FRANKLIN FINANCIAL SERVICES CORP /PA/

Previous wording

Disclosure of the Corporation’s significant accounting policies is included in Note 1 to the consolidated financial statements. These policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by Management. Senior management has discussed the development of such estimates, and related Management Discussion and Analysis disclosure, with the Audit Committee of the Board of Directors.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

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. 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. 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. Likewise, the cost of all deposits increased from 0.23% in 2022 to 1.23% in 2023.

Current wording

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

Previous wording

Average earning assets for 2023 were $1.656 billion compared to $1.702 billion in 2022, a decrease of 2.8%. In 2023, the average balance of interest-earning cash balances decreased $109.2 million (68.4%) to support loan growth and to offset a decrease in average deposits during the year. The average balance of the investment portfolio decreased $48.9 million (9.6%), while the average balance of the loan portfolio increased $111.3 million (10.8%), over the prior year averages. Within the loan portfolio, average commercial loan balances increased $77.7 million during the year and residential mortgages increased $33.2 million. Total deposits averaged $1.530 billion for 2023, a decrease of $101.4 million (6.2%) from the average balance for 2022. All deposit categories reported a year-over-year decrease in average balances, except for time deposits. On a year-over-year comparison, the yield on earning assets increased 130 basis points from 3.40% in 2022 to 4.70% for 2023, while the cost of interest-bearing liabilities increased 139 basis points from 0.36% to 1.75% over the same period.

Current wording

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

Previous wording

On January 1, 2023, the Bank adopted a new accounting standard for the calculation of its allowance for credit losses (ACL), referred to as the current expected credit loss (CECL) model. Upon adoption, the Bank recorded a decrease of $536 thousand to the ACL for loans, an increase of $411 thousand to the ACL for unfunded commitments (carried in Other Liabilities on the consolidated balance sheet), an increase of $98 thousand to retained earnings, and a deferred tax liability of $26 thousand. The provision for credit losses for 2023 was calculated using the CECL model, while the provision for loan losses for 2022 was calculated under the previous methodology. For 2023, the provision for credit losses on loans was $2.6 million compared to $650 thousand for 2022. The increase in the provision for credit loss was due primarily to growth in the loan portfolio. The ACL ratio for loans was 1.28% on December 31, 2023, compared to 1.35% on December 31, 2022. For 2023, the provision for credit losses on unfunded commitments was $135 thousand compared to $0 for 2022. The ACL for unfunded commitments was $2.0 million on December 31, 2023, compared to $1.5 million on December 31, 2022.

Current wording

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

Previous wording

Noninterest income was $14.9 million compared to $15.3 million in 2022. The decrease was driven primarily by a loss of $1.1 million from the sale of securities as part of a portfolio restructuring in 2023, partially offset by increases in wealth management fees and debit card income.

Current wording

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

Previous wording

Noninterest expense was $50.0 million in 2023 compared to $48.7 million in 2022. The following categories contributed to the year-over-year increase: salaries and benefits increased $720 thousand (primarily salaries due to a highly competitive labor market, merit and performance increases), net occupancy increased $329 thousand (primarily depreciation on the new headquarters building put in service in July 2022), and a lease termination expense of $495 thousand.

Current wording

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

Previous wording

Total assets at December 31, 2023 were $1.836 billion compared to $1.700 billion at December 31, 2022, an increase of 8.0%. Significant balance sheet changes since December 31, 2022, include:

Current wording

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

Previous wording

Short-term Borrowings: At December 31, 2023, the Bank had $90.0 million borrowed from the Federal Reserve’s Bank Term Funding Program (BTFP) to temporarily support its liquidity position and $40.0 million in short-term borrowing from the Federal Home Loan Bank of Pittsburgh (FHLB). The BTFP borrowing is comprised of $50.0 million with a rate of 4.38% due March 22, 2024, $20.0 million with a rate of 4.71% due May 10, 2024, and $20.0 million with a rate of 4.93% due December 13, 2024. At December 31, 2023, the fair value of debt securities pledged for the BTFP was $88.4 million. The FHLB borrowings have a blended rate of 5.80% and are due during the third quarter of 2024.

Current wording

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

Previous wording

Shareholders’ equity increased $17.9 million from December 31, 2022. 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. 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.

Current wording

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

Previous wording

Table 1 shows the change in tax-equivalent net interest income year over year. Changes in interest income and expense are driven by changes in balance (volume) and changes in the average rate on interest-earning assets and interest-bearing liabilities. The changes attributable to rate or volume are shown in Table 2. The yield on earning assets (Table 3) increased to 4.70% for 2023 from 3.40% for 2022. The benefit provided by tax-exempt income was $1.1 million in 2023.

Current wording

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

Previous wording

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. For 2023, the Corporation recorded $2.7 million as a provision for credit loss expense allocated between the provision for loans of $2.6 million and the provision for unfunded commitments of $135 thousand. 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. As part of this process, Management performs a comprehensive analysis of the loan portfolio considering delinquencies trends and events, current economic forecasts and conditions, and other relevant factors to determine the adequacy of the allowance for credit losses and the provision for credit losses. For more information, refer to the Loan Quality discussion and Table 10.

Current wording

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

Previous wording

Wealth management fees: These fees are comprised of asset management fees, estate administration and settlement fees, employee benefit plans, and commissions from the sale of insurance and investment products. Asset management fees are recurring in nature and are affected by the fair value of assets under management at the time the fees are recognized. Asset management fees totaled $6.9 million for 2023 and $6.5 million for 2022 with fluctuations in value during the year affecting fee income. 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. Commissions from the sale of insurance and investment products increased by $167 thousand compared to 2022.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

Deposit fees: This category is comprised primarily of fees from overdrafts, an overdraft protection program, service charges, and account analysis fees. The decrease of $35 thousand in this category was due to a lower volume of overdraft fees.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

Debit card income: Debit card fees are comprised of both a retail and business card program. 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.

Current wording

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

Previous wording

Net (losses) gains on sales of debt securities: The Bank took losses of $1.1 million on the sale of investment securities as part of portfolio restructuring. Due to market conditions, the Bank was able to sell low yielding bonds and reinvest at higher yields.

Current wording

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

Previous wording

Salaries and benefits: This category is the largest noninterest expense category and includes expenses for salaries, health benefits, insurance, pension service, employment taxes and other employee benefit programs. This category increased by $719 thousand compared to the prior year from: salary increases of $1.6 million due to merit and annual increases, and new positions offset by decreases in health insurance expense of $371 thousand, $225 thousand in stock compensation expense, $153 thousand for incentive compensation plans, and $126 thousand in pension service costs. See Note 17 of the accompanying consolidated financial statements for additional information on benefit plans.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

Nonservice pension: The decrease in the nonservice pension expense was due to a $684 thousand reduction in pension settlement costs related to lump-sum pension payouts during 2022 and lower asset returns and amortization.

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Other: The largest increases in this category were in directors’ fees ($141 thousand) and charitable donations ($135 thousand). All other increases are due primarily to overall higher operating expenses.

Current wording

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

Previous wording

In 2023, the Corporation recorded a Federal income tax expense of $2.2 million compared to $2.6 million in 2022. The effective tax rate was 14.6% for 2022 and 13.7% for 2023, which reflects the benefit of $367 thousand in tax credits recorded during 2023. Without tax credits, the Bank’s effective tax rate was 16.0%. 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. For a more comprehensive analysis of Federal income tax expense refer to Note 14 of the accompanying consolidated financial statements.

Current wording

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

Previous wording

One method of evaluating the Corporation’s condition is in terms of its sources and uses of funds. Assets represent uses of funds while liabilities represent sources of funds. At December 31, 2023, total assets increased 8.0% over the prior year to $1.84 billion from $1.70 billion at the end of 2022.

Current wording

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

Previous wording

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. 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.

Current wording

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

Previous wording

The investment portfolio serves as a mechanism to invest funds if funding sources out pace lending activity, to provide liquidity for lending and operations, and provide collateral for deposits and borrowings. The mix of securities and investing decisions are made as a component of balance sheet management. Debt securities include U.S. Government Agencies, U.S. Government Agency mortgage-backed securities, non-agency mortgage-backed securities, state and municipal government bonds, and corporate debt primarily in the form of bank-issued subordinated debt. The weighted average life of the portfolio is 5.0 years, the effective duration (which measures the change in fair value for a 1% change in interest rates) is 3.7%, and $207.4 million (fair value) is pledged as collateral for deposits. The Bank has no investments in a single issuer that exceeds 10% of shareholders equity, except for U.S. Treasuries. All securities are classified as available for sale and all investment balances refer to fair value, unless noted otherwise. The following table presents the amortized cost and estimated fair value of investment securities by type at December 31 for the past two years:

Current wording

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

Previous wording

The following table presents investment securities at December 31, 2023 by maturity, and the weighted average yield for each maturity presented. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities. The yields presented in this table are calculated using tax-equivalent interest and the amortized cost.

Current wording

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

Previous wording

Table 3, previously presented, shows the two-year trend of average balances and yields on the investment portfolio. The tax-equivalent yield on the portfolio increased from 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

Current wording

Table 3, previously presented, shows the two-year trend of average balances and yields on the investment portfolio. The tax-equivalent yield on the portfolio increased from 3.55% in 2023 to 3.82% in 2024. U.S. Agency mortgage-backed securities and non-agency mortgage-backed securities comprise the largest sectors by fair value of the portfolio, approximately 33% and 29% respectively. The Bank expects that the portfolio will continue to remain concentrated in these investment sectors. The portfolio returned $97.3 million of principal cash flow in 2024 while $136.3 million was invested into the portfolio during the year.

Previous wording

Municipal Bonds: This sector holds $138.6 million or 29% of the total portfolio and the amortized cost decreased by $24.7 million year over year. The Bank’s municipal bond portfolio is well diversified geographically and is comprised of both tax-exempt (35% of the portfolio) and taxable (65% of the portfolio) municipal bonds. Sixty-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 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.

Current wording

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

Previous wording

Corporate Bonds: This sector is comprised primarily of $19.2 million of subordinate debt from 44 different community bank issuers.

Current wording

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

Previous wording

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. Government Agency, or a government sponsored entity securitized by pools of residential mortgages and other loan assets.

Current wording

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

Previous wording

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. 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.

Current wording

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

Previous wording

Impairment: For securities with an unrealized loss, the Bank considers: (1) the extent to which the fair value is less than amortized cost; (2) adverse conditions specifically related to the security, industry or geographic area; (3) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future; (4) failure of the issuer of the security to make scheduled interest or principal payments; and (5) any changes to the rating of the security by a rating agency. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. The Bank does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. The impairment identified on debt securities and subject to evaluation at December 31, 2023, was determined not to be attributable to credit related factors; therefore, the Bank does not have an allowance for credit loss for these investments. During 2023, $40.1 million of securities were sold as part of a portfolio restructuring to take advantage of higher market interest rates. The realized loss on these sales was $1.1 million.

Current wording

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

Previous wording

The Corporation owns one equity investment with a readily determinable fair value. At December 31, 2023, this investment was reported at fair value ($427 thousand) with changes in value reported through income in 2023.

Current wording

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

Previous wording

The Bank held $2.4 million of restricted stock at the end of 2023 of which $2.4 million is stock in the FHLB, carried at a cost of $100 per share. FHLB stock is evaluated for impairment primarily based on an assessment of the ultimate recoverability of its cost. As a government sponsored entity, FHLB has the ability to raise funding through the U.S. Treasury that can be used to support its operations. There is not a public market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and low-cost funding) add value to the stock beyond purely financial measures. If FHLB stock were deemed to be impaired, the write-down for the Bank could be significant. Management intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.

Current wording

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

Previous wording

The loan portfolio increased by 19.6% ($205.9 million) in 2023, due primarily to an increase of $139.5 million in commercial real estate loans. Average gross loans for 2023 increased by $111.3 million to $1.144 billion. 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. Table 3, previously presented, shows the average balances and yields earned on loans for the past two years.

Current wording

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

Previous wording

Residential real estate: This category is comprised of first lien loans and, to a lesser extent, junior liens and lines of credit secured by residential real estate, as well as loans made to individuals secured by unimproved noncommercial real estate. Total residential real estate loans increased $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. The Bank does not originate or hold any loans that would be considered sub-prime or Alt-A and does not generally originate mortgages outside of its primary market area.

Current wording

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