1 | P a g e

Notes from the Ambassador Bank Vault June 15, 2016

Flying Under The Radar: Small and Micro-Cap Banks in Central Pennsylvania

Central Pennsylvania, which is the focus of this Industry Report, is a disjointed banking market as there are many smaller community banks, but only a few with assets greater than $2 billion. We define (somewhat arbitrarily) Central Pennsylvania as the area ranging from Maryland on the south to New York State on the north; and stretching through the prime farmlands of Lancaster County to the western border of Centre County. Please see the map on Page 5.

This report highlights the publicly-traded banks in Central Pennsylvania with total assets between $900 million and $9.9 billion. As shown below, there are 10 institutions headquartered in this region that fit this criterion. We opine that the community banks within this range are large enough to operate fairly efficiently and small enough to deliver personalized services. These bank stocks typically trade below the radar screen - they are not widely followed by brokerage firms or institutional investors for a variety of reasons, which include the small market capitalizations and low trading volumes. Figure 1

Rick Weiss Matt Resch Rob Pachence Dave Danielson 610.724.7133 610.351.1633 610.351.1633 240.424.4083 rweiss@ambfg.com mresch@ambfg.com rpachence@ambfg.com ddanielson@ambfg.com Important Disclosure: Ambassador Financial Group does and seeks to do business with companies included in this report. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of the report.

2 | P a g e

Table of Contents Highlights .................................................................................................................................................... 3

Valuation Summary ..................................................................................................................................... 4

Market Area ................................................................................................................................................. 5

Company Descriptions ................................................................................................................................. 6

Company Ratios ......................................................................................................................................... 11

Mergers and Acquisitions .......................................................................................................................... 14

Appendix A: Deposit Market Share by Selected County ........................................................................... 17

Random Central Pennsylvania Facts

• We Are…On home football Saturdays, State College becomes the third largest city in Pennsylvania.

• “Happy Valley” is another often-used term to refer to the State College area, including the borough and the townships of College, Harris, Patton, and Ferguson.

• America’s only ice tobaggan slide is located near Williamsport, in the north central part of the state.

• Williamsport is home to the nation’s Little League World Series held annually in August.

• Founded in 1894, The Hershey Company is headquartered in Dauphin County and is America’s largest producer of chocolate.

• The town of Gettysburg is a major tourist destination due to the Civil War battle. The two armies suffered between 46,000 and 51,000 casualties in the fight which lasted for three days.

• Lancaster, which is America’s oldest inland city, was the nation’s capital for one day in 1777.

• James Buchanan, the 15th President of the United States and the only one from Pennsylvania, was born in Franklin County in 1791.

• Newt Gingrich was born in Harrisburg, PA in 1943.

• There are more deer than people in Potter County.

3 | P a g e

Highlights

• This Industry Report highlights key performance ratios and valuation metrics of 10 Central Pennsylvania community banks using March 2016 quarter data.

• The median return on assets (ROA) and return on equity (ROE) of the 10 Central Pennsylvania community banks highlighted herein were 0.89% and 8.4%, respectively, compared with 0.87% and 8.0% for all Pennsylvania community banks of similar asset size. The same ratios were 0.88% and 7.9% for the same-sized banks in the mid-Atlantic region. (These ratios are annualized and use the most recent quarter financial data.)

• The highlighted banks generally have solid balance sheets that reflect strong asset quality, solid funding sources, and acceptable tangible capital ratios. Revenue generation, however, is likely to remain a challenge particularly if the yield curve continues to flatten. Spread income, as is the case with community banks in general, represents the overwhelming majority of revenue.

• The weighted average yields on loans and investment securities vary considerably among the highlighted institutions. Prolonged historically low interest rates have dialed up the pressure on asset/liability officers to maximize profitability without sacrificing risk management standards.

• Community banks are generally exposed to commercial real estate, middle market commercial lending, and residential mortgage lending. To date, these businesses have performed well despite the slow-growth economy. The loan composition for each of the highlighted banks is shown in the Company Descriptions section of this report.

• There are 171 depository institutions, including 91 which are publicly-traded, in Pennsylvania. The top five banks have a combined deposit market share of approximately 50%. PNC Financial Services (NYSE: PNC) is the market leader with a 23% deposit share. Of the top ten Pennsylvania banks in terms of market share, only PNC, F.N.B. Corporation (NYSE: FNB), and Fulton Financial (NASDAQ: FULT) are headquartered in-state.

• Central Pennsylvania is home to 4.4 million people, or about half of Pennsylvania’s population. Culturally and demographically, the Central Pennsylvania population is best characterized by what it is not – similar to Philadelphia or Pittsburgh markets!

• According to the U.S. Bureau of Labor Statistics, the Harrisburg-Carlisle market and Pennsylvania state unemployment rates were 4.2% and 5.3%, respectively, in April 2016. The rate was 4.7% for the nation in April 2016.

• Recent acquisitions of a few larger Central Pennsylvania banks created opportunities for locally-

based institutions. These deals include BB&T Corporation’s (NYSE: BBT) acquisitions of Susquehanna Bancshares and National Penn Bancshares; F.N.B. Corporation’s purchase of Metro Bancorp, Inc. and the S&T Bancorp (NASDAQ: STBA) acquisition of Integrity Bancshares, Inc.

• Several smaller Pennsylvania banks have expanded into faster-growing market areas. For example,

Citizens Financial Services, Inc. (OTC Pink: CZFS) based in northcentral Pennsylvania, acquired First National Bank of Fredericksburg in Lebanon County. Other banks that have recently expanded their presence in Lancaster County include Centric Financial Corp (OTC Pink: CFCX), Mid-Penn Bancorp, Inc. (NASDAQ: MPB), Orrstown Financial Services (NASDAQ: ORRF), and Univest Corporation of Pennsylvania (NASDAQ: UVSP).

4 | P a g e

Valuation Summary As of June 10, 2016, the median price-to-trailing 12-month earnings and price-to-tangible book multiples for the highlighted banks in this Industry Report were 13.0x and 122% respectively. As of the same date, all Pennsylvania banks and thrifts traded at median multiples of 14.2x and 111%, respectively. As of the same date, all Pennsylvania banks and thrifts traded at median multiples of 14.2x and 111%, respectively. Nationally, the median price-to-trailing 12-month earnings and price-to-tangible book multiples for publicly traded banks and thrifts were 14.6x and 110%, respectively. Many of the stock prices of those banks are based on tangible book value, rather than earnings. Investors expect a certain level of return to compensate them for their investment. Because the stock price theoretically should reflect expectations regarding the level of future dividends, earnings and earnings growth determine the valuation. In theory, if a company fails to generate a required level of return, shareholders will sell shares until the price equals the cost of capital. On the other hand, higher returns should drive the share price higher. An added degree of caution is required when analyzing returns on equity (ROE) for banks due to legislative/regulatory demands for capital. Financial institutions must exceed (or at least match) regulatory requirements and publish the ratios in public financial reports. Capital levels, therefore, are often higher than needed strictly to maximize economic profit. Some of the companies with particularly high ROEs may also be those with the lower equity ratios, which inflates the ROE relative to peers with strong equity ratios. A few companies with particularly high ROE ratios may not be able to sustain them if regulators or investors demand more equity capital. Companies with very high equity ratios, on the other hand, have relatively understated ROEs. The following figures, therefore, are best viewed along with other financial data to assess the overall profitability and risk of the bank in question.

Figure 2

5 | P a g e

Market Area Home to approximately 4.4 million people, the Central Pennsylvania market area is primarily rural with pockets of smaller metropolitan areas. The region features prime farmland, national forests, and major rivers. Central Pennsylvania encompasses many counties which are more rural and slower-growing compared with other parts of the state. Several banks’ core markets, however, include much of the Marcellus Shale gas fields and would likely see significantly increased economic activity if and when energy commodity prices rebound. The Marcellus Shale gas fields stretch 600 miles along the Appalachian Mountains from New York State to West Virginia. According to the Pennsylvania Department of Labor and Industry, about 90,000 direct and indirect jobs have been created – about 1.5% of total employment in a state with 5.7 million jobs. Although drilling and the attributes of Marcellus Shale are hotly debated across the state (and political lines), it appears evident that the economic benefits are primarily realized in areas where drilling occurs, rather than throughout the entire state. The following map highlights the Central Pennsylvania region as defined in this report. Figure 3

Central Pennsylvania Region

6 | P a g e

Company Descriptions

ACNB Corporation (NASDAQ: ACNB). Headquartered in Gettysburg, ACNB’s principal market area is Adams County, which is located in southcentral Pennsylvania. Adams County depends on agriculture, industry, and tourism to provide employment for its residents. In addition to its main office, the company had 13 branches in Adams County, four branches in York County, one branch in Cumberland County, and two branches in Franklin County, as well as a loan production office in York County. ACNB provides full-service commercial banking and operates under charter from the Pennsylvania Department of Banking and Securities. At March 31, 2016, ACNB had total assets of $1.2 billion, total deposits of $912.8 million, and total stockholders’ equity of $116.9 million.

Citizens & Northern Corporation (NASDAQ: CZNC). The company is headquartered in Wellsboro, which is the county seat of Tioga County and home of Pennsylvania’s Grand Canyon. In recent years, most of the counties where Citizens & Northern operates were significantly affected by an upsurge in natural gas exploration, as technological developments made exploration of the Marcellus Shale commercially feasible. After much activity in 2009 through most of 2011, the price of natural gas declined, causing Marcellus Shale natural gas exploration activity to slow, though some activity continued to occur throughout the company’s market area. As of March 31, 2016, total assets, deposits, and shareholders’ equity were $1.2 billion, $955.8 million, and $188.3 million, respectively.

7 | P a g e

Citizens Financial Services, Inc. (OTC Pink: CZFS). Located in Mansfield, Tioga County, Citizens Financial is a commercial bank engaged in a broad range of banking activities and services for individual, business, governmental and institutional customers. The company’s primary market area consists of Bradford, Clinton, Potter and Tioga counties in north central Pennsylvania and Allegany, Steuben, Chemung and Tioga counties in southern New York State. With the completion of the First National Bank of Fredericksburg acquisition on June 30, 2015, the company added seven additional banking offices in south central Pennsylvania; four offices in Lebanon Country, two offices in Schuylkill County, and one office in Berks County. As of March 31, 2016, total assets, deposits, and shareholders’ equity were $1.2 billion, $1.1 billion, and $122.0 million, respectively.

Codorus Valley Bancorp, Inc. (NASDAQ: CVLY). Based in York County, Codorus Valley Bancorp is a Pennsylvania business corporation whose primary business consists of managing PeoplesBank, which was organized in 1864. PeoplesBank, which is a Pennsylvania-chartered bank, offers a full range of business and consumer banking services. PeoplesBank operates 27 financial centers located in York and Cumberland counties, Pennsylvania, and in Baltimore, Harford and Carroll counties, and Baltimore City, Maryland. Most of the company’s business is with customers in York County, Pennsylvania and northern Maryland. On March 31, 2016, Codorus Valley had total consolidated assets of $1.4 billion, total deposits of $1.1 billion, and total shareholders’ equity of $150.0 million.

8 | P a g e

ENB Financial Corp. (OTC Pink: ENBP). Headquartered in Ephrata, Lancaster County, the corporation ranks first in deposit market share in the Ephrata area with 43.3% of deposits as of June 30, 2015. The area served by the company is a mix of rural communities and small to mid-sized towns. The basic business of ENB Financial is to provide a broad range of financial services to individuals and small-to-medium-sized businesses in northern Lancaster County as well as Berks and Lebanon counties. Nine full service offices are located in Lancaster County with one full service office in Lebanon County, Pennsylvania. As of March 31, 2016, total assets, deposits, and shareholders’ equity were $924.8 million, $749.7 million, and $96.9 million, respectively.

First Keystone Corporation (OTC Pink: FKYS). First Keystone is a Pennsylvania business corporation and bank holding company of First Keystone Community Bank. Originally formed in 1864, First Keystone Community Bank is a Pennsylvania-chartered institution and has a commercial banking operation and trust department as its major lines of business. The primary market area reaches from Monroe and Montour counties along the Interstate 80 corridor through parts of Columbia and Luzerne counties as well as other adjoining counties. The company’s eastern market area is centered in Stroudsburg, Pennsylvania and serves all of Monroe County, as well as adjoining counties of Pike and Northampton. The market is a mix of rural communities and small to mid-sized towns. At March 31, 2016, First Keystone had total consolidated assets, deposits and stockholders’ equity of approximately $980.8 million, $725.9 million, and $113.6 million, respectively.

9 | P a g e

Franklin Financial Services Corporation (OTCQX: FRAF). Headquartered in Chambersburg, in south central Pennsylvania, Franklin conducts substantially all of its business through its wholly-owned banking subsidiary, F&M Trust. Established in 1906, F&M Trust is a full-service, Pennsylvania-chartered commercial bank and trust company. F&M Trust operates 22 community banking offices in Franklin, Cumberland, Fulton and Huntingdon counties, Pennsylvania. The company offers a wide variety of banking services to businesses, individuals, and governmental entities. As of March 31, 2016, total assets, deposits, and stockholders’ equity were $1.1 billion, $951 million, and $114 million, respectively. Trust assets under management were $588 million.

Mid-Penn Bancorp (NASDAQ: MPB). Headquartered in Millersburg (near Harrisburg), Pennsylvania, Mid-Penn Bank operates 19 branches in six central Pennsylvania counties. Millersburg Bank, the predecessor to Mid-Penn, was organized shortly after the Civil War in 1868 and obtained trust powers in 1935. The company is supervised by the Pennsylvania Department of Banking and Securities and the FDIC. Mid-Penn is a commercially-oriented bank, which caters to small and mid-sized businesses and retail customers. The company also provides a full range of trust and retail investment services. The company acquired Phoenix Bancorp on March 1, 2015, which increased total assets by approximately $140 million and expanded the company’s presence in Schuylkill County and established a presence in Luzerne County. As of March 31, 2016, total assets, deposits, and shareholders’ common equity were $931.7 million, $777.0 million, and $70.1 million, respectively.

10 | P a g e

Orrstown Financial Services, Inc (NASDAQ: ORRF). Headquartered in Shippensburg, Orrstown Financial was organized in 1987, and is the holding company for Orrstown Bank. The bank was originally organized in 1919 as a state-chartered bank. Orrstown provides banking and bank-related services through 22 offices, located in South Central Pennsylvania, principally in Cumberland, Franklin, Lancaster and Perry Counties and in Washington County, Maryland. The bank grants commercial, residential, consumer and agribusiness loans in its market areas. As of March 31, 2016, total assets, deposits, and shareholders’ common equity were $1.3 billion, $1.0 billion, and $138.2 million, respectively.

Penns Woods Bancorp (NASDAQ: PWOD.) Headquartered in Williamsport, Penns Woods Bancorp conducts business across six central Pennsylvania counties through 24 branches. The holding company’s two banking subsidiaries, Jersey Shore State Bank (“JSSB”) and Luzerne Bank, operate as fairly distinct entities. Luzerne, formerly Luzerne National Bank Corporation, was acquired in June 2013. The acquisition increased the company’s total assets by $307 million and expanded its presence in contiguous Luzerne and Lackawanna counties. Penns Woods’s market area includes regions that should benefit over the long term from the Marcellus Shale gas fields, but the sharp decline in energy prices will likely stymie economic vitality in those markets in the short-run. As of March 31, 2016, total assets, deposits, and shareholders’ common equity were $1.3 billion, $1.1 billion, and $137.6 million, respectively.

11 | P a g e

Company Ratios Profitability Our sense is that the local Pennsylvania economies remain healthy, but the relatively large number of banks competing for market share in an overall slower-growth region has resulted in intense pricing pressure for both loans and deposits. Our impression is that asset quality remains good, but we wonder if current loan pricing reflects an adequate risk premium should the economy sour or interest rates unexpectedly rise significantly. As is the case with community banks in general, Central Pennsylvania’s banks are challenged to better develop customer relationships, achieve a higher earnings growth rate, and gain market share. The flattening yield curve presents challenges as the majority of revenue depends upon spread income. “Watch the pennies and the dollars will take care of themselves.” Benjamin Franklin. As shown below, weighted average yields on loans and investment securities vary widely among the 10 institutions depending upon the individual banks’ loan and investment composition, term-to- maturities, and risk profile. Total loans as a percentage of total assets (68%) and the loan-to-deposit ratio (81%) tend to be below industry norms primarily due to the challenge of growing quality loans in slower-growth markets. The medians for the same ratios regarding peer institutions in the mid-Atlantic region were 73% and 94%, respectively. Please see Figures 5 and 6 for a break-out of the individual banks’ loan composition. As of March 31, 2016, the median investment securities-to-total asset ratio was 22% for the highlighted Central Pennsylvania banks compared with a median ratio of 17% for peer banks in the mid-Atlantic region as of the same date. As a result of the higher percentage of investment securities, banks must pay greater attention to their profitability potential while attending to interest rate risk and liquidity demands. Figure 4

12 | P a g e

Lending Activities As is the case with most community banks and thrifts, Central Pennsylvania banks are dependent upon interest income from loans for revenue growth. Net interest income represents 80-85% of total revenue for the highlighted banks in this report. These community banks have generally benefited from a local presence and industry consolidation. Figure 5

Figure 6

13 | P a g e

Asset Quality Asset quality has generally remained good in recent years as Central Pennsylvania banks were largely spared from the devastating effects of the Great Recession. Figure 7

Deposits: We believe the crown jewels of a company’s franchise value rests in its core deposit base. As of March 31, 2016, the median core deposit ratio for the highlighted banks was 87%, and non-interest bearing deposits were 16% of total deposits. We define core deposits as all deposits excluding certificates of deposit. Figure 8

14 | P a g e

Mergers and Acquisitions Banks are not bought, but are sold. We opine that timing and this truism are the underlying reason for the scarcity of Pennsylvania deals thus far in 2016, as potential sellers have unrealistic pricing expectations. We also believe deal premiums are unlikely to increase much (if at all) as potential acquirers have become more selective, and therefore, institutions without strong core deposits or sustainable operating earnings will be fortunate to receive substantial merger premiums unless they are based in desirable market areas. We believe there are compelling reasons for consolidation. These factors include: (1) fierce competition for loans and the flatter yield curve will likely pressure earnings and motivate both buyers and sellers; (2) enduring technology and cyber-security concerns; (3) onerous regulatory and compliance demands (especially burdening small companies); (4) stable credit quality, which makes it easier for buyers to determine credit marks; (5) strategic acquisitions to gain or defend market share; (6) succession issues (7) difficulty attracting qualified younger workers, particularly outside metropolitan areas; and (8) small bank shareholders gain more liquidity for their investment.

Reasons for fewer transactions include: (1) unrealistic pricing expectations by potential sellers; (2) nonsensical purchase accounting rules tend to create immediate and substantial tangible book value dilution; (3) regulatory/legislative uncertainty (particularly at asset break-points of $1 billion, $10 billion and $50 billion); and (4) the dearth of de novo banks, which provides less fuel for the merger and acquisition machine.

15 | P a g e

Figure 9. Pennsylvania Bank Deals Since 2008

16 | P a g e

Figure 10. Pennsylvania Thrift Deals Since 2008

Rick Weiss 610.724.7133 rweiss@ambfg.com Ryan Walker 610.851.4945 rwalker@ambfg.com Important Disclosure: Ambassador Financial Group does and seeks to do business with companies included in this report. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of the report. Information contained herein is provided for informational purposes only, is not a solicitation to sell or offer to buy, and is obtained from sources believed to be reliable. We do not guarantee its accuracy or completeness. Opinions expressed reflect that of the author and are subject to change without notice. Ambassador, its officers/directors/shareholders/ employees and affiliates will not be held liable for use of this information other than for informational purposes. Ambassador, its officers/directors/shareholders/employees/affiliates and family members, may make investments in a company/security mentioned herein. Ambassador may perform/seek to perform investment banking or other services for entities mentioned herein. Prices and availability are subject to change. Additional information on securities mentioned herein is available upon request.

17 | P a g e

Appendix A: Deposit Market Share by Selected County

18 | P a g e

19 | P a g e

20 | P a g e

21 | P a g e

The information presented is for informational purposes only. This is not an offer or solicitation to purchase or sell any security through Ambassador Financial Group, Inc., a current member of FINRA/SIPC. For more information contact us at 610.351.1633. © 2016 Ambassador Financial Group, Inc.

Important Disclosure: Ambassador Financial Group does and seeks to do business with companies included in this report. As a result, readers should be aware that the firm may have a conflict of interest that could affect the objectivity of the report.

THE AMBASSADOR TEAM:

1605 North Cedar Crest Blvd. Suite 508Allentown, PA 18104866.240.3898 (toll-free) 610.351.1633

6010 Executive Blvd. Suite 503Rockville, MD 20852866.240.3898 (toll-free) 240.242.4083

Chicago Mercantile Exchange30 South Wacker Drive22nd FloorChicago, IL 60606866.240.3898 (toll-free)312.466.7646

Joshua A. Albright, CFA Senior Vice President, Fixed Income Trading

Allen R. Collins Managing Director, Chief Compliance Officer

Arnold G. Danielson Chairman Emeritus,Danielson

David G. Danielson Managing Director,Head of Investment Banking

Ryan G. Epler Senior Vice President, Fixed Income Trading

Heidi Geist Administrative and Trade Settlement Coordinator

Mike Harrison Vice President

Karl J. Ostby Managing Director, Investment Banking

Robert J. Pachence, Jr. Co-Founder & Managing Principal

Jack E. Payne, CFA, CFP Senior Vice President, Finance & Operations

John D. Putman Senior Vice President

Michael Rasmussen Managing Director, Investment Banking

Matthew T. Resch, CFA Co-Founder & Managing Principal

Jay Shah, CFA Vice President, Capital Markets

Eric R. Tesche Managing Director

Mark B. Trinkle Senior Vice President, Fixed Income Trading

John S. Walker, Ph.D., CFA Chief Economist

Ryan J. Walker Associate Research Analyst

Rick Weiss Managing Director, Head of Investor Relations