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Item 2. Management’s Discussion and Analysis

2026-05-08 compared with 2025-11-05 · 150 added, 240 removed, 372 unchanged (51% of the section changed)

11 unchanged sentences

FIRST UNITED CORPORATION

First United Corporation is a Maryland corporation chartered in 1985 and a financial holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended, that elected financial holding company status in 2021.

First United Corporation is a Maryland corporation chartered in 1985 and a bank holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended, that elected financial holding company status in 2021.

The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, “the Trusts”), both Connecticut statutory business trusts.

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In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and a 99.9% non-voting membership interest in MCC FUBT Fund, LLC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland and Mineral County, West Virginia.

At September 30, 2025, the Corporation’s total assets were $2.0 billion, net loans were $1.5 billion, and deposits were $1.7 billion.

Shareholders’ equity at September 30, 2025 was $199.1 million.

At March 31, 2026, the Corporation’s total assets were $2.0 billion, net loans were $1.5 billion, and deposits were $1.8 billion.

Shareholders’ equity at March 31, 2026 was $205.3 million.

We maintain an Internet site at www.mybank.com on which we make available, free of charge, First United Corporation’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

RESULTS OF OPERATIONS

Consolidated net income was $6.9 million for the third quarter of 2025, or $1.07 per basic and diluted share, compared to $5.8 million, or $0.89 per basic and diluted share, for the third quarter of 2024.

Net income for the first nine months of 2025 was $18.7 million, or $2.89 per basic share and $2.88 per diluted common share, compared to $14.4 million, or $2.20 per basic and diluted share, for the same period of 2024.

The $1.2 million increase in quarterly net income when compared to the third quarter of 2024 was primarily driven by a $2.2 million increase in net interest income and a $0.3 million increase in non-interest income, partially offset by increases in provision expense of $0.2 million, non-interest expense of $0.7 million and income tax expense of $0.4 million.

Comparing the third quarter of 2025 to the same period of 2024, interest and fees on loans increased by $2.0 million primarily due to the repricing of adjustable-rate loans and new production booked at higher rates.

Quarterly interest expense increased by $0.3 million on a year-over-year basis.

This increase was attributable to growth in our municipal deposit balances, offset slightly by reduced interest expense on short-term borrowings related to the repayment of $40.0 million in Bank Term Funding Program (“BTFP”) balances in September 2024.

Other operating income increased by $0.3 million due to increases in wealth management income and net gains as a result of an investment sale transaction.

Other operating expenses increased by $0.7 million due to a $0.4 million increase in salaries and benefit expenses, a $0.2 million increase in professional services, and a $0.2 million increase in data processing costs.

These increases were offset by slight reductions in equipment, other real estate owned (“OREO”) and investor relations expenses.

Net income for the first nine months of 2025 was $18.7 million compared to $14.4 million for the same period in 2024.

Net interest income increased by $5.8 million due to a $6.4 million increase in interest income due to loans repricing at higher rates and new loan production booked at higher rates.

Interest expense increased by $0.6 million driven by a $1.2 million increase in interest on deposits related to growth in our municipal balances, partially offset by a net reduction in borrowing costs of $0.7 million resulting from the repayment of $40.0 million in BTFP balances late in the third quarter of 2024.

Provision for credit losses decreased by $0.4 million due primarily to strong credit quality, lower charge-offs and lower loan growth during the first nine months of 2025 when compared to the same time period in 2024.

Other operating income increased by $0.6 million primarily due to a $0.4 million increase in trust department income and a $0.2 million increase on gains from the sales of residential mortgages and investment securities.

These increases were partially offset by a $1.0 million increase in other operating expenses that were primarily related to a $0.7 million increase in salaries and employee benefits as a result of increased salary expense as we continue to build our sales teams, a $0.5 million increase in data processing expenses related to software agreements, and a $0.3 million increase in professional services expenses from increased audit fees.

These increases were partially offset by a $0.8 million decrease in equipment and occupancy expenses due primarily to reduced depreciation expense related to the closure of four branches early in 2024.

Other operating income, including net gains, for the third quarter of 2025 increased by $0.3 million when compared to the same period of 2024.

This increase was driven by a $0.2 million increase in wealth management income, reflecting higher market valuations and expanded relationships with both new and existing clients.

Additionally, $0.1 million in net gains from the sale of available-for-sale investments was recognized in the third quarter of 2025.

Other operating income for the nine months ended September 30, 2025 increased by $0.6 million when compared to the same period of 2024.

This increase was attributable to a $0.4 million increase in wealth management income, driven by improving market conditions, increased annuity sales and growth in new and existing customer relationships.

Gains on sales of residential mortgages increased by $0.1 million and gains on sales of investment securities increased by $0.1 million.

Service charge and debit card income were both stable when comparing the first nine months of 2025 to the same period of 2024.

Operating expenses increased by $0.7 million in the third quarter of 2025 when compared to the third quarter of 2024.

Salaries and employee benefits increased by $0.4 million due to a $0.4 million increase in salary expense related to normal merit increases effective April 1, 2025 and increased staffing levels as an effort to build out our West region and a $0.1 million increase in incentive expense, partially offset by decreases in employee life and health insurance expense due to decreased claims.

Additionally, data processing and professional services expenses each increased by $0.2 million year-over-year.

For the nine months ended September 30, 2025, non-interest expense increased by $1.0 million when compared to the nine months ended September 30, 2024.

Salaries and employee benefits increased by $0.7 million related to normal merit increases effective April 1, 2025, increased salary expense as a result of increased staffing levels as we continue to expand our West region, increases in incentives, and 401K expenses offset by reduced life and health insurance costs related to reduced claims in 2025.

Net OREO expenses increased by $0.1 million.

Data processing expenses increased by $0.5 million primarily due to increased software agreements and professional services expenses increased by $0.3 million as a result of increased audit fees.

These increases were partially offset by a $0.8 million decrease in occupancy and equipment expenses related to accelerated depreciation expense recognized in the first quarter of 2024 related to branch closures.

Consolidated net income was $6.7 million for the first quarter of 2026, or $1.03 per diluted share, compared to $5.8 million, or $0.89 per diluted share, for the first quarter of 2025.

Non-GAAP net income was $6.6 million, or $1.02 per diluted share, for the first quarter of 2026 compared to $5.8 million, or $0.89 per diluted share, for the first quarter of 2025 and $7.2 million, or $1.10 per diluted share, for the fourth quarter of 2025.

Return on Average Assets and Return on Average Equity for the quarter ended March 31, 2026, were 1.29% and 13.06%, respectively.

The $0.9 million increase in quarterly net income when compared to the first quarter of 2025 was primarily driven by a $2.1 million increase in net interest income, an increase of $0.4 million in non-interest income, inclusive of gains, partially offset by a $0.2 million increase in provision for credit losses as a result of increased off-balance sheet loan commitments, an increase in non-interest expense of $1.1 million, and an increase in income tax expense of $0.3 million.

Comparing the first quarter of 2026 to the same period of 2025, interest and fees on loans increased by $0.7 million resulting from new loans booked at higher rates late in 2025 and the repricing of adjustable-rate loans.

Interest expense decreased by $0.4 million when comparing year-over-year quarterly expense, resulting from the repayment of a $25.0 million brokered certificate of deposit in January 2026 and $65.0 million in Federal Home Loan Bank (“FHLB”) borrowings in March 2026.

Other operating income increased by $0.4 million, driven by an increase in trust and brokerage income of $0.2 million resulting from increased production and a $0.2 million increase in bank owned life insurance (“BOLI”) related to a one-time death benefit received in the first quarter of 2026.

Other operating expenses increased by $1.1 million, driven by a $0.9 million increase in salaries and benefits as a result of filling open positions throughout 2025, normal merit increases in April 2025 and increased incentive payouts, partially offset by reduced life and health insurance expense due to reduced claims and an increase in the reduction of costs associated with loan originations related to increased loan production.

Professional services expenses increased by $0.1 million and data processing expenses increased by $0.2 million.

These increases were partially offset by reductions in other expenses such as miscellaneous loan fees and net periodic pension expenses.

Net Interest Income

3 unchanged sentences

This is a non-GAAP disclosure and management believes it is not materially different than the corresponding GAAP disclosure.

The tables below summarize net interest income for the nine- and three-month periods ended September 30, 2025 and 2024.

Nine Months Ended

September 30,

(in thousands)

Interest income

Interest expense

Net interest income

Net interest margin %

The table below summarizes net interest income for the three-month periods ended March 31, 2026 and 2025.

Three Months Ended

September 30,

(in thousands)

3 unchanged sentences

Net interest margin %

The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the nine- and three-month periods ended September 30, 2025 and 2024:

Nine Months Ended

September 30,

(in thousands)

Investment Securities:

Federal funds sold

Interest-bearing deposits with other banks

Other interest-earning assets

Total earning assets

Allowance for loan losses

Non-earning assets

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

Interest-bearing money markets - retail

Interest-bearing money markets - brokered

Savings deposits

Time deposits - retail

Time deposits - brokered

Total deposits

Short-term borrowings

Long-term borrowings

Total interest-bearing liabilities

Non-interest-bearing deposits

Other liabilities

Shareholders’ Equity

Total Liabilities and Shareholders’ Equity

Net interest income and spread

Net interest margin

(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2025 and 2024.

Non-GAAP interest income on an FTE for the nine-month periods ended September 30, 2025 and 2024 was $160 and $176, respectively.

(2) Net interest margin is calculated as net interest income divided by average earning assets.

(3) The average yields on investments are based on amortized cost.

The following table sets forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the three-month periods ended March 31, 2026 and 2025:

Three Months Ended

September 30,

(dollars in thousands)

(in thousands)

Investment Securities:

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(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2026 and 2025.

Non-GAAP interest income on an FTE basis for the three-month periods ended September 30, 2025 and 2024 was $57 and $61, respectively.

Non-GAAP interest income on an FTE basis for the three-month periods ended March 31, 2026 and 2025 was $56 and $49, respectively.

(2) Average balances are presented on a daily average basis.

(3) The average balances of non-accrual loans for the three-months ended March 31, 2026 and 2025, which were reported in the average loan balances for these periods, were $4,029 and $4,265, respectively.

(4) Net interest margin is calculated as net interest income divided by average earning assets.

(5) The average yields on investments are based on amortized cost.

Net interest income, on a non-GAAP, FTE basis, increased by $2.2 million for the third quarter of 2025 when compared to the third quarter of 2024 .

This increase was driven by an increase of $2.5 million in interest income due to a $2.0 million increase in interest income on loans resulting from an increase of 25 basis points in the overall yield on the loan portfolio.

This increase i n yield was attributable to upward repricing of adjustable-rate loans and an increase in average balances of $68.4 million.

Interest income on investment securities increased by $0.2 million due to an increase in average balances of $9.0 million and an increase in yield of 17 basis points.

The increase in the investment portfolio resulted from management’s strategic decision to reinvest cashflows in the higher rate environment to increase yield on the portfolio.

Interest income on Federal funds sold increased by $0.2 million due to an increase of $37.4 million in average balances, partially offset by a decrease of 147 basis points in average rates.

Interest expense increased by $0.3 million when compared to the third quarter of 2024.

Interest expense paid on deposits increased by $0.4 million related to a $100.5 million increase in average balances, partially offset by a decrease of 6 basis points on the rate paid.

Interest paid on short-term borrowings decreased by $0.5 million when compared to the same period of 2024 due to the repayment of the $40.0 million borrowing from the BTFP late in the third quarter of 2024.

Interest paid on long-term borrowings increased by

$0.4 million when compared to the third quarter of 2024 due to a $43.8 million increase in average balances, partially offset by a decrease of 80 basis points on rates paid.

Comparing the nine months ended September 30, 2025 to the nine months ended September 30, 2024, net interest income, on a non-GAAP, FTE basis, increased by $5.8 million.

Interest income increased by $6.4 million and was driven by an increase of $6.6 million on interest and fees on loans as average loan balances increased by $72.6 million and the overall yield increased by 32 basis points in correlation with upward repricing of adjustable-rate loans.

Interest expense on deposits increased by $1.2 million as the average deposit balances increased by $87.6 million, driven by increases of $6.3 million in demand deposit accounts, $73.6 million in money market balances and $24.4 million in brokered time deposits, partially offset by decreases in savings balances of $15.2 million and $1.5 million in retail time deposits.

Interest expense on short-term borrowings decreased by $1.4 million due to the Bank’s utilization of the BTFP program in 2024 and subsequent repayment late in the third quarter of 2024.

Long-term borrowing costs increased $0.7 million as a result of an increase of $37.3 million in Federal Home Loan Bank of Atlanta (the “FHLB”) average balances, partially offset by a decrease in rate paid of 85 basis points.

The net interest margin for the nine months ended September 30, 2025 was 3.64% compared to 3.34% for the nine months ended September 30, 2024.

The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the nine- and three-month periods ended September 30, 2025 and 2024:

For the nine months ended September 30, 2025

compared to the nine months ended September 30, 2024

(in thousands and tax equivalent basis)

Interest Income:

Taxable Investments

Non-taxable Investments

Federal funds sold

Interest-bearing deposits

Other interest earning assets

Total interest income

Interest Expense:

Interest-bearing demand deposits

Interest-bearing money markets- retail

Interest-bearing money markets- brokered

Savings deposits

Time deposits - retail

Time deposits - brokered

Short-term borrowings

Long-term borrowings

Total interest expense

Net interest income

(1) The change in interest income/expense due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

For the three months ended September 30, 2025

compared to the three months ended September 30, 2024

Net interest income, on a non-GAAP, FTE basis, increased by $2.1 million for the first quarter of 2026 when compared to the first quarter of 2025.

This increase was driven by an increase of $1.7 million in interest income.

Interest income on loans increased by $0.7 million due to the increase of 21 basis points in overall yield on the loan portfolio as new loans were booked at higher rates during 2025 as well as the upward repricing of adjustable-rate loans.

Investment income increased slightly by $0.1 million as management continues to reinvest cashflows back into the portfolio resulting in an increase in yield of 14 basis points.

Interest income on federal funds sold increased by $0.8 million due to an increase of $87.2 million in average cash balances held at the Federal Reserve Bank as a result of strong deposit growth in 2025.

Interest expense, in the first quarter of 2026 decreased by $0.4 million when compared to the first quarter of 2025.

Interest on deposits remained stable despite a $95.9 million increase in average deposit balances, primarily in interest bearing demand and money market deposits.

Long-term borrowing expense decreased by $0.3 million for the first quarter of 2026 when compared to the same period of 2025 due to the repayment of $65.0 million of FHLB advances at their maturity in March of 2026.

For the three months ended March 31, 2026

compared to the three months ended March 31, 2025

(in thousands and tax equivalent basis)

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Specific allocations have been made for loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the estimated allowance for credit losses (“ACL”) have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

For the first nine months of 2025 and 2024, net credit loss expense was $2.0 million and $2.4 million, respectively.

For the third quarters of 2025 and 2024, net provision expense was $0.5 million and $0.3 million, respectively.

The composition of other operating income for the nine- and three-month periods ended September 30, 2025 and 2024 is illustrated in the following table:

Income as % of

The provision for credit losses was $0.9 million for the quarter ended March 31, 2026 compared to $0.7 million for the quarter ended March 31, 2025.

The composition of other operating income for the three-month periods ended March 31, 2026 and 2025 is illustrated in the following table:

Income as % of

Total Other Income

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

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Other Operating Expenses

The composition of other operating expenses for the nine- and three-month periods ended September 30, 2025 and 2024 is illustrated in the following table:

Expense as % of

The composition of other operating expenses for the three-month periods ended March 31, 2026 and 2025 is illustrated in the following table:

Expense as % of

Total Other Operating Expenses

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

1 unchanged sentence

FDIC premiums

Equipment expense

Occupancy expense of premises

3 unchanged sentences

Contract labor

Other real estate owned

Other real estate owned expense, net

Investor relations

6 unchanged sentences

In arriving at this effective tax rate, however, no effect should be included for the tax related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year.

The effective income tax rates as a percentage of income for the nine-month periods ended September 30, 2025 and September 30, 2024 were 24.7% and 24.6%, respectively.

The effective income tax rates, as a percentage of income, for the three-month periods ended March 31, 2026 and 2025 were both 24.6%.

GAAP and Non-GAAP Financial Measures

The following table sets forth certain selected financial data for the periods ended September 30, 2025 and 2024 under GAAP (as reported) and non-GAAP.

The following table sets forth certain selected financial data for the three-month periods ended March 31, 2026 and 2025 under GAAP (as reported) and non-GAAP.

A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with GAAP in the United States.

The Corporation’s management believes that the presentation of non-GAAP financial measures provides investors with a greater understanding of the Corporation’s operating results in addition to the results measured in accordance with GAAP.

Management believes that the presentation of non-GAAP financial measures provides investors with a greater understanding of the Corporation’s operating results in addition to the results measured in accordance with GAAP.

While management uses these non-GAAP measures in its analysis of the Corporation’s performance, this information should not be viewed as a substitute for financial results determined in accordance with GAAP or considered to be more important than financial results determined in accordance with GAAP.

Nine months ended September 30,

Three months ended September 30,

(in thousands, except for per share amount)

Three months ended March 31,

Per Share Data

Basic net income per share

Basic net income per share - as reported

Basic net income per share - non-GAAP

Diluted net income per share

Diluted net income per share - as reported

Diluted net income per share - non-GAAP

Basic book value per share

Diluted book value per share

Net income - as reported

Accelerated depreciation expenses

Income tax effect of adjustments

Adjusted net income (non-GAAP)

Diluted earnings per share - as reported

Accelerated depreciation expenses

Income tax effect of adjustments

Adjusted diluted earnings per share (non-GAAP)

Significant Ratios:

Nine months ended September 30,

Return on Average Assets - as reported

Accelerated depreciation expenses

Income tax effect of adjustments

Gain on disposal of fixed assets

Adjusted Return on Average Assets (non-GAAP)

Return on Average Equity - as reported

Accelerated depreciation expenses

Income tax effect of adjustments

Gain on disposal of fixed assets

Adjusted Return on Average Equity (non-GAAP)

Three months ended March 31,

(in thousands, except for per share amount)

Net income - as reported

Gain on disposal of fixed assets

Income tax effect of adjustments

Adjusted net income (non-GAAP)

Diluted earnings per share - as reported

Gain on disposal of fixed assets

Adjusted diluted earnings per share (non-GAAP)

FINANCIAL CONDITION

Balance Sheet Overview

Total assets at September 30, 2025 were $2.0 billion, representing a $51.0 million increase since December 31, 2024.

During the first nine months of 2025, the investment portfolio increased by $8.9 million as bonds were purchased to lock in yield in anticipation of potential declines in long-term rates.

Gross loans increased by $16.0 million as new production during the nine months of 2025 was mitigated by amortization and increased payoffs.

Other assets, including deferred taxes, premises and equipment, bank owned life insurance, pension assets, accrued trust income receivable, and accrued interest receivable, increased by $11.3 million.

Total liabilities at September 30, 2025 were $1.8 billion, representing a $31.1 million increase since December 31, 2024.

Total assets at March 31, 2026 were $2.0 billion, representing a $48.4 million decrease since December 31, 2025.

During the first quarter of 2026, cash and interest-bearing deposits in other banks decreased by $41.8 million.

The investment portfolio increased by $3.2 million as cashflows of the bonds were reinvested in the first quarter of 2026 in an effort to gain yield before long-

term rates decline.

Gross loans increased slightly by $3.8 million.

While loan production was strong during the quarter, amortization and unusually high payoffs exceeded growth levels.

Pension assets decreased by $0.8 million due to decreased market values.

Total liabilities at March 31, 2026 were $1.8 billion, representing a $50.1 million decrease since December 31, 2025.

Total deposits increased by $15.5 million when compared to December 31, 2025.

The increase in deposits was primarily driven by $50.0 million in new brokered time deposits obtained in January 2025 to fund the repayment of the $50.0 million in overnight borrowings outstanding at December 31, 2024.

In addition, savings and money market accounts increased by $42.0 million, retail time deposits increased by $9.7 million, and non-interest-bearing deposits increased by $3.2 million.

Interest-bearing demand deposits, primarily our ICS product, decreased slightly by $0.8 million due primarily to seasonal fluctuations in municipal deposit accounts.

Short-term borrowings decreased by $45.2 million due to the purchase of the brokered time deposit discussed above, which was partially offset by increases in the overnight investment sweep product.

Long-term borrowings decreased by $25.0 million due to the full repayment of a matured $25.0 million Federal Home Loan Bank borrowing in September 2025.

In January 2026, a $25.0 million brokered certificate of deposit with an interest rate of 4.23% matured and was repaid.

Savings and money market accounts increased by $44.4 million due primarily to the expansion of current and new relationships throughout the first three months of 2026.

Non-interest-bearing demand deposits decreased by $1.7 million and interest-bearing demand deposits decreased by $1.4 million due primarily to seasonal fluctuations in municipal and commercial account balances and increased spending by businesses and consumers.

Retail time deposits decreased by $0.8 million since December 31, 2025.

Loan Portfolio

1 unchanged sentence

(in thousands)

September 30, 2025

March 31, 2026

December 31, 2025

3 unchanged sentences

Residential mortgage

Outstanding loans of $1.5 billion at September 30, 2025 reflected a $16.0 million increase since December 31, 2024.

Since December 31, 2024, commercial real estate loans increased by $28.1 million, acquisition and development loans decreased by $1.3 million, commercial and industrial loans decreased by $8.5 million, residential mortgage loans increased by $2.5 million, and consumer loans decreased by $4.8 million.

New commercial loan production for the third quarter of 2025 was approximately $29.8 million.

Year-to-date commercial production was approximately $139.0 million, which compares to $117.0 million for the nine months ended September 30, 2024.

The commercial pipeline was strong as of September 30, 2025 at $50.4 million, and unfunded, commercial construction loans totaled approximately $42.8 million.

Commercial amortization and payoffs were unusually high at approximately $29.4 million for the three months ended September 30, 2025.

Included in that amount were payoffs of approximately $20.9 million during the third quarter primarily attributable to four relationships either utilizing cash to repay or consolidating debt.

New consumer mortgage loan production for the third quarter of 2025 was approximately $20.8 million, most of which was comprised of in-house mortgages booked to our portfolio.

The pipeline of in-house, portfolio loans as of September 30, 2025 was $23.0 million.

Unfunded commitments related to residential construction loans totaled $12.1 million at September 30, 2025.

Non-accrual loans totaled $3.8 million at September 30, 2025 compared to $4.9 million at December 31, 2024.

The decrease in non-accrual balances at September 30, 2025 was related to principal paydowns and the charge-off of $0.5 million related to a non-accrual commercial and industrial relationship that was recorded during the third quarter of 2025.

The following table presents loans in our commercial real estate portfolio by industry type at September 30, 2025.

Outstanding loans of $1.5 billion at March 31, 2026 reflected a $3.8 million increase since December 31, 2025.

Since December 31, 2025, commercial real estate loans increased by $38.7 million as a result of new customer relationships;

acquisition and development loans increased by $7.5 million;

commercial and industrial loans decreased by $30.8 million as a result of payoffs related to approximately $15.0 million due to competitive pricing, approximately $5.3 million related to sales of businesses, and approximately $8.0 million as a result of a refinance to another institution;

residential mortgage loans decreased by $10.6 million as a result of normal amortization;

and consumer loans decreased by $1.0 million.

New commercial loan production for the three months ended March 31, 2026 was approximately $98.0 million.

The pipeline of commercial loans as of March 31, 2026 was robust, and unfunded committed commercial construction loans totaled approximately $43.0 million.

Commercial amortization and payoffs were approximately $43.0 million through March 31, 2026, due primarily to pay-offs of short-term commercial loans as well as normal amortizations of the commercial loan portfolio.

New consumer mortgage loan production for the first quarter of 2026 was approximately $16.0 million, with most of this production comprised of in-house mortgages.

The pipeline of in-house, portfolio loans as of March 31, 2026 was $17.5 million.

Unfunded commitments related to residential construction loans totaled $14.4 million at March 31, 2026.

As a percentage of the loan portfolio, accruing loans past due 30 days or more increased slightly to 0.35 % at March 31, 2026 compared to 0.32 % at December 31, 2025.

Non-accrual loans totaled $4.7 million at March 31, 2026 compared to $4.2 million at December 31, 2025.

The increase in non-accrual balances at March 31, 2026 was related to one commercial loan moving to non-accrual status in the first quarter.

The following table presents loans in our commercial real estate portfolio by industry type at March 31, 2026.

(in thousands)

27 unchanged sentences

(in thousands)

September 30,

Non-accrual loans:

Commercial real estate

Acquisition and development

Commercial and industrial

2 unchanged sentences

Accruing Loans Past Due 90 days or more:

Commercial real estate

Commercial and industrial

Residential mortgage

4 unchanged sentences

Total non-performing assets

Modified Loans:

Total modified loans

Individually evaluated loans without a valuation allowance

Total individually evaluated loans

Non-accrual loans to total loans (as %)

3 unchanged sentences

Allowance for credit losses to non-performing assets (as %)

Modified Loans:

Total modified loans

Individually evaluated loans without a valuation allowance

Individually evaluated loans with a valuation allowance

Total individually evaluated loans

Allowance for Credit Losses

11 unchanged sentences

Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio.

For the nine-month period ended September 30, 2025, the range of outcomes would produce a 7% reduction or a 68% increase in reserves based on the best-case and worst-case scenarios, respectively.

The following table presents a summary of the activity in the ACL for the nine-month periods ended September 30, 2025 and 2024:

For the three-month period ended March 31, 2026, the range of outcomes would produce a 26% reduction or a 44% increase in reserves based on the best-case and worst-case scenarios, respectively.

The following table presents a summary of the activity in the ACL for the three-month periods ended March 31, 2026 and 2025:

(in thousands)

4 unchanged sentences

Total charge-offs

Commercial real estate

Acquisition and development

6 unchanged sentences

Allowance for credit losses to gross loans outstanding (as %)

The following table presents a summary of charge-offs and recoveries as a percent to their applicable portfolio for the three-month periods ended March 31, 2026 and 2025:

Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio

3 unchanged sentences

Residential mortgage

The following presents management’s allocation of the ACL by major loan category in comparison to that loan category’s percentage of total loans.

Changes in the allocation over time reflect changes in the composition of the loan portfolio risk profile and refinements to the methodology of determining the ACL.

Specific allocations in any particular category may be reallocated in the future as needed to reflect current conditions.

Accordingly, the entire ACL is considered available to absorb losses in any category.

Allocation of the Allowance for Credit Losses

(in thousands)

Amount of Allowance Allocated

Percent of Loans in Each Category to Total Loans

Ratio of Allowance Allocated to Loans in Each Category

March 31, 2026

Commercial real estate

Acquisition and development

Commercial and industrial

Residential mortgage

December 31, 2025

Commercial real estate

Acquisition and development

Commercial and industrial

Residential mortgage

Investment Securities

At September 30, 2025, the total amortized cost basis of the available-for-sale investment portfolio was $123.2 million compared to a fair value of $105.1 million.

Unrealized gains and losses on available-for-sale securities are reflected in accumulated other comprehensive loss, a component of shareholders’ equity.

At March 31, 2026, the total amortized cost basis of the available-for-sale investment portfolio was $126.3 million compared to a fair value of $109.0 million.

Unrealized gains and losses on available-for-sale securities are reflected in accumulated other comprehensive loss, net of tax, a component of shareholders’ equity.

The amortized cost basis of the held to maturity portfolio was $172.8 million compared to a fair value of $148.9 million.

The following table presents the composition of our securities portfolio at amortized cost and fair values at the dates indicated:

September 30, 2025

March 31, 2026

December 31, 2025

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Total held to maturity

Total fair value of investment securities available for sale increased by $10.6 million since December 31, 2024 as cash flow from the portfolio was reinvested into securities at higher yields and to maintain balances for liquidity.

At September 30, 2025, the securities classified as available-for-sale included a net unrealized loss of $18.1 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

Total amortized cost of securities held to maturity decreased by $2.6 million since December 31, 2024 as principal paydowns were partially offset by reinvestment in new security purchases.

Total fair value of investment securities available for sale increased by $1.9 million since December 31, 2025.

At March 31, 2026, the securities classified as available-for-sale included a net unrealized loss of $17.3 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

Total amortized cost of securities held to maturity increased by $1.3 million since December 31, 2025 due to new security purchases.

As discussed in Note 6 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures .

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e., supported with little

or no market activity).

Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e., supported with little or no market activity).

These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

Approximately $89.8 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $14.6 million at September 30, 2025.

Approximately $92.8 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $14.7 million at March 31, 2026.

The remaining $16.2 million of the available-for-sale securities represents the entire collateralized debt obligation portfolio, which was valued using significant unobservable inputs (Level 3 assets).

2 unchanged sentences

(in thousands)

September 30, 2025

March 31, 2026

December 31, 2025

7 unchanged sentences

Total Deposits

Total deposits at September 30, 2025 increased by $104.1 million when compared to December 31, 2024.

In January 2025, $50.0 million in brokered time deposits with an average interest rate of 4.24% were obtained to fund the repayment of $50.0 million in overnight borrowings that were outstanding on December 31, 2024.

Savings and money market accounts increased by $42.0 million due primarily to the expansion of current and new relationships throughout the first nine months of 2025.

Non-interest-bearing checking deposits increased by $3.2 million and interest-bearing checking deposits decreased by $0.8 million as we experienced seasonal fluctuations in municipal and commercial account balances and increased spending by businesses and consumers related to inflation.

Retail time deposits increased by $9.7 million since December 31, 2024.

The following table summarizes the percentage of deposits that are insured by deposit insurance or otherwise fully collateralized by securities compared to uninsured deposits as of September 30, 2025 and December 31, 2024.

September 30, 2025

Total deposits at March 31, 2026 increased by $15.5 million when compared to December 31, 2025.

Savings and money market accounts increased by $44.4 million due primarily to the expansion of current and new relationships throughout the first three months of 2026.

Retail time deposits decreased by $0.8 million since December 31, 2025.

In January 2026, a $25.0 million brokered certificate of deposit, with an interest rate of 4.23%, was repaid at its maturity.

March 31, 2026

December 31, 2025

4 unchanged sentences

Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of September 30, 2025 and December 31, 2024.

September 30, 2025

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of March 31, 2026 and December 31, 2025.

March 31, 2026

December 31, 2025

5 unchanged sentences

(in thousands)

September 30,

Overnight borrowings from Federal Reserve Discount Window

Securities sold under agreements to repurchase

3 unchanged sentences

Total long-term borrowings

Short-term borrowings decreased by $45.2 million due to the purchase of the brokered time deposit discussed above, which was partially offset by increases in the overnight investment sweep product.

Long-term borrowings decreased by $25.0 million due to the full repayment of a matured $25.0 million FHLB borrowing in September 2025.

Short-term borrowings increased by $1.9 million due to increased balances in the overnight investment sweep product.

Long-term borrowings decreased by $65.0 million due to the full repayment of $65.0 million in FHLB advances at their maturities in March 2026.

Liquidity Management

19 unchanged sentences

● One Way Buy CDARS/ICS funding – a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly.

The following table presents sources of liquidity available to the Corporation as of September 30, 2025.

The following table presents sources of liquidity available to the Corporation as of March 31, 2026.

(in thousands)

19 unchanged sentences

A negative gap position would benefit us during a period of declining interest rates.

At September 30, 2025, we were asset sensitive.

At March 31, 2026, we were asset sensitive.

Our interest rate risk management goals are:

7 unchanged sentences

Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios.

Key assumptions used in

the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans.

Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans.

This modeling reflects interest rate changes and the related impact on net interest income over specified periods.

12 unchanged sentences

They do not necessarily indicate the long-term prospects or economic value of the institution.

Based on the simulation analysis performed at September 30, 2025 and December 31, 2024, management estimated the following changes in net interest income, assuming the indicated rate changes:

Based on the simulation analysis performed at March 31, 2026 and December 31, 2025, management estimated the following changes in net interest income, assuming the indicated rate changes:

(in thousands)

September 30,

+400 basis points

6 unchanged sentences

-400 basis points

Due to the current rate environment and changes to prepayment speeds, the Corporation became slightly less asset sensitive as of September 30, 2025 when compared to December 31, 2024.

The Corporation became slightly more asset sensitive as of March 31, 2026 when compared to December 31, 2025 as a result of increased reductions of liabilities related to the repayment of the brokered CD and FHLB borrowings.

All changes in net interest income from our simulation analysis remain within our policy limits.

10 unchanged sentences

During inflationary periods, monetary assets lose value in terms of purchasing power and monetary liabilities have corresponding purchasing power gains.

The concept of purchasing power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings.

The concept of purchasing

power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings.

Capital Resources

4 unchanged sentences

The following table presents the Bank’s capital ratios as of the dates indicated:

September 30,

Total Capital (to risk-weighted assets)

2 unchanged sentences

Tier 1 Capital (to average assets)

As of both September 30, 2025 and December 31, 2024, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

As of both March 31, 2026 and December 31, 2025, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

Contractual Obligations, Commitments and Contingent Liabilities

Contractual Obligations

1 unchanged sentence

Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment.

Comparing September 30, 2025 to December 31, 2024, short-term borrowings decreased by $45.2 million primarily due to the repayment of $50.0 million of overnight borrowings outstanding at December 31, 2024 from the purchase of a $50.0 million brokered CD, partially offset by increases in balances of the overnight investment sweep product.

Comparing March 31, 2026 to December 31, 2025, short-term borrowings increased by $1.9 million due to increases in the overnight investment sweep product.

Long-term borrowings decreased by $65.0 million due to the full repayment of $65.0 million in FHLB advances at their maturities in March 2026.

Loan commitments are made to accommodate the financial needs of our customers.

Letters of credit commit us to make payments on behalf of customers when certain specified future events occur.

The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies.

We are not a party to any other off-balance sheet arrangements.

Commitments to extend credit in the form of consumer, commercial and business at the dates indicated were as follows:

Loan commitments have credit risk essentially the same as that involved in extending loans to customers and are subject to normal credit policies.

Commitments to extend credit generally have fixed expiration dates, may require payment of a fee, and contain cancellation clauses in the event of an adverse change in the customer’s credit quality.

The contractual amounts of commitments to extend credit at the dates indicated were as follows:

(in thousands)

September 30,

Residential mortgage - home equity

2 unchanged sentences

Standby letters of credit

The increase of $1.7 million in commitments at September 30, 2025 when compared to December 31, 2024 was primarily due to new residential home equity loan commitments originated during 2025.

For the nine-month periods ended September 30, 2025 and 2024, net credit loss expense/(credit) for off-balance sheet exposures was approximately $118,000 and ($17,000), respectively.

For the three-month periods ended September 30, 2025 and 2024, net credit loss (credit)/expense for off-balance sheet exposures was approximately ($13,000) and $55,000, respectively.

The increase of $29.2 million in commitments at March 31, 2026 when compared to December 31, 2025 was primarily due to new commercial business commitments originated during the first quarter of 2026.

For the three-month periods ended March 31, 2026 and 2025, net credit loss expense/(credit) for off-balance sheet exposures was approximately $0.2 million and ($1,000), respectively.

We do not issue any guarantees that would require liability recognition or disclosure other than the standby letters of credit issued by the Bank.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party to support contractual obligations and to ensure job performance.

Generally, the Bank’s letters of credit are issued with expiration dates within one year.

Historically, most letters of credit expire unfunded, and therefore, cash requirements are substantially less than the total commitment.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The Bank generally holds collateral and/or personal guarantees supporting letters of credit.

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis