# FRANKLIN FINANCIAL SERVICES CORP /PA/ (FRAF) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FRANKLIN FINANCIAL SERVICES CORP /PA/'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/723646/000072364625000020/fraf-20241231x10k.htm
Accession: 0000723646-25-000020
Filing date: 2025-03-14
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FRAF/
All MD&A years: /company/FRAF/mda/
Previous year: /company/FRAF/mda/fy2023/ (FY 2023)
Next year: /company/FRAF/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

[[GREPCENT_TABLE]]
[["","","Summary of Selected Financial Data as of and for the Year Ended December 31"],["","","2024","","2023","","2022","","2021","","2020"],["(Dollars in thousands, except per share)"],["Balance Sheet Highlights"],["Total assets","","$","2,197,841","","$","1,836,039","","$","1,699,579","","$","1,773,806","","$","1,535,038"],["Debt securities available for sale, at fair value","","","508,604","","","472,503","","","487,247","","","530,292","","","397,331"],["Loans, net","","","1,380,424","","","1,240,933","","","1,036,866","","","983,746","","","992,915"],["Deposits","","","1,815,647","","","1,537,978","","","1,551,448","","","1,584,359","","","1,354,573"],["Other borrowings","","","200,000","","","130,000","","","\u2014","","","\u2014","","","\u2014"],["Shareholders' equity","","","144,716","","","132,136","","","114,197","","","157,065","","","145,176"],["Summary of Operations"],["Interest income","","$","101,451","","$","76,762","","$","56,449","","$","47,573","","$","45,939"],["Interest expense","","","43,937","","","23,125","","","4,863","","","2,902","","","3,978"],["Net interest income","","","57,514","","","53,637","","","51,586","","","44,671","","","41,961"],["Provision for credit losses - loans","","","1,975","","","2,589","","","650","","","(2,100)","","","4,625"],["Provision for credit losses - unfunded commitments","","","8","","","135","","","\u2014","","","\u2014","","","\u2014"],["Total provision for credit losses","","","1,983","","","2,724","","","650","","","(2,100)","","","4,625"],["Net interest income after provision for credit losses","","","55,531","","","50,913","","","50,936","","","46,771","","","37,336"],["Noninterest income","","","13,679","","","14,851","","","15,250","","","19,488","","","15,084"],["Noninterest expense","","","55,895","","","50,011","","","48,691","","","43,245","","","39,362"],["Income before income taxes","","","13,315","","","15,753","","","17,495","","","23,014","","","13,058"],["Income tax expense","","","2,216","","","2,155","","","2,557","","","3,398","","","258"],["Net income","","$","11,099","","$","13,598","","$","14,938","","$","19,616","","$","12,800"],["Performance Measurements"],["Return on average assets","","","0.54%","","","0.78%","","","0.83%","","","1.17%","","","0.91%"],["Return on average equity","","","8.05%","","","11.39%","","","11.64%","","","13.20%","","","9.56%"],["Return on average tangible equity (1)","","","8.62%","","","12.32%","","","12.52%","","","14.05%","","","10.24%"],["Efficiency ratio (1)","","","73.36%","","","70.75%","","","71.21%","","","66.12%","","","67.32%"],["Net interest margin, fully tax equivalent","","","2.95%","","","3.31%","","","3.11%","","","2.88%","","","3.21%"],["Shareholders' Value (per common share)"],["Diluted earnings per share","","$","2.51","","$","3.10","","$","3.36","","$","4.42","","$","2.93"],["Basic earnings per share","","","2.52","","","3.11","","","3.38","","","4.44","","","2.94"],["Regular cash dividends paid","","","1.28","","","1.28","","","1.28","","","1.25","","","1.2"],["Book value","","","32.69","","","30.23","","","26.01","","","35.36","","","33.07"],["Tangible book value (1)","","","30.65","","","28.17","","","23.96","","","33.34","","","31.02"],["Market value*","","","29.90","","","31.55","","","36.10","","","33.10","","","27.03"],["Market value/book value ratio","","","91.47%","","","104.37%","","","138.79%","","","93.61%","","","81.74%"],["Market value/tangible book value ratio","","","97.54%","","","112.01%","","","150.67%","","","99.29%","","","87.13%"],["Price/earnings multiple year-to-date","","","11.91","","","10.18","","","10.74","","","7.49","","","9.23"],["Dividend yield**","","","4.28%","","","4.06%","","","3.55%","","","3.87%","","","4.44%"],["Dividend payout ratio","","","50.72%","","","41.15%","","","37.88%","","","28.16%","","","40.83%"],["Safety and Soundness"],["Average equity/average assets","","","6.65%","","","6.82%","","","7.17%","","","8.89%","","","9.48%"],["Risk-based capital ratio (Total)","","","13.85%","","","14.45%","","","17.21%","","","18.41%","","","17.69%"],["Leverage ratio (Tier 1)","","","7.92%","","","9.01%","","","8.95%","","","8.52%","","","8.69%"],["Common equity ratio (Tier 1)","","","11.31%","","","11.82%","","","14.22%","","","15.20%","","","14.32%"],["Nonperforming loans/gross loans","","","0.02%","","","0.01%","","","0.01%","","","0.74%","","","0.87%"],["Nonperforming assets/total assets","","","0.01%","","","0.01%","","","0.01%","","","0.42%","","","0.57%"],["Allowance for credit loss/loans","","","1.26%","","","1.28%","","","1.35%","","","1.51%","","","1.66%"],["Net loan (charge-offs) recoveries/average loans","","","-0.03%","","","-0.02%","","","-0.15%","","","0.04%","","","0.02%"],["Assets under Management"],["Wealth Management Services (fair value)","","$","1,169,282","","$","1,094,747","","$","904,317","","$","946,964","","$","836,381"],["Held at third-party brokers (fair value)","","","139,872","","","135,423","","","116,398","","","118,046","","","112,624"],["(1) See the section titled \"GAAP versus Non-GAAP Presentation\" that follows."],["* Based on the closing price of FRAF as quoted on the Nasdaq Capital Market for all years shown."],["** Based on annualized 4th quarter dividend and year-end market value."]]
[[/GREPCENT_TABLE]]

19

Table of Contents

GAAP versus non-GAAP Presentations – The Corporation supplements its traditional GAAP measurements with certain non-GAAP measurements to evaluate its performance and to eliminate the effect of intangible assets.  By eliminating intangible assets, the Corporation believes it presents a measurement that is comparable to companies that have no intangible assets or to companies that have eliminated intangible assets in similar calculations. However, not all companies may use the same calculation method for each measurement. The Efficiency Ratio measures the cost to generate one dollar of revenue. The non-GAAP measurements are not intended to be used as a substitute for the related GAAP measurements and should not be read in isolation or relied upon as a substitute for GAAP measures. The following table shows the calculation of the non-GAAP measurements.

[[GREPCENT_TABLE]]
[["(Dollars in thousands, except per share)","","For the Year Ended December 31"],["","","2024","","2023","","2022","","2021","","2020"],["Return on Average Tangible Equity (non-GAAP)"],["Net income","","$","11,099","","$","13,598","","$","14,938","","$","19,616","","$","12,800"],["Average shareholders' equity","","","137,840","","","119,408","","","128,283","","","148,637","","","133,958"],["Less average intangible assets","","","(9,016)","","","(9,016)","","","(9,016)","","","(9,016)","","","(9,016)"],["Average shareholders' equity (non-GAAP)","","","128,824","","","110,392","","","119,267","","","139,621","","","124,942"],["Return on average tangible equity (non-GAAP)","","","8.62%","","","12.32%","","","12.52%","","","14.05%","","","10.24%"],["Tangible Book Value (per share) (non-GAAP)"],["Shareholders' equity","","$","144,716","","$","132,136","","$","114,197","","$","157,065","","$","145,176"],["Less intangible assets","","","(9,016)","","","(9,016)","","","(9,016)","","","(9,016)","","","(9,016)"],["Shareholders' equity (non-GAAP)","","","135,700","","","123,120","","","105,181","","","148,049","","","136,160"],["Shares outstanding (in thousands)","","","4,427","","","4,371","","","4,390","","","4,441","","","4,389"],["Tangible book value (non-GAAP)","","","30.65","","","28.17","","","23.96","","","33.34","","","31.02"],["Efficiency Ratio (non-GAAP)"],["Noninterest expense","","$","55,895","","$","50,011","","$","48,691","","$","43,245","","$","39,362"],["Net interest income","","","57,514","","","53,637","","","51,586","","","44,671","","","41,961"],["Plus tax equivalent adjustment to net interest income","","","938","","","1,094","","","1,381","","","1,466","","","1,407"],["Plus noninterest income, net of securities transactions","","","17,737","","","15,954","","","15,410","","","19,271","","","15,104"],["Total revenue","","","76,189","","","70,685","","","68,377","","","65,408","","","58,472"],["Efficiency ratio (non-GAAP)","","","73.36%","","","70.75%","","","71.21%","","","66.12%","","","67.32%"]]
[[/GREPCENT_TABLE]]

Forward-Looking Statements

Certain statements appearing herein which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements refer to a future period or periods, reflecting Management’s current views as to likely future developments, and use words “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” or similar terms. Because forward-looking statements involve certain risks, uncertainties and other factors over which the Corporation has no direct control, actual results could differ materially from those contemplated in such statements. These factors include (but are not limited to) the following: general economic conditions, changes in interest rates, changes in the rate of inflation and product and service prices, change in the Corporation’s cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, effects of government shutdowns and budget negotiations, impacts of the interruption, degradation or breach in security of our information and technology systems or other technological risks and attacks, acts of war, terrorism or geopolitical instabilities, changes in accounting policies or practices, changes in technology, the intensification of competition within the Corporation’s market area, and other similar factors.

We caution readers not to place undue reliance on these forward-looking statements. They only reflect Management’s analysis as of this date. The Corporation does not revise or update these forward-looking statements to reflect events or changed circumstances. Please carefully review the risk factors described in other documents the Corporation files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Application of Critical Accounting Policies:

Disclosure of the Corporation’s significant accounting policies is included in Note 1 to the consolidated financial statements. These policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by Management.

20

Table of Contents

Senior management has discussed the development of such estimates, and related Management Discussion and Analysis disclosure, with the Audit Committee of the Board of Directors.

The following accounting policy is identified by management to be critical to the results of operations: Allowance for Credit Losses (ACL).

Results of Operations:

Management’s Overview

The following discussion and analysis is intended to assist the reader in reviewing the financial information presented and should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein.

Summary

Franklin Financial Services Corporation reported consolidated earnings of $11.1 million ($2.51 per diluted share) for 2024 compared with $13.6 million ($3.10 per diluted share) for the same period in 2023.

Year-to-date, net interest income was $57.5 million, an increase of 7.2% compared to $53.6 million for the same period in 2023. On a year-over-year comparison, the net interest margin was 2.95% for 2024 compared to 3.31% in 2023. The increase in the 2024 net interest margin was due primarily to a 0.46% increase in the yield on earning assets from 4.70% in 2023 to 5.16% in 2024 as all asset classes had higher yields in 2024. The cost of interest-bearing liabilities increased from 1.75% for 2023 to 2.68% for 2024. Likewise, the cost of all deposits increased from 1.23% in 2023 to 1.89% in 2024. 

Average earning assets for 2024 were $1.983 billion compared to $1.656 billion in 2023, an increase of 19.8%. In 2024, the average balance of interest-earning cash balances increased $125.6 million (248.9%) due to $200.0 million term loan borrowing not yet fully invested. The average balance of the investment portfolio increased $22.2 million (4.8%), while the average balance of the loan portfolio increased $179.2 million (15.7%), over the prior year averages. Within the loan portfolio, average commercial loan balances increased $118.7 million during the year and residential mortgages increased $52.5 million. Total deposits averaged $1.638 billion for 2024, an increase of $108.7 million (7.1%) from the average balance for 2023. All deposit categories reported a year-over-year decrease in average balances, except for money management and time deposits. On a year-over-year comparison, the yield on earning assets increased 46 basis points from 4.70% in 2023 to 5.16% for 2024, while the cost of interest-bearing liabilities increased 93 basis points from 1.75% to 2.68% over the same period.

For 2024, the provision for credit losses on loans was $2.0 million compared to $2.6 million in 2023. The ACL ratio for loans was 1.26% on December 31, 2024, compared to 1.28% on December 31, 2023. For 2024, the provision for credit losses on unfunded commitments was $8 thousand compared to $135 thousand for 2023. The ACL for unfunded commitments was $2.0 million on December 31, 2024, unchanged from December 31, 2023.

Noninterest income was $13.7 million compared to $14.9 million in 2023. The decrease was driven primarily by a loss of $3.4 million, net of tax loss, on the sale of securities as part of a portfolio restructuring in the fourth quarter of 2024, which was partially offset by increases in wealth management fees and debit card income.  

‎ 

Noninterest expense was $55.9 million in 2024 compared to $50.0 million in 2023. The following categories contributed to the year-over-year increase: salaries and benefits increased $3.9 million (primarily due to a highly competitive labor market and health insurance), data processing expenses increased $1.0 million, and an $859 thousand increase in FDIC premiums.

The effective federal income tax rate was 16.6% for 2024 compared to 13.7% in 2023, which included certain tax credits not recognized in 2024.

‎

21

Table of Contents

Total assets at December 31, 2024 were $2.198 billion compared to $1.836 billion at December 31, 2023, an increase of 19.7%. Significant balance sheet changes since December 31, 2023, include:    

Short-term interest-bearing deposits in other banks increased $180.1 million and the investment portfolio increased $36.1 million due to purchases made in the fourth quarter of 2024. 

‎ 

The net loan portfolio increased $139.5 million (11.2%) over the year-end 2023 balance, primarily from increases in commercial real estate loans of $99.6 million and first lien 1-4 family residential real estate loans of $35.3 million. 

‎ 

Deposits increased $277.7 million (18.1%) over year-end 2023 with increases in noninterest-bearing deposits of $17.3 million, money management deposits of $122.8 million and time deposits of $183.5 million, partially offset by a $36.6 million decrease in interest-bearing checking deposits.  

Total borrowings were $200.0 million from the Federal Home Loan Bank of Pittsburgh (FHLB).

‎ 

Shareholders’ equity increased $12.6 million from December 31, 2023. Retained earnings increased $5.5 million net of dividends of $5.6 million paid to shareholders during 2024. The accumulated other comprehensive loss (AOCI) decreased from $40.9 million at year-end 2023 to $35.5 million from a decrease in the unrealized loss of the investment portfolio due in part to the realization of losses on the previously mentioned security sales. At December 31, 2024, the book value of the Corporation’s common stock was $32.69 per share and tangible book value was $30.65 per share. In January 2025, an open market repurchase plan was approved to repurchase 150,000 shares through December 31, 2025. The Bank is considered to be well-capitalized under regulatory guidance as of December 31, 2024.

Other key performance measurements are presented elsewhere in Item 7 of this report.

A more detailed discussion of the areas that had the greatest effect on the reported results follows.

Net Interest Income

The most important source of the Corporation’s earnings is net interest income, which is defined as the difference between income on interest-earning assets and the expense of interest-bearing liabilities supporting those assets. Principal categories of interest-earning assets are loans and securities, while deposits, short-term borrowings and long-term debt are the principal categories of interest-bearing liabilities. For the purpose of this discussion, balance sheet items refer to the average balance for the year and net interest income is adjusted to a fully taxable-equivalent basis. This tax-equivalent adjustment facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Corporation’s 21% Federal statutory rate. The components of net interest income are detailed in Tables 1, 2 and 3.

Table 1 shows the change in tax-equivalent net interest income year over year. Changes in interest income and expense are driven by changes in balance (volume) and changes in the average rate on interest-earning assets and interest-bearing liabilities. The changes attributable to rate or volume are shown in Table 2. The yield on earning assets (Table 3) increased to 5.16% for 2024 from 4.70% for 2023. The benefit provided by tax-exempt income was $938 thousand in 2024.

Table 1. Net Interest Income

[[GREPCENT_TABLE]]
[["","","","","","","","","Change"],["(Dollars in thousands)","","2024","","2023","","$","","%"],["Interest income","","$","101,451","","$","76,762","","$","24,689","","32.2"],["Interest expense","","","43,937","","","23,125","","","20,812","","90.0"],["Net interest income","","","57,514","","","53,637","","","3,877","","7.2"],["Tax equivalent adjustment","","","938","","","1,094","","","(156)","","(14.3)"],["Tax equivalent net interest income","","$","58,452","","$","54,731","","$","3,721","","6.8"]]
[[/GREPCENT_TABLE]]

‎

22

Table of Contents

Table 2 identifies increases and decreases in tax equivalent net interest income due to either changes in average volume or to changes in average rates for interest-earning assets and interest-bearing liabilities. Numerous and simultaneous balance and rate changes occur during the year. The amount of change that is not due solely to volume or rate is allocated proportionally to both.

Table 2. Rate-Volume Analysis of Tax Equivalent Net Interest Income

[[GREPCENT_TABLE]]
[["","","2024 Compared to 2023","","2023 Compared to 2022"],["Increase (Decrease) due to:","","Increase (Decrease) due to:","","Increase (Decrease) due to:"],["(Dollars in thousands)","","Volume","","Rate","","Net","","Volume","","Rate","","Net"],["Interest earned on:"],["Interest-earning deposits in other banks","","$","6,567","","$","263","","$","6,830","","$","(2,571)","","$","2,495","","$","(76)"],["Investment securities:"],["Taxable","","","973","","","1,308","","","2,281","","","(434)","","","5,305","","","4,871"],["Nontaxable","","","(96)","","","(105)","","","(201)","","","(885)","","","(185)","","","(1,070)"],["Investment securities","","","877","","","1,203","","","2,080","","","(1,319)","","","5,120","","","3,801"],["Loans:"],["Residential real estate 1-4 family:"],["First liens","","","2,406","","","1,124","","","3,530","","","1,505","","","778","","","2,283"],["Junior liens and lines of credit","","","224","","","361","","","585","","","(19)","","","1,691","","","1,672"],["Residential real estate - construction","","","470","","","181","","","651","","","(30)","","","320","","","290"],["Commercial real estate","","","6,746","","","3,025","","","9,771","","","3,568","","","5,834","","","9,402"],["Commercial","","","(75)","","","1,047","","","972","","","65","","","2,483","","","2,548"],["Consumer","","","91","","","23","","","114","","","26","","","80","","","106"],["Loans","","","9,862","","","5,761","","","15,623","","","5,115","","","11,186","","","16,301"],["Total net change in interest income","","","17,306","","","7,227","","","24,533","","","1,225","","","18,801","","","20,026"],["Interest expense on:"],["Interest checking","","","(208)","","","762","","","554","","","(155)","","","1,354","","","1,199"],["Money management","","","1,525","","","3,456","","","4,981","","","(90)","","","11,349","","","11,259"],["Savings","","","(26)","","","16","","","(10)","","","(9)","","","91","","","82"],["Time deposits","","","3,571","","","1,629","","","5,200","","","119","","","2,002","","","2,121"],["Brokered deposits","","","1,340","","","(2)","","","1,338","","","366","","","\u2014","","","366"],["Deposits","","","6,202","","","5,861","","","12,063","","","231","","","14,796","","","15,027"],["Subordinate notes","","","2","","","(3)","","","(1)","","","2","","","2","","","4"],["Federal Reserve Bank borrowings","","","(530)","","","118","","","(412)","","","2,374","","","\u2014","","","2,374"],["Federal Home Loan Bank advances","","","9,390","","","(228)","","","9,162","","","857","","","\u2014","","","857"],["Total net change in interest expense","","","15,064","","","5,748","","","20,812","","","3,464","","","14,798","","","18,262"],["Change in tax equivalent net interest income","","$","2,242","","$","1,479","","$","3,721","","$","(2,239)","","$","4,003","","$","1,764"]]
[[/GREPCENT_TABLE]]

23

Table of Contents

The following table presents average balances, tax-equivalent (T/E) interest income, interest expense, and yields earned or rates paid on the assets or liabilities. Nonaccrual loans are included in the average loan balances.

Table 3. Analysis of Net Interest Income

[[GREPCENT_TABLE]]
[["","2024","","2023"],["","Average","","Income or","","Average","","Average","","Income or","","Average"],["(Dollars in thousands)","balance","","expense","","yield/rate","","balance","","expense","","yield/rate"],["Interest-earning assets:"],["Interest-earning deposits in other banks","$","176,041","","$","9,237","","5.25%","","$","50,451","","$","2,407","","4.77%"],["Investment securities:"],["Taxable","","432,684","","","17,127","","3.96%","","","406,937","","","14,846","","3.65%"],["Tax exempt","","50,868","","","1,322","","2.60%","","","54,416","","","1,523","","2.80%"],["Investment securities","","483,552","","","18,449","","3.82%","","","461,353","","","16,369","","3.55%"],["Loans:"],["Residential real estate 1-4 family:"],["First liens","","222,572","","","11,442","","5.14%","","","173,986","","","7,912","","4.55%"],["Junior liens and lines of credit","","76,515","","","4,635","","6.06%","","","72,623","","","4,050","","5.58%"],["Residential real estate - construction","","28,096","","","1,954","","6.95%","","","21,124","","","1,303","","6.17%"],["Commercial real estate","","747,037","","","42,975","","5.75%","","","626,817","","","33,204","","5.30%"],["Commercial","","241,554","","","13,052","","5.40%","","","243,045","","","12,080","","4.97%"],["Consumer","","7,322","","","645","","8.81%","","","6,285","","","531","","8.45%"],["Loans","","1,323,096","","","74,703","","5.65%","","","1,143,880","","","59,080","","5.16%"],["Total interest-earning assets","","1,982,689","","$","102,389","","5.16%","","","1,655,684","","$","77,856","","4.70%"],["Other assets","","91,137","","","","","","","","95,489"],["Total assets","$","2,073,826","","","","","","","$","1,751,173"],["Interest-bearing liabilities:"],["Deposits:"],["Interest checking","$","416,770","","$","2,632","","0.63%","","$","459,447","","$","2,078","","0.45%"],["Money Management","","627,163","","","18,782","","2.99%","","","568,521","","","13,801","","2.43%"],["Savings","","101,335","","","173","","0.17%","","","117,026","","","183","","0.16%"],["Time","","177,281","","","7,615","","4.30%","","","84,428","","","2,415","","2.86%"],["Brokered","","33,183","","","1,704","","5.14%","","","7,084","","","366","","5.17%"],["Total interest-bearing deposits","","1,355,732","","","30,906","","2.28%","","","1,236,506","","","18,843","","1.52%"],["Subordinate notes","","19,680","","","1,050","","5.34%","","","19,642","","","1,051","","5.35%"],["Federal Reserve Bank borrowings","","41,667","","","1,962","","4.71%","","","53,041","","","2,374","","4.48%"],["Federal Home Loan Bank advances","","219,883","","","10,019","","4.56%","","","14,704","","","857","","5.83%"],["Total interest-bearing liabilities","","1,636,962","","","43,937","","2.68%","","","1,323,893","","","23,125","","1.75%"],["Noninterest-bearing deposits","","282,460","","","","","","","","293,001"],["Other liabilities","","16,564","","","","","","","","14,871"],["Shareholders' equity","","137,840","","","","","","","","119,408"],["Total liabilities and shareholders' equity","$","2,073,826","","","","","","","$","1,751,173"],["T/E net interest income/Net interest margin","","","","","58,452","","2.95%","","","","","","54,731","","3.31%"],["Tax equivalent adjustment","","","","","(938)","","","","","","","","(1,094)"],["Net interest income","","","","$","57,514","","","","","","","$","53,637"],["Net Interest Spread","","","","","","","2.48%","","","","","","","","2.95%"],["Cost of Funds","","","","","","","2.29%","","","","","","","","1.43%"],["Cost of Deposits","","","","","","","1.89%","","","","","","","","1.23%"]]
[[/GREPCENT_TABLE]]

Provision for Credit Losses

In 2024, the Bank recorded gross loan charge-offs of $560 thousand, which were partially offset by $186 thousand of recoveries, resulting in net loan charge-offs of $374 thousand. For 2024, the Corporation recorded $2.0 million as a provision for credit loss on loans. These changes resulted in an increase in the allowance for credit losses (ACL) on loans to $17.7 million at year-end 2024 (1.26% of total loans), compared to $16.1 million at year-end 2023 (1.28% of total loans). The provision for credit losses for unfunded commitments was $8 thousand for 2024 with reserve balance of $2.0 million at year-end 2024, unchanged from year-end 2023. Management closely monitors the credit quality of the portfolio in order to ensure that an appropriate ACL is maintained. As part of this process, Management performs a comprehensive analysis of the loan portfolio considering delinquencies trends and events, current economic forecasts and conditions, and other relevant factors to determine the adequacy of the allowance for credit losses and the provision for credit losses. For more information, refer to the Loan Quality discussion and Table 10.

24

Table of Contents

Noninterest Income

The following table presents a comparison of noninterest income for the years ended December 31, 2024 and 2023:

Table 4. Noninterest Income

[[GREPCENT_TABLE]]
[["","","","","Change"],["(Dollars in thousands)","","2024","","2023","","Amount","","%"],["Noninterest Income"],["Wealth management fees","","$","8,538","","$","7,512","","$","1,026","","13.7"],["Loan service charges","","","987","","","811","","","176","","21.7"],["Gain on sale of loans","","","565","","","199","","","366","","183.9"],["Deposit service charges and fees","","","2,448","","","2,492","","","(44)","","(1.8)"],["Other service charges and fees","","","2,040","","","1,852","","","188","","10.2"],["Debit card income","","","2,279","","","2,157","","","122","","5.7"],["Increase in cash surrender value of life insurance","","","457","","","448","","","9","","2.0"],["Net (losses) gains on sales of debt securities","","","(4,267)","","","(1,119)","","","(3,148)","","281.3"],["Change in fair value of equity securities","","","209","","","16","","","193","","1,206.3"],["Other","","","423","","","483","","","(60)","","(12.4)"],["Total","","$","13,679","","$","14,851","","$","(1,172)","","(7.9)"]]
[[/GREPCENT_TABLE]]

The most significant changes in noninterest income are discussed below:

Wealth management fees: These fees are comprised of asset management fees, estate administration and settlement fees, employee benefit plans, and commissions from the sale of insurance and investment products. Asset management fees are recurring in nature and are affected by the fair value of assets under management at the time the fees are recognized. Asset management fees totaled $7.8 million for 2024 and $6.9 million for 2023. The fair value of trust assets under management was $1.169 billion at year-end, compared to $1.095 billion at the end of 2023. Estate fees were $508 thousand in 2024 compared to $295 thousand in 2023. By the nature of an estate settlement, these fees are considered nonrecurring. Commissions from the sale of insurance and investment products decreased by $58 thousand compared to 2023.

Loan service charges: This category includes primarily commercial letter of credit fees, commercial loan prepayment penalties, mortgage servicing fees and consumer debt protection fees.

Gain on sale of loans: This category is comprised of fees from the sale of residential mortgages with servicing released in the secondary market. Due to higher origination volume, the Bank sold more loans in 2024 compared to 2023.

Deposit fees: This category is comprised primarily of fees from overdrafts, an overdraft protection program, service charges, and account analysis fees. The decrease of $44 thousand in this category was due to a lower volume of overdraft fees.

Other service charges and fees: The most significant items in this category include fees from the Bank’s merchant card program and ATM fees. ATM fees increased $184 thousand.

Debit card income: Debit card fees are comprised of both a retail and business card program. Retail fees increased by $93 thousand, while business card fees increased $29 thousand. The business debit card offers a cash back rewards program based on usage, while the retail debit card offers reward points based on usage. Debit card income is reported net of reward program expense.

Net (losses) gains on sales of debt securities: The Bank took losses of $4.3 million on the sale of investment securities as part of a portfolio restructuring during the fourth quarter of 2024. The event is more thoroughly described on a Form 8-K previously filed by the Corporation on October 18, 2024.

25

Table of Contents

Noninterest Expense

The following table presents a comparison of noninterest expense for the years ended December 31, 2024 and 2023:

Table 5. Noninterest Expense

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","","","Change"],["Noninterest Expense","","2024","","2023","","Amount","","%"],["Salaries and benefits","","$","32,752","","$","28,813","","$","3,939","","13.7"],["Net occupancy","","","4,583","","","4,398","","","185","","4.2"],["Marketing and advertising","","","1,891","","","2,071","","","(180)","","(8.7)"],["Legal and professional","","","2,133","","","2,301","","","(168)","","(7.3)"],["Data processing","","","5,804","","","4,792","","","1,012","","21.1"],["Pennsylvania bank shares tax","","","483","","","745","","","(262)","","(35.2)"],["FDIC insurance","","","1,710","","","851","","","859","","100.9"],["ATM/debit card processing","","","1,300","","","1,235","","","65","","5.3"],["Telecommunications","","","435","","","405","","","30","","7.4"],["Nonservice pension","","","(51)","","","(117)","","","66","","(56.4)"],["Lease termination","","","\u2014","","","495","","","(495)","","\u2014"],["Other","","","4,855","","","4,022","","","833","","20.7"],["Total","","$","55,895","","$","50,011","","$","5,884","","11.8"]]
[[/GREPCENT_TABLE]]

The most significant changes in noninterest expense are discussed below:

Salaries and benefits: This category is the largest noninterest expense category and includes expenses for salaries, health benefits, insurance, pension service, employment taxes and other employee benefit programs. This category increased by $3.9 million compared to the prior year from: salary and commission increases of $2.1 million due to merit and annual increases, and new positions, health insurance increases of $703 thousand, incentive compensation plan increase of $532 thousand, stock compensation expense of $151 thousand and 401K match increase of $125 thousand. See Note 17 of the accompanying consolidated financial statements for additional information on benefit plans.

Net Occupancy: This category includes all of the expense associated with the properties and facilities used for bank operations such as depreciation, leases, maintenance, utilities and real estate taxes. The increase in 2024 was partially due to a new community office in Linglestown, Dauphin County, which opened in the fall of 2024.

Legal and professional fees: This category consists of fees paid to outside legal counsel, consultants, and audit fees.

Data processing: The largest cost in this category is the expense associated with the Bank’s core processing system and related services and accounted for $2.2 million of the total data processing costs in 2024 and $2.0 million in 2023. The increase in 2024 was due primarily to increases in software expenses.

Nonservice pension: The change in the nonservice pension expense was due to higher asset returns and amortization.

Lease Termination: The lease termination in 2023 was for a long-term land lease held for a new community office that will not be constructed.

Other: The largest increases in this category were in armored car expense ($100 thousand) due to additional services and amortization of solar tax credits ($235 thousand). All other increases are due primarily to overall higher operating expenses.

Provision for Income Taxes

In 2024, the Corporation recorded a Federal income tax expense of $2.0 million compared to $2.2 million in 2023. The effective tax rate was 16.6% for 2024 and 13.7% for 2023, which reflects the benefit of $367 thousand in tax credits recorded during 2023. Without the tax credits, the Bank’s effective tax rate would have been 16.0% in 2023. The Corporation’s 2024 and 2023 effective tax rate was lower than its statutory rate due to the effect of tax-exempt income from certain investment securities, loans, and bank owned life insurance. For a more comprehensive analysis of Federal income tax expense refer to Note 14 of the accompanying consolidated financial statements.

.

26

Table of Contents

Financial Condition

One method of evaluating the Corporation’s condition is in terms of its sources and uses of funds. Assets represent uses of funds while liabilities represent sources of funds. At December 31, 2024, total assets increased 19.7% over the prior year to $2.198 billion from $1.836 billion at the end of 2023.

Interest Earning Deposits in Other Banks:

Short-term interest-earning deposits, held primarily at the Federal Reserve, increased to $183.8 million at December 31, 2024 from $3.6 million at December 31, 2023, due to a new FHLB term borrowing of $200.0 million in 2024 which was not fully deployed during 2024. Long-term interest-earning deposits decreased from $6.2 million at December 31, 2023 to $1.5 million at December 31, 2024. The average balance of interest-earning deposits increased to $176.0 million in 2024 compared to $50.5 million in 2023.

Investment Securities:

AFS Securities

The investment portfolio serves as a mechanism to invest funds if funding sources out pace lending activity, to provide liquidity for lending and operations, and provide collateral for deposits and borrowings. The mix of securities and investing decisions are made as a component of balance sheet management. Debt securities include U.S. Government Agencies, U.S. Government Agency mortgage-backed securities, non-agency mortgage-backed securities, state and municipal government bonds, and corporate debt primarily in the form of bank-issued subordinated debt. The weighted average life of the portfolio is 5.6 years, the effective duration (which measures the change in fair value for a 1% change in interest rates) is 4.8%, and $177.9 million (fair value) is pledged as collateral for deposits. The Bank has no investments in a single issuer that exceeds 10% of shareholders equity, except for U.S. Treasuries. All securities are classified as available for sale and all investment balances refer to fair value, unless noted otherwise. The following table presents the amortized cost and estimated fair value of investment securities by type at December 31 for the past two years:

Table 6. Investment Securities at Amortized Cost and Estimated Fair Value

[[GREPCENT_TABLE]]
[["","2024","","2023"],["","Amortized","","Fair","","Amortized","","Fair"],["(Dollars in thousands)","Cost","","value","","Cost","","value"],["U.S. Treasury","$","36,192","","$","31,797","","$","83,494","","$","74,091"],["Municipal","","156,528","","","133,592","","","161,339","","","138,618"],["Corporate","","26,356","","","24,224","","","26,336","","","23,198"],["Agency mortgage & asset-backed","","180,423","","","169,821","","","142,565","","","132,591"],["Non-agency mortgage & asset-backed","","154,554","","","149,170","","","108,185","","","104,005"],["Total","$","554,053","","$","508,604","","$","521,919","","$","472,503"]]
[[/GREPCENT_TABLE]]

The following table presents AFS investment securities at December 31, 2024 by maturity, and the weighted average yield for each maturity presented. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities. The yields presented in this table are calculated using tax-equivalent interest and the amortized cost.

Table 7. Maturity Distribution of Investment Portfolio

[[GREPCENT_TABLE]]
[["","One year or less","","After one year through five years","","After five years through ten years","","After ten years","","Total"],["","Fair","","","Fair","","","Fair","","","Fair","","","Fair"],["(Dollars in thousands)","Value","Yield","","Value","Yield","","Value","Yield","","Value","Yield","","Value","Yield"],["Available for Sale"],["U.S. Treasury","$","\u2014","\u2014","","$","24,327","1.23%","","$","7,470","1.57%","","$","\u2014","\u2014","","$","31,797","1.31%"],["Municipal","","\u2014","\u2014","","","9,522","2.21%","","","49,188","2.29%","","","74,882","2.09%","","","133,592","2.17%"],["Corporate","","\u2014","\u2014","","","4,166","5.99%","","","19,197","4.77%","","","861","4.28%","","","24,224","4.95%"],["Agency mortgage & asset-backed","","109","2.25%","","","20,158","1.81%","","","16,424","2.61%","","","133,131","4.43%","","","169,822","3.92%"],["Non-agency mortgage & asset-backed","","6,026","6.64%","","","9,108","5.87%","","","\u2014","\u2014","","","134,036","4.97%","","","149,170","5.09%"],["Total","$","6,135","6.57%","","$","67,281","2.40%","","$","92,279","2.78%","","$","342,910","4.07%","","$","508,605","3.63%"]]
[[/GREPCENT_TABLE]]

Table 3, previously presented, shows the two-year trend of average balances and yields on the investment portfolio. The tax-equivalent yield on the portfolio increased from 3.55% in 2023 to 3.82% in 2024. U.S. Agency mortgage-backed securities and non-agency mortgage-backed securities comprise the largest sectors by fair value of the portfolio, approximately 33% and 29%

27

Table of Contents

respectively. The Bank expects that the portfolio will continue to remain concentrated in these investment sectors. The portfolio returned $97.3 million of principal cash flow in 2024 while $136.3 million was invested into the portfolio during the year.

Municipal Bonds: This sector holds $133.6 million or 26% of the total portfolio and the amortized cost decreased by $4.8 million year over year. The Bank’s municipal bond portfolio is well diversified geographically and is comprised of both tax-exempt (35% of the portfolio) and taxable (65% of the portfolio) municipal bonds. Sixty-eight percent of the portfolio are general obligation bonds and thirty-two percent are revenue bonds. The portfolio holds bonds from 151 issuers within 34 states. The largest dollar exposures are in the states of Texas (16%), California (13%) and Pennsylvania (13%). When purchasing municipal bonds, the Bank looks primarily to the underlying credit of the issuer as a sign of credit quality and then to any credit enhancement. The entire portfolio is rated “A” or higher by a nationally recognized statistical rating organization.

Corporate Bonds: This sector is comprised primarily of $20.1 million of subordinate debt from 44 different community bank issuers.

Agency Mortgage & Asset-backed Securities (MBS): This sector holds $169.8 million, or 33%, of the total portfolio. This sector is comprised of bonds issued and guaranteed by the U.S. Government, a U.S. Government Agency, or a government sponsored entity securitized by pools of residential mortgages and other loan assets.

Non-Agency Mortgage & Asset-backed Securities (ABS): This sector holds $149.2 million, or 29%, of the total portfolio. This sector is comprised of senior private label first-lien commercial and residential mortgages. As senior position bonds, they benefit from credit support in the form of junior tranches and reserve funds that absorb loss prior to the senior bonds. This sector has $132.6 million of its fair value rated investment grade by a nationally recognized statistical rating organizations while $16.6 million of its fair value is nonrated.

Allowance for Credit Losses: For securities with an unrealized loss, the Bank considers: (1) the extent to which the fair value is less than amortized cost; (2) adverse conditions specifically related to the security, industry or geographic area; (3) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future; (4) failure of the issuer of the security to make scheduled interest or principal payments; and (5) any changes to the rating of the security by a rating agency. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. The Bank does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. The debt securities in a loss position and subject to evaluation at December 31, 2024 and 2023, were determined not to be attributable to credit related factors; therefore, the Bank does not have an allowance for credit loss for these investments. During 2024, $42.4 million of securities were sold as part of a portfolio restructuring to take advantage of higher market interest rates. The realized pre-tax loss on these sales was $4.3 million.

Equity Securities at Fair Value

The Corporation owns one equity investment with a readily determinable fair value. At December 31, 2024, this investment was reported at fair value ($166 thousand) with changes in value reported through income in 2024.

Restricted Stock at Cost

The Bank held $8.8 million of restricted stock at the end of 2024 of which all but $30 thousand is stock in the FHLB, carried at a cost of $100 per share. FHLB stock is evaluated for impairment primarily based on an assessment of the ultimate recoverability of its cost. As a government sponsored entity, FHLB has the ability to raise funding through the U.S. Treasury that can be used to support its operations. There is not a public market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and low-cost funding) add value to the stock beyond purely financial measures. If FHLB stock were deemed to be impaired, the write-down for the Bank could be significant. Management intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.

Loans:

The loan portfolio increased by 11.2% ($141.1 million) in 2024, due primarily to an increase of $99.6 million in commercial real estate loans and $35.3 million in residential real estate 1-4 family loans. Average gross loans for 2024 increased by $179.2 million to $1.323 billion. Commercial real estate, mortgage and consumer loans showed an increase in average balances during the year, which was partially offset by a decline in commercial loans during the year. The yield on the portfolio increased in 2024 to 5.65% from 5.16% in 2023. Table 3, previously presented, shows the average balances and yields earned on loans for the past two years.

28

Table of Contents

The following table shows loans outstanding, by class, as of December 31 for the past 2 years.

Table 8. Loan Portfolio

[[GREPCENT_TABLE]]
[["","","","","","","","","Change"],["(Dollars in thousands)","2024","","2023","","","Amount","","%"],["Residential real estate 1-4 family"],["Consumer first lien","$","181,780","","$","142,017","","$","39,763","","28.0"],["Commercial first lien","","58,821","","","63,271","","","(4,450)","","(7.0)"],["Total first liens","","240,601","","","205,288","","","35,313","","17.2"],["Consumer junior lien and lines of credit","","76,035","","","68,752","","","7,283","","10.6"],["Commercial junior liens and lines of credit","","6,199","","","3,809","","","2,390","","62.7"],["Total junior liens and lines of credit","","82,234","","","72,561","","","9,673","","13.3"],["Total residential real estate 1-4 family","","322,835","","","277,849","","","44,986","","16.2"],["Residential real estate construction"],["Consumer","","20,742","","","13,837","","","6,905","","49.9"],["Commercial","","11,685","","","12,063","","","(378)","","(3.1)"],["Total residential real estate construction","","32,427","","","25,900","","","6,527","","25.2"],["Commercial real estate","","803,365","","","703,767","","","99,598","","14.2"],["Commercial","","230,597","","","242,654","","","(12,057)","","(5.0)"],["Total commercial","","1,033,962","","","946,421","","","87,541","","9.2"],["Consumer","","8,853","","","6,815","","","2,038","","29.9"],["Total loans","","1,398,077","","","1,256,985","","","141,092","","11.2"],["Less: Allowance for credit losses","","(17,653)","","","(16,052)","","","(1,601)","","10.0"],["Net loans","$","1,380,424","","$","1,240,933","","$","139,491","","11.2"]]
[[/GREPCENT_TABLE]]

Residential real estate: This category is comprised of first lien loans and, to a lesser extent, junior liens and lines of credit secured by residential real estate, as well as loans made to individuals secured by unimproved noncommercial real estate. Total residential real estate loans increased $45.0 million in 2024, primarily in consumer first lien loans. In 2024, the Bank originated $123.1 million in mortgages compared to $92.4 million in 2023, including approximately $43.1 million for sale in the secondary market. The Bank does not originate or hold any loans that would be considered sub-prime or Alt-A and does not generally originate mortgages outside of its primary market area.

Commercial purpose loans in this category represent loans made for various business needs but are secured with residential real estate. In addition to the real estate collateral, it is possible that additional security is provided by personal guarantees or UCC filings. These loans are underwritten as commercial loans and are not originated to be sold.

Residential real estate construction: The largest component of this category, $20.7 million, represents loans for individuals to construct personal residences, while loans to residential real estate developers and home builders totaled $11.7 million at December 31, 2024. The Bank’s exposure to residential construction loans is concentrated primarily in south central Pennsylvania. Real estate construction loans, including residential real estate and land development loans, occasionally provide an interest reserve in order to assist the developer during the development stage when minimal cash flow is generated.

Commercial real estate (CRE): This category includes commercial, industrial, and farm loans, where real estate serves as the primary collateral for the loan. This loan category increased by $99.6 million over the prior year. The three largest growth sectors by collateral in 2024 were apartment buildings, hotels & motels, and office buildings which totaled $49.1 million. Included in commercial real estate are approximately $615.0 million of nonowner occupied loans located in the Bank’s market area of south-central Pennsylvania.

‎

29

Table of Contents

The following table presents the largest sectors by collateral in the commercial real estate category:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","December 31, 2024","","December 31, 2023"],["Commercial Real Estate (CRE) Sectors","","Amount","","% of CRE","","Amount","","% of CRE"],["Apartment buildings","","$","146,661","","18%","","$","120,180","","17%"],["Hotels & motels","","","97,460","","12%","","","80,670","","11%"],["Office buildings","","","92,926","","12%","","","87,137","","12%"],["Shopping centers","","","82,518","","10%","","","68,478","","10%"],["Development land","","","66,645","","8%","","","62,439","","9%"]]
[[/GREPCENT_TABLE]]

Also included in CRE are real estate construction loans totaling $207.1 million. At December 31, 2024, the Bank had $71.9 million in real estate construction loans funded with an interest reserve and capitalized $3.2 million of interest in 2024 from these reserves on active projects for commercial construction. Real estate construction loans are monitored on a regular basis by either an independent third-party inspector or the assigned loan officer depending on loan amount or complexity of the project. This monitoring process includes, at a minimum, the submission of invoices or AIA documents (depending on the complexity of the project) detailing costs incurred by the borrower, on-site inspections, and a signature by the assigned loan officer for disbursement of funds. All real estate construction loans are underwritten in the same manner, regardless of the use of an interest reserve.

Commercial: This category includes commercial, industrial, farm, agricultural, and tax-free loans. Collateral for these loans may include business assets or equipment, personal guarantees, or other non-real estate collateral. Commercial loans decreased $12.1 million over the 2023 ending balance. At December 31, 2024, the Bank had approximately $105 million of tax-free loans in its portfolio. This category also includes $7 thousand of PPP loans that are 100% guaranteed by the SBA, compared to $57 thousand at December 31, 2023.

The following table presents the largest sectors by industry in the commercial category:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","December 31, 2024","","December 31, 2023"],["Commercial","","Amount","","% of Commercial","","Amount","","% of Commercial"],["Public administration","","$","43,184","","19%","","$","44,717","","18%"],["Utilities","","","38,498","","17%","","","41,961","","17%"],["Real estate, rental & leasing","","","23,162","","10%","","","25,016","","10%"],["Retail trade","","","18,267","","8%","","","18,589","","8%"],["Manufacturing","","","16,930","","7%","","","17,254","","7%"]]
[[/GREPCENT_TABLE]]

Participations: At December 31, 2024, the outstanding commercial participations were $107.2 million (9.6% of commercial purpose loans and 7.7% of total gross loans), compared to $97.8 million (9.5% of commercial purpose loans and 7.8% of total gross loans) at the prior year-end. The Bank’s total exposure (including unfunded commitments) to purchased participations was $133.1 million at December 31, 2024 and $135.4 million at December 31, 2023. The loan participations are comprised of $28.4 million of commercial loans and $78.8 million of CRE loans, reported in the respective loan segment.

Consumer loans: This category is comprised of installment loans and personal lines of credit and increased $2.0 thousand in 2024 over 2023 ending balances.

30

Table of Contents

Table 9. Maturities and Interest Rate Terms of Selected Loans

The following table presents the stated maturities (or earlier call dates) of selected loans as of December 31, 2024.

[[GREPCENT_TABLE]]
[["","Less than","","","","","","","Over"],["(Dollars in thousands)","1 year","","1-5 years","","5-15 years","","15 years","","Total"],["Loans:"],["Residential real estate 1-4 family"],["Fixed rate","$","3,644","","$","8,405","","$","38,646","","$","19,435","","$","70,130"],["Variable rate","","9,152","","","8,339","","","55,757","","","179,457","","","252,705"],["","","12,796","","","16,744","","","94,403","","","198,892","","","322,835"],["Residential real estate construction"],["Fixed rate","","255","","","\u2014","","","27","","","19,923","","","20,205"],["Variable rate","","7,611","","","3,131","","","944","","","536","","","12,222"],["","","7,866","","","3,131","","","971","","","20,459","","","32,427"],["Commercial real estate"],["Fixed rate","","12,251","","","69,301","","","71,638","","","\u2014","","","153,190"],["Variable rate","","43,216","","","154,764","","","398,156","","","54,039","","","650,175"],["","","55,467","","","224,065","","","469,794","","","54,039","","","803,365"],["Commercial"],["Fixed rate","","2,670","","","33,873","","","50,795","","","\u2014","","","87,338"],["Variable rate","","49,119","","","15,088","","","37,674","","","41,378","","","143,259"],["","","51,789","","","48,961","","","88,469","","","41,378","","","230,597"],["Consumer"],["Fixed rate","","105","","","3,080","","","630","","","1,501","","","5,316"],["Variable rate","","771","","","1,347","","","1,419","","","\u2014","","","3,537"],["","","876","","","4,427","","","2,049","","","1,501","","","8,853"],["","$","128,794","","$","297,328","","$","655,686","","$","316,269","","$","1,398,077"]]
[[/GREPCENT_TABLE]]

Loan Quality:

Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans are identified as either a pass or substandard rating based on the performance status of the loans. Substandard consumer loans are loans that are 90 days or more past due and still accruing. Loans rated 1 – 4 are considered pass credits. Loans that are rated 5-Pass Watch are credits that have been identified as credits that are likely to warrant additional attention and monitoring. Loans rated 6-Other Asset Especially Mentioned (OAEM) or worse begin to receive enhanced monitoring and reporting by the Bank. Loans rated 7-Substandard or 8-Doubtful exhibit the greatest financial weakness and present the greatest possible risk of loss to the Bank. Nonaccrual loans are rated no better than 7-Substandard. The following represent some of the factors used in determining the risk rating of a borrower: cash flow, debt coverage, liquidity, management, and collateral. Risk ratings, for pass credits, are generally reviewed annually for term debt and at renewal for revolving or renewing debt. The Bank monitors overall loan quality of the portfolio by reviewing three primary measurements: (1) loans rated 6-OAEM or worse (collectively “watch list”), (2) delinquent loans, and (3) net-charge-offs.

Watch list loans exhibit financial weaknesses that increase the potential risk of default or loss to the Bank. However, inclusion on the watch list, does not by itself, mean a loss is certain. The watch list includes both performing and nonperforming loans. Watch list loans totaled $21.5 million at year-end compared to $17.2 million one year earlier. Included in the watch list are $266 thousand of nonaccrual loans at year-end 2024, compared to $147 thousand at year-end 2023. The composition of the watch list (loans rated 6, 7 or 8), by primary collateral, is shown in Note 6 of the accompanying financial statements.

Delinquent loans are a result of borrowers’ cash flow and/or alternative sources of cash being insufficient to repay loans. The Bank’s likelihood of collateral liquidation to repay the loans becomes more probable the further behind a borrower falls, particularly when loans reach 90 days or more past due. Management monitors the performance status of loans by the use of an aging report. The aging report can provide an early indicator of loans that may become severely delinquent and possibly result in a loss to the Bank. See Note 6 in the accompanying financial statements for information on the aging of payments in the loan portfolio.

Nonaccruing loans generally represent Management’s determination that the borrower will be unable to repay the loan in accordance with its contractual terms and that collateral liquidation may or may not fully repay both interest and principal. It is the Bank’s policy to evaluate the probable collectability of principal and interest due under terms of loan contracts for all loans 90-days or

31

Table of Contents

more, nonaccrual loans, or impaired loans. Further, it is the Bank’s policy to discontinue accruing interest on loans that are not adequately secured and in the process of collection. Upon determination of nonaccrual status, the Bank subtracts any current year accrued and unpaid interest from its income, and any prior year accrued and unpaid interest from the allowance for loan losses. Management continually monitors the status of nonperforming loans, the value of any collateral and potential for risk of loss. Nonaccrual loans are rated no better than 7-Substandard.

The Bank’s Loan Management Committee reviews these loans and risk ratings on a quarterly basis in order to proactively identify and manage problem loans. In addition, a committee meets monthly to discuss possible workout strategies for all credits rated 7-Substandard or worse. Management also tracks other commercial loan risk measurements including high loan to value loans, concentrations, participations and policy exceptions and reports these to the Board Enterprise Risk Management Committee of the Board of Directors. The Bank also uses an external loan review consultant to assist with internal loan review with a goal of reviewing up to 80% of commercial loans each year. The FDIC defines certain supervisory loan-to-value lending limits. The Bank’s internal loan–to-value limits are all equal to or have a lower loan-to-value limit than the supervisory limits. However, in certain instances, the Bank may make a loan that exceeds the supervisory loan-to-value limit. At December 31, 2024, the Bank had loans of $14.1 million (1.0% of gross loans) that exceeded the supervisory loan-to value limit, compared to 1.1% at the prior year end.

Loan quality, as measured by nonaccrual loans, totaled $266 thousand at December 31, 2024 compared to $147 thousand at December 31, 2023 and the nonperforming loan to total loans ratio was 0.02% at December 31, 2024 compared to 0.01% at December 31, 2023. Loans past due 90-days or more, but still accruing, totaled $2 thousand at December 31, 2024 compared to $5 thousand at the prior year end.

In addition to monitoring nonaccrual loans, the Bank also closely monitors loans to borrowers experiencing financial difficulty when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. At December 31, 2024 and 2023, the Bank had no modified loans to borrowers experiencing financial difficulty.

Allowance for Credit Losses:

Allowance for Credit Losses – Loans

The ACL for loans is established through provisions for credit losses charged against income. Loans deemed to be uncollectible are charged against the ACL, and subsequent recoveries, if any, are credited to the ACL.

The ACL for loans is an estimate of the losses expected to be realized over the life of the loan portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated individually for expected credit losses (specific reserve), and 2) loans evaluated collectively for expected credit losses (pooled reserve). Management’s periodic evaluation of the adequacy of the ACL for loans is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic forecasts and conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ actual or perceived financial and managerial strengths, and other relevant factors. This evaluation is inherently subjective, as it requires material assumptions and estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on loans evaluated individually.

Loans evaluated individually for credit losses are primarily commercial purpose loans that do not share similar characteristics with those loans evaluated in the pool. These loans may exhibit performance characteristics where it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All commercial purpose loans greater than $250 thousand and rated Substandard (7), Doubtful (8) or on nonaccrual status may be considered for individual evaluation. Impairment is measured on a loan-by-loan basis by one of the following methods: the fair value of the collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s obtainable market price. Commercial purpose loans with a balance less than $250 thousand, and consumer purpose loans are not evaluated individually for a specific reserve but are included in the pooled reserve calculation. Loans that are evaluated for a specific reserve, but not needing a specific reserve are not included in the pooled reserve calculation.

The Corporation has elected to exclude accrued interest receivable from the measurement of the ACL. When a loan is placed on nonaccrual status, any outstanding current accrued interest is reversed against income and prior year accrued interest is deducted from the ACL.

The pooled reserve represents the ACL for pools of homogenous loans, not evaluated individually. The pooled reserve is calculated using a quantitative and qualitative component for the loan pools.

‎

32

Table of Contents

The following inputs are used to calculate the quantitative component for the loan pool:

Segregating loans into homogeneous pools by the FRB Call Code which is primarily a collateral-based and secondarily a purpose-based segmentation.

The average remaining life of each pool is calculated using the weighted average remaining maturity method (WARM). The WARM method produces an estimated remaining balance by pool, by year, until maturity.

A historical credit loss rate is calculated for each pool, using the average historical loss, by FRB Call Code, for a peer group of Pennsylvania community banks over the last eight quarters. The loss rate is calculated over a historical period the Bank believes best represents a period, based on a reasonable and supportable forecast, that will be similar to the next four quarters.

The historical credit loss rate is applied to each WARM bucket though the initial four quarter forward-looking period.

At the end of the forward-looking period, the credit loss rate applied to each WARM bucket reverts to the peer group historical loss rate for the respective pool.

Collectively these estimated losses represent the quantitative component of the pooled reserve.

The qualitative component for the pool utilizes a risk matrix comprised of eight risk factors and assigns a risk level to each factor. The risk factors give consideration to changes in: lending policy, procedures and practice; economic conditions; nature and volume of loans; experience of lending team; volume of past due loans; quality of the loan review system; concentrations of credit; and other external factors. The risk factors are weighted to reflect Management’s estimate of how the factor affects potential losses. The risk levels within each factor are measured in basis points and range from minimal risk to very high risk and are determined independently for commercial loans, residential mortgage loans and consumer loans.

The ACL for pooled loans is the sum of the quantitative and qualitative loss estimates.

Allowance for Credit Losses – Unfunded Commitments

The ACL for unfunded commitments is recorded in other liabilities on the consolidated balance sheet. The ACL represents management’s estimate of expected losses from unfunded commitments and is determined by estimating future usage of the commitments, based on historical usage. The estimated loss is calculated in a manner similar to that used for the ACL for loans, previously described. The ACL is increased or decreased through the provision for credit losses.

33

Table of Contents

The following table shows the allocation of the allowance for credit losses and other loan performance ratios, by class, as of December 31, 2024 and 2023:

Table 10. Loan Performance Ratios

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Residential Real Estate 1-4 Family"],["","","","","","Junior Liens &","","","","","Commercial"],["","","First Liens","","Lines of Credit","","Construction","","Real Estate","","Commercial","","Consumer","","Total"],["2024"],["Loans at December 31, 2024","","$","240,601","","$","82,234","","$","32,427","","$","803,365","","$","230,597","","$","8,853","","$","1,398,077"],["Average Loans for 2024","","","222,572","","","76,515","","","28,096","","","747,037","","","241,554","","","7,322","","","1,323,096"],["Nonaccrual Loans at December 31, 2024","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","266","","","\u2014","","","266"],["Allowance for Credit Losses at December 31, 2024","","","1,497","","","461","","","376","","","12,004","","","3,182","","","133","","","17,653"],["Net Recoveries/(Charge-offs) for 2024","","","3","","","\u2014","","","14","","","2","","","(329)","","","(64)","","","(374)"],["Loans/Total Gross Loans at December 31, 2024","","","17%","","","6%","","","2%","","","57%","","","16%","","","1%","","","100%"],["Nonaccrual Loans/Total Gross Loans at December 31, 2024","","","0.00%","","","0.00%","","","0.00%","","","0.00%","","","0.12%","","","0.00%","","","0.02%"],["Allowance for Credit Loss/Gross Loans at December 31, 2024","","","0.62%","","","0.56%","","","1.16%","","","1.49%","","","1.38%","","","1.50%","","","1.26%"],["Net Recoveries (Charge-offs)/Average Loans for 2024","","","0.00%","","","0.00%","","","0.05%","","","0.00%","","","-0.14%","","","-0.87%","","","-0.03%"],["Allowance for Credit Loss/Nonaccrual Loans at December 31, 2024","","","","","","","","","","","","","","","","","","","","","6,636.47%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2023"],["Loans at December 31, 2023","","$","205,288","","$","72,561","","$","25,900","","$","703,767","","$","242,654","","$","6,815","","$","1,256,985"],["Average Loans for 2023","","","173,986","","","72,623","","","21,124","","","626,817","","","243,045","","","6,285","","","1,143,880"],["Nonaccrual Loans at December 31, 2023","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","147","","","\u2014","","","147"],["Allowance for Credit Losses at December 31, 2023","","","1,296","","","419","","","296","","","10,657","","","3,290","","","94","","","16,052"],["Net Recoveries/(Charge-offs) for 2023","","","2","","","\u2014","","","49","","","1","","","(193)","","","(35)","","","(176)"],["Loans/Total Gross Loans at December 31, 2023","","","16%","","","6%","","","2%","","","56%","","","19%","","","1%","","","100%"],["Nonaccrual Loans/Total Gross Loans at December 31, 2023","","","0.00%","","","0.00%","","","0.00%","","","0.00%","","","0.06%","","","0.00%","","","0.01%"],["Allowance for Credit Loss/Gross Loans at December 31, 2023","","","0.63%","","","0.58%","","","1.14%","","","1.51%","","","1.36%","","","1.38%","","","1.28%"],["Net Recoveries (Charge-offs)/Average Loans for 2023","","","0.00%","","","0.00%","","","0.23%","","","0.00%","","","-0.08%","","","-0.56%","","","-0.02%"],["Allowance for Credit Loss/Nonaccrual Loans at December 31, 2023","","","","","","","","","","","","","","","","","","","","","10,919.73%"]]
[[/GREPCENT_TABLE]]

Goodwill:

The Bank has $9.0 million of goodwill recorded on its balance sheet as the result of corporate acquisitions. Goodwill is not amortized, nor deductible for tax purposes. However, goodwill is tested for impairment at least annually in accordance with ASC Topic 350. Goodwill was tested for impairment as of August 31, 2024. The 2024 test was conducted using a qualitative assessment method that requires the use of significant assumptions in order to make a determination of impairment. These assumptions may include, but are not limited to: macroeconomic factors, banking industry conditions, banking merger and acquisition trends, the Bank’s historical financial performance, the Corporation’s stock price, forecast Bank financial performance, and change of control premiums. Management determined the Bank’s goodwill was likely not impaired in 2024 and did not make a further assessment.

The 2023 impairment test was also conducted using a qualitative assessment and Management determined the Bank’s goodwill was likely not impaired in 2023 and did not make a further assessment.

At December 31, 2024, Management subsequently considered certain qualitative factors affecting the Corporation and determined that it was not likely that the results of the prior test had changed, and it determined that goodwill was not impaired at year-end.

34

Table of Contents

Deposits:

The Bank depends on deposits generated in the normal course of business as its primary source of funds. The Bank offers numerous deposit products including demand deposits (noninterest and interest-bearing accounts), savings, money management accounts, and time deposits (certificates of deposits/CDs) to retail, commercial, and municipal customers. Table 11 shows a comparison of the major deposit categories over a two-year period at December 31. Table 3, presented previously, shows the average balance of the major deposit categories and the average cost of these deposits over a two-year period.

Table 11. Deposits

[[GREPCENT_TABLE]]
[["","","","","","","Change"],["(Dollars in thousands)","","2024","","2023","","Amount","","%"],["Noninterest-bearing checking","","$","290,346","","$","273,050","","$","17,296","","6.3"],["Interest-bearing checking","","","417,870","","","454,517","","","(36,647)","","(8.1)"],["Money management","","","694,880","","","572,058","","","122,822","","21.5"],["Savings","","","96,646","","","105,907","","","(9,261)","","(8.7)"],["Time deposits","","","315,905","","","132,446","","","183,459","","138.5"],["Total","","$","1,815,647","","$","1,537,978","","$","277,669","","18.1"]]
[[/GREPCENT_TABLE]]

Noninterest-bearing checking: This category increased $17.3 million while the average balance decreased by $10.5 million for the year. As a noninterest bearing account, these deposits contributed approximately 37 basis points to the net interest margin.

Interest-bearing checking: This category saw a decrease of $36.6 million in the ending balance compared to the prior year and a decrease of $42.7 million compared to the prior year average primarily, in retail accounts in 2024. The cost of these accounts increased by 18 basis points year over year.

Money management: The year over year balance increased $122.8 million and the average balance increased $58.6 million compared to the 2023 average balance. The cost of this product increased by 56 basis points during the year as market rates increased.

Savings: Savings accounts decreased $9.3 million during the year. The cost of this product increased by 1 basis points during the year as market rates increased.

Time deposits: Time deposits increased by $183.5 million in 2024 with an increase in the average balance of $119.0 million as customers locked in higher interest rates. The cost of these accounts increased from 3.04% to 4.43% as market rates increased. Included in this category is $87.1 million of brokered CDs, which increased $78.4 million over the prior year end balance of $8.7 million.

Reciprocal deposits: At year-end 2024, the Bank had $288.9 million placed in the IntraFi Network deposit program ($124.0 million in interest-bearing checking and $164.9 million in money management) and $39.6 million of time deposits placed into the CDARS program. These programs allow the Bank to offer full FDIC coverage to large depositors, but with the convenience to the customer of only having to deal with one bank. The Bank solicits these deposits from within its market and it believes they present no greater risk than any other local deposit. Only reciprocal deposits that exceed 20% of liabilities are considered brokered deposits. At December 31, 2024, the Bank’s reciprocal deposits were 16.2% of total liabilities.

The Bank continually reviews different methods of funding growth that include traditional deposits and other wholesale sources. Competition from other local financial institutions, internet banks, credit unions and brokerages will continue to be a challenge for the Bank in its efforts to attract new and retain existing deposit accounts. This competition is not expected to lessen in the future.

Uninsured deposits: Aggregate estimated uninsured deposits at December 31, 2024 were $411.6 million (22.7% of total deposits) compared to $299.9 million (19.5% of total deposits) at December 31, 2023 utilizing Call Report methodology. Certain Bank deposits may not be insured but are fully collateralized by other assets. The Bank estimates that approximately 85% of its deposits are FDIC insured or collateralized as of December 31, 2024.

35

Table of Contents

At December 31, 2024, time deposits in excess of the FDIC insurance limit and time deposits that are otherwise uninsured by maturity were as follows:

Table 12. Time Deposits of $250,000 or More

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Individual Instruments that Meet or Exceed FDIC Insurance Limit","","Time Deposits that Meet or Exceed FDIC Insurance Limit"],["Maturity distribution:"],["Within three months","","$","26,648","","$","18,398"],["Over three through six months","","","15,170","","","6,920"],["Over six through twelve months","","","32,615","","","29,865"],["Over twelve months","","","2,978","","","1,478"],["Total","","$","77,411","","$","56,661"]]
[[/GREPCENT_TABLE]]

Borrowings:

As of December 31, 2024, the Bank had outstanding borrowings of $200.0 million in a term loan from FHLB maturing in January 2027 at a rate of 4.32%. The proceeds of the term loan were used to restructure borrowings and to fund expected loan growth.

On August 4, 2020, the Corporation completed the sale of a subordinated debt note offering. The Corporation sold $15.0 million of subordinated debt notes with a maturity date of September 1, 2030. These notes are noncallable for 5 years and carry a fixed interest rate of 5% per year for 5 years and then convert to a floating rate of SOFR plus 4.93% per year for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The Corporation also sold $5.0 million of subordinated debt notes with a maturity date of September 1, 2035. These notes are noncallable for 10 years and carry a fixed interest rate of 5.25% per year for 10 years and then convert to a floating rate of SOFR plus 4.92% per year for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. The Corporation paid an issuance fee of 2% of the total issue and is being amortized to the maturity date of each issue on a pro-rata basis. The notes are recorded on the consolidated balance sheet net of unamortized debt issuance costs. The proceeds are intended to be used for general corporate purposes.

Shareholders’ Equity:

Shareholders’ equity increased by $12.6 million to $144.7 million at December 31, 2024. Retained earnings increased $5.5 million in 2024 from earnings of $11.1 million offset by dividends paid of $5.6 million ($1.28 per share). The dividend payout ratio was 50.7% in 2024 compared to 41.2% in 2023.

The Board of Directors frequently authorizes the repurchase of the Corporation’s $1.00 par value common stock. Information regarding stock repurchase plans in place during the year are included in Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. Additional information on Shareholders’ Equity is reported in Note 20 of the accompanying consolidated financial statements.

The Corporation’s dividend reinvestment plan (DRIP) allows for shareholders to purchase additional shares of the Corporation’s common stock by reinvesting cash dividends paid on their shares or through optional cash payments. The Dividend Reinvestment Plan (DRIP) added $1.7 million to capital during 2024. This total was comprised of $1.0 million from the reinvestment of quarterly dividends and $730 thousand of optional cash purchases.

A strong capital position is important to the Corporation as it provides a solid foundation for the future growth of the Corporation, as well as instills confidence in the Bank by depositors, regulators and investors, and is considered essential by Management. The Corporation is continually exploring other sources of capital as part of its capital management plan for the Corporation and the Bank.

Common measures of adequate capitalization for banking institutions are capital ratios. These ratios indicate the proportion of permanently committed funds to the total asset base. Guidelines issued by federal and state regulatory authorities require both banks and bank holding companies to meet minimum leverage capital ratios and risk-based capital ratios.

The leverage ratio compares Tier 1 capital to average assets while the risk-based ratio compares Tier 1 and total capital to risk-weighted assets and off-balance-sheet activity in order to make capital levels more sensitive to the risk profiles of individual banks. Tier 1 capital is comprised of common stock, additional paid-in capital, retained earnings and components of other comprehensive income, reduced by goodwill and other intangible assets. Total capital is comprised of Tier 1 capital plus the allowable portion of the allowance for loan losses.

36

Table of Contents

The Corporation, as a bank holding company, is required to comply with the capital adequacy standards established by Federal Reserve Board. The Bank is required to comply with capital adequacy standards established by the FDIC. In addition, the Pennsylvania Department of Banking also requires state-chartered banks to maintain a 6% leverage capital level and 10% risk-based capital, defined substantially the same as the federal regulations.

The Corporation and the Bank are subject to the capital requirements contained in the regulation generally referred to as Basel III. The Basel III standards were effective for the Corporation and the Bank, effective January 1, 2015. Basel III imposes significantly higher capital requirements and more restrictive leverage and liquidity ratios than those previously in place. The capital ratios to be considered “well capitalized” under Basel III are: (1) Common Equity Tier 1(CET1) of 6.5%, (2) Tier 1 Leverage of 5%, (3) Tier 1 Risk-Based Capital of 8%, and (4) Total Risk-Based Capital of 10%. The CET1 ratio is a new capital ratio under Basel III and the Tier 1 risk-based capital ratio of 8% has been increased from 6%. The rules also included changes in the risk weights of certain assets to better reflect credit and other risk exposures. In addition, a capital conservation buffer of 2.50% is applicable to all of the capital ratios except for the Tier 1 Leverage ratio. The capital conservation buffer is equal to the lowest value of the three applicable capital ratios less the regulatory minimum (“adequately capitalized”) for each respective capital measurement. The Bank’s capital conservation buffer at December 31, 2024 was 4.96%. Compliance with the capital conservation buffer is required in order to avoid limitations on certain capital distributions, especially dividends. As of December 31, 2024, the Bank was “well capitalized’ under the Basel III requirements.

In 2019, the Community Bank Leverage Ratio (CBLR) was approved by federal banking agencies as an optional capital measure available to Qualifying Community Banking Organizations (QCBO). If a bank qualifies as a QCBR and maintains a CBLR of 9% or greater, the bank would be considered “well-capitalized” for regulatory capital purposes and exempt from complying with the Basel III risk-based capital rule. The CBLR rule was effective January 1, 2020 and banks could opt-in through an election in the first quarter 2020 regulatory filings. The Bank met the criteria of a QCBO but did not opt-in to the CBLR.

The consolidated asset limit on small bank holding companies is $3 billion and a company with assets under that limit is not subject to the consolidated capital rules but may file reports that include capital amounts and ratios. The Corporation has elected to file those reports.

The following table presents capital ratios for the Corporation and Bank at December 31:

Table 13. Capital Ratios

[[GREPCENT_TABLE]]
[["","2024","","2023"],["","Corporation","","Bank","","Corporation","","Bank"],["Common Equity Tier 1 risk-based capital ratio","11.31%","","11.71%","","11.82%","","12.38%"],["Total risk-based capital ratio","13.85%","","12.96%","","14.45%","","13.63%"],["Tier 1 risk-based capital ratio","11.31%","","11.71%","","11.82%","","12.38%"],["Tier 1 leverage ratio","7.92%","","8.20%","","9.01%","","9.44%"]]
[[/GREPCENT_TABLE]]

For additional information on capital adequacy refer to Note 2 of the accompanying consolidated financial statements.

Local Economy

The Corporation’s primary market area includes Franklin, Fulton, Cumberland, Huntingdon, and Dauphin County, PA, and Washington County, MD. This area is diverse in demographic and economic composition. County populations range from a low of approximately 15,000 in Fulton County to over 289,000 in Dauphin County. The market area has a diverse economic base and local industries include warehousing, truck and rail shipping centers, light and heavy manufacturers, health care, higher education institutions, farming and agriculture, and a varied service sector. The market area provides easy access to the major metropolitan markets on the east coast via trucking and rail transportation. Because of this, warehousing and distribution companies continue to find the area attractive. The local economy is not overly dependent on any one industry or business and Management believes that the Bank’s primary market area continues to be well suited for growth. The following provides selected economic data for the Bank’s primary market at December 31:

37

Table of Contents

Economic Data

[[GREPCENT_TABLE]]
[["","","2024","","2023"],["Unemployment Rate (not seasonally adjusted)"],["Market area range (1)","","2.7% - 3.8%","","2.4% - 3.5%"],["Pennsylvania (seasonally adjusted)","","3.4%","","3.4%"],["Maryland (seasonally adjusted)","","3.0%","","1.7%"],["United States (seasonally adjusted)","","4.2%","","3.7%"],["Housing Price Index - year over year change"],["PA, nonmetropolitan statistical area","","9.5%","","4.6%"],["United States","","5.1%","","4.8%"],["Building Permits - year over year change -12 months (2)"],["Residential, estimated","","6.1%","","-15.4%"],["Multifamily, estimated","","46.0%","","-50.7%"],["(1) Cumberland, Dauphin, Franklin, Fulton and Huntingdon County, PA, Washington County, MD and State of Maryland"],["(2) Harrisburg-Carlisle, PA MSA, Chambersburg-Waynesboro, PA MSA and Hagerstown, MD Martinsburg, WV MSA"]]
[[/GREPCENT_TABLE]]

The assets and liabilities of the Corporation are financial in nature, as such, the pricing of products, customer demand for certain types of products, and the value of assets and liabilities are greatly influenced by interest rates. As such, interest rates and changes in interest rates may have a more significant effect on the Corporation’s financial results than on other types of industries. Because of this, the Corporation watches the actions of the Federal Reserve Open Market Committee (FOMC) as it makes decisions about interest rate changes and monetary policy. In January 2025, the FOMC release included this: “Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.” Over the long-term, the Corporation benefits from higher interest rates. 

Liquidity

The Corporation conducts substantially all of its business through its bank subsidiary. The liquidity needs of the Corporation are funded primarily by the bank subsidiary, supplemented with liquidity from its dividend reinvestment plan.

The Bank must meet the financial needs of the customers that it serves, while providing a satisfactory return on the shareholders’ investment. In order to accomplish this, the Corporation must maintain sufficient liquidity in order to respond quickly to the changing level of funds required for both loan and deposit activity. The goal of liquidity management is to meet the ongoing cash flow requirements of depositors who want to withdraw funds and of borrowers who request loan disbursements. The Bank regularly reviews its liquidity position by measuring its projected net cash flows (in and out) at a 30 and 90-day interval. The Bank stress tests this measurement by assuming a level of deposit out-flows that have not historically been realized. In addition to this forecast, other funding sources are reviewed as a method to provide emergency funding if necessary. The objective of this measurement is to identify the amount of cash that could be raised quickly without the need to liquidate assets. The Bank also stresses its liquidity position utilizing different longer-term scenarios. The varying degrees of stress create pressure on deposit flows in its local market, reduce access to wholesale funding and limit access of funds available through brokered deposit channels. In addition to stressing cash flow, specific liquidity risk indicators are monitored to help identify risk areas. This analysis helps identify and quantify the potential cash surplus/deficit over a variety of time horizons to ensure the Bank has adequate funding resources. Assumptions used for liquidity stress testing are subjective. Should an evolving liquidity situation or business cycle present new data, potential assumption changes will be considered. The Bank believes it can meet all anticipated liquidity demands.

Historically, the Bank has satisfied its liquidity needs from earnings, repayment of loans, amortizing and maturing investment securities, loan sales, deposit growth and its ability to access existing lines of credit. All investment securities are classified as

38

Table of Contents

available for sale; therefore, marketable securities that are unencumbered as collateral for borrowings are an additional source of readily available liquidity (approximately $301.4 million fair value), either by selling the security or, more preferably, to provide collateral for additional borrowing. The Bank also has access to other wholesale funding via the brokered CD market.

The FHLB system has always been a major source of funding for community banks. There are no indicators that lead the Bank to believe the FHLB will discontinue its lending function or restrict the Bank’s ability to borrow. If either of these events were to occur, it would have a material negative effect on the Bank, and it is highly unlikely that the Bank could replace the level of FHLB funding in a short time. The Bank has also established credit at the Federal Reserve Discount Window and unsecured lines of credit at correspondent banks.

The following table shows the Bank’s available liquidity at December 31, 2024.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)"],["Liquidity Source","","","Capacity","","","Outstanding","","","Available"],["Federal Home Loan Bank","","$","562,697","","$","200,000","","$","362,697"],["Federal Reserve Bank Discount Window","","","64,575","","","\u2014","","","64,575"],["Correspondent Banks","","","76,000","","","\u2014","","","76,000"],["Total","","$","703,272","","$","200,000","","$","503,272"]]
[[/GREPCENT_TABLE]]

Off Balance Sheet Commitments

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet loans and lines of credit. Because these unfunded instruments have fixed maturity dates and many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation. The ACL for unfunded commitments is reported in Other Liabilities on the Consolidated Balance Sheet.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)"],["Financial instruments whose contract amounts represent credit risk","","2024","","2023"],["Commercial commitments to extend credit","","$","328,806","","$","325,982"],["Consumer commitments to extend credit (secured)","","","135,776","","","112,157"],["Consumer commitments to extend credit (unsecured)","","","5,352","","","5,964"],["","","$","469,934","","$","444,103"],["Standby letters of credit","","$","28,815","","$","19,851"],["ACL - Unfunded Commitments (1)","","$","2,030","","$","2,022"],["(1) Reported in Other Liabilities on the Consolidated Balance Sheets"]]
[[/GREPCENT_TABLE]]

Management believes that any amounts actually drawn upon can be funded in the normal course of operations. The Corporation has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity.