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What changed in FRANKLIN FINANCIAL SERVICES CORP /PA/'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of FRANKLIN FINANCIAL SERVICES CORP /PA/'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+281 added−300 removedSource: 10-K (2024-03-11) vs 10-K (2023-03-10)

Top changes in FRANKLIN FINANCIAL SERVICES CORP /PA/'s 2023 10-K

281 paragraphs added · 300 removed · 208 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

63 edited+26 added−42 removed107 unchanged
Biggest changeSpecifically, The Bank’s compensation philosophy for executives and employees is to provide pay opportunities at the median level of prevailing industry practices among community banking companies of similar asset size and market type. We engage a reputable outside compensation consulting firm to independently evaluate the effectiveness of our executive and employee compensation program and provide benchmarking against our peers within the industry. We strive to pay all employees equitably by providing wages that are competitive and consistent with their positions, skill levels, relevant experience, knowledge, and geographic location.
Biggest changeThe Bank’s compensation philosophy is to provide pay opportunities at the median level of prevailing industry practices among community banking companies of similar asset size and market type. Employee Training and Development. To empower our employees to unleash their full potential, we offer a comprehensive range of training and development programs, opportunities, and resources tailored to their needs.
The Bank’s present CRA rating is “satisfactory.” Various consumer laws and regulations also affect the operations of the Bank. Capital Adequacy Guidelines 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.
The Bank’s present CRA rating is “satisfactory.” Various consumer laws and regulations also affect the operations of the Bank. Capital Adequacy Guidelines The Corporation, as a bank holding company, is required to comply with the capital adequacy standards established by the Federal Reserve Board. The Bank is required to comply with capital adequacy standards established by the FDIC.
The Bank’s access to liquidity sources could be affected by unrealized losses if investments must be sold at a loss, tangible capital ratios continue to decline from an increase in unrealized losses or realized credit losses, the FHLB or other sources reduce capacity, or bank regulators impose restrictions on the Bank such as a limit on interest rates it may pay on deposits or its ability to access brokered deposits.
The Bank’s access to liquidity sources could be affected by unrealized losses if investments must be sold at a loss, tangible capital ratios decline from an increase in unrealized losses or realized credit losses, the FHLB or other sources reduce capacity, or bank regulators impose restrictions on the Bank such as a limit on interest rates it may pay on deposits or its ability to access brokered deposits.
The Bank encounters strong competition from other financial institutions in its primary market area, which consists of Franklin, Cumberland, Fulton and Huntingdon Counties, Pennsylvania; and Washington County, MD. In addition, established financial institutions not already operating in the Bank’s primary market area may open branches there at future dates or can compete in the market via the Internet.
The Bank encounters strong competition from other financial institutions in its primary market area, which consists of Franklin, Cumberland, Dauphin, Fulton and Huntingdon Counties, Pennsylvania; and Washington County, MD. In addition, established financial institutions not already operating in the Bank’s primary market area may open branches there at future dates or can compete in the market via the Internet.
The Bank’s lending activities consist primarily of commercial real estate, construction and land development, agricultural, commercial and industrial loans, installment and revolving loans to consumers and residential mortgage loans. Secured and unsecured commercial and industrial loans, including accounts receivable and inventory financing, and commercial equipment financing, are made to small and medium-sized businesses, individuals, governmental entities, and non-profit organizations.
The Bank’s lending activities consist primarily of commercial real estate, construction and land development, commercial and industrial loans, installment and revolving loans to consumers and residential mortgage loans. Secured and unsecured commercial and industrial loans, including accounts receivable and inventory financing, and commercial equipment financing, are made to small and medium-sized businesses, individuals, governmental entities, and non-profit organizations.
As a holding company, the Corporation is a separate legal entity from the Bank and does not have significant operations of its own. It currently depends upon the Bank's cash and liquidity to pay dividends to its shareholders. The Corporation cannot assure you that in the future the Bank will have the capacity to pay dividends to the Corporation.
As a financial holding company, the Corporation is a separate legal entity from the Bank and does not have significant operations of its own. It currently depends upon the Bank's cash and liquidity to pay dividends to its shareholders. The Corporation cannot assure you that in the future the Bank will have the capacity to pay dividends to the Corporation.
The Bank classifies loans in this report by the type of collateral, primarily residential or commercial and agricultural real estate. Loans secured by residential real estate loans may be further broken down into consumer or commercial purposes. Consumer purpose residential real estate loans represent traditional residential mortgages and home equity products.
The Bank classifies loans in this report by the type of collateral, primarily residential or commercial real estate. Loans secured by residential real estate loans may be further broken down into consumer or commercial purposes. Consumer purpose residential real estate loans represent traditional residential mortgages and home equity products.
Additionally, the Bank Holding Company Act prohibits the Corporation from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non - banking business, unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto.
Additionally, the Bank Holding Company Act prohibits the Corporation from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any 5 Table of Contents class of voting stock of any company engaged in a non - banking business, unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto.
As of December 31, 2022, the Bank was “well capitalized’ under the Basel III requirements. For additional information on the capital ratios see the section titled Shareholders’ Equity, and Table 13. 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).
As of December 31, 2023, the Bank was “well capitalized’ under the Basel III requirements. For additional information on the capital ratios, see the section titled Shareholders’ Equity and Table 13. 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).
However, there can be no assurance that the Bank will be successful in attracting or maintaining customers seeking larger loans or that it will be able to engage in participation of such loans or on terms favorable to the Bank. 11 Table of Contents There is strong competition in the Bank’s primary market areas and its geographic diversification is limited.
However, there can be no assurance that the Bank will be successful in 9 Table of Contents attracting or maintaining customers seeking larger loans or that it will be able to engage in participation of such loans or on terms favorable to the Bank. There is strong competition in the Bank’s primary market areas and its geographic diversification is limited.
Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings). At December 31, 2022, the Bank satisfied the criteria to be classified as "well capitalized" within the meaning of applicable regulations.
Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings). At December 31, 2023, the Bank satisfied the criteria to be classified as "well capitalized" within the meaning of applicable regulations.
Financial institutions were directed to review the interagency guidance on “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” issued in 2006 providing that a financial institution is potentially exposed to significant CRE concentration risk, and should employ enhanced risk management practices where (1) total CRE loans represent 300% or more of total capital, and (2) the outstanding balance of the CRE loan portfolio has increased by 50% or more during the prior 36 months.
Financial institutions were directed to review the interagency guidance on “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” issued in 2006 providing that a financial institution is potentially exposed to significant CRE concentration risk, and should employ enhanced risk management practices where (1) total non-owner occupied CRE loans represent 300% or more of total capital, and (2) the outstanding balance of the CRE loan portfolio has increased by 50% or more during the prior 36 months.
The Corporation’s common stock is listed under the symbol “FRAF” on the Nasdaq Capital Market. The Corporation’s internet address is www.franklinfin.com. Electronic copies of the Corporation’s 2022 Annual Report on Form 10-K are available free of charge by visiting the “Investor Information” section of www.franklinfin.com.
The Corporation’s common stock is listed under the symbol “FRAF” on the Nasdaq Capital Market. The Corporation’s internet address is www.franklinfin.com. Electronic copies of the Corporation’s 2023 Annual Report on Form 10-K are available free of charge by visiting the “Investor Information” section of www.franklinfin.com.
There are 33 competing commercial banks that have offices within the Corporation’s primary market area. These banks range from large regional banks to independent community banks. In addition, credit unions, mortgage banks, brokerage firms and other on-line competitors compete within the market.
There are 35 competing commercial banks that have offices within the Corporation’s primary market area. These banks range from large regional banks to independent community banks. In addition, credit unions, mortgage banks, brokerage firms and other on-line competitors compete within the market.
This evaluation is inherently subjective, as it requires material assumptions and estimates that may be susceptible to significant change. Although Management believes the loan loss allowance is adequate to absorb inherent losses in the loan portfolio, such losses cannot be predicted, and the allowance may not be adequate.
This evaluation is inherently subjective, as it requires material assumptions and estimates that may be susceptible to significant change. Although Management believes the ACL is adequate to absorb inherent losses in the loan portfolio, such losses cannot be predicted, and the allowance may not be adequate.
The amount of the allowance is determined through a periodic review and consideration of several factors, including an ongoing review of the quality, size and diversity of our loan portfolio; evaluation of nonperforming loans; historical loan loss experience; and the amount and quality of collateral, including guarantees, securing the loan.
The amount of the allowance is determined through a periodic review and consideration of several factors, including an ongoing review of the quality, size and diversity of our loan portfolio; evaluation of nonperforming loans; historical loan loss experience; economic outlook; and the amount and quality of collateral, including guarantees, securing the loan.
The Corporation cannot predict how any new legislation, or new rules adopted by the federal banking agencies, may affect its business in the future. Selected Statistical Information Certain statistical information is included in this report as part of Management’s Discussion and Analysis of Financial Condition and Results of Operations. ‎ 10 Table of Contents Item 1 A.
The Corporation cannot predict how any new legislation, or new rules adopted by the federal banking agencies, may affect its business in the future. Selected Statistical Information Certain statistical information is included in this report as part of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Item 1 A.
While we have systems, policies and 12 Table of Contents procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed.
While we have systems, policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed.
Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. 7 Table of Contents Most of the Dodd-Frank rules and regulations have been implemented.
Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. Most of the Dodd-Frank rules and regulations have been implemented.
F&M Trust operates twenty-two community banking offices in Franklin, Cumberland, Fulton and Huntingdon Counties, Pennsylvania; and Washington County, Maryland. It also has a location in Dauphin County, PA that serves as a regional support center for Commercial, and Investment and Trust services.
F&M Trust operates twenty-two community banking offices in Franklin, Cumberland, Fulton and Huntingdon Counties, Pennsylvania; and Washington County, Maryland. It also has a location in Dauphin County, PA that serves as a regional support center for Commercial, and Wealth Management services.
F&M Trust’s Investment and Trust Services Department offers all of the personal and corporate trust services normally associated with community bank trust departments including: estate planning and administration, corporate and personal trust fund management, pension, profit sharing and other employee benefit funds management, and custodial services.
F&M Trust’s Wealth Management Department offers all of the personal and corporate trust services normally associated with community bank trust departments including: estate planning and administration, corporate and personal trust fund management, pension, profit sharing and other employee benefit funds management, custodial services, and non-trust related investment services.
The Bank's rating under the Community Reinvestment Act, assigned by the FDIC pursuant to an examination of the Bank, is important in determining whether the bank may receive approval for, or utilize certain streamlined procedures in applications to engage in new activities.
The Bank's rating under the Community Reinvestment Act, assigned by the FDIC pursuant to an examination of the Bank, is important in determining whether the bank may receive approval for, 6 Table of Contents or utilize certain streamlined procedures in applications to engage in new activities.
The Bank maintains an allowance for loan losses that Management believes is appropriate to provide for any inherent losses in the loan portfolio.
The Bank maintains an allowance for credit losses (ACL) that Management believes is appropriate to provide for any inherent losses in the loan portfolio.
Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs. Severe weather, natural disasters, acts of war or terrorism, and other external events could negatively impact the Corporation’s business.
Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, reputational risks and costs, and potentially affect customer relationships. Severe weather, natural disasters, acts of war or terrorism, and other external events could negatively impact the Corporation’s business.
Excessive loan losses could have a material adverse effect on the Bank’s financial condition and results of operations. The Bank’s lending limit is smaller than many of our competitors, which affects the size of the loans it can offer customers . The Bank’s lending limit is approximately $44.0 million.
Excessive credit losses could have a material adverse effect on the Bank’s financial condition and results of operations. The Bank’s lending limit is smaller than many of our competitors, which affects the size of the loans it can offer customers . The Bank’s lending limit is approximately $47.0 million.
F&M Trust through licensed members of its Investment and Trust Services Department sells mutual funds, annuities and selected insurance products. Competition The Corporation and its banking subsidiary operate in a highly competitive environment. The principal market of F&M Trust is in south central Pennsylvania, primarily the counties of Franklin, Cumberland, Fulton and Huntingdon, and Washington County, MD.
F&M Trust through licensed members of its Wealth Management Department sells mutual funds, annuities and selected insurance products. Competition The Corporation and its banking subsidiary operate in a highly competitive environment. The principal market of F&M Trust is south central Pennsylvania, primarily the counties of Franklin, Cumberland, Dauphin, Fulton, Huntingdon; and Washington County, MD.
The FDIC charges a premium to depository institutions for deposit insurance. This rate is based on the risk category of the institution and the total premium is based on average total assets less average tangible equity. As of December 31, 2022, the Bank was considered well capitalized and its assessment rate was approximately 4.4 basis points of the assessment base.
The FDIC charges a premium to depository institutions for deposit insurance. This rate is based on the risk category of the institution and the total premium is based on average total assets less average tangible equity. As of December 31, 2023, the Bank was considered well capitalized and its assessment rate was approximately 5.8 basis points of the assessment base.
We discuss these matters further in Part I Item 3 Legal Proceedings and in Note 21 Commitments and Contingencies in the Notes to Consolidated Financial Statements in Part II Item 8 of this Report. 13 Table of Contents Public health crisis such as epidemics or pandemics could materially and adversely impact our business .
We discuss these matters further in Part I Item 3 Legal Proceedings and in Note 21 Commitments and Contingencies in the Notes to Consolidated Financial Statements in Part II Item 8 of this Report. Public health crises such as epidemics or pandemics could materially and adversely impact our business .
Thirty-seven percent ($569.6 million) of all deposits are in the Bank’s money management product. The interest rate on these deposits generally follows market rates. A large or continuous increase in market rates could result in a rapid increase in the interest expense of these deposits.
Thirty-seven percent ($572.1 million) of all deposits are in the Bank’s money management product. The interest rate on these deposits generally follows market rates. A large or continuous increase in market rates could result in a rapid increase in the interest expense of these deposits.
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, 2022 was 7.88%. Compliance with the capital conservation buffer is required in order to avoid limitations on certain capital distributions, especially dividends.
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, 2023 was 5.63%. Compliance with the capital conservation buffer is required in order to avoid limitations on certain capital distributions, especially dividends.
A large component of fee income is dependent on stock market values. Fee income from the Bank’s Investment and Trust Services Department comprises a large percentage of total noninterest income. Fee income from Investment and Trust Services is comprised primarily of asset management fees as measured by the market value of assets under management.
A large component of fee income is dependent on stock market values. Fee income from the Bank’s Wealth Management Department comprises a large percentage of total noninterest income. Fee income from Wealth Management Department is comprised primarily of asset management fees as measured by the market value of assets under management.
These services include, but are not necessarily limited to, accepting and maintaining checking, savings, and time deposit accounts, providing investment and trust services, making loans and providing safe deposit facilities.
These services include, but are not necessarily limited to, accepting and maintaining checking, savings, and time deposit accounts, providing wealth management services, making loans and providing safe deposit facilities.
A decline in real estate values means it is possible that the real estate collateral may be insufficient to cover the outstanding balance of a delinquent or foreclosed loan, resulting in a loss to the Bank. In addition, the real estate collateral is concentrated in a small market area of south-central Pennsylvania.
A decline in real estate values means it is possible that the real estate collateral may be insufficient to cover the outstanding balance of a delinquent or foreclosed loan, resulting in a loss to the Bank. In addition, the real estate collateral is concentrated in the Bank’s primary market area.
Commercial purpose loans may be secured by real estate, business assets and equipment, personal guarantees, or non-real estate collateral. Commercial purpose loans secured by real estate were $643.0 million at December 31, 2022 and account for 73% of the total commercial loan portfolio. These loans contain all the risks associated with real estate lending as discussed above.
Commercial purpose loans may be secured by real estate, business assets and equipment, personal guarantees, or non-real estate collateral. Commercial purpose loans secured by real estate were $782.9 million at December 31, 2023 and account for 76% of the total commercial loan portfolio. These loans contain all the risks associated with real estate lending as discussed above.
Dodd-Frank is expected to have a significant impact on our business operations as its provisions take effect. Among the provisions that are likely to affect the Corporation are the following: FDIC Insurance. The insurance limit was increased to $250,000 per depositor. In addition, the assessment base was changed from a deposit-based calculation to an asset-based calculation.
Dodd-Frank has made a significant impact on our business operations as its provisions took effect. Among the provisions that have affected the Corporation are the following: FDIC Insurance. The insurance limit was increased to $250,000 per depositor. In addition, the assessment base was changed from a deposit-based calculation to an asset-based calculation.
As such, the market values are directly related to stock market values. Therefore, any significant negative change in the value of assets under management due to stock market fluctuations could greatly reduce fee income and have a material adverse effect on our financial condition and results of operations. A large component of fee income is dependent on two deposit services.
Therefore, any significant negative change in the value of assets under management due to stock market fluctuations could greatly reduce fee income and have a material adverse effect on our financial condition and results of operations. 10 Table of Contents A large component of fee income is dependent on two deposit services.
Commercial loans are a significant portion of our loan portfolio. The Bank continues to grow its commercial loan portfolio. Commercial purpose loans account for 84% ($878.6 million) of the total loan portfolio. These loans are made to businesses for a variety of commercial purposes and may include fixed and variable rate loans, term loans, and lines of credit.
Commercial loans are a significant portion of our loan portfolio. The Bank continues to grow its commercial loan portfolio. Commercial purpose loans account for 82% ($1.026 billion) of the total loan portfolio. These loans are made to businesses for a variety of commercial purposes and may include fixed and variable rate loans, term loans, and lines of credit.
The Bank attempts to mitigate these risks through its underwriting and loan review process; however, this risk cannot be eliminated, and substantial credit losses could result in reduced earnings or losses. The allowance for loan losses may prove to be insufficient to absorb inherent losses in our loan portfolio.
The Bank attempts to mitigate these risks through its underwriting and loan review process; however, this risk cannot be eliminated, and substantial credit losses could result in reduced earnings or losses.
The Prompt Corrective Action Rules and the Basel III rules, described above, may further limit the ability of banks to pay dividends or make capital distributions if regulatory capital requirements are not met.
The Prompt Corrective Action Rules and the Basel III rules, described above, may further limit the ability of banks to pay dividends or make capital distributions if regulatory capital requirements are not met. There are currently no restrictions on the payments of dividends by either the Bank or the Corporation.
The ATR/QM rule was effective January 10, 2014 . Commercial Real Estate Guidance In December 2015, the federal banking agencies released a “Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Statement”).
Commercial Real Estate Guidance In December 2015, the federal banking agencies released a “Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Statement”).
Risk Factors The following is a summary of the primary risks associated with the Corporation’s business, financial condition and results of operations, and common stock. Risk Factors Relating to the Corporation Real estate related loans are a significant portion of our loan portfolio. The Bank offers a variety of loan products, including residential mortgage, consumer, construction and commercial loans.
Risk Factors The following is a summary of the primary risks associated with the Corporation’s business, financial condition and results of operations, and common stock. 8 Table of Contents Risk Factors Relating to the Corporation Real estate related loans are a significant portion of our loan portfolio.
An epidemic or pandemic (such as COVID-19) may cause prolonged global, national, or regional recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition.
An epidemic or pandemic (such as COVID-19) may cause prolonged global, national, or regional recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition. 11 Table of Contents As a result, the demand for our products and services may be significantly impacted, which could adversely affect our revenue and results of operations.
Our business and financial results could be impacted materially by adverse results in legal proceedings. The nature of the Corporation’s business generates a certain amount of litigation involving matters arising in the ordinary course of business (and, in some cases, from the activities of companies we have acquired).
The nature of the Corporation’s business generates a certain amount of litigation involving matters arising in the ordinary course of business (and, in some cases, from the activities of companies we have acquired).
While the Corporation believes its business continuity plan and efforts to evaluate the business continuity plans of critical third-party service providers help mitigate risks, disruptions or failures affecting any of these systems may cause interruptions in service to customers, damage to the Corporation's reputation, and loss or liability to the Corporation. 14 Table of Contents Risk Factors Relating to the Common Stock The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.
While the Corporation believes its business continuity plan and efforts to evaluate the business continuity plans of critical third-party service providers help mitigate risks, disruptions or failures affecting any of these systems may cause interruptions in service to customers, damage to the Corporation's reputation, and loss or liability to the Corporation.
In 2022, F&M Trust donated over $419 thousand to 255 organizations in our communities and contributed over $192 thousand and 342 scholarships to Kindergarten through 12th grade and Pre-Kindergarten schools and organizations through the Pennsylvania Educational Improvement Tax Credit program. In addition, employees of the Bank provided 1,309 volunteer hours to 62 different service organizations.
In 2023, F&M Trust donated over $480 thousand to 296 organizations in our communities and funded 323 scholarships for $156 thousand to kindergarten through 12th grade and Pre-kindergarten schools and organizations through the Pennsylvania Educational Improvement Tax Credit program. In addition, employees of the Bank provided 2,043 volunteer hours to 91 different service organizations.
Commercial and agricultural real estate loans are secured by properties such as hotels, office buildings, apartment buildings, retail sites, and farmland or agricultural related properties. These loans are highly dependent on the business operations for repayment. Compared to residential real estate, this collateral may be more difficult to sell in the event of a default.
These loans are highly dependent on the business operations for repayment. Compared to residential real estate, this collateral may be more difficult to sell in the event of a default. Construction loans are made to finance the purchase of land and the construction of residential and commercial buildings and are secured by mortgages on real estate.
The Bank does not engage in, or expect to engage in, any transactions that are considered “covered activities” as defined by the Volker Rule. Therefore, the Bank does not have any compliance obligations under the Volker Rule.
Volker Rule In December 2013, Federal banking regulators issued rules for complying with the Volker Rule provision of the Dodd-Frank Act. The Bank does not engage in, or expect to engage in, any transactions that are considered “covered activities” as defined by the Volker Rule. Therefore, the Bank does not have any compliance obligations under the Volker Rule.
The Bank’s commitment to community service reflects our core values and is a key driver for attracting and retaining employees. We aim to give back to the communities where we live and work and believe this commitment helps in our efforts to attract and retain employees.
These numbers underscore the strong sense of loyalty and commitment among our employees. Community Involvement . The Bank’s commitment to community service reflects our core values. We aim to give back to the communities where we live and work and believe this commitment helps in our efforts to attract and retain employees.
In certain situations, the Bank acquires properties through foreclosure on delinquent loans. The Bank initially records these properties at the estimated fair value less cost to sell with subsequent adjustments to fair value recorded as needed.
In certain situations, the Bank acquires properties through foreclosure on delinquent loans. The Bank initially records these properties at the estimated fair value less cost to sell with subsequent adjustments to fair value recorded as needed. Commercial real estate loans are secured by properties such as hotels, office buildings, apartment buildings, retail sites, and farmland or agricultural related properties.
Construction loans are made to finance the purchase of land and the construction of residential and commercial buildings and are secured by mortgages on real estate. These loans are primarily comprised of loans to consumers to build a home, and loans to contractors and developers to construct residential properties for resale or rental.
These loans are primarily comprised of loans to consumers to build a home, and loans to contractors and developers to construct residential properties for resale or rental.
In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. 6 Table of Contents The Bank Holding Company Act prohibits the Corporation from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of any bank, or from merging or consolidating with another bank holding company, without prior approval of the Federal Reserve Board.
The Bank Holding Company Act prohibits the Corporation from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of any bank, or from merging or consolidating with another bank holding company, without prior approval of the Federal Reserve Board.
F&M Trust’s compensation program is designed to align the compensation of our employees with the Bank’s performance and to provide the proper incentives to attract, retain, and motivate employees to achieve the Bank’s strategic growth objectives.
The survey assesses key engagement drivers, including Organization, Job & Career, Co-worker/Team, Leader, and Diversity, Equity, and Inclusion (DEI) engagement. Competitive Pay and Benefits. F&M Trust’s compensation program is designed to align the compensation of our employees with the Bank’s performance and to provide the proper incentives to attract, retain, and motivate employees to achieve the Bank’s strategic growth objectives.
The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies and financial institutions specifically. Market fluctuations could adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies.
Market fluctuations could adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies.
The Bank requires real estate as collateral for many of its loans. At December 31, 2022, approximately 77% ($809.2 million) of its loans were secured by real estate. These real estate loans are located primarily in the Bank’s market area of south-central Pennsylvania. Real estate values tend to follow changes in general economic cycles.
These real estate loans are located primarily in the Bank’s market area of south-central Pennsylvania and Washington County, MD. Real estate values tend to follow changes in general economic cycles.
F&M Trust is the largest financial institution headquartered in Franklin County and had total assets of approximately $1.7 billion on December 31, 2022. Human Capital Company Overview and Values. F&M Trust is committed to remaining independent by growing our Bank to meet the increasing financial needs of our customers, communities, and shareholders.
F&M Trust is the largest financial institution headquartered in Franklin County, PA and had total assets of approximately $1.8 billion on December 31, 2023. Human Capital Company Overview and Values. At F&M Trust, we recognize that our employees are fundamental to the realization of our vision and the execution of our ongoing strategy.
Our Total Voluntary Turnover for 2022 was 13.99%. The “Intent to Stay” metric from our last employee engagement survey indicated that 81% of our workforce planned to stay with the Bank for at least three years or more, with over 40% indicating they would remain with the bank more than ten years.
The "Intent to Stay" metric from our most recent employee engagement survey indicated that 85% of our workforce plans to remain with the Bank for at least three years or more. Over 45% of our employees expressed their intention to stay with the Bank for more than ten years.
The ATR/QM rule applies to almost all closed-end consumer credit transactions secured by a dwelling. The ATR rule provides eight specific factors that must be considered during the underwriting process. QMs generally have three types of requirements: restrictions on loan features, points and fees, and underwriting criteria. A QM is presumed to comply with the ATR requirements.
QMs generally have three types of requirements: restrictions on loan features, points and fees, and underwriting criteria. A QM is presumed to comply with the ATR requirements. The ATR/QM rule was effective January 10, 2014 .
However, the CFPB can require any bank to submit reports it deems necessary to fulfill its mission and it can request to be part of any bank examination.
However, the CFPB can require any bank to submit reports it deems necessary to fulfill its mission and it can request to be part of any bank examination. 7 Table of Contents Ability to Repay / Qualified Mortgages In July 2013, the Consumer Finance Protection Bureau adopted the final rules that implement the Ability to Repay (ATR) / Qualified Mortgages (QM) provisions of the Dodd-Frank Act.
The inability to access FHLB funding, through a restriction on credit or the failure of the FHLB, could have a materially adverse effect on the Bank’s liquidity management. Unrealized losses in the Bank’s investment portfolio could affect liquidity. As market interest rates increased during 2022, the unrealized losses on the Bank’s investment portfolio also increased.
The inability to access FHLB funding, through a restriction on credit or the failure of the FHLB, could have a materially adverse effect on the Bank’s liquidity management. The Bank also has funding available with the Federal Reserve Bank and believes it may be a more stable source of liquidity than the FHLB.
The following table shows the Bank’s market share in its primary market as reported on the June 30, 2022 FDIC Summary of Deposits Report: (Dollars in thousands) F&M Trust County, State # of Locations Deposits Market Deposits Market Share Franklin, PA 12 $ 1,172,344 $ 2,894,215 41% Cumberland, PA 6 395,903 11,145,661 4% Fulton, PA 2 99,469 273,678 36% Huntingdon, PA 1 27,318 779,380 4% Washington, MD* - - 3,393,811 - 21 $ 1,695,034 $ 18,486,745 9% *Washington County, MD office opened July 1, 2022 With increasing competition, many nonbanking institutions offer services similar to those offered by the Bank.
The following table shows the Bank’s market share where it operates retail banking offices as reported on the June 30, 2023 FDIC Summary of Deposits Report: (Dollars in thousands) F&M Trust County, State # of Locations Deposits Market Deposits Market Share Franklin, PA 13 $ 1,027,967 $ 2,731,797 37.63% Cumberland, PA 8 378,683 11,053,104 3.43% Fulton, PA 2 83,735 244,936 34.19% Huntingdon, PA 1 27,487 720,626 3.81% Washington, MD 1 6,153 3,272,678 0.19% 25 $ 1,524,025 $ 18,023,141 8.46% With increasing competition, many nonbanking institutions offer services similar to those offered by the Bank.
As of December 31, 2022, we had 298 employees on our team, nearly all of whom were full-time and of which the majority were women. At the core of our DEI efforts is a belief that when employees bring forward their own brand of thought and perspective, it creates a more positive and innovative environment for everyone.
Therefore, we are dedicated to continuously enhancing our DEI efforts to create a more vibrant, innovative, and equitable workplace for all. As of December 31, 2023, we had 306 employees in our workforce, nearly all of whom were full-time and of which the majority were women. Engagement.
We do not currently know of any practice, condition or violation that might lead to termination of our deposit insurance. 9 Table of Contents Tax Reform On December 22, 2017 the Tax Cuts and Jobs Act (the Act) was signed into law. This comprehensive tax legislation provided for significant changes to the U.S.
We do not currently know of any practice, condition or violation that might lead to termination of our deposit insurance. New Legislation Congress is often considering new financial industry legislation, and the federal banking agencies routinely propose new regulations.
Ability to Repay / Qualified Mortgages In July 2013, the Consumer Finance Protection Bureau adopted the final rules that implement the Ability to Repay (ATR) / Qualified Mortgages (QM) provisions of the Dodd-Frank Act. Regulators believe that the ATR/QM rules will prevent many of the loose underwriting practices that contributed to the mortgage crisis in 2008.
Regulators believe that the ATR/QM rules will prevent many of the loose underwriting practices that contributed to the mortgage crisis in 2008. The ATR/QM rule applies to almost all closed-end consumer credit transactions secured by a dwelling. The ATR rule provides eight specific factors that must be considered during the underwriting process.
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While our desire is apparent, we also understand that we must be intentional in how we conduct ourselves and expect to continually earn the right to maintain our independence as a community Bank.
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We are committed to fostering and maintaining a strong, healthy organizational culture that aligns with our core values and empowers our employees to thrive. Our company values—integrity, excellence, accountability, teamwork, and concern for our customers and communities—guide every aspect of our operations.
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With over 117 years of stability, we have a history of making decisions with the long-term view in mind and collaborating internally to achieve the goals and results set forth in the Bank’s strategic plan. Our employees are critical to achieving our vision and executing upon ongoing strategy.
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We believe that by upholding these principles, we not only strengthen our internal cohesion but also enhance our ability to serve our customers, support our communities, and deliver value to our shareholders.
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As such, fostering and maintaining a strong, healthy organizational culture is a key strategic focus for us.
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Through our unwavering commitment to our employees and our values, we are confident in our ability to sustain our independence as a community bank and continue delivering exceptional service and value to our customers, communities, and shareholders for years to come. 4 Table of Contents Diversity, Equity, and Inclusion (DEI).
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Our core values of integrity, excellence, accountability, teamwork, and concern for our customers and communities reflect who we are 4 Table of Contents collectively and guide our employees as they conduct business and during their interactions with one another, our customers, communities, and shareholders. Diversity, Equity, and Inclusion (DEI).
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At F&M Trust, we are deeply committed to fostering a workplace that values diversity, promotes equity, and embraces inclusion. We recognize that our success as an organization is intrinsically linked to the diverse perspectives, experiences, and talents of our employees.
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We are committed to our continued efforts to increase the diversity of our workforce, ensure equity in all our employment practices, and foster an inclusive work environment that supports our employees and the communities we serve.
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To ensure a positive and productive working environment for all our employees, F&M Trust has a robust focus on employee engagement. Central to this initiative is our annual engagement survey conducted by an independent third party. In 2023, we achieved an outstanding survey response rate of 94%, marking the sixth consecutive year of best-in-class participation levels.
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We hire the most qualified individuals for positions within the Bank regardless of race, gender, ethnicity, or other protected traits, and it is our policy to fully comply with all laws applicable to discrimination in the workplace.
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Identifying and nurturing the talents of our next generation of leaders is also a priority for us. We regularly conduct succession planning and talent reviews to identify and nurture top talent within the organization. Wellness.
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This belief enables us to leverage the strengths of our workforce to meet the needs of the Bank’s key constituents and achieve its growth objectives. We continue to enhance our DEI efforts, which are fully endorsed by our Senior Management team and Board of Directors.
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The well-being of our employees is paramount to the success of our Bank, and we demonstrate our commitment to their holistic wellness through our comprehensive wellness program, which has been a cornerstone of our culture since 2001.
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Key initiatives include fostering an inclusive employee experience, training employees on DEI concepts, developing leaders to embody the traits of inclusive leadership, partnering with non-profit and community organizations to support and develop a diverse talent pipeline, and acquiring the best available talent.
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Our wellness program boasts high levels of employee participation, with over 75% of our workforce completing health risk assessments and biometric screenings in 2023. Retention. Monitoring employee turnover rates is crucial for us, as we understand that retaining our talented and committed personnel is essential for our continued success. In 2023, our Total Voluntary Turnover rate was 12.77%.
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The Bank ensures accountability for making progress in this area by embedding DEI objectives in the annual performance goals of the President/CEO and other key officers. Engagement.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe Corporation owns or leases thirty-six properties in Franklin, Cumberland, Fulton and Huntingdon Counties, Pennsylvania, and Washington County, Maryland, for banking operations, as described below: Property Owned Leased Facilities used in Banking Operations 16 11 Remote ATM Sites 3 5 Other Properties — 1 The Bank’s properties are adequate for the purposes intended.
Biggest changeThe Corporation owns or leases thirty-five properties in Franklin, Cumberland, Dauphin, Fulton and Huntingdon Counties, Pennsylvania; and Washington County, Maryland, for banking operations, as described below: Property Owned Leased Facilities used in Banking Operations 16 11 Remote ATM Sites 3 5 The Bank’s properties are adequate for the purposes intended.
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Included in Other Properties is a property leased for future use.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeNo material proceedings are pending or are known to be threatened or contemplated against us by governmental authorities. In management’s opinion, there are no other proceedings pending to which the Corporation is a party or to which its property is subject which, if determined adversely to the Corporation, would be material. Item 4. Mine Safety Disclosures Not Applicable Part II
Biggest changeNo material proceedings are pending or are known to be threatened or contemplated against us by governmental authorities. In management’s opinion, there are no other proceedings pending to which the Corporation is a party or to which its property is subject which, if determined adversely to the Corporation, would be material.
Thus, at December 31, 2022, we are unable to provide an evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss with respect to such other matters and, accordingly, have not yet established any specific accrual for such other matters.
Thus, at December 31, 2023, we are unable to provide an evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss with respect to such other matters and, accordingly, have not yet established any specific accrual for such other matters.
Item 3. Legal Proceedings The nature of the Corporation’s business generates a certain amount of litigation. 15 Table of Contents We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and the amount of the loss can be reasonably estimated.
Item 3. Legal Proceedings The nature of the Corporation’s business generates a certain amount of litigation. We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and the amount of the loss can be reasonably estimated.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeInformation is provided by S&P Global Market Intelligence. 17 Table of Contents Period Ending Index 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Franklin Financial Services Corporation $ 100.00 $ 86.88 $ 110.17 $ 80.32 $ 102.43 $ 116.23 Peer Group* $ 100.00 $ 96.47 $ 113.38 $ 93.10 $ 118.26 $ 119.68 SNL Mid-Atlantic Bank $ 100.00 $ 85.44 $ 121.49 $ 109.82 $ 138.70 $ 117.14 NASDAQ Composite $ 100.00 $ 97.16 $ 132.81 $ 192.47 $ 235.15 $ 158.65 *Peer Group consists of Mid Atlantic Banks with Assets between $1B-$2B as of 9/30/2022 ‎ 18 Table of Contents Shareholders’ Information Dividend Reinvestment Plan: Franklin Financial Services Corporation offers a dividend reinvestment program whereby shareholders of the Corporation’s common stock may reinvest their dividend, or make optional cash payment, to purchase additional shares of the Corporation.
Biggest changeBMI Banks - Mid-Atlantic Region Index $ 100.00 $ 142.19 $ 128.53 $ 162.33 $ 137.10 $ 166.23 Peer Group* $ 100.00 $ 112.40 $ 90.80 $ 116.46 $ 121.78 $ 120.76 *Peer Group consists of Mid Atlantic Banks with Assets between $1B-$2B as of 12/31/2023 ‎ 16 Table of Contents Shareholders’ Information Dividend Reinvestment Plan: Franklin Financial Services Corporation offers a dividend reinvestment program whereby shareholders of the Corporation’s common stock may reinvest their dividend, or make optional cash payment, to purchase additional shares of the Corporation.
Only shareholders will be granted access to the meeting as described in the Franklin Financial Services Corporation 2023 Proxy Statement. Websites: Franklin Financial Services Corporation: www.franklinfin.com Farmers & Merchants Trust Company: www.fmtrust.bank Stock Information: The Corporation’s common stock is traded on the Nasdaq Capital Market under the symbol “FRAF”.
Only shareholders will be granted access to the meeting as described in the Franklin Financial Services Corporation 2024 Proxy Statement. Websites: Franklin Financial Services Corporation: www.franklinfin.com Farmers & Merchants Trust Company: www.fmtrust.bank Stock Information: The Corporation’s common stock is traded on the Nasdaq Capital Market under the symbol “FRAF”.
Securities Authorized for Issuance under Equity Compensation Plans The information related to equity compensation plans is incorporated by reference to the materials set forth under the heading “Executive Compensation – Compensation Tables” in the Corporation’s Proxy Statement for the 2023 Annual Meeting of Shareholders.
Securities Authorized for Issuance under Equity Compensation Plans The information related to equity compensation plans is incorporated by reference to the materials set forth under the heading “Executive Compensation – Compensation Tables” in the Corporation’s Proxy Statement for the 2024 Annual Meeting of Shareholders.
Performance Graph The following graph compares the cumulative total return to shareholders of Franklin Financial with selected market indices and a bank peer group, consisting of Mid-Atlantic Banks with assets between $1 billion - $2 billion as of September 30, 2022; for the five-year period ended December 31, 2022, in each case assuming an initial investment of $100 on December 31, 2017 and the reinvestment of all dividends.
Performance Graph The following graph compares the cumulative total return to shareholders of Franklin Financial with selected market indices and a bank peer group, consisting of Mid-Atlantic Banks with assets between $1 billion - $2 billion as of September 30, 2023; for the five-year period ended December 31, 2023, in each case assuming an initial investment of $100 on December 31, 2018 and the reinvestment of all dividends.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Market and Dividend Information The Corporation had 1 ,574 shareholders of record as of December 31, 2022.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Market and Dividend Information The Corporation had 1 ,536 shareholders of record as of December 31, 2023.
Information concerning this optional program is available by contacting the Corporate Secretary at 717-264-611, or: Corporate Secretary 1500 Nitterhouse Drive, P.O. Box 6010 Chambersburg, PA 17201-6010 Annual Meeting: The Annual Meeting of the shareholders of Franklin Financial Services Corporation will be held Tuesday, April 25, 2023 at 9:00 a.m. at The Orchards Restaurant, 1580 Orchard Drive, Chambersburg, PA.
Information concerning this optional program is available by contacting the Corporate Secretary at 717-264-611, or: Corporate Secretary 1500 Nitterhouse Drive, P.O. Box 6010 Chambersburg, PA 17201-6010 Annual Meeting: The Annual Meeting of the shareholders of Franklin Financial Services Corporation will be held Tuesday, April 23, 2024 at 9:00 a.m. in a virtual meeting format only.
Common Stock Repurchases The Board of Directors, from time to time, authorizes the repurchase of the Corporation’s $1.00 par value common stock.
Common Stock Repurchases The Board of Directors, from time to time, authorizes the repurchase of the Corporation’s $1.00 par value common stock. The repurchased shares will be held as Treasury shares available for issuance in connection with future stock dividends and stock splits, employee benefit plans, executive compensation plans, the Dividend Reinvestment Plan and other appropriate corporate purposes.
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The repurchased shares will be held as Treasury shares available for issuance in connection with future stock dividends and stock splits, employee benefit plans, executive compensation plans, the Dividend Reinvestment Plan and other appropriate corporate purposes. 16 Table of Contents The following table shows stock repurchase activity under approved plans: Period Number of Shares Purchased as Part of Publicly Announced Program Weighted Average Price Paid per Share Dollar Amount of Shares Purchased as Part of Publicly Announced Program Maximum Number of Shares Yet To Be Purchased Under Program October 2022 9,107 $ 31.64 $ 288,151 55,550 November 2022 4,469 $ 31.89 142,523 51,081 December 2022 7,529 $ 31.00 233,362 147,152 21,105 $ 664,036 In December 2022, an open market repurchase plan was approved to repurchase 150,000 shares over a one-year period.
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There were no shares purchased during the fourth quarter of 2023. In December 2023, an open market repurchase plan was approved to repurchase 150,000 shares over a one-year period.
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Information is provided by S&P Global Market Intelligence. 15 Table of Contents Period Ending Index 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 Franklin Financial Services Corporation $ 100.00 $ 126.80 $ 92.45 $ 117.89 $ 133.80 $ 122.03 NASDAQ Composite $ 100.00 $ 136.69 $ 198.10 $ 242.03 $ 163.28 $ 236.17 S&P U.S.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeAnalysis of Net Interest Income 2022 2021 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 $ 159,610 $ 2,483 1.56% $ 109,263 $ 249 0.23% Investment securities: Taxable 424,703 9,975 2.35% 392,789 7,216 1.84% Tax exempt 85,566 2,593 3.03% 93,764 2,661 2.84% Investments 510,269 12,568 2.46% 486,553 9,877 2.03% Loans: Commercial, industrial and agricultural 869,536 37,009 4.26% 849,201 33,982 4.00% Residential mortgage 70,294 2,490 3.54% 68,581 2,382 3.47% Home equity loans and lines 86,851 2,855 3.29% 83,465 2,103 2.52% Consumer 5,938 425 7.16% 6,855 446 6.51% Loans 1,032,619 42,779 4.14% 1,008,102 38,913 3.86% Total interest-earning assets 1,702,499 $ 57,830 3.40% 1,603,918 $ 49,039 3.06% Other assets 87,300 67,381 Total assets $ 1,789,799 $ 1,671,299 Interest-bearing liabilities: Deposits: Interest-bearing checking $ 543,553 $ 879 0.16% $ 472,596 $ 521 0.11% Money Management 588,728 2,542 0.43% 537,010 830 0.15% Savings 128,203 101 0.08% 112,506 64 0.06% Time 64,273 294 0.46% 72,525 438 0.60% Total interest-bearing deposits 1,324,757 3,816 0.29% 1,194,637 1,853 0.16% Subordinate notes 19,605 1,047 5.34% 19,571 1,049 5.36% Total interest-bearing liabilities 1,344,362 4,863 0.36% 1,214,208 2,902 0.24% Noninterest-bearing deposits 306,102 293,027 Other liabilities 11,052 15,427 Shareholders' equity 128,283 148,637 Total liabilities and shareholders' equity $ 1,789,799 $ 1,671,299 T/E net interest income/Net interest margin 52,967 3.11% 46,137 2.88% Tax equivalent adjustment (1,381) (1,466) Net interest income $ 51,586 $ 44,671 Net Interest Spread 3.04% 2.82% Cost of Funds 0.29% 0.19% Cost of Deposits 0.23% 0.12% Provision for Loan Losses In 2022, the Bank recorded gross loan charge-offs of $1.6 million, which were offset by $103 thousand of recoveries, resulting in net loan charge-offs of $1.5 million.
Biggest changeAnalysis of Net Interest Income 2023 2022 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 $ 50,451 $ 2,407 4.77% $ 159,610 $ 2,483 1.56% Investment securities: Taxable 406,937 14,846 3.65% 424,703 9,975 2.35% Tax exempt 54,416 1,523 2.80% 85,566 2,593 3.03% Investment securities 461,353 16,369 3.55% 510,269 12,568 2.46% Loans: Residential real estate 1-4 family: First liens 173,986 7,912 4.55% 139,577 5,629 4.03% Junior liens and lines of credit 72,623 4,050 5.58% 73,200 2,378 3.25% Residential real estate - construction 21,124 1,303 6.17% 21,737 1,013 4.66% Commercial real estate 626,817 33,204 5.30% 550,772 23,802 4.32% Commercial 243,045 12,080 4.97% 241,395 9,532 3.95% Consumer 6,285 531 8.45% 5,938 425 7.16% Loans 1,143,880 59,080 5.16% 1,032,619 42,779 4.14% Total interest-earning assets 1,655,684 $ 77,856 4.70% 1,702,499 $ 57,830 3.40% Other assets 95,489 87,300 Total assets $ 1,751,173 $ 1,789,799 Interest-bearing liabilities: Deposits: Interest checking $ 459,447 $ 2,078 0.45% $ 543,553 $ 879 0.16% Money Management 568,521 13,801 2.43% 588,728 2,542 0.43% Savings 117,026 183 0.16% 128,203 101 0.08% Time 91,512 2,781 3.04% 64,273 294 0.46% Total interest-bearing deposits 1,236,506 18,843 1.52% 1,324,757 3,816 0.29% Subordinate notes 19,642 1,051 5.35% 19,605 1,047 5.34% Federal Reserve Bank borrowings 53,041 2,374 4.48% — — 0.00% Federal Home Loan Bank advances 14,704 857 5.83% — — 0.00% Total interest-bearing liabilities 1,323,893 23,125 1.75% 1,344,362 4,863 0.36% Noninterest-bearing deposits 293,001 306,102 Other liabilities 14,871 11,052 Shareholders' equity 119,408 128,283 Total liabilities and shareholders' equity $ 1,751,173 $ 1,789,799 T/E net interest income/Net interest margin 54,731 3.31% 52,967 3.11% Tax equivalent adjustment (1,094) (1,381) Net interest income $ 53,637 $ 51,586 Net Interest Spread 2.95% 3.04% Cost of Funds 1.43% 0.29% Cost of Deposits 1.23% 0.23% Provision for Credit Losses In 2023, the Bank recorded gross loan charge-offs of $422 thousand, which were partially offset by $246 thousand of recoveries, resulting in net loan charge-offs of $176 thousand.
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 of risk of loss. Nonaccrual loans are rated no better than 7-Substandard.
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 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 it liquidity position by measuring its projected net cash flows (in and out) at a 30 and 90-day interval.
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’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 and OREO.
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.
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 2022 and did not make a further assessment.
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 2023 and did not make a further assessment.
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, 2022. The 2022 test was conducted using a qualitative assessment method that requires the use of significant assumptions in order to make a determination of impairment.
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, 2023. The 2023 test was conducted using a qualitative assessment method that requires the use of significant assumptions in order to make a determination of impairment.
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 260,000 in Cumberland County.
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 280,000 in Dauphin County.
As part of this process, Management performs a comprehensive analysis of the loan portfolio considering delinquencies trends and events, current economic conditions, and other relevant factors to determine the adequacy of the allowance for loan losses and the provision for loan losses.
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.
Table 3, previously presented, shows the average balances and yields earned on loans for the past two years. 29 Table of Contents The following table shows loans outstanding, by class, as of December 31 for the past 2 years. Table 8.
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.
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.
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 30 Table of Contents collateral.
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. 23 Table of Contents Table 2.
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. 22 Table of Contents Table 2.
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.
A more detailed discussion of the areas that had the greatest effect on the reported results follows. 21 Table of Contents 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.
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.
The Corporation is continually exploring other sources of capital as part of its capital management plan for the Corporation and the Bank. 35 Table of Contents 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.
At December 31, 2022, 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.
At December 31, 2023, 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. 33 Table of Contents Deposits: The Bank depends on deposits generated in the normal course of business as its primary source of funds.
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.
This monitoring 29 Table of Contents 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.
The 2021 impairment test was also conducted using a qualitative assessment and Management determined the Bank’s goodwill was likely not impaired in 2021 and did not make a further assessment.
The 2022 impairment test was also conducted using a qualitative assessment and Management determined the Bank’s goodwill was likely not impaired in 2022 and did not make a further assessment.
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 $6.5 million for 2022 and 2021 with fluctuations in value during the year affecting fee income.
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 $6.9 million for 2023 and $6.5 million for 2022 with fluctuations in value during the year affecting fee income.
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 $66.0 million, or 14%, of the total portfolio. This sector is comprised of senior private label first-lien commercial and residential mortgages.
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 $104.0 million, or 22%, of the total portfolio. This sector is comprised of senior private label first-lien commercial and residential mortgages.
This total was comprised of $1.0 million from the reinvestment of quarterly dividends and $390 thousand of optional cash purchases.
This total was comprised of $1.0 million from the reinvestment of quarterly dividends and $312 thousand of optional cash purchases.
The Corporation has elected to file those reports. The following table presents capital ratios for the Corporation at December 31: Table 13.
The Corporation has elected to file those reports. The following table presents capital ratios for the Corporation and Bank at December 31: Table 13.
The following provides selected economic data for the Bank’s primary market at December 31: 37 Table of Contents Economic Data 2022 2021 Unemployment Rate (seasonally adjusted) Market area range (1) 2.4% - 4.1% 3.6% - 5.2% Pennsylvania 4.0% 5.7% Maryland 4.3% 5.4% United States 3.7% 4.2% Housing Price Index - year over year change PA, nonmetropolitan statistical area 14.3% 11.5% United States 16.6% 16.4% Building Permits - year over year change -12 months Harrisburg-Carlisle, PA MSA, Chambersburg-Waynesboro, PA MSA and Hagerstown, MD MSA Residential, estimated -3.6% 7.4% Multifamily, estimated 260.9% -24.0% (1) Franklin, Cumberland, Fulton and Huntingdon County, PA and Washington County, MD 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.
The following provides selected economic data for the Bank’s primary market at December 31: Economic Data 2023 2022 Unemployment Rate (seasonally adjusted) Market area range (1) 2.4% - 3.5% 2.4% - 4.1% Pennsylvania 3.4% 4.0% Maryland 1.7% 4.3% United States 3.7% 3.7% Housing Price Index - year over year change PA, nonmetropolitan statistical area 4.6% 14.3% United States 4.8% 16.6% Building Permits - year over year change -12 months Harrisburg-Carlisle, PA MSA, Chambersburg-Waynesboro, PA MSA and Hagerstown, MD MSA Residential, estimated -15.4% -3.6% Multifamily, estimated -50.7% 260.9% (1) Franklin, Cumberland, Fulton and Huntingdon County, PA and Washington County, MD 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.
The largest dollar exposure is in the states of Texas (14%), Pennsylvania (13%) and California (12%). 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.
The largest dollar exposures are in the states of Texas (15%), California (13%) and Pennsylvania (12%). 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.
Commissions from the sale of insurance and investment products increased by $5 thousand compared to 2021. Loan service charges: This category includes primarily commercial letter of credit fees, commercial loan prepayment penalties, mortgage servicing fees and consumer debt protection fees.
Commissions from the sale of insurance and investment products increased by $167 thousand compared to 2022. Loan service charges: This category includes primarily commercial letter of credit fees, commercial loan prepayment penalties, mortgage servicing fees and consumer debt protection fees.
Legal and professional fees: This category consists of fees paid to outside legal counsel, consultants, and audit fees. Consulting fees increased $128 thousand due to advisory services related to the implementation of a customer relationship management system. Internal and external audit fees increased by $80 thousand.
Legal and professional fees: This category consists of fees paid to outside legal counsel, consultants, and audit fees. Consulting fees increased $44 thousand due to advisory services related to the implementation of a customer relationship management system. Internal and external audit fees increased by $3 thousand.
In December 2022, an open market 22 Table of Contents repurchase plan was approved to repurchase 150,000 shares over a one-year period. The Bank is considered to be well-capitalized under the regulatory guidance as of December 31, 2022. Other key performance measurements are presented in Item 7 of this report.
In December 2023, an open market repurchase plan was approved to repurchase 150,000 shares over a one-year period. The Bank is considered to be well-capitalized under the regulatory guidance as of December 31, 2023. Other key performance measurements are presented elsewhere in Item 7 of this report.
For more information, refer to the Loan Quality discussion and Table 10. 25 Table of Contents Noninterest Income The following table presents a comparison of noninterest income for the years ended December 31, 2022 and 2021: Table 4.
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, 2023 and 2022: Table 4.
Other service charges and fees: The most significant items in this category include fees from the Bank’s merchant card program and ATM fees. Merchant card fees increased $38 thousand while ATM fees decreased $36 thousand. Debit card income: Debit card fees are comprised of both a retail and business card program.
Other service charges and fees: The most significant items in this category include fees from the Bank’s merchant card program and ATM fees. Merchant card fees increased $28 thousand while ATM fees increased $83 thousand. Debit card income: Debit card fees are comprised of both a retail and business card program.
The yield on earning assets (Table 3) increased to 3.40% for 2022 from 3.06% for 2021. The benefit provided by tax-exempt income was $1.4 million in 2022. Table 1.
The yield on earning assets (Table 3) increased to 4.70% for 2023 from 3.40% for 2022. The benefit provided by tax-exempt income was $1.1 million in 2023. Table 1.
Consumer loans: This category is comprised of installment loans and personal lines of credit, and decreased $207 thousand in 2022 over 2021 ending balances. 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, 2022.
Consumer loans: This category is comprised of installment loans and personal lines of credit and increased $616 thousand in 2023 over 2022 ending balances. 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, 2023.
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.
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.
The Bank’s capital conservation buffer at December 31, 2022 was 7.88%. Compliance with the capital conservation buffer is required in order to avoid limitations on certain capital distributions, especially dividends. As of December 31, 2022, the Bank was “well capitalized’ under the Basel III requirements.
The Bank’s capital conservation buffer at December 31, 2023 was 5.63%. Compliance with the capital conservation buffer is required in order to avoid limitations on certain capital distributions, especially dividends. As of December 31, 2023, the Bank was “well capitalized’ under the Basel III requirements.
Only reciprocal deposits that exceed 20% of liabilities are considered brokered deposits. At December 31, 2022, the Bank’s reciprocal deposits were 12.7% of total liabilities. The Bank continually reviews different methods of funding growth that include traditional deposits and other wholesale sources.
Only reciprocal deposits that exceed 20% of liabilities are considered brokered deposits. At December 31, 2023, the Bank’s reciprocal deposits were 15.5% of total liabilities. The Bank continually reviews different methods of funding growth that include traditional deposits and other wholesale sources.
Residential real estate construction: The largest component of this category represents loans for individuals to construct personal residences totaled $13.9 million, while loans to residential real estate developers and home builders totaled $10.5 million at December 31, 2022. The Bank’s exposure to residential construction loans is concentrated primarily in south central Pennsylvania.
Residential real estate construction: The largest component of this category, $13.8 million, represents loans for individuals to construct personal residences, while loans to residential real estate developers and home builders totaled $12.1 million at December 31, 2023. The Bank’s exposure to residential construction loans is concentrated primarily in south central Pennsylvania.
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 $42.7 million of its fair value investment grade rated by nationally recognized statistical rating organizations while $23.1 million of its fair value is not rated.
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 $83.0 million of its fair value investment grade rated by nationally recognized statistical rating organizations while $21.0 million of its fair value is nonrated.
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.
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.
(Dollars in thousands, except per share) For the Year Ended December 31 2022 2021 2019 2018 2017 Return on Average Tangible Equity (non-GAAP) Net income $ 14,938 $ 19,616 $ 12,800 $ 16,115 $ 6,125 Average shareholders' equity 128,283 148,637 133,958 122,377 114,625 Less average intangible assets (9,016) (9,016) (9,016) (9,016) (9,016) Average shareholders' equity (non-GAAP) 119,267 139,621 124,942 113,361 105,609 Return on average tangible equity (non-GAAP) 12.52% 14.05% 10.24% 14.22% 5.80% Tangible Book Value (per share) (non-GAAP) Shareholders' equity $ 114,197 $ 157,065 $ 145,176 $ 127,528 $ 118,396 Less intangible assets (9,016) (9,016) (9,016) (9,016) (9,016) Shareholders' equity (non-GAAP) 105,181 148,049 136,160 118,512 109,380 Shares outstanding (in thousands) 4,390 4,441 4,389 4,353 4,409 Tangible book value (non-GAAP) 23.96 33.34 31.02 27.23 24.81 Efficiency Ratio (non-GAAP) Noninterest expense $ 48,691 $ 43,245 $ 39,362 $ 38,314 $ 37,369 Net interest income 51,586 44,671 41,961 42,122 40,654 Plus tax equivalent adjustment to net interest income 1,381 1,466 1,407 1,393 1,522 Plus noninterest income, net of securities transactions 15,410 19,271 15,104 15,102 12,564 Total revenue 68,377 65,408 58,472 58,617 54,740 Efficiency ratio (non-GAAP) 71.21% 66.12% 67.32% 65.36% 68.27% 21 Table of Contents 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.
(Dollars in thousands, except per share) For the Year Ended December 31 2023 2022 2021 2020 2019 Return on Average Tangible Equity (non-GAAP) Net income $ 13,598 $ 14,938 $ 19,616 $ 12,800 $ 16,115 Average shareholders' equity 119,408 128,283 148,637 133,958 122,377 Less average intangible assets (9,016) (9,016) (9,016) (9,016) (9,016) Average shareholders' equity (non-GAAP) 110,392 119,267 139,621 124,942 113,361 Return on average tangible equity (non-GAAP) 12.32% 12.52% 14.05% 10.24% 14.22% Tangible Book Value (per share) (non-GAAP) Shareholders' equity $ 132,136 $ 114,197 $ 157,065 $ 145,176 $ 127,528 Less intangible assets (9,016) (9,016) (9,016) (9,016) (9,016) Shareholders' equity (non-GAAP) 123,120 105,181 148,049 136,160 118,512 Shares outstanding (in thousands) 4,371 4,390 4,441 4,389 4,353 Tangible book value (non-GAAP) 28.17 23.96 33.34 31.02 27.23 Efficiency Ratio (non-GAAP) Noninterest expense $ 50,011 $ 48,691 $ 43,245 $ 39,362 $ 38,314 Net interest income 53,637 51,586 44,671 41,961 42,122 Plus tax equivalent adjustment to net interest income 1,094 1,381 1,466 1,407 1,393 Plus noninterest income, net of securities transactions 15,954 15,410 19,271 15,104 15,102 Total revenue 70,685 68,377 65,408 58,472 58,617 Efficiency ratio (non-GAAP) 70.75% 71.21% 66.12% 67.32% 65.36% 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.
All real estate construction loans are underwritten in the same manner, regardless of the use of an interest reserve. 30 Table of Contents 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.
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 increased $7.1 million over the 2022 ending balance.
Corporate Bonds : This sector is comprised primarily of $20.3 million of subordinate debt from 44 different community bank issuers. Agency Mortgage & Asset-backed Securities (MBS) : This sector holds $150.9 million, or 31%, of the total portfolio. This sector is comprised of bonds issued and guaranteed by the U.S. Government, a U.S.
Corporate Bonds : This sector is comprised primarily of $19.2 million of subordinate debt from 44 different community bank issuers. Agency Mortgage & Asset-backed Securities (MBS) : This sector holds $132.6 million, or 28%, of the total portfolio. This sector is comprised of bonds issued and guaranteed by the U.S. Government, a U.S.
This increase was primarily the result of action by the Federal Reserve to increase short-term interest rates in 2022. The cost of interest-bearing liabilities increased from 0.16% for 2021 to 0.29% for 2022.
This increase was primarily the result of action by the Federal Reserve to increase short-term interest rates in 2023. The cost of interest-bearing liabilities increased from 0.36% for 2022 to 1.75% for 2023.
This category also includes $179 thousand of PPP loans that are 100% guaranteed by the SBA, compared to $7.8 million at December 31, 2021.
This category also includes $57 thousand of PPP loans that are 100% guaranteed by the SBA, compared to $179 thousand at December 31, 2022.
Retail fees decreased by $333 thousand, while business card fees increased $31 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.
Retail fees increased by $289 thousand, while business card fees were flat year over year. 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.
The tax-equivalent yield on the portfolio increased from 2.03% in 2021 to 2.46% in 2022. U.S. Agency mortgage-backed securities and municipal bonds continue to comprise the largest sectors by fair value of the portfolio, approximately 31% and 32% respectively. The Bank expects that the portfolio will continue to remain concentrated in these investment sectors.
The tax-equivalent yield on the portfolio increased from 2.46% in 2022 to 3.55% in 2023. U.S. Agency mortgage-backed securities and municipal bonds continue to comprise the largest sectors by fair value of the portfolio, approximately 28% and 29% respectively. The 27 Table of Contents Bank expects that the portfolio will continue to remain concentrated in these investment sectors.
At December 31, 2022, the Bank had $22.8 million in real estate construction loans funded with an interest reserve and capitalized $776 thousand of interest in 2022 from these reserves on active projects for commercial construction.
At December 31, 2023, the Bank had $63.4 million in real estate construction loans funded with an interest reserve and capitalized $1.4 million of interest in 2023 from these reserves on active projects for commercial construction.
Long-term interest-earning deposits increased from $10.5 million at December 31, 2021 to $14.0 million at December 31, 2022. The average balance of interest-earning deposits increased to $159.6 million in 2022 compared to $109.3 million in 2021.
Long-term interest-earning deposits decreased from $14.0 million at December 31, 2022 to $6.2 million at December 31, 2023. The average balance of interest-earning deposits decreased to $50.5 million in 2023 compared to $159.3 million in 2022.
Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Selected Financial Data as of and for the Year Ended December 31 2022 2021 2020 2019 2018 (Dollars in thousands, except per share) Balance Sheet Highlights Total assets $ 1,699,579 $ 1,773,806 $ 1,535,038 $ 1,269,157 $ 1,209,587 Investment and equity securities 487,247 530,292 397,331 187,873 131,846 Loans, net 1,036,866 983,746 992,915 922,609 960,960 Deposits 1,551,448 1,584,359 1,354,573 1,125,392 1,082,629 Shareholders' equity 114,197 157,065 145,176 127,528 118,396 Summary of Operations Interest income $ 56,449 $ 47,573 $ 45,939 $ 49,235 $ 44,868 Interest expense 4,863 2,902 3,978 7,113 4,214 Net interest income 51,586 44,671 41,961 42,122 40,654 Provision for loan losses 650 (2,100) 4,625 237 9,954 Net interest income after provision for loan losses 50,936 46,771 37,336 41,885 30,700 Noninterest income 15,250 19,488 15,084 15,424 12,629 Noninterest expense 48,691 43,245 39,362 38,314 37,369 Income before income taxes 17,495 23,014 13,058 18,995 5,960 Federal income tax expense (benefit) 2,557 3,398 258 2,880 (165) Net income $ 14,938 $ 19,616 $ 12,800 $ 16,115 $ 6,125 Performance Measurements Return on average assets 0.83% 1.17% 0.91% 1.29% 0.52% Return on average equity 11.64% 13.20% 9.56% 13.17% 5.34% Return on average tangible equity (1) 12.52% 14.05% 10.24% 14.22% 5.80% Efficiency ratio (1) 71.21% 66.12% 67.32% 65.36% 68.27% Net interest margin, fully tax equivalent 3.11% 2.88% 3.21% 3.68% 3.78% Shareholders' Value (per common share) Diluted earnings per share $ 3.36 $ 4.42 $ 2.93 $ 3.67 $ 1.39 Basic earnings per share 3.38 4.44 2.94 3.68 1.40 Regular cash dividends paid 1.28 1.25 1.20 1.17 1.05 Book value 26.01 35.36 33.07 29.30 26.85 Tangible book value (1) 23.96 33.34 31.02 27.23 24.81 Market value* 36.10 33.10 27.03 38.69 31.50 Market value/book value ratio 138.79% 93.61% 81.74% 132.05% 117.32% Market value/tangible book value ratio 150.67% 99.29% 87.13% 142.11% 126.97% Price/earnings multiple year-to-date 10.74 7.49 9.23 10.54 22.66 Dividend yield 3.55% 3.87% 4.44% 3.10% 3.43% Dividend payout ratio 37.88% 28.16% 40.83% 31.74% 75.07% Safety and Soundness Average equity/average assets 7.17% 8.89% 9.48% 9.78% 9.73% Risk-based capital ratio (Total) 17.21% 18.41% 17.69% 16.08% 15.21% Leverage ratio (Tier 1) 8.95% 8.52% 8.69% 9.72% 9.78% Common equity ratio (Tier 1) 14.22% 15.20% 14.32% 14.82% 13.96% Nonperforming loans/gross loans 0.01% 0.74% 0.87% 0.42% 0.27% Nonperforming assets/total assets 0.01% 0.42% 0.57% 0.31% 0.44% Allowance for loan loss/loans 1.35% 1.51% 1.66% 1.28% 1.28% Net loan (charge-offs) recoveries/average loans -0.15% 0.04% 0.02% -0.07% -0.97% Assets under Management Trust and Investment Services (fair value) $ 904,317 $ 946,964 $ 836,381 $ 790,949 $ 684,825 Held at third-party brokers (fair value) 116,398 118,046 112,624 127,976 122,213 *Based on the closing price of FRAF as quoted on the Nasdaq Capital Market for 2022, 2021, 2020 and 2019 and the OTCQX for 2018.
Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Selected Financial Data as of and for the Year Ended December 31 2023 2022 2021 2020 2019 (Dollars in thousands, except per share) Balance Sheet Highlights Total assets $ 1,836,039 $ 1,699,579 $ 1,773,806 $ 1,535,038 $ 1,269,157 Debt securities available for sale, at fair value 472,503 487,247 530,292 397,331 187,873 Loans, net 1,240,933 1,036,866 983,746 992,915 922,609 Deposits 1,537,978 1,551,448 1,584,359 1,354,573 1,125,392 Shareholders' equity 132,136 114,197 157,065 145,176 127,528 Summary of Operations Interest income $ 76,762 $ 56,449 $ 47,573 $ 45,939 $ 49,235 Interest expense 23,125 4,863 2,902 3,978 7,113 Net interest income 53,637 51,586 44,671 41,961 42,122 Provision for credit losses - loans 2,589 650 (2,100) 4,625 237 Provision for credit losses - unfunded commitments 135 — — — — Net interest income after provision for credit losses 50,913 50,936 46,771 37,336 41,885 Noninterest income 14,851 15,250 19,488 15,084 15,424 Noninterest expense 50,011 48,691 43,245 39,362 38,314 Income before income taxes 15,753 17,495 23,014 13,058 18,995 Federal income tax expense 2,155 2,557 3,398 258 2,880 Net income $ 13,598 $ 14,938 $ 19,616 $ 12,800 $ 16,115 Performance Measurements Return on average assets 0.78% 0.83% 1.17% 0.91% 1.29% Return on average equity 11.39% 11.64% 13.20% 9.56% 13.17% Return on average tangible equity (1) 12.32% 12.52% 14.05% 10.24% 14.22% Efficiency ratio (1) 70.75% 71.21% 66.12% 67.32% 65.36% Net interest margin, fully tax equivalent 3.31% 3.11% 2.88% 3.21% 3.68% Shareholders' Value (per common share) Diluted earnings per share $ 3.10 $ 3.36 $ 4.42 $ 2.93 $ 3.67 Basic earnings per share 3.11 3.38 4.44 2.94 3.68 Regular cash dividends paid 1.28 1.28 1.25 1.20 1.17 Book value 30.23 26.01 35.36 33.07 29.30 Tangible book value (1) 28.17 23.96 33.34 31.02 27.23 Market value* 31.55 36.10 33.10 27.03 38.69 Market value/book value ratio 104.37% 138.79% 93.61% 81.74% 132.05% Market value/tangible book value ratio 112.01% 150.67% 99.29% 87.13% 142.11% Price/earnings multiple year-to-date 10.18 10.74 7.49 9.23 10.54 Dividend yield** 4.06% 3.55% 3.87% 4.44% 3.10% Dividend payout ratio 41.15% 37.88% 28.16% 40.83% 31.74% Safety and Soundness Average equity/average assets 6.82% 7.17% 8.89% 9.48% 9.78% Risk-based capital ratio (Total) 14.45% 17.21% 18.41% 17.69% 16.08% Leverage ratio (Tier 1) 9.01% 8.95% 8.52% 8.69% 9.72% Common equity ratio (Tier 1) 11.82% 14.22% 15.20% 14.32% 14.82% Nonperforming loans/gross loans 0.01% 0.01% 0.74% 0.87% 0.42% Nonperforming assets/total assets 0.01% 0.01% 0.42% 0.57% 0.31% Allowance for credit loss/loans 1.28% 1.35% 1.51% 1.66% 1.28% Net loan (charge-offs) recoveries/average loans -0.02% -0.15% 0.04% 0.02% -0.07% Assets under Management Wealth Management Services (fair value) $ 1,094,747 $ 904,317 $ 946,964 $ 836,381 $ 790,949 Held at third-party brokers (fair value) 135,423 116,398 118,046 112,624 127,976 (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. 18 Table of Contents 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.
The fair value of trust assets under management was $904.3 million at year-end, compared to $947.0 million at the end of 2021. Estate fees increased by $44 thousand, to $498 thousand in 2022. By the nature of an estate settlement, these fees are considered nonrecurring.
The fair value of trust assets under management was $1.095 billion at year-end, compared to $904.3 million at the end of 2022. Estate fees were $295 thousand in 2023 compared to $498 thousand in 2022. By the nature of an estate settlement, these fees are considered nonrecurring.
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 Committee is strongly committed to returning inflation to its 2 percent objective.” 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.
On a year-over-year comparison, the net interest margin was 3.11% for 2022 compared to 2.88% in 2021. The increase in the 2022 net interest margin was due primarily to a 0.34% increase in the yield on earning assets from 3.06% in 2021 to 3.40% in 2022 as all asset classes had higher yields in 2022.
On a year-over-year comparison, the net interest margin was 3.31% for 2023 compared to 3.11% in 2022. The increase in the 2023 net interest margin was due primarily to a 1.30% increase in the yield on earning assets from 3.40% in 2022 to 4.70% in 2023 as all asset classes had higher yields in 2023.
Therefore, the allowance for loan losses decreased to $14.2 million at year-end 2022 (1.35% of total loans), compared to $15.1 million at year-end 2021 (1.51% of total loans). Management closely monitors the credit quality of the portfolio in order to ensure that an appropriate ALL is maintained.
Due to loan growth in 2023, the allowance for credit losses increased to $16.1 million at year-end 2023 (1.28% of total loans), compared to $14.2 million at year-end 2022 (1.35% of total loans). Management closely monitors the credit quality of the portfolio in order to ensure that an appropriate ACL is maintained.
The Bank’s municipal bond portfolio is well diversified geographically and is comprised of both tax-exempt (40% of the portfolio) and taxable (60% of the portfolio) municipal bonds. Sixty-five percent of the portfolio are general obligation 28 Table of Contents bonds and thirty-five percent are revenue bonds. The portfolio holds bonds from 179 issuers within 34 states.
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-nine percent of the portfolio are general obligation bonds and thirty-two percent are revenue bonds. The portfolio holds bonds from 154 issuers within 34 states.
The Bank’s total exposure (including unfunded commitments) to purchased participations was $90.0 million at December 31, 2022 and $95.9 million at December 31, 2021. The commercial loan participations are comprised of $19.9 million of commercial loans and $50.7 million of CRE loans, reported in the respective loan segment.
The Bank’s total exposure (including unfunded commitments) to purchased participations was $135.4 million at December 31, 2023 and $90.0 million at December 31, 2022. The loan participations are comprised of $26.0 million of commercial loans and $71.8 million of CRE loans, reported in the respective loan segment.
Participations: At December 31, 2022, the outstanding commercial participations accounted for 10.1% of commercial purpose loans, or $70.6 million, and 6.7% of total gross loans compared to 9.2%, or $77.5 million, and 7.8%, respectively, at the prior year-end.
Participations: At December 31, 2023, the outstanding commercial participations were $97.8 million (9.5% of commercial purpose loans and 7.8% of total gross loans), compared to $70.6 million (8.1% of commercial purpose loans and 6.7% of total gross loans) at the prior year-end.
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 $1.4 million to capital during 2022.
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 $1.4 million to capital during 2023.
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.
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 36 Table of Contents Bank’s primary market area continues to be well suited for growth.
(Dollars in thousands) Financial instruments whose contract amounts represent credit risk 2022 2021 Commercial commitments to extend credit $ 275,867 $ 288,075 Consumer commitments to extend credit (secured) 93,124 82,095 Consumer commitments to extend credit (unsecured) 5,247 5,389 $ 374,238 $ 375,559 Standby letters of credit $ 30,734 $ 23,284 Management believes that any amounts actually drawn upon can be funded in the normal course of operations.
(Dollars in thousands) Financial instruments whose contract amounts represent credit risk 2023 2022 Commercial commitments to extend credit $ 325,982 $ 275,867 Consumer commitments to extend credit (secured) 112,157 93,124 Consumer commitments to extend credit (unsecured) 5,964 5,247 $ 444,103 $ 374,238 Standby letters of credit $ 19,851 $ 30,734 Management believes that any amounts actually drawn upon can be funded in the normal course of operations.
Capital Ratios 2022 2021 Corporation Bank Corporation Bank Common Equity Tier 1 risk-based capital ratio 14.22% 14.63% 15.20% 15.28% Total risk-based capital ratio 17.21% 15.88% 18.41% 16.54% Tier 1 risk-based capital ratio 14.22% 14.63% 15.20% 15.28% Tier 1 leverage ratio 8.95% 9.21% 8.52% 8.57% For additional information on capital adequacy refer to Note 2 of the accompanying consolidated financial statements.
Capital Ratios 2023 2022 Corporation Bank Corporation Bank Common Equity Tier 1 risk-based capital ratio 11.82% 12.38% 14.22% 14.63% Total risk-based capital ratio 14.45% 13.63% 17.21% 15.88% Tier 1 risk-based capital ratio 11.82% 12.38% 14.22% 14.63% Tier 1 leverage ratio 9.01% 9.44% 8.95% 9.21% For additional information on capital adequacy refer to Note 2 of the accompanying consolidated financial statements.
Total residential real estate loans increased $13.8 million in 2022 from 2021, primarily in consumer first lien loans. In 2022, the Bank originated $81.7 million in mortgages compared to $127.6 million in 2021, including approximately $51.3 million for sale in the secondary market.
Total residential real estate loans increased $57.3 million in 2023, primarily in consumer first lien loans. In 2023, the Bank originated $92.4 million in mortgages compared to $81.7 million in 2022, including approximately $14.0 million for sale in the secondary market.
Average gross loans for 2022 increased by $24.5 million to $1.0 billion. Commercial, mortgage and home equity loans and lines all showed an increase in average balances during the year, which was partially offset by a decline in consumer loans. The yield on the portfolio increased in 2022 to 4.14% from 3.86% in 2021.
Commercial, mortgage and consumer loans showed an increase in average balances during the year, which was partially offset by a decline in home equity loans and lines of credit and construction loans. The yield on the portfolio increased in 2023 to 5.16% from 4.14% in 2022.
Summary Franklin Financial Services Corporation reported consolidated earnings of $14.9 million ($3.36 per diluted share) for 2022 compared with $19.6 million ($4.42 per diluted share) for the same period in 2021. Year-to-date, net interest income was $51.6 million (including $388 thousand of PPP interest and fees), an increase of 15.5% compared to $44.7 million for the same period in 2021 (including $3.3 million of PPP interest and fees).
Summary Franklin Financial Services Corporation reported consolidated earnings of $13.6 million ($3.10 per diluted share) for 2023 compared with $14.9 million ($3.36 per diluted share) for the same period in 2022. Year-to-date, net interest income was $53.6 million, an increase of 4.0% compared to $51.6 million for the same period in 2022.
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 $2.3 million of the total data processing costs in 2022 and 2021. An increase in software expense for a customer relationship management system contributed $655 thousand to the total increase in this category.
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 $2.0 million of the total data processing costs in 2023 and $2.3 million in 2022.
Long-term Debt: 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.
The FHLB borrowings have a blended rate of 5.80% and are due during the third quarter of 2024. Long-term Debt: 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.
For additional information on the capital ratios see the section titled Shareholders’ Equity, and Table 13. 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).
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).
All investment securities are classified as available for sale; therefore, securities that are unencumbered (approximately $307.6 million fair value) as collateral for borrowings are an additional source of readily available liquidity, 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.
All investment securities are classified as available for sale; therefore, marketable securities that are unencumbered as collateral for borrowings are an additional source of 37 Table of Contents readily available liquidity (approximately $164.8 million fair value), either by selling the security or, more preferably, to provide collateral for additional borrowing.
Gain on sale of loans : This category is comprised of fees from the sale of mortgages with servicing released in the secondary market. Due to lower origination volume, the Bank sold fewer loans in 2022 compared to 2021. Deposit fees: This category is comprised primarily of fees from overdrafts, an overdraft protection program, service charges, and account analysis 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 lower origination volume, the Bank sold substantially fewer loans in 2023 compared to 2022.
A loan is considered to be impaired 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. Nonaccrual loans (excluding consumer purpose loans) and TDR loans are considered impaired.
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.
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 a third-party consultant to assist with internal loan review with a goal of reviewing 80% of commercial loans each year.
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.
Likewise, t he cost of all deposits increased from 0.12% in 2021 to 0.23% in 2022. ‎ Average earning assets for 2022 were $1.7 billion compared to $1.6 billion in 2021, an increase of 6.1%.
Likewise, t he cost of all deposits increased from 0.23% in 2022 to 1.23% in 2023. Average earning assets for 2023 were $1.656 billion compared to $1.702 billion in 2022, a decrease of 2.8%.
The Corporation’s 2022 and 2021 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.
The Corporation’s 2023 and 2022 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.
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. 36 Table of Contents 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.
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.
If either of these events were to occur, 38 Table of Contents it would have a negative effect on the Bank, and it is unlikely that the Bank could replace the level of FHLB funding in a short time.
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.
Retained earnings increased $9.3 million in 2022 but was offset by a decrease of $50.7 million in accumulated other comprehensive income (AOCI) as the fair value of the investment portfolio declined during the year. At December 31, 2022, the book value of the Corporation’s common stock was $26.01 per share and tangible book value was $23.96 per share.
Retained earnings increased $8.1 million in 2023 and accumulated other comprehensive income (AOCI) increased $10.3 million as the fair value of the investment portfolio improved during the year. At December 31, 2023, the book value of the Corporation’s common stock was $30.23 per share and tangible book value was $28.17 per share.
At December 31, 2022, total assets decreased 4.2% over the prior year to $1.70 billion from $1.77 billion at the end of 2021. 27 Table of Contents Interest Earning Deposits in Other Banks: Short-term interest-earning deposits, held primarily at the Federal Reserve, decreased to $47.0 million at December 31, 2022 compared to $164.9 million at December 31, 2021, as the excess cash was redeployed into the loan portfolio and deposit balances decreased.
Interest Earning Deposits in Other Banks: Short-term interest-earning deposits, held primarily at the Federal Reserve, decreased to $3.6 million at December 31, 2023 compared to $47.0 million at December 31, 2022, as the excess cash was redeployed into the loan portfolio and deposit balances decreased.
Money management: The year over year balance decreased $10.2 million, in both retail and commercial accounts and the average balance increased $51.7 million compared to the 2021 average balance. The cost of this product increased by 28 basis points during the year as market rates increased.
The cost of these accounts increased by 29 basis points. Money management: The year over year balance increased $2.5 million and the average balance decreased $20.2 million compared to the 2022 average balance. The cost of this product increased by 200 basis points during the year as market rates increased. Savings: Savings accounts decreased $22.8 million during the year.
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 $11.6 million at year-end compared to $36.6 million one year earlier. Included in the watch list are $120 thousand of nonaccrual loans at year-end 2022, compared to $7.4 million at year-end 2021.
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 $17.2 million at year-end compared to $11.6 million one year earlier.
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 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.
Noninterest Expense (Dollars in thousands) Change Noninterest Expense 2022 2021 Amount % Salaries and benefits $ 28,094 $ 24,780 $ 3,314 13.4 Net occupancy 4,069 3,580 489 13.7 Marketing and advertising 1,915 1,533 382 24.9 Legal and professional 2,202 2,013 189 9.4 Data processing 4,751 4,026 725 18.0 Pennsylvania bank shares tax 1,148 1,017 131 12.9 FDIC insurance 736 735 1 0.1 ATM/debit card processing 1,428 1,305 123 9.4 Telecommunications 396 407 (11) (2.7) Nonservice pension 567 819 (252) (30.8) Other 3,385 3,030 355 11.7 Total $ 48,691 $ 43,245 $ 5,446 12.6 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.
Noninterest Expense (Dollars in thousands) Change Noninterest Expense 2023 2022 Amount % Salaries and benefits $ 28,813 $ 28,094 $ 719 2.6 Net occupancy 4,398 4,069 329 8.1 Marketing and advertising 2,071 1,915 156 8.1 Legal and professional 2,301 2,202 99 4.5 Data processing 4,792 4,751 41 0.9 Pennsylvania bank shares tax 745 1,148 (403) (35.1) FDIC insurance 851 736 115 15.6 ATM/debit card processing 1,235 1,428 (193) (13.5) Telecommunications 405 396 9 2.3 Nonservice pension (117) 567 (684) (120.6) Lease termination 495 — 495 — Other 4,022 3,385 637 18.8 Total $ 50,011 $ 48,691 $ 1,320 2.7 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.
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. Depreciation increased during 2022 as the Bank began to depreciate its new headquarters building and rent expense increased from a new community office opened in July 2022 in Hagerstown, MD.
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. Depreciation increased during 2023 from a full year of depreciation of its new headquarters building.
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.
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.
Loan Performance Ratios (Dollars in thousands) Residential Real Estate 1-4 Family Junior Liens & Commercial First Liens Lines of Credit Construction Real Estate Commercial Consumer Unallocated Total 2022 Loans at December 31, 2022 $ 144,497 $ 73,688 $ 24,393 $ 566,662 $ 235,602 $ 6,199 $ — $ 1,051,041 Average Loans for 2022 139,577 73,200 21,737 550,772 241,395 5,938 — 1,032,619 Nonaccrual Loans at December 31, 2022 120 — — — — — — 120 Allowance for Loan Losses at December 31, 2022 459 234 343 7,493 4,846 133 667 14,175 Net Recoveries/(Charge-offs) for 2022 28 2 — (1,450) (45) (76) — (1,541) Loans/Total Gross Loans at December 31, 2022 14% 7% 2% 54% 22% 1% — 100% Nonaccrual Loans/Total Gross Loans at December 31, 2022 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% — 0.01% Allowance for Loan Loss/Gross Loans at December 31, 2022 0.32% 0.32% 1.41% 1.32% 2.06% 2.15% — 1.35% Net Recoveries (Charge-offs)/Average Loans for 2022 0.02% 0.00% 0.00% -0.26% -0.02% -1.28% — -0.15% Allowance for Loan Loss/Nonaccrual Loans at December 31, 2022 11,812.50% 2021 Loans at December 31, 2021 $ 132,483 $ 71,944 $ 20,657 $ 522,779 $ 244,543 $ 6,406 $ — $ 998,812 Average Loans for 2021 138,249 68,467 19,533 504,441 270,557 6,855 — 1,008,102 Nonaccrual Loans at December 31, 2021 50 38 424 6,812 60 — — 7,384 Allowance for Loan Losses at December 31, 2021 475 252 325 8,168 5,127 130 589 15,066 Net Recoveries/(Charge-offs) for 2021 — 170 (28) (56) 455 (164) — 377 Loans/Total Gross Loans at December 31, 2021 13% 7% 2% 52% 24% 1% — 100% Nonaccrual Loans/Total Gross Loans at December 31, 2021 0.04% 0.05% 2.05% 1.30% 0.02% 0.00% — 0.74% Allowance for Loan Loss/Gross Loans at December 31, 2021 0.36% 0.35% 1.57% 1.56% 2.10% 2.03% — 1.51% Net Recoveries/(Charge-offs)/Average Loans for 2021 0.00% 0.25% -0.14% -0.01% 0.17% -2.39% — 0.04% Allowance for Loan Loss/Nonaccrual Loans at December 31, 2021 204.04% Goodwill : The Bank has $9.0 million of goodwill recorded on its balance sheet as the result of corporate acquisitions.
Loan Performance Ratios (Dollars in thousands) Residential Real Estate 1-4 Family Junior Liens & Commercial First Liens Lines of Credit Construction Real Estate Commercial Consumer Unallocated Total 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 — — — — 147 — — 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 — 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% 2022 Loans at December 31, 2022 $ 146,868 $ 73,688 $ 24,393 $ 564,291 $ 235,602 $ 6,199 $ — $ 1,051,041 Average Loans for 2022 139,577 73,200 21,737 550,772 241,395 5,938 — 1,032,619 Nonaccrual Loans at December 31, 2022 120 — — — — — — 120 Allowance for Loan Losses at December 31, 2022 459 234 343 7,493 4,846 133 667 14,175 Net Recoveries/(Charge-offs) for 2022 28 2 — (1,450) (45) (76) — (1,541) Loans/Total Gross Loans at December 31, 2022 14% 7% 2% 54% 22% 1% — 100% Nonaccrual Loans/Total Gross Loans at December 31, 2022 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% — 0.01% Allowance for Loan Loss/Gross Loans at December 31, 2022 0.32% 0.32% 1.41% 1.32% 2.06% 2.15% — 1.35% Net Recoveries (Charge-offs)/Average Loans for 2022 0.02% 0.00% 0.00% -0.26% -0.02% -1.28% — -0.15% Allowance for Loan Loss/Nonaccrual Loans at December 31, 2022 11,812.50% Goodwill : The Bank has $9.0 million of goodwill recorded on its balance sheet as the result of corporate acquisitions.
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 2022 2021 Amortized Fair Amortized Fair (Dollars in thousands) Cost value Cost value U.S.
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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

5 edited+0 added−2 removed6 unchanged
Biggest changeThe Bank believes a ramp scenario is more realistic than an interest rate shock scenario; however, the Bank also runs scenarios using shocks and yield curve twists. 39 Table of Contents Computations of prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit repricing that cannot be measured with complete precision.
Biggest changeComputations of prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit repricing that cannot be measured with complete precision. Further, the computations do not contemplate any actions Management could undertake in response to changes in market interest rates. Table 14.
Although inflation (and inflation expectations) may affect the interest rate environment, it is not possible to measure with any precision the impact of future inflation upon the Corporation. ‎ 40 Table of Contents
Although inflation (and inflation expectations) may affect the interest rate environment, it is not possible to measure with any precision the impact of future inflation upon the Corporation. ‎ 39 Table of Contents
Sensitivity to Changes in Market Interest Rates (Dollars in thousands) Net Interest Income Change in rates (basis points) Projected % Change +400 $ 47,154 (15.9)% +300 $ 49,391 (11.9)% +200 $ 51,694 (7.8)% +100 $ 54,044 (3.6)% unchanged $ 56,080 — (100) $ 56,822 1.3% (200) $ 56,338 0.5% Impact of Inflation The impact of inflation upon financial institutions such as the Corporation differs from its effect upon other commercial enterprises.
Sensitivity to Changes in Market Interest Rates (Dollars in thousands) Net Interest Income Change in rates (basis points) Projected % Change +300 $ 48,500 (7.5)% +200 $ 50,000 (4.8)% +100 $ 51,300 (2.3)% unchanged $ 52,500 — (100) $ 52,000 (0.9)% (200) $ 51,700 (1.5)% (300) $ 51,400 (2.1)% Impact of Inflation The impact of inflation upon financial institutions such as the Corporation differs from its effect upon other commercial enterprises.
The Corporation’s primary tool for analyzing interest rate risk is financial simulation modeling which captures the effect of not only changing interest rates but also other sources of cash flow variability including loan and securities prepayments and customer preferences.
The objective of interest rate risk management is to identify and manage the sensitivity of net interest income and economic value of equity to changing interest rates in order to achieve consistent earnings that are not contingent upon favorable trends in interest rates. 38 Table of Contents The Corporation’s primary tool for analyzing interest rate risk is financial simulation modeling which captures the effect of not only changing interest rates but also other sources of cash flow variability including loan and securities prepayments and customer preferences.
For each scenario, interest rate changes are ramped up or down over a period of 1 year.
For each scenario, interest rate changes are ramped up or down over a period of 1 year. The Bank believes a ramp scenario is more realistic than an interest rate shock scenario; however, the Bank also runs scenarios using shocks and yield curve twists.
Removed
The objective of interest rate risk management is to identify and manage the sensitivity of net interest income and economic value of equity to changing interest rates in order to achieve consistent earnings that are not contingent upon favorable trends in interest rates.
Removed
Further, the computations do not contemplate any actions Management could undertake in response to changes in market interest rates. Table 14.

Other FRAF 10-K year-over-year comparisons