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.
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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, 2022, 43.7% of the Corporation’s loan portfolio
consisted of commercial, industrial, and construction loans secured by real estate. Another 12.1% 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 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.
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
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in industry and finance, and the strength of the U.S. economy and the local economies in which the Corporation 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
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such as loans and
dividends, capital adequacy requirements, requirements for anti-money laundering programs and 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 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, Dodd-Frank has had and will continue to have a significant
impact on our business operations as its provisions have taken effect. 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 services could have a material adverse
effect on the Corporation’s business, results of operations, and financial condition.
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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’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 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
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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 regulatory scrutiny and possible regulatory
penalties, litigation or negative publicity that could damage our reputation adversely affecting customer or investor confidence.
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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.
Other Events
Natural Disasters, Acts Of War Or Terrorism, Domestic and International
Instability, Pandemics, and Other External Events Could Significantly Impact The Corporation’s Business
Severe weather, natural disasters, acts of war or terrorism, domestic and
international instability, 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.
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
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• 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.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
As of December 31, 2022, ENB Financial Corp and Ephrata National Bank owned
and leased buildings in the normal course of business. The headquarters of ENB Financial Corp and main office of Ephrata National Bank
is at 31 East Main Street, Ephrata, Pennsylvania. As of December 31, 2022, the Bank owned 18 properties and leased five properties. These
properties are adequate for their intended and present utilization.
For more information concerning the amounts recorded for premises and equipment
and commitments under current leasing agreements, see Notes D and Q of the Notes to Consolidated Financial Statements included in Item
8. “Financial Statements and Supplementary Data” of this report on Form 10-K.
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ENB FINANCIAL CORP
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 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
The Corporation has only one class of stock authorized, issued, and outstanding,
which consists of common stock with a par value of $0.10 per share. As of December 31, 2022, there were 24,000,000 shares of common stock
authorized with 5,739,114 shares issued, and 5,635,533 shares outstanding to approximately 847 shareholders. The Corporation’s common
stock is traded on a limited basis on the OTCQX Best Market under the symbol “ENBP.” Prices presented in the table below reflect
high and low prices of actual transactions known to management. Prices and dividends per share are adjusted for stock splits. Market quotations
reflect inter-dealer prices, without retail mark up, mark down, or commission and may not reflect actual transactions.
High Low Dividend High Low Dividend
Dividends
The Corporation, and before it the Bank, since 1973 has generally paid
quarterly cash dividends on or around March 15, June 15, September 15, and December 15 of each year. The Corporation currently expects
to continue the practice of paying regular quarterly cash dividends to its shareholders for the foreseeable future. However, future dividends
are dependent upon future earnings and legal restrictions. The dividend payments reflected above amount to a dividend payout ratio between
25.0% and 26.0% for 2021 and 2022, respectively. The dividend payout ratio is only one element of management’s plan for managing
capital. Certain laws restrict the amount of dividends that may be paid to shareholders in any given year. In addition, under Pennsylvania
corporate law, the Corporation may not pay a dividend if, after issuing the dividend (1) the Corporation would be unable to pay its debts
as they become due, or (2) the Corporation’s total assets would be less than its total liabilities plus the amount needed to satisfy
any preferential rights of shareholders. In addition, as declared by the Board of Directors, Ephrata National Bank’s dividend restrictions
apply indirectly to ENB Financial Corp because cash available for dividend distributions will initially come from dividends Ephrata National
Bank pays to ENB Financial Corp. See Note M to the consolidated financial statements in this Form 10-K filing, for information that discusses
and quantifies this regulatory restriction.
ENB Financial Corp offers its shareholders the convenience of a Dividend
Reinvestment Plan (DRP) and the direct deposit of cash dividends. The DRP gives shareholders registered with the Corporation the opportunity
to have their quarterly dividends invested automatically in additional shares of the Corporation’s common stock. Shareholders who
prefer a cash dividend may have their quarterly dividends deposited directly into a checking or savings account at their financial institution.
For additional information on either program, contact the Corporation’s stock registrar and dividend paying agent, Computershare
Shareholder Services, P.O. Box 505000, Louisville, KY 40233-5000.
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ENB FINANCIAL CORP
Purchases
The following table details the Corporation’s purchase of its own
common stock during the three months ended December 31, 2022.
Issuer Purchase of Equity Securites
Total Number of Maximum Number
Total Number Average Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet be Purchased
Period Purchased Per Share Announced Plans * Under the Plan *
* On October 21, 2020, the Board of Directors of the Corporation approved a plan to repurchase, in the open market
and privately renegotiated transactions, up to 200,000 shares of its outstanding common stock. This plan replaces the 2019 plan. The first
purchase of common stock under this plan occurred on October 28, 2020. By December 31, 2022, a total of 39,356 shares were repurchased
at a total cost of $785,020, for an average cost per share of $19.95.
Recent Sales of Unregistered Securities and Equity Compensation Plan
The Corporation does not have an equity compensation plan and has not
sold any unregistered securities.
Item 6. [Reserved]
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis represents management’s view
of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with
the consolidated financial statements and other financial schedules included in this annual report. The financial condition and results
of operations presented are not indicative of future performance.
Strategic Overview
ENB Financial Corp and its wholly owned subsidiary, Ephrata National Bank,
are committed to remaining an independent community bank serving its market area. The Corporation’s roots date back to the April
11, 1881 charter granted to Ephrata National Bank by the Office of the Comptroller of the Currency. The Bank’s growth has been entirely
organic over 141 years of existence. The Board and Management are committed to the principles and values that have served the company
well over its history and the desire is to produce strong financial results that will ensure trust from the Bank’s customers and
favorable returns to the shareholders.
Results of Operations
Overview
The year ended December 31, 2022 was positively impacted by a number of
items resulting in solid financial results. The Corporation grew interest-earning assets rapidly during 2022 resulting in significantly
higher levels of net interest income. The growth in net interest income was also supported by the rapid increase in the Federal Funds
rate and concurrently the Prime rate as the Federal Reserve moved to combat inflation by increasing overnight rates dramatically. While
years prior to 2022 were marked by significant balance sheet growth because of growth in the deposit portfolio, 2022 was marked by significant
loan growth.
The Corporation recorded net income of $14,631,000 for the year ended December
31, 2022, a $285,000, or 1.9% decrease from the year ended December 31, 2021. The earnings per share, basic and diluted, were $2.62 in
2022, compared to $2.68 in 2021, a 2.2% decrease. The decrease in the Corporation’s 2022 earnings was caused primarily by a decline
in non-interest income in addition to an increase in operating expenses and provision expense that was partially offset by the increase
in net interest income.
The Corporation’s net interest income
(NII) increased by $10,012,000, or 24.7%, in 2022, compared to 2021. The increase in NII primarily resulted from an increase in interest
and fees on loans of $7,698,000, or 22.5%, and interest on securities available for sale of $4,406,000, or 49.8%. Interest expense on
deposits and borrowings increased by $2,356,000, or 78.0%, in 2022 compared to the prior year. The increasing interest rate environment
has caused an increase in asset yield, but also an increase in the cost of funds, which has resulted in these much higher levels of net
interest income.
The Corporation recorded a $1,300,000 provision
for loan losses in 2022, compared to $475,000 in 2021. The higher provision in 2022 was primarily caused by the rapid volume growth in
the loan portfolio. The increase in the provision was constrained by a decline in classified loan balances throughout the year and a decrease
in several qualitative factors as a result of improved conditions.
Non-interest income excluding security and mortgage gains increased by
$951,000, or 8.4%, for the year ended December 31, 2022, compared to the prior year, due to many positive trends such as higher trust
income, higher service fees, and higher earnings on bank-owned life insurance from two death benefit payouts. Mortgage gains decreased
in 2022 to $1,302,000, compared to $5,526,000 in 2021. Mortgage production was stable in 2022 compared to 2021, but the rapid market rate
increases affected the margin that the Corporation was able to obtain on the sale of mortgages. The majority of mortgage production during
2022 were adjustable rate mortgages that were generated and retained on the Corporation’s balance sheet. Additionally, gains on
debt and equity securities were $1,044,000, or 99.1% lower in 2022 compared to the prior year due to higher interest rates which resulted
in fewer security sales.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
The financial services industry uses two primary performance measurements
to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates
income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the
amount of equity or capital utilized.
Key Performance Ratios
Year ended December 31,
Return on Average Assets 0.83% 0.95%
The results of the Corporation’s operations are best explained by
addressing in further detail the five major sections of the income statement, which are as follows:
● Net interest income
● Provision for loan losses
● Other income
● Operating expenses
● Income taxes
The following discussion analyzes each of these five
components.
Net Interest Income
NII represents the largest portion of the Corporation’s operating
income. In 2022, NII generated 78.9% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared
to 69.4% in 2021. This increase is a result of much higher levels of interest-earning assets in 2022 compared to 2021 with lower non-interest
income as a result of the changes in mortgage activity. The overall performance of the Corporation is highly dependent on the changes
in NII since it comprises such a significant portion of operating income.
The following table shows a summary analysis of NII on a fully taxable
equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest
spread, and net yield on interest earning assets are presented on an FTE basis. The FTE NII shown in both tables below will exceed the
NII reported on the consolidated statements of income, which is not shown on an FTE basis.
Net Interest Income
(DOLLARS IN THOUSANDS)
Year ended December 31,
$ $
Net interest income
NII is the difference between interest income earned on assets and interest
expense incurred on liabilities. Accordingly, two factors affect NII:
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
NII is impacted by yields earned on assets and rates paid on liabilities.
With the rapid increase in the short-term Federal Reserve rates in 2022, asset yields have increased and the U.S. Treasury curve increased
dramatically on the short end but has been relatively flat on the long end.
As a result of a larger balance sheet in 2022, with higher asset yields,
the Corporation’s NII on a tax equivalent basis increased significantly and the Corporation’s margin increased to 3.03% for
year ended December 31, 2022, compared to 2.81% in 2021. Loan and investment yields were higher in 2022 due to the 425 basis point Fed
rate increases during the year positively impacting yields on variable rate instruments and increasing the yields on new volume. The Corporation’s
NII on a tax equivalent basis in 2022 increased over 2021, by $10,081,000, or 24.2%.
The Corporation’s overall cost of funds on a monthly annualized basis,
including non-interest bearing funds, remained stable through the first half of 2022 between 18 and 22 basis points. In the second half
of the year, core deposit interest rates as well as time deposit rates were increased resulting in a much higher cost of funds for the
second half of 2022 ranging between 25 and 67 basis points. The average balance and interest rates of borrowings was higher in 2022 compared
to 2021, resulting in higher interest expense of $509,000, or 39.9%. The Corporation now carries a total of $40 million of subordinated
debt that was issued at the holding company; $20 million beginning on December 30, 2020, at a rate of 4.00%, and $20 million beginning
on July 22, 2022, at a rate of 5.75%. The additional subordinated debt resulted in an increase in interest expense of $511,000, or 63.9%,
when comparing 2022 to 2021.
The following table provides an analysis of year-to-year changes in net
interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result
of interest rate increases or decreases.
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
Increase (Decrease) Increase (Decrease)