UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2025

¨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.)


1500 Nitterhouse Drive, Chambersburg, PA	17201-0819
(Address of principal executive offices)	(Zip Code)

(717) 264-6116

(Registrant's telephone number, including area code)

Not Applicable

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

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



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

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

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

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

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

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

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

There were 4,458,298 outstanding shares of the Registrant’s common stock as of April 30, 2025.

INDEX


Part I - FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024 (unaudited)	1
	Consolidated Statements of Income for the Three Months ended March 31, 2025 and 2024 (unaudited)	2
	Consolidated Statements of Comprehensive Income for the Three Months ended	3
	March 31, 2025 and 2024 (unaudited)
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months	3
	ended March 31, 2025 and 2024 (unaudited)
	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2025	4
	and 2024 (unaudited)
	Notes to Consolidated Financial Statements (unaudited)	5

Item 2	Management’s Discussion and Analysis ofResults of Operations and Financial Condition	28
Item 3	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4	Controls and Procedures	42

Part II - OTHER INFORMATION

Item 1	Legal Proceedings	43
Item 1A	Risk Factors	43
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3	Defaults Upon Senior Securities	43
Item 4	Mine Safety Disclosures	43
Item 5	Other Information	43
Item 6	Exhibits	44
SIGNATURE PAGE		45

Part I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets



(Dollars in thousands, except share and per share data)	(unaudited)
	March 31,		December 31,
	2025		2024
Assets
Cash and due from banks	$	23,277	$	19,848
Short-term interest-earning deposits in other banks		201,679		183,765
Total cash and cash equivalents		224,956		203,613
Long-term interest-earning deposits in other banks		1,249		1,499
Debt securities available for sale, at fair value		495,487		508,604
Equity securities		—		166
Restricted stock		8,765		8,775
Loans held for sale		1,791		2,470
Loans		1,456,191		1,398,077
Allowance for credit losses		(18,444)		(17,653)
Net Loans		1,437,747		1,380,424
Premises and equipment, net		28,765		29,039
Right of use asset		4,090		4,106
Bank owned life insurance		22,850		22,735
Goodwill		9,016		9,016
Deferred tax asset, net		9,860		10,831
Other assets		12,902		16,563
Total assets	$	2,257,478	$	2,197,841

Liabilities
Deposits
Noninterest-bearing checking	$	298,945	$	290,346
Money management, savings, and interest checking		1,257,102		1,209,396
Time		311,530		315,905
Total deposits		1,867,577		1,815,647
FHLB advances		200,000		200,000
Subordinate notes		19,710		19,699
Lease liability		4,252		4,263
Other liabilities		14,548		13,516
Total liabilities		2,106,087		2,053,125

Commitments and contingent liabilities

Shareholders' equity
Common stock, $1 par value per share,15,000,000 shares authorized with
4,710,972 shares issued and 4,454,382 shares outstanding at March 31, 2025 and
4,710,972 shares issued and 4,427,362 shares outstanding at December 31, 2024		4,711		4,711
Capital stock no par value, 5,000,000 shares authorized with no
shares issued and outstanding		—		—
Additional paid-in capital		43,607		43,791
Retained earnings		141,967		139,463
Accumulated other comprehensive loss		(31,856)		(35,508)
Treasury stock, 256,590 shares at March 31, 2025 and 283,610 shares at
December 31, 2024, at cost		(7,038)		(7,741)
Total shareholders' equity		151,391		144,716
Total liabilities and shareholders' equity	$	2,257,478	$	2,197,841

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

Consolidated Statements of Income



	For the Three Months Ended
(Dollars in thousands, except per share data) (unaudited)	March 31,
	2025		2024
Interest income
Loans, including fees	$	19,864	$	17,222
Interest and dividends on investments:
Taxable interest		4,825		3,913
Tax exempt interest		270		275
Dividend income		191		45
Interest-earning deposits in other banks		1,908		2,354
Total interest income		27,058		23,809
Interest expense
Deposits		9,030		6,504
FHLB overnight borrowings and advances		2,158		2,527
Federal Reserve Bank borrowings		—		961
Subordinate notes		264		264
Total interest expense		11,452		10,256
Net interest income		15,606		13,553
Provision for credit losses - loans		750		490
Provision for (reversal of) credit losses - unfunded commitments		29		(38)
Total provision for credit losses		779		452
Net interest income after credit loss expense		14,827		13,101
Noninterest income
Wealth management fees		2,215		2,026
Loan service charges		209		206
Gain on sale of loans		109		58
Deposit service charges and fees		605		613
Other service charges and fees		483		488
Debit card income		558		536
Increase in cash surrender value of life insurance		115		112
Change in fair value of equity securities		(7)		(41)
Other		275		190
Total noninterest income		4,562		4,188
Noninterest Expense
Salaries and employee benefits		8,506		7,727
Net occupancy		1,225		1,182
Marketing and advertising		433		519
Legal and professional		527		516
Data processing		1,557		1,423
Pennsylvania bank shares tax		160		125
FDIC Insurance		545		322
ATM/debit card processing		340		323
Telecommunications		106		111
Nonservice pension		12		(29)
Other		1,166		1,065
Total noninterest expense		14,577		13,284
Income before income taxes		4,812		4,005
Income tax expense		890		644
Net income	$	3,922	$	3,361
Per share
Basic earnings per share	$	0.88	$	0.77
Diluted earnings per share	$	0.88	$	0.77

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

Consolidated Statements of Comprehensive Income (Loss)



	For the Three Months Ended
	March 31,
(Dollars in thousands) (unaudited)	2025		2024
Net Income	$	3,922	$	3,361

Debt Securities:
Unrealized gains (losses) arising during the period		6,523		(373)
Reclassification adjustment for (gains) losses realized in income on fair value hedge (1)		(1,900)		—
Net unrealized gains (losses)		4,623		(373)
Tax effect		(971)		79
Net of tax amount		3,652		(294)

Total other comprehensive gain (loss)		3,652		(294)

Total Comprehensive Income (Loss)	$	7,574	$	3,067

(1) Reclassified to interest income

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

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2025 and 2024



								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 January 1, 2025	4,427,362	$	4,711	$	43,791	$	139,463	$	(35,508)	$	(7,741)	$	144,716
Net income			—		—		3,922		—		—		3,922
Other comprehensive gain			—		—		—		3,652		—		3,652
Cash dividends declared, $0.32 per share			—		—		(1,418)		—		—		(1,418)
Acquisition of treasury stock	(3,922)		—		—		—		—		(142)		(142)
Treasury shares issued under dividend reinvestment plan	12,352		—		107		—		—		337		444
Stock Compensation Plans:
Treasury shares issued	18,590		—		(485)		—		—		508		23
Compensation expense			—		194		—		—		—		194
Balance at March 31, 2025	4,454,382	$	4,711	$	43,607	$	141,967	$	(31,856)	$	(7,038)	$	151,391



Balance at January 1, 2024	4,371,231	$	4,711	$	43,646	$	133,993	$	(40,940)	$	(9,274)	$	132,136
Net income			—		—		3,361		—		—		3,361
Other comprehensive loss			—		—		—		(294)		—		(294)
Cash dividends declared, $0.32 per share			—		—		(1,399)		—		—		(1,399)
Acquisition of treasury stock	(1,518)		—		—		—		—		(39)		(39)
Treasury shares issued under dividend reinvestment plan	12,288		—		(6)		—		—		335		329
Stock Compensation Plans:
Treasury shares issued	11,872		—		(311)		—		—		324		13
Compensation expense			—		130		—		—		—		130
Balance at March 31, 2024	4,393,873	$	4,711	$	43,459	$	135,955	$	(41,234)	$	(8,654)	$	134,237

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

Consolidated Statements of Cash Flows



	Three Months Ended ‎March 31,
	2025		2024
(Dollars in thousands) (unaudited)
Cash flows from operating activities
Net income	$	3,922	$	3,361
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		537		538
Net amortization of loans and investment securities		71		914
Amortization of subordinate debt issuance costs		11		11
Provision for credit losses		779		452
Loss on sale of equity securities		7		—
Change in fair value of equity securities		—		41
Loans originated for sale		(6,986)		(3,439)
Proceeds from sale of loans		7,774		3,429
Gain on sale of loans held for sale		(109)		(58)
Increase in cash surrender value of life insurance		(115)		(112)
Gain from claims on life insurance policies		—		(78)
Stock based compensation		194		130
Decrease in other assets		1,607		762
Increase in other liabilities		1,131		1,353
Net cash provided by operating activities		8,823		7,304
Cash flows from investing activities
Net decrease in long-term interest-earning deposits in other banks		250		2,240
Proceeds from maturities, calls and pay-downs of securities available for sale		19,643		11,997
Purchase of investment securities available for sale		—		(3,510)
Decrease (increase) in restricted stock		10		(7,920)
Net increase in loans		(58,135)		(20,617)
Proceeds from surrender of life insurance policies		—		559
Proceeds from sale of equity securities		161		—
Capital expenditures		(246)		(861)
Net cash used in investing activities		(38,317)		(18,112)
Cash flows from financing activities
Net increase (decrease) in demand deposits, interest-bearing checking, and savings accounts		56,305		(18,129)
Net (decrease) increase in time deposits		(4,375)		39,463
Increase in long-term borrowings (FHLB & FRB)		—		200,000
Decrease in long-term borrowings (FHLB & FRB)		—		(50,000)
Dividends paid		(1,418)		(1,399)
Purchase of Treasury shares		(142)		(39)
Cash received from option exercises		23		13
Treasury shares issued under dividend reinvestment plan		444		329
Net cash provided by financing activities		50,837		170,238
Increase in cash and cash equivalents		21,343		159,430
Cash and cash equivalents at the beginning of the period		203,613		23,140
Cash and cash equivalents at the end of the period	$	224,956	$	182,570
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest on deposits and other borrowed funds	$	12,146	$	9,902
Noncash Activities
Lease liabilities arising from obtaining right-of-use assets		131		—

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

FRANKLIN FINANCIAL SERVICES CORPORATION and SUBSIDIARIES

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

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

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows as of March 31, 2025, 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 2024 Annual Report on Form 10-K. The consolidated results of operations for the three months ended March 31, 2025 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, 2024 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
	March 31,
(Dollars and shares in thousands, except per share data)	2025		2024
Weighted average shares outstanding (basic)		4,436		4,378
Impact of common stock equivalents		15		8
Weighted average shares outstanding (diluted)		4,451		4,386
Anti-dilutive options excluded from calculation		—		—
Net income	$	3,922	$	3,361
Basic earnings per share	$	0.88	$	0.77
Diluted earnings per share	$	0.88	$	0.77

‎

Note 2. Recent Accounting Pronouncements

Recently adopted accounting standards

ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures

Description

This ASU is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses.

Effective Date

Fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024

Effect on the Consolidated Financial Statements

The Corporation adopted the ASU as of December 31, 2024 and it did not have an effect on its consolidated financial statements.

Recently issued but not yet effective accounting standards

ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures

Description

This ASU is intended to improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation table and income taxes paid to be disaggregated by jurisdiction. It also includes certain amendments to improve the effectiveness of income tax disclosures.

Effective Date

Effective for annual periods beginning after December 15, 2024.

Effect on the Consolidated Financial Statements

The ASU is not expected to have an impact on the Corporation's financial statements.

ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative

Description

This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirement, and align the requirements in the Codification with the SEC's regulations.

Effective Date

The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

Effect on the Consolidated Financial Statements

The ASU is not expected to have an impact on the Corporation's financial statements.

Note 3. Accumulated Other Comprehensive Income (Loss)

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



	March 31,		December 31,
(Dollars in thousands)	2025		2024

Net unrealized (losses) gains on debt securities	$	(38,526)	$	(43,149)
Tax effect		8,090		9,061
Net of tax amount	$	(30,436)	$	(34,088)

Accumulated pension adjustment	$	(1,797)	$	(1,797)
Tax effect		377		377
Net of tax amount	$	(1,420)	$	(1,420)

Total accumulated other comprehensive (loss) income	$	(31,856)	$	(35,508)

‎

Note 4. Investments

Available for Sale (AFS) Securities

The amortized cost and estimated fair value of AFS securities as of March 31, 2025 and December 31, 2024 are as follows:



(Dollars in thousands)			Gross		Gross
	Amortized		unrealized		unrealized		Fair
March 31, 2025	cost		gains		losses		Value
U.S. Treasury	$	36,115	$	—	$	(3,643)	$	32,472
Municipal		155,220		—		(21,341)		133,879
Corporate		26,361		—		(2,020)		24,341
Agency MBS & CMO		145,771		13		(8,091)		137,693
Non-Agency MBS & CMO		140,674		132		(3,679)		137,127
Asset-backed		30,272		133		(430)		29,975
Total	$	534,413	$	278	$	(39,204)	$	495,487



(Dollars in thousands)			Gross		Gross
	Amortized		unrealized		unrealized		Fair
December 31, 2024	cost		gains		losses		value
U.S. Treasury	$	36,192	$	—	$	(4,395)	$	31,797
Municipal		156,528		37		(22,973)		133,592
Corporate		26,356		1		(2,133)		24,224
Agency MBS & CMO		149,003		15		(10,276)		138,742
Non-Agency MBS & CMO		154,554		45		(5,429)		149,170
Asset-backed		31,420		163		(504)		31,079
Total	$	554,053	$	261	$	(45,710)	$	508,604

At March 31, 2025 and December 31, 2024, the fair value of debt securities pledged to secure public deposits, trust deposits and FHLB borrowing commitments totaled $206.2 million and $207.2 million, respectively. 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 March 31, 2025, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities. Securities not due at a single maturity date are presented separately.



(Dollars in thousands)	Amortized ‎cost		Fair ‎value
Due in one year or less	$	—	$	—
Due after one year through five years		43,406		39,945
Due after five years through ten years		90,269		79,271
Due after ten years		84,021		71,476
		217,696		190,692
MBS, CMO & ABS		316,717		304,795
	$	534,413	$	495,487

Credit Impairment:

The debt securities portfolio contained 523 securities, having a fair value of $460.4 million, with $39.2 million in unrealized losses at March 31, 2025, an improvement of $6.5 million from the prior year-end.

AFS securities in an unrealized loss position are evaluated for credit impairment at least quarterly. For these securities, the Bank considers: (1) the extent to which the fair value is less than amortized cost; (2) adverse conditions specifically related to the security, industry or geographic area; (3) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future; (4) failure of the issuer of the security to make scheduled interest or principal payments; and (5) any changes to the rating of the security by a rating agency. In addition, the Bank

considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. The Bank does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost. The unrealized losses identified on debt securities and subject to evaluation at March 31, 2025 and December 31, 2024, were determined not to be attributable to credit related factors; therefore, the Bank does not have an allowance for credit loss for these investments.

The following table summarizes debt securities in the AFS portfolio in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category, length of time that individual securities have been in continuous unrealized loss position and the number of securities in each category as of March 31, 2025 and December 31, 2024:



	March 31, 2025
	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. Treasury	$	—	$	—	—	$	32,472	$	(3,643)	13	$	32,472	$	(3,643)	13
Municipal		771		(100)	2		133,108		(21,241)	163		133,879		(21,341)	165
Corporate		983		(5)	1		23,358		(2,015)	50		24,341		(2,020)	51
Agency MBS & CMO		55,424		(1,231)	16		80,715		(6,860)	178		136,139		(8,091)	194
Non-Agency MBS & CMO		68,983		(1,724)	18		43,499		(1,955)	43		112,482		(3,679)	61
Asset-backed		1,729		(7)	4		19,378		(423)	35		21,107		(430)	39
Total unrealized losses	$	127,890	$	(3,067)	41	$	332,530	$	(36,137)	482	$	460,420	$	(39,204)	523



	December 31, 2024
	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. Treasury	$	—	$	—	—	$	31,797	$	(4,395)	13	$	31,797	$	(4,395)	13
Municipal		—		—	—		132,550		(22,973)	164		132,550		(22,973)	164
Corporate		—		—	—		23,237		(2,133)	50		23,237		(2,133)	50
Agency MBS & CMO		54,388		(2,250)	15		82,110		(8,026)	183		136,498		(10,276)	198
Non-Agency MBS & CMO		79,422		(2,974)	26		53,615		(2,455)	50		133,037		(5,429)	76
Asset-backed		733		(1)	3		19,061		(503)	34		19,794		(504)	37
Total unrealized losses	$	134,543	$	(5,225)	44	$	342,370	$	(40,485)	494	$	476,913	$	(45,710)	538

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 mortgage loans include long-term loans to individuals and businesses secured by mortgages on the borrower’s real property. Construction loans are made to finance the purchase of land and the construction of residential and commercial buildings thereon and are secured by mortgages on real estate. Commercial loans are made to businesses of various sizes for a variety of purposes including construction, property, plant and equipment, and working capital. Commercial loans also include loans to government municipalities. Commercial lending is concentrated in the Bank’s primary market but also includes purchased loan participations. Consumer loans are comprised of installment, home equity and unsecured personal lines of credit.

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

Residential Real Estate 1-4 family

The largest risk in residential real estate loans to retail customers is the borrower’s inability to repay the loan due to the loss of the primary source of income. The Bank attempts to mitigate this risk through prudent underwriting standards including employment history, current financial condition and credit history. These loans are generally owner occupied and serve as the borrower’s primary residence. The Bank usually holds a first lien position on these properties but may hold a

second lien position in some home equity loans or lines of credit. Commercial purpose loans, secured by residential real estate, are usually dependent upon repayment from the rental income or other business purposes. These loans are generally non-owner occupied. In addition to the real estate collateral, these loans may have personal guarantees or UCC filings on other business assets. If a payment default occurs on a 1-4 family residential real estate loan, the collateral serves as a source of repayment but may be subject to a change in value due to economic conditions.

Residential Real Estate Construction

This class includes loans to individuals for construction of a primary residence and 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 first 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 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, including commercial real estate construction loans, may be secured by various types of commercial property including retail space, office buildings, warehouses, hotels and motels, 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 indicators 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 indicators occurs 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.

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 history. 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.

‎

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



	March 31,		December 31,
(Dollars in thousands)	2025		2024
Residential Real Estate 1-4 Family
Consumer first liens	$	187,649	$	181,780
Commercial first lien		57,795		58,821
Total first liens		245,444		240,601

Consumer junior liens and lines of credit		77,981		76,035
Commercial junior liens and lines of credit		5,908		6,199
Total junior liens and lines of credit		83,889		82,234
Total residential real estate 1-4 family		329,333		322,835

Residential real estate - construction
Consumer		26,629		20,742
Commercial		22,339		11,685
Total residential real estate construction		48,968		32,427

Commercial real estate		831,787		803,365
Commercial		238,010		230,597
Total commercial		1,069,797		1,033,962

Consumer		8,093		8,853
		1,456,191		1,398,077
Less: Allowance for credit losses		(18,444)		(17,653)
Net Loans	$	1,437,747	$	1,380,424

Included in the loan balances are the following:
Net unamortized deferred loan costs	$	1,576	$	1,766

Loans pledged as collateral for borrowings and commitments from:
FHLB	$	783,516	$	775,410
Federal Reserve Bank		99,548		96,592
	$	883,064	$	872,002

Note 6. Loan Quality and Allowance for Credit Losses

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

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

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

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

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

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

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

‎

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



(Dollars in thousands)													Revolving		Revolving
	Term Loans												Loans		Loans
	Amortized Cost Basis by Origination Year												Amortized		Converted
As of March 31, 2025	2025		2024		2023		2022		2021		Prior		Cost Basis		to Term		Total
Residential real estate 1-4 family:
Commercial:
Risk rating:
Pass (1-5)	$	799	$	5,150	$	9,157	$	7,221	$	9,918	$	27,471	$	3,801	$	—	$	63,517
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		186		—		—		186
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		799		5,150		9,157		7,221		9,918		27,657		3,801		—		63,703
Consumer:
Performing		9,648		35,815		66,103		30,933		13,998		35,493		56,209		17,418		265,617
Nonperforming		—		—		—		—		—		13		—		—		13
Total Consumer		9,648		35,815		66,103		30,933		13,998		35,506		56,209		17,418		265,630
Total	$	10,447	$	40,965	$	75,260	$	38,154	$	23,916	$	63,163	$	60,010	$	17,418	$	329,333
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential real estate construction:
Commercial:
Risk rating:
Pass (1-5)	$	1,921	$	15,574	$	2,201	$	403	$	582	$	1,658	$	—	$	—	$	22,339
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		1,921		15,574		2,201		403		582		1,658		—		—		22,339
Consumer:
Performing		1,597		24,550		482		—		—		—		—		—		26,629
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		1,597		24,550		482		—		—		—		—		—		26,629
Total	$	3,518	$	40,124	$	2,683	$	403	$	582	$	1,658	$	—	$	—	$	48,968
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate:
Risk rating:
Pass (1-5)	$	41,435	$	95,143		215,877		103,900	$	92,285	$	235,849	$	18,218	$	—	$	802,707
OAEM (6)		—		—		8,879		1,760		706		9,509		—		—		20,854
Substandard (7)		—		—		6,269		253		—		1,654		50		—		8,226
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	41,435	$	95,143	$	231,025	$	105,913	$	92,991	$	247,012	$	18,268	$	—	$	831,787
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial:
Risk rating:
Pass (1-5)	$	6,434	$	26,234	$	15,702	$	26,473	$	37,616	$	76,484	$	46,964	$	—	$	235,907
OAEM (6)		—		—		10		405		1,456		7		175		—		2,053
Substandard (7)		—		—		—		—		—		—		50		—		50
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	6,434	$	26,234	$	15,712	$	26,878	$	39,072	$	76,491	$	47,189	$	—	$	238,010
Current period gross charge-offs	$	(3)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(3)

Consumer:
Performing		605		1,838		1,059		336		1,633		40		2,575		—		8,086
Nonperforming		—		—		—		—		—		—		7		—		7
Total	$	605	$	1,838	$	1,059	$	336	$	1,633	$	40	$	2,582	$	—	$	8,093
Current period gross charge-offs	$	(12)	$	—	$	—	$	(1)	$	(1)	$	(1)	$	(3)	$	—	$	(18)

‎



(Dollars in thousands)													Revolving		Revolving
	Term Loans												Loans		Loans
	Amortized Cost Basis by Origination Year												Amortized		Converted
As of December 31, 2024	2024		2023		2022		2021		2020		Prior		Cost Basis		to Term		Total
Residential real estate 1-4 family:
Commercial:
Risk rating:
Pass (1-5)	$	5,306	$	9,436	$	7,529	$	10,133	$	8,099	$	20,251	$	4,079	$	—	$	64,833
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		187		—		187
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		5,306		9,436		7,529		10,133		8,099		20,251		4,266		—		65,020
Consumer:
Performing		36,214		67,248		31,290		14,303		9,014		27,744		54,147		17,855		257,815
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		36,214		67,248		31,290		14,303		9,014		27,744		54,147		17,855		257,815
Total	$	41,520	$	76,684	$	38,819	$	24,436	$	17,113	$	47,995	$	58,413	$	17,855	$	322,835
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential real estate construction:
Commercial:
Risk rating:
Pass (1-5)	$	5,582	$	3,306	$	403	$	1,150	$	159	$	1,085	$	—	$	—	$	11,685
OAEM (6)		—		—		—		—		—		—		—		—		—
Substandard (7)		—		—		—		—		—		—		—		—		—
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total Commercial		5,582		3,306		403		1,150		159		1,085		—		—		11,685
Consumer:
Performing		19,907		835		—		—		—		—		—		—		20,742
Nonperforming		—		—		—		—		—		—		—		—		—
Total Consumer		19,907		835		—		—		—		—		—		—		20,742
Total	$	25,489	$	4,141	$	403	$	1,150	$	159	$	1,085	$	—	$	—	$	32,427
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate:
Risk rating:
Pass (1-5)	$	95,410	$	221,889	$	106,385	$	93,228	$	32,546	$	218,875	$	16,290	$	—	$	784,623
OAEM (6)		—		—		1,772		1,711		6,624		—		—		—		10,107
Substandard (7)		—		6,301		266		—		—		2,018		50		—		8,635
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	95,410	$	228,190	$	108,423	$	94,939	$	39,170	$	220,893	$	16,340	$	—	$	803,365
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(2)	$	—	$	—	$	(2)

Commercial:
Risk rating:
Pass (1-5)	$	25,398	$	16,289	$	27,545	$	37,927	$	18,196	$	60,126	$	42,595	$	—	$	228,076
OAEM (6)		—		11		420		1,500		9		—		250		—		2,190
Substandard (7)		—		—		—		—		58		—		273		—		331
Doubtful (8)		—		—		—		—		—		—		—		—		—
Total	$	25,398	$	16,300	$	27,965	$	39,427	$	18,263	$	60,126	$	43,118	$	—	$	230,597
Current period gross charge-offs	$	(11)	$	—	$	(287)	$	—	$	—	$	—	$	(161)	$	—	$	(459)

Consumer:
Performing		2,289		1,140		386		1,682		36		27		3,291		—		8,851
Nonperforming		—		—		—		1		—		—		1		—		2
Total	$	2,289	$	1,140	$	386	$	1,683	$	36	$	27	$	3,292	$	—	$	8,853
Current period gross charge-offs	$	(44)	$	—	$	—	$	—	$	(6)	$	—	$	(49)	$	—	$	(99)

‎

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing as of the date presented:



	March 31, 2025						December 31, 2024
(Dollars in thousands)	Nonaccrual and Loans past due 90 Days or more						Nonaccrual and Loans past due 90 Days or more
					Loans past due						Loans past due
	Nonaccrual		Nonaccrual		90 Days or more		Nonaccrual		Nonaccrual		90 Days or more
	Without ACL		With ACL		Still Accruing		Without ACL		With ACL		Still Accruing
March 31, 2025
Residential Real Estate 1-4 Family
First liens	$	—	$	—	$	13	$	—	$	—	$	—
Junior liens and lines of credit		—		—		—		—		—		—
Total		—		—		13		—		—		—
Residential real estate - construction		—		—		—		—		—		—
Commercial real estate		253		—		—		266		—		—
Commercial		—		—		—		—		—		—
Consumer		—		—		7		—		—		2
Total	$	253	$	—	$	20	$	266	$	—	$	2

At March 31, 2025, the Corporation had one commercial loan relationship for $253 thousand that was considered to be collateral dependent, compared to $266 thousand at December 31, 2024. This loan is secured by real estate and the Bank has not established a specific reserve for this loan.

At March 31, 2025 and December 31, 2024, the Bank had $0 of residential properties in the process of foreclosure.

The following table presents the aging of payments of the loan portfolio:



(Dollars in thousands)	Loans Past Due						Total				Total
	30-59 Days		60-89 Days		90 Days+		Past Due		Current		Loans
March 31, 2025
Residential Real Estate 1-4 Family
First liens	$	520	$	58	$	13	$	591	$	244,853	$	245,444
Junior liens and lines of credit		342		—		—		342		83,547		83,889
Total		862		58		13		933		328,400		329,333
Residential real estate - construction		—		—		—		—		48,968		48,968
Commercial real estate		3,506		—		253		3,759		828,028		831,787
Commercial		154		50		—		204		237,806		238,010
Consumer		32		1		7		40		8,053		8,093
Total	$	4,554	$	109	$	273	$	4,936	$	1,451,255	$	1,456,191



	Loans Past Due						Total				Total
	30-59 Days		60-89 Days		90 Days+		Past Due		Current		Loans
December 31, 2024
Residential Real Estate 1-4 Family
First liens	$	203	$	640	$	—	$	843	$	239,758	$	240,601
Junior liens and lines of credit		241		160		—		401		81,833		82,234
Total		444		800		—		1,244		321,591		322,835
Residential real estate - construction		—		—		—		—		32,427		32,427
Commercial real estate		380		219		—		599		802,766		803,365
Commercial		747		50		266		1,063		229,534		230,597
Consumer		30		4		2		36		8,817		8,853
Total	$	1,601	$	1,073	$	268	$	2,942	$	1,395,135	$	1,398,077

‎

The following table presents, by class, the activity in the Allowance for Credit Losses (ACL) 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		Total

ACL at December 31, 2024	$	1,497	$	461	$	376	$	12,004	$	3,182	$	133	$	17,653
Charge-offs		—		—		—		—		(3)		(18)		(21)
Recoveries		—		—		3		—		54		5		62
Provision		32		9		76		476		161		(4)		750
ACL at March 31, 2025	$	1,529	$	470	$	455	$	12,480	$	3,394	$	116	$	18,444

ACL at December 31, 2024	$	1,497	$	461	$	376	$	12,004	$	3,182	$	133	$	17,653
ACL at December 31, 2023	$	1,296	$	419	$	296	$	10,657	$	3,290	$	94	$	16,052
Charge-offs		—		—		—		(2)		(66)		(28)		(96)
Recoveries		—		—		4		—		60		23		87
Provision		12		(4)		37		402		40		3		490
ACL at March 31, 2024	$	1,308	$	415	$	337	$	11,057	$	3,324	$	92	$	16,533

As of March 31, 2025 and December 31, 2024 there were no modifications made to borrowers experiencing financial difficulty.

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

Lease costs:

The components of total lease cost were as follows:



	Three Months Ended ‎March 31,
(Dollars in thousands)	2025		2024
Operating lease cost	$	179	$	194
Short-term lease cost		4		1
Variable lease cost		40		37
Total lease cost	$	223	$	232

‎

Supplemental Lease Information:



	Three Months Ended ‎March 31,
(Dollars in thousands)	2025		2024
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	178	$	189

Weighted-average remaining lease term (years)		11.3		11.7
Weighted-average discount rate		3.52%		3.42%

Lease Obligations:

Future undiscounted lease payments for operating leases with initial terms of one year or more as of March 31, 2025, are as follows:



(Dollars in thousands)

2025	$	534
2026		597
2027		455
2028		416
2029		420
2030 and beyond		2,808
Undiscounted cash flow		5,230
Imputed Interest		(978)
Total lease liability	$	4,252

Note 8. Other Real Estate Owned

The Bank had no other real estate owned at March 31, 2025 and December 31, 2024.

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.

Fair Value Hedges – The Corporation entered into certain interest rate swap contracts designated as fair value portfolio layer hedges of certain available-for-sale investment securities. The Corporation makes a fixed payment and receives a variable payment over the life of the contracts. The hedges were determined to be effective during all periods presented and are expected to be effective during the remaining term of the contracts. At March 31, 2025, the Corporation had posted cash collateral of $5.2 million of restricted cash collateral to a counterparty, reported in interest-bearing deposits in other banks on the Consolidated Balance Sheet.

Derivatives Not Designated as Hedges – These derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Corporation’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain lenders which participate in loans.

‎

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


(Dollars in thousands)	As of March 31, 2025						As of December 31, 2024
		Notional amount	Balance Sheet Location		Fair Value		Notional amount	Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments
Interest rate swaps	$	108,437	Other Assets	$	375	$	111,087	Other Assets	$	2,275
Total derivatives designated as hedging instruments				$	375				$	2,275

Derivatives not designated as hedging instruments
Other Contracts	$	6,012	Other Liabilities	$	—	$	6,064	Other Liabilities	$	—
Total derivatives not designated as hedging instruments				$	—				$	—

The table below presents the effect of the Corporation’s derivative financial instruments that are designated as hedging instruments on the Income Statement.


Effect of Derivatives Designated as Hedging Instruments on the Statement of Financial Performance
Derivatives 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
		Three Months Ended
(Dollars in thousands)		March 31,
			2025		2024
Interest rate swaps	Investment income	$	199	$	-

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 Not Designated as Hedging Instruments on the Statement of Financial Performance
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
		Three Months Ended
(Dollars in thousands)		March 31,
			2025		2024
Other Contracts	Other income	$	-	$	1

The table below presents the carrying amount of the derivative financial instruments as of March 31, 2025 and December 31, 2024:



	Carrying amount of the hedged items				Cumulative amount of fair value hedging instruments
	Three Months Ended				Three Months Ended
(Dollars in thousands)	March 31,				March 31,
	2025		2024		2025		2024
Investment securities, AFS (1)	$	110,364	$	-	$	(400)	$	-

(1)The amounts represent the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedge period. At March 31, 2025, the fair value of the closed portfolio used in these hedging relationships was $107.5 million and the notional amount was $129.1 million.

‎

Note 10. Pension

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



	Three Months Ended
	March 31,
(Dollars in thousands)	2025		2024
Components of net periodic cost:
Service cost	$	53	$	51
Interest cost		200		188
Expected return on plan assets		(208)		(217)
Recognized net actuarial loss		20		—
Total pension expense	$	65	$	22

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 may be different than the amounts reported at each year-end. The Corporation uses the exit price notion to measure the fair value of financial instruments.

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

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

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

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

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

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

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

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

Investment securities: Fair values of investment securities available-for-sale were primarily measured using information from a first-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.

Collateral Dependent Loans: The fair value of collateral dependent loans with specific allocations of the allowance for credit losses is generally based on recent real estate appraisals conducted by an independent, licensed appraiser, less cost to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach (Level 2). If the appraiser makes an adjustment to account for differences between the comparable sales and income data available for similar loans, or if management adjusts the appraised value, then the fair value is considered Level 3. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral dependent loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy. No partial charge-offs on these loans were taken in the first three months of 2025. Collateral dependent loans are measured at fair value on a nonrecurring basis.

Derivatives: The fair value of derivatives are based on valuation methods using observable market data as of the measurement date (Level 2). The fair value of derivatives are determined using quantitative models using multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates and other factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources including, brokers, market transactions and third-party pricing services. The fair value represents an estimate of the amount the Corporation would receive or pay to terminate the derivative contract.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at the lower of cost or the fair value less costs to sell when acquired. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties (Level2). 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. In connection with the measurement and initial recognition of other real estate owned, losses are recognized through the allowance for loan losses. Subsequent charge-offs are recognized as an expense. Other real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

‎

Recurring Fair Value Measurements

For financial assets and liabilities measured at fair value on a recurring basis and the fair value measurements by level within the fair value hierarchy used at March 31, 2025 and December 31, 2024 are as follows:



(Dollars in thousands)	Fair Value at March 31, 2025
Assets	Level 1		Level 2		Level 3		Total
Equity securities, at fair value	$	—	$	—	$	—	$	—

Available for sale:
U.S. Treasury		32,472		—		—		32,472
Municipal		—		133,879		—		133,879
Corporate		—		24,341		—		24,341
Agency MBS & CMO		—		137,693		—		137,693
Non-Agency MBS & CMO		—		137,127		—		137,127
Asset-backed		—		29,975		—		29,975
Total assets	$	32,472	$	463,015	$	—	$	495,487

Liabilities
Derivatives	$	—	$	375	$	—	$	375


(Dollars in thousands)	Fair Value at December 31, 2024
Assets	Level 1		Level 2		Level 3		Total
Equity securities, at fair value	$	166	$	—	$	—	$	166

Available for sale:
U.S. Treasury		31,797		—		—		31,797
Municipal		—		133,592		—		133,592
Corporate		—		24,224		—		24,224
Agency MBS & CMO		—		138,742		—		138,742
Non-Agency MBS & CMO		—		149,170		—		149,170
Asset-backed				31,079				31,079
Total assets	$	31,963	$	476,807	$	—	$	508,770

Liabilities
Derivatives	$	—	$	2,275	$	—	$	2,275

Nonrecurring Fair Value Measurements

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2025 and December 31, 2024 were as follows:



(Dollars in Thousands)	Fair Value at March 31, 2025
Asset Description	Level 1		Level 2		Level 3		Total
Collateral Dependent (1)	$	—	$	—	$	380	$	380
Total assets	$	—	$	—	$	380	$	380



(Dollars in Thousands)	Fair Value at December 31, 2024
Asset Description	Level 1		Level 2		Level 3		Total
Collateral Dependent (1)	$	—	$	—	$	380	$	380
Total assets	$	—	$	—	$	380	$	380

(1)Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

The Corporation did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at March 31, 2025. 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 March 31, 2025.

The following table presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis.



(Dollars in thousands)					Range
March 31, 2025		Fair Value	Valuation Technique	Unobservable Input	(Weighted Average)
Collateral Dependent	$	380	Appraisal	Appraisal Adjustment on:
				Real estate assets	100% (100%)
				Cost to sell	10%

					Range
December 31, 2024		Fair Value	Valuation Technique	Unobservable Input	(Weighted Average)
Collateral Dependent	$	380	Appraisal	Appraisal Adjustment on:
				Real estate assets	100% (100%)
				Cost to sell	10%

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


	March 31, 2025
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets, carried at cost:
Cash and cash equivalents	$	224,956	$	224,956	$	224,956	$	—	$	—
Long-term interest-earning deposits in other banks		1,249		1,249		1,249		—		—
Loans held for sale		1,791		1,821		—		1,821		—
Net loans		1,437,747		1,420,280		—		—		1,420,280
Accrued interest receivable		7,298		7,298		—		—		7,298

Financial liabilities:
Deposits	$	1,867,577	$	1,868,881	$	—	$	1,868,881	$	—
FHLB advances		200,000		201,565		—		201,565		—
Subordinate notes		19,710		18,032		—		18,032		—
Accrued interest payable		3,995		3,995		—		3,995		—

	December 31, 2024
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets, carried at cost:
Cash and cash equivalents	$	203,613	$	203,613	$	203,613	$	—	$	—
Long-term interest-earning deposits in other banks		1,499		1,499		1,499
Loans held for sale		2,470		2,470		—		2,470		—
Net loans		1,380,424		1,351,450		—		—		1,351,450
Accrued interest receivable		7,348		7,348		—		—		7,348

Financial liabilities:
Deposits	$	1,815,647	$	1,814,479	$	—	$	1,814,479	$	—
FHLB Advances		200,000		200,883				200,883
Subordinate notes		19,699		18,032		—		18,032		—
Accrued interest payable		4,689		4,689		—		4,689		—

‎

Note 12. Deposits



	March 31,		December 31,
(Dollars in thousands)	2025		2024
Noninterest-bearing checking	$	298,945	$	290,346

Interest-bearing checking		407,951		417,870
Money management		752,218		694,880
Savings		96,933		96,646
Total interest-bearing checking and savings		1,257,102		1,209,396

Time deposits		224,473		228,848
Time - brokered deposits		87,057		87,057
Total time deposits		311,530		315,905

Total deposits	$	1,867,577	$	1,815,647

Overdrawn deposit accounts reclassified as loans	$	136	$	136

Time deposits greater than $250,000 at March 31, 2025 and December 31, 2024 were $75.7 million and $77.4 million, respectively.

Note 13. Borrowings

At March 31, 2025, the Bank had $200.0 million in total borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB), compared to $200.0 million at December 31, 2024. The borrowings have a rate of 4.32% and are due January 12, 2027.

At March 31, 2025, the Corporation had $20.0 million of unsecured subordinated debt notes payable, $15.0 million which mature on September 1, 2030 and $5.0 million which mature on September 1, 2035. The notes are recorded on the consolidated balance sheet net of remaining debt issuance costs totaling $290 thousand at March 31, 2025, which is being amortized on a pro-rata basis, based on the maturity date of the notes, on an effective interest method. The subordinated notes totaling $15.0 million have a fixed interest rate of 5.00% through September 1, 2025, then convert to a variable rate of 90-day Secured Overnight Financing Rate (SOFR) plus 4.93% for the applicable interest periods through maturity. The subordinated notes totaling $5.0 million have a fixed interest rate of 5.25% through September 1, 2030, then convert to a variable rate of 90-day SOFR plus 4.92% for the applicable interest periods through maturity. The Corporation may, at its option, redeem the notes, in whole or in part, at any time 5-years prior to the maturity. The notes are structured to qualify as Tier 2 Capital for the Corporation and there are no debt covenants on the notes.

Note 14. Capital Ratios

Capital adequacy for the Bank is currently defined by regulatory agencies through the use of several minimum required ratios. The capital ratios to be considered “well capitalized” are: (1) Common Equity Tier 1 (CET1) of 6.5%, (2) Tier 1 Leverage of 5%, (3) Tier 1 Risk-Based Capital of 8%, and (4) Total Risk-Based Capital of 10%. In addition, a capital conservation buffer of 2.5% is applicable to all of the capital ratios except for the Tier 1 Leverage ratio. The capital conservation buffer is equal to the lowest value of the three applicable capital ratios less the regulatory minimum for each respective capital measurement. The Bank’s capital conservation buffer at March 31, 2025 was 4.69% compared to the regulatory buffer of 2.5%. Compliance with the capital conservation buffer is required in order to avoid limitations to certain capital distributions and is in addition to the minimum required capital requirements. As of March 31, 2025, the Bank was “well capitalized.”

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

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

The following table summarizes the regulatory capital requirements and results as of March 31, 2025 and December 31, 2024 for the Corporation and the Bank:



			Regulatory Ratios
			Adequately	Well
	March 31,	December 31,	Capitalized	Capitalized
(Dollars in thousands)	2025	2024	Minimum	Minimum

Common Equity Tier 1 Risk-based Capital Ratio (1)
Franklin Financial Services Corporation	10.86%	11.31%	N/A	N/A
Farmers & Merchants Trust Company	11.44%	11.71%	4.50%	6.50%

Tier 1 Risk-based Capital Ratio (2)
Franklin Financial Services Corporation	10.86%	11.31%	N/A	N/A
Farmers & Merchants Trust Company	11.44%	11.71%	6.00%	8.00%

Total Risk-based Capital Ratio (3)
Franklin Financial Services Corporation	13.30%	13.85%	N/A	N/A
Farmers & Merchants Trust Company	12.69%	12.96%	8.00%	10.00%

Tier 1 Leverage Ratio (4)
Franklin Financial Services Corporation	7.82%	7.92%	N/A	N/A
Farmers & Merchants Trust Company	8.24%	8.20%	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

Note 15. Revenue Recognition

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

Wealth Management 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 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. Commissions from the sale of investment and insurance products are recognized upon the completion of the transaction.

The following table presents Wealth Management Fees for the three months ended March 31, 2025 and 2024:



	For the Three Months Ended
(Dollars in thousands)	March 31,
Wealth Management Fees	2025		2024

Asset Management Fees	$	1,996	$	1,833
Estate Management Fees		136		87
Commissions		83		106
Total	$	2,215	$	2,026

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 first-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 first party for enrolling a customer in the processor’s program. Credit card fees represent a fee earned by the Bank for a successful referral to a card-issuing company. ATM surcharges and interchange fees are the result of Bank customers conducting ATM transactions that generate fee income and are processed through multiple card networks. All of these fees are transaction based and are recognized at the time of the transaction.

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

Contract Balances

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

Contract Acquisition Costs

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

1Note 16. Commitments and Contingencies

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

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

‎

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



	March 31,		December 31,
(Dollars in thousands)	2025		2024
Financial instruments whose contract amounts represent credit risk
Commercial commitments to extend credit	$	347,325	$	328,806
Consumer commitments to extend credit (secured)		137,353		135,776
Consumer commitments to extend credit (unsecured)		6,170		5,352
	$	490,849	$	469,934
Standby letters of credit	$	30,747	$	28,815

ACL - Unfunded Commitments (1)	$	2,059	$	2,030
(1) Reported in Other Liabilities on the Consolidated Balance Sheets

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.

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

Legal Proceedings

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

The Corporation establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable, and the amount of the loss can be reasonably estimated. When the Corporation is able to do so, it also determines estimates of possible losses, whether in excess of any accrued liability or where there is no accrued liability.

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

‎

In management’s opinion, the Corporation does not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of all litigation to which the Corporation is a party at this time will have a material adverse effect on its financial position. The Corporation cannot now determine, however, whether or not any claim asserted against it will have a material adverse effect on its results of operations in any future reporting period, which will depend on, among other things, the amount of loss resulting from the claim and the amount of income otherwise reported for the reporting period. Thus, at March 31, 2025, 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 17. Segment Reporting

The Corporation’s reportable segments are determined by the Chief Operating Officer of the Bank, who is the designated chief operating decision maker (CODM), based upon information provided about the Corporation’s products and services offered primarily between community banking and wealth management segments. The segments are also distinguished by the level of information provided to the CODM, who uses such information to review the performance of various components of the business, which are then aggregated if operating performance, products/services, and customer are similar. The CODM evaluates the financial performance of the Corporation’s business segments by evaluating revenue streams, significant expenses, and budget to actual results to assess the performance of the segments and to determine allocation of resources. This evaluation is also used to assess the performance of each segment to evaluate compensation of certain employees.

Segment pretax profit or loss is used to assess the performance of the community banking segment by monitoring net interest income, fee income and noninterest expense. In this segment, interest income on loans and securities, and banking service fees are the primary source of revenue. Interest expense, the provision for credit losses, and salaries and benefits are the primary expenses.

Segment pretax profit or loss is used to assess the performance of the wealth management segment by monitoring fee income and operating expense, and by assets under management. In this segment, fees from assets under management are the primary source of revenue, while salaries and benefits are the primary expense.

‎



	For the Three Months Ended						For the Three Months Ended
	March 31, 2025						March 31, 2024
	Reportable Segments						Reportable Segments
(Dollars in thousands)	Wealth		Community Banking		Consolidated Total		Wealth		Community Banking		Consolidated Total

Interest income - loans, including fees	$	—	$	19,864	$	19,864	$	—	$	17,222	$	17,222
Interest income - investments		—		5,286		5,286		—		4,231		4,233
Interest income - interest-earning deposits in other banks		—		1,908		1,908		—		2,354		2,354
Wealth fee income		2,215		—		2,215		2,026		—		2,026
Total segment income	$	2,215	$	27,058	$	29,273	$	2,026	$	23,807	$	25,835

Reconciliation of revenue
Other revenue - not allocated to a segment						2,347						2,162
Total consolidated revenue					$	31,620					$	27,997

Less:
Interest expense - deposits	$	—	$	9,030	$	9,030	$	—	$	6,504	$	6,504
Interest expense - other borrowings		—		2,158		2,422		—		3,488		3,752
Provision for credit losses		—		779		779		—		452		452
Salary and benefit expense		1,022		7,484		8,506		947		6,780		7,727
Segment profit	$	1,022	$	19,451	$	20,737	$	947	$	17,224	$	18,435

Other expenses - not allocated to a segment						6,071						5,557

Income before taxes					$	4,812					$	4,005

Other segment disclosures
Net occupancy	$	138	$	1,087	$	1,225	$	131	$	1,051	$	1,182
Data processing	$	45	$	1,512	$	1,557	$	59	$	1,364	$	1,423

Total assets for reportable segments	$	1,497	$	2,257,354	$	2,257,478	$	1,590	$	2,010,353	$	2,011,614

Note 18. Reclassifications

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.

‎

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

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

For the Three Months Ended March 31, 2025 and 2024

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, changes in the rates of inflation and the effects of inflation, changes in interest rates, disruption in the financial services industry caused by bank failures and uncertainties involving various banks, changes in the Corporation’s cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, changes in 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 2024 Annual Report on Form 10-K in regards to application or related judgments and estimates used as of March 31, 2025. Please refer to Item 7 of the Corporation’s 2024 Annual Report on Form 10-K for a more detailed disclosure of the critical accounting policies.

Results of Operations

Summary

A summary of operating results for Franklin Financial Services Corporation for the three months ended March 31, 2025 are as follows:

Net income for the first quarter of 2025 was $3.9 million ($0.88 per diluted share) compared to $3.4 million ($0.77 per diluted share) for the first quarter of 2024, an increase of 16.7%.

Wealth management fees were $2.2 million for the first quarter of 2025 as assets under management exceeded $1.3 billion.

For the first quarter of 2025, the provision for credit losses was $779 thousand compared to $452 thousand for the first quarter of 2024. The increase in the provision expense was due primarily to loan growth of $57.3 million since year-end 2024.

Total assets at March 31, 2025 were $2.257 billion, compared to $2.198 billion at year-end 2024, an increase of 2.7%.

Total net loans increased $57.3 million (4.2%) from December 31, 2024.

Deposits grew by $51.9 million (2.9%) from prior year-end at a cost of 2.02% for the first quarter of 2025, compared to a cost of 2.06% for the fourth quarter of 2024.

Return on Average Assets (ROA) was 0.72%, Return on Average Equity (ROE) was 10.80% and the Net Interest Margin (NIM) was 3.05% on an annualized basis for the first quarter of 2025, compared to an ROA of 0.67%, ROE of 10.21%, and NIM of 2.88% for the same period in 2024.

On April 10, 2025, the Board of Directors declared a $0.33 per share regular quarterly cash dividend for the second quarter of 2025 to be paid on May 28, 2025, to shareholders of record at the close of business on May 2, 2025. This represents a 3.1% increase over the dividend for the fourth quarter of 2024.

‎

Key performance ratios as of, or for the periods ended as shown:



	Three Months Ended				Twelve Months Ended
	March 31,		March 31,		December 31,
(Dollars in thousands, except per share) (Unaudited)	2025		2024		2024

Balance Sheet Highlights
Total assets	$	2,257,478	$	2,011,614	$	2,197,841
Debt securities available for sale		495,487		462,951		508,604
Loans, net		1,437,747		1,261,062		1,380,424
Deposits		1,867,577		1,559,312		1,815,647
Other borrowings		200,000		280,000		200,000
Shareholders' equity		151,391		134,237		144,716

Summary of Operations
Interest income	$	27,058	$	23,809	$	101,451
Interest expense		11,452		10,256		43,937
Net interest income		15,606		13,553		57,514
Provision for credit losses - loans		750		490		1,975
Provision for (reversal of) credit losses - unfunded commitments		29		(38)		8
Total provision for credit losses		779		452		1,983
Net interest income after provision for credit losses		14,827		13,101		55,531
Noninterest income		4,562		4,188		13,679
Noninterest expense		14,577		13,284		55,895
Income before income taxes		4,812		4,005		13,315
Federal income tax expense		890		644		2,216
Net income	$	3,922	$	3,361	$	11,099

Performance Measurements
Return on average assets*		0.72%		0.67%		0.54%
Return on average equity*		10.80%		10.21%		8.05%
Return on average tangible equity (1)*		11.35%		10.92%		8.62%
Efficiency ratio (1)		71.36%		73.76%		73.36%
Net interest margin*		3.05%		2.88%		2.95%

Shareholders' Value (per common share)
Diluted earnings per share	$	0.88	$	0.77	$	2.51
Basic earnings per share		0.88		0.77		2.52
Regular cash dividends declared		0.32		0.32		1.28
Book value		33.99		30.55		32.69
Tangible book value (1)		31.97		28.50		30.65
Market value		35.45		26.20		29.90
Market value/book value ratio		104.30%		85.76%		91.47%
Market value/tangible book value ratio		110.90%		91.94%		97.54%
Price/earnings multiple*		10.07		8.51		11.91
Current quarter dividend yield		3.61%		4.89%		4.28%
Dividend payout ratio year-to-date		36.16%		41.62%		50.72%

Safety and Soundness
Average equity/average assets		6.69%		6.58%		6.65%
Risk-based capital ratio (Total)		13.30%		14.53%		13.85%
Leverage ratio (Tier 1)		7.82%		8.32%		7.92%
Common equity ratio (Tier 1)		10.86%		11.91%		11.31%
Nonperforming loans / gross loans		0.02%		0.04%		0.02%
Nonperforming assets/total assets		0.01%		0.02%		0.01%
Allowance for credit losses as a % of loans		1.27%		1.29%		1.26%
Net loans (charged-off) recovered / average loans*		0.01%		0.00%		-0.03%

Assets under Management
Trust assets under management (fair value)	$	1,183,180	$	1,107,611	$	1,169,282
Held at third-party brokers (fair value)		139,918		151,465		139,872
	$	1,323,098	$	1,259,076	$	1,309,154

*Year-to-date annualized

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

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 as of, or for the three months ended March 31, 2025 and 2024 and the year ended December 31, 2024.



(Dollars in thousands, except per share)
	March 31, 2025		March 31, 2024		December 31, 2024
Return on Tangible Equity (non-GAAP)
Net income	$	3,922	$	3,361	$	11,099

Average shareholders' equity		147,256		132,081		137,840
Less average intangible assets		(9,016)		(9,016)		(9,016)
Average tangible equity (non-GAAP)		138,240		123,065		128,824

Return on average tangible equity (non-GAAP)*		11.35%		10.92%		8.62%

Tangible Book Value (per share) (non-GAAP)
Shareholders' equity	$	151,391	$	134,237	$	144,716
Less intangible assets		(9,016)		(9,016)		(9,016)
Tangible book value (non-GAAP)		142,375		125,221		135,700

Shares outstanding (in thousands)		4,454		4,394		4,427

Tangible book value per share (non-GAAP)	$	31.97	$	28.50	$	30.65

Efficiency Ratio
Noninterest expense	$	14,577	$	13,304	$	55,895

Net interest income		15,606		13,553		57,514
Plus tax equivalent adjustment to net interest income		251		254		938
Plus noninterest income, net of securities transactions		4,569		4,229		17,737
Total revenue		20,426		18,036		76,189

Efficiency ratio (Noninterest expense/total revenue)		71.36%		73.76%		73.36%

* 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.

Comparison of the three months ended March 31, 2025 to the three months ended March 31, 2024:

Tax equivalent net interest income increased $2.1 million to $15.9 million in the first quarter of 2025 compared to $13.8 million for the same period in 2024. Tax equivalent net interest income increased $467 thousand from balance sheet volume changes and $1.6 million from interest rate changes.

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



	For the Three Months Ended March 31,
	2025					2024

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

Interest-earning assets:
Interest-earning deposits in other banks	$	173,573	$	1,908	4.46%	$	176,259	$	2,354	5.36%
Investment securities:
Taxable		462,357		5,016	4.40%		425,474		3,958	3.73%
Tax exempt		50,370		336	2.70%		51,397		337	2.63%
Investments		512,727		5,352	4.23%		476,871		4,295	3.61%
Loans:
Residential real estate 1-4 family:
First liens		244,487		3,290	5.46%		206,763		2,527	4.90%
Junior liens and lines of credit		83,128		1,215	5.93%		72,451		1,066	5.90%
Residential real estate - construction		34,623		568	6.65%		27,196		476	7.02%
Commercial real estate		816,450		11,710	5.82%		712,855		10,015	5.64%
Commercial		234,946		3,090	5.33%		240,527		3,186	5.31%
Consumer		7,940		176	8.99%		6,889		144	8.38%
Loans		1,421,574		20,049	5.72%		1,266,681		17,414	5.51%
Total interest-earning assets		2,107,874	$	27,309	5.25%		1,919,811	$	24,063	5.03%
Other assets		92,224					88,970
Total assets	$	2,200,098				$	2,008,781

Interest-bearing liabilities:
Deposits:
Interest-bearing checking	$	404,451	$	591	0.59%	$	421,302	$	596	0.57%
Money Management		728,959		4,892	2.72%		584,033		4,212	2.89%
Savings		97,051		40	0.17%		104,338		40	0.15%
Time		220,461		2,331	4.29%		139,457		1,408	4.05%
Time - Brokered		87,057		1,176	5.48%		19,033		248	5.23%
Total interest-bearing deposits		1,537,979		9,030	2.38%		1,268,163		6,504	2.06%

Subordinated notes		19,703		264	5.36%		19,665		264	5.37%
Overnight borrowings		—		—	---		2,166		31	5.74%
Federal Reserve Bank borrowings		—		—	---		84,505		961	4.56%
Federal Home Loan Bank advances		200,000		2,158	4.32%		215,824		2,496	4.64%
Total interest-bearing liabilities		1,757,682		11,452	2.64%		1,590,323		10,256	2.59%
Noninterest-bearing deposits		277,558					269,307
Other liabilities		17,602					17,070
Shareholders' equity		147,256					132,081
Total liabilities and shareholders' equity	$	2,200,098				$	2,008,781
T/E net interest income/Net interest margin				15,857	3.05%				13,807	2.88%
Tax equivalent adjustment				(251)					(254)
Net interest income			$	15,606				$	13,553

Net Interest Spread					2.61%					2.44%
Cost of Funds					2.28%					2.21%
Cost of Deposits					2.02%					1.70%

Provision for Credit Losses

For the first quarter of 2025, the provision for credit losses on loans was $750 thousand and the provision for unfunded commitments was $29 thousand, resulting in a total provision for credit loss expense of $779 thousand. The loan provision expense increase was due primarily to growth in the loan portfolio as the historical credit loss rate and the qualitative loss factor have not materially changed during the first quarter of 2025.

The Allowance for Credit Losses (ACL) ratio for loans was 1.27% at March 31, 2025 compared to 1.26% at December 31, 2024. The ACL for unfunded commitments was $2.1 million at March 31, 2025 compared to $2.0 million at December 31, 2024. For more information refer to the Loan Quality and Allowance for Credit Losses discussion in the Financial Condition section.

Noninterest Income

For the first quarter of 2025, noninterest income increased $374 thousand from the same period in 2024. Wealth Management fees increased, primarily because of growth in assets under management. Gains on sale of loans increased due to volume of mortgage sales. Other income increased from swap referral fees.

The following table presents a comparison of noninterest income for the three months ended March 31, 2025 and 2024:



	For the Three Months Ended
	March 31,				Change
(Dollars in thousands)	2025		2024		Amount		%
Noninterest Income
Wealth management fees	$	2,215	$	2,026	$	189	9.3
Loan service charges		209		206		3	1.5
Gain on sale of loans		109		58		51	87.9
Deposit service charges and fees		605		613		(8)	(1.3)
Other service charges and fees		483		488		(5)	(1.0)
Debit card income		558		536		22	4.1
Increase in cash surrender value of life insurance		115		112		3	2.7
Change in fair value of equity securities		(7)		(41)		34	(82.9)
Other		275		190		85	44.7
Total noninterest income	$	4,562	$	4,188	$	374	8.9

Noninterest Expense

Noninterest expense for the first quarter of 2025 increased $1.3 million compared to the same period in 2024. Salaries and benefits increased $779 thousand primarily in salaries ($246 thousand), an increase in health insurance costs ($292 thousand) and an increase in commissions ($110 thousand) from an increase in mortgage volume. Data processing costs increased due to software expenses. FDIC insurance increased due to growth in the balance sheet. The increase in other expense is due, in part, to an increase in armored car expense from the addition of new services.

The following table presents a comparison of noninterest expense for the three months ended March 31, 2025 and 2024:



	For the Three Months Ended
(Dollars in thousands)	March 31,				Change
Noninterest Expense	2025		2024		Amount		%
Salaries and benefits	$	8,506	$	7,727	$	779	10.1
Net occupancy		1,225		1,182		43	3.6
Marketing and advertising		433		519		(86)	(16.6)
Legal and professional		527		516		11	2.1
Data processing		1,557		1,423		134	9.4
Pennsylvania bank shares tax		160		125		35	28.0
FDIC insurance		545		322		223	69.3
ATM/debit card processing		340		323		17	5.3
Telecommunications		106		111		(5)	(4.5)
Nonservice pension		12		(29)		41	(141.4)
Other		1,166		1,065		101	9.5
Total noninterest expense	$	14,577	$	13,284	$	1,293	9.7

Provision for Income Taxes

For the first quarter of 2025, the Corporation recorded a Federal income tax expense of $917 thousand and state tax credit of $27 thousand compared to $624 thousand for federal income tax and $20 thousand for state income tax in the same quarter in 2024. The effective tax rate for the first quarter of 2025 was 18.5% compared to 15.7% for the same period in 2024. The federal statutory tax rate is 21% for 2025 and 2024.

Financial Condition

Cash and Cash Equivalents:

Cash and cash equivalents totaled $225.0 million at March 31, 2025, an increase of $21.3 million from the prior year-end balance of $203.6 million. Short-term interest-earning deposits are held primarily at the Federal Reserve ($196.2 million). At March 31, 2025, the Corporation had posted cash collateral of $5.2 million to a counterparty in a derivative transaction.

Investment Securities:

Available for Sale (AFS) Securities: At March 31, 2025, the AFS securities portfolio had an amortized cost of $534.4 million, a decrease of $19.6 million from the prior year-end, and a fair value of $495.5 million, a decrease of $13.1 million from the prior year-end. During the first three months of 2025, the portfolio returned $19.6 million of principal and there were no new purchases. The Bank did not sell any investments in the first three months of 2025. The AFS portfolio had a net unrealized loss of $38.9 million at March 31, 2025 compared to a net unrealized loss of $45.4 million at the prior year-end. The AFS portfolio averaged $512.7 million with a tax equivalized yield of 4.23% for the three months ended March 31, 2025. This compares to an average of $476.9 million and a tax-equivalized yield of 3.61% for the same period in 2024.

The AFS portfolio holdings are classified by type of security issuer. U.S. Agency mortgage-backed and collateralized mortgage obligations are issued by a U.S. Government Agency or a government sponsored entity and securitized by pools of residential and commercial mortgages. Municipal securities are issued by state and local government entities and consist of taxable and tax-exempt securities. Many municipal securities have credit enhancements in the form of private bond insurance or other credit support. Corporate securities are mostly subordinated notes issued by community banks with the remainder consisting of five trust preferred securities. Non-Agency mortgage-backed and collateralized mortgage obligation securities are issued by private entities and securitized by residential and commercial mortgages. Many of these securities benefit from credit enhancements in the form of subordinated tranches and overcollateralization. Asset-backed securities are issued by or insured by a U.S. Government Agency and securitized by loan pools other than mortgages.

Restricted Stock at Cost: The Bank held $8.8 million of restricted stock at March 31, 2025 and December 31, 2024. 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:

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



	March 31,		December 31,			Change
(Dollars in thousands)	2025		2024			Amount	%
Residential Real Estate 1-4 Family
Consumer first liens	$	187,649	$	181,780	$	5,869	3.2
Commercial first lien		57,795		58,821		(1,026)	(1.7)
Total first liens		245,444		240,601		4,843	2.0

Consumer junior liens and lines of credit		77,981		76,035		1,946	2.6
Commercial junior liens and lines of credit		5,908		6,199		(291)	(4.7)
Total junior liens and lines of credit		83,889		82,234		1,655	2.0
Total residential real estate 1-4 family		329,333		322,835		6,498	2.0

Residential real estate - construction
Consumer		26,629		20,742		5,887	28.4
Commercial		22,339		11,685		10,654	91.2
Total residential real estate construction		48,968		32,427		16,541	51.0

Commercial real estate		831,787		803,365		28,422	3.5
Commercial		238,010		230,597		7,413	3.2
Total commercial		1,069,797		1,033,962		35,835	3.5

Consumer		8,093		8,853		(760)	(8.6)
		1,456,191		1,398,077		58,114	4.2
Less: Allowance for credit losses		(18,444)		(17,653)		(791)	4.5
Net Loans	$	1,437,747	$	1,380,424	$	57,323	4.2

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

Total residential real estate loans increased by $6.5 million over year-end 2024, primarily in consumer first lien loans. For the first three months of 2025, the Bank originated $23.0 million in mortgages compared to $11.7 million for the same period in 2024, including $7.0 million for sale through the secondary market. The Bank does not originate or hold any loans that would be considered sub-prime or Alt-A and does not generally originate mortgages outside of its primary market area.

Residential real estate construction: This category contains loans for the vertical construction of 1-4 family residential properties. The largest component of this category ($26.6 million) represents loans for individuals to construct personal residences, while loans to residential real estate developers totaled $22.3 million at March 31, 2025. The Bank’s exposure to residential construction loans is concentrated primarily in south central Pennsylvania. Real estate construction loans,

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

Commercial real estate (CRE): This category includes commercial, industrial, farm and agricultural loans and land development loans, where real estate serves as the primary collateral for the loans. Total commercial real estate loans increased to $831.8 million from $803.4 million at the end of 2024. Included in commercial real estate are approximately $508 million of nonowner occupied loans located primarily in the Bank’s market area of south-central Pennsylvania.

The following table presents the largest sectors by collateral in the commercial real estate category:



(Dollars in thousands)
Commercial Real Estate (CRE) Sectors	March 31, 2025		% of CRE	December 31, 2024		% of CRE
Apartment buildings	$	166,642	20%	$	146,661	18%
Hotels & motels		100,926	12%		97,460	12%
Office buildings		92,654	11%		92,926	12%
Shopping centers		83,157	10%		82,518	10%
Development land		64,307	8%		66,645	8%

Also included in CRE are real estate construction loans totaling $161.7 million. At March 31, 2025, the Bank had $72.9 million in real estate construction loans funded with an interest reserve and capitalized $920 thousand of interest in the first three months of 2025 from these reserves on active projects for commercial construction. Real estate construction loans are monitored on a regular basis by either an independent first-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 increased $7.4 million to $238.0 million at March 31, 2025, compared to $230.6 million at the end of 2024. At March 31, 2025, the Bank had $105.1 million in tax-free loans.

The following table presents the largest sectors by industry in the commercial category:



(Dollars in thousands)
Commercial	March 31, 2025		% of Commercial	December 31, 2024		% of Commercial
Public administration	$	42,667	18%	$	43,184	19%
Utilities		38,316	16%		38,498	17%
Real estate, rental & leasing		21,755	9%		23,162	10%
Manufacturing		21,250	9%		16,930	7%

Participations: The Bank may supplement its own commercial loan production by purchasing loan participations. These participations are primarily located in south-central Pennsylvania. At March 31, 2025, the outstanding commercial participations were $111.5 million, or 9.6%, of commercial purpose loans and 7.7% of total gross loans compared to $107.2 million at December 31, 2024, or 9.6%, of commercial purpose loans and 7.7% of total gross loans. The Bank’s total exposure (including outstanding balances and unfunded commitments) to purchased participations is $132.7 million, compared to $133.1 million at December 31, 2024. The commercial loan participations are comprised of $30.3 million of Commercial loans and $81.2 million of CRE loans, reported in the respective loan class.

Consumer loans: This category had a balance of $8.1 million at March 31, 2025, compared to $8.9 million at prior year-end and is comprised primarily of installment loans and personal lines of credit.

‎

Loan Quality:

Management monitors loan performance on a monthly basis and performs a quarterly evaluation of the adequacy of the Allowance for Credit Loss for loans (ACL). The Bank begins enhanced monitoring of all loans rated 6–Other Assets Especially Mentioned or worse and obtains a new appraisal or asset valuation for any loans placed on nonaccrual and rated 7 - Substandard or worse. Management, at its discretion, may determine that additional adjustments to the appraisal or valuation are required. Valuation adjustments will be made as necessary based on factors, including, but not limited to: the economy, deferred maintenance, industry, type of property/equipment, age of the appraisal, etc. and the knowledge Management has about a particular situation. In addition, the cost to sell or liquidate the collateral is also estimated and deducted from the valuation in order to determine the net realizable value to the Bank. When determining the ACL, certain factors involved in the evaluation are inherently subjective and require material estimates that may be susceptible to significant change, including the amounts and timing of future cash flows. Management monitors the adequacy of the ACL on an ongoing basis and reports its adequacy quarterly to the Board Enterprise Risk Management Committee of the Board of Directors. Management believes the ACL at March 31, 2025 is adequate.

Watch list loans exhibit financial weaknesses that increase the potential risk of default or loss to the Bank. However, inclusion on the watch list, does not by itself, mean a loss is certain. The watch list totaled $31.4 million at March 31, 2025 compared to $21.5 million at December 31, 2024. The increase was primarily due to credit downgrades on two hotel loans__ during the first quarter of 2025. The watch list includes both performing and nonperforming loans. Included in the watchlist total are $253 thousand of nonaccrual loans as of March 31, 2025 and $266 thousand as of December 31, 2024. The credit composition of the watch list (loans rated 6, 7, or 8), by primary collateral is shown in Note 6 of the accompanying financial statements.

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

Nonaccruing loans generally represent Management’s determination that the borrower will be unable to repay the loan in accordance with its contractual terms and that collateral liquidation may or may not fully repay both interest and principal. It is the Bank’s policy to evaluate the probable collectability of principal and interest due under terms of loan contracts for all loans 90-days or more past due, nonaccrual loans, or individually evaluated 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 credit 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 up to 80% of commercial loans each year. The FDIC defines certain supervisory loan-to-value lending limits. The Bank’s internal loan–to-value limits are all equal to or have a lower loan-to-value limit than the supervisory limits. However, in certain instances, the Bank may make a loan that exceeds the supervisory loan-to-value limit. At March 31, 2025, the Bank had loans of $12.7 million (0.9% of gross loans) that exceeded the supervisory limit, compared to 1.0% at year-end 2024.

Loan quality, as measured by nonaccrual loans, totaled $253 thousand at March 31, 2025 compared to $266 thousand at December 31, 2024 and the nonperforming loan to gross loans ratio was 0.02% at March 31, 2025 and December 31, 2024. Loans past due 90-days or more, but still accruing, totaled $20 thousand at March 31, 2025.

In addition to monitoring nonaccrual loans, the Bank also closely monitors loans to borrowers experiencing financial difficulty when, based on current information and events, it is probable that the Bank will be unable to collect all interest and principal payments due according to the originally contracted terms of the loan agreement.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

As of March 31, 2025 and December 31, 2024 there were no modifications made to borrowers experiencing financial difficulty.

Allowance for Credit Losses:

Allowance for Credit Losses – Loans

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

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

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

The Corporation has elected to exclude accrued interest receivable from the measurement of the ACL. When a loan is placed on nonaccrual status, any outstanding current accrued interest is reversed against income and prior year accrued interest is deducted from the ACL.

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

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

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

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

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

The historical credit loss rate is applied to each WARM bucket through the next four quarter period.

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

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

The qualitative component for the pool utilizes a risk matrix comprised of eight risk factors and assigns a risk level to each factor. The risk factors give consideration to changes in: lending policy, procedures and practice; economic conditions; nature and volume of loans; experience of lending team; volume of past due loans; quality of the loan review system; concentrations of credit; and other external factors. The risk factors are weighted to reflect Management’s estimate of how the factor affects potential losses. The risk levels within each factor are measured in basis points and range from minimal

risk to very high risk and are determined independently for commercial loans, residential mortgage loans and consumer loans.

The ACL for pooled loans is the sum of the quantitative and qualitative loss estimates. At March 31, 2025, the pooled loan reserve was $18.4 million and approximately 69% of the pooled reserve was from the qualitative component, unchanged from year-end 2024. The was no specific reserve as of March 31, 2025 or December 31, 2024.

Allowance for Credit Losses – Unfunded Commitments

The ACL for unfunded commitments is recorded in other liabilities on the consolidated balance sheet. The ACL represents management’s estimate of expected losses from unfunded commitments and is determined by estimating future usage of the commitments, based on historical usage. The estimated loss is calculated in a manner similar to that used for the ACL for loans, previously described. The ACL is increased or decreased through the provision for credit losses. At March 31, 2025, the ACL for unfunded commitments totaled $2.1 million, compared to $2.0 million at December 31, 2024.

The following table shows the allocation of the allowance for credit losses and other loan performance ratios, by class, as of March 31, 2025 and December 31, 2024:



(Dollars in thousands)	Residential Real Estate 1-4 Family
			Junior Liens &				Commercial
	First Liens		Lines of Credit		Construction		Real Estate		Commercial		Consumer		Total
2025
Loans at March 31, 2025	$	245,444	$	83,889	$	48,968	$	831,787	$	238,010	$	8,093	$	1,456,191
Average Loans through March 31, 2025		244,487		83,128		34,623		816,450		234,946		7,940		1,421,574
Nonaccrual Loans at March 31, 2025		—		—		—		253		—		—		253
Allowance for Credit Loss at March 31, 2025		1,529		470		455		12,480		3,394		116		18,444
YTD Net (Charge-offs)/Recoveries at March 31, 2025		—		—		3		—		51		(13)		41

Loans/Total Gross Loans at March 31, 2025		17%		6%		3%		57%		16%		1%		100%
Nonaccrual Loans/Total Gross Loans at March 31, 2025		0.00%		0.00%		0.00%		0.03%		0.00%		0.00%		0.02%
Allowance for Credit Loss/Gross Loans at March 31, 2025		0.62%		0.56%		0.93%		1.50%		1.43%		1.43%		1.27%
Net (Charge-offs) Recoveries/Average Loans at March 31, 2025*		0.00%		0.00%		0.03%		0.00%		0.09%		-0.65%		0.01%
Allowance for Credit Loss/Nonaccrual Loans at March 31, 2025														7,290.12%



2024
Loans at December 31, 2024	$	240,601	$	82,234	$	32,427	$	803,365	$	230,597	$	8,853	$	1,398,077
Average Loans for 2024		222,572		76,515		28,096		747,037		241,554		7,322		1,323,096
Nonaccrual Loans at December 31, 2024		—		—		—		—		266		—		266
Allowance for Credit Losses at December 31, 2024		1,497		461		376		12,004		3,182		133		17,653
Net Recoveries/(Charge-offs) for 2024		3		—		14		2		(329)		(64)		(374)

Loans/Total Gross Loans at December 31, 2024		17%		6%		2%		57%		16%		1%		100%
Nonaccrual Loans/Total Gross Loans at December 31, 2024		0.00%		0.00%		0.00%		0.00%		0.12%		0.00%		0.02%
Allowance for Credit Loss/Gross Loans at December 31, 2024		0.62%		0.56%		1.16%		1.49%		1.38%		1.50%		1.26%
Net Recoveries(Charge-offs)/Average Loans for 2024		0.00%		0.00%		0.05%		0.00%		-0.14%		-0.87%		-0.03%
Allowance for Credit Loss/Nonaccrual Loans at December 31, 2024														6,636.47%

*Annualized

Deposits:

Total deposits increased $51.9 million during the first three months of 2025 to $1.868 billion. Noninterest checking increased $8.6 million, primarily in municipal and small business accounts. Interest-bearing checking decreased by $9.9 million, primarily in municipal deposits, while the Bank’s Money Management product increased $57.3 million. Time deposits decreased $4.4 million. The Bank has $87.5 million of brokered CDs at March 31, 2025 and December 31, 2024.

As of March 31, 2025, the Bank had deposits of $303.2 million placed in the IntraFi Network reciprocal deposit program ($106.3 million in interest-bearing checking and $196.9 million in money management) and $29.7 million in reciprocal time deposits in the CDARS program included in time deposits. These programs allow the Bank to offer full FDIC coverage to large depositors, but with the convenience to the customer of only having to deal with one bank. The Bank solicits these

deposits from within its market and it believes they present no greater risk than any other local deposit. Only reciprocal deposits that exceed 20% of liabilities are considered brokered deposits. At March 31, 2025, the Bank’s reciprocal deposits were 15.9% of the Bank’s total liabilities compared to 16.2% at year-end 2024.

The Bank estimates that approximately 89% of its deposits are FDIC insured or collateralized as of March 31, 2025, compared to 85% at December 31, 2024.

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



	March 31,		December 31,			Change
(Dollars in thousands)	2025		2024			Amount	%
Noninterest-bearing checking	$	298,945	$	290,346	$	8,599	3.0

Interest-bearing checking		407,951		417,870		(9,919)	(2.4)
Money management		752,218		694,880		57,338	8.3
Savings		96,933		96,646		287	0.3
Total interest-bearing checking and savings		1,257,102		1,209,396		47,706	3.9

Time deposits		311,530		315,905		(4,375)	(1.4)
Total deposits	$	1,867,577	$	1,815,647	$	51,930	2.9

Overdrawn deposit accounts reclassified as loans	$	136	$	136

Borrowings:

At March 31, 2025, the Bank had $200.0 million in total borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB). The borrowings are comprised of $200.0 million in long-term borrowings with a rate of 4.32%, due January 12, 2027.

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 5.00% per year for 5 years and then convert to floating rate of SOFR plus 4.93% per year for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The Corporation also sold $5.0 million of subordinated debt notes with a maturity date of September 1, 2035. These notes are noncallable for 10 years and carry a fixed interest rate of 5.25% per year for 10 years and then convert to a 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 maturity date of each issue on a pro-rata basis. The proceeds are intended to be used for general corporate purposes.

Shareholders’ Equity:

Total shareholders’ equity increased $6.7 million to $151.4 million as of March 31, 2025 from December 31, 2024. Retained earnings increased $2.5 million in 2025 and accumulated other comprehensive income/(loss) (AOCI) improved $3.7 million since year-end 2024. The increase in retained earnings was from net income of $3.9 million partially offset by cash dividends of $1.4 million. The Corporation’s Dividend Reinvestment Plan (DRIP) added $190 thousand in new capital from optional cash contributions and $254 thousand from the reinvestment of quarterly dividends. The Corporation’s dividend payout ratio was 36.16% for the first three months of 2025 compared to 41.62% for the same period in 2024.

As part of its quarterly dividend decision, the Corporation considers, among other factors, current and future income projections, dividend yield, payout ratio, current and future capital ratios, reserves and allocations. For the first quarter of 2025, the Corporation paid a $0.32 per share dividend, compared to $0.32 paid in the first quarter of 2024. On April 10, 2025, the Board of Directors declared a $0.33 per share regular quarterly dividend for the second quarter of 2025, which will be paid on May 28, 2024. This represents a 3.1% increase over the second quarter 2024 dividend.

In January 2025, the Board of Directors authorized a 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 over a one-year period. No shares were purchased during the first three months of 2025.

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The following table summarizes the regulatory capital requirements and results as of March 31, 2025 and December 31, 2024 for the Corporation and the Bank:



			Regulatory Ratios
			Adequately	Well
	March 31,	December 31,	Capitalized	Capitalized
(Dollars in thousands)	2025	2024	Minimum	Minimum

Common Equity Tier 1 Risk-based Capital Ratio (1)
Franklin Financial Services Corporation	10.86%	11.31%	N/A	N/A
Farmers & Merchants Trust Company	11.44%	11.71%	4.50%	6.50%

Tier 1 Risk-based Capital Ratio (2)
Franklin Financial Services Corporation	10.86%	11.31%	N/A	N/A
Farmers & Merchants Trust Company	11.44%	11.71%	6.00%	8.00%

Total Risk-based Capital Ratio (3)
Franklin Financial Services Corporation	13.30%	13.85%	N/A	N/A
Farmers & Merchants Trust Company	12.69%	12.96%	8.00%	10.00%

Tier 1 Leverage Ratio (4)
Franklin Financial Services Corporation	7.82%	7.92%	N/A	N/A
Farmers & Merchants Trust Company	8.24%	8.20%	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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Economy

The Corporation’s primary market area includes Franklin, Fulton, Cumberland, Huntingdon, and Dauphin County, PA, and Washington County, MD. This area is diverse in demographic and economic composition. County populations range from a low of approximately 15,000 in Fulton County to over 289,000 in Dauphin County. The market area has a diverse economic base and local industries include warehousing, truck and rail shipping centers, light and heavy manufacturers, health care, higher education institutions, farming and agriculture, and a varied service sector. The market area provides easy access to the major metropolitan markets on the east coast via trucking and rail transportation. Because of this, warehousing and distribution companies continue to find the area attractive. The local economy is not overly dependent on any one industry or business and Management believes that the Bank’s primary market area continues to be well suited for growth.

Impact of Inflation

The impact of inflation upon financial institutions such as the Corporation differs from its effect upon other commercial enterprises. Unlike many companies, the assets and liabilities of the Corporation are financial in nature. As such, interest rates and changes in interest rates may have a more significant effect on the Corporation’s financial results than on other types of industries. Because of this, the Corporation watches the actions of the Federal Reserve Open Market Committee (FOMC) as it makes decisions about interest rate changes and how such changes affect market rates and the Corporation. Although inflation (and inflation expectations) may affect the interest rate environment, it is not possible to measure with any precision the effect of inflation on the Corporation.

Liquidity

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

Historically, the Corporation has satisfied its liquidity needs from earnings, repayment of loans and amortizing investment securities, maturing investment securities, loan sales, deposit growth and its ability to access existing lines of credit. All investment securities are classified as available for sale; therefore, marketable securities that are unencumbered ($276.7 million fair value) 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 March 31, 2025.



(Dollars in thousands)

Liquidity Source		Capacity		Outstanding		Available
Federal Home Loan Bank	$	567,117	$	200,000	$	367,117
Federal Reserve Bank Discount Window		65,885		—		65,885
Correspondent Banks		76,000		—		76,000
Total	$	709,002	$	200,000	$	509,002

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.



	March 31,		December 31,
(Dollars in thousands)	2025		2024
Financial instruments whose contract amounts represent credit risk
Commercial commitments to extend credit	$	347,325	$	328,806
Consumer commitments to extend credit (secured)		137,353		135,776
Consumer commitments to extend credit (unsecured)		6,170		5,352
	$	490,849	$	469,934
Standby letters of credit	$	30,747	$	28,815

ACL - Unfunded Commitments (1)	$	2,059	$	2,030
(1) Reported in Other Liabilities on the Consolidated Balance Sheets

The Corporation has entered into various contractual obligations to make future payments. These obligations include time deposits, long-term debt, operating leases, deferred compensation and pension payments. These amounts have not changed materially, except as reported, from those reported in the Corporation’s 2024 Annual Report on Form 10-K.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the Corporation’s exposure to market risk during the three months ended March 31, 2025. For more information on market risk refer to the Corporation’s 2024 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2025, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Corporation’s internal control over financial reporting during the quarterly period ended March 31, 2025, 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.

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 legal proceedings pending to which the Corporation is a party or to which its property is subject which, if determined adversely to the Corporation, would be material to the Corporation’s financial condition or results of operations. No material proceedings are pending or are known to be threatened or contemplated against us by any governmental authorities.

Item 1A. Risk Factors

There were no material changes in the Corporation’s risk factors during the three months ended March 31, 2025, except as described below. For more information, refer to the Corporation’s 2024 Annual Report on Form 10-K.

Changes to trade policies and tariffs can have an adverse impact on our business and our customers.

Changes in trade policies, including the imposition of tariffs or the escalation of a trade war, could negatively impact the economic conditions in the markets we serve. Our customers - particularly local businesses engaged in agriculture, manufacturing, and retail - may face higher costs for imported goods and materials, reduced export demand, and supply chain disruptions due to increased tariffs. These challenges could lead to lower revenues, reduced profitability, and potential layoffs, all of which may impair our customers' ability to meet their financial obligations. Furthermore, prolonged trade tensions and economic uncertainty could lead to market volatility, declining asset values, and weakened consumer confidence. If our customers experience financial stress, we could see an increase in loan delinquencies and credit losses, negatively affecting our asset quality and overall financial performance. Additionally, any decline in local economic activity could reduce loan demand, deposit growth, and fee income, which are critical to our long-term success. While we actively monitor economic and policy developments, we cannot predict the outcome of trade negotiations or the full impact of tariffs and trade restrictions on our business, customers, and the broader economy. Any adverse effects from tariffs or a trade war could materially and negatively impact our financial condition, results of operations, and future growth prospects.

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

In January 2025, the Board of Directors approved an open market repurchase plan to repurchase 150,000 shares of the Corporation’s $1.00 par value common stock at market prices in open market or privately negotiated transactions during 2025. No shares were repurchased during the first three months of 2025.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None of our directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or adopted or terminated a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the quarter ended March 31, 2025, except as follows:

On February 24, 2025, Craig W. Best, Director, Chief Executive Officer and President, adopted a non-Rule 10b5-1 trading arrangement to purchase up to 6,775 shares of the Corporation’s common stock. The arrangement was terminated on March 7, 2025.

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 September 2, 2022 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)

‎

FRANKLIN FINANCIAL SERVICES CORPORATION

and SUBSIDIARIES

SIGNATURES

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

Franklin Financial Services Corporation



May 15, 2025		/s/ Craig W. Best
		Craig W. Best
		Chief Executive Officer and President
		(Principal Executive Officer)

May 15, 2025		/s/ Mark R. Hollar
		Mark R. Hollar
		Treasurer and Chief Financial Officer
		(Principal Financial and Accounting Officer)