Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto, that appear in Part II, "Item 8. Financial Statements and Supplementary Data" and should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this 2025 Form 10-K.

General

As a South Carolina corporation, the Company is authorized to engage in any activity permitted by South Carolina General Corporation Law. Functioning as a single bank holding company, the Company leverages this structure to potentially broaden the scale and range of financial services beyond the current offerings of the Bank. This holding company setup not only grants the Company enhanced flexibility compared to the Bank but also allows for diversification of business activities through existing or newly formed subsidiaries, acquisitions, mergers with financial institutions, and other companies. Presently, there are no existing arrangements or agreements regarding such acquisitions, and the Company's future activities will be funded through the ongoing operations of the Bank and borrowings from third parties. Additionally, potential funding sources may include the sale of additional securities or income generated by the Company's various activities, although no plans for such actions are in place at this time.

The investment and other activities of the Company have had no significant impact on the results of operations for the periods presented in the Consolidated Financial Statements included herein. Given that all material business operations are conducted through the Bank, the following discussion of financial results is primarily indicative of the activities of the Bank.

The principal business of the Bank is accepting deposits from the general public and originating consumer, commercial, and mortgage loans, including loans that enable borrowers to purchase or refinance one-to-four family residential properties. The Bank also originates construction loans for single-family residences, multi-family dwellings, commercial real estate, and residential subdivisions, as well as loans for commercial development projects. The Bank also provides trust services and it offers property and casualty insurance products through its subsidiary, SFINS.

The Bank's net income depends primarily on its interest rate spread, which is the difference between the average yield earned on its loan and investment portfolios and the average rate paid on its deposits and borrowings. When the rate earned on interest-earning assets equals or exceeds the rate paid on interest-bearing liabilities, this positive interest rate spread will generate net interest income. The Bank's interest spread is influenced by interest rates, deposit flows, and loan demands. Levels of non-interest income and operating expense are also significant factors in earnings.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). In doing so, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.

The significant accounting policies of the Company are described in Note 1 of the Notes to the Consolidated Financial Statements included under "Item 8. Financial Statements and Supplementary Data," in this 2025 Form 10-K.

The Company believes the allowance for credit losses is a critical accounting policy that requires the most significant judgments, estimates and assumptions used in preparation of the Consolidated Financial Statements. The impact of an unexpectedly large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings. The Company considers the allowance for credit losses to be a critical accounting policy, requiring significant judgments, estimates, and assumptions in preparing its Consolidated Financial Statements. An unexpectedly large loss could deplete the allowance, necessitating increased provisions that may negatively impact earnings. The CECL method is employed for credit loss provisioning, with all credit losses and recoveries charged and credited, respectively, to the related allowance. Additions to the allowance are determined based on various factors, including collateral value, borrower guarantees, repayment ability, loan portfolio composition, and economic conditions. Monthly evaluations are conducted, adjusting the allowance in response to changes. While management uses the best available information, future adjustments may be necessary if economic conditions differ significantly from assumptions. Further details on the estimation process and methodology are discussed in the "Financial Condition" and "Comparison of the Years Ended December 31, 2025 and 2024 - Provision for Credit Losses" sections of this 2025 Form 10-K.

The Company uses assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations.

The Company exercises considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change.

No assurance can be given that either the tax returns submitted by the Company or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service.

Financial Condition - Assets

Total assets increased $6.3 million or 0.4% to $1.62 billion at December 31, 2025from $1.61 billion at December 31, 2024. This increase was primarily due to increases in investment securities and bank owned life insurance ("BOLI"), partially offset by decreases in cash and cash equivalents, net loans receivable and other assets.

Cash and cash equivalents decreased $102.9 million or 57.7% to $75.3 million at December 31, 2025compared to $178.3 million at December 31, 2024, due to increased investment securities and the payoff of FRB borrowings and junior subordinated debentures during the year ended December 31, 2025.

Total investment securities increased $115.5 million or 17.5% to $776.3 million at December 31, 2025from $660.8 million at December 31, 2024as purchases of investments exceeded maturities, sales and principal paydowns during the year. The Company purchased $228.3 million of investment securities during the year ended December 31, 2025compared to $71.9 million during 2024.

Loans receivable, net, including loans held for sale, decreased $10.9 million or 1.6% to $676.2 million at December 31, 2025from $687.1 million at December 31, 2024. The decrease was due to a decline in construction loan balances, which was partially offset by growth in all remaining loan categories in 2025.

Construction loans decreased $43.4 million or 39.4% to $66.6 million at December 31, 2025 from $109.9 million at December 31, 2024. The decrease in construction loans was partially offset by growth in all other loan categories. The most significant growth occurred in our residential and commercial real estate loan portfolios. Residential mortgage loans held for investment increased $16.3 million or 8.0% to $219.9 million at December 31, 2025from $203.7 million at December 31, 2024. Commercial real estate loans increased $6.8 million or 2.4% to $295.3 million at December 31, 2025, from $288.5 million at December 31, 2024. Additionally, commercial and agricultural loans increased by $1.0 million, HELOCs by $5.2 million, and other consumer loans by $21,000.

Other assets decreased $3.9 million or 23.2% to $12.9 million at December 31, 2025from $16.8 million at December 31, 2024. The decrease was primarily the result of a $3.5 million decrease in the net deferred asset associated with the change in market value of our AFS investment securities.

Financial Condition - Non-Performing Assets

The Bank's non-performing assets, consisting of nonaccrual loans and OREO, decreased $1.8 million or 23.5% to $5.8 million at December 31, 2025, from $7.6 million at December 31, 2024. At December 31, 2025 and 2024, the Bank did not have any loans that were 90 days or more past due and still accruing interest. Non-performing assets represented 0.36% and 0.47% of total assets at December 31, 2025 and 2024, respectively. The ratio of the allowance for credit losses to total loans was 1.97% and 1.98% at December 31, 2025 and 2024, respectively.

The following table presents information regarding the Bank's non-performing loans at the dates indicated.

			As of December 31, 2025								At December 31, 2024
(Dollars in thousands)		Amount				# of loans				Amount				# of loans				$ Change				% Change
Non-Accrual Loans:
Construction Real Estate		$	461				3			$	1,438				4			$	(977	)			(67.9	)%
Residential Real Estate			1,576				19				1,707				19				(131	)			(7.7	)
Commercial Real Estate			3,259				6				3,658				7				(399	)			(10.9	)
Commercial and Agricultural			193				7				331				5				(138	)			(41.7	)
HELOC			162				4				424				7				(262	)			(61.8	)
Other Consumer			146				13				78				12				68				87.2
Total Non-Accrual Loans			5,797				52				7,636				54				(1,839	)			(24.1	)%
Other Non-Performing Assets:
OREO			45								-								45				100.0
Total Non-Performing Assets		$	5,842							$	7,636							$	(1,794	)			(23.5	)%
Total Gross Loans Receivable, Net of Deferred Loan Fees		$	686,585							$	700,444
Non-Accrual Loans to Total Loans			0.84	%							1.09	%
Non-Performing Assets to Total Assets			0.36	%							0.47	%
Allowance for Credit Losses on Loans to Non-Accrual Loans			233.38	%							181.95	%
Allowance for Credit Losses on Loans to Total Loans			1.97	%							1.98	%

The decrease in non-performing assets at December 31, 2025, was primarily driven by lower levels of non-performing loans in all categories except other consumer loans when compared to the year ended December 31, 2024. The largest decrease occurred in non-performing construction loans, which decreased $977,000 or 67.9% to $461,000 at December 31, 2025, from $1.4 million at December 31, 2024. At December 31, 2025, non-performing construction loans consisted of three loans to three borrowers, with an average loan balance of $154,000, compared to four loans to four borrowers with an average loan balance of $252,000 at December 31, 2024.

Non-performing residential real estate loans decreased $131,000 or 7.7% to $1.6 million at December 31, 2025, up from $1.7 million at December 31, 2024. Non-performing residential real estate loans at December 31, 2025, consisted of 19 loans to 19 borrowers with an average loan balance of $83,000, compared to 19 loans to 19 borrowers with an average loan balance of $113,000, at December 31, 2024.

Non-performing commercial real estate loans declined $399,000 or 10.9% to $3.3 million at December 31, 2025, from $3.7 million at December 31, 2024. At December 31, 2025, non-performing commercial real estate loans consisted of six loans to six borrowers, with an average loan balance of $543,000, compared to seven loans to seven borrowers, with an average loan balance of $523,000 at December 31, 2024.

Non-performing commercial and agricultural loans decreased $138,000 or 41.7% to $193,000 at December 31, 2025, compared to $331,000 at December 31, 2024. At December 31, 2025, non-performing commercial and agricultural loans consisted of seven loans to seven borrowers, with an average loan balance of $24,000, compared to five loans to five borrowers, with an average loan balance of $66,000 at December 31, 2024.

Non-performing HELOCs decreased $262,000 or 61.8% to $162,000 at December 31, 2025, compared to $424,000 at December 31, 2024. At December 31, 2025, non-performing HELOCs consisted of four loans to four borrowers, with an average loan balance of $40,000, compared to seven loans to seven borrowers, with an average loan balance of $61,000 at December 31, 2024.

Offsetting these decreases was a $68,000 or 87.2% increase in non-performing other consumer loans and a $45,000 increase in OREO at December 31, 2025.

Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the underlying collateral. In the event an acceptable arrangement cannot be reached, we may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

The Bank conducts a monthly review of its loan portfolio and allowance for credit losses. In determining the appropriate allowance during the years ended December 31, 2025 and 2024, management considered various factors, including national and state unemployment rates, benefit claim levels, government financial assistance, inflation, consumer spending trends, and the Bank's largest commercial loan relationships.

Management will continue monitoring economic conditions and collaborating with borrowers to navigate this challenging economic climate. Future additions to the allowance for credit losses depend on factors such as loan portfolio performance, economic conditions, real estate values, and interest rates. There is no assurance that future periods won't require additions to the allowance. Determining the appropriate level of the allowance involves a high degree of subjectivity and significant estimates, all of which are subject to material changes.

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations. Management continually monitors its loan portfolio for the impact of local economic changes.

Financial Condition - Liabilities and Shareholders' Equity

The majority of the Bank's deposits are originated within the Bank's immediate market area. Total deposits increased $47.7 million or 3.6% to $1.37 billion at December 31, 2025, up from $1.32 billion at December 31, 2024. The increase primarily was the result of a $46.6 million or 10.4% increase in money market account balances and, to a lesser extent, a $6.5 million or 1.3% increase in checking account balances. We believe the majority of the increases in deposits were due to competitive promotional rates for money market accounts.

We had brokered time deposits of $5.1 million and $25.8 million at December 31, 2025 and 2024, respectively. We use brokered time deposits as part of our interest rate risk management strategy, as they provide access to large deposit amounts at competitive rates that are typically slightly higher than those available in our market areas. A portion of these brokered time deposits includes a call option, allowing the Bank to redeem them early should interest rates shift. Additionally, the Bank maintained $6.3 million and $5.4 million in non-certificate brokered deposits at December 31, 2025 and 2024, respectively. Brokered deposits were 0.8% and 2.5% of total deposits at December 31, 2025 and 2024, respectively.

Total uninsured deposits (those that met or exceeded the FDIC insurance limit of $250,000) totaled $334.4 million and $365.8 million at December 31, 2025 and 2024, respectively. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements. The Bank had no deposit relationships greater than 5.0% of outstanding deposits at either December 31, 2025 or 2024.

Certificates of deposits exceeding the FDIC insurance limit totaled $81.1 million and $96.0 million at December 31, 2025 and 2024, respectively. The following table summarizes the maturity schedule of certificates of deposit with a balance of $250,000 or more at December 31, 2025:

		(In Thousands)
Within 3 Months		$	22,176
After 3 Months, Within 6 Months			30,251
After 6 Months, Within 12 Months			23,401
After 12 Months			5,267
		$	81,095

Certificates of deposit scheduled to mature in one year or less totaled $253.1 million at December 31, 2025compared to $198.3 million at December 31, 2024. Management's policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with the Bank.

We had no outstanding FHLB advances at December 31, 2025 and 2024. We also had no outstanding borrowings from the FRB at December 31, 2025, compared to $50.0 million in outstanding borrowings under the FRB's BTFP with a weighted average borrowing rate of 4.76% at December 31, 2024. The Company originally elected to participate in the BTFP during 2023 to refinance existing FRB discount window borrowings at a lower fixed rate. Advances under that program had a one-year term and were priced at the one year overnight index swap ("OIS") rate plus 10 basis points on the day the advance was made. Effective January 24, 2024, the FRB announced that future advances through the BTFP's expiration on March 11, 2024, would be set at no lower than the interest rate on reserve balances in effect at the time of the advance. At December 31, 2025, we had pledged investment securities with an amortized cost of $312.9 million and a fair value of $293.9 million as collateral for FRB borrowings compared to an amortized cost and fair value of $370.2 million and a fair value of $341.0 million, respectively, at December 31, 2024, respectively.

Other borrowings decreased $2.5 million or 9.2% to $25.3 million at December 31, 2025from $27.8 million at December 31, 2024. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days, and the interest rate paid on these borrowings floats monthly with money-market type rates. The interest rate paid on the repurchase agreements was 1.49% at both December 31, 2025 and 2024, respectively. We had pledged, as collateral for these repurchase agreements, investment securities with amortized costs and fair values of $36.4 million and $34.4 million at December 31, 2025, and $42.1 million and $39.7 million at December 31, 2024, respectively.

During 2025, the Company redeemed its junior subordinated debentures leaving no remaining balance at December 31, 2025 compared to $5.2 million in junior subordinated debentures outstanding at December 31, 2024. In addition, the Company had $10.0 million in subordinated debentures ("Notes") outstanding compared at both December 31, 2025 and 2024. During the year ended December 31, 2024, the Company repurchased $16.5 million in principal of the Notes. For additional information, refer to Notes 12 and 13 of the Notes to Consolidated Financial Statements included under "Item 8. Financial Statements and Supplementary Data" in this 2025 Form 10-K.

Total shareholders' equity increased $18.1 million or 9.9% to $200.5 million at December 31, 2025from $182.4 million at December 31, 2024. The increase was primarily attributable to net income available to common shareholders of $13.7 million during 2025 and a $10.5 million decrease in accumulated other comprehensive loss, net of tax, related to the unrecognized gain in value of AFS securities during the year ended December 31, 2025. These increases were partially offset by $2.2 million in dividends paid to common shareholders, $1.7 million in dividends paid to preferred shareholders and $2.3 million paid for share repurchases. Book value per common share was $37.74 at December 31, 2025compared to $31.21 at December 31, 2024.

Results of Operations

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table also distinguishes between the changes related to higher or lower outstanding balances and the changes related to the volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in rate (multiplied by prior year volume); (2) changes in volume (multiplied by prior year rate); and (3) net change (the sum of the prior columns). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change attributable to volume and the change attributable to rate. Changes in income are calculated on a tax equivalent basis using the effective tax rate for the period.

		Years Ended December 31,
		2025 vs. 2024												2024 vs. 2023
		Increase (Decrease) Due to Change in												Increase (Decrease) Due to Change in
(Dollars in thousands)		Volume				Rate				Net				Volume				Rate				Net
Interest-Earning Assets:
Loans: (1)		$	1,479			$	1,372			$	2,851			$	4,469			$	4,005			$	8,474
Taxable Investment Securities			1,999				(1,488	)			511				(1,277	)			2,006				729
Non-taxable Investment Securities (2)			(179	)			109				(70	)			(202	)			(62	)			(264	)
Deposits in Other Banks			(1,079	)			(871	)			(1,950	)			3,425				(81	)			3,344
Total Interest-Earning Assets		$	2,220			$	(878	)		$	1,342			$	6,415			$	5,868			$	12,283
Interest-Bearing Liabilities:
Deposits:
Certificate Accounts		$	2,179			$	(272	)		$	1,907			$	1,987			$	3,047			$	5,034
Other Interest Bearing Deposits			1,025				(2,628	)			(1,603	)			953				3,160				4,113
Total Deposits			3,204				(2,900	)			304				2,940				6,207				9,147
Borrowings			(2,985	)			(1,357	)			(4,342	)			209				395				604
Total Interest-Bearing Liabilities			219				(4,257	)			(4,038	)			3,149				6,602				9,751
Net change in net interest income (tax equivalent) (2)		$	2,001			$	3,379			$	5,380			$	3,266			$	(734	)		$	2,532

(1)	INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN AVERAGE LOANS OUTSTANDING.

(2)	THE TAX-EQUIVALENT INTEREST INCOME ADJUSTMENT RELATES TO THE TAX EXEMPT MUNICIPAL BONDS. THE TAX EQUIVALENT YIELD ADJUSTMENT TO INTEREST EARNED ON MUNICIPAL BONDS WAS $101,000 AND $105,000 FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024, RESPECTIVELY.

Average Balances, Interest Income and Expenses, and Average Yields and Rates

The following table compares detailed average balances, average yields on interest-earning assets, and average costs of interest-bearing liabilities at December 31, 2025 and 2024. The average balances were derived from the daily balances throughout the periods indicated. The average yields or costs were calculated by dividing the income or expense by the average balance of the corresponding assets or liabilities. Nonaccrual loans are included in earning assets in the following tables. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status.

		For the Year Ended December 31,
		2025												2024
(Dollars in thousands)		Average Balance				Interest				Yield/Rate				Average Balance				Interest				Yield/Rate
Interest-Earning Assets:
Loans (1)		$	696,600			$	44,152				6.34	%		$	673,566			$	41,301				6.13	%
Taxable Investment Securities			708,744				29,989				4.23				662,859				29,478				4.45
Non-taxable Investments (2)			10,457				457				4.37				14,728				527				3.58
Deposits in Other Banks			96,364				4,155				4.31				119,561				6,105				5.11
Total Interest-Earning Assets		$	1,512,165			$	78,753				5.21			$	1,470,714			$	77,411				5.26
Interest-Bearing Liabilities:
Checking, Savings and Money Market Accounts		$	776,682			$	17,221				2.22			$	734,424			$	18,824				2.56
Certificate Accounts			320,863				12,932				4.03				267,140				11,025				4.13
Total Interest-Bearing Deposits			1,097,545				30,153				2.75				1,001,564				29,849				2.98
Junior Subordinated Debt			4,915				310				6.30				5,155				376				7.29
Subordinated Debt			10,000				525				5.25				24,713				1,297				5.25
FRB and Other Borrowings (3)			26,831				453				1.69				96,941				3,957				4.08
Total Borrowed Funds			41,746				1,288				3.09				126,809				5,630				4.44
Total Interest-Bearing Liabilities		$	1,139,291			$	31,441				2.76	%		$	1,128,373			$	35,479				3.14	%
Net Interest Rate Spread											2.45	%											2.12	%
Tax Equivalent Net Interest Income/Margin (2)						$	47,312				3.13	%						$	41,932				2.85	%
Less: tax equivalent adjustment (2)							101												105
Net Interest Income						$	47,211											$	41,827

(1)	INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN AVERAGE LOANS OUTSTANDING.

(2)

TAX EQUIVALENT BASIS RECOGNIZES THE INCOME TAX SAVINGS WHEN COMPARING TAXABLE AND TAX-EXEMPT ASSETS AND WAS CALCULATED USING THE EFFECTIVE TAX RATE IN PLACE FOR THE YEARS ENDED December 31, 2025 and 2024. THE TAX-EQUIVALENT INTEREST INCOME ADJUSTMENT RELATES TO THE TAX EXEMPT MUNICIPAL BONDS INCLUDED IN OUR INVESTMENT PORTFOLIO DURING THE PERIODS INDICATED.

(3)	INCLUDES BORROWINGS FROM THE FRB (2024 ONLY) AND REPURCHASE AGREEMENTS.

Comparison of the Years Ended December 31, 2025 and 2024

Net Income Available to Common Shareholders

Net income available to common shareholders increased $3.1 million or 35.3% to $12.0 million or $3.80 per basic common share for the year ended December 31, 2025, compared to $8.9 million or $2.77 per basic common share for the year ended December 31, 2024. The increase in net income was primarily due to increases in net interest income and non-interest income and a reduction to the provision for credit losses, which were partially offset by an increase in non-interest expense.

Net Interest Income

Net interest income increased $5.3 million or 12.8% to $47.2 million for the year ended December 31, 2025, compared to $41.8 million in 2024. The increase was due to higher interest income from loans and taxable investment securities combined with a decrease in interest expense on long term debt and non certificate deposit accounts. These were partially offset by lower interest income from deposits in other banks and an increase in interest expense on certificate of deposit accounts. The net interest margin on a tax-equivalent basis increased 28 basis points to 3.13% for the year ended December 31, 2025 from 2.85% for the year ended December 31, 2024.

Total average interest-earning assets increased $41.5 million or 2.8% to $1.51 billion for the year ended December 31, 2025 from $1.47 billion for the year ended December 31, 2024, despite a five basis point decrease in the average yield earned on these assets. Similarly, average interest-bearing liabilities increased $10.9 million or 1.0% to $1.14 billion for the year ended December 31, 2025 from $1.13 billion for the year ended December 31, 2024, while the average cost of these liabilities decreased 38 basis points to 2.76%. The interest rate spread on a tax-equivalent basis increased 33 basis points to 2.45% for the year ended December 31, 2025 from 2.12% in 2024.

Total interest income increased $1.3 million or 1.7% to $78.6 million for the year ended December 31, 2025, compared to $77.3 million for the year ended December 31, 2024, as a result of increased interest income on loans and taxable investments. Interest income on loans increased $2.8 million or 6.8% to $44.1 million for the year ended December 31, 2025 compared to $41.3 million for the year ended December 31, 2024. The increase was due to a $23.0 million increase in the average balance of loans outstanding combined with a 20 basis point increase in the average loan yield during the year ended December 31, 2025.

Interest income on taxable investment securities increased $511,000, or 1.7%, due to a $45.9 million increase in the aggregate average balance of these interest-earning assets, partially offset by a 22 basis point decrease in the average yield earned during 2025 compared to 2024. Conversely, tax equivalent interest income on non-taxable investment securities decreased $70,000 or 13.3%, due to a $4.3 million decrease in the aggregate average balance of these assets, which was partially offset by a decrease of 79 basis points in the average yield earned on these assets during 2025 compared to 2024.

Interest income on deposits with other banks decreased $2.0 million or 31.9% to $4.2 million for the year ended December 31, 2025, compared to $6.1 million for prior year. This decrease was due to a $23.2 million decrease in the average balance of deposits with other banks. The average yield earned on these deposits was 4.31% for the year ended December 31, 2025, compared to 5.11% in 2024.

Total interest expense decreased $4.0 million or 11.4% to $31.4 million for the year ended December 31, 2025, compared to $35.5 million for the year ended December 31, 2024, due to a 38 basis point decrease in the average cost of interest-bearing liabilities, which was partially offset by a $10.9 million increase in their average balance. Interest expense on deposits increased $304,000 or 1.0% to $30.2 million for the year ended December 31, 2025. The average balance of interest-bearing deposits increased $96.0 million or 9.6% to $1.1 billion during the year ended December 31, 2025, compared to $1.0 billion during 2024 while the average cost of these deposits decreased 23 basis points to 2.75% in 2025 from 2.98% in 2024.

Interest expense on all borrowed funds decreased $4.3 million or 77.1% to $1.3 million during 2025, compared to $5.6 million during the prior year. The decrease was attributable to both a $85.1 million or 67.1% decrease in the average balance of all borrowings and a 135 basis point decrease in the average cost of borrowings, which fell to 3.09% in 2025 from 4.44% during 2024. Most of the decrease in interest expense was for FRB and other borrowings, which decreased $3.5 million to $453,000 for 2025 due to both a $70.1 million decrease in the average balance and a 239 basis point decrease in the average cost of these liabilities in 2025.

Provision for Credit Losses

We recorded a $235,000 reversal of credit losses for the year ended December 31, 2025. This consisted of a $194,000 reversal of credit losses on loans and a $41,000 reversal of credit losses on unfunded commitments, compared to a $1.4 million provision for credit losses for the year ended December 31, 2024, which consisted of a $1.5 million provision for credit losses on loans and a $110,000 reversal of credit losses on unfunded commitments. The decrease in the provision was due to a reduction in loan balances and a decrease in substandard loans. Non-performing assets represented 0.36% and 0.47% of total assets at December 31, 2025 and 2024, respectively. Net charge-offs totaled $171,000 for the year ended December 31, 2025, compared to $155,000 in 2024. Non-performing assets, consisting of nonaccrual loans and OREO, decreased $1.8 million, or 23.5%, to $5.8 million at December 31, 2025 from $7.6 million at December 31, 2024.

The provision for credit losses is determined as part of management's ongoing monthly assessment of the loan portfolio's credit quality and the adequacy of the allowance for credit losses. The Company follows established policies and procedures to evaluate and monitor credit quality, including internal and external loan reviews to identify potential problem loans. The Asset Classification Committee conducts monthly reviews, and the Board of Directors evaluates the adequacy of the allowance for credit losses on a quarterly basis.

Management believes the allowance for credit losses at December 31, 2025is adequate based on its best estimates of the expected losses in the loan portfolio; however, these estimates are subject to uncertainty. Since the allowance for credit losses is an estimation, there is no guarantee that actual credit losses will not exceed the allowance or that further increases in the allowance will not be necessary in the future. A significant deterioration in national and local economic conditions, triggered by factors like inflation, recession, unemployment or money supply fluctuations, could lead to a substantial increase in the allowance for credit losses, potentially adversely impacting the Company's financial condition and results of operations. In addition, bank regulatory agencies may require us to make additional provisions to the allowance for credit losses during examinations, based on their own judgments and estimates.

Non-Interest Income

Non-interest income increased $1.3 million or 12.5% to $11.5 million for the year ended December 31, 2025from $10.2 million for the year ended December 31, 2024, with increases occurring in all categories except gain on sale of investment securities, net and trust income. Increases in gain on sales of loans, grant income, and other non-interest income, which includes rental income, were the primary drivers of the increase in non-interest income.

Gain on sales of loans increased $115,000 or 14.8% to $894,000 for the year ended December 31, 2025, compared to the prior year, as the dollar volume of loans sold to investors increased. The Bank sold $39.8 million of loans in 2025 compared to $31.3 million during 2024.

We received $1.1 million and $500,000 in grant income during the years ended December 31, 2025and 2024, respectively. All grant income received in 2025 was from a Community Development Financial Institution ("CDFI") Financial Assistance ("FA") Award, while the grant income received in 2024 included a $220,000 CDFI FA Award and $280,000 through the CDFI Fund Bank Enterprise Award ("BEA") program. These grants were allocated to support the Bank's ongoing initiatives in community development financing and service activities within the most economically distressed communities.

Other non-interest income increased $658,000 or 87.2% to $1.4 million for the year ended December 31, 2025compared to $407,000 in 2024 primarily due to increased rental income. During the first quarter of 2025, we purchased a multi-tenant property resulting in a $548,000 increase in rental income in 2025 when compared to the prior year. The property is intended to be the future site of a full-service branch for the Bank.

These increases were offset by a $371,000 decrease in trust income to $1.9 million for the year ended December 31, 2025compared to $2.3 million in 2024 primarily due to non-recurring estate settlement fees received in 2024.

Non-Interest Expense

Non-interest expense increased $3.5 million or 9.1% to $41.6 million during the year ended December 31, 2025compared to $38.1 million in 2024. This increase was primarily a result of increases in compensation and employee benefits, occupancy expense, debit card expenses and data processing expenses in 2025.

Compensation and employee benefits increased $2.2 million or 10.1% to $24.0 million during the year ended December 31, 2025from $21.8 million in 2024. This increase was primarily due to an increase in employee salaries and annual cost-of-living adjustments.

Occupancy expenses increased $397,000 or 12.0% to $3.7 million in 2025 from $3.3 million in 2024, primarily due to increased utilities, taxes and building maintenance costs in 2025.

Debit card expenses increased $378,000 or 24.2% to $1.9 million during the year ended December 31, 2025from $1.6 million in 2024, primarily due higher transaction volumes and rising transaction costs.

Data processing expenses increased $230,000 or 16.3% to $1.6 million during the year ended December 31, 2025as a result of increases in the cost of services provided by third-party vendors and higher transaction volume when compared to the prior year.

Provision for Income Taxes

The provision for income taxes increased $901,000 or 32.7% to $3.7 million during the year ended December 31, 2025 compared to $2.8 million for the year ended December 31, 2024 due to an increase in pre-tax income. The Company's combined federal and state effective income tax rate was 21.1% for 2025 compared to 21.9% for 2024.

Regulatory Capital

The following table reconciles the Bank's shareholders' equity to its various regulatory capital positions.

		December 31,
(Dollars in thousands)			2025				2024
Bank's Shareholders' Equity (1)		$	164,921			$	159,948
Reduction for Goodwill			1,200				1,200
Tangible Capital			163,721				158,748
Core Capital			163,721				158,748
Supplemental Capital			10,646				10,657
Total Risk-Based Capital		$	174,367			$	169,405

(1)	EXCLUDES UNREALIZED LOSSES ON INVESTMENT SECURITIES OF $20.6 MILLION AND $31.1 MILLION December 31, 2025 and 2024, RESPECTIVELY.

The Bank is subject to minimum capital requirements imposed by the FDIC. Based on capital levels at December 31, 2025, the Bank was considered to be well capitalized. At December 31, 2025, the Bank exceeded all regulatory capital requirements with Tier 1 leverage-based capital, Tier 1 risk-based capital, total risk-based capital, and common equity Tier 1 (CET1) capital ratios of 10.2%, 19.3%, 20.6%, and 19.3%, respectively. CET1 consists of Tier 1 capital less all capital components that are not considered common equity.

In addition to the FDIC's minimum capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. At December 31, 2025, the Bank's capital conservation buffer was 12.6%.

For additional information regarding the Bank's and Company's regulatory capital compliance, see the discussion included in Note 15 of the Notes to Consolidated Financial Statements included under "Item 8. Financial Statements and Supplementary Data" in this 2025 Form 10-K.

Liquidity and Capital Resources

Liquidity refers to the ability to generate sufficient cash flows to fund current loan demand, repay maturing borrowings, fund maturing deposit withdrawals, and meet operating expenses. Our primary sources of funds include deposits, scheduled loan and investment security repayments, including interest payments, maturities and sales of loans and investment securities, borrowings from the FRB, advances from the FHLB and cash flow generated from operations. The need for funds varies among periods depending on funding needs as well as the rate of amortization and prepayment on loans. The use of borrowings from the FRB, FHLB advances and other borrowings varies depending on loan demand, deposit inflows, and the use of investment leverage strategies that we might employee to increase net interest income.

Our principal use of funds is the origination of mortgages and other loans, and the purchase of investment securities. The Bank's liquidity is impacted by the volume of loans sold and principal payments received. During the years ended December 31, 2025 and 2024, the Bank sold $39.8 million and $31.3 million in loans, respectively. During the same periods, the change in loans outstanding, accounting for originations and principal repayments (excluding loans held for sale), was a net decrease $13.6 million and a net increase of $66.5 million, respectively. Further, purchases of investment securities totaled $228.3 million during 2025 compared to $71.9 million during 2024. Other uses of funds in 2025 included repayment of FRB borrowings and junior subordinated debentures, property and equipment purchases and improvements, repurchases of common stock and $3.9 million in dividend payments to common and preferred shareholders.

In the normal course of business, we make off-balance sheet arrangements, including credit commitments to its customers to meet their financial needs. These arrangements involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated statement of financial condition. We make personal, commercial, and real estate lines of credit available to customers and issue standby letters of credit.

Commitments to extend credit are subject to the Bank's normal credit policies. At December 31, 2025, unused lines of credit on HELOCs, credit cards, and commercial loans totaled $136.4 million. The Bank also had undisbursed loans-in-process of $6.2 million, included in total unused commitments. These commitments are expected to be funded through loan amortizations, deposit inflows, principal payments on investments, and short-term borrowing capacity. See Note 18 of the Notes to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" in this 2025 Form 10-K for additional information regarding our commitments and off-balance sheet arrangements.

We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during 2026 that would materially impact liquidity. We also have purchase obligations, generally with remaining terms of less than three years and contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor. For the year ending December 31, 2026, we project that fixed commitments will include $459,000 of operating lease payments. See Note 5 of the Notes to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" in this 2025 Form 10-K for additional information regarding our operating leases.

The Bank's liquidity has been positively impacted by increases in deposit levels in recent years. During the year ended December 31, 2025, deposits increased by $47.7 million, bringing total deposits to $1.4 billion at year end. At December 31, 2025, the Bank had $75.3 million in cash and cash equivalents, compared to $178.3 million at December 31, 2024. In addition, the Bank held certificates of deposit at other banks and AFS investment securities, which together with cash and cash equivalents amounted to $740.1 million at December 31, 2025, up from $705.2 million at December 31, 2024. Total certificates of deposit scheduled to mature within one year totaled $279.1 million at December 31, 2025. Management's policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with the Bank.

Primary sources of short-term liquidity for the Bank include borrowings from the FRB, the FHLB of Atlanta, and a $50.0 million line of credit with the Pacific Coast Bankers Bank. We had no outstanding FRB borrowings at December 31, 2025, compared to $50.0 million in outstanding borrowings under the FRB's BTFP with a weighted average borrowing rate of 4.76% at December 31, 2024. At December 31, 2025, we had pledged investment securities with an amortized cost of $312.9 million and a fair value of $293.9 million as collateral for these borrowings.

We had no outstanding FHLB advances at December 31, 2025 and 2024. The Bank maintains an approved line of credit with the FHLB of Atlanta, allowing for borrowing of up to 25% of the Bank's assets, which, when utilized, is collateralized by a pledge against specific investment securities and/or eligible loans. As of December 31, 2025, the Bank has the ability to borrow $463.9 million based on the collateral value of pledged investment securities and loans. Management believes that future liquidity can be met through the Bank's deposits, which totaled $1.4 billion at December 31, 2025, as well as through sales and maturities of investment securities, and loans sold to investors. During the years ended December 31, 2025 and 2024, proceeds from sales, payments and maturities of investment securities totaled $123.7 million and $113.5 million, and loans sold to investors totaled $39.8 million and $31.3 million, respectively.

Historically the Bank's cash flow from operating activities has been relatively stable. The cash flows from investing activities vary with sales of investment securities and with the need to invest excess funds or utilize leverage strategies with the purchase of investment securities. The cash flows from financing activities vary depending on the need for borrowings from the FRB, FHLB advances and other borrowings. The Bank's management regularly reviews its liquidity position and has implemented internal policies establishing guidelines for sources of asset-based liquidity and evaluates and monitors the total amount of purchased funds used to support the balance sheet and funding from noncore sources. The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.

Security Federal Corporation is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. Sources of capital and liquidity for Security Federal Corporation include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends. At December 31, 2025, Security Federal Corporation (on an unconsolidated basis) had liquid assets of $45.0 million. The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate in 2026 is $0.16 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2026 at this rate of $0.16 per share, our average total common stock dividends paid each quarter would be approximately $498,000 based on the number of our current outstanding shares at December 31, 2025.

In June 2023, the Company announced that its Board of Directors approved a share repurchase program for the purchase of up to three percent, or approximately 97,612 shares, of the Company's outstanding common stock as of that date. In general, stock-repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. On August 19, 2024, the Company's Board of Directors announced an additional 100,000 shares available to be purchased under the program. During the year ended December 31, 2025, the Company repurchased 74,066 shares of its common stock at an aggregate cost of $2.3 million, leaving 53,000 shares available for further repurchase under the existing stock repurchase program at December 31, 2025. The repurchase program does not obligate the Company to purchase any particular number of shares. For additional information, see Part II, Item 5 - "Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities."