Franklin Financial Services Corp: Form 10-Q for the period ended Jun 30, 2026

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

For the Three and Six Months Ended June 30, 2026 and 2025

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 2025 Annual Report on Form 10-K in regards to application or related judgments and estimates used as of June 30, 2026. Please refer to Item 7 of the Corporation’s 2025 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 and six months ended June 30, 2026 are as follows:

Net income: $6.6 million (basic and diluted earnings per share $1.47) for the second quarter of 2026 compared to $5.9 million (basic and diluted earnings per share $1.32) for the second quarter of 2025, an increase of 11.9%. Net income for the first six months of 2026 was $13.2 million (basic earnings per share $2.95 and diluted earnings per share $2.94) compared to $9.8 million (basic earnings per share $2.21 and diluted earnings per share $2.20) for the same period in 2025, an increase of 34.8%

Wealth Management: $2.6 million in fees for the second quarter of 2026, an increase of 6.1% from $2.4 million in the second quarter of 2025. Fees were $4.9 million for the first six months of 2026 compared to $4.6 million for the first six months of 2025, an increase of 5.2%. Assets under management were $1.481 billion on June 30, 2026.

Asset Growth: $2.335 billion in total assets on June 30, 2026, an increase of 4.3% from $2.239 billion at year-end 2025.

Loan Growth: Net loans totaled $1.589 billion on June 30, 2026, an increase of 3.1% from $1.541 billion on December 31, 2025.

Deposit Growth: Total deposits of $1.925 billion, an increase of 4.8% from $1.836 billion on December 31, 2025.

Quarterly Performance Metrics: Return on Average Assets (ROA) of 1.14%, Return on Average Equity (ROE) of 14.80%, and Net Interest Margin (NIM) of 3.50%, on an annualized basis for the second quarter of 2026, compared to an ROA of 1.04%, ROE of 15.64% and NIM of 3.21% for the second quarter of 2025.

On July 16, 2026, the Board of Directors declared $0.34 per share regular quarterly cash dividend for the third quarter of 2026 to be paid on August 26, 2026, to shareholders of record at the close of business on August 7, 2026. This dividend represents a 3.0% increase over the third quarter 2025 dividend.

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

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

(Dollars in thousands, except per share)

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 June 30, 2026 to the three months ended June 30, 2025:

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.

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%.

(Dollars in thousands)

32

Provision for Credit Losses

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.

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.

Noninterest Income

For the second quarter of 2026, noninterest income increased $46 thousand compared to the same period in 2025. Wealth Management fees increased, primarily because of growth in assets under management. Nearly all categories of noninterest income increased compared to the prior year period, but increases were partially offset by a decrease in other income from a state tax refund received in 2025.

The following table presents a comparison of noninterest income for the three months ended June 30, 2026 and 2025:

(Dollars in thousands)

Noninterest Expense

Noninterest expense for the second quarter of 2026 increased $220 thousand compared to the same period in 2025. Salary expense increased $243 thousand. Employee benefits decreased, primarily in health insurance ($300 thousand). Other expense increased primarily from armored car expense and in loan collection expense.

The following table presents a comparison of noninterest expense for the three months ended June 30, 2026 and 2025:

(Dollars in thousands)

33

Provision for Income Taxes

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.

Comparison of the six months ended June 30, 2026 to the six months ended June 30, 2025:

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.

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%.

(Dollars in thousands)

Provision for Credit Losses

For the first half of 2026, the provision for credit losses on loans was $1.8 million compared to $1.5 million for the same period in 2025. The increase is due primarily to an additional $1.0 million of specific reserves on two collateral dependent loans to unrelated borrowers, which was partially offset by a change in management’s reassessment of the municipal loans portfolio and qualitative factor decreases for municipal loans. 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.

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.

Noninterest Income

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.

The following table presents a comparison of noninterest income for the six months ended June 30, 2026 and 2025:

(Dollars in thousands)

Noninterest Expense

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.

The following table presents a comparison of noninterest expense for the six months ended June 30, 2026 and 2025:

(Dollars in thousands)

Provision for Income Taxes

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.

Financial Condition

Cash and Cash Equivalents:

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).

Investment Securities:

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.

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 four 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 $9.0 million of restricted stock at June 30, 2026 and $8.9 million at December 31, 2025. Except for $30 thousand, this investment represents stock in Federal Home Loan Bank of Pittsburgh (the FHLB). 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 no 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:

(Dollars in thousands)

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 $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.

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.

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.

The following table presents the largest non-owner occupied CRE by collateral:

(Dollars in thousands)

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.

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.

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

(Dollars in thousands)

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.

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.

Loan Quality:

Management utilizes a risk rating scale ranging from 1-Prime to 9-Loss to evaluate loan quality. This risk rating scale is used primarily for commercial purpose loans. Consumer purpose loans are identified as either a 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.

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.

The composition of the Watch list by risk rating is shown below:

(Dollars in thousands)

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 information on the age 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, nonaccrual loans, or impaired loans. Further, it is the Bank’s policy to discontinue accruing interest on loans that are not adequately secured and in the process of collection. Upon determination of nonaccrual status, the Bank subtracts any current year accrued and unpaid interest from its income, and any prior year accrued and unpaid interest from the allowance for loan losses. Management continually monitors the status of nonperforming loans, the value of any collateral and potential for 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 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.

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.

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.

The Bank may modify loans to borrowers experiencing financial difficulty (BEFD) by providing modifications such as principal forgiveness, term extension, an other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit loss. The Bank may also provide multiple types of concessions on one loan.

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.

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 Corporation has also elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. A loan is considered collateral-dependent when the repayment is expected to be provided primarily through the sale or operation of the collateral.

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 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.

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

The following table shows the allocation of the ACL and other loan performance ratios, by class, as of June 30, 2026 and December 31, 2025:

(Dollars in thousands)

Deposits:

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.

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.

In July 2026, the 21st Century Road to Housing Act (the Act) became law. The Act expands 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 and is expected to more than double the Bank’s capacity for non-brokered reciprocal deposits.

The Bank estimates that approximately 90% of its deposits are FDIC insured or collateralized as of June 30, 2026, compared to 87% at December 31, 2025.

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

(Dollars in thousands)

Borrowings:

At June 30, 2026, the Bank had $200.0 million in total borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB), with a rate of 4.32%, due January 12, 2027. The Bank’s decision on how this borrowing is paid off or restructured will be made closer to the maturity date.

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.

Shareholders’ Equity:

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.

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.

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.

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.”

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.

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.

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

The following table summarizes the regulatory capital requirements and results as of June 30, 2026 and December 31, 2025 for the Corporation and the Bank:

(Dollars in thousands)

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

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

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

(4) Tier 1 capital / average quarterly assets

Economy

The Corporation’s primary market area includes Franklin, Fulton, Cumberland, Huntingdon, and Dauphin Counties, 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 ($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.

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 also established credit at the Federal Reserve Discount Window and unsecured lines of credit at correspondent banks.

The following table shows the Bank’s available liquidity from borrowing sources at June 30, 2026.

(Dollars in thousands)

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.

(Dollars in thousands)

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 2025 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.

There were no material changes in the Corporation’s exposure to market risk during the six months ended June 30, 2026. For more information on market risk refer to the Corporation’s 2025 Annual Report on Form 10-K.

Evaluation of Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2026, the Corporation’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Corporation’s internal control over financial reporting during the quarterly period ended June 30, 2026, 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.

There were no material changes in the Corporation’s risk factors during the six months ended June 30, 2026. For more information, refer to the Corporation’s 2025 Annual Report on Form 10-K.