First Western Financial Inc: Form 10-Q for the period ended Jun 30, 2025

The following discussion and analysis is intended to assist readers in understanding our financial condition and results of operations for the three and six months ended June 30, 2025 and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in this Quarterly Report on Form 10-Q (this "Form 10-Q") and in our Annual Report on Form 10-K filed with the SEC on March 7, 2025. Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to "we," "our," "us," "the Company," and "First Western" refer to First Western Financial, Inc. and its consolidated subsidiaries, including First Western Trust Bank, which we sometimes refer to as "the Bank" or "our Bank."

The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs, and expected performance. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Note Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Item 1A - Risk Factors" included in our Annual Report Form 10-K filed with the SEC on March 7, 2025 and in Part II–Item 1A of this Form 10-Q. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Company Overview

We are a financial holding company founded in 2002 and headquartered in Denver, Colorado. We provide a fully integrated suite of wealth management services to our clients including banking, trust, and investment management products and services. Our mission is to be the best private bank for the Western wealth management client. We target entrepreneurs, professionals, and high-net worth individuals, typically with $1.0 million-plus in liquid net worth, and their related philanthropic and business organizations, which we refer to as the "Western wealth management client". We believe that the Western wealth management client shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services that are tailored to meet their specific needs. We partner with our clients to solve their unique financial needs through our expert integrated services provided in a team approach.

We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming, Montana, and California. Our profit centers, which are comprised of private bankers, lenders, wealth planners, and portfolio managers, under the leadership of a local chairman and/or president, are also supported centrally by teams providing management services such as operations, risk management, credit administration, marketing, technology support, human capital, and accounting/finance services, which we refer to as support centers.

From 2004, when we opened our first profit center, until June 30, 2025, we have expanded our footprint into fourteen full service profit centers, four loan production offices, and one trust office located across five states. As of and for the six months ended June 30, 2025, we had $3.03 billion in total assets, $47.1 million in total income before non-interest expense, and provided fiduciary and advisory services on $7.50 billion of AUM.

Recent Industry Developments

Coming off the headwinds of 2024, the banking sector is poised to have a stronger, albeit tempered, 2025. The banking industry faces a dynamic regulatory landscape shaped by a new administration and evolving supervisory priorities. Despite the uncertain economic and political landscape, the Company continues to position itself to capitalize on the areas in which it excels. The Bank remains stable with strong fundamentals. The Company has a low amount of HTM securities, which represent 3.3% of Total assets, and carries unrecognized losses amounting to 2.3% of Total shareholders’ equity as of June 30, 2025. We have a conservative credit appetite and our client base is well diversified with no single industry concentration.

Primary Factors Used to Evaluate the Results of Operations

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our Condensed Consolidated Balance Sheets and Statements of Income as well as various financial ratios that are commonly used in our industry. The primary factors we use to evaluate our results of operations include net interest income, non-interest income, and non-interest expense.

Net Interest Income

Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and investment securities. We incur interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate Net interest income, we measure and monitor: (i) yields on loans, investment securities, and other interest-earning assets; (ii) the costs of deposits and other funding sources; (iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances, changes in interest rates on deposits, and the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities.

Non-Interest Income

Non-interest income primarily consists of the following:

• *Trust and investment management fees—*fees and other sources of income charged to clients for managing their trust and investment assets, providing financial planning consulting services, 401(k) and retirement advisory consulting services, and other wealth management services. Trust and investment management fees are primarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuations in market value.
• *Net gain on mortgage loans—*gain on originating and selling mortgages and origination fees, less commissions to loan originators, document review, and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments (IRLC), mortgage derivatives, and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions.
• *Net gain on loans accounted for under the fair value option—*unrealized gains or losses on the fair value adjustments to held for investment loans on which the Bank has elected the fair value option of accounting. This also includes realized gains or losses on charge-offs and recoveries.
• *Bank fees—*income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, loan prepayment penalty fees, loan interest rate swap fees, and other banking fees. Bank fees are primarily impacted by the level of business activities and cash movement activities of our clients.
• *Risk management and insurance fees—*commissions earned on insurance policies we have placed for clients through our client risk management team who incorporate insurance services, primarily life insurance, to support our clients’ wealth planning needs. Our insurance revenues are primarily impacted by the type and volume of policies placed for our clients.
• *Income on company-owned life insurance—*income earned on the growth of the cash surrender value of life insurance policies we hold on certain key associates. The income on the increase in the cash surrender value is non-taxable income.

Non-Interest Expense

Non-interest expense is comprised primarily of the following:

• *Salaries and employee benefits—*all forms of compensation-related expenses including salary, incentive compensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs, and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs.
• *Occupancy and equipment—*costs related to building and land maintenance, leasing our office space, depreciation charges for the buildings, building improvements, furniture, fixtures and equipment, amortization of leasehold improvements, utilities, and other occupancy-related expenses. Occupancy and equipment costs are primarily impacted by the number of locations we occupy.
• *Professional services—*costs related to legal, accounting, tax, consulting, personnel recruiting, insurance, and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments we pay to the FDIC for deposit insurance.
• *Technology and information systems—*costs related to software and information technology services to support office activities and internal networks. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of associates we have, and the level of service we require from our third-party technology vendors.
• *Data processing—*costs related to processing fees paid to our third-party data processing system providers relating to our core private trust banking platform. Data processing costs are primarily impacted by the number of loan, deposit, and trust accounts we have and the level of transactions processed for our clients.
• *Marketing—*costs related to promoting our business through advertising, promotions, charitable events, sponsorships, donations, and other marketing-related expenses. Marketing costs are primarily impacted by the levels of advertising programs and other marketing activities and events held throughout the year.
• *Amortization of other intangible assets—*primarily represents the amortization of intangible assets including client lists, core deposit intangibles, and other similar items recognized in connection with acquisitions.
• *Other—*includes costs related to operational expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare other real estate owned (OREO) for sale, changes in OREO valuations subsequent to the initial acquisition when updated fair values are lower than the cost basis, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs.

Operating Segments

The Company’s reportable segments consist of Wealth Management and Mortgage. We measure the overall profitability of operating segments based on Income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 14 – Segment Reporting of the accompanying Notes to the Condensed Consolidated Financial Statements.

Primary Factors Used to Evaluate our Balance Sheet

The primary factors we use to evaluate our balance sheet include asset and liability levels, asset quality, capital, liquidity, and potential profit production from assets.

We manage our asset levels to ensure our lending initiatives are efficiently and profitably supported and to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated and forecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loan opportunities.

We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity, and trend of problem assets such as those determined to be classified, delinquent, non-accrual, non-performing or restructured; the adequacy of our ACL; the diversification and quality of loan and investment portfolios; and the extent of counterparty risks, credit risk concentrations, and other factors.

We manage our liquidity based upon factors that include the level and quality of capital and our overall financial condition, the trend and volume of problem assets, our balance sheet risk exposure, the level of deposits as a percentage of total loans, the amount of non-deposit funding used to fund assets, the availability of unused funding sources and off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, and other factors.

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The Company has adopted the Basel III regulatory capital framework. As of June 30, 2025, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

Results of Operations

Overview

The three months ended June 30, 2025 compared with the three months ended June 30, 2024. We reported Net income available to common shareholders of $2.5 million for the three months ended June 30, 2025, compared to $1.1 million of Net income available to common shareholders for the three months ended June 30, 2024, a $1.4 million, or 127.3% increase. For the three months ended June 30, 2025, our Income before income tax was $3.3 million, a $1.9 million, or 134.4% increase from the three months ended June 30, 2024. The increase was primarily driven by a $2.1 million increase in Net interest income and a $0.6 million decrease in Provision for credit losses, partially offset by a $0.7 million decrease in Non-interest income.

• The increase in Net interest income was driven by a 32 basis point increase in net interest margin, partially offset by a decline in average interest-earnings assets. The increase in net interest margin was primarily due to a 42 basis point decrease in total cost of funds as a result of the lower interest rate environment.
• The decrease in Provision for credit losses was primarily driven by a decrease in specific reserve provisions due to a large specific reserve recorded in the second quarter of 2024, partially offset by increases in general reserve provisions primarily due to loan growth
• The decrease in Non-interest income was primarily driven by decreases in Net gain on mortgage loans due to a decrease in origination volume and Trust and investment management fees due to a mix-shift in AUM to lower fee product categories, partially offset by an increase in Net gain on loans accounted for under the fair value option.

The six months ended June 30, 2025 compared with the six months ended June 30, 2024. We reported Net income available to common shareholders of $6.7 million for the six months ended June 30, 2025, compared to $3.6 million of Net income available to common shareholders for the six months ended June 30, 2024, a $3.1 million, or 86.1% increase. For the six months ended June 30, 2025, our Income before income tax was $8.7 million, a $3.7 million, or 73.7% increase from the six months ended June 30, 2024. The increase was primarily driven by a $3.5 million increase in Net interest income and a $0.6 million decrease in Provision for credit losses, partially offset by a $0.6 million decrease in Non-interest income.

• The increase in Net interest income was driven by a 30 basis point increase in net interest margin, partially offset by a decline in average interest-earning assets. The increase in net interest margin was primarily due to a 36 basis point decrease in total cost of funds as a result of the lower interest rate environment.
• The decrease in Provision for credit losses was primarily driven by a decrease in specific reserve provisions due to a large specific reserve recorded in the second quarter of 2024, partially offset by increases in general reserve provisions primarily due to loan growth.
• The decrease in Non-interest income was primarily driven by decreases in Net gain on mortgage loans due to a decrease in origination volume, Trust and investment management fees due to a mix-shift in AUM to lower fee product categories, and Bank fees due to a large loan prepayment penalty fee collected in the first quarter of 2024, partially offset by increases in Net gain on loans accounted for under the fair value option and Net gain on other real estate owned.

Net Interest Income

The three months ended June 30, 2025 compared with the three months ended June 30, 2024. For the three months ended June 30, 2025, Net interest income, before the Provision for credit losses, was $17.9 million, an increase of $2.1 million, or 13.3%, compared to the three months ended June 30, 2024. The increase in Net interest income was primarily driven by a 62 basis point decrease in average rates paid on Interest-bearing deposits, partially offset by a 6 basis point decrease in average interest-earning asset yields. Net interest margin increased 32 basis points to 2.67% in the second quarter of 2025 from 2.35% reported in the second quarter of 2024.

Interest expense on Interest-bearing deposits decreased $2.6 million, or 12.7%, during the three months ended June 30, 2025 compared to the same period in 2024. Average Interest-bearing deposit rates were 3.57% for the three months ended June 30, 2025, compared to 4.19% for the three months ended June 30, 2024. The decrease in Interest-bearing deposit rates was primarily attributable to the lower interest rate environment.

The decrease in average interest-earning asset yields during the three months ended June 30, 2025 compared to the same period in 2024 was primarily driven by a $19.7 million decrease in average balance and an 81 basis point decrease in average yield on Interest-bearing deposits in other financial institutions. The average Interest-bearing deposits in other financial institutions yield was 4.46% for the three months ended June 30, 2025, compared to 5.27% for the three months ended June 30, 2024. The decrease in the Interest-bearing deposits in other financial institutions yield was primarily attributable to the lower interest rate environment.

The six months ended June 30, 2025 compared with the six months ended June 30, 2024. For the six months ended June 30, 2025, Net interest income, before the Provision for credit losses, was $35.3 million, an increase of $3.5 million, or 11.0%, compared to the six months ended June 30, 2024. The increase was primarily driven by a 58 basis point decrease in average rates paid on Interest-bearing deposits, partially offset by a 4 basis point decrease in average interest-earning asset yields. Net interest margin increased 30 basis points to 2.64% for the six months ended June 30, 2025 from 2.34% reported for the six months ended June 30, 2024.

Interest expense on Interest-bearing deposits decreased $4.7 million, or 11.4%, during the six months ended June 30, 2025 compared to the same period in 2024. Average interest-bearing deposit rates were 3.58% for the six months ended June 30, 2025, compared to 4.16% for the six months ended June 30, 2024. The decrease in Interest-bearing deposit rates was primarily attributable to the lower interest rate environment.

The decrease in average interest-earning asset yields for the six months ended June 30, 2025 compared to the same period in 2024 was primarily due to a $41.4 million decrease in average loan balances. The average loan yield was 5.71% for the six months ended June 30, 2025, compared to 5.70% for the six months ended June 30, 2024.

The following presents an analysis of Net interest income and net interest margin during the periods presented, using daily average balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid, and the average rate earned or paid on those assets or liabilities:

(dollars in thousands)

55

(dollars in thousands)

(1) Average balance represents daily averages, unless otherwise noted.

(2) Represents monthly averages.

(3) Non-performing loans are included in the respective average loan balances. Income, if any, is not recognized until all principal has been repaid.

(4) Mortgage loans held for sale are included in the interest-earning assets above, with interest income recognized in the Interest and dividend income on loans, including fees line in the Condensed Consolidated Statements of Income. These balances are included in the margin calculations in these tables.

(5) Tax-equivalent yield adjustments are immaterial.

(6) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

(7) Net interest income is the difference between income earned on interest-earning assets and expense paid on interest-bearing liabilities.

(8) Net interest margin is equal to annualized net interest income divided by average interest-earning assets.

The following presents the dollar amount of changes in interest income and interest expense during the periods presented for each component of interest-earning assets and interest-bearing liabilities, and distinguishes between changes attributable to volume and interest rates. Changes attributable to both rate and volume that cannot be separated have been allocated to volume:

(dollars in thousands)

Provision for Credit Losses

We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk, and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the three and six ended June 30, 2025, we recorded a $1.8 million and $1.9 million Provision for credit losses, respectively. For the three and six months ended June 30, 2024, we recorded a $2.3 million and $2.4 million Provision for credit losses, respectively. The provision recorded for the three and six months ended June 30, 2025 was primarily due to loan growth, charge-offs, an increase in specific reserves related to individually analyzed loans, and modest macroeconomic forecast deterioration, partially offset by mix shifts within our portfolio towards loans with lower loss rates.

The Company maintains a credit management program which includes internal and external loan review along with recurring portfolio monitoring activities to address the changing environment. Management believes the financial strength of the Bank’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio.

Non-Interest Income

The three months ended June 30, 2025 compared with the three months ended June 30, 2024. For the three months ended June 30, 2025 compared with the three months ended June 30, 2024, Non-interest income decreased $0.7 million, or 9.6%, to $6.3 million. The decrease in Non-interest income during the three months ended June 30, 2025 was driven primarily by decreases in Net gain on mortgage loans and Trust and investment management fees, partially offset by an increase in Net gain on loans accounted for under the fair value option.

The six months ended June 30, 2025 compared with the six months ended June 30, 2024. For the six months ended June 30, 2025 compared with the six months ended June 30, 2024, Non-interest income decreased $0.6 million, or 4.2%, to $13.7 million. The decrease in Non-interest income during the six months ended June 30, 2025 was primarily driven by decreases in Net gain on mortgage loans, Trust and investment management fees, and Bank fees, partially offset by increases in Net gain on loans accounted for under the fair value option and Net gain on other real estate owned.

The following presents the significant categories of our non-interest income during the periods presented:

(dollars in thousands)

(dollars in thousands)

* Represents percentages that are not meaningful.

*Trust and investment management fees—*The decrease in Trust and investment management fees of $0.4 million, or 7.4%, and $0.6 million, or 6.3%, for the three and six months ended June 30, 2025, respectively, was primarily attributable to mix-shift in AUM to lower fee product categories.

*Net gain on mortgage loans—*The decrease in Net gain on mortgage loans of $0.6 million, or 34.8%, and $0.8 million, or 26.9%, for the three and six months ended June 30, 2025, respectively, was primarily attributable to lower origination volume.

*Net gain on loans held for sale—*During the six months ended June 30, 2025, the Net gain on loans held for sale of $0.2 million was due to the reversal of a write-down on a non-performing loan recorded during the three months ended December 31, 2024. This loan was previously classified as held for sale; however, during the three months ended March 31, 2025 it was transferred to held for investment and charged off through the ACL.

*Bank fees—*The decrease in Bank fees of $0.5 million, or 41.3%, for the six months ended June 30, 2025, was primarily driven by a large loan prepayment penalty fee collected in the first quarter of 2024.

*Risk management and insurance fees—*The increase in Risk management and insurance fees of $0.1 million, or 93.7%, for the six months ended June 30, 2025, was primarily driven by an increase in insurance client agreements.

*Net gain (loss) on loans accounted for under the fair value option—*The increase in Net gain on loans accounted for under the fair value option of $0.3 million, or 108.3%, and $0.6 million, or 105.2%, for the three and six months ended June 30, 2025, respectively, was primarily attributable to lower charges offs and improved overall performance of the portfolio.

*Net gain on other real estate owned—*During the three months ended March 31, 2025, we sold our two largest OREO properties for a net gain of $0.5 million.

Non-Interest Expense

The three months ended June 30, 2025 compared with the three months ended June 30, 2024. For the three months ended June 30, 2025 compared with the three months ended June 30, 2024, Non-interest expense increased $0.1 million, or 0.5%, to $19.1 million. The increase in Non-interest expense during the three months ended June 30, 2025 was driven primarily by an increase in Occupancy and equipment, partially offset by a decrease in Salaries and employee benefits.

The six months ended June 30, 2025 compared with the six months ended June 30, 2024. For the six months ended June 30, 2025 compared with the six months ended June 30, 2024, Non-interest expense decreased $0.2 million, or 0.6%, to $38.5 million. The decrease in Non-interest expense during the six months ended June 30, 2025 was driven primarily by decreases in Professional services and Other, partially offset by increases to Occupancy and equipment and Data processing.

The following presents the significant categories of our non-interest expense during the periods presented:

(dollars in thousands)

(dollars in thousands)

*Occupancy and equipment—*The increase in Occupancy and equipment of $0.1 million, or 6.9%, and $0.4 million, or 9.3% for the three and six months ended June 30, 2025, respectively, was driven by additional rent expense relating to multiple lease extensions and an increase in variable lease costs.

*Professional services—*The decrease in Professional services of $0.7 million, or 16.0% for the six months ended June 30, 2025, was driven by decreases in legal expenses, audit fees, and FDIC insurance fees.

*Data processing—*The increase in Data processing of $0.2 million, or 11.7%, for the six months ended June 30, 2025, was primarily driven by increased costs related to our trust and investment management system.

*Other—*The decrease in Other of $0.4 million, or 11.9%, for the six months ended June 30, 2025, was primarily driven by lower expenses related to problem assets and lower reciprocal deposit fees.

Income Tax

The Company recorded an income tax provision of $0.8 million and $0.3 million for the three months ended June 30, 2025 and 2024, respectively, reflecting an effective tax rate of 24.5% and 24.0%, respectively. The Company recorded an income tax provision of $2.0 million and $1.4 million for the six months ended June 30, 2025 and 2024, respectively, reflecting an effective tax rate of 22.9% and 28.1%, respectively.

Segment Reporting

We have two reportable operating segments: Wealth Management and Mortgage. Our Wealth Management segment consists of operations relating to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services for which fee revenue is recognized. Parent company activity primarily consists of subordinated debt interest expense and is included within Wealth Management as management evaluates and makes business decisions for Wealth Management, including the parent company, collectively as one segment.

Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Services provided by our Mortgage segment include soliciting, originating, and selling mortgage loans into the secondary market. Mortgage products are financial in nature, for which origination fees are recognized net of origination expenses, upon the funding of the mortgage loans. Mortgage loans held for sale are accounted for under the fair value option with changes in fair value reported through earnings at inception when loans are locked to the borrower and until the loan is sold to third parties, at which time additional gains or losses on the sale are recorded. Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients.

The following presents key metrics related to our segments during the periods presented:

(dollars in thousands)

(dollars in thousands)

(1) Net interest income after provision plus non-interest income.

The following presents selected financial metrics of each segment as of and during the periods presented:

Wealth Management

(dollars in thousands)

(dollars in thousands)

The Wealth Management segment reported Income before income tax of $3.1 million for the three months ended June 30, 2025, compared to $0.7 million for the same period in 2024, as well as Income before income tax of $8.5 million for the six months ended June 30, 2025, compared to $4.1 million for the same period in 2024. The majority of our assets and liabilities are on the Wealth Management segment balance sheet. The increase in Income before taxes for both the three and six month periods ended June 30, 2025 was driven primarily by an increase in Net interest income, after provision for credit losses. The increase in Net interest income, after provision for credit losses was primarily driven by a decrease in Total interest expense due to the lower interest rate environment and a decrease in provision due to a large individually analyzed specific reserve recorded in the second quarter of 2024, partially offset by a decrease in Total interest and dividend income due to a decline in average interest-earning assets.

Mortgage

(dollars in thousands)

(dollars in thousands)

The Mortgage segment reported Income before income tax of $0.2 million for the three months ended June 30, 2025, compared to $0.8 million for the same period in 2024, as well as Income before income tax of $0.2 million for the six months ended June 30, 2025, compared to $0.9 million for the same period in 2024. The decrease in Income before taxes for both the three and six month periods ended June 30, 2025 was primarily driven by a decrease in Net gain on mortgage loans, which was primarily driven by lower origination volume.

Financial Condition

The following presents our Condensed Consolidated Balance Sheets as of the dates noted:

(dollars in thousands)

Cash and cash equivalents decreased by $3.7 million, or 1.6%, to $232.3 million as of June 30, 2025 compared to December 31, 2024.

Held-to-maturity debt securities increased by $24.1 million, or 31.8%, to $99.8 million as of June 30, 2025 compared to December 31, 2024. The increase was primarily due to the purchase of collateralized-mortgage obligation (CMO) debt securities.

Loans, net of allowance increased by $113.9 million, or 4.7%, to $2.52 billion as of June 30, 2025 compared to December 31, 2024, primarily due to new loan production well diversified across markets and loan types.

Mortgage loans held for sale decreased $1.3 million, or 5.1%, to $24.2 million as of June 30, 2025 compared to December 31, 2024. The decrease was primarily due to lower origination volumes.

Other real estate owned, net decreased by $31.5 million as of June 30, 2025 compared to December 31, 2024. The decrease was due to the sale of two OREO properties during the first quarter.

Other assets increased by $6.5 million, or 7.2%, to $96.3 million as of June 30, 2025 compared to December 31, 2024. The increase was primarily due to the purchase of FHLB stock.

Deposits increased $14.9 million, or 0.6%, to $2.53 billion as of June 30, 2025 compared to December 31, 2024. Money market deposit accounts increased $119.4 million, or 7.9%, to $1.63 billion as of June 30, 2025 compared to December 31, 2024. Time deposit accounts decreased $74.4 million, or 15.8%, from December 31, 2024 to $397.0 million as of June 30, 2025. Interest checking accounts decreased $15.4 million, or 11.1%, to $124.0 million from December 31, 2024 to June 30, 2025.

Borrowings increased $98.5 million, or 89.9%, to $208.1 million as of June 30, 2025 compared to December 31, 2024. The increase was primarily driven by net draws on the Company's FHLB line of credit as a result of interest-earning asset growth during the quarter, partially offset by $8.0 million of subordinated notes that were redeemed in the first quarter of 2025.

Other liabilities decreased $12.2 million, or 28.4%, to $30.7 million as of June 30, 2025 compared to December 31, 2024. The decrease was primarily due to to payments related to participated non-performing assets resolved through the sale of two OREO properties and payment of 2024 bonuses in the first quarter of 2025.

Total shareholders’ equity increased $6.5 million, or 2.6%, from December 31, 2024 to $258.8 million as of June 30, 2025. The increase was primarily due to Net income for the year.

Assets Under Management

(dollars in millions)

* Trust & investment management fees divided by period end balance.

AUM increased $320.0 million, or 4.5%, during the three months ended June 30, 2025 driven primarily by improving market conditions. For the six months ended June 30, 2025, AUM increased $176.0 million, or 2.4%.

Debt Securities

Debt securities we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized gains and losses excluded from earnings and reported in OCI, net of tax. The carrying values of our debt securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of OCI in shareholders’ equity.

Debt securities for which we have the intent and ability to hold to their maturity are classified as Held-to-maturity debt securities and are recorded at amortized cost. Debt securities HTM are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity. As of June 30, 2025 and December 31, 2024, all our investments in debt securities were classified as HTM.

The following presents the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security as of June 30, 2025. Weighted average yields are not presented on a taxable equivalent basis.

(dollars in thousands)

(dollars in thousands)

* Represents percentages that are insignificant.

As of June 30, 2025 and December 31, 2024, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.

Allowance for Credit Losses for HTM Debt Securities

Management measures expected credit losses on HTM debt securities on a collective basis by major security type. The majority of our HTM investment portfolio consists of debt securities issued by U.S. government entities and agencies and we consider the risk of credit loss to be zero and, therefore, we do not record an ACL. The Company's non-government backed debt securities include private label CMO and MBS as well as corporate bonds. The ACL on HTM debt securities was $0.1 million as of June 30, 2025 and December 31, 2024.

Loan Portfolio

Our primary source of interest income is derived through interest earned on loans to high net worth individuals and their related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel and we believe that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisions are managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient, and effective. The management team and credit culture demands prudent, practical, and conservative approaches to all credit requests in compliance with the credit policy guidelines to ensure strong credit underwriting practices.

In addition to originating loans for our own portfolio, we conduct mortgage banking activities in which we originate and sell servicing-released, whole loans in the secondary market. Our mortgage banking loan sale activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed-upon criteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loan sales, and loan repayments depends on overall credit availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The amount of gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as our pricing and asset liability management strategies. As of June 30, 2025 and December 31, 2024, we had Mortgage loans held for sale of $24.2 million and $25.5 million, respectively, of residential mortgage loans we originated.

As of June 30, 2025 and December 31, 2024, we had loans held for sale of $0.0 million and $0.3 million, respectively. As of June 30, 2025, the Company has $5.1 million in loans accounted for under the fair value option with an unpaid principal balance amount of $5.2 million. As of December 31, 2024, the Company had $7.3 million in loans accounted for under the fair value option with an unpaid principal balance amount of $7.5 million. See Note 12 – Fair Value in the Notes to Condensed Consolidated Financial Statements.

The following presents the amortized cost of our loan portfolio by type of loan as of the dates noted:

(dollars in thousands)

(1) Includes $5.2 million and $7.5 million of unpaid principal balance of Loans held for investment accounted for under fair value option as of June 30, 2025 and December 31, 2024, respectively.

(2) Includes $23.6 million and $25.2 million of unpaid principal balance of Mortgage loans held for sale as of June 30, 2025 and December 31, 2024, respectively.

(3) Includes $0.0 million and $0.6 million of principal balance of loans held for sale as of June 30, 2025 and December 31, 2024, respectively.

• *Cash, Securities, and Other—*consists of consumer and commercial purpose loans, which are primarily secured by securities managed and under custody with us, cash on deposit with us, or life insurance policies. In addition, loans in this portfolio are collateralized with other sources of collateral. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment.
• *Consumer and Other—*consists of unsecured consumer loans. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. Loans held for investment accounted for under the fair value option are primarily consumer and other loans and are presented separately within the above table.
• *Construction and Development—*consists of loans to finance the construction of residential and non-residential properties. These loans are dependent on the strength of the industries of the related borrowers and the risks consistent with construction projects.
• *1-4 Family Residential—*consists of loans and home equity lines of credit secured by 1-4 family residential properties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owner occupied or non-owner occupied 1-4 family residential properties. Loans in this segment are dependent on the industries tied to these loans as well as the national and local economies, and local residential and commercial real estate markets.
• *Commercial Real Estate, Owner Occupied, and Non-Owner Occupied—*consists of commercial loans collateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-family residential real estate. These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.
• *Commercial and Industrial—*consists of commercial and industrial loans, including working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses.

The largest category of the Company’s loan portfolio is CRE. An additional breakdown of the Company’s CRE portfolio follows:

(dollars in thousands)

The following summarizes the Company’s CRE portfolio by geographic location as of the dates indicated:

(dollars in thousands)

The CRE portfolio is comprised of loans made to purchase, construct, and finance commercial real estate properties. On average, the balances are small and geographically disbursed across our footprint. Specifically, our CRE portfolio has an average loan balance of $2.62 million and $2.47 million with a weighted average loan-to-value ratio (LTV) of 54.3% and 52.9% as of June 30, 2025 and December 31, 2024, respectively.

Due to the recent trends in the banking industry, there has been increased risk associated with commercial real estate loans, including with respect to the higher vulnerability of these credits to pressure as interest rates remain elevated and market conditions in many large metropolitan areas continue to show signs of stress. The Company has limited exposure to the office building sector in central business districts as the office portfolio is generally diversified in suburban markets with strong occupancy levels. The Company maintains a practice of regular and ongoing loan reviews, stress tests, and sensitivity analyses to assess the level of risk in the loan portfolio. Loan reviews include monitoring past due rates, non-performing trends, concentrations, LTV’s, among other qualitative factors. Credit policies are robust and are updated as needed to meet the strategic and risk mitigation goals of the company.

The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range, at amortized cost as of the dates noted, are summarized in the following:

(dollars in thousands)

(dollars in thousands)

(1) Loans accounted for under the fair value option are disclosed at fair value rather than amortized cost.

Loan Modifications

GAAP requires that certain types of loan modifications to borrowers experiencing financial difficulty be reported and include the following; (i) principal forgiveness, (ii) interest rate reduction, (iii) other than insignificant payment delay, (iv) term extension, or (v) any combination of the foregoing. Each modified loan is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service their obligations as modified. Such loans at June 30, 2025 had an amortized cost of $1.1 million. For additional information on loan modifications, see Note 4 – Loans and the Allowance For Credit Losses.

Non-Performing Assets

Non-performing assets include non-accrual loans and OREO. The accrual of interest on loans is discontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process of collection or renewal due to maturity. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful.

OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance, and legal fees, among others, until the OREO property is disposed. During the first quarter of 2025, the Company sold two OREO properties resulting in a net gain on sale of $0.5 million. As of June 30, 2025 and December 31, 2024, OREO properties had carrying amounts of $4.4 million and $35.9 million, respectively.

The Company reversed immaterial amounts of interest on non-accrual loans during the three months ended June 30, 2025 and 2024, respectively. The amount of interest income that would have been recognized on loans accounted for on a non-accrual basis pursuant to contractual terms was $0.6 million and $2.1 million for the three months ended June 30, 2025 and 2024, respectively. The Company reversed an immaterial amount and $0.1 million of interest on non-accrual loans during the six months ended June 30, 2025 and 2024, respectively. The amount of interest income that would have been recognized on loans accounted for on a non-accrual basis pursuant to contractual terms was $1.2 million and $4.6 million for the six months ended June 30, 2025 and 2024, respectively.

We had amortized cost of $18.8 million and $48.7 million in non-performing assets as of June 30, 2025 and December 31, 2024, respectively. The decrease in non-performing assets was primarily due to the sale of two OREO properties.

The following presents the amortized cost basis of non-performing assets as of the dates noted:

(dollars in thousands)

(1) Held at the lower of cost or fair value as described in Note 12.

(2) Excludes Mortgage loans held for sale of $24.2 million and $25.5 million as of June 30, 2025 and December 31, 2024, respectively. Excludes $5.1 million and $7.3 million of loans held for investment accounted for under the fair value option as of June 30, 2025 and December 31, 2024, respectively.

Credit Quality Indicators

The following presents the amortized cost basis of loans by credit quality indicator, by class of financing receivable, as of the dates noted:

(dollars in thousands)

(dollars in thousands)

(1) Includes $5.1 million and $7.3 million of loans held for investment accounted for under fair value option as of June 30, 2025 and December 31, 2024, respectively.

As of June 30, 2025 and December 31, 2024, non-performing loans of $14.4 million and $12.8 million, respectively, were included in the substandard category in the table above.

Allowance for Credit Losses on Loans

The ACL for loans represents Management’s best estimate of CECL on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms, adjusted for expected prepayments when appropriate. Our quantitative discounted cash flow models use twelve-month economic forecasts including; HPI, GDP, and national unemployment. The ACL increased $0.7 million during the six months ended June 30, 2025. The ACL on pooled loans was $18.0 million as of June 30, 2025 and December 31, 2024. The $0.0 million provision on pooled loans for the six months ended June 30, 2025 was primarily due to loan growth being offset by mix shifts within the loan portfolio and modest HPI, GDP, and unemployment forecast deterioration. The ACL on individually analyzed loans was $1.0 million and $0.3 million as of June 30, 2025 and December 31, 2024, respectively. The $0.7 million provision on individually analyzed loans for the six months ended June 30, 2025 was primarily due to the addition of individually analyzed loans with collateral shortfalls.

The following presents summary information regarding our allowance for credit losses during the periods presented:

(dollars in thousands)

(1) Average balances are average daily balances.

(2) Excludes average outstanding balances of Mortgage loans held for sale of $18.8 million and $20.3 million for the three months ended June 30, 2025 and 2024, respectively, and $16.2 million and $13.5 million for the six months ended June 30, 2025 and 2024, respectively. Excludes average outstanding balances of loans held for investment under the fair value option of $5.7 million and $11.3 million for the three months ended June 30, 2025 and 2024, respectively, and $6.3 million and $12.2 million for the six months ended June 30, 2025 and 2024, respectively.

(3) Excludes Mortgage loans held for sale of $24.2 million and $26.9 million as of June 30, 2025 and 2024, respectively. Excludes $5.1 million and $10.1 million of loans held for investment accounted for under the fair value option as of June 30, 2025 and 2024, respectively.

(*)Immaterial.

The following presents the allocation of the ACL among loan categories and other summary information. The allocation for credit losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The allocation of a portion of the ACL to one category of loans does not preclude its availability to absorb losses in other categories.

(dollars in thousands)

(1) Represents the percentage of loans to total loans in the respective category.

Allowance for credit losses - off-balance sheet credit exposures

In the normal course of business, there may be various outstanding commitments to obtain funding and to extend credit, such as letters of credit and unfunded loan commitments, which are not reflected in the accompanying Condensed Consolidated Financial Statements. The Company assessed the off balance sheet credit exposures as of June 30, 2025 and determined an ACL of $0.6 million was adequate to absorb the estimated credit losses. For additional information regarding the Company’s ACL on off-balance sheet credit exposures, see Note 8 – Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements.

Deferred Tax Assets, Net

Deferred tax assets, net of our valuation allowance, represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses. Our deferred tax assets, net, are valued based on the amounts that are expected to be recovered in the future utilizing the tax rates in effect at the time recognized. Deferred tax assets, net as of June 30, 2025 were $2.8 million, a decrease of $0.3 million, or 8.8%, from December 31, 2024.

Deposits

Our deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), interest checking accounts, and savings accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount.

Total deposits increased by $14.9 million, or 0.6%, to $2.53 billion as of June 30, 2025, from December 31, 2024. Total average deposits for the three months ended June 30, 2025 were $2.40 billion, a decrease of $14.5 million, or 0.6%, compared to $2.41 billion as of June 30, 2024. Total average deposits for the six months ended June 30, 2025 and June 30, 2024 were $2.43 billion.

The following presents the average balances and average rates paid on deposits during the periods presented:

(dollars in thousands)

(dollars in thousands)

Average Noninterest-bearing deposits to average Total deposits was 14.7% and 17.1% for the three months ended June 30, 2025 and 2024, respectively, and 14.8% and 17.6% for the six months ended June 30, 2025 and 2024, respectively.

Our average cost of funds was 3.12% and 3.54% for the three months ended June 30, 2025 and 2024, respectively, and 3.13% and 3.49% for the six months ended June 30, 2025 and 2024, respectively. The decrease in cost of funds was primarily driven by decreased rates on interest-bearing deposit accounts and borrowings due to the lower interest rate environment.

Total money market accounts as of June 30, 2025 were $1.63 billion, an increase of $119.4 million, or 7.9%, compared to December 31, 2024. Interest checking accounts decreased $15.4 million, or 11.1%, to $124.0 million compared to December 31, 2024.

Total time deposits as of June 30, 2025 were $397.0 million, a decrease of $74.4 million, or 15.8%, from December 31, 2024.

The following presents the amount of certificates of deposit by time remaining until maturity as of June 30, 2025:

(dollars in thousands)

Borrowings

We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of June 30, 2025 and December 31, 2024, borrowings totaled $208.1 million and $109.6 million, respectively.

The increase in borrowings as of June 30, 2025 compared to December 31, 2024 was driven by net draws on the Company's FHLB line of credit as a result of interest-earning asset growth during the quarter.

The following presents balances of each of the borrowing facilities as of the dates noted:

(dollars in thousands)

FHLB

The following presents additional information on our FHLB borrowings:

(dollars in thousands)

Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. As of June 30, 2025 and December 31, 2024, the Company was in compliance with the covenant requirements.

Derivatives

Cash Flow Hedges: On March 21, 2023, the Company executed an interest rate swap with a notional amount that was designated as a cash flow hedge of certain Federal Home Loan Bank borrowings. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The swap hedges the benchmark index (SOFR) with a receive float/pay fixed swap for the period March 21, 2023 through April 1, 2026. The notional amount of the interest rate swap as of June 30, 2025 and December 31, 2024 was $50.0 million. As of June 30, 2025 and December 31, 2024, this hedge was determined to be effective, and the Company expects the hedge to remain effective during the remaining terms of the swap.

Derivatives Not Designated as Hedges: The Company periodically enters into interest rate swaps to offset interest rate exposure with its commercial and residential variable rate loan clients. Clients with variable rate loans may choose to enter into an interest rate swap to hedge the interest rate risk on the loan and effectively pay a fixed rate payment. The Company will simultaneously enter into an interest rate swap on the same underlying loan and notional amount to hedge risk on the fixed rate loan. The notional amount of interest rate swaps with its loan customers as of June 30, 2025 and December 31, 2024 was $65.3 million and $70.4 million, respectively. While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes. During the three months ended June 30, 2025 and 2024, the Company recognized $0.0 million and $0.1 million, respectively, of fees related to new interest rate swaps, which are included in the Bank fees line of the Condensed Consolidated Statements of Income. During the six months ended June 30, 2025 and 2024, the Company recognized $0.0 million and $0.1 million, respectively, of fees related to new interest rate swaps.

Liquidity and Capital Resources

Liquidity resources primarily include Interest-bearing and Noninterest-bearing deposits which contribute to our ability to raise funds to support asset growth, acquisitions, and meet deposit withdrawals and other payment obligations. Access to purchased funds include the ability to borrow from FHLB, other correspondent banks, and the use of brokered deposits.

The following presents the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets during the periods presented:

Our primary source of funds is Interest-bearing and Noninterest-bearing deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future.

Capital Resources

Total shareholders’ equity increased $6.5 million, or 2.6%, from December 31, 2024 to $258.8 million as of June 30, 2025. The increase was primarily due to Net income year to date.

We are subject to various regulatory capital adequacy requirements at a consolidated level and the Bank level. These requirements are administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our condensed consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators. Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As of June 30, 2025 and December 31, 2024, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow our operations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of earnings. We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards.

Contractual Obligations and Off-Balance Sheet Arrangements

We enter into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets. Commitments may expire without being utilized. Our exposure to credit loss is represented by the contractual amount of these commitments, although material losses are not anticipated. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.

The following presents future contractual obligations to make future payments during the periods presented:

(dollars in thousands)

(1) Reflects contractual maturity dates of December 1, 2030, September 1, 2031, and December 15, 2032, although the Company can call the notes prior to their contractual maturity.

We may enter into contracts for services in the conduct of ordinary business operations, which may require payment for services to be provided in the future and may contain penalty clauses for early termination of the contracts. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have an effect on future operations.

Critical Accounting Policies

Our accounting policies and procedures are described in Note 1 – Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Condensed Consolidated Financial Statements as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 as filed with the SEC.

Interest Rate Sensitivity and Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices, and equity prices. Our market risk arises primarily from interest rate risk inherent in lending, investing, and deposit taking activities. To that end, management actively monitors and manages interest rate risk exposure. We do not have any market risk sensitive instruments entered into for trading purposes.

Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within established guidelines of acceptable levels of risk-taking.

The Board of Directors monitors interest rate risk by analyzing the potential impact on the net economic value of equity and net interest income from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. We manage our balance sheet, in part, to maintain the potential impact on economic value of equity and net interest income within acceptable ranges despite changes in interest rates.

Our exposure to interest rate risk is reviewed at least quarterly by the Board of Directors. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in net interest income and economic value of equity in the event of hypothetical changes in interest rates. If potential changes to net economic value of equity and net interest income resulting from hypothetical interest rate changes are not within the limits established by our Board of Directors, the Board of Directors may direct management to adjust the asset and liability mix to bring interest rate risk within Board of Directors-approved limits.

The following presents the sensitivity in net interest income and fair value of equity during the periods presented, using a parallel ramp scenario:

The model simulations as of June 30, 2025 imply that our balance sheet maintains a similar interest rate risk profile compared to our balance sheet as of December 31, 2024.

Although the simulation model is useful in identifying potential exposure to interest rate changes, actual results for net interest income and economic value of equity may differ. There are a variety of factors that can impact the outcomes such as timing and magnitude of interest rate changes, asset and liability mix, pre-payment speeds, deposit beta assumptions, and decay rates that differ from our projections. Additionally, the results do not account for actions implemented to manage our interest rate risk exposure.

Impact of Inflation

Our Condensed Consolidated Financial Statements and related notes included within this Form 10-Q have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Our assets and liabilities are substantially monetary in nature. Therefore, changes in interest rates can significantly impact our performance beyond the general effects of inflation. Interest rates do not necessarily move in the same direction or magnitude as prices of general goods and services, while other operating expenses can be correlated with the impact of general levels of inflation.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the six months ended June 30, 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There has been no material change in the risk factors previously disclosed under “Item 1A. Risk Factors” of the Company’s 2024 Annual Report on Form 10-K filed with the SEC on March 7, 2025.