What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-04 compared with 2026-05-07 · 173 added, 92 removed, 224 unchanged (54% of the section changed)

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

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report of Form 10-K and the Company’s Consolidated Financial Statements and Notes thereto on pages A-20 through A-62 of the Company’s 2025 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2026 Annual Meeting of Shareholders.

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report on Form 10-K and the Company’s Consolidated Financial Statements and Notes thereto on pages A-20 through A-62 of the Company’s 2025 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2026 Annual Meeting of Shareholders.

Management’s discussion and analysis of earnings and related data are presented to assist in understanding the consolidated financial condition and results of operations of the Company.

16 unchanged sentences

The Federal Reserve Federal Open Market Committee (“FOMC”) increased the target federal funds rate 500 basis points between March 2022 and July 2023 to address the supply-chain disruption and rising inflation that had developed in the markets.

The target federal funds rate was lowered 175 basis points between September 2024 and December 2025 to a range of 3.50% to 3.75% at March 31, 2026.

The target federal funds rate was lowered 175 basis points between September 2024 and December 2025 to a range of 3.50% to 3.75% at June 30, 2026.

We believe that economic conditions in our market area continue to be relatively stable and as a result businesses in our market area continue to grow and invest.

18 unchanged sentences

Results of Operations

Net earnings were $4.4 million or $0.83 per share and $0.80 per diluted share for the three months ended March 31, 2026, compared to $4.3 million or $0.82 per share and $0.79 per diluted share for the prior year period.

The increase in first quarter net earnings is primarily attributable to an increase in net interest income, which was partially offset by an increase in the provision for credit losses and an increase in non-interest expense, compared to the prior year period, as discussed below.

The annualized return on average assets was 1.04% for the three months ended March 31, 2026, compared to 1.07% for the same period one year ago, and annualized return on average shareholders’ equity was 11.45% for the three months ended March 31, 2026, compared to 13.52% for the same period one year ago.

Net earnings were $5.2 million or $0.98 per share and $0.96 per diluted share for the three months ended June 30, 2026, compared to $5.2 million or $0.97 per share and $0.95 per diluted share for the prior year period.

The increase in second quarter net earnings is primarily attributable to an increase in net interest income, which was partially offset by an increase in the provision for credit losses, a decrease in non-interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

Net earnings were $9.6 million or $1.81 per share and $1.76 per diluted share for the six months ended June 30, 2026, compared to $9.5 million or $1.79 per share and $1.74 per diluted share for the same period one year ago.

The increase in year-to-date net earnings is primarily attributable to an increase in net interest income, which was partially offset by an increase in the provision for credit losses, a decrease in non-interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

The annualized return on average assets was 1.13% for the six months ended June 30, 2026, compared to 1.15% for the same period one year ago, and annualized return on average shareholders’ equity was 12.22% for the six months ended June 30, 2026, compared to 14.06% for the same period one year ago.

Net Interest Income.

2 unchanged sentences

Net interest margin is calculated by dividing tax-equivalent net interest income by average interest-earning assets, and represents the Company’s net yield on its interest-earning assets.

Net interest income was $15.1 million for the three months ended March 31, 2026, compared to $13.9 million for the three months ended March 31, 2025.

Net interest income was $16.0 million for the three months ended June 30, 2026, compared to $14.6 million for the three months ended June 30, 2025.

The increase in net interest income is due to a $806,000 increase in interest income and a $565,000 decrease in interest expense.

Net interest income after the provision for credit losses was $14.5 million for the three months ended March 31, 2026, compared to $13.7 million for the three months ended March 31, 2025.

The provision for credit losses for the three months ended March 31, 2026 was $560,000, compared to $268,000 for the three months ended March 31, 2025.

The increase in the provision for credit losses is primarily attributable to a $38.9 million increase in total loans from December 31, 2025 to March 31, 2026, compared to a $13.7 million increase in total loans from December 31, 2024 to March 31, 2025.

Interest income was $20.9 million for the three months ended March 31, 2026, compared to $20.0 million for the three months ended March 31, 2025.

Net interest income after the provision for credit losses was $15.7 million for the three months ended June 30, 2026, compared to $14.8 million for the three months ended June 30, 2025.

The provision for credit losses for the three months ended June 30, 2026 was $293,000, compared to a recovery of $213,000 for the three months ended June 30, 2025.

The increase in the provision for credit losses reflects continued growth in total loans, which increased $36.3 million during the three months ended June 30, 2026, compared to an increase of $5.9 million during the three months ended June 30, 2025.

Additionally, the increase in the provision for credit losses includes a $29,000 increase in net charge-offs during the three months ended June 30, 2026, compared to the three months ended June 30, 2025.

Interest income was $21.5 million for the three months ended June 30, 2026, compared to $20.7 million for the three months ended June 30, 2025.

The increase in interest income is primarily due to a $1.5 million increase in interest income and fees on loans, which was partially offset by a $511,000 decrease in interest income on balances due from banks and a $231,000 decrease in interest income on investment securities.

1 unchanged sentence

The decrease in interest income on balances due from banks is due to a decrease in average balances outstanding and rate decreases implemented by the FOMC.

The decrease in interest income on investment securities is due to a reduction in average investment securities and decreases in yields on variable rate securities.

During the three months ended March 31, 2026, average loans were $1.22 billion, an increase of $80.2 million from average loans of $1.14 billion for the three months ended March 31, 2025.

During the three months ended March 31, 2026, average investment securities were $413.4 million, a decrease of $22.9 million from average investment securities of $436.3 million for the three months ended March 31, 2025.

The average yield on loans for the three months ended March 31, 2026 and 2025 was 5.80% and 5.69%, respectively.

The average yield on investment securities available for sale was 3.05% and 3.25% for the three months ended March 31, 2026 and 2025, respectively.

The average yield on earning assets was 5.09% and 5.03% for the three months ended March 31, 2026 and 2025, respectively.

Interest expense was $5.8 million for the three months ended March 31, 2026, compared to $6.0 million for the three months ended March 31, 2025.

The decrease in interest income on investment securities is due to a reduction in balances outstanding and decreases in yields on variable rate securities.

During the three months ended June 30, 2026, average loans were $1.25 billion, an increase of $96.2 million from average loans of $1.16 billion for the three months ended June 30, 2025.

During the three months ended June 30, 2026, average investment securities were $411.2 million, a decrease of $7.8 million from average investment securities of $419.0 million for the three months ended June 30, 2025.

The average yield on loans for the three months ended June 30, 2026 and 2025 was 5.83% and 5.78%, respectively.

The average yield on investment securities available for sale was 3.03% and 3.21% for the three months ended June 30, 2026 and 2025, respectively.

The average yield on earning assets was 5.12% and 5.07% for the three months ended June 30, 2026 and 2025, respectively.

Interest expense was $5.6 million for the three months ended June 30, 2026, compared to $6.1 million for the three months ended June 30, 2025.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities resulting from rate decreases implemented by the FOMC.

During the three months ended March 31, 2026, average interest-bearing non-maturity deposits were $782.2 million, an increase of $35.3 million from average interest-bearing non-maturity deposits of $746.9 million for the three months ended March 31, 2025.

During the three months ended March 31, 2026, average certificates of deposit were $340.0 million, a decrease of $1.3 million from average certificates of deposit of $341.3 million for the three months ended March 31, 2025.

The average rate paid on interest-bearing checking and savings accounts was 1.50% and 1.44% for the three months ended March 31, 2026 and 2025, respectively.

The average rate paid on certificates of deposit was 3.18% for the three months ended March 31, 2026, compared to 3.72% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.06% for the three months ended March 31, 2026, compared to 2.21% for the same period one year ago.

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended March 31, 2026 and 2025.

During the three months ended June 30, 2026, average interest-bearing non-maturity deposits were $811.7 million, an increase of $61.4 million from average interest-bearing non-maturity deposits of $750.3 million for the three months ended June 30, 2025.

During the three months ended June 30, 2026, average certificates of deposit were $315.9 million, a decrease of $37.4 million from average certificates of deposit of $353.3 million for the three months ended June 30, 2025.

The average rate paid on interest-bearing checking and savings accounts was 1.51% and 1.46% for the three months ended June 30, 2026 and 2025, respectively.

The average rate paid on certificates of deposit was 2.90% for the three months ended June 30, 2026, compared to 3.58% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 1.95% for the three months ended June 30, 2026, compared to 2.19% for the same period one year ago.

The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods.

Yield information does not give effect to changes in fair value of available for sale investment securities that are reflected as a component of shareholders’ equity.

Yields and interest income on tax-exempt investments for the three months ended March 31, 2026 have been adjusted to present this information on a tax equivalent basis using an effective tax rate of 22.58% for securities that are both federal and state tax exempt and an effective tax rate of 20.58% for federal tax-exempt securities.

Yields and interest income on tax-exempt investments for the three months ended March 31, 2025 have been adjusted to present this information on a tax equivalent basis using an effective tax rate of 22.78% for securities that are both federal and state tax exempt and an effective tax rate of 20.53% for federal tax-exempt securities.

Yields and interest income on tax-exempt investments for the three months ended June 30, 2026 have been adjusted to present this information on a tax equivalent basis using an effective tax rate of 22.58% for securities that are both federal and state tax exempt and an effective tax rate of 20.58% for federal tax-exempt securities.

Yields and interest income on tax-exempt investments for the three months ended June 30, 2025 have been adjusted to present this information on a tax equivalent basis using an effective tax rate of 22.78% for securities that are both federal and state tax exempt and an effective tax rate of 20.53% for federal tax-exempt securities.

Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported.

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The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Three months ended

March 31, 2026

March 31, 2025

June 30, 2026

June 30, 2025

(Dollars in thousands)

28 unchanged sentences

Tax rates of 2.00% and 2.25% were used to calculate the tax equivalent yields on these securities in 2026 and 2025, respectively.

Net interest income was $31.1 million for the six months ended June 30, 2026, compared to $28.5 million for the six months ended June 30, 2025.

The increase in net interest income is due to a $1.7 million increase in interest income and a $818,000 decrease in interest expense.

Net interest income after the provision for credit losses was $30.2 million for the six months ended June 30, 2026, compared to $28.5 million for the six months ended June 30, 2025.

The provision for credit losses for the six months ended June 30, 2026 was $853,000, compared to $55,000 for the six months ended June 30, 2025.

The increase in the provision for credit losses reflects continued growth in total loans, which increased $75.2 million during the six months ended June 30, 2026, compared to an increase of $19.6 million during the six months ended June 30, 2025.

Additionally, the increase in the provision for credit losses includes a $66,000 increase in net charge-offs during the six months ended June 30, 2026, compared to the six months ended June 30, 2025.

Interest income was $42.4 million for the six months ended June 30, 2026, compared to $40.7 million for the six months ended June 30, 2025.

The increase in interest income is primarily due to a $3.0 million increase in interest income and fees on loans, which was partially offset by a $620,000 decrease in interest income on balances due from banks and a $673,000 decrease in interest income on investment securities.

The increase in interest income and fees on loans is primarily due to an increase in total loans.

The decrease in interest income on balances due from banks is due to a decrease in average balances outstanding and rate decreases implemented by the FOMC.

The decrease in interest income on investment securities is due to a reduction in balances outstanding and decreases in yields on variable rate securities.

During the six months ended June 30, 2026, average loans were $1.24 billion, an increase of $88.3 million from average loans of $1.15 billion for the six months ended June 30, 2025.

During the six months ended June 30, 2026, average investment securities were $412.3 million, a decrease of $15.3 million from average investment securities of $427.6 million for the six months ended June 30, 2025.

The average yield on loans for the six months ended June 30, 2026 and 2025 was 5.81% and 5.73%, respectively.

The average yield on investment securities available for sale was 3.05% and 3.23% for the six months ended June 30, 2026 and 2025, respectively.

The average yield on earning assets was 5.11% and 5.05% for the six months ended June 30, 2026 and 2025, respectively.

Interest expense was $11.3 million for the six months ended June 30, 2026, compared to $12.1 million for the six months ended June 30, 2025.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities resulting from rate decreases implemented by the FOMC.

During the six months ended June 30, 2026, average interest-bearing non-maturity deposits were $797.1 million, an increase of $48.4 million from average interest-bearing non-maturity deposits of $748.7 million for the six months ended June 30, 2025.

During the six months ended June 30, 2026, average certificates of deposit were $327.9 million, a decrease of $19.4 million from average certificates of deposit of $347.3 million for the six months ended June 30, 2025.

The average rate paid on interest-bearing checking and savings accounts was 1.50% and 1.45% for the six months ended June 30, 2026 and 2025, respectively.

The average rate paid on certificates of deposit was 3.05% for the six months ended June 30, 2026, compared to 3.65% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.00% for the six months ended June 30, 2026, compared to 2.20% for the same period one year ago.

Yield information does not give effect to changes in fair value of available for sale investment securities that are reflected as a component of shareholders’ equity.

Yields and interest income on tax-exempt investments for the six months ended June 30, 2026 have been adjusted to present this information on a tax equivalent basis using an effective tax rate of 22.58% for securities that are both federal and state tax exempt and an effective tax rate of 20.58% for federal tax-exempt securities.

Yields and interest income on tax-exempt investments for the six months ended June 30, 2025 have been adjusted to present this information on a tax equivalent basis using an effective tax rate of 22.78% for securities that are both federal and state tax exempt and an effective tax rate of 20.53% for federal tax-exempt securities.

Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported.

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry.

Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Six months ended

June 30, 2026

June 30, 2025

(Dollars in thousands)

Average Balance

Interest-earning assets:

Loans receivable

Investments - taxable

Investments - nontaxable*

Due from banks

Total interest-earning assets

Non-interest earning assets:

Cash and due from banks

Allowance for credit losses

Interest-bearing liabilities:

Interest-bearing demand, MMDA & savings deposits

Time deposits

Junior subordinated debentures

Total interest-bearing liabilities

Non-interest bearing liabilities and shareholders' equity:

Demand deposits

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Net interest spread

Net yield on interest-earning assets

Taxable equivalent adjustment

Investment securities

Net interest income

*Includes U.S.

Government agency securities that are non-taxable for state income tax purposes of $5.3 million in 2026 and $7.3 million in 2025.

Tax rates of 2.00% and 2.25% were used to calculate the tax equivalent yields on these securities in 2026 and 2025, respectively.

Changes in interest income and interest expense can result from variances in both volume and rates.

1 unchanged sentence

The changes in net interest income due to both volume and rate changes have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

Three months ended March 31, 2026 compared to three months ended March 31, 2025

Three months ended March 31, 2025 compared to three months ended March 31, 2024

Three months ended June 30, 2026

compared to three months ended

June 30, 2025

Six months ended June 30, 2026

compared to six months ended

June 30, 2025

(Dollars in thousands)

19 unchanged sentences

Provision for Credit Losses .

The provision for credit losses for the three months ended March 31, 2026 was $560,000, compared to $268,000 for the three months ended March 31, 2025.

The provision for credit losses for the three months ended June 30, 2026 was $293,000, compared to a recovery of $213,000 for the three months ended June 30, 2025.

The provision for credit losses for the six months ended June 30, 2026 was $853,000, compared to $55,000 for the six months ended June 30, 2025.

Additionally, the increase in the provision for credit losses includes a $66,000 increase in net charge-offs during the six months ended June 30, 2026, compared to the six months ended June 30, 2025.

Non-Interest Income.

Non-interest income was $6.5 million for the three months ended March 31, 2026 and 2025.

A $422,000 decrease in appraisal management fee income due to a decrease in appraisal volume was partially offset by a $108,000 increase in mortgage banking income due to an increase in secondary mortgage market activity, a $238,000 increase in miscellaneous non-interest income primarily due to an increase in income on Small Business Investment Company (SBIC) investments and a $32,000 increase in insurance and brokerage commissions.

Non-interest income was $7.1 million for the three months ended June 30, 2026, compared to $7.7 million for the three months ended June 30, 2025.

The decrease in non-interest income is primarily attributable to a $929,000 decrease in appraisal management fee income due to a decrease in appraisal volume, which was partially offset by a $108,000 increase in mortgage banking income due to an increase in secondary mortgage market activity and a $254,000 increase in miscellaneous non-interest income primarily due to an increase in deferred compensation income associated with an increase in valuations for the assets in the deferred compensation plan and an increase in income on Small Business Investment Company (SBIC) investments.

Non-interest income was $13.6 million for the six months ended June 30, 2026, compared to $14.2 million for the six months ended June 30, 2025.

The decrease in non-interest income is primarily attributable to a $1.4 million decrease in appraisal management fee income due to a decrease in appraisal volume, which was partially offset by a $216,000 increase in mortgage banking income due to an increase in secondary mortgage market activity and a $492,000 increase in miscellaneous non-interest income primarily due to an increase in deferred compensation income associated with an increase in valuations for the assets in the deferred compensation plan and an increase in income on SBIC investments.

Non-Interest Expense.

Non-interest expense was $15.4 million for the three months ended March 31, 2026, compared to $14.6 million for the three months ended March 31, 2025.

The increase in non-interest expense is primarily attributable to a $458,000 increase in salaries and employee benefits expense primarily due to increases in health insurance and restricted stock expenses, a $279,000 increase in occupancy expense primarily due to an increase in furniture and equipment maintenance/service contract expenses, a $173,000 increase in professional fees primarily due to an increase in consulting expense, and a $190,000 increase in debit card expense.

Non-interest expense was $16.1 million for the three months ended June 30, 2026, compared to $15.8 million for the three months ended June 30, 2025.

The increase in non-interest expense is primarily attributable to a $482,000 increase in occupancy expense primarily due to an increase in furniture and equipment maintenance/service contract expenses, a $241,000 increase in debit card expense and a $288,000 increase in miscellaneous non-interest expense primarily due to an increase in deferred compensation expense associated with an increase in valuations for the assets in the deferred compensation plan.

The increases in non-interest expense were partially offset by a $718,000 decrease in appraisal management fee expense due to a decrease in appraisal volume.

Non-interest expense was $31.5 million for the six months ended June 30, 2026, compared to $30.4 million for the six months ended June 30, 2025.

The increase in non-interest expense is primarily attributable to a $417,000 increase in salaries and employee benefits expense primarily due to increases in salary and restricted stock expenses, a $761,000 increase in occupancy expense primarily due to an increase in furniture and equipment maintenance/service contract expenses, a $179,000 increase in professional fees primarily due to an increase in consulting expense, a $431,000 increase in debit card expense and a $293,000 increase in miscellaneous non-interest expense primarily due to an increase in deferred compensation expense associated with an increase in valuations for the assets in the deferred compensation plan.

The increases in non-interest expense were partially offset by a $1.0 million decrease in appraisal management fee expense due to a decrease in appraisal volume.

Income Taxes.

Income tax expense was $1.3 million for the three months ended March 31, 2026 and 2025.

The effective tax rate was 22.13% for the three months ended March 31, 2026, compared to 22.85% for the three months ended March 31, 2025.

Income tax expense was $1.5 million for the three months ended June 30, 2026 and 2025.

The effective tax rate was 22.23% for the three months ended June 30, 2026, compared to 22.56% for the three months ended June 30, 2025.

Income tax expense was $2.7 million for the six months ended June 30, 2026, compared to $2.8 million for the six months ended June 30, 2025.

The effective tax rate was 22.18% for the six months ended June 30, 2026, compared to 22.69% for the six months ended June 30, 2025.

The decrease in the effective tax rate is primarily due to the North Carolina corporate income tax rate decreasing from 2.25% to 2.00% effective January 1, 2026 and the revaluation of the deferred tax asset due to further upcoming reductions in the North Carolina corporate income tax rate.

1 unchanged sentence

Investment Securities.

Available for sale securities were $370.1 million as of March 31, 2026, compared to $377.4 million as of December 31, 2025.

Average investment securities for the three months ended March 31, 2026 were $413.4 million, compared to $421.6 million for the year ended December 31, 2025.

Total loans were $1.24 billion as of March 31, 2026, compared to $1.20 billion at December 31, 2025.

Average loans represented 74% and 70% of average earning assets for the three months ended March 31, 2026 and the year ended December 31, 2025, respectively.

The Bank had $1.7 million and $1.1 million in mortgage loans held for sale as of March 31, 2026 and December 31, 2025, respectively.

Available for sale securities were $364.5 million as of June 30, 2026, compared to $377.4 million as of December 31, 2025.

Average investment securities for the six months ended June 30, 2026 were $412.3 million, compared to $421.6 million for the year ended December 31, 2025.

Total loans were $1.28 billion as of June 30, 2026, compared to $1.20 billion at December 31, 2025.

Average loans represented 74% and 70% of average earning assets for the six months ended June 30, 2026 and the year ended December 31, 2025, respectively.

The Bank had $1.7 million and $1.1 million in mortgage loans held for sale as of June 30, 2026 and December 31, 2025, respectively.

Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market.

Real estate mortgage loans include both commercial and residential mortgage loans.

At March 31, 2026, the Bank had $139.7 million in residential mortgage loans, $128.0 million in home equity loans and $758.6 million in commercial mortgage loans, which include $610.8 million secured by commercial property and $147.8 million secured by residential property.

At June 30, 2026, the Bank had $144.6 million in residential mortgage loans, $130.7 million in home equity loans and $773.2 million in commercial mortgage loans, which include $624.8 million secured by commercial property and $148.4 million secured by residential property.

All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

The Bank also had construction and land development loans totaling $127.4 million at March 31, 2026.

The Bank also had construction and land development loans totaling $133.6 million at June 30, 2026.

Allowance for Credit Losses (ACL).

6 unchanged sentences

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of March 31, 2026.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of June 30, 2026.

The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

10 unchanged sentences

and interest rate risk.

The portion of the ACL balance attributable to qualitative factors was $5.5 million and $5.3 million at March 31, 2026 and December 31, 2025, respectively.

The portion of the ACL balance attributable to qualitative factors was $5.6 million and $5.3 million at June 30, 2026 and December 31, 2025, respectively.

The risk factors are weighted as follows:

Local, State and National Economic Outlook – 30%, Concentrations of Credit – 5%, Interest Rate Risk – 5%, Trends in Terms of Volume, Mix and Size of Loans – 15%, Seasoning of the Loan Portfolio – 10%, Experience of Staff – 10%, and Levels and Trends of Delinquencies – 25%.

No changes to the risk status of any of the risk factors was made during the three months ended March 31, 2026.

No changes to the risk status of any of the risk factors was made during the six months ended June 30, 2026.

Loans that do not share risk characteristics are evaluated on an individual basis.

6 unchanged sentences

The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

The allowance for credit losses on loans was $10.5 million or 0.84% of total loans at March 31, 2026, compared to $10.1 million or 0.84% of total loans at December 31, 2025.

The allowance for credit losses on loans increased $332,000 primarily due to a $38.9 million increase in total loans from December 31, 2025 to March 31, 2026.

The allowance for credit losses on unfunded commitments was $1.6 million at March 31, 2026, compared to $1.4 million at December 31, 2025.

The increase in the allowance for credit losses on unfunded commitments was due to a $5.7 million increase in unfunded loan commitments from December 31, 2025 to March 31, 2026.

The allowance for credit losses on loans was $10.6 million or 0.83% of total loans at June 30, 2026, compared to $10.1 million or 0.84% of total loans at December 31, 2025.

The allowance for credit losses on loans increased $504,000 primarily due to a $75.2 million increase in total loans from December 31, 2025 to June 30, 2026.

The allowance for credit losses on unfunded commitments was $1.6 million at June 30, 2026, compared to $1.4 million at December 31, 2025.

The increase in the allowance for credit losses on unfunded commitments was due to a $11.7 million increase in unfunded loan commitments from December 31, 2025 to June 30, 2026.

Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectability becomes doubtful.

22 unchanged sentences

Although management uses the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting the operating results of the Company.

Non-performing Assets.

Non-performing assets were $4.8 million or 0.28% of total assets at March 31, 2026, compared to $4.2 million or 0.25% of total assets at December 31, 2025.

Non-performing assets comprise $3.6 million in residential mortgage loans and $1.2 million in commercial mortgage loans at March 31, 2026, compared to $3.6 million in residential mortgage loans and $533,000 in commercial mortgage loans at December 31, 2025.

The Bank had no other real estate owned or repossessed assets as of March 31, 2026 and December 31, 2025.

Deposits were $1.54 billion as of March 31, 2026, compared to $1.51 billion as of December 31, 2025.

Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of less than $250,000, were $1.40 billion at March 31, 2026, compared to $1.35 billion at December 31, 2025.

Non-performing assets were $5.2 million or 0.29% of total assets at June 30, 2026, compared to $4.2 million or 0.25% of total assets at December 31, 2025.

Non-performing assets comprise $4.0 million in residential mortgage loans, $1.1 million in commercial mortgage loans and $122,000 in other loans at June 30, 2026, compared to $3.6 million in residential mortgage loans and $533,000 in commercial mortgage loans at December 31, 2025.

The Bank had no other real estate owned or repossessed assets as of June 30, 2026 and December 31, 2025.

Deposits were $1.57 billion as of June 30, 2026, compared to $1.51 billion as of December 31, 2025.

Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of less than $250,000, were $1.44 billion at June 30, 2026, compared to $1.35 billion at December 31, 2025.

Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s overall cost of funds and profitability.

Certificates of deposit in amounts of $250,000 or more totaled $143.7 million at March 31, 2026, compared to $160.4 million December 31, 2025.

Estimated uninsured deposits totaled $347.4 million, or 22.55% of total deposits, at March 31, 2026, compared to $358.5 million, or 23.75% of total deposits, at December 31, 2025.

Certificates of deposit in amounts of $250,000 or more totaled $131.2 million at June 30, 2026, compared to $160.4 million at December 31, 2025.

Estimated uninsured deposits totaled $336.5 million, or 21.47% of total deposits, at June 30, 2026, compared to $358.5 million, or 23.75% of total deposits, at December 31, 2025.

Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits.

The Bank did not have any significant deposit concentrations at March 31, 2026.

The Bank did not have any significant deposit concentrations at June 30, 2026.

Borrowed Funds.

There were no borrowed funds, other than junior subordinated debt debentures, outstanding at March 31, 2026 and December 31, 2025.

There were no borrowed funds, other than junior subordinated debt debentures, outstanding at June 30, 2026 and December 31, 2025.

Junior Subordinated Debentures (related to Trust Preferred Securities).

Junior subordinated debentures were $15.5 million at March 31, 2026 and December 31, 2025.

Junior subordinated debentures were $15.5 million at June 30, 2026 and December 31, 2025.

Asset Liability and Interest Rate Risk Management.

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Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds.

Average rate sensitive assets for the three months ended March 31, 2026 totaled $1.66 billion, exceeding average rate sensitive liabilities of $1.14 billion by $525.5 million.

Average rate sensitive assets for the six months ended June 30, 2026 totaled $1.67 billion, exceeding average rate sensitive liabilities of $1.14 billion by $533.8 million.

Included in the rate sensitive assets are $186.1 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC.

Certain variable rate loans are structured to establish floors on interest rates charged to protect against downward movements in the prime rate.

At March 31, 2026, the Company had $130.2 million in loans with interest rate floors.

Floors were in effect on four loans, totaling $9,000, at March 31, 2026.

At June 30, 2026, the Company had $131.9 million in loans with interest rate floors.

Floors were in effect on three loans, totaling $6,000, at June 30, 2026.

The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements.

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In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit.

As of March 31, 2026, such unfunded commitments to extend credit were $372.3 million, while commitments in the form of standby letters of credit totaled $1.6 million.

As of June 30, 2026, such unfunded commitments to extend credit were $378.3 million, while commitments in the form of standby letters of credit totaled $1.6 million.

As of December 31, 2025, such unfunded commitments to extend credit were $366.5 million, while commitments in the form of standby letters of credit totaled $1.6 million.

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The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships.

As of March 31, 2026, the Bank’s core deposits, a non-GAAP measure, totaled $1.40 billion, or 90.70% of total deposits.

As of June 30, 2026, the Bank’s core deposits, a non-GAAP measure, totaled $1.44 billion, or 91.63% of total deposits.

As of December 31, 2025, the Bank’s core deposits totaled $1.35 billion, or 89.44% of total deposits.

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The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits and internet certificates of deposit.

The Bank did not have any wholesale funding at March 31, 2026 and December 31, 2025.

The Bank did not have any wholesale funding at June 30, 2026 and December 31, 2025.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets.

There were no FHLB borrowings outstanding at March 31, 2026 and December 31, 2025.

At March 31, 2026, the carrying value of loans pledged as collateral to the FHLB totaled $253.6 million compared to $247.8 million at December 31, 2025.

The remaining availability under the line of credit with the FHLB was $150.6 million at March 31, 2026 compared to $148.5 million at December 31, 2025.

The Bank had no borrowings from the FRB at March 31, 2026 or December 31, 2025.

There were no FHLB borrowings outstanding at June 30, 2026 and December 31, 2025.

At June 30, 2026, the carrying value of loans pledged as collateral to the FHLB totaled $255.4 million compared to $247.8 million at December 31, 2025.

The remaining availability under the line of credit with the FHLB was $153.3 million at June 30, 2026 compared to $148.5 million at December 31, 2025.

The Bank had no borrowings from the FRB at June 30, 2026 or December 31, 2025.

FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB.

At March 31, 2026, the carrying value of loans pledged as collateral to the FRB totaled $720.1 million compared to $689.9 million at December 31, 2025.

Availability under the line of credit with the FRB was $603.7 million at March 31, 2026 compared to $583.8 million at December 31, 2025.

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of March 31, 2026.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 26.91% at March 31, 2026 and 26.86% at December 31, 2025.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, 2026 and December 31, 2025.

At June 30, 2026, the carrying value of loans pledged as collateral to the FRB totaled $725.9 million compared to $689.9 million at December 31, 2025.

Availability under the line of credit with the FRB was $603.7 million at June 30, 2026 compared to $583.8 million at December 31, 2025.

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of June 30, 2026.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 26.07% at June 30, 2026 and 26.86% at December 31, 2025.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at June 30, 2026 and December 31, 2025.

Contractual Obligations and Off-Balance Sheet Arrangements.

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Capital Resources.

Shareholders’ equity was $158.1 million, or 9.12% of total assets, at March 31, 2026, compared to $157.1 million, or 9.23% of total assets, at December 31, 2025.

Annualized return on average equity for the three months ended March 31, 2026 was 11.45%, compared to 13.52% for the three months ended March 31, 2025.

Total cash dividends paid on common stock were $2.1 million for the three months ended March 31, 2026, compared to $2.0 million for the three months ended March 31, 2025.

Shareholders’ equity was $161.3 million, or 9.14% of total assets, at June 30, 2026, compared to $157.1 million, or 9.23% of total assets, at December 31, 2025.

Annualized return on average equity for the six months ended June 30, 2026 was 12.22%, compared to 14.06% for the six months ended June 30, 2025.

Total cash dividends paid on common stock were $3.2 million for the six months ended June 30, 2026, compared to $3.1 million for the six months ended June 30, 2025.

In March 2025, the Board of Directors authorized a stock repurchase program, whereby up to $3.0 million was allocated to repurchase the Company’s common stock.

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Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill.

Tier 1 capital includes $15.0 million in trust preferred securities at March 31, 2026 and December 31, 2025.

The Company’s Tier 1 capital ratio was 14.75% and 14.96% at March 31, 2026 and December 31, 2025, respectively.

Tier 1 capital includes $15.0 million in trust preferred securities at June 30, 2026 and December 31, 2025.

The Company’s Tier 1 capital ratio was 14.68% and 14.96% at June 30, 2026 and December 31, 2025, respectively.

Total risk-based capital is defined as Tier 1 capital plus supplementary capital.

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Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets.

The Company’s total risk-based capital ratio was 15.63% and 15.82% at March 31, 2026 and December 31, 2025, respectively.

The Company’s total risk-based capital ratio was 15.55% and 15.82% at June 30, 2026 and December 31, 2025, respectively.

The Company’s common equity Tier 1 capital consists of common stock and retained earnings.

The Company’s common equity Tier 1 capital ratio was 13.65% and 13.83% at March 31, 2026 and December 31, 2025, respectively.

The Company’s common equity Tier 1 capital ratio was 13.61% and 13.83% at June 30, 2026 and December 31, 2025, respectively.

Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater.

The Company’s Tier 1 leverage capital ratio was 11.60% and 11.33% at March 31, 2026 and December 31, 2025, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.62% and 14.83% at March 31, 2026 and December 31, 2025, respectively.

The total risk-based capital ratio for the Bank was 15.50% and 15.70% at March 31, 2026 and December 31, 2025, respectively.

The Bank’s common equity Tier 1 capital ratio was 14.62% and 14.83% at March 31, 2026 and December 31, 2025, respectively.

The Bank’s Tier 1 leverage capital ratio was 11.39% and 11.13% at March 31, 2026 and December 31, 2025, respectively.

The Company’s Tier 1 leverage capital ratio was 11.70% and 11.33% at June 30, 2026 and December 31, 2025, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.55% and 14.83% at June 30, 2026 and December 31, 2025, respectively.

The total risk-based capital ratio for the Bank was 15.42% and 15.70% at June 30, 2026 and December 31, 2025, respectively.

The Bank’s common equity Tier 1 capital ratio was 14.55% and 14.83% at June 30, 2026 and December 31, 2025, respectively.

The Bank’s Tier 1 leverage capital ratio was 11.50% and 11.13% at June 30, 2026 and December 31, 2025, respectively.

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater.

Based upon these guidelines, the Bank was considered to be “well capitalized” at March 31, 2026.

Based upon these guidelines, the Bank was considered to be “well capitalized” at June 30, 2026.

Quantitative and Qualitative Disclosures About Market Risk

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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