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Item 7. Management’s Discussion and Analysis

2026-02-24 compared with 2025-03-03 · 721 added, 632 removed, 302 unchanged (82% of the section changed)

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Management’s Discussion and

Analysis of Financial Condition and Results of Operations

The following discussion and analysis identifies significant

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At December 31, 2025, we had total assets of $4.40

billion, a slight increase from total assets of $4.06 billion at December 31, 2023.

The largest components of our total assets are loans

which were $3.63 billion and $3.60 billion at December 31, 2024 and 2023, respectively.

Our liabilities and shareholders’ equity

at December 31, 2024 totaled $3.76 billion and $330.4 million, respectively, compared to liabilities of $3.74 billion and shareholders’

equity of $312.5 million at December 31, 2023.

The principal component of our liabilities is deposits which were $3.44 billion and $3.38

billion at December 31, 2024 and 2023, respectively.

Like most community banks, we derive the majority of

our income from interest received on our loans and investments.

Our primary source of funds for making these loans and investments is

our deposits, on which we pay interest.

Consequently, one of the key measures of our success is our amount of net interest income, or

the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing

billion, an increase from total assets of $4.09 billion at December 31, 2024.

The largest components of our total assets are loans, which

were $3.85 billion and $3.63 billion at December 31, 2025 and 2024, respectively.

Our liabilities and shareholders’ equity at December

31, 2025 totaled $4.03 billion and $368.7 million, respectively, compared to liabilities of $3.76 billion and shareholders’ equity

of $330.4 million at December 31, 2024.

The principal component of our liabilities is deposits which were $3.72 billion and $3.44 billion

at December 31, 2025 and 2024, respectively.

Like most community banks, we derive the majority

of our income from interest received on our loans and investments.

Our primary source of funds for making these loans and investments

is our deposits, on which we pay interest.

Consequently, one of the key measures of our success is our amount of net interest income,

or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing

liabilities, such as deposits and borrowings.

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The increase in net income resulted primarily from an increase

in net interest income and an increase in noninterest income, partially offset by an increase in noninterest expenses and a decrease in

the provision for credit losses.

In addition, our net income available to shareholders was $29.1 million, or EPS of $3.61 for the year

ended December 31, 2022.

in net interest income.

In addition, our net income available to common shareholders was $13.4 million, or EPS of $1.66 for the year ended

December 31, 2023.

SELECTED FINANCIAL DATA

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Ended December 31,

in thousands, except per share data)

BALANCE SHEET

for credit losses

FHLB advances

and other borrowings

(dollars in thousands, except per share

BALANCE SHEET DATA

Investment securities

Allowance for credit losses

FHLB advances and other borrowings

Subordinated debentures

Common equity

Preferred stock

Shareholders’

RESULTS OF OPERATIONS DATA

SELECTED RESULTS OF OPERATIONS DATA

Interest income

Net interest income

for credit losses

income after provision for credit losses

before income tax expense

Net interest income after provision

for credit losses

Noninterest income

Income before income tax expense

income available to common shareholders

average number of common shares outstanding:

FINANCIAL RATIOS

on average assets

on average equity

on average common equity

margin, tax equivalent (2)

Asset Quality

PER COMMON SHARE DATA

Weighted average number of common

shares outstanding:

Basic, in thousands

SELECTED FINANCIAL RATIOS

Performance Ratios:

Return on average assets

Return on average equity

Return on average common equity

interest margin, tax equivalent (2)

Asset Quality Ratios:

Nonperforming

assets to total loans (1)

Nonperforming

assets to total assets

Net charge-offs

to average total loans

for credit losses to nonperforming loans

for credit losses to total loans

Holding Company

Capital Ratios:

Total risk-based

capital ratio

risk-based capital ratio

Nonperforming assets to total assets

Net charge-offs to average total loans

Allowance for credit losses to nonperforming

Allowance for credit losses to total

Holding Company Capital Ratios:

Total risk-based capital ratio

Tier 1 risk-based capital ratio

Leverage ratio

equity tier 1 ratio (4)

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Growth Ratios (6) :

in net income to common shareholders

Change in assets

Change in loans

Change in deposits

Change in net income to common shareholders

in earnings per common share - diluted

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The common equity ratio is calculated as total equity less preferred stock divided by total assets.

The percentage change for 2023 reflects the change compared to 2022, which is not presented in the table above.

See the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for the finanical information for that year.

CRITICAL ACCOUNTING ESTIMATES

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and our results of operations.

We consider these accounting policies and estimates to be critical accounting policies.

We have identified

the determination of the allowance for credit losses, the fair valuation of financial instruments and income taxes to be the accounting

areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information

becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates.

management has reviewed and approved these critical accounting policies and estimates and has discussed these policies with the Company’s

Audit Committee.

We consider these accounting policies and estimates to be critical.

We have identified the determination

of the allowance for credit losses, the fair valuation of financial instruments and income taxes to be the accounting areas that require

the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available

or circumstances change, including overall changes in the economic climate and/or market interest rates.

Therefore, management has reviewed

and approved these critical accounting policies and estimates and has discussed these policies with the Company’s Audit Committee.

Allowance for Credit Losses

The allowance for credit losses

(“ACL”) is management’s current estimate of expected credit losses that will result from the inability of our borrowers

to make required loan payments, with particular applicability on our balance sheet to loans and unfunded loan commitments.

The allowance for credit

losses (“ACL”) is management’s current estimate of expected credit losses that will result from the inability of our

borrowers to make required loan payments, with particular applicability on our balance sheet to loans and unfunded loan commitments.

the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable

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based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

There are many factors affecting

some are quantitative while others require qualitative judgment.

Although management believes its process for determining the

allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective

elements and is susceptible to significant change.

To the extent actual outcomes are worse than management estimates, additional provision

for credit losses could be required that could adversely affect our earnings or financial position in future periods.

There are many factors affecting the ACL;

quantitative while others require qualitative judgment.

Although management believes its process for determining the allowance adequately

considers all the potential factors that could result in credit losses, the process includes subjective elements and is susceptible to

significant change.

Changes in economic conditions, portfolio composition, collateral values, and forecast assumptions could materially

affect the ACL.

To the extent actual outcomes are worse than management estimates, additional provision for credit losses could be required

that could adversely affect our earnings or financial position in future periods.

During 2025, we transitioned to the discounted cash

flow “DCF” methodology for calculating the ACL, and management analyzed the risk level associated with factors such as changes

in lending policies;

international, national, regional, and local conditions;

volume and terms of loans;

experience and depth of management;

volume and severity of past due loans;

concentrations of credit;

and loan review results in the consideration of the qualitative portion

See Note 1 – Summary

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result in significant impact on our results of operations, financial condition or disclosures of fair value information.

The fair value hierarchy requires

use of observable inputs first and subsequently unobservable inputs when observable inputs are not available.

Our fair value measurements

involve various valuation techniques and models, which involve inputs that are observable (Level 1 or Level 2 in fair value hierarchy),

when available.

The level of judgment required to determine fair value is dependent on the methods or techniques used in the process.

Assets and liabilities that are measured at fair value using quoted prices in active markets (Level 1) do not require significant judgment

while the valuation of assets and liabilities when quoted market prices are not available (Levels 2 and 3) may require significant

judgment to assess whether

observable or unobservable inputs for those assets and liabilities provide reasonable determination of fair value.

See Note 12 to the

Consolidated Financial Statements for additional information regarding the fair values measured at each level of the fair value hierarchy,

additional discussion regarding fair value measurements, and a brief description of how fair value is determined for categories that have

unobservable inputs.

The fair value hierarchy

requires use of observable inputs first and subsequently unobservable inputs when observable inputs are not available.

Our fair value

measurements involve various valuation techniques and models, which involve inputs that are observable (Level 1 or Level 2 in fair value

hierarchy), when available.

The level of judgment required to determine fair value is dependent on the methods or techniques used in the

Assets and liabilities that are measured at fair value using quoted prices in active markets (Level 1) do not require significant

judgment while the valuation of assets and liabilities when quoted market prices are not available (Levels 2 and 3) may require significant

judgment to assess whether observable or unobservable inputs for those assets and liabilities provide reasonable determination of fair

See Note 12 to the Consolidated Financial Statements for additional information regarding the fair values measured at each level

of the fair value hierarchy, additional discussion regarding fair value measurements, and a brief description of how fair value is determined

for categories that have unobservable inputs.

The financial statements have been prepared on the

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in which those temporary differences are expected to be realized or settled.

The realization of deferred tax assets depends on

generating sufficient future taxable income within the applicable carryforward periods.

We evaluate the need for a valuation allowance

by assessing the available evidence, including expectations of future taxable income, the timing of reversal of temporary differences

and available tax planning strategies.

We also evaluate uncertain tax positions and recognize and measure a tax benefit only when it is

more likely than not that the position will be sustained upon examination;

if applicable, we record related interest and penalties in

income tax expense.

RESULTS OF OPERATIONS

Net Interest Income and Margin

Our level of net interest income is determined by the

level of earning assets and the management of our net interest margin.

For the years ended December 31, 2024, 2023, and 2022, our net

interest income was $81.2 million, $77.7 million, and $97.6 million, respectively.

Our level of net interest income is determined by

the level of earning assets and the management of our net interest margin.

For the years ended December 31, 2025, 2024, and 2023, our

net interest income was $105.0 million, $81.2 million, and $77.7 million, respectively.

The $23.7 million, or 29.2%, increase in net interest

income during 2024, compared to 2023, was driven by a $23.6 million increase in interest income, partially offset by a $20.0 million increase

in interest expense.

During 2023, our net interest income decreased $20.0 million, or 20.5%, compared to 2022.

This decrease in net interest

income was driven by a $79.9 million increase in interest expense, primarily related to our interest-bearing deposits, partially offset

by a $59.9 million increase in interest income during the 2023 period.

income during 2025, compared to 2024, was driven by a $13.5 million decrease in interest expense and a $10.3 million increase in interest

During 2024, our net interest income increased $3.6 million, or 4.6%, compared to 2023.

This increase in net interest income was

driven by a $23.6 million increase in interest income, partially offset by a $20.0 million increase in interest expense during the 2024

Interest income for the years ended December 31, 2025,

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Also, included in interest income on loans was $1.7 million related to the net amortization of loan fees and capitalized loan origination

costs for the year ended December 31, 2024, compared to $1.7 million for the years ended December 31, 2023 and 2022, respectively.

increase in interest income during 2024 was driven by an increase in average interest-earning assets, combined with higher yields on those

costs for the year ended December 31, 2025, compared to $1.6 million and $1.7 million for the years ended December 31, 2024 and 2023,

respectively.

The increase in interest income during 2025 was driven by an increase in average loan balances, combined with an increase

in loan yield.

Interest expense was $106.5 million, $120.0 million,

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Interest expense on deposits for 2025 represented

90.7% of total interest expense, compared to 91.4% for 2023, and 90.3% for 2022, while interest expense on borrowings represented 9.3%

of total interest expense for 2024, compared to 8.6% for 2023, and 9.7% for 2022.

The increase in interest expense on deposits during

the 2024 and 2023 periods was driven by the increase in the rate paid on deposit balances which relates to the Federal Reserve’s

525 basis point increase in the federal funds rate beginning in March 2022 and continuing through July 2023.

89.8% of total interest expense, compared to 90.7% for 2024, and 91.4% for 2023, while interest expense on borrowings represented the

remaining portion of total interest expense.

The decrease in interest expense on deposits during 2025 was driven primarily by repricing

of our deposit portfolio in response to declining market interest rates, including reductions in the Federal Reserve’s target range

for the federal funds rate during 2024 and 2025.

We have included a number of tables to assist in our

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the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown.

We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables

to illustrate our interest rate sensitivity with respect to interest-earning and interest-bearing accounts.

We also track the

sensitivity of our various categories of assets and

liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning

and interest-bearing accounts.

The following table sets forth information related

to our average balance sheet, average yields on assets, and average costs of liabilities at December 31, 2024, 2023 and 2022.

these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities.

We derived average

balances from the daily balances throughout the periods indicated.

During the same periods, we had no securities purchased with agreements

All investments were owned at an original maturity of over one year.

Nonaccrual loans are included in earning assets in the

following tables.

to our average balance sheet, average yields on assets, and average costs of liabilities for the years ended December 31, 2025, 2024 and

We derived these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities.

We derived average balances from the daily balances throughout the periods indicated.

During the same periods, we had no securities purchased

with agreements to resell.

All investments were purchased at an original maturity of over one year.

Nonaccrual loans are included in earning

assets in the following tables.

Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status.

of capitalized loan costs and fees are amortized into interest income on loans.

Average Balances, Income and Expenses, Yields and Rates

(dollars in thousands)

Interest-earning assets

Federal funds sold and

interest-bearing deposits with banks

Investment securities, taxable

The net of capitalized loan costs and fees are amortized into interest income on loans.

Average Balances, Income and Expenses, Yields and

Ended December 31,

in thousands)

Interest-earning

funds sold and interest-bearing deposits with banks

securities, taxable

securities, nontaxable (1)

Total interest-earning assets

Noninterest-earning assets

interest-earning assets

Noninterest-earning

Interest-bearing

& money market

interest-bearing deposits

advances and other borrowings

interest-bearing liabilities

Savings & money market

Time deposits

Total interest-bearing deposits

FHLB advances and other borrowings

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Noninterest-bearing

Shareholders’

liabilities and shareholders’ equity

Net interest spread

Net interest income(tax equivalent)/margin

interest income(tax equivalent)/margin

tax-equivalent adjustment (1)

interest income

(1) The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income

to a comparable yield on a taxable basis.

The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

Includes loans held for sale and nonaccrual loans.

Our net interest margin, on

a tax-equivalent basis (TE), was 2.06%, 2.07% and 3.19% for the years ended December 31, 2024, 2023 and 2022, respectively.

Our net interest

margin (TE) was relatively stable in 2024, compared to 2023 as both our yield on interest earning assets and rate of interest bearing

liabilities increased similarly during the year.

During 2023, our net interest margin decreased 112 basis points, compared to 2022, driven

primarily by higher costs on our interest-bearing liabilities.

Our average interest-earning assets increased by $175.0

million during the year ended December 31, 2024, compared to 2023, while the related yield on our interest-earning assets increased by

39 basis points.

The increase in average interest-earning assets was driven by a $131.9 million increase in average loan balances and

a $26.2 million increase in federal funds sold and interest-bearing deposits with banks.

In addition, the increase in yield on our interest

earning assets was driven by a 40 basis point increase in the yield on our loan portfolio.

Our net interest margin,

on a tax-equivalent basis (TE), was 2.57%, 2.06% and 2.07% for the years ended December 31, 2025, 2024 and 2023, respectively.

2025, our net interest margin increased 51 basis points, compared to 2024, driven primarily by a decrease in rates paid on our interest-bearing

liabilities, combined with an increase in our average interest-earning assets.

During 2024, our net interest margin was relatively stable,

compared to 2023 as both our interest earning assets and interest-bearing liabilities increased similarly in volume and rates during the

Our average interest-earning

assets increased by $152.4 million during the year ended December 31, 2025, compared to 2024, while the related yield on our interest-earning

assets increased by six basis points.

The increase in average interest-earning assets was driven by a $124.1 million increase in average

loan balances, while the increase in yield on our interest earning assets was driven by a 13 basis point increase in the yield on our

loan portfolio.

Our average interest-bearing liabilities increased

by $81.7 million during 2025 while the cost of our interest-bearing liabilities decreased by 54 basis points.

The increase in average

interest-bearing liabilities was driven primarily by a $90.5 million increase in average interest-bearing deposits.

The decrease in cost

of our interest-bearing liabilities was primarily driven by a 58 basis point decrease in the cost of our interest-bearing deposits.

During the year ended December 31, 2024, our average

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The increase in average interest-earning assets was driven primarily by a $131.9 million increase in average loan balances,

combined with a $46.4 million increase in federal funds sold and interest-bearing deposits with banks.

In addition, the increase in yield

on our interest earning assets was driven by a 357 basis point increase in the yield on our federal funds sold and other interest-bearing

deposits which repriced as the Federal Reserve increased the federal funds rate by 100 basis points during 2023.

Our average interest-bearing liabilities increased

by $193.2 million during 2024 while the cost of our interest-bearing liabilities increased by 44 basis points.

The increase in average

interest-bearing liabilities was driven primarily by a $268.7 million increase in average time deposits at an average rate of 4.94% and

an increase of $70.4 million in FHLB advances and other borrowings.

During 2023, our average interest-bearing liabilities increased by

$749.3 million, compared to 2022, while the cost of our interest-bearing liabilities increased by 255 basis points.

while the yield on our interest earning assets was driven by a 40 basis point increase in the yield on our loan portfolio.

our average interest-bearing liabilities increased by $193.2 million, compared to 2023, while the cost of our interest-bearing liabilities

increased by 44 basis points.

Our net interest spread was

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is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities.

44 basis point increase in the cost of our interest-bearing liabilities, partially offset by a 39 basis point increase in yield on our

interest-earning assets resulted in a 5 basis point

decrease in our net interest

spread for the 2024 period.

We anticipate continued pressure on our net interest spread and net interest margin in future periods

as our deposits continue to reprice immediately with increases in the fed funds rate, compared to our loan portfolio which reprices as

loans are originated or renewed.

six basis point increase in our interest-earning assets, combined with the 54 basis point decrease in the cost of our interest-bearing

liabilities, resulted in a 60 basis point increase in our net interest spread for the 2025 period.

We seek to fund increased loan volumes

by growing our core deposits, but, subject to internal policy limits on the amount of wholesale funding we may maintain, will utilize

wholesale funding to fund shortfalls, if any, or provide additional liquidity.

To the extent that our dependence on wholesale funding

sources increases, our net interest margin would likely be negatively impacted as we may not be able to reduce the rates we pay on these

deposits as quickly as we can on core deposits as rates have and may continue to decline.

We continue to deploy various asset liability

management strategies to manage our risk to interest rate fluctuations.

Rate/Volume Analysis

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impact of changing interest rates and changing volume.

The following tables set forth the effect which the varying levels of interest-earning

The following table sets forth the effect which the varying levels of interest-earning

assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.

(Decrease) Due to Change in

in thousands)

The rate/volume variance has been allocated between the rate and volume variances based on the relative magnitude of the change in each,

with the remaining interaction reflected in the rate/volume column.

December 31, 2025 vs.

December 31, 2024 vs.

Increase (Decrease) Due to Change in

(dollars in thousands)

funds sold and interest-bearing deposits with banks

interest income

advances and other borrowings

FHLB advances

and other borrowings

interest expense

interest income

Net interest income, the largest component of our income,

was $81.2 million for the year ended December 31, 2024, a $3.6 million increase from net interest income of $77.7 million for the year

ended December 31, 2023.

The increase in net interest income was driven by a $23.6 million increase in interest income, partially offset

by a $20.0 million increase in interest expense.

The 40 basis point increase in loan yield combined with the $131.9 million increase in

average loan balances drove the increase in interest income while the 47 basis point increase in deposit costs drove the increase in interest

Net interest income, the largest component of our

income, was $105.0 million for the year ended December 31, 2025, a $23.7 million increase from net interest income of $81.2 million for

the year ended December 31, 2024.

The increase in net interest income was driven by a $13.5 million decrease in interest expense, combined

with a $10.3 million increase in interest income.

The $124.1 million increase in average loan balances drove the increase in interest

income while the 58 basis point decrease in deposit costs drove the decrease in interest expense.

Net interest income was $81.2 million for the year

ended December 31, 2023, a $20.0 million decrease from net interest income of $97.6 million for the year ended December 31, 2022.

decrease in net interest income was driven by a $79.9 million increase in interest expense, partially offset by a $59.9 million increase

in interest income.

The 257 basis point increase in deposit costs drove the increase in interest expense while the $626.9 million increase

in average loan balances combined with the 77 basis point increase in loan yield drove the increase in interest income.

ended December 31, 2024, a $3.6 million increase from net interest income of $77.7 million for the year ended December 31, 2023.

in net interest income was driven by a $23.6 million increase in interest income, partially offset by a $20.0 million increase in interest

The 40 basis point increase in loan yield combined with the $131.9 million increase in average loan balances drove the increase

in interest income while the 47 basis point increase in deposit costs drove the increase in interest expense.

Provision for Credit Losses

The provision for credit losses, which includes a provision

for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded commitments

at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.

the adequacy of the allowance for credit losses on a quarterly basis.

Please see the discussion below under “Results of Operations

– Allowance for Credit Losses” for a description of the factors we consider in determining the amount of the provision we

expense each period to maintain this allowance.

There was a $125,000 provision for credit losses for

the year ended December 31, 2024, compared to a provision of $1.3 million and $6.2 million for the years ended December 31, 2023 and 2022,

The provision for credit losses, which includes a

provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded

commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.

We review the adequacy of the allowance

for credit losses on a quarterly basis.

The provision

for credit losses is determined based on management’s assessment of expected credit losses in the loan portfolio and unfunded commitments,

as discussed below.

There was a $3.0 million provision for credit losses

for the year ended December 31, 2025, compared to a provision of $125,000 and $1.3 million for the years ended December 31, 2024, and

2023, respectively.

The $125,000 provision during 2024 included a provision of $500,000 for credit losses and a reversal of $375,000 for unfunded

The $500,000 provision was driven primarily by $29.1 million in loan growth during the year combined with slightly lower

expected loss rates due to historically low charge-offs, while the $375,000 reversal was driven by a $5.5 million decrease in unfunded

commitments combined with lower historical loss rates.

The $1.3 million provision during 2023 included a $2.2 million provision for credit

losses and a reversal of $949,000 for unfunded commitments.

The $2.2 million provision was driven primarily by $329.3 million in loan

growth during the year, while the $949,000 reversal was driven by a $153.7 million decrease in unfunded commitments.

The $6.2 million

provision during 2022, which included a $780,000 provision for unfunded commitments, was driven primarily by $783.5 million in loan growth

during the year, combined with a $259.6 million increase in unfunded commitments.

In addition, to loan growth, the provision for credit

losses was impacted by

slightly lower expected loss rates due to historically

low charge-offs during the 12 months ended December 31, 2022 while minor adjustments to two internal qualitative factors increased the

qualitative component of the allowance and related provision expense.

The $3.0 million provision during 2025 included a provision of $2.5 million for credit losses and a $500,000 provision

for unfunded commitments.

The $2.5 million provision was driven primarily by $213.4 million in loan growth during the year combined with

slightly lower expected loss rates due to historically low charge-offs, while the $500,000 provision for unfunded commitments was driven

by a $124.5 million increase in unfunded commitments combined with lower historical loss rates.

The $125,000 provision during 2024 included

a $500,000 provision for credit losses and a reversal of $375,000 in the provision for unfunded commitments.

The $500,000 provision for

credit losses was driven primarily by $29.1 million in loan growth during the year combined with slightly lower expected loss rates due

to historically low charge-offs, while the $375,000 reversal was driven by a $5.5 million decrease in unfunded commitments combined with

lower historical loss rates.

The $1.3 million provision during 2023 included a $2.2 million provision for credit losses and a reversal

of $949,000 for unfunded commitments.

The $2.2 million provision was driven primarily by $329.3 million in loan growth during the year,

while the $949,000 reversal was driven by a $153.7 million decrease in unfunded commitments.

first quarter of 2025, the Company refined its methodology for estimating the allowance for credit losses on loans by transitioning from

a lifetime probability of default and loss given default model to a DCF approach.

The Company transitioned to the DCF method as it allows

for a better estimation of credit losses through customization among the various inputs by loan segmentation.

The DCF model uses regression

techniques that relate one or more economic factors to the default rate of various portfolios to build reasonable and supportable forecasts

to estimate future losses.

The Company determined that the national gross domestic product and unemployment rate were the two economic

factors which had the greatest correlation to historical performance to use in the forecasted portion of the model.

In addition, the transition

to the DCF model allowed the Company to reduce its reliance on qualitative factors and to analyze them on a more granular level, such

as by segment.

The refinement represents a change in accounting estimate under ASC Topic 250, Accounting Changes and Error Corrections,

with prospective application beginning in the period of change.

This change in accounting estimate did not have a material effect on the

Company’s financial statements.

During the quarter ended September 30, 2025, the risk weightings associated with certain qualitative

factors were revised based on new information reflecting the current economic and market environment.

The result of these changes was

immaterial as it relates to the allowance for credit losses balance.

DCF methodology, expected loss rates are evaluated at the individual loan level using contractual cash flows, prepayment assumptions,

reasonable and supportable economic forecasts, and other model inputs.

Internal risk ratings continue to inform credit risk monitoring,

segmentation, and qualitative adjustments, as applicable.

The incorporation of the weighted average life of loan into the calculation

was a key driver of the change in allocation between our commercial portfolio and our consumer portfolio as the weighted average life

of our consumer loans is generally longer than that of our commercial loans, thus driving the changes in the expected loss rate to correlate

to the expected life of the loan.

As a result, the allocation of the ACL shifted among loan categories, reducing the ACL allotted to the

commercial portfolio and increasing the ACL allotted to the consumer portfolio.

Following is a summary of the activity in the allowance

for credit losses.

in thousands)

(dollars in thousands)

Balance, beginning of period

Adjustment for CECL

Provision for credit losses

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Loan recoveries

loan (charge-offs) recoveries

loan charge-offs

end of period

As of December 31, 2024, the allowance for credit losses

totaled $39.9 million, or 1.10% of gross loans.

As of December 31, 2025, the allowance for credit

losses totaled $42.3 million, or 1.10% of gross loans.

In comparison, the allowance for credit losses totaled $39.9 million as of December

1 unchanged sentence

During the year ended December 31, 2025, we had net

charge-offs of $1.3 million, consisting of $1.7 million of loans charged-off in the current year, partially offset by $466,000 of recoveries

on loans previously charged-off.

Net charge-offs were 0.04% of the average outstanding loan portfolio for 2024.

In addition, nonperforming

assets increased to 0.27% of total assets while our level of classified assets decreased to 4.25% at December 31, 2024.

We reported net charge-offs of $166,000 and net recoveries

of $1.4 million for the years ended December 31, 2023 and 2022, respectively, including charge-offs of $761,000 and $485,000 in 2023 and

2022, respectively.

The net charge-offs of $166,000 and net recoveries of $1.4 million during 2023 and 2022, respectively, represented

0.0.% and 0.05% of the average outstanding loan portfolios for 2023 and 2022, respectively.

In addition, nonperforming assets were 0.10%

and 0.07% of total assets for 2023 and 2022, respectively, and classified assets were 4.25% and 4.72% at December 31, 2023 and 2022, respectively.

charge-offs of $84,000, consisting of $351,000 of loans charged-off in the current year, partially offset by $267,000 of recoveries on

loans previously charged-off.

Net charge-offs were

0.00% of the average outstanding loan portfolio for

In addition, nonperforming assets represented 0.32% of total assets while our level of classified assets to total capital (risk

based) decreased to 4.22% at December 31, 2025.

We reported net charge-offs of $1.3 million and $166,000

for the years ended December 31, 2024, and 2023, respectively, including charge-offs of $1.7 million and $761,000 in 2024 and 2023, respectively.

The net charge-offs of $1.3 million and $166,000 during 2024 and 2023, respectively, represented 0.04% and 0.00% of the average outstanding

loan portfolios for 2024 and 2023, respectively.

In addition, nonperforming assets were 0.27% and 0.10% of total assets for 2024 and 2023,

respectively, and classified assets were 4.25% at December 31, 2024 and 2023.

Noninterest Income

1 unchanged sentence

to our noninterest income.

Ended December 31,

Year Ended December 31,

(dollars in thousands)

3 unchanged sentences

Income from bank owned life insurance

Gain (loss) on disposal of fixed assets

noninterest income

Noninterest income was $12.1 million for the year ended

December 31, 2024, a $2.3 million, or 23.1%, increase compared to noninterest income of $9.9 million for the year ended December 31, 2023.

The increase in noninterest income during 2024, compared to 2023, resulted primarily from an increase in mortgage banking income, service

fees on deposit accounts and income from bank owned life insurance.

Mortgage banking income increased by $1.5 million, or 37.8%, due to

higher mortgage volume during the year.

Service fees on deposit accounts increased by $382,000, or 27.6%, due to transaction volume and

increased use of the commercial credit cards offered to our clients.

Noninterest income was $9.9 million for the year ended

December 31, 2023, a $280,000, or 2.9%, increase compared to noninterest income of $9.6 million for the year ended December 31, 2022.

The increase in noninterest income during 2023, compared to 2022, resulted primarily from a loss on disposal of assets during the prior

Offsetting the increases in noninterest income were decreases in mortgage banking income and other income.

Other income decreased

due to a decrease in loan fee income during 2023 as compared to 2022 due to fewer loan originations.

Loss on sale of investment securities

Total noninterest income

Noninterest income was $13.1 million for the year

ended December 31, 2025, a $997,000, or 8.2%, increase compared to noninterest income of $12.1 million for the year ended December 31,

The increase in noninterest income during 2025, compared to 2024, resulted primarily from an increase in mortgage banking income

and service fees on deposit accounts.

Mortgage banking income increased by $722,000, or 13.0%, due to higher mortgage volume during the

Service fees on deposit accounts increased by $601,000, or 34.1%, driven primarily by higher transaction volume, wire transfer fees

and growth in our commercial credit card services.

Partially offsetting these increases was a $515,000 decrease from the loss on sale

of investment securities.

Noninterest income was $12.1 million for the year

ended December 31, 2024, a $2.3 million, or 23.1%, increase compared to noninterest income of $9.9 million for the year ended December

The increase in noninterest income during 2024, compared to 2023, resulted primarily from an increase in mortgage banking income,

service fees on deposit accounts and income from bank owned life insurance.

Mortgage banking income increased by $1.5 million, or 37.8%,

due to higher mortgage volume during the year while service fees on deposit accounts increased by $382,000, or 27.6%, due to transaction

volume and increased use of the commercial credit cards offered to our clients.

Noninterest Expenses

1 unchanged sentence

to our noninterest expenses.

Ended December 31,

Year Ended December 31,

(dollars in thousands)

2 unchanged sentences

Professional fees

noninterest expenses

Total noninterest expenses

Noninterest expenses were $75.5 million for the year

ended December 31, 2024, a $4.5 million, or 6.5%, increase from noninterest expense of $68.8 million for 2023.

ended December 31, 2025, a $2.2 million, or 3.0%, increase from noninterest expenses of $73.3 million for 2024.

The increase in total noninterest expenses during

2025, compared to 2024, resulted primarily from the following:

· Compensation and benefits expense

increased $3.3 million, or 8.1%, during 2024 relating primarily to an increase in group insurance and other benefits expenses as well

as increases in salaries and incentive compensation.

· Outside service and data processing

costs increased $663,000, or 9.4%, primarily due to increased electronic banking, software licensing costs and debit card related expenses.

· Insurance expenses increased

$256,000, or 6.8%, related to higher FDIC insurance premiums.

· Other noninterest expenses increased

$310,000, or 8.6%, due primarily to an increase in debit card losses, collection expense, and other staff related expenses.

Compensation and benefits expense increased $1.3 million, or 2.9%, during 2025 relating primarily to increases in salaries, commissions, and other employee benefits expenses.

Outside service and data processing costs increased $787,000, or 10.2%, primarily due to increases in software licensing and maintenance costs, electronic banking, and other services we provide our clients.

Other noninterest expenses increased $448,000, or 11.5%, due primarily to an increase in employee travel and other expenses associated with recognition of the Company’s 25 th anniversary.

Partially offsetting the above increases was a decrease

in occupancy of $308,000, or 3.0%, due to lower depreciation expense as several larger items were fully depreciated during 2025.

Noninterest expenses were $73.3 million for the year

2 unchanged sentences

2024, compared to 2023, resulted primarily from the following:

· Compensation and benefits expense

increased $1.5 million, or 3.8%, during 2023 relating primarily to an increase in salaries and incentive compensation.

· Occupancy expenses increased

$1.2 million, or 12.6%, driven by increased depreciation, insurance, property taxes and maintenance expenses primarily related to our

new headquarters building.

· Outside service and data processing

costs increased $966,000, or 15.8%, primarily due to increased electronic banking, software licensing costs and debit card related expenses.

· Insurance expenses increased

$2.1 million, or 123.4%, related to higher FDIC insurance premiums.

· Marketing expenses increased

$141,000, or 11.6%, driven by an increase in community sponsorships and business development.

· Other noninterest expenses increased

$211,000, or 6.2%, due primarily to an increase in telephone expense and deposit account and fraud losses.

Partially offsetting the above increases was a decrease

in professional fees of $139,000, or 5.3% due to less legal fees and consulting expenses during 2023.

Our efficiency ratio was 78.5% for 2024 and 78.7% for

The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue

and is computed by dividing noninterest expense by the sum of net interest income and noninterest income.

Our efficiency ratio was elevated

for the twelve months ended December 31, 2024 due to the comparatively smaller increase in net interest income and noninterest income,

as compared to the increase in noninterest expenses during the year.

Income tax expense was $4.4 million, $4.0 million and

$9.0 million for the years ended December 31, 2024, 2023 and 2022, respectively.

Our effective tax rate was 22.0% for the year ended December

31, 2024, compared to 23.0% for 2023, and 23.6% for 2022.

The fluctuation in the effective rate for each of the periods is driven by the

effect of equity compensation transactions and return to provision differences on our actual tax rate during the year compared to what

was estimated during the year.

Compensation and benefits expense increased $3.3 million, or 8.1%, during 2024 relating primarily to an increase in group insurance and other benefits expenses as well as increases in salaries and incentive compensation.

Outside service and data processing costs increased $663,000, or 9.4%, primarily due to increased electronic banking, software licensing costs and debit card related expenses.

Insurance expenses increased $256,000, or 6.8%, related to higher FDIC insurance premiums.

Other noninterest expenses increased $310,000, or 8.6%, due primarily to an increase in debit card losses, collection expense, and other staff related expenses.

Our efficiency ratio was 64.0% for 2025, 78.5% for

2024 and 78.7% for 2023.

The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full

dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income.

Our efficiency

ratio decreased for the twelve months ended December 31, 2025 due to the comparatively larger increase in net interest income and noninterest

income, as compared to the increase in noninterest expenses during the year.

Income tax expense was $9.2 million, $4.4 million

and $4.0 million for the years ended December 31, 2025, 2024 and 2023, respectively.

Our effective tax rate was 23.3% for the year ended

December 31, 2025, compared to 22.0% for 2024, and 23.0% for 2023.

The fluctuation in the effective rate for each of the periods is driven

by the effect of equity compensation transactions and return to provision differences on our actual tax rate during the year compared

to what was estimated during the year.

Investment Securities

At December 31, 2025 and 2024, our investment securities

portfolio was $151.6 million and $154.6 million, respectively, and represented approximately 3.7% and 3.8% of our total assets, respectively.

Our available for sale investment portfolio included corporate bonds, US treasuries, US agency securities, SBA securities, state and political

subdivisions, asset-backed securities, and mortgage-backed securities with a fair value of $132.1 million and amortized cost of $146.6

million for an unrealized loss of $14.5 million at December 31, 2024 compared to a fair value of $134.7 million and amortized cost of

$149.1 million for an unrealized loss of $14.4 million at December 31, 2023.

portfolio (including available-for-sale securities and other investments) was $147.8 million and $151.6 million, respectively, and represented

approximately 3.4% and 3.7% of our total assets, respectively.

Our available for sale investment portfolio included corporate bonds, US

treasuries, US agency securities, SBA securities, state and political subdivisions, asset-backed securities, and mortgage-backed securities

with a fair value of $127.7 million and amortized cost of $137.2 million for an unrealized loss of $9.4 million at December 31, 2025 compared

to a fair value of $132.1 million and amortized cost of $146.6 million for an unrealized loss of $14.5 million at December 31, 2024.

net unrealized losses primarily reflect the impact of market interest rate movements on the fair value of our fixed-rate securities portfolio.

The amortized costs and the fair value of our investments

8 unchanged sentences

Mortgage-backed securities

Contractual maturities and yields on our investments

are shown in the following table.

Expected maturities may differ from contractual maturities because issuers may have the right to call

or prepay obligations with or without call or prepayment penalties.

Than One Year

to Five Years

Contractual maturities and yields on a tax-equivalent

basis for our investments are shown in the following table.

Expected maturities may differ from contractual maturities because issuers

may have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2025

Less Than One Year

One to Five Years

Five to Ten Years

Over Ten Years

(dollars in thousands)

1 unchanged sentence

Corporate bonds

US treasuries

US government agencies

13 unchanged sentences

total loans outstanding at December 31, 2025 and 2024 were $3.85 billion and $3.63 billion, respectively.

The principal component of our loan portfolio

is loans secured by real estate mortgages.

As of December 31, 2024, our loan portfolio included $3.03 billion, or 83.5%, of real estate

loans, compared to $3.05 billion, or 84.8%, as of December

Most of our real estate loans are

secured by residential or commercial property.

We obtain a security interest in real estate, in addition to any other available collateral,

in order to increase the likelihood of the ultimate repayment of the loan.

Generally, we limit the loan-to-value ratio on loans to coincide

with the appropriate regulatory guidelines.

We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent

in concentration in certain types of collateral and business types.

In addition to traditional residential mortgage loans, we issue second

mortgage residential real estate loans and home equity lines of credit.

Home equity lines of credit totaled $204.9 million as of December

31, 2024, of which approximately 46% were in a first lien position, while the remaining balance was second liens, compared to $183.0 million

as of December 31, 2023, of which approximately 46% were in first lien positions and the remaining balance was in second liens.

home equity loan had a balance of approximately $92,000 and a loan to value of approximately 74% as of December 31, 2024, compared to

an average loan balance of $85,000 and a loan to value of approximately 73% as of December 31, 2023.

Further, 0.12% and 0.8% of our total

home equity lines of credit were over 30 days past due as of December 31, 2024 and 2023, respectively.

The principal component of our loan portfolio is loans

secured by real estate mortgages.

As of December 31, 2025, our loan portfolio included $3.18 billion, or 82.8%, of loans secured by real

estate, compared to $3.03 billion, or 83.5%, as of December 31, 2024.

Most of our real estate loans are secured by residential or commercial

We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood

of the ultimate repayment of the loan.

Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory

We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain

types of collateral and business categories.

In addition to traditional residential mortgage loans, we issue second mortgage residential

real estate loans and home equity lines of credit.

Home equity lines of credit totaled $248.7 million as of December 31, 2025, of which

approximately 47% were in a first lien position, while the remaining balance was second liens, compared to $204.9 million as of December

31, 2024, of which approximately 46% were in first lien positions and the remaining balance was in second liens.

The average home equity

loan had a balance of approximately $108,000 and a loan to value of approximately 73% as of December 31, 2025, compared to an average

loan balance of $92,000 and a loan to value of approximately 74% as of December 31, 2024.

Further, 0.38% and 0.12% of our total home equity

lines of credit were over 30 days past due as of December 31, 2025 and 2024, respectively.

Following is a summary of our loan composition for

1 unchanged sentence

Of the $213.4 million in loan growth in 2025, $141.8 million of growth was in commercial

related loans, while $18.9 million of growth was in consumer related loans, specifically consumer real estate mortgages which grew by

$46.2 million and home equity lines of credit which grew by $21.9 million during 2024.

Offsetting the growth in consumer real estate loans

and home equity lines of credit was a $42.5 million decrease in consumer construction loans.

The increase in consumer real estate loans

is related to our focus to continue to originate high quality 1-4 family consumer real estate loans.

Our average consumer real estate

loan currently has a principal balance of $468,000, a term of 23 years, and an average rate of 4.36%.

(dollars in thousands)

related loans, specifically commercial owner occupied which grew by $85.4 million and commercial business which grew by $63.6 million,

partially offset by declines in other commercial categories (including construction and non-owner occupied real estate loans), while $71.5

million of growth was in consumer related loans.

Consumer real estate loans represent the largest category in our consumer portfolio and

currently have an average principal balance of $472,000, a term of 24 years, and an average rate of 4.55%.

in thousands)

Owner occupied RE

Non-owner occupied RE

Total commercial

consumer loans

Total commercial loans

Total consumer loans

Total gross loans, net of deferred fees

1 unchanged sentence

Total loans, net

We have included the table below to provide additional

We have included the tables below to provide additional

clarity on our commercial real estate exposure.

We have not identified any geographic concentrations within these collateral types.

level of non-owner occupied commercial real estate loans represents 247.2% of the Bank’s total risk-based capital at December 31,

We have not identified any material geographic concentrations within these collateral

The table below presents the majority of our commercial real estate exposure by collateral type which are included in the commercial

business, construction, and non-owner occupied segments.

December 31, 2025

1 unchanged sentence

Weighted Average

Maturities and Sensitivity of Loans to Changes in Interest

December 31, 2024

(dollars in thousands)

Weighted Average

Our level of non-owner occupied commercial real estate

loans represented 236.5% of the Bank’s total risk-based capital at December 31, 2025.

Maturities and Sensitivity of Loans to Changes in

Interest Rates

The information in the following table is based on

5 unchanged sentences

maturities of the loan portfolio.

in thousands)

December 31, 2025

(dollars in thousands)

fifteen years

Owner occupied RE

commercial loans

consumer loans

gross loan, net of deferred fees

The following table summarizes the loans due after one

year by category.

Non-owner occupied RE

Total commercial loans

Total consumer loans

Total gross loan, net of deferred fees

The following table summarizes loans due after one year

(i.e., excluding loans due one year or less), by category and by interest rate type.

Interest Rate

6 unchanged sentences

Nonperforming Assets

Nonperforming assets include real estate acquired through

foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status.

The following table shows the nonperforming assets and

the related percentage of nonperforming assets to total assets and gross loans for the three years ended December 31, 2024.

a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering

economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the

loan is doubtful.

Nonperforming assets include real estate acquired

through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status.

The following table shows the nonperforming assets

and the related percentage of nonperforming assets to total assets and gross loans as of December 31, 2025.

Generally, a loan is placed

on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and

business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful.

A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.

Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with

the loan terms before that loan can be placed back on accrual status.

Further, the borrower must show capacity to continue performing

into the future prior to restoration of accrual status.

Our policy with

respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before

that loan can be placed back on accrual status.

Further, the borrower must show capacity to continue performing into the future prior

to restoration of accrual status.

(dollars in thousands)

troubled debt restructurings (TDRs)

nonaccrual loans, including nonaccruing TDRs

nonperforming assets

Asset Quality

Nonperforming

assets/total assets

loans/gross loans

over 90 days past due (1)

over 90 days past due and still accruing

troubled debt restructurings

(1) Loans over

90 days are included in nonaccrual loans

At December 31, 2024, nonperforming assets were $10.9

million, or 0.27% of total assets and 0.30% of gross loans, compared to $4.0 million, or 0.10% of total assets and 0.11% of gross loans

at December 31, 2023.

Nonaccrual loans increased $6.9 million during the twelve months ending December 31, 2024 due primarily to one commercial

relationship related to the assisted living industry.

The amount of foregone interest income on the nonaccrual loans as of December 31,

2024 and 2023 was approximately $200,000 and $73,000, respectively, for the twelve-month periods.

A significant portion, or 94.9%, of nonaccrual loans

at December 31, 2024 were secured by real estate.

We have evaluated the underlying collateral on these loans and believe that the collateral

on these loans is sufficient to minimize future losses.

As a result of this level of coverage on nonaccrual loans, we believe the allowance

for credit losses of $39.9 million for the year ended December 31, 2024 is adequate.

As a general practice, most of our commercial loans

and a portion of our consumer loans are originated with relatively short maturities of less than ten years.

Owner occupied RE

Non-owner occupied RE

Total nonaccrual loans

Other real estate owned

Total nonperforming assets

Asset Quality Ratios:

Nonperforming assets/total assets

Nonaccrual loans/gross loans

Total loans over 90 days past due (1)

Loans over 90 days past due and still accruing

over 90 days are included in nonaccrual loans

At December 31, 2025, nonperforming assets were $14.1 million,

or 0.32% of total assets, compared to $10.9 million, or 0.27% of total assets at December 31, 2024.

In addition, nonaccrual loans were

0.36% of gross loans at December 31, 2025 and 0.30% of gross loans at December 31, 2024.

Nonaccrual loans increased $3.0 million during

the twelve months ended December 31, 2025 due to loans moving within the consumer real estate portfolio.

The amount of foregone interest

income on the nonaccrual loans as of December 31, 2025 and 2024 was approximately $308,000 and $200,000, respectively, for the years ended

December 31, 2025 and 2024.

A significant portion, or 98.0%, of nonaccrual loans at December

31, 2025 were secured by real estate.

We have evaluated the underlying collateral on these loans and believe that the collateral on these

loans is sufficient to minimize future losses.

As a result of this level of coverage on nonaccrual loans, we believe the allowance for

credit losses of $42.3 million as of December 31, 2025 is adequate.

As a general practice, most of our commercial loans and a

portion of our consumer loans are originated with relatively short maturities of less than ten years.

As a result, when a loan reaches

23 unchanged sentences

reserve for individually evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan

At December 31, 2024, individually evaluated loans

totaled approximately $12.2 million for which $4.5 million of these loans have a reserve of approximately $1.9 million allocated in the

At December 31, 2023, individually evaluated loans totaled approximately $4.8 million for which $3.7 million of these loans

had a reserve of approximately $688,000 allocated in the allowance.

We adopted Accounting Standards Update (“ASU”)

2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”)

effective January 1, 2023.

The amendments in ASU 2022-02 eliminated the recognition and measurement of troubled debt restructurings and

enhanced disclosures for loan

modifications

to borrowers experiencing financial difficulty.

Loan modifications to borrowers experiencing financial difficulty were not material for

the twelve months ended December 31, 2024 and December 31, 2023.

for Credit Losses

December 31, 2024 and December 31, 2023, the allowance for credit losses was $39.9 million and $40.7 million, respectively, or 1.10%

and 1.13% of outstanding loans, respectively.

The allowance for credit losses as a percentage of our outstanding loan portfolio decreased

from the prior year primarily due to historically low loan charge-offs which factors into the expected loss rate on our current loan

In addition, our nonperforming assets increased to 0.27% as a percentage of total assets at December 31, 2024 from 0.10%,

as a percentage of total assets, at December 31, 2023, while our classified assets were 4.25% of capital as of December 31, 2024 and

At December 31, 2025, individually evaluated loans totaled

approximately $15.1 million for which $5.2 million of these loans had a reserve of approximately $1.5 million allocated in the allowance.

At December 31, 2024, individually evaluated loans totaled approximately $12.2 million for which $4.5 million of these loans had a reserve

of approximately $1.9 million allocated in the allowance.

During the 12 months ended December 31, 2025, we had two commercial

non-owner occupied loans that were modified due to the borrowers experiencing financial difficulty.

The amortized cost basis of the two

loans was $6.9 million at

December 31, 2025.

Loan modifications to borrowers experiencing financial difficulty were not material for the

twelve months ended December 31, 2024.

Allowance for Credit Losses

At December 31, 2025 and December 31, 2024, the allowance

for credit losses was $42.3 million and $39.9 million, respectively, or 1.10% of outstanding loans, respectively.

In addition, our nonperforming

assets increased to 0.32% as a percentage of total assets at December 31, 2025 from 0.27%, as a percentage of total assets, at December

31, 2024, while our classified assets were 4.22% and 4.25% of total capital (risk based) as of December 31, 2025 and December 31, 2024,

respectively.

See Note 4 to the Consolidated Financial Statements for more information on our allowance for credit losses.

following table summarizes the net charge-off detail as a percentage of average loans by loan composition for the three years ended December

ended December 31,

The following table summarizes the net charge-off detail as a

percentage of average loans by loan composition for the three years ended December 31, 2025.

Year ended December 31,

(dollars in thousands)

Net charge-offs:

Non-owner occupied

Non-owner occupied RE

Total commercial

loan (charge-offs) recoveries

loan (charge-offs) recoveries as a % of average loans

following table summarizes the allocation of the allowance for credit losses among the various loan categories.

ended December 31,

allowance for credit losses

(1) Percentage

of loans in each category to total loans

and Other Interest-Bearing Liabilities

primary source of funds for loans and investments is our deposits and advances from the FHLB.

In the past, we have chosen to obtain a

portion of our certificates of deposits from areas outside of our market in order to obtain longer term deposits than are readily available

in our local market.

Our internal guidelines regarding the use of brokered CDs limit our brokered CDs to 30% of total deposits.

guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent

retail deposits represented $2.89 billion, or 84.0% of total deposits, at December 31, 2024 and $3.00 billion, or 88.8% of total deposits,

at December 31, 2023.

Brokered deposits were $550.3 million, representing 16.0% of our total deposits at December 31, 2024, and $379.4

million, or 12.6%, at December 31, 2023 and are included in time deposits greater than $250,000 in the following table.

Our loan-to-deposit

ratio was 106%, 107%, and 104% at December 31, 2024, 2023, and 2022, respectively.

following table shows the average balance amounts and the average rates paid on deposits held by us.

Total consumer

Net loan charge-offs

Net loan charge-offs as a % of average loans

The following table

summarizes the allocation of the allowance for credit losses among the various loan categories.

Year ended December 31,

(dollars in thousands)

Owner occupied RE

Non-owner occupied RE

Total commercial

Total consumer

Total allowance for credit losses

(1) Percentage of loans in each

category to total loans

Deposits and Other Interest-Bearing Liabilities

Our primary source of funds for loans and investments is our

deposits and advances from the FHLB.

In the past, we have chosen to obtain a portion of our certificates of deposits from areas outside

of our market in order to obtain longer term deposits than are readily available in our local market.

Our internal guidelines regarding

the use of brokered CDs limit our brokered CDs to 30% of total deposits.

These guidelines allow us to take advantage of the attractive

terms that wholesale funding can offer while mitigating the related inherent risk.

Our retail deposits represented $3.16 billion, or 85.1% of

total deposits, at December 31, 2025 and $2.89 billion, or 84.0% of total deposits, at December 31, 2024.

Brokered deposits were $552.9

million, representing 14.9% of our total deposits at December 31, 2025, and $550.3 million, or 16.0%, at December 31, 2024 and are included

in time deposits greater than $250,000 in the following table.

Our loan-to-deposit ratio was 103%, 106%, and 107% at December 31, 2025,

2024, and 2023, respectively.

The following table shows the average balance amounts and the

average rates paid on deposits held by us.

(dollars in thousands)

Noninterest bearing demand deposits

5 unchanged sentences

Total deposits

the 12 months ended December 31, 2024, our average transaction account balances decreased by $183.7 million, or 6.7%, while our average

time deposit balances increased by $268.8 million, or 42.5%.

Core deposits exclude out-of-market deposits and time deposits of $250,000

or more and provide a relatively stable funding source for our loan portfolio and other earning assets.

Our core deposits were $2.66

billion, $2.81 billion, and $2.76 billion at December 31, 2024, 2023 and 2022, respectively.

of our time deposits are certificates of deposits.

The maturity distribution of our time deposits of $250,000 or more is as follows:

During the 12 months ended December 31, 2025, our average

transaction account balances increased by $81.2 million, or 3.2%, while our average time deposit balances increased by $48.2 million,

Core deposits exclude out-of-market deposits and time deposits of $250,000 or more and provide a relatively stable funding source

for our loan portfolio and other earning assets.

Our core deposits were $2.88 billion, $2.66 billion, and $2.81 billion at December 31,

2025, 2024 and 2023, respectively.

All of our time deposits are certificates of deposit.

maturity distribution of our time deposits of $250,000 or more is as follows:

(dollars in thousands)

3 unchanged sentences

Over twelve months

deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2024 and December 31, 2023 were $774.0 million and

$568.1 million, respectively, including wholesale deposits.

December 31, 2024 and 2023, we estimate that we have approximately $1.3 billion, respectively, in uninsured deposits including related

interest accrued and unpaid.

Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above

are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements by

the FDIC for the Call Report.

and Capital Resources

is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing

obligations and existing commitments.

Our liquidity principally depends on our cash flows from operating activities, investment in and

maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds.

The several large bank failures

across the United States in the first five months of 2023 exemplify the potential serious results of the unexpected inability of insured

depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate

once uninsured depositors lose confidence in an institutions ability to satisfy its obligations to depositors.

We seek to ensure our

funding needs are met by maintaining a level of liquidity through asset and liability management.

Liquidity management involves monitoring

our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits.

Liquidity management is

made more complicated because different balance sheet components are subject to varying degrees of management control.

For example, the

timing of maturities of our investment portfolio is fairly predictable and subject to a high degree

of control at the time investment

decisions are made.

However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

December 31, 2024 and 2023, our cash and cash equivalents amounted to $162.9 million and $156.2 million, or 4.0% and 3.9% of total assets,

respectively.

Our investment securities at December 31, 2024 and 2023 amounted to $151.6 million and $154.6 million, or 3.7% and 3.8%

of total assets, respectively.

Investment securities traditionally provide a secondary source of liquidity since they can be converted

into cash in a timely manner.

ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity.

We plan to meet

our future cash needs through the liquidation of temporary investments, the generation of deposits, and from additional borrowings.

addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities.

We maintain six federal

funds purchased lines of credit with correspondent banks totaling $128.5 million to meet short-term liquidity needs.

There were no borrowings

against the lines at December 31, 2024.

At December 31, 2024, we had $210.8 million pledged and available with the Federal Reserve Discount

are also a member of the FHLB of Atlanta, from which applications for borrowings can be made.

The FHLB requires that securities, qualifying

mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB.

The unused borrowing capacity

currently available from the FHLB at December 31, 2024 was $807.5 million, based on the Bank’s $14.5 million investment in FHLB

stock, as well as qualifying mortgages available to secure any future borrowings.

However, we are able to pledge additional securities

to the FHLB in order to increase our available borrowing capacity.

In addition, at December 31, 2024 we had $205.4 million of letters

of credit outstanding with the FHLB to secure client deposits.

have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance

in amounts exceeding $250,000.

This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious

With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network.

Additionally,

subject to certain limits, the Bank can use IntraFi to purchase cost-effective funding without collateralization and in lieu of generating

funds through traditional brokered CDs or the FHLB.

In this manner, IntraFi can provide us with another funding option.

Thus, it serves

as a deposit-gathering tool and an additional liquidity management tool.

Under the Economic Growth, Regulatory Relief, and Consumer Protection

Act, a well capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities

or $5 billion without those deposits being treated as brokered deposits.

also have a line of credit with another financial institution for $15.0 million, which was unused at December 31, 2024.

The line of credit

was issued on December 28, 2024 at an interest rate of the U.S.

Prime Rate plus 0.25% and a maturity date of February 28, 2025.

was renewed under the same terms with a new maturity date of March 5, 2026.

believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, availability

with the Federal Reserve’s Discount Window, and borrowings from the FHLB will enable us to successfully meet our long-term liquidity

However, as short-term liquidity needs arise, we have the ability to sell a portion of our investment securities portfolio should

we be required to meet those needs.

shareholders’ equity was $330.4 million at December 31, 2024 and $312.5 million at December 31, 2023.

The $18.0 million increase

during 2024 is due primarily to net income to common shareholders of $15.5 million, stock option exercises and expenses of $2.6 million

combined with a $130,000 loss in other comprehensive income.

following table shows the return on average assets (net income divided by average total assets), return on average equity (net income

divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total

equity less preferred stock divided by total assets) for the three years ended December 31, 2024.

Since our inception, we have not paid

cash dividends.

Time deposits that meet or exceed the FDIC insurance limit

of $250,000 at December 31, 2025 and December 31, 2024 were $778.0 million and $774.0 million, respectively, including wholesale deposits.

At December 31, 2025 and 2024, we

estimate that we have approximately $1.5 billion and $1.3 billion, respectively, in uninsured deposits including related interest accrued

Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates

and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements by the FDIC for the

Liquidity and Capital Resources

Liquidity is our ability to fund operations, to meet depositor

withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments.

Our liquidity principally

depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings,

and our ability to borrow funds.

The bank failures beginning in March 2023, and continuing with additional failures in 2024, 2025 and

January 2026, exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed

liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence

in an institution’s ability to satisfy its obligations to depositors.

We seek to ensure our funding needs are met by maintaining

a level of liquidity through asset and liability management.

Liquidity management involves monitoring our sources and uses of funds in

order to meet our day-to-day cash flow requirements while maximizing profits.

Liquidity management is made more complicated because different

balance sheet components are subject to varying degrees of management control.

For example, the timing of maturities of our investment

portfolio is fairly predictable and

subject to a high degree of control at the time investment decisions are made.

However, net deposit

inflows and outflows are far less predictable and are not subject to the same degree of control.

At December 31, 2025 and 2024, our cash and cash equivalents

amounted to $269.6 million and $162.9 million, or 6.1% and 4.0% of total assets, respectively.

Our investment securities at December 31,

2025 and 2024 amounted to $147.8 million and $151.6 million, or 3.4% and 3.7% of total assets, respectively.

Investment securities traditionally

provide a secondary source of liquidity since they can be converted into cash in a timely manner.

Our ability to maintain and expand our deposit base and borrowing

capabilities serves as our primary source of liquidity.

We plan to meet our future cash needs through the liquidation of temporary investments,

the generation of deposits, and from additional borrowings.

In addition, we will receive cash upon the maturity and sale of loans and

the maturity of investment securities.

We maintain six federal funds purchased lines of credit with correspondent banks totaling $128.5

million to meet short-term liquidity needs.

There were no borrowings against the lines at December 31, 2025.

At December 31, 2025, we

had $181.2 million pledged and available with the Federal Reserve Discount Window.

We are also a member of the FHLB of Atlanta, from which applications

for borrowings can be made.

The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged

to secure any advances from the FHLB.

The unused borrowing capacity currently available from the FHLB at December 31, 2025 was $836.5

million, based on the Bank’s $14.5 million investment in FHLB stock, as well as qualifying mortgages available to secure any future

However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity.

addition, at December 31, 2025 we had $231.9 million of letters of credit outstanding with the FHLB to secure client deposits.

We have a relationship with IntraFi Promontory Network, allowing

us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000.

This gives us the ability, as and

when needed, to attract and retain large deposits from insurance conscious customers.

With IntraFi, we have the option to keep deposits

on balance sheet or sell them to other members of the network.

Additionally, subject to certain limits, the Bank can use IntraFi to purchase

cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB.

manner, IntraFi can provide us with another funding option.

Thus, it serves as a deposit-gathering tool and an additional liquidity management

Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well-capitalized bank with a CAMELS rating of 1 or

2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as

brokered deposits.

We also have a line of credit with another financial institution

for $15.0 million, which was unused at December 31, 2025.

The line of credit was issued on December 28, 2024 at an interest rate of the

Prime Rate plus 0.25% and an original maturity date of February 28, 2025.

The line was renewed under the same terms with a new maturity

date of March 5, 2026.

We believe that our existing stable base of core deposits,

federal funds purchased lines of credit with correspondent banks, availability with the Federal Reserve’s Discount Window, and borrowings

from the FHLB will enable us to successfully meet our long-term liquidity needs.

However, as short-term liquidity needs arise, we have

the ability to sell a portion of our investment securities portfolio should we be required to meet those needs.

Total shareholders’ equity was $368.7 million at December

31, 2025 and $330.4 million at December 31, 2024.

The $38.3 million increase during 2025 is due primarily to net income to common shareholders

of $30.4 million, equity compensation transactions of $3.8 million combined with a $4.0 million increase in other comprehensive income.

The following table shows the return on average assets (net

income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average

equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) for the

three years ended December 31, 2025.

Since our inception, we have not paid cash dividends.

(dollars in thousands)

4 unchanged sentences

Tangible common equity to assets ratio

the capital adequacy guidelines, regulatory capital is classified into two tiers.

These guidelines require an institution to maintain

a certain level of Tier 1 and Tier 2 capital to risk-weighted assets.

Tier 1 capital consists of common shareholders’ equity, excluding

the unrealized gain or loss on securities available for sale, minus certain intangible assets.

In determining the amount of risk-weighted

assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks

believed to be inherent in the type of asset.

Tier 2 capital consists of Tier 1 capital plus the general reserve for credit losses, subject

to certain limitations.

We are also required to maintain capital at a minimum level based on total average assets, which is known as

the Tier 1 leverage ratio.

capital rules, which we refer to as Basel III, impose minimum capital requirements for bank holding companies and banks.

The Basel III

rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan

holding companies other than “small bank holding companies,” generally holding companies with consolidated assets of less

than $3 billion.

In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking

organization must maintain a “capital conservation buffer” on top of our minimum risk-based capital requirements.

must consist solely of common equity Tier 1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and

total capital).

The capital conservation buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

be considered “well-capitalized” for purposes of certain rules and prompt corrective action requirements, the Bank must maintain

a minimum total risked-based capital ratio of at least 10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital

ratio of at least 6.5%, and a leverage ratio of at least 5%.

As of December 31, 2024, our capital ratios exceed these ratios and we remain

“well capitalized.”

following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.

See Note 21 to the Consolidated

Financial Statements for ratios of the Company.

Under the capital adequacy guidelines, regulatory capital

is classified into two tiers.

These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to

risk-weighted assets.

Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities

available for sale, minus certain intangible assets.

In determining the amount of risk-weighted assets, all assets, including certain

off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type

Tier 2 capital consists of Tier 1 capital plus the general reserve for credit losses, subject to certain limitations.

also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

Regulatory capital rules, which we refer to as Basel III,

impose minimum capital requirements for bank holding companies and banks.

The Basel III rules apply to all national and state banks and

savings associations regardless of size and bank holding companies and savings and loan holding companies other than “small bank

holding companies,” generally holding companies with consolidated assets of less than $3 billion.

In order to avoid restrictions

on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital

conservation buffer” on top of our minimum risk-based capital requirements.

This buffer must consist solely of common equity Tier

1, but the buffer applies to all three measurements (common equity Tier 1, Tier 1 capital and total capital).

The capital conservation

buffer consists of an additional amount of CET1 equal to 2.5% of risk-weighted assets.

To be considered “well-capitalized” for purposes

of certain rules and prompt corrective action requirements, the Bank must maintain a minimum total risk-based capital ratio of at least

10%, a total Tier 1 capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a leverage ratio of at least

As of December 31, 2025, our capital ratios exceed these ratios and we remain “well capitalized.”

The following table summarizes the capital amounts and ratios

of the Bank and the regulatory minimum requirements.

See Note 21 to the Consolidated Financial Statements for ratios of the Company.

adequacy purposes

be well capitalized

To be well capitalized

action provisions

15 unchanged sentences

Tier 1 Capital (to average assets)

do not include the capital conservation buffer of 2.5%.

September 30, 2019, we sold and issued $23.0 million in aggregate principal amount of 4.75% Fixed-to-Floating Rate Subordinated Notes

due 2029 to eligible purchasers in a private offering.

We used the proceeds from the offering, which were approximately $22.5 million,

for general corporate purposes, including providing capital to the Bank and supporting organic growth.

The Notes rank junior in right

to payment to the Company’s current and future senior indebtedness.

The Notes are intended to qualify as Tier 2 capital for regulatory

capital purposes for the Company and are subject to certain limitations.

On September 30, 2024, in conjunction with the semi-annual interest

payment, we redeemed $11.5 million of our outstanding subordinated debt.

Beginning September 30, 2024, the interest rate on the subordinated

debt reset to an interest rate per annum equal to the Three-Month Term SOFR plus 340.8 basis points (8.00% at December 31, 2024), payable

quarterly in arrears.

(1) Ratios do not include the capital

conservation buffer of 2.5%.

On September 30, 2019, we

sold and issued $23.0 million in aggregate principal amount of 4.75% Fixed-to-Floating Rate Subordinated Notes due 2029 to eligible purchasers

in a private offering.

We used the proceeds from the offering, which were approximately $22.5 million, for general corporate purposes,

including providing capital to the Bank and supporting organic growth.

The Notes rank junior in right to payment to the Company’s

current and future senior indebtedness.

The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes for the Company

and are subject to certain limitations.

On September 30, 2024, in conjunction with the semi-annual interest payment, we redeemed $11.5

million of our outstanding subordinated debt.

Beginning September 30, 2024, the interest rate on the subordinated debt reset to an interest

rate per annum equal to the Three-Month Term SOFR plus 340.8 basis points (7.34% at December 31, 2025), payable quarterly in arrears.

See Note 9 to the Consolidated Financial Statements for more information on our subordinated debentures.

ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank.

The dividends that

may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements.

of Inflation and Changing Prices

effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements.

Rather, our financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.

most industrial companies, our assets and liabilities are primarily monetary in nature.

Therefore, the effect of changes in interest

rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general.

interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude.

previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate

fluctuations, including those resulting from inflation.

to extend credit are agreements to lend to a client as long as the client has not violated any material condition established in the

Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.

31, 2024, unfunded commitments to extend credit were approximately $719.1 million, of which $57.5 million were at fixed rates and $661.6

million were at variable rates.

At December 31, 2023, unfunded commitments to extend credit were $724.6 million, of which approximately

$145.6 million were at fixed rates and $579.0 million were at variable rates.

A majority of the unfunded commitments related to commercial

business lines of credit and home equity lines of credit.

Based on historical experience, we anticipate that a significant portion of

these lines of credit will not be funded.

We evaluate each client’s credit worthiness on a case-by-case basis.

The amount of collateral

obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower.

The type of collateral

varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

December 31, 2024 and 2023, there were $16.2 million and $16.1 million of commitments under letters of credit, respectively.

risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients.

Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

as disclosed in this Annual Report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities

that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly

impact earnings.

Risk and Interest Rate Sensitivity

risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in

our lending, investing, deposit gathering, and borrowing activities.

Other types of market risks, such as foreign currency exchange rate

risk and commodity price risk, do not generally arise in the normal course of our business.

actively monitor and manage our interest rate risk exposure to seek to control the mix and maturities of our assets and liabilities utilizing

a process we call asset/liability management.

The essential purposes of asset/liability management are to seek to ensure adequate liquidity

and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts

on earnings from changes in market interest rates.

asset/liability management committee (“ALCO”) monitors and considers

methods of managing exposure to interest rate risk by repricing assets or liabilities, selling securities available for sale, replacing

an asset or liability at maturity, by adjusting the interest rate during the life of an asset or liability, or by the use of derivatives

such as interest rate swaps and other hedging instruments.

Managing the amount of assets and liabilities repricing in the same time interval

helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

We have both an internal

ALCO consisting of senior management that meets no less than quarterly and a board risk committee that meets quarterly, and both committees

are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved

of December 31, 2024, the following table summarizes the forecasted impact on net interest income using a base case scenario given upward

and downward movements in interest rates of 100, 200, and 300 basis points based on forecasted assumptions of prepayment speeds, nominal

interest rates and loan and deposit repricing rates.

Estimates are based on current economic conditions, historical interest rate cycles

and other factors deemed to be relevant.

However, underlying assumptions may be impacted in future periods which were not known to management

at the time of the issuance of the Consolidated Financial Statements.

Therefore, management’s assumptions may or may not prove

No assurance can be given that changing economic conditions and other relevant factors impacting our net interest income will

not cause actual occurrences to differ from underlying assumptions.

In addition, this analysis does not consider any strategic changes

to our balance sheet which management may consider as a result of changes in market conditions.

The ability of the Company

to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank.

The dividends that may be paid by the Bank

to the Company are subject to legal limitations and regulatory capital requirements.

Effect of Inflation and Changing Prices

The effect of relative purchasing power over time due to inflation

has not been taken into account in our consolidated financial statements.

Rather, our financial statements have been prepared on an historical

cost basis in accordance with generally accepted accounting principles.

Unlike most industrial companies, our assets and liabilities

are primarily monetary in nature.

Therefore, the effect of changes in interest rates will have a more significant impact on our performance

than will the effect of changing prices and inflation in general.

In addition, interest rates may generally increase as the rate of inflation

increases, although not necessarily in the same magnitude.

As discussed previously, we seek to manage the relationships between interest

sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

Off-Balance Sheet Risk

Commitments to extend credit are agreements to lend to a client

as long as the client has not violated any material condition established in the contract.

Commitments generally have fixed expiration

dates or other termination clauses and may require the payment of a fee.

At December 31, 2025, unfunded commitments to extend credit were

approximately $843.6 million, of which $81.4 million were at fixed rates and $762.2 million were at variable rates.

At December 31, 2024,

unfunded commitments to extend credit were $719.1 million, of which approximately $57.5 million were at fixed rates and $661.6 million

were at variable rates.

A majority of the unfunded commitments related to commercial business lines of credit and home equity lines of

Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded.

each client’s credit worthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by us upon extension

of credit, is based on our credit evaluation of the borrower.

The type of collateral varies but may include accounts receivable, inventory,

property, plant and equipment, and commercial and residential real estate.

At December 31, 2025 and 2024, there were $20.4 million and

$16.2 million of commitments under letters of credit, respectively.

The credit risk and collateral involved in issuing letters of credit

is essentially the same as that involved in extending loan facilities to clients.

Since most of the letters of credit are expected to

expire without being drawn upon, they do not necessarily represent future cash requirements.

Except as disclosed in this Annual Report, we are not involved

in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions

that could result in liquidity needs or other commitments that significantly impact earnings.

Market Risk and Interest Rate Sensitivity

Market risk is the risk of loss from adverse changes in market

prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing

Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise

in the normal course of our business.

We actively monitor and manage our interest rate risk exposure

to seek to control the mix and maturities of our assets and liabilities utilizing a process we call asset/liability management.

The essential

purposes of asset/liability management are to seek to ensure adequate liquidity and to maintain an appropriate balance between interest

sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates.

asset/liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk by

repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, by adjusting the

interest rate during the life of an asset or liability, or by the use of derivatives such as interest rate swaps and other hedging instruments.

Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net

interest income of rising or falling interest rates.

We have both an internal ALCO consisting of senior management that meets no less

than quarterly and a board risk committee that meets quarterly, and both committees are responsible for maintaining the level of interest

rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.

As of December 31, 2025, the following table summarizes the

forecasted impact on net interest income using a base case scenario given upward and downward movements in interest rates of 100, 200,

and 300 basis points based on forecasted assumptions of prepayment speeds, nominal interest rates and loan and deposit repricing rates.

Estimates are based on current economic conditions, historical interest rate cycles and other factors deemed to be relevant.

underlying assumptions may be impacted in future periods which were not known to management at the time of the issuance of the Consolidated

Financial Statements.

Therefore, management’s assumptions may or may not prove valid.

No assurance can be given that changing economic

conditions and other relevant factors impacting our net interest income will not cause actual occurrences to differ from underlying assumptions.

In addition, this analysis does not consider any strategic changes to our balance sheet which management may consider as a result of changes

in market conditions.

Interest rate scenario

7 unchanged sentences

Down 300 basis points

have commitments with various investment partners under the Small Business Investment Company (“SBIC”) and the Rural Business

Investment Company (“RBIC”) programs for which we have committed to make capital contributions from time to time.

As of December

31, 2024, $1.2 million remained outstanding under these commitments.

utilize a variety of short-term and long-term borrowings to supplement our supply of lendable funds, to assist in meeting deposit withdrawal

requirements, and to fund growth of interest-earning assets in excess of traditional deposit growth.

Certificates of deposit, structured

repurchase agreements, FHLB advances, and subordinated debentures serve as our primary sources of such funds.

under noncancelable operating lease agreements are payable over several years with the longest obligation expiring in 2032.

feel that any existing noncancelable operating lease agreements are likely to materially impact our financial condition or results of

operations in an adverse way.

Contractual obligations relative to these agreements are noted in the table below.

Option periods that

we have not yet exercised are not included in this analysis as they do not represent contractual obligations until exercised.

following table provides payments due by period for obligations under long-term borrowings and operating lease obligations as of December

Due by Period

Contractual Obligations

We have commitments with various investment partners under

the Small Business Investment Company (“SBIC”) and the Rural Business Investment Company (“RBIC”) programs for

which we have committed to make capital contributions from time to time.

As of December 31, 2025, $769,000 remained outstanding under

these commitments.

We utilize a variety of short-term and long-term borrowings

to supplement our supply of lendable funds, to assist in meeting deposit withdrawal requirements, and to fund growth of interest-earning

assets in excess of traditional deposit growth.

Certificates of deposit, structured repurchase agreements, FHLB advances, and subordinated

debentures serve as our primary sources of such funds.

Obligations under noncancelable operating lease agreements

are payable over several years with the longest obligation expiring in 2032.

We do not feel that any existing noncancelable operating

lease agreements are likely to materially impact our financial condition or results of operations in an adverse way.

Contractual obligations

relative to these agreements are noted in the table below.

Option periods that we have not yet exercised are not included in this analysis

as they do not represent contractual obligations until exercised.

The following table provides payments due by period for obligations

under long-term borrowings and operating lease obligations as of December 31, 2025.

December 31, 2025

Payments Due by Period

(dollars in thousands)

2 unchanged sentences

Operating lease obligations

Reporting, and Regulatory Matters

Note 1 – Summary of Significant Accounting Policies and Activities in our “Notes to Consolidated Financial Statements”

for a discussion on the effects of recently issued accounting pronouncements.

Quantitative and Qualitative Disclosures about Market Risk

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk and Interest

Rate Sensitivity and – Liquidity and Capital Resources.

Accounting, Reporting, and Regulatory Matters

See Note 1 – Summary of Significant Accounting Policies

and Activities in our “Notes to Consolidated Financial Statements” for a discussion on the effects of recently issued accounting

pronouncements.

Quantitative and Qualitative Disclosures

about Market Risk

Management’s Discussion and Analysis of

Financial Condition and Results of Operations – Market Risk and Interest Rate Sensitivity and – Liquidity and Capital Resources.

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What changed 10-K

Item 7. Management’s Discussion and Analysis