FIRST UNITED CORP/MD/ (FUNC)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of First United Corporation and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, as well as the audited consolidated financial statements and related notes included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2025.

Unless the context clearly suggests otherwise, references in this report to “us”, “we”, “our”, and “the Corporation” are to First United Corporation and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts, but are statements about management’s beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives. These statements are evidenced by terms such as "anticipate," "estimate," "should," “will”, "expect," "believe," "intend," and similar expressions. Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not prove true. The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission (the “SEC”) entitled "Risk Factors".

FIRST UNITED CORPORATION

First United Corporation is a Maryland corporation chartered in 1985 and a bank holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended, that elected financial holding company status in 2021.  The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, “the Trusts”), both Connecticut statutory business trusts.  The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital.  The Bank has two consumer finance company subsidiaries- OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company – and one subsidiary that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure – First OREO Trust, a Maryland statutory trust.  In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and a 99.9% non-voting membership interest in MCC FUBT Fund, LLC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland and Mineral County, West Virginia.

At March 31, 2026, the Corporation’s total assets were $2.0 billion, net loans were $1.5 billion, and deposits were $1.8 billion. Shareholders’ equity at March 31, 2026 was $205.3 million.

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

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RESULTS OF OPERATIONS

Overview

Consolidated net income was $6.7 million for the first quarter of 2026, or $1.03 per diluted share, compared to $5.8 million, or $0.89 per diluted share, for the first quarter of 2025.  Non-GAAP net income was $6.6 million, or $1.02 per diluted share, for the first quarter of 2026 compared to $5.8 million, or $0.89 per diluted share, for the first quarter of 2025 and $7.2 million, or $1.10 per diluted share, for the fourth quarter of 2025.  Return on Average Assets and Return on Average Equity for the quarter ended March 31, 2026, were 1.29% and 13.06%, respectively.

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The $0.9 million increase in quarterly net income when compared to the first quarter of 2025 was primarily driven by a $2.1 million increase in net interest income, an increase of $0.4 million in non-interest income, inclusive of gains, partially offset by a $0.2 million increase in provision for credit losses as a result of increased off-balance sheet loan commitments, an increase in non-interest expense of $1.1 million, and an increase in income tax expense of $0.3 million.  Comparing the first quarter of 2026 to the same period of 2025, interest and fees on loans increased by $0.7 million resulting from new loans booked at higher rates late in 2025 and the repricing of adjustable-rate loans.  Interest expense decreased by $0.4 million when comparing year-over-year quarterly expense, resulting from the repayment of a $25.0 million brokered certificate of deposit in January 2026 and $65.0 million in Federal Home Loan Bank (“FHLB”) borrowings in March 2026.  Other operating income increased by $0.4 million, driven by an increase in trust and brokerage income of $0.2 million resulting from increased production and a $0.2 million increase in bank owned life insurance (“BOLI”) related to a one-time death benefit received in the first quarter of 2026.  Other operating expenses increased by $1.1 million, driven by a $0.9 million increase in salaries and benefits as a result of filling open positions throughout 2025, normal merit increases in April 2025 and increased incentive payouts, partially offset by reduced life and health insurance expense due to reduced claims and an increase in the reduction of costs associated with loan originations related to increased loan production.  Professional services expenses increased by $0.1 million and data processing expenses increased by $0.2 million.  These increases were partially offset by reductions in other expenses such as miscellaneous loan fees and net periodic pension expenses.

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Net Interest Income

Net interest income is our largest source of operating revenue. Net interest income is the difference between the interest that we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to a fully taxable equivalent (“FTE”) basis to facilitate performance comparisons between taxable and tax-exempt assets by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate. This is a non-GAAP disclosure and management believes it is not materially different than the corresponding GAAP disclosure.

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

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

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[Excerpt truncated for page length; source filing is linked above.]

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto for the years ended December 31, 2025 and 2024, which are included in Item 8 of Part II of this annual report.

Overview

First United Corporation is a financial holding company that, through the Bank and its non-bank subsidiaries, provides an array of financial products and services primarily to customers in four Western Maryland counties and three Northeastern West Virginia counties. Its principal operating subsidiary is the Bank, which consists of a community banking network of 23 branch offices located throughout its market areas. Our primary sources of revenue are interest income earned from our loan and investment securities portfolios and fees earned from financial services provided to customers.

For the years ended December 31, 2025 and 2024, net income was $24.5 million and $20.6 million, respectively, on a generally accepted accounting principles (“GAAP”) basis.  Net income for the year ended December 31, 2025 was inclusive of a $1.3 million write-down, net of tax, on other real estate owned (“OREO”) property, a $0.2 million loss, net of tax, on disposal of fixed assets, and a $0.1 million gain, net of tax, on sale of available-for-sale (“AFS”) investment securities and adjusted net income was $25.8 million on a non-GAAP basis.  Net income for the year ended December 31, 2024 was inclusive of a $0.4 million increase in expenses, net of tax, related to announced branch closures and adjusted net income was $21.0 million on a non-GAAP basis.

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The provision for credit losses on loans was $2.3 million for the year ended December 31, 2025 and $2.9 million for the year ended December 31, 2024.  Net charge-offs of $1.0 million were recorded for the year ended December 31, 2025, compared to $2.2 million for 2024. The ratio of the ACL to loans outstanding was 1.28% at December 31, 2025 compared to 1.23% at December 31, 2024.

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Net interest income, on a non-GAAP, fully-taxable equivalent (“FTE”) basis, increased by $8.1 million in 2025 when compared to 2024.  Interest income increased by $8.8 million, which was partially offset by a $0.7 million increase in interest expense.  The net interest margin was 3.67% and 3.38% for the years ending December 31, 2025 and 2024, respectively.  Management continues to place a strong focus on margin management as we move into 2026.  Higher cash levels at December 31, 2025 should allow us to repay outstanding debt and brokered deposits at their maturities.

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Other operating income, including net gains on sales of mortgage loans, sales of investment securities and disposal of fixed assets, increased by approximately $0.7 million when compared to 2024.  This increase was attributable to a $0.7 million increase in wealth management income, driven by improving market conditions, increased annuity sales, and growth in new and existing customer relationships. Net gains, service charge income and debit card income were stable when comparing the year ended December 31, 2025 to the same period of 2024.

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Other operating expenses increased by $3.8 million when compared to the year ended December 31, 2024.  Salaries and employee benefits increased by $1.3 million related to normal merit increases effective April 1, 2025, increased salary expense as a result of increased staffing levels as we enhanced our sales team in Morgantown, WV, increases in incentives, and 401(k) expenses, offset by reduced life and health insurance costs related to reduced claims in 2025. Net OREO expenses increased by $2.0 million related to the fair value write-down of one OREO property.  The write-down was attributable to a legacy participation loan, originated in 2013, that was taken into OREO several years ago.  The property is serviced by another lender and, following the cancellation of a previous contract, the Company made the decision, alongside other participants, to entertain a new letter of intent and to mark the property based on the new fair value.  Data processing expenses increased by $0.5 million due primarily to increased software agreements, and professional services expenses increased by $0.5 million driven by increased audit fees.   These increases were partially offset by a $0.5 million decrease in occupancy and equipment expenses related to accelerated depreciation expense related to branch closures that were recognized in the first quarter of 2024.

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Outstanding gross loans of $1.5 billion at December 31, 2025 reflected growth of $40.9 million in 2025.  Since December 31, 2024, commercial real estate loans increased by $44.4 million, acquisition and development loans decreased by $5.0 million as construction projects were completed and rolled into permanent financing, commercial and industrial loans decreased by $10.5 million, residential mortgage loans increased by $18.1 million, and consumer loans decreased by $6.1 million as production continued to be outpaced by amortization. Commercial growth was offset during 2025 by unusually high payoffs as a result of clients utilizing cash to repay or consolidate debt.

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Total deposits at December 31, 2025 increased by $160.3 million when compared to December 31, 2024.  In January 2025, $50.0 million in brokered time deposits with an average interest rate of 4.24% were obtained to fund the repayment of $50.0 million in overnight borrowings that were outstanding on December 31, 2024.  Savings and money market accounts increased by $70.2 million due primarily to the expansion of current and new relationships throughout 2025.  Non-interest-bearing checking deposits increased by $26.3 million due primarily to seasonal fluctuations of deposit balances of two commercial customers in the healthcare sector, and interest-bearing checking deposits increased by $6.0 million as we experienced seasonal fluctuations in municipal and commercial account balances.  Retail time deposits increased by $7.8 million since December 31, 2024.  We repaid a $25.0 million brokered time deposit at its maturity in January 2026.

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Estimates and Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. (See Note 1 to the Consolidated Financial Statements.)  On an on-going basis, management evaluates estimates and bases those estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Corporation identifies the following critical accounting policies may affect our more significant judgments and estimates used in the preparation of the Consolidated Financial Statements.

Allowance for Credit Losses- Loans

The ACL represents an amount which, in management’s judgment, is adequate to absorb expected credit losses over the life of outstanding loans as of the balance sheet date based on the evaluation of current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.  The ACL is measured and recorded upon the initial recognition of a financial asset.  The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased by a provision or decreased by a recovery for credit losses, which is recorded as a current period operating expense.

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Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates.  The reasonableness of the ACL is reviewed quarterly by management.

Management believes that it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP.  However, the determination of the ACL requires significant judgment, and estimates of expected credit losses in the loan portfolio can vary from the amounts actually observed.  While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial conditions of borrowers.

The ACL “base case” model is derived from various economic forecasts provided by widely recognized sources.  Management evaluates the variability of market conditions by examining the peak and trough of economic cycles.  These peaks and troughs are used to stress the base case model to develop a range of potential outcomes.  Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio.  For the year ended December 31, 2025, the range of outcomes would produce a 10.54% reduction or a 48.15% increase in reserves based on the best-case and worst-case scenarios, respectively.

The ACL is also discussed below in Item 7 under the heading “Allowance for Credit Losses” and in Note 5 to the Consolidated Financial Statements.

Liquidity Sources

As of December 31, 2025, we had approximately $140.0 million in unsecured lines of credit with our correspondent banks, $83.9 million available through a secured line of credit with the Federal Reserve Discount Window, and approximately $261.6 million of secured borrowings with the FHLB.  Additionally, we have access to the brokered money market and certificates of deposit markets.

Capital

The Bank’s capital ratios are strong, and the Bank is considered to be well-capitalized by applicable regulatory measures.

Adoption of New Accounting Standards and Effects of New Accounting Pronouncements

Note 1 to the Consolidated Financial Statements discusses new accounting pronouncements that, when adopted, could affect our future consolidated financial statements.

CONSOLIDATED STATEMENT OF INCOME REVIEW

Net Interest Income

Net interest income is our largest source of operating revenue and is the difference between the interest that we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to an FTE basis to facilitate performance comparisons between taxable and tax-exempt assets by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate. This is a non-GAAP disclosure, and it is not materially different than the corresponding GAAP disclosure.

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The table below summarizes net interest income for 2025 and 2024.

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Net interest income, on a non-GAAP, FTE basis, increased by $8.1 million (13.5%) during the year ended December 31, 2025 when compared to the year ended December 31, 2024, driven by a $8.8 million (9.6%) increase in interest income, which was partially offset by an increase in interest expense of $0.7 million (2.2%).  The net interest margin, on an FTE basis, increased to 3.67% for the year ended December 31, 2025 from 3.38% for the year ended December 31, 2024.

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Comparing the year ended December 31, 2025 with the year ended December 31, 2024, interest income increased by $8.8 million driven by an increase of $8.6 million on interest and fees on loans, as average loan balances increased by $68.8 million and the overall yield increased by 31 basis points in correlation with upward repricing of adjustable-rate loans.  Interest income on the investment portfolio increased by $0.5 million as a result of reinvesting the cashflow back into the portfolio in an effort to increase the overall yield in the current rate environment.

Interest expense increased by $0.7 million as a result of a $1.7 million increase in interest on deposits, as the average deposit balances increased by $90.0 million, driven by a $70.9 million increase in retail money market average balances and $30.9 million increase in average brokered time deposits, partially offset by decreases in average savings balances of $14.8 million.  The overall rate paid on deposits decreased by 3 basis points.  Interest expense on short-term borrowings decreased by $1.4 million due to the Bank’s utilization of the BTFP program in 2024 and subsequent repayment of the balances due under that program late in the third quarter of 2024. Long-term borrowing costs increased by $0.4 million as a result of an increase of $21.6 million in FHLB average balances due to borrowings obtained in the third quarter of 2024 and subsequent repayment of a $25.0 million advance at its maturity in September 2025, partially offset by a decrease in rate paid of 60 basis points.

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As shown below, the composition of total interest income between 2025 and 2024 remained relatively stable.

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The following table sets forth the average balances, net interest income and expense, and average yields and rates for our interest-earning assets and interest-bearing liabilities for 2025 and 2024:

Distribution of Assets, Liabilities and Shareholders’ Equity

Interest Rates and Interest Differential – Tax Equivalent Basis

Notes:

The following table sets forth an analysis of volume and rate changes in interest income and interest expense of our average interest-earning assets and average interest-bearing liabilities for 2025 and 2024. This table distinguishes between the changes related to average outstanding balances (changes in volume created by holding the interest rate constant) and the changes related to average interest rates (changes in interest income or expense attributed to average rates created by holding the outstanding balance constant).

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Interest Variance Analysis (1)

Note:

Provision for Credit Losses

The provision for credit losses for loans was $2.3 million for the year ended December 31, 2025 and $2.9 million for the year ended December 31, 2024.  Net charge-offs of $1.0 million were recorded for the year ended December 31, 2025 compared to net charge-offs of $2.2 million for 2024. The ratio of the ACL to loans outstanding was 1.28% at December 31, 2025 compared to 1.23% at December 31, 2024.  The ACL reflects a level commensurate with the risk inherent in our loan portfolio.

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Other Operating Income

The following table shows the major components of other operating income for the past two years, exclusive of net gains, and the percentage changes during these years:

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Other operating income, exclusive of gains, increased by $0.8 million for the year ended December 31, 2025 when compared to the same period of 2024.  The increase was primarily a result of an increase of $0.7 million in wealth management income due to increased market values of assets under management, increased annuity sales and growth in new and existing customer relationships.

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Net gains of $0.4 million were reported for the years ended December 31, 2025 and 2024, as a $0.1 million increase in gains from the sales of residential mortgages and a $0.1 million increase in net gains on sales of investment securities was offset by a $0.2 million loss on the disposal of fixed assets.

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The following table shows the components of net gains for the years ended December 31, 2025 and 2024.

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Other Operating Expense

The following table compares the major components of other operating expense for 2025 and 2024:

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For the year ended December 31, 2025, non-interest expense increased by $3.8 million when compared to the year ended December 31, 2024.  Salaries and employee benefits increased by $1.3 million related to normal merit increases effective April 1, 2025, increased salary expense as a result of increased staffing levels as we enhanced our sales team in Morgantown, WV, increases in incentives, and 401(k) expenses, offset by reduced life and health insurance costs related to reduced claims in 2025. Net OREO expenses increased by $2.0 million due to the previously mentioned fair value write-down and expenses recorded in the fourth quarter of 2025.  Data processing expenses increased by $0.5 million due primarily to increased software agreements, and professional services expenses increased by $0.5 million driven by increased audit fees.   These increases were partially offset by a $0.5 million decrease in occupancy and equipment expenses related to accelerated depreciation expense related to branch closures that were recognized in the first quarter of 2024.

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Applicable Income Taxes

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We recognized a tax expense of $8.0 million in 2025 compared to a tax expense of $6.7 million in 2024. See the discussion under “Income Taxes” in Note 12 to the Consolidated Financial Statements presented elsewhere in this annual report for a detailed analysis of our deferred tax assets and liabilities.  Our effective income tax rate as a percentage of income for the years ended December 31, 2025 and December 31, 2024 was 24.6% and 24.5%, respectively.  The increase in the tax rate for the 2025 period was primarily related to changes in allocations of state income tax expense.

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At December 31, 2025, the Corporation had Maryland Net Operating Losses (“NOLs”) of $34.9 million for which a deferred tax asset of $2.3 million has been recorded. There was also a Maryland state interest expense carryforward of $4.4 million, for which a deferred tax asset of $0.3 million has been recorded.  There has been and continues to be a full valuation allowance on these NOLs and interest expense deferred tax assets, based on management’s belief that it is more likely than not that these NOLs will not be realized prior to the expiration of their carry-forward periods because the Corporation will not generate sufficient taxable income in the future to fully utilize the NOLs. The valuation allowance was $2.6 million at both December 31, 2025 and 2024.

We have concluded that no valuation allowance is deemed necessary for our remaining federal and state deferred tax assets at December 31, 2025, as it is more likely than not that they will be realized based on the expected reversal of deferred tax liabilities, the generation of future income sufficient to realize the deferred tax assets as they reverse, and the ability to implement tax planning strategies to prevent the expiration of any carry-forward periods.

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GAAP and Non-GAAP Measures

The following tables sets forth certain selected financial data for the years ended December 31, 2025 and 2024 under GAAP (as reported) and non-GAAP.  A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with GAAP in the United States.  The Corporation’s management believes that the presentation of non-GAAP financial measures provides investors with a greater understanding of the Corporation’s operating results in addition to the results measured in accordance with GAAP.  While management uses these non-GAAP measures in its analysis of the Corporation’s performance, this information should not be viewed as a substitute for financial results determined in accordance with GAAP or considered to be more important than financial results determined in accordance with GAAP.

The following non-GAAP financial measures exclude net gains on the sale of investment securities, losses on disposal of fixed assets and a write-down of OREO in 2025 and accelerated depreciation and lease termination expenses related to the branch closures in 2024.

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CONSOLIDATED BALANCE SHEET REVIEW

Overview

Total assets at December 31, 2025 were $2.1 billion, representing a $114.4 million increase since December 31, 2024.  During the year, the investment portfolio increased by $9.5 million as bonds were purchased to lock in yield in anticipation of potential declines in long-term rates. Gross loans increased by $40.9 million as new production during the year was mitigated by amortization and unusually high payoffs in the commercial portfolio.  These payoffs were a result of sales of businesses of approximately $10.5 million and approximately $33.5 million related to refinancings and balance sheet restructurings.  Other assets, including deferred taxes, premises and equipment, bank owned life insurance, pension assets, accrued trust income receivable, and accrued interest receivable, increased by $13.6 million.

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Total liabilities at December 31, 2025 were $1.9 billion, representing a $90.1 million increase since December 31, 2024.  Total deposits increased by $160.3 million when compared to December 31, 2024.   Brokered time deposits increased by $50.0 million as new brokered time deposits were obtained in January 2025 to fund the repayment of the $50.0 million in overnight borrowings outstanding at December 31, 2024. In addition, savings and money market accounts increased by $70.2 million, retail time deposits increased by $7.8 million, and non-interest-bearing deposits increased by $26.3 million.  Interest-bearing demand deposits, primarily our IntraFi Cash Service product, increased by $6.0 million due primarily to seasonal fluctuations in municipal deposit accounts.  Short-term borrowings decreased by $47.7 million due to the purchase of the brokered time deposit mentioned above, which was partially offset by increases in the overnight investment sweep product.  Long-term borrowings decreased by $25.0 million due to the repayment of a matured $25.0 million FHLB borrowing in September 2025.

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As indicated below, the total interest-earning asset mix remained relatively constant at December 31, 2025 when compared to December 31, 2024. The mix for each year is illustrated below.

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The year-end total liability mix has remained stable during the two-year period as illustrated below.

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Loan Portfolio

The Bank is actively engaged in originating loans to customers primarily in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Berkeley County, Mineral County, and Monongalia County, in West Virginia; and the surrounding regions of Maryland, West Virginia, Virginia and Pennsylvania. We have policies and procedures designed to mitigate credit risk and to maintain the quality of our loan portfolio. These policies include underwriting standards for new credits as well as continuous monitoring and reporting policies for asset quality and the adequacy of the ACL. These policies, coupled with ongoing training efforts, have provided effective checks and balances for the risk associated with the lending process. Lending authority is based on the type of the loan, and the experience of the lending officer.

Commercial loans are collateralized primarily by real estate and, to a lesser extent, equipment and vehicles. Unsecured commercial loans represent an insignificant portion of total commercial loans. Residential mortgage loans are collateralized by the related property. Generally, a residential mortgage loan exceeding a specified internal loan-to-value ratio requires private mortgage insurance. Installment loans are typically collateralized, with loan-to-value ratios which are established based on the financial condition of the borrower. We also have made unsecured consumer loans to qualified borrowers meeting our underwriting standards. Additional information about our loans and underwriting policies can be found in Item 1 of Part I of this annual report under the heading “Banking Products and Services”.

The following table sets forth the composition of our loan portfolio. Historically, our policy has been to make the majority of our loan commitments in our market areas. We had no foreign loans in our portfolio as of December 31 for any of the years presented.

Summary of Loan Portfolio

The following table presents the composition of our loan portfolio as of December 31 for the past two years:

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Outstanding gross loans of $1.5 billion at December 31, 2025 reflected growth of $40.9 million in 2025.  Since December 31, 2024, commercial real estate loans increased by $44.4 million, acquisition and development loans decreased by $5.0 million as construction projects were completed and rolled into permanent financing, commercial and industrial loans decreased by $10.5 million, residential mortgage loans increased by $18.1 million, and consumer loans decreased by $6.1 million as production continued to be outpaced by amortization. Commercial growth was offset during 2025 by unusually high payoffs as a result of clients utilizing cash to repay or consolidate debt.

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New commercial loan production for the year ended December 31, 2025 was approximately $247.0 million, which compares to $189.5 million for the year ended December 31, 2024.  The commercial pipeline continued to be strong at December 31, 2025 at $61.0 million, and unfunded, commercial construction loans totaled approximately $46.5 million.  Commercial amortization and payoffs were approximately $170.5 million for the year ended December 31, 2025.

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New residential mortgage loan production for year ended December 31, 2025 was approximately $76.7 million, with most of this production comprised of in-house loans.  The pipeline of in-house, portfolio loans at December 31, 2025 was $4.5 million. Unfunded commitments related to residential construction loans totaled $14.5 million at December 31, 2025.

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The following table presents loans in our commercial real estate portfolio by industry type at December 31, 2025.

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Our loan portfolio does not consist of any loans secured by office buildings located in major metropolitan areas or that are over four stories or any retail properties rented to major big box retail tenants.

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The following table sets forth the maturities, based upon contractual dates, for selected loan categories as of December 31, 2025:

Maturities of Loan Portfolio at December 31, 2025

Fixed Rate Loans

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Variable Rate Loans

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Management monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a required payment is past due. A loan is considered to be past due when a scheduled payment has not been received for 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection.  Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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The following sets forth the amounts of non-accrual, past-due and modified loans for the past two years:

Risk Elements of Loan Portfolio

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Accruing loans past due 30 days or more was 0.32% at both December 31, 2025 and 2024.  Non-accrual loans totaled $4.2 million at December 31, 2025 compared to $4.9 million at December 31, 2024.  The decrease in non-accrual balances at December 31, 2025 was due to principal paydowns and the charge-off of $0.6 million related to a non-accrual commercial and industrial relationship that was recorded during the second half of 2025.

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Individually evaluated loans totaled $19.6 million at December 31, 2025 and $4.4 million at December 31, 2024.  This increase primarily relates to one credit relationship in our commercial and industrial portfolio that is in the automotive dealership industry.  While the credit was not past-due or non-accrual, it was not meeting the contractual terms of the loan agreement; therefore, management felt it was prudent to designate the credit as individually evaluated at December 31, 2025.  A $0.4 million specific reserve within the ACL was calculated against the credit using discounted cash flows at December 31, 2025.

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The following table sets forth the percent applicable by portfolio for non-accrual loans for the past two years:

Non-Accrual Loans as a % of Applicable Portfolio

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We would have recognized $0.4 million and $0.8 million in interest income for the years ended December 31, 2025 and 2024, respectively, had our non-accrual loans been current and performing in accordance with their terms.  During 2025 and 2024, we recognized, on a cash basis, $0.1 million and $0.2 million, respectively, of interest income on non-accrual loans that paid off.

Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above.  Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

A loan that is considered a non-accrual or modified loan may be subject to the individually evaluated loan analysis if the commitment is $100,000 or greater; otherwise, the modified loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows.  For a discussion with respect to reserve calculations regarding individually evaluated loans, refer to the “Individually evaluated loans” section in Note 17, Fair Value of Financial Instruments.

From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty.  In some cases, these modifications may result in new loans.  Loan modifications to borrowers may be in the form of a principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, a term extension, or a combination thereof, among other things.

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The below table presents the amortized cost basis of loans that were both experiencing financial difficulty and modified during the years ended December 31, 2025 and 2024, by class and by type of modification.  The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:

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All loans presented in the table above were performing in accordance with their modified terms at December 31, 2025 and 2024.

Allowance for Credit Losses

Effective January 1, 2023, we adopted the accounting guidance in FASB’s Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments- Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments, universally referred to as CECL.   In connection with our adoption of ASU 2016-13, we made changes to our loan portfolio segments to align with the methodology of CECL.  Refer to Note 5, Loans and Related Allowance for Credit Losses, for further discussion of these portfolio segments.

The ACL represents an amount which, in management’s judgment, is adequate to absorb expected credit losses over the life of outstanding loans as of the balance sheet date based on the evaluation of current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.  The ACL is measured and recorded upon the initial recognition of a financial asset.  The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased by a provision or decreased by a recovery for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of highly subjective estimates.  The reasonableness of the ACL is reviewed quarterly by management.

Management believes that it uses relevant information available to make determination about the ACL and that it has established the existing allowance in accordance with GAAP.  However, the determination of the ACL requires significant judgment, and estimates of expected credit losses in the loan portfolio can vary from the amounts actually observed.  While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The ACL “base case” model is derived from various economic forecasts provided by widely recognized sources.  Management evaluates the variability of market conditions by examining the peak and trough of economic cycles.  These peaks and troughs are used to stress the base case model to develop a range of potential outcomes.  Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions

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and known risks in the portfolio.   Management enhances its calculation with the use of Moody’s economic forecast data to provide additional support to substantiate its ACL.

The ACL was $19.5 million at December 31, 2025 compared to $18.2 million at December 31, 2024. The provision for credit losses on loans was $2.3 million for the year ended December 31, 2025 compared to $2.9 million for the year ended December 31, 2024.  The provision expense recorded in 2025 was primarily related to charge-offs recorded in our commercial and industrial portfolio and growth in our loan portfolio.  Net charge-offs of $1.0 million and $2.2 million were recorded for the years ended December 31, 2025 and 2024, respectively.  The ratio of the ACL to loans outstanding was 1.28% at December 31, 2025 and 1.23% at December 31, 2024.

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The ratio of net charge offs to average loans was 0.07% for the year ended December 31, 2025 and 0.16% for the year ended December 31, 2024.  The commercial and industrial portfolio had net charge offs of 0.33% and 0.50% for the years ended December 31, 2025 and 2024, respectively, due primarily to charge offs on one non-accrual commercial relationship.  The acquisition and development portfolio had net recoveries of 0.33% and 0.06% for the years ended December 31, 2025 and 2024, respectively.  This shift in the acquisition and development portfolio was due primarily to recoveries recognized in 2025 related to one relationship previously charged off in 2016 as additional collateral was brought into OREO in the third quarter of 2025.  The decrease in net charge offs in consumer loans in 2025 was primarily driven by approximately $0.3 million in charge offs of demand deposit balances during the first quarter of 2024.  Details of the ratios, by loan type, are shown below.  Our special assets team continues to actively collect on charged-off loans, resulting in overall low net charge-off ratios.

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Management believes that the ACL at December 31, 2025 is adequate to provide for losses over the life of the loan portfolio. Amounts that will be recorded for the provision for credit losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors. Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for credit losses.

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The following table presents a summary of the activity in the ACL by major loan category for the past two years.

Analysis of Activity in the Allowance for Credit Losses

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The following presents management’s allocation of the ACL by major loan category in comparison to that loan category’s percentage of total loans. Changes in the allocation over time reflect changes in the composition of the loan portfolio risk profile and refinements to the methodology of determining the ACL. Specific allocations in any particular category may be reallocated in the future as needed to reflect current conditions. Accordingly, the entire ACL is considered available to absorb losses in any category.

Allocation of the Allowance for Credit Losses

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Investment Securities

The following table sets forth the composition of our investment securities portfolio by major category as of the indicated dates:

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The total fair value of AFS securities was $107.1 million and the book value of HTM securities totaled $171.5 million at December 31, 2025, representing an increase of $12.7 million and a decrease of $4.1 million, respectively, since December 31, 2024.  New investment purchases in the amount of $24.6 million were made during 2025 to enhance the overall yield of the portfolio. Management intends to hold the portfolio relatively stable in 2026 by reinvesting cashflows back into the portfolio to enhance the overall yield of the portfolio.  The investment portfolio is primarily utilized for liquidity purposes, management of interest sensitivity and collateralization needs.

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As discussed in Note 17 to the Consolidated Financial Statements presented elsewhere in this report, we measure fair market values based on the fair value hierarchy established in FASB’s Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e., supported with little or no market activity). These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Approximately $91.1 million of the AFS portfolio was valued using Level 2 pricing and had net unrealized losses of $13.9 million at December 31, 2025. The remaining $16.0 million of the AFS securities represents the collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs, or Level 3 pricing. The $2.8

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million in net unrealized losses associated with the CDO portfolio relates to nine pooled trust preferred securities.  There have been no changes to the ratings or payment status of the CDO portfolio in 2025.

The following table sets forth the contractual or estimated maturities of the components of our investment securities portfolio as of December 31, 2025 and the weighted average yields on a tax-equivalent basis.

Investment Security Maturities, Yields, and Fair Values at December 31, 2025

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The weighted average yield was calculated using historical cost balances and does not give effect to changes in fair value.

Deposits

The following table sets forth the deposit balances by major category for December 31, 2025 and 2024:

Deposit Balances

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Total deposits at December 31, 2025 increased by $160.3 million when compared to December 31, 2024.  In January 2025, $50.0 million in brokered time deposits with an average interest rate of 4.24% were obtained to fund the repayment of $50.0 million in overnight borrowings that were outstanding on December 31, 2024.  Savings and money market accounts increased by $70.2 million due primarily to the expansion of current and new relationships throughout 2025.  Non-interest-bearing checking deposits increased by $26.3 million due primarily to seasonal fluctuations of deposit balances of two commercial customers in the healthcare sector, and interest-bearing checking deposits increased by $6.0 million as we experienced seasonal fluctuations in municipal and commercial account balances.  Retail time deposits increased by $7.8 million since December 31, 2024.  We repaid a $25.0 million brokered time deposit at its maturity in January 2026.

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

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

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Borrowed Funds

The following shows the composition of our borrowings at December 31:

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The following is a summary of short-term borrowings at December 31 with original maturities of less than one year:

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Short-term borrowings decreased by $47.7 million as a result of the purchase of $50.0 million brokered time deposits to repay the overnight borrowings, which was partially offset by increases in the overnight investment sweep product.  Long-term borrowings decreased by $25.0 million due to the repayment of a matured $25.0 million FHLB borrowing in September 2025.

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Management will continue to closely monitor interest rates within the context of its overall asset-liability management process. See the discussion under the heading “Interest Rate Sensitivity” in this Item 7 for further information on this topic.

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See “Liquidity Sources” above for discussion on additional borrowing capacity available to us at December 31, 2025. See Note 9 to the Consolidated Financial Statements presented elsewhere in this annual report for further details about our borrowings and additional borrowing capacity, which is incorporated herein by reference.

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financing needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, lines of credit, and standby letters of credit. Our exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of the instruments. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. We generally require collateral or other security to support the financial instruments with credit risk. The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty. We evaluate each customer’s creditworthiness on a case-by-case basis.

Loan commitments and letters of credit totaled $270.0 million and $16.4 million, respectively, at December 31, 2025. Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. We are not a party to any other off-balance sheet arrangements. See Note 16 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information on these arrangements.

Capital Resources

We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdraw demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified below under the heading “Liquidity Management”.  Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.

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In addition to operational requirements, the Bank is subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit. Detailed information about these capital regulations and their requirements is set forth in the “Supervision and Regulation” section of Item 1 of Part I of this annual report under the heading “Capital Requirements”.

At December 31, 2025, the Bank’s total risk-based capital ratio was 15.19%, which was well above the regulatory minimum of 8%. The total risk-based capital ratios of the Bank at December 31, 2024 was 14.59%.

At December 31, 2025, the most recent notification from the regulators categorizes the Bank as “well capitalized” under the regulatory framework for prompt corrective action. See Note 3 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information regarding regulatory capital ratios.

Liquidity Management

Liquidity is a financial institution’s capability to meet customer demands for deposit withdrawals while funding all credit-worthy loans. The factors that determine the institution’s liquidity are:

We actively manage our liquidity position through meetings of a sub-committee of executive management, which looks forward 12 months at 30-day intervals. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds.

It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations. That is, the Bank will manage its liquidity to minimize the need to make unplanned sales of assets or to borrow funds under emergency conditions. The Bank will use funding sources where the interest cost is relatively insensitive to market changes in the short run (periods of one year or less) to satisfy operating cash needs. The remaining normal funding will come from interest-sensitive liabilities, either deposits or borrowed funds. When the marginal cost of needed wholesale funding is lower than the cost of raising this funding in the retail markets, the Corporation may supplement retail funding with external funding sources such as:

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The following table presents sources of liquidity available to the Corporation as of December 31, 2025.

We have adequate liquidity available to respond to current and anticipated liquidity demands and are not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect our ability to maintain liquidity at satisfactory levels.

Market Risk and Interest Sensitivity

Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities that we engage in, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on our liabilities. Interest rate sensitivity refers to the degree that earnings will be impacted by changes in the prevailing level of interest rates. Interest rate risk arises from mismatches in the repricing or maturity characteristics between interest-bearing assets and liabilities. Management seeks to minimize fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates. Management uses interest sensitivity gap analysis and simulation models to measure and manage these risks. The interest rate sensitivity gap analysis assigns each interest-earning asset and interest-bearing liability to a time frame reflecting its next repricing or maturity date. The differences between total interest-sensitive assets and liabilities at each time interval represent the interest sensitivity gap for that interval. A positive gap generally indicates that rising interest rates during a given interval will increase net interest income, as more assets than liabilities will reprice. A negative gap position would benefit us during a period of declining interest rates.

At December 31, 2025, we were asset sensitive.

Our interest rate risk management goals are:

In order to manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Management uses computer simulations to measure the effect on net interest income of various

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interest rate scenarios. Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans. This modeling reflects interest rate changes and the related impact on net interest income over specified periods.

We evaluate the effect of a change in interest rates of -400 basis points to +400 basis points on both NII and Net Portfolio Value (“NPV”) / Economic Value of Equity (“EVE”). We concentrate on NII rather than net income as long as NII remains the significant contributor to net income.

NII modeling allows management to view how changes in interest rates will affect the spread between the yield earned on assets and the cost of deposits and borrowed funds. Unlike traditional Gap modeling, NII modeling takes into account the different degree to which installments in the same repricing period will adjust to a change in interest rates. It also allows the use of different assumptions in a falling versus a rising rate environment. The period considered by the NII modeling is the next eight quarters.

NPV / EVE modeling focuses on the change in the market value of equity. NPV / EVE is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present value of all future cash flows on or off the balance sheet, NPV / EVE modeling takes a longer-term view of interest rate risk. This complements the shorter-term view of the NII modeling.

Measures of NII at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

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

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This estimate is based on assumptions that may be affected by unforeseeable changes in the general interest rate environment and any number of unforeseeable factors. Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between lending rates and rates paid on purchased funds are not constant over time. Management can respond to current or anticipated market conditions by lengthening or shortening the Bank’s sensitivity through loan repricings or changing its funding mix. The rate of growth in interest-free sources of funds will influence the level of interest-sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest-sensitive gap is only one factor to be considered in estimating the net interest margin.

Impact of Inflation – Our assets and liabilities are primarily monetary in nature, and as such, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money. During inflationary periods, monetary assets lose value in terms of purchasing power and monetary liabilities have corresponding purchasing power gains. The concept of purchasing power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings.

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