Major classifications of loans at March 31 and December 31 are as follows:

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Overdrafts on customer deposit accounts are included in consumer loans. Overdraft balances totaled approximately $200 and $200 at March 31, 2026 and December 31, 2025, respectively.

Mortgage loans sold and serviced for others, and the portion of loans participated to others, with the Bank as lead lender and servicer, are not included in the accompanying financial statements. The unpaid principal balance of loans serviced for others at March 31, 2026 and December 31, 2025 was approximately $19,624,000 and $20,078,000, respectively.

Loans are pooled based on similar risk characteristics, including loan type, collateral, and borrower characteristics. The risk characteristics applicable to each segment of the loan portfolio are described as follows:

Single family residential - Residential real estate loans are secured by 1-4 family residences and are split basically equal between owner-occupied and non-owner occupied. The Bank generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded on owner occupied properties only. Loan to value ratios greater than 80% on non-owner occupied are not originated. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions, such as unemployment levels, inflationary pressures, and housing values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Multi-family and nonresidential - Loans secured by multi-family and nonresidential real estate generally have larger balances and involve a greater degree of risk than 1-4 family residential mortgage loans. The primary risk associated with multi-family and nonresidential real estate lending is the property cash flow. Payments on loans secured by income properties often depend on successful operation and management of the properties. To monitor cash flows on income properties, the Bank requires borrowers, co-borrowers and loan guarantors of large loan relationships to provide annual financial statements and tax returns. In reaching a decision on whether to originate a multi-family and nonresidential real estate loan, the Bank considers the net operating income of the property, the borrower’s expertise, credit history, and profitability and the value of the underlying property(ies). The Bank generally requires that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.15x.

Construction and land - Loans secured by land are made primarily to borrowers wishing to own tracts adjacent to their residence or to utilize the land for recreational purposes. The risks associated with these loans is primarily the resale value of the land. This risk is mitigated by limiting loans on land to well qualified borrowers. Construction loans also involve risks associated with project completion, including cost overruns, delays in construction, and the possibility that the completed project may not achieve the expected value or occupancy levels.

Second mortgage - Second mortgage loans are generally for homes improvements or other purposes approved by the Bank. Second mortgage loans typically involve an appraisal, title examination, verification of first mortgage balances, and adequate hazard insurance. These loans are subject to the same credit requirements as any other loans and are limited to maximum combined loan-to-value ratio. The risk inherent in second mortgages is similar to the risk of first lien mortgages on owner and non-owner occupied properties.

Lines of credit - Commercial lines of credit will normally be extended to commercial customers for short-term working capital purposes, many times on an unsecured basis. The risk associated with these lines of credit is the potential default of the guarantor as they are unsecured lines of credit. This risk is mitigated by limiting the origination of these loans to only high-quality borrowers with substantial net worth and liquidity that have several years of seasoning with the bank. Technically, the lines of credit mature annually and are required to be paid-off at maturity. However, the lines of credit may be renewed on an annual basis after performing a financial review of the borrower’s current situation which includes obtaining an updated credit report, updated tax returns and an updated personal financial statement before a decision to renew is approved. Additional risk mitigation factor for these loans is the guarantee has cognovit language to expedite judgement in the event of a default. Home equity lines of credit (HELOC) are secured by real estate and therefore do not undergo the same annual review process as commercial lines of credit.

Commercial – Includes loans originated by a third-party and purchased by the Bank and the commercial unsecured lines of credit originated by the Bank. Commercial loans are primarily based on the global cash flow of the guarantor(s). Secondarily, they are based on the overall financial strength of the guarantor(s). Commercial loans are secured by personal guarantees. The risk associated with these loans is primarily the default of the guarantor(s). This risk is mitigated by the Bank’s conservative underwriting standards in lending to seasoned customers and/or high-income guarantors with good credit history.

Consumer - Consumer loans consist of personal loans with the majority of these loans purchased from a third-party originator. They generally have fixed rates and terms ranging from 72-120 months. Consumer loans generally have higher interest rates but pose additional risks of collectability and loss when compared to certain other types of loans. The mitigating risk factor is the Bank’s underwriting standards are higher than the originating bank. Therefore, purchased loans have extremely restrictive underwriting criteria such as higher credit scores, lower debt ratios, seasoned employment, home ownership and other factors.

The following tables present the balance in the allowance for credit losses based on portfolio segment for the periods ended March 31, 2026 and December 31, 2025:

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The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. At March 31, 2026 and December 31, 2025, the Bank maintained a reserve for unfunded loan commitments. The following table presents the balance in the allowance for credit losses on off-balance sheet credit exposures. See Note 10 – Commitments and Uncertainties for additional information.

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The provision for credit losses is determined by the Bank as the amount that is added to ACL accounts to bring the ACL to that, in management’s judgement, is adequate to absorb expected credit losses over the lives of the respective financial instruments. The following table presents the components of the provision for credit losses:

Provision for Credit Losses

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The Bank uses a risk-rating system to quantify loan quality. A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The categories used are:

The Bank evaluates the loan risk grading system definitions on an ongoing basis. No significant changes were made during the three months ended March 31, 2026 and 2025. The following tables represent loans, as of March 31, 2026 and December 31, 2025, by grading category and year in which the loans were originated:

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