Bankwell Financial Group, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements and related notes contained elsewhere in this report on Form 10-Q. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the Company’s Form 10-K filed for the year ended December 31, 2025 in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward-looking statements. General Bankwell Financial Group, Inc. is a bank holding company headquartered in New Canaan, Connecticut. Through our wholly-owned subsidiary, Bankwell Bank, or the Bank, we serve small and medium-sized businesses and retail clients. We have a history of building long-term client relationships and attracting new clients through what we believe is out superior service and our ability to deliver a diverse product offering. The following discussion and analysis presents our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the Bank. We generate most of our revenue from interest on loans and investments and fee-based revenues. Our primary source of funding for our loans is deposits. Our largest expenses are interest on deposits and salaries and related employee benefits. We measure our performance primarily through our net interest margin, efficiency ratio, ratio of ACL-Loans to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios. Executive Overview We strive to be the preferred banking provider, offering a compelling alternative to larger institutions. Our strategy rests on our competitive strengths: • Strategic Market Reach: While we serve our client base within 100 miles of our branch network, we also selectively pursue commercial banking opportunities beyond this radius, leveraging established business relationships and technology to support our clients’ growth. • Experienced Leadership: Our Executive Management Team brings a proven track record of success and deep industry expertise. • Dedicated Board of Directors: Our Board combines valuable expertise with close community ties, ensuring we understand and respond to local needs and are positioned to capitalize on market opportunities. • Disciplined Risk Management: We employ a robust and proactive risk management framework to safeguard assets, ensure regulatory compliance, and support sustainable growth. • Strong Capital Position: Our capital position has facilitated our growth and is integral to the execution of our business plan, and; • Scalable Operating Platform: Designed for efficiency and scalability, our platform supports our growth and provides a seamless customer experience. 46 Critical Accounting Policies and Estimates The discussion and analysis of our results of operations and financial condition are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from our current estimates, as a result of changing conditions and future events. We believe that accounting estimates related to the measurement of the ACL-Loans, the valuation of derivative instruments, investment securities and deferred income taxes, and the evaluation of investment securities for are particularly critical and susceptible to significant near-term change. Earnings and Performance Overview Revenues (net interest income plus noninterest income) for the quarter ended March 31, 2026 were $30.2 million, versus $23.6 million for the quarter ended March 31, 2025. The increase in revenues was mainly attributable to a decrease in interest expense, higher gains from loans sales, and an increase in earning asset yields. Net income available to common shareholders was $11.3 million, or $1.41 per diluted share, and $6.9 million, or $0.87 per diluted share, for the three months ended March 31, 2026 and 2025, respectively. The increase was primarily due to the aforementioned increase in revenues and a decrease in provision for credit losses. Returns on average shareholders' equity and average assets for the three months ended March 31, 2026 were 14.88% and 1.35%, respectively, compared to 10.16% and 0.86%, respectively, for the three months ended March 31, 2025. Results of Operations Net Interest Income Net interest income is the difference between interest earned on loans and securities and interest paid on deposits and other borrowings, and is the primary source of our operating income. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest earning assets and interest bearing liabilities. Included in interest income are certain loan fees, such as deferred origination fees and late charges. We convert tax-exempt income to a fully taxable equivalent ("FTE") basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. The average balances are principally daily averages. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments. Premium amortization and discount accretion are included in the respective interest income and interest expense amounts. FTE net interest income for the three months ended March 31, 2026 and 2025 was $27.0 million and $22.2 million, respectively. FTE interest income for the three months ended March 31, 2026 increased by $2.0 million, or 4.2%, to $50.6 million, compared to FTE interest income for the three months ended March 31, 2025. This increase was due to an increase in interest and fees on loans due to higher overall loan balances. Interest expense for the three months ended March 31, 2026 decreased by $2.8 million compared to interest expense for the three months ended March 31, 2025. The decrease in interest expense was driven by a decrease in interest expense on deposits, resulting from a decrease in rates on interest bearing deposits. 47 Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential The following table presents the average balances and yields earned on interest earning assets and average balances and weighted average rates paid on our funding liabilities for the three months ended March 31, 2026 and 2025. For the Quarter Ended March 31, 2026 March 31, 2025 Average Balance Interest Yield/ Rate (4) Average Balance Interest Yield/ Rate (4) Assets: Cash and Fed funds sold $ 244,216 $ 1,965 3.26 % $ 349,235 $ 3,557 4.13 % Securities (1) 192,116 1,829 3.81 150,650 1,477 3.92 Loans: Commercial real estate 1,900,235 29,511 6.21 1,848,208 28,285 6.12 Residential real estate 32,293 464 5.75 41,585 633 6.09 Construction 163,728 2,939 7.18 178,878 3,468 7.76 Commercial business 682,398 12,815 7.51 508,417 10,007 7.87 Consumer 74,237 1,058 5.78 81,483 1,082 5.38 Total loans 2,852,891 46,787 6.56 2,658,571 43,475 6.54 Federal Home Loan Bank stock 5,789 64 4.49 4,596 110 9.71 Total earning assets 3,295,012 $ 50,645 6.15 % 3,163,052 $ 48,619 6.15 % Other assets 86,396 89,743 Total assets $ 3,381,408 $ 3,252,795 Liabilities and shareholders' equity: Interest bearing liabilities: NOW $ 98,330 $ 49 0.20 % $ 99,487 $ 109 0.45 % Money market 1,058,395 9,065 3.47 893,361 8,521 3.87 Savings 97,719 671 2.79 88,167 658 3.03 Time 1,218,184 12,145 4.04 1,378,468 15,484 4.56 Total interest bearing deposits 2,472,628 21,930 3.60 2,459,483 24,772 4.10 Borrowed Money 156,441 1,720 4.46 133,917 1,639 4.96 Total interest bearing liabilities 2,629,069 $ 23,650 3.65 % 2,593,400 $ 26,411 4.13 % Noninterest bearing deposits 400,021 333,796 Other liabilities 44,967 50,555 Total liabilities 3,074,057 2,977,751 Shareholders' equity 307,351 275,044 Total liabilities and shareholders' equity $ 3,381,408 $ 3,252,795 Net interest income (2) $ 26,995 $ 22,208 Interest rate spread 2.50 % 2.02 % Net interest margin (3) 3.28 % 2.81 % (1) Average balances and yields for securities are based on amortized cost. (2) The adjustment for securities and loans taxable eq ui valency amounted to $109 thousand and $142 thousand for the three months ended March 31, 2026 and 2025, respectively. (3) Annualized net interest income as a percentage of earning assets. (4) Yields are calculated using the contractual day count convention for each respective product type. 48 Effect of changes in interest rates and volume of average earning assets and average interest bearing liabilities The following table shows the extent to which changes in interest rates and changes in the volume of average earning assets and average interest bearing liabilities have affected net interest income. For each category of earning assets and interest bearing liabilities, information is provided relating to: changes in volume (changes in average balances multiplied by the prior year’s average interest rates); changes in rates (changes in average interest rates multiplied by the prior year’s average balances); and the total change. Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each. Three Months Ended March 31, 2026 vs 2025 Increase (Decrease) (In thousands) Volume Rate Total Interest and dividend income: Cash and Fed funds sold $ (940) $ (652) $ (1,592) Securities 396 (43) 353 Loans: Commercial real estate 804 421 1,225 Residential real estate (135) (33) (168) Construction (282) (247) (529) Commercial business 3,288 (481) 2,807 Consumer (100) 76 (24) Total loans 3,575 (264) 3,311 Federal Home Loan Bank stock 24 (70) (46) Total change in interest and dividend income 3,055 (1,029) 2,026 Interest expense: Deposits: NOW (1) (60) (61) Money market 1,475 (930) 545 Savings 68 (55) 13 Time (1,703) (1,637) (3,340) Total deposits (161) (2,682) (2,843) Borrowed money 263 (182) 81 Total change in interest expense 102 (2,864) (2,762) Change in net interest income $ 2,953 $ 1,835 $ 4,788 Provision for Credit Losses The provision for credit losses is based on management’s periodic assessment of the adequacy of our ACL-Loans and ACL-Unfunded Commitments which, in turn, is based on interrelated factors such as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, economic and credit conditions, the direction of real estate values, and regulatory guidelines. The provision for credit losses is charged against earnings in order to maintain our ACL-Loans and ACL-Unfunded Commitments and reflects management’s best estimate of probable losses inherent in our loan portfolio as of the balance sheet date. The credit for credit losses for the three months ended March 31, 2026 was $1.0 million compared to a provision for credit losses of $0.5 million for the three months ended March 31, 2025. Noninterest Income Noninterest income is a component of our revenue and is comprised primarily of fees generated from deposit relationships with our clients, fees generated from sales and referrals of loans, and income earned on bank-owned life insurance. 49 The following table compares noninterest income for the three months ended March 31, 2026 and 2025: Three Months Ended March 31, Change (Dollars in thousands) 2026 2025 $ % Gains and fees from sales of loans $ 2,425 $ 442 $ 1,983 Favorable Bank-owned life insurance 358 344 14 4.1 Service charges and fees 780 602 178 29.6 Other (220) 117 (337) Unfavorable Total noninterest income $ 3,343 $ 1,505 $ 1,838 122.1 % Noninterest income increased by $1.8 million for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The increase in noninterest income was mainly driven by higher gains from SBA loan sales. Noninterest Expense The following table compares noninterest expense for the three months ended March 31, 2026 and 2025: Three Months Ended March 31, Change (Dollars in thousands) 2026 2025 $ % Salaries and employee benefits $ 9,830 $ 7,052 $ 2,778 39.4 % Occupancy and equipment 2,705 2,575 130 5.0 Professional services 1,393 1,529 (136) (8.9) Data processing 716 885 (169) (19.1) Director fees 363 348 15 4.3 FDIC insurance 543 779 (236) (30.3) Marketing 126 142 (16) (11.3) Other 1,213 831 382 46.0 Total noninterest expense $ 16,889 $ 14,141 $ 2,748 19.4 % Noninterest expense increased by $2.7 million to $16.9 million for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The increase in noninterest expense was primality attributable to an increase in salaries and employee benefits resulting from incremental new hires in support of strategic initiatives. Income Taxes Income tax expense for the three months ended March 31, 2026 and 2025 totaled $3.1 million and $2.1 million, respectively. The effective tax rates for the three months ended March 31, 2026 and 2025 were 21.5% and 23.2%, respectively. Financial Condition Summary Assets totaled $3.4 billion at March 31, 2026, an increase of $14.0 million or 0.4% compared to December 31, 2025. Gross loans totaled $2.9 billion at March 31, 2026, an increase of $26.5 million or 0.9% compared to December 31, 2025. Deposits totaled $2.9 billion at March 31, 2026, an increase of $55.8 million, or 2.0% compared to December 31, 2025. Shareholders’ equity totaled $311.9 million as of March 31, 2026, an increase of $10.4 million compared to December 31, 2025, primarily a result of net income of $11.3 million for the three months ended March 31, 2026. The increase was partially offset by dividends paid of $1.6 million. 50 Loan Portfolio We originate commercial real estate loans, construction loans, commercial business loans and consumer loans in our market. We also pursue certain types of commercial lending opportunities outside our market. Our loan portfolio is the largest category of our earning assets. Total loans before deferred loan fees and the ACL-Loans were $2.9 billion at March 31, 2026 and $2.8 billion at December 31, 2025. Total gross loans increased $26.5 million as of March 31, 2026 compared to the year ended December 31, 2025. The following table compares the composition of our loan portfolio for the dates indicated: (In thousands) At March 31, 2026 At December 31, 2025 Change Real estate loans: Residential $ 30,128 $ 33,139 $ (3,011) Commercial 1,896,565 1,930,979 (34,414) Construction 155,826 153,778 2,048 2,082,519 2,117,896 (35,377) Commercial business 723,272 645,321 77,951 Consumer 60,827 76,855 (16,028) Total loans $ 2,866,618 $ 2,840,072 $ 26,546 The following table compares the composition of our commercial real estate loan portfolio by non-owner occupied and owner occupied loans at March 31, 2026 and December 31, 2025: At March 31, 2026 At December 31, 2025 Change Total % Total % Total (Dollars in thousands) Commercial real estate loans: Non-owner occupied $ 1,086,481 57.29 % $ 1,128,993 58.47 % $ (42,512) Owner occupied 810,084 42.71 801,851 41.53 8,233 Total commercial real estate loans (1) $ 1,896,565 100.00 % $ 1,930,844 100.00 % $ (34,279) (1) Excludes the positive fair value effect of the portfolio layer swap of $135 thousand for Commercial Real Estate at December 31, 2025. 51 The following table compares the composition of our commercial real estate loan portfolio by property type, and collateral location as of March 31, 2026 : Commercial Real Estate CT NYC All Other NY NJ FL PA OH All Other Total (Dollars in thousands) Residential care (1) $ 8,650 $ 37,004 $ 38,550 $ 20,800 $ 267,626 $ 51,048 $ 94,899 $ 262,593 $ 781,170 Retail 76,469 7,197 71,559 12,997 1,080 32,923 3,301 86,827 292,353 Multifamily 166,449 49,665 22,315 6,995 — 21,396 — — 266,820 Office 47,201 8,361 9,977 28,541 2,157 — — 57,822 154,059 Industrial / warehouse 54,811 18,620 19,094 16,674 2,611 — — 10,695 122,505 Mixed use 48,207 60,772 2,456 — — — — 850 112,285 Medical office 28,655 1,337 11,929 — — 3,900 4,643 20,682 71,146 1-4 family investment 14,953 1,819 1,580 2,074 16,808 — — — 37,234 All other (2) 11,398 22,599 24,996 — — — — — 58,993 $ 456,793 $ 207,374 $ 202,456 $ 88,081 $ 290,282 $ 109,267 $ 102,843 $ 439,469 $ 1,896,565 (1) Primarily consists of skilled nursing and assisted living facilities. (2) Includes Special use, self storage, and land. As of March 31, 2026, the Bank had $154.1 million of loans collateralized by offices, which represented 11.9% of the total loan portfolio. Most of the properties in this portfolio are in suburban locations. 95.7% of this portfolio was pass rated, and there was one relationship totaling $5.1 million on nonaccrual status. We also performed an additional review of our multifamily exposure. As of March 31, 2026, we had $266.8 million of loans collateralized by multifamily properties, which represented 9.3% of the total loan portfolio. 89.4% of this portfolio is pass rated and current. These properties are all located in Connecticut, New York, New Jersey, or Pennsylvania, with eight properties, totaling $49.7 million, located in New York City. 78.3% of the New York City exposure is located in Brooklyn, 11.9% in Manhattan and the remaining 9.8% in Queens. The following table presents an analysis of the commercial real estate portfolio's loan to value at origination and by property type as of March 31, 2026 . Commercial Real Estate Total CRE Portfolio Percentage of Total CRE Portfolio Loan to Value % (Dollars in thousands) Property Type Residential care (1) $ 781,170 41.2 % 65.6 % Retail 292,353 15.4 63.3 Multifamily 266,820 14.1 62.5 Office 154,059 8.1 63.8 Industrial / warehouse 122,505 6.5 64.6 Mixed use 112,285 5.9 57.9 Medical office 71,146 3.8 61.4 1-4 family investment 37,234 2.0 62.0 All other 58,993 3.1 52.7 Total $ 1,896,565 100.0 % 63.5 % (1) Primarily consists of skilled nursing and assisted living facilities. 52 Asset Quality We actively manage asset quality through our underwriting practices and collection operations. Our Board of Directors monitors credit risk management. The Directors Loan Committee has primary oversight responsibility for the credit-granting function including approval authority for credit-granting policies, review of management’s credit-granting activities and approval of large exposure credit requests, as well as loan review and problem loan management and resolution. The committee reports the results of its respective oversight functions to our Board of Directors. In addition, our Board of Directors receives information concerning asset quality measurements and trends on a monthly basis. While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences as a result of general economic weakness, such as a prolonged downturn in the housing market or commercial real estate market on a national scale. Decreases in real estate values could adversely affect the value of property used as collateral for loans. In addition, adverse changes in the economy could have a negative effect on the ability of borrowers to make scheduled loan payments, which would likely have an adverse impact on earnings. The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each client and, for conventional loans, extends credit of up to 80% of the market value of the collateral, (85% maximum for owner occupied commercial real estate), depending on the client's creditworthiness and the type of collateral. The client’s ability to service the debt is monitored on an ongoing basis. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment for commercial loans to be based on the client’s ability to generate continuing cash flows. The Company does not provide first or second consumer mortgage loans secured by residential properties but has a small legacy portfolio which continues to amortize, pay off due to the sale of the collateral, or refinance away from the Company. Credit quality indicators. To measure credit risk for the loan portfolios, the Company employs a credit risk rating system. This risk rating represents an assessed level of a loan’s risk based on the character and creditworthiness of the borrower/guarantor, the capacity of the borrower to adequately service the debt, any credit enhancements or additional sources of repayment, and the quality, value and coverage of the collateral, if any. The following table presents credit risk ratings as of March 31, 2026 and December 31, 2025: Credit Risk Ratings March 31, 2026 December 31, 2025 (In thousands) Pass $ 2,723,680 $ 2,711,179 Special Mention (1) 98,459 80,429 Substandard 44,395 48,464 Doubtful 84 — Loss — — Total loans $ 2,866,618 $ 2,840,072 ( 1) 95.7% and 100.0% of Risk Rated 6 loans are current on payments of which 99.6% and 99.3% are guaranteed by ultra-high net worth sponsors as of March 31, 2026 and December 31, 2025, respectively. Credit risk management involves a partnership between our relationship managers and our credit approval, portfolio management, credit administration and collections teams. Disciplined underwriting, portfolio monitoring and early problem recognition are important aspects of maintaining our high credit quality standards. 53 Nonperforming assets . Nonperforming assets include nonaccrual loans and property acquired through foreclosures or repossession. The following table presents nonperforming assets and additional asset quality data for the dates indicated: (In thousands) At March 31, 2026 At December 31, 2025 Nonaccrual loans: Real estate loans: Residential $ 544 $ 557 Commercial 17,112 14,445 Commercial business 1,380 1,302 Construction — — Consumer — — Total nonaccrual loans 19,036 16,304 Other real estate owned — — Total nonperforming assets $ 19,036 $ 16,304 Nonperforming assets to total assets 0.56 % 0.49 % Nonaccrual loans to total gross loans 0.66 % 0.57 % ACL-loans as a % of total loans 1.03 % 1.08 % ACL-loans as a % of nonperforming loans 155.39 % 188.33 % Total past due loans to total gross loans 0.62 % 0.31 % Nonaccrual loans totaled $19.0 million at March 31, 2026 and $16.3 million at December 31, 2025. There was no Other Real Estate Owned ("OREO") at March 31, 2026 and December 31, 2025, respectively. Allowance for Credit Losses - Loans ("ACL-Loans") Our Board of Directors has adopted an Allowance for Credit Losses policy designed to provide management with a methodology for determining and documenting the allowance for credit losses for each reporting period. We evaluate the adequacy of the ACL-Loans at least quarterly, and in determining our ACL-Loans, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of our ACL-Loans is based on internally assigned risk classifications of loans, the Bank’s and peer banks’ historical loss experience, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Our general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that it is probable that the loan will not be repaid according to its original contractual terms, including principal and interest. Full or partial charge-offs on collateral dependent loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. We do not recognize a recovery when an updated appraisal indicates a subsequent increase in value of the collateral. Our charge-off policies, which comply with standards established by our banking regulators, are consistently applied from period to period. Charge-offs are recorded on a monthly basis, as incurred. Partially charged-off loans continue to be evaluated on a monthly basis and additional charge-offs or provisions for credit losses may be recorded on the remaining loan balance based on the same criteria. 54 The following table presents the activity in our ACL-Loans and related ratios for the dates indicated: Three Months Ended March 31, (Dollars in thousands) 2026 2025 Balance at beginning of period $ 30,705 $ 29,007 Charge-offs: Residential real estate — — Commercial real estate — (67) Commercial business (148) — Consumer (73) (33) Total charge-offs (221) (100) Recoveries: Commercial real estate 5 — Commercial business 15 4 Consumer 33 36 Total recoveries 53 40 Net (charge-offs) recoveries (168) (60) (Credit) provision for credit losses - loans (957) 538 Balance at end of period $ 29,580 $ 29,485 Net charge-offs to average loans 0.01 % 0.00 % ACL-Loans to total gross loans 1.03 % 1.11 % At March 31, 2026 , our ACL-Loans was $29.6 million and represented 1.03% of total gross loans, compared to $30.7 million or 1.08% of total gross loans, at December 31, 2025. The following table presents the allocation of the ACL-Loans balance and the related allocation percentage of these loans across the total loan portfolio: At March 31, 2026 At December 31, 2025 (Dollars in thousands) ACL-Loans Amount ACL-Loans Percentage Loan Segment to Total Loans Percentage ACL-Loans Amount ACL-Loans Percentage Loan Segment to Total Loans Percentage Residential real estate $ 48 0.2 % 1.1 % $ 55 0.2 % 1.2 % Commercial real estate 18,588 62.8 66.2 20,255 66.0 68.0 Construction 1,912 6.5 5.4 2,251 7.3 5.4 Commercial business 7,706 26.1 25.2 6,635 21.6 22.7 Consumer 1,326 4.4 2.1 1,509 4.9 2.7 Total ACL-Loans $ 29,580 100.0 % 100.0 % $ 30,705 100.0 % 100.0 % The allocation of the ACL-Loans at March 31, 2026 reflects our assessment of credit risk and probable loss within each portfolio. We believe that the level of the ACL-Loans at March 31, 2026 is appropriate to cover probable losses. ACL- Unfunded Commitments The ACL-Unfunded Commitments provision is based on "forward looking" losses inherent with funding the unused portion of legal commitments to lend. The reserve for unfunded credit commitments is included within other liabilities in the accompanying Consolidated Balance Sheets. Changes in the ACL-Unfunded Commitments are reported as a component of the provision for credit losses in the accompanying Consolidated Statements of Income. 55 Investment Securities At March 31, 2026, the carrying value of our investment securities portfolio totaled $187.6 million and represented 5.6% of total assets, compared to $192.1 million, or 5.7% of total assets, at December 31, 2025. The net unrealized loss position on our investment portfolio at March 31, 2026 was $1.9 million and included gross unrealized gains of $1.3 million. The net unrealized loss position on our investment portfolio at December 31, 2025 was $0.7 million and included gross unrealized gains of $2.0 million. Deposit Activities and Other Sources of Funds March 31, 2026 December 31, 2025 (Dollars in thousands) Amount Percent Amount Percent Noninterest bearing demand $ 428,384 14.85 % $ 403,652 14.27 % NOW 104,704 3.63 90,205 3.19 Money market 1,095,883 37.98 1,007,844 35.62 Savings 99,008 3.43 97,418 3.44 Time 1,157,270 40.11 1,230,362 43.48 Total deposits $ 2,885,249 100.00 % $ 2,829,481 100.00 % Tota l de posits were $2.9 billion at March 31, 2026, an increase of $55.8 million, from t he balance at December 31, 2025. Brokered certificates of deposits totaled $460.6 million at March 31, 2026 and $505.0 million at December 31, 2025, respectively. Brokered money market accounts totaled $53.7 million at March 31, 2026 and $53.7 million at December 31, 2025, respectively. Certificate of deposits from national listing services were $32.9 million and $42.3 million as of March 31, 2026 and December 31, 2025, respectively. There were no one-way buy CDARS or one-way buy ICS at March 31, 2026 or December 31, 2025. Brokered deposits are comprised of Brokered CDs, brokered money market accounts, one-way buy CDARS, and one-way buy ICS. As of March 31, 2026, our FDIC insured deposits were $1,851.8 million, or 64% of total deposits. Additionally, deposits totaling $80.0 million, or 3% of total deposits, are insured by standby letters of credit with the Federal Home Loan Bank of Boston. At March 31, 2026 and December 31, 2025, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $1.0 billion and $1.1 billion, respectively, maturing during the periods indicated in the table below: (Dollars in thousands) March 31, 2026 December 31, 2025 Maturing: Within 3 months $ 377,829 $ 318,803 After 3 but within 6 months 227,042 352,251 After 6 months but within 1 year 380,302 379,021 After 1 year 2,494 3,265 Total $ 987,667 $ 1,053,340 We utilize advances from the Federal Home Loan Bank of Boston, or FHLB, as part of our overall funding strategy and to meet short-term liquidity needs, and to a lesser degree, manage interest rate risk arising from the difference in asset and liability maturities. Total FHLB advances were $60.0 million and $110.0 million at March 31, 2026 and December 31, 2025, respectively. The Bank has addition al borrowing capacity at the FHLB up to a certain percentage of the value of qualified collateral. In accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At March 31, 2026, the Bank had pledged $889.3 million of eligible loans and investment securities as collateral to support 56 borrowing capacity at the FHLB. As of March 31, 2026, the Bank had immediate availability to borrow an additional $509.1 million from the FHLB based on qualified collateral. At March 31, 2026 , the Bank had a secured borrowing line with the FRB, a letter of credit with the FHLB, and unsecured lines of credit with Zions Bank, Pacific Coast Bankers Bank ("PCBB"), and Atlantic Community Bankers Bank ("ACBB"). The total borrowing line, letter, or line of credit and the amount outstanding at March 31, 2026 is summarized below: March 31, 2026 Total Letter or Line of Credit Total Outstanding (Dollars in thousands) FRB $ 663,989 $ — FHLB 639,777 130,645 Zions Bank 45,000 — PCBB 38,000 — ACBB 12,000 — Total $ 1,398,766 $ 130,645 Liquidity and Capital Resources Liquidity Management Liquidity is defined as the ability to generate sufficient cash flows to meet all present and future funding requirements at reasonable costs. Our primary source of liquidity is deposits. While our generally preferred funding strategy is to attract and retain low cost deposits, our ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from our investment securities portfolios, loan sales, loan repayments and earnings. Investment securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs. The Bank’s liquidity positions are monitored daily by management. The Asset Liability Committee ("ALCO") establishes guidelines to ensure maintenance of prudent levels of liquidity. ALCO reports to the Company’s Board of Directors. The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. We employ a stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. The Bank has established unsecured borrowing capacity with Zions Bank, PCBB, and ACBB. The Bank also maintains additional collateralized borrowing capacity with the FRB and the FHLB in excess of levels used in the ordinary course of business. Our sources of liquidity include cash, unpledged investment securities, borrowings from the FRB, FHLB, lines of credit from Zions Bank, PCBB, and ACBB, the brokered deposit market and national CD listing services. Capital Resources Shareholders’ equity totaled $311.9 million as of March 31, 2026, an increase of $10.4 million compared to December 31, 2025, primarily a result of net income of $11.3 million for the three months ended March 31, 2026. The increase was partially offset by dividends paid of $1.6 million. The Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. At March 31, 2026, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action. At March 31, 2026, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 11.97%, Tier 1 capital to risk-weighted assets was 11.97%, total capital to risk-weighted assets was 13.00% and Tier 1 capital to average assets was 10.32%. At March 31, 2026, the Company met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action. At March 31, 2026, the Company’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 10.59%, Tier 1 capital to risk-weighted assets was 10.59%, total capital to risk-weighted assets was 14.01% and Tier 1 capital to average assets was 9.13%. 57 Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum common equity Tier 1 risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a capital conservation buffer consisting of common Tier 1 equity in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Company and the Bank to effectively maintain common equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively. The Company and the Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends, pay discretionary bonuses, or to engage in share repurchases. Asset/Liability Management and Interest Rate Risk We measure interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk, or IRR, is quantified and appropriate strategies are formulated and implemented. We model IRR by using two primary risk measurement techniques: simulation of net interest income and simulation of economic value of equity. These two measurements are complementary and provide both short-term and long-term risk profiles for the Company. Because both baseline simulations assume that our balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that ALCO could implement in response to rate shifts. The simulation analyses are updated quarterly. We use a net interest income at risk simulation to measure the sensitivity of net interest income to changes in market rates. This simulation captures underlying product behaviors, such as asset and liability repricing dates, balloon dates, interest rate indices and spreads, rate caps and floors, as well as other behavioral attributes. The simulation of net interest income also requires a number of key assumptions such as: (i) prepayment projections for loans and securities that are projected under each interest rate scenario using internal and external mortgage analytics; (ii) new business loan rates that are based on recent new business origination experience; and (iii) deposit pricing assumptions for non-maturity deposits reflecting the Bank’s history, management judgment and core deposit studies. Combined, these assumptions can be inherently uncertain, and as a result, actual results may differ from simulation forecasts due to the timing, magnitude and frequency of interest rate changes, future business conditions, as well as unanticipated changes in management strategies. We use two sets of standard scenarios to measure net interest income at risk. For the Parallel Ramp Scenarios, rate changes are ramped over a twelve-month horizon based upon a parallel yield curve shift and then maintained at those levels over the remainder of the simulation horizon. Parallel Shock Scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Simulation analysis involves projecting a future balance sheet structure and interest income and expense under the various rate scenarios. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than: 6% for a 100 basis point shift; 12% for a 200 basis point shift; and 18% for a 300 basis point shift. Per Company policy, the Bank should not be outside these limits for twelve consecutive months unless the Bank's forecasted capital ratios are considered to be "well capitalized". As of March 31, 2026, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized". 58 The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning March 31, 2026 and December 31, 2025: Parallel Ramp Estimated Percent Change in Net Interest Income Rate Changes (basis points) March 31, 2026 December 31, 2025 -100 (0.30) % 0.10 % +200 2.00 1.00 Parallel Shock Estimated Percent Change in Net Interest Income Rate Changes (basis points) March 31, 2026 December 31, 2025 -100 (0.80) % (0.60) % +100 2.70 2.20 +200 5.20 4.20 +300 7.90 6.40 The net interest income at risk simulation results indicate that, as of March 31, 2026, we remain liability sensitive. The liability sensitivity is due to the fact that there are more liabilities than assets subject to repricing as market rates change. Based on our model, which was run as of March 31, 2026, we estimated that over the next one-year period a 200 basis-point parallel ramp increase of interest rates would increase our net interest income by 2.00%, while a 100 basis-point parallel ramp decrease of interest rates would decrease net interest income by 0.30%. As of December 31, 2025, we estimated that over the next one-year period a 200 basis-point parallel ramp increase of interest rates would increase our net interest income by 1.00%, while a 100 basis-point parallel ramp decrease of interest rates would increase net interest income by 0.10%. Based on our model, which was run as of March 31, 2026, we estimated that over the next two years, on a cumulative basis, a 200 basis point parallel ramp increase of interest rates would increase our net interest income by 6.80%, while a 100 basis-point parallel ramp decrease in interest rates would increase net interest income by 6.70%. As of December 31, 2025, we estimated that over the next two years, on a cumulative basis, a 200 basis-point parallel ramp increase of interest rates would increase our net interest income by 6.00%, while a 100 basis-point parallel ramp decrease in interest rates would increase net interest income by 7.90%. The change in sensitivity between March 31, 2026 and December 31, 2025 was impacted by an increase in variable-rate loans. We also conduct an economic value of equity at risk simulation in tandem with our net interest income simulations, which measures the sensitivity of economic value of equity to changes in interest rates. Base case economic value of equity at risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates. The base case scenario assumes that future interest rates remain unchanged. The following table sets forth the estimated percentage change in our economic value of equity at risk, assuming various shifts in interest rates: Estimated Percent Change in Economic Value of Equity ("EVE") Rate Changes (basis points) March 31, 2026 December 31, 2025 -100 0.50 % 1.10 % +100 (0.10) (1.00) +200 (0.90) (2.70) +300 (1.40) (3.70) While ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of our balance sheet may change to a different degree than estimated. ALCO recognizes that deposit balances could shift into higher yielding alternatives as market rates change. ALCO has modeled increased costs of deposits in the rising rate simulation scenarios presented above. 59 It should be noted that the static balance sheet assumption does not necessarily reflect our expectation for future balance sheet growth, which is a function of the business environment and client behavior. Another significant simulation assumption is the sensitivity of core deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.