Southern First Bancshares Inc: Form 10-Q for the period ended Jun 30, 2026

The following discussion reviews our results of operations for the three and six month periods ended June 30, 2026 as compared to the three and six month periods ended June 30, 2025 and assesses our financial condition as of June 30, 2026 as compared to December 31, 2025. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2025 included in our Annual Report on

Form 10-K for that period. Results for the three and six month periods ended June 30, 2026 are not necessarily indicative of the results for the year ending December 31, 2026 or any future period.

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares, Inc. and its consolidated subsidiary. References to the “Bank” refer to Southern First Bank.

Cautionary Warning Regarding forward-looking statements

This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “seek to,” “strive,” “focus,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to:

• Restrictions or conditions imposed by our regulators on our operations;
• Increases in competitive pressure in the banking and financial services industries;
• Changes in access to funding or increased regulatory requirements with regard to funding, which could impair our liquidity;
• Changes in deposit flows, which may be negatively affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic or industry conditions;
• Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;
• Credit losses due to loan concentration;
• Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;
• Our ability to successfully execute our business strategy;
• Our ability to attract and retain key personnel;
• The success and costs of our expansion into potential new markets;
• Risks with respect to future mergers or acquisitions, including our ability to successfully expand and integrate the businesses and operations that we acquire and realize the anticipated benefits of the mergers or acquisitions;
• Changes in the interest rate environment which could reduce anticipated or actual margins;
• Changes in political, economic, legislative, or regulatory conditions, including new governmental initiatives affecting the financial services industry and potential disruptions resulting from U.S. federal government funding lapses, shutdowns, or related fiscal policy uncertainty;
• Changes in economic conditions resulting in, among other things, a deterioration in credit quality;
• Changes occurring in business conditions and inflation;
• Increased cybersecurity risk, including potential business disruptions or financial losses;
• Changes in technology;
• The adequacy of the level of our allowance for credit losses and the amount of loan loss provisions required in future periods;
• Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses or write-down assets;
• Changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;
• Any increase in FDIC assessments which will increase our cost of doing business;
• Risks associated with complex and changing regulatory environments, including, among others, with respect to data privacy, artificial intelligence (“AI”), information security, climate change or other environmental, social and governance matters, and labor matters, relating to our operations;
• The rate of delinquencies and amounts of loans charged-off;
• The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;
• Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;
• Adverse changes in asset quality and resulting credit risk-related losses and expenses;
• Changes in accounting standards, rules and interpretations and the related impact on our financial statements;
• Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;
• Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed;
• The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics; war, terrorism, or other geopolitical conflicts or instability, including the war in Ukraine, the ongoing conflict involving the United States, Israel and Iran and other conflicts in the Middle East, political and economic instability and military and diplomatic developments involving Venezuela, and tensions between China and Taiwan; disruptions in our customers’ supply chains or transportation networks; disruptions to global energy markets or critical shipping routes; essential utility outages; trade disputes and related tariffs; and disruptions caused by widespread cybersecurity incidents; and
• Other risks and uncertainties detailed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2025, in Part II, Item 1A, “Risk Factors” of our Quarterly Reports on Form 10-Q, and in our other filings with the SEC.

If any of these risks or uncertainties materialize, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements, except as required by law.

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 June 30, 2026, we had total assets of $4.70 billion, a 6.7% increase from total assets of $4.40 billion at December 31, 2025. The largest component of our total assets is loans which were $4.03 billion and $3.85 billion at June 30, 2026, and December 31, 2025, respectively. Our liabilities and shareholders’ equity at June 30, 2026 totaled $4.2 billion and $452.3 million, respectively, compared to liabilities of $4.03 billion and shareholders’ equity of $368.7 million at December 31, 2025. The principal component of our liabilities is deposits which were $3.94 billion and $3.72 billion at June 30, 2026 and December 31, 2025, 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 spread 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 to common shareholders was $11.2 million and $6.6 million for the three months ended June 30, 2026, and 2025, respectively. Diluted earnings per share (“EPS”) was $1.20 for the second quarter of 2026 as compared to $0.81 for the same period in 2025. Our net income to common shareholders was $21.1 million and $11.8 million for the six months ended June 30, 2026 and 2025, respectively. Diluted EPS was $2.39 for the six months ended June 30, 2026 as compared to $1.46 for the same period of 2025. The increase in net income for the three and six months ended June 30, 2026 was primarily driven by an increase in net interest income.

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. Our net interest income was $32.4 million for the second quarter of 2026, a 28.0% increase over net interest income of $25.3 million for the second quarter of 2025, driven primarily by a $5.8 million increase in interest income on our interest-earning assets combined with a $1.3 million decrease in interest expense on our interest-bearing liabilities. In addition, our net interest margin, on a tax-equivalent (TE) basis, was 2.87% for the second quarter of 2026 compared to 2.50% for the same period in 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 reflects 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 the three and six month periods ended June 30, 2026 and 2025. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” tables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

The following tables entitled “Average Balances, Income and Expenses, Yield and Rates” set forth information related to our average balance sheets, average yields on assets, and average costs of liabilities. We derived these yields 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 owned have an original maturity of over one year. Nonaccrual loans are included 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

(dollars in thousands)

(1) Annualized for the three month period.

(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) Includes loans held for sale and nonaccrual loans.

Our net interest margin (TE) increased by 37 basis points to 2.87% during the second quarter of 2026, compared to the second quarter of 2025, driven primarily by an increase in our average interest-earning assets combined with a decrease in rates paid on our interest-bearing liabilities. Our average interest-earning assets grew by $464.7 million during the second quarter of 2026 from the prior year, while the average yield on these assets decreased by two basis points to 5.16%. In comparison, our average interest-bearing liabilities grew by $283.9 million during the second quarter of 2026 from the prior year, while the rate on these liabilities decreased 44 basis points to 3.05%.

The increase in average interest-earning assets for the second quarter of 2026 related primarily to an increase of $254.6 million in our average loan balances from the prior year combined with a $205.6 million increase in the average balance of Federal funds sold and interest-bearing deposits with banks. While the total yield on our interest-earning assets decreased two basis points, driven by a 71 basis point decrease in the yield on our Federal funds sold and interest-bearing deposits with banks, the yield on our loan portfolio increased seven basis points from the prior year.

The increase in average interest-bearing liabilities for the second quarter of 2026 related primarily to an increase of $284.1 million in our average interest-bearing deposits. The 44 basis point decrease in cost of our interest-bearing liabilities was driven by a 47 basis point decrease in the cost of our interest-bearing deposits.

Our net interest spread was 2.11% for the second quarter of 2026 compared to 1.69% for the same period in 2025. 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 two-basis point decrease in yield on our interest-earning assets, combined with the 44 basis point decrease in the rate on our interest-bearing liabilities, resulted in a 42 basis point increase in our net interest spread for the 2026 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.

Average Balances, Income and Expenses, Yields and Rates

(dollars in thousands)

(1) Annualized for the six month period.

(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) Includes mortgage loans held for sale.

During the first six months of 2026, our net interest margin (TE) increased by 41 basis points to 2.88%, compared to 2.47% for the first six months of 2025, driven primarily by an increase in our average interest-earning assets combined with a decrease in rates paid on our interest-bearing liabilities. Our average interest-earning assets grew by $414.6 million during the first half of 2026 from the prior year, while the average yield remained constant at 5.18%. In comparison, our average interest-bearing liabilities grew by $246.3 million from prior year, while the rate of these liabilities decreased by 46 basis points to 3.05%.

The increase in average interest-earning assets for the first half of 2026 related primarily to a $239.9 million increase in our average loan balances combined with a $154.7 million increase in the average balance of Federal funds sold and interest-bearing deposits with banks. While the yield on our interest-earning assets remained stable at 5.18%, the yield on our loan portfolio increased 10 basis points from the prior year to 5.34%. Offsetting this increase was a 67 basis point decrease in the yield on Federal Funds sold and interest-bearing deposits with banks as the Federal Reserve lowered the federal funds rate by 75 basis points during the fourth quarter of 2025.

The increase in average interest-bearing liabilities for the first half of 2026 was driven by an increase in interest-bearing deposits of $246.4 million. The primary driver of the 46 basis point decrease in the rate of our interest-bearing liabilities was a 48 basis point decrease in the cost of our interest-bearing deposits, which was driven by the 75 basis point decrease in the federal funds rate which has a strong correlation to the cost of our non-maturity deposits.

Our net interest spread was 2.13% for the first half of 2026 compared to 1.67% for the same period in 2025. 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 46 basis point decrease in the rate on our interest-bearing liabilities resulted in a 46 basis point increase in our net interest spread for 2026.

Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following tables set 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.

(dollars in thousands)

Net interest income, the largest component of our income, was $32.4 million for the second quarter of 2026 and $25.3 million for the second quarter of 2025, a $7.1 million, or 28.0%, increase year over year. The increase during 2026 was driven by a $5.8 million increase in interest income primarily due to an increase in average loan balances and average balances in Federal funds sold and interest-bearing deposits with banks, as well as a $1.3 million decrease in interest expense primarily due to lower rates on our interest-bearing deposits.

(dollars in thousands)

33

Net interest income for the first half of 2026 was $62.6 million compared to $48.7 million for 2025, a $14.0 million, or 28.7%, increase. The increase in net interest income during 2026 was driven by a $10.8 million increase in interest income, related primarily to an increase in average loan balances. In addition, interest expense decreased by $3.2 million driven by lower rates on our interest-bearing deposits.

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 for credit losses on a quarterly basis. Please see the discussion included in Note 4 – Loans and Allowance for Credit Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

We recorded a provision for credit losses of $1.0 million during the second quarter of 2026, compared to a provision for credit losses of $700,000 in the second quarter of 2025. The provision during the second quarter of 2026 was driven primarily by growth in our loan portfolio and included a provision of $950,000 for credit losses and a $75,000 provision for unfunded commitments. The $700,000 provision in 2025, which included a $650,000 provision for credit losses and a $50,000 reserve for unfunded commitments was also driven primarily by growth in our loan portfolio.

Our provision expense was $2.3 million and $1.5 million for the six months ended June 30, 2026 and June 30, 2025, respectively. The $2.3 million provision expense for the first half of 2026 included a $2.1 million provision for credit losses and a $225,000 reserve for unfunded commitments. The increase in provision expense during the first six months of 2026 was primarily due to loan growth during the first half of the year. The $1.5 million provision expense for the first half of 2025 included $1.4 million provision for credit losses and a $50,000 reserve for unfunded commitments.

Noninterest Income

The following table sets forth information related to our noninterest income.

(dollars in thousands)

Noninterest income was $3.5 million for the second quarter of 2026, a $174,000, or 5.2%, increase from noninterest income of $3.3 million for the second quarter of 2025. The increase in noninterest income during 2026, compared to 2025, resulted primarily from an increase in service fees on deposit accounts and ATM and debit card income. Service fees on deposit accounts increased $299,000, or 52.7% over the prior year driven by higher transaction volume, fee income on our commercial credit cards and additional wire fee income. Partially offsetting these increases, was a $246,000, or 15.7%, decrease in mortgage banking income which was driven by changes in the market rates from the time the loan was locked.

Noninterest income was $7.0 million for the first half of 2026, a $600,000, or 9.3%, increase from noninterest income of $6.4 million for the first half of 2025. The year over year increase was driven by a $515,000, or 46.6%, increase in service fees on deposit accounts and a $100,000, or 8.8%, increase in ATM and debit card income over the prior year. Partially offsetting these increases was a $177,000, or 5.9%, decrease in mortgage banking income from the first half of 2025.

Noninterest expenses

The following table sets forth information related to our noninterest expenses.

(dollars in thousands)

Noninterest expense was $20.4 million for the second quarter of 2026, a $1.1 million, or 5.5%, increase from noninterest expense of $19.3 million for the second quarter of 2025. The increase in noninterest expense was driven primarily by the following:

• Compensation and benefits expense increased $578,000, or 5.0%, relating primarily to an increase in salaries and commissions expenses.
• Outside service and data processing costs increased $227,000, or 10.4%, relating primarily to increases in software licensing and maintenance costs, electronic banking, and other services we provide to our clients which are driven by increased volume.
• Professional fees increased $173,000, or 28.4%, relating primarily to an increase in director’s fees, legal fees and audit and accounting fees.
• Other noninterest expenses increased $77,000, or 7.4%, relating primarily to an increase in travel and entertainment expenses and other employee related expenses.

Partially offsetting the above increases was a decrease in insurance expense of $52,000, or 5.7%, due to lower FDIC assessment expense during the second quarter of 2026.

Noninterest expense was $40.4 million for the first half of 2026, a $2.2 million, or 5.9%, increase from noninterest expense of $38.2 million for the first half of 2025. The increase in noninterest expense was driven primarily by the following:

• Compensation and benefits expense increased $1.3 million, or 5.5%, relating primarily to annual salary increases, commissions, and other employee benefit expenses.
• Outside service and data processing costs increased $457,000, or 10.8%, relating primarily to increases in software licensing and maintenance costs, ATM card related expenses, and other business electronic banking services we provide to our clients.
• Professional fees increased $338,000, or 30.2%, relating primarily to an increase in director’s fees, legal fees and audit and accounting fees.
• Other noninterest expenses increased $335,000, or 16.0%, relating primarily to an increase in electronic banking losses and operational losses, employee travel and other employee expenses.

Partially offsetting the above increases was a decrease in insurance expense of $170,000, or 8.9%, due to lower FDIC assessment expense during the first half of 2026.

Our efficiency ratio was 56.8% for the second quarter of 2026, compared to 67.5% for the second quarter of 2025. 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. The improvement during the 2026 period was driven primarily by the increase in net interest income.

We incurred income tax expense of $3.3 million and $2.0 million for the three months ended June 30, 2026 and 2025, respectively, and $5.9 million and $3.7 million for the six months ended June 30, 2026 and 2025. Our effective tax rate was 21.8% and 23.6% for the six months ended June 30, 2026 and 2025, respectively. The decrease in the effective tax rate was driven by the effect of equity compensation transactions in comparison to our income before income tax expense.

Balance Sheet Review

Investment Securities

At June 30, 2026, the $164.9 million in our investment securities portfolio represented approximately 3.5% of our total assets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of $144.4 million and an amortized cost of $155.0 million, resulting in an unrealized loss of $10.6 million. At December 31, 2025, the $147.8 million in our investment securities portfolio represented approximately 3.4% of our total assets, including investment securities with a fair value of $127.7 million and an amortized cost of $137.2 million for an unrealized loss of $9.4 million. In addition, other investments, which include FHLB Stock and other nonmarketable investments, increased $421,000 from December 31, 2025 to $20.5 million at June 30, 2026.

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, excluding mortgage loans held for sale, for the six months ended June 30, 2026 and 2025 were $3.93 billion and $3.69 billion, respectively (the average loan balances reflected in the “Average Balances, Income and Expenses, Yields and Rates” tables above include mortgage loans held for sale, as noted in footnote (3) to those tables, and therefore differ from the amounts presented here). Before the allowance for credit losses, total loans outstanding at June 30, 2026 and December 31, 2025 were $4.03 billion and $3.85 billion, respectively.

The principal component of our loan portfolio is loans secured by real estate mortgages. As of June 30, 2026, our loan portfolio included $3.27 billion, or 81.0%, of real estate loans, compared to $3.18 billion, or 82.8%, at December 31, 2025. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. Home equity lines of credit totaled $273.0 million as of June 30, 2026, of which approximately 49% were in a first lien position, while the remaining balance was in second liens. At December 31, 2025, our home equity lines of credit totaled $248.7 million, of which approximately 47% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately $115,000 and a loan to value of 75% as of June 30, 2026, compared to an average loan balance of $108,000 and a loan to value of approximately 73% as of December 31, 2025. Further, 0.18% and 0.38% of our total home equity lines of credit were over 30 days past due as of June 30, 2026 and December 31, 2025, respectively.

Following is a summary of our loan composition at June 30, 2026 and December 31, 2025. During the first six months of 2026, our loan portfolio increased by $185.1 million, or 9.7% annualized, primarily driven by a $125.1 million increase in commercial loans with $93.4 million of the increase being in commercial business loans. In addition, our consumer loans grew by $60.0 million with $24.3 million being in home equity loans. Our consumer real estate portfolio, which increased by $14.0 million during the first half of 2026 includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $469,000, a term of 24 years, and an average rate of 4.66% as of June 30, 2026, compared to a principal balance of $472,000, a term of 24 years, and an average rate of 4.55% as of December 31, 2025.

(dollars in thousands)

We have included the table below to provide additional clarity on our commercial real estate exposure. We have not identified any 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.

(dollars in thousands)

(dollars in thousands)

Our level of non-owner occupied commercial real estate loans represents 237.3% of the Bank’s total risk-based capital at June 30, 2026 compared to 236.5% at December 31, 2025.

Nonperforming assets

Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. 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 contractual principal or interest on 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 and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of June 30, 2026 and December 31, 2025 we had no loans that were 90 days past due and still accruing.

Following is a summary of our nonperforming assets.

(dollars in thousands)

At June 30, 2026, nonperforming assets were $12.6 million, or 0.27% of total assets and 0.31% of gross loans. Comparatively, nonperforming assets were $14.1 million, or 0.32% of total assets and 0.37% of gross loans at December 31, 2025. The increase in commercial owner occupied loans was primarily due to one loan being moved to non-accrual status during the first quarter of 2026, while the decrease in commercial non-owner occupied loans was primarily driven by the payoff of one large non-residential loan. The amount of foregone interest income on nonaccrual loans in the second quarter of 2026 and 2025 was $220,000 and $126,000, respectively.

At June 30, 2026 and December 31, 2025, the allowance for credit losses represented 395.41% and 305.65% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at June 30, 2026 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 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, at June 30, 2026, 81.0% of our loans were collateralized by real estate and 88.6% of our individually evaluated loans were secured by real estate. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Individually evaluated loans are reviewed on a quarterly basis to determine the level of credit loss. As of June 30, 2026, we did not have any individually evaluated real estate 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 June 30, 2026, individually evaluated loans totaled $12.5 million, for which $6.0 million of these loans had a reserve of approximately $2.6 million allocated in the allowance for credit losses. Comparatively, individually evaluated loans totaled $15.1 million at December 31, 2025 for which $5.2 million of these loans had a reserve of approximately $1.5 million allocated in the allowance for credit losses.

Allowance for Credit Losses

The allowance for credit losses was $44.2 million, representing 1.10% of outstanding loans and providing coverage of 395.41% of nonperforming loans at June 30, 2026, compared to $42.3 million, or 1.10% of outstanding loans and 305.65% of nonperforming loans at December 31, 2025. At June 30, 2025, the ACL was $41.3 million, or 1.10% of outstanding loans and 362.35% of nonperforming loans.

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.

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

(dollars in thousands)

(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, which allows us to take advantage of the attractive terms that wholesale funding can offer while mitigating the related inherent risk.

Our retail deposits represented $3.56 billion, or 90.4% of total deposits, while our brokered deposits represented $379.4 million, or 9.6%, of total deposits at June 30, 2026. At December 31, 2025, retail deposits represented $3.16 billion, or 85.1%, of our total deposits, and brokered deposits were $552.9 million, representing 14.9% of our total deposits. The $392.1 million increase in retail deposits during the first six months of 2026 relates to our intense focus on growing client and core deposits and allowed us to reduce the balance of our brokered deposits by $173.5 million during the same period. Our loan-to-deposit ratio was 102% at June 30, 2026 and 103% at December 31, 2025.

The following is a detail of our deposit accounts:

(dollars in thousands)

Our primary focus is on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. In addition, at June 30, 2026 and December 31, 2025, we estimate that we have approximately $1.8 billion and $1.5 billion, or 46.8% and 39.6% of total deposits, 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 by the FDIC for the Bank’s regulatory reporting requirements.

The following table shows the average balance amounts and the average rates paid on deposits.

(dollars in thousands)

During the first six months of 2026, our average transaction account balances increased by $488.8 million, or 19.1%, from the prior year, while our average time deposit balances decreased by $65.1 million, or 7.0%. The increase in our average transaction account balances is the result of our focus on growing core deposits.

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits $250,000 or more at June 30, 2026 and December 31, 2025 was as follows:

(dollars in thousands)

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at June 30, 2026 and December 31, 2025 were $626.6 million and $778.0 million, respectively. 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.

At June 30, 2026 and December 31, 2025, we had $240.0 million of convertible fixed rate FHLB advances with a weighted average rate of 3.70% and 3.74%, respectively. At June 30, 2026, the $240.0 million was secured with approximately $1.40 billion of mortgage loans and $14.8 million of stock in the FHLB. At December 31, 2025, the $240.0 million was secured with approximately $1.38 billion of mortgage loans and $14.5 million of stock in the FHLB.

Listed below is a summary of the terms and maturities of the advances outstanding at June 30, 2026 and December 31, 2025.

(dollars in thousands)

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 several large bank failures across the United States in the first five months of 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At June 30, 2026 and December 31, 2025 our cash and cash equivalents totaled $361.6 million and $269.6 million, respectively, or 7.7% and 6.1% of total assets, respectively. Our investment securities at June 30, 2026 and December 31, 2025 amounted to $164.9 million and $147.8 million, respectively, or 3.5% and 3.4% 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, loan payoffs, 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 five federal funds purchased lines of credit with correspondent banks totaling $113.5 million for which there were no borrowings against the lines of credit at June 30, 2026. We also had $145.9 million pledged and available with the Federal Reserve Discount Window at June 30, 2026. Comparatively, 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, 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 June 30, 2026 was $832.1 million, based primarily on the Bank’s 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 June 30, 2026 and December 31, 2025 we had $302.4 million and $231.9 million, respectively, 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 June 30, 2026. The line of credit was renewed on March 5, 2026 at an interest rate of the U.S. Prime Rate plus 0.25% and matures on March 5, 2027.

We believe that our existing stable base of core deposits, federal funds purchased lines of credit with correspondent banks, availability with the Federal Reserve 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 to meet those needs.

Total shareholders’ equity was $452.3 million at June 30, 2026 and $368.7 million at December 31, 2025. The $83.6 million increase from December 31, 2025 is primarily related to the issuance of 1,207,500 shares of common stock on April 17, 2026 in a public offering. The common stock was issued at $54.00 per share for net proceeds of $61.3 million. Proceeds from the offering are being used for general corporate purposes, including supporting organic growth initiatives, providing capital to the Bank, repurchasing or redeeming outstanding indebtedness, and funding working capital needs. Consistent with this use, on June 30, 2026, in conjunction with the quarterly interest payment, we applied a portion of these proceeds to redeem the remaining $11.5 million of outstanding subordinated debt. The increase in shareholders’ equity was also driven by net income of $21.1 million for the first half of 2026.

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) annualized for the six months ended June 30, 2026 and the year ended December 31, 2025.

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 June 30, 2026 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.

(dollars in thousands)

(dollars in thousands)

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

(dollars in thousands)

(dollars in thousands)

(1) The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

The ability of the Company to pay cash dividends to shareholders 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. Since our inception, we have not paid cash dividends to shareholders.

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 a 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 money 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 June 30, 2026 unfunded commitments to extend credit were $926.5 million, of which $100.5 million were at fixed rates and $826.0 million were at variable rates. At December 31, 2025, unfunded commitments to extend credit were $843.6 million, of which approximately $81.4 million were at fixed rates and $762.2 million were at variable rates. A significant portion of the unfunded commitments related to commercial business loans and consumer home equity lines of credit. 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.

As of June 30, 2026 the reserve for unfunded commitments was $2.2 million or 0.24%, compared to $2.0 million or 0.23% as of December 31, 2025.

At June 30, 2026 and December 31, 2025, there were commitments under letters of credit for $20.6 million and $20.4 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 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 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.

Critical Accounting Estimates

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements.

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. Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2025, for a description our significant accounting policies that use critical accounting estimates.

Accounting, Reporting, and Regulatory Matters

See Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

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 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 June 30, 2026, 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.

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the six months ended June 30, 2026, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the caption “Cautionary Warning Regarding Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q, and in our other filings with the SEC.

There have been no material changes to the risk factors previously disclosed in the Company’s (i) Annual Report on Form 10-K for fiscal year ended December 31, 2025.