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

As of December 31, 2024,2025, approximately 84%83% of our loans had had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A weakening of of the real estate market in our primary market areas could result in an increase in the number of borrowers who default on their loans and and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset asset quality. Deterioration in the real estate market could cause us to adjust our opinion of the level of credit quality in our loan portfolio. portfolio. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our our earnings and capital could be adversely affected. Acts of nature, including hurricanes, tornados,tornadoes, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively affect our financial condition.

At December 31, 2024,2025, 55.4%45.7% of our loan portfolio was was secured by commercial real estate. Loans secured by commercialCommercial real estate areloans generallymay viewedinvolve asdistinct havingcredit moreand riskcollateral ofrisks defaultcompared thanto loansother securedloan by residential real estate or consumer loanstypes because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers, the accuracy of the estimate of the property’s value at completion of construction, and the estimated cost of construction. Such loans are generally riskier than loans secured by residential Commercial real estate loans also often involve larger loan balances and borrower relationships, so the deterioration of one or consumera loanssmall becausenumber of thosecredits loansmay arehave typicallya notdisproportionate securedimpact byon realasset estatequality collateral.and results of operations. An adverse development with respect to one lending relationship can expose us to a significantly greater risk of loss compared with a single-family residential mortgage loan because we typically have more than one loan with such borrowers. Additionally, these loans typically involve larger loan balances to single borrowers or groups of related borrowers compared with single-family residential mortgage loans. Therefore, the deterioration of one or a few of these loans could cause a significant decline in the related asset quality. A return of recessionary conditions could result in a sharp increase in loans charged-off and could require us to significantly increase our allowance for credit losses, which could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

The 2006 “Concentrations in Commercial Real Estate Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”) provides that a bank’s commercial real estate lending lending exposure could receive increased supervisory scrutiny where total non-owner occupied commercial real estate loans, including loans secured secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our level of commercial real estate and multi-family loans represents 247.2%236.5% of the Bank’s total risk-based capital at December 31, 2024.2025. If the FDIC, our primary federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolioportfolio, our earnings would be adversely affected.

Our actual loansloan losses could exceed our allowance for credit losses and therefore our historic allowance for credit losses may not be adequate. As of December 31, 2024,2025, 55.4%45.7% of our loan portfolio portfolio was secured by commercial real estate. Repayment of such loans is generally considered more subject to market risk than residential mortgage mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire entire charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including among other things, changes in market conditions affecting the value of loan collateral, the cash flows of our borrowers and problems affecting borrower credit. If we suffer credit losses that exceed our allowance for credit losses, our financial condition, liquidity or results of operations could be materially and adversely affected.

The determination of the appropriate level of the allowance allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. A deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. Economic uncertainty remains elevated entering 2026, driven by persistent inflationary pressures, higher interest rates, geopolitical conflicts, and the potential for continued volatility in global markets—despite forecasts for moderate growth in the U.S. and abroad. In addition, regulatory agencies periodically review our allowance for credit losses and and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations.

Dividends from the Bank provide the primary source of funds for the Company. The primary sources of funds of the Bank are client deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. In 2024 and early 2025, increased competition for deposits and volatility in wholesale funding markets have added to liquidity pressures. Market volatility increased regulatory scrutiny of financial institutions, or adverse perceptions regarding the banking industry could further constrain capital availability.

Additionally, deposit levels may be affected by a number number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include proceeds from FHLB advances, sales of investment securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate. Likewise, recent bank failures and heightened sensitivity to liquidity risk have increased regulatory and market focus on contingency funding planning and liquidity stress testing.

The Company is a stand-alone entity with its own liquidity needs to service its debt or other obligations. Other than dividends from the Bank, the Company does not have additional means of generating liquidity without obtaining additional debt or equity funding. In addition, the Company and the Bank are each required by federal regulatory authorities to maintain adequate levels of capital to support their operations and to comply with evolving regulatory capital expectations, including stress testing, capital planning, and concentration risk considerations. If we are unable to receive dividends from the Bank or obtain additional funding, we may be unable to pay our debt or other obligations.

We operate in a highly regulated industry and are subject subject to examination, supervision, and comprehensive regulation by various regulatory agencies. We are subject to regulation by the Federal Federal Reserve. The Bank is subject to extensive regulation, supervision, and examination by our primary federal regulator, the FDIC, the regulating authority that insures client deposits, and by our primary state regulator, the S.C. Board. Also, as a member of the Federal Home Loan Bank, Bank system, the Bank must comply with applicable regulations and guidance of the Federal Housing Finance BoardAgency and the applicable Federal Home Loan Bank. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders. The Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A sufficient claim against us under these laws could have a material adverse effect on our results of operations. Recent regulatory developments in 2023 and early 2024 have led to enhanced expectations in areas such as cybersecurity, data privacy, digital digital asset management, and anti-money laundering. Regulators could also limit capital distributions, including dividends or share repurchases. These evolving requirements are increasing our compliance costs and the complexity of our regulatory obligations.

In 2025, theThe U.S. political landscape remains uncertain,fluid, and with the Republicans holding the majoritychanges in bothCongressional thecomposition, U.S.presidential House of Representativesadministrations, and theagency U.S.leadership Senate.may Aresult unified Republican Congress has created conditions for potentialin shifts in policy,regulatory thoughpriorities and partisanpolicy divisiondirection. may still result in challenges to enacting sweeping reforms. Under the Biden Administration, Congressional committees with jurisdiction over the banking sector pursued oversight and legislative initiatives in a variety of areas, including addressing climate-related risks, promoting diversity and equality within the banking industry and addressing other Environmental, Social, and Governance matters, improving competition in the banking sector and enhancing oversight of bank mergers and acquisitions, establishing a regulatory framework for digital assets and markets, and oversight of pandemic responses and economic recovery. TheSubsequent Trumpchanges Administration,in alongside aadministration unifiedand RepublicanCongressional Congress,leadership may pursueresult policiesin efforts to reverse, suspend, or changesmodify thatregulatory (i)initiatives reverseadopted orin suspendprior key actions implemented under the Biden Administration, (ii)periods, promote deregulation by easing regulatory burdens on financial institutions, (iii) adopt a technology-forward regulatory approach, andor (iv) take a more favorable stance on bank mergers and acquisitions. For example, recent legislative and acquisitions,regulatory potentiallyactions streamlininghave included the approvaluse processof the Congressional Review Act to encouragerepeal agency consolidation withinrules affecting bank merger review processes and the bankingenactment sector.of Thelegislation establishing a federal framework for stablecoins and other digital assets. Because of this kind of oscillation in regulation, the prospects for the enactment of major banking reform legislation remain unclear at this time.

Furthermore, leadership changes within federal banking agencies and financial regulators continue to shape the regulatory environment. Since the changerecent changes in presidential administration in 2020,administration, key positions across agencies—including the Comptroller of the Currency, CFPB, CFTC, SEC, and the U.S. Treasury—have experienced significant turnover.periods Whileof someturnover leadershipand positions were filled, others remained vacant,transition, leading to ongoing shifts in regulatory priorities and enforcement approaches. In early 2025, additionalthis same manner of turnover and policy realignments within these agencies have further contributed to regulatory uncertainty in the financial services sector. The unifiedpotential Republican government could further alter the compositionimpact of these agencies,changes introducingin newgovernment leadership and new policies and rules that could significantly impact the banking sector. The potential impact of the unified Republican government on additional changes in agency structure, personnel, policies and priorities on the financial services sector, including the Company and the Bank, cannot be fully predicted at this time. Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition or results of operations.

Federal, state and local consumerConsumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

The banking and financial services industry is very competitive and includes services offered from other banks, savings and loan associations, credit unions, mortgage companies, other lenders, and institutions offering uninsured investment alternatives. Legal and regulatory developments have made it easier for new and sometimes unregulated competitors to compete with us. The financial services industry has and is experiencing an ongoing trend towards consolidation in which fewer large national and regional banks and other financial institutions are replacing many smaller and more local banks. These larger banks and other financial institutions hold a large accumulation of assets and have significantly greater resources and a wider geographic presence or greater accessibility. In some instances, these larger entities operate without the traditional brick and mortar facilities that restrict geographic presence. Some competitors have more aggressive marketing campaigns and better brand recognition, and are able to offer more services, more favorable pricing or greater customer convenience than the Bank. In addition, competition has increased from new banks and other financial services providers that target our existing or potential clients. As consolidation continues among large banks, we expect other smaller institutions to try to compete in the markets we serve. This competition could reduce our net income by decreasing the number and size of the loans that we originate and the interest rates we charge on these loans. Additionally, these competitors may offer higher interest rates, which could decrease the deposits we attract or require us to increase rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations which could increase our cost of funds. Likewise, rapid adoption of AI by competitors, either in financial services or FinTech, could create significant pressure on pricing, automation, or client satisfaction. If we fail to keep pace with AI-enabled analytics and customer offerings, our competitive positioning could be detrimentally impacted.

Third parties provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While we have selected these third-party vendors carefully, we do not control their actions. Any problem caused by these third parties, including poor performance of services, data breaches, failure to provide services, disruptions in communication services provided by a vendor and failure to handle current or higher volumes, could adversely affect our ability to deliver products and services to our clients and otherwise conduct our business, and may harm our reputation. Our reliance on third-party vendors for critical systems and services, likewise, increases our exposure to cybersecurity risks. While regulatory expectations for vendor oversight have intensified, requiring enhanced due diligence and ongoing monitoring, failure of third-party controls could result in operational disruptions or data breaches. Financial or operational difficulties of a third-party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to serve us. Replacing these third-party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.

In addition, criminals committing fraud increasingly are using more sophisticated techniques and in some cases are part of larger criminal rings, which allow them to be more effective. This type of fraudulent activity has taken many forms, ranging from check fraud, mechanical devices attached to ATM machines,machines (“skimming”), social engineering and phishing attacks to obtain personal information or impersonation of our clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify themselves, particularly when banking online, yet seek to establish a business relationship for the purpose of perpetrating fraud. Further, in addition to fraud committed against us, we may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer to commit fraud. Many of these data compromises are widely reported in the media.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. 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 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. In 2024recent and early 2025,years, the pace of technological change has accelerated, and the rapid evolution evolution of cybersecurity threats, as well as the need to integrate new digital platforms, has increased the risks associated with failure to adapt.

The development and use of AI by us or our third-party vendors poses significant risks. The evolving legal and regulatory landscape—covering intellectual property, privacy, consumer protection, employment, and more—could force costly changes and heighten non-compliance risks. AI models, especially generative ones, might produce biased, inaccurate, harmful, or harmfulotherwise ‘hallucinated’ outputs, disclose confidential information, or infringe on intellectual property rights. Moreover, their inherent complexity limits transparency, complicating oversight and error reduction. Reliance on third-party models further exposes us to risks associated with unauthorized training data and their risk management practices. Any of these issues could lead to legal liabilities, reputational harm, and adverse impacts on our business.

In March 2020, in response to the COVID-19 pandemic, pandemic, the Federal Reserve reduced the target Federal Funds rate to between zero and 0.25%. However, starting in March 2022 and continuing through mid-2023, the Federal Reserve raised the target Federal Funds rate to between 5.25% and 5.50% in response to persistent inflationary pressures. In 2024 and early 2025, continued regional economic uncertainty, exacerbated by persistent inflation, supply chain disruptions, and subdued consumer spending, has further increased the risks in our primary markets. As of mid-to-late 2025, interest rates remain elevated, and prolonged higher rates could result in net interest margin compression as interest-bearing interest-bearing liability rates continue to reprice upwards, while interest-earning assets may have already repriced to peak yields. Rapid changes in interest rates make it difficult for us to balance our loan and deposit portfolios, which may adversely affect our results of operations by, for example, reducing asset yields or spreads, creating operating and system issues, or having other adverse impacts on our business. When short-term interest rates are low for a prolonged period and assuming longer-term interest rates fall further, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem, which would have an adverse effect on our net interest income and could have an adverse effect on our business, financial condition and results of operations. When interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income. When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income.

In 2021 throughand 2022, inflation rose to levels not seen seenin fordecades. over 40 years, reaching 7% and 6.5%, respectively. In 2023, the annualWhile inflation ratehas decreasedsince to 3.4% butmoderated, inflationary pressures are currentlyhave expectedremained toa remainfactor elevatedinto throughout2026, 2024.notwithstanding During the latter partperiods of 2024 and into early 2025, the annual inflation ratemoderation. averaged approximately 4.2%, although some moderation has been observed in early 2025. Nonetheless, persistently higher input costs, wage pressures, and ongoing supply chain disruptions continue to challenge our customers’ ability to service their debt, thereby potentially increasing our credit risk. Inflation could lead to increased costs to our customers, making it more difficult for them to repay their loans or other obligations increasing our credit risk. Sustained higher interest rates by the Federal Reserve may be needed to tame persistent inflationary price pressures, which could push down asset prices and weaken economic activity. A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.

In recent years, the Federal Reserve has maintained a relatively tight monetary policy to address persistent inflationary pressures, resulting in elevated short-term interest rates. InSince mid-2024, mid-2024, as inflation beganhas to moderate,moderated, the Federal Reserve signaledhas agradually gradual recalibration ofrecalibrated its policy stance,stance and dropped rates, though it remains cautious cautious amid ongoing economic uncertainty.

The high-profile bank failures in 2023 involving Silicon Valley Bank, Signature Bank, and First Republic Bank caused general uncertainty and concern regarding the liquidity adequacy of the banking sector. Although we were not directly affected by these bank failures, the resulting speed and ease in which news, including social media commentary, led depositors to withdraw or attempt to withdraw their funds from these and other financial institutions, which then caused the stock prices of many financial institutions to become volatile. InAdditional 2024 and into 2025, continued concerns regarding the stability of certain regional banks and potential liquidity risks have further contributed to market volatility and investor caution. Additional bank failures could have an adverse effect on our financial condition and results of operations, either directly or through an adverse impact on certain of our customers.

In response to these bank failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of Bridge Banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. Separately, a Federal Reserve emergency lending facility established in response to the 2023 bank failures ceased making new loans in March 2024. With the risk of any additional bank failures, we may face the potential for reputational risk, deposit outflows, increased costs and competition competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

R. Arthur Seaver, Jr., our chief executive officer, and Calvin C. Hurst, our president, each have extensive and long-standing ties within our primary market area and substantial experience with our operations, and each has contributed significantly to our growth. If we lose the services of any of these individuals, they would be difficult to replace, and our business and development could be materially and adversely affected. We may not be successful in retaining key personnel, and the unexpected loss of services of one or more of our key personnel could have a material adverse effect on our business because of their skill, knowledge of our primary markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. In particular, D. Andrew Borrmann, our chief financial officer, announced his resignation on February 27, 2024. Leadership transitions can be inherently difficult to manage, and an inadequate transition to a permanent successor may cause disruptions to our business due to, among other things, diverting management’s attention or causing a deterioration in morale.

Many aspects of the banking business involve a substantial risk of legal liability. From time to time, we are, or may become, the subject of information-gathering requests, reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank regulatory agencies, self-regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgements,judgments, settlements, fines, injunctions, restrictions on the way we conduct our business or reputational harm.

At December 31, 2024,2025, we had total assets of $4.09$4.40 billion, a slightan increase from total assets of $4.06$4.09 billion at December 31, 2023.2024. The largest components of our total assets are loansloans, which which were $3.63$3.85 billion and $3.60$3.63 billion at December 31, 20242025 and 2023,2024, respectively. Our liabilities and shareholders’ equity at December 31, 20242025 totaled $3.76$4.03 billion and $330.4$368.7 million, respectively, compared to liabilities of $3.74$3.76 billion and shareholders’ equity equity of $312.5$330.4 million at December 31, 2023.2024. The principal component of our liabilities is deposits which were $3.44$3.72 billion and $3.38$3.44 billion billion at December 31, 20242025 and 2023,2024, respectively.

Our net income available to common shareholders for the years ended December 31, 20242025 and 20232024 was $15.5$30.4 million and $13.4$15.5 million, or diluted earnings per share (“EPS”) of $1.91$3.72 and $1.66$1.91 for the years ended December 31, 20242025 and 2023,2024, respectively. The increase in net income resulted primarily from an increase in net interest income and an increase in noninterest income, partially offset by an increase in noninterest expenses and a decrease in the provision for credit losses.income. In addition, our net income available to common shareholders was $29.1$13.4 million, or EPS of $3.61$1.66 for the year ended ended December 31, 2022.2023.

Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. We consider these accounting policies and estimates to be critical accounting policies.critical. We have identified the determination of the allowance for credit losses, the fair valuation of financial instruments and income taxes to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with the Company’s Audit Committee.

There are many factors affecting the ACL; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. Changes in economic conditions, portfolio composition, collateral values, and forecast assumptions could materially affect the ACL. To the extent actual outcomes are worse than management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods. During 2025, we transitioned to the discounted cash flow “DCF” methodology for calculating the ACL, and management analyzed the risk level associated with factors such as changes in lending policies; international, national, regional, and local conditions; volume and terms of loans; experience and depth of management; volume and severity of past due loans; concentrations of credit; and loan review results in the consideration of the qualitative portion of the ACL.

Our level of net interest income is determined by the the level of earning assets and the management of our net interest margin. For the years ended December 31, 2025, 2024, and 2023, andour net 2022, our net interest income was $81.2$105.0 million, $77.7$81.2 million, and $97.6$77.7 million, respectively. The $3.6$23.7 million, or 4.6%,29.2%, increase in net interest income during 2024,2025, compared to 2023,2024, was driven by a $13.5 million decrease in interest expense and a $10.3 million increase in interest income. During 2024, our net interest income increased $3.6 million, or 4.6%, compared to 2023. This increase in net interest income was driven by a $23.6 million increase in interest income, partially offset by a $20.0 million increase in interest expense. During 2023, our net interest income decreased $20.0 million, or 20.5%, compared to 2022. This decrease in net interest income was driven by a $79.9 million increase in interest expense, primarily related to our interest-bearing deposits, partially offset by a $59.9 million increase in interest incomeexpense during the 2023 2024 period.

Interest income for the years ended December 31, 2025, 2024, 2023, and 20222023 was $211.5 million, $201.2 million, $177.6 million, and $117.7$177.6 million, respectively. A significant portion of our interest income relates to our strategy to maintain a large portion of our assets in higher earning loans compared to lower yielding investments and federal funds sold. As such, 92.9%93.7% of our interest income related to interest on loans during 2024,2025, compared to 92.9% during 2024 and 93.5% during 2023 and 97.1% during 2022.2023. Also, included in interest income on loans was $1.6$1.7 million related to the net amortization of loan fees and capitalized loan origination costs for the year ended December 31, 2024,2025, compared to $1.6 million and $1.7 million for the years ended December 31, 20232024 and 2022, 2023, respectively. The increase in interest income during 20242025 was driven by an increase in average interest-earningloan assets,balances, combined with higheran yieldsincrease in onloan those assets.yield.

Interest expense was $120.0$106.5 million, $99.9$120.0 million, and $20.0$99.9 million for the years ended December 31, 2025, 2024, 2023, and 2022,2023, respectively. Interest expense on deposits for 20242025 represented 90.7%89.8% of total interest expense, compared to 90.7% for 2024, and 91.4% for 2023, and 90.3% for 2022, while interest expense on borrowings represented 9.3%the remaining portion of total interest expense for 2024, compared to 8.6% for 2023, and 9.7% for 2022.expense. The increasedecrease in interest expense on deposits during the 2024 and 2023 periods2025 was driven primarily by therepricing of increaseour deposit portfolio in the rate paid on deposit balances which relatesresponse to declining market interest rates, including reductions in the Federal Reserve’s target range 525 basis point increase infor the federal funds rate beginningduring in March 20222024 and continuing through July 2023.2025.

The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities atfor the years ended December 31, 2024,2025, 20232024 and 2022. 2023. We derived these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments were ownedpurchased at an original maturity of over one year. Nonaccrual loans are included in earning assets in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. The net of capitalized loan costs and fees are amortized into interest income on loans.

Our net interest margin, on on a tax-equivalent basis (TE), was 2.06%,2.57%, 2.07%2.06% and 3.19%2.07% for the years ended December 31, 2024,2025, 20232024 and 2022,2023, respectively. OurDuring 2025, our net interest margin (TE)increased 51 basis points, compared to 2024, driven primarily by a decrease in rates paid on our interest-bearing liabilities, combined with an increase in our average interest-earning assets. During 2024, our net interest margin was relatively stable in 2024, stable, compared to 2023 as both our yield on interest earning assets and rateinterest-bearing of interest bearing liabilities increased similarly in volume and rates during the year. During 2023, our net interest margin decreased 112 basis points, compared to 2022, driven primarily by higher costs on our interest-bearing liabilities.

Our average interest-earning assets increased by $175.0 $152.4 million during the year ended December 31, 2024,2025, compared to 2023,2024, while the related yield on our interest-earning assets increased by 39 six basis points. The increase in average interest-earning assets was driven by a $131.9$124.1 million increase in average loan balancesbalances, and a $26.2 million increase in federal funds sold and interest-bearing deposits with banks. In addition,while the increase in yield on our interest earning assets was driven by a 4013 basis point increase in the yield on our loan portfolio.

Our average interest-bearing liabilities increased by $193.2$81.7 million during 20242025 while the cost of our interest-bearing liabilities increaseddecreased by 4454 basis points. The increase in average interest-bearing liabilities was driven primarily by a $268.7$90.5 million increase in average timeinterest-bearing depositsdeposits. atThe an average rate of 4.94% and an increase of $70.4 milliondecrease in FHLB advances and other borrowings. During 2023,cost of our average interest-bearing liabilities increasedwas primarily driven by $749.3 million,a compared58 tobasis 2022,point whiledecrease in the cost of our interest-bearing liabilities increased by 255 basis points.deposits.

Our net interest spread was 1.16%1.76% for the year ended December 31, 2024,2025, compared to 1.21%1.16% for the same period in 20232024 and 2.88%1.21% for 2022.2023. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 44six basis point increase in our interest-earning assets, combined with the 54 basis point decrease in the cost of our interest-bearing liabilities, partiallyresulted offset byin a 3960 basis point increase in yield on our interest-earning assets resulted in a 5 basis point decrease in our net interest spread for the 2024 period. We anticipate continued pressure on our net interest spread andfor the 2025 period. We seek to fund increased loan volumes by growing our core deposits, but, subject to internal policy limits on the amount of wholesale funding we may maintain, will utilize wholesale funding to fund shortfalls, if any, or provide additional liquidity. To the extent that our dependence on wholesale funding sources increases, our net interest margin inwould futurelikely periods be negatively impacted as ourwe may not be able to reduce the rates we pay on these deposits as quickly as we can on core deposits as rates have and may continue to repricedecline. immediatelyWe with increases in the fed funds rate, comparedcontinue to deploy various asset liability management strategies to manage our loanrisk portfolioto whichinterest repricesrate as loans are originated or renewed.fluctuations.

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following tablestable setsets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented. The rate/volume variance has been allocated between the rate and volume variances based on the relative magnitude of the change in each, with the remaining interaction reflected in the rate/volume column.

Net interest incomeincome, the largest component of our income, was $77.7 million for the year ended December 31, 2023, a $20.0 million decrease from net interest income of $97.6$105.0 million for the year ended December 31, 2022.2025, a $23.7 million increase from net interest income of $81.2 million for the year ended December 31, 2024. The decrease increase in net interest income was driven by a $79.9$13.5 million decrease in interest expense, combined with a $10.3 million increase in interest expense,income. partiallyThe offset by a $59.9$124.1 million increase in average loan balances drove the increase in interest income income.while Thethe 25758 basis point increasedecrease in deposit costs drove the increasedecrease in interest expense while the $626.9 million increase in average loan balances combined with the 77 basis point increase in loan yield drove the increase in interest income.expense.

The provision for credit losses, which includes a provision provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded commitments commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. We review the adequacy of the allowance for credit losses on a quarterly basis. PleaseThe seeprovision for credit losses is determined based on management’s assessment of expected credit losses in the discussionloan belowportfolio underand “Resultsunfunded ofcommitments, as Operations –discussed Allowance for Credit Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.below.

There was a $125,000$3.0 million provision for credit losses for for the year ended December 31, 2024,2025, compared to a provision of $1.3 million$125,000 and $6.2$1.3 million for the years ended December 31, 20232024, and 2023, respectively. The $3.0 million provision during 2025 included a provision of $2.5 million for credit losses and 2022,a $500,000 provision respectively.for unfunded commitments. The $2.5 million provision was driven primarily by $213.4 million in loan growth during the year combined with slightly lower expected loss rates due to historically low charge-offs, while the $500,000 provision for unfunded commitments was driven by a $124.5 million increase in unfunded commitments combined with lower historical loss rates. The $125,000 provision during 2024 included a $500,000 provision of $500,000 for credit losses and a reversal of $375,000 in the provision for unfunded commitments. The $500,000 provision for credit losses was driven primarily by $29.1 million in loan growth during the year combined with slightly lower expected loss rates due to historically low charge-offs, while the $375,000 reversal was driven by a $5.5 million decrease in unfunded commitments combined with lower historical loss rates. The $1.3 million provision during 2023 included a $2.2 million provision for credit losses and a reversal of $949,000 for unfunded commitments. The $2.2 million provision was driven primarily by $329.3 million in loan growth during the year, while the $949,000 reversal was driven by a $153.7 million decrease in unfunded commitments. The $6.2 million provision during 2022, which included a $780,000 provision for unfunded commitments, was driven primarily by $783.5 million in loan growth during the year, combined with a $259.6 million increase in unfunded commitments. In addition, to loan growth, the provision for credit losses was impacted by slightly lower expected loss rates due to historically low charge-offs during the 12 months ended December 31, 2022 while minor adjustments to two internal qualitative factors increased the qualitative component of the allowance and related provision expense.

During the year ended December 31, 2024,2025, we had net charge-offs of $1.3 million,$84,000, consisting of $1.7 million$351,000 of loans charged-off in the current year, partially offset by $466,000$267,000 of recoveries on on loans previously charged-off. Net charge-offs were 0.04%0.00% of the average outstanding loan portfolio for 2024. 2025. In addition, nonperforming assets increasedrepresented to 0.27%0.32% of total assets while our level of classified assets to total capital (risk based) decreased to 4.25%4.22% at December 31, 2024.2025.

We reported net charge-offs of $166,000$1.3 million and net recoveries$166,000 of $1.4 million for the years ended December 31, 20232024, and 2022,2023, respectively, including charge-offs of $761,000$1.7 million and $485,000$761,000 in 20232024 and 2022, 2023, respectively. The net charge-offs of $166,000$1.3 million and net recoveries of $1.4 million$166,000 during 20232024 and 2022,2023, respectively, represented 0.0.% 0.04% and 0.05%0.00% of the average outstanding loan portfolios for 20232024 and 2022,2023, respectively. In addition, nonperforming assets were 0.10% 0.27% and 0.07%0.10% of total assets for 20232024 and 2022, 2023, respectively, and classified assets were 4.25% and 4.72% at December 31, 20232024 and 2022, respectively.2023.

Noninterest income was $12.1$13.1 million for the year ended ended December 31, 2024,2025, a $2.3 million,$997,000, or 23.1%,8.2%, increase compared to noninterest income of $9.9$12.1 million for the year ended December 31, 2024. 2023. The increase in noninterest income during 2024,2025, compared to 2023,2024, resulted primarily from an increase in mortgage banking income,income and service fees on deposit accounts and income from bank owned life insurance.accounts. Mortgage banking income increased by $1.5 million,$722,000, or 37.8%,13.0%, due to higher mortgage volume during the year. Service fees on deposit accounts increased by $382,000,$601,000, or 27.6%,34.1%, duedriven toprimarily by higher transaction volumevolume, wire transfer fees and increased usegrowth ofin theour commercial credit cardscard offeredservices. toPartially ouroffsetting clients.these increases was a $515,000 decrease from the loss on sale of investment securities.

Our efficiency ratio was 64.0% for 2025, 78.5% for 2024 and 78.7% for 2023. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. Our efficiency ratio wasdecreased elevated for the twelve months ended December 31, 20242025 due to the comparatively smallerlarger increase in net interest income and noninterest income, income, as compared to the increase in noninterest expenses during the year.

At December 31, 20242025 and 2023,2024, our investment securities portfolio (including available-for-sale securities and other investments) was $151.6$147.8 million and $154.6$151.6 million, respectively, and represented approximately 3.7%3.4% and 3.8%3.7% of our total assets, respectively. Our available for sale investment portfolio included corporate bonds, US treasuries, US agency securities, SBA securities, state and political subdivisions, asset-backed securities, and mortgage-backed securities with witha fair value of $127.7 million and amortized cost of $137.2 million for an unrealized loss of $9.4 million at December 31, 2025 compared to a fair value of $132.1 million and amortized cost of $146.6 million for an unrealized loss of $14.5 million at December 31, 20242024. comparedThe net tounrealized alosses primarily reflect the impact of market interest rate movements on the fair value of $134.7our millionfixed-rate andsecurities amortized cost of $149.1 million for an unrealized loss of $14.4 million at December 31, 2023.portfolio.

Contractual maturities and yields on a tax-equivalent basis for our investments are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of December 31, 2024,2025, our loan portfolio included $3.18 billion, or 82.8%, of loans secured by real estate, compared to $3.03 billion, or 83.5%, of real estate loans, compared to $3.05 billion, or 84.8%, as of December 31, 2023.2024. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types.categories. In addition to traditional residential mortgage loans, we issue second mortgage residential real estate loans and home equity lines of credit. Home equity lines of credit totaled $204.9$248.7 million as of December 31, 2024,2025, of which approximately 46%47% were in a first lien position, while the remaining balance was second liens, compared to $183.0$204.9 million as of December 31, 2023,2024, of which approximately 46% were in first lien positions and the remaining balance was in second liens. The average home equity loan had a balance of approximately $108,000 and a loan to value of approximately 73% as of December 31, 2025, compared to an average loan balance of $92,000 and a loan to value of approximately 74% as of December 31, 2024,2024. comparedFurther, to an average loan balance of $85,0000.38% and a loan to value of approximately 73% as of December 31, 2023. Further, 0.12% and 0.8% of our total home equity lines of credit were over 30 days past due as of December 31, 20242025 and 2023,2024, respectively.

Following is a summary of our loan composition for each of the last three years ended December 31, 2024.2025. Of the $29.1$213.4 million in loan growth in 2024,2025, $10.3$141.8 million of growth was in commercial related loans, specifically commercial owner occupied which grew by $85.4 million and commercial business which grew by $63.6 million, partially offset by declines in other commercial categories (including construction and non-owner occupied real estate loans), while $18.9 $71.5 million of growth was in consumer related loans,loans. specifically consumer real estate mortgages which grew by $46.2 million and home equity lines of credit which grew by $21.9 million during 2024. Offsetting the growth in consumerConsumer real estate loans and homerepresent equitythe lineslargest of credit was a $42.5 million decreasecategory in consumer construction loans. The increase inour consumer realportfolio estateand currently loans ishave related to our focus to continue to originate high quality 1-4 family consumer real estate loans. Ouran average consumer real estate loan currently has a principal balance of $468,000,$472,000, a term of 2324 years, and an average rate of 4.36%.4.55%.

We have included the tabletables below to provide additional clarity on our commercial real estate exposure. We have not identified any material geographic concentrations within these collateral types. Our levelThe table below presents the majority of non-owner occupiedour commercial real estate loansexposure representsby 247.2%collateral oftype which are included in the Bank’scommercial business, totalconstruction, risk-basedand capitalnon-owner atoccupied December 31, 2024.segments.

The following table summarizes the loans due after one year (i.e., excluding loans due one year or less), by category.category and by interest rate type.

Nonperforming assets include real estate acquired through through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. The following table shows the nonperforming assets and and the related percentage of nonperforming assets to total assets and gross loans foras the three years endedof December 31, 2024.2025. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status.

At December 31, 2024,2025, nonperforming assets were $14.1 million, or 0.32% of total assets, compared to $10.9 million, or 0.27% of total assets at December 31, 2024. In addition, nonaccrual loans were 0.36% of gross loans at December 31, 2025 and 0.30% of gross loans,loans compared to $4.0 million, or 0.10% of total assets and 0.11% of gross loans at December 31, 2023.2024. Nonaccrual loans increased $6.9$3.0 million during the twelve months endingended December 31, 20242025 due primarily to oneloans commercial relationshipmoving related towithin the assistedconsumer livingreal industry.estate portfolio. The amount of foregone interest income on the nonaccrual loans as of December 31, 2024 2025 and 20232024 was approximately $200,000$308,000 and $73,000,$200,000, respectively, for the twelve-monthyears periods.ended December 31, 2025 and 2024.

A significant portion, or 94.9%,98.0%, of nonaccrual loans at December 31, 20242025 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. As a result of this level of coverage on nonaccrual loans, we believe the allowance for for credit losses of $39.9$42.3 million foras the year endedof December 31, 20242025 is adequate.

We adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminatedDuring the recognition12 andmonths measurementended ofDecember troubled31, debt2025, restructuringswe andhad two commercial enhancednon-owner disclosuresoccupied forloans loanthat modifications were modified due to the borrowers experiencing financial difficulty. The amortized cost basis of the two loans was $6.9 million at December 31, 2025. Loan modifications to borrowers experiencing financial difficulty were not material for the the twelve months ended December 31, 2024 and December 31, 2023.2024.

At December 31, 20242025 and December 31, 2023,2024, the allowance for credit losses was $39.9$42.3 million and $40.7$39.9 million, respectively, or 1.10% and 1.13% of outstanding loans, respectively. The allowance for credit losses as a percentage of our outstanding loan portfolio decreased from the prior year primarily due to historically low loan charge-offs which factors into the expected loss rate on our current loan portfolio. In addition, our nonperforming assets increased to 0.27%0.32% as a percentage of total assets at December 31, 20242025 from 0.10%, 0.27%, as a percentage of total assets, at December 31, 2023,2024, while our classified assets were 4.22% and 4.25% of total capital (risk based) as of December 31, 20242025 and December 31, 2023.2024, respectively. See Note 4 to the Consolidated Financial Statements for more information on our allowance for credit losses.

During the 12 months ended December 31, 2024,2025, our average transaction account balances decreasedincreased by $183.7$81.2 million, or 6.7%,3.2%, while our average time deposit balances increased by $268.8$48.2 million, or 42.5%.5.4%. Core deposits exclude out-of-market deposits and time deposits of $250,000 or more and provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $2.66 $2.88 billion, $2.81$2.66 billion, and $2.76$2.81 billion at December 31, 2025, 2024, 20232024 and 2022,2023, respectively.

All of our time deposits are certificates of deposits.deposit. The maturity distribution of our time deposits of $250,000 or more is as follows:

At December 31, 20242025 and 2023,2024, we estimate that we have approximately $1.5 billion and $1.3 billion, respectively, in uninsured deposits including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements by the FDIC for the Call Report.

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. The several large bank failures across the United Statesbeginning in theMarch first2023, fiveand monthscontinuing ofwith 2023additional failures in 2024, 2025 and January 2026, exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institutionsinstitution’s ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, IntraFi can provide us with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity management tool. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalizedwell-capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits.

We also have a line of credit with another financial institution for $15.0 million, which was unused at December 31, 2024.2025. The line of credit was issued on December 28, 2024 at an interest rate of the U.S. Prime Rate plus 0.25% and aan original maturity date of February 28, 2025. The line was renewed under the same terms with a new maturity date of March 5, 2026.

Total shareholders’ equity was $368.7 million at December 31, 2025 and $330.4 million at December 31, 2024 and $312.5 million at December 31, 2023.2024. The $18.0$38.3 million increase during 20242025 is due primarily to net income to common shareholders of $30.4 million, equity compensation transactions of $15.5 million, stock option exercises and expenses of $2.6$3.8 million combined with a $130,000$4.0 lossmillion increase in other comprehensive income.

To be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risked-basedrisk-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of December 31, 2024,2025, our capital ratios exceed these ratios and we remain “well capitalized.”

We have commitments with various investment partners under the Small Business Investment Company (“SBIC”) and the Rural Business Investment Company (“RBIC”) programs for which we have committed to make capital contributions from time to time. As of December 31, 2024,2025, $1.2 million$769,000 remained outstanding under these commitments.

The following discussion reviews our results of operations for the three-monththree periodand six month periods ended MarchJune 31,30, 2026 as compared to the three-monththree periodand six month periods ended MarchJune 31,30, 2025 and assesses our financial condition as of MarchJune 31,30, 2026 as compared to December 31, 2025. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and and the related notes for the year ended December 31, 2025 included in our Annual Report on Form 10-K for that period. Results for the three-month period ended March 31, 2026 are not necessarily indicative of the results for the year ending December 31, 2026 or any future period.

At MarchJune 31,30, 2026, we had total assets of $4.58$4.70 billion, a 4.0%6.7% increase from total assets of $4.40 billion at December 31, 2025. The largest component of our total assets is loans which were $3.94$4.03 billion and $3.85 billion at MarchJune 31,30, 2026, and December 31, 2025, respectively. Our liabilities and shareholders’ equity at MarchJune 31,30, 2026 totaled $4.20$4.2 billion and $379.4$452.3 million, respectively, compared to liabilities of $4.03 billion and shareholders’ equity of $368.7 million at December 31, 2025. The principal component of our liabilities is deposits which were $3.87$3.94 billion and $3.72 billion at MarchJune 31,30, 2026 and December 31, 2025, respectively.

Our net income to common shareholders was $9.9$11.2 million and $5.3$6.6 million for the three months ended MarchJune 31,30, 2026, and 2025, respectively. Diluted earnings per share (“EPS”) was $1.19$1.20 for the firstsecond quarter of 2026 as compared to $0.65$0.81 for the same period in 2025. Our net income to common shareholders was $21.1 million and $11.8 million for the six months ended June 30, 2026 and 2025, respectively. Diluted EPS was $2.39 for the six months ended June 30, 2026 as compared to $1.46 for the same period of 2025. The increase in net income for the three and six months ended June 30, 2026 was primarily driven by an increase in net interest income.

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $30.3$32.4 million for the firstsecond quarter of 2026, a 29.4%28.0% increase over net interest income of $23.4$25.3 million for the firstsecond quarter of 2025, driven primarily by a $5.0$5.8 million increase in interest income on our interest-earning assets combined with a $1.9$1.3 million decrease in interest expense on our interest-bearing liabilities. In addition, our net interest margin, on a tax-equivalent (TE) basis, was 2.88%2.87% for the firstsecond quarter of 2026 compared to 2.41%2.50% for the same period in 2025.

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three-monththree and six month periods ended MarchJune 31,30, 2026 and 2025. A review of this table shows shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” tables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

Our net interest margin (TE) increased by 4737 basis points to 2.88%2.87% during the firstsecond quarter of 2026, compared to the firstsecond quarter of 2025, driven primarily by an increase in our average interest-earning assets combined with a decrease in rates paid on our interest-bearing liabilities. Our average interest-earning assets grew by $324.4$464.7 million during the firstsecond quarter of 2026 from the prior year, while the average yield on these assets increaseddecreased by eighttwo basis points to 5.20%.5.16%. OurIn comparison, our average interest-bearing liabilities grew by $208.3$283.9 million during the firstsecond quarter of 2026 from the prior year, while the rate on these liabilities decreased 4644 basis points to 3.06%.3.05%.

The increase in average interest-earning assets for the firstsecond quarter of 2026 related primarily to an increase of $225.1$254.6 million in our average loan balances from the prior year.year Thecombined eight-basiswith pointa $205.6 million increase in the average balance of Federal funds sold and interest-bearing deposits with banks. While the total yield on our interest-earning assets wasdecreased two basis points, driven by a 1371 basis point increasedecrease in the yield on our Federal funds sold and interest-bearing deposits with banks, the yield on our loan portfolio. Theportfolio 13increased seven basis pointpoints increasefrom includedthe aprior $543,000 repayment of interest on one large nonaccrual loan.year.

The increase in average interest-bearing liabilities for the firstsecond quarter of 2026 related primarily to an increase of $208.3$284.1 million in our average interest-bearing deposits. The 4644 basis point decrease in cost of our interest-bearing liabilities was driven by a 5047 basis point decrease in the cost of our interest-bearing deposits.

Our net interest spread was 2.14%2.11% for the firstsecond quarter of 2026 compared to 1.60%1.69% for the same period in 2025. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The eight-basistwo-basis point increasedecrease in yield on our interest-earning assets, combined with the 4644 basis point decrease in the rate on our interest-bearing liabilities, resulted in a 5442 basis point increase in our net interest spread for the 2026 period. We seek to fund increased loan volumes by growing our core deposits, but, subject to internal policy limits on the amount of wholesale funding we may maintain, will utilize wholesale funding to fund shortfalls, if any, or provide provide additional liquidity. To the extent that our dependence on wholesale funding sources increases, our net interest margin would likely be negatively impacted as we may not be able to reduce the rates we pay on these deposits as quickly as we can on core deposits as rates have and may continue to decline. We continue to deploy various asset liability management strategies to manage our risk to interest rate rate fluctuations.

Net interest income, the largest component of our income, was $30.3$32.4 million for the firstsecond quarter of 2026 and $23.4$25.3 million for the firstsecond quarter of 2025, a $6.9$7.1 million, representing aor 29.4%,28.0%, increase year over year. The increase during 2026 was driven by a $5.0$5.8 million increase in interest income primarily due to an increase in average loan balances and higheraverage yieldsbalances onin ourFederal loanfunds portfolio,sold and interest-bearing deposits with banks, as well as a $1.9$1.3 million decrease in interest expense primarily due to lower rates on our interest-bearing deposits.

We recorded a provision for credit losses of $1.3$1.0 million during the firstsecond quarter of 2026, compared to a provision for credit losses of $750,000$700,000 in the firstsecond quarter of 2025. The provision during the firstsecond quarter of 2026 was driven primarily by growth in our loan portfolio.portfolio The $1.3 million provision during 2026and included a provision of $1.2 million$950,000 for credit losses and a $150,000$75,000 provision for unfunded commitments. ThereThe was no$700,000 provision in 2025, which included a $650,000 provision for credit losses and a $50,000 reserve for unfunded commitments recorded was also driven primarily by growth in theour firstloan quarter of 2025.portfolio.

Noninterest income was $3.5 million for the firstsecond quarter of 2026, a $426,000,$174,000, or 13.7%,5.2%, increase from noninterest income of $3.1$3.3 million for the firstsecond quarter of 2025. The increase in noninterest income during 2026, compared to 2025, resulted primarily from an increase in mortgage banking income and service fees on deposit accounts and ATM and accounts.debit Mortgagecard bankingincome. incomeService fees on deposit accounts increased $69,000,$299,000, or 4.8%,52.7% over the prior year due to higher mortgage volume. Service fees on deposit accounts increased $217,000, or 40.3%, over the prior year, driven by higher transaction volume, fee income on our commercial credit cards and additional wire fee income. Partially offsetting these increases, was a $246,000, or 15.7%, decrease in mortgage banking income which was driven by changes in the market rates from the time the loan was locked.

Noninterest expense was $20.0$20.4 million for the firstsecond quarter of 2026, a $1.2$1.1 million, or 6.3%,5.5%, increase from noninterest expense of $18.8$19.3 million for the firstsecond quarter of 2025. The increase in noninterest expense was driven primarily by the following:

Partially offsetting the above increases was a decrease in insurance expense of $118,000,$52,000, or 11.7%,5.7%, due to lower FDIC assessment expense during the firstsecond quarter of 2026.

Our efficiency ratio was 59.2%56.8% for the firstsecond quarter of 2026, compared to 71.1%67.5% for the firstsecond quarter of 2025. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The improvement during the 2026 period was driven primarily by the increase in net interest income.

We incurred income tax expense of $2.6$3.3 million and $1.6$2.0 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively.respectively, and $5.9 million and $3.7 million for the six months ended June 30, 2026 and 2025. Our effective tax rate was 20.8%21.8% and 23.8%23.6% for the three six months ended MarchJune 31,30, 2026 and 2025, respectively. The decrease in the effective tax rate was driven by the effect of equity compensation transactions in comparison to our income before income tax expense.

At MarchJune 31,30, 2026, the $144.6$164.9 million in our investment securities portfolio represented approximately 3.2%3.5% of our total assets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of $124.2$144.4 million and an amortized cost of $134.2$155.0 million, resulting in an unrealized loss of $10.0$10.6 million. At December 31, 2025, the $147.8 million in our investment securities portfolio represented approximately 3.4% of our total assets, including investment securities with a fair value of $127.7 million and an amortized cost of $137.2 million for an unrealized loss of $9.4 million. In addition, other investments, which include FHLB Stock and other nonmarketable investments, increased $314,000$421,000 from December 31, 2025 to $20.4$20.5 million at MarchJune 31,30, 2026.

Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the threesix months ended MarchJune 31,30, 2026 and 2025 were $3.90$3.93 billion and $3.67$3.69 billion, respectively respectively.(the average loan balances reflected in the “Average Balances, Income and Expenses, Yields and Rates” tables above include mortgage loans held for sale, as noted in footnote (3) to those tables, and therefore differ from the amounts presented here). Before the allowance for credit losses, total loans outstanding at MarchJune 31,30, 2026 and December 31, 2025 were $3.94$4.03 billion and $3.85 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of MarchJune 31,30, 2026, our loan portfolio included $3.22$3.27 billion, or 81.8%,81.0%, of real estate loans, compared to $3.18 billion, or 82.8%, at December 31, 2025. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. Home equity lines of credit totaled $262.5$273.0 million as of MarchJune 31,30, 2026, of which approximately 49% were in a first lien position, while the remaining balance was in second liens. At December 31, 2025, our home equity lines of credit totaled $248.7 million, of which approximately 47% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately $112,000$115,000 and a loan to value of 74%75% as of MarchJune 31,30, 2026, compared to an average loan balance of $108,000 and a loan to value of approximately 73% as of December 31, 2025. Further, 0.58%0.18% and 0.38% of our total home equity lines of credit were over 30 days past due as of MarchJune 31,30, 2026 and December 31, 2025, respectively.

Following is a summary of our loan composition at MarchJune 31,30, 2026 and December 31, 2025. During the first threesix months of 2026, our loan portfolio increased by $97.1$185.1 million, or 10.2%9.7% annualized, annualized, primarily driven by a $58.1$125.1 million increase in commercial business loans andwith a $22.6$93.4 million of the increase being in commercial owner occupiedbusiness loans. In addition, our consumer loans grew by $60.0 million with $24.3 million being in home equity loansloans. Our consumer real estate portfolio, which increased by $13.8$14.0 million during the first three monthshalf of 2026. Our consumer real estate portfolio, which decreased by $5.2 million2026 includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $470,000,$469,000, a term of 24 years, and an average rate of 4.57%4.66% as of MarchJune 31, 30, 2026, compared to a principal balance of $472,000, a term of 24 years, and an average rate of 4.55% as of December 31, 2025.

Our level of non-owner occupied commercial real estate loans represents 237.6% 237.3% of the Bank’s total risk-based capital at MarchJune 31,30, 2026 compared to 236.5% at December 31, 2025.

Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of MarchJune 31,30, 2026 and December 31, 2025 we had no loans that were 90 days past due and still accruing.

At MarchJune 31,30, 2026, nonperforming assets were $11.9$12.6 million, or 0.26%0.27% of total assets and 0.30%0.31% of gross loans. Comparatively, nonperforming assets were $14.1 million, or 0.32% of total assets and 0.37% of gross loans at December 31, 2025. The increase in commercial owner occupied loans was primarily due to one loan being moved moved to non-accrual status during the first quarter of 2026, while the decrease in commercial non-owner occupied loans was primarily driven driven by the payoff of one large non-residential loan. The amount of foregone interest income on nonaccrual loans in the firstsecond quarter of 2026 and 2025 was $68,000$220,000 and $74,000,$126,000, respectively.

At MarchJune 31,30, 2026 and December 31, 2025, the allowance for credit losses represented 378.22%395.41% and 305.65% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at MarchJune 31,30, 2026 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses.

In addition, at MarchJune 31,30, 2026, 81.8%81.0% of our loans were collateralized by real estate and 92.2%88.6% of our individually evaluated loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Individually evaluated loans are reviewed on a quarterly basis to determine the level of credit loss. As of MarchJune 31,30, 2026, we did not have any individually evaluated real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for individually evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

At MarchJune 31,30, 2026, individually evaluated loans totaled $12.8$12.5 million, for which $5.7$6.0 million of these loans had a reserve of approximately $2.3$2.6 million allocated in the allowance for credit losses. Comparatively, individually evaluated loans totaled $15.1 million at December 31, 2025 for which $5.2 million of these loans had a reserve of approximately $1.5 million allocated in the allowance for credit losses.

The allowance for credit losses was $43.4$44.2 million, representing 1.10% of outstanding loans and providing coverage of 378.22%395.41% of nonperforming loans at MarchJune 31,30, 2026, compared to $42.3 million, million, or 1.10% of outstanding loans and 305.65% of nonperforming loans at December 31, 2025. At MarchJune 31,30, 2025, the ACL was $40.7$41.3 million, or 1.10% of outstanding loans and 378.09%362.35% of nonperforming loans.

Our retail deposits represented $3.37$3.56 billion, or 87.0%90.4% of total deposits, while our brokered deposits represented $501.7$379.4 million, or 13.0%,9.6%, of total deposits at MarchJune 31,30, 2026. At December December 31, 2025, retail deposits represented $3.16 billion, or 85.1%, of our total depositsdeposits, and brokered deposits were $552.9 million, representing representing 14.9% of our total deposits. The $392.1 million increase in retail deposits during the first six months of 2026 relates to our intense focus on growing client and core deposits and allowed us to reduce the balance of our brokered deposits by $173.5 million during the same period. Our loan-to-deposit ratio was 102% at MarchJune 31,30, 2026 and 103% at December 31, 2025.

Our primary focus is on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. In addition, at MarchJune 31,30, 2026 and December 31, 2025, we estimate that we have approximately $1.6$1.8 billion and $1.5 billion, or 42.4%46.8% and 39.6% of total deposits, respectively, in uninsured deposits, including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used by the FDIC for the Bank’s regulatory reporting requirements.

During the first threesix months of 2026, our average transaction account balances increased by $313.4$488.8 million, or 12.5%,19.1%, from the prior year, while our average time deposit balances decreased by $35.2$65.1 million, or 3.8%.7.0%. The increase in our average transaction account balances is the result of our focus on growing core deposits.

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits $250,000 or more at MarchJune 30, 2026 and December 31, 20262025 was as follows:

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at MarchJune 31,30, 2026 and December 31, 2025 were $725.2$626.6 million and $778.0 million, respectively. We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network.

At MarchJune 31,30, 2026 and December 31, 2025, we had $240.0 million of convertible fixed rate FHLB advances with a weighted average rate of 3.74%.3.70% and 3.74%, respectively. At MarchJune 31,30, 2026, the $240.0 million was secured with approximately $1.37$1.40 billion of mortgage loans and $14.8 million of stock in the FHLB. At December 31, 2025, the $240.0 million was secured with approximately $1.38 billion of mortgage loans and $14.5 million of stock in the FHLB.

Listed below is a summary of the terms and maturities of the advances outstanding at MarchJune 31,30, 2026 and December 31, 2025.

At June 30, 2026 and December 31, 2025 our cash and cash equivalents totaled $361.6 million and $269.6 million, respectively, or 7.7% and 6.1% of total assets, respectively. Our investment securities at MarchJune 31,30, 2026 and December 31, 2025 amounted to $144.6$164.9 million and $147.8 million, respectively, or 3.2%3.5% and 3.4% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain sixfive federal funds purchased lines of credit with correspondent banks totaling $128.5$113.5 million for which there were no borrowings against the lines of credit at MarchJune 31,30, 2026. We also also had $178.6$145.9 million pledged and available with the Federal Reserve Discount Window at MarchJune 31,30, 2026. Comparatively, at December 31, 2025, 2025, we had $181.2 million pledged and available with the Federal Reserve Discount Window.

We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at MarchJune 31,30, 2026 was $811.7$832.1 million, based primarily on the Bank’s qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at MarchJune 31,30, 2026 and December 31, 2025 we had had $270.3$302.4 million and $231.9 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

We also have a line of credit with another financial institution for $15.0 million, which was unused at MarchJune 31,30, 2026. The line of credit was renewed on March 5, 2026 at an interest rate of the U.S. Prime Rate plus 0.25% and matures on March 5, 2027.

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the threesix months ended MarchJune 31,30, 2026 and the year ended December 31, 2025.

To be considered “well capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risk-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least 5%. As of MarchJune 31,30, 2026 our capital ratios exceed these ratios and we remain “well capitalized.”

Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At MarchJune 31,30, 2026 unfunded commitments to to extend credit were $905.2$926.5 million, of which $91.8$100.5 million were at fixed rates and $813.4$826.0 million were at variable rates. At December 31, 2025, unfunded commitments to extend credit were $843.6 million, of which approximately $81.4 million were at fixed rates and $726.2$762.2 million were at variable rates. A significant portion of the unfunded commitments related to commercial business loans and consumer home equity lines of credit. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. As of March 31, 2026 the reserve for unfunded commitments was $2.1 million or 0.23%, compared to $2.0 million or 0.23% as of December 31, 2025.

At MarchJune 31,30, 2026 and December 31, 2025, there were were commitments under letters of credit for $18.4$20.6 million and $20.4 million, respectively. The credit risk and collateral involved in issuing issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.