PEOPLES BANCORP OF NORTH CAROLINA INC

Previous wording

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report of Form 10-K and the Company’s Consolidated Financial Statements and Notes thereto on pages A-20 through A-62 of the Company’s 2025 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2026 Annual Meeting of Shareholders.

Current wording

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report on Form 10-K and the Company’s Consolidated Financial Statements and Notes thereto on pages A-20 through A-62 of the Company’s 2025 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2026 Annual Meeting of Shareholders.

Previous wording

*Summary.*Net earnings were $4.4 million or $0.83 per share and $0.80 per diluted share for the three months ended March 31, 2026, compared to $4.3 million or $0.82 per share and $0.79 per diluted share for the prior year period. The increase in first quarter net earnings is primarily attributable to an increase in net interest income, which was partially offset by an increase in the provision for credit losses and an increase in non-interest expense, compared to the prior year period, as discussed below.

Current wording

*Summary.*Net earnings were $5.2 million or $0.98 per share and $0.96 per diluted share for the three months ended June 30, 2026, compared to $5.2 million or $0.97 per share and $0.95 per diluted share for the prior year period. The increase in second quarter net earnings is primarily attributable to an increase in net interest income, which was partially offset by an increase in the provision for credit losses, a decrease in non-interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

Previous wording

The annualized return on average assets was 1.04% for the three months ended March 31, 2026, compared to 1.07% for the same period one year ago, and annualized return on average shareholders’ equity was 11.45% for the three months ended March 31, 2026, compared to 13.52% for the same period one year ago.

Current wording

The annualized return on average assets was 1.13% for the six months ended June 30, 2026, compared to 1.15% for the same period one year ago, and annualized return on average shareholders’ equity was 12.22% for the six months ended June 30, 2026, compared to 14.06% for the same period one year ago.

Previous wording

Net interest income was $15.1 million for the three months ended March 31, 2026, compared to $13.9 million for the three months ended March 31, 2025. The increase in net interest income is due to a $906,000 increase in interest income and a $253,000 decrease in interest expense. Net interest income after the provision for credit losses was $14.5 million for the three months ended March 31, 2026, compared to $13.7 million for the three months ended March 31, 2025. The provision for credit losses for the three months ended March 31, 2026 was $560,000, compared to $268,000 for the three months ended March 31, 2025. The increase in the provision for credit losses is primarily attributable to a $38.9 million increase in total loans from December 31, 2025 to March 31, 2026, compared to a $13.7 million increase in total loans from December 31, 2024 to March 31, 2025.

Current wording

Net interest income was $16.0 million for the three months ended June 30, 2026, compared to $14.6 million for the three months ended June 30, 2025. The increase in net interest income is due to a $806,000 increase in interest income and a $565,000 decrease in interest expense. Net interest income after the provision for credit losses was $15.7 million for the three months ended June 30, 2026, compared to $14.8 million for the three months ended June 30, 2025. The provision for credit losses for the three months ended June 30, 2026 was $293,000, compared to a recovery of $213,000 for the three months ended June 30, 2025. The increase in the provision for credit losses reflects continued growth in total loans, which increased $36.3 million during the three months ended June 30, 2026, compared to an increase of $5.9 million during the three months ended June 30, 2025. Additionally, the increase in the provision for credit losses includes a $29,000 increase in net charge-offs during the three months ended June 30, 2026, compared to the three months ended June 30, 2025.

Previous wording

Interest income was $20.9 million for the three months ended March 31, 2026, compared to $20.0 million for the three months ended March 31, 2025. The increase in interest income is primarily due to a $1.5 million increase in interest income and fees on loans, which was partially offset by a $109,000 decrease in interest income on balances due from banks and a $442,000 decrease in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans. The decrease in interest income on balances due from banks is due to a decrease in average balances outstanding and rate decreases implemented by the FOMC. The decrease in interest income on investment securities is due to a reduction in average investment securities and decreases in yields on variable rate securities. During the three months ended March 31, 2026, average loans were $1.22 billion, an increase of $80.2 million from average loans of $1.14 billion for the three months ended March 31, 2025. During the three months ended March 31, 2026, average investment securities were $413.4 million, a decrease of $22.9 million from average investment securities of $436.3 million for the three months ended March 31, 2025. The average yield on loans for the three months ended March 31, 2026 and 2025 was 5.80% and 5.69%, respectively. The average yield on investment securities available for sale was 3.05% and 3.25% for the three months ended March 31, 2026 and 2025, respectively. The average yield on earning assets was 5.09% and 5.03% for the three months ended March 31, 2026 and 2025, respectively.

Current wording

Interest income was $21.5 million for the three months ended June 30, 2026, compared to $20.7 million for the three months ended June 30, 2025. The increase in interest income is primarily due to a $1.5 million increase in interest income and fees on loans, which was partially offset by a $511,000 decrease in interest income on balances due from banks and a $231,000 decrease in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans. The decrease in interest income on balances due from banks is due to a decrease in average balances outstanding and rate decreases implemented by the FOMC. The decrease in interest income on investment securities is due to a reduction in balances outstanding and decreases in yields on variable rate securities. During the three months ended June 30, 2026, average loans were $1.25 billion, an increase of $96.2 million from average loans of $1.16 billion for the three months ended June 30, 2025. During the three months ended June 30, 2026, average investment securities were $411.2 million, a decrease of $7.8 million from average investment securities of $419.0 million for the three months ended June 30, 2025. The average yield on loans for the three months ended June 30, 2026 and 2025 was 5.83% and 5.78%, respectively. The average yield on investment securities available for sale was 3.03% and 3.21% for the three months ended June 30, 2026 and 2025, respectively. The average yield on earning assets was 5.12% and 5.07% for the three months ended June 30, 2026 and 2025, respectively.

Previous wording

Interest expense was $5.8 million for the three months ended March 31, 2026, compared to $6.0 million for the three months ended March 31, 2025. The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities resulting from rate decreases implemented by the FOMC. During the three months ended March 31, 2026, average interest-bearing non-maturity deposits were $782.2 million, an increase of $35.3 million from average interest-bearing non-maturity deposits of $746.9 million for the three months ended March 31, 2025. During the three months ended March 31, 2026, average certificates of deposit were $340.0 million, a decrease of $1.3 million from average certificates of deposit of $341.3 million for the three months ended March 31, 2025. The average rate paid on interest-bearing checking and savings accounts was 1.50% and 1.44% for the three months ended March 31, 2026 and 2025, respectively. The average rate paid on certificates of deposit was 3.18% for the three months ended March 31, 2026, compared to 3.72% for the same period one year ago. The average rate paid on interest-bearing liabilities was 2.06% for the three months ended March 31, 2026, compared to 2.21% for the same period one year ago.

Current wording

Interest expense was $5.6 million for the three months ended June 30, 2026, compared to $6.1 million for the three months ended June 30, 2025. The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities resulting from rate decreases implemented by the FOMC. During the three months ended June 30, 2026, average interest-bearing non-maturity deposits were $811.7 million, an increase of $61.4 million from average interest-bearing non-maturity deposits of $750.3 million for the three months ended June 30, 2025. During the three months ended June 30, 2026, average certificates of deposit were $315.9 million, a decrease of $37.4 million from average certificates of deposit of $353.3 million for the three months ended June 30, 2025. The average rate paid on interest-bearing checking and savings accounts was 1.51% and 1.46% for the three months ended June 30, 2026 and 2025, respectively. The average rate paid on certificates of deposit was 2.90% for the three months ended June 30, 2026, compared to 3.58% for the same period one year ago. The average rate paid on interest-bearing liabilities was 1.95% for the three months ended June 30, 2026, compared to 2.19% for the same period one year ago.

Previous wording

*Provision for Credit Losses.*The provision for credit losses for the three months ended March 31, 2026 was $560,000, compared to $268,000 for the three months ended March 31, 2025. The increase in the provision for credit losses is primarily attributable to a $38.9 million increase in total loans from December 31, 2025 to March 31, 2026, compared to a $13.7 million increase in total loans from December 31, 2024 to March 31, 2025.

Current wording

Provision for Credit Losses. The provision for credit losses for the three months ended June 30, 2026 was $293,000, compared to a recovery of $213,000 for the three months ended June 30, 2025. The increase in the provision for credit losses reflects continued growth in total loans, which increased $36.3 million during the three months ended June 30, 2026, compared to an increase of $5.9 million during the three months ended June 30, 2025. Additionally, the increase in the provision for credit losses includes a $29,000 increase in net charge-offs during the three months ended June 30, 2026, compared to the three months ended June 30, 2025.

Previous wording

Non-Interest Income. Non-interest income was $6.5 million for the three months ended March 31, 2026 and 2025. A $422,000 decrease in appraisal management fee income due to a decrease in appraisal volume was partially offset by a $108,000 increase in mortgage banking income due to an increase in secondary mortgage market activity, a $238,000 increase in miscellaneous non-interest income primarily due to an increase in income on Small Business Investment Company (SBIC) investments and a $32,000 increase in insurance and brokerage commissions.

Current wording

Non-Interest Income. Non-interest income was $7.1 million for the three months ended June 30, 2026, compared to $7.7 million for the three months ended June 30, 2025. The decrease in non-interest income is primarily attributable to a $929,000 decrease in appraisal management fee income due to a decrease in appraisal volume, which was partially offset by a $108,000 increase in mortgage banking income due to an increase in secondary mortgage market activity and a $254,000 increase in miscellaneous non-interest income primarily due to an increase in deferred compensation income associated with an increase in valuations for the assets in the deferred compensation plan and an increase in income on Small Business Investment Company (SBIC) investments.

Previous wording

Non-Interest Expense. Non-interest expense was $15.4 million for the three months ended March 31, 2026, compared to $14.6 million for the three months ended March 31, 2025. The increase in non-interest expense is primarily attributable to a $458,000 increase in salaries and employee benefits expense primarily due to increases in health insurance and restricted stock expenses, a $279,000 increase in occupancy expense primarily due to an increase in furniture and equipment maintenance/service contract expenses, a $173,000 increase in professional fees primarily due to an increase in consulting expense, and a $190,000 increase in debit card expense. The increases in non-interest expense were partially offset by a $324,000 decrease in appraisal management fee expense due to a decrease in appraisal volume.

Current wording

Non-interest expense was $31.5 million for the six months ended June 30, 2026, compared to $30.4 million for the six months ended June 30, 2025. The increase in non-interest expense is primarily attributable to a $417,000 increase in salaries and employee benefits expense primarily due to increases in salary and restricted stock expenses, a $761,000 increase in occupancy expense primarily due to an increase in furniture and equipment maintenance/service contract expenses, a $179,000 increase in professional fees primarily due to an increase in consulting expense, a $431,000 increase in debit card expense and a $293,000 increase in miscellaneous non-interest expense primarily due to an increase in deferred compensation expense associated with an increase in valuations for the assets in the deferred compensation plan. The increases in non-interest expense were partially offset by a $1.0 million decrease in appraisal management fee expense due to a decrease in appraisal volume.

Previous wording

*Income Taxes.*Income tax expense was $1.3 million for the three months ended March 31, 2026 and 2025. The effective tax rate was 22.13% for the three months ended March 31, 2026, compared to 22.85% for the three months ended March 31, 2025. The decrease in the effective tax rate is primarily due to the North Carolina corporate income tax rate decreasing from 2.25% to 2.00% effective January 1, 2026 and the revaluation of the deferred tax asset due to further upcoming reductions in the North Carolina corporate income tax rate.

Current wording

*Income Taxes.*Income tax expense was $1.5 million for the three months ended June 30, 2026 and 2025. The effective tax rate was 22.23% for the three months ended June 30, 2026, compared to 22.56% for the three months ended June 30, 2025. Income tax expense was $2.7 million for the six months ended June 30, 2026, compared to $2.8 million for the six months ended June 30, 2025. The effective tax rate was 22.18% for the six months ended June 30, 2026, compared to 22.69% for the six months ended June 30, 2025. The decrease in the effective tax rate is primarily due to the North Carolina corporate income tax rate decreasing from 2.25% to 2.00% effective January 1, 2026 and the revaluation of the deferred tax asset due to further upcoming reductions in the North Carolina corporate income tax rate.

Previous wording

*Investment Securities.*Available for sale securities were $370.1 million as of March 31, 2026, compared to $377.4 million as of December 31, 2025. Average investment securities for the three months ended March 31, 2026 were $413.4 million, compared to $421.6 million for the year ended December 31, 2025.

Current wording

*Investment Securities.*Available for sale securities were $364.5 million as of June 30, 2026, compared to $377.4 million as of December 31, 2025. Average investment securities for the six months ended June 30, 2026 were $412.3 million, compared to $421.6 million for the year ended December 31, 2025.

Previous wording

*Loans.*Total loans were $1.24 billion as of March 31, 2026, compared to $1.20 billion at December 31, 2025. Average loans represented 74% and 70% of average earning assets for the three months ended March 31, 2026 and the year ended December 31, 2025, respectively.

Current wording

*Loans.*Total loans were $1.28 billion as of June 30, 2026, compared to $1.20 billion at December 31, 2025. Average loans represented 74% and 70% of average earning assets for the six months ended June 30, 2026 and the year ended December 31, 2025, respectively.

Previous wording

Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At March 31, 2026, the Bank had $139.7 million in residential mortgage loans, $128.0 million in home equity loans and $758.6 million in commercial mortgage loans, which include $610.8 million secured by commercial property and $147.8 million secured by residential property. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization. The Bank also had construction and land development loans totaling $127.4 million at March 31, 2026.

Current wording

Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At June 30, 2026, the Bank had $144.6 million in residential mortgage loans, $130.7 million in home equity loans and $773.2 million in commercial mortgage loans, which include $624.8 million secured by commercial property and $148.4 million secured by residential property. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization. The Bank also had construction and land development loans totaling $133.6 million at June 30, 2026.

Previous wording

The portion of the ACL balance attributable to qualitative factors was $5.5 million and $5.3 million at March 31, 2026 and December 31, 2025, respectively. The risk factors are weighted as follows: Local, State and National Economic Outlook – 30%, Concentrations of Credit – 5%, Interest Rate Risk – 5%, Trends in Terms of Volume, Mix and Size of Loans – 15%, Seasoning of the Loan Portfolio – 10%, Experience of Staff – 10%, and Levels and Trends of Delinquencies – 25%. No changes to the risk status of any of the risk factors was made during the three months ended March 31, 2026.

Current wording

The portion of the ACL balance attributable to qualitative factors was $5.6 million and $5.3 million at June 30, 2026 and December 31, 2025, respectively. The risk factors are weighted as follows: Local, State and National Economic Outlook – 30%, Concentrations of Credit – 5%, Interest Rate Risk – 5%, Trends in Terms of Volume, Mix and Size of Loans – 15%, Seasoning of the Loan Portfolio – 10%, Experience of Staff – 10%, and Levels and Trends of Delinquencies – 25%. No changes to the risk status of any of the risk factors was made during the six months ended June 30, 2026.

Previous wording

The allowance for credit losses on loans was $10.5 million or 0.84% of total loans at March 31, 2026, compared to $10.1 million or 0.84% of total loans at December 31, 2025. The allowance for credit losses on loans increased $332,000 primarily due to a $38.9 million increase in total loans from December 31, 2025 to March 31, 2026.

Current wording

The allowance for credit losses on loans was $10.6 million or 0.83% of total loans at June 30, 2026, compared to $10.1 million or 0.84% of total loans at December 31, 2025. The allowance for credit losses on loans increased $504,000 primarily due to a $75.2 million increase in total loans from December 31, 2025 to June 30, 2026.

Previous wording

The allowance for credit losses on unfunded commitments was $1.6 million at March 31, 2026, compared to $1.4 million at December 31, 2025. The increase in the allowance for credit losses on unfunded commitments was due to a $5.7 million increase in unfunded loan commitments from December 31, 2025 to March 31, 2026.

Current wording

The allowance for credit losses on unfunded commitments was $1.6 million at June 30, 2026, compared to $1.4 million at December 31, 2025. The increase in the allowance for credit losses on unfunded commitments was due to a $11.7 million increase in unfunded loan commitments from December 31, 2025 to June 30, 2026.

Previous wording

*Non-performing Assets.*Non-performing assets were $4.8 million or 0.28% of total assets at March 31, 2026, compared to $4.2 million or 0.25% of total assets at December 31, 2025. Non-performing assets comprise $3.6 million in residential mortgage loans and $1.2 million in commercial mortgage loans at March 31, 2026, compared to $3.6 million in residential mortgage loans and $533,000 in commercial mortgage loans at December 31, 2025. The Bank had no other real estate owned or repossessed assets as of March 31, 2026 and December 31, 2025.

Current wording

Non-performing assets were $5.2 million or 0.29% of total assets at June 30, 2026, compared to $4.2 million or 0.25% of total assets at December 31, 2025. Non-performing assets comprise $4.0 million in residential mortgage loans, $1.1 million in commercial mortgage loans and $122,000 in other loans at June 30, 2026, compared to $3.6 million in residential mortgage loans and $533,000 in commercial mortgage loans at December 31, 2025. The Bank had no other real estate owned or repossessed assets as of June 30, 2026 and December 31, 2025.

Previous wording

*Deposits.*Deposits were $1.54 billion as of March 31, 2026, compared to $1.51 billion as of December 31, 2025. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of less than $250,000, were $1.40 billion at March 31, 2026, compared to $1.35 billion at December 31, 2025. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s overall cost of funds and profitability. Certificates of deposit in amounts of $250,000 or more totaled $143.7 million at March 31, 2026, compared to $160.4 million December 31, 2025.

Current wording

*Deposits.*Deposits were $1.57 billion as of June 30, 2026, compared to $1.51 billion as of December 31, 2025. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of less than $250,000, were $1.44 billion at June 30, 2026, compared to $1.35 billion at December 31, 2025. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s overall cost of funds and profitability. Certificates of deposit in amounts of $250,000 or more totaled $131.2 million at June 30, 2026, compared to $160.4 million at December 31, 2025.

Previous wording

Estimated uninsured deposits totaled $347.4 million, or 22.55% of total deposits, at March 31, 2026, compared to $358.5 million, or 23.75% of total deposits, at December 31, 2025. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits. The Bank did not have any significant deposit concentrations at March 31, 2026.

Current wording

Estimated uninsured deposits totaled $336.5 million, or 21.47% of total deposits, at June 30, 2026, compared to $358.5 million, or 23.75% of total deposits, at December 31, 2025. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits. The Bank did not have any significant deposit concentrations at June 30, 2026.

Previous wording

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the three months ended March 31, 2026 totaled $1.66 billion, exceeding average rate sensitive liabilities of $1.14 billion by $525.5 million.

Current wording

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the six months ended June 30, 2026 totaled $1.67 billion, exceeding average rate sensitive liabilities of $1.14 billion by $533.8 million.

Previous wording

Included in the rate sensitive assets are $184.9 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. Certain variable rate loans are structured to establish floors on interest rates charged to protect against downward movements in the prime rate. At March 31, 2026, the Company had $130.2 million in loans with interest rate floors. Floors were in effect on four loans, totaling $9,000, at March 31, 2026.

Current wording

Included in the rate sensitive assets are $186.1 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. Certain variable rate loans are structured to establish floors on interest rates charged to protect against downward movements in the prime rate. At June 30, 2026, the Company had $131.9 million in loans with interest rate floors. Floors were in effect on three loans, totaling $6,000, at June 30, 2026.

Previous wording

*Liquidity.*The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of March 31, 2026, such unfunded commitments to extend credit were $372.3 million, while commitments in the form of standby letters of credit totaled $1.6 million. As of December 31, 2025, such unfunded commitments to extend credit were $366.5 million, while commitments in the form of standby letters of credit totaled $1.6 million.

Current wording

*Liquidity.*The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of June 30, 2026, such unfunded commitments to extend credit were $378.3 million, while commitments in the form of standby letters of credit totaled $1.6 million. As of December 31, 2025, such unfunded commitments to extend credit were $366.5 million, while commitments in the form of standby letters of credit totaled $1.6 million.

Previous wording

The Bank uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships. As of March 31, 2026, the Bank’s core deposits, a non-GAAP measure, totaled $1.40 billion, or 90.70% of total deposits. As of December 31, 2025, the Bank’s core deposits totaled $1.35 billion, or 89.44% of total deposits.

Current wording

The Bank uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships. As of June 30, 2026, the Bank’s core deposits, a non-GAAP measure, totaled $1.44 billion, or 91.63% of total deposits. As of December 31, 2025, the Bank’s core deposits totaled $1.35 billion, or 89.44% of total deposits.

Previous wording

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. There were no FHLB borrowings outstanding at March 31, 2026 and December 31, 2025. At March 31, 2026, the carrying value of loans pledged as collateral to the FHLB totaled $253.6 million compared to $247.8 million at December 31, 2025. The remaining availability under the line of credit with the FHLB was $150.6 million at March 31, 2026 compared to $148.5 million at December 31, 2025. The Bank had no borrowings from the FRB at March 31, 2026 or December 31, 2025. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At March 31, 2026, the carrying value of loans pledged as collateral to the FRB totaled $720.1 million compared to $689.9 million at December 31, 2025. Availability under the line of credit with the FRB was $603.7 million at March 31, 2026 compared to $583.8 million at December 31, 2025.

Current wording

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. There were no FHLB borrowings outstanding at June 30, 2026 and December 31, 2025. At June 30, 2026, the carrying value of loans pledged as collateral to the FHLB totaled $255.4 million compared to $247.8 million at December 31, 2025. The remaining availability under the line of credit with the FHLB was $153.3 million at June 30, 2026 compared to $148.5 million at December 31, 2025. The Bank had no borrowings from the FRB at June 30, 2026 or December 31, 2025. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At June 30, 2026, the carrying value of loans pledged as collateral to the FRB totaled $725.9 million compared to $689.9 million at December 31, 2025. Availability under the line of credit with the FRB was $603.7 million at June 30, 2026 compared to $583.8 million at December 31, 2025.

Previous wording

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 26.91% at March 31, 2026 and 26.86% at December 31, 2025. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, 2026 and December 31, 2025.

Current wording

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 26.07% at June 30, 2026 and 26.86% at December 31, 2025. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at June 30, 2026 and December 31, 2025.

Previous wording

*Capital Resources.*Shareholders’ equity was $158.1 million, or 9.12% of total assets, at March 31, 2026, compared to $157.1 million, or 9.23% of total assets, at December 31, 2025.

Current wording

*Capital Resources.*Shareholders’ equity was $161.3 million, or 9.14% of total assets, at June 30, 2026, compared to $157.1 million, or 9.23% of total assets, at December 31, 2025.

Previous wording

Annualized return on average equity for the three months ended March 31, 2026 was 11.45%, compared to 13.52% for the three months ended March 31, 2025. Total cash dividends paid on common stock were $2.1 million for the three months ended March 31, 2026, compared to $2.0 million for the three months ended March 31, 2025.

Current wording

Annualized return on average equity for the six months ended June 30, 2026 was 12.22%, compared to 14.06% for the six months ended June 30, 2025. Total cash dividends paid on common stock were $3.2 million for the six months ended June 30, 2026, compared to $3.1 million for the six months ended June 30, 2025.

Previous wording

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million in trust preferred securities at March 31, 2026 and December 31, 2025. The Company’s Tier 1 capital ratio was 14.75% and 14.96% at March 31, 2026 and December 31, 2025, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for credit losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 15.63% and 15.82% at March 31, 2026 and December 31, 2025, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 13.65% and 13.83% at March 31, 2026 and December 31, 2025, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 11.60% and 11.33% at March 31, 2026 and December 31, 2025, respectively.

Current wording

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million in trust preferred securities at June 30, 2026 and December 31, 2025. The Company’s Tier 1 capital ratio was 14.68% and 14.96% at June 30, 2026 and December 31, 2025, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for credit losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 15.55% and 15.82% at June 30, 2026 and December 31, 2025, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 13.61% and 13.83% at June 30, 2026 and December 31, 2025, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 11.70% and 11.33% at June 30, 2026 and December 31, 2025, respectively.

Previous wording

The Bank’s Tier 1 risk-based capital ratio was 14.62% and 14.83% at March 31, 2026 and December 31, 2025, respectively. The total risk-based capital ratio for the Bank was 15.50% and 15.70% at March 31, 2026 and December 31, 2025, respectively. The Bank’s common equity Tier 1 capital ratio was 14.62% and 14.83% at March 31, 2026 and December 31, 2025, respectively. The Bank’s Tier 1 leverage capital ratio was 11.39% and 11.13% at March 31, 2026 and December 31, 2025, respectively.

Current wording

The Bank’s Tier 1 risk-based capital ratio was 14.55% and 14.83% at June 30, 2026 and December 31, 2025, respectively. The total risk-based capital ratio for the Bank was 15.42% and 15.70% at June 30, 2026 and December 31, 2025, respectively. The Bank’s common equity Tier 1 capital ratio was 14.55% and 14.83% at June 30, 2026 and December 31, 2025, respectively. The Bank’s Tier 1 leverage capital ratio was 11.50% and 11.13% at June 30, 2026 and December 31, 2025, respectively.