UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2021 ¨ 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- ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2021 ¨ 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 25-14408 ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 ¨ 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 25-1440 ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (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, Chamber ...

Part I - Financial Information [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The report presents unaudited consolidated financial statements for the nine months ended September 30, 2020 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets grew to $1.51 billion, driven by increases in securities, loans, and deposits Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | **$1,511,213** | **$1,269,157** | | Total cash and cash equivalents | $71,160 | $83,828 | | Debt securities available for sale | $346,473 | $187,433 | | Net Loans | $1,005,807 | $922,609 | | **Total Liabilities** | **$1,371,639** | **$1,141,629** | | Total deposits | $1,336,749 | $1,125,392 | | Subordinate notes | $19,547 | $— | | **Total Shareholders' Equity** | **$139,574** | **$127,528** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Net income declined to $8.2 million for the nine-month period due to a higher provision for loan losses Income Statement Summary (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net Interest Income | $30,968 | $31,725 | | Provision for loan losses | $5,350 | $237 | | Noninterest Income | $10,903 | $10,342 | | Noninterest Expense | $28,821 | $28,010 | | **Net Income** | **$8,248** | **$11,720** | | Diluted Earnings Per Share | $1.89 | $2.66 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Cash and cash equivalents decreased by $12.7 million, as financing activities funded investment purchases Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,375 | $14,566 | | Net cash (used in) provided by investing activities | ($242,245) | $12,000 | | Net cash provided by financing activities | $227,202 | $70,611 | | **(Decrease) increase in cash and cash equivalents** | **($12,668)** | **$97,177** | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Disclosures cover CECL adoption, COVID-19 loan modifications, new debt, and regulatory capital ratios - The Corporation is preparing for the adoption of the new **CECL standard**, effective January 1, 2023, which is expected to result in earlier recognition of loan loss allowances[25](index=25&type=chunk) - As of September 30, 2020, the Bank has granted approximately **$83 million in loan deferrals** (about 8% of gross loans) in response to the COVID-19 pandemic under the CARES Act[53](index=53&type=chunk) - In Q3 2020, the Corporation issued **$20 million of unsecured subordinated debt** notes, structured to qualify as Tier 2 Capital[79](index=79&type=chunk) Regulatory Capital Ratios (Bank) as of Sep 30, 2020 | Ratio | Actual | Well-Capitalized Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 | 13.99% | 6.50% | | Tier 1 Risk-based Capital | 13.99% | 8.00% | | Total Risk-based Capital | 15.25% | 10.00% | | Tier 1 Leverage | 8.61% | 5.00% | [Management's Discussion and Analysis (MD&A)](index=30&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Results%20of%20Operations%20and%20Financial%20Condition) Management analyzes financial results, focusing on the pandemic's impact on loan loss provisions and balance sheet changes [Results of Operations](index=30&type=section&id=Results%20of%20Operations) Net income fell to $8.2 million due to a $5.4 million provision for loan losses related to the COVID-19 pandemic Year-to-Date Performance Summary (in thousands) | Metric | YTD Sep 30, 2020 | YTD Sep 30, 2019 | | :--- | :--- | :--- | | Net Income | $8,248 | $11,720 | | Net Interest Income | $30,968 | $31,725 | | Provision for Loan Losses | $5,350 | $237 | | Noninterest Income | $10,903 | $10,342 | | Noninterest Expense | $28,821 | $28,010 | - The year-to-date provision for loan loss expense increased to **$5.4 million** due to qualitative factor increases related to the economic effects of the COVID-19 pandemic[112](index=112&type=chunk) - A **tax benefit of $1.1 million** was recorded in Q2 2020 due to a CARES Act provision allowing the carryback of a 2018 Net Operating Loss (NOL)[115](index=115&type=chunk)[142](index=142&type=chunk) [Financial Condition](index=39&type=section&id=Financial%20Condition) Total assets grew to $1.51 billion, funded by a surge in deposits and new subordinated debt - Net loans increased by **$83.2 million (9%)** in 2020, largely due to **$63.4 million in Paycheck Protection Program (PPP) loans**[117](index=117&type=chunk) - Deposits increased by **$211.4 million** since year-end 2019, attributed to government stimulus payments and lower consumer spending during the pandemic[119](index=119&type=chunk) - In Q3 2020, the Corporation issued **$20.0 million of subordinated notes** to enhance regulatory capital and for general corporate purposes[120](index=120&type=chunk)[197](index=197&type=chunk) [Loan Portfolio and Quality](index=40&type=section&id=Loan%20Portfolio%20and%20Quality) Loan quality deteriorated with nonperforming loans rising to 0.93%, driven by downgrades in the hotel portfolio Loan Portfolio Composition (in thousands) | Loan Class | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Residential real estate 1-4 family | $200,372 | $190,543 | | Residential real estate - construction | $14,214 | $13,323 | | Commercial real estate | $505,498 | $494,262 | | Commercial (incl. PPP) | $296,331 | $230,007 | | Consumer | $6,543 | $6,440 | | **Total Gross Loans** | **$1,022,958** | **$934,575** | Credit Quality Metrics | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Nonperforming loans to total gross loans | 0.93% | 0.42% | | Nonperforming assets to total assets | 0.63% | 0.31% | | Allowance for loan losses to nonperforming loans | 180.31% | 306.43% | - The **'watch list' of loans increased to $48.1 million** from $11.6 million at year-end 2019, primarily due to downgrades of hotel loans impacted by the pandemic[163](index=163&type=chunk) - As of Sep 30, 2020, the Bank had **$82.5 million in active loan deferrals** under the CARES Act, with the hotel sector comprising the largest portion at $60.8 million[175](index=175&type=chunk)[177](index=177&type=chunk) [Allowance for Loan Losses (ALL)](index=46&type=section&id=Allowance%20for%20Loan%20Losses%20(ALL)) The ALL increased to $17.2 million (1.68% of loans) due to higher qualitative risk factors for the pandemic - The year-to-date increase in the ALL was **primarily driven by the qualitative analysis** component of the calculation methodology[184](index=184&type=chunk)[185](index=185&type=chunk)[186](index=186&type=chunk) - Due to the pandemic, the qualitative risk factor for **'economic conditions' was increased to 'very high'**, and modified loans received a separate, higher risk assessment[186](index=186&type=chunk) Allowance for Loan Losses (ALL) Summary | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | ALL Balance (in thousands) | $17,151 | $11,966 | | ALL as a % of gross loans | 1.68% | 1.28% | | ALL as a % of gross loans (ex-PPP) | 1.79% | N/A | [Liquidity and Capital Resources](index=52&type=section&id=Liquidity%20and%20Capital%20Resources) The Corporation maintains strong liquidity with $497.1 million in available funding and well-capitalized ratios Available Liquidity at Sep 30, 2020 (in thousands) | Liquidity Source | Available | | :--- | :--- | | Federal Home Loan Bank | $387,935 | | Federal Reserve Bank Discount Window | $24,786 | | Correspondent Banks | $21,000 | | Paycheck Protection Program Liquidity Facility | $63,395 | | **Total** | **$497,116** | - The Corporation's **stock repurchase plan was suspended** on March 19, 2020, and no shares were purchased during the third quarter[200](index=200&type=chunk)[233](index=233&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=53&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) No material changes in market risk exposure were reported for the first nine months of 2020 - There were **no material changes** in the Corporation's market risk exposure during the first nine months of 2020[218](index=218&type=chunk) [Controls and Procedures](index=53&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2020 - The CEO and CFO concluded that as of September 30, 2020, the Corporation's **disclosure controls and procedures are effective**[219](index=219&type=chunk) - **No changes were made** during the quarter that materially affected internal control over financial reporting[219](index=219&type=chunk) Part II - Other Information [Legal Proceedings](index=54&type=section&id=Item%201.%20Legal%20Proceedings) Current litigation is not expected to have a material adverse effect on the Corporation's financial position - In management's opinion, the ultimate aggregate liability from all current litigation is **not expected to have a material adverse effect** on the Corporation's financial position[226](index=226&type=chunk) [Risk Factors](index=54&type=section&id=Item%201A.%20Risk%20Factors) Key risks include the uncertain impact of the COVID-19 pandemic and potential liabilities from PPP lending - The **COVID-19 pandemic could materially and adversely impact the business** through increased credit losses, reduced revenue, and operational disruptions[229](index=229&type=chunk) - Participation in the PPP exposes the Corporation to **litigation risk** from applicants regarding its loan processing procedures[231](index=231&type=chunk) - There is a credit risk that the **SBA may deny its guarantee on PPP loans** if it finds deficiencies in origination, underwriting, or servicing[232](index=232&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=55&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The stock repurchase plan was suspended in March 2020, with no shares repurchased in the third quarter - The **stock repurchase plan was suspended** on March 19, 2020, and no share purchases were made during the third quarter of 2020[233](index=233&type=chunk) [Other Items and Exhibits](index=55&type=section&id=Other%20Items%20and%20Exhibits) The report confirms no defaults on senior securities and lists all filed exhibits, including certifications - The report confirms **no defaults on senior securities** and lists filed exhibits, including CEO/CFO certifications and XBRL data files[234](index=234&type=chunk)[236](index=236&type=chunk)

[Part I - FINANCIAL INFORMATION](index=3&type=section&id=Part%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The unaudited consolidated financial statements for the period ended June 30, 2020, show a significant increase in total assets to **$1.42 billion**, driven by loan growth (including **$62.5 million** in PPP loans) and a larger investment portfolio, while net income for the first six months of 2020 decreased to **$4.8 million** from **$7.2 million** in the prior year, primarily due to a **$5.0 million** provision for loan losses related to the COVID-19 pandemic's economic impact, with shareholders' equity increasing to **$134.8 million** [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) As of June 30, 2020, total assets grew to **$1.423 billion** from **$1.269 billion** at year-end 2019, driven by a **$77.6 million** increase in gross loans to **$1.012 billion** and a **$98.8 million** increase in debt securities available for sale, funded by a **$148.0 million** increase in total deposits, which reached **$1.273 billion**, with shareholders' equity rising to **$134.8 million** Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$1,423,111** | **$1,269,157** | **+$153,954** | | Net Loans | $995,583 | $922,609 | +$72,974 | | Debt securities available for sale | $286,217 | $187,433 | +$98,784 | | Total cash and cash equivalents | $58,599 | $83,828 | -$25,229 | | **Total Liabilities** | **$1,288,271** | **$1,141,629** | **+$146,642** | | Total deposits | $1,273,353 | $1,125,392 | +$147,961 | | **Total Shareholders' Equity** | **$134,840** | **$127,528** | **+$7,312** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) For the six months ended June 30, 2020, net income was **$4.8 million** (**$1.10** per diluted share), down from **$7.2 million** (**$1.63** per diluted share) in the same period of 2019, primarily driven by a significant increase in the provision for loan losses to **$5.0 million**, compared to **$399 thousand** in the prior year, while net interest income remained relatively stable at **$20.6 million** Six Months Ended June 30 (in thousands, except per share data) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $20,585 | $20,890 | | Provision for loan losses | $4,975 | $399 | | Noninterest Income | $7,301 | $6,862 | | Noninterest Expense | $19,173 | $19,017 | | **Net Income** | **$4,786** | **$7,221** | | Diluted EPS | $1.10 | $1.63 | - The provision for loan losses for the six months ended June 30, 2020, increased dramatically to **$4.975 million** from just **$399 thousand** in the prior-year period, reflecting the anticipated economic impact of the COVID-19 pandemic[11](index=11&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2020, net cash used in investing activities was **$172.9 million**, primarily due to the purchase of investment securities, largely funded by net cash provided by financing activities of **$145.1 million**, driven by a significant increase in deposits, with net cash from operating activities at **$2.6 million**, resulting in an overall decrease in cash and cash equivalents of **$25.2 million** during the period Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,572 | $8,509 | | Net cash used in investing activities | ($172,941) | ($5,854) | | Net cash provided by financing activities | $145,140 | $26,835 | | **Net (Decrease) Increase in Cash** | **($25,229)** | **$29,490** | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Key disclosures include the delayed adoption of the CECL accounting standard to January 1, 2023, a loan portfolio growth to **$1.012 billion** (including **$62.5 million** in PPP loans), a significant increase in the allowance for loan losses to **$16.6 million** (**1.64%** of gross loans) due to the pandemic, approximately **$196 million** in granted loan deferrals, all capital ratios remaining above "well-capitalized" minimums, and a significant subsequent event of issuing **$20 million** in subordinated debt in August 2020 - The adoption of ASU 2016-13 (CECL) has been delayed and is now effective for the Corporation on January 1, 2023, with the company working with a third-party vendor and expecting to run the model in test mode in 2020[26](index=26&type=chunk) - As of June 30, 2020, the Bank has granted approximately **$196 million** in loan deferrals or modifications, representing about **19%** of gross loans, in response to the COVID-19 pandemic[54](index=54&type=chunk) - On August 4, 2020, the Corporation completed a subordinated debt offering, selling **$15.0 million** in 10-year notes and **$5.0 million** in 15-year notes, structured to qualify as Tier 2 capital[105](index=105&type=chunk)[106](index=106&type=chunk) [Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition](index=30&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Results%20of%20Operations%20and%20Financial%20Condition) Management attributes the year-over-year decline in net income primarily to a **$5.0 million** provision for loan losses taken in H1 2020 due to the economic uncertainty from the COVID-19 pandemic, which increased the allowance for loan loss ratio to **1.64%**, while the company actively participated in the Paycheck Protection Program (PPP), funding **$62.8 million** in loans, contributing to a **$77.6 million** growth in the total loan portfolio and a **$148.0 million** increase in deposits, with management believing the Corporation's asset quality is stable and its capital position, with a total risk-based capital ratio of **15.93%**, is strong enough to meet the challenges [Results of Operations](index=30&type=section&id=Results%20of%20Operations) Net income for Q2 2020 was **$3.1 million**, down from **$4.0 million** in Q2 2019, and for the first six months, net income was **$4.7 million**, down from **$7.2 million**, primarily driven by a **$5.0 million** year-to-date provision for loan losses due to the COVID-19 pandemic's economic impact, with net interest income seeing a slight decline as the net interest margin compressed to **3.39%** from **3.80%** year-over-year despite growth in earning assets, while noninterest income increased year-to-date due to a gain on a bank-owned life insurance policy, and noninterest expense remained relatively flat Key Performance Metrics (YTD) | Metric | June 30, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Net Income (in millions) | $4.8 | $7.2 | | Diluted EPS | $1.10 | $1.63 | | Net Interest Margin | 3.39% | 3.80% | | Provision for Loan Loss (in millions) | $5.0 | $0.4 | | Return on average assets | 0.73% | 1.18% | | Return on average equity | 7.37% | 12.02% | - The Corporation recorded an income tax benefit of **$1.1 million** in Q2 2020 due to the CARES Act, which allows for the carryback of a 2018 Net Operating Loss (NOL) to a period with a higher statutory tax rate (**34%** vs. **21%**)[115](index=115&type=chunk)[128](index=128&type=chunk) [Financial Condition](index=38&type=section&id=Financial%20Condition) As of June 30, 2020, the Corporation's financial condition remained strong despite economic headwinds, with total assets growing to **$1.423 billion**, the loan portfolio increasing by **$77.6 million** since year-end largely due to **$62.5 million** in PPP loans, the allowance for loan losses significantly bolstered to **1.64%** of gross loans, deposits surging by **$148.0 million** enhancing liquidity, shareholders' equity growing to **$134.8 million**, and all regulatory capital ratios exceeding "well-capitalized" thresholds - The loan portfolio grew by **$77.6 million** (**8.3%**) since year-end 2019, primarily driven by **$62.5 million** in Paycheck Protection Program (PPP) loans[115](index=115&type=chunk)[158](index=158&type=chunk) - Total deposits increased by **$148.0 million** (**13.1%**) since year-end 2019, with a significant portion of the growth in noninterest-bearing and low-cost checking accounts, and approximately **$36.0 million** of the increase attributed to remaining PPP loan proceeds[191](index=191&type=chunk)[192](index=192&type=chunk) - The Corporation suspended its stock repurchase plan on March 19, 2020, having repurchased **36,401 shares** in the first quarter of 2020 before the suspension[199](index=199&type=chunk)[228](index=228&type=chunk) [Loan Quality and Allowance for Loan Losses](index=40&type=section&id=Loan%20Quality%20and%20Allowance%20for%20Loan%20Losses) Overall loan quality remained stable, with the nonperforming loans to gross loans ratio at **0.41%**, but in response to the pandemic, the Bank increased its Allowance for Loan Losses (ALL) by **$4.6 million** since year-end to **$16.6 million**, or **1.64%** of gross loans, driven by a significant increase in the qualitative component of the ALL calculation reflecting heightened economic risk, and also implemented widespread loan modifications, granting deferrals on approximately **$196 million** (**19%** of gross loans), with the largest exposures in the Real Estate, and Accommodation and Food Services sectors Loan Quality Ratios | Metric | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Nonperforming loans / gross loans | 0.41% | 0.42% | | Allowance for loan losses / gross loans | 1.64% | 1.28% | | Allowance for loan losses / nonperforming loans | 397.86% | 306.43% | - The Bank granted loan deferrals totaling **$196.5 million**, with the largest concentrations in Real Estate and Rental/Leasing (**$72.4 million**) and Accommodation and Food Services (**$70.8 million**)[174](index=174&type=chunk)[176](index=176&type=chunk) - The increase in the Allowance for Loan Losses was primarily due to changes in the qualitative analysis, including increasing the risk factor for economic conditions to "very high" and assigning a higher risk score to the portfolio of modified loans[185](index=185&type=chunk) [Liquidity](index=50&type=section&id=Liquidity) The Corporation maintains a strong liquidity position, with total available liquidity of **$476.7 million** at June 30, 2020, primarily from borrowing capacity from the FHLB (**$372.2 million**) and the Federal Reserve, and to support liquidity during the pandemic, the Bank is participating in the Paycheck Protection Program Liquidity Facility (PPPLF), which provides low-cost funding for the **$62.5 million** in PPP loans it originated, preserving its traditional liquidity sources Available Liquidity Sources (in thousands) | Source | Available Capacity | | :--- | :--- | | Federal Home Loan Bank | $372,200 | | Federal Reserve Bank Discount Window | $21,000 | | Correspondent Banks | $21,000 | | Paycheck Protection Program Liquidity Facility | $62,513 | | **Total** | **$476,713** | - The Bank is utilizing the Paycheck Protection Program Liquidity Facility (PPPLF) to fund its PPP loans, which allows it to preserve its normal liquidity sources like the FHLB[212](index=212&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=51&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The Corporation reported no material changes in its exposure to market risk during the six months ended June 30, 2020 - There were no material changes in the Corporation's exposure to market risk during the six months ended June 30, 2020[215](index=215&type=chunk) [Item 4. Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of June 30, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective[216](index=216&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting[216](index=216&type=chunk) [Part II - OTHER INFORMATION](index=53&type=section&id=Part%20II%20-%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=53&type=section&id=Item%201.%20Legal%20Proceedings) The Corporation is involved in litigation incidental to its business but does not anticipate that the ultimate liability from these proceedings will have a material adverse effect on its financial position, and no material proceedings by governmental authorities are pending or threatened - In management's opinion, the ultimate aggregate liability from all current litigation is not expected to have a material adverse effect on the Corporation's financial position[222](index=222&type=chunk) [Item 1A. Risk Factors](index=53&type=section&id=Item%201A.%20Risk%20Factors) A significant new risk factor has been identified related to the COVID-19 pandemic, which has negatively impacted global, national, and local economies, leading to potential adverse effects on the company's revenue, credit losses, and loan portfolio quality, with the extent of the impact highly uncertain and dependent on future developments, including the duration of the pandemic and government responses - The COVID-19 pandemic is identified as a significant risk factor that could materially and adversely impact the business, including increased credit losses, reduced demand for products and services, and potential impairments on securities[225](index=225&type=chunk) - The ultimate impact of the pandemic on business operations and financial condition is highly uncertain and depends on future developments, such as the scope and duration of the pandemic and related government actions[225](index=225&type=chunk)[226](index=226&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=54&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Corporation's 2019 stock repurchase plan, authorized for up to **150,000 shares**, was suspended on March 19, 2020, and no shares were repurchased during the second quarter of 2020 - The Corporation suspended its stock repurchase plan on March 19, 2020, and made no share purchases during the second quarter of 2020[228](index=228&type=chunk) [Item 3. Defaults Upon Senior Securities](index=54&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) None - None[229](index=229&type=chunk) [Item 4. Mine Safety Disclosures](index=54&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Not Applicable - Not Applicable[229](index=229&type=chunk) [Item 5. Other Information](index=55&type=section&id=Item%205.%20Other%20Information) None - None[230](index=230&type=chunk) [Item 6. Exhibits](index=55&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the report, including Articles of Incorporation, Bylaws, CEO/CFO certifications (Rule 13a-14(a) and Section 1350), and Interactive Data Files (XBRL) - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Act rules and Interactive Data Files (XBRL)[230](index=230&type=chunk)

[Part I - Financial Information](index=3&type=section&id=Part%20I%20-%20FINANCIAL%20INFORMATION) This section presents the unaudited consolidated financial statements and management's discussion for Franklin Financial Services Corporation [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, with detailed notes [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Table: Consolidated Balance Sheets | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :------------------------------ | :------------------------------- | | Total Assets | $1,262,126 | $1,269,157 | | Net Loans | $921,656 | $922,609 | | Total Deposits | $1,117,433 | $1,125,392 | | Total Shareholders' Equity | $129,005 | $127,528 | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Table: Consolidated Statements of Income | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Income | $1,719 | $3,237 | | Basic Earnings Per Share | $0.40 | $0.73 | | Diluted Earnings Per Share | $0.39 | $0.73 | | Net Interest Income | $10,252 | $10,329 | | Provision for Loan Losses | $3,000 | $399 | | Total Noninterest Income | $3,889 | $3,165 | [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Table: Consolidated Statements of Comprehensive Income | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Income | $1,719 | $3,237 | | Net Unrealized Gains (Debt Securities) | $2,058 | $1,390 | | Total Comprehensive Income | $3,345 | $4,336 | [Consolidated Statements of Changes in Shareholders' Equity](index=5&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Table: Consolidated Statements of Changes in Shareholders' Equity | Metric | January 1, 2020 (in thousands) | March 31, 2020 (in thousands) | | :-------------------------------------- | :----------------------------- | :---------------------------- | | Balance at Beginning/End of Period | $127,528 | $129,005 | | Net Income | - | $1,719 | | Other Comprehensive Income | - | $1,626 | | Cash Dividends Declared ($0.30 per share) | - | $(1,306) | | Acquisition of Treasury Stock | - | $(1,172) | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Table: Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :----------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Cash Provided by Operating Activities | $2,491 | $4,220 | | Net Cash Used in Investing Activities | $(23,111) | $(2,765) | | Net Cash Used in Financing Activities | $(9,858) | $(7,379) | | Decrease in Cash and Cash Equivalents | $(30,478) | $(5,924) | | Cash and Cash Equivalents at End of Period | $53,350 | $47,033 | [Notes to Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [Note 1. Basis of Presentation](index=7&type=section&id=Note%201.%20Basis%20of%20Presentation) This note outlines the Corporation's consolidation and clarifies that unaudited Q1 results are not indicative of the full year - The consolidated financial statements include Franklin Financial Services Corporation, Farmers and Merchants Trust Company of Chambersburg, and Franklin Future Fund Inc[18](index=18&type=chunk) - The financial statements are unaudited and condensed, and the consolidated results for the three-month period ended March 31, 2020, are not necessarily indicative of the operating results for the full year[20](index=20&type=chunk) [Note 2. Recent Accounting Pronouncements](index=8&type=section&id=Note%202.%20Recent%20Accounting%20Pronouncements) ASU 2017-04 and 2018-14 had no material effect, but ASU 2016-13 (CECL) is expected to increase loan loss provisions from 2023 - ASU 2017-04 (Goodwill) was early adopted in Q4 2018 and did not have a material effect on the consolidated financial statements[23](index=23&type=chunk) - ASU 2018-14 (Defined Benefit Plans) was adopted on January 1, 2020, and did not have a material effect on the consolidated financial statements as it only revised disclosure requirements[23](index=23&type=chunk) - ASU 2016-13 (CECL model) is effective January 1, 2023, and is expected to result in earlier recognition of additions to the allowance for loan losses and possibly a larger allowance balance with a corresponding increase in the provision for loan losses[24](index=24&type=chunk) [Note 3. Accumulated Other Comprehensive Loss](index=9&type=section&id=Note%203.%20Accumulated%20Other%20Comprehensive%20Loss) Accumulated other comprehensive loss decreased to **$4.36 million** at March 31, 2020, due to **$1.63 million** in current period other comprehensive income Table: Accumulated Other Comprehensive Loss | Metric | March 31, 2020 (in thousands) | January 1, 2020 (in thousands) | | :----------------------------------- | :---------------------------- | :----------------------------- | | Beginning Balance | - | $(5,986) | | Current Period Other Comprehensive Income | $1,626 | - | | Ending Balance | $(4,360) | - | [Note 4. Investments](index=9&type=section&id=Note%204.%20Investments) AFS securities increased to **$208.0 million** with a **$2.3 million** net unrealized gain, and equity securities decreased to **$313 thousand** Table: Investments | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | Debt Securities Available for Sale, at Fair Value | $208,040 | $187,433 | | Equity Securities | $313 | $440 | - The AFS securities portfolio had a net unrealized gain of **$2.3 million** at March 31, 2020, an increase from **$234 thousand** at year-end 2019[26](index=26&type=chunk)[130](index=130&type=chunk) - The unrealized loss in the municipal bond portfolio decreased to **$242 thousand** from **$997 thousand** at December 31, 2019, and was deemed non-credit related with no other-than-temporary impairment charges[132](index=132&type=chunk) [Note 5. Loans](index=11&type=section&id=Note%205.%20Loans) The total loan portfolio increased slightly to **$936.4 million**, driven by residential real estate and construction loans, offsetting commercial declines Table: Loan Portfolio by Class | Loan Class | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :---------------------------- | :------------------------------- | | Total Loans | $936,386 | $934,575 | | Residential Real Estate 1-4 Family | $193,972 | $190,543 | | Residential Real Estate - Construction | $15,482 | $13,323 | | Commercial Real Estate | $494,143 | $494,262 | | Commercial | $226,128 | $230,007 | [Note 6. Loan Quality and Allowance for Loan Losses](index=13&type=section&id=Note%206.%20Loan%20Quality%20and%20Allowance%20for%20Loan%20Losses) The ALL significantly increased to **$14.7 million** due to a **$3.0 million** provision for loan losses, and **$30 million** in COVID-19 deferrals were granted Table: Loan Quality and Allowance for Loan Losses | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | ALL at Period End | $14,730 | $11,966 | | Provision for Loan Losses (Q1) | $3,000 | $399 (Q1 2019) | | Total Impaired Loans (Recorded Investment) | $11,969 | $12,176 | | Nonaccrual Loans | $3,673 | $3,828 | | Loans Past Due 90 Days+ | $32 | $77 | | Troubled Debt Restructurings (TDRs) | $10,315 | $10,446 | - Approximately **$30 million** in loan deferrals or modifications were granted as of March 31, 2020, in response to COVID-19[53](index=53&type=chunk) - No new TDR loans were reported during 2020 or 2019[53](index=53&type=chunk) [Note 7. Leases](index=17&type=section&id=Note%207.%20Leases) Operating lease costs decreased to **$174 thousand** in Q1 2020, with a **12.8-year** average term and **$5.16 million** total lease liability Table: Lease Costs | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Operating Lease Cost | $158 | $188 | | Short-term Lease Cost | $2 | $6 | | Variable Lease Cost | $14 | $11 | | Total Lease Cost | $174 | $205 | - Weighted-average remaining lease term is **12.8 years** and weighted-average discount rate is **3.53%** as of March 31, 2020[56](index=56&type=chunk) - Total lease liability is **$5.159 million** as of March 31, 2020[56](index=56&type=chunk) [Note 8. Other Real Estate Owned](index=18&type=section&id=Note%208.%20Other%20Real%20Estate%20Owned) The balance of other real estate owned remained at zero for the three months ended March 31, 2020, indicating no additions or dispositions during the period Table: Other Real Estate Owned | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Balance at End of Period | $0 | $2,684 | [Note 9. Derivatives](index=18&type=section&id=Note%209.%20Derivatives) Derivative liabilities increased to **$55 thousand** at March 31, 2020, resulting in a **$36 thousand** recognized loss from non-hedging loan arrangements Table: Derivatives Fair Value and Recognized Loss | Metric | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :---------------------------- | | Fair Value of Derivative Liabilities | $55 | $0 | | Amount of Loss Recognized in Income | $(36) | $0 | - Derivatives are not designated as hedges and result from loan participation arrangements[59](index=59&type=chunk)[62](index=62&type=chunk) [Note 10. Pension](index=19&type=section&id=Note%2010.%20Pension) Total pension expense increased to **$171 thousand** in Q1 2020 due to higher actuarial losses, with further increases expected Table: Total Pension Expense | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------ | :----------------------------------------------- | :----------------------------------------------- | | Total Pension Expense | $171 | $120 | - The Bank expects its pension expense to increase to approximately **$680 thousand** in 2020 compared to **$421 thousand** in 2019, primarily due to increases in recognized net actuarial losses[64](index=64&type=chunk) [Note 11. Fair Value Measurements and Fair Values of Financial Instruments](index=19&type=section&id=Note%2011.%20Fair%20Value%20Measurements%20and%20Fair%20Values%20of%20Financial%20Instruments) This note details the fair value hierarchy, with equity securities at Level 1, AFS securities at Level 2, and no nonrecurring fair value assets Table: Fair Value of Financial Instruments | Asset Description | Fair Value at March 31, 2020 (in thousands) | Fair Value at December 31, 2019 (in thousands) | | :--------------------------------- | :------------------------------------------ | :--------------------------------------------- | | Equity Securities (Level 1) | $313 | $440 | | Available for Sale Securities (Level 2) | $208,040 | $187,433 | | Impaired Loans (Level 3, nonrecurring) | $0 | $1,080 | - No assets were measured at fair value on a nonrecurring basis at March 31, 2020[76](index=76&type=chunk)[77](index=77&type=chunk) [Note 12. Capital Ratios](index=22&type=section&id=Note%2012.%20Capital%20Ratios) The Bank remains 'well capitalized', exceeding all regulatory minimums, and did not opt-in to CBLR, with PPP loans carrying a **0%** risk-weight Table: Capital Ratios (Bank) | Capital Ratio (Bank) | March 31, 2020 | December 31, 2019 | Well Capitalized Minimum | | :------------------------------- | :------------- | :---------------- | :----------------------- | | Common Equity Tier 1 Risk-based Capital Ratio | 14.52% | 14.62% | 6.50% | | Tier 1 Risk-based Capital Ratio | 14.52% | 14.62% | 8.00% | | Total Risk-based Capital Ratio | 15.78% | 15.87% | 10.00% | | Tier 1 Leverage Ratio | 9.71% | 9.59% | 5.00% | - The Bank's capital conservation buffer at March 31, 2020, was **7.78%**, exceeding the 2020 regulatory buffer of **2.50%**[80](index=80&type=chunk) - The Bank did not opt-in to the Community Bank Leverage Ratio (CBLR) despite meeting the criteria of a Qualifying Community Banking Organization[81](index=81&type=chunk) - PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios and carry a **0%** risk-weight for risk-based capital rules[82](index=82&type=chunk) [Note 13. Revenue Recognition](index=23&type=section&id=Note%2013.%20Revenue%20Recognition) This note details revenue recognition policies for non-interest income streams, primarily transactional or monthly recognized fees - Investment and trust services fees, loan service charges, deposit service charges and fees, debit card income, and other service charges and fees are recognized as non-interest income[85](index=85&type=chunk)[87](index=87&type=chunk)[88](index=88&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk)[91](index=91&type=chunk) - Asset management fees are generally recognized monthly based on the value of assets under management[89](index=89&type=chunk) - Commissions from the sale of investment and insurance products, loan service charges, deposit service charges (transaction-based), debit card income, and other service charges are recognized upon completion of the transaction[86](index=86&type=chunk)[87](index=87&type=chunk)[88](index=88&type=chunk)[90](index=90&type=chunk)[91](index=91&type=chunk) [Note 14. Commitments and Contingencies](index=24&type=section&id=Note%2014.%20Commitments%20and%20Contingencies) Off-balance-sheet commitments totaled **$305.2 million** for credit and **$24.2 million** for standby letters of credit, with a **$2.1 million** reserve Table: Off-Balance-Sheet Commitments | Commitment Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | Commercial Commitments to Extend Credit | $241,341 | $248,251 | | Consumer Commitments to Extend Credit (secured) | $58,712 | $56,898 | | Consumer Commitments to Extend Credit (unsecured) | $5,146 | $5,088 | | Total Commitments to Extend Credit | $305,199 | $310,237 | | Standby Letters of Credit | $24,199 | $26,382 | - The Bank reversed **$250 thousand** from a **$2.4 million** allowance for a standby letter of credit, resulting in a remaining reserve of **$2.1 million** at March 31, 2020[98](index=98&type=chunk) [Note 15. Risk Factors](index=25&type=section&id=Note%2015.%20Risk%20Factors) This note highlights the COVID-19 pandemic's potential adverse effects on operations, including increased loan losses and goodwill impairment, with uncertain duration - The COVID-19 pandemic could adversely impact customer loan payments, leading to elevated loan losses and an increase in the Corporation's allowance for loan losses[104](index=104&type=chunk) - Future evaluations of the carrying amount of goodwill could result in a conclusion that goodwill is impaired[104](index=104&type=chunk) - The extent to which the coronavirus may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted[104](index=104&type=chunk) [Note 16. Reclassification](index=25&type=section&id=Note%2016.%20Reclassification) Certain prior period amounts may have been reclassified to conform to the current year presentation, but such reclassifications did not affect reported net income - Certain prior period amounts may have been reclassified to conform to the current year presentation, but these reclassifications did not affect reported net income[105](index=105&type=chunk) [Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Results%20of%20Operations%20and%20Financial%20Condition) Management discusses Q1 2020 financial performance, noting a net income decrease due to higher loan loss provisions, strong capital, and active PPP participation [Forward Looking Statements](index=26&type=section&id=Forward%20Looking%20Statements) The report contains forward-looking statements subject to risks and uncertainties, including economic conditions, interest rates, and regulatory changes - The report contains forward-looking statements that involve risks, uncertainties, and other factors over which the Corporation has no direct control, and actual results could differ materially[107](index=107&type=chunk) - Key factors include general economic conditions (particularly the negative impact of COVID-19), changes in interest rates, government monetary policy, regulation, taxation, inflation, technology, and competition[107](index=107&type=chunk) [Critical Accounting Policies](index=26&type=section&id=Critical%20Accounting%20Policies) No changes were made to the critical accounting policies disclosed in the 2019 Annual Report on Form 10-K - There were no changes to the critical accounting policies disclosed in the 2019 Annual Report on Form 10-K regarding application or related judgments and estimates[108](index=108&type=chunk) [Results of Operations](index=26&type=section&id=Results%20of%20Operations) This section details the Corporation's financial performance, including net income, net interest income, and noninterest income and expense [Summary](index=26&type=section&id=Summary) Q1 2020 net income decreased to **$1.7 million** (**$0.39** diluted EPS) due to a **$3.0 million** loan loss provision, despite stable net interest and increased noninterest income Table: Key Financial Highlights | Metric | Q1 2020 (in thousands, except per share) | Q1 2019 (in thousands, except per share) | | :------------------------- | :--------------------------------------- | :--------------------------------------- | | Net Income | $1,719 | $3,237 | | Diluted Earnings Per Share | $0.39 | $0.73 | | Net Interest Income | $10,252 | $10,329 | | Net Interest Margin | 3.53% | 3.86% | | Provision for Loan Losses | $3,000 | $399 | | Noninterest Income | $3,889 | $3,165 | - The provision for loan loss expense of **$3.0 million** was recorded due to the economic effects of the COVID-19 pandemic, increasing qualitative factors in the allowance for loan loss calculation[110](index=110&type=chunk) - The Bank funded **512** loans for **$50.1 million** (**5.4%** of gross loans) through the Paycheck Protection Program (PPP) as of April 30, 2020, expecting approximately **$2.0 million** in processing fees[112](index=112&type=chunk) [Net Interest Income](index=29&type=section&id=Net%20Interest%20Income) Tax equivalent net interest income decreased slightly to **$10.6 million** in Q1 2020 due to rate reductions, despite positive volume contribution Table: Tax Equivalent Net Interest Income | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | | :----------------------------------- | :--------------------- | :--------------------- | | Tax Equivalent Net Interest Income | $10,552 | $10,717 | | Yield on Total Interest-Earning Assets | 4.00% | 4.45% | | Cost of Total Interest-Bearing Liabilities | 0.61% | 0.77% | | Net Interest Margin (T/E) | 3.53% | 3.86% | - Balance sheet volume contributed **$77 thousand** to tax equivalent net interest, but was offset by a **$242 thousand** reduction due to rates[119](index=119&type=chunk) [Provision for Loan Losses](index=30&type=section&id=Provision%20for%20Loan%20Losses) The provision for loan losses increased substantially to **$3.0 million** in Q1 2020, directly resulting from the COVID-19 pandemic's economic effects Table: Provision for Loan Losses | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | | :------------------------ | :--------------------- | :--------------------- | | Provision for Loan Losses | $3,000 | $399 | - The increase in provision was due to the economic effects of the COVID-19 pandemic, which caused several qualitative factors in the allowance for loan loss calculation to increase from moderate to very high risk[122](index=122&type=chunk) [Noninterest Income](index=30&type=section&id=Noninterest%20Income) Noninterest income increased by **$724 thousand** (**22.9%**) to **$3.89 million** in Q1 2020, driven by an **$812 thousand** life insurance gain Table: Noninterest Income Categories | Noninterest Income Category | Q1 2020 (in thousands) | Q1 2019 (in thousands) | Change (Amount) | Change (%) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------- | | Total Noninterest Income | $3,889 | $3,165 | $724 | 22.9 | | Life Insurance Gain | $812 | $0 | $812 | NA | | Loan Service Charges | $285 | $203 | $82 | 40.4 | | Debit Card Income | $418 | $402 | $16 | 4.0 | | Change in Fair Value of Equity Securities | $(127) | $3 | $(130) | (4,333.3) | [Noninterest Expense](index=31&type=section&id=Noninterest%20Expense) Total noninterest expense increased slightly by **$116 thousand** (**1.2%**) to **$9.53 million** in Q1 2020, mainly due to higher salaries Table: Noninterest Expense Categories | Noninterest Expense Category | Q1 2020 (in thousands) | Q1 2019 (in thousands) | Change (Amount) | Change (%) | | :--------------------------- | :--------------------- | :--------------------- | :-------------- | :--------- | | Total Noninterest Expense | $9,528 | $9,412 | $116 | 1.2 | | Salaries and Employee Benefits | $5,535 | $5,442 | $93 | 1.7 | | Pennsylvania Bank Shares Tax | $175 | $243 | $(68) | (28.0) | - The decrease in Pennsylvania bank shares tax was due to tax credits associated with charitable donations[125](index=125&type=chunk) [Provision for Income Taxes](index=31&type=section&id=Provision%20for%20Income%20Taxes) The Corporation recorded a federal income tax benefit of **$106 thousand** in Q1 2020, resulting in an effective tax rate of **(6.5)%** Table: Federal Income Tax and Effective Tax Rate | Metric | Q1 2020 (in thousands) | Q1 2019 (in thousands) | | :------------------------------- | :--------------------- | :--------------------- | | Federal Income Tax (Benefit) Expense | $(106) | $446 | | Effective Tax Rate | (6.5)% | 12.1% | [Financial Condition](index=32&type=section&id=Financial%20Condition) This section reviews the Corporation's financial position, including cash, investments, loans, deposits, and shareholders' equity [Cash and Cash Equivalents](index=32&type=section&id=Cash%20and%20Cash%20Equivalents) Cash and cash equivalents decreased by **$30.5 million** to **$53.4 million** at March 31, 2020, mainly due to investment purchases Table: Cash and Cash Equivalents | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------ | :---------------------------- | :------------------------------- | | Cash and Cash Equivalents | $53,350 | $83,828 | - The decrease was mainly due to lower interest-bearing balances at the Federal Reserve from purchases in the investment portfolio[128](index=128&type=chunk) [Investment Securities](index=32&type=section&id=Investment%20Securities) The AFS securities portfolio increased by **$18.5 million** with a **$2.3 million** net unrealized gain, while equity securities decreased to **$313 thousand** - The AFS securities portfolio increased **$18.5 million** on a cost basis since year-end 2019[129](index=129&type=chunk) - The unrealized loss in the municipal bond portfolio decreased to **$242 thousand** from **$997 thousand** at December 31, 2019, with no other-than-temporary impairment charges recorded[132](index=132&type=chunk) - No other-than-temporary impairment charges were recorded for trust preferred securities or asset-backed securities, despite unrealized losses[133](index=133&type=chunk)[134](index=134&type=chunk) Table: Investment Securities Unrealized Gain/Loss | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | Net Unrealized Gain on AFS Securities | $2,293 | $234 | | Equity Securities at Fair Value | $313 | $440 | [Loans](index=32&type=section&id=Loans) The total loan portfolio increased slightly by **$1.8 million** (**0.2%**) to **$936.4 million**, driven by residential real estate and construction loans Table: Loan Portfolio by Class | Loan Class | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (Amount) | Change (%) | | :--------------------------------- | :---------------------------- | :------------------------------- | :-------------- | :--------- | | Total Loans | $936,386 | $934,575 | $1,811 | 0.2 | | Residential Real Estate 1-4 Family | $193,972 | $190,543 | $3,429 | 1.8 | | Residential Real Estate - Construction | $15,482 | $13,323 | $2,159 | 16.2 | | Commercial Real Estate | $494,143 | $494,262 | $(119) | (0.0) | | Commercial | $226,128 | $230,007 | $(3,879) | (1.7) | - Commercial loan participations decreased to **$60.3 million** (**6.4%** of total gross loans) at March 31, 2020, from **$67.7 million** (**9.4%** of total gross loans) at December 31, 2019[144](index=144&type=chunk) - The Bank retained a higher percentage of its mortgage originations in Q1 2020[139](index=139&type=chunk) [Loan Quality](index=34&type=section&id=Loan%20Quality) Loan quality remained stable at **0.40%** nonperforming loans, but **$154 million** in COVID-19 deferrals were granted, with PPP loans carrying no credit risk Table: Loan Quality Metrics | Metric | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Nonperforming Loans to Total Gross Loans | 0.40% | 0.42% | | Nonaccrual Loans | $3,673k | $3,828k | | Loans Past Due 90 Days or More and Still Accruing | $32k | $77k | - As of April 30, 2020, the Bank granted approximately **$154 million** in loan deferrals or modifications (**16%** of gross loans) in response to the pandemic[161](index=161&type=chunk) - Top industries for loan deferrals include Accommodation and Food Services (**$68.8 million**), Retail Trade (**$36.8 million**), and Real Estate and Rental and Leasing (**$26.4 million**)[164](index=164&type=chunk) - The Bank funded **$50.1 million** in PPP loans, which are **100%** guaranteed by the SBA and present no credit risk to the Bank[165](index=165&type=chunk) - Loans with high perceived pandemic risk totaled **$128.1 million** (**14%** of gross loans), concentrated in Arts, Entertainment, and Recreation; Retail Trade - Non Operating Sectors; and Accommodation and Food Services[168](index=168&type=chunk) [Allowance for Loan Losses](index=38&type=section&id=Allowance%20for%20Loan%20Losses) The ALL significantly increased to **$14.7 million** (**1.57%** of loans) due to a **$2.6 million** increase in the qualitative component from pandemic risk Table: Allowance for Loan Losses | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------- | | ALL at Period End | $14,730 | $11,966 | | ALL as a % of Loans | 1.57% | 1.28% | | Net Charge-offs (recoveries)/Average Loans* | 0.10% | 0.07% | - The qualitative component of the ALL increased by **$2.6 million** due to increased risk scores for economic conditions and level of risk, reflecting the impact of the pandemic[173](index=173&type=chunk) - No specific reserve was established for any of the individually evaluated impaired loans[170](index=170&type=chunk)[176](index=176&type=chunk) [Deposits](index=40&type=section&id=Deposits) Total deposits decreased by **$8.0 million** (**0.7%**) to **$1.117 billion** in Q1 2020, with noninterest-bearing deposits increasing but offset by declines Table: Deposits by Type | Deposit Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (Amount) | Change (%) | | :--------------------------------- | :---------------------------- | :------------------------------- | :-------------- | :--------- | | Total Deposits | $1,117,433 | $1,125,392 | $(7,959) | (0.7) | | Noninterest-bearing Checking | $198,384 | $192,108 | $6,276 | 3.3 | | Interest-bearing Checking | $319,928 | $331,886 | $(11,958) | (3.6) | | Time Deposits | $83,841 | $89,348 | $(5,507) | (6.2) | - The Bank had **$158.1 million** in ICS reciprocal deposits and **$3.2 million** in CDARS reciprocal time deposits at March 31, 2020[181](index=181&type=chunk) [Borrowings](index=40&type=section&id=Borrowings) The Corporation reported no outstanding borrowings at both March 31, 2020, and December 31, 2019 - The Corporation had no outstanding borrowings at March 31, 2020, and December 31, 2019[183](index=183&type=chunk) [Shareholders' Equity](index=40&type=section&id=Shareholders'%20Equity) Total shareholders' equity increased by **$1.5 million** to **$129.0 million**, driven by net earnings and capital contributions, with the stock repurchase plan suspended Table: Shareholders' Equity | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------- | :---------------------------- | :------------------------------- | | Total Shareholders' Equity | $129,005 | $127,528 | | Net Earnings (Q1) | $1,719 | - | | Cash Dividend (Q1) | $(1,306) | - | - The Dividend Reinvestment Plan added **$349 thousand** in new capital and **$211 thousand** from reinvested dividends[184](index=184&type=chunk) - The Corporation repurchased **36,401** shares in Q1 2020 under the 2019 Repurchase Plan, which was suspended on March 19, 2020[187](index=187&type=chunk) - The Bank was 'well capitalized' as of March 31, 2020, exceeding all regulatory minimum capital ratios[188](index=188&type=chunk) [Economy](index=41&type=section&id=Economy) The Corporation's market area has a diverse economic base, but the COVID-19 pandemic dramatically changed the economic outlook with uncertain effects - The Corporation's primary market area (Franklin, Fulton, Cumberland, and Huntingdon Counties, PA) has a diverse economic base and historically stable unemployment[192](index=192&type=chunk) - The economic outlook dramatically changed in March 2020 due to the COVID-19 pandemic, leading to curtailed economic activity, business shutdowns, and dramatically increased unemployment[194](index=194&type=chunk) - The length of this economic downturn and its effect on the Corporation is currently uncertain[194](index=194&type=chunk) [Impact of Inflation](index=42&type=section&id=Impact%20of%20Inflation) Inflation's impact on financial institutions is primarily through interest rates, which the Corporation monitors, though the precise effect is difficult to measure - The impact of inflation on financial institutions differs from other commercial enterprises, with interest rates and changes in interest rates having a more significant effect[195](index=195&type=chunk) - The Corporation monitors the Federal Reserve Open Market Committee (FOMC) decisions regarding interest rate changes, but the precise effect of inflation is difficult to measure[195](index=195&type=chunk) [Liquidity](index=42&type=section&id=Liquidity) The Corporation maintains robust liquidity through earnings, loan repayments, investment securities, deposit growth, and access to various credit lines - The Corporation maintains liquidity through earnings, loan repayments, amortizing investment securities, loan sales, deposit growth, and access to existing lines of credit[197](index=197&type=chunk) - The Bank is participating in the Paycheck Protection Program Liquidity Facility (PPPLF) to fund PPP loans, which allows full funding at a low fixed rate without accessing normal liquidity sources[201](index=201&type=chunk) - A temporary increase in funding is expected from stimulus checks provided by the CARES Act, though these funds are expected to be quickly withdrawn[201](index=201&type=chunk) Table: Available Liquidity Capacity | Liquidity Source | Available Capacity (in thousands) | | :-------------------------------- | :-------------------------------- | | Federal Home Loan Bank | $377,600 | | Federal Reserve Bank Discount Window | $21,000 | | Correspondent Banks | $21,000 | | Total | $419,600 | [Off Balance Sheet Commitments](index=43&type=section&id=Off%20Balance%20Sheet%20Commitments) Off-balance-sheet commitments include unused credit commitments and standby letters of credit, which generally do not present significant liquidity risk Table: Off-Balance-Sheet Commitments | Commitment Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------------- | :---------------------------- | :------------------------------- | | Unused Commitments | $329,400 | $336,600 | | Standby Letters of Credit | $24,199 | $26,382 | - These commitments generally do not present significant liquidity risk as many are expected to expire without being drawn upon[202](index=202&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) No material changes in the Corporation's exposure to market risk occurred during the three months ended March 31, 2020 - No material changes in the Corporation's exposure to market risk occurred during the three months ended March 31, 2020[204](index=204&type=chunk) [Item 4. Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The Corporation's disclosure controls and procedures were effective as of March 31, 2020[205](index=205&type=chunk) - There were no material changes in the Corporation's internal control over financial reporting during the quarterly period ended March 31, 2020[206](index=206&type=chunk) [Part II - Other Information](index=45&type=section&id=Part%20II%20-%20OTHER%20INFORMATION) This section provides other required information, including legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) The Corporation is involved in inherent litigation but anticipates no material adverse effect on its financial position, with no material governmental proceedings pending - The nature of the Corporation's business generates a certain amount of litigation[210](index=210&type=chunk) - Management does not anticipate that the ultimate aggregate liability from current litigation will have a material adverse effect on the Corporation's financial position[212](index=212&type=chunk) - The Corporation is unable to determine whether any claim will have a material adverse effect on its results of operations in any future reporting period[212](index=212&type=chunk) - No material proceedings are pending or known to be threatened or contemplated against the Corporation by governmental authorities[213](index=213&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) The COVID-19 pandemic is a significant new risk, potentially causing adverse impacts on business, loan portfolios, and security impairments, with uncertain duration - The COVID-19 pandemic could materially and adversely impact the Corporation's business, including significantly affecting demand for products/services, increasing credit losses in loan portfolios, and requiring further impairments on securities[215](index=215&type=chunk) - Business operations may be disrupted if significant portions of the workforce are unable to work effectively due to illness, quarantines, or government actions[215](index=215&type=chunk) - The magnitude, duration, and likelihood of the COVID-19 outbreak and its future direct and indirect effects on the economy and the Corporation's business are highly uncertain[216](index=216&type=chunk)[217](index=217&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Corporation repurchased **36,401** shares for **$1.172 million** in Q1 2020, but suspended its stock repurchase plan on March 19, 2020 Table: Equity Securities Repurchases | Metric | Q1 2020 (in thousands, except per share) | | :----------------------------------- | :--------------------------------------- | | Number of Shares Purchased | 36,401 | | Weighted Average Price Paid per Share | $32.19 | | Dollar Amount of Shares Purchased | $1,172 | - The Corporation suspended activity in its stock repurchase plan on March 19, 2020[218](index=218&type=chunk) [Item 3. Defaults Upon Senior Securities](index=46&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The Corporation reported no defaults on its senior securities - The Corporation reported no defaults on its senior securities[219](index=219&type=chunk) [Item 4. Mine Safety Disclosures](index=46&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the Corporation - Mine Safety Disclosures are not applicable to the Corporation[219](index=219&type=chunk) [Item 5. Other Information](index=47&type=section&id=Item%205.%20Other%20Information) No other information was reported under this item - No other information was reported[220](index=220&type=chunk) [Item 6. Exhibits](index=47&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the 10-Q report, including corporate documents and executive certifications - Exhibits include Articles of Incorporation, Bylaws, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and the Interactive Data File (XBRL)[220](index=220&type=chunk)[221](index=221&type=chunk) [Signatures](index=48&type=section&id=SIGNATURES) The report was signed on May 11, 2020, by the Chief Executive Officer and Chief Financial Officer, certifying its submission - The report was signed on May 11, 2020, by Timothy G. Henry (Chief Executive Officer and President) and Mark R. Hollar (Treasurer and Chief Financial Officer)[224](index=224&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Securities registered pursuant to Section 12(b) of the Act NONE PENNSYLVANIA 25-1440803 (I.R.S. Employer Identification No.) (State or other jurisdiction of incorporation or organization) 17201-0819 For the t ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 ☐ 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) (State or other ...

[Part I - FINANCIAL INFORMATION](index=3&type=section&id=Part%20I%20-%20FINANCIAL%20INFORMATION) This section details the unaudited consolidated financial statements, management's analysis, market risk, and internal controls [Item 1 Financial Statements](index=3&type=section&id=Item%201%20Financial%20Statements) This section presents unaudited consolidated financial statements, showing asset growth, a shift to net income, and improved cash flows [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific dates | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Total assets | $1,252,141 | $1,209,587 | | Total liabilities | $1,128,227 | $1,091,191 | | Total shareholders' equity | $123,914 | $118,396 | | Net Loans | $969,904 | $960,960 | | Total deposits | $1,113,049 | $1,082,629 | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) This section details the company's financial performance over specific periods, showing a significant turnaround to net income Net Income (Loss) and EPS (Three Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change | | :----------------------- | :------------------ | :------------------ | :----- | | Net Income (Loss) | $3,984 | $(5,181) | +$9,165 | | Basic EPS | $0.91 | $(1.18) | +$2.09 | | Diluted EPS | $0.90 | $(1.18) | +$2.08 | Net Income (Loss) and EPS (Six Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change | | :----------------------- | :------------------ | :------------------ | :----- | | Net Income (Loss) | $7,221 | $(1,679) | +$8,900 | | Basic EPS | $1.64 | $(0.38) | +$2.02 | | Diluted EPS | $1.63 | $(0.38) | +$2.01 | - Provision for loan losses significantly decreased: **$0** for Q2 2019 vs. **$9,129 thousand** for Q2 2018, and **$399 thousand** for YTD 2019 vs. **$9,329 thousand** for YTD 2018[12](index=12&type=chunk) [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents comprehensive income, including net income and other comprehensive income components, for the reported periods Total Comprehensive Income (Loss) (Three Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change | | :--------------------------- | :------------------ | :------------------ | :----- | | Total Comprehensive Income (Loss) | $4,767 | $(5,453) | +$10,220 | Total Comprehensive Income (Loss) (Six Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change | | :--------------------------- | :------------------ | :------------------ | :----- | | Total Comprehensive Income (Loss) | $9,103 | $(2,732) | +$11,835 | - Net unrealized gains on debt securities for the six months ended June 30, 2019, were **$2,381 thousand**, a significant improvement from a loss of **$(1,387) thousand** in 2018[15](index=15&type=chunk) [Consolidated Statements of Changes in Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) This section details the changes in shareholders' equity, reflecting net income, dividends, and stock repurchases Shareholders' Equity Changes (Six Months Ended June 30, 2019) | Metric | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Balance at January 1, 2019 | $118,396 | | Net income | $7,221 | | Other comprehensive income | $1,882 | | Cash dividends declared | $(2,509) | | Acquisition of treasury stock | $(2,027) | | Balance at June 30, 2019 | $123,914 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section summarizes cash inflows and outflows from operating, investing, and financing activities over the period Cash Flow Summary (Six Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change | | :------------------------------------ | :------------------ | :------------------ | :----- | | Net cash provided (used) by operating activities | $8,509 | $(2,244) | +$10,753 | | Net cash used in investing activities | $(5,854) | $(36,113) | +$30,259 | | Net cash provided by financing activities | $26,835 | $9,224 | +$17,611 | | Increase (decrease) in cash and cash equivalents | $29,490 | $(29,133) | +$58,623 | | Cash and cash equivalents at end of period | $82,447 | $29,470 | +$52,977 | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations of accounting policies, significant transactions, and financial instrument details - The Corporation adopted **ASU 2016-02**, 'Leases (Topic 842),' on January 1, 2019, recognizing a **$6.2 million** lease liability and a right-of-use asset without a material effect on consolidated results of operations[27](index=27&type=chunk)[52](index=52&type=chunk) - **ASU 2016-13**, 'Financial Instruments - Credit Losses (Topic 326)' (**CECL model**), is effective January 1, 2020 (delayed for smaller reporting companies to January 2023) and is expected to result in earlier recognition and potentially a larger allowance for loan losses[28](index=28&type=chunk) Key Investment and Loan Metrics | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | | AFS securities fair value | $129,422 | $131,472 | | Net gains on sales of debt securities (YTD) | $253 | $52 | | Total loans outstanding | $982,457 | $973,375 | | Allowance for Loan Losses (ALL) | $12,553 | $12,415 | | Impaired loans | $14,359 | $11,926 | | Nonaccrual loans | $5,312 | $2,300 | - The Bank was **'well capitalized'** under Basel III requirements at June 30, 2019, with a Common Equity Tier 1 Risk-based Capital Ratio of **13.77%** and a Total Risk-based Capital Ratio of **15.02%**[76](index=76&type=chunk)[78](index=78&type=chunk) - Total commercial commitments to extend credit increased to **$270,082 thousand** at June 30, 2019, from **$216,913 thousand** at December 31, 2018[90](index=90&type=chunk) [Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition](index=28&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Results%20of%20Operations%20and%20Financial%20Condition) This section analyzes the Corporation's improved financial performance, driven by increased net interest income and reduced loan loss provisions [Summary of Operations](index=28&type=section&id=Summary%20of%20Operations) This section provides an overview of the Corporation's financial results, highlighting net income and key performance ratios - Reported net income of **$4.0 million** for the second quarter and **$7.2 million** year-to-date, a significant improvement from prior year losses[102](index=102&type=chunk) - Diluted earnings per share increased to **$0.90** for Q2 2019 (from **-$1.18** in Q2 2018) and **$1.63** year-to-date (from **-$0.38** in YTD 2018)[103](index=103&type=chunk) - Total assets were **$1.252 billion** at June 30, 2019, an increase of **$42.6 million** from year-end 2018[103](index=103&type=chunk) Key Performance Ratios (Year-to-Date Annualized June 30) | Metric | 2019 | 2018 | | :-------------------------------- | :----- | :----- | | Return on average assets | 1.18% | -0.29% | | Return on average equity | 12.02% | -2.89% | | Efficiency ratio | 67.34% | 73.96% | | Net interest margin | 3.80% | 3.75% | | Nonperforming loans/gross loans | 0.59% | 0.59% | | Allowance for loan losses as a % of loans | 1.28% | 1.29% | [Net Interest Income](index=31&type=section&id=Net%20Interest%20Income) This section analyzes changes in net interest income, driven by fluctuations in asset and liability volumes and rates - Tax equivalent net interest income increased by **$449 thousand** to **$10.9 million** in Q2 2019 (from **$10.5 million** in Q2 2018), driven by volume (**$346 thousand**) and rate changes (**$103 thousand**)[111](index=111&type=chunk)[113](index=113&type=chunk) - For the first half of 2019, tax equivalent net interest income increased **$1.1 million** to **$21.6 million** (from **$20.5 million** in H1 2018), with volume contributing **$676 thousand** and rates **$427 thousand**[121](index=121&type=chunk)[123](index=123&type=chunk) Net Interest Margin and Cost of Funds | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :---------------- | :------ | :------ | :------- | :------- | | Net Interest Margin | 3.74% | 3.78% | 3.80% | 3.75% | | Cost of Funds | 0.66% | 0.37% | 0.65% | 0.34% | [Provision for Loan Losses](index=33&type=section&id=Provision%20for%20Loan%20Losses) This section details the provision for loan losses, reflecting changes in loan portfolio quality and growth - **No provision** for loan loss expense was recorded for Q2 2019 due to slower loan growth, compared to **$9.1 million** in Q2 2018, which included an **$8.7 million** charge-off from a loan participation[114](index=114&type=chunk) - Year-to-date provision for loan loss expense was **$399 thousand** in 2019, significantly down from **$9.3 million** in 2018[124](index=124&type=chunk) [Noninterest Income](index=33&type=section&id=Noninterest%20Income) This section analyzes noninterest income sources, including investment and trust fees, and debt securities gains Noninterest Income (Three Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change Amount | Change % | | :------------------------------------ | :------------------ | :------------------ | :------------ | :------- | | Total noninterest income | $3,696 | $3,221 | $475 | 14.7 | | Investment and trust services fees | $1,647 | $1,464 | $183 | 12.5 | | Debt securities gains, net | $229 | $52 | $177 | 340.4 | | Debit card income | $464 | $417 | $47 | 11.3 | Noninterest Income (Six Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change Amount | Change % | | :------------------------------------ | :------------------ | :------------------ | :------------ | :------- | | Total noninterest income | $6,862 | $6,369 | $493 | 7.7 | | Investment and trust services fees | $3,099 | $2,861 | $238 | 8.3 | | Debt securities gains, net | $253 | $52 | $201 | 386.5 | | Debit card income | $866 | $802 | $64 | 8.0 | [Noninterest Expense](index=34&type=section&id=Noninterest%20Expense) This section details noninterest expenses, including salaries, benefits, and other operating costs Noninterest Expense (Three Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change Amount | Change % | | :------------------------------------ | :------------------ | :------------------ | :------------ | :------- | | Total noninterest expense | $9,606 | $11,188 | $(1,582) | (14.1) | | Provision for credit losses on off-balance sheet exposures | $0 | $2,361 | $(2,361) | (100.0) | | Salaries and benefits | $5,355 | $5,096 | $259 | 5.1 | | Advertising | $481 | $341 | $140 | 41.1 | | Data processing | $738 | $604 | $134 | 22.2 | Noninterest Expense (Six Months Ended June 30) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change Amount | Change % | | :------------------------------------ | :------------------ | :------------------ | :------------ | :------- | | Total noninterest expense | $19,017 | $19,837 | $(820) | (4.1) | | Provision for credit losses on off-balance sheet exposures | $0 | $2,361 | $(2,361) | (100.0) | | Salaries and employee benefits | $10,797 | $10,082 | $715 | 7.1 | | Legal and professional | $901 | $771 | $130 | 16.9 | [Provision for Income Taxes](index=34&type=section&id=Provision%20for%20Income%20Taxes) This section outlines the income tax expense or benefit, reflecting pre-tax income and effective tax rates - Federal income tax expense for Q2 2019 was **$669 thousand**, compared to a tax benefit of **$(1,816) thousand** in Q2 2018, due to a pre-tax loss in 2018[119](index=119&type=chunk) - For the first half of 2019, federal income tax expense was **$1.1 million**, compared to a tax benefit of **$(1.3) million** in H1 2018. The effective tax rate for YTD 2019 was **13.4%**[133](index=133&type=chunk) [Financial Condition](index=37&type=section&id=Financial%20Condition) This section reviews the Corporation's financial position, including cash, investments, loans, deposits, and capital adequacy - Cash and cash equivalents increased by **$29.4 million** to **$82.4 million** at June 30, 2019, from **$53.0 million** at year-end 2018[135](index=135&type=chunk) - The AFS securities portfolio had a net unrealized gain of **$1.3 million** at June 30, 2019, compared to a net unrealized loss of **$1.1 million** at prior year-end[137](index=137&type=chunk) Loans Outstanding by Class | Loan Class | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | Change Amount | Change % | | :------------------------------------ | :----------------------------- | :------------------------------- | :------------ | :------- | | Total residential real estate 1-4 family | $191,903 | $196,120 | $(4,217) | (2.2) | | Total residential real estate - construction | $14,088 | $10,225 | $3,863 | 37.8 | | Commercial real estate | $505,653 | $487,980 | $17,673 | 3.6 | | Commercial | $264,862 | $274,054 | $(9,192) | (3.4) | | Consumer | $5,951 | $4,996 | $955 | 19.1 | | Total loans | $982,457 | $973,375 | $9,082 | 0.9 | Nonperforming Assets | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | | Total nonaccrual loans | $5,312 | $2,300 | | Total loans past due 90 days or more and still accruing | $360 | $357 | | Total nonperforming loans | $5,672 | $2,657 | | Other real estate owned | $2,684 | $2,684 | | Total nonperforming assets | $8,356 | $5,341 | | Nonperforming loans to total gross loans | 0.58% | 0.27% | | Allowance for loan losses to nonperforming loans | 221.32% | 467.26% | - Total deposits increased **$30.4 million** (**2.8%**) to **$1.113 billion**, driven by a **$24.4 million** (**39.7%**) increase in time deposits[176](index=176&type=chunk)[178](index=178&type=chunk) - Shareholders' equity increased **$5.5 million** to **$123.9 million**, with a dividend payout ratio of **34.75%** for the first six months of 2019[180](index=180&type=chunk) - The Bank was **'well capitalized'** under Basel III requirements at June 30, 2019, with a Total Risk-based Capital Ratio of **15.02%** (minimum **10.00%**)[184](index=184&type=chunk)[185](index=185&type=chunk) - The Bank maintains strong liquidity, with **$371.9 million** available borrowing capacity from FHLB and **$17.1 million** from the Federal Reserve Discount Window[193](index=193&type=chunk)[194](index=194&type=chunk) [Item 3 Quantitative and Qualitative Disclosures about Market Risk](index=46&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) There were no material changes in the Corporation's exposure to market risk during the six months ended June 30, 2019 - **No material changes** in the Corporation's exposure to market risk during the six months ended June 30, 2019[197](index=197&type=chunk) [Item 4 Controls and Procedures](index=46&type=section&id=Item%204%20Controls%20and%20Procedures) The Corporation's management, including the Chief Executive Officer and Chief Financial Officer, concluded that its disclosure controls and procedures were effective as of June 30, 2019. No material changes in internal control over financial reporting occurred during the quarter - The Corporation's disclosure controls and procedures were **effective** as of June 30, 2019[198](index=198&type=chunk) - **No material changes** in internal control over financial reporting occurred during the quarterly period ended June 30, 2019[198](index=198&type=chunk) [Part II - OTHER INFORMATION](index=47&type=section&id=Part%20II%20-%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, defaults, and other miscellaneous disclosures [Item 1 Legal Proceedings](index=47&type=section&id=Item%201%20Legal%20Proceedings) Management believes there are no material legal proceedings pending or threatened against the Corporation. A previously disclosed class action lawsuit was settled in July 2018, with a $10.0 million payment made by F&M Trust in May 2018, which had been accrued in 2017 - **No material legal proceedings** are pending or known to be threatened against the Corporation[203](index=203&type=chunk) - The Kalan et al. v. Farmers and Merchants Trust Company of Chambersburg, et al. class action lawsuit settlement was granted final approval on July 31, 2018, with a **$10.0 million** payment made in May 2018[204](index=204&type=chunk) [Item 1A Risk Factors](index=47&type=section&id=Item%201A%20Risk%20Factors) There were no material changes in the Corporation's risk factors during the six months ended June 30, 2019 - **No material changes** in the Corporation's risk factors during the six months ended June 30, 2019[205](index=205&type=chunk) [Item 2 Unregistered Sales of Equity Securities and Use of Proceeds](index=48&type=section&id=Item%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q2 2019, the Corporation repurchased 39,600 shares of common stock for $1,467 thousand under the 2018 Repurchase Plan, which authorized up to 100,000 shares and was completed in Q3 2019 Shares Repurchased (Q2 2019) | Period | Number of Shares Purchased | Weighted Average Price Paid per Share | Dollar Amount of Shares Purchased (in thousands) | | :------- | :------------------------- | :------------------------------------ | :----------------------------------------------- | | April 2019 | 21,940 | $36.83 | $808 | | May 2019 | 300 | $38.08 | $11 | | June 2019 | 17,360 | $37.32 | $648 | | **Total** | **39,600** | **$37.05** | **$1,467** | - The 2018 Repurchase Plan, authorizing up to **100,000 shares**, was completed in the third quarter of 2019[207](index=207&type=chunk) [Item 3 Defaults Upon Senior Securities](index=48&type=section&id=Item%203%20Defaults%20Upon%20Senior%20Securities) The Company reported no defaults upon senior securities - **No defaults** upon senior securities[208](index=208&type=chunk) [Item 4 Mine Safety Disclosures](index=48&type=section&id=Item%204%20Mine%20Safety%20Disclosures) This item is not applicable to the Corporation - **Not Applicable**[209](index=209&type=chunk) [Item 5 Other Information](index=49&type=section&id=Item%205%20Other%20Information) No other information was reported in this section - **No other information** was reported[210](index=210&type=chunk) [Item 6 Exhibits](index=49&type=section&id=Item%206%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, the 2019 Omnibus Stock Incentive Plan, and various certifications - Exhibits include **Articles of Incorporation**, **Bylaws**, **2019 Omnibus Stock Incentive Plan**, **Rule 13a – 14(a)/15d-14(a) Certifications**, **Section 1350 Certifications**, and the **Interactive Data File (XBRL)**[210](index=210&type=chunk) [SIGNATURES](index=50&type=section&id=SIGNATURES) The report was duly signed on August 2, 2019, by Timothy G. Henry, Chief Executive Officer and President, and Mark R. Hollar, Treasurer and Chief Financial Officer - The report was signed by **Timothy G. Henry (CEO and President)** and **Mark R. Hollar (Treasurer and CFO)** on August 2, 2019[214](index=214&type=chunk)