SOUTHERN FIRST BANCSHARES INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this Annual Report on Form 10-K. OVERVIEW Our business model continues to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer to as “ClientFIRST.” At December 31, 2025, we had total assets of $4.40 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. Another key measure is the difference between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our clients. Our net income available to common shareholders for the years ended December 31, 2025 and 2024 was $30.4 million and $15.5 million, or diluted earnings per share (“EPS”) of $3.72 and $1.91 for the years ended December 31, 2025 and 2024, respectively. The increase in net income resulted primarily from an increase 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. 49 Table of Contents SELECTED FINANCIAL DATA The following table sets forth our selected historical consolidated financial information for the periods and as of the dates indicated. We derived our balance sheet and income statement data for the years ended December 31, 2025, 2024, and 2023 from our audited consolidated financial statements. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes thereto, which are included elsewhere in this Annual Report on Form 10-K. Years Ended December 31, (dollars in thousands, except per share data) 2025 2024 2023 BALANCE SHEET DATA Total assets $ 4,403,494 4,087,593 4,055,789 Investment securities 147,793 151,617 154,641 Loans (1) 3,845,124 3,631,767 3,602,627 Allowance for credit losses 42,280 39,914 40,682 Deposits 3,716,803 3,435,765 3,379,564 FHLB advances and other borrowings 240,000 240,000 275,000 Subordinated debentures 24,903 24,903 36,322 Common equity 368,657 330,444 312,467 Preferred stock - - - Shareholders’ equity 368,657 330,444 312,467 SELECTED RESULTS OF OPERATIONS DATA Interest income $ 211,481 201,212 177,598 Interest expense 106,530 119,990 99,944 Net interest income 104,951 81,222 77,654 Provision for credit losses 2,950 125 1,260 Net interest income after provision for credit losses 102,001 81,097 76,394 Noninterest income 13,138 12,141 9,860 Noninterest expenses 75,534 73,326 68,827 Income before income tax expense 39,605 19,912 17,427 Income tax expense 9,239 4,382 4,001 Net income available to common shareholders $ 30,366 15,530 13,426 PER COMMON SHARE DATA Basic $ 3.75 1.92 1.67 Diluted 3.72 1.91 1.66 Book value 44.89 40.47 38.63 Weighted average number of common shares outstanding: Basic, in thousands 8,091 8,081 8,047 Diluted, in thousands 8,160 8,117 8,078 SELECTED FINANCIAL RATIOS Performance Ratios: Return on average assets 0.72 % 0.38 % 0.34 % Return on average equity 8.73 % 4.84 % 4.44 % Return on average common equity 8.73 % 4.84 % 4.44 % Net interest margin, tax equivalent (2) 2.57 % 2.06 % 2.07 % Efficiency ratio (3) 63.96 % 78.54 % 78.65 % Asset Quality Ratios: Nonperforming assets to total loans (1) 0.37 % 0.30 % 0.11 % Nonperforming assets to total assets 0.32 % 0.27 % 0.10 % Net charge-offs to average total loans 0.00 % 0.04 % 0.00 % Allowance for credit losses to nonperforming loans 305.65 % 366.94 % 1,026.58 % Allowance for credit losses to total loans 1.10 % 1.10 % 1.13 % Holding Company Capital Ratios: Total risk-based capital ratio 12.89 % 12.70 % 12.57 % Tier 1 risk-based capital ratio 11.44 % 11.16 % 10.60 % Leverage ratio 8.93 % 8.55 % 8.14 % Common equity tier 1 ratio (4) 11.06 % 10.75 % 10.19 % Tangible common equity (5) 8.37 % 8.08 % 7.70 % Growth Ratios (6) : Change in assets 7.73 % 0.78 % 9.85 % Change in loans 5.87 % 0.81 % 10.06 % Change in deposits 8.18 % 1.66 % 7.84 % Change in net income to common shareholders 95.53 % 15.67 % -53.89 % Change in earnings per common share - diluted 94.76 % 15.06 % -54.02 % 50 Table of Contents Footnotes to table: (1) Excludes loans held for sale. (2) 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. (3) Noninterest expense divided by the sum of net interest income and noninterest income. (4) The common equity tier 1 ratio is calculated as the sum of common equity divided by risk-weighted assets. (5) The common equity ratio is calculated as total equity less preferred stock divided by total assets. (6) 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 We have adopted various accounting policies that govern the application of accounting principles generally accepted in the U.S. and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements as of December 31, 2025. Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. We consider these accounting policies and estimates to be critical. 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. Estimating the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans. Credit losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. There are many factors affecting the ACL; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all the potential factors that could result in credit losses, the process includes subjective elements and is susceptible to significant change. Changes in economic conditions, portfolio composition, collateral values, and forecast assumptions could materially affect the ACL. To the extent actual outcomes are worse than management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods. During 2025, we transitioned to the discounted cash flow “DCF” methodology for calculating the ACL, and management analyzed the risk level associated with factors such as changes in lending policies; international, national, regional, and local conditions; volume and terms of loans; experience and depth of management; volume and severity of past due loans; concentrations of credit; and loan review results in the consideration of the qualitative portion of the ACL. See Note 1 – Summary of Significant Accounting Policies and Activities for further detailed descriptions of our estimation process and methodology related to the ACL. See also Note 4 – Loans and Allowance for Credit Losses and “Provision for Credit Losses” in this MD&A. Fair Valuation of Financial Instruments Certain assets and liabilities are measured at fair value on a recurring basis, including securities and derivative instruments. Assets and liabilities carried at fair value inherently include subjectivity and may require the use of significant assumptions, adjustments and judgment including, among others, discount rates, rates of return on assets, cash flows, default rates, loss rates, terminal values and liquidation values. A significant change in assumptions may result in a significant change in fair value, which in turn, may result in a higher degree of financial statement volatility and could result in significant impact on our results of operations, financial condition or disclosures of fair value information. 51 Table of Contents 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. Income Taxes The financial statements have been prepared on the accrual basis. When income and expenses are recognized in different periods for financial reporting purposes versus for the purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years 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, 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 2025, compared to 2024, was driven by a $13.5 million decrease in interest expense and a $10.3 million increase in interest income. During 2024, our net interest income increased $3.6 million, or 4.6%, compared to 2023. This increase in net interest income was driven by a $23.6 million increase in interest income, partially offset by a $20.0 million increase in interest expense during the 2024 period. Interest income for the years ended December 31, 2025, 2024, and 2023 was $211.5 million, $201.2 million, and $177.6 million, respectively. A significant portion of our interest income relates to our strategy to maintain a large portion of our assets in higher earning loans compared to lower yielding investments and federal funds sold. As such, 93.7% of our interest income related to interest on loans during 2025, compared to 92.9% during 2024 and 93.5% during 2023. 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, 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, and $99.9 million for the years ended December 31, 2025, 2024, and 2023, respectively. Interest expense on deposits for 2025 represented 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 description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table shows the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during 2025, 2024, and 2023. Similarly, the “Rate/Volume Analysis” table demonstrates 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 52 Table of Contents 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 for the years ended December 31, 2025, 2024 and 2023. We derived these yields or costs by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the same periods, we had no securities purchased with agreements to resell. All investments were 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. The net of capitalized loan costs and fees are amortized into interest income on loans. Average Balances, Income and Expenses, Yields and Rates Year Ended December 31, 2025 2024 2023 (dollars in thousands) Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate Interest-earning assets Federal funds sold and interest-bearing deposits with banks $ 186,387 $ 7,966 4.27 % $ 160,683 $ 8,537 5.31 % $ 134,495 $ 6,998 5.20 % Investment securities, taxable 141,304 5,206 3.68 % 138,494 5,645 4.08 % 121,739 4,296 3.53 % Investment securities, nontaxable (1) 7,774 213 2.74 % 8,012 217 2.71 % 7,941 217 2.73 % Loans (2) 3,753,665 198,145 5.28 % 3,629,570 186,863 5.15 % 3,497,623 166,137 4.75 % Total interest-earning assets 4,089,130 211,530 5.17 % 3,936,759 201,262 5.11 % 3,761,798 177,648 4.72 % Noninterest-earning assets 153,269 159,441 162,771 Total assets $ 4,242,399 $ 4,096,200 $ 3,924,569 Interest-bearing liabilities NOW accounts $ 332,222 2,930 0.88 % $ 303,580 2,810 0.93 % $ 299,703 2,254 0.75 % Savings & money market 1,575,613 52,188 3.31 % 1,561,925 61,455 3.93 % 1,708,874 61,241 3.58 % Time deposits 948,815 40,506 4.27 % 900,628 44,509 4.94 % 631,967 27,878 4.41 % Total interest-bearing deposits 2,856,650 95,624 3.35 % 2,766,133 108,774 3.93 % 2,640,544 91,373 3.46 % FHLB advances and other borrowings 240,022 9,104 3.79 % 240,344 9,066 3.77 % 169,963 6,382 3.75 % Subordinated debt 24,903 1,802 7.24 % 33,448 2,150 6.43 % 36,265 2,189 6.04 % Total interest-bearing liabilities 3,121,575 106,530 3.41 % 3,039,925 119,990 3.95 % 2,846,772 99,944 3.51 % Noninterest-bearing liabilities 772,806 735,363 775,116 Shareholders’ equity 348,018 320,912 302,681 Total liabilities and shareholders’ equity $ 4,242,399 $ 4,096,200 $ 3,924,569 Net interest spread 1.76 % 1.16 % 1.21 % Net interest income(tax equivalent)/margin $ 105,000 2.57 % $ 81,272 2.06 % $ 77,704 2.07 % Less: tax-equivalent adjustment (1) 49 50 50 Net interest income $ 104,951 $ 81,222 $ 77,654 (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. (2) Includes loans held for sale and nonaccrual loans. 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. During 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 year. 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. 53 Table of Contents During the year ended December 31, 2024, our average interest-earning assets increased by $175.0 million, compared to 2023, while the yield on our interest-earning assets increased by 39 basis points. The increase in average interest-earning assets was driven primarily by a $131.9 million increase in average loan balances, while the yield on our interest earning assets was driven by a 40 basis point increase in the yield on our loan portfolio. During 2024, 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 1.76% for the year ended December 31, 2025, compared to 1.16% for the same period in 2024 and 1.21% for 2023. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 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 Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. 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. 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. Year Ended December 31, 2025 vs. 2024 December 31, 2024 vs. 2023 Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in (dollars in thousands) Volume Rate Rate/ Volume Total Volume Rate Rate/ Volume Total Interest income Loans $ 6,389 4,731 162 11,282 $ 6,267 13,933 526 20,726 Investment securities 102 (535 ) (9 ) (442 ) 579 682 88 1,349 Federal funds sold and interest-bearing deposits with banks 1,366 (1,670 ) (267 ) (571 ) 1,363 147 29 1,539 Total interest income 7,857 2,526 (114 ) 10,269 8,209 14,762 643 23,614 Interest expense Deposits 4,089 (16,614 ) (625 ) (13,150 ) 2,316 14,712 373 17,401 FHLB advances and other borrowings (12 ) 49 - 37 2,644 29 12 2,685 Subordinated debt (675 ) 479 (151 ) (347 ) 4 (44 ) - (40 ) Total interest expense 3,402 (16,086 ) (776 ) (13,460 ) 4,964 14,697 385 20,046 Net interest income $ 4,455 18,612 662 23,729 $ 3,245 65 258 3,568 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, 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 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. We review the adequacy of the allowance 54 Table of Contents 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 $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. During the 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. Under the 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. December 31, (dollars in thousands) 2025 2024 2023 Balance, beginning of period $ 39,914 40,682 38,639 Provision for credit losses 2,450 500 2,209 Loan charge-offs (351 ) (1,734 ) (761 ) Loan recoveries 267 466 595 Net loan charge-offs (84 ) (1,268 ) (166 ) Balance, end of period $ 42,280 39,914 40,682 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 31, 2024, or 1.10% of gross loans, and $40.7 million as of December 31, 2023, or 1.13% of gross loans. During the year ended December 31, 2025, we had net 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 55 Table of Contents 0.00% of the average outstanding loan portfolio for 2025. 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 The following table sets forth information related to our noninterest income. Year Ended December 31, (dollars in thousands) 2025 2024 2023 Mortgage banking income $ 6,282 5,560 4,036 Service fees on deposit accounts 2,365 1,764 1,382 ATM and debit card income 2,377 2,337 2,245 Income from bank owned life insurance 1,705 1,569 1,379 Loss on sale of investment securities (515 ) - - Other income 924 911 818 Total noninterest income $ 13,138 12,141 9,860 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, 2024. 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 year. 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 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 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 The following table sets forth information related to our noninterest expenses. Year Ended December 31, (dollars in thousands) 2025 2024 2023 Compensation and benefits $ 44,806 43,546 40,275 Occupancy 9,983 10,291 10,255 Outside service and data processing costs 8,528 7,741 7,078 Insurance 3,875 4,022 3,766 Professional fees 2,455 2,404 2,496 Marketing 1,529 1,412 1,357 Other 4,358 3,910 3,600 Total noninterest expenses $ 75,534 73,326 68,827 Noninterest expenses were $75.5 million for the year 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 $1.3 million, or 2.9%, during 2025 relating primarily to increases in salaries, commissions, and other employee benefits expenses. 56 Table of Contents · 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 ended December 31, 2024, a $4.5 million, or 6.5%, increase from noninterest expense of $68.8 million for 2023. The increase in total noninterest expenses during 2024, compared to 2023, 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. 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 Taxes 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 (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. The 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 are as follows. December 31, 2025 2024 2023 Amortized Fair Amortized Fair Amortized Fair (dollars in thousands) Cost Value Cost Value Cost Value Available for Sale Corporate bonds $ 1,703 1,600 2,121 1,927 2,147 1,910 US treasuries - - 999 908 9,495 9,394 US government agencies 13,225 12,278 17,540 15,795 20,594 18,656 State and political subdivisions 19,934 17,870 22,387 19,322 22,642 19,741 Asset-backed securities 16,505 16,419 36,613 36,538 33,450 33,236 Mortgage-backed securities 85,798 79,563 66,988 57,637 60,730 51,765 Total $ 137,165 127,730 146,648 132,127 149,058 134,702 57 Table of Contents 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 Total (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Available for Sale Corporate bonds $ - - $ 1,600 2.04 % $ - - $ - - $ 1,600 2.04 % US government agencies - - 4,871 1.37 % 7,407 4.39 % - - 12,278 3.20 % State and political subdivisions - - 2,561 1.62 % 5,565 2.21 % 9,744 2.41 % 17,870 2.23 % Asset-backed securities - - - - 3,486 5.19 % 12,933 5.12 % 16,419 5.14 % Mortgage-backed securities 19 2.37 % 2,229 1.70 % 9,272 2.74 % 68,043 4.17 % 79,563 3.93 % Total $ 19 2.37 % $ 11,261 1.59 % $ 25,730 3.43 % $ 90,720 4.12 % $ 127,730 3.76 % Other investments are comprised of the following and are recorded at cost which approximates fair value. December 31, (dollars in thousands) 2025 2024 Federal Home Loan Bank stock $ 14,540 14,516 Other investments 5,120 4,571 Investment in Trust Preferred subsidiaries 403 403 Total $ 20,063 19,490 Loans Since loans typically provide higher interest yields than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans for the years ended December 31, 2025 and 2024 were $3.75 billion and $3.63 billion, respectively. Before allowance for credit losses, 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, 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 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 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 each of the last three years ended December 31, 2025. Of the $213.4 million in loan growth in 2025, $141.8 million of growth was in commercial related loans, specifically commercial owner occupied which grew by $85.4 million and commercial business which grew by $63.6 million, partially offset by declines in other commercial categories (including construction and non-owner occupied real estate loans), while $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%. 58 Table of Contents December 31, 2025 2024 2023 %of %of %of (dollars in thousands) Amount Total Amount Total Amount Total Commercial Owner occupied RE $ 736,979 19.2 % $ 651,597 17.9 % $ 631,657 17.5 % Non-owner occupied RE 956,812 24.9 % 924,367 25.5 % 942,529 26.2 % Construction 63,666 1.7 % 103,204 2.8 % 150,680 4.2 % Business 619,667 16.0 % 556,117 15.3 % 500,161 13.9 % Total commercial loans 2,377,124 61.8 % 2,235,285 61.5 % 2,225,027 61.8 % Consumer Real estate 1,153,285 30.0 % 1,128,629 31.1 % 1,082,429 30.0 % Home equity 248,685 6.5 % 204,897 5.6 % 183,004 5.1 % Construction 24,997 0.6 % 20,874 0.6 % 63,348 1.7 % Other 41,033 1.1 % 42,082 1.2 % 48,819 1.4 % Total consumer loans 1,468,000 38.2 % 1,396,482 38.5 % 1,377,600 38.2 % Total gross loans, net of deferred fees 3,845,124 100.0 % 3,631,767 100.0 % 3,602,627 100.0 % Less – allowance for credit losses (42,280 ) (39,914 ) (40,682 ) Total loans, net $ 3,802,844 $ 3,591,853 $ 3,561,945 We have included the tables below to provide additional clarity on our commercial real estate exposure. We have not identified any material geographic concentrations within these collateral types. 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 (dollars in thousands) Outstanding % of Loan Portfolio Average Loan Size Weighted Average LTV Collateral Office $ 221,425 5.76 % $ 1,377 53 % Retail 186,692 4.86 % 1,611 50 % Hotel 144,155 3.75 % 7,651 48 % Multifamily 101,703 2.64 % 2,462 43 % December 31, 2024 (dollars in thousands) Outstanding % of Loan Portfolio Average Loan Size Weighted Average LTV Collateral Office $ 214,048 5.89 % $ 1,364 57 % Retail 170,601 4.70 % 1,543 52 % Hotel 125,557 3.46 % 7,250 48 % Multifamily 96,735 2.66 % 2,385 45 % 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 the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties. The following table summarizes the composition and maturities of the loan portfolio. 59 Table of Contents December 31, 2025 (dollars in thousands) One year or less After one but within five years After five but within fifteen years After fifteen years Total Commercial Owner occupied RE $ 49,286 294,424 374,220 19,049 736,979 Non-owner occupied RE 160,526 588,542 190,475 17,269 956,812 Construction 17,357 27,808 18,501 - 63,666 Business 139,003 349,904 127,474 3,286 619,667 Total commercial loans 366,172 1,260,678 710,670 39,604 2,377,124 Consumer Real estate 26,591 115,347 218,489 792,858 1,153,285 Home equity 6,073 36,692 201,872 4,048 248,685 Construction 19,053 1,379 4,565 - 24,997 Other 5,548 30,433 4,406 646 41,033 Total consumer loans 57,265 183,851 429,332 797,552 1,468,000 Total gross loan, net of deferred fees $ 423,437 1,444,529 1,140,002 837,156 3,845,124 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 (dollars in thousands) Fixed Floating or Adjustable Commercial Owner occupied RE $ 630,228 57,465 Non-owner occupied RE 682,360 113,926 Construction 11,455 34,854 Business 285,215 195,449 Total commercial loans 1,609,258 401,694 Consumer Real estate 963,817 162,877 Home equity 8,789 233,823 Construction 5,944 - Other 9,100 26,385 Total consumer loans 987,650 423,085 Total gross loan, net of deferred fees $ 2,596,908 824,779 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 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. 60 Table of Contents December 31, (dollars in thousands) 2025 2024 2023 Commercial Owner occupied RE $ 259 - - Non-owner occupied RE 6,917 7,641 1,423 Business 189 1,016 319 Consumer Real estate 5,763 1,908 985 Home equity 705 312 1,236 Total nonaccrual loans 13,833 10,877 3,963 Other real estate owned 275 - - Total nonperforming assets $ 14,108 10,877 3,963 Asset Quality Ratios: Nonperforming assets/total assets 0.32 % 0.27 % 0.10 % Nonaccrual loans/gross loans 0.36 % 0.30 % 0.11 % Total loans over 90 days past due (1) $ 4,499 2,641 1,300 Loans over 90 days past due and still accruing - - - (1) Loans 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 its maturity, we frequently renew the loan and thus extend its maturity using similar credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonaccrual after evaluating the loan’s collateral value and financial strength of its guarantors. Nonaccrual loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, we will generally seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, we will typically seek performance under the guarantee. In addition, approximately 83% of our loans are collateralized by real estate and approximately 98% of our individually evaluated loans are secured by real estate. Individual loan evaluations are generally performed for individually evaluated loans, which includes nonaccrual loans and certain loans not meeting the risk characteristics of the pool, whether on accrual or nonaccrual status. We use third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to review individually evaluated loans at least annually and determine whether it is necessary to obtain an updated appraisal, either through a new external appraisal or an internal appraisal evaluation. We review each of our individually evaluated loans on a quarterly basis to determine the level of impairment. As of December 31, 2025, we do not have any individually evaluated loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for individually evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement. At 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 61 Table of Contents 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. 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, 2025 2024 2023 (dollars in thousands) Amount % Amount % Amount % Net charge-offs: Commercial Non-owner occupied RE $ - - $ (1,029 ) (0.03 )% $ (57 ) 0.00 % Business (166 ) (0.00 )% (468 ) (0.01 )% 279 0.01 % Total commercial (166 ) (0.00 )% (1,497 ) (0.04 )% 222 0.01 % Consumer Real Estate 36 0.00 % - - - - Home equity 42 0.00 % 210 0.01 % (373 ) (0.01 )% Other 4 0.00 % 19 0.00 % (15 ) 0.00 % Total consumer 82 0.00 % 229 0.01 % (388 ) (0.01 )% Net loan charge-offs $ (84 ) $ (1,268 ) $ (166 ) Net loan charge-offs as a % of average loans (0.00 )% (0.04 )% 0.00 % The following table summarizes the allocation of the allowance for credit losses among the various loan categories. Year ended December 31, 2025 2024 (dollars in thousands) Amount % (1) Amount % (1) Commercial Owner occupied RE $ 3,911 19.2 % $ 5,482 17.9 % Non-owner occupied RE 6,773 24.9 % 10,219 25.5 % Construction 611 1.7 % 940 2.8 % Business 12,148 16.0 % 7,745 15.3 % Total commercial 23,443 61.8 % 24,386 61.5 % Consumer Real estate 15,866 30.0 % 12,359 31.1 % Home equity 1,827 6.5 % 2,655 5.6 % Construction 569 0.6 % 115 0.6 % Other 575 1.1 % 399 1.2 % Total consumer 18,837 38.2 % 15,528 38.5 % Total allowance for credit losses $ 42,280 100.0 % $ 39,914 100.0 % (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. 62 Table of Contents 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. December 31, 2025 2024 2023 (dollars in thousands) Amount Rate Amount Rate Amount Rate Noninterest bearing demand deposits $ 715,699 - % $ 676,792 - % $ 717,275 - % Interest bearing demand deposits 332,222 0.88 % 303,580 0.93 % 299,703 0.75 % Money market accounts 1,544,612 3.37 % 1,531,994 4.00 % 1,672,550 3.66 % Savings accounts 31,001 0.33 % 29,931 0.25 % 36,324 0.11 % Time deposits less than $250,000 190,292 3.74 % 211,494 4.59 % 106,169 5.04 % Time deposits greater than $250,000 758,523 4.40 % 689,134 5.03 % 525,798 4.30 % Total deposits $ 3,572,349 2.68 % $ 3,442,925 3.15 % $ 3,357,819 2.72 % 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, or 5.4%. Core deposits exclude out-of-market deposits and time deposits of $250,000 or more and provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $2.88 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. The maturity distribution of our time deposits of $250,000 or more is as follows: December 31, (dollars in thousands) 2025 2024 Three months or less $ 215,650 233,514 Over three through six months 180,050 187,478 Over six through twelve months 271,920 130,568 Over twelve months 110,334 222,468 Total $ 777,954 774,028 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 and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements by the FDIC for the Call Report. Liquidity 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 63 Table of Contents 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 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, 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. 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. 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 U.S. 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. December 31, (dollars in thousands) 2025 2024 2023 Return on average assets 0.72 % 0.38 % 0.34 % Return on average equity 8.73 % 4.84 % 4.44 % Return on average common equity 8.73 % 4.84 % 4.44 % Average equity to average assets ratio 8.20 % 7.83 % 7.71 % Tangible common equity to assets ratio 8.37 % 8.08 % 7.70 % 64 Table of Contents 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 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. 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 5%. 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. Actual For capital adequacy purposes minimum (1) To be well capitalized under prompt corrective action provisions minimum (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2025 Total Capital (to risk weighted assets) $ 437,207 12.85 % $ 272,120 8.00 % $ 340,150 10.00 % Tier 1 Capital (to risk weighted assets) 394,927 11.61 % 204,090 6.00 % 272,120 8.00 % Common Equity Tier 1 (to risk weighted assets) 394,927 11.61 % 153,068 4.50 % 221,098 6.50 % Tier 1 Capital (to average assets) 394,927 9.06 % 174,276 4.00 % 217,845 5.00 % As of December 31, 2024 Total Capital (to risk weighted assets) $ 402,629 12.66 % $ 254,412 8.00 % $ 318,015 10.00 % Tier 1 Capital (to risk weighted assets) 362,875 11.41 % 190,809 6.00 % 254,412 8.00 % Common Equity Tier 1 (to risk weighted assets) 362,875 11.41 % 143,107 4.50 % 206,709 6.50 % Tier 1 Capital (to average assets) 362,875 8.75 % 165,941 4.00 % 207,426 5.00 % As of December 31, 2023 Total Capital (to risk weighted assets) $ 390,197 12.28 % $ 254,278 8.00 % $ 317,847 10.00 % Tier 1 Capital (to risk weighted assets) 350,455 11.03 % 190,708 6.00 % 254,278 8.00 % Common Equity Tier 1 (to risk weighted assets) 350,455 11.03 % 143,031 4.50 % 206,601 6.50 % Tier 1 Capital (to average assets) 350,455 8.47 % 165,414 4.00 % 206,767 5.00 % (1) Ratios do not include the capital conservation buffer of 2.5%. 65 Table of Contents 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. 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 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. 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 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. 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. Our 66 Table of Contents 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. 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 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 Change in net interest income from base Up 300 basis points (11.87 )% Up 200 basis points (7.16 )% Up 100 basis points (3.28 )% Base - Down 100 basis points 2.67 % Down 200 basis points 6.87 % Down 300 basis points 11.52 % 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) Within One Year Over One to Two Years Over Two to Three Years Over Three to Four Years After Five Years Total Certificates of deposit $ 846,094 30,643 81,522 62 416 958,737 Subordinated debentures - - - 24,903 - 24,903 Operating lease obligations 2,210 2,267 2,015 1,501 18,686 26,679 Total $ 848,304 32,910 83,537 26,466 19,102 1,010,319 67 Table of Contents 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risk See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk and Interest Rate Sensitivity and – Liquidity and Capital Resources. 68 Table of Contents