FRANKLIN FINANCIAL SERVICES CORP /PA/

Previous wording

A summary of operating results for Franklin Financial Services Corporation for the three and six months ended June 30, 2026 are as follows:

Current wording

A summary of operating results for Franklin Financial Services Corporation for the three and nine months ended September 30, 2026 are as follows:

Previous wording

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 six months ended June 30, 2026 and 2025 and the year ended December 31, 2025.

Current wording

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 nine months ended September 30, 2026 and 2025 and the year ended December 31, 2025.

Previous wording

Tax equivalent net interest income increased $2.1 million to $19.6 million in the second quarter of 2026 compared to $17.5 million for the same period in 2025. Tax equivalent net interest income increased $1.8 million from balance sheet volume changes and $300 thousand from interest rate changes.

Current wording

Tax equivalent net interest income increased $2.0 million to $20.4 million in the third quarter of 2026 compared to $18.4 million for the same period in 2025. Tax equivalent net interest income increased $1.7 million from balance sheet volume changes and $300 thousand from interest rate changes.

Previous wording

The provision for credit losses on unfunded commitments was $39 thousand compared to reversal of $69 thousand for the same period in 2025. The ACL for unfunded commitments was $2.0 million on June 30, 2026 and December 31, 2025, respectively. For more information refer to the Loan Quality and Allowance for Credit Losses discussion in the Financial Condition section.

Current wording

The provision for credit losses on unfunded commitments was $1.4 million compared to reversal of $53 thousand for the same period in 2025. The increase was due to the establishment of a $1.5 million reserve on a letter of credit related to a non-accrual CRE construction loan. The ACL for unfunded commitments was $3.4 million on September 30, 2026 and $1.9 million on December 31, 2025.

Previous wording

For the second quarter of 2026, total income tax was $1.6 million, comprised of $1.5 million in Federal income tax and $89 thousand in state income taxes. Income tax for the second quarter increased by $228 thousand compared to the second quarter of 2025, due to higher pre-tax income in 2026. The effective tax rate for the second quarter of 2026 was 19.9% compared to 19.3% for the same period in 2025. The federal statutory tax rate is 21% for 2026 and 2025.

Current wording

For the third quarter of 2026, total income tax was $2.1 million, which was comprised of $2.0 million in Federal income tax and $99 thousand in state income taxes. Income tax for the third quarter of 2026 increased by $818 thousand compared to the third quarter of 2025, due to higher pre-tax income in 2026. The effective tax rate for the third quarter of 2026 was 19.9% compared to 19.6% for the same period in 2025. The federal statutory tax rate is 21% for 2026 and 2025.

Previous wording

Tax equivalent net interest income increased $5.0 million to $38.3 million in the first six months of 2026 compared to $33.3 million for the same period in 2025. Tax equivalent net interest income increased $3.6 million from balance sheet volume changes and $1.4 million from interest rate changes.

Current wording

Tax equivalent net interest income increased $7.0 million to $58.7 million in the first nine months of 2026 compared to $51.7 million for the same period in 2025. Tax equivalent net interest income increased $5.3 million from balance sheet volume changes and $1.7 million from interest rate changes.

Previous wording

For the second quarter of 2026, the provision for credit losses on loans was $1.6 million compared to $704 thousand for the second quarter of 2025. The increase is due primarily to an additional $934 thousand of specific reserves on two collateral dependent loans to unrelated borrowers. See the Loan Quality discussion for additional information on these loans. The ACL ratio for loans was 1.36% on June 30, 2026 and 1.32% on December 31, 2025.

Current wording

For the first nine months of 2026, the provision for credit losses on loans was $935 thousand compared to $2.7 million for the same period in 2025. The 2025 provision included an expense of $894 thousand for one (1) of the previously discussed nonaccrual CRE construction loans. The ACL ratio for loans was 1.32% on September 30, 2026 and 1.32% on December 31, 2025. See the Loan Quality discussion for additional information on these loans.

Previous wording

The provision for credit losses on unfunded commitments was $58 thousand compared to a reversal of $40 thousand for the same period in 2025. The ACL for unfunded commitments was $2.0 million on June 30, 2026 and $1.9 million on December 31, 2025, respectively. For more information refer to the Loan Quality and Allowance for Credit Losses discussion in the Financial Condition section.

Current wording

The provision for credit losses on unfunded commitments was $1.5 million compared to a reversal of $93 thousand for the same period in 2025. The increase was due to the establishment of a $1.5 million reserve on a letter of credit related to a non-accrual CRE construction loan. The ACL for unfunded commitments was $3.4 million on September 30, 2026 and $1.9 million on December 31, 2025, respectively.

Previous wording

For the first half of 2026, noninterest income, before securities transactions, increased $838 thousand compared to the same period in 2025. Wealth Management fees increased, primarily because of growth in assets under management, the gain on sale of loans increased due to a one-time sale of mortgages and deposit service charges and fees increased due to a higher volume of account analysis fees.

Current wording

For the first nine months of 2026, noninterest income, before securities transactions, increased $1.5 million compared to the same period in 2025. The increase was spread across nearly all fee income categories with the largest increases in wealth management fees primarily as a result of growth in assets under management, gain on sale of loans, loan service charges due to prepayment penalties, deposit fees from a higher volume of account analysis fees, and cash surrender value of life insurance due to new purchases in the third quarter of 2026.

Previous wording

Noninterest expense for the first half of 2026 increased $995 thousand compared to the same period in 2025. Salaries increased $304 thousand. Legal and professional fees increased primarily in audit and consulting fees, and PA shares tax expense increased in 2026 compared to the same period in 2025. FDIC insurance decreased due to an improvement in performance metrics.

Current wording

Noninterest expense for the first nine months of 2026 increased $239 thousand compared to the same period in 2025. Salaries increased $235 thousand, while employee benefits decreased primarily in the Bank's self-insured health insurance plan expense, which declined from $3.0 million in 2025 to $2.4 million in 2026. Legal and professional fees increased primarily in audit and consulting fees, and Pennsylvania shares tax expense increased in 2026 compared to the same period in 2025. FDIC insurance decreased due to an improvement in performance metrics.

Previous wording

For the first half of 2026, total income tax was $3.3 million, comprised of $3.0 million in Federal income tax and $319 thousand in state income taxes. Income tax for the first half of 2026 increased by $1.0 million compared to the first half of 2025, due to higher pre-tax income in 2026. The effective tax rate for the first half of 2026 was 20.0% compared to 19.0% for the same period in 2025. The federal statutory tax rate is 21% for 2026 and 2025.

Current wording

For the first nine months of 2026, total income tax was $5.4 million, comprised of $5.0 million in Federal income tax and $417 thousand in state income taxes. Income tax for the first nine months of 2026 increased by $1.8 million compared to the first nine months of 2025, due to higher pre-tax income in 2026. The effective tax rate for the first nine months of 2026 was 19.9% compared to 19.2% for the same period in 2025. The federal statutory tax rate is 21% for 2026 and 2025.

Previous wording

Cash and cash equivalents totaled $195.0 million on June 30, 2026, an increase of $67.3 million from the prior year-end balance of $127.7 million, as deposit growth has outpaced loan growth during the first half of 2026. Short-term interest-earning deposits are held primarily at the Federal Reserve ($168.9 million).

Current wording

Cash and cash equivalents totaled $183.6 million on September 30, 2026, an increase of $55.9 million from the prior year-end balance of $127.7 million, as deposit growth has outpaced loan growth during the first nine months of 2026, resulting in higher cash balances. Short-term interest-earning deposits are held primarily at the Federal Reserve ($163.2 million).

Previous wording

Available for Sale (AFS) Securities: At June 30, 2026, the AFS securities portfolio had an amortized cost of $481.4 million, unchanged from the prior year-end, and a fair value of $452.3 million, a decrease of $2.2 million from the prior year-end. During the first six months of 2026, the portfolio returned $33.0 million of principal and $33.2 million was purchased. The Bank did not sell any investments in the first six months of 2026. The AFS portfolio had a net unrealized loss of $29.1 million at June 30, 2026 compared to a net unrealized loss of $26.8 million at the prior year-end. The AFS portfolio averaged $444.6 million with a tax equivalized yield of 3.50% for the six months ended June 30, 2026. This compares to an average of $489.5 million and a tax-equivalized yield of 4.07% for the same period in 2025.

Current wording

Available for Sale (AFS) Securities: At September 30, 2026, the AFS securities portfolio had an amortized cost of $511.5 million, an increase of $30.1 million from the prior year-end, and a fair value of $465.5 million, an increase of $10.9 million from the prior year-end. During the first nine months of 2026, the portfolio returned $42.5 million of principal and new purchases of $72.5 million were made. The Bank did not sell any investments in the first nine months of 2026. The AFS portfolio had a net unrealized loss of $46.0 million at September 30, 2026 compared to a net unrealized loss of $26.8 million at the prior year-end. The AFS portfolio averaged $456.7 million with a tax equivalized yield of 3.50% for the nine months ended September 30, 2026. This compares to an average of $488.9 million and a tax-equivalized yield of 4.01% for the same period in 2025.

Previous wording

Total residential real estate loans increased by $24.7 million over the prior year-end, primarily in consumer first lien loans. For the first six months of 2026, the Bank originated $62.1 million in mortgages, including $25.5 million for sale through the secondary market compared to $54.8 million of total originations for the same period in 2025. 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.

Current wording

Total residential real estate loans increased by $49.2 million over the prior year-end, primarily in consumer first lien loans. For the first nine months of 2026, the Bank originated $96.4 million in mortgages, including $28.7 million for sale through the secondary market compared to $95.3 million of total originations for the same period in 2025. 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.

Previous wording

Residential real estate construction: This category contains loans for the vertical construction of 1-4 family residential properties. The largest component of this category ($38.4 million) represents loans for individuals to construct personal residences, while loans to residential real estate developers totaled $15.7 million at June 30, 2026. The Bank’s exposure to residential construction loans is concentrated primarily in south central Pennsylvania. All real estate construction loans are underwritten in the same manner, regardless of the use of an interest reserve.

Current wording

Residential real estate construction: This category contains loans for the vertical construction of 1-4 family residential properties. The largest component of this category ($35.8 million) represents loans for individuals to construct personal residences, while loans to residential real estate developers totaled $14.1 million at September 30, 2026. The Bank’s exposure to residential construction loans is concentrated primarily in south central Pennsylvania. All real estate construction loans are underwritten in the same manner, regardless of the use of an interest reserve.

Previous wording

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 CRE loans increased to $949.4 million at June 30, 2026 from $903.6 million at the end of the prior year. Included in CRE are approximately $755 million of nonowner occupied loans located primarily in the Bank’s market area of south-central Pennsylvania. The Bank’s CRE concentration ratio is 348.2% of risk-based capital at June 30, 2026 compared to 349.9% at December 31, 2025.

Current wording

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 CRE loans increased to $948.4 million at September 30, 2026 from $903.6 million at the end of the prior year. Included in CRE are approximately $730 million of nonowner occupied loans located primarily in the Bank’s market area of south-central Pennsylvania. The Bank’s CRE concentration ratio is 327.3% of risk-based capital at September 30, 2026 compared to 349.9% at December 31, 2025.

Previous wording

Included in CRE are real estate construction loans totaling $220.7 million. At June 30, 2026, the Bank had $94.3 million in real estate construction loans funded with an interest reserve and capitalized $1.3 million of interest in the first six months of 2026 from these reserves on active projects for commercial construction. Real estate construction loans are monitored on a regular basis by either an independent third-party inspector or the assigned loan officer depending on loan amount or complexity of the project. This monitoring process includes at a minimum, the submission of invoices and 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.

Current wording

Included in CRE are real estate construction loans totaling $202.9 million. At September 30, 2026, the Bank had $63.5 million in real estate construction loans funded with an interest reserve and capitalized $1.8 million of interest in the first nine months of 2026 from these reserves on active projects for commercial construction. Real estate construction loans are monitored on a regular basis by either an independent third-party inspector or the assigned loan officer depending on loan amount or complexity of the project. This monitoring process includes at a minimum, the submission of invoices and 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.

Previous wording

Commercial: This category includes commercial, industrial, farm, agricultural, and municipal loans. Commercial loans decreased $19.6 million to $205.9 million at June 30, 2026, compared to $225.5 million at the end of the prior year. On June 30, 2026, the Bank had $97.8 million in tax-free loans compared to $102.0 million at December 31, 2025.

Current wording

Commercial: This category includes commercial, industrial, farm, agricultural, and municipal loans. Commercial loans decreased $28.4 million to $197.1 million at September 30, 2026, compared to $225.5 million at the end of the prior year. On September 30, 2026, the Bank had $97.8 million in tax-free loans compared to $102.0 million at December 31, 2025.

Previous wording

Participations: The Bank may supplement its own commercial loan production by purchasing loan participations. These participations are primarily located in south-central Pennsylvania. On June 30, 2026, the outstanding commercial participations were $96.4 million, or 7.8%, of commercial purpose loans and 6.0% of total gross loans compared to $100.8 million at December 31, 2025, or 8.2%, of commercial purpose loans and 6.5% of total gross loans. The Bank’s total exposure (including outstanding balances and unfunded commitments) to purchased participations is $118.7 million, compared to $129.3 million at December 31, 2025. The commercial loan participations are comprised of $23.6 million of commercial loans and $72.8 million of CRE loans, reported in the respective loan class.

Current wording

Participations: The Bank may supplement its own commercial loan production by purchasing loan participations. These participations are primarily located in south-central Pennsylvania. On September 30, 2026, the outstanding commercial participations were $99.8 million, or 8.1%, of commercial purpose loans and 6.1% of total gross loans compared to $100.8 million at December 31, 2025, or 8.2%, of commercial purpose loans and 6.5% of total gross loans. The Bank’s total exposure (including outstanding balances and unfunded commitments) to purchased participations is $126.3 million, compared to $129.3 million at December 31, 2025. The commercial loan participations are comprised of $22.7 million of commercial loans and $77.1 million of CRE loans, reported in the respective loan class.

Previous wording

Consumer loans: This category had a balance of $8.2 million at June 30, 2026, compared to $9.7 million at prior year-end and is comprised primarily of installment loans and personal lines of credit.

Current wording

Consumer loans: This category had a balance of $11.5 million at September 30, 2026, compared to $9.7 million at prior year-end and is comprised primarily of installment loans and personal lines of credit.

Previous wording

Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans are identified as either a performing or nonperforming rating based on the performance status of the loans. Nonperforming loans are loans that are 90 days or more past due and still accruing. Loans rated 1 – 4 are considered pass credits. Loans that are rated 5-Pass Watch are credits that have been identified as credits that are likely to warrant additional attention and monitoring. Loans rated 6-Other Asset Especially Mentioned (OAEM) or worse begin to receive enhanced monitoring and reporting by the Bank. Loans rated 7-Substandard or 8-Doubtful exhibit the greatest financial weakness and present the greatest possible risk of loss to the Bank. Nonaccrual loans are rated no better than 7-Substandard. The following represent some of the factors used in determining the risk rating of a borrower: cash flow, debt coverage, liquidity, management, and collateral. Risk ratings, for pass credits, are generally reviewed annually for term debt and at renewal for revolving or renewing debt. The Bank monitors overall loan quality of the portfolio by reviewing three primary measurements: (1) loans rated 6-OAEM or worse (collectively “watch list”), (2) delinquent loans, and (3) net-charge-offs.

Current wording

Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans are identified as either a pass or substandard rating based on the performance status of the loans. Substandard consumer loans are loans that are 90 days or more past due and still accruing. Loans rated 1 – 5 are considered pass credits. Loans rated 6-Other Asset Especially Mentioned (OAEM) or worse begin to receive enhanced monitoring and reporting by the Bank. Loans rated 7-Substandard or 8-Doubtful exhibit the greatest financial weakness and present the greatest possible risk of loss to the Bank. Loans rated 9-Loss are considered uncollectable and the loan will be charged-off in the period it is deemed uncollectable. There were no loans in this category. Nonaccrual loans are rated no better than 7-Substandard. The following represent some of the factors used in determining the risk rating of a borrower: cash flow, debt coverage, liquidity, management, and collateral. Risk ratings, for pass credits, are generally reviewed annually for term debt and at renewal for revolving or renewing debt. The Bank monitors overall loan quality of the portfolio by reviewing three primary measurements: (1) loans rated 6-OAEM or worse (collectively “watch list”), (2) delinquent loans, and (3) net-charge-offs.

Previous wording

Watch list loans (commercial loans rated 6, 7 or 8) 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 includes both performing and nonperforming loans. Watch list loans totaled $51.6 million at June 30, 2026 compared to $58.8 million at December 31, 2025. The composition of the watch list (commercial loans rated 6, 7 or 8), by primary collateral, is shown in Note 6 of the accompanying financial statements.

Current wording

Watch list loans (commercial loans rated 6, 7 or 8) 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 includes both performing and nonperforming loans. Watch list loans totaled $51.6 million at September 30, 2026 compared to $58.8 million at December 31, 2025. The composition of the watch list (commercial loans rated 6, 7 or 8), by primary collateral, is shown in Note 6 of the accompanying financial statements and by risk rating below:

Previous wording

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 June 30, 2026, the Bank had loans of $15.0 million (0.9% of gross loans) that exceeded the supervisory loan-to value limit, compared to 1.0% at the prior year end.

Current wording

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 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 September 30, 2026, the Bank had loans of $13.8 million (0.8% of gross loans) that exceeded the supervisory loan-to value limit, compared to 1.0% at the prior year end.

Previous wording

Loan quality, as measured by nonaccrual loans, totaled $17.7 million at June 30, 2026 compared to $8.5 million at December 31, 2025 and the nonperforming loan to total loans ratio was 1.10% at June 30, 2026 compared to 0.55% at December 31, 2025. Loans past due 90-days or more, but still accruing, totaled $5 thousand at June 30, 2026 and December 31, 2025. The increase in nonaccrual loans in 2026 was largely due to one commercial real estate loan for $8.8 million that was put on nonaccrual in the second quarter of 2026. This loan is current on payments as of June 30, 2026 and a specific reserve of $734 thousand has been established for this loan based on its risk rating and collateral values.

Current wording

Loan quality, as measured by nonaccrual loans, totaled $17.8 million at September 30, 2026 compared to $8.5 million at December 31, 2025 and the nonperforming loan to total loans ratio was 1.11% at September 30, 2026 compared to 0.55% at December 31, 2025. Loans past due 90-days or more, but still accruing, totaled $204 thousand at September 30, 2026 compared to $5 thousand at December 31, 2025. The increase in nonaccrual loans in 2026 was largely due to one commercial real estate loan for $8.6 million that was put on nonaccrual in the second quarter of 2026 and is discussed below.

Previous wording

The nonaccrual loans are comprised primarily of two (2) CRE loans to unrelated borrowers totaling $17.4 million. Of these two CRE loans, one is for a matured $7.0 million construction loan on a mixed-use commercial project. During the second quarter, the Bank committed to provide additional funding of up to $2.5 million (with $1.6 million advanced as of June 30, 2026) to fully enclose the property and protect the collateral, and to pay all past due construction costs. In total, $8.6 million is in nonaccrual for this borrower as of June 30, 2026. As part of this funding commitment, a forbearance agreement was signed by the developer that ceased all construction until funding from new sources was acquired, established specific performance criteria for the developer, and established specific remedies for the Bank in the event of non-compliance with the forbearance agreement. Based on a discounted “as-is” appraisal received in the first quarter of 2026 and the additional funding committed, the Bank increased its specific reserve from $1.0 million on March 31, 2026, to $1.2 million on June 30, 2026. The second CRE loan totals $8.8 million and is secured by six (6) commercial office buildings. This loan is a purchased participation loan where the Bank is not the lead lender. The loan was placed on nonaccrual status during the second quarter of 2026, and as of June 30, 2026, the Bank has a specific reserve of $734 thousand based on a recent appraisal.

Current wording

The nonperforming loans are comprised primarily of three (3) CRE loans totaling $17.5 million to two (2) unrelated borrowers. The Bank has two (2) construction loans to one (1) borrower totaling $8.9 million on a mixed-use commercial project. One of these loans is for $7.0 million and has matured. The second loan is for $1.9 million, part of a $2.5 million commitment, made during the second quarter of 2026 to provide additional funding to fully enclose the property and protect the collateral, and to pay all past due construction costs. As part of this funding commitment, a forbearance agreement was signed by the developer that ceased all construction until funding from new sources was acquired, established specific performance criteria for the developer, and established specific remedies for the Bank in the event of non-compliance with the forbearance agreement. Based on a discounted “as-is” appraisal received in the third quarter of 2026, the Bank has maintained its specific reserve of $1.2 million on September 30, 2026 for this loan. The loan to the second borrower is for an $8.6 million CRE loan and is secured by six (6) commercial office buildings. This loan is a purchased participation loan where the Bank is not the lead lender. The loan was placed on nonaccrual status during the second quarter of 2026, and as of September 30, 2026, the Bank has a specific reserve of $628 thousand.

Previous wording

During the second quarter of 2026, the Bank provided modifications to two unrelated BEFD. One $7.0 million CRE loan was modified with a term extension that had a more-than-significant payment delay. As of June 30, 2026, this loan had matured and repayment has been delayed under the terms of a forbearance agreement. As part of the forbearance agreement, the Bank has committed to lend $2.5 million to the borrower and had advanced $1.6 million as of June 30, 2026, for a total of $8.6 million outstanding to this BEFD as of June 30, 2026. The payment terms of the new loan are also covered by the terms of the forbearance agreement. This loan is on nonaccrual status as of June 30, 2026, and a $1.2 million specific reserve has been established for this loan. The second loan modification was for an $8.8 million CRE loan that was granted interest only payments until the third quarter of 2026 when it is scheduled to return to full principal and interest payments. The Bank has no commitment to lend additional amounts to this borrower. As of June 30, 2026, this loan was on nonaccrual and had a specific reserve of $734 thousand.

Current wording

During the nine months ending September 30, 2026, the Bank provided modifications to two unrelated BEFD. One $7.0 million CRE construction loan was modified with a term extension that had a more-than-insignificant payment delay. As of September 30, 2026, this loan had matured and repayment has been delayed under the terms of a forbearance agreement. As part of the forbearance agreement, the Bank has committed to lend and additional $2.5 million to the borrower and had advanced $1.9 million as of September 30, 2026, for a total of $8.9 million outstanding to this BEFD as of September 30, 2026. The payment terms of the new loan are also covered by the terms of the forbearance agreement. This loan is on nonaccrual status as of September 30, 2026, and a $1.2 million specific reserve has been established for this loan. The second loan modification was for an $8.6 million CRE loan that was granted a modified payment schedule. The Bank has no commitment to lend additional amounts to this borrower. As of September 30, 2026, this loan was on nonaccrual status and had a specific reserve of $628 thousand.

Previous wording

The ACL for pooled loans is the sum of the quantitative and qualitative loss estimates. At June 30, 2026, the pooled loan reserve was $19.9 million and approximately 68% of the pooled reserve was from the qualitative component. On June 30, 2026 the Bank had specific reserves of $1.9 million on two CRE loans compared to $1.2 million of specific reserves as of December 31, 2025.

Current wording

The ACL for pooled loans is the sum of the quantitative and qualitative loss estimates. At September 30, 2026, the pooled loan reserve was $19.6 million and approximately 70% of the pooled reserve was from the qualitative component. On September 30, 2026 the Bank had specific reserves of $1.8 million compared to $1.2 million as of December 31, 2025.

Previous wording

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. The ACL for unfunded commitments was $2.0 million on June 30, 2026 and $1.9 million on December 31, 2025.

Current wording

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. The ACL for unfunded commitments was $3.4 million on September 30, 2026 and $1.9 million on December 31, 2025. The increase to the ACL for unfunded commitments was due to the establishment of a $1.5 million reserve on a letter of credit related to a previously discussed non-accrual CRE construction loan.

Previous wording

Total deposits increased $88.8 million during the first six months of 2026 to $1.925 billion. Noninterest checking increased $30.9 million to $341.1 million (17.7% of total deposits), primarily in municipal and small business accounts. Interest-bearing checking decreased by $22.8 million, primarily in retail deposits, while the Bank’s money management product increased $76.8 million across all sectors. Time deposits increased $4.3 million.

Current wording

Total deposits increased $121.6 million during the first nine months of 2026 to $1.957 billion. Noninterest checking increased $70.2 million to $380.5 million (19.4% of total deposits), primarily in municipal and small business accounts. Interest-bearing checking decreased by $17.2 million, primarily in retail deposits, while the Bank’s money management product increased $69.2 million across all sectors. Time deposits increased $0.6 million.

Previous wording

As of June 30, 2026, the Bank had deposits of $289.5 million placed in a reciprocal deposit program ($105.5 million in interest-bearing checking and $184.0 million in money management) and $37.9 million in a reciprocal time deposit 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 for regulatory reporting purposes. At June 30, 2026, the Bank’s reciprocal deposits were 15.3% of the Bank’s total liabilities compared to 17.0% at the previous year-end.

Current wording

As of September 30, 2026, the Bank had deposits of $326.0 million placed in a reciprocal deposit program ($141.3 million in interest-bearing checking and $184.7 million in money management) and $35.0 million in a reciprocal time deposit 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. In July 2026, the 21st Century Road to Housing Act (the Act) became law expanding the limit on the use of reciprocal deposits that can be excluded from brokered deposit treatment by banks. The Act prescribes a tiered calculation for reciprocal deposits. At September 30, 2026, the Bank’s reciprocal deposits were 16.3% of the Bank’s total liabilities compared to 17.0% at the previous year-end.

Previous wording

At June 30, 2026, the Corporation had $11.0 million of unsecured subordinated debt notes remaining outstanding of which $6.0 million mature on September 1, 2030 and $5.0 million mature on September 1, 2035. The notes are recorded on the consolidated balance sheet net of remaining debt issuance costs totaling $145 thousand 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 $6.0 million have a variable interest rate of 90-day Average Secured Overnight Financing Rate (SOFR) plus 4.93% and resets quarterly. The subordinated notes totaling $5.0 million have a fixed interest rate of 5.25% through June 29, 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 at par, 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.

Current wording

At September 30, 2026, the Corporation had $11.0 million of unsecured subordinated debt notes remaining outstanding of which $6.0 million mature on September 1, 2030 and $5.0 million mature on September 1, 2035. The notes are recorded on the consolidated balance sheet net of remaining debt issuance costs totaling $140 thousand 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 $6.0 million have a variable interest rate of 90-day Average Secured Overnight Financing Rate (SOFR) plus 4.93% and resets quarterly. The subordinated notes totaling $5.0 million have a fixed interest rate of 5.25% through June 29, 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 at par, 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.

Previous wording

Total shareholders’ equity increased $8.6 million to $183.8 million as of June 30, 2026 from December 31, 2025. Retained earnings increased $10.2 million in 2026, with net income of $13.2 million partially offset by cash dividends of $3.0 million. Accumulated other comprehensive loss (AOCL) increased $1.9 million since year-end 2025. The Corporation’s Dividend Reinvestment Plan (DRIP) added $36 thousand in new capital from optional cash contributions and $495 thousand from the reinvestment of quarterly dividends. The Corporation’s dividend payout ratio was 22.70% for the first six months of 2026 compared to 29.39% for the same period in 2025.

Current wording

Total shareholders’ equity increased $2.5 million to $177.7 million as of September 30, 2026 from December 31, 2025. Retained earnings increased $17.2 million in 2026, with net income of $21.8 million partially offset by cash dividends of $4.5 million. Accumulated other comprehensive loss (AOCL) increased $15.2 million since year-end 2025. The Corporation’s Dividend Reinvestment Plan (DRIP) added $79 thousand in new capital from optional cash contributions and $742 thousand from the reinvestment of quarterly dividends. The Corporation’s dividend payout ratio was 20.83% for the first nine months of 2026 compared to 28.76% for the same period in 2025.

Previous wording

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 second quarter of 2026, the Corporation paid a $0.34 per share dividend, compared to $0.33 paid in the first quarter of 2026. On July 16, 2026, the Board of Directors declared a $0.34 per share regular quarterly dividend for the third quarter of 2026, which will be paid on August 26, 2026. This represents a 3.0% increase over the third quarter 2025 dividend.

Current wording

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 third quarter of 2026, the Corporation paid a $0.34 per share dividend, compared to $0.34 paid in the second quarter of 2026. On October 15, 2026, the Board of Directors declared a $0.34 per share regular quarterly dividend for the fourth quarter of 2026, which will be paid on November 25, 2026. This represents a 3.0% increase over the fourth quarter 2025 dividend.

Previous wording

In December 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. During the first six months of 2026, 10,950 shares were purchased to fund the quarterly dividend reinvestment plan.

Current wording

In December 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. During the first nine months of 2026, 14,950 shares were purchased to fund the quarterly dividend reinvestment plan and employee stock purchase plan. No shares were repurchased during the third quarter of 2026.

Previous wording

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 shown in the table below. 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 June 30, 2026 was 5.73% 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 June 30, 2026, the Bank was “well capitalized.”

Current wording

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 shown in the table below. 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 September 30, 2026 was 5.95% 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 September 30, 2026, the Bank was “well capitalized.”

Previous wording

In 2026, the federal banking agencies amended the CBLR to decrease the CBLR ratio from 9% to 8% effective July 1, 2026. The revisions to the CBLR also provide for a longer grace period for banks that fall out of compliance with the new ratio to regain compliance. Adoption of the new CBLR may be made on the bank’s quarterly call report. The Bank does not expect to adopt the new CBLR ratio.

Current wording

In 2026, the federal banking agencies amended the CBLR to decrease the CBLR ratio from 9% to 8% effective July 1, 2026. The revisions to the CBLR also provide for a longer grace period for banks that fall out of compliance with the new ratio to regain compliance. Adoption of the new CBLR may be made on the bank’s quarterly call report. The Bank did not adopt the new CBLR ratio.

Previous wording

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 ($81.3 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 and reciprocal deposits via its Wealth Management service.

Current wording

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 ($73.3 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 and reciprocal deposits via its Wealth Management service.