Item 1A. Risk Factors
An investment in the Corporation’s common stock is subject
to risks inherent to the banking industry and the equity markets. The material risks and uncertainties that management believes
affect the Corporation are described below. Before making an investment decision, you should carefully consider the risks and uncertainties
described below together with all of the other information included or incorporated by reference in this report. The risks and
uncertainties described below are not the only ones facing the Corporation. Additional risks and uncertainties that management
is not aware of or is not focused on, or currently deems immaterial, may also impair the Corporation’s business operations.
This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Corporation’s
financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of
the Corporation’s common stock could decline significantly, and you could lose all or part of your investment.
Risks Related To The Corporation’s Business
The Corporation Is Subject To Interest Rate Risk
The Corporation’s earnings and cash flows are largely dependent
upon its net interest income. Net interest income is the difference between interest income earned on interest earning assets,
such as loans and securities, and interest expense paid on interest bearing liabilities, such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond the Corporation’s control, including general economic conditions
and policies of various governmental and regulatory agencies, particularly, the Board of Governors of the Federal Reserve System.
Changes in monetary policy, including changes in interest rates, could influence not only the interest the Corporation receives
on loans and securities, but also the amount of interest it pays on deposits and borrowings. Changes in interest rates could also
affect:
· The Corporation’s ability to originate loans and obtain deposits
· The fair value of the Corporation’s financial assets and liabilities
· The average duration of the Corporation’s assets and liabilities
· The future liquidity of the Corporation
If the interest rates paid on deposits and other borrowings increase
at a faster rate than the interest rates received on loans and other securities, the Corporation’s net interest income, and
therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans
and other securities fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it has implemented effective asset
and liability management strategies to reduce the potential effects of changes in interest rates on the Corporation’s results
of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the
Corporation’s financial condition and results of operations.
The Corporation Is Subject To Lending Risk
There are inherent risks associated with the Corporation’s
lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic
conditions in the markets where the Corporation operates, as well as those across the Commonwealth of Pennsylvania and the United
States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay
outstanding loans or the value of the collateral securing these loans. The Corporation is also subject to various laws and regulations
that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Corporation to regulatory
enforcement action that could result in the assessment of significant civil money penalties against the Corporation.
As of December 31, 2020, 41.5% of the Corporation’s loan
portfolio consisted of commercial, industrial, and construction loans secured by real estate. Another 12.7% of the Corporation’s
loan portfolio consisted of commercial loans not secured by real estate. These types of loans are generally viewed as having more
risk of default than consumer real estate loans or other consumer loans. These types of loans are also typically larger than
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consumer
real estate loans and other consumer loans. Because the Corporation’s loan portfolio contains a significant number of commercial
and industrial, construction, and commercial real estate loans with relatively large balances, the deterioration of one or a few
of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in
a net loss of earnings from these loans, an increase in the provision for possible loan losses, and an increase in loan charge-offs,
all of which could have a material adverse effect on the Corporation’s financial condition and results of operations.
An Accounting Standard Will Result
In A Significant Change In How We Recognize Credit Losses And May Have A Material Impact On Our Financial Condition Or Results
Of Operations.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment
model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit
losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise
of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected,
through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect
management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The
income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected
increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and
interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after
December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to
opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019,
the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting
companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. We expect
to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting
period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall
impact of the new guidance on the consolidated financial statements.
The Corporation’s Allowance For Possible Loan Losses
May Be Insufficient
The Corporation maintains an allowance for possible loan losses,
which is a reserve established through a provision for loan losses, charged to expense. The allowance represents management’s
best estimate of expected losses inherent in the existing portfolio of loans. The allowance, in the judgment of management, is
necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s
continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality,
present economic, political, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. Determining
the appropriate level of the allowance for possible loan losses understandably involves a high degree of subjectivity and requires
the Corporation to make significant estimates of current credit risks and future trends, all of which may undergo material changes.
Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem
loans, and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance
for possible loan losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan
losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based
on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for possible
loan losses, the Corporation will need additional provisions to increase the allowance for possible loan losses. Any increases
in the allowance for possible loan losses will result in a decrease in net income, and may have a material adverse effect on the
Corporation’s financial condition and results of operations.
The Basel III Capital Requirements May Require Us To Maintain
Higher Levels Of Capital, Which Could Reduce Our Profitability
Basel III targets higher levels of base capital, certain capital
buffers, and a migration toward common equity as the key source of regulatory capital. Although the new capital requirements are
phased in over the next decade, Basel III signals a growing effort by domestic and international bank regulatory agencies to require
financial institutions, including depository institutions, to maintain higher levels of capital. As Basel III is implemented, regulatory
viewpoints could change and require additional capital to support our business risk profile. If the Corporation and the Bank are
required to maintain higher levels of capital, the Corporation and the Bank may have fewer opportunities to invest capital into
interest-earning assets, which could limit the profitable business operations available to the Corporation and the Bank and adversely
impact our financial condition and results of operations.
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Future Credit Downgrades Of The United States Government Due
To Issues Relating To Debt And The Deficit May Adversely Affect The Corporation
As a result of past difficulties of the federal government to reach
agreement over federal debt and issues connected with the debt ceiling, certain rating agencies placed the United States Government’s
long-term sovereign debt rating on their equivalent of negative watch and announced the possibility of a rating downgrade.
The rating agencies, due to constraints related to the rating of the United States, also placed government-sponsored enterprises
in which the Corporation invests and receives lines of credit on negative watch and a downgrade of the United States credit rating
would trigger a similar downgrade in the credit rating of these government-sponsored enterprises. Furthermore, the credit
rating of other entities, such as state and local governments, may also be downgraded should the United States credit rating be
downgraded. Credit downgrades often cause a lower valuation of the Corporation’s securities.
The Corporation Is Subject To Environmental Liability Risk
Associated With Lending Activities
A significant portion of the Corporation’s loan portfolio
is secured by real property. During the ordinary course of business, the Corporation may foreclose on and take title to properties
securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If
hazardous or toxic substances are found, the Corporation may be liable for remediation costs, as well as for personal injury and
property damage. Environmental laws may require the Corporation to incur substantial expenses and may materially reduce the affected
property’s value or limit the Corporation’s ability to use or sell the affected property. In addition, future laws
or more stringent interpretations or enforcement policies with respect to existing laws, may increase the Corporation’s exposure
to environmental liability. Although the Corporation has policies and procedures to perform an environmental review before initiating
any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The
remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect
on the Corporation’s financial condition and results of operations.
If The Corporation Concludes That The Decline In Value Of
Any Of Its Investment Securities Is Other Than Temporary, The Corporation is Required To Write Down The Value Of That Security
Through A Charge To Earnings
The Corporation reviews the investment securities portfolio at each
quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any
of the investment securities has declined below its carrying value, the Corporation is required to assess whether the decline is
other than temporary. If it concludes that the decline is other than temporary, it is required to write down the value of that
security through a charge to earnings. Changes in the expected cash flows of these securities and/or prolonged price declines have
resulted and may result in concluding in future periods that there is additional impairment of these securities that is other than
temporary, which would require a charge to earnings to write down these securities to their fair value. Due to the complexity of
the calculations and assumptions used in determining whether an asset is impaired, the impairment disclosed may not accurately
reflect the actual impairment in the future.
The Corporation’s Profitability Depends Significantly
On Economic Conditions In The Commonwealth Of Pennsylvania And Its Market Area
The Corporation’s success depends primarily on the general
economic conditions of the Commonwealth of Pennsylvania, and more specifically, the local markets in which the Corporation operates.
Unlike larger national or other regional banks that are more geographically diversified, the Corporation provides banking and financial
services to customers primarily located in Lancaster County, as well as Berks, Chester, and Lebanon Counties. The local economic
conditions in these areas have a significant impact on the demand for the Corporation’s products and services as well as
the ability of the Corporation’s customers to repay loans, the value of the collateral securing loans, and the stability
of the Corporation’s deposit funding sources. A significant decline in general economic conditions, caused by inflation,
recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in
securities markets, or other factors could impact these local economic conditions and, in turn, have a material adverse effect
on the Corporation’s financial condition and results of operations.
The Earnings Of Financial Services Companies Are Significantly
Affected By General Business And Economic Conditions
The Corporation’s operations and profitability are impacted
by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term
interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity
capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which the
Corporation
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operates, all of which are beyond the Corporation’s control. Deterioration in economic conditions could result
in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for
the Corporation’s products and services, among other things, any of which could have a material adverse impact on the Corporation’s
financial condition and results of operations.
The Corporation Operates In A Highly Competitive Industry
And Market Area
The Corporation faces substantial competition in all areas of its
operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors
primarily include national, regional, and community banks within the various markets in which the Corporation operates. Additionally,
various out-of-state banks have begun to enter or have announced plans to enter the market areas in which the Corporation currently
operates. The Corporation also faces competition from many other types of financial institutions, including, without limitation,
online banks, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes,
and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding
company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency
and underwriting), and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer
products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Corporation’s
competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors
may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better
pricing for those products and services than the Corporation can offer.
The Corporation’s ability to compete successfully depends
on a number of factors, including, among other things:
· The ability to expand the Corporation’s market position
· Customer satisfaction with the Corporation’s level of service
· Industry and general economic trends
Failure to perform in any of these areas could significantly weaken
the Corporation’s competitive position, which could adversely affect the Corporation’s growth and profitability and
have a material adverse effect on the Corporation’s financial condition and results of operations.
The Corporation Is Subject To Extensive Government Regulation
And Supervision
The Corporation is subject to extensive federal and state regulation
and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds,
and the banking system as a whole, not shareholders. These regulations affect the Corporation’s lending practices, capital
structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually
review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies,
including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Corporation in substantial
and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and
products the Corporation may offer, and/or increase the ability of non-banks to offer competing financial services and products,
among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil
money penalties, and/or reputation damage, which could have a material adverse effect on the Corporation’s business, financial
condition, and results of operations.
While the Corporation has policies and procedures designed to prevent
any such violations, there can be no assurance that such violations will not occur.
Future Governmental Regulation And Legislation Could Limit
The Corporation’s Future Growth
The Corporation is a registered bank holding company,
and its subsidiary bank is a depository institution whose deposits are insured by the FDIC. As a result, the Corporation is subject
to various regulations and examinations by various regulatory authorities. In general, statutes establish the corporate governance
and eligible business activities for the Corporation, certain acquisition and merger restrictions, limitations on inter-company
transactions such as loans and dividends, capital adequacy requirements, requirements for anti-money laundering programs and
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other compliance matters, among other
regulations. The Corporation is extensively regulated under federal and state banking laws and regulations that are intended
primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. Compliance
with these statutes and regulations is important to the Corporation’s ability to engage in new activities and
consummate additional acquisitions. In addition, the Corporation is subject to changes in federal and state tax laws as well
as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. The
Corporation cannot predict whether any of these changes may adversely and materially affect it. Federal and state banking
regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may
result in higher capital requirements, higher insurance premiums and limitations on the Corporation’s activities that
could have a material adverse effect on its business and profitability. While these statutes are generally designed to
minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such
statutes increases the Corporation’s expense, requires management’s attention and can be a disadvantage from a
competitive standpoint with respect to non-regulated competitors.
The Regulatory Environment For The Financial Services Industry
Is Being Significantly Impacted By Financial Regulatory Reform Initiatives In The United States And Elsewhere, Including Dodd-Frank
And Regulations Promulgated To Implement It
Dodd-Frank, which was signed into law on July 21, 2010,
comprehensively reforms the regulation of financial institutions, products and services. Dodd-Frank requires various federal
regulatory agencies to implement numerous rules and regulations. Because the federal agencies are granted broad discretion in
drafting these rules and regulations, many of the details and the impact of Dodd-Frank may not be known for many months or
years. While much of how the Dodd-Frank and other financial industry reforms will change our current business operations
depends on the specific regulatory reforms and interpretations, many of which have yet to be released or finalized, it is
clear that the reforms, both under Dodd-Frank and otherwise, will have a significant effect on our entire industry. Although
Dodd-Frank and other reforms will affect a number of the areas in which we do business, it is not clear at this time the full
extent of the adjustments that will be required and the extent to which we will be able to adjust our businesses in response
to the requirements. Although it is difficult to predict the magnitude and extent of these effects at this stage, we believe
compliance with Dodd-Frank and implementing its regulations and initiatives will negatively impact revenue and increase the
cost of doing business, both in terms of transition expenses and on an ongoing basis, and it may also limit our ability to
pursue certain business opportunities.
The Corporation’s Banking Subsidiary May Be Required
To Pay Higher FDIC Insurance Premiums Or Special Assessments Which May Adversely Affect Its Earnings
Future bank failures may prompt
the FDIC to increase its premiums above the current levels or to issue special assessments. The Corporation generally is unable
to control the amount of premiums or special assessments that its subsidiary is required to pay for FDIC insurance. Any future
changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on the Corporation’s
results of operations, financial condition, and the ability to continue to pay dividends on common stock at the current rate or
at all.
The Corporation’s Controls And Procedures May Fail Or
Be Circumvented
Management regularly reviews and updates the Corporation’s
internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls,
however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of the Corporation’s controls and procedures or failure
to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business,
results of operations, and financial condition.
New Lines Of Business Or New Products And Services May Subject
The Corporation To Additional Risks
From time to time, the Corporation may implement new lines of business
or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated
with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines
of business and/or new products and services, the Corporation may invest significant time and resources. Initial timetables for
the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability
targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market
preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore,
any new line of business and/or new product or service could have a significant impact on the effectiveness of the Corporation’s
system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business
or new products or
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services could have a material adverse effect on the Corporation’s business, results of operations, and
financial condition.
The Corporation’s Ability To Pay Dividends Depends On
Earnings And Is Subject To Regulatory Limits
The Corporation’s ability to pay dividends is also subject
to its profitability, financial condition, capital expenditures, and other cash flow requirements. Dividend payments are subject
to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory
agencies. There is no assurance that the Corporation will have sufficient earnings to be able to pay dividends or generate adequate
cash flow to pay dividends in the future. The Corporation’s failure to pay dividends on its common stock could have a material
adverse effect on the market price of its common stock.
Future Acquisitions May Disrupt The Corporation’s Business
And Dilute Stockholder Value
The Corporation may use its common stock to acquire other companies
or make investments in corporations and other complementary businesses. The Corporation may issue additional shares of common stock
to pay for future acquisitions, which would dilute the ownership interest of current shareholders of the Corporation. Future business
acquisitions could be material to the Corporation, and the degree of success achieved in acquiring and integrating these businesses
into the Corporation could have a material effect on the value of the Corporation’s common stock. In addition, any acquisition
could require the Corporation to use substantial cash or other liquid assets or to incur debt. In those events, the Corporation
could become more susceptible to economic downturns and competitive pressures.
The Corporation May Need To Or Be Required To Raise Additional
Capital In The Future, And Capital May Not Be Available When Needed And On Terms Favorable To Current Shareholders
Federal banking regulators
require the Corporation and its subsidiary bank to maintain adequate levels of capital to support their operations. These capital
levels are determined and dictated by law, regulation, and banking regulatory agencies. In addition, capital levels
are also determined by the Corporation’s management and board of directors based on capital levels that they believe are
necessary to support the Corporation’s business operations.
If the Corporation raises
capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership
interests of current investors and could dilute the per share book value and earnings per share of its common stock. Furthermore,
a capital raise through issuance of additional shares may have an adverse impact on the Corporation’s stock price. New investors
also may have rights, preferences and privileges senior to the Corporation’s current shareholders, which may adversely impact
its current shareholders. The Corporation’s ability to raise additional capital will depend on conditions in the
capital markets at that time, which are outside of its control, and on its financial performance. Accordingly, the Corporation
cannot be certain of its ability to raise additional capital on acceptable terms and acceptable time frames or to raise additional
capital at all. If the Corporation cannot raise additional capital in sufficient amounts when needed, its ability to comply with
regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts
may adversely affect the Corporation’s financial condition and results of operations.
The Corporation May Not Be Able To Attract And Retain Skilled
People
The Corporation’s success highly depends on its ability to
attract and retain key people. Competition for the best people in most activities engaged in by the Corporation can be intense
and the Corporation may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Corporation’s
key personnel could have a material adverse impact on the Corporation’s business because of their skills, knowledge of the
Corporation’s market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
The Corporation does not currently have employment agreements or non-competition agreements with any of its senior officers.
The Corporation’s Information Systems May Experience
An Interruption Or Breach In Security
The Corporation relies heavily on communications and information
systems to conduct its business. Any failure, interruption, or breach in security of these systems could result in failures or
disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan, and other systems. While
the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach
of its information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur
or, if they do occur, that they will be adequately addressed. Further, while the Corporation maintains insurance coverage that
may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks,
such insurance coverage may be insufficient to cover all losses. The occurrence
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of any failures, interruptions, or security breaches
of the Corporation’s information systems could damage the Corporation’s reputation, adversely affecting customer or
consumer confidence, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny and possible
regulatory penalties, or expose the Corporation to civil litigation and possible financial liability, any of which could have a
material adverse effect on the Corporation’s financial condition and results of operations.
The Corporation Continually Encounters Technological Change
The financial services industry is continually undergoing rapid
technological change with frequent introductions of new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation’s
future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products
and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations.
Many of the Corporation’s competitors have substantially greater resources to invest in technological improvements. The Corporation
may not be able to effectively implement new technology-driven products and services or be successful in marketing these products
and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry
could have a material adverse impact on the Corporation’s business, financial condition, and results of operations.
The Corporation’s Operations Of Its Business, Including
Its Interaction With Customers, Are Increasingly Done Via Electronic Means, And This Has Increased Its Risks Related To Cyber Security
The Corporation is exposed to the risk of cyber-attacks in the normal
course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. The Corporation has
observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining
unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing
operational disruption. To combat against these attacks, policies and procedures are in place to prevent or limit the effect on
the possible security breach of its information systems. While the Corporation maintains insurance coverage that may, subject to
policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance
coverage may be insufficient to cover all losses. While the Corporation has not incurred any material losses related to cyber-attacks,
nor is it aware of any specific or threatened cyber-incidents as of the date of this report, it may incur substantial costs and
suffer other negative consequences if it falls victim to successful cyber-attacks. Such negative consequences could include remediation
costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying
additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues
resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; disruption
or failures of physical infrastructure, operating systems or networks that support our business and customers resulting in the
loss of customers and business opportunities; additional regulatory scrutiny and possible regulatory penalties; litigation; and
reputational damage adversely affecting customer or investor confidence.
The Increasing Use Of Social Media Platforms Presents New
Risks And Challenges And Our Inability Or Failure To Recognize, Respond To And Effectively Manage The Accelerated Impact Of Social
Media Could Materially Adversely Impact Our Business
There has been a marked increase in the use of social media platforms,
including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individuals access
to a broad audience of consumers and other interested persons. Social media practices in the banking industry are evolving, which
creates uncertainty and risk of noncompliance with regulations applicable to our business. Consumers value readily available information
concerning businesses and their goods and services and often act on such information without further investigation and without
regard to its accuracy. Many social media platforms immediately publish the content their subscribers and participants post, often
without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to
our interests and/or may be inaccurate. The dissemination of information online could harm our business, prospects, financial condition,
and results of operations, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity
for redress or correction.
Other risks associated with the use of social media include improper
disclosure of proprietary information, negative comments about our business, exposure of personally identifiable information, fraud,
out-of-date information, and improper use by employees and customers. The inappropriate use of social media by our customers or
employees could result in negative consequences including remediation costs including training for employees, additional
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regulatory
scrutiny and possible regulatory penalties, litigation or negative publicity that could damage our reputation adversely affecting
customer or investor confidence.
The Corporation Is Subject To Claims And Litigation Pertaining
To Fiduciary Responsibility
From time to time, customers make claims and take legal action pertaining
to the Corporation’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the
Corporation’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are
not resolved in a manner favorable to the Corporation, they may result in significant financial liability and/or adversely affect
the market perception of the Corporation and its products and services as well as impact customer demand for those products and
services. Any financial liability or reputation damage could have a material adverse effect on the Corporation’s business,
financial condition, and results of operations.
Financial Services Companies Depend On The Accuracy And Completeness
Of Information About Customers And Counterparties
In deciding whether to extend credit or enter into other transactions,
the Corporation may rely on information furnished by, or on behalf of, customers and counterparties, including financial statements,
credit reports, and other financial information. The Corporation may also rely on representations of those customers, counterparties,
or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate
or misleading financial statements, credit reports, or other financial information could have a material adverse impact on the
Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.
Consumers May Decide Not To Use Banks To Complete Their Financial
Transactions
Technology and other changes are allowing parties to complete financial
transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that
would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions
such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries,
known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and
the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of
funds could have a material adverse effect on the Corporation’s financial condition and results of operations.
A Change In Control Of The United States Government And Issues
Relating To Debt And The Deficit May Adversely Affect The Corporation
The outcome of future elections could result in changes in control
of the federal government and bring significant changes (or uncertainty) in governmental policies, regulatory environments, spending
sentiment and many other factors and conditions, some of which could adversely impact the Corporation’s business, financial
condition and results of operations.
Risks Related to COVID-19
The COVID-19 Pandemic Has Adversely Impacted Our Business
And Financial Results, And The Ultimate Impact Will Depend On Future Developments, Which Are Highly Uncertain And Cannot Be Predicted,
Including The Scope And Duration Of The Pandemic And Actions Taken By Governmental Authorities In Response To The Pandemic.
The COVID-19 pandemic has negatively impacted the global, national
and local economies, disrupted global and national supply chains, lowered equity market valuations, created significant volatility
and disruption in financial markets, and increased unemployment levels. In addition, the pandemic resulted in temporary closures
of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities
and may result in the same or similar restrictions in the future. As a result, the demand for our products and services have been
and may continue to be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore,
the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance
for credit losses, particularly if businesses remain closed or are required to operate at diminished capacities or are required
to close again, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit
or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting
issuers, we may be required to recognize further impairments on the securities we hold as well as reductions in other comprehensive
income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively,
including because of illness, quarantines, government actions, or other restrictions in connection with
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the pandemic. The extent
to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory
capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including
the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the
pandemic.
We continue to closely monitor the COVID-19 pandemic and related
risks as they evolve. The magnitude, duration and likelihood of the current outbreak of COVID-19, further outbreaks of COVID-19,
future actions taken by governmental authorities and/or other third parties in response to the COVID-19 pandemic, and its future
direct and indirect effects on the global, national and local economy and our business and results of operation are highly uncertain.
The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or longer lasting effects on economic
conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial
condition.
Due to the Corporation’s participation in the U.S. Small
Business Administration ("SBA") Paycheck Protection Program ("PPP"), the Corporation is subject to additional
risks of litigation from its clients or other parties regarding the processing of loans for the PPP and risks that the SBA may
not fund some or all PPP loan guaranties.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security
Act ("CARES Act") was enacted, which included a $349 billion loan program administered through the SBA referred to as
the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and
other approved regulated lenders. The Corporation participated as a lender in the PPP. Because of the short timeframe between the
passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation
of the PPP along with the continually evolving nature of SBA the rules, interpretations and guidelines concerning this program,
which exposes us to risks relating to noncompliance with the PPP. Since the launch of the PPP, several large banks have been subject
to litigation regarding the process and procedures that such banks used in processing applications for the PPP. As such, we may
be exposed to the risk of litigation, from both clients and non-clients that approached the Corporation regarding PPP loans, regarding
its process and procedures used in processing applications for the PPP. If any such litigation is filed against us and is not resolved
in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition,
litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP
related litigation could have a material adverse impact on our business, financial condition and results of operations.
The Corporation also has credit risk on PPP loans if a determination
is made by the SBA that there is a deficiency in the manner in which the loan was originated, underwritten, certified by the borrower,
funded, or serviced by the Corporation, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or
may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss
resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP
loan was originated, certified by the borrower, funded, or serviced by the Corporation, the SBA may deny its liability under the
guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to
the deficiency from us.
Other Events
Natural Disasters, Acts Of War Or Terrorism, Pandemics, and
Other External Events Could Significantly Impact The Corporation’s Business
Severe weather, natural disasters, acts of war or terrorism, pandemics,
and other adverse external events could have a significant impact on the Corporation’s ability to conduct business. Such
events could affect the stability of the Corporation’s deposit base; impair the ability of borrowers to repay outstanding
loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause
the Corporation to incur additional expenses. Severe weather or natural disasters, acts of war or terrorism, pandemics, or other
adverse external events, may occur in the future. Although management has established disaster recovery policies and procedures,
the occurrence of any such event could have a material adverse effect on the Corporation’s business, financial condition,
and results of operations.
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ENB FINANCIAL CORP
Risks Associated With The Corporation’s Common Stock
The Corporation’s Stock Price Can Be Volatile
Stock price volatility may make it more difficult for shareholders
to resell their shares of common stock when they desire and at prices they find attractive. The Corporation’s stock price
can fluctuate significantly in response to a variety of factors including, among other things:
• Actual or anticipated variations in quarterly results of operations
• Recommendations by securities analysts
• New technology used, or services offered, by competitors
• Changes in government regulations
General market fluctuations, industry factors, and general economic
and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could
also cause the Corporation’s stock price to decrease regardless of operating results.
The Trading Volume In The Corporation’s Common Stock
Is Less Than That Of Other Larger Financial Services Companies
The Corporation’s common stock is listed for trading on the
OTCQX Best Market (OTCQX) under the symbol ENBP. The trading volume in its common stock is a fraction of that of other larger financial
services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on
the presence in the marketplace of willing buyers and sellers of the Corporation’s common stock at any given time. This presence
depends on the individual decisions of investors and general economic and market conditions over which the Corporation has no control.
Given the lower trading volume of the Corporation’s common stock, significant sales of the Corporation’s common stock,
or the expectation of these sales, could cause the Corporation’s stock price to fall.
An Investment In The Corporation’s Common Stock Is Not
An Insured Deposit
The Corporation’s common stock is not a bank deposit and,
therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity.
Investment in the Corporation’s common stock is inherently risky for the reasons described in this “Risk Factors”
section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company.
As a result, an investor in the Corporation’s common stock may lose some or all of their investment.
The Corporation’s Articles Of Incorporation And
Bylaws, As Well As Certain Banking Laws, May Have An Anti-Takeover Effect
Provisions of the Corporation’s articles of incorporation
and bylaws, federal banking laws, including regulatory approval requirements, and the Corporation’s stock purchase rights
plan, could make it more difficult for a third party to acquire the Corporation, even if doing so would be perceived to be beneficial
to the Corporation’s shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other
business combination that could adversely affect the market price of the Corporation’s common stock.
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Item 1B. Unresolved Staff Comments
None
Item 2. Properties
ENB Financial Corp’s headquarters and main office of Ephrata
National Bank are located at 31 East Main Street, Ephrata, Pennsylvania.
Listed below are the office locations of properties owned or leased
by the Corporation. No mortgages, liens, or encumbrances exist on any of the Corporation’s owned properties. As of December
31, 2020, the Corporation leased three properties.
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ENB FINANCIAL CORP
Owned or Location Bldg
Property Location Leased Acreage Sq Ftg
Corporate Headquarters/Main Office Owned 0.50 42,539
31 East Main Street
Ephrata, Pennsylvania
ENB's Money Management Group Owned 0.17 11,156
47 East Main Street
Ephrata, Pennsylvania
31 East Franklin Street
Ephrata, Pennsylvania
Administrative Offices Leased N/A 13,656
124 East Main Street, 4th Floor
Ephrata, Pennsylvania
Main Street Drive-In Owned 0.41 700
42 East Main Street
Ephrata, Pennsylvania
809 Martin Avenue
Ephrata, Pennsylvania
935 North Railroad Avenue
New Holland, Pennsylvania
1 Main Street
Denver, Pennsylvania
Akron, Pennsylvania
Lititz, Pennsylvania
110 Marble Avenue
East Earl, Pennsylvania
1 North Penryn Road
Manheim, Pennsylvania
Leola Office Leased N/A 3,736
361 West Main Street
Leola, Pennsylvania
615 East Lincoln Avenue
Myerstown, Pennsylvania
Morgantown, Pennsylvania
Georgetown Drive-Thru Office Leased N/A 252
Quarryville, Pennsylvania
60 Historic Drive
Strasburg, Pennsylvania
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In addition to the above properties, the Corporation owns an additional
property located on the Corporation’s Ephrata Main Street Campus. This property was acquired in 2002, when a group of properties
adjacent to and surrounding the Corporation’s Main Office was purchased. The Corporation owns another 4.7 acre property
located off the Main Street Campus but still within Ephrata Borough. These two properties are being held for future use or possible
sale. The other properties purchased in 2002 have been remodeled as office or operational space and are reflected in the offices
shown above.
Item 3. Legal Proceedings
The nature of the Corporation’s business generates a certain
amount of litigation involving matters arising in the ordinary course of business; however, in the opinion of management, there
are no material proceedings pending to which the Corporation is a party to, or which would be material in relation to the Corporation’s
undivided profits or financial condition. There are no proceedings pending other than ordinary routine litigation incident to the
business of the Corporation. In addition, no material proceedings are pending, known to be threatened, or contemplated against
the Corporation by governmental authorities.
Item 4. Mine Safety Disclosures – Not Applicable
Part II
Item 5. Market for Registrant’s Common Equity, Related
Shareholder Matters, and Issuer Purchases of Equity Securities
On April 17, 2019, ENB Financial Corp announced the Board of Directors