UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2022~~2023

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________ to___________

Commission file number 001-38884

FRANKLIN FINANCIAL SERVICES CORPORATION

(Exact name of registrant as specified in its charter)


Pennsylvania	25-1440803
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)


~~20 South Main Street,~~1500 Nitterhouse Drive, Chambersburg, PA	17201-0819
(Address of principal executive offices)	(Zip Code)

(717) 264-6116

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of class	Symbol	Name of exchange on which registered
Common stock	FRAF	Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company x Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No x

There were ~~4,457,959~~4,381,611 outstanding shares of the Registrant’s common stock as of April ~~29, 2022.~~30, 2023.

INDEX


Part I - FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 (unaudited)	1
	Consolidated Statements of Income for the Three Months ended March 31, ~~2022~~2023	2
	and ~~2021~~2022 (unaudited)
	Consolidated Statements of Comprehensive Income for the Three Months ended	3
	March 31, ~~2022~~2023 and ~~2021~~2022 (unaudited)
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months	3
	ended March 31, ~~2022~~2023 and ~~2021~~2022 (unaudited)
	Consolidated Statements of Cash Flows for the Three Months ended March 31, ~~2022~~2023	4
	and ~~2021~~2022 (unaudited)
	Notes to Consolidated Financial Statements (unaudited)	5

Item 2	Management’s Discussion and Analysis ofResults of Operations and Financial Condition	27
Item 3	Quantitative and Qualitative Disclosures about Market Risk	4245
Item 4	Controls and Procedures	4245

Part II - OTHER INFORMATION

Item 1	Legal Proceedings	4346
Item 1A	Risk Factors	4346
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	4346
Item 3	Defaults Upon Senior Securities	4347
Item 4	Mine Safety Disclosures	4347
Item 5	Other Information	4448
Item 6	Exhibits	4448
SIGNATURE PAGE		4549

Part I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets



(Dollars in thousands, except share and per share data)	(unaudited)				(unaudited)
	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Assets
Cash and due from banks	$	18,209	$	10,463	$	17,954	$	17,883
Short-term interest-bearing deposits in other banks		155,500		164,686
Short-term interest-earning deposits in other banks						68,609		47,016
Total cash and cash equivalents		173,709		175,149		86,563		64,899
Long-term interest-bearing deposits in other banks		10,742		10,492
Long-term interest-earning deposits in other banks						9,477		13,975
Debt securities available for sale, at fair value		511,477		529,811		457,767		486,836
Equity securities		492		481		387		411
Restricted stock		507		495		644		644
Loans held for sale		3,142		2,827		—		283
Loans		1,000,977		998,812		1,077,446		1,051,041
Allowance for loan losses		(15,050)		(15,066)
Allowance for credit losses						(14,109)		(14,175)
Net Loans		985,927		983,746		1,063,337		1,036,866
Premises and equipment, net		23,198		19,190		29,654		30,026
Right of use asset		4,658		4,759		5,855		6,010
Bank owned life insurance		21,982		21,874		22,419		22,311
Goodwill		9,016		9,016		9,016		9,016
Deferred tax asset, net		9,135		3,314		13,676		15,630
Other assets		13,076		12,652		12,490		12,672
Total assets	$	1,767,061	$	1,773,806	$	1,711,285	$	1,699,579

Liabilities
Deposits
Noninterest-bearing checking	$	303,382	$	298,403	$	298,008	$	299,231
Money management, savings, and interest checking		1,223,753		1,211,703		1,130,527		1,194,827
Time		69,251		74,253		73,575		57,390
Total deposits		1,596,386		1,584,359		1,502,110		1,551,448
Short-term borrowings						50,000		—
Subordinate notes		19,598		19,588		19,635		19,623
Lease liability		4,763		4,857		5,999		6,144
Other liabilities		9,178		7,937		9,958		8,167
Total liabilities		1,629,925		1,616,741		1,587,702		1,585,382

Commitments and contingent liabilities

Shareholders' equity
Common stock, $1 par value per share,15,000,000 shares authorized with
4,710,972 shares issued and 4,456,918 shares outstanding at March 31, 2022 and
4,710,972 shares issued and 4,441,443 shares outstanding at December 31, 2021		4,711		4,711
Capital stock no par value, 5,000,000 shares authorized with 0
4,710,972 shares issued and 4,402,675 shares outstanding at March 31, 2023 and
4,710,972 shares issued and 4,390,397 shares outstanding at December 31, 2022						4,711		4,711
Capital stock no par value, 5,000,000 shares authorized with no
shares issued and outstanding		—		—		—		—
Additional paid-in capital		43,077		43,085		43,356		43,535
Retained earnings		118,203		116,612		127,877		125,892
Accumulated other comprehensive loss		(22,444)		(547)		(43,996)		(51,287)
Treasury stock, 254,054 shares at March 31, 2022 and 269,529 shares at
December 31, 2021, at cost		(6,411)		(6,796)
Treasury stock, 308,297 shares at March 31, 2023 and 320,575 shares at
December 31, 2022, at cost						(8,365)		(8,654)
Total shareholders' equity		137,136		157,065		123,583		114,197
Total liabilities and shareholders' equity	$	1,767,061	$	1,773,806	$	1,711,285	$	1,699,579

The accompanying notes are an integral part of these unaudited financial statements.

Consolidated Statements of Income


	For the Three Months Ended				For the Three Months Ended
(Dollars in thousands, except per share data) (unaudited)	March 31,				March 31,
	2022		2021		2023		2022
Interest income
Loans, including fees	$	9,067	$	9,381	$	12,336	$	9,067
Interest and dividends on investments:
Taxable interest		1,843		1,623		3,451		1,843
Tax exempt interest		525		532		365		525
Dividend income		1		3		8		1
Interesting-bearing deposits in other banks		98		53
Interesting-earnings deposits in other banks						423		98
Total interest income		11,534		11,592		16,583		11,534
Interest expense
Deposits		463		485		3,429		463
Short-term borrowings						51		—
Subordinate notes		263		263		266		263
Total interest expense		726		748		3,746		726
Net interest income		10,808		10,844		12,837		10,808
Provision for loan losses		—		(800)
Net interest income after provision for loan losses		10,808		11,644
Provision for credit losses - loans						467		—
Provision for credit losses - unfunded commitments						62		—
Net interest income after credit loss expense						12,308		10,808
Noninterest income
Investment and trust services fees		1,828		1,636		1,834		1,828
Loan service charges		116		196		302		116
Gain on sale of loans		254		782		73		254
Deposit service charges and fees		623		468		583		623
Other service charges and fees		412		396		432		412
Debit card income		458		517		502		458
Increase in cash surrender value of Bank owned life insurance		108		115		108		108
Net (losses) gains on sales of debt securities						(602)		—
Change in fair value of equity securities		11		54		(24)		11
Other		74		63		17		74
Total noninterest income		3,884		4,227		3,225		3,884
Noninterest Expense
Salaries and employee benefits		6,366		5,658		6,936		6,347
Net occupancy		974		910		1,110		974
Marketing and advertising		497		345		519		497
Legal and professional		515		475		552		515
Data processing		1,137		929		1,060		1,137
Pennsylvania bank shares tax		143		92		223		143
FDIC Insurance		183		202		182		183
ATM/debit card processing		346		296		294		346
Telecommunications		92		129		100		92
Nonservice pension		69		205		(29)		69
Other		944		924		1,072		963
Total noninterest expense		11,266		10,165		12,019		11,266
Income before federal income taxes		3,426		5,706		3,514		3,426
Federal income tax expense		414		876		222		414
Net income	$	3,012	$	4,830	$	3,292	$	3,012
Per share
Basic earnings per share	$	0.68	$	1.10	$	0.75	$	0.68
Diluted earnings per share	$	0.67	$	1.09	$	0.75	$	0.67

The accompanying notes are an integral part of these unaudited financial statements.

Consolidated Statements of Comprehensive Income (Loss)


	For the Three Months Ended				For the Three Months Ended
	March 31,				March 31,
(Dollars in thousands) (unaudited)	2022		2021		2023		2022
Net Income	$	3,012	$	4,830	$	3,292	$	3,012

Debt Securities:
Unrealized losses arising during the period		(27,718)		(10,577)
Unrealized gain (losses) arising during the period						8,626		(27,718)
Reclassification adjustment for losses included in net income (1)						602		—
Net unrealized gain/(losses)						9,228		(27,718)
Tax effect		5,821		2,221		(1,937)		5,821
Net of tax amount		(21,897)		(8,356)		7,291		(21,897)

Total other comprehensive loss		(21,897)		(8,356)
Total other comprehensive income (loss)						7,291		(21,897)

Total Comprehensive Loss	$	(18,885)	$	(3,526)
Total Comprehensive Income (Loss)					$	10,583	$	(18,885)

(1) Reclassified to net gains on sales of debt securities
(1) Reclassified to net losses on sales of debt securities

The accompanying notes are an integral part of these unaudited financial statements.

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, ~~2022~~2023 and ~~2021~~2022


								Accumulated													Accumulated
				Additional				Other									Additional				Other
	Shares	Common		Paid-in		Retained		Comprehensive		Treasury				Shares	Common		Paid-in		Retained		Comprehensive		Treasury
(Dollars in thousands, except per share data) (unaudited)	Outstanding	Stock		Capital		Earnings		Loss		Stock		Total		Outstanding	Stock		Capital		Earnings		Income (Loss)		Stock		Total
Balance at January 1, 2022	4,441,443	$	4,711	$	43,085	$	116,612	$	(547)	$	(6,796)	$	157,065
Balance at January 1, 2023														4,390,397	$	4,711	$	43,535	$	125,892	$	(51,287)	$	(8,654)	$	114,197
Cumulative change in accounting principle, net of tax																—		—		98		—		—		98
Net income			—		—		3,012		—		—		3,012			—		—		3,292		—		—		3,292
Other comprehensive income			—		—		—		(21,897)		—		(21,897)			—		—		—		7,291		—		7,291
Cash dividends declared, $0.32 per share			—		—		(1,421)		—		—		(1,421)			—		—		(1,405)		—		—		(1,405)
Acquisition of treasury stock	(609)		—		—		—		—		(20)		(20)	(10,108)		—		—		—		—		(316)		(316)
Treasury shares issued under dividend reinvestment plan	9,379		—		78		—		—		236		314	8,484		—		48		—		—		229		277
Stock Compensation Plans:
Treasury shares issued	6,705		—		(156)		—		—		169		13	13,902		—		(362)		—		—		376		14
Compensation expense			—		70		—		—		—		70			—		135		—		—		—		135
Balance at March 31, 2022	4,456,918	$	4,711	$	43,077	$	118,203	$	(22,444)	$	(6,411)	$	137,136
Balance at March 31, 2023														4,402,675	$	4,711	$	43,356	$	127,877	$	(43,996)	$	(8,365)	$	123,583


Balance at January 1, 2021	4,389,355	$	4,711	$	42,589	$	102,520	$	3,190	$	(7,834)	$	145,176
Balance at January 1, 2022														4,441,443	$	4,711	$	43,085	$	116,612	$	(547)	$	(6,796)	$	157,065
Net income			—		—		4,830		—		—		4,830			—		—		3,012		—		—		3,012
Other comprehensive income			—		—		—		(8,356)		—		(8,356)			—		—		—		(21,897)		—		(21,897)
Cash dividends declared, $0.30 per share			—		—		(1,318)		—		—		(1,318)
Cash dividends declared, $0.32 per share																—		—		(1,421)		—		—		(1,421)
Acquisition of treasury stock	(474)		—		—		—		—		(13)		(13)	(609)		—		—		—		—		(20)		(20)
Treasury shares issued under dividend reinvestment plan	11,682		—		40		—		—		285		325	9,379		—		78		—		—		236		314
Stock Compensation Plans:
Treasury shares issued	7,020		—		(164)		—		—		171		7	6,705		—		(156)		—		—		169		13
Compensation expense			—		48		—		—		—		48			—		70		—		—		—		70
Balance at March 31, 2021	4,407,583	$	4,711	$	42,513	$	106,032	$	(5,166)	$	(7,391)	$	140,699
Balance at March 31, 2022														4,456,918	$	4,711	$	43,077	$	118,203	$	(22,444)	$	(6,411)	$	137,136

The accompanying notes are an integral part of these unaudited financial statements.

Consolidated Statements of Cash Flows


	Three Months Ended ‎March 31,				Three Months Ended ‎March 31,
	2022		2021		2023		2022
(Dollars in thousands) (unaudited)
Cash flows from operating activities
Net income	$	3,012	$	4,830	$	3,292	$	3,012
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		267		324		479		267
Net amortization of loans and investment securities		711		124		842		711
Amortization of subordinate debt issuance costs		10		10		12		10
(Recovery of) provision for loan losses		—		(800)
Provision for credit losses						529		—
Change in fair value of equity securities		(11)		(54)		24		(11)
Realized losses on sales of debt securities						602		—
Loans originated for sale		(14,086)		(28,992)		(5,007)		(14,086)
Proceeds from sale of loans		14,025		34,521		5,363		14,025
Gain on sale of loans held for sale		(254)		(782)		(73)		(254)
Increase in cash surrender value of life insurance		(108)		(115)		(108)		(108)
Increase in fair value of derivative		(8)		(23)
Stock option compensation		70		48
(Increase) decrease in other assets		(581)		691
Decrease in fair value of derivative						1		(8)
Stock based compensation						135		70
Decrease in other assets						(168)		(581)
Increase in other liabilities		1,399		667		1,794		1,399
Net cash provided by operating activities		4,446		10,449		7,717		4,446
Cash flows from investing activities
Net (increase) decrease in long-term interest-bearing deposits in other banks		(250)		1,746
Net decrease (increase) in long-term interest-earning deposits in other banks						4,498		(250)
Proceeds from sales and calls of investment securities available for sale						32,855		—
Proceeds from maturities and pay-downs of securities available for sale		1,227		9,367		8,452		1,227
Purchase of investment securities available for sale		(11,525)		(45,827)		(4,325)		(11,525)
Net increase in restricted stock		(12)		—		—		(12)
Net (increase) decrease in loans		(1,978)		9,439
Net increase in loans						(26,654)		(1,978)
Capital expenditures		(4,261)		(168)		(111)		(4,261)
Net cash used in investing activities		(16,799)		(25,443)
Net cash provided by (used in) investing activities						14,715		(16,799)
Cash flows from financing activities
Net increase in demand deposits, interest-bearing checking, and savings accounts		17,029		69,285
Net decrease in time deposits		(5,002)		(2,816)
Net (decrease) increase in demand deposits, interest-bearing checking, and savings accounts						(65,523)		17,029
Net increase (decrease) in time deposits						16,185		(5,002)
Net increase in short-term borrowings						50,000		—
Dividends paid		(1,421)		(1,318)		(1,405)		(1,421)
Purchase of Treasury shares		(20)		(13)		(316)		(20)
Cash received from option exercises		13		7		14		13
Treasury shares issued under dividend reinvestment plan		314		325		277		314
Net cash provided by financing activities		10,913		65,470
(Decrease) increase in cash and cash equivalents		(1,440)		50,476
Net cash (used in) provided by financing activities						(768)		10,913
Increase (decrease) in cash and cash equivalents						21,664		(1,440)
Cash and cash equivalents at the beginning of the period		175,149		57,146		64,899		175,149
Cash and cash equivalents at the end of the period	$	173,709	$	107,622	$	86,563	$	173,709
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits and other borrowed funds	$	475	$	513	$	3,268	$	475
Noncash Activities
Lease liabilities arising from obtaining right-of-use assets	$	30	$	—	$	—	$	30

The accompanying notes are an integral part of these unaudited financial statements.

FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The consolidated financial statements include the accounts of Franklin Financial Services Corporation (the Corporation), and its wholly owned subsidiaries, Farmers and Merchants Trust Company of Chambersburg (the Bank) and Franklin Future Fund Inc. Farmers and Merchants Trust Company of Chambersburg is a commercial bank that has one wholly owned subsidiary, Franklin Financial Properties Corp. Franklin Financial Properties Corp. holds real estate assets that are leased by the Bank. Franklin Future Fund Inc. is a non-bank investment company. The activities of the non-bank subsidiary are not significant to the consolidated totals. All significant intercompany transactions and account balances have been eliminated.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows as of March 31, ~~2022,~~2023, and for all other periods presented have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s ~~2021~~2022 Annual Report on Form 10-K. The consolidated results of operations for the three-month period ended March 31, ~~2022~~2023 are not necessarily indicative of the operating results for the full year. Management has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

The consolidated balance sheet at December 31, ~~2021~~2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks and cash items with original maturities less than 90 days.

Earnings per share are computed based on the weighted average number of shares outstanding during each period end. A reconciliation of the weighted average shares outstanding used to calculate basic earnings per share and diluted earnings per share follows:


	For the Three Months Ended				For the Three Months Ended
	March 31,				March 31,
(Dollars and shares in thousands, except per share data)	2022		2021		2023		2022
Weighted average shares outstanding (basic)		4,446		4,396		4,395		4,446
Impact of common stock equivalents		24		19		22		24
Weighted average shares outstanding (diluted)		4,470		4,415		4,417		4,470
Anti-dilutive options excluded from calculation		30		61		25		30
Net income	$	3,012	$	4,830	$	3,292	$	3,012
Basic earnings per share	$	0.68	$	1.10	$	0.75	$	0.68
Diluted earnings per share	$	0.67	$	1.09	$	0.75	$	0.67

‎

Note 2. Recent Accounting Pronouncements



Recently adopted accounting standards

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Description	This standard requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of that instrument. The ASU replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.
	In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities. Management does not intend to sell or believes that it is more likely than not they will be required to sell.
	The Corporation adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
Effective Date	January 1, 2023
Effect on the Consolidated Financial Statements	The Corporation adopted the ASU as of January 1, 2023 and recorded a decrease to the allowance for credit loss (ACL) for loans of $536 thousand, an increase of $412 thousand to the ACL for unfunded commitments, an increase of $98 thousand to retained earnings, and a deferred tax liability of $26 thousand.
	The following table illustrates the impact of ASC 326:
					As Reported		Pre-ASC		Impact of
					Under		326		ASC 326
					ASC 326		Adoption		Adoption
	(Dollars in thousands)
	Assets:
		Loans
			First liens	$	1,555	$	459	$	1,096
			Junior liens & lines of credit		727		234		493
			Construction		248		343		(95)
			Commercial real estate		8,077		7,493		584
			Commercial		2,939		4,846		(1,907)
			Consumer		93		133		(40)
			Unallocated		—		667		(667)
		Allowance for credit losses on loans		$	13,639	$	14,175	$	(536)

	Liabilities:
		Allowance for credit losses on OBS credit exposures		$	1,887	$	1,475	$	412


ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief
Description	This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 has the same effective date as ASU 2016-13. On October 16, 2019, FASB approved its August 2019 proposal to grant certain small public companies a delay in the effective date of ASU 2016-13. For the Corporation, the delay makes the ASU effective January 2023. Since the Corporation currently meets the SEC definition of a small reporting company, the delay will be applied to the Corporation. Early adoption is permitted.
Effective Date	January 1, 2023
Effect on the Consolidated Financial Statements	The Corporation adopted the ASU on January 1, 2023 and did not elect the fair value option on any financial instruments.

ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures

Description

ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification ("ASC") 310-40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the current expected credit loss model introduced by ASU 2016-13, "Financial Instrucments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." ASU 2022-02 also required that public business entities disclosure current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, "Financial Instruments - Credit Losses - Measured at Amortized Cost."

Effective Date

January 1, 2023

Effect on the Consolidated Financial Statements

The Corporation adopted the standard on January 1, 2023 and it decreased the balance of loans individually evaluated by $3.0 million, and decreased the balance of performing TDR loans by the same amount.

Recently issued but not yet effective accounting standards

ASU ~~2016-13, Financial Instruments - Credit Losses~~2023-01, Leases (Topic ~~326)~~842): ~~Measurement of Credit Losses on Financial Instruments~~Common Control Arrangements

Description

This ~~standard~~ASU requires ~~credit losses on most financial assets measured at amortized cost and certain other instruments~~entities to determine whether a related party arrangement between entities under common control is a lease. If the arrangement is determined to be ~~measured using~~a lease, an ~~expected credit loss model (referred to~~entity must classify and account for the lease on the same basis as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. The ASU replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assetsan arrangement with a ~~more-than insignificant amount~~related party (on the basis of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.legally enforceable terms and conditions).

Effective Date

January 1, ~~2023~~2024

Effect on the Consolidated Financial Statements

WeThe ASU is not expected to have ~~formed~~ an ~~implementation team led by~~impact on the Corporation's Risk Management function. The team is reviewing the requirements of the ASU and evaluating methods and models for implementation. As of the beginning of the first reporting period in which the new standard is adopted, the Corporation expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses, which will flow through retained earnings. After adoption, the new standard will result in earlier recognition of additions to the allowance for loan losses and possibly a larger allowance for loan loss balance with a corresponding increase in the provision for loan losses in results of operations; however, the Corporation is continuing to evaluate the impact of the pending adoption of the new standard on its consolidated financial statements. ~~A third-party vendor has been selected to assist with the CECL calculations and the implementation process has started. The Corporation is running the CECL model in test mode in 2022.~~

ASU ~~2019-05, Financial Instruments~~2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit ~~Losses (Topic 326): Targeted Transition Relief~~Structures Using the Proporational Amortization Method

Description

This ASU ~~allows~~permits reporting entities to ~~irrevocably~~ elect ~~upon adoption~~to account for their tax equity investments, regardless of ~~ASU 2016-13,~~ the ~~fair value option on financial instruments that (1) were previously recorded at amortized cost and (2)~~tax credit program from which the income tax credits are ~~within~~received, using the ~~scope of ASC 326-20~~proportional amortization method if ~~the instruments~~certain conditions are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 has the same effective date as ASU 2016-13. On October 16, 2019, FASB approved its August 2019 proposal to grant certain small public companies a delay in the effective date of ASU 2016-13. For the Corporation, the delay makes the ASU effective January 2023. Since the Corporation currently meets the SEC definition of a small reporting company, the delay will be applied to the Corporation. Early adoption is permitted.met.

Effective Date

January 1, ~~2023~~2024

Effect on the Consolidated Financial Statements

The ~~Corporation continues~~ASU is not expected to ~~review~~have an impact on the ~~ASU as part of its adoption of ASU 2016-13.~~Corporation's financial statements.

~~ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debit Restructurings and Vintage Disclosures~~

~~Description~~

This ASU will eliminate the recognition and measurement accounting guidance for Troubled Debt Restructurings (TDRs) by creditors in Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

~~Effective Date~~

~~January 1, 2023~~

~~Effect on the Consolidated Financial Statements~~

~~The Corporation is reviewing the ASU as part of its adoption of ASU 2016-13.~~

~~ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~

~~Description~~

This ASU provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include: (1) a change in a contract's reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debts, leases, and other arrangements that meet specific criteria, and (2) when updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its accounting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship.

~~Effective Date~~

~~March 12, 2020 through December 31, 2022~~

~~Effect on the Consolidated Financial Statements~~

~~The Corporation continues to review the ASU as part of its adoption but does not expect it to have a material effect on the consolidated financial statements.~~

Note 3. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of income tax effects, included in shareholders' equity are as follows:



	March 31,		December 31,		March 31,		December 31,
(Dollars in thousands)	2022		2021		2023		2022

Net unrealized gains on debt securities	$	(23,624)	$	4,094
Net unrealized losses on debt securities					$	(52,269)	$	(61,497)
Tax effect		4,961		(860)		10,977		12,914
Net of tax amount	$	(18,663)	$	3,234	$	(41,292)	$	(48,583)

Accumulated pension adjustment	$	(4,786)	$	(4,786)	$	(3,423)	$	(3,423)
Tax effect		1,005		1,005		719		719
Net of tax amount	$	(3,781)	$	(3,781)	$	(2,704)	$	(2,704)

Total accumulated other comprehensive loss	$	(22,444)	$	(547)
Total accumulated other comprehensive (loss)					$	(43,996)	$	(51,287)

‎

Note 4. Investments

Available for Sale (AFS) Securities

The amortized cost and estimated fair value of AFS securities as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:



(Dollars in thousands)			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
March 31, 2022	cost		gains		losses		value
March 31, 2023									cost		gains		losses		Value
U.S. Treasury	$	84,725	$	—	$	(5,713)	$	79,012	$	84,025	$	—	$	(9,762)	$	74,263
Municipal		205,912		811		(10,920)		195,803		170,095		—		(24,590)		145,505
Corporate		25,300		69		(639)		24,730		26,381		—		(2,382)		23,999
Agency mortgage & asset-backed		174,496		117		(6,208)		168,405		156,934		68		(10,910)		146,092
Non-Agency mortgage & asset-backed		44,668		11		(1,152)		43,527		72,601		28		(4,721)		67,908
Total	$	535,101	$	1,008	$	(24,632)	$	511,477	$	510,036	$	96	$	(52,365)	$	457,767



(Dollars in thousands)			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
December 31, 2021	cost		gains		losses		value
December 31, 2022									cost		gains		losses		value
U.S. Treasury	$	84,896	$	88	$	(698)	$	84,286	$	101,980	$	—	$	(11,723)	$	90,257
Municipal		206,501		7,148		(1,422)		212,227		186,007		14		(30,566)		155,455
Corporate		24,794		333		(188)		24,939		26,316		—		(2,077)		24,239
Agency mortgage & asset-backed		178,614		1,157		(2,086)		177,685		163,274		19		(12,358)		150,935
Non-Agency mortgage & asset-backed		30,912		34		(272)		30,674		70,756		1		(4,807)		65,950
Total	$	525,717	$	8,760	$	(4,666)	$	529,811	$	548,333	$	34	$	(61,531)	$	486,836

At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the fair value of debt securities pledged to secure public funds and trust deposits totaled ~~$153.8~~$147.1 million and ~~$160.3~~$208.9 million, respectively. The Bank has 0no investment in a single issuer that exceeds 10% of shareholders’ equity, except for securities issued by the U.S. Treasury and U.S. government sponsored entities.

The amortized cost and estimated fair value of debt securities at March 31, ~~2022,~~2023, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities. Securities not due at a single maturity date are presented separately.



(Dollars in thousands)	Amortized ‎cost		Fair ‎value		Amortized ‎cost		Fair ‎value
Due in one year or less	$	1,667	$	1,682	$	—	$	—
Due after one year through five years		8,933		8,848		10,911		9,946
Due after five years through ten years		144,994		137,312		144,217		127,268
Due after ten years		160,343		151,703		125,373		106,553
		315,937		299,545		280,501		243,767
Mortgage & asset-backed		219,164		211,932		229,535		214,000
	$	535,101	$	511,477	$	510,036	$	457,767

The composition of the net realized gains (losses) on debt securities for the three months ended are as follows:


	For the Three Months Ended
	March 31,
(Dollars in thousands)	2023		2022
Proceeds	$	32,855	$	—
Gross gains realized		12		—
Gross losses realized		(614)		—
Net (losses) gains realized	$	(602)	$	—

Tax benefit (provision) on net (losses) gains realized	$	126	$	—

Impairment:

The debt securities portfolio contained ~~464~~571 securities with ~~$442.0~~$448.6 million of temporarily impaired fair value and ~~$24.6~~$52.4 million in unrealized losses at March 31, ~~2022.~~2023. The total unrealized loss position has ~~increased $20.0~~decreased $9.2 million since year-end ~~2021.~~2022 due primarily to a decrease in long-term market interest rates.

~~For~~AFS securities ~~with~~in an unrealized loss ~~Management applies a systematic methodology in order~~position are evaluated for credit impairment at least quarterly. For these securities, the Bank considers: (1) the extent to ~~perform an assessment~~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 ~~potential for other-than-temporary impairment. In~~debt security and the ~~case~~likelihood of ~~debt securities, investments considered for other-than-temporary impairment: (1) had~~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 ~~specified maturity or repricing date; (2) were generally expected to be redeemed at par; and (3) were expected to achieve a recovery in market value within a reasonable period of time.~~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 ~~municipal bond portfolio, which has~~Bank does not have the ~~largest unrealized loss, is well diversified geographically (203 issuers)~~intent to sell and ~~is comprised primarily~~does not believe it will more likely than not be required to sell any of ~~general obligation bonds (63%). Many municipal bonds have credit enhancements in the form~~these securities prior to a recovery of private bond insurance or other credit support. The largest geographic municipal bond exposure is in the states of Texas (14%), California (11%), Pennsylvania (11%), and Michigan (10%). The average rating of the municipal portfolio from Moody’s is AA. NaN municipal bonds are rated below investment grade.their fair value to amortized cost. The impairment identified on debt securities and subject to ~~assessment~~evaluation at March 31, ~~2022,~~2023, was ~~deemed~~determined not to be ~~temporary and required no further adjustments~~attributable to credit related factors; therefore, the ~~financial statements, unless otherwise noted.~~Bank does not have an allowance for credit loss for these investments. During the first quarter of 2023, approximately $33 million of securities was sold as part of a portfolio restructuring to take advantage of higher market interest rates. The loss on these sales was $602 thousand.

‎

The following table reflects ~~temporary~~ impairment in the AFS portfolio, aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:



	March 31, 2022															March 31, 2023
	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

U.S. Treasury	$	79,012	$	(5,713)	28	$	—	$	—	—	$	79,012	$	(5,713)	28	$	—	$	—	—	$	74,263	$	(9,762)	28	$	74,263	$	(9,762)	28
Municipal		143,337		(8,389)	158		18,653		(2,531)	21		161,990		(10,920)	179		1,332		(171)	3		144,173		(24,419)	173		145,505		(24,590)	176
Corporate		13,989		(420)	27		3,781		(219)	7		17,770		(639)	34		7,462		(576)	17		16,537		(1,806)	34		23,999		(2,382)	51
Agency mortgage & asset-backed		124,484		(4,592)	165		26,240		(1,616)	28		150,724		(6,208)	193		17,046		(479)	58		124,043		(10,431)	192		141,089		(10,910)	250
Non-Agency mortgage & asset-backed		28,847		(981)	25		3,698		(171)	5		32,545		(1,152)	30		27,105		(1,416)	29		36,632		(3,305)	37		63,737		(4,721)	66
Total temporarily impaired	$	389,669	$	(20,095)	403	$	52,372	$	(4,537)	61	$	442,041	$	(24,632)	464	$	52,945	$	(2,642)	107	$	395,648	$	(49,723)	464	$	448,593	$	(52,365)	571



	December 31, 2021															December 31, 2022
	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

U.S. Treasury	$	76,383	$	(698)	21	$	—	$	—	—	$	76,383	$	(698)	21	$	17,598	$	(183)	3	$	72,659	$	(11,540)	28	$	90,257	$	(11,723)	31
Municipal		38,997		(910)	44		15,404		(512)	16		54,401		(1,422)	60		73,644		(9,586)	90		80,503		(20,981)	104		154,147		(30,566)	194
Corporate		8,954		(132)	17		1,694		(56)	3		10,648		(188)	20		12,221		(851)	25		10,368		(1,226)	21		22,589		(2,077)	46
Agency mortgage & asset-backed		96,923		(1,669)	94		15,991		(417)	18		112,914		(2,086)	112		55,393		(2,747)	139		88,953		(9,611)	113		144,346		(12,358)	252
Non-Agency mortgage & asset-backed		15,215		(215)	11		1,964		(57)	3		17,179		(272)	14		49,301		(3,092)	52		14,207		(1,715)	16		63,508		(4,807)	68
Total temporarily impaired	$	236,472	$	(3,624)	187	$	35,053	$	(1,042)	40	$	271,525	$	(4,666)	227	$	208,157	$	(16,459)	309	$	266,690	$	(45,072)	282	$	474,847	$	(61,531)	591

~~The following table represents the cumulative credit losses on debt securities recognized in earnings for:~~

Three Months Ended
(Dollars in thousands)
March 31,
2022
2021
Balance of cumulative credit-related OTTI at January 1
$
257
$
272
Decreases for previously recognized credit losses on securities that paid off
—
(15)
Balance of credit-related OTTI at March 31
$
257
$
257

Equity Securities at Fair Value

The Corporation owns 1one equity investment with a readily determinable fair value. At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, this investment was reported at fair value of ~~$492~~$387 thousand and ~~$481~~$411 thousand, respectively, with changes in value reported through income.

Note 5. Loans

The Bank reports its loan portfolio based on the primary collateral of the loan. It further classifies these loans by the primary purpose, either consumer or commercial. The Bank’s ~~residential real estate~~mortgage loans include long-term loans to individuals and businesses secured by mortgages on the borrower’s real ~~property and include home equity loans.~~property. Construction loans are made to finance the purchase of land and the construction of residential and commercial buildings thereon and are secured by mortgages on real estate. Commercial ~~real estate loans include construction, owner and non-owner occupied properties and farm real estate. Commercial~~ loans are made to businesses of various sizes for a variety of purposes including construction, property, plant and equipment, and working ~~capital and~~capital. Commercial loans also include loans to government municipalities. Commercial lending is concentrated in the Bank’s primary market, but also includes purchased loan participations. Consumer loans are comprised of installment, ~~loans~~home equity and unsecured personal lines of credit.

Each class of loans involves a different kind of risk. However, risk factors such as changes in interest rates, general economic conditions and changes in collateral values are common across all classes. The risk of each loan class is presented below.

Residential Real Estate 1-4 ~~Family~~family

The largest risk in residential real estate loans to retail customers is the borrower’s inability to repay the loan due to the loss of the primary source of income. The Bank attempts to mitigate this risk through prudent underwriting standards including employment history, current financial condition and credit history. These loans are generally owner occupied and serve as the borrower’s primary residence. The Bank usually holds a first lien position on these properties but may hold a second lien position in some home equity loans or lines of credit. Commercial purpose loans, secured by residential real estate, are usually dependent upon repayment from the rental income or other business purposes. These loans are generally non-owner occupied. In addition to the real estate collateral, these loans may have personal guarantees

or UCC filings on other business assets. If a payment default occurs on a 1-4 family residential real estate loan, the collateral serves as a source of repayment, but may be subject to a change in value due to economic conditions.

Residential Real Estate Construction

This class includes loans to individuals for construction of a primary residence and tocontractors and developers to improve real estate and construct residential properties. Construction loans to individuals generally bear the same risk as 1-4 family residential loans. Additional risks may include cost overruns, delays in construction or contractor problems.

Loans to contractors and developers are primarily dependent on the sale of improved lots or finished homes for repayment. Risks associated with these loans include the borrower’s character and capacity to complete a development, the effect of economic conditions on the valuation of lots or homes, cost overruns, delays in construction or contractor problems. In addition to real estate collateral, these loans may have personal guarantees or UCC filings on other business assets, depending on the financial strength and experience of the developer. Real estate construction loans are monitored on a regular basis by either an independent third party or the responsible loan officer, depending on the size and complexity of the project. This monitoring process includes, at a minimum, the submission of invoices or ~~American Institute of Architects (AIA)~~AIA documents detailing the cost incurred by the borrower, on-site inspections, and an authorizing signature for disbursement of funds.

Commercial Real Estate

Commercial real estate loans may be secured by various types of commercial property including retail space, office buildings, warehouses, hotels and ~~motels,~~motel, manufacturing facilities and, agricultural land.

Commercial real estate loans present a higher level of risk than residential real estate loans. Repayment of these loans is normally dependent on ~~cash-flow~~cash flow generated by the operation of a business that utilizes the real estate. The successful operation of the business, and therefore repayment ability, may be affected by general economic conditions outside of the control of the operator. On most commercial real estate loans ongoing monitoring of cash flow and other financial

performance indictors is completed annually through financial statement analysis. In addition, the value of the collateral may be negatively affected by economic conditions and may be insufficient to repay the loan in the event of default. In the event of foreclosure, commercial real estate may be more difficult to liquidate than residential real estate.

Commercial

Commercial loans are made for various business purposes to finance equipment, inventory, accounts receivables, and operating liquidity. These loans are generally secured by business assets or equipment, non-real estate collateral and/or personal guarantees.

Commercial loans present a higher level of credit risk than other loans because repayment ability is usually dependent on cash-flow from a business operation that can be affected by general economic conditions. On most ~~Commercial real estate~~commercial loans ongoing monitoring of cash flow and other financial performance ~~indictors is completed~~indicators occur at least annually through financial statement analysis. In the event of a default, collateral for these loans may be more difficult to liquidate, and the valuation of the collateral may decline more quickly than loans secured by other types of collateral.

Loans to governmental municipalities are also included in the Commercial class. These loans generally have less risk than Commercial & Industrial (C&I) loans due to the taxing authority of the municipality and its ability to assess fees on services.

This class also includes loans made as part of the Paycheck Protection Program (PPP). The PPP is a small business loan program, administered by the Small Business Administration (SBA). The PPP loans are 100 percent guaranteed by the SBA and have a maturity of two years or five years with a fixed interest rate of 1%1.00% for the life of the loan. Because the PPP loans are 100% guaranteed by the SBA, they present no credit risk to the Bank once the SBA guarantee is fulfilled. However, if the SBA does not grant loan forgiveness, the PPP loan would present the same risk factors as any other commercial loan.

Consumer

These loans are made for a variety of reasons to consumers and include term loans and personal lines-of credit. The loans may be secured or unsecured. Repayment is primarily dependent on the income of the borrower and to a lesser extent the sale of collateral. The underwriting of these loans is based on the consumer’s ability and willingness to repay and is determined by the borrower’s employment history, current financial condition and credit background. Collateral for these loans, if any, usually depreciates quickly and therefore, may not be adequate to repay the loan if it is repossessed. Therefore, the overall health of the economy, including unemployment rates and wages, will have an effect on the credit quality in this loan class.

‎

1011

A summary of loans outstanding, by class, at the end of the reporting periods is as follows:



	March 31,		December 31,		March 31,		December 31,
(Dollars in thousands)	2022		2021		2023		2022
Residential Real Estate 1-4 Family
Consumer first liens	$	72,246	$	71,828	$	93,540	$	82,795
Commercial first lien		61,814		60,655		62,569		61,702
Total first liens		134,060		132,483		156,109		144,497

Consumer junior liens and lines of credit		67,780		67,103		68,765		69,561
Commercial junior liens and lines of credit		4,538		4,841		4,358		4,127
Total junior liens and lines of credit		72,318		71,944		73,123		73,688
Total residential real estate 1-4 family		206,378		204,427		229,232		218,185

Residential real estate - construction
Consumer		8,382		8,278		9,559		13,908
Commercial		13,050		12,379		9,892		10,485
Total residential real estate construction		21,432		20,657		19,451		24,393

Commercial real estate		524,138		522,779		575,516		566,662
Commercial		243,008		244,543		247,042		235,602
Total commercial		767,146		767,322		822,558		802,264

Consumer		6,021		6,406		6,205		6,199
		1,000,977		998,812		1,077,446		1,051,041
Less: Allowance for loan losses		(15,050)		(15,066)
Less: Allowance for credit losses						(14,109)		(14,175)
Net Loans	$	985,927	$	983,746	$	1,063,337	$	1,036,866

Included in the loan balances are the following:
Net unamortized deferred loan costs	$	1,964	$	1,289	$	1,887	$	2,027

Loans pledged as collateral for borrowings and commitments from:
FHLB	$	605,267	$	614,828	$	585,601	$	585,601
Federal Reserve Bank		52,480		45,453		91,305		92,922
	$	657,747	$	660,281	$	676,906	$	678,523

Paycheck Protection Program (included in commercial loans)	$	2,932	$	7,755	$	88	$	179

Note 6. Loan Quality and Allowance for ~~Loan~~Credit Losses

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the collectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience, derived from peer group data, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in: lending policy, procedures and practice; economic conditions; nature and volume of loans; experience of lending team; volume of past due loans; quality of the loan review system; concentrations of credit; and other external factors.

‎

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Bank measures the ALC using the following inputs to calculate the quantitative component for the pool:

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

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

Using third party data, the Bank determines a reasonable and supportable economic forecast that it believes is likely to exist for the next 4 quarters.

A historical credit loss rate is calculated for each pool, using the average historical loss, by FRB Call Code, for a peer group of Pennsylvania community banks over the last eight quarters. The historical loss rate is calculated over a historical period the Bank believes best represents a period that will be similar to the next 4 quarters.

The historical peer credit loss rate is applied to each WARM bucket though the initial 4 quarter forecast period.

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

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

This risk factor for each portfolio segment are presented in Note 6 of the accompanying financial statements.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pool evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the sale of the collateral, the expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for any discounts and selling costs as appropriate.

Management monitors loan performance on a monthly basis and performs a quarterly evaluation of the adequacy of the Allowance for Credit Loss for loans (ACL). The Bank begins enhanced monitoring of all loans rated 6–OAEM or worse and obtains a new appraisal or asset valuation for any loans placed on nonaccrual and rated 7 - Substandard or worse. Management, at its discretion, may determine that additional adjustments to the appraisal or valuation are required. Valuation adjustments will be made as necessary based on factors, including, but not limited to: the economy, deferred maintenance, industry, type of property/equipment, age of the appraisal, etc. and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated and deducted from the valuation in order to determine the net realizable value to the Bank.When determining the ACL, certain factors involved in the evaluation are inherently subjective and require material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows. Management monitors the adequacy of the ACL on an ongoing basis and reports its adequacy quarterly to the Board Enterprise Risk Management Committee of the Board of Directors. Management believes the ACL at March 31, 2023 is adequate.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a modification will be executed with an individual borrower or the extension or renewal options are included int eh original or modified contract at the reporting date and are not unconditionally cancellable by the Bank.

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, and current economic trends, among other factors. Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans are identified as either performing or nonperforming based on the payment status of the loans. Nonperforming consumer loans are loans that are nonaccrual or 90 days or more past due and still accruing. The Bank uses the following definitions for risk ratings:

Pass (1-5): are considered pass credits with lower or average risk and are not otherwise classified.

OAEM (6): Loans classified as OAEM have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard (7): Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful (8): Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

‎

The following table presents loans by year of origination and internally assigned risk ratings:


(Dollars in thousands, except per share)													Revolving		Revolving
	Term Loans												Loans		Loans
	Amortized Cost Basis by Origination Year												Amortized		Converted
As of March 31	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Residential real estate 1-4 family:
Commercial:
Risk rating:
Pass (1-5)	$	2,581	$	9,807	$	12,658	$	10,043	$	3,045	$	25,496	$	2,202	$	975	$	66,807
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		120		—		120
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		2,581		9,807		12,658		10,043		3,045		25,496		2,322		975		66,927
Consumer:
Performing		8,073		23,784		16,757		12,274		6,032		31,690		47,025		16,566		162,201
Nonperforming		—		—		—		—		—		104		—		—		104
Total Consumer		8,073		23,784		16,757		12,274		6,032		31,794		47,025		16,566		162,305
Total	$	10,654	$	33,591	$	29,415	$	22,317	$	9,077	$	57,290	$	49,347	$	17,541	$	229,232

Residential real estate 1-4 family:
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential real estate construction:
Commercial:
Risk rating:
Pass (1-5)	$	594	$	2,869	$	2,316	$	238	$	731	$	3,144	$	—	$	—	$	9,892
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		594		2,869		2,316		238		731		3,144		—		—		9,892
Consumer:
Performing		82		9,477		—		—		—		—		—		—		9,559
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		82		9,477		—		—		—		—		—		—		9,559
Total	$	676	$	12,346	$	2,316	$	238	$	731	$	3,144	$	—	$	—	$	19,451

Residential real estate construction:
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate:
Risk rating:
Pass (1-5)	$	23,385	$	113,854	$	98,742	$	329,898	$	—	$	—	$	5,686	$	—	$	571,565
OAEM (6)		—		—		—		1,089		—		—		—		—		1,089
Substandard (7)		—		—		—		2,812		—		—		50		—		2,862
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	23,385	$	113,854	$	98,742	$	333,799	$	—	$	—	$	5,736	$	—	$	575,516

Commercial real estate:
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial:
Risk rating:
Pass (1-5)	$	15,512	$	37,608	$	46,469	$	102,789	$	—	$	—	$	39,646	$	—	$	242,024
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		276		—		3,773		—		—		969		—		5,018
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	15,512	$	37,884	$	46,469	$	106,562	$	—	$	—	$	40,615	$	—	$	247,042

Commercial:
Current period gross charge-offs	$	(5)	$	—	$	(81)	$	—	$	—	$	—	$	—	$	—	$	(86)

Consumer:
Performing		2,324		952		534		502		—		—		1,893		—		6,205
Nonperforming		—		—		—		—		—		—		—		—		—
Total	$	2,324	$	952	$	534	$	502	$	—	$	—	$	1,893	$	—	$	6,205

Consumer:
Current period gross charge-offs	$	(13)	$	—	$	(6)	$	—	$	—	$	—	$	(15)	$	—	$	(34)

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of March 31, 2023:


(Dollars in thousands)	Nonaccrual and Loans Past Due Over 90 Days+
					Loans Past Due
	Nonaccrual		Nonaccrual		Over 90 Days
	Without ACL		With ACL		Still Accruing
March 31, 2023
Residential Real Estate 1-4 Family
First liens	$	120	$	—	$	104
Junior liens and lines of credit		—		—		2
Total		120		—		106
Residential real estate - construction		—		—		—
Commercial real estate		—		—		—
Commercial		—		—		—
Consumer		—		—		—
Total	$	120	$	—	$	106

The following table reports the risk rating for those loans in the portfolio that were assigned an individual risk rating at December 31, 2022:


	Pass		OAEM		Substandard		Doubtful
(Dollars in thousands)	(1-5)		(6)		(7)		(8)		Total

December 31, 2022
Residential Real Estate 1-4 Family
First liens	$	144,377	$	—	$	120	$	—	$	144,497
Junior liens and lines of credit		73,688		—		—		—		73,688
Total		218,065		—		120		—		218,185
Residential real estate - construction		24,393		—		—		—		24,393
Commercial real estate		562,665		1,095		2,902		—		566,662
Commercial		228,085		2,751		4,766		—		235,602
Consumer		6,199		—		—		—		6,199
Total	$	1,039,407	$	3,846	$	7,788	$	—	$	1,051,041

‎

At March 31, 2023 and December 31, 2022, the Bank had $120 thousand of residential properties in the process of foreclosure. The following table presents the aging of payments of the loan portfolio:


(Dollars in thousands)	Loans Past Due
							Total				Total
	30-59 Days		60-89 Days		90 Days+		Past Due		Current		Loans
March 31, 2023
Residential Real Estate 1-4 Family
First liens	$	70	$	—	$	224	$	294	$	155,815	$	156,109
Junior liens and lines of credit		184		30		2		216		72,907		73,123
Total		254		30		226		510		228,722		229,232
Residential real estate - construction		—		—		—		—		19,451		19,451
Commercial real estate		195		—		—		195		575,321		575,516
Commercial		335		10		—		345		246,697		247,042
Consumer		22		31		—		53		6,152		6,205
Total	$	806	$	71	$	226	$	1,103	$	1,076,343	$	1,077,446


									Total
									Past Due &				Total
December 31, 2022	30-59 Days		60-89 Days		90 Days+		Nonaccrual		Nonaccrual		Current		Loans
Residential Real Estate 1-4 Family
First liens	$	340	$	177	$	—	$	120	$	637	$	143,860	$	144,497
Junior liens and lines of credit		490		—		—		—		490		73,198		73,688
Total		830		177		—		120		1,127		217,058		218,185
Residential real estate - construction		—		—		—		—		—		24,393		24,393
Commercial real estate		649		—		—		—		649		566,013		566,662
Commercial		681		50		—		—		731		234,871		235,602
Consumer		29		5		13		—		47		6,152		6,199
Total	$	2,189	$	232	$	13	$	120	$	2,421	$	2,434	$	1,051,041

The following table presents, by class, the activity in the Allowance for ~~Loan~~Credit Losses ~~(ALL)~~(ACL) for the periods shown:


	Residential Real Estate 1-4 Family																Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial										First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total		Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total

ALL at December 31, 2022																	$	459	$	234	$	343	$	7,493	$	4,846	$	133	$	667	$	14,175
Impact of adopting ASU 2016-13																		1,096		493		(95)		584		(1,907)		(40)		(667)		(536)
Charge-offs																		—		—		—		—		(86)		(34)		—		(120)
Recoveries																		2		—		39		—		67		15		—		123
Provision																		67		(37)		(97)		159		355		20		—		467
ACL at March 31, 2023																	$	1,624	$	690	$	190	$	8,236	$	3,275	$	94	$	—	$	14,109

ALL at December 31, 2021	$	475	$	252	$	325	$	8,168	$	5,127	$	130	$	589	$	15,066	$	475	$	252	$	325	$	8,168	$	5,127	$	130	$	589	$	15,066
Charge-offs		(20)		—		—		—		(1)		(24)		—		(45)		(20)		—		—		—		(1)		(24)		—		(45)
Recoveries		15		1		—		—		5		8		—		29		15		1		—		—		5		8		—		29
Provision		10		—		4		(206)		52		11		129		—		10		—		4		(206)		52		11		129		—
ALL at March 31, 2022	$	480	$	253	$	329	$	7,962	$	5,183	$	125	$	718	$	15,050	$	480	$	253	$	329	$	7,962	$	5,183	$	125	$	718	$	15,050

ALL at December 31, 2020	$	555	$	226	$	294	$	9,163	$	5,679	$	97	$	775	$	16,789
Charge-offs		—		—		—		(13)		(5)		(18)		—		(36)
Recoveries		—		169		—		—		7		7		—		183
Provision		(108)		(184)		24		(365)		(208)		27		14		(800)
ALL at March 31, 2021	$	447	$	211	$	318	$	8,785	$	5,473	$	113	$	789	$	16,136

1117

The following table presents, by class, loans that were evaluated for the ~~ALL~~ACL under the specific reserve (individually) and those that were evaluated under the general reserve (collectively) and the amount of the ~~ALL~~ACL established in each class as of ~~the periods shown:~~December 31, 2022:



	Residential Real Estate 1-4 Family																Residential Real Estate 1-4 Family
	First		Junior Liens &				Commercial										First		Junior Liens &				Commercial
(Dollars in thousands)	Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total		Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Unallocated		Total
March 31, 2022
December 31, 2022
Loans evaluated for ALL:
Individually	$	651	$	—	$	422	$	10,293	$	—	$	—	$	—	$	11,366	$	619	$	—	$	—	$	2,331	$	—	$	—	$	—	$	2,950
Collectively		133,409		72,318		21,010		513,845		243,008		6,021		—		989,611		143,878		73,688		24,393		564,331		235,602		6,199		—		1,048,091
Total	$	134,060	$	72,318	$	21,432	$	524,138	$	243,008	$	6,021	$	—	$	1,000,977	$	144,497	$	73,688	$	24,393	$	566,662	$	235,602	$	6,199	$	—	$	1,051,041

ALL established for ‎ loans evaluated:
Individually	$	—	$	—	$	—	$	662	$	—	$	—	$	—	$	662	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively		480		253		329		7,300		5,183		125		718		14,388		459		234		343		7,493		4,846		133		667		14,175
ALL at March 31, 2022	$	480	$	253	$	329	$	7,962	$	5,183	$	125	$	718	$	15,050

December 31, 2021
Loans evaluated for ALL:
Individually	$	661	$	—	$	424	$	10,520	$	—	$	—	$	—	$	11,605
Collectively		131,822		71,944		20,233		512,259		244,543		6,406		—		987,207
Total	$	132,483	$	71,944	$	20,657	$	522,779	$	244,543	$	6,406	$	—	$	998,812

ALL established for ‎ loans evaluated:
Individually	$	—	$	—	$	—	$	698	$	—	$	—	$	—	$	698
Collectively		475		252		325		7,470		5,127		130		589		14,368
ALL at December 31, 2021	$	475	$	252	$	325	$	8,168	$	5,127	$	130	$	589	$	15,066
ALL at December 31, 2022																	$	459	$	234	$	343	$	7,493	$	4,846	$	133	$	667	$	14,175

‎

At March 31, 2023, there were no loans evaluated individually for the ACL.

12On January 1, 2023, The Bank adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

As of March 31, 2023, the Bank did not have any loans made to borrowers experiencing financial difficulties and there were no loans modifications made to borrowers experiencing financial difficulties during the first quarter of 2023.

Prior to the adoption of ASU 2022-02, certain modified loans were reported as TDRs and impaired. The following table ~~shows additional information about those~~presents impaired loans ~~considered to be impaired~~ as of ~~the periods shown:~~December 31, 2022.

Impaired Loans
With No Allowance
With Allowance
(Dollars in thousands)
Unpaid
Unpaid
Recorded
Principal
Recorded
Principal
Related
March 31, 2022
Investment
Balance
Investment
Balance
Allowance
Residential Real Estate 1-4 Family
First liens
$
651
$
651
$
—
$
—
$
—
Junior liens and lines of credit
—
—
—
—
—
Total
651
651
—
—
—
Residential real estate - construction
422
531
—
—
—
Commercial real estate
4,751
5,224
5,542
5,796
662
Commercial
—
—
—
—
—
Total
$
5,824
$
6,406
$
5,542
$
5,796
$
662


December 31, 2021
											Impaired Loans
											With No Allowance				With Allowance
(Dollars in thousands)													Unpaid				Unpaid
											Recorded		Principal		Recorded		Principal		Related
December 31, 2022											Investment		Balance		Investment		Balance		Allowance
Residential Real Estate 1-4 Family
First liens	$	661	$	661	$	—	$	—	$	—	$	619	$	619	$	—	$	—	$	—
Junior liens and lines of credit		—		—		—		—		—		—		—		—		—		—
Total		661		661		—		—		—		619		619		—		—		—
Residential real estate - construction		424		729		—		—		—		—		—		—		—		—
Commercial real estate		4,942		5,405		5,578		5,764		698		2,331		2,331		—		—		—
Commercial		—		—		—		—		—		—		—		—		—		—
Total	$	6,027	$	6,795	$	5,578	$	5,764	$	698	$	2,950	$	2,950	$	—	$	—	$	—

~~The following table shows the average balance of impaired loans and related interest income for the periods shown:~~

Three Months Ended
March 31, 2022
Average
Interest
(Dollars in thousands)
Recorded
Income
Investment
Recognized
Residential Real Estate 1-4 Family
First liens
$
656
$
7
Junior liens and lines of credit
—
—
Total
656
7
Residential real estate - construction
423
—
Commercial real estate
10,256
43
Commercial
—
—
Total
$
11,335
$
50
Three Months Ended
March 31, 2021
Average
Interest
(Dollars in thousands)
Recorded
Income
Investment
Recognized
Residential Real Estate 1-4 Family
First liens
$
634
$
8
Junior liens and lines of credit
—
—
Total
634
8
Residential real estate - construction
512
—
Commercial real estate
16,043
91
Commercial
—
—
Total
$
17,189
$
99

‎

1318

At March 31, 2022, the Bank had $38.0 thousand of residential properties in the process of foreclosure compared to $38.0 thousand at the end of 2021. The following table presents the aging of payments of the loan portfolio:

(Dollars in thousands)
Loans Past Due and Still Accruing
Total
Current
30-59 Days
60-89 Days
90 Days+
Total
Non-Accrual
Loans
March 31, 2022
Residential Real Estate 1-4 Family
First liens
$
133,720
$
204
$
120
$
16
$
340
$
—
$
134,060
Junior liens and lines of credit
72,265
12
3
—
15
38
72,318
Total
205,985
216
123
16
355
38
206,378
Residential real estate - construction
21,010
—
—
—
—
422
21,432
Commercial real estate
516,816
446
—
—
446
6,876
524,138
Commercial
242,688
260
—
—
260
60
243,008
Consumer
6,007
8
2
4
14
—
6,021
Total
$
992,506
$
930
$
125
$
20
$
1,075
$
7,396
$
1,000,977

December 31, 2021
Residential Real Estate 1-4 Family
First liens
$
132,224
$
96
$
113
$
—
$
209
$
50
$
132,483
Junior liens and lines of credit
71,788
118
—
—
118
38
71,944
Total
204,012
214
113
—
327
88
204,427
Residential real estate - construction
20,233
—
—
—
—
424
20,657
Commercial real estate
515,487
293
187
—
480
6,812
522,779
Commercial
244,377
106
—
—
106
60
244,543
Consumer
6,368
27
11
—
38
—
6,406
Total
$
990,477
$
640
$
311
$
—
$
951
$
7,384
$
998,812

‎

The following table reports the risk rating for those loans in the portfolio that are assigned an individual risk rating. Consumer purpose loans are assigned a rating of either pass or substandard based on the performance status of the loans. Substandard consumer loans are comprised of loans 90 days or more past due and still accruing, and nonaccrual loans. Commercial purpose loans may be assigned any rating in accordance with the Bank’s internal risk rating system.

Pass
OAEM
Substandard
Doubtful
(Dollars in thousands)
(1-5)
(6)
(7)
(8)
Total
March 31, 2022
Residential Real Estate 1-4 Family
First liens
$
134,060
$
—
$
—
$
—
$
134,060
Junior liens and lines of credit
72,280
—
38
—
72,318
Total
206,340
—
38
—
206,378
Residential real estate - construction
21,010
—
422
—
21,432
Commercial real estate
488,884
18,722
16,532
—
524,138
Commercial
240,182
2,647
179
—
243,008
Consumer
6,021
—
—
—
6,021
Total
$
962,437
$
21,369
$
17,171
$
—
$
1,000,977

December 31, 2021
Residential Real Estate 1-4 Family
First liens
$
132,433
$
—
$
50
$
—
$
132,483
Junior liens and lines of credit
71,906
—
38
—
71,944
Total
204,339
—
88
—
204,427
Residential real estate - construction
20,233
—
424
—
20,657
Commercial real estate
486,903
19,006
16,870
—
522,779
Commercial
244,315
49
179
—
244,543
Consumer
6,406
—
—
—
6,406
Total
$
962,196
$
19,055
$
17,561
$
—
$
998,812

The following table presents ~~information on the Bank’s Troubled Debt Restructuring (TDR)~~TDR loans as ~~of:~~

Troubled Debt Restructurings
Within the Last 12 Months
That Have Defaulted
(Dollars in thousands)
Troubled Debt Restructurings
On Modified Terms
Number of
Recorded
Number of
Recorded
Contracts
Investment
Performing*
Nonperforming*
Contracts
Investment
March 31, 2022
Residential real estate - construction
1
$
422
$
—
$
422
—
$
—
Residential real estate
5
650
650
—
—
—
Commercial real estate - owner occupied
4
1,147
1,147
—
—
—
Commercial real estate - farm land
4
1,496
1,496
—
—
—
Commercial real estate - construction and land development
1
1,360
1,360
—
—
—
Commercial real estate
2
287
98
189
—
—
Total
17
$
5,362
$
4,751
$
611
—
$
—
December 31, 2021
Residential real estate - construction
1
$
424
$
—
$
424
—
$
—
Residential real estate
5
661
661
—
—
—
Commercial real estate - owner occupied
4
1,161
1,161
—
—
—
Commercial real estate - farm land
4
1,664
1,664
—
—
—
Commercial real estate - construction and land development
1
1,360
1,360
—
—
—
Commercial real estate
2
294
294
—
—
—
Total
17
$
5,564
$
5,140
$
424
—
$
—

*The performing status is determined by the loan’s compliance with the modified terms.

‎

~~There were no new TDR loans during the first quarter~~ of ~~2022.~~

~~The following table reports new TDR loans during 2021, concession granted and the recorded investment as of March~~December 31, 2022:

New During Period
Twelve Months Ended
Number of
Pre-TDR
After-TDR
Recorded
December 31, 2021
Contracts
Modification
Modification
Investment
Concession
Residential real estate
1
$
41
$
50
$
47
multiple


								Troubled Debt Restructurings
								Within the Last 12 Months
								That Have Defaulted
(Dollars in thousands)	Troubled Debt Restructurings							On Modified Terms
	Number of	Recorded						Number of	Recorded
	Contracts	Investment		Performing*		Nonperforming*		Contracts	Investment
December 31, 2022
Residential real estate - construction	—	$	—	$	—	$	—	—	$	—
Residential real estate	5		619		619		—	—		—
Commercial real estate - owner occupied	3		783		783		—	—		—
Commercial real estate - farm land	3		1,466		1,466		—	—		—
Commercial real estate - construction and land development	—		—		—		—	—		—
Commercial real estate - other	1		82		82		—	—		—
Total	12	$	2,950	$	2,950	$	—	—	$	—

*The performing status is determined by the loans compliance with the modified terms. Nonperforming is considered 90 days or more past due.

Note 7. Leases

The Corporation leases various assets in the course of its operations that are subject to recognition on the balance sheet. The Corporation considers all of its leases to be operating leases and it has no finance leases. The leased assets ~~are comprised of~~may include equipment, and buildings and land (collectively real estate). The equipment leases are shorter-term than the real estate leases, and generally have a fixed payment over a defined term without renewal options. Certain equipment leases have purchase options and it was determined the option was not reasonably certain to be exercised. The real estate leases are longer-term and may contain renewal options after the initial term, but none of the real estate leases contain a purchase option. The renewal options on real estate leases were reviewed and if it was determined the option was reasonably certain to be renewed, the option term was considered in the determination of the lease liability. There is only one real estate lease with a variable payment based on an index included in the lease liability. None of the leases contain any restrictive covenants and there are no significant leases that have not yet commenced. The discount rate used to determine the lease liability is based on the Bank’s fully secured borrowing rate from the Federal Home Loan Bank for a term similar to the lease term. Operating lease expense is included in net occupancy expense in the consolidated statements of income.

Lease costs:

The components of total lease cost were as follows:


	Three Months Ended ‎March 31,				Three Months Ended ‎March 31,
(Dollars in thousands)	2022		2021		2023		2022
Operating lease cost	$	173	$	174	$	211	$	173
Short-term lease cost		123		—		4		123
Variable lease cost		25		24		36		25
Total lease cost	$	321	$	198	$	251	$	321

Supplemental Lease Information:


	Three Months Ended ‎March 31,				Three Months Ended ‎March 31,
(Dollars in thousands)	2022		2021		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	166	$	162	$	206	$	166

Weighted-average remaining lease term (years)		10.8		11.5		11.8		10.8
Weighted-average discount rate		3.37%		3.34%		3.38%		3.37%

‎

1619

Lease Obligations:

Future undiscounted lease payments for operating leases with initial terms of one year or more as of March 31, ~~2022~~2023 are as follows:


(Dollars in thousands)

2022	$	487
2023		660	$	624
2024		639		804
2025		588		752
2026		479		650
2027				507
2027 and beyond		2,917		4,084
Undiscounted cash flow		5,770		7,421
Imputed Interest		(1,007)		(1,422)
Total lease liability	$	4,763	$	5,999

Note 8. Other Real Estate Owned

The Bank had 0no other real estate owned at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

Note 9. Derivatives

The Corporation is exposed to certain risks arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.

The Corporation’s existing credit derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation arrangements. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain lenders which participate in loans.

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the Balance Sheet.


		Fair Value of Derivative Instruments										Fair Value of Derivative Instruments
		Derivative Liabilities										Derivative Liabilities
(Dollars in thousands)		March 31, 2022					December 31, 2021					March 31, 2023					December 31, 2022
		Notional amount	Balance Sheet Location		Fair Value		Notional amount	Balance Sheet Location		Fair Value		Notional amount	Balance Sheet Location		Fair Value		Notional amount	Balance Sheet Location		Fair Value
Derivatives not designated as hedging instruments
Other Contracts	$	6,606	Other Liabilities	$	13	$	6,653	Other Liabilities	$	21	$	6,416	Other Liabilities	$	4	$	6,465	Other Liabilities	$	3
Total derivatives not designated as hedging instruments				$	13				$	21				$	4				$	3

The table below presents the effect of the Corporation’s derivative financial instruments that are not designated as hedging instruments on the Income Statement.

Effect of Derivatives as Hedging Instruments on the Income Statement

Derivatives Not Designated as Hedging Instruments under Subtopic 815-20

Location of Gain or (Loss) Recognized in Income on Derivative

Amount of Gain or (Loss) Recognized in Income on Derivatives

Location of Gain or (Loss) Recognized in Income on Derivative

Amount of Gain or (Loss) Recognized in Income on Derivatives

(Dollars in thousands)

Three Months Ended

March 31, 2022

March 31, 2021

March 31, 2023

March 31, 2022

Other Contracts

Other income

(1)

As of March 31, ~~2022,~~2023, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was ~~$13~~$4 thousand.

1720

Note 10. Pension

The components of pension expense for the periods presented are as follows:


	Three Months Ended				Three Months Ended
	March 31,				March 31,
(Dollars in thousands)	2022		2021		2023		2022
Components of net periodic cost:
Service cost	$	86	$	99	$	54	$	86
Interest cost		168		87		202		168
Expected return on plan assets		(249)		(274)		(231)		(249)
Settlement expense		—		108
Recognized net actuarial loss		150		285		—		150
Total pension expense	$	155	$	305	$	25	$	155

The service cost component of pension expense is recorded in the salaries and employee benefits line and all other cost components are recorded in the nonservice pension line of the Consolidated Statements of Income.

Note 11. Fair Value Measurements and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates maybe different than the amounts reported at each year-end. The Corporation uses the exit price notion to measure the fair value of financial instruments.

FASB ASC Topic 820, “Financial Instruments”, requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring and nonrecurring basis. The Corporation does not report any nonfinancial assets at fair value. FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1: Valuation is based on unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. There may be substantial differences in the assumptions used for securities within the same level. For example, prices for U.S. Agency securities have fewer assumptions and are closer to level 1 valuations than the private label mortgage-backed securities that require more assumptions and are closer to level 3 valuations.

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Corporation’s assumptions regarding what market participants would assume when pricing a financial instrument.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following information regarding the fair value of the Corporation’s financial instruments should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful.

‎

The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments measured at fair value on a recurring and nonrecurring basis.

Equity Securities: Equity securities are valued using quoted market prices from nationally recognized markets (Level 1). Equity securities are measured at fair value on a recurring basis.

Investment securities: Fair values of investment securities available-for-sale were primarily measured using information from a third-party pricing service. This service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications. Level 2 investment securities are primarily comprised of debt securities issued by states and municipalities, corporations, mortgage-backed securities issued by government agencies, and government-sponsored enterprises. Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. Investment securities are measured at fair value on a recurring basis.

~~Impaired~~Collateral Dependent Loans: The fair value of ~~impaired~~collateral dependent loans with specific allocations of the allowance for ~~loan~~credit losses is generally based on recent real estate appraisals conducted by an independent, licensed appraiser, less cost to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach (Level 2). If the appraiser makes an adjustment to account for differences between the comparable sales and income data available for similar loans, or if management adjusts the appraised value, then the fair value is considered Level 3. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. ~~Impaired~~Collateral dependent loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy. ~~NaN~~No partial charge-offs on ~~impaired~~these loans ~~were~~was taken in the first quarter of ~~2022. Impaired~~2023. Collateral dependent loans are measured at fair value on a nonrecurring basis.

‎

Recurring Fair Value Measurements

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:



(Dollars in thousands)	Fair Value at March 31, 2022								Fair Value at March 31, 2023
Asset Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Equity securities, at fair value	$	492	$	—	$	—	$	492	$	387	$	—	$	—	$	387

Available for sale:
U.S. Government and Agency securities		79,012		—		—		79,012
Municipal securities		—		195,803		—		195,803
Corporate securities		—		24,730		—		24,730
Agency mortgage and asset-backed securities		—		168,405		—		168,405
Non-Agency mortgage and asset-backed securities		—		43,527		—		43,527
U.S. Treasury										74,263		—		—		74,263
Municipal										—		145,505		—		145,505
Corporate										—		23,999		—		23,999
Agency mortgage & asset-backed										—		146,092		—		146,092
Non-Agency mortgage & asset-backed										—		67,908		—		67,908
Total assets	$	79,504	$	432,465	$	—	$	511,969	$	74,650	$	383,504	$	—	$	458,154



(Dollars in thousands)	Fair Value at December 31, 2021								Fair Value at December 31, 2022
Asset Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Equity securities, at fair value	$	481	$	—	$	—	$	481	$	411	$	—	$	—	$	411

Available for sale:
U.S. Government and Agency securities		84,286		—		—		84,286
Municipal securities		—		212,227		—		212,227
Corporate securities		—		24,939		—		24,939
Agency mortgage and asset-backed securities		—		177,685		—		177,685
Non-Agency mortgage and asset-backed securities		—		30,674		—		30,674
U.S. Treasury										90,257		—		—		90,257
Municipal										—		155,455		—		155,455
Corporate										—		24,239		—		24,239
Agency mortgage and asset-backed										—		150,935		—		150,935
Non-Agency mortgage and asset-backed										—		65,950		—		65,950
Total assets	$	84,767	$	445,525	$	—	$	530,292	$	90,668	$	396,579	$	—	$	487,247

The fair value of derivative liabilities measured at fair value at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$13~~$4 thousand and ~~$21~~$3 thousand, respectively, and was considered immaterial.

Nonrecurring Fair Value Measurements

~~For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2022 and December 31, 2021 are as follows:~~

(Dollars in Thousands)
Fair Value at March 31, 2022
Asset Description
Level 1
Level 2
Level 3
Total
Impaired loans (1)
$
—
$
—
$
4,880
$
4,880
Total assets
$
—
$
—
$
4,880
$
4,880

(Dollars in Thousands)
Fair Value at December 31, 2021
Asset Description
Level 1
Level 2
Level 3
Total
Impaired loans (1)
$
—
$
—
$
4,880
$
4,880
Total assets
$
—
$
—
$
4,880
$
4,880

~~(1)Includes assets that may have been charged-down to fair value during the reporting period or have a specific reserve established.~~

The Corporation did 0tnot record any assets or liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at March 31, ~~2022.~~2023. For financial assets and liabilities measured at fair value on a recurring basis, there were 0no transfers of financial assets or liabilities between Level 1 and Level 2 during the period ending March 31, ~~2022.~~

‎

~~The following table presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021:~~


~~(Dollars in thousands)~~					~~Range~~
~~March 31, 2022~~		~~Fair Value~~	~~Valuation Technique~~	~~Unobservable Input~~	~~(Weighted Average)~~
~~Impaired loans~~	$	~~4,880~~	~~Appraisal~~	~~Appraisal Adjustment on:~~
				~~Real estate assets~~	~~20% (20%)~~
				~~Cost to sell~~	8%

				~~Non-real estate assets~~	~~50% - 100% (83%)~~
				~~Cost to sell~~	8%

					~~Range~~
~~December 31, 2021~~		~~Fair Value~~	~~Valuation Technique~~	~~Unobservable Input~~	~~(Weighted Average)~~
~~Impaired Loans~~	$	~~4,880~~	~~Appraisal~~	~~Appraisal Adjustment on:~~
				~~Real estate assets~~	~~20% (20%)~~
				~~Cost to sell~~	8%

				~~Non-real estate assets~~	~~50% - 100% (83%)~~
				~~Cost to sell~~	8%

2023.

The carrying amounts and estimated fair value of financial instruments not carried at fair value are as follows:



	March 31, 2022										March 31, 2023
	Carrying		Fair								Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets, carried at cost:
Cash and cash equivalents	$	173,709	$	173,709	$	173,709	$	—	$	—	$	86,563	$	86,563	$	86,563	$	—	$	—
Long-term interest-bearing deposits in other banks		10,742		10,742		10,742		—		—		9,477		9,477		9,477		—		—
Loans held for sale		3,142		3,195		—		3,195		—		—		—		—		—		—
Net loans		985,927		975,150		—		—		975,150		1,063,337		1,025,387		—		—		1,025,387
Accrued interest receivable		3,080		3,080		—		—		3,080		5,784		5,784		—		—		5,784

Financial liabilities:
Deposits	$	1,596,386	$	1,528,444	$	—	$	1,528,444	$	—	$	1,502,110	$	1,501,309	$	—	$	1,501,309	$	—
Short-term borrowings												50,000		50,000		—		50,000		—
Subordinate notes		19,598		19,009		—		19,009		—		19,635		18,167		—		18,167		—
Accrued interest payable		334		334		—		334		—		670		670		—		670		—

	December 31, 2021										December 31, 2022
	Carrying		Fair								Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets, carried at cost:
Cash and cash equivalents	$	175,149	$	175,149	$	175,149	$	—	$	—	$	64,899	$	64,899	$	64,899	$	—	$	—
Long-term interest-bearing deposits in other banks		10,492		10,492		10,492		—		—		13,975		13,975		13,975		—		—
Loans held for sale		2,827		2,940		—		2,940		—		283		287		—		287		—
Net loans		983,746		1,003,580		—		—		1,003,580		1,036,866		986,141		—		—		986,141
Accrued interest receivable		5,217		5,217		—		—		5,217		6,354		6,354		—		—		6,354

Financial liabilities:
Deposits	$	1,584,359	$	1,616,128	$	—	$	1,616,128	$	—	$	1,551,448	$	1,550,030	$	—	$	1,550,030	$	—
Subordinate notes		19,588		19,909		—		19,909		—		19,623		17,876		—		17,876		—
Accrued interest payable		83		83		—		83		—		192		192		—		192		—

Note 12. Deposits


	March 31,		December 31,			Change
(Dollars in thousands)	2023		2022			Amount	%
Noninterest-bearing checking	$	298,008	$	299,231	$	(1,223)	(0.4)

Interest-bearing checking		461,228		496,533		(35,305)	(7.1)
Money management		544,379		569,585		(25,206)	(4.4)
Savings		124,920		128,709		(3,789)	(2.9)
Total interest-bearing checking and savings		1,130,527		1,194,827		(64,300)	(5.4)

Time deposits		73,575		57,390		16,185	28.2
Total deposits	$	1,502,110	$	1,551,448	$	(49,338)	(3.2)

Overdrawn deposit accounts reclassified as loans	$	79	$	103

2123

Time deposits greater than $250,000 at March 31, 2023 and December 31, 2022 were $11.7 million and $8.8 million, respectively.

Note ~~12. Subordinated Notes~~13. Borrowings

At March 31, ~~2022,~~2023, the Bank had $50.0 million borrowed from the Federal Reserve’s Bank Term Funding Program (BTFP) to temporarily support its liquidity position. This borrowing has a rate of 4.38% and is due March 22, 2024. At March 31, 2023, the fair value of debt securities pledged for the BTFP was $72.0 million.

At March 31, 2023, the Corporation had $20.0 million of unsecured subordinated debt notes payable, $15.0 million which mature on September 1, 2030 and $5.0 million which mature on September 1, 2035. The notes are recorded on the consolidated balance sheet net of remaining debt issuance costs totaling ~~$402.0~~$365 thousand at March 31, ~~2022,~~2023, which is being amortized on a pro-rata basis, ~~over a 5-year and 10-year period,~~ based on the ~~call dates~~maturity date of the notes, on an effective interest method. The subordinated notes totaling $15.0 million have a fixed interest rate of 5.00% through September 1, 2025, then convert to a variable rate of 90-day Secured Overnight Financing Rate (SOFR) plus 4.93% for the applicable interest periods through maturity. The subordinated notes totaling $5.0 million have a fixed interest rate of 5.25% through September 1, 2030, then convert to a variable rate of 90-day SOFR plus 4.92% for the applicable interest periods through maturity. The Corporation may, at its option, redeem the notes, in whole or in part, at any time 5-years prior to the maturity. The notes ~~are structured to qualify as Tier 2 Capital for the Corporation and there are no debt covenants on the notes.~~

Note ~~13.~~14. Capital Ratios

Capital adequacy for the Bank is currently defined by regulatory agencies through the use of several minimum required ratios. The capital ratios to be considered “well capitalized” are: (1) Common Equity Tier 1 (CET1) of 6.5%, (2) Tier 1 Leverage of 5%, (3) Tier 1 Risk-Based Capital of 8%, and (4) Total Risk-Based Capital of 10%. In addition, a capital conservation buffer of ~~2.50%~~2.5% is applicable to all of the capital ratios except for the Tier 1 Leverage ratio. The capital conservation buffer is equal to the lowest value of the three applicable capital ratios less the regulatory minimum for each respective capital measurement. The Bank’s capital conservation buffer at March 31, ~~2022~~2023 was ~~8.30%~~7.99% compared to the regulatory buffer of ~~2.50%~~2.5%. Compliance with the capital conservation buffer is required in order to avoid limitations to certain capital distributions and is in addition to the minimum required capital requirements. As of March 31, ~~2022,~~2023, the Bank was “well capitalized.”

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

The consolidated asset limit on small bank holding companies is $3.0 billion and a company with assets under that limit is not subject to the consolidated capital rules but may file reports that include capital amounts and ratios. The Corporation has elected to file those reports.

‎

2224

The following table summarizes the regulatory capital requirements and results as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 for the Corporation and the Bank:


			Regulatory Ratios				Regulatory Ratios
			Adequately	Well			Adequately	Well
	March 31,	December 31,	Capitalized	Capitalized	March 31,	December 31,	Capitalized	Capitalized
(Dollars in thousands)	2022	2021	Minimum	Minimum	2023	2022	Minimum	Minimum

Common Equity Tier 1 Risk-based Capital Ratio (1)
Franklin Financial Services Corporation	14.94%	15.20%	N/A	N/A	14.24%	14.22%	N/A	N/A
Farmers & Merchants Trust Company	15.05%	15.28%	4.50%	6.50%	14.74%	14.63%	4.50%	6.50%

Tier 1 Risk-based Capital Ratio (2)
Franklin Financial Services Corporation	14.94%	15.20%	N/A	N/A	14.24%	14.22%	N/A	N/A
Farmers & Merchants Trust Company	15.05%	15.28%	6.00%	8.00%	14.74%	14.63%	6.00%	8.00%

Total Risk-based Capital Ratio (3)
Franklin Financial Services Corporation	18.09%	18.41%	N/A	N/A	17.21%	17.21%	N/A	N/A
Farmers & Merchants Trust Company	16.30%	16.54%	8.00%	10.00%	15.99%	15.88%	8.00%	10.00%

Tier 1 Leverage Ratio (4)
Franklin Financial Services Corporation	8.59%	8.52%	N/A	N/A	9.58%	8.95%	N/A	N/A
Farmers & Merchants Trust Company	8.65%	8.57%	4.00%	5.00%	9.92%	9.21%	4.00%	5.00%

(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets
(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets

(1)Common equity Tier 1 capital / total risk-weighted assets

(2)Tier 1 capital / total risk-weighted assets

(3)Total risk-based capital / total risk-weighted assets

(4)Tier 1 capital / average quarterly assets

‎

Note ~~14.~~15. Revenue Recognition

All of the Corporation’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income as presented in its consolidated statements of income. Revenue generating activities that fall within the scope of ASC 606 are described as follows:

Investment and Trust Service Fees – these represent fees from wealth management (assets under management), fees from the management and settlement of estates and commissions from the sale of investment and insurance products.

Asset management fees are generally assessed based on a tiered fee schedule, based on the value of assets under management, and are recognized monthly when the service obligation is completed. Fees recognized were $1.6 million for the first quarter of ~~2022,~~2023, compared to ~~$1.5~~$1.6 million in the first quarter of ~~2021.~~2022.

Fees for estate management services are based on the estimated fair value of the estate. These fees are generally recognized monthly over an 18-month period that Management has determined to represent the average time to fulfill the performance obligations of the contract. Management has the discretion to adjust this time period as needed based upon the nature and complexity of an individual estate. Fees recognized were ~~$173~~$92 thousand for the first quarter of ~~2022,~~2023, compared to ~~$84~~$173 thousand in the first quarter of ~~2021.~~2022.

Commissions from the sale of investment and insurance products are recognized upon the completion of the transaction. Commissions recognized were $105 thousand for the first quarter of 2023, compared to $31 thousand for the first quarter of ~~2022, compared to $37 thousand for the first quarter of 2021.~~2022.

Loan Service Charges – these represent fees on loans for services or charges that occur after the loan has been booked, for example, late payment fees. These also include fees for mortgages settled for third-party mortgage companies. All of these fees are transactional in nature and are recognized upon completion of the transaction which represents the performance obligation.

Deposit Service Charges and Fees – these represent fees from deposit customers for transaction based, account maintenance, and overdraft services. Transaction based fees include, but are not limited to, stop payment fees and overdraft fees. These fees are recognized at the time of the transaction when the performance obligation has been fulfilled.

Account maintenance fees and account analysis fees are earned over the course of a month, representing the period of the performance obligation, and are recognized monthly.

Debit Card Income – this represents interchange fees from cardholder transactions conducted through the card payment network. Cardholders use the debit card to conduct point-of-sale transactions that produce interchange fees. The fees are transaction based and the fee is recognized with the processing of the transaction. These fees are reported net of cardholder rewards.

Other Service Charges and Fees – these are comprised primarily of merchant card fees, credit card fees, ATM surcharges and interchange fees and wire transfer fees. Merchant card fees represent fees the Bank earns from a third party for enrolling a customer in the processor’s program. Credit card fees represent a fee earned by the Bank for a successful referral to a card-issuing company. ATM surcharges and interchange fees are the result of Bank customers conducting ATM transactions that generate fee income and are processed through multiple card networks. All of these fees are transaction based and are recognized at the time of the transaction.

Gains/Losses on the Sale of Other Real Estate – these are recognized when control of the property transfers to the buyer.

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into longer-term revenue contracts with customers, and therefore, does not experience significant contract balances.

Contract Acquisition Costs

The Corporation expenses all contract acquisition costs as costs are incurred.

‎

1Note ~~15.~~16. Commitments and Contingencies

In the normal course of business, the Bank is a party to financial instruments that are not reflected in the accompanying financial statements and are commonly referred to as off-balance-sheet instruments. These financial instruments are entered into primarily to meet the financing needs of the Bank’s customers and include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated balance sheet.

The Corporation’s exposure to credit loss in the event of nonperformance by other parties to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contract or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.

The Bank had the following outstanding commitments for the periods presented:


	March 31,		December 31,		March 31,		December 31,
(Dollars in thousands)	2022		2021		2023		2022
Financial instruments whose contract amounts represent credit risk
Commercial commitments to extend credit	$	281,285	$	288,075	$	303,262	$	275,867
Consumer commitments to extend credit (secured)		90,243		82,095		92,054		93,124
Consumer commitments to extend credit (unsecured)		5,310		5,389		4,936		5,247
	$	376,838	$	375,559	$	400,252	$	374,238
Standby letters of credit	$	26,487	$	23,284	$	27,819	$	30,734

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses with the exception of home equity lines and personal lines of credit and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, is based on Management’s credit evaluation of the

counterparty. Collateral for most commercial commitments varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. Collateral for secured consumer commitments consists of liens on residential real estate.

Standby letters of credit are instruments issued by the Bank, which guarantee the beneficiary payment by the Bank in the event of default by the Bank’s customer in the nonperformance of an obligation or service. Most standby letters of credit are extended for one-year periods. Generally, the credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supporting those commitments for which collateral is deemed necessary primarily in the form of certificates of deposit and liens on real estate. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. In

On January 1, 2023, the ~~second quarter~~Corporation adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of ~~2018,~~Credit Losses on Financial Instruments, referred to as the ~~Bank established a $2.4 million~~current expected credit loss (CECL) methodology. Upon adoption, $412 thousand was added to the allowance ~~against letters of~~for credit ~~issued in connection with a commercial borrower that declared bankruptcy. In~~losses (ACL) – unfunded commitments. For the first quarter of ~~2020,~~2023, a provision for credit losses-unfunded commitments was recorded and added to the Bank reversed $250 thousand of this reserve as one letter of credit was cancelled. In the second quarter of 2021, the Bank reversed $636 thousand of this reserve as a second letter of credit was cancelled.ACL. At March 31, ~~2022, this reserve~~2023, the ACL-unfunded commitments was $1.9 million compared to $1.5 ~~million. Except for the liability recorded for standby letters of credit, liabilities for credit loss associated with off-balance sheet commitments were not material~~million at ~~March 31, 2022 and~~ December 31, ~~2021.~~2022. The ACL-unfunded commitments is reported in Other Liabilities on the Consolidated Balance Sheet.

Most of the Bank’s business activity is with customers located within its primary market and does not involve any significant concentrations of credit to any one entity or industry.

‎

Legal Proceedings

The nature of the Corporation’s business generates a certain amount of litigation.

The Corporation establishes 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. When the Corporation is able to do so, it also determines estimates of possible losses, whether in excess of any accrued liability or where there is no accrued liability.

These assessments are based on the analysis of currently available information and are subject to significant judgment and a variety of assumptions and uncertainties. As new information is obtained, the Corporation may change its assessments and, as a result, take or adjust the amounts of its accruals and change its estimates of possible losses or ranges of possible losses. Due to the inherent subjectivity of the assessments and the unpredictability of outcomes of legal proceedings, any amounts that may be accrued or included in estimates of possible losses or ranges of possible losses may not represent the actual loss to the Corporation from any legal proceeding. Its exposure and ultimate losses may be higher, possibly significantly higher, than amounts it may accrue or amounts it may estimate.

In management’s opinion, the Corporation does not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of all litigation to which the Corporation is a party at this time will have a material adverse effect on its financial position. The Corporation cannot now determine, however, whether or not any claim asserted against it will have a material adverse effect on its results of operations in any future reporting period, which will depend on, among other things, the amount of loss resulting from the claim and the amount of income otherwise reported for the reporting period. Thus, at March 31, ~~2022,~~2023, the Corporation is 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.

Note ~~16.~~17. Reclassification

Certain prior period amounts may have been reclassified to conform to the current year presentation. Such reclassifications did not affect prior year net income or shareholders’ equity.

‎

2627

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

Management’s Discussion and Analysis of Results of Operations and Financial Condition

For the Three Months Ended March 31, ~~2022~~2023 and ~~2021~~2022

Forward Looking Statements

Certain statements appearing herein which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements refer to a future period or periods, reflecting management’s current views as to likely future developments, and use words such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” or similar terms. Because forward-looking statements involve certain risks, uncertainties and other factors over which the Corporation has no direct control, actual results could differ materially from those contemplated in such statements. These factors include (but are not limited to) the following: general economic conditions, ~~particularly with regard to~~changes in the ~~negative impact~~rates of ~~severe, wide-ranging~~inflation and ~~continuing disruptions caused by, and resulting from,~~ the ~~spread~~effects of ~~the coronavirus COVID-19 pandemic and affects thereof, including governmental responses thereto,~~inflation, changes in interest rates, ongoing disruption in the financial services industry caused by the recent failure and continuous instability of certain banks, changes in the Corporation’s cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, ~~changes in the rate of inflation,~~ changes in technology, the intensification of competition within the Corporation’s market area, and other similar factors. We caution readers not to place undue reliance on these forward-looking statements. They only reflect management’s analysis as of this date. The Corporation does not revise or update these forward-looking statements to reflect events or changed circumstances.

Critical Accounting Policies

Management has identified critical accounting policies for the Corporation. These policies are particularly sensitive, requiring significant judgements, estimates and assumptions to be made by Management.

On January 1, 2023, the Corporation adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit commitments not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, and unfunded credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with the previously applicable incurred loss methodology.

The Corporation has determined this accounting policy to be critical to the results of operations. A summary of the adoption of the new ASU follows:

Investment Securities – Management classifies its debt securities at the time of purchase as available for sale (AFS) or held to maturity (HTM). At March 31, 2023 and December 31, 2022, all debt securities were classified as available for sale, meaning that the Corporation intends to hold them for an indefinite period of time, but not necessarily to maturity. Available for sale debt securities are stated at estimated fair value, adjusted for amortization of premiums and accretion of discounts which are recognized as adjustments of interest income through call date or maturity. The related unrealized gains and losses are reported as other comprehensive income or loss, net of tax, until realized.

With the adoption of CECL on January 1, 2023, the previous concept of other-than-temporary impairment for AFS securities has been eliminated. Under CECL, credit losses on AFS debt securities are recognized in (Allowance for Credit Losses) ACL for investments, through the provision for credit losses, rather than through a direct write-down of the security. In evaluating AFS securities for credit losses, Management considers factors such as delinquency, guarantees, invest grade rating, and specific conditions related to a specific security or industry. If an impaired debt security is sold, any previous ACL on that security is charged-off and any incremental loss will be recognized through earnings. Any improvement in expected credit losses will be recognized by reducing the ACL.

For HTM securities an estimate of current expected credit loss must be established at the time of purchase with changes in estimated credit loss recognized in the ACL through the provision for credit losses.

Prior to January 1, 2023, declines in the fair value of securities was recorded under the other-than-temporary impairment concept more fully described in the Corporation’s report on Form 10-K as of December 31, 2022.

Realized securities gains and losses are computed using the specific identification method. Gains or losses on the disposition of debt investment securities are recorded on the trade date, based on the net proceeds and the adjusted carrying amount of the specific security sold. Equity investments are carried at fair value with changes in fair value recognized in net income.

Allowance for Credit Losses – Loans

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

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

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

The Corporation has elected to exclude accrued interest receivable from the measurement of the ACL. When a loan is placed on nonaccrual status, any outstanding accrued interest is reversed against income. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

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

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

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

Using third party data, the Bank determines a reasonable and supportable economic forecast that it believes is likely to exist for the next 4 quarters.

The historical peer credit loss rate is applied to each WARM bucket though the initial 4 quarter forecast period.

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

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

The qualitative component for the pool utilizes a risk matrix comprised of eight risk factors and assigns a risk level to each factor. The risk factors give consideration to changes in: lending policy, procedures and practice; economic

conditions; nature and volume of loans; experience of lending team; volume of past due loans; quality of the loan review system; concentrations of credit; and other external factors. The risk levels are measured in basis points and range from minimal risk (0 basis points) to very high risk (20 basis points); and collectively range from 0 to 160 basis points. The qualitative risk level is determined independently for commercial loans, residential mortgage loans and consumer loans.

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

Allowance for Credit Losses – Unfunded Commitments

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

There were no other changes to the critical accounting policies disclosed in the ~~2021~~2022 Annual Report on Form 10-K in regards to application or related judgments and estimates used. Please refer to Item 7 of the Corporation’s ~~2021~~2022 Annual Report on Form 10-K for a more detailed disclosure of the critical accounting policies.

Results of Operations

Summary

Franklin Financial Services Corporation reported consolidated earnings of ~~$3.0~~$3.3 million ($~~.67~~0.75 per diluted share) for the first quarter of ~~2022~~2023 compared to ~~$4.8~~$3.0 million ($~~1.09~~0.67 per diluted share) for the same period in ~~2021, and $3.7 million ($.82 per diluted share) for the fourth quarter of 2021.~~2022.

A summary of operating results for the first quarter of ~~2022~~2023 are as follows:

Net interest income was $12.8 million for the first quarter of 2023 compared to $10.8 million ~~inclusive of $384 thousand of interest and fees from Paycheck Protection Program (PPP) loans, compared to $11.4 million (including $488 thousand of PPP fees and interest) in~~for the ~~fourth~~first quarter of ~~2021 (including $883 thousand of PPP interest and fees). All deferred PPP fees have been fully recognized as of March 31,~~ 2022. The net interest margin increased to 3.41% for the first quarter of 2023 from 2.66% for the same quarter of the prior year. The increase in the 2023 net interest margin was ~~2.66%~~due primarily to an increase in the yield on earning assets from 2.83% in 2022 to 4.38% in 2023 as all asset classes had higher yields in 2023. The cost of interest-bearing deposits rose from .15% in the first quarter of 2022 to 1.14% for the first quarter of 2023. Likewise, the total cost of deposits increased from 0.12% for the first quarter of 2022 ~~compared~~ to ~~2.79% for the fourth quarter of 2021 and 3.03%~~0.92% for the first quarter of ~~2021. The net interest margin continued to experience downward pressure into 2022~~2023 and was 1.02% as ~~the yield on earning assets fell from 3.23% for the first quarter~~ of ~~2021 to 2.83% for the first quarter of 2022. Over this same period the cost of all deposits only decreased from 0.14% in 2021 to 0.12% in 2022.~~March 31, 2023.
‎

Average earning assets for ~~2022~~2023 were $1.7 billion compared to ~~$1.5~~$1.8 billion ~~for the first quarter~~in 2022, a decrease of ~~2021, an increase of 12.2%~~5.5%. ~~Over the comparative period,~~In 2023, the average balance of ~~interest-bearing~~interest-earning cash balances ~~increased $79.0~~decreased $114.3 million ~~(100.1%~~(72.3%), to support loan growth and to offset a decrease in average deposits during the year. The average balance of the investment portfolio ~~increased $117.6~~decreased $55.4 million ~~(28.8%~~(10.5%), and the average balance of the loan portfolio ~~decreased $13.3~~increased $48.6 million ~~(1.3%~~(4.9%)., over the prior year averages. Within the loan portfolio, average commercial loan balances increased $28.1 million during the year and residential mortgages increased $20.9 million. Total deposits averaged $1.5 billion for 2023, a decrease of $72.3 million (4.6%) over the average balance for 2022, reflecting deposit reductions of ~~PPP~~more than $64 million in December 2022. All deposit categories reported a year-over-year decrease in average balances, except for savings deposits.
‎

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, ~~declined from $54.6 million~~an increase of $411 thousand to the ACL for unfunded commitments (carried in Other Liabilities on the consolidated balance sheet), and an increase of $98 thousand to retained earnings, and a deferred tax liability of $26 thousand. The provision for credit losses for the first quarter of ~~2021 to $5.6 million~~2023 was calculated using the CECL model and methodology, while the provision for ~~the first quarter of 2022. Total deposits averaged $1.6 billion~~loan losses for the first quarter of 2022 ~~an increase~~was calculated under the previous methodology in accordance with GAAP. For the first quarter of ~~$190.9 million (13.8%) over~~2023, the ~~average balance~~provision for credit losses was $592 thousand allocated between the provision for loans of $467 thousand and the provision for unfunded commitments of $62 thousand. The provision for loan loss expense for the ~~same period~~first quarter of ~~2021. All deposit categories reported a year-over-year increase in average balances except~~2022 was $0. The ACL ratio for ~~time deposits, which decreased by $1.7~~loans was 1.31% at March 31, 2023 compared to 1.35% at December 31, 2022. The ACL for unfunded commitments was $1.9 million ~~or 2.3%.~~ compared to $1.5 million at December 31, 2022.
‎

2730

~~The provision for loan loss was $0~~Noninterest income totaled $3.2 million for the first quarter of ~~2022~~2023 compared to ~~a reversal of $800 thousand during the same period of 2021. The negative provision expense~~$3.9 million in the first quarter of ~~2021 resulted from the reversal~~2022 (a decrease of ~~provision expense previously recorded in 2020 due to the uncertain economic effect of the pandemic as credit quality stabilized. The allowance~~17.0%) and $3.6 million for ~~loan loss ratio was 1.50% of gross loans as of March 31, 2022, compared to 1.61% one year earlier.~~
‎

~~Noninterest income for the first quarter of 2022 was $3.9 million. Compared to~~ the fourth quarter of ~~2021, this represents~~2022. The decrease year-over-year was due to a decrease of ~~$704~~$181 thousand ~~(15.4%) from $4.6 million. Significant variances to the fourth quarter~~in gains on sale of ~~2021 include: loan service charges (down $140 thousand)~~mortgages and ~~gains~~losses on the sale of ~~mortgages (down $301 thousand). In comparison to the first quarter for 2021, the current quarter results represent~~investment securities of $602 thousand taken as part of a ~~decrease~~portfolio restructuring. The changes were partially offset by an increase of ~~$343~~$186 thousand (8.1%) from $4.2 million. Significant variances to the first quarter of 2021 include: Investment and Trust Services fees (up $192 thousand), deposit fees (up $155 thousand) and gains on the sale of mortgages (down $528 thousand). in loan service charges.

‎

Noninterest expense for the first quarter of 2023 was $12.0 million compared to $11.3 million in the first quarter of 2022 ~~was $11.3 million. Compared to~~(an increase of 6.7%) and $13.2 million for the fourth quarter of ~~2021, this represents a decrease of $715 thousand (6.0%) from $12.0 million. The most significant variance~~2022. Contributing to the ~~fourth quarter of 2021~~year-over-year increase was a decrease in salary and benefit expense of $553 thousand, primarily in incentive compensation expense and health insurance expense. In comparison to the first quarter of 2021, the current quarter results represent an increase of ~~$1.1 million (10.8%). Significant variances to the first quarter of 2021 include:~~$570 thousand in salaries and benefits ~~(up $708~~(primarily salaries due to a highly competitive labor market) and net occupancy increased $136 thousand ~~primarily~~from costs associated with the new headquarters and operations center that was put in ~~salary expense and incentive compensation expense), marketing and advertising (up $152 thousand) and data processing (up $208 thousand).~~
‎service in July 2022.

The effective federal income tax rate was ~~12.1%~~6.3% for the first quarter of ~~2022, 13.4% for~~2023 and reflects the ~~fourth quarter~~benefit of ~~2021, and 15.4% for~~a $280 thousand tax credit that was recorded during the ~~first quarter of 2021.~~quarter. Without the tax credit, the effective rate would have been 14.3%.

‎

Total assets at March 31, ~~2022~~2023 were ~~$1.767~~$1.7 billion ~~compared to $1.774 billion at~~unchanged from December 31, ~~2021.~~2022; however, the composition of the balance sheet changed since year-end. Significant balance sheet changes since December 31, ~~2021,~~2022, include: 

Short-term ~~interest-bearing~~interest-earning deposits in other banks ~~decreased $9.2~~increased $21.6 million (45.9%) and the investment portfolio ~~carried at fair value~~ decreased ~~$18.3~~$29.1 million ~~due~~(6.0%). Approximately $33 million of investments were sold during the quarter as part of a portfolio restructuring to ~~decreases in the fair value~~take advantage of ~~securities.~~ higher market interest rates.
‎

The net loan portfolio increased ~~$2.2~~$26.4 million (2.5%) over the year-end ~~2021 balance. During the quarter, the~~2022 balance, primarily from an increase in commercial purpose loans of ~~PPP loans decreased~~$31.5 million from ~~$7.8 million at December 31, 2021 to $2.9 million at March 31,~~year-end 2022. Without the PPP payoffs, net loans would have increased approximately $7.0 million. Commercial loans, net of PPP loans, were unchanged at $767.0 million while mortgage and home equity loans increased slightly.

Deposits ~~increased $12.0~~decreased $49.3 million ~~(0.8%~~(3.2%) over year-end ~~2021, with all deposit products showing~~2022, primarily from a decrease in interest-bearing checking and money management accounts, that was partially offset by an increase ~~except~~in time deposits. The largest decrease occurred in municipal accounts, reversing much of the growth in these account deposits ~~which decreased by $5.0~~that occurred during 2022 as some accounts sought higher yielding products. Time deposits showed an increase of $16.2 million due to the addition of $8.6 million in brokered CDs and retail depositors seeking higher rates. The Bank’s cost of deposits has increased from .64% at December 31, 2022 to 1.02% at March 31, 2023. At March 31, 2023, the Bank estimated that approximately 92% of its deposits were FDIC insured or ~~6.7%. Money management accounts~~collateralized.

At March 31, 2023, the Bank had borrowed $50.0 million from the Federal Reserve through the Bank Term Funding Program (BTFP) to temporarily support its liquidity position. The Bank has additional funding capacity in the BTPF, the Federal Reserve Discount Window and ~~interest-bearing checking products showed~~ the ~~largest increases over the prior year-end.~~ Federal Home Loan Bank.
‎

Shareholders’ equity ~~decreased $19.9~~increased $9.4 million from December 31, ~~2021. During the quarter, shareholders’ equity~~2022. Retained earnings increased ~~by $1.6~~$2.0 million ~~from retained earnings, but this was more than offset by a $22 million decrease~~ in 2023 and accumulated other comprehensive income (AOCI) increased $7.3 million as the fair value of the investment portfolio ~~declined as a result of an increase in market interest rates.~~increased during the year. At March 31, ~~2022,~~2023, the book value of the Corporation’s common stock was ~~$30.77~~$28.07 per share ~~down from $35.36 per share at year-end 2021, reflecting~~and the ~~effect of the decrease in AOCI on book value. The~~ tangible book value ~~fell from $33.34~~was $26.02 per ~~share at year-end 2021 to $28.75 at quarter end.~~share. In December ~~2021,~~2022, an open market repurchase plan was approved to repurchase 150,000 shares over a one-year period and no8,752 shares have been repurchased in 2023 and 11,600 shares have been repurchased under ~~this program~~the approved plan as of March 31, ~~2022.~~2023. The Bank is considered to be well- capitalized under regulatory guidance as of March 31, 2023.

‎

2831

Key performance ratios as of, or for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 and the year ended December 31, ~~2021~~2022 are listed below:


	March 31,		December 31,		March 31,		March 31,		December 31,		March 31,
(Dollars in thousands, except per share)	2022		2021		2021		2023		2022		2022

Balance Sheet Highlights
Total assets	$	1,767,061	$	1,773,806	$	1,597,559	$	1,711,285	$	1,699,579	$	1,767,061
Investment and equity securities		511,969		530,292		422,622		458,154		487,247		511,969
Loans, net		985,927		983,746		984,797		1,063,337		1,036,866		985,927
Deposits		1,596,386		1,584,359		1,421,042		1,502,110		1,551,448		1,596,386
Shareholders' equity		137,136		157,065		140,699		123,583		114,197		137,136

Summary of Operations
Interest income	$	11,534	$	47,573	$	11,592	$	16,583	$	56,449	$	11,534
Interest expense		726		2,902		748		3,746		4,863		726
Net interest income		10,808		44,671		10,844		12,837		51,586		10,808
Provision for loan losses		—		(2,100)		(800)
Provision for credit losses								529		650		—
Net interest income after provision for loan losses		10,808		46,771		11,644		12,308		50,936		10,808
Noninterest income		3,884		19,488		4,227		3,225		15,250		3,884
Noninterest expense		11,266		43,245		10,165		12,019		48,691		11,266
Income before income taxes		3,426		23,014		5,706		3,514		17,495		3,426
Federal income tax expense		414		3,398		876		222		2,557		414
Net income	$	3,012	$	19,616	$	4,830	$	3,292	$	14,938	$	3,012

Performance Measurements
Return on average assets*		0.69%		1.17%		1.23%		0.80%		0.83%		0.69%
Return on average equity*		7.96%		13.20%		13.47%		11.33%		11.64%		7.96%
Return on average tangible equity (1)*		8.47%		14.05%		14.37%		12.11%		12.52%		8.47%
Efficiency ratio (1)		75.50%		66.12%		66.06%		72.02%		71.21%		75.50%
Net interest margin*		2.66%		2.88%		3.03%		3.41%		3.11%		2.66%

Shareholders' Value (per common share)
Diluted earnings per share	$	0.67	$	4.42	$	1.09	$	0.75	$	3.36	$	0.67
Basic earnings per share		0.68		4.44		1.10		0.75		3.38		0.68
Regular cash dividends declared		0.32		1.25		0.30		0.96		1.28		0.93
Book value		30.77		35.36		31.92		28.07		26.01		30.77
Tangible book value (1)		28.75		33.34		29.87		26.02		23.96		28.75
Market value		33.58		33.10		31.18		29.64		36.10		33.58
Market value/book value ratio		109.13%		93.61%		97.68%		105.59%		138.79%		109.13%
Market value/tangible book value ratio		116.82%		99.29%		104.37%		113.91%		150.67%		116.82%
Price/earnings multiple*		12.53		7.49		7.15		9.88		10.74		12.53
Current quarter dividend yield*		3.81%		3.87%		3.85%
Current quarter dividend yield								4.32%		3.55%		3.81%
Dividend payout ratio year-to-date		47.18%		28.16%		27.29%		42.68%		37.88%		47.18%

Safety and Soundness
Average equity/average assets		8.60%		8.89%		9.16%		7.09%		7.17%		8.60%
Risk-based capital ratio (Total)		18.09%		18.41%		18.18%		17.21%		17.21%		18.09%
Leverage ratio (Tier 1)		8.59%		8.52%		8.76%		9.58%		8.95%		8.59%
Common equity ratio (Tier 1)		14.94%		15.20%		14.80%		14.24%		14.22%		14.94%
Nonperforming loans/gross loans		0.74%		0.74%		0.88%
Nonperforming loans / gross loans								0.02%		0.01%		0.74%
Nonperforming assets/total assets		0.42%		0.42%		0.55%		0.01%		0.01%		0.42%
Allowance for loan losses as a % of loans		1.50%		1.51%		1.61%
Net loans (charged-off) recovered/average loans*		-0.01%		0.04%		0.06%
Allowance for credit losses as a % of loans								1.31%		1.35%		1.50%
Net loans (charged-off) recovered / average loans*								0.00%		-0.15%		-0.01%

Assets under Management
Trust assets under management (fair value)	$	920,597	$	946,964	$	860,794	$	942,025	$	904,317	$	920,597
Held at third-party brokers (fair value)		111,742		118,046		118,180		124,483		116,398		111,742

*Year-to-date annualized

(1) See the section titled “GAAP versus Non-GAAP Presentation” that follows.

2932

GAAP versus non-GAAP Presentations – The Corporation supplements its traditional GAAP measurements with certain non-GAAP measurements to evaluate its performance and to eliminate the effect of intangible assets. By eliminating intangible assets (Goodwill), the Corporation believes it presents a measurement that is comparable to companies that have no intangible assets or to companies that have eliminated intangible assets in similar calculations. However, not all companies may use the same calculation method for each measurement. The non-GAAP measurements are not intended to be used as a substitute for the related GAAP measurements. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP. In the event of such a disclosure or release, the Securities and Exchange Commission’s Regulation G requires: (i) the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a reconciliation of the differences between the non-GAAP financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP. The following table shows the calculation of the non-GAAP ~~measurements.~~measurements as of, or for the three months ended March 31, 2023 and 2022 and the year ended December 31, 2022.


(Dollars in thousands, except per share)	Three Months Ended		Twelve Months Ended		Three Months Ended
	March 31, 2022		December 31, 2021		March 31, 2021		March 31, 2023		December 31, 2022		March 31, 2022
Return on Tangible Equity (non-GAAP)
Net income	$	3,012	$	19,616	$	4,830	$	3,292	$	14,938	$	3,012

Average shareholders' equity		151,290		148,637		143,439		117,785		128,283		151,290
Less average intangible assets		(9,016)		(9,016)		(9,016)		(9,016)		(9,016)		(9,016)
Average tangible equity (non-GAAP)		142,274		139,621		134,423		108,769		119,267		142,274

Return on average tangible equity (non-GAAP)*		8.47%		14.05%		14.37%		12.11%		12.52%		8.47%

Tangible Book Value (per share) (non-GAAP)
Shareholders' equity	$	137,136	$	157,065	$	140,699	$	123,583	$	114,197	$	137,136
Less intangible assets		(9,016)		(9,016)		(9,016)		(9,016)		(9,016)		(9,016)
Tangible book value (non-GAAP)		128,120		148,049		131,683		114,567		105,181		128,120

Shares outstanding (in thousands)		4,457		4,441		4,408		4,403		4,390		4,457

Tangible book value per share (non-GAAP)		28.75		33.34		29.87	$	26.02	$	23.96	$	28.75

Efficiency Ratio
Noninterest expense	$	11,266	$	43,245	$	10,165	$	12,019	$	48,691	$	11,266

Net interest income		10,808		44,671		10,844		12,837		51,586		10,808
Plus tax equivalent adjustment to net interest income		240		1,466		370		—		1,381		240
Plus noninterest income, net of securities transactions		3,873		19,271		4,173		3,851		15,410		3,873
Total revenue		14,921		65,408		15,387		16,688		68,377		14,921

Efficiency ratio (Noninterest expense/total revenue)		75.50%		66.12%		66.06%		72.02%		71.21%		75.50%

* Year-to-date annualized

Net Interest Income

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

3034

Comparison of the three months ended March 31, 20222023 to the three months ended March 31, 2021:2022:

Tax equivalent net interest income ~~decreased $166 thousand~~increased $2.1 million to ~~$11.0~~$13.1 million in the first quarter of ~~2022~~2023 compared to ~~$11.2~~$11.0 million for the same period in ~~2021.~~2022. Balance sheet volume contributed $44 thousand to the increase and a ~~$1.2 million increase to tax equivalent net interest income offset by changes~~change in rates ~~of $1.4~~added $2.1 million.

The following table presents average balances, tax-equivalent (T/E) interest income, and yields earned or rates paid on the assets or liabilities. Loans are ~~presented~~classified by ~~primary loan~~type of collateral and residential loans include commercial purpose loans and nonaccrual loans are included in the average loan balance used to calculate the yield. All nontaxable interest income has been adjusted to a tax-equivalent basis using a tax rate of 21%.


	For the Three Months Ended March 31,										For the Three Months Ended March 31,
	2022					2021					2023					2022

	Average		Income or		Average	Average		Income or		Average	Average		Income or		Average	Average		Income or		Average
(Dollars in thousands)	balance		expense		yield/rate	balance		expense		yield/rate	balance		expense		yield/rate	balance		expense		yield/rate

Interest-earning assets:
Interest-bearing obligations in other banks	$	157,942	$	98	0.25%	$	78,930	$	53	0.27%
Interest-earning obligations in other banks											$	43,684	$	423	3.92%	$	157,942	$	98	0.25%
Investment securities:
Taxable		434,489		1,844	1.72%		315,673		1,626	2.09%		407,326		3,459	3.44%		434,489		1,844	1.72%
Tax Exempt		91,594		615	2.72%		92,773		668	2.88%
Tax exempt												63,309		461	2.95%		91,594		615	2.72%
Investments		526,083		2,459	1.90%		408,446		2,294	2.28%		470,635		3,920	3.38%		526,083		2,459	1.90%
Loans:
Commercial, industrial and agricultural		845,633		8,017	3.84%		858,360		8,372	3.90%
Residential mortgage		64,550		553	3.47%		67,886		603	3.58%
Home equity loans and lines		85,231		547	2.60%		81,920		525	2.60%
Residential real estate 1-4 family:
First liens												150,276		1,614	4.36%		134,206		1,302	3.93%
Junior liens and lines of credit												72,930		925	5.14%		71,470		417	2.37%
Residential real estate - construction												24,408		307	5.09%		21,308		185	3.52%
Commercial real estate												563,219		6,931	4.99%		522,389		4,886	3.79%
Commercial												233,246		2,651	4.61%		246,041		2,327	3.84%
Consumer		6,132		100	6.61%		6,714		115	6.95%		6,111		123	8.15%		6,132		100	6.61%
Loans		1,001,546		9,217	3.73%		1,014,880		9,615	3.80%		1,050,190		12,551	4.85%		1,001,546		9,217	3.73%
Total interest-earning assets		1,685,571	$	11,774	2.83%		1,502,256	$	11,962	3.23%		1,564,509	$	16,894	4.38%		1,685,571	$	11,774	2.83%
Other assets		72,830					62,905					96,643					72,830
Total assets	$	1,758,401				$	1,565,161				$	1,661,152				$	1,758,401

Interest-bearing liabilities:
Deposits:
Interest-bearing checking	$	509,049	$	142	0.11%	$	426,410	$	113	0.11%	$	470,061	$	410	0.35%	$	509,049	$	142	0.11%
Money Management		580,399		231	0.16%		513,083		199	0.16%		557,551		2,739	1.99%		580,399		231	0.16%
Savings		123,150		17	0.06%		106,046		15	0.06%		126,898		48	0.15%		123,150		17	0.06%
Time		72,416		73	0.41%		74,146		158	0.86%		62,212		232	1.52%		72,416		73	0.41%
Total interest-bearing deposits		1,285,014		463	0.15%		1,119,685		485	0.18%		1,216,722		3,429	1.14%		1,285,014		463	0.15%

Subordinated Notes		19,592		263	5.37%		19,558		263	5.37%
Subordinated notes												19,626		266	5.42%		19,592		263	5.37%
Short-term borrowings												4,667		51	4.40%		—		—	-
Total interest-bearing liabilities		1,304,606		726	0.23%		1,139,243		748	0.27%		1,241,015		3,746	1.22%		1,304,606		726	0.23%
Noninterest-bearing deposits		292,041					266,491					288,004					292,041
Other liabilities		10,464					15,988					14,348					10,464
Shareholders' equity		151,290					143,439					117,785					151,290
Total liabilities and shareholders' equity	$	1,758,401				$	1,565,161				$	1,661,152				$	1,758,401
T/E net interest income/Net interest margin				11,048	2.66%				11,214	3.03%				13,148	3.41%				11,048	2.66%
Tax equivalent Adjustment				(240)					(370)
Tax equivalent adjustment														(311)					(240)
Net interest income			$	10,808				$	10,844				$	12,837				$	10,808

Net Interest Spread					2.60%					2.96%					3.16%					2.60%
Cost of Funds					0.18%					0.22%					0.99%					0.18%
Cost of Deposits					0.12%					0.14%					0.92%					0.12%

Provision for LoanCredit Losses

For the first quarter of 2023, the provision for credit losses was $592 thousand allocated between the provision for loans of $467 thousand and the provision for unfunded commitments of $62 thousand. The ~~Bank had~~ provision for loan loss expense ~~of $0~~ for the first quarter of 2022 was $0. The ACL ratio for loans was 1.31% at March 31, 2023 compared to ~~a reversal of $800 thousand in the first quarter of 2021.~~1.35% at December 31, 2022. The ACL for unfunded commitments was $1.9 million compared to $1.5 million at December 31, 2022. For more information refer to the Loan Quality and Allowance for ~~Loan~~Credit Losses discussion in the Financial Condition section.

Noninterest Income

For the first quarter of ~~2022,~~2023, noninterest income decreased ~~$343~~$659 thousand from the same period in ~~2021. Investment and trust~~2022. Loan service ~~fees~~charges increased ~~primarily due to an increase~~but was offset by a decrease in ~~asset management fees. Gains~~gains on sale of loans ~~decreased~~ as the volume of mortgages sold decreased. ~~Deposit service charges increased due to increased usage~~Losses on the sale of ~~retail deposit products and overdraft protection.~~investment securities of $602 thousand were taken as part of a portfolio restructuring.

The following table presents a comparison of noninterest income for the three months ended March 31, ~~2022~~2023 and ~~2021:~~2022:


	For the Three Months Ended							For the Three Months Ended
	March 31,				Change			March 31,				Change
(Dollars in thousands)	2022		2021		Amount		%	2023		2022		Amount		%
Noninterest Income
Investment and trust services fees	$	1,828	$	1,636	$	192	11.7	$	1,834	$	1,828	$	6	0.3
Loan service charges		116		196		(80)	(40.8)		302		116		186	160.3
Gain on sale of loans		254		782		(528)	(67.5)		73		254		(181)	(71.3)
Deposit service charges and fees		623		468		155	33.1		583		623		(40)	(6.4)
Other service charges and fees		412		396		16	4.0		432		412		20	4.9
Debit card income		458		517		(59)	(11.4)		502		458		44	9.6
Increase in cash surrender value of life insurance		108		115		(7)	(6.1)		108		108		—	—
Net (losses) gains on sales of debt securities									(602)		—		(602)	NA
Change in fair value of equity securities		11		54		(43)	(79.6)		(24)		11		(35)	(318.2)
Other		74		63		11	17.5		17		74		(57)	(77.0)
Total noninterest income	$	3,884	$	4,227	$	(343)	(8.1)	$	3,225	$	3,884	$	(659)	(17.0)

Noninterest Expense

Noninterest expense for the first quarter of ~~2022~~2023 increased ~~$1.1 million~~$753 thousand compared to the same period in ~~2021.~~2022. Salary expense increased primarily due to ~~additional expense for incentive compensation programs~~a highly competitive labor market, while net occupancy increased from costs associated with the new headquarters and new positions. Marketing and advertising expense increased primarily from sponsorships of community events. Data processing expenses were higher due primarily to the implementation of a customer relationship management platformoperations center that ~~began~~was put in ~~the fourth quarter of 2021.~~service in July 2022.

The following table presents a comparison of noninterest expense for the three months ended March 31, ~~2022~~2023 and ~~2021:~~2022:


	For the Three Months Ended							For the Three Months Ended
(Dollars in thousands)	March 31,				Change			March 31,				Change
Noninterest Expense	2022		2021		Amount		%	2023		2022		Amount		%
Salaries and benefits	$	6,366	$	5,658	$	708	12.5	$	6,936	$	6,347	$	589	9.3
Net occupancy		974		910		64	7.0		1,110		974		136	14.0
Marketing and advertising		497		345		152	44.1		519		497		22	4.4
Legal and professional		515		475		40	8.4		552		515		37	7.2
Data processing		1,137		929		208	22.4		1,060		1,137		(77)	(6.8)
Pennsylvania bank shares tax		143		92		51	55.4		223		143		80	55.9
FDIC insurance		183		202		(19)	(9.4)		182		183		(1)	(0.5)
ATM/debit card processing		346		296		50	16.9		294		346		(52)	(15.0)
Telecommunications		92		129		(37)	(28.7)		100		92		8	8.7
Nonservice pension		69		205		(136)	(66.3)		(29)		69		(98)	(142.0)
Other		944		924		20	2.2		1,072		963		109	11.3
Total noninterest expense	$	11,266	$	10,165	$	1,101	10.8	$	12,019	$	11,266	$	753	6.7

Provision for Income Taxes

For the first quarter of ~~2022,~~2023, the Corporation recorded a Federal income tax expense of ~~$414~~$222 thousand compared to ~~$876~~$414 thousand for the same quarter in ~~2021.~~2022. The effective tax rate for the first quarter of ~~2022~~2023 was ~~12.1%~~6.3% and reflects the benefit of a $280 thousand tax credit recorded during the quarter. Without the tax credit, the effective rate would have been 14.3% compared to ~~15.4%~~12.1% for the first quarter of ~~2021.~~ ~~The decrease in the effective tax rate was due primarily to lower pre-tax income driven by the reversal in the provision for loan loss expense in 2021 compared to no provision expense in 2022~~.2022. The federal statutory tax rate is 21% for ~~2022~~2023 and ~~2021.~~2022.

‎

Financial Condition

Cash and Cash Equivalents:

Cash and cash equivalents totaled ~~$173.7~~$86.6 million at March 31, ~~2022, a decrease~~2023, an increase of ~~$1.4~~$21.7 million from the prior year-end balance of ~~$175.1~~$64.9 million. ~~Interest-bearing~~Short-term interest-earning deposits are held primarily at the Federal Reserve ($~~153.9~~68.1 million).

Investment Securities:

AFS Securities: The AFS securities portfolio has ~~increased $9.4~~decreased $38.3 million on aan amortized cost basis since year-end ~~2021.~~2022. The portfolio is comprised primarily of ~~municipal securities and~~ mortgage and asset-backed securities issued by U.S. Agencies and municipal securities at approximately ~~38%~~32% and ~~33%~~32% of the portfolio fair value, respectively. The weighted average life of the portfolio was ~~6.0 years.~~5.6 years and the effective duration is 4.40%.

The AFS securities portfolio had a net unrealized loss of ~~$23.6~~$52.3 million at March 31, ~~2022~~2023 compared to a net unrealized ~~gain~~loss of ~~$4.1~~$61.5 million at the prior year-end. This change was primarily due to a decrease in long-term market interest rates. The portfolio averaged ~~$526.1~~$470.6 million with a tax-equivalized yield of ~~1.90%~~3.38% for the ~~first~~ three months ~~of 2022.~~ended March 31, 2023. This compares to an average of ~~$408.4~~$526.1 million and a tax-equivalized yield of ~~2.28%~~1.90% for the same period in ~~2021.~~2022. Impairment in the investment portfolio, measured by gross unrealized losses, was $52.4 million, compared to $61.5 million at December 31, 2022.

The municipal bond portfolio had the largest gross unrealized loss of $24.6 million, 47% of the total gross unrealized loss. The municipal bond portfolio is well diversified geographically ~~(203~~(161 issuers) and is comprised primarily of general obligation bonds ~~(63%~~(67%). Many municipal bonds have credit enhancements in the form of private bond insurance or other credit support. The largest geographic municipal bond exposure is in the states of Texas ~~(14%~~(15%), Pennsylvania (13%), California ~~(11%), Pennsylvania (11%~~(12%), and Michigan (10%). The average rating of the municipal portfolio from Moody’s is AA. No municipal bonds are rated below investment grade.

Temporary impairment in the investment portfolio, measured by gross unrealized losses, was $24.6 million, compared to $4.7 million at December 31, 2021. The municipal bond portfolio had the largest unrealized loss of $10.9 million, 44% of the total unrealized loss ($24.6 million). There are 179 securities in this portfolio with an unrealized loss and the loss in this portfolio is deemed to be non-credit related and no other-than-temporary impairment charges have been recorded.

The corporate portfolio is comprised predominantly of ~~5 variable rate bank issued trust preferred securities with a fair value of $4.1 million and 43~~46 fixed rate community bank issued subordinated notes with a fair value of ~~$20.6~~$20.0 million and gross unrealized losses of $2.1 million. ~~This~~The majority of these securities are not rated.

The non-agency mortgage and asset-backed securities portfolio ~~has an~~had a gross unrealized loss of ~~$639 thousand on 34~~$4.7 million. The majority of these securities, with a fair value of ~~$17.8 million. The trust-preferred securities held by~~$46.2 million, are investment grade rated while the ~~Bank~~remaining $21.7 million of fair value are ~~single entity issues, not pooled trust preferred securities. None~~unrated. Many of these ~~issuers~~securities have ~~suspended or missed a dividend or interest payment.~~ credit enhancement in the form of subordination and overcollateralization.

At March 31, ~~2022,~~2023, the Bank believes it will be able to collect all interest and principal due on impaired securities and the decline in fair value below amortized cost is due to changing interest rates and not due to credit related factors; therefore, the Bank has no allowance for credit loss for these ~~bonds~~investments. The Bank does not have the intent to sell, and ~~no other-than-temporary-impairment charges were recorded.~~

~~The unrealized loss in the non-agency mortgage and asset-backed securities portfolio increased $880 thousand from December 31, 2021. Many~~does not believe it will more likely than not be required to sell, any of these securities ~~have credit enhancement in the form~~prior to a recovery of ~~overcollateralization. Management fully expects~~their fair value to ~~be paid back at par and no other-than-temporary impairment charges have been recorded.~~amortized cost.

Restricted Stock at Cost: The Bank held ~~$507~~$644 thousand of restricted stock at March 31, ~~2022.~~2023. Except for $30 thousand, this investment represents stock in FHLB Pittsburgh. The Bank is required to hold this stock to be a member of FHLB and it is carried at cost of $100 per share. The level of FHLB stock held is determined by FHLB and is comprised of a minimum membership amount plus a variable activity amount. 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. 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.

See Note 4 of the accompanying financial statements for additional information on Investment Securities.

Loans:

Residential real estate: This category is comprised of consumer purpose loans secured by residential real estate and to a lesser extent, commercial purpose loans secured by residential real estate. The consumer purpose category represents traditional residential mortgage loans and home equity products (primarily junior liens and lines of credit). Commercial purpose loans in this category represent loans made for various business needs but are secured with residential real estate. In addition to the real estate collateral, it is possible that additional security is provided by personal guarantees or UCC filings. These loans are underwritten as commercial loans and are not originated to be sold.

Total residential real estate loans increased by ~~$2.0~~$11.0 million over year-end ~~2021.~~2022. For the first three months of ~~2022,~~2023, the Bank originated ~~$25.5~~$5.0 million of mortgages held for sale and sold ~~$14.0~~$5.4 million ~~in mortgages~~ through third party brokerage agreements. 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.

Residential real estate construction: This category contains loans for the vertical construction of 1-4 family residential properties. The largest component of this category represents loans to residential real estate developers ($~~13.1~~9.9 million), while loans for individuals to construct personal residences totaled ~~$8.4~~$9.6 million at March 31, ~~2022.~~2023. The Bank’s exposure

to residential construction loans is concentrated primarily in south central Pennsylvania. Real estate construction loans, including residential real estate and land development loans, occasionally provide an interest reserve in order to assist the developer during the development stage when minimal cash flow is generated. All real estate construction loans are underwritten in the same manner, regardless of the use of an interest reserve.

Commercial real estate (CRE): This category includes commercial, industrial, farm and agricultural loans and land development loans, where real estate serves as the primary collateral for the loans. Total commercial real estate loans increased to ~~$524.1~~$575.5 million from ~~$522.8~~$566.7 million at the end of ~~2021.~~2022. The largest sectors (by collateral) in the commercial real estate category are: apartment buildings ($97.0 million), hotels and motels ($~~80.8 million), apartment units ($74.7~~80.5 million), office buildings ($~~48.4~~61.8 million), ~~land development~~shopping centers ($~~46.6~~55.9 million), and ~~manufacturing facilities~~development land ($~~37.3~~45.6 million). Within the office building portfolio, approximately 34% of total office building exposure is to owner occupied properties. The majority of the Bank’s hotel exposure is located along the Interstate 81 (I-81) corridor through south-central Pennsylvania. The portfolio is comprised of properties operating under 1813 flagged brands and 3 independent operators.

Also included in CRE are real estate construction loans totaling ~~$95.5~~$92.0 million. At March 31, ~~2022,~~2023, the Bank had ~~$59.5~~$26.2 million in real estate construction loans funded with an interest reserve and capitalized ~~$131~~$251 thousand of interest in ~~2022~~2023 from these reserves on active projects for commercial construction. Real estate construction loans are monitored on a regular basis by either an independent third-party inspector or the assigned loan officer depending on loan amount or complexity of the project. This monitoring process includes at a minimum, the submission of invoices and American Institute of Architects (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.

Commercial: This category includes commercial, industrial, farm, agricultural, and municipal loans. Commercial loans ~~decreased $1.5~~increased $11.4 million to ~~$243.0~~$247.0 million at March 31, ~~2022,~~2023, compared to ~~$244.5~~$235.6 million at the end of ~~2021 primarily due to $4.9 million of PPP forgiveness.~~2022. At March 31, ~~2022,~~2023, the balance of PPP loans was ~~$2.9 million,~~$88 thousand, down from ~~$7.8 million~~$179 thousand at ~~year-end, which are 100% guaranteed by the SBA.~~year-end. At March 31, ~~2022,~~2023, the Bank had approximately ~~$135.0~~$119.0 million in tax-free ~~loans in the commercial portfolio.~~loans. The largest sectors (by industry) in the commercial category are: utilities ($42.8 million), public administration ($~~51.6 million), utilities ($45.4~~42.7 million), real estate rental and leasing ($~~20.0~~24.9 million), ~~finance and insurance~~manufacturing ($~~13.2~~15.8 million) and ~~manufacturing~~retail trade ($~~13.2~~13.9 million).

Participations: The Bank may supplement its own commercial loan production by purchasing loan participations. These participations are primarily located in south-central Pennsylvania. At March 31, ~~2022,~~2023, the outstanding commercial participations ~~accounted for 7.9%~~were $77.9 million, or 8.7%, ~~or $78.6 million,~~of commercial purpose loans and 7.2% of total gross loans compared to ~~7.8% and $77.5~~$70.6 million at December 31, ~~2021.~~2022, or 8.0%, of commercial purpose loans and 6.7% of total gross loans. The Bank’s total exposure (including outstanding balances and unfunded commitments) to purchased participations is ~~$97.2~~$88.6 million, compared to ~~$95.9~~$90.0 million at December 31, ~~2021.~~2022. The commercial loan participations are comprised of ~~$27.1~~$27.8 million of Commercial loans and ~~$51.5~~$50.1 million of CRE loans, reported in the respective loan class.

Consumer loans: This category ~~decreased by $385 thousand to~~remained unchanged at $6.0 million at March 31, ~~2022,~~2023, compared to ~~$6.4 million at~~ prior year-end and is ~~mainly~~ comprised primarily of ~~unsecured~~installment loans and personal lines of credit.

‎

3438

The following table presents a summary of loans outstanding, by class as of:



	March 31,		December 31,			Change		March 31,		December 31,			Change
(Dollars in thousands)	2022		2021			Amount	%	2023		2022			Amount	%
Residential Real Estate 1-4 Family
Consumer first liens	$	72,246	$	71,828	$	418	0.6	$	93,540	$	82,795	$	10,745	13.0
Commercial first lien		61,814		60,655		1,159	1.9		62,569		61,702		867	1.4
Total first liens		134,060		132,483		1,577	1.2		156,109		144,497		11,612	8.0

Consumer junior liens and lines of credit		67,780		67,103		677	1.0		68,765		69,561		(796)	(1.1)
Commercial junior liens and lines of credit		4,538		4,841		(303)	(6.3)		4,358		4,127		231	5.6
Total junior liens and lines of credit		72,318		71,944		374	0.5		73,123		73,688		(565)	(0.8)
Total residential real estate 1-4 family		206,378		204,427		1,951	1.0		229,232		218,185		11,047	5.1

Residential real estate - construction
Consumer		8,382		8,278		104	1.3		9,559		13,908		(4,349)	(31.3)
Commercial		13,050		12,379		671	5.4		9,892		10,485		(593)	(5.7)
Total residential real estate construction		21,432		20,657		775	3.8		19,451		24,393		(4,942)	(20.3)

Commercial real estate		524,138		522,779		1,359	0.3		575,516		566,662		8,854	1.6
Commercial		243,008		244,543		(1,535)	(0.6)		247,042		235,602		11,440	4.9
Total commercial		767,146		767,322		(176)	(0.0)		822,558		802,264		20,294	2.5

Consumer		6,021		6,406		(385)	(6.0)		6,205		6,199		6	0.1
		1,000,977		998,812		2,165	0.2		1,077,446		1,051,041		26,405	2.5
Less: Allowance for loan losses		(15,050)		(15,066)		16	(0.1)
Less: Allowance for credit losses									(14,109)		(14,175)		66	(0.5)
Net Loans	$	985,927	$	983,746	$	2,181	0.2	$	1,063,337	$	1,036,866	$	26,471	2.6

Loan Quality:

Management ~~utilizes~~monitors loan performance on a ~~risk rating scale ranging from 1-Prime~~monthly basis and performs a quarterly evaluation of the adequacy of the Allowance for Credit Loss for loans (ACL). The Bank begins enhanced monitoring of all loans rated 6–OAEM or worse and obtains a new appraisal or asset valuation for any loans placed on nonaccrual and rated 7 - Substandard or worse. Management, at its discretion, may determine that additional adjustments to ~~9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans~~the appraisal or valuation are ~~identified~~required. Valuation adjustments will be made as ~~either a pass or substandard rating~~necessary based on factors, including, but not limited to: the ~~performance status~~economy, deferred maintenance, industry, type of property/equipment, age of the ~~loans. Substandard consumer loans are loans that are 90 days~~appraisal, etc. and the knowledge Management has about a particular situation. In addition, the cost to sell or ~~more past due~~liquidate the collateral is also estimated and ~~still accruing. Loans rated 1 – 4 are considered Pass credits. Loans rated 5 are Pass credits but have been identified as credits that are likely~~deducted from the valuation in order to ~~warrant additional attention and monitoring. Loans rated 6-Other Asset Especially Mentioned (OAEM) or worse begin to receive enhanced monitoring and reporting by~~determine the ~~Bank. Loans rated 7-Substandard or 8-Doubtful exhibit the greatest financial weakness and present the greatest possible risk of loss~~net realizable value to the Bank. ~~Nonaccrual loans~~When determining the ACL, certain factors involved in the evaluation are ~~rated no better than 7-Substandard. The following factors represent some~~inherently subjective and require material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows. Management monitors the adequacy of the ~~factors used in determining~~ACL on an ongoing basis and reports its adequacy quarterly to the ~~risk rating~~Board Enterprise Risk Management Committee of ~~a borrower: cash flow, debt coverage, liquidity, management, and collateral. Risk ratings, for pass credits, are generally reviewed annually for term debt and~~the Board of Directors. Management believes the ACL at renewal for revolving or renewing debt. The Bank monitors loan quality by reviewing three primary measurements: (1) loans rated 6-OAEM or worse (collectively “watch list”), (2) delinquent loans, and (3) net-charge-offs.March 31, 2023 is adequate.

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 totaled ~~$38.5~~$9.2 million at March 31, ~~2022~~2023 compared to ~~$36.6~~$11.6 million at December 31, ~~2021.~~2022. The watch list includes both performing and nonperforming loans. Included in the watchlist total are ~~$7.4 million~~$120 thousand of nonaccrual loans. The credit composition of the watch list (loans rated 6, 7, or 8), by primary collateral is shown in Note 6 of the accompanying financial statements.

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

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

contracts for all loans 90-days or more past due, nonaccrual loans, or impaired loans. Further, it is the Bank’s policy to

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

The Bank’s Loan Management Committee reviews these loans and risk ratings on a quarterly basis in order to proactively identify and manage problem loans. In addition, a committee meets monthly to discuss possible workout strategies for all credits rated 7-Substandard or worse. Management also tracks other commercial loan risk measurements including high loan to value loans, concentrations, participations and policy exceptions and reports these to the Board Enterprise Risk Management Committee of the Board of Directors. The Bank also uses an external loan review consultant to assist with internal loan review with a goal of reviewing 80% of commercial loans each year. The FDIC defines certain supervisory loan-to-value lending limits. The Bank’s internal loan–to-value limits are all equal to or have a lower loan-to-value limit than the supervisory limits. However, in certain instances, the Bank may make a loan that exceeds the supervisory loan-to-value limit. At March 31, ~~2022,~~2023, the Bank had loans of ~~$18.1~~$11.9 million ~~(1.8%~~(6.7% of ~~gross loans)~~risk-based capital) that exceeded the supervisory limit, compared to ~~1.8%~~7.2% at year-end ~~2021.~~2022.

Loan quality improved, as measured by nonaccrual loans, iswhich remained unchanged ~~during~~at $120 thousand for the first three months of 2023 compared to December 31, 2022 ~~with $7.4 million of nonaccrual loan~~ and ~~a nonaccrual~~the nonperforming loan to total loans ratio ~~of .74%.~~decreased from 0.74% to 0.02% at March 31, 2023. Loans past due 90-days or more, but still accruing, totaled ~~$20~~$106 thousand at March 31, ~~2022.~~2023.

In addition to monitoring nonaccrual loans, the Bank also closely monitors ~~impaired~~ loans ~~and troubled debt restructurings (TDR). A loan is considered impaired~~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. ~~Nonaccrual loans (excluding consumer purpose loans) and TDR loans are considered impaired.~~

~~A loan is considered a TDR if the creditor (the Bank), for economic or legal reasons related~~Modifications to ~~the debtor’s~~borrowers experiencing financial ~~difficulties, grants a concession to the debtor that it would not otherwise consider. These concessions~~difficulty may include ~~lowering the~~interest rate ~~extending the maturity, re-amortization~~reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the payment, or a combination of multiple concessions. The Bank reviews all loans rated 6-OAEM or worse when it is providing a loan restructure, modification or new credit facility to determine if the action is a TDR. If a TDR loan is placed on nonaccrual status, it remains on nonaccrual status for at least six months to ensure performance.

In accordance with financial accounting standards, TDR loans are always considered impaired until they are paid off or in certain circumstances, refinanced. At March 31, 2022, there were 17 TDR loans with a balance of $5.4 million, including two TDR loans not performing in accordance with the modified terms for $611 thousand. Impaired loans, including TDR loans, totaled $11.4 million compared to $11.6 million at year-end 2021. There is a specific reserve of $662 thousand established on one impaired loan.collateral.

Allowance for ~~Loan~~Credit Losses:

~~Management monitors~~Allowance for Credit Losses – Loans

The ACL for loans is an estimate of the losses expected to be realized over the life of the loan ~~performance on a monthly basis~~portfolio. The ACL is determined for two distinct categories of loans: 1) loans evaluated individually for expected credit losses (specific reserve), and ~~performs a quarterly~~2) loans evaluated collectively for expected credit losses (pooled reserve). Management’s periodic evaluation of the adequacy of the ~~allowance~~ACL for loans is based on the Bank’s past loan ~~losses. The ALL is determined by segmenting~~loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, ~~based on the loan’s collateral. When calculating the ALL, consideration is given to a variety of factors in establishing this estimate including, but not limited to,~~ current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, ~~historical charge-offs, the adequacy of the underlying collateral (if collateral dependent)~~borrowers’ actual or perceived financial and managerial strengths, and other relevant factors. The Bank begins enhanced monitoring of all loans rated 6-OAEM, or worse, and obtains a new appraisal or asset valuation for any placed on nonaccrual and rated 7-Substandard or worse. Management, at its discretion, may determine that additional adjustments to the appraisal or valuation are required. Valuation adjustments will be made as necessary based on factors, including, but not limited to; the economy, deferred maintenance, industry, type of property/equipment, age of the appraisal, etc. and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateralThis evaluation is ~~also estimated and deducted from the valuation in order to determine the net realizable value to the Bank.When determining the allowance for loan losses, certain factors involved in the evaluation are~~ inherently subjective, as it requires material assumptions and ~~require material~~ estimates that may be susceptible to significant change, including the amounts and timing of future cash flows expected to be received on impaired loans. Management monitors the adequacy of the allowance for loan losses on an ongoing basis and reports its adequacy quarterly to the Board Enterprise Risk Management Committee of the Board of Directors. Management believes that the allowance for loan losses at March 31, 2022 is adequate.

~~The analysis~~Loans evaluated individually for ~~determining~~credit losses are primarily commercial purpose loans that do not share similar characteristics with those loans evaluated in the ALL is consistent with guidance set forth in generally accepted accounting principles (GAAP) and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The analysis has three components: specific, general and unallocated. The specific component addresses specific reserves established for impaired loans. A loan is considered impaired when, based on current information and events,pool. These loans may exhibit performance characteristics where it is probable that the Bank will be unable to collect ~~all~~the scheduled payments of principal or interest ~~and principal payments~~when due according to the ~~originally contracted~~contractual terms of the loan agreement. ~~Collateral values discounted~~All commercial purpose loans greater than $250 thousand and rated Substandard (7), Doubtful (8) or on nonaccrual status may be considered for ~~market conditions and selling costs are used to establish specific allocations~~

~~for impaired loans. However, it~~individual evaluation. Impairment is ~~possible that as~~measured on a ~~result~~loan-by-loan basis by one of the ~~credit analysis, a specific reserve~~following methods: the fair value of the collateral if the loan is ~~not required for an impaired loan.~~collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s obtainable market price. Commercial purpose loans with a balance less than $250 thousand, and ~~all~~ consumer purpose loans are not evaluated individually for a specific reserve but are included in the ~~specific~~pooled reserve ~~analysis as impaired loans but are added to the general allocation pool.~~calculation. Loans that are evaluated for a specific reserve, but not needing a specific reserve are not ~~added back to~~included in the ~~general allocation pool. There was a $662 thousand specific~~pooled reserve ~~established for one impaired loan ($5.5 million) at March 31, 2022 compared to a specific reserve of $698 thousand at year-end 2021 on the same loan.~~calculation.

The ~~general allocation component addresses~~Corporation has elected to exclude accrued interest receivable from the ~~reserves established~~measurement of the ACL. When a loan is placed on nonaccrual status, any outstanding accrued interest is reversed against income.

The pooled reserve represents the ACL for pools of homogenous ~~loans.~~loans, not evaluated individually. The ~~general component includes~~pooled reserve is calculated using a quantitative and qualitative ~~analysis. When calculating~~component for the ~~general allocation,~~loan pools.

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

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

Using third party data, the Bank ~~segregates its loan portfolio into~~determines a reasonable and supportable economic forecast that it believes is likely to exist for the following segments based primarily on the type of supporting collateral: residential real estate, commercial, industrial or agricultural real estate; commercial and industrial (C&I non-real estate), and consumer. Each segment may be further segregated by type of collateral, lien position, or owner/nonowner occupied properties. The quantitative analysis uses the Bank’s twenty quarter rollingnext 4 quarters.

A historical ~~loan~~credit loss ~~experience as determined~~rate is calculated for each ~~loan segment~~pool, using the average historical loss, by FRB Call Code, for a peer group of Pennsylvania community banks over the last eight quarters. The historical loss rate is calculated over a historical period the Bank believes best represents a period that will be similar to ~~determine a~~the next 4 quarters.

The historical peer credit loss ~~factor applicable~~rate is applied to each ~~loan segment. PPP loans, because~~WARM bucket though the initial 4 quarter forecast period.

At the end of the ~~SBA guarantee, are excluded from~~forecast period, the credit loss rate applied to each WARM bucket reverts to the peer group historical loss rate for the respective pool.

Collectively these estimated losses represent the quantitative ~~analysis. The allowance established as a result~~component of the ~~quantitative analysis was $3.0 million compared to $2.8 million at year-end 2021.~~pooled reserve.

The qualitative ~~analysis~~component for the pool utilizes a risk matrix ~~that incorporates four primary~~comprised of eight risk ~~factors: economic conditions, delinquency, classified loans, and level of risk,~~factors and assigns a risk ~~score (as measured in basis points)~~level to each factor. The risk factors give consideration to changes in: lending policy, procedures and practice; economic ~~condition factor is primarily based on unemployment rates. The delinquency factor considers the level~~conditions; nature and volume of loans; experience of lending team; volume of past due ~~loans and charge-offs. The classified loan factor considers the internal credit risk score~~loans; quality of the ~~portfolio. The level of risk factor considers operational factors such as: loan volume, management,~~ loan review ~~process, credit~~system; concentrations ~~competition,~~of credit; and ~~legal and regulatory issues.~~other external factors. The risk ~~score (as~~levels are measured in basis points and range from minimal risk (0 basis points) ~~for each of the four risk factors is minimal, low, moderate, high or~~to very high risk (20 basis points); and collectively range from 0 to 160 basis points. The qualitative risk level is determined independently for commercial loans, residential mortgage loans and consumer loans. ~~The qualitative allowance declined to $10.7 million at March 31, 2022 from $11.0 million at year-end 2021. PPP loans, because of the SBA guarantee, were excluded from the qualitative analysis.~~

The ~~unallocated component~~ACL for pooled loans is ~~maintained to cover uncertainties that could affect Management’s~~the sum of the quantitative and qualitative loss estimates.

Allowance for Credit Losses – Unfunded Commitments

The ACL for unfunded commitments is recorded in other liabilities on the consolidated balance sheet. The ACL represents management’s estimate of ~~probable loss. The unallocated component~~expected losses from unfunded commitments and is determined by estimating future usage of the ALL reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The unallocated allowance was $718 thousand at March 31, 2022.

Real estate appraisals and collateral valuations are an important part of the Bank’s process for determining potential loss on collateral dependent loans and thereby have a direct effect on the determination of loan reserves, charge-offs and the calculation of the allowance for loan losses. As long as the loan remains a performing loan, no further updates to appraisals are required. If a loan or relationship migrates to nonaccrual and a risk rating of 7-Substandard or worse, an evaluation for impairment status is madecommitments, based on historical usage. The estimated loss is calculated in a manner similar to that used for the ~~current information available at~~ACL for loans, previously described. The ACL is increased or decreased through the ~~time of downgrade and a new appraisal or collateral valuation is obtained. We believe this practice complies with the regulatory guidance.~~

~~In determining the allowance~~provision for loan losses, Management, at its discretion, may determine additional adjustments to the fair value obtained from an appraisal or collateral valuation are required. Adjustments will be made as necessary based on factors, including, but not limited to the economy, deferred maintenance, industry, type of property or equipment etc., and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated and deducted from the valuation in order to determine the net realizable value to the Bank. If an appraisal is not available, Management may make its best estimate of the real value of the collateral or use last known market value and apply appropriate discounts. If an adjustment is made to the collateral valuation, this will be documented with appropriate support and reported to the Loan Management Committee.credit losses.

3741

The following table shows the allocation of the allowance for ~~loan~~credit losses and other loan performance ratios, by class, as of March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

(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 March 31, 2022
$
134,060
$
72,318
$
21,432
$
524,138
$
243,008
$
6,021
$
—
$
1,000,977
Average Loans at March 31, 2022
135,727
71,470
21,308
520,869
246,112
6,060
—
1,001,546
Nonaccrual Loans at March 31, 2022
—
38
422
6,876
60
—
—
7,396
Allowance for Loan Loss at March 31, 2022
480
253
329
7,962
5,183
125
718
15,050
Net (Charge-offs)/Recoveries at March 31, 2022
(5)
1
—
—
4
(16)
—
(16)
Loans/Total Gross Loans at March 31, 2022
13%
7%
2%
52%
24%
1%
—
100%
Nonaccrual Loans/Total Gross Loans at March 31, 2022
0.00%
0.05%
1.97%
1.31%
0.02%
0.00%
—
0.74%
Allowance for Loan Loss at March 31, 2022
0.36%
0.35%
1.54%
1.52%
2.13%
2.08%
—
1.50%
Net (Charge-offs) Recoveries/Average Loans at March 31, 2022*
-0.01%
0.01%
0.00%
0.00%
0.01%
-1.06%
—
-0.01%
Allowance for Loan Loss/Nonaccrual Loans at March 31, 2022
203.49%


(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 March 31, 2023	$	156,109	$	73,123	$	19,451	$	575,516	$	247,042	$	6,205	$	—	$	1,077,446
Average Loans through March 31, 2023		150,276		72,930		24,408		563,220		233,246		6,111		—		1,050,191
Nonaccrual Loans at March 31, 2023		120		—		—		—		—		—		—		120
Allowance for Credit Loss at March 31, 2023		1,624		690		190		8,236		3,275		94		—		14,109
YTD Net (Charge-offs)/Recoveries at March 31, 2023		2		—		39		—		(19)		(19)		—		3

Loans/Total Gross Loans at March 31, 2023		14%		7%		2%		53%		23%		1%		—		100%
Nonaccrual Loans/Total Gross Loans at March 31, 2023		0.08%		0.00%		0.00%		0.00%		0.00%		0.00%		—		0.01%
Allowance for Credit Loss/Gross Loans at March 31, 2023		1.04%		0.94%		0.98%		1.43%		1.33%		1.51%		—		1.31%
Net (Charge-offs) Recoveries/Average Loans at March 31, 2023*		0.01%		0.00%		0.64%		0.00%		-0.03%		-1.24%		—		0.00%
Allowance for Credit Loss/Nonaccrual Loans at March 31, 2023																11757.50%

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%
*Annualized


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																11812.50%

*Annualized

Deposits:

Total deposits ~~increased $12.0~~decreased $49.3 million during the first three months of ~~2022~~2023 to ~~$1.596~~$1.502 billion. Noninterest-bearing deposits increased $5.0 million (primarily in small business deposits) and interest-bearing checking and savings deposits increased $12.1 million, while time deposits decreased $5.0 million. Interest-bearing checking decreased by ~~$6.9~~$35.3 million primarily in ~~commercial~~state/municipal deposits, while the Bank’s Money Management ~~increased $10.7~~decreased $25.2 million, ~~and savings increased $8.3 million. The decrease in time deposits is~~ primarily in ~~retail accounts.~~

state/municipal deposits. Time deposits increased $16.2 million as customers shifted to higher rate products. The Bank also added $8.6 million of brokered CDs, during the first quarter of 2023.

As of March 31, ~~2022,~~2023, the Bank had deposits of ~~$238.0~~$200.8 million placed in the IntraFi Network deposit program ($~~166.9~~131.2 million in interest-bearing checking and ~~$71.1~~$67.7 million in money management) and ~~$4.1~~$1.9 million in reciprocal time deposits in the CDARS program included in time deposits. These programs allow the Bank to offer full FDIC coverage to large depositors, but with the convenience to the customer of only having to deal with one bank. The Bank solicits these deposits from within its market and it believes they present no greater risk than any other local deposit. Only reciprocal deposits that exceed 20% of liabilities are considered brokered deposits. At March 31, ~~2022,~~2023, the Bank’s reciprocal deposits were ~~14.7%~~12.6% of total liabilities compared to ~~16.0%~~12.7% at year-end ~~2021.~~2022.

The Bank estimates that approximately 92% of its deposits are FDIC insured or collateralized as of March 31, 2023.

The following table presents a summary of deposits for the periods ended:


	March 31,		December 31,			Change		March 31,		December 31,			Change
(Dollars in thousands)	2022		2021			Amount	%	2023		2022			Amount	%
Noninterest-bearing checking	$	303,382	$	298,403	$	4,979	1.7	$	298,008	$	299,231	$	(1,223)	(0.4)

Interest-bearing checking		505,104		511,969		(6,865)	(1.3)		461,228		496,533		(35,305)	(7.1)
Money management		590,477		579,826		10,651	1.8		544,379		569,585		(25,206)	(4.4)
Savings		128,172		119,908		8,264	6.9		124,920		128,709		(3,789)	(2.9)
Total interest-bearing checking and savings		1,223,753		1,211,703		12,050	1.0		1,130,527		1,194,827		(64,300)	(5.4)

Time deposits		69,251		74,253		(5,002)	(6.7)		73,575		57,390		16,185	28.2
Total deposits	$	1,596,386	$	1,584,359	$	12,027	0.8	$	1,502,110	$	1,551,448	$	(49,338)	(3.2)

Overdrawn deposit accounts reclassified as loans	$	173	$	103				$	79	$	103

Borrowings:

At March 31, 2023, the Bank had $50.0 million borrowed from the Federal Reserve’s Bank Term Funding Program to temporarily support its liquidity position. This borrowing has a rate of 4.38% and is due March 22, 2024. At March 31, 2023, the fair value of debt securities pledged for the BTFP was $72.0 million.

On August 4, 2020, the Corporation completed the sale of a subordinated debt note offering. The Corporation sold $15.0 million of subordinated debt notes with a maturity date of September 1, 2030. These notes are noncallable for 5 years and carry a fixed interest rate of 5%5.00% per year for 5 years and then convert to floating rate of SOFR plus 4.93% per year for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The Corporation also sold $5.0 million of subordinated debt notes with a maturity date of September 1, 2035. These notes are noncallable for 10 years and carry a fixed interest rate of 5.25% per year for 10 years and then convert to floating rate of SOFR plus 4.92% per year for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. The Corporation paid an issuance fee of 2% of the total issue that will be amortized to ~~the call~~maturity date of each issue on a pro-rata basis. The proceeds are intended to be used for general corporate purposes.

Shareholders’ Equity:

Total shareholders’ equity ~~decreased $19.9~~increased $9.4 million to ~~$137.1~~$123.6 million as of March 31, ~~2022~~2023 from December 31, ~~2021,~~2022, due primarily to ~~a decrease~~an increase of ~~$21.9~~$7.3 million in accumulated other comprehensive income (AOCI) as the fair value of the investment portfolio ~~declined~~improved during ~~2022 and was partially offset by an increase of $1.6~~2023. Retained earnings increased $2.0 million ~~in retained earnings. The Corporation’s~~as net earnings of ~~$3.0~~$3.3 million were partially offset by cash dividends of $1.4 million. The Corporation’s Dividend Reinvestment Plan (DRIP) added ~~$61~~$21 thousand in new capital from optional cash contributions and ~~$254~~$256 thousand from the reinvestment of quarterly dividends. The Corporation’s dividend payout ratio was ~~47.2%~~42.68% for the first three months of ~~2022~~2023 compared to ~~27.3%~~47.18% for the first ~~quarter~~three months of ~~2021.~~2022.

As part of its quarterly dividend decision, the Corporation considers current and future income projections, dividend yield, payout ratio, and current and future capital ratios. For the first quarter of ~~2022,~~2023, the Corporation paid a $0.32 per share dividend, compared to $0.32 paid in the fourth quarter of ~~2021.~~2022. On April ~~14, 2022,~~13, 2023, the Board of Directors declared a $0.32 per share regular quarterly dividend for the second quarter of ~~2022,~~2023, which will be paid on May ~~25, 2022.~~24, 2023.

On December ~~20, 2021,~~15, 2022, the Board of Directors authorized the ~~2021~~2022 Repurchase Plan for the repurchase of up to 150,000 shares of the Corporation’s $1.00 par value common stock at market prices in open market or privately negotiated transactions beginning December ~~20, 2021~~22, 2022 and expiring on December ~~19, 2022. No~~21, 2023. The Corporation repurchased 8,752 shares ~~were repurchased in~~during the first quarter of ~~2022.~~2023. A total of 11,600 shares have been repurchased under the current plan. The Corporation is monitoring the market and intends to repurchase shares when and if the opportunity arises in accordance with applicable law, regulations and plan authorizations.

3943

~~limitations to~~ certain capital distributions and is in addition to the minimum required capital requirements. As of March 31, ~~2022,~~2023, the Bank was “well capitalized.”

The consolidated asset limit on small bank holding companies is $3$3.0 billion and a company with assets under that limit is not subject to the consolidated capital rules but may file reports that include capital amounts and ratios. The Corporation has elected to file those reports.

The following table summarizes the regulatory capital requirements and results as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 for the Corporation and the Bank:


			Regulatory Ratios				Regulatory Ratios
			Adequately	Well			Adequately	Well
	March 31,	December 31,	Capitalized	Capitalized	March 31,	December 31,	Capitalized	Capitalized
(Dollars in thousands)	2022	2021	Minimum	Minimum	2023	2022	Minimum	Minimum

Common Equity Tier 1 Risk-based Capital Ratio (1)
Franklin Financial Services Corporation	14.94%	15.20%	N/A	N/A	14.24%	14.22%	N/A	N/A
Farmers & Merchants Trust Company	15.05%	15.28%	4.50%	6.50%	14.74%	14.63%	4.50%	6.50%

Tier 1 Risk-based Capital Ratio (2)
Franklin Financial Services Corporation	14.94%	15.20%	N/A	N/A	14.24%	14.22%	N/A	N/A
Farmers & Merchants Trust Company	15.05%	15.28%	6.00%	8.00%	14.74%	14.63%	6.00%	8.00%

Total Risk-based Capital Ratio (3)
Franklin Financial Services Corporation	18.09%	18.41%	N/A	N/A	17.21%	17.21%	N/A	N/A
Farmers & Merchants Trust Company	16.30%	16.54%	8.00%	10.00%	15.99%	15.88%	8.00%	10.00%

Tier 1 Leverage Ratio (4)
Franklin Financial Services Corporation	8.59%	8.52%	N/A	N/A	9.58%	8.95%	N/A	N/A
Farmers & Merchants Trust Company	8.65%	8.57%	4.00%	5.00%	9.92%	9.21%	4.00%	5.00%

(1) Common equity Tier 1 capital/ total risk-weighted assets (2) Tier 1 capital / total risk-weighted assets
(3) Total risk-based capital / total risk-weighted assets, (4) Tier 1 capital / average quarterly assets

(1)Common equity Tier 1 capital / total risk-weighted assets

(2)Tier 1 capital / total risk-weighted assets

(3)Total risk-based capital / total risk-weighted assets

(4)Tier 1 capital / average quarterly assets

Economy

The Corporation’s primary market area includes Franklin, Fulton, Cumberland, Huntingdon, and ~~Huntingdon~~Dauphin Counties, Pennsylvania and Washington County, Maryland. This area is diverse in demographic and economic makeup. County populations range from a low of approximately 15,000 in Fulton County to over ~~250,000~~260,000 in Cumberland County. Unemployment in the Bank’s market area ranged from ~~3.4%~~3.3% in Cumberland County, PA and Washington County, MD to ~~6.9%~~7.4% in Huntingdon County, as of the end of ~~February.~~January 2023. The market area has a diverse economic base and local industries include warehousing, truck & rail shipping centers, light and heavy manufacturers, healthcare, higher education institutions, farming and agriculture, and a varied service sector. The Corporation’s primary market area ~~is located in South Central PA and~~ provides easy access to the major metropolitan markets on the east coast via trucking and rail transportation. Because of this, warehousing and distribution companies continue to find the area attractive. The local economy is not overly dependent on any one industry or business and Management believes that the Bank’s primary market area continues to be well suited for growth.

Impact of Inflation

The impact of inflation upon financial institutions such as the Corporation differs from its effect upon other commercial enterprises. Unlike many companies, the assets and liabilities of the Corporation are financial in nature. As

such, interest rates and changes in interest rates may have a more significant effect on the Corporation’s financial results than on other types of industries. Because of this, the Corporation watches the actions of the Federal Reserve Open Market Committee (FOMC) as it makes decisions about interest rate changes and how such changes affect market rates and the Corporation. Although inflation (and inflation expectations) may affect the interest rate environment, it is not

possible to measure with any precision the effect of inflation on the Corporation.

Liquidity

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

Historically, the Corporation has satisfied its liquidity needs from earnings, repayment of loans and amortizing investment securities, maturing investment securities, loan` sales, deposit growth and its ability to access existing lines of credit. All investment securities are classified as available for sale; therefore, securities that are unencumbered ~~(approximately $356~~($238.7 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.

The FHLB system has always been a major funding source for the Bank. There are no current indicators that lead the Bank to believe the FHLB would discontinue its lending function or restrict the Bank’s ability to borrow. If either of these events would occur, 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. The Bank has established credit at the Federal Reserve Discount Window and at correspondent banks. At March 31, 2023 the Bank had an outstanding balance of $50.0 million from the Federal Reserve’s Bank Term Funding Program to temporarily support its liquidity position.

The following table shows the Bank’s available liquidity at March 31, ~~2022.~~2023.


(Dollars in thousands)

Liquidity Source		Capacity		Outstanding		Available		Capacity		Outstanding		Available
Federal Home Loan Bank	$	360,951	$	—	$	360,951	$	403,692	$	—	$	403,692
Federal Reserve Bank Discount Window		34,898		—		34,898		59,513		—		59,513
Fed Bank Term Funding Program								71,858		50,000		21,858
Correspondent Banks		56,000		—		56,000		56,000		—		56,000
Total	$	451,849	$	—	$	451,849	$	591,063	$	50,000	$	541,063

‎

Off Balance Sheet Commitments

The Corporation’s financial statements do not reflect various commitments that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation. Unused commitments and standby letters of credit totaled $403.3 million and $398.8 million, respectively, at March 31, 2022 and December 31, 2021. In the second quarter of 2018, the Bank established a $2.4 million allowance against letters of credit issued in connection with a commercial borrower that declared bankruptcy. In the first quarter of 2020, the Bank reversed $250 thousand of this reserve as one letter of credit was cancelled. In the second quarter of 2021, the Bank reversed $636 thousand of this reserve as a second letter of credit was cancelled. At March 31, ~~2022, this reserve~~2023, the ACL-unfunded commitments was $1.9 million compared to $1.5 ~~million.~~million at December 31, 2022. The ACL-unfunded commitments is reported in Other Liabilities on the Consolidated Balance Sheet.


	March 31,		December 31,
(Dollars in thousands)	2023		2022
Financial instruments whose contract amounts represent credit risk
Commercial commitments to extend credit	$	303,262	$	275,867
Consumer commitments to extend credit (secured)		92,054		93,124
Consumer commitments to extend credit (unsecured)		4,936		5,247
	$	400,252	$	374,238
Standby letters of credit	$	27,819	$	30,734

The Corporation has entered into various contractual obligations to make future payments. These obligations include time deposits, long-term debt, operating leases, deferred compensation and pension payments. These amounts have not changed materially, except as reported, from those reported in the Corporation’s ~~2021~~2022 Annual Report on Form 10-K.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the Corporation’s exposure to market risk during the three months ended March 31, ~~2022.~~2023. For more information on market risk refer to the Corporation’s ~~2021~~2022 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, ~~2022,~~2023, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Corporation’s internal control over financial reporting during the quarterly period ended March 31, ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

‎

4246

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

The nature of the Corporation’s business generates a certain amount of litigation in the ordinary course of business.

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 to the Corporation’s financial condition or results of operations. No material proceedings are pending or are known to be threatened or contemplated against us by any governmental authorities.

Item 1A. Risk Factors

There were no material changes in the Corporation’s risk factors during the three months ended March 31, ~~2022.~~2023 except as described below. For more information, refer to the Corporation’s ~~2021~~2022 Annual Report on Form 10-K.

Recent Negative Developments Affecting the Banking Industry, Including Recent Bank Failures or Concerns Regarding Liquidity, Have Eroded Customer Confidence in the Banking System and May Have a Material Adverse Effect on the Corporation.

During March and April 2023 three significant bank failures occurred (Silicon Valley Bank, Signature Bank, and First Republic Bank). This was and continues to be accompanied by financial instability at certain additional banks. These bank failures and bank instabilities have created and may continue to create market and other risks, for all financial institutions and banks, including the Corporation. These risks include, but are not limited to:

1.Market risk and loss of confidence in the financial services sector, and/or specific banks;

2.Deterioration of securities and loan portfolios;

3.Deposit volatility and reductions with higher volumes and occurring over shorter periods of time;

4.Increased liquidity demand and utilization of sources of liquidity; and

5.Interest rate volatility and abrupt, sudden and greater than usual rate changes.

These factors individually, or in any combination, could materially and adversely affect:

1.Financial condition;

2.Operations and results thereof; and

3.Stock price.

In addition, the previously mentioned bank failures and instabilities may result in an increase of FDIC deposit insurance premiums and/or result in special FDIC deposit insurance assessments, which also may adversely affect the Corporation’s financial condition, operations, results thereof or stock price.

The Corporation cannot predict the impact, timing or duration of such events.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


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
January 2023	—	$	—	$	—	147,152
February 2023	—	$	—		—	147,152
March 2023	8,752	$	31.12		272,358	138,400
	8,752			$	272,358

Item 3. Defaults by the Company on its Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

‎

4348

Item 5. Other Information

None

Item 6. Exhibits

Exhibits


3.1	Amended and Restated Articles of Incorporation of the Corporation (Filed as Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and incorporated herein by reference).

3.2	Bylaws of the Corporation. (Filed on Form 8-K, as Exhibit 99 with the commission on ~~July 9, 2021~~September 2, 2022 and incorporated herein by ~~reference.)~~reference).

31.1	Rule 13a – 14(a)/15d-14(a) Certifications – Principal Executive Officer

31.2	Rule 13a – 14(a)/15d-14(a) Certifications – Principal Financial Officer

32.1	Section 1350 Certifications – Principal Executive Officer

32.2	Section 1350 Certifications – Principal Financial Officer

101	Interactive Data File (XBRL)

104	Cover Page Interactive Data File (the cover page XBRL tags are imbedded in the XBRL document)

‎

4449

FRANKLIN FINANCIAL SERVICES CORPORATION

and SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Franklin Financial Services Corporation



May ~~13, 2022~~12, 2023		/s/ Timothy G. Henry
		Timothy G. Henry
		Chief Executive Officer and President
		(Principal Executive Officer)

May ~~13, 2022~~12, 2023		/s/ Mark R. Hollar
		Mark R. Hollar
		Treasurer and Chief Financial Officer
		(Principal Financial and Accounting Officer)

4550



(Dollars in thousands)			Loans Past Due and Still Accruing										Total
	Current		30-59 Days		60-89 Days		90 Days+		Total		Non-Accrual		Loans
March 31, 2022
Residential Real Estate 1-4 Family
First liens	$	133,720	$	204	$	120	$	16	$	340	$	—	$	134,060
Junior liens and lines of credit		72,265		12		3		—		15		38		72,318
Total		205,985		216		123		16		355		38		206,378
Residential real estate - construction		21,010		—		—		—		—		422		21,432
Commercial real estate		516,816		446		—		—		446		6,876		524,138
Commercial		242,688		260		—		—		260		60		243,008
Consumer		6,007		8		2		4		14		—		6,021
Total	$	992,506	$	930	$	125	$	20	$	1,075	$	7,396	$	1,000,977


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%

*Annualized