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

20 South Main Street, 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 4,419,642 outstanding shares of the Registrant’s common stock as of July 31, 2021.

INDEX

Part I - FINANCIAL INFORMATION |
Item 1 | Financial Statements |
| Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 (unaudited) | 1
| Consolidated Statements of Income for the Three and Six Months ended June 30, 2021 | 2
| and 2020 (unaudited) |
| Consolidated Statements of Comprehensive Income for the Three and Six Months ended | 3
| June 30, 2021 and 2020 (unaudited) |
| Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months | 3
| ended June 30, 2021 and 2020 (unaudited) |
| Consolidated Statements of Cash Flows for the Six Months ended June 30, 2021 | 5
| and 2020 (unaudited) |
| Notes to Consolidated Financial Statements (unaudited) | 6
Item 2 | Management’s Discussion and Analysis of Results of Operations and Financial Condition | 29
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 51
Item 4 | Controls and Procedures | 52
Part II - OTHER INFORMATION |
Item 1 | Legal Proceedings | 53
Item 1A | Risk Factors | 53
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 53
Item 3 | Defaults Upon Senior Securities | 53
Item 4 | Mine Safety Disclosures | 53
Item 5 | Other Information | 54
Item 6 | Exhibits | 54
SIGNATURE PAGE | 55

#

Part I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets

(Dollars in thousands, except share and per share data) | (unaudited) |  |  |
| June 30, |  | December 31,
| 2021 |  | 2020
Assets |  |  |  |  |
Cash and due from banks | $ | 16,499 |  | $ | 17,059
Short-term interest-bearing deposits in other banks |  | 81,632 |  |  | 40,087
Total cash and cash equivalents |  | 98,131 |  |  | 57,146
Long-term interest-bearing deposits in other banks |  | 10,492 |  |  | 12,741
Debt securities available for sale, at fair value |  | 512,247 |  |  | 396,940
Equity securities |  | 482 |  |  | 391
Restricted stock |  | 495 |  |  | 468
Loans held for sale |  | 5,537 |  |  | 9,446
Loans |  | 999,035 |  |  | 1,009,704
Allowance for loan losses |  | (15,055) |  |  | (16,789)
Net Loans |  | 983,980 |  |  | 992,915
Premises and equipment, net |  | 11,183 |  |  | 13,105
Right of use asset |  | 5,023 |  |  | 5,272
Bank owned life insurance |  | 22,515 |  |  | 22,288
Goodwill |  | 9,016 |  |  | 9,016
Deferred tax asset, net |  | 6,231 |  |  | 2,401
Other assets |  | 12,976 |  |  | 12,909
Total assets | $ | 1,678,308 |  | $ | 1,535,038
Liabilities |  |  |  |  |
Deposits |  |  |  |  |
Noninterest-bearing checking | $ | 293,350 |  | $ | 259,060
Money management, savings, and interest checking |  | 1,128,041 |  |  | 1,019,348
Time |  | 69,817 |  |  | 76,165
Total deposits |  | 1,491,208 |  |  | 1,354,573
Subordinate notes |  | 19,571 |  |  | 19,555
Lease liability |  | 5,105 |  |  | 5,332
Other liabilities |  | 11,268 |  |  | 10,402
Total liabilities |  | 1,527,152 |  |  | 1,389,862
Commitments and contingent liabilities |  |  |  |  |
Shareholders' equity |  |  |  |  |
Common stock, $1 par value per share,15,000,000 shares authorized with |  |  |  |  |
4,710,872 shares issued and 4,425,092 shares outstanding at June 30, 2021 and |  |  |  |  |
4,710,872 shares issued and 4,389,355 shares outstanding at December 31, 2020 |  | 4,711 |  |  | 4,711
Capital stock no par value, 5,000,000 shares authorized with no |  |  |  |  |
shares issued and outstanding |  | — |  |  | —
Additional paid-in capital |  | 42,774 |  |  | 42,589
Retained earnings |  | 109,930 |  |  | 102,520
Accumulated other comprehensive income |  | 844 |  |  | 3,190
Treasury stock, 285,780 shares at June 30, 2021 and 321,517 shares at |  |  |  |  |
December 31, 2020, at cost |  | (7,103) |  |  | (7,834)
Total shareholders' equity |  | 151,156 |  |  | 145,176
Total liabilities and shareholders' equity | $ | 1,678,308 |  | $ | 1,535,038

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

1

# Consolidated Statements of Income

|  | For the Three Months Ended |  | For the Six Months Ended
(Dollars in thousands, except per share data) (unaudited) |  | June 30, |  | June 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Interest income |  |  |  |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 9,188 |  | $ | 9,680 |  | $ | 18,569 |  | $ | 19,848
Interest and dividends on investments: |  |  |  |  |  |  |  |  |  |  |  |
Taxable interest |  |  | 1,755 |  |  | 1,048 |  |  | 3,377 |  |  | 2,110
Tax exempt interest |  |  | 530 |  |  | 352 |  |  | 1,062 |  |  | 524
Dividend income |  |  | 12 |  |  | 3 |  |  | 15 |  |  | 9
Interesting-bearing deposits in other banks |  |  | 58 |  |  | 82 |  |  | 112 |  |  | 340
Total interest income |  |  | 11,543 |  |  | 11,165 |  |  | 23,135 |  |  | 22,831
Interest expense |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 457 |  |  | 833 |  |  | 943 |  |  | 2,246
Subordinate notes |  |  | 263 |  |  | — |  |  | 525 |  |  | —
Total interest expense |  |  | 720 |  |  | 833 |  |  | 1,468 |  |  | 2,246
Net interest income |  |  | 10,823 |  |  | 10,332 |  |  | 21,667 |  |  | 20,585
(Recovery of) provision for loan losses |  |  | (1,100) |  |  | 1,975 |  |  | (1,900) |  |  | 4,975
Net interest income after provision for loan losses |  |  | 11,923 |  |  | 8,357 |  |  | 23,567 |  |  | 15,610
Noninterest income |  |  |  |  |  |  |  |  |  |  |  |
Investment and trust services fees |  |  | 1,905 |  |  | 1,590 |  |  | 3,542 |  |  | 3,035
Loan service charges |  |  | 227 |  |  | 274 |  |  | 423 |  |  | 414
Gain on sale of loans |  |  | 555 |  |  | 228 |  |  | 1,337 |  |  | 372
Deposit service charges and fees |  |  | 470 |  |  | 397 |  |  | 938 |  |  | 962
Other service charges and fees |  |  | 420 |  |  | 336 |  |  | 816 |  |  | 683
Debit card income |  |  | 576 |  |  | 438 |  |  | 1,093 |  |  | 857
Increase in cash surrender value of Bank owned life insurance |  |  | 112 |  |  | 112 |  |  | 227 |  |  | 236
Bank owned life insurance gain |  |  | — |  |  | — |  |  | — |  |  | 812
Gains (losses) on sales of debt securities |  |  | 91 |  |  | — |  |  | 91 |  |  | (10)
Change in fair value of equity securities |  |  | 38 |  |  | 27 |  |  | 91 |  |  | (100)
Other |  |  | 95 |  |  | 10 |  |  | 158 |  |  | 40
Total noninterest income |  |  | 4,489 |  |  | 3,412 |  |  | 8,716 |  |  | 7,301
Noninterest Expense |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 6,245 |  |  | 5,382 |  |  | 11,903 |  |  | 10,916
Net occupancy |  |  | 856 |  |  | 865 |  |  | 1,766 |  |  | 1,695
Marketing and advertising |  |  | 396 |  |  | 464 |  |  | 740 |  |  | 919
Legal and professional |  |  | 498 |  |  | 430 |  |  | 973 |  |  | 825
Data processing |  |  | 888 |  |  | 834 |  |  | 1,817 |  |  | 1,641
Pennsylvania bank shares tax |  |  | 308 |  |  | 263 |  |  | 400 |  |  | 438
FDIC Insurance |  |  | 179 |  |  | 88 |  |  | 382 |  |  | 148
ATM/debit card processing |  |  | 329 |  |  | 279 |  |  | 625 |  |  | 543
Telecommunications |  |  | 83 |  |  | 108 |  |  | 213 |  |  | 213
Nonservice pension |  |  | 189 |  |  | 88 |  |  | 395 |  |  | 176
Other |  |  | 140 |  |  | 843 |  |  | 1,063 |  |  | 1,659
Total noninterest expense |  |  | 10,111 |  |  | 9,644 |  |  | 20,277 |  |  | 19,173
Income before federal income taxes |  |  | 6,301 |  |  | 2,125 |  |  | 12,006 |  |  | 3,738
Federal income tax expense (benefit) |  |  | 1,030 |  |  | (942) |  |  | 1,905 |  |  | (1,048)
Net income |  | $ | 5,271 |  | $ | 3,067 |  | $ | 10,101 |  | $ | 4,786
Per share |  |  |  |  |  |  |  |  |  |  |  |
Basic earnings per share |  | $ | 1.19 |  | $ | 0.71 |  | $ | 2.29 |  | $ | 1.10
Diluted earnings per share |  | $ | 1.19 |  | $ | 0.71 |  | $ | 2.28 |  | $ | 1.10

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

2

# Consolidated Statements of Comprehensive Income

|  | For the Three Months Ended |  | For the Six Months Ended
|  | June 30, |  | June 30,
(Dollars in thousands) (unaudited) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Net Income |  | $ | 5,271 |  | $ | 3,067 |  | $ | 10,101 |  | $ | 4,786
Debt Securities: |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gains (losses) gains arising during the period |  |  | 7,699 |  |  | 4,602 |  |  | (2,878) |  |  | 6,650
Reclassification adjustment for (gains) losses included in net income (1) |  |  | (91) |  |  | — |  |  | (91) |  |  | 10
Net unrealized gains (losses) |  |  | 7,608 |  |  | 4,602 |  |  | (2,969) |  |  | 6,660
Tax effect |  |  | (1,598) |  |  | (967) |  |  | 623 |  |  | (1,399)
Net of tax amount |  |  | 6,010 |  |  | 3,635 |  |  | (2,346) |  |  | 5,261
Total other comprehensive income (loss) |  |  | 6,010 |  |  | 3,635 |  |  | (2,346) |  |  | 5,261
Total Comprehensive Income |  | $ | 11,281 |  | $ | 6,702 |  | $ | 7,755 |  | $ | 10,047
(1) Reclassified to net gains on sales of debt securities |  |  |  |  |  |  |  |  |  |  |  |

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

‎

3

# Consolidated Statements of Changes in Shareholders’ Equity

For the three and six months ended June 30, 2021 and 2020

|  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |
|  |  |  |  |  | Additional |  |  |  |  | Other |  |  |  |  |  |
| Shares |  | Common |  | Paid-in |  | Retained |  | Comprehensive |  | Treasury |  |  |
(Dollars in thousands, except per share data) (unaudited) | Outstanding |  | Stock |  | Capital |  | Earnings |  | Income (Loss) |  | Stock |  | Total
Balance at April 1, 2021 | 4,407,583 |  | $ | 4,711 |  | $ | 42,513 |  | $ | 106,032 |  | $ | (5,166) |  | $ | (7,391) |  | $ | 140,699
Net income |  |  |  | — |  |  | — |  |  | 5,271 |  |  | — |  |  | — |  |  | 5,271
Other comprehensive income |  |  |  | — |  |  | — |  |  | — |  |  | 6,010 |  |  | — |  |  | 6,010
Cash dividends declared, $0.31 per share |  |  |  | — |  |  | — |  |  | (1,373) |  |  | — |  |  | — |  |  | (1,373)
Acquisition of treasury stock | (23,155) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (706) |  |  | (706)
Treasury shares issued under dividend reinvestment plan | 36,327 |  |  | — |  |  | 212 |  |  | — |  |  | — |  |  | 887 |  |  | 1,099
Stock Compensation Plans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Treasury shares issued | 4,337 |  |  | — |  |  | (18) |  |  | — |  |  | — |  |  | 107 |  |  | 89
Compensation expense |  |  |  | — |  |  | 67 |  |  | — |  |  | — |  |  | — |  |  | 67
Balance at June 30, 2021 | 4,425,092 |  | $ | 4,711 |  | $ | 42,774 |  | $ | 109,930 |  | $ | 844 |  | $ | (7,103) |  | $ | 151,156
Balance at January 1, 2021 | 4,389,355 |  | $ | 4,711 |  | $ | 42,589 |  | $ | 102,520 |  | $ | 3,190 |  | $ | (7,834) |  | $ | 145,176
Net income |  |  |  | — |  |  | — |  |  | 10,101 |  |  | — |  |  | — |  |  | 10,101
Other comprehensive income |  |  |  | — |  |  | — |  |  | — |  |  | (2,346) |  |  | — |  |  | (2,346)
Cash dividends declared, $0.61 per share |  |  |  | — |  |  | — |  |  | (2,691) |  |  | — |  |  | — |  |  | (2,691)
Acquisition of treasury stock | (23,629) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (719) |  |  | (719)
Treasury shares issued under dividend reinvestment plan | 48,009 |  |  | — |  |  | 252 |  |  | — |  |  | — |  |  | 1,172 |  |  | 1,424
Stock Compensation Plans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Treasury shares issued | 11,357 |  |  | — |  |  | (182) |  |  | — |  |  | — |  |  | 278 |  |  | 96
Compensation expense |  |  |  | — |  |  | 115 |  |  | — |  |  | — |  |  | — |  |  | 115
Balance at June 30, 2021 | 4,425,092 |  | $ | 4,711 |  | $ | 42,774 |  | $ | 109,930 |  | $ | 844 |  | $ | (7,103) |  | $ | 151,156

Balance at April 1, 2020 | 4,337,520 |  | $ | 4,711 |  | $ | 42,390 |  | $ | 95,359 |  | $ | (4,360) |  | $ | (9,095) |  | $ | 129,005
Net income |  |  |  | — |  |  | — |  |  | 3,067 |  |  | — |  |  | — |  |  | 3,067
Other comprehensive income |  |  |  | — |  |  | — |  |  | — |  |  | 3,635 |  |  | — |  |  | 3,635
Cash dividends declared, $0.30 per share |  |  |  | — |  |  | — |  |  | (1,302) |  |  | — |  |  | — |  |  | (1,302)
Treasury shares issued under dividend reinvestment plan | 14,964 |  |  | — |  |  | 16 |  |  | — |  |  | — |  |  | 364 |  |  | 380
Stock Compensation Plans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Compensation expense |  |  |  | — |  |  | 55 |  |  | — |  |  | — |  |  | — |  |  | 55
Balance at June 30, 2020 | 4,352,484 |  | $ | 4,711 |  | $ | 42,461 |  | $ | 97,124 |  | $ | (725) |  | $ | (8,731) |  | $ | 134,840
Balance at January 1, 2020 | 4,352,753 |  | $ | 4,710 |  | $ | 42,268 |  | $ | 94,946 |  | $ | (5,986) |  | $ | (8,410) |  | $ | 127,528
Net income |  |  |  | — |  |  | — |  |  | 4,786 |  |  | — |  |  | — |  |  | 4,786
Other comprehensive income |  |  |  | — |  |  | — |  |  | — |  |  | 5,261 |  |  | — |  |  | 5,261
Cash dividends declared, $0.60 per share |  |  |  | — |  |  | — |  |  | (2,608) |  |  | — |  |  | — |  |  | (2,608)
Acquisition of treasury stock | (36,401) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,172) |  |  | (1,172)
Treasury shares issued under dividend reinvestment plan | 35,088 |  |  | — |  |  | 91 |  |  | — |  |  | — |  |  | 849 |  |  | 940
Stock Compensation Plans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Treasury shares issued | 71 |  |  | — |  |  | 1 |  |  | — |  |  | — |  |  | 2 |  |  | 3
Common shares issued | 973 |  |  | 1 |  |  | 15 |  |  | — |  |  | — |  |  | — |  |  | 16
Compensation expense |  |  |  | — |  |  | 86 |  |  | — |  |  | — |  |  | — |  |  | 86
Balance at June 30, 2020 | 4,352,484 |  | $ | 4,711 |  | $ | 42,461 |  | $ | 97,124 |  | $ | (725) |  | $ | (8,731) |  | $ | 134,840

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

#

4

# Consolidated Statements of Cash Flows

|  | Six Months Ended ‎June 30,
|  | 2021 |  | 2020
(Dollars in thousands) (unaudited) |  |  |  |  |  |
Cash flows from operating activities |  |  |  |  |  |
Net income |  | $ | 10,101 |  | $ | 4,786
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |
Depreciation and amortization |  |  | 647 |  |  | 663
Net amortization of loans and investment securities |  |  | 497 |  |  | 867
Amortization of subordinate debt issuance costs |  |  | 526 |  |  | —
(Recovery of) provision for loan losses |  |  | (1,900) |  |  | 4,975
(Increase) decrease in fair value of equity securities |  |  | (91) |  |  | 100
Debt securities (gains) losses, net |  |  | (91) |  |  | 10
Loans originated for sale |  |  | (57,028) |  |  | (28,817)
Proceeds from sale of loans |  |  | 62,274 |  |  | 25,974
Gain on sale of loans |  |  | (1,337) |  |  | (372)
Increase in cash surrender value of bank owned life insurance |  |  | (227) |  |  | (236)
Decrease (increase) in fair value of derivative |  |  | 16 |  |  | (36)
Gains from surrender of life insurance policies |  |  | — |  |  | (812)
Income tax benefit of statutory treatment of net operating loss carryback |  |  | — |  |  | (1,112)
Stock option compensation |  |  | 115 |  |  | 86
Increase in other assets |  |  | (2,231) |  |  | (2,459)
Increase (decrease) in other liabilities |  |  | 816 |  |  | (1,045)
Net cash provided by operating activities |  |  | 12,087 |  |  | 2,572
Cash flows from investing activities |  |  |  |  |  |
Net decrease (increase) in long-term interest-bearing deposits in other banks |  |  | 2,249 |  |  | (5,239)
Proceeds from sales and calls of investment securities available for sale |  |  | 16,060 |  |  | 165
Proceeds from maturities and pay-downs of securities available for sale |  |  | 17,744 |  |  | 21,049
Purchase of investment securities available for sale |  |  | (153,392) |  |  | (114,107)
Net increase in restricted stock |  |  | (27) |  |  | (3)
Net decrease (increase) in loans |  |  | 11,741 |  |  | (78,056)
Proceeds from surrender of bank owned life insurance policy |  |  | — |  |  | 3,623
Capital expenditures |  |  | (222) |  |  | (373)
Net cash used in investing activities |  |  | (105,847) |  |  | (172,941)
Cash flows from financing activities |  |  |  |  |  |
Net increase in demand deposits, interest-bearing checking, and savings accounts |  |  | 142,983 |  |  | 157,599
Net decrease in time deposits |  |  | (6,348) |  |  | (9,638)
Dividends paid |  |  | (2,691) |  |  | (2,608)
Purchase of Treasury shares |  |  | (719) |  |  | (1,172)
Cash received from option exercises |  |  | 96 |  |  | 19
Treasury shares issued under dividend reinvestment plan |  |  | 1,424 |  |  | 940
Net cash provided by financing activities |  |  | 134,745 |  |  | 145,140
Increase (decrease) in cash and cash equivalents |  |  | 40,985 |  |  | (25,229)
Cash and cash equivalents at the beginning of the period |  |  | 57,146 |  |  | 83,828
Cash and cash equivalents at the end of the period |  | $ | 98,131 |  | $ | 58,599
Supplemental Disclosures of Cash Flow Information |  |  |  |  |  |
Cash paid during the year for: |  |  |  |  |  |
Interest on deposits and other borrowed funds |  | $ | 1,554 |  | $ | 2,424
Income taxes |  | $ | 1,458 |  | $ | 567
Noncash Activities |  |  |  |  |  |
Lease liabilities arising from obtaining right-of-use assets |  | $ | — |  | $ | 105

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

5

# 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 June 30, 2021, 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 2020 Annual Report on Form 10-K. The consolidated results of operations for the three and six-month periods ended June 30, 2021 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, 2020 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 Six Months Ended
|  | June 30, |  | June 30,
(Dollars and shares in thousands, except per share data) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Weighted average shares outstanding (basic) |  |  | 4,425 |  |  | 4,345 |  |  | 4,411 |  |  | 4,346
Impact of common stock equivalents |  |  | 19 |  |  | 5 |  |  | 21 |  |  | 8
Weighted average shares outstanding (diluted) |  |  | 4,444 |  |  | 4,350 |  |  | 4,432 |  |  | 4,354
Anti-dilutive options excluded from calculation |  |  | 30 |  |  | 80 |  |  | 61 |  |  | 80
Net income |  | $ | 5,271 |  | $ | 3,067 |  | $ | 10,101 |  | $ | 4,786
Basic earnings per share |  | $ | 1.19 |  | $ | 0.71 |  | $ | 2.29 |  | $ | 1.10
Diluted earnings per share |  | $ | 1.19 |  | $ | 0.71 |  | $ | 2.28 |  | $ | 1.10

‎

6

# Note 2. Recent Accounting Pronouncements

Recently issued but not yet effective 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 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 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.
Effective Date |  | January 1, 2023
Effect on the Consolidated Financial Statements |  | We have formed an implementation team led by 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 expects to be able to run the CECL model in test mode in 2021.
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 continues to review 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.

7

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:

|  | June 30, |  | December 31,
(Dollars in thousands) |  | 2021 |  | 2020
Net unrealized gains on debt securities |  | $ | 9,602 |  | $ | 12,571
Tax effect |  |  | (2,017) |  |  | (2,640)
Net of tax amount |  | $ | 7,585 |  | $ | 9,931
Accumulated pension adjustment |  | $ | (8,533) |  | $ | (8,533)
Tax effect |  |  | 1,792 |  |  | 1,792
Net of tax amount |  | $ | (6,741) |  | $ | (6,741)
Total accumulated other comprehensive income |  | $ | 844 |  | $ | 3,190

Note 4. Investments

Available for Sale (AFS) Securities

The amortized cost and estimated fair value of AFS securities as of June 30, 2021 and December 31, 2020 are as follows:

(Dollars in thousands) |  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | unrealized |  | unrealized |  | Fair
June 30, 2021 |  | cost |  | gains |  | losses |  | value
U.S. Government and Agency securities |  | $ | 79,377 |  | $ | 358 |  | $ | (17) |  | $ | 79,718
Municipal securities |  |  | 219,690 |  |  | 8,724 |  |  | (1,146) |  |  | 227,268
Corporate securities |  |  | 24,275 |  |  | 295 |  |  | (159) |  |  | 24,411
Agency mortgage-backed securities |  |  | 115,849 |  |  | 1,694 |  |  | (420) |  |  | 117,123
Private-label mortgage-backed securities |  |  | 20,087 |  |  | 35 |  |  | (60) |  |  | 20,062
Asset-backed securities |  |  | 43,367 |  |  | 381 |  |  | (83) |  |  | 43,665
|  | $ | 502,645 |  | $ | 11,487 |  | $ | (1,885) |  | $ | 512,247

(Dollars in thousands) |  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | unrealized |  | unrealized |  | Fair
December 31, 2020 |  | cost |  | gains |  | losses |  | value
U.S. Government and Agency securities |  | $ | 12,594 |  | $ | 20 |  | $ | (40) |  | $ | 12,574
Municipal securities |  |  | 236,253 |  |  | 11,020 |  |  | (219) |  |  | 247,054
Corporate securities |  |  | 20,421 |  |  | 22 |  |  | (155) |  |  | 20,288
Agency mortgage-backed securities |  |  | 70,443 |  |  | 1,905 |  |  | (107) |  |  | 72,241
Private-label mortgage-backed securities |  |  | 8,412 |  |  | 56 |  |  | (15) |  |  | 8,453
Asset-backed securities |  |  | 36,246 |  |  | 249 |  |  | (165) |  |  | 36,330
|  | $ | 384,369 |  | $ | 13,272 |  | $ | (701) |  | $ | 396,940

At June 30, 2021 and December 31, 2020, the fair value of debt securities pledged to secure public funds and trust deposits totaled $137.4 million in both periods. The Bank has no 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 June 30, 2021, 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.

8

(Dollars in thousands) |  | Amortized ‎cost |  | Fair ‎value
Due in one year or less |  | $ | 2,804 |  | $ | 2,829
Due after one year through five years |  |  | 22,439 |  |  | 23,044
Due after five years through ten years |  |  | 248,520 |  |  | 256,445
Due after ten years |  |  | 49,579 |  |  | 49,079
|  |  | 323,342 |  |  | 331,397
Mortgage-backed and asset-backed securities |  |  | 179,303 |  |  | 180,850
|  | $ | 502,645 |  | $ | 512,247

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

|  | For the Three Months Ended |  | For the Six Months Ended
|  | June 30, |  | June 30,
(Dollars in thousands) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Proceeds |  | $ | 16,060 |  | $ | — |  | $ | 16,060 |  | $ | 165
Gross gains realized |  |  | 169 |  |  | — |  |  | 169 |  |  | —
Gross losses realized |  |  | (78) |  |  | — |  |  | (78) |  |  | (10)
Net gains (losses) realized |  | $ | 91 |  | $ | — |  | $ | 91 |  | $ | (10)
Tax (provision) benefit on net gains (losses) realized |  | $ | (19) |  | $ | — |  | $ | (19) |  | $ | 2

Impairment:

The debt securities portfolio contained 136 securities with $128.9 million of temporarily impaired fair value and $1.9 million in unrealized losses at June 30, 2021. The total unrealized loss position has increased $1.2 million since year-end 2020.

For securities with an unrealized loss, Management applies a systematic methodology in order to perform an assessment of the potential for other-than-temporary impairment. In the case of debt securities, investments considered for other-than-temporary impairment: (1) had 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. 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 impairment identified on debt securities and subject to assessment at June 30, 2021, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted.

‎

9

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 June 30, 2021 and December 31, 2020:

| June 30, 2021
| Less than 12 months |  | 12 months or more |  | Total
| Fair |  | Unrealized |  |  |  | Fair |  | Unrealized |  |  |  | Fair |  | Unrealized |  |
(Dollars in thousands) | Value |  | Losses |  | Count |  | Value |  | Losses |  | Count |  | Value |  | Losses |  | Count
U.S. Government and Agency ‎ securities | $ | — |  | $ | — |  | — |  | $ | 5,870 |  | $ | (17) |  | 7 |  | $ | 5,870 |  | $ | (17) |  | 7
Municipal securities |  | 45,357 |  |  | (1,135) |  | 47 |  |  | 1,040 |  |  | (11) |  | 1 |  |  | 46,397 |  |  | (1,146) |  | 48
Corporate securities |  | 8,413 |  |  | (87) |  | 17 |  |  | 2,830 |  |  | (72) |  | 3 |  |  | 11,243 |  |  | (159) |  | 20
Agency mortgage-backed securities |  | 44,250 |  |  | (415) |  | 37 |  |  | 1,403 |  |  | (5) |  | 3 |  |  | 45,653 |  |  | (420) |  | 40
Private-label mortgage-backed securities |  | 8,239 |  |  | (60) |  | 6 |  |  | — |  |  | — |  | — |  |  | 8,239 |  |  | (60) |  | 6
Asset-backed securities |  | 4,518 |  |  | (27) |  | 5 |  |  | 6,983 |  |  | (56) |  | 10 |  |  | 11,501 |  |  | (83) |  | 15
Total temporarily impaired ‎ securities | $ | 110,777 |  | $ | (1,724) |  | 112 |  | $ | 18,126 |  | $ | (161) |  | 24 |  | $ | 128,903 |  | $ | (1,885) |  | 136

| December 31, 2020
| Less than 12 months |  | 12 months or more |  | Total
| Fair |  | Unrealized |  |  |  | Fair |  | Unrealized |  |  |  | Fair |  | Unrealized |  |
(Dollars in thousands) | Value |  | Losses |  | Count |  | Value |  | Losses |  | Count |  | Value |  | Losses |  | Count
U.S. Government and Agency ‎ securities | $ | 3,966 |  | $ | (21) |  | 5 |  | $ | 4,185 |  | $ | (19) |  | 11 |  | $ | 8,151 |  | $ | (40) |  | 16
Municipal securities |  | 27,022 |  |  | (219) |  | 28 |  |  | — |  |  | — |  | — |  |  | 27,022 |  |  | (219) |  | 28
Corporate securities |  | 7,576 |  |  | (37) |  | 13 |  |  | 3,040 |  |  | (118) |  | 4 |  |  | 10,616 |  |  | (155) |  | 17
Agency mortgage-backed securities |  | 18,390 |  |  | (101) |  | 17 |  |  | 3,355 |  |  | (6) |  | 5 |  |  | 21,745 |  |  | (107) |  | 22
Private-label mortgage-backed securities |  | 2,506 |  |  | (15) |  | 2 |  |  | — |  |  | — |  | — |  |  | 2,506 |  |  | (15) |  | 2
Asset-backed securities |  | 1,458 |  |  | (12) |  | 2 |  |  | 11,452 |  |  | (153) |  | 15 |  |  | 12,910 |  |  | (165) |  | 17
Total temporarily impaired ‎ securities | $ | 60,918 |  | $ | (405) |  | 67 |  | $ | 22,032 |  | $ | (296) |  | 35 |  | $ | 82,950 |  | $ | (701) |  | 102

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

|  | Six Months Ended
(Dollars in thousands) |  | June 30,
|  | 2021 |  | 2020
Balance of cumulative credit-related OTTI at January 1 |  | $ | 272 |  | $ | 272
Decreases for previously recognized credit losses on securities that paid off |  |  | (15) |  |  | —
Balance of credit-related OTTI at June 30 |  | $ | 257 |  | $ | 272

Equity Securities at Fair Value

The Corporation owns one equity investment with a readily determinable fair value. At June 30, 2021 and December 31, 2020, this investment was reported at fair value of $482 thousand and $391 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 loans include long-term loans to individuals and businesses secured by mortgages on the borrower’s real property and include home equity loans. 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

10

purposes including property, plant and equipment, working capital and 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 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

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. 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 to contractors 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) 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 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 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 loans ongoing monitoring of cash flow and other financial performance indictors 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), designed to assist in allowing small businesses keep workers on the payroll during the COVID-19 pandemic. When workers are kept on the payroll for the qualifying period, the loan could be forgiven if the small business incurs eligible expenses. 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% 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, if necessary. However, if the SBA does not grant loan forgiveness, the PPP loan would present the

11

same risk factors as any other commercial loan. The PPP loan is only designed to cover short-term operating needs of the borrower. If the economy does not recover quickly from the pandemic and the borrower experiences long-term operational problems beyond the PPP funding, the performance of other loans to these customers could begin to deteriorate.

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.

‎

12

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

|  | June 30, |  | December 31,
(Dollars in thousands) |  | 2021 |  | 2020
Residential Real Estate 1-4 Family |  |  |  |  |  |
Consumer first liens |  | $ | 76,577 |  | $ | 77,373
Commercial first lien |  |  | 58,460 |  |  | 59,851
Total first liens |  |  | 135,037 |  |  | 137,224
Consumer junior liens and lines of credit |  |  | 63,303 |  |  | 60,935
Commercial junior liens and lines of credit |  |  | 4,910 |  |  | 4,425
Total junior liens and lines of credit |  |  | 68,213 |  |  | 65,360
Total residential real estate 1-4 family |  |  | 203,250 |  |  | 202,584
Residential real estate - construction |  |  |  |  |  |
Consumer |  |  | 8,242 |  |  | 6,751
Commercial |  |  | 11,962 |  |  | 9,558
Total residential real estate construction |  |  | 20,204 |  |  | 16,309
Commercial real estate |  |  | 495,407 |  |  | 503,977
Commercial |  |  | 273,146 |  |  | 281,257
Total commercial |  |  | 768,553 |  |  | 785,234
Consumer |  |  | 7,028 |  |  | 5,577
|  |  | 999,035 |  |  | 1,009,704
Less: Allowance for loan losses |  |  | (15,055) |  |  | (16,789)
Net Loans |  | $ | 983,980 |  | $ | 992,915
Included in the loan balances are the following: |  |  |  |  |  |
Net unamortized deferred loan (fees) costs |  | $ | (229) |  | $ | 8
Paycheck Protection Program (PPP) loans (included in Commercial loans above) |  |  |
Two-year loans |  | $ | 2,154 |  | $ | 5,378
Five-year loans |  |  | 51,419 |  |  | 46,912
Total Paycheck Protection Program loans |  | $ | 53,573 |  | $ | 52,290
Net unamortized deferred PPP loan fees (included in Net unamortized deferred loan fees above) |  |  |  |  |  |
Two-year loans |  | $ | (45) |  | $ | (165)
Five-year loans |  |  | (1,889) |  |  | (1,178)
Total net unamortized deferred PPP loan fees |  | $ | (1,934) |  | $ | (1,343)
Loans pledged as collateral for borrowings and commitments from: |  |  |  |  |  |
FHLB |  | $ | 707,061 |  | $ | 840,850
Federal Reserve Bank |  |  | 45,358 |  |  | 50,605
|  | $ | 752,419 |  | $ | 891,455

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Note 6. Loan Quality and Allowance for Loan Losses

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

|  | Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |
|  | First |  | Junior Liens & |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  | Liens |  | Lines of Credit |  | Construction |  | Real Estate |  | Commercial |  | Consumer |  | Unallocated |  | Total
ALL at March 31, 2021 |  | $ | 447 |  | $ | 211 |  | $ | 318 |  | $ | 8,785 |  | $ | 5,473 |  | $ | 113 |  | $ | 789 |  | $ | 16,136
Charge-offs |  |  | — |  |  | — |  |  | (28) |  |  | — |  |  | (3) |  |  | (18) |  |  | — |  |  | (49)
Recoveries |  |  | — |  |  | 1 |  |  | — |  |  | 1 |  |  | 54 |  |  | 12 |  |  | — |  |  | 68
Provision |  |  | 12 |  |  | 8 |  |  | 59 |  |  | (908) |  |  | (215) |  |  | (5) |  |  | (51) |  |  | (1,100)
ALL at June 30, 2021 |  | $ | 459 |  | $ | 220 |  | $ | 349 |  | $ | 7,878 |  | $ | 5,309 |  | $ | 102 |  | $ | 738 |  | $ | 15,055
ALL at December 31, 2020 |  | $ | 555 |  | $ | 226 |  | $ | 294 |  | $ | 9,163 |  | $ | 5,679 |  | $ | 97 |  | $ | 775 |  | $ | 16,789
Charge-offs |  |  | — |  |  | — |  |  | (28) |  |  | (13) |  |  | (8) |  |  | (36) |  |  | — |  |  | (85)
Recoveries |  |  | — |  |  | 170 |  |  | — |  |  | 1 |  |  | 61 |  |  | 19 |  |  | — |  |  | 251
Provision |  |  | (96) |  |  | (176) |  |  | 83 |  |  | (1,273) |  |  | (423) |  |  | 22 |  |  | (37) |  |  | (1,900)
ALL at June 30, 2021 |  | $ | 459 |  | $ | 220 |  | $ | 349 |  | $ | 7,878 |  | $ | 5,309 |  | $ | 102 |  | $ | 738 |  | $ | 15,055
ALL at March 31, 2020 |  | $ | 563 |  | $ | 178 |  | $ | 269 |  | $ | 8,249 |  | $ | 4,713 |  | $ | 98 |  | $ | 660 |  | $ | 14,730
Charge-offs |  |  | - |  |  | — |  |  | — |  |  | — |  |  | (145) |  |  | (29) |  |  | — |  |  | (174)
Recoveries |  |  | 1 |  |  | — |  |  | — |  |  | — |  |  | 19 |  |  | 4 |  |  | — |  |  | 24
Provision |  |  | 16 |  |  | 19 |  |  | (27) |  |  | 588 |  |  | 1,258 |  |  | 32 |  |  | 89 |  |  | 1,975
ALL at June 30, 2020 |  | $ | 580 |  | $ | 197 |  | $ | 242 |  | $ | 8,837 |  | $ | 5,845 |  | $ | 105 |  | $ | 749 |  | $ | 16,555
ALL at December 31, 2019 |  | $ | 416 |  | $ | 119 |  | $ | 187 |  | $ | 6,607 |  | $ | 4,021 |  | $ | 84 |  | $ | 532 |  | $ | 11,966
Charge-offs |  |  | - |  |  | — |  |  | — |  |  | — |  |  | (365) |  |  | (59) |  |  | — |  |  | (424)
Recoveries |  |  | 4 |  |  | — |  |  | — |  |  | — |  |  | 24 |  |  | 10 |  |  | — |  |  | 38
Provision |  |  | 160 |  |  | 78 |  |  | 55 |  |  | 2,230 |  |  | 2,165 |  |  | 70 |  |  | 217 |  |  | 4,975
ALL at June 30, 2020 |  | $ | 580 |  | $ | 197 |  | $ | 242 |  | $ | 8,837 |  | $ | 5,845 |  | $ | 105 |  | $ | 749 |  | $ | 16,555

14

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

|  | Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |
|  | First |  | Junior Liens & |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  | Liens |  | Lines of Credit |  | Construction |  | Real Estate |  | Commercial |  | Consumer |  | Unallocated |  | Total
June 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans evaluated for ALL: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually |  | $ | 666 |  | $ | — |  | $ | 430 |  | $ | 15,891 |  | $ | — |  | $ | — |  | $ | — |  | $ | 16,987
Collectively |  |  | 134,371 |  |  | 68,213 |  |  | 19,774 |  |  | 479,516 |  |  | 273,146 |  |  | 7,028 |  |  | — |  |  | 982,048
Total |  | $ | 135,037 |  | $ | 68,213 |  | $ | 20,204 |  | $ | 495,407 |  | $ | 273,146 |  | $ | 7,028 |  | $ | — |  | $ | 999,035
ALL established for ‎ loans evaluated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually |  | $ | — |  | $ | — |  | $ | — |  | $ | 322 |  | $ | — |  | $ | — |  | $ | — |  | $ | 322
Collectively |  |  | 459 |  |  | 220 |  |  | 349 |  |  | 7,556 |  |  | 5,309 |  |  | 102 |  |  | 738 |  |  | 14,733
ALL at June 30, 2021 |  | $ | 459 |  | $ | 220 |  | $ | 349 |  | $ | 7,878 |  | $ | 5,309 |  | $ | 102 |  | $ | 738 |  | $ | 15,055
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans evaluated for ALL: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually |  | $ | 637 |  | $ | — |  | $ | 512 |  | $ | 16,104 |  | $ | — |  | $ | — |  | $ | — |  | $ | 17,253
Collectively |  |  | 136,587 |  |  | 65,360 |  |  | 15,797 |  |  | 487,873 |  |  | 281,257 |  |  | 5,577 |  |  | — |  |  | 992,451
Total |  | $ | 137,224 |  | $ | 65,360 |  | $ | 16,309 |  | $ | 503,977 |  | $ | 281,257 |  | $ | 5,577 |  | $ | — |  | $ | 1,009,704
ALL established for ‎ loans evaluated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually |  | $ | — |  | $ | — |  | $ | — |  | $ | 228 |  | $ | — |  | $ | — |  | $ | — |  | $ | 228
Collectively |  |  | 555 |  |  | 226 |  |  | 294 |  |  | 8,935 |  |  | 5,679 |  |  | 97 |  |  | 775 |  |  | 16,561
ALL at December 31, 2020 |  | $ | 555 |  | $ | 226 |  | $ | 294 |  | $ | 9,163 |  | $ | 5,679 |  | $ | 97 |  | $ | 775 |  | $ | 16,789

‎

15

The following table shows additional information about those loans considered to be impaired as of the periods shown:

|  | Impaired Loans
|  | With No Allowance |  | With Allowance
(Dollars in thousands) |  |  |  |  | Unpaid |  |  |  |  | Unpaid |  |  |
|  | Recorded |  | Principal |  | Recorded |  | Principal |  | Related
June 30, 2021 |  | Investment |  | Balance |  | Investment |  | Balance |  | Allowance
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First liens |  | $ | 666 |  | $ | 666 |  | $ | — |  | $ | — |  | $ | —
Junior liens and lines of credit |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
Total |  |  | 666 |  |  | 666 |  |  | — |  |  | — |  |  | —
Residential real estate - construction |  |  | 430 |  |  | 729 |  |  | — |  |  | — |  |  | —
Commercial real estate |  |  | 10,095 |  |  | 10,861 |  |  | 5,796 |  |  | 5,796 |  |  | 322
Commercial |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
Total |  | $ | 11,191 |  | $ | 12,256 |  | $ | 5,796 |  | $ | 5,796 |  | $ | 322

December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First liens |  | $ | 637 |  | $ | 637 |  | $ | — |  | $ | — |  | $ | —
Junior liens and lines of credit |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
Total |  |  | 637 |  |  | 637 |  |  | — |  |  | — |  |  | —
Residential real estate - construction |  |  | 512 |  |  | 729 |  |  | — |  |  | — |  |  | —
Commercial real estate |  |  | 10,402 |  |  | 11,107 |  |  | 5,702 |  |  | 5,702 |  |  | 228
Commercial |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
Total |  | $ | 11,551 |  | $ | 12,473 |  | $ | 5,702 |  | $ | 5,702 |  | $ | 228

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

|  | Three Months Ended |  | Six Months Ended
|  | June 30, 2021 |  | June 30, 2021
|  | Average |  | Interest |  | Average |  | Interest
(Dollars in thousands) |  | Recorded |  | Income |  | Recorded |  | Income
|  | Investment |  | Recognized |  | Investment |  | Recognized
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |
First liens |  | $ | 669 |  | $ | 7 |  | $ | 652 |  | $ | 15
Junior liens and lines of credit |  |  | — |  |  | — |  |  | — |  |  | —
Total |  |  | 669 |  |  | 7 |  |  | 652 |  |  | 15
Residential real estate - construction |  |  | 510 |  |  | — |  |  | 511 |  |  | —
Commercial real estate |  |  | 15,946 |  |  | 97 |  |  | 15,995 |  |  | 188
Commercial |  |  | — |  |  | — |  |  | — |  |  | —
Total |  | $ | 17,125 |  | $ | 104 |  | $ | 17,158 |  | $ | 203
|  | Three Months Ended |  | Six Months Ended
|  | June 30, 2020 |  | June 30, 2020
|  | Average |  | Interest |  | Average |  | Interest
(Dollars in thousands) |  | Recorded |  | Income |  | Recorded |  | Income
|  | Investment |  | Recognized |  | Investment |  | Recognized
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |
First liens |  | $ | 651 |  | $ | 8 |  | $ | 653 |  | $ | 19
Junior liens and lines of credit |  |  | — |  |  | — |  |  | — |  |  | —
Total |  |  | 651 |  |  | 8 |  |  | 653 |  |  | 19
Residential real estate - construction |  |  | 520 |  |  | — |  |  | 521 |  |  | —
Commercial real estate |  |  | 11,179 |  |  | 93 |  |  | 11,039 |  |  | 187
Commercial |  |  | — |  |  | — |  |  | — |  |  | —
Total |  | $ | 12,350 |  | $ | 101 |  | $ | 12,213 |  | $ | 206

‎

16

At June 30, 2021, the Bank had $38.0 thousand of residential properties in the process of foreclosure compared to $68.0 thousand at the end of 2020. 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
June 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First liens |  | $ | 134,753 |  | $ | 223 |  | $ | 20 |  | $ | — |  | $ | 243 |  | $ | 41 |  | $ | 135,037
Junior liens and lines of credit |  |  | 67,927 |  |  | 212 |  |  | — |  |  | 74 |  |  | 286 |  |  | — |  |  | 68,213
Total |  |  | 202,680 |  |  | 435 |  |  | 20 |  |  | 74 |  |  | 529 |  |  | 41 |  |  | 203,250
Residential real estate - construction |  |  | 19,774 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 430 |  |  | 20,204
Commercial real estate |  |  | 486,529 |  |  | 706 |  |  | — |  |  | — |  |  | 706 |  |  | 8,172 |  |  | 495,407
Commercial |  |  | 272,762 |  |  | 279 |  |  | — |  |  | — |  |  | 279 |  |  | 105 |  |  | 273,146
Consumer |  |  | 6,997 |  |  | 29 |  |  | 2 |  |  | — |  |  | 31 |  |  | — |  |  | 7,028
Total |  | $ | 988,742 |  | $ | 1,449 |  | $ | 22 |  | $ | 74 |  | $ | 1,545 |  | $ | 8,748 |  | $ | 999,035

December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First liens |  | $ | 137,056 |  | $ | 43 |  | $ | 58 |  | $ | 26 |  | $ | 127 |  | $ | 41 |  | $ | 137,224
Junior liens and lines of credit |  |  | 65,212 |  |  | 115 |  |  | 23 |  |  | — |  |  | 138 |  |  | 10 |  |  | 65,360
Total |  |  | 202,268 |  |  | 158 |  |  | 81 |  |  | 26 |  |  | 265 |  |  | 51 |  |  | 202,584
Residential real estate - construction |  |  | 15,797 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 512 |  |  | 16,309
Commercial real estate |  |  | 495,609 |  |  | 74 |  |  | 261 |  |  | — |  |  | 335 |  |  | 8,033 |  |  | 503,977
Commercial |  |  | 280,930 |  |  | 219 |  |  | — |  |  | — |  |  | 219 |  |  | 108 |  |  | 281,257
Consumer |  |  | 5,525 |  |  | 38 |  |  | 2 |  |  | 12 |  |  | 52 |  |  | — |  |  | 5,577
Total |  | $ | 1,000,129 |  | $ | 489 |  | $ | 344 |  | $ | 38 |  | $ | 871 |  | $ | 8,704 |  | $ | 1,009,704

‎

17

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
June 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |  |
First liens | $ | 134,996 |  | $ | — |  | $ | 41 |  | $ | — |  | $ | 135,037
Junior liens and lines of credit |  | 68,139 |  |  | — |  |  | 74 |  |  | — |  |  | 68,213
Total |  | 203,135 |  |  | — |  |  | 115 |  |  | — |  |  | 203,250
Residential real estate - construction |  | 19,774 |  |  | — |  |  | 430 |  |  | — |  |  | 20,204
Commercial real estate |  | 438,804 |  |  | 38,138 |  |  | 18,465 |  |  | — |  |  | 495,407
Commercial |  | 263,802 |  |  | 9,066 |  |  | 278 |  |  | — |  |  | 273,146
Consumer |  | 7,028 |  |  | — |  |  | — |  |  | — |  |  | 7,028
Total | $ | 932,543 |  | $ | 47,204 |  | $ | 19,288 |  | $ | — |  | $ | 999,035

December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |  |
First liens | $ | 137,156 |  | $ | — |  | $ | 68 |  | $ | — |  | $ | 137,224
Junior liens and lines of credit |  | 65,350 |  |  | — |  |  | 10 |  |  | — |  |  | 65,360
Total |  | 202,506 |  |  | — |  |  | 78 |  |  | — |  |  | 202,584
Residential real estate - construction |  | 15,797 |  |  | — |  |  | 512 |  |  | — |  |  | 16,309
Commercial real estate |  | 449,478 |  |  | 35,947 |  |  | 18,552 |  |  | — |  |  | 503,977
Commercial |  | 270,272 |  |  | 10,698 |  |  | 287 |  |  | — |  |  | 281,257
Consumer |  | 5,565 |  |  | — |  |  | 12 |  |  | — |  |  | 5,577
Total | $ | 943,618 |  | $ | 46,645 |  | $ | 19,441 |  | $ | — |  | $ | 1,009,704

The following table presents information on the Bank’s Troubled Debt Restructuring (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
June 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate - construction |  | 1 |  | $ | 430 |  | $ | — |  | $ | 430 |  | — |  | $ | —
Residential real estate |  | 5 |  |  | 666 |  |  | 625 |  |  | 41 |  | — |  |  | —
Commercial real estate - owner occupied |  | 4 |  |  | 1,199 |  |  | 849 |  |  | 350 |  | — |  |  | —
Commercial real estate - farm land |  | 6 |  |  | 2,173 |  |  | 2,173 |  |  | — |  | — |  |  | —
Commercial real estate - construction and land development |  | 2 |  |  | 5,947 |  |  | 5,703 |  |  | 244 |  | — |  |  | —
Commercial real estate |  | 2 |  |  | 314 |  |  | 113 |  |  | 201 |  | — |  |  | —
Total |  | 20 |  | $ | 10,729 |  | $ | 9,463 |  | $ | 1,266 |  | — |  | $ | —
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate - construction |  | 1 |  | $ | 434 |  | $ | 434 |  | $ | — |  | — |  | $ | —
Residential real estate |  | 4 |  |  | 637 |  |  | 637 |  |  | — |  | — |  |  | —
Commercial real estate - owner occupied |  | 4 |  |  | 1,224 |  |  | 1,224 |  |  | — |  | — |  |  | —
Commercial real estate - farm land |  | 6 |  |  | 2,257 |  |  | 2,257 |  |  | — |  | — |  |  | —
Commercial real estate - construction and land development |  | 2 |  |  | 6,129 |  |  | 6,129 |  |  | — |  | — |  |  | —
Commercial real estate |  | 2 |  |  | 330 |  |  | 122 |  |  | 208 |  | — |  |  | —
Total |  | 19 |  | $ | 11,011 |  | $ | 10,803 |  | $ | 208 |  | — |  | $ | —

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

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The following table reports new TDR loans during 2021, concession granted and the recorded investment as of June 30, 2021:

|  | New During Period
Six Months Ended |  | Number of |  |  | Pre-TDR |  |  | After-TDR |  |  | Recorded |  |
June 30, 2021 |  | Contracts |  |  | Modification |  |  | Modification |  |  | Investment |  | Concession
Residential real estate |  | 1 |  | $ | 41 |  | $ | 41 |  | $ | 41 |  | multiple

The following table reports new TDR loans during 2020, concession granted and the recorded investment as of June 30, 2021:

|  | New During Period
Twelve Months Ended |  | Number of |  |  | Pre-TDR |  |  | After-TDR |  |  | Recorded |  |
December 31, 2020 |  | Contracts |  |  | Modification |  |  | Modification |  |  | Investment |  | Concession
Commercial real estate - farm land |  | 1 |  | $ | 650 |  | $ | 650 |  | $ | 653 |  | multiple
Commercial real estate - owner occupied |  | 2 |  |  | 426 |  |  | 426 |  |  | 423 |  | maturity
|  | 3 |  | $ | 1,076 |  | $ | 1,076 |  | $ | 1,076 |  |

Loans that have been modified on a good-faith basis in response to COVID-19 to borrowers who were classified as current prior to any relief are not TDRs as outlined in the March 22, 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus or Section 4013 of the CARES Act. Such short-term modifications (e.g., six months) may include payment deferrals, fee waivers, extension of payment terms or other delays in payment that are insignificant. Loans may be modified under Section 4013 until the earlier of January 1, 2022 or the 60th day after the end of the COVID-19 national emergency declared by the President. As of June 30, 2021, the Bank has still outstanding $13.3 million of loans deferred or modified (approximately 1% of gross loans) that have not yet returned to their original terms.

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 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 ‎June 30, |  | Six Months Ended ‎June 30,
(Dollars in thousands) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Operating lease cost |  | $ | 174 |  | $ | 159 |  | $ | 348 |  | $ | 317
Short-term lease cost |  |  | — |  |  | 1 |  |  | — |  |  | 3
Variable lease cost |  |  | 25 |  |  | 14 |  |  | 49 |  |  | 28
Total lease cost |  | $ | 199 |  | $ | 174 |  | $ | 397 |  | $ | 348

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Supplemental Lease Information:

|  | Six Months Ended ‎June 30,
(Dollars in thousands) |  | 2021 |  | 2020
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | 326 |  | $ | 304
Weighted-average remaining lease term (years) |  |  | 11.3 |  |  | 12.7
Weighted-average discount rate |  |  | 3.35% |  |  | 3.54%

Lease Obligations:

Future undiscounted lease payments for operating leases with initial terms of one year or more as of June 30, 2021 are as follows:

(Dollars in thousands) |  |  |
2021 |  | $ | 331
2022 |  |  | 640
2023 |  |  | 650
2024 |  |  | 628
2025 |  |  | 588
2026 and beyond |  |  | 3,396
Undiscounted cash flow |  |  | 6,233
Imputed Interest |  |  | (1,128)
Total lease liability |  | $ | 5,105

Note 8. Other Real Estate Owned

The Bank had no other real estate owned at June 30, 2021 and December 31, 2020.

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.

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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
|  | Derivative Liabilities
(Dollars in thousands) |  | June 30, 2021 |  |  | December 31, 2020
|  | Notional amount |  | Balance Sheet Location |  |  | Fair Value |  |  | Notional amount |  | Balance Sheet Location |  |  | Fair Value
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other Contracts | $ | 6,745 |  | Other Liabilities |  | $ | 24 |  | $ | 6,836 |  | Other Liabilities |  | $ | 40
Total derivatives not designated as hedging instruments |  |  |  |  |  | $ | 24 |  |  |  |  |  |  | $ | 40

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 |  |  |  |  |  |
(Dollars in thousands) |  |  |  | Three Months Ended |  | Six Months Ended
|  |  |  | June 30, 2021 |  | June 30, 2020 |  | June 30, 2021 |  | June 30, 2020
Other Contracts |  | Other income |  | $ | (7) |  | $ | - |  | $ | 16 |  | $ | (36)

As of June 30, 2021, 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 $24 thousand.

Note 10. Pension

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

|  | Three Months Ended |  | Six Months Ended
|  | June 30, |  | June 30,
(Dollars in thousands) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Components of net periodic cost: |  |  |  |  |  |  |  |  |  |  |  |
Service cost |  | $ | 107 |  | $ | 83 |  | $ | 205 |  | $ | 166
Interest cost |  |  | 96 |  |  | 131 |  |  | 183 |  |  | 262
Expected return on plan assets |  |  | (280) |  |  | (269) |  |  | (554) |  |  | (539)
Settlement expense |  |  | 90 |  |  | — |  |  | 198 |  |  | —
Recognized net actuarial loss |  |  | 283 |  |  | 226 |  |  | 568 |  |  | 452
Total pension expense |  | $ | 296 |  | $ | 171 |  | $ | 600 |  | $ | 341

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

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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 Loans: The fair value of impaired loans with specific allocations of the allowance for loan 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 loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy. No partial charge-offs on impaired loans were taken in the second quarter of 2021. Impaired loans are measured at fair value on a nonrecurring basis.

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22

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 June 30, 2021 and December 31, 2020 are as follows:

(Dollars in thousands) |  | Fair Value at June 30, 2021
Asset Description |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Equity securities, at fair value |  | $ | 482 |  | $ | — |  | $ | — |  | $ | 482
Available for sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and Agency securities |  |  | 69,074 |  |  | 10,644 |  |  | — |  |  | 79,718
Municipal securities |  |  | — |  |  | 227,268 |  |  | — |  |  | 227,268
Corporate securities |  |  | — |  |  | 24,411 |  |  | — |  |  | 24,411
Agency mortgage-backed securities |  |  | — |  |  | 117,123 |  |  | — |  |  | 117,123
Private-label mortgage-backed securities |  |  | — |  |  | 20,062 |  |  | — |  |  | 20,062
Asset-backed securities |  |  | — |  |  | 43,665 |  |  | — |  |  | 43,665
Total assets |  | $ | 69,556 |  | $ | 443,173 |  | $ | — |  | $ | 512,729

(Dollars in thousands) |  | Fair Value at December 31, 2020
Asset Description |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Equity securities, at fair value |  | $ | 391 |  | $ | — |  | $ | — |  | $ | 391
Available for sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and Agency securities |  |  | — |  |  | 12,574 |  |  | — |  |  | 12,574
Municipal securities |  |  | — |  |  | 247,054 |  |  | — |  |  | 247,054
Corporate securities |  |  | — |  |  | 20,288 |  |  | — |  |  | 20,288
Agency mortgage-backed securities |  |  | — |  |  | 72,241 |  |  | — |  |  | 72,241
Private-label mortgage-backed securities |  |  | — |  |  | 8,453 |  |  | — |  |  | 8,453
Asset-backed securities |  |  | — |  |  | 36,330 |  |  | — |  |  | 36,330
Total assets |  | $ | 391 |  | $ | 396,940 |  | $ | — |  | $ | 397,331

The fair value of derivative liabilities measured at fair value at June 30, 2021 and December 31, 2020 was $24 thousand and $40 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 June 30, 2021 and December 31, 2020 are as follows:

(Dollars in Thousands) |  | Fair Value at June 30, 2021
Asset Description |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Impaired loans (1) |  | $ | — |  | $ | — |  | $ | 5,474 |  | $ | 5,474
Total assets |  | $ | — |  | $ | — |  | $ | 5,474 |  | $ | 5,474

(Dollars in Thousands) |  | Fair Value at December 31, 2020
Asset Description |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Impaired loans (1) |  | $ | — |  | $ | — |  | $ | 5,474 |  | $ | 5,474
Total assets |  | $ | — |  | $ | — |  | $ | 5,474 |  | $ | 5,474

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

The Corporation did no t record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at June 30, 2021. For financial assets and liabilities measured at fair value on a recurring basis, there were no transfers of financial assets or liabilities between Level 1 and Level 2 during the period ending June 30, 2021.

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23

The following table presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis at June 30, 2021 and December 31, 2020:

(Dollars in thousands) |  |  |  |  |  |  |  |  | Range
June 30, 2021 |  |  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Weighted Average
Impaired loans |  | $ | 5,474 |  | Appraisal |  | Appraisal Adjustment on |  | 0%-100% (66%)
|  |  |  |  |  |  | Non-real estate assets |  |
|  |  |  |  |  |  | Cost to sell |  | 8%
|  |  |  |  |  |  |  |  | Range
December 31, 2020 |  |  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | (Weighted Average)
Impaired Loans |  | $ | 5,474 |  | Appraisal |  | Appraisal Adjustment |  | 0% - 100% (66%)
|  |  |  |  |  |  | Cost to sell |  | 8%

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

| June 30, 2021
| Carrying |  | Fair |  |  |  |  |  |  |
(Dollars in thousands) | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial assets, carried at cost: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 98,131 |  | $ | 98,131 |  | $ | 98,131 |  | $ | — |  | $ | —
Long-term interest-bearing deposits in other banks |  | 10,492 |  |  | 10,492 |  |  | 10,492 |  |  | — |  |  | —
Loans held for sale |  | 5,537 |  |  | 5,598 |  |  | — |  |  | 5,598 |  |  | —
Net loans |  | 983,980 |  |  | 1,007,488 |  |  | — |  |  | — |  |  | 1,007,488
Accrued interest receivable |  | 6,059 |  |  | 6,059 |  |  | — |  |  | — |  |  | 6,059
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits | $ | 1,491,208 |  | $ | 1,535,180 |  | $ | — |  | $ | 1,535,180 |  | $ | —
Subordinate notes |  | 19,571 |  |  | 20,215 |  |  | — |  |  | 20,215 |  |  | —
Accrued interest payable |  | 94 |  |  | 94 |  |  | — |  |  | 94 |  |  | —
| December 31, 2020
| Carrying |  | Fair |  |  |  |  |  |  |  |  |
(Dollars in thousands) | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial assets, carried at cost: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 57,146 |  | $ | 57,146 |  | $ | 57,146 |  | $ | — |  | $ | —
Long-term interest-bearing deposits in other banks |  | 12,741 |  |  | 12,741 |  |  | 12,741 |  |  | — |  |  | —
Loans held for sale |  | 9,446 |  |  | 9,446 |  |  | — |  | 9,446 | 9,446 |  |  | —
Net loans |  | 992,915 |  |  | 990,867 |  |  | — |  |  | — |  |  | 990,867
Accrued interest receivable |  | 6,410 |  |  | 6,410 |  |  | — |  |  | — |  |  | 6,410
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits | $ | 1,354,573 |  | $ | 1,355,086 |  | $ | — |  | $ | 1,355,086 |  | $ | —
Subordinate notes |  | 19,555 |  |  | 19,750 |  |  | — |  |  | 19,750 |  |  | —
Accrued interest payable |  | 180 |  |  | 180 |  |  | — |  |  | 180 |  |  | —

Note 12. Subordinated Notes

At June 30, 2021, t he 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 $428.8 thousand at June 30, 2021, which is being amortized on a pro-rata basis over a 5-year and 10-year period, based on the call dates of the notes, on an effective interest method. The subordinated notes totaling $15.0 million have a fixed interest rate of 5.00% through

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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. 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% 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 June 30, 2021 was 8.28% compared to the regulatory buffer of 2.50%. 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 June 30, 2021, 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 Bank is participating in the PPP and the Paycheck Protection Program Liquidity Facility (PPPLF) to fund PPP Loans. In accordance with regulatory guidance, PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios. PPP loans will also carry a 0% risk-weight for risk-based capital rules.

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.

The following table summarizes the regulatory capital requirements and results as of June 30, 2021 and December 31, 2020 for the Corporation and the Bank:

|  |  |  |  |  | Regulatory Ratios
|  |  |  |  |  | Adequately |  | Well
|  | June 30, |  | December 31, |  | Capitalized |  | Capitalized
(Dollars in thousands) |  | 2021 |  | 2020 |  | Minimum |  | Minimum
Common Equity Tier 1 Risk-based Capital Ratio (1) |  |  |  |  |  |  |  |
Franklin Financial Services Corporation |  | 15.16% |  | 14.32% |  | N/A |  | N/A
Farmers & Merchants Trust Company |  | 15.02% |  | 14.07% |  | 4.50% |  | 6.50%
Tier 1 Risk-based Capital Ratio (2) |  |  |  |  |  |  |  |
Franklin Financial Services Corporation |  | 15.16% |  | 14.32% |  | N/A |  | N/A
Farmers & Merchants Trust Company |  | 15.02% |  | 14.07% |  | 6.00% |  | 8.00%
Total Risk-based Capital Ratio (3) |  |  |  |  |  |  |  |
Franklin Financial Services Corporation |  | 18.52% |  | 17.69% |  | N/A |  | N/A
Farmers & Merchants Trust Company |  | 16.28% |  | 15.33% |  | 8.00% |  | 10.00%
Tier 1 Leverage Ratio (4) |  |  |  |  |  |  |  |
Franklin Financial Services Corporation |  | 8.53% |  | 8.69% |  | N/A |  | N/A
Farmers & Merchants Trust Company |  | 8.46% |  | 8.54% |  | 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

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25

Note 14. 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 $1.8 million for the second quarter of 2021, compared to $1.5 million in the second quarter of 2020 and $3.3 million for the first half of 2021, compared to $2.8 million for the first half of 2020.

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 $99 thousand for the second quarter of 2021, compared to $40 thousand in the second quarter of 2020 and $183 thousand for the first half of 2021, compared to $73 thousand for the first half of 2020.

Commissions from the sale of investment and insurance products are recognized upon the completion of the transaction. Commissions recognized were $48 thousand for the second quarter of 2021, compared to $49 thousand for the second quarter of 2020 and $85 thousand for the first half of 2021, compared to $123 thousand for the first half of 2020.

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.

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26

1 Note 15. 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:

|  | June 30, |  | December 31,
(Dollars in thousands) |  | 2021 |  | 2020
Financial instruments whose contract amounts represent credit risk |  |  |  |  |  |
Commercial commitments to extend credit |  | $ | 304,178 |  | $ | 280,939
Consumer commitments to extend credit (secured) |  |  | 80,545 |  |  | 71,761
Consumer commitments to extend credit (unsecured) |  |  | 5,446 |  |  | 5,224
|  | $ | 390,169 |  | $ | 357,924
Standby letters of credit |  | $ | 23,123 |  | $ | 22,334

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 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 June 30, 2021, this reserve was $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 at June 30, 2021 and December 31, 2020.

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.

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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 June 30, 2021, 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. Subsequent Event

On July 23, 2021, the Bank completed the acquisition of a property to house its corporate headquarters and operation center and completed the sale of its current headquarters and operations center. This transaction was first announced in a press release filed on Form 8-K on August 15, 2019. The Bank will lease back its current headquarters and operation center until renovations on the new property are completed in 2022. The Bank is expected to recognize a pre-tax gain on the sale of its property of approximately $1.8 million, and the property was reported at its cost basis of $1.5 million in Other Assets on the Consolidated Balance Sheet as of June 30, 2021.

Note 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.

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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 and Six Months Ended June 30, 2021 and 2020

## 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 the negative impact of severe, wide-ranging and continuing disruptions caused by, and resulting from, the spread of the coronavirus COVID-19 pandemic and affects thereof, including governmental responses thereto, changes in interest rates, 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. There were no changes to the critical accounting policies disclosed in the 2020 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 2020 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 $5.3 million ($1.19 per diluted share) for the second quarter of 2021 compared to $3.1 million ($.71 per diluted share) for the same period in 2020, and $4.8 million ($1.09 per diluted share) for the first quarter of 2021. Net income for year-to-date 2021 was $10.1 million ($2.28 per diluted share) compared to $4.8 million ($1.10 per diluted share) for the same six-month period in 2020.

A summary of operating results for the second quarter of 2021 and year-to-date 2021 are as follows:

Net interest income was $10.8 million, inclusive of $746 thousand of interest and fees from Paycheck Protection Program (PPP) loans, for the second quarter of 2021 compared to $10.8 million (including $884 thousand of PPP interest and fees) for the first quarter of 2021 and $10.3 million for the second quarter of 2020. Year-to-date, net interest income was $21.7 million (including $1.6 million of PPP interest and fees) compared to $20.6 million for the same period in 2020. The net interest margin decreased to 2.82% for the second quarter of 2021 from 3.26% for the same quarter of the prior year. On a year-to-date comparison, the net interest margin was 2.92% for 2021 compared to 3.39% in 2020. The yield on earning assets decreased in both the second quarter of 2021 versus 2020 comparison (down 0.52%) and y ear-to-date comparison (down 0.64%) as all asset classes had lower yields as market rates decreased over the year. The year-to-date cost of interest-bearing deposits decreased from 0.47% in 2020 to 0.16% in 2021 while the cost of total deposits fell from 0.38% in 2020 to 0.13% in 2021 as the Bank reduced deposit rates to offset lower asset yields.

Earning assets for the second quarter of 2021 averaged $1.6 billion compared to $1.3 billion for the same period in 2020, and year-to-date average earnings assets were 23.2% higher than 2021.The 2021 average balance of the investment portfolio increased $216.2 million over the same

29

comparative period, primarily in the municipal bond portfolio. T he average balance of the loan portfolio increased from $962.3 million for the first six months of 2020 to $1.0 billion in 2021. The average balance of the commercial loan portfolio increased $32.9 million, primarily due to the addition of Paycheck Protection Program (PPP) loans, which totaled $53.6 million at June 30, 2021, and averaged $57.2 million for the year-to-date period. The average balance of deposits for the year increased $259.6 million over the same period in 2020 with every deposit category increasing except for time deposits.
‎

The provision for loan loss expense for the second quarter of 2021 was a reversal of $1.1 million compared to an $800 thousand reversal in the first quarter of 2021, and a provision expense of $2.0 million for the second quarter of 2020. Year-to-date, the provision for loan loss expense was a reversal of $1.9 million compared to $5.0 million provision expense for the same period in 2020. The 2020 provision expense was the result of an increase in several qualitative factors in the allowance for loan loss calculation due to the projected economic effects and impact of the COVID-19 pandemic. As of June 30, 2021, several qualitative factors were reduced reflecting a lower risk of loss in the loan portfolio and the twenty-quarter historical average charge-off rate used in the calculation decreased, thereby resulting in a reversal of the provision for loan loss expense. The allowance for loan loss ratio was 1.51% of gross loans as of June 30, 2021, compared to 1.66% at December 31, 2020. Excluding the PPP loans, the allowance for loan loss ratio was 1.59% at the end of the second quarter of 2021 and 1.75% at year-end 2020.
‎

Noninterest income totaled $4.5 for the second quarter of 2021 compared to $4.2 million in the first quarter and $3.4 million for the comparable quarter of 2020. Year-to-date, noninterest income was $8.7 million, $1.4 million greater than the prior year. The largest increases year-over-year were in Investment and Trust Service fees ($507 thousand), gain on the sale of mortgages ($965 thousand) and debit card income ($236 thousand). These increases were partially offset by a decrease of $812 thousand from a gain on a bank owned life insurance policy recorded in 2020.
‎

Noninterest expense for the second quarter of 2021 was $10.1 million compared to $10.2 million in the prior quarter and $9.6 million for the second quarter of 2020. Year-to-date, noninterest expense was $20.3 million compared to compared to $19.2 million in 2020. Salaries and benefits increased $987 thousand, FDIC insurance increased $234 thousand year-over-year, while nonservice pension increased $219 thousand. Other expense decreased $596 thousand year-over-year. In the second quarter of 2020, a $636 thousand allowance previously established for an off-balance sheet liability was reversed with an offsetting amount reversed from other expense, compared to a $250 thousand reversal in the prior year-to-date period related to the same off-balance sheet liability.

The effective tax rate for was 16.4% and 15.9% for the second quarter and year-to-date period of 2021, respectively.

Total assets at June 30, 2021 were $1.678 billion compared $1.535 billion at December 31, 2020. Significant balance sheet changes since December 31, 2020 include:

Short-term interest-bearing deposits in other banks increased $41.5 million and the investment portfolio increased $115.3 million.
‎

The net loan portfolio decreased $8.9 million during 2021 over the year-end 2020 balance. The reduction occurred primarily in the commercial loan portfolio, with a decrease in commercial real estate loans partially offset by an increase in PPP loans. The Bank held $53.6 million in PPP loans at June 30, 2021, with $1.9 million net deferred PPP fees remaining to be recognized. The Bank is recognizing the PPP fees over the contractual life of the PPP loans (two years or five years). As PPP

30

loans are granted forgiveness by the SBA, fee recognition will accelerate.
‎

At June 30 2021, the Bank had $13.3 million modified loans compared to $67.6 million at year-end 2020. The current balance is comprised primarily of two unrelated loans to hotels for $7.8 million, one loan for $4.7 million in rental real estate and one loan in food service for $771 thousand. All of these loans were making some form of modified payment as of June 30, 2021 and are currently expected to return to a principal and interest payment schedule in the third quarter of 2021.
‎

Deposits increased $136.6 million (10.1%) over year-end 2020, with all deposit products showing an increase except time deposits. Based on current information known to Management, the increases seem to stem from government stimulus payments to consumers, businesses and municipalities, lower spending as economic activity slowed during the pandemic and a sense of security offered by bank deposits in uncertain economic times.
‎

Shareholders’ equity increased $6.0 million from the end of 2020, due primarily to an increase of $7.4 million in retained earnings partially offset by a decrease of $2.3 million in accumulated other comprehensive income (AOCI) as the fair value of the investment portfolio declined during the year. At June 30, 2021, the book value of the Corporation’s common stock was $34.16 per share and the tangible book value was $32.12 per share. In December 2020, an open market repurchase plan was approved to repurchase 150,000 shares over a one-year period and 23,155 shares have been repurchased under the plan as of June 30, 2021.

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31

Key performance ratios as of, or for the six months ended June 30, 2021 and 2020 and the year ended December 31, 2020 are listed below:

|  | June 30, |  | December 31, |  | June 30,
(Dollars in thousands, except per share) |  | 2021 |  | 2020 |  | 2020
Balance Sheet Highlights |  |  |  |  |  |  |  |  |
Total assets |  | $ | 1,678,308 |  | $ | 1,535,038 |  | $ | 1,423,111
Investment and equity securities |  |  | 512,729 |  |  | 397,331 |  |  | 286,557
Loans, net |  |  | 983,980 |  |  | 992,915 |  |  | 995,583
Deposits |  |  | 1,491,208 |  |  | 1,354,573 |  |  | 1,273,353
Shareholders' equity |  |  | 151,156 |  |  | 145,176 |  |  | 134,840
Summary of Operations |  |  |  |  |  |  |  |  |
Interest income |  | $ | 23,135 |  | $ | 45,939 |  | $ | 22,831
Interest expense |  |  | 1,468 |  |  | 3,978 |  |  | 2,246
Net interest income |  |  | 21,667 |  |  | 41,961 |  |  | 20,585
(Recovery of) provision for loan losses |  |  | (1,900) |  |  | 4,625 |  |  | 4,975
Net interest income after provision for loan losses |  |  | 23,567 |  |  | 37,336 |  |  | 15,610
Noninterest income |  |  | 8,716 |  |  | 15,084 |  |  | 7,301
Noninterest expense |  |  | 20,277 |  |  | 39,362 |  |  | 19,173
Income before income taxes |  |  | 12,006 |  |  | 13,058 |  |  | 3,738
Federal income tax expense (benefit) |  |  | 1,905 |  |  | 258 |  |  | (1,048)
Net income |  | $ | 10,101 |  | $ | 12,800 |  | $ | 4,786
Performance Measurements |  |  |  |  |  |  |  |  |
Return on average assets* |  |  | 1.25% |  |  | 0.91% |  |  | 0.73%
Return on average equity* |  |  | 14.07% |  |  | 9.56% |  |  | 7.37%
Return on average tangible equity (1)* |  |  | 15.01% |  |  | 10.24% |  |  | 7.92%
Efficiency ratio (1) |  |  | 65.55% |  |  | 67.32% |  |  | 66.95%
Net interest margin* |  |  | 2.92% |  |  | 3.21% |  |  | 3.39%
Shareholders' Value (per common share) |  |  |  |  |  |  |  |  |
Diluted earnings per share |  | $ | 2.28 |  | $ | 2.93 |  | $ | 1.10
Basic earnings per share |  |  | 2.29 |  |  | 2.94 |  |  | 1.10
Regular cash dividends declared |  |  | 0.61 |  |  | 1.20 |  |  | 0.60
Book value |  |  | 34.16 |  |  | 33.07 |  |  | 30.98
Tangible book value (1) |  |  | 32.12 |  |  | 31.02 |  |  | 28.91
Market value |  |  | 31.94 |  |  | 27.03 |  |  | 25.90
Market value/book value ratio |  |  | 93.50% |  |  | 81.74% |  |  | 83.60%
Market value/tangible book value ratio |  |  | 99.43% |  |  | 87.13% |  |  | 89.58%
Price/earnings multiple* |  |  | 7.00 |  |  | 9.23 |  |  | 9.12
Current quarter dividend yield* |  |  | 3.88% |  |  | 4.44% |  |  | 4.63%
Dividend payout ratio year-to-date |  |  | 26.64% |  |  | 40.83% |  |  | 42.45%
Safety and Soundness |  |  |  |  |  |  |  |  |
Average equity/average assets |  |  | 8.91% |  |  | 9.48% |  |  | 9.83%
Risk-based capital ratio (Total) |  |  | 18.52% |  |  | 17.69% |  |  | 15.93%
Leverage ratio (Tier 1) |  |  | 8.53% |  |  | 8.69% |  |  | 9.22%
Common equity ratio (Tier 1) |  |  | 15.16% |  |  | 14.32% |  |  | 14.66%
Nonperforming loans/gross loans |  |  | 0.88% |  |  | 0.87% |  |  | 0.41%
Nonperforming assets/total assets |  |  | 0.53% |  |  | 0.57% |  |  | 0.29%
Allowance for loan losses as a % of loans |  |  | 1.51% |  |  | 1.66% |  |  | 1.64%
Net loans (recovered) charged-off/average loans* |  |  | -0.03% |  |  | -0.02% |  |  | 0.08%
Assets under Management |  |  |  |  |  |  |  |  |
Trust assets under management (fair value) |  | $ | 912,651 |  | $ | 836,381 |  | $ | 743,381
Held at third-party brokers (fair value) |  |  | 118,469 |  |  | 112,624 |  |  | 121,781

*Year-to-date annualized

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

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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.

(Dollars in thousands, except per share) |  | Six Months Ended |  | Twelve Months Ended |  | Six Months Ended
|  | June 30, 2021 |  | December 31, 2020 |  | June 30, 2020
Return on Tangible Equity (non-GAAP) |  |  |  |  |  |  |  |  |
Net income |  | $ | 10,101 |  | $ | 12,800 |  | $ | 4,786
Average shareholders' equity |  |  | 143,588 |  |  | 133,958 |  |  | 129,819
Less average intangible assets |  |  | (9,016) |  |  | (9,016) |  |  | (9,016)
Average tangible equity (non-GAAP) |  |  | 134,572 |  |  | 124,942 |  |  | 120,803
Return on average tangible equity (non-GAAP)* |  |  | 15.01% |  |  | 10.24% |  |  | 7.92%
Tangible Book Value (per share) (non-GAAP) |  |  |  |  |  |  |  |  |
Shareholders' equity |  | $ | 151,156 |  | $ | 145,176 |  | $ | 134,840
Less intangible assets |  |  | (9,016) |  |  | (9,016) |  |  | (9,016)
Tangible book value (non-GAAP) |  |  | 142,140 |  |  | 136,160 |  |  | 125,824
Shares outstanding (in thousands) |  |  | 4,425 |  |  | 4,389 |  |  | 4,352
Tangible book value per share (non-GAAP) |  |  | 32.12 |  |  | 31.02 |  |  | 28.91
Efficiency Ratio |  |  |  |  |  |  |  |  |
Noninterest expense |  | $ | 20,277 |  | $ | 39,362 |  | $ | 19,173
Net interest income |  |  | 21,667 |  |  | 41,961 |  |  | 20,585
Plus tax equivalent adjustment to net interest income |  |  | 734 |  |  | 1,407 |  |  | 640
Plus noninterest income, net of securities transactions |  |  | 8,534 |  |  | 15,104 |  |  | 7,411
Total revenue |  |  | 30,935 |  |  | 58,472 |  |  | 28,636
Efficiency ratio (Noninterest expense/total revenue) |  |  | 65.55% |  |  | 67.32% |  |  | 66.95%
* 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.

33

## Comparison of the three months ended June 30, 2021 to the three months ended June 30, 2020:

Tax equivalent net interest income increased $514 thousand to $11.2 million in the second quarter of 2021 compared to $10.7 million for the same period in 2020. Balance sheet volume contributed $1.0 million to tax equivalent net interest but was offset by a $502 thousand reduction due to rates.

The following table presents average balances, tax-equivalent (T/E) interest income, and yields earned or rates paid on the assets or liabilities. 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 June 30,
| 2021 |  | 2020
| Average |  | Income or |  | Average |  | Average |  | Income or |  | Average
(Dollars in thousands) | balance |  | expense |  | yield/rate |  | balance |  | expense |  | yield/rate
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing obligations in other banks | $ | 124,137 |  | $ | 58 |  | 0.19% |  | $ | 77,451 |  | $ | 82 |  | 0.42%
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | 371,951 |  |  | 1,767 |  | 1.91% |  |  | 191,496 |  |  | 1,051 |  | 2.20%
Tax Exempt |  | 92,426 |  |  | 667 |  | 2.89% |  |  | 53,010 |  |  | 443 |  | 3.34%
Investments |  | 464,377 |  |  | 2,434 |  | 2.10% |  |  | 244,506 |  |  | 1,494 |  | 2.45%
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, industrial and agricultural |  | 847,205 |  |  | 8,198 |  | 3.84% |  |  | 846,686 |  |  | 8,559 |  | 4.01%
Residential mortgage |  | 66,710 |  |  | 585 |  | 3.48% |  |  | 68,918 |  |  | 698 |  | 4.11%
Home equity loans and lines |  | 83,081 |  |  | 517 |  | 2.50% |  |  | 67,930 |  |  | 608 |  | 3.59%
Consumer |  | 7,102 |  |  | 114 |  | 6.44% |  |  | 6,520 |  |  | 64 |  | 3.94%
Loans |  | 1,004,098 |  |  | 9,414 |  | 3.72% |  |  | 990,054 |  |  | 9,929 |  | 3.99%
Total interest-earning assets |  | 1,592,612 |  | $ | 11,906 |  | 3.00% |  |  | 1,312,011 |  | $ | 11,505 |  | 3.52%
Other assets |  | 65,689 |  |  |  |  |  |  |  | 62,982 |  |  |  |  |
Total assets | $ | 1,658,301 |  |  |  |  |  |  | $ | 1,374,993 |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing checking | $ | 473,362 |  | $ | 122 |  | 0.10% |  | $ | 372,373 |  | $ | 199 |  | 0.21%
Money Management |  | 529,683 |  |  | 205 |  | 0.16% |  |  | 448,069 |  |  | 342 |  | 0.31%
Savings |  | 112,015 |  |  | 16 |  | 0.06% |  |  | 91,790 |  |  | 17 |  | 0.07%
Time |  | 72,141 |  |  | 114 |  | 0.63% |  |  | 81,240 |  |  | 275 |  | 1.36%
Total interest-bearing deposits |  | 1,187,201 |  |  | 457 |  | 0.15% |  |  | 993,472 |  |  | 833 |  | 0.34%
Subordinated Notes |  | 19,567 |  |  | 263 |  | 5.37% |  |  | — |  |  | — |  | —
Total interest-bearing liabilities |  | 1,206,768 |  |  | 720 |  | 0.24% |  |  | 993,472 |  |  | 833 |  | 0.34%
Noninterest-bearing deposits |  | 293,136 |  |  |  |  |  |  |  | 236,193 |  |  |  |  |
Other liabilities |  | 14,661 |  |  |  |  |  |  |  | 15,301 |  |  |  |  |
Shareholders' equity |  | 143,736 |  |  |  |  |  |  |  | 130,027 |  |  |  |  |
Total liabilities and shareholders' equity | $ | 1,658,301 |  |  |  |  |  |  | $ | 1,374,993 |  |  |  |  |
T/E net interest income/Net interest margin |  |  |  |  | 11,186 |  | 2.82% |  |  |  |  |  | 10,672 |  | 3.26%
Tax equivalent adjustment |  |  |  |  | (363) |  |  |  |  |  |  |  | (340) |  |
Net interest income |  |  |  | $ | 10,823 |  |  |  |  |  |  | $ | 10,332 |  |
Net Interest Spread |  |  |  |  |  |  | 2.76% |  |  |  |  |  |  |  | 3.18%
Cost of Funds |  |  |  |  |  |  | 0.19% |  |  |  |  |  |  |  | 0.27%
Cost of Deposits |  |  |  |  |  |  | 0.12% |  |  |  |  |  |  |  | 0.27%

## Provision for Loan Losses

The Bank recorded a reversal of $1.1 million in the provision for loan loss for the second quarter, compared to an expense of $2.0 million in the second quarter of 2020. For more information refer to the Loan Quality and Allowance for Loan Losses discussion in the Financial Condition section.

‎

34

Noninterest Income

For the second quarter of 2021, noninterest income increased $1.1 million from the same period in 2020. Investment and trust service fees increased primarily due to an increase in asset management fees. Gain on sale of loans increased as mortgage production was higher in 2021 compared to 2020. Debit card income increased due to an increase in activity.

The following table presents a comparison of noninterest income for the three months ended June 30, 2021 and 2020:

|  | For the Three Months Ended |  |  |  |  |
|  | June 30, |  | Change
(Dollars in thousands) |  | 2021 |  | 2020 |  | Amount |  | %
Noninterest Income |  |  |  |  |  |  |  |  |  |  |
Investment and trust services fees |  | $ | 1,905 |  | $ | 1,590 |  | $ | 315 |  | 19.8
Loan service charges |  |  | 227 |  |  | 274 |  |  | (47) |  | (17.2)
Gain on sale of loans |  |  | 555 |  |  | 228 |  |  | 327 |  | 143.4
Deposit service charges and fees |  |  | 470 |  |  | 397 |  |  | 73 |  | 18.4
Other service charges and fees |  |  | 420 |  |  | 336 |  |  | 84 |  | 25.0
Debit card income |  |  | 576 |  |  | 438 |  |  | 138 |  | 31.5
Increase in cash surrender value of life insurance |  |  | 112 |  |  | 112 |  |  | — |  | —
Net gains on sales of debt securities |  |  | 91 |  |  | — |  |  | 91 |  | —
Change in fair value of equity securities |  |  | 38 |  |  | 27 |  |  | 11 |  | 40.7
Other |  |  | 95 |  |  | 10 |  |  | 85 |  | 850.0
Total noninterest income |  | $ | 4,489 |  | $ | 3,412 |  | $ | 1,077 |  | 31.6

Noninterest Expense

Noninterest expense for the second quarter of 2021 increased $467 thousand compared to the same period in 2020. Salary expense increased primarily due to higher mortgage commissions from increased mortgage production and health insurance costs from the Bank’s self-insured plan, as claims increased in 2021 versus the same period in 2020. FDIC insurance expense increased primarily due to growth of the Bank’s balance sheet. Nonservice pension increased due to pension settlement expenses. Other expenses decreased in 2021 due to a $636 thousand allowance previously established for an off-balance sheet liability that was reversed with an offsetting amount reversed from other expense.

The following table presents a comparison of noninterest expense for the three months ended June 30, 2021 and 2020:

|  | For the Three Months Ended |  |  |  |  |
(Dollars in thousands) |  | June 30, |  | Change
Noninterest Expense |  | 2021 |  | 2020 |  | Amount |  | %
Salaries and benefits |  | $ | 6,245 |  | $ | 5,382 |  | $ | 863 |  | 16.0
Net occupancy |  |  | 856 |  |  | 865 |  |  | (9) |  | (1.0)
Marketing and advertising |  |  | 396 |  |  | 464 |  |  | (68) |  | (14.7)
Legal and professional |  |  | 498 |  |  | 430 |  |  | 68 |  | 15.8
Data processing |  |  | 888 |  |  | 834 |  |  | 54 |  | 6.5
Pennsylvania bank shares tax |  |  | 308 |  |  | 263 |  |  | 45 |  | 17.1
FDIC insurance |  |  | 179 |  |  | 88 |  |  | 91 |  | 103.4
ATM/debit card processing |  |  | 329 |  |  | 279 |  |  | 50 |  | 17.9
Telecommunications |  |  | 83 |  |  | 108 |  |  | (25) |  | (23.1)
Nonservice pension |  |  | 189 |  |  | 88 |  |  | 101 |  | 114.8
Other |  |  | 140 |  |  | 843 |  |  | (703) |  | (83.4)
Total noninterest expense |  | $ | 10,111 |  | $ | 9,644 |  | $ | 467 |  | 4.8

## Provision for Income Taxes

For the second quarter of 2021, the Corporation recorded a Federal income tax expense of $1.0 million compared to a tax benefit of $942 thousand for the same quarter in 2020. Part of the tax benefit in 2020 was a $1.1 million tax benefit from the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) which allowed for net operating losses (NOL) from prior years to be carried back to past year instead of forward to future periods. The effective tax rate for the second quarter of 2021 was 16.4% compared to 8.0% (excluding the NOL benefit) for the second quarter of 2020. The increase in the effective tax rate was due primarily to higher pre-tax income driven by the large change in the provision for loan loss expense quarter-over-quarter. The benefit of tax-exempt income increased only slightly quarter-over-quarter. The federal statutory tax rate is 21% for 2021 and 2020.

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## Comparison of the six months ended June 30, 2021 to the six months ended June 30, 2020:

Tax equivalent net interest income increased $1.2 million to $22.4 million in the first half 2021 compared to $21.2 million for the same period in 2020. Balance sheet volume contributed $2.7 million to tax equivalent net interest but was offset by a $1.5 million reduction due to rates.

The following table presents average balances, tax-equivalent (T/E) interest income, and yields earned or rates paid on the assets or liabilities. 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 Six Months Ended June 30,
| 2021 |  | 2020
| Average |  | Income or |  | Average |  | Average |  | Income or |  | Average
(Dollars in thousands) | balance |  | expense |  | yield/rate |  | balance |  | expense |  | yield/rate
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing obligations in other banks | $ | 101,658 |  | $ | 112 |  | 0.22% |  | $ | 73,213 |  | $ | 340 |  | 0.93%
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable |  | 343,967 |  |  | 3,392 |  | 1.99% |  |  | 181,908 |  |  | 2,119 |  | 2.34%
Tax Exempt |  | 92,599 |  |  | 1,336 |  | 2.89% |  |  | 38,435 |  |  | 659 |  | 3.43%
Investments |  | 436,566 |  |  | 4,728 |  | 2.18% |  |  | 220,343 |  |  | 2,778 |  | 2.53%
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, industrial and agricultural |  | 852,752 |  |  | 16,569 |  | 3.87% |  |  | 819,886 |  |  | 17,449 |  | 4.22%
Residential mortgage |  | 67,294 |  |  | 1,189 |  | 3.53% |  |  | 68,633 |  |  | 1,427 |  | 4.19%
Home equity loans and lines |  | 82,504 |  |  | 1,042 |  | 2.55% |  |  | 67,265 |  |  | 1,332 |  | 3.97%
Consumer |  | 6,909 |  |  | 229 |  | 6.68% |  |  | 6,514 |  |  | 145 |  | 4.46%
Loans |  | 1,009,459 |  |  | 19,029 |  | 3.76% |  |  | 962,298 |  |  | 20,353 |  | 4.20%
Total interest-earning assets |  | 1,547,683 |  | $ | 23,869 |  | 3.11% |  |  | 1,255,854 |  | $ | 23,471 |  | 3.75%
Other assets |  | 64,305 |  |  |  |  |  |  |  | 64,396 |  |  |  |  |
Total assets | $ | 1,611,988 |  |  |  |  |  |  | $ | 1,320,250 |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing checking | $ | 450,015 |  | $ | 235 |  | 0.11% |  | $ | 348,837 |  | $ | 473 |  | 0.27%
Money Management |  | 521,429 |  |  | 405 |  | 0.16% |  |  | 440,170 |  |  | 1,083 |  | 0.49%
Savings |  | 109,047 |  |  | 31 |  | 0.06% |  |  | 87,924 |  |  | 74 |  | 0.17%
Time |  | 73,138 |  |  | 272 |  | 0.75% |  |  | 84,507 |  |  | 616 |  | 1.46%
Total interest-bearing deposits |  | 1,153,629 |  |  | 943 |  | 0.16% |  |  | 961,438 |  |  | 2,246 |  | 0.47%
Subordinated Notes |  | 19,563 |  |  | 525 |  | 5.37% |  |  | — |  |  | — |  | —
Total interest-bearing liabilities |  | 1,173,192 |  |  | 1,468 |  | 0.25% |  |  | 961,438 |  |  | 2,246 |  | 0.47%
Noninterest-bearing deposits |  | 279,887 |  |  |  |  |  |  |  | 212,464 |  |  |  |  |
Other liabilities |  | 15,321 |  |  |  |  |  |  |  | 16,529 |  |  |  |  |
Shareholders' equity |  | 143,588 |  |  |  |  |  |  |  | 129,819 |  |  |  |  |
Total liabilities and shareholders' equity | $ | 1,611,988 |  |  |  |  |  |  | $ | 1,320,250 |  |  |  |  |
T/E net interest income/Net interest margin |  |  |  |  | 22,401 |  | 2.92% |  |  |  |  |  | 21,225 |  | 3.39%
Tax equivalent adjustment |  |  |  |  | (734) |  |  |  |  |  |  |  | (640) |  |
Net interest income |  |  |  | $ | 21,667 |  |  |  |  |  |  | $ | 20,585 |  |
Net Interest Spread |  |  |  |  |  |  | 2.86% |  |  |  |  |  |  |  | 3.28%
Cost of Funds |  |  |  |  |  |  | 0.20% |  |  |  |  |  |  |  | 0.38%
Cost of Deposits |  |  |  |  |  |  | 0.13% |  |  |  |  |  |  |  | 0.38%

## Provision for Loan Losses

The Bank recorded a reversal of $1.9 million in the provision for loan loss for the first half of 2021, compared to an expense of $5.0 million in the first half of 2020. For more information refer to the Loan Quality and Allowance for Loan Losses discussion in the Financial Condition section.

‎

36

Noninterest Income

For the first half of 2021, noninterest income increased $1.4 million from the same period in 2020. Trust and investment service fees increased primarily due to an increase in asset management fees. Gain on sale of loans increased as mortgage production was higher in 2021 compared to 2020. Debit card income increased due to an increase in activity. The decrease in bank owned life insurance gains was from a life insurance gain from a bank-owned life insurance policy in 2020. Other income was higher in 2021 due to sales tax refunds received.

The following table presents a comparison of noninterest income for the six months ended June 30, 2021 and 2020:

|  | For the Six Months Ended |  |  |  |  |
|  | June 30, |  | Change
(Dollars in thousands) |  | 2021 |  | 2020 |  | Amount |  | %
Noninterest Income |  |  |  |  |  |  |  |  |  |  |
Investment and trust services fees |  | $ | 3,542 |  | $ | 3,035 |  | $ | 507 |  | 16.7
Loan service charges |  |  | 423 |  |  | 414 |  |  | 9 |  | 2.2
Gain on sale of loans |  |  | 1,337 |  |  | 372 |  |  | 965 |  | 259.4
Deposit service charges and fees |  |  | 938 |  |  | 962 |  |  | (24) |  | (2.5)
Other service charges and fees |  |  | 816 |  |  | 683 |  |  | 133 |  | 19.5
Debit card income |  |  | 1,093 |  |  | 857 |  |  | 236 |  | 27.5
Increase in cash surrender value of life insurance |  |  | 227 |  |  | 236 |  |  | (9) |  | (3.8)
Bank owned life insurance gain |  |  | — |  |  | 812 |  |  | (812) |  | (100.0)
Net gains on sales of debt securities |  |  | 91 |  |  | (10) |  |  | 101 |  | 1,010.0
Change in fair value of equity securities |  |  | 91 |  |  | (100) |  |  | 191 |  | (191.0)
Other |  |  | 158 |  |  | 40 |  |  | 118 |  | 295.0
Total noninterest income |  | $ | 8,716 |  | $ | 7,301 |  | $ | 1,415 |  | 19.4

Noninterest Expense

Noninterest expense for the first half of 2021 increased $1.1 million compared to the same period in 2020. Salary expense increased primarily due to higher mortgage commissions from increased mortgage production and health insurance costs from the Bank’s self-insured plan, as claims increased in 2021 versus the same period in 2020. FDIC insurance expense increased primarily due to growth of the Bank’s balance sheet. Nonservice pension increased due to pension settlement expenses. Other expenses decreased in 2021 due to a $636 thousand allowance previously established for an off-balance sheet liability that was reversed with an offsetting amount reversed from other expense, compared to a $250 thousand reversal in the prior year-to-date period related to the same off-balance sheet liability.

The following table presents a comparison of noninterest expense for the six months ended June 30, 2021 and 2020:

|  | For the Six Months Ended |  |  |  |  |
(Dollars in thousands) |  | June 30, |  | Change
Noninterest Expense |  | 2021 |  | 2020 |  | Amount |  | %
Salaries and employee benefits |  | $ | 11,903 |  | $ | 10,916 |  | $ | 987 |  | 9.0
Net occupancy |  |  | 1,766 |  |  | 1,695 |  |  | 71 |  | 4.2
Marketing and advertising |  |  | 740 |  |  | 919 |  |  | (179) |  | (19.5)
Legal and professional |  |  | 973 |  |  | 825 |  |  | 148 |  | 17.9
Data processing |  |  | 1,817 |  |  | 1,641 |  |  | 176 |  | 10.7
Pennsylvania bank shares tax |  |  | 400 |  |  | 438 |  |  | (38) |  | (8.7)
FDIC insurance |  |  | 382 |  |  | 148 |  |  | 234 |  | 158.1
ATM/debit card processing |  |  | 625 |  |  | 543 |  |  | 82 |  | 15.1
Telecommunications |  |  | 213 |  |  | 213 |  |  | — |  | —
Nonservice pension |  |  | 395 |  |  | 176 |  |  | 219 |  | 124.4
Other |  |  | 1,063 |  |  | 1,659 |  |  | (596) |  | (35.9)
Total noninterest expense |  | $ | 20,277 |  | $ | 19,173 |  | $ | 1,104 |  | 5.8

## Provision for Income Taxes

For the first half of 2021, the Corporation recorded a Federal income tax expense of $1.9 million compared to a tax benefit of $1.0 million for the same period in 2020. Part of the tax benefit in 2020 was a $1.1 million tax benefit from the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) which allowed for net operating losses (NOL) from prior years to be carried back to past year instead of forward to future periods. The effective tax rate for the first half of 2021 was 15.9% compared to 1.7% (excluding the NOL benefit) for the first half of 2020. The increase in the effective tax rate was due primarily to higher pre-tax income driven by the large change in the provision for loan loss expense year-

37

over-year. The benefit of tax-exempt income increased only slightly year-over-year. The federal statutory tax rate is 21% for 2021 and 2020.

## Financial Condition

Cash and Cash Equivalents:

Cash and cash equivalents totaled $98.1 million at June 30, 2021, an increase of $41.0 million from the prior year-end balance of $57.1 million. Interest-bearing deposits are held primarily at the Federal Reserve ($81.2 million).

Investment Securities:

AFS Securities: The AFS securities portfolio has increased $118.3 million on a cost basis since year-end 2020. The portfolio is comprised primarily municipal securities and U.S. Agency mortgage-backed securities at approximately 44% and 23% of the portfolio fair value, respectively. The average life of the portfolio was 6.73 years.

The AFS securities portfolio had a net unrealized gain of $9.6 million at June 30, 2021 compared to a net unrealized gain of $12.6 million at the prior year-end. The portfolio averaged $436.6 million with a yield of 2.18% for the first half of 2021. This compares to an average of $220.3 million and a yield of 2.53% for the same period in 2020.

The municipal bond portfolio is well diversified geographically (210 issuers) and is comprised primarily of general obligation bonds (65%). 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%), California (12%), Michigan (11%), and Pennsylvania (11%). 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 $1.9 million, compared to $701 thousand at December 31, 2020. The municipal bond portfolio had the largest unrealized loss of $1.1 million, 60.8% of the total unrealized loss ($1.9 million). There are one hundred and thirty-six 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 of 5 variable rate bank issued trust preferred securities with a fair value of $4.1 million and 42 fixed rate bank issued subordinated notes with a fair value of $20.3 million. This portfolio has an unrealized loss of $159 thousand on twenty securities with a fair value of $11.2 million. The trust-preferred securities held by the Bank are single entity issues, not pooled trust preferred securities. None of these issuers have suspended or missed a dividend or interest payment. At June 30, 2021, the Bank believes it will be able to collect all interest and principal due on these bonds and no other-than-temporary-impairment charges were recorded.

The unrealized loss in the asset-backed securities portfolio decreased $82 thousand from December 31, 2020. FFELP (Federal Family Education Loan Program) bonds make up the majority of this sector and have a 97% guarantee from the U.S. Department of Education. The FFELP bonds are all rated AAA. Management fully expects to be paid back at par and no other-than-temporary impairment charges have been recorded.

Restricted Stock at Cost: The Bank held $495 thousand of restricted stock at June 30, 2021. 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 slightly by $666 thousand over year-end 2020. For the first six months of 2021, the Bank originated $57.0 million and sold $62.3 million in mortgages through third party brokerage agreements.

38

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 ($12.0 million), while loans for individuals to construct personal residences totaled $8.2 million at June 30, 2021. 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 decreased to $495.4 million from $504.0 million at the end of 2020, as originations did not keep pace with pay-downs. The largest sectors (by collateral) in the commercial real estate category are: hotels and motels ($76.1 million), office building ($51.0 million), land development ($50.5 million), manufacturing facility ($39.4 million) and shopping centers ($34.5 million). 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 17 flagged brands and 3 independent operators.

Also included in CRE are real estate construction loans totaling $84.1 million. At June 30, 2021, the Bank had $26.0 million in real estate construction loans funded with an interest reserve and capitalized $403 thousand of interest in 2021 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 $8.1 million to $273.1 million at June 30, 2021, compared to $281.3 million at the end of 2020, primarily due to PPP forgiveness. At June 30, 2021, the Bank had approximately $139 million in tax-free loans in the commercial portfolio. The largest sectors (by industry) in the commercial category are: public administration ($58.3 million), utilities ($54.6 million), educational services ($13.7 million), real estate rental and leasing ($11.5 million) and transportation and warehousing ($10.3 million). This category also includes $53.6 million of PPP loans that are 100% guaranteed by the SBA.

Participations: The Bank may supplement its own commercial loan production by purchasing loan participations. These participations are primarily located in south-central Pennsylvania. At June 30, 2021, the outstanding commercial participations accounted for 6.9%, or $69.3 million, of total gross loans compared to 6.8% and $68.7 million at December 31, 2020. The Bank’s total exposure (including outstanding balances and unfunded commitments) to purchased participations is $83.1 million, compared to $84.0 million at December 31, 2020. The commercial loan participations are comprised of $15.6 million of Commercial loans and $53.7 million of CRE loans, reported in the respective loan class.

Consumer loans: This category increased by $1.4 million to $7.0 million at June 30, 2021, compared to $5.6 million at prior year-end and is mainly comprised of unsecured personal lines of credit.

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

|  | June 30, |  | December 31, |  |  | Change
(Dollars in thousands) |  | 2021 |  | 2020 |  |  | Amount |  | %
Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |
Consumer first liens |  | $ | 76,577 |  | $ | 77,373 |  | $ | (796) |  | (1.0)
Commercial first lien |  |  | 58,460 |  |  | 59,851 |  |  | (1,391) |  | (2.3)
Total first liens |  |  | 135,037 |  |  | 137,224 |  |  | (2,187) |  | (1.6)
Consumer junior liens and lines of credit |  |  | 63,303 |  |  | 60,935 |  |  | 2,368 |  | 3.9
Commercial junior liens and lines of credit |  |  | 4,910 |  |  | 4,425 |  |  | 485 |  | 11.0
Total junior liens and lines of credit |  |  | 68,213 |  |  | 65,360 |  |  | 2,853 |  | 4.4
Total residential real estate 1-4 family |  |  | 203,250 |  |  | 202,584 |  |  | 666 |  | 0.3
Residential real estate - construction |  |  |  |  |  |  |  |  |  |  |
Consumer |  |  | 8,242 |  |  | 6,751 |  |  | 1,491 |  | 22.1
Commercial |  |  | 11,962 |  |  | 9,558 |  |  | 2,404 |  | 25.2
Total residential real estate construction |  |  | 20,204 |  |  | 16,309 |  |  | 3,895 |  | 23.9
Commercial real estate |  |  | 495,407 |  |  | 503,977 |  |  | (8,570) |  | (1.7)
Commercial |  |  | 273,146 |  |  | 281,257 |  |  | (8,111) |  | (2.9)
Total commercial |  |  | 768,553 |  |  | 785,234 |  |  | (16,681) |  | (2.1)
Consumer |  |  | 7,028 |  |  | 5,577 |  |  | 1,451 |  | 26.0
|  |  | 999,035 |  |  | 1,009,704 |  |  | (10,669) |  | (1.1)
Less: Allowance for loan losses |  |  | (15,055) |  |  | (16,789) |  |  | 1,734 |  | (10.3)
Net Loans |  | $ | 983,980 |  | $ | 992,915 |  | $ | (8,935) |  | (0.9)

Paycheck Protection Program (PPP) loans (included in Commercial loans above) |  |  |  |  |  |  |  |
Two-year loans |  | $ | 2,154 |  | $ | 5,378 |  |  |  |  |
Five-year loans |  |  | 51,419 |  |  | 46,912 |  |  |  |  |
Total Paycheck Protection Program loans |  | $ | 53,573 |  | $ | 52,290 |  | $ | 1,283 |  | 2.5

Loan Quality:

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 a pass or substandard rating based on the performance status of the loans. Substandard consumer loans are loans that are 90 days or more past due 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 to warrant additional attention and monitoring. Loans rated 6-Other Asset Especially Mentioned (OAEM) or worse begin to receive enhanced monitoring and reporting by the Bank. Loans rated 7-Substandard or 8-Doubtful exhibit the greatest financial weakness and present the greatest possible risk of loss to the Bank. Nonaccrual loans are rated no better than 7-Substandard. The following factors represent some of the factors used in determining the risk rating of a borrower: cash flow, debt coverage, liquidity, management, and collateral. Risk ratings, for pass credits, are generally reviewed annually for term debt and 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.

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 $66.5 million at June 30, 2021 quarter end compared to $66.1 million at December 31, 2020. The composition of the loans in the watch list as of June 30, 2021 is essentially unchanged from the prior year-end. The watch list includes both performing and nonperforming loans. Included in the watchlist total are $8.7 million 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

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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 June 30, 2021, the Bank had loans of $23.6 million (2.4% of gross loans) that exceeded the supervisory limit, compared to 2.3% at year-end 2020. Potential problem loans, defined as watch list loans less loans on nonaccrual or past due more than 90 days totaled $57.7 million at June 30, 2021 compared to $53.2 million at December 31, 2020.

Loan quality, as measured by nonperforming loans is nearly unchanged during the first half of 2021 with $8.8 million of nonperforming loans and a nonperforming loan ratio of .88%

The following table presents a summary of nonperforming assets as of:

|  | June 30, |  | December 31,
(Dollars in thousands) |  | 2021 |  | 2020
Nonaccrual loans |  |  |  |  |  |
Residential Real Estate 1-4 Family |  |  |  |  |  |
First liens |  | $ | 41 |  | $ | 41
Junior liens and lines of credit |  |  | — |  |  | 10
Total |  |  | 41 |  |  | 51
Residential real estate - construction |  |  | 430 |  |  | 512
Commercial real estate |  |  | 8,172 |  |  | 8,033
Commercial |  |  | 105 |  |  | 108
Total nonaccrual loans |  |  | 8,748 |  |  | 8,704
Loans past due 90 days or more and still accruing |  |  |  |  |  |
Residential Real Estate 1-4 Family |  |  |  |  |  |
First liens |  |  | — |  |  | 26
Junior liens and lines of credit |  |  | 74 |  |  | —
Total |  |  | 74 |  |  | 26
Commercial real estate |  |  | — |  |  | —
Consumer |  |  | — |  |  | 12
Total loans past due 90 days or more and still accruing |  |  | 74 |  |  | 17
Total nonperforming loans |  |  | 8,822 |  |  | 8,721
Other real estate owned |  |  | — |  |  | —
Total nonperforming assets |  | $ | 8,822 |  | $ | 8,721
Nonperforming loans to total gross loans |  |  | 0.88% |  |  | 0.87%
Nonperforming assets to total assets |  |  | 0.53% |  |  | 0.57%
Allowance for loan losses to nonperforming loans |  |  | 170.65% |  |  | 192.05%

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The following table identifies the most significant loans in nonaccrual status. These two nonaccrual loans account for 80% of the total nonaccrual balance.

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | ALL |  | Nonaccrual |  | TDR |  |  |  |  |  | Collateral
|  | Balance |  |  | Reserve |  | Date |  | Status |  | Collateral |  | Location |  | Value (1)
Credit 1 | $ | 1,226 |  | $ | — |  | Mar-12 |  | Y |  | 1st and 2nd liens on commercial real estate, residential real estate and business assets |  | PA |  | $ | 2,807
Credit 2 |  | 5,796 |  |  | 322 |  | Sep-20 |  | N |  | 1st and 2nd liens on commercial real estate (hotel) and all related business assets |  | PA |  | $ | 5,474
| $ | 7,022 |  | $ | 322 |  |  |  |  |  |  |  |  |  |  |
(1) Includes any estimated discount on appraised value and cost to sell.

In addition to monitoring nonaccrual loans, the Bank also closely monitors impaired loans and troubled debt restructurings (TDR). A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement. Nonaccrual loans (excluding consumer purpose loans) and TDR loans are considered impaired.

A loan is considered a troubled debt restructuring if the creditor (the Bank), for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. These concessions may include lowering the rate, extending the maturity, re-amortization 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.

Loans that have been modified on a good-faith basis in response to COVID-19 to borrowers who were classified as current prior to any relief are not TDRs as outlined in the March 22, 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus or Section 4013 of the CARES Act. Loans may be modified under Section 4013 until the earlier of January 1, 2022 or the 60 th day after the end of the COVID-19 national emergency declared by the President. Consequently, loan delinquencies and nonaccrual loans could continue to increase during the remainder of 2021 if modified loans are not able to return to a performing status.

In accordance with financial accounting standards, TDR loans are always considered impaired until they are paid off or in certain circumstances, refinanced. However, an impaired TDR loan can be a performing loan. Impaired loans totaled $17.0 million compared to $17.3 million at year-end 2020.

Loan Deferrals. As the economy quickly contracted in 2020 as the result of the pandemic, the Bank began to receive requests for payment modifications. Unlike past economic downturns, bank regulators provided favorable guidance for banks allowing them wide latitude to make modifications. Under guidance provided by the CARES Act and a joint regulatory agency statement issued by banking agencies, banks could, under certain circumstances, avoid reporting loan modifications as delinquent, nonperforming or as a trouble debt restructuring. As of June 30, 2021, t he Bank has $13.3 million in loan deferrals or modifications (approximately 1% of gross loans), down from 7% in first quarter 2021. These modified loans are all on an interest only payment schedule at June 30, 2021 and will return to a principal and interest payment schedule in the third quarter of 2021.

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The following tables show loan deferrals made as of June 30, 2021 by North American Industry Classification System (NAICS) code and type of collateral.

|  |  |  |  |  |  |  | Percent of |  | Collateral
(Dollars in thousands) |  | Number of |  |  |  | Percent of |  | Risk-based |  | Real Estate |  | Non-Real Estate
Industry Description |  | Loans |  |  | Balance |  | Gross Loans |  | Capital (1) |  | secured |  | secured
Hotels |  | 2 |  | $ | 7,790 |  | 1% |  | 5% |  | $ | 7,790 |  | $ | —
Real Estate, Rental & Leasing |  | 1 |  |  | 4,719 |  | < 1% |  | 3% |  |  | 4,719 |  |  | —
Food Service |  | 1 |  |  | 771 |  | < 1% |  | < 1% |  |  | 771 |  |  | —
Total |  | 4 |  | $ | 13,280 |  | 1% |  | 9% |  | $ | 13,280 |  | $ | —
(1) Based on Bank's Risk-based Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

The following tables show the type of modifications by industry as of June 30, 2021, and the same sectors at December 31, 2020.

June 30, 2021 |  | Type of Modification
(Dollars in thousands) |  | Principal Deferred |  | Interest Only Loans |  | Principal & Interest |  |  |
Industry Description |  | Interest Only Payments |  | Payments Deferred |  | Payments Deferred |  |  | Total
Hotels |  | $ | 7,790 |  | $ | — |  | $ | — |  | $ | 7,790
Real Estate, Rental & Leasing |  |  | 4,719 |  |  | — |  |  | — |  |  | 4,719
Food Service |  |  | 771 |  |  | — |  |  | — |  |  | 771
Total |  | $ | 13,280 |  | $ | — |  | $ | — |  | $ | 13,280
December 31, 2020 |  | Type of Modification
(Dollars in thousands) |  | Principal Deferred |  | Interest Only Loans |  | Principal & Interest |  |  |
Industry Description |  | Interest Only Payments |  | Payments Deferred |  | Payments Deferred |  |  | Total
Hotels |  | $ | 40,304 |  | $ | — |  | $ | 6,183 |  | $ | 46,487
Arts, Entertainment & Recreation |  |  | 13,613 |  |  | — |  |  | 462 |  |  | 14,075
Real Estate, Rental & Leasing |  |  | — |  |  | 4,718 |  |  | — |  |  | 4,718
Food Service |  |  | — |  |  | 882 |  |  | 724 |  |  | 1,606
Other Services |  |  | — |  |  | — |  |  | 671 |  |  | 671
Total |  | $ | 53,917 |  | $ | 5,600 |  | $ | 8,040 |  | $ | 67,557

The performance of these loans as they come out of the deferral period will be critical in predicting the credit quality of the loans in the future.

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Industry Exposure. The Bank believes its greatest risk exposure to modified loans is in the hotel sector. The following table presents additional information on the modified hotel loans.

June 30, 2021 |  |  |
(Dollars in thousands, except average daily rate) |  |
Modified Balance |  | $ | 7,790
Loans with principal payment deferred, paying interest |  | $ | 7,790
Loans with deferred principal and interest |  | $ | —
Expected modification expiration |  |  |
1-3 months |  | $ | 7,790
4-6 months |  | $ | —
Number of Loans Modified |  |  | 2
Average Balance |  | $ | 3,895
Average Loan-to-Value |  |  | 62%
Risk Rated: 5 - Pass |  | $ | —
Risk Rated: 6 - Other Asset Especially Mentioned |  | $ | 6,842
Risk Rated: 7 - Substandard |  | $ | 948
May 2021 Daily Occupancy* |  |  | 58%
May 2020 Daily Occupancy* |  |  | 28%
May 2021 Average Daily Rate* |  | $ | 99
May 2020 Average Daily Rate* |  | $ | 62
Hotel Flags |  |  | 2

*Daily occupancy and average daily rate represent data reported for the primary markets in which the hotels operate and may or may not represent the experience of any specific property in the portfolio.

Paycheck Protection Program. In March 2020, Congress passed the CARES Act to provide economic relief to small business and consumers affect by the COVID-19 pandemic. Included in this Act was the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The PPP is a small business loan program designed to assist in allowing small businesses to keep workers on the payroll during the COVID-19 pandemic. When workers are kept on the payroll for the qualifying period, the loan could be forgiven if the small business incurs eligible expenses. 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% for the life of the loan. Borrowers of PPP loans do not have to make payments on the loan during the SBA defined deferral period, and then the loans will fully amortize for the remainder of the two- or five-year terms.

The SBA paid originating banks a processing fee ranging from 1% to 5% of the loan, depending on the loan balance for round 1 of PPP funding. The SBA will pay processing fees to originating banks for round 2 of PPP funding at levels similar to those paid in round 1. The Bank will recognize these fees in interest income over the contractual life (two or five years) of the loan. As PPP loans are granted forgiveness by the SBA, fee recognition will accelerate. At June 30, 2021, the Bank had $1.9 million of PPP fees remaining to be recognized.

At June 30, 2021 the Bank held $53.6 million in PPP loans, $51.4 million with a 5-year maturity and $2.2 million with a 2-year maturity.

The PPP loans are 100% guaranteed by the SBA, thereby presenting no credit risk to the Bank once the SBA guarantee is fulfilled, if necessary. However, the PPP loan is only designed to cover short-term operating needs of the borrower. If the economy does not recover quickly from the pandemic and the borrower experiences long-term operational problems beyond the PPP funding, the performance of other loans to these customers could begin to deteriorate.

Allowance for Loan Losses:

Management monitors loan performance on a monthly basis and performs a quarterly evaluation of the adequacy of the allowance for loan losses. The ALL is determined by segmenting 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) 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

44

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 allowance for loan losses, 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 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 June 30, 2021 is adequate.

The analysis for determining 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 to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement. Collateral values discounted for market conditions and selling costs are used to establish specific allocations for impaired loans. However, it is possible that as a result of the credit analysis, a specific reserve is not required for an impaired loan. Commercial loans with a balance less than $250 thousand, and all consumer purpose loans are not included in the specific reserve analysis as impaired loans but are added to the general allocation pool. These loans totaled $302 thousand at June 30, 2021 and are comprised primarily of loans secured by residential real estate. Management does not believe that excluding these loans from the specific reserve analysis presents any additional risk. Loans that are evaluated for a specific reserve, but not needing a specific reserve are not added back to the general allocation pool. There was a $322 thousand specific reserve established for one impaired loan at June 30, 2021 compared to $228 thousand at year-end 2020.

The general allocation component addresses the reserves established for pools of homogenous loans. The general component includes a quantitative and qualitative analysis. When calculating the general allocation, the Bank segregates its loan portfolio into 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 rolling historical loan loss experience as determined for each loan segment to determine a loss factor applicable to each loan segment. PPP loans, because of the SBA guarantee, are excluded from the quantitative analysis. The allowance established as a result of the quantitative analysis was $2.8 million compared to $3.6 million at year-end 2020. The decrease in the quantitative allowance was due primarily to a decrease in the twenty-quarter rolling historical loss rate used in the calculation.

The qualitative analysis utilizes a risk matrix that incorporates four primary risk factors: economic conditions, delinquency, classified loans, and level of risk, and assigns a risk score (as measured in basis points) to each factor. The economic condition factor is primarily based on unemployment rates. The delinquency factor considers the level of past due loans and charge-offs. The classified loan factor considers the internal credit risk score of the portfolio. The level of risk factor considers operational factors such as: loan volume, management, loan review process, credit concentrations, competition, and legal and regulatory issues. The risk score (as measured in basis points) for each of the four risk factors is minimal, low, moderate, high and very high and is determined independently for commercial loans, residential mortgage loans and consumer loans. During 2020, as a result of the negative effects of the pandemic on the economy, the Bank increased the basis point risk factor for certain qualitative components. In addition, the Bank carved out the portfolio of modified loans for a qualitative assessment separate from the overall commercial loan portfolio. This allowed for assignment of an increased qualitative risk score on this portfolio. As of June 30, 2021, several qualitative factors were decreased reflecting a lower risk of loss in the loan portfolio. This is the third consecutive quarter of a decrease in certain qualitative factors and the qualitative allowance declined to $11.2 million at June 30, 2021 down from $12.1 million at year-end 2020 and from a high of $12.6 million at September 30, 2020. PPP loans, because of the SBA guarantee, were excluded from the qualitative analysis.

The unallocated component is maintained to cover uncertainties that could affect Management’s estimate of probable loss. The unallocated component 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 $738 thousand at June 30, 2021.

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 made based on the current information available at 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 for loan losses, Management, at its discretion, may determine that additional adjustments to the fair value obtained from an appraisal or collateral valuation are required. Adjustments will be made as

45

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.

The following table shows, by loan segment, the activity in the ALL, the amount of allowance established in each category and the loans that were evaluated for the ALL under a specific reserve (individually) and those that were evaluated under a general reserve (collectively) as of June 30, 2021.

|  | Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |
|  | First |  | Junior Liens & |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  | Liens |  | Lines of Credit |  | Construction |  | Real Estate |  | Commercial |  | Consumer |  | Unallocated |  | Total
ALL at March 31, 2021 |  | $ | 447 |  | $ | 211 |  | $ | 318 |  | $ | 8,785 |  | $ | 5,473 |  | $ | 113 |  | $ | 789 |  | $ | 16,136
Charge-offs |  |  | — |  |  | — |  |  | (28) |  |  | — |  |  | (3) |  |  | (18) |  |  | — |  |  | (49)
Recoveries |  |  | — |  |  | 1 |  |  | — |  |  | 1 |  |  | 54 |  |  | 12 |  |  | — |  |  | 68
Provision |  |  | 12 |  |  | 8 |  |  | 59 |  |  | (908) |  |  | (215) |  |  | (5) |  |  | (51) |  |  | (1,100)
ALL at June 30, 2021 |  | $ | 459 |  | $ | 220 |  | $ | 349 |  | $ | 7,878 |  | $ | 5,309 |  | $ | 102 |  | $ | 738 |  | $ | 15,055
ALL at December 31, 2020 |  | $ | 555 |  | $ | 226 |  | $ | 294 |  | $ | 9,163 |  | $ | 5,679 |  | $ | 97 |  | $ | 775 |  | $ | 16,789
Charge-offs |  |  | — |  |  | — |  |  | (28) |  |  | (13) |  |  | (8) |  |  | (36) |  |  | — |  |  | (85)
Recoveries |  |  | — |  |  | 170 |  |  | — |  |  | 1 |  |  | 61 |  |  | 19 |  |  | — |  |  | 251
Provision |  |  | (96) |  |  | (176) |  |  | 83 |  |  | (1,273) |  |  | (423) |  |  | 22 |  |  | (37) |  |  | (1,900)
ALL at June 30, 2021 |  | $ | 459 |  | $ | 220 |  | $ | 349 |  | $ | 7,878 |  | $ | 5,309 |  | $ | 102 |  | $ | 738 |  | $ | 15,055
ALL at March 31, 2020 |  | $ | 563 |  | $ | 178 |  | $ | 269 |  | $ | 8,249 |  | $ | 4,713 |  | $ | 98 |  | $ | 660 |  | $ | 14,730
Charge-offs |  |  | - |  |  | — |  |  | — |  |  | — |  |  | (145) |  |  | (29) |  |  | — |  |  | (174)
Recoveries |  |  | 1 |  |  | — |  |  | — |  |  | — |  |  | 19 |  |  | 4 |  |  | — |  |  | 24
Provision |  |  | 16 |  |  | 19 |  |  | (27) |  |  | 588 |  |  | 1,258 |  |  | 32 |  |  | 89 |  |  | 1,975
ALL at June 30, 2020 |  | $ | 580 |  | $ | 197 |  | $ | 242 |  | $ | 8,837 |  | $ | 5,845 |  | $ | 105 |  | $ | 749 |  | $ | 16,555
ALL at December 31, 2019 |  | $ | 416 |  | $ | 119 |  | $ | 187 |  | $ | 6,607 |  | $ | 4,021 |  | $ | 84 |  | $ | 532 |  | $ | 11,966
Charge-offs |  |  | - |  |  | — |  |  | — |  |  | — |  |  | (365) |  |  | (59) |  |  | — |  |  | (424)
Recoveries |  |  | 4 |  |  | — |  |  | — |  |  | — |  |  | 24 |  |  | 10 |  |  | — |  |  | 38
Provision |  |  | 160 |  |  | 78 |  |  | 55 |  |  | 2,230 |  |  | 2,165 |  |  | 70 |  |  | 217 |  |  | 4,975
ALL at June 30, 2020 |  | $ | 580 |  | $ | 197 |  | $ | 242 |  | $ | 8,837 |  | $ | 5,845 |  | $ | 105 |  | $ | 749 |  | $ | 16,555

‎

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|  | Residential Real Estate 1-4 Family |  |  |  |  |  |  |  |  |  |  |  |  |
|  | First |  | Junior Liens & |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  | Liens |  | Lines of Credit |  | Construction |  | Real Estate |  | Commercial |  | Consumer |  | Unallocated |  | Total
June 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans evaluated for ALL: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually |  | $ | 666 |  | $ | — |  | $ | 430 |  | $ | 15,891 |  | $ | — |  | $ | — |  | $ | — |  | $ | 16,987
Collectively |  |  | 134,371 |  |  | 68,213 |  |  | 19,774 |  |  | 479,516 |  |  | 273,146 |  |  | 7,028 |  |  | — |  |  | 982,048
Total |  | $ | 135,037 |  | $ | 68,213 |  | $ | 20,204 |  | $ | 495,407 |  | $ | 273,146 |  | $ | 7,028 |  | $ | — |  | $ | 999,035
ALL established for ‎ loans evaluated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually |  | $ | — |  | $ | — |  | $ | — |  | $ | 322 |  | $ | — |  | $ | — |  | $ | — |  | $ | 322
Collectively |  |  | 459 |  |  | 220 |  |  | 349 |  |  | 7,556 |  |  | 5,309 |  |  | 102 |  |  | 738 |  |  | 14,733
ALL at June 30, 2021 |  | $ | 459 |  | $ | 220 |  | $ | 349 |  | $ | 7,878 |  | $ | 5,309 |  | $ | 102 |  | $ | 738 |  | $ | 15,055
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans evaluated for ALL: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually |  | $ | 637 |  | $ | — |  | $ | 512 |  | $ | 16,104 |  | $ | — |  | $ | — |  | $ | — |  | $ | 17,253
Collectively |  |  | 136,587 |  |  | 65,360 |  |  | 15,797 |  |  | 487,873 |  |  | 281,257 |  |  | 5,577 |  |  | — |  |  | 992,451
Total |  | $ | 137,224 |  | $ | 65,360 |  | $ | 16,309 |  | $ | 503,977 |  | $ | 281,257 |  | $ | 5,577 |  | $ | — |  | $ | 1,009,704
ALL established for ‎ loans evaluated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually |  | $ | — |  | $ | — |  | $ | — |  | $ | 228 |  | $ | — |  | $ | — |  | $ | — |  | $ | 228
Collectively |  |  | 555 |  |  | 226 |  |  | 294 |  |  | 8,935 |  |  | 5,679 |  |  | 97 |  |  | 775 |  |  | 16,561
ALL at December 31, 2020 |  | $ | 555 |  | $ | 226 |  | $ | 294 |  | $ | 9,163 |  | $ | 5,679 |  | $ | 97 |  | $ | 775 |  | $ | 16,789

The allocation of the allowance for loan losses is based on estimates and is not intended to imply limitations on the usage of the allowance. The entire allowance is available to absorb any losses without regard to the category in which the loan is classified.

The following table shows the ALL and charge-off ratios for the periods ended:

| Six Months Ended | Year Ended |  | Six Months Ended
| June 30, 2021 |  | December 31, 2020 |  | June 30, 2020
Net charge-offs (recoveries)/average loans* |  | -0.03% |  |  | -0.02% |  |  | 0.06%
Allowance for loan losses as a % of loans |  | 1.51% |  |  | 1.66% |  |  | 1.64%
Net (recoveries) charge-offs | $ | (166) |  | $ | (198) |  | $ | 386
* Annualized |  |  |  |  |  |  |  |

Deposits:

Total deposits increased $136.6 million during the first six months of 2021 to $1.491 billion. Noninterest-bearing deposits increased $34.3 million (primarily in small business and retail checking deposits) and interest-bearing checking and savings deposits increased $108.7 million, while time deposits decreased $6.3 million. Interest-bearing checking increased by $67.2 million in retail and commercial deposits, while the Bank’s Money Management increased $36.6 million. Based on current information known to Management, the increases seem to stem from government stimulus payments to consumers, businesses and municipalities, lower spending as economic activity slowed during the pandemic and a sense of security offered by bank deposits in uncertain economic times. The decrease in time deposits is primarily in retail accounts.

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As of June 30, 2021, the Bank had $235.3 million placed in the IntraFi Network deposit program ($168.0 million in interest-bearing checking and $67.3 million in money management) and $4.4 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 June 30, 2021, the Bank’s reciprocal deposits were 15.5% of total liabilities compared to 12.9% at year-end 2020.

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

|  | June 30, |  | December 31, |  |  | Change
(Dollars in thousands) |  | 2021 |  | 2020 |  |  | Amount |  | %
Noninterest-bearing checking |  | $ | 293,350 |  | $ | 259,060 |  | $ | 34,290 |  | 13.2
Interest-bearing checking |  |  | 476,404 |  |  | 409,178 |  |  | 67,226 |  | 16.4
Money management |  |  | 537,648 |  |  | 501,017 |  |  | 36,631 |  | 7.3
Savings |  |  | 113,989 |  |  | 109,153 |  |  | 4,836 |  | 4.4
Total interest-bearing checking and savings |  |  | 1,128,041 |  |  | 1,019,348 |  |  | 108,693 |  | 10.7
Time deposits |  |  | 69,817 |  |  | 76,165 |  |  | (6,348) |  | (8.3)
Total deposits |  | $ | 1,491,208 |  | $ | 1,354,573 |  | $ | 136,635 |  | 10.1
Overdrawn deposit accounts reclassified as loans |  | $ | 114 |  | $ | 86 |  |  |  |  |

‎

48

Borrowings:

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% 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 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 increased $6.0 million to $151.2 million at June 30, 2021, from $145.2 million at the end of 2020, due primarily to an increase in retained earnings of $7.4 million, partially offset by a decrease of $2.3 million in accumulated other comprehensive income (AOCI). The Corporation’s net earnings of $10.1 million were partially offset by the cash dividend of $2.7 million. The Corporation’s Dividend Reinvestment Plan (DRIP) added $958 thousand in new capital from optional cash contributions and $466 thousand from the reinvestment of quarterly dividends. The Corporation’s dividend payout ratio was 26.64% for the first six months of 2021.

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 second quarter of 2021, the Corporation paid a $0.31 per share dividend, compared to $0.30 paid in the first quarter of 2020. On July 8, 2021, the Board of Directors declared a $0.32 per share regular quarterly dividend for the third quarter of 2021, which will be paid on August 25, 2021.

On December 17, 2020, the Board of Directors authorized the 2020 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 18, 2020 and expiring on December 18, 2021. The Corporation repurchased 23,155 shares in the second quarter of 2021. No shares were repurchased during the first quarter of 2021. 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.

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% 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 June 30, 2021 was 8.28% compared to the regulatory buffer of 2.50%. 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, 2021, 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 QCBR 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 QCBR but did not opt-in to the CBLR.

The Bank is participating in the Paycheck Protection Program (PPP) and the Paycheck Protection Program Liquidity Facility (PPPLF) to fund PPP Loans. In accordance with regulatory guidance, PPP loans pledged as collateral for PPPLF, and PPPLF advances, are excluded from leverage capital ratios. PPP loans will also carry a 0% risk-weight for risk-based capital rules.

The consolidated asset limit on small bank holding companies is $3 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.

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The following table summarizes the regulatory capital requirements and results as of June 30, 2021 and December 31, 2020 for the Corporation and the Bank:

|  |  |  |  |  | Regulatory Ratios
|  |  |  |  |  | Adequately |  | Well
|  | June 30, |  | December 31, |  | Capitalized |  | Capitalized
(Dollars in thousands) |  | 2021 |  | 2020 |  | Minimum |  | Minimum
Common Equity Tier 1 Risk-based Capital Ratio (1) |  |  |  |  |  |  |  |
Franklin Financial Services Corporation |  | 15.16% |  | 14.32% |  | N/A |  | N/A
Farmers & Merchants Trust Company |  | 15.02% |  | 14.07% |  | 4.50% |  | 6.50%
Tier 1 Risk-based Capital Ratio (2) |  |  |  |  |  |  |  |
Franklin Financial Services Corporation |  | 15.16% |  | 14.32% |  | N/A |  | N/A
Farmers & Merchants Trust Company |  | 15.02% |  | 14.07% |  | 6.00% |  | 8.00%
Total Risk-based Capital Ratio (3) |  |  |  |  |  |  |  |
Franklin Financial Services Corporation |  | 18.52% |  | 17.69% |  | N/A |  | N/A
Farmers & Merchants Trust Company |  | 16.28% |  | 15.33% |  | 8.00% |  | 10.00%
Tier 1 Leverage Ratio (4) |  |  |  |  |  |  |  |
Franklin Financial Services Corporation |  | 8.53% |  | 8.69% |  | N/A |  | N/A
Farmers & Merchants Trust Company |  | 8.46% |  | 8.54% |  | 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

Economy

The Corporation’s primary market area includes Franklin, Fulton, Cumberland and Huntingdon Counties, Pennsylvania. 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 in Cumberland County. Unemployment in the Bank’s market area ranged from 5.7% in Cumberland County to 10.5% in Huntingdon County, as of the end of April. 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.

As of June 30, 2021, COVID-19 cases have been declining, vaccinations have increased, and lockdowns and restrictions have eased. With these, it appears the economy is set to begin a recovery, but the extent of any such recovery is still uncertain.

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 it liquidity position by measuring its projected net cash

50

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 $391 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.

The following table shows the Bank’s available liquidity at June 30, 2021.

(Dollars in thousands) |  |  |  |  |  |  |  |  |
Liquidity Source |  |  | Capacity |  |  | Outstanding |  |  | Available
Federal Home Loan Bank |  | $ | 351,666 |  | $ | — |  | $ | 351,666
Federal Reserve Bank Discount Window |  |  | 24,635 |  |  | — |  |  | 24,635
Correspondent Banks |  |  | 56,000 |  |  | — |  |  | 56,000
Paycheck Protection Program Liquidity Facility |  |  | 53,573 |  |  | — |  |  | 53,573
Total |  | $ | 485,874 |  | $ | — |  | $ | 485,874

The Paycheck Protection Program Liquidity Facility offered by the Federal Reserve will expire on July 31, 2021. This is not expected to affect the Bank’s liquidity position.

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 $413.3 million and $380.3 million, respectively, at June 30, 2021 and December 31, 2020. 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 June 30, 2021, this reserve was $1.5 million.

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 from those reported in the Corporation’s 2020 Annual Report on Form 10-K.

## Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the Corporation’s exposure to market risk during the six months ended June 30, 2021. For more information on market risk refer to the Corporation’s 2020 Annual Report on Form 10-K.

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Item 4. Controls and Pr ocedures

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 June 30, 2021, 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 June 30, 2021, 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.

‎

52

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. 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 and six months ended June 30, 2021. For more information, refer to the Corporation’s 2020 Annual Report on Form 10-K.

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

On December 17, 2020, the Board of Directors authorized the 2020 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 18, 2020 and expiring on December 17, 2021. The following table presents the activity under this plan during the second quarter of 2021.

(Dollars in thousands, except per share) |  |  |  |  |  |
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 |  |  | ‎Shares Yet ‎To Be Purchased ‎Under Program
April 2021 |  | — |  |  |  |  | $ | — |  |  | 150,000
May 2021 |  | — |  |  |  |  |  | — |  |  | 150,000
June 2021 |  | 23,155 |  |  | 30.48 |  |  | 705,677 |  |  | 126,845
|  | 23,155 |  |  |  |  | $ | 705,677 |  |  |

Item 3. Defaults by the Company on its Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

‎

53

Item 5. Other In formation

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 and incorporated herein by 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)

‎

54

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

August 9, 2021 |  | /s/ Timothy G. Henry
|  | Timothy G. Henry
|  | Chief Executive Office and President
|  | (Principal Executive Officer)
August 9, 2021 |  | /s/ Mark R. Hollar
|  | Mark R. Hollar
|  | Treasurer and Chief Financial Officer
|  | (Principal Financial and Accounting Officer)

55