk is a regular part of managing the Company. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of non-contractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the board of directors which includes limits on the impact to earnings from shifts in interest rates.

Interest Rate Risk Measurement. Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings at risk simulation and economic value at risk simulation. While each of the interest rate risk measurements has limitations, collectively, they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company and the distribution of risk along the yield curve, the level of risk through time and the amount of exposure to changes in certain interest rate relationships.

Static Gap. The ratio between assets and liabilities re-pricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.

To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals. A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) indicates the opposite effect. The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO ~~to gauge~~in gauging the effects of ~~the~~ interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread. At September 30, ~~2022,~~2023, the Company maintained a one-year cumulative gap of negative (liability sensitive) ~~$86.4~~$177.0 million, or ~~-3.5%~~-7%, of total assets. The effect of this negative gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of rising interest rates. Conversely, in a ~~declining~~decreasing interest rate environment, net interest income could be positively impacted because more liabilities than assets will re-price downward during the one-year period.

Certain shortcomings are inherent in the method of analysis discussed above and presented in the next table. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table amounts. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The following table reflects the re-pricing of the balance sheet or “gap” position at September 30, ~~2022:~~2023:

				More than three			More than											More than three			More than
	Three months			months to			one year			More than					Three months			months to			one year			More than
(dollars in thousands)	or less			twelve months			to three years			three years			Total		or less			twelve months			to three years			three years			Total

Cash and cash equivalents	$	69,062		$	-		$	-		$	64,980		$	134,042	$	82,040		$	-		$	-		$	28,431		$	110,471
Investment securities ⁽¹⁾⁽²⁾		8,149			22,182			55,629			553,466			639,426		5,405			17,092			54,488			503,503			580,488
Loans and leases⁽²⁾		335,699			215,498			402,971			553,381			1,507,549		326,833			227,640			455,596			618,726			1,628,795
Fixed and other assets		-			53,711			-			101,040			154,751		-			54,226			-			102,840			157,066
Total assets	$	412,910		$	291,391		$	458,600		$	1,272,867		$	2,435,768	$	414,278		$	298,958		$	510,084		$	1,253,500		$	2,476,820
Total cumulative assets	$	412,910		$	704,301		$	1,162,901		$	2,435,768				$	414,278		$	713,236		$	1,223,320		$	2,476,820

Non-interest-bearing transaction deposits ⁽³⁾	$	-		$	61,746		$	169,509		$	385,589		$	616,844	$	-		$	55,029		$	151,069		$	343,643		$	549,741
Interest-bearing transaction deposits ⁽³⁾		637,258			-			351,250			526,875			1,515,383		667,010			-			292,870			439,304			1,399,184
Certificates of deposit		33,105			52,216			28,038			7,647			121,006		22,956			115,021			61,331			3,526			202,834
Secured borrowings		6,333			-			1,355			-			7,688		6,178			-			1,261			-			7,439
Short-term borrowings		10			-			-			-			10		124,000			-			-			-			124,000
Other liabilities		-			-			-			28,350			28,350		-			-			-			28,189			28,189
Total liabilities	$	676,706		$	113,962		$	550,152		$	948,461		$	2,289,281	$	820,144		$	170,050		$	506,531		$	814,662		$	2,311,387
Total cumulative liabilities	$	676,706		$	790,668		$	1,340,820		$	2,289,281				$	820,144		$	990,194		$	1,496,725		$	2,311,387

Interest sensitivity gap	$	(263,796	)	$	177,429		$	(91,552	)	$	324,406				$	(405,866	)	$	128,908		$	3,553		$	438,838
Cumulative gap	$	(263,796	)	$	(86,367	)	$	(177,919	)	$	146,487				$	(405,866	)	$	(276,958	)	$	(273,405	)	$	165,433

Off-balance sheet:
Swap - portfolio hedge															$	100,000		$	-		$	(100,000	)	$	-
Cumulative gap															$	(305,866	)	$	(176,958	)	$	(273,405	)	$	165,433

Cumulative gap to total assets		(10.8	)%		(3.5	)%		(7.3	)%		6.0	%				(12.3	)%		(7.1	)%		(11.0	)%		6.7	%

Earnings at Risk and Economic Value at Risk Simulations. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet that extend beyond static re-pricing gap analysis. Although it will continue to measure its re-pricing gap position, the Company utilizes additional modeling for identifying and measuring the interest rate risk in the overall balance sheet. The ALCO is responsible for focusing on “earnings at risk” and “economic value at risk”, and how both relate to the risk-based capital position when analyzing the interest rate risk.

Earnings at Risk. An earnings at risk simulation measures the change in net interest income and net income should interest rates rise and fall. The simulation recognizes that not all assets and liabilities re-price one-for-one with market rates (e.g., savings rate). The ALCO looks at “earnings at risk” to determine income changes from a base case scenario under an increase and decrease of 200 basis points in interest rate simulation models.

Economic Value at Risk. An earnings at risk simulation measures the short-term risk in the balance sheet. Economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets and liabilities. The ALCO examines this ratio quarterly utilizing an increase and decrease of 200 basis points in interest rate simulation models. The ALCO recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.

The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity). This analysis assumed that the adjusted interest-earning asset and interest-bearing liability levels at September 30, ~~2022~~2023 remained constant. The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the September 30, ~~2022~~2023 levels:

In the scenarios in the above table, the Board-approved policy has the following guidelines: net interest income within +/- 10%, net income within +/- 25%, economic value of equity within +/- 25%, economic value of equity as a percent of total assets within +/-5%.

Economic value has the most meaning when viewed within the context of risk-based capital. Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%. At September 30, ~~2022,~~2023, the Company’s risk-based capital ratio was ~~14.34%~~14.76%.

Given the existing economic and interest rate conditions along with the recent increase in earnings at risk exposure to rising rates, management is evaluating to pursue balance sheet hedging opportunities on both sides of balance sheet with an independent third-party vendor with derivative expertise in response to mitigate these interest rate risks on net interest income. The Company has a derivative policy in place and any balance sheet hedges require Board pre-approval along with quarterly monitoring requirements by the Company's ALCO Committee.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning October 1, ~~2022,~~2023, under alternate interest rate scenarios using the income simulation model described above:

Simulation models require assumptions about certain categories of assets and liabilities. The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date or earliest re-pricing opportunity. MBS – GSE residential securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments. For investment securities, the Company uses a third-party service to provide cash flow estimates in the various rate environments. Savings, money market and interest-bearing checking accounts do not have stated maturities or re-pricing terms and can be withdrawn or re-price at any time. This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff. Management projects the re-pricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity. The model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term at current product interest rates. As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant.

Liquidity management ensures that adequate funds will be available to meet customers’ needs for borrowings, deposit withdrawals and maturities, facility expansion and normal operating expenses. Sources of liquidity are cash and cash equivalents, asset maturities and pay-downs within one year, loans HFS, investments AFS, growth of core deposits, utilization of borrowing capacities from the FHLB, correspondent banks, IntraFi's ICS and ~~CDARs,~~One-Way Buy program, the Discount Window of the Federal Reserve Bank of Philadelphia (FRB), Atlantic Community Bankers Bank (ACBB) and proceeds from the issuance of capital stock. Though regularly scheduled investment and loan payments are dependable sources of daily liquidity, sales of both loans HFS and investments AFS, deposit activity and investment and loan prepayments are significantly influenced by general economic conditions including the interest rate environment. During low and declining interest rate environments, prepayments from interest-sensitive assets tend to accelerate and provide significant liquidity that can be used to invest in other interest-earning assets but at lower market rates. Conversely, in periods of high or rising interest rates, prepayments from interest-sensitive assets tend to decelerate causing prepayment cash flows from mortgage loans and mortgage-backed securities to decrease. Rising interest rates may also cause deposit inflow but priced at higher market interest rates or could also cause deposit outflow due to higher rates offered by the Company’s competition for similar products. The Company closely monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities.

The Company’s contingency funding plan (CFP) sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal. The Company established guidelines for identifying, measuring, monitoring and managing the resolution of potentially serious liquidity crises. The CFP outlines required monitoring tools, acceptable alternative funding sources and required actions during various liquidity scenarios. Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity conditions. At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s Asset/Liability Committee. As of September 30, ~~2022,~~2023, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.

During the nine months ended September 30, ~~2022,~~ 2023, the Company generated ~~$37.2~~$81.4 million of cash. During the period, the Company’s operations provided approximately ~~$40.3~~$21.4 million mostly from ~~$54.7~~$50.2 million of net cash inflow from the components of net interest income ~~plus $12.0 million in proceeds over originations of loans HFS~~ partially offset by net non-interest expense/income related payments of ~~$25.2~~$25.5 million and ~~$1.6~~$2.6 million in quarterly estimated tax payments. Cash inflow from interest-earning assets, ~~deposits~~the sale of securities, short-term borrowings and loan payments were used to ~~purchase investment securities and replace maturing and cash runoff of securities,~~ fund the loan portfolio, invest in bank premises and equipment and make net dividend payments. The Company received a large amount of public deposits over the past six years. The seasonal nature of deposits from municipalities and other public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of cash outflow from this customer base, including maintaining the requirements to pledge investment securities. Accordingly, the use of short-term overnight borrowings could be used to fulfill funding gap needs. The CFP is a tool to help the Company ensure that alternative funding sources are available to meet its liquidity needs.

During ~~2020,~~January 2023, the Company sold $31.2 million in AFS securities at breakeven to generate liquidity in order to pay down overnight borrowings which will result in interest expense savings. Management will continue to execute strategies to generate liquidity when it makes sense for the Company's operations.

During 2021 and ~~the first nine months of~~ 2022, the Company also experienced deposit inflow resulting from businesses and municipalities that received relief from the CARES Act, American Rescue Plan Act ("ARPA") and other government stimulus. There is uncertainty about the length of time that these deposits will remain which could require the Company to maintain elevated cash balances. During the first nine months of 2023, the Company experienced an outflow of $66.1 million in ARPA funds, or approximately 68% of the balance of these funds from the end 2022. The Company will continue to monitor deposit ~~fluctuation~~fluctuations for other significant changes.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy. These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments.

Lending commitments include commitments to originate loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a ~~fee.~~ fee. Unfunded commitments of existing loan facilities totaled $365.3 million, standby letters of credit totaled $19.0 million and the level of uninsured and non-collateralized deposits was $480.5 million at September 30, 2023. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

As of September 30, ~~2022~~2023, the Company maintained ~~$134.0~~$110.5 million in cash and cash equivalents and ~~$414.8~~$355.2 million of investments AFS and loans HFS. Also as of September 30, ~~2022~~2023, the Company had approximately ~~$607.4~~$647.4 million available to borrow from the FHLB, ~~$31.0~~$20.0 million from correspondent banks, ~~$113.6~~$36.5 million from the FRB and ~~$362.2~~$371.5 million from the IntraFi Network One-Way Buy program. The combined total of ~~$1.7 billion~~$1,541.1 million represented ~~68%~~62% of total assets at September 30, ~~2022~~2023. The Company also has the ability to pledge securities to borrow at par from the Federal Reserve Bank Term Funding Program to gain liquidity. Management believes this level of liquidity to be strong and adequate to support current operations.

During the nine months ended September 30, ~~2022,~~2023, total shareholders' equity ~~decreased $65.2~~increased $2.5 million, or ~~31%~~2%, due principally to a $82.5 million after tax reduction in the net unrealized gain position to a net unrealized loss position in the Company’s investment portfolio, $5.7 million of cash dividends declared on the Company’s common stock and $1.2 million in treasury stock purchases. These items were partially offset by $22.9$17.7 million in net income added into retained ~~earnings,~~earnings. Capital was enhanced by $0.3 million from investments in the Company’s common stock via the Employee Stock Purchase Plan (ESPP) ~~and $1.0~~, $1.3 million from stock-based compensation expense from the ESPP and restricted stock and ~~SSARs.~~$1.2 million from the re-issuance of treasury stock for the dividend reinvestment plan. Partially offsetting these increases were a $10.4 million after tax decline in the net unrealized loss position in the Company’s investment portfolio. $6.2 million of cash dividends declared on the Company’s common stock, a $1.3 million cumulative effect adjustment for adoption of CECL and $0.2 million in treasury stock purchases to cover employee withholdings. The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was ~~24.7%~~34.9% for the nine months ended September 30, ~~2022.~~2023. The balance of earnings is retained to further strengthen the Company’s capital position.

As of September 30, ~~2022,~~2023, the Company reported a net unrealized loss position of ~~$82.3~~$81.5 million, net of tax, from the securities portfolio compared to a net unrealized ~~gain~~loss of ~~$0.2~~$71.2 million as of December 31, ~~2021.~~2022. The ~~$82.5~~$10.4 million ~~reduction~~decline during the first nine months of ~~2022~~2023 was from the ~~$64.5~~$11.7 million ~~reduction~~decline in ~~net unrealized gains to~~ net unrealized losses on AFS securities, net of tax, and ~~$18.0~~$1.3 million in accretion of net unrealized losses on HTM securities transferred from AFS, net of tax. ~~Lower unrealized gains and higher~~Higher unrealized losses on all types of securities contributed to the ~~net unrealized losses~~decline in the investment portfolio. Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and not in the creditworthiness of the issuers.

Generally, when U.S. Treasury rates rise, investment securities’ pricing declines and fair values of investment securities also decline. ~~While volatility~~Volatility has existed in the yield curve within the past twelve months ~~a rising rate environment is expected~~ and ~~during the period of rising rates,~~ the Company ~~expects pricing in~~is uncertain about the ~~bond portfolio to decline.~~expected rate environment. There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of investment securities.

The tangible common equity (TCE) ratio (non-GAAP) was 5.89% and 5.19% for the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023 and 2022, the held-to-maturity securities portfolio had $36.2 million and $31.7 million in unrealized losses, net of deferred taxes. If the TCE ratio was adjusted to include the unrealized losses on held-to-maturity securities, the adjusted TCE ratio (non-GAAP) would have been 4.41% and 3.87% at September 30, 2023 and 2022. See reconciliation on page 39.

To help maintain a healthy capital position, the Company can issue stock to participants in the DRP and ESPP plans. The DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants. During the first nine months of ~~2022,~~2023, the Company ~~acquired~~re-issued treasury shares ~~in the open market~~ to fulfill the needs of the DRP. Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet.

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. A capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements of 2.50%. As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company and the Bank exceeded all capital adequacy requirements to which it was subject.

The Company continues to closely monitor and evaluate alternatives to enhance its capital ratios as the regulatory and economic environments change. The following table depicts the capital amounts and ratios of the Company, on a consolidated basis, and the Bank as of September 30, ~~2022~~2023 and December 31, ~~2021:~~2022:

													For capital adequacy					To be well capitalized																		For capital adequacy					To be well capitalized
						For capital							purposes with capital					under prompt corrective											For capital							purposes with capital					under prompt corrective
	Actual					adequacy purposes							conservation buffer					action provisions						Actual					adequacy purposes							conservation buffer					action provisions
(dollars in thousands)	Amount		Ratio			Amount			Ratio				Amount		Ratio			Amount			Ratio			Amount		Ratio			Amount			Ratio				Amount		Ratio			Amount			Ratio
As of September 30, 2022
As of September 30, 2023

Total capital (to risk-weighted assets)
Consolidated	$	224,313		14.3	%	≥	$	125,097		8.0	%	≥	$	164,190		10.5	%			N/A		N/A		$	245,784		14.8	%	≥	$	133,184		8.0	%	≥	$	174,805		10.5	%			N/A		N/A
Bank	$	223,871		14.3	%	≥	$	125,026		8.0	%	≥	$	164,097		10.5	%	≥	$	156,282		10.0	%	$	244,567		14.7	%	≥	$	133,174		8.0	%	≥	$	174,790		10.5	%	≥	$	166,467		10.0	%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	207,496		13.3	%	≥	$	70,367		4.5	%	≥	$	109,460		7.0	%			N/A		N/A		$	226,039		13.6	%	≥	$	74,916		4.5	%	≥	$	116,536		7.0	%			N/A		N/A
Bank	$	207,054		13.3	%	≥	$	70,327		4.5	%	≥	$	109,398		7.0	%	≥	$	101,584		6.5	%	$	224,822		13.5	%	≥	$	74,910		4.5	%	≥	$	116,527		7.0	%	≥	$	108,204		6.5	%

Tier I capital (to risk-weighted assets)
Consolidated	$	207,496		13.3	%	≥	$	93,823		6.0	%	≥	$	132,916		8.5	%			N/A		N/A		$	226,039		13.6	%	≥	$	99,888		6.0	%	≥	$	141,508		8.5	%			N/A		N/A
Bank	$	207,054		13.3	%	≥	$	93,769		6.0	%	≥	$	132,840		8.5	%	≥	$	125,026		8.0	%	$	224,822		13.5	%	≥	$	99,880		6.0	%	≥	$	141,497		8.5	%	≥	$	133,174		8.0	%

Tier I capital (to average assets)
Consolidated	$	207,496		8.5	%	≥	$	97,488		4.0	%	≥	$	97,488		4.0	%			N/A		N/A		$	226,039		9.2	%	≥	$	98,075		4.0	%	≥	$	98,075		4.0	%			N/A		N/A
Bank	$	207,054		8.5	%	≥	$	97,481		4.0	%	≥	$	97,481		4.0	%	≥	$	121,851		5.0	%	$	224,822		9.2	%	≥	$	98,068		4.0	%	≥	$	98,068		4.0	%	≥	$	122,585		5.0	%

													For capital adequacy					To be well capitalized																		For capital adequacy					To be well capitalized
						For capital							purposes with capital					under prompt corrective											For capital							purposes with capital					under prompt corrective
	Actual					adequacy purposes							conservation buffer					action provisions						Actual					adequacy purposes							conservation buffer					action provisions
(dollars in thousands)	Amount		Ratio			Amount			Ratio				Amount		Ratio			Amount			Ratio			Amount		Ratio			Amount			Ratio				Amount		Ratio			Amount			Ratio
As of December 31, 2021
As of December 31, 2022

Total capital (to risk-weighted assets)
Consolidated	$	205,667		14.5	%	≥	$	113,421		8.0	%	≥	$	148,866		10.5	%			N/A		N/A		$	230,133		14.4	%	≥	$	128,325		8.0	%	≥	$	168,427		10.5	%			N/A		N/A
Bank	$	205,726		14.5	%	≥	$	113,406		8.0	%	≥	$	148,845		10.5	%	≥	$	141,757		10.0	%	$	229,803		14.3	%	≥	$	128,308		8.0	%	≥	$	168,405		10.5	%	≥	$	160,385		10.0	%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	189,980		13.4	%	≥	$	63,800		4.5	%	≥	$	99,244		7.0	%			N/A		N/A		$	212,935		13.3	%	≥	$	72,183		4.5	%	≥	$	112,285		7.0	%			N/A		N/A
Bank	$	190,039		13.4	%	≥	$	63,791		4.5	%	≥	$	99,230		7.0	%	≥	$	92,142		6.5	%	$	212,605		13.3	%	≥	$	72,173		4.5	%	≥	$	112,270		7.0	%	≥	$	104,251		6.5	%

Tier I capital (to risk-weighted assets)
Consolidated	$	189,980		13.4	%	≥	$	85,066		6.0	%	≥	$	120,510		8.5	%			N/A		N/A		$	212,935		13.3	%	≥	$	96,244		6.0	%	≥	$	136,346		8.5	%			N/A		N/A
Bank	$	190,039		13.4	%	≥	$	85,054		6.0	%	≥	$	120,493		8.5	%	≥	$	113,406		8.0	%	$	212,605		13.3	%	≥	$	96,231		6.0	%	≥	$	136,328		8.5	%	≥	$	128,308		8.0	%

Tier I capital (to average assets)
Consolidated	$	189,980		7.9	%	≥	$	95,688		4.0	%	≥	$	95,688		4.0	%			N/A		N/A		$	212,935		8.7	%	≥	$	97,960		4.0	%	≥	$	97,960		4.0	%			N/A		N/A
Bank	$	190,039		7.9	%	≥	$	95,680		4.0	%	≥	$	95,680		4.0	%	≥	$	119,600		5.0	%	$	212,605		8.7	%	≥	$	97,951		4.0	%	≥	$	97,951		4.0	%	≥	$	122,439		5.0	%

The Company advises readers to refer to the Supervision and Regulation section of Management’s Discussion and Analysis of Financial Condition and Results of Operation, of its ~~2021~~2022 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective. The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended September 30, ~~2022.~~2023.

The nature of the Company’s business generates a certain amount of litigation involving matters arising in the ordinary course of business. However, in the opinion of the Company after consultation with legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material adverse effect on the Company’s undivided profits or financial condition, operations or the results of such operations. No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank. In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal or regulatory actions against the Company or the Bank.

Negative Developments Affecting the Banking Industry, Including Bank Failures or Concerns Regarding Liquidity, Have Eroded Customer Confidence in the Banking System and May Have a Material Adverse Effect on the Company.

During March and April 2023, three significant bank failures occurred (Silicon Valley Bank, Signature Bank, and First Republic Bank). These failures continue to be accompanied by financial instability at various additional banks. These bank failures and bank instabilities have created and may continue to create market and other risks, for all financial institutions and banks, including the Corporation. These risks include, but are not limited to:

These factors individually, or in any combination, could materially and adversely affect our:

In addition, the previously mentioned bank failures and instabilities, or future bank failures and instability, may result in an increase of FDIC deposit insurance premiums and/or result in special FDIC deposit insurance assessments, which also may adversely affect the Company’s financial condition, operations, results thereof or stock price.

Management of the Company does not believe there have been any other material changes to the risk factors that were disclosed in the ~~2021~~2022 Form 10-K filed with the Securities and Exchange Commission on March ~~23, 2022.~~20, 2023.

On May 18, 2022, the Company announced that the Board of Directors approved a plan to purchase, in open market and privately negotiated transactions, up to 3% of its outstanding common stock in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. The plan shall terminate on the earlier of the date an aggregate of $5,000,000 of stock have been purchased or August 9, 2023.None

The following exhibits are filed herewith or incorporated by reference as a part of this Form 10-Q:

101 Interactive data files: The following, from Fidelity D&D Bancorp, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2022,~~2023, is formatted in Inline XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of September 30, ~~2022~~2023 and December 31, ~~2021;~~2022; Consolidated Statements of Income for the three and nine months ended September 30, ~~2022~~2023 and ~~2021;~~2022; Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2022~~2023 and ~~2021;~~2022; Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, ~~2022~~2023 and ~~2021;~~2022; Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 and the Notes to the Consolidated Financial Statements. **

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

** Pursuant to Rule 406T of Regulation S-T, the interactive data files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022	3
	Consolidated Statements of Income for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2022~~2023 and ~~2021~~2022	8
	Notes to Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	58
Item 4.	Controls and Procedures	6462

Part II. Other Information
Item 1.	Legal Proceedings	6563
Item 1A.	Risk Factors	6563
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6563
Item 3.	Defaults upon Senior Securities	6563
Item 4.	Mine Safety Disclosures	6563
Item 5.	Other Information	6563
Item 6.	Exhibits	6664
Signatures		6866

*As of and for the nine months ended September 30, 2022*
*As of and for the nine months ended September 30, 2023*										*As of and for the nine months ended September 30, 2023*
	Unrealized gains										Unrealized gains
	(losses) on			Securities							(losses) on			Securities
	available-for-sale			transferred to							available-for-sale			transferred to
(dollars in thousands)	debt securities			held-to-maturity			Total				debt securities			held-to-maturity			Total
Beginning balance	$	179		$	-		$	179			$	(53,624	)	$	(17,528	)	$	(71,152	)

Other comprehensive loss before reclassifications, net of tax		(64,466	)		(17,983	)		(82,449	)
Other comprehensive (loss) income before reclassifications, net of tax												(11,710	)		1,357			(10,353	)
Amounts reclassified from accumulated other comprehensive income, net of tax		(3	)		-			(3	)			1			-			1
Net current-period other comprehensive loss		(64,469	)		(17,983	)		(82,452	)			(11,709	)		1,357			(10,352	)
Ending balance	$	(64,290	)	$	(17,983	)	$	(82,273	)		$	(65,333	)	$	(16,171	)	$	(81,504	)

*As of and for the three months ended September 30, 2023*
	Unrealized gains
	(losses) on			Securities
	available-for-sale			transferred to
(dollars in thousands)	debt securities			held-to-maturity			Total
Beginning balance	$	(48,641	)	$	(16,627	)	$	(65,268	)

Other comprehensive (loss) income before reclassifications, net of tax		(16,692	)		456			(16,236	)
Amounts reclassified from accumulated other comprehensive income, net of tax		-			-			-
Net current-period other comprehensive loss		(16,692	)		456			(16,236	)
Ending balance	$	(65,333	)	$	(16,171	)	$	(81,504	)

As of and for the nine months ended September 30, 2022
	Unrealized gains
	(losses) on			Securities
	available-for-sale			transferred to
(dollars in thousands)	securities			held-to-maturity			Total
Beginning balance	$	179		$	-		$	179

Other comprehensive loss before reclassifications, net of tax		(64,466	)		(17,983	)		(82,449	)
Amounts reclassified from accumulated other comprehensive income, net of tax		(3	)		-			(3	)
Net current-period other comprehensive loss		(64,469	)		(17,983	)		(82,452	)
Ending balance	$	(64,290	)	$	(17,983	)	$	(82,273	)

As of and for the three months ended September 30, 2022
	Unrealized gains
	(losses) on			Securities
	available-for-sale			transferred to
(dollars in thousands)	debt securities			held-to-maturity			Total
Beginning balance	$	(42,491	)	$	(18,429	)	$	(60,920	)

Other comprehensive income (loss) before reclassifications, net of tax		(21,796	)		446			(21,350	)
Amounts reclassified from accumulated other comprehensive income, net of tax		(3	)		-			(3	)
Net current-period other comprehensive income (loss)		(21,799	)		446			(21,353	)
Ending balance	$	(64,290	)	$	(17,983	)	$	(82,273	)

Details about accumulated other
comprehensive income components	Amount reclassified from accumulated												Affected line item in the statement
(dollars in thousands)	other comprehensive income												where net income is presented
	For the three months						For the nine months
	ended September 30,						ended September 30,
	2022			2021			2022			2021

Unrealized gains (losses) on AFS debt securities	$	4		$	40		$	4		$	40		Gain (loss) on sale of investment securities
Income tax effect		(1	)		(9	)		(1	)		(9	)	Provision for income taxes
Total reclassifications for the period	$	3		$	31		$	3		$	31		Net income

Details about accumulated other
comprehensive income components	Amount reclassified from accumulated									Affected line item in the statement
(dollars in thousands)	other comprehensive income									where net income is presented
	For the three months ended September 30,				For the nine months ended September 30,
	*2023*		2022		*2023*			2022

Unrealized gains (losses) on AFS debt securities	$	-	$	-	$	(1	)	$	-	Gain (loss) on sale of investment securities
Income tax effect		-		-		-			-	Provision for income taxes
Total reclassifications for the period	$	-	$	-	$	(1	)	$	-	Net income

			*Gross*		*Gross*							*Gross*		*Gross*
	*Amortized*		*unrealized*		*unrealized*			*Fair*		*Amortized*		*unrealized*		*unrealized*			*Fair*
(dollars in thousands)	*cost*		*gains*		*losses*			*value*		*cost*		*gains*		*losses*			*value*
September 30, 2022
September 30, 2023
Held-to-maturity securities:
Agency - GSE	$	80,039	$	-	$	(9,574	)	$	70,465	$	81,107	$	-	$	(11,755	)	$	69,352
Obligations of states and political subdivisions		142,335		-		(30,560	)		111,775		142,746		-		(34,086	)		108,660

Total held-to-maturity securities	$	222,374	$	-	$	(40,134	)	$	182,240	$	223,853	$	-	$	(45,841	)	$	178,012

Available-for-sale debt securities:
Agency - GSE	$	37,050	$	-	$	(4,714	)	$	32,336	$	31,155	$	-	$	(4,696	)	$	26,459
Obligations of states and political subdivisions		198,534		324		(35,256	)		163,602		173,281		-		(33,734	)		139,547
MBS - GSE residential		259,209		-		(41,734	)		217,475		231,099		-		(44,270	)		186,829

Total available-for-sale debt securities	$	494,793	$	324	$	(81,704	)	$	413,413	$	435,535	$	-	$	(82,700	)	$	352,835

	Amortized		Fair		Amortized		Fair
(dollars in thousands)	cost		value		cost		value
Held-to-maturity securities:
Due in one year or less	$	-	$	-	$	-	$	-
Due after one year through five years		4,698		4,302		22,575		20,286
Due after five years through ten years		66,667		58,901		74,050		61,870
Due after ten years		151,009		119,037		127,228		95,856
Total held-to-maturity securities	$	222,374	$	182,240	$	223,853	$	178,012

Available-for-sale securities:
Debt securities:
Due in one year or less	$	2,999	$	2,982	$	751	$	749
Due after one year through five years		18,773		17,087		26,100		23,014
Due after five years through ten years		44,734		37,101		34,385		27,976
Due after ten years		169,078		138,768		143,148		114,267

MBS - GSE residential		259,209		217,475		231,099		186,829
Total available-for-sale debt securities	$	494,793	$	413,413	$	435,483	$	352,835

	Less than 12 months					More than 12 months					Total					Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	value		losses			value		losses			value		losses			value		losses			value		losses			value		losses

September 30, 2022
September 30, 2023
Agency - GSE	$	29,095	$	(2,933	)	$	72,706	$	(11,355	)	$	101,801	$	(14,288	)	$	-	$	-		$	95,811	$	(16,451	)	$	95,811	$	(16,451	)
Obligations of states and political subdivisions		178,491		(40,043	)		91,109		(25,773	)		269,600		(65,816	)		1,788		(162	)		246,419		(67,606	)		248,207		(67,768	)
MBS - GSE residential		100,151		(15,013	)		117,324		(26,721	)		217,475		(41,734	)		-		-			186,829		(44,218	)		186,829		(44,218	)
Total	$	307,737	$	(57,989	)	$	281,139	$	(63,849	)	$	588,876	$	(121,838	)	$	1,788	$	(162	)	$	529,059	$	(128,275	)	$	530,847	$	(128,437	)
Number of securities		320					163					483					4					433					437

December 31, 2021
December 31, 2022
Agency - GSE	$	84,308	$	(1,460	)	$	26,516	$	(1,140	)	$	110,824	$	(2,600	)	$	9,285	$	(377	)	$	93,312	$	(13,409	)	$	102,597	$	(13,786	)
Obligations of states and political subdivisions		193,124		(2,662	)		12,796		(399	)		205,920		(3,061	)		170,484		(26,928	)		112,353		(25,835	)		282,837		(52,763	)
MBS - GSE residential		137,495		(2,351	)		9,469		(327	)		146,964		(2,678	)		61,803		(6,018	)		155,632		(31,277	)		217,435		(37,295	)
Total	$	414,927	$	(6,473	)	$	48,781	$	(1,866	)	$	463,708	$	(8,339	)	$	241,572	$	(33,323	)	$	361,297	$	(70,521	)	$	602,869	$	(103,844	)
Number of securities		187					26					213					272					213					485

(dollars in thousands)	Nonaccrual With No Allowance for Credit Loss		Nonaccrual With Allowance for Credit Loss		Total Nonaccrual		Loans Past Due Over 89 Days Still Accruing
At December 31, 2022
Commercial and industrial:
Commercial	$	580	$	139	$	719	$	-
Municipal		-		-		-		-
Commercial real estate:
Non-owner occupied		168		215		383		-
Owner occupied		716		350		1,066		-
Consumer:
Home equity installment		-		-		-		-
Home equity line of credit		211		-		211		-
Auto loans - Recourse		135		18		153		-
Auto loans - Non-recourse		-		-		-		16
Direct finance leases		-		-		-		17
Other		-		-		-		-
Residential:
Real estate		3		-		3		-
Total	$	1,813	$	722	$	2,535	$	33

	Loans modified for the nine months ended:
(dollars in thousands)	*September 30, 2023*
	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Principal Forgiveness		Combination Term Extension Interest Rate Reduction		Total Class of Financing Receivable
Commercial and industrial:
Commercial	$	-	$	46	$	-	$	-	$	-	$	-		0.03	%
Commercial real estate:
Non-owner occupied		-		-		915		3,131		-		-		1.30	%
Owner occupied		-		-		128		-		-		-		0.04	%
Total	$	-	$	46	$	1,043	$	3,131	$	-	$	-

(dollars in thousands)	September 30, 2023
	Principal Forgiveness		Weighted-Average Interest Rate Reduction			Weighted-Average Term Extension (Months)

Commercial real estate:
Non-owner occupied	$	-		6.13	%		8.8
Owner occupied		-		-			74.0
Total	$	-		6.13	%		82.8

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
September 30, 2022
Commercial and industrial	$	861	$	18	$	610	$	628	$	18
Commercial real estate:
Non-owner occupied		1,114		322		792		1,114		97
Owner occupied		2,887		1,691		577		2,268		362
Consumer:										-
Home equity installment		33		-		-		-		-
Home equity line of credit		162		29		90		119		-
Auto loans		239		95		106		201		25
Residential:
Real estate		84		-		37		37		-
Total	$	5,380	$	2,155	$	2,212	$	4,367	$	502

	For the nine months ended
	*September 30, 2022*						September 30, 2021
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	376	$	-	$	-	$	433	$	3	$	-
Commercial real estate:
Non-owner occupied		1,630		57		-		2,838		133		-
Owner occupied		2,175		78		-		1,711		27		-
Construction		-		-		-		-		-		-
Consumer:
Home equity installment		5		-		-		35		4		-
Home equity line of credit		130		7		-		268		20		-
Auto loans		141		4		-		30		-		-
Direct finance leases		-		-		-		-		-		-
Other		-		-		-		-		-		-
Residential:
Real estate		297		39		-		717		-		-
Construction		-		-		-		-		-		-
Total	$	4,754	$	185	$	-	$	6,032	$	187	$	-

	For the three months ended												For the nine months ended
	*September 30, 2022*						September 30, 2021						September 30, 2022
					Cash basis						Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	709	$	-	$	-	$	325	$	-	$	-	$	376	$	-	$	-
Commercial real estate:
Non-owner occupied		1,108		5		-		2,676		73		-		1,630		57		-
Owner occupied		2,262		24		-		1,555		7		-		2,175		78		-
Construction		-		-		-		-		-		-		-		-		-
Consumer:
Home equity installment		-		-		-		27		-		-		5		-		-
Home equity line of credit		143		7		-		114		-		-		130		7		-
Auto loans		203		2		-		44		-		-		141		4		-
Direct finance leases		-		-				-		-		-		-		-		-
Other		-		-		-		-		-		-		-		-		-
Residential:
Real estate		40		-		-		699		-		-		297		39		-
Construction		-		-		-		-		-		-		-		-		-
Total	$	4,465	$	38	$	-	$	5,440	$	80	$	-	$	4,754	$	185	$	-

	*September 30, 2022*
(dollars in thousands)		Performing		Non-performing		Total
Consumer
Home equity installment	$	56,814	$	-	$	56,814
Home equity line of credit		53,513		119		53,632
Auto loans		132,551		251		132,802
Direct finance leases ⁽¹⁾		30,733		-		30,733
Other		7,733		-		7,733
Total consumer		281,344		370		281,714
Residential
Real estate		384,456		37		384,493
Construction		37,433		-		37,433
Total residential		421,889		37		421,926
Total consumer & residential	$	703,233	$	407	$	703,640

	December 31, 2021
(dollars in thousands)	Performing		Non-performing		Total

Consumer
Home equity installment	$	47,571	$	-	$	47,571
Home equity line of credit		54,781		97		54,878
Auto loans		117,951		78		118,029
Direct finance leases ⁽²⁾		24,739		64		24,803
Other		8,013		-		8,013
Total consumer		253,055		239		253,294
Residential
Real estate		325,289		572		325,861
Construction		34,919		-		34,919
Total residential		360,208		572		360,780
Total consumer & residential	$	613,263	$	811	$	614,074

	●	Reversion period: ASC Topic 326 does not require Management to estimate a reasonable and supportable forecast for the entire contractual life of financial assets. Management may apply reversion techniques for the contractual life remaining after considering the reasonable and supportable forecast period, which allows Management to apply a historical loss rate to latter periods of the financial asset’s life. The Company currently uses a 12 month (4 quarter) straight-line reversion period.
	■ ●	~~identification~~Qualitative factor adjustments: The Company’s ACL estimate considers all significant factors relevant to the expected collectability of ~~specific loans that are~~its financial assets as of the reporting date; Qualitative factors reflect the impact of conditions not ~~impaired, but have an identified potential for loss;~~
	■	~~calculation of specific allowances where required for~~captured elsewhere, such as the ~~impaired loans based on collateral and other objective and quantifiable evidence;~~
	■	~~determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;~~
	■	~~application of~~ historical loss ~~percentages (trailing~~ ~~twelve~~~~-quarter average) to pools to determine~~data or within the ~~allowance allocation;~~
	■	~~application of~~economic forecast. The qualitative ~~factor adjustment percentages to historical losses for trends~~considerations can be captured directly within measurement models or ~~changes~~as additional components in the ~~loan portfolio.~~
	■	~~Qualitative factor adjustments include:~~ overall ACL methodologies. Currently, the Company uses the following qualitative factors:

	o	levels of and trends in delinquencies and non-accrual loans;
	o	levels of and trends in charge-offs and recoveries;
	o	trends in volume and terms of loans;
	o	changes in risk selection and underwriting standards;
	o	changes in lending policies and legal and regulatory requirements;
	o	experience, ability and depth of lending management;
	o	national and local economic trends and conditions; ~~and~~
	o	changes in credit ~~concentrations.~~concentrations; and
	o	changes in underlying collateral.

As of and for the year ended December 31, 2021
As of and for the year ended December 31, 2022
	Commercial &			Commercial							Residential								Commercial &			Commercial							Residential
(dollars in thousands)	industrial			real estate			Consumer				real estate			Unallocated		Total			industrial			real estate			Consumer				real estate		Unallocated			Total
Allowance for Loan Losses:
Beginning balance	$	2,407		$	6,383		$	2,552			$	2,781		$	79	$	14,202		$	2,204		$	7,422		$	2,404			$	3,508	$	86		$	15,624
Charge-offs		(130	)		(491	)		(206	)			(162	)		-		(989	)		(371	)		(67	)		(377	)			-		-			(815	)
Recoveries		23			250			138				-			-		411			11			153			74				2		-			240
Provision		(96	)		1,280			(80	)			889			7		2,000			1,080			(346	)		726				659		(19	)		2,100
Ending balance	$	2,204		$	7,422		$	2,404			$	3,508		$	86	$	15,624		$	2,924		$	7,162		$	2,827			$	4,169	$	67		$	17,149
Ending balance: individually evaluated for impairment	$	18		$	1,237		$	4			$	-		$	-	$	1,259		$	48		$	112		$	1			$	-	$	-		$	161
Ending balance: collectively evaluated for impairment	$	2,186		$	6,185		$	2,400			$	3,508		$	86	$	14,365		$	2,876		$	7,050		$	2,826			$	4,169	$	67		$	16,988
Loans Receivables:
Ending balance ⁽²⁾	$	236,304		$	582,750		$	253,294		⁽¹⁾	$	360,780		$	-	$	1,433,128		$	234,478		$	606,618		$	282,710		⁽¹⁾	$	440,368	$	-		$	1,564,174
Ending balance: individually evaluated for impairment	$	154		$	5,034		$	175			$	572		$	-	$	5,935		$	719		$	2,782		$	364			$	3	$	-		$	3,868
Ending balance: collectively evaluated for impairment	$	236,150		$	577,716		$	253,119			$	360,208		$	-	$	1,427,193		$	233,759		$	603,836		$	282,346			$	440,365	$	-		$	1,560,306

As of and for the nine months ended September 30, 2022
	Commercial &			Commercial						Residential
(dollars in thousands)	industrial			real estate			Consumer			real estate		Unallocated			Total
Allowance for Loan Losses:
Beginning balance	$	2,204		$	7,422		$	2,404		$	3,508	$	86		$	15,624
Charge-offs		(323	)		(1	)		(226	)		-		-			(550	)
Recoveries		8			61			59			2		-			130
Provision		785			(320	)		604			512		(6	)		1,575
Ending balance	$	2,674		$	7,162		$	2,841		$	4,022	$	80		$	16,779

	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	*2022*		2021		*2022*		2021		*2023*		2022		*2023*		2022
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders	$	7,689	$	4,859	$	22,875	$	16,222	$	5,340	$	7,689	$	17,742	$	22,875
Weighted-average common shares outstanding		5,634,182		5,643,897		5,649,332		5,212,500		5,687,553		5,634,182		5,669,454		5,649,332
Basic EPS	$	1.36	$	0.86	$	4.05	$	3.11	$	0.94	$	1.36	$	3.13	$	4.05

Diluted EPS:
Net income available to common shareholders	$	7,689	$	4,859	$	22,875	$	16,222	$	5,340	$	7,689	$	17,742	$	22,875
Weighted-average common shares outstanding		5,634,182		5,643,897		5,649,332		5,212,500		5,687,553		5,634,182		5,669,454		5,649,332
Potentially dilutive common shares		31,400		38,861		31,996		40,723		37,703		31,400		37,563		31,996
Weighted-average common and potentially dilutive shares outstanding		5,665,582		5,682,758		5,681,328		5,253,223		5,725,256		5,665,582		5,707,017		5,681,328
Diluted EPS	$	1.36	$	0.85	$	4.03	$	3.09	$	0.93	$	1.36	$	3.11	$	4.03

	2012 & 2022 Stock incentive plans											2012 & 2022 Stock incentive plans
	Director			Omnibus			Total			Weighted- average grant date fair value		Director			Omnibus			Total			Weighted- average grant date fair value
Non-vested balance at December 31, 2021		14,920			28,123			43,043		$	53.20
Non-vested balance at December 31, 2022													23,872			38,614			62,486		$	51.46
Granted		18,000			16,570			34,570			49.83		-			36,734			36,734			49.28
Forfeited		-			(3,323	)		(3,323	)		52.20		-			-			-			-
Vested		(9,048	)		(2,651	)		(11,699	)		52.83		(11,353	)		(13,089	)		(24,442	)		52.57
Non-vested balance at September 30, 2022		23,872			38,719			62,591		$	51.46
Non-vested balance at September 30, 2023													12,519			62,259			74,778		$	50.03

	Awards		Weighted-average grant date fair value		Weighted-average remaining contractual term (years)		Awards			Weighted-average grant date fair value		Weighted-average remaining contractual term (years)
Outstanding December 31, 2021		94,332	$	9.66		5.5
Outstanding December 31, 2022								87,133		$	9.69		4.5
Granted		-						-
Exercised		-						(22,807	)
Forfeited		-						-
Outstanding September 30, 2022		94,332	$	9.66		4.8
Outstanding September 30, 2023								64,326		$	11.59		4.1

	As of		As of
(dollars in thousands)	*September 30, 2022*		*September 30, 2023*
Unrecognized stock-based compensation expense:
2012 Director stock incentive plan	$	898	$	388
2012 Omnibus stock incentive plan		985		433
2022 Omnibus stock incentive plan		1		1,287
Total unrecognized stock-based compensation expense	$	1,884	$	2,108

	●	Cash and cash equivalents;
	●	Non-interest bearing deposit accounts;
	●	Savings, interest-bearing checking and money market accounts and
	●	Short-term borrowings.

	*Total carrying value*		*Quoted prices in active markets*		*Significant other observable inputs*		*Significant other unobservable inputs*		*Total carrying value*		*Quoted prices in active markets*		*Significant other observable inputs*		*Significant other unobservable inputs*
(dollars in thousands)	*September 30, 2022*		*(Level 1)*		*(Level 2)*		*(Level 3)*		*September 30, 2023*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Available-for-sale securities:
Agency - GSE	$	32,336	$	-	$	32,336	$	-	$	26,459	$	-	$	26,459	$	-
Obligations of states and political subdivisions		163,602		-		163,602		-		139,547		-		139,547		-
MBS - GSE residential		217,475		-		217,475		-		186,829		-		186,829		-
Total available-for-sale debt securities	$	413,413	$	-	$	413,413	$	-	$	352,835	$	-	$	352,835	$	-

	Total carrying value		Quoted prices in active markets		Significant other observable inputs		Significant other unobservable inputs		Total carrying value		Quoted prices in active markets		Significant other observable inputs		Significant other unobservable inputs
(dollars in thousands)	December 31, 2021		(Level 1)		(Level 2)		(Level 3)		December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	117,003	$	-	$	117,003	$	-	$	31,533	$	-	$	31,533	$	-
Obligations of states and political subdivisions		364,710		-		364,710		-		171,894		-		171,894		-
MBS - GSE residential		257,267		-		257,267		-		217,435		-		217,435		-
Total available-for-sale debt securities	$	738,980	$	-	$	738,980	$	-	$	420,862	$	-	$	420,862	$	-

			*Quoted prices in*		*Significant other*		*Significant other*					*Quoted prices in*		*Significant other*		*Significant other*
	*Total carrying value*		*active markets*		*observable inputs*		*unobservable inputs*			*Total carrying value*		*active markets*		*observable inputs*		*unobservable inputs*
(dollars in thousands)	*at September 30, 2022*		*(Level 1)*		*(Level 2)*		*(Level 3)*		*Valuation techniques*	*at September 30, 2023*		*(Level 1)*		*(Level 2)*		*(Level 3)*

Impaired loans	$	1,653	$	-	$	-	$	1,653
Individually evaluated loans									Fair value of collateral appraised value	$	216	$	-	$	-	$	216
Individually evaluated loans									Discount cash flow		286						286
Other real estate owned		103		-		-		103	Fair value of asset less selling costs		1		-		-		1
Total	$	1,756	$	-	$	-	$	1,756	Total	$	503	$	-	$	-	$	503

			Quoted prices in		Significant other		Significant other				Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs		Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2021		(Level 1)		(Level 2)		(Level 3)		at December 31, 2022		(Level 1)		(Level 2)		(Level 3)

Impaired loans	$	2,245	$	-	$	-	$	2,245	$	1,515	$	-	$	-	$	1,515
Other real estate owned		198		-		-		198		168		-		-		168
Total	$	2,443	$	-	$	-	$	2,443	$	1,683	$	-	$	-	$	1,683

Purchase Price Consideration in Common Stock
Landmark shares settled for stock		2,382,695
Exchange ratio		0.272
Total FDBC shares issued		647,990
Value assigned to FDBC common share (9/30/2021 closing price)	$	54.10
	��
Purchase price assigned to Landmark common shares exchanged for FDBC common shares	$	35,056,259

Purchase Price Consideration - Cash for Common Stock
Landmark shares exchanged for cash, excluding fractional shares		2,382,695
Cash consideration (per Landmark share)	$	3.26
Cash portion of purchase price	$	7,767,586

Cash portion of purchase price (cash paid fractional shares)	$	5,559

Cash for outstanding Landmark stock options	$	69,250

Total consideration paid	$	42,898,654

Allocation of Purchase Price	In thousands
Total Purchase Price			$	42,899

Estimated Fair Value of Assets Acquired
Cash and cash equivalents		4,090
Investment securities		49,430
Loans		298,860
Restricted investments in bank stock		1,186
Premises and equipment		3,405
Lease property under finance leases		1,188
Core deposit intangible asset		597
Other real estate owned		488
Other assets		11,629
Total assets acquired		370,873

Estimated Fair Value of Liabilities Assumed
Non-interest bearing deposits		100,472
Interest bearing deposits		208,057
Short-term borrowings		2,224
FHLB borrowings		4,602
Secured borrowings		20,619
Finance lease obligation		1,188
Other liabilities		3,387
Total liabilities assumed		340,549

Net Assets Acquired				30,324
Goodwill Recorded in Acquisition			$	12,575

*Dollars in thousands*
Gross amortized cost basis at September 30, 2021	$	309,767
Interest rate fair value adjustment on pools of homogeneous loans		(1,855	)
Credit fair value adjustment on pools of homogeneous loans		(7,915	)
Credit fair value adjustment on purchased credit impaired loans		(1,137	)
Fair value of acquired loans at September 30, 2021	$	298,860

Dollars in thousands
Contractual principal and interest at acquisition	$	5,306
Non-accretable difference		(1,691	)
Expected cash flows at acquisition		3,615
Accretable yield		(588	)
Fair value of purchased impaired loans	$	3,027