EFSI 10-K & 10-Q changes, risk factors and insider trading

In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks of the Company and its customers and third-party service providers. The secure processing, maintenance, and use of this information is critical to the Company's operations and business strategy. In addition, the Company relies heavily on communications and information systems to conduct its business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan, and other systems. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers, and data from damage or unauthorized access. To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but the Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers. The continued evolution and increased usage of artificial intelligence technologies may further increase these risks. The Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged, or disclosed. A breach in security or other failure could result in legal claims, regulatory penalties, disruption in operations, increased expenses, loss of customers and business partners, and damage to the Company’s reputation, which could adversely affect its business and financial condition. Furthermore, as cyber threats continue to evolve and increase, the Company may be required to expend significant additional financial and operational resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services.services, including artificial intelligence. The effective use of technology increases efficiency and enables financial institutions and other firms to better serve customers and to reduce costs. The pace of these technological changes has increased in the “Fintech” environment, in which industry changing products and services are often introduced and adopted, including innovative ways that customers can make payments, access products, and manage accounts. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services, which could entail significant time, resources and additional risk to develop or adopt, or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

The Company’s banking subsidiary faces competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. Certain divisions within the banking subsidiary face competition from wealth management and investment brokerage firms. A number of these banks and other financial institutions are significantly larger and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. In addition, the Company faces competition from market place lenders and other financial technology firms, which may provide competitive services quickly and in innovative ways and may have fewer regulatory constraints and lower cost structures. ThisThe financial services industry continues to undergo rapid technological change with introductions of new technologies and services, including new ways that customers can make payments or manage their accounts, including through use of stablecoins and other forms of cryptocurrency, tokens, and other digital assets or alternative payment systems.This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.

The Company’s branches are located in the counties of Clarke, Frederick, Fauquier, Loudoun, and Loudoun,Fairfax the towns of Purcellville, Leesburg and Ashburn, and the City of Winchester. The Company also operates loan production offices in the counties of Fairfax (Virginia) as well asand Frederick (Maryland). Because our lending is concentrated in these markets, we will be affected by the general economic conditions in these areas. Changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. Over the past several years, the growth in economic activity and in the demand for goods and services, coupled with labor shortages, supply chain disruptions and other factors, has contributed to rising inflationary pressures, the Federal Reserve’s responsive interest rate hikes, and the risk of recession. A decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact the demand for banking products and services generally, which could negatively affect our financial condition and performance.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. If such events were to occur again in the future and result in the receivership of financial institutions, there is no guarantee that the systemic risk exception would be invoked to allow the FDIC to complete its resolution of such financial institutions in a manner that fully protects depositors or counterparties. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.

The Company expects that the Trump administration will seek to implement a regulatory agenda that could reduce and streamline certain prudential and regulatory requirements applicable to banking organizations at a federal level. At this time, however, it is significantlyunclear different than that ofwhat the Bidenimpacts administration, impactingto the rulemaking, supervision, examination, and enforcement priorities of the federal banking agencies.agencies Atwill this time, it is unclearbe, what laws, regulations, and policies may changechange, and whether future changes or uncertainty surrounding future changes will adversely affect the Company’s operating environmentenvironment, and therefore its business, financial condition, and results of operations.

The Bank is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which it must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. Under the Dodd-Frank Act, the federal banking agencies have established stricter capital requirements and leverage limits for banks and bank holding companies that are based on the Basel III regulatory capital reforms. The Basel III Capital Rules require banking organizations to maintain significantly more capital and adoptedadopt more demanding regulatory capital risk weightings and calculations. While the recently passed Economic Growth Act requires that federal banking regulators establish a simplified leverage capital framework for smaller banks, these more stringent capital requirements could, among other things, limit banking operations and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The Bank believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the Basel III Final rules. However, if the Bank fails to meet these minimum capital guidelines and/or other regulatory requirements, the Bank could be subject to regulatory restrictions, including limitations on paying dividends to the holding company for shareholder dividends and share repurchases and paying discretionary bonuses, or experience other adverse consequences that could cause its financial condition to be materially and adversely affected.

Increasing scrutiny and evolvingEvolving expectations from customers, regulators, investors, and other stakeholders with respect to environmental, social and governance ("ESG") practices may impose additional costs on the Company or expose it to new or additional risks.

Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESGcorporate practicessocial responsibility, environmental concerns, governance and disclosuresrelated especiallypractices. Failure to act responsibly or in line with regulatory and stakeholder expectations in a number of areas, such as they relate to climate risk, human capital and hiring practices, thehuman diversity of the work force, racial and social justice issues,rights, support for local communities, and corporate governance and transparency.transparency, Newcould rulesnegatively impact the Company’s reputation, ability to do business with certain partners, and regulationsstock alsoprice. could result in new or more stringent forms of ESG oversight and reporting, diligence, and disclosure. Complying with ESG-relatedThe rules, regulations and/or stakeholder expectations of regulators, customers, investors, associates, and other stakeholders with respect to these matters continue to evolve, which could result in increases to the Company’s overall operational costs and increased management time and attention. Further, failureas these rules, regulations and expectations continue to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards or to act responsibly in these areas could negatively impactevolve, the Company’s reputation,stakeholders abilitymay tohave dodiffering businessviews withon certainrelated partners,matters. andScrutiny, stockor price.the Conversely,perception ifthat the Company’s efforts around diversity and inclusion and other ESG-related areas are perceived as too ambitious,ambitious or misdirected, could expose the Company mayto bethe subjectrisk toof investigations, litigation and other proceedings andor reputational harm. If the Company is unable to meet its reputationsocial- mayor beenvironmentally-related damaged.goals Adverseor incidentsevolving and divergent stakeholder expectations and industry standards, it could negatively impact the value of the Company’s brand, the cost of its operations and/or relationships with customers, investors or employees, any of which could adversely affect its business and results.

Although our common shares are listed for trading underon the symbolNasdaq “EFSI,”Capital Market, the trading volume in our common shares hasmay substantiallybe less liquiditylower than manyother otherlarger financial institutions or publicly traded companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that volume of trading in our common shares will increase in the future.

Our stock price has fluctuated from a low of $27.90 to a high of $36.40 between January 3, 2024 and January 2, 2025. On February 10, 2025, the Company completed a public offering increasing its common shares outstanding by 1,796,875 shares, or 50.2%, at a price of $32.00. Volatility in the market price of our common stock may negatively impact the price at withwhich our common stock may be sold and may also negatively impact the timing of any sale. The market price of our common stock may continue to fluctuate widely in response to a variety of factors including the risk factors described herein and, among other things:

changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws or regulations, including as a result of the 2024 U.S. presidential electionregulations;

The purpose of this discussion is to focus on certain information relevant to the important factors affecting theCompany’s financial condition, results of operations, liquidity and capital resources of Eagle Financial Services, Inc. (the “Company”).resources. This discussion should be read in conjunction with the Company’s Audited Consolidated Financial Statements and thenotes Notes to the Consolidated Financial Statementsthereto presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. Operating results for the year ended December 31, 2025 are not necessarily indicative of the results for any future period.

The Company is a bank holding company which owns 100% of the stock of Bank of Clarke (the “Bank”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank. The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and corporate,mortgage-backed securities, municipal and U.S. government agency securities. The Bank also operates a wealth management division, which provides both a full-service trust department and a separate brokerage area. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law. At December 31, 2024, the Company had total assets of $1.87 billion, net loans of $1.45 billion, total deposits of $1.58 billion and shareholders’ equity of $119.0 million. The Company’s net income was $15.3 million for the year ended December 31, 2024.

The Bank is a locally managedmanaged, financialcommercial focused banking institution asoperating wellin asseveral predominantly locally owned. Whileof the country's most attractive markets. The Company expanded its ownership to institutional investors thoughthrough a public offering of its common stock in February 2025, its operating strategy remains the same. The public offering increasedincreasing the number of shares outstanding by 50% and added approximately $53.5 million in capital. This operating strategy allows the Bank to be flexible and responsive in the products and services it offers and to further grow by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank strives to fund these loans through deposits gathered from local residents and businesses. The Bank prices its deposits by comparing alternative sources of funds and selecting the lowest cost available. When deposits are not adequate to fund asset growth, the Bank relies on borrowings, both short and long term. The Bank’s primary source of borrowed funds is the Federal Home Loan Bank of Atlanta which offers numerous terms and rate structures to the Bank.

As interest rates change, the Bank attempts to maintain its net interest margin. This is accomplished by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through the Bank of Clarke Wealth Management Division, which is the Bank’s investment management division that offers both trust services and investment sales, mortgage originationsoriginations, loan sales to the secondary market, and deposit operations. The Bank also incurs noninterest expenses associated with compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.

The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, joint approval of Co-Approval officers (Executive, Regional Credit Officer, Small Business Credit Officer), and a director loan committee. Lending limits for individuals are set by the Board of Directors and are determined by loan purpose, collateral type, and internal risk rating of the borrower. The highest individual authority (Executive) is assigned to the Bank’s President/ Chief Executive Officer, Chief Banking Officer and Chief Credit Officer (approval authority only). Two Executive officers may combine their authority to approve loan requests to borrowers with credit exposure up to $10.0 million on a secured basis and $6.0 million unsecured. Three Executive officers may combine to approve loan requests to borrowers with credit exposure up to $15.0 million on a secured basis and $9.0 million unsecured. Consumer Central Lenders are individual lenders who have been assigned to an Approval Category (A through F) based on their level of experience and job function. Consumer Central Lenders can co-approve consumer, home equity lines of credit and home equity loan requests up to their stated authorities. Officers in Categories A through F have lesser authorities and with approval of an Executive officer may extend loans to borrowers with exposure of $5.0 million on a secured basis and $3.0 million unsecured. Officers in Categories A through F can also utilize the co-approval of the Regional and Small Business Credit Officers to extend loans with exposures up to $2.5 million and $1.5 million, respectively on a secured basis, and up to $1 million and $750 thousand, respectively on an unsecured basis. Loans exceeding $15.0 million and up to the Bank’s legal lending limit can be approved by the Risk Committee consisting of four directors (three directors constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management. The following sections discuss the major loan categories within the total loan portfolio:

The Bank's marine loan portfolio is comprised of originated retail loans. InThe Company ceased accepting new marine business in August 2023, theupon Companycompletion completedof a sale of specific assets from its marine lending segment and reduced its workforce associated with the marine lending division, as it ceased accepting new marine lending business. As part of the sale, the Company sold its interest in marine vessel floor plan loans, its rights to service loans that had been sold to secondary market investors prior to the date of sale, and other assets that were not individually significant.segment. Subsequent to the sale the Company retained ownership of its portfolio of marine vessel retail loans, which continue to constitute a significant portion of the Company's assets, revenues, and earnings. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid. Retail loans were generally limited to premium manufacturers with established relationships with the Company which have a vested interest in the secondary market pricing of their respective brand due to the limited inventory available for resale. Consequently, while not contractually committed, manufacturers will often support secondary resale values which can have the effect of reducing losses from non-performing retail marine loans. Retail borrowers generally have very high credit scores, substantial down payments, substantial net worth, personal liquidity, and excess cash flow.

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)., which requires us to make estimates and assumptions. Actual results could differ from those estimates. The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change. The accounting estimate with the greatest uncertainty and susceptibility to significant near-term change for the Company is the allowance for credit losses on loans.

This report refers to certain financial measures that are computed under a basis other than GAAP ("non-GAAP"). The Company uses certain non-GAAP financial measures, including non-GAAP net income, non-GAAP noninterest income, non-GAAP earnings per share, non-GAAP return on average equity and average assets, tax-equivalent net interest income and efficiency ratio, to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP.GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.

Return on average assets (“ROA”) measures how efficiently the Company uses its assets to produce net income. Factors reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company, on an annualized basis, was 0.85% and 0.54% for 2024 and 2023, respectively.

Return on average equity (“ROE”) measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by the shareholders. The ROE for the Company was 13.77% and 9.05% for 2024 and 2023, respectively.

Average Balances, Income and Expenses, Yields and Rates (Tax-Equivalent Basis)

The purpose of this discussion is to focus on certain information relevant to the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Audited Consolidated Financial Statements and notes thereto included in the 2025 Form 10-K, and in conjunction with the Unaudited Consolidated Financial Statements and notes thereto presented in Part I, Item 1, Financial Statements, of this Form 10-Q. Operating results for the three and six months ended MarchJune 31,30, 2026 are not necessarily indicative of the results for the full-year ending December 31, 2026 or any future period.

At MarchJune 31,30, 2026, the Company had total assets of $1.84$1.85 billion, net loans of $1.44$1.48 billion, total deposits of $1.60 billion, and shareholders’ equity of $190.3$193.9 million.

Our most significant policies are described in in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to our audited financial statements for the year ended December 31, 2025, included in the Company's 2025 Annual Report on Form 10-K filed with the SEC. There have been no changes since that time.

ThereThe wereCompany noexecuted significant non-recurring transactions executedduring duringthe second quarter of 2026 and the first quarter of 20262025 that substantiallysignificantly impacted the Company's operating results,results unlike duringfor the 2025respective quarter.periods. In May 2026, the Company sold its membership interest in Bearing Insurance Group, LLC ("Bearing") to an unaffiliated third party and recognized a pre-tax gain of $3.5 million. During the threefirst monthsquarter ended March 31,of 2025, the Company executed balance sheet repositioning transactions and recorded a realized loss on the sale of the available for sale securities totaling $12.4 million. ThisThese losstransactions significantly impacted the Company's operating results and certain performance metrics and ratios for the three months ended MarchJune 31,30, 2026 and the six months ended June 30, 2026 and 2025.

The following tabletables presentspresent a summarized consolidated statement of operations for the periods indicated:

(1) Adjusted to exclude the lossgain on sale of securitiesother assets in connection with the Company's balancesale sheetof repositioningits transactionsmembership interest in Bearing during the three months ended MarchJune 31,30, 2025.2026. See "Non-GAAP Financial Measures" for a reconciliation to comparable measures calculated in accordance with GAAP.

TheDuring the six months ended June 30, 2026 the Company's net income increased during the three months ended March 31, 2026, compared to the threesix months ended MarchJune 31,30, 2025 primarily due to the loss on the sale of available for sale securities totaling $12.4 million, or $9.8 million, net of tax, recognized during the prior year period. The first2026 quarteryear-to-date of 2026period also experiencedincreased andue increaseto inimproved net interest income,income and gain on sale of other assets, which was partiallymostly offset by higher noninterest expenses and provision for credit losses over the corresponding 2025 period.

(1) Adjusted to exclude the gain on sale of other assets in connection with the Company's second quarter 2026 sale of its membership interest in Bearing and the loss on sale of securities in connection with the Company's balance sheet repositioning transactionsduringtransactions during the threefirst monthsquarter ended March 31,of 2025. See "Non-GAAP Financial Measures" for a reconciliation to comparable measures calculated in accordance with GAAP.

The following table shows average balance, interest, and yield/rate information, as well as net interest margin on a tax- equivalent basis for the three months ended MarchJune 31,30, 2026 and 2025 (dollars in thousands):

The year-over-year improvements in net interest income, tax-equivalent net interest income, net interest spread, and net interest margin primarily reflect a decrease indemonstrate the average balances of interest-bearing liabilities and reductions in the average rates paid. Additionally, the impactbenefits of the balance sheet repositioning strategy completed in March 2025, pursuant toin which the Company raised capital, increased cash on hand and replaced lower-yielding investment securities with higher yielding securities,securities. The Company has deployed capital to reduce its reliance on wholesale borrowings and anfor increasemeaningful inloan the average yield earned on loans contributed to the increase in net interest income during the three months ended March 31, 2026.growth.

Net interest income, on a tax-equivalent basis, was $15.9$17.0 million and $13.4$15.7 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively, an increase of $2.6$1.3 million, or 19.2%.8.0%. For the six months ended June 30, 2026 and 2025, tax-equivalent net interest income was $32.9 million and $29.1 million, respectively, an increase of $3.8 million, or 13.1%.

The Company's net interest spread and net interest margin increased 6750 basis points and 6544 basis points, respectively, for the three months ended MarchJune 31,30, 2026 compared to the three months ended MarchJune 31,30, 2025. TheseFor increasesthe aresix primarilymonths attributableended June 30, 2026, the Company's net interest spread and net interest margin increased 58 basis points and 54 basis points, respectively, compared to thesix repositioningmonths ofended theJune securities30, portfolio and reductions in the average rate paid on and average balances of time deposits.2025. Ongoing margin pressures include loan demand unpredictability, deposit competition, and elevated funding costs.

Total average balance of securities increased by $4.4$329 thousand and $2.4 million for the three and six months ended MarchJune 31,30, 20262026, respectively, from the average balance in the prior year period due to purchases exceeding routine paydowns and maturities in the portfolio.periods. The average yield on securities increaseddecreased 141three basis points during the three months ended MarchJune 31,30, 2026 compared to the three months ended MarchJune 31,30, 20252025. During the six months ended June 30, 2026, the average yield on securities increased 70 basis points compared to the six months ended June 30, 2025, reflecting the sale of lower-yielding securities and reinvestment into higher-yielding securities in the first quarter of 2025.

The total average loan balances for the three months ended MarchJune 31,30, 2026 remainedincreased level$55.2 withmillion and for the six months ended June 30, 2026 increased $29.4 million compared to the same periodperiods in 20252025. reflectingThe increase in average balances reflect strong growth in commercial real estateestate, construction, commercial and industrial, and home equity lines of credit loan portfolios, offset by continued amortization of the marine loan portfolio. The year-to-date change was also impacted by the sale of a pool of mortgage loans totaling $18.8 million early in the first quarter of 2025 ahead of the Company's public offering, continued amortization of the marine loan portfolio as the Company is no longer accepting new marine business, and a net decrease in the commercial and industrial loan portfolio largely due to sales of SBA loans to the secondary market.2025.

Total average balance of federal funds sold and interest-bearing deposits in other banks decreased $46.7$133.9 million and $90.5 million during the three and six months ended MarchJune 31,30, 20262026, respectively, compared to the three and six months ended MarchJune 31,30, 2025, largely due to loan growth and the payoff of maturing borrowings.

Total average interest-bearing deposit balances for three and six months ended MarchJune 31,30, 2026 decreased $21.2$46.3 million and $33.8 million from the same periodperiods in 2025. TimeFor the three months ended June 30, 2026, average balances of time deposits and savings accounts decreased $60.6$67.3 million and $10.3$7.7 million, respectively, partially offset by NOW and money market accounts which increased $36.9$10.3 million and $12.8$18.5 million, respectively. The average rate paid on interest-bearing deposits decreased 3931 basis points and 35 basis points during the three and six months ended MarchJune 31,30, 20262026, respectively, compared to the three and six months ended MarchJune 31,30, 2025 reflecting lower average rates paid on time deposits.

The average balance of FHLB advances decreased $82.1$40.8 million and $61.4 million during the three and six months ended MarchJune 31,30, 20262026, respectively, compared to the three and six months ended MarchJune 31,30, 2025 due to maturing advances that were not replaced with new borrowings. During the three months ended March 31, 20262026, the Company's remaining FHLB borrowings were fully paid down, which materially reduced our reliance on wholesale funding.

The increase in the provision for credit losses for the three and six months ended MarchJune 31,30, 2026 and 2025 included the impact of neta losseschange in historical loss factors driven by charge-offs, higher qualitative factors adjustments including forecasted economic conditions and loan growth, and higher specific reserve allocations on individually evaluated nonaccrual loans and reflected management's estimate of forecasted economic conditions and changes in loan balances.loans.

DuringFor both the three and six months ended MarchJune 31,30, 2026, net recoveriescharge-offs totaled $34$2.2 thousandmillion, compared to net charge-offs totaling $891$159 thousand and $1.1 million during the three and six months ended MarchJune 31,30, 2025.2025, respectively. The higher qualitative factor adjustment was primarily driven by loan growth in the commercial and industrial and construction loan portfolios.

Total noninterest income (loss) was $4.9$8.6 million and $(8.6)$4.9 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively, and $13.5 million and $(3.6) million for the six months ended June 30, 2026 and 2025, respectively. Management reviews the activities which generate noninterest income on an ongoing basis. The following table provides the components of noninterest income for the three and six months ended MarchJune 31,30, 2026 and 2025, which are included within the respective Consolidated Statements of Operations headings.

Wealth management fee income increased from 2025 to 2026. Wealth management fee income is comprised of income from fiduciary activities as well as commissions from the sale of non-deposit investment products. The amount of income from fiduciary activities is determined by the number of active accounts and total assets under management,management. whichSince hasJune 30, 2025, assets under management increased $48.5$55.0 million, or 9.22%,10.1%, to $574.4$599.0 millionmillion, sincereflecting Marchincreases 31,in 2025.market value and new business accounts. Additionally, per transaction fees for estates and other services have also contributed to the year over year increase in revenue. Partially offsetting these increases was a decrease in investment sales commissions.

IncomeService fromcharges holdingson indeposit small business investment companiesaccounts increased during the three and six months ended MarchJune 31,30, 2026,2026 compared to the same period in 2025. The increase during the current year period is mainly attributeddriven toby higher cashoverdraft distributions received, based on the results of their performancecharges and differenceaccount inanalysis timing of distributions.income.

Total noninterest expenses increased $1.6$2.1 million, or 13%,16%, for the three months ended MarchJune 31,30, 2026 and $3.8 million, or 14%, for the six months ended June 30, 2026 compared to the same periodperiods in 2025. The following table presents the components of noninterest expense for the three and six months ended MarchJune 31,30, 2026 and 2025, which are included within the respective Consolidated Statements of Operations headings.

Salaries and employee benefits increased during the three and six months ended MarchJune 31,30, 2026 over 2025, primarily reflecting increases in salaries,salaries employeedue insuranceto expense,investments employerin 401(k) expense,staffing and higher annual incentive compensation plan accruals as certain performance metrics were attained. Further contributing to the increases were higher stock-based compensation expense.expense and employee medical insurance costs. The Company's number of full-time equivalent employees ("FTE's") has increased from 233244 at MarchJune 31,30, 2025 to 253259 at MarchJune 31,30, 2026.

BankAdvertising Franchiseand taxmarketing expenses increased during the three and six months ended MarchJune 31,30, 2026 compared to the2025 same period in 2025mainly due to a higher estimatebusiness fordevelopment 2026,and reflectivedigital ofmarketing the Company's capital level.campaigns.

OtherComputer operatingsoftware expenses increased by$97 $552thousand thousand,and or$169 43%thousand during the three and six months ended MarchJune 31,30, 2026 respectively, compared to the threesame monthsperiod endedin March 31, 2025, largely2025 reflecting higherongoing expensesinvestments relatedin technology to volumeenhance basedsystems costssecurity and loanimprove collectionoperational costs, an increase in director expenses, and higher charitable contributions.efficiencies.

The efficiency ratio of the Company was 67.97%70.29% and 72.20%64.91% for the three months ended MarchJune 31,30, 2026 and 2025, respectively.respectively and 69.16% and 68.23% for the six months ended June 30, 2026 and 2025. The improvementdecline in the efficiency ratio during the 2026 periods reflects anincreases increasein noninterest expenses, partially offset by increases in net interest and noninterest income, which was partially offset by an increase in noninterest expenses.income. The efficiency ratio is not a measurement under GAAP. It is calculated by dividing noninterest expense by the sum of tax equivalent net interest income and noninterest income. The Company adjusts for non-recurring items such as gains and losses on the investment portfolio and other gains/losses from OREO, repossessed or other assets, disposals of bank premises and equipment, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.

The calculation of the efficiency ratio for the three and six months ended MarchJune 31,30, 2026 and 2025 was as follows:

Income tax expense for the three months ended MarchJune 31,30, 2026 was comprised of federal and state income taxes of $874$1.5 thousandmillion and $44$65 thousand, respectively. For the three months ended MarchJune 31,30, 2025, the Company recognized a net income tax benefitexpense of $2.1$1.3 million, whichcomprised represented aof federal income tax benefit partially offset byand state income taxes of $1$1.2 thousand.million Theand increase$56 inthousand, income tax expense reflects the level of net income recognized during the first quarter of 2026 compared to a net loss recognized in the first quarter of 2025.respectively.

The effective tax rate forFor the three and six months ended MarchJune 31,30, 2026 was below2025, the statutory rate of 21% due primarily to the recognition of tax-exempt life insurance income. The effective tax rate was also impacted by tax-exempt income on investment securities and loans, qualified rehabilitation credits and tax credits on qualified affordable housing project investments. The effective tax rate for the three months ended March 31, 2025 was also impacted by the balance sheet repositioning transaction previously discussed in the "Non-GAAP Financial Measures" section above.