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Item 2. Management’s Discussion and Analysis

2026-07-31 compared with 2026-05-01 · 288 added, 201 removed, 468 unchanged (51% of the section changed)

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RESULTS OF OPERATIONS SUMMARY

First Quarter 2026 Compared to First Quarter 2025

First quarter 2026 net income was $12.5 million, and $0.96 per diluted share as compared to $9.1 million and $0.65 per diluted share in the first quarter of 2025.

The Company’s annualized return on average equity was 13.88% and annualized

return on average assets was 1.39% for the quarter March 31, 2026, compared to 10.44% and 1.02%, respectively, for the same quarter in 2025.

The primary drivers behind the variance in first quarter net income are as follows:

● Net income for the first quarter of 2026 increased $3.4 million, or 38%, to $12.5 million.

There were favorable changes in every major income statement category, including a decrease in provision for credit losses of $2.0 million, or 99%, an increase in net interest income of $0.5 million, or 2%, an increase in noninterest income of $1.3 million, or 20%, and a $0.6 million, or 3%, reduction in noninterest expense.

● The $0.5 million increase in net interest income was due to a $0.8 million decrease in interest expense partially offset by a $0.3 million decrease in interest income.

● The decrease of $2.0 million in the provision for credit losses was primarily due to an increased specific reserve in the first quarter of 2025 on an individually evaluated loan related to a single loan relationship of a wine grape grower.

● The $1.3 million increase in noninterest income was primarily due to higher service charge income, an increase in cash surrender value of life insurance due to purchases of additional life insurance in the second quarter of 2025, and other increases related to higher FHLB dividend income and an increase in the fair value of bank stocks.

● The $0.6 million decline in noninterest expense in the first quarter over the same quarter last year was primarily due to decreases in salaries and benefits, professional services, and deferred directors’ fees.

Second Quarter 2026 Compared to Second Quarter 2025

Second quarter 2026 net income was $9.9 million, and $0.77 per diluted share as compared to $10.6 million and $0.78 per diluted share in the second quarter of 2025.

The Company’s annualized return on average equity was 10.90% and annualized return on average assets was 1.09% for the quarter ended June 30, 2026, compared to 12.08% and 1.16%,

respectively, for the same quarter in 2025.

The primary drivers behind the variance in second quarter net income are as follows:

● A $1.1 million increase in credit loss expense on loans, resulting primarily from a $2.5 million specific reserve on a single agricultural production loan to a borrower in the lumber industry.

● Net interest income remained stable, decreasing $0.2 million, while noninterest income increased slightly and noninterest expense decreased by $0.3 million.

● Noninterest income and noninterest expense changes included a $0.4 million increase in earnings from separate account life insurance and a $0.1 million increase in deferred compensation expense.

Separate account life insurance income and deferred compensation expense are designed to offset each other.

● Noninterest expense in the second quarter of 2026 included approximately $0.5 million of severance and recruitment related charges resulting from a restructuring of the executive team.

First Half of 2026 Compared to First Half of 2025

● Net income increased $2.7 million, or 14%, to $22.4 million for the first six months of 2026.

The increase was driven primarily by a $1.3 million increase in noninterest income, a $1.1 million decrease in provision for credit losses, and a $0.9 million decrease in noninterest expense.

Diluted earnings per share increased 20% to $1.72 compared to $1.43 in the comparative period.

● Net interest income increased $0.3 million due primarily to a four basis point increase in net interest margin to 3.75%, partially offset by slightly lower average earning assets.

Funding costs declined meaningfully during the period, with cost of funds decreasing to 1.32% from 1.48% and cost of deposits declining to 1.14% from 1.31%.

● Noninterest income increased $1.3 million, or 9%, compared to the first six months of 2025.

The increase was driven primarily by a $0.5 million increase in earnings on separate account life insurance, a $0.3 million increase in cash surrender value income from life insurance, a $0.2 million increase in service charges and fees, and a $0.4 million gain on sale of fixed assets.

These favorable variances were partially offset by lower securities gains.

● Noninterest expense decreased $0.9 million, or 2%, compared to the first six months of 2025.

The reduction was driven primarily by lower other operating expenses and deposit service costs, partially offset by increased occupancy expenses and higher professional service costs.

FINANCIAL CONDITION SUMMARY

March 31, 2026, Relative to December 31, 2025

The Company’s assets totaled $3.8 billion at March 31, 2026, a decrease of $74.8 million, or 2.0% from December 31, 2025.

The following provides a summary of key balance sheet changes during the first three months of 2026:

● Investment securities decreased $13.2 million, or 1.0%, to $903.0 million primarily due to early calls of U.S.

government agencies.

● Gross loans decreased $80.1 million, due mostly to a $39.9 million seasonal decrease in mortgage warehouse line utilization coupled with declines in overall line utilization and new credit extended.

● Deposits totaled $2.9 billion at March 31, 2026, representing a year-to-date increase of $49.3 million, or 2%.

The increase in deposits came from a $56.8 million increase in core customer deposits, partially offset by a $7.7 million decline in customer time deposits.

● Overnight borrowings decreased $93.0 million, FHLB term advances decreased $25.0 million, and customer repurchase agreements decreased $3.0 million.

● Total capital of $363.7 million at March 31, 2026, reflects a decrease of $1.1 million compared to December 31, 2025.

The decrease in equity during the first quarter of 2026 was due to $9.5 million in share repurchases, a $3.4 million dividend paid to shareholders, and $1.8 million unfavorable swing in other comprehensive income/loss due principally to negative changes in investment securities’ fair value.

These changes were partially offset by $12.5 million in net income recorded during the quarter.

June 30, 2026, Relative to December 31, 2025 (unless otherwise noted)

The Company’s assets totaled $3.7 billion at June 30, 2026, a decrease of $108.7 million, or 3% from December 31, 2025.

The following provides a summary of key balance sheet changes during the first six months of 2026:

● Investment securities decreased $21.4 million, or 2%, to $894.7 million primarily due to calls of U.S.

government agencies and collateralized loan obligations (“CLOs”).

● Gross loans decreased $90.8 million, or 4%, due to a $60.9 million decrease in mortgage warehouse balances, a $13.9 million decrease in residential real estate loans, a $13.4 million decrease in other commercial loans, a $1.2 million decrease in commercial real estate, and a $2.5 million decrease in farmland loans.

These decreases were partially offset by an increase of $1.4 million in construction loans.

● Mortgage warehouse average balances increased $8.0 million during the second quarter of 2026 compared to the linked quarter, while ending balances declined by $21.0 million.

Average balances of commercial real estate and commercial and industrial loans decreased during the quarter, and period-end balances increased slightly.

However, loan production strengthened significantly as the quarter progressed, that we believe reflects a shift in

momentum entering the third quarter of 2026, driven by increasing commercial real estate and commercial and industrial lending opportunities.

● Total deposits increased $54.6 million, or 2%.

Growth was concentrated in noninterest-bearing demand deposits and non-maturing interest-bearing deposits.

Customer deposits increased $57.5 million, while brokered deposits decreased $2.9 million during the period.

● Other interest-bearing liabilities declined to $155.0 million at June 30, 2026, from $302.7 million at December 31, 2025, primarily reflecting a reduction in wholesale funding as mortgage warehouse loan balances decreased.

The decline consisted of a $102.7 million reduction in overnight borrowings and a $45.0 million reduction in FHLB term advances.

Customer repurchase agreements also decreased $8.5 million during the period.

● Total capital of $366.9 million at June 30, 2026, reflects an increase of $2.0 million compared to December 31, 2025.

The increase in equity during the first six months of 2026 was primarily attributable to $22.4 million in net income, partially offset by $14.4 million in share repurchases, $6.8 million in cash dividends declared, and a $1.0 million increase in accumulated other comprehensive loss, related to changes in the fair value of investment securities.

The remaining difference was related to activity from stock options and restricted stock during the year.

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The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money.

The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as BOLI, equity

investments, and investment gains.

The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as BOLI, investments in bank stocks, and investment gains.

The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a full range of banking services to its customers.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income was $30.6 million for the first quarter of 2026, a $0.5 million increase, or 2% over the first quarter of 2025.

Interest expense decreased $0.8 million compared to the first quarter of 2025, primarily due to a reduction in the cost of interest‑bearing liabilities and a modest decline in average interest‑bearing liability balances.

The cost of interest‑bearing liabilities decreased approximately 21 basis points, while average interest‑bearing liabilities increased by $74.4 million.

Although average interest‑earning assets increased $42.7 million during the period, the yield on those assets declined by approximately 9 basis points compared to the first quarter of 2025, partially offsetting the favorable impact from lower funding costs.

The Company had $1.8 billion in adjustable and variable rate loans and $232.6 million in floating rate bonds, as compared to $227.0 million in floating rate CDs and $36.1 million in floating rate trust preferred securities at March 31, 2026.

Net interest income was $30.4 million for the second quarter of 2026, a decrease of $0.2 million, or 1%, compared to the second quarter of 2025.

The decrease was primarily attributable to lower average interest-earning asset balances and yields, substantially offset by lower funding costs.

Interest expense declined $1.5 million, or 13%, from the prior-year quarter, reflecting the benefits of lower deposit and wholesale funding costs.

For the second quarter of 2026, average interest-earning assets decreased $81.2 million, or 2%, from the same period in 2025, while the yield on those assets declined eight basis points to 5.02%.

The decline in average earning assets was driven primarily by lower investment securities balances and decreases in real estate loans and agricultural production loans.

Average interest-bearing liabilities decreased $23.7 million in the second quarter of 2026 compared to the same period in 2025, while the cost of those liabilities declined 26 basis points to 1.92%.

The quarterly decrease was primarily attributable to a 28 basis point reduction in the cost of interest-bearing deposits and a 23 basis point reduction in the cost of borrowed funds to 1.73% and 2.81%, respectively.

Average interest-bearing deposit balances declined $42.8 million from the prior-year quarter, comprised primarily of a decline in higher-cost customer time deposits which decreased $62.7 million and brokered deposits which declined $16.2 million.

These changes were partially offset by higher average balances of federal funds purchased, which also increased to fund mortgage warehouse lending activity.

The reduction in funding costs more than offset the modest decline in earning asset yields, resulting in a six basis point increase in the net interest margin to 3.74% from 3.68% in the second quarter of 2025.

Net interest income for the first six months of 2026 increased $0.3 million to $61.0 million, compared to the same period in 2025.

The increase resulted primarily from an improved net interest margin, driven by lower funding costs and partially offset by a modest decline in average earning assets.

Average interest-earning assets decreased $19.6 million, or 1%, and the yield on those assets decreased nine basis points to 5.03%.

For the first six months of 2026, interest expense decreased $2.3 million to $21.1 million, compared to $23.4 million during the same period in 2025.

The decrease was driven by a 23 basis point reduction in the cost of interest-bearing liabilities to 1.93%, partially offset by a $25.1 million increase in average interest-bearing liabilities.

The reduction in funding costs contributed to a four basis point increase in net interest margin to 3.75% for the first six months of 2026, compared to 3.71% for the same period in 2025.

The Company had $1.8 billion in adjustable and variable rate loans and $214.4 million in floating rate bonds, as compared to $220.5 million in floating rate CDs and $36.1 million in floating rate trust preferred securities at June 30, 2026.

The adjustable-rate loans have repricing frequencies ranging from 30-days to 10-years.

Of the $1.8 billion in adjustable and variable rate loans, $797.4 million reprice or mature in the next twelve months.

Of the $1.8 billion in adjustable and variable rate loans, $793.3 million reprice or mature in the next twelve months, including $457.5 million in mortgage warehouse facilities, which generally reprice immediately as interest rates change.

In addition, there were $620.2 million of fixed-term deposits that reprice or mature within twelve months.

Based on current rates of the $797.4 million in adjustable and variable rate loans that reprice or mature over the next twelve months, $197.6 million, or 25%, have a pricing index rate higher than the current index, while $49.0 million, or 6%, have a pricing index rate lower than the current index.

The remaining balance of $550.8 million in loans are priced at the current index rate or are expected to mature.

Net interest margin was 3.75% for the first quarter of 2026, as compared to 3.74% for the first quarter of 2025.

Compared to the first quarter of 2025, the net interest margin increased one basis point, reflecting the benefit of lower funding costs, partially offset by modest pressure on asset yields.

The cost of average total deposits declined to 1.17%, from 1.33% in the first quarter of 2025, while the cost of interest-bearing liabilities declined to 1.94%, from 2.15%, reflecting improved funding mix and lower average balances of higher-cost deposits and borrowings.

Of the $793.3 million in adjustable and variable rate loans that reprice or mature over the next twelve months, $270.5 million, or 34%, have a pricing index rate higher than the current index, while $12.7 million, or 2%, have a pricing index rate lower than the current index.

The remaining balance of $510.1 million in loans are priced at the current index rate.

Overall, the Company continues to benefit from continued lower cost funding, which was partially offset by lower yields on investment securities, as assets repriced in a lower rate environment, resulting in a stable net interest margin compared to the prior year.

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For the three months ended

March 31, 2026

March 31, 2025

June 30, 2026

June 30, 2025

Rate/Yield (2)

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Total investments

Mortgage warehouse lines

Mortgage warehouse facilities

Total interest-earning assets (4)

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Loan fees have been included in the calculation of interest income.

Net loan costs and loan acquisition FMV amortization were $(0.3) million and $(0.3) million for the quarters ended March 31, 2026 and 2025, respectively.

Net loan costs and loan acquisition FMV amortization were $(0.3) million and $(0.4) million for the quarters ended June 30, 2026 and 2025, respectively.

(4) Nonaccrual loans have been included in total loans for purposes of computing total earning assets.

(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.

Average Balances and Rates

(Dollars in Thousands, Unaudited)

For the six months ended

June 30, 2026

June 30, 2025

Rate/Yield (2)

Interest-earning due from banks

Total investments

Mortgage warehouse facilities

Total interest-earning assets (4)

Other earning assets

Non-earning assets

Liabilities and shareholders' equity

Interest-bearing deposits:

Demand deposits

Savings accounts

Time Deposits

Brokered deposits

Total interest-bearing deposits

Borrowed funds:

Federal funds purchased

Repurchase agreements

Short term borrowings

Long term FHLB advances

Long-term debt

Subordinated debentures

Total borrowed funds

Total interest-bearing liabilities

Demand deposits - noninterest-bearing

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Interest income/interest-earning assets

Interest expense/interest-earning assets

Net interest income and margin (5)

(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(2) Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective federal tax rate.

(3) Loans are gross of the allowance for possible loan losses.

Loan fees have been included in the calculation of interest income.

Net loan fees and loan acquisition FMV amortization were $(0.6) million and $(0.7) million for the six months ended June 30, 2026, and 2025, respectively.

(4) Non-accrual loans have been included in total loans for purposes of computing total earning assets.

(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.

The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest-earning assets and interest-bearing liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average interest rates.

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(dollars in thousands, unaudited)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

2026 over 2025

Increase (decrease) due to

Federal funds sold/due from time

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(1) Subtotals are a sum of the categories above and are not recalculated on the portfolio totals.

The volume variance was favorable at $0.2 million, primarily driven by higher average loan balances, most notably within the mortgage warehouse portfolio, which contributed a favorable volume variance of $1.8 million.

This was partially offset by lower average balances in investment securities, which resulted in an unfavorable volume variance of $0.6 million, as excess liquidity was redeployed and certain securities, including collateralized loan obligations, experienced pay‑downs.

The rate variance was a favorable $0.2 million, as favorable rate impacts on loans and interest‑bearing liabilities more than offset unfavorable rate variances on investment securities.

Loan yields contributed positively to the rate variance, while interest‑bearing liabilities benefited from lower overall funding costs.

These favorable impacts were partially offset by lower yields on variable‑rate investment securities.

The mix variance was a favorable $0.1 million, reflecting changes in the composition of interest‑earning assets and interest‑bearing liabilities, including growth in higher‑yielding loan categories and changes in funding mix.

Overall, the combined impact of these factors resulted in a $0.5 million increase in net interest income for the first quarter of 2026 compared to the prior‑year quarter.

Variances in interest expense were the result of changes discussed under the “Net Interest Income and Net Interest Margin” heading.

PROVISION FOR CREDIT LOSSES ON LOANS

The volume and rate analysis indicates that lower funding costs remained the primary driver of earnings performance during both the quarterly and year-to-date periods.

Favorable deposit and borrowing cost repricing largely offset pressure from lower investment balances and reduced earning asset yields, while growth in mortgage warehouse lending provided a meaningful positive volume contribution.

Variances in net interest income were the result of changes discussed under the “Net Interest Income and Net Interest Margin” heading.

PROVISION FOR CREDIT LOSS EXPENSE

Credit risk is inherent in the business of making loans.

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Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance.

The Company recorded a provision for credit losses on loans of $0.1 million for the first quarter of 2026, compared to a credit loss benefit of $0.8 million in the fourth quarter of 2025 and a provision of $2.0 million in the first quarter of 2025.

The $0.8 million release in allowance for credit losses during the fourth quarter of 2025 was due mostly to the $1.5 million release of specific reserve on loans individually evaluated, partially offset by higher reserve on loans collectively evaluated.

The provision recorded during the first quarter of 2026 is due to the increase in specific reserve and changes to certain assumptions used, partially offset by lower loan balances and net loan charge-offs.

The Company recorded a provision for credit loss expense on loans of $2.3 million for the second quarter of 2026, compared to $1.2 million for the second quarter of 2025.

For the first six months of 2026, the provision for credit losses on loans was $2.4 million, compared to $3.2 million for the same period in 2025.

A $2.5 million specific reserve established on an agricultural production loan during the second quarter of 2026 was the primary driver of the increase in credit loss expense for the quarterly comparison.

Following the end of the second quarter, the Company received a $0.5 million payment on this loan.

Management continues to work with the borrower to evaluate and pursue various resolution alternatives for this credit.

The allowance for credit losses on loans is at a level that, in Management’s judgment, is adequate to absorb probable credit losses on loans related to individually identified loans as well as probable credit losses in the remaining loan portfolio.

3 unchanged sentences

(dollars in thousands, unaudited)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

Noninterest income:

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Stationery and supply costs

Sundry and tellers

Debit card and fraud loss

Total noninterest expense

2 unchanged sentences

Noninterest Income:

Noninterest income increased $1.3 million, or 20%, to $8.0 million in the first quarter of 2026 compared to the same period in 2025.

The $1.3 million increase in noninterest income in the first quarter of 2026 as compared to the same quarter in 2025 was due to higher service charge and fee income, an increase in cash surrender value of life insurance due to purchases of additional life insurance in the second quarter of 2025, and other increases related to higher FHLB dividend income, an increase in the fair value of bank stocks, and a gain on sale of fixed assets.

Service charges and fees on customer deposit accounts increased by $0.1 million, or 2%, to $5.7 million in the first quarter of 2026 as compared to the same quarter in 2025.

Higher overdraft income and a decrease in costs related to our VISA debit card program were the primary drivers of the favorable variance.

The Company maintains a non-qualified deferred compensation plan for officers and directors, under which participants may defer a portion of their earnings and select from various hypothetical investment alternatives to determine their individual returns.

Total noninterest income was unchanged at $8.6 million compared to the second quarter of 2025.

Favorable variances included a $0.4 million increase in earnings on separate account BOLI, a $0.1 million increase in service charges and fees on deposit accounts, and a modest increase in cash surrender value income from life insurance.

These improvements were largely offset by a $0.6 million decrease in other income, mainly due to a decrease in gain on life insurance proceeds.

For the first six months of 2026, noninterest income increased $1.3 million, or 9%, to $16.5 million compared to $15.2 million for the same period in 2025.

These favorable changes were partially offset by lower gains on sale of investment securities.

The Company’s non-qualified deferred compensation plan for officers and directors, allows participants to defer a portion of their earnings and select from various hypothetical investment alternatives to determine their individual returns.

The Company economically offsets this liability with separate account life insurance policies that are invested in similar underlying fund types within the life insurance policy.

Because the deferred compensation liability and the separate account life insurance asset are not contractually linked, differences in balances, fund performance, and insurance costs can result in temporary timing mismatches between changes in separate account life insurance income and the related deferred compensation expense.

During the first quarter of 2026, declines in market values of investments inside the life insurance policy to offset employee and director deferred compensation plan elections resulted in a $0.4 million net loss related to separate account life insurance, while the related deferred compensation liability experienced a $0.6 million benefit as the funds that the plan participants elected declined in value.

These offsetting movements reflect market-driven changes in the underlying investment alternatives and do not represent credit- or performance-related deterioration.

The majority of the deferred compensation expense is reported within professional fees, under deferred directors’ fees, as it primarily relates to the deferral of directors’ compensation.

Specifically, $0.6 million of deferred compensation benefit was recorded as deferred directors’ fees during the first quarter of 2026.

The related tax shortfall associated with the loss associated with separate account life insurance and taxable deferred compensation expense/(benefit) totaled $0.3 million for the quarter.

Earnings on separate account life insurance were $1.4 million for the second quarter of 2026, compared to a loss of $0.4 million in the linked quarter and earnings of $1.0 million in the second quarter of 2025.

For the first six months of 2026, earnings on separate account life insurance totaled $1.0 million, compared to $0.5 million for the same period in 2025.

These changes reflect market-driven fluctuations in the value of the underlying investment alternatives and do not represent changes in the operating performance or credit quality of the Company.

The majority of the related deferred compensation expense or benefit is reported within professional services expense under deferred directors' fees, as it primarily relates to directors' deferred compensation elections.

Deferred directors' fee expense was $1.0 million during the second quarter of 2026, compared to a benefit of $0.6 million in the linked quarter and expense of $0.9 million in the second quarter of 2025.

For the first six months of 2026 and 2025, deferred directors' fee expense totaled $0.5 million.

Noninterest Expense:

Total noninterest expense decreased $0.6 million, or 3%, to $21.8 million in the first quarter of 2026, compared to the first quarter of 2025.

The primary driver of lower noninterest expense was lower deferred compensation expense, reflecting market-driven changes in the related deferred compensation liability.

Excluding the change in deferred compensation, total noninterest expense declined $1.0 million in the first quarter of 2026 as compared to the fourth quarter of 2025.

The decrease in deferred compensation expense was mostly offset by lower separate account life insurance income, as declines in market values during the quarter resulted in a loss related to separate account life insurance policies, consistent with the discussion above.

These offsetting movements reflect normal market-related volatility between the separate account life insurance asset and the deferred compensation liability.

Salaries and benefits were relatively stable compared to both the linked quarter and the same period last year, with modest period-to-period changes primarily related to normal compensation timing and benefit costs.

Occupancy expense declined modestly compared to the linked quarter and remained relatively consistent year over year, reflecting disciplined expense management.

Other noninterest expense declined compared to both the linked quarter and the prior year, driven primarily by lower deferred directors’ compensation expense/(benefit) and continued cost control across operating expense categories.

Total noninterest expense decreased $0.3 million, or 1%, compared to the second quarter of 2025.

Salaries and benefits expense remained essentially unchanged from the prior year quarter.

Other noninterest expense decreased $0.3 million, primarily due to lower deposit service costs and other operating expenses.

These favorable variances were partially offset by higher deferred compensation expense, legal and accounting costs, and directors' fees.

For the first six months of 2026, noninterest expense decreased $0.9 million, or 2%, to $45.3 million from $46.2 million for the same period in 2025.

Salaries and benefits decreased $0.3 million, while other noninterest expense declined $0.7 million.

The improvement was primarily attributable to lower deposit service costs, lower operating expenses, and reduced sundry and teller expenses, partially offset by higher occupancy costs, legal and accounting expenses, and director-related costs.

In addition, we had $0.5 million in severance and recruiting costs related to an executive leadership restructuring during the quarter, which was offset by a reduction in overall staff.

These results reflect management's continued focus on maintaining a relatively flat expense base while selectively investing in strategic growth initiatives, technology enhancements, regulatory compliance, and customer service capabilities.

Overall full-time equivalent employees were 452 at June 30, 2026, as compared to 465 at December 31, 2025, and 494 at June 30, 2025.

PROVISION FOR INCOME TAXES

The Company sets aside a provision for income taxes on a monthly basis.

The amount of that provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits.

The Company records its provision for income taxes using the annual effective tax rate method prescribed by ASC 740, Income Taxes.

Under this methodology, income tax expense is determined by applying the Company's estimated annual effective tax rate to year-to-date pre-tax income and adjusting for discrete tax items recognized in the period in which they occur.

The estimated annual effective tax rate reflects the impact of tax-exempt income, tax credits, and other permanent differences between book and taxable income.

Permanent differences include, but are not limited to, tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax deductions.

Tax credits consist primarily of those generated by investments in low-income housing tax credit funds.

The Company's provision for income taxes was 25.2% of pre-tax income in the first quarter of 2026, relative to 25.8% in the first quarter of 2025.

The decrease in effective tax rate for both the quarterly and year-to-date comparisons was due to the tax credits and tax-exempt income representing a larger percentage of total taxable income.

The Company's effective tax rate was 25.3% for the second quarter of 2026, unchanged from the second quarter of 2025 and as compared to 25.2% in the linked first quarter of 2026.

For the first six months of 2026, the effective tax rate was 25.2%, compared to 25.5% for the same period in 2025.

The lower year-to-date effective tax rate reflects the continued benefit of tax-exempt income and tax credit investments as a percentage of pre-tax earnings.

BALANCE SHEET ANALYSIS

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and 5) they can provide partially tax exempt income.

The investment portfolio is reflected on the balance sheet as investment securities and totaled $903.0 million, or 24% of total assets at March 31, 2026, and $916.1 million, or 24% of total assets at December 31, 2025.

The investment portfolio is reflected on the balance sheet as investment securities and totaled $894.7 million, or 24% of total assets at June 30, 2026, and $916.1 million, or 24% of total assets at December 31, 2025.

The modest decrease was due to regularly scheduled maturities and paydowns.

1 unchanged sentence

The Company currently has the intent and ability to hold investment securities to maturity, but the securities are all marketable.

The expected effective duration was 2.8 years for available-for-sale investments and 5.7 years for held-to-maturity investments at March 31, 2026, as compared to 2.8 years for available-for-sale investments and 5.6 years for held-to-maturity investments at December 31, 2025.

The expected effective duration was 3.1 years for available-for-sale investments and 5.2 years for held-to-maturity investments at June 30, 2026, as compared to 2.8 years for available-for-sale investments and 5.6 years for held-to-maturity investments at December 31, 2025.

The following table sets forth the carrying amount for available-for-sale securities, at fair value, and held-to-maturity securities, at amortized cost, net of the allowance for credit losses of the Company’s investment portfolio by investment type as of the dates noted:

1 unchanged sentence

(dollars in thousands, unaudited)

March 31, 2026

June 30, 2026

December 31, 2025

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Total securities

Investment securities pledged as collateral for borrowings and/or potential borrowings from the FHLB and the FRB, customer repurchase agreements, and other purposes as required or permitted by law totaled $363.5 million at March 31, 2026, and $367.5 million at December 31, 2025, leaving $539.5 million in unpledged debt securities at March 31, 2026, and $548.6 million at December 31, 2025.

Securities pledged in excess of actual pledging needs and thus available for liquidity purposes, if needed, totaled $191.1 million at March 31, 2026, and $192.3 million at December 31, 2025.

At March 31, 2026, the Company’s investment portfolio included 229 municipal bonds issued by 199 different government municipalities and agencies located within 28 different states, with an aggregate fair value of $221.9 million.

The fair value of investment securities pledged as collateral for borrowings and/or potential borrowings from the FHLB and the FRB, customer repurchase agreements, and other purposes as required or permitted by law totaled $362.5 million at June 30, 2026, and $367.5 million at December 31, 2025, leaving $528.1 million in unpledged debt securities at June 30, 2026, and $548.6 million at December 31, 2025.

Securities pledged in excess of actual pledging needs and thus available for liquidity purposes, if needed, totaled $204.3 million at June 30, 2026, and $192.3 million at December 31, 2025.

At June 30, 2026, the Company’s investment portfolio included 231 municipal bonds issued by 201 different government municipalities and agencies located within 28 different states, with an aggregate fair value of $229.8 million.

The largest exposure to any single municipality or agency was a combined $5.2 million (fair value) in general obligation bonds issued by the City of New York (NY).

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The following table summarizes the amortized cost and fair values of general obligation and revenue bonds in the Company’s investment securities portfolio at the indicated dates, identifying the state in which the issuing municipality or agency operates for the Company’s largest geographic concentrations:

March 31, 2026

June 30, 2026

December 31, 2025

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It is maintained at a level that is considered adequate to measure expected losses across the classes of major investment security types related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value.

The Company maintains it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both March 31, 2026, and December 31, 2025, that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold.

The following bullets outline additional support for Management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of March 31, 2026, and December 31, 2025, was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.

The Company maintains it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both June 30, 2026, and December 31, 2025, that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold.

The following bullets outline additional support for Management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of June 30, 2026, and December 31, 2025, was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.

government agencies are supported by the full faith and creditworthiness of the U.S.

federal government and Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either March 31, 2026, or December 31, 2025.

federal government and Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either June 30, 2026, or December 31, 2025.

● Mortgage-backed securities issued by government-sponsored enterprises (“GSEs”) carry an implicit guarantee by the U.S.

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federal government up to a limit, with an implied ability to draw funds beyond the limit.

Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either March 31, 2026, or December 31, 2025.

Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either June 30, 2026, or December 31, 2025.

● Management routinely monitors third party credit grades of the municipal issuers in the Company’s state and political subdivisions portfolio.

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In addition, Management performs annual reviews of the underlying municipal issuers financial statements in order to evaluate stability and repayment capacity and has noted no concerns with any of the bonds in the Company’s state and local portfolio.

As of both March 31, 2026 and December 31, 2025, Management concluded that no allowance for credit losses was warranted on any of the Company’s municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.

As of both June 30, 2026, and December 31, 2025, Management concluded that no allowance for credit losses was warranted on any of the Company’s available-for-sale municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.

● The Company has invested in corporate debt issuances of other financial institutions.

Various financial metrics, including credit quality, reserve adequacy, profitability and capital, of each of the issuing financial institutions are reviewed by Management quarterly.

Following review of the financial metrics available for each of the

underlying institutions as of March 31, 2026, and December 31, 2025, Management concluded the unrealized loss position of these securities were related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution.

Various financial metrics, including credit quality, reserve adequacy, profitability and capital, of each of the issuing financial institutions

are reviewed by Management quarterly.

Following review of the financial metrics available for each of the underlying institutions as of June 30, 2026, and December 31, 2025, Management concluded the unrealized loss position of these securities were related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution.

These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to ongoing quarterly reviews.

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Management monitors the credit rating, in addition to various performance metrics available through a third-party informational service, of these investments on a quarterly basis.

Following review of financial metrics as of both March 31, 2026, and December 31, 2025, Management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rate spreads due to changes in supply or demand, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

Following review of financial metrics as of both June 30, 2026, and December 31, 2025, Management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rate spreads due to changes in supply or demand, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

LOAN PORTFOLIO

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(dollars in thousands, unaudited)

March 31, 2026

June 30, 2026

December 31, 2025

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Other commercial

Mortgage warehouse lines

Mortgage warehouse facilities

Consumer loans

Gross loan balances decreased $80.1 million, or 3%, during the first quarter of 2026, reflecting lower mortgage warehouse line utilization, portfolio runoff, changes in commercial line utilization, and lower volumes of new credit extended.

Mortgage warehouse balances declined $39.9 million, driven by seasonal activity and late-quarter paydowns.

Excluding mortgage warehouse activity, loan balances declined modestly across several portfolios, including decreases of $9.1 million in commercial real estate loans, $19.9 million in other commercial loans, $9.7 million in residential real estate loans, $2.1 million in farmland loans, and $0.2 million in consumer loans.

Other construction loans increased $0.8 million during the quarter.

As indicated in the loan rollforward below, new credit extended for the first quarter of 2026 decreased $19.0 million over the linked quarter comparison and $58.6 million over the same period in 2025.

For the first three months ended 2026, we had $25.3 million in loan paydowns and maturities, along with a $22.6 million decrease in line of credit utilization, and a $39.9 million decrease in mortgage warehouse utilization.

The reduction in new credit extended is primarily due to a strategic shift in our target customer base with a change to increase granularity within the portfolio by focusing more on

serving our local communities, as well as expanded commercial real estate lending.

It is taking time to refresh the pipeline, but our pipeline had returned to prior quarter levels by the end of March 2026.

The decrease in gross loan balances compared to December 31, 2025, was primarily driven by a $60.9 million reduction in mortgage warehouse facilities balances, reflecting normal fluctuations in mortgage origination activity and secondary market demand.

Other changes in loan balances were primarily attributable to scheduled paydowns, payoffs, and normal customer activity.

Despite the decline in period-end balances, mortgage warehouse average balances increased $8.0 million during the second quarter of 2026 compared to the linked quarter.

Average balances of commercial real estate and commercial and industrial loans declined modestly during the quarter, while period-end balances remained relatively stable.

As the quarter progressed, however, loan production strengthened significantly, that we believe reflects a shift in momentum entering the third quarter of 2026.

This improvement was particularly evident within the commercial real estate and commercial and industrial portfolios and resulted in an enhanced pipeline of lending opportunities entering the second half of the year.

The Company's loan portfolio remains diversified, with commercial real estate representing 57% of total loans, mortgage warehouse facilities representing 19%, residential real estate comprising 14%, and other commercial loans representing

7% of the portfolio at June 30, 2026.

Commercial real estate balances remained relatively stable during the first six months of the year despite elevated payoff activity, reflecting continued success in replacing runoff with new production.

As indicated in the loan rollforward table below, new credit extended for the second quarter of 2026 increased $41.6 million over the linked quarter to $49.4 million and increased $1.2 million over the same period in 2025.

The Company also had $59.6 million in loan paydowns and maturities, a $27.4 million decline in line of credit utilization, and a decrease of $60.9 million in mortgage warehouse facilities utilization for the first half of 2026.

LOAN ROLLFORWARD

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For the three months ended:

For the six months ended:

Gross loans beginning balance

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Gross loans ending balance

Deferred costs and (fees), net

Gross loans, amortized cost

(1) Change does not include new balances on lines of credit extended during the respective periods as such balances are included as part of “New credit extended” line above.

At March 31, 2026, the total regulatory CRE concentration ratio of total CRE over Tier 1 Capital plus allowance was 238.7% as compared to 242.1% at December 31, 2025.

The overall level of construction and land development lending was 3.3% of regulatory capital plus allowance for credit losses at March 31, 2026.

At March 31, 2026, non-owner occupied commercial real estate included $305.1 million of retail;

At June 30, 2026, the total regulatory CRE concentration ratio of total CRE over Tier 1 Capital plus allowance was 235.9% as compared to 242.1% at December 31, 2025.

The overall level of construction and land development lending was 3.4% of regulatory capital plus allowance for credit losses at June 30, 2026.

At June 30, 2026, non-owner occupied commercial real estate included $304.7 million of retail;

$137.2 million of warehouse/industrial;

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(dollars in thousands, unaudited)

March 31, 2026

June 30, 2026

December 31, 2025

March 31, 2025

June 30, 2025

Nonperforming loans:

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Nonperforming assets as a % of total gross loans and foreclosed assets

Total nonperforming assets, comprised of nonaccrual loans and foreclosed assets, declined $4.4 million to $10.4 million at March 31, 2026, compared to $14.8 million at December 31, 2025.

This improvement was driven by a reduction in nonaccrual loan balances, reflecting resolutions and paydowns within the Company’s criticized loan portfolio.

The Company’s ratio of nonperforming loans to gross loans decreased to approximately 0.42% at March 31, 2026, compared

to approximately 0.52% at December 31, 2025, reflecting both the reduction in nonperforming loan balances and a modest decline in total loan balances during the quarter.

The Company had no foreclosed assets at March 31, 2026, compared to $1.6 million at December 31, 2025, as the remaining foreclosed property was resolved during the quarter.

Total nonperforming assets, comprised of nonaccrual loans and foreclosed assets, declined $4.3 million to $10.5 million at June 30, 2026, compared to $14.8 million at December 31, 2025.

The improvement was primarily attributable to lower nonaccrual loan balances, reflecting resolutions and paydowns within the Company's criticized loan portfolio.

The increase in nonaccrual Farmland balances was primarily attributable to a single relationship which management believes is well secured and has a current loan-to-value ratio of approximately 61%.

Additionally, the Company sold its only foreclosed asset during the first six months of 2026, eliminating foreclosed assets from the balance sheet.

The Company’s ratio of nonperforming loans to gross loans decreased to 0.43% at June 30, 2026, compared to 0.52% at December 31, 2025, reflecting both the reduction in nonperforming loan balances and a modest decline in total loan balances during the quarter.

The Company had no foreclosed assets at June 30, 2026, compared to $1.6 million at December 31, 2025, as the remaining foreclosed property was resolved during the first quarter of 2026.

All nonperforming assets are individually evaluated for credit losses on a quarterly basis, and Management believes the allowance for credit losses allocated to these loans is appropriate.

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Collection efforts are continuously pursued for all nonperforming loans, but the Company cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company had $0.9 million in loans past due 30-89 days and still accruing at March 31, 2026.

This was a decrease of $5.9 million compared to the balance at December 31, 2025.

At June 30, 2026, loans past due 30 to 89 days and still accruing totaled $5.4 million compared to $6.8 million at December 31, 2025.

Approximately $4.6 million of this balance related to a single commercial real estate loan that became 30 days past due near the end of the second quarter of 2026.

Management believes the loan is well secured, with an estimated current loan-to-value ratio of approximately 51%, and therefore does not consider the credit to present a significant loss exposure.

All of these past due loans are under Management supervision, and every effort is being taken to assist the borrowers and manage credit risk in this regard.

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recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off.

The Company's allowance for credit losses on loans and leases was $21.3 million at March 31, 2026, as compared to $21.5 million at December 31, 2025.

The decrease resulted from net charge‑offs during the quarter of $0.3 million, partially offset by a provision for credit losses of $0.1 million, reflecting Management’s assessment of credit quality, portfolio composition, and current economic conditions.

The following tables highlight the coverage ratios by loan category at March 31, 2026, and December 31, 2025 (dollars in thousands, unaudited):

As of March 31, 2026

The following tables highlight the coverage ratios by loan category at June 30, 2026, and December 31, 2025 (dollars in thousands, unaudited):

As of June 30, 2026

Total Allowance

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Residential real estate

Mortgage warehouse lines

Mortgage warehouse facilities

Gross loans, amortized cost

As of December 31, 2025

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Residential real estate

Mortgage warehouse lines

Mortgage warehouse facilities

Gross loans, amortized cost

(1) Coverage ratio equals allowance for credit losses on loans divided by total loans on the amortized cost basis.

(2) Does not include residential real estate.

(3) Does not include mortgage warehouse lines.

The allowance as a percentage of gross loans was 0.86% and 0.84%, at March 31, 2026, and December 31, 2025, respectively.

Management's detailed analysis indicates that the Company's allowance for credit losses on loans should be sufficient to cover credit losses for the life of the loans outstanding as of March 31, 2026, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the credit loss allowance for loans.

The total allowance for credit losses on loans of $21.3 million at March 31, 2026, included $0.6 million of allowance related to $478.5 million of mortgage warehouse lines.

A separate allowance of $0.7 million for potential credit losses inherent in unused commitments is included in other liabilities at March 31, 2026, a decrease of $0.1 million, from December 31, 2025.

(3) Does not include mortgage warehouse facilities.

The allowance for credit losses on loans was $23.6 million, or 0.96% of gross loans, at June 30, 2026, compared to $21.5 million, or 0.84% of gross loans, at December 31, 2025.

The Company's overall coverage ratio is influenced by the composition of its loan portfolio, which includes significant concentrations in mortgage warehouse and residential real estate loans that have historically experienced minimal credit losses and therefore require comparatively low reserve

At June 30, 2026, mortgage warehouse and residential real estate loans totaled $803.0 million, representing approximately 33% of total loans, while the related allowance was $1.8 million, or 0.23% of the outstanding balances.

As a result, these portfolios reduce the Company's overall allowance coverage ratio.

Excluding mortgage warehouse and residential real estate loans, the allowance for credit losses totaled $21.8 million and represented 1.32% of the remaining loan portfolio, compared to 1.16% at December 31, 2025.

The Company's commercial real estate portfolio, which represents its largest loan segment, maintained a reserve coverage ratio of 1.15% at June 30, 2026.

The increase in the allowance during the first six months of 2026 was driven primarily by higher reserve levels within the other commercial loan portfolio, including increased specific reserves related to individually evaluated credits and changes in management's assessment of credit risk.

Allowance for Credit Losses on Loans

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Consumer loans

Net loan charge-offs

Net loan (recoveries) charge-offs

Balance at end of period

Net charge-offs to average loans (annualized)

Net (recoveries) charge-offs to average loans (annualized)

Allowance for credit losses on loans to gross loans at end of period

Net loan charge-offs to allowance for credit losses on loans at end of period

Net loan charge-offs to provision for credit losses on loans

Net loan (recoveries) charge-offs to allowance for credit losses on loans at end of period

Net loan (recoveries) charge-offs to provision for credit losses on loans

(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

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A summary of the Company’s unfunded commitments and utilization is presented below (dollars in thousands, unaudited):

March 31, 2026

June 30, 2026

December 31, 2025

March 31, 2025

June 30, 2025

Line Available (2)

Utilization %

Line Available (2)

Utilization %

Line Available (2)

Utilization %

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Other commercial

Mortgage warehouse lines

Mortgage warehouse facilities

Overdrafts - Commercial and Consumer

Unused commitment as a percent of gross loans

Unused mortgage warehouse commitments as percent of gross loans

(1) Excludes mortgage warehouse lines and overdraft lines.

Included in unused commitments are mortgage warehouse lines, which are mostly in the form of repurchase lines.

Unused commitment as a percent of gross loans, amortized cost

Unused mortgage warehouse facilities as percent of gross loans, amortized cost

(1) Excludes mortgage warehouse facilities and overdraft lines.

Included in unused commitments are mortgage warehouse facilities, which are mostly in the form of repurchase lines.

The repurchase agreement structure provides stronger credit protection to the Company, as well as more favorable regulatory capital treatment, as these repurchase lines are not considered off-balance sheet commitments for regulatory capital purposes as they are unconditionally cancellable.

The Company also had undrawn letters of credit issued to customers totaling $5.8 million at March 31, 2026, and $5.7 million at December 31, 2025.

The Company also had undrawn letters of credit issued to customers totaling $5.7 million at June 30, 2026, and December 31, 2025.

The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used.

However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should the Company be required to fund a significant portion of unused commitments.

In addition to unused commitments to provide credit, the Company is utilizing a $125 million letter of credit issued by the FHLB on the Company’s behalf as security for certain local agency deposits which totaled $80.1 million at March 31, 2026.

That letter of credit is backed by loans pledged to the FHLB by the Company.

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While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to, and borrowings from, correspondent banks, including the FRB and the FHLB.

Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits.

If a “long” position is prevalent, the Company could let brokered deposits or other wholesale borrowings roll off as they mature, or invest excess liquidity into investments or loans, subject to the Company’s risk

The Company’s balance of non-earning cash and due from banks was $105.7 million at March 31, 2026, relative to $71.4 million at December 31, 2025.

Should a large “short” overnight position persist

for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits.

The Company’s balance of non-earning cash and due from banks was $107.6 million at June 30, 2026, relative to $71.4 million at December 31, 2025.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”

Net premises and equipment decreased by $0.5 million during the first three months of 2026, to $14.4 million.

This decline was mostly a result of the sale of a bank owned real estate property and depreciation in the first three months of 2026.

Goodwill was $27.4 million at March 31, 2026, unchanged during the first three months of 2026.

Net premises and equipment decreased by $0.9 million during the first six months of 2026, to $14.1 million.

This decline was mostly a result of the sale of a bank owned real estate property and depreciation in the first six months of 2026.

Goodwill was $27.4 million at June 30, 2026, unchanged during the first half of 2026.

Goodwill is tested for impairment annually, unless events and circumstances exist which indicate that an impairment test should be performed.

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Management continues to evaluate whether or not a triggering event occurs, or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount before the next annual test in 2026.

Bank-owned life insurance, with a balance of $68.7 million at March 31, 2026, decreased $0.6 million during the first three months of 2026.

Bank-owned life insurance, with a balance of $70.1 million at June 30, 2026, increased $0.8 million during the first six months of 2026.

Additional details are discussed above in the “Noninterest Income and Noninterest Expense” section.

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(dollars in thousands, unaudited)

March 31, 2026

June 30, 2026

December 31, 2025

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Total deposits

Total deposits increased $49.4 million, or 2%, to $2.93 billion at March 31, 2026, compared to $2.88 billion at December 31, 2025.

The increase was driven primarily by growth in noninterest‑bearing demand deposits, which increased $33.1 million, or 3%, during the quarter.

Noninterest‑bearing demand deposits represented 35.2% of total deposits at March 31, 2026, compared to 34.6% at December 31, 2025, reflecting a modest improvement in the Company’s funding mix.

Interest‑bearing demand deposits increased $20.2 million, while balances in NOW, savings, and money market accounts were relatively stable during the quarter.

Customer time deposits declined $7.7 million, reflecting continued runoff of higher‑cost certificates, while brokered deposits remained essentially flat, increasing $0.3 million as compared to December 31, 2025.

Total deposits increased $54.6 million, or 1.9%, to $2.93 billion at June 30, 2026, from $2.88 billion at December 31, 2025.

The increase was primarily driven by growth in core deposit categories, including a $30.7 million increase in noninterest-bearing demand deposits and a $27.9 million increase in money market deposits.

The growth in noninterest-bearing demand deposits improved the Company's funding mix, with such deposits representing 35.0% of total deposits at June 30, 2026, compared to 34.6% at December 31, 2025.

Interest-bearing transaction accounts increased $9.8 million, while savings balances remained relatively stable.

Partially offsetting these increases were declines in customer time deposits and brokered deposits of $10.3 million and $2.9 million, respectively, reflecting the Company's continued emphasis on lower-cost funding sources.

Overall uninsured deposits are estimated to be $734.2 million, or 25% of total deposit balances, excluding public agency deposits that are subject to collateralization through a letter of credit issued by the FHLB.

In addition, uninsured deposits of the bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (CDARS).

In addition, uninsured deposits of the bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep account or a time deposit through the Certificate of Deposit Account Registry System (CDARS).

IntraFi allows for up to $285 million of combined pass-through FDIC insurance which would more than cover each of the Bank’s deposit customers if a customer desired to have such pass-through insurance.

The Bank maintains a diversified deposit base with no significant customer concentrations and does not bank any cryptocurrency companies.

At March 31, 2026, the Company had approximately 116,000 accounts, and the 25 largest deposit balance customers had balances of approximately 10% of overall deposits .

During the first quarter of 2026, except for seasonal fluctuations in the normal course of business, there have been no material changes in the composition of our 25 largest deposit balance customers.

At June 30, 2026, the Company had approximately 114,000 accounts, and the 25 largest deposit balance customers had balances of approximately 11% of overall deposits .

During the first half of 2026, except for seasonal fluctuations in the normal course of business, there have been no material changes in the composition of our 25 largest deposit balance customers.

OTHER INTEREST-BEARING LIABILITIES

Customer repurchase agreements were $127.8 million at March 31, 2026, as compared to $130.9 million at December 31, 2025.

Customer repurchase agreements were $122.4 million at June 30, 2026, as compared to $130.9 million at December 31, 2025.

Customer repurchase agreements allow customers to sweep excess deposit balances over the FDIC insurance limit each day into a separate repurchase agreement account.

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The secured component depends on the level of pledged collateral.

At March 31, 2026, the Company had $130.0 million in overnight borrowings and $55.0 million of term FHLB borrowings, as compared to $222.7 million in overnight borrowings and $80.0 million of term FHLB borrowings at December 31, 2025.

Long-term debt at March 31, 2026, consisted of $49.5 million of subordinated debt.

At June 30, 2026, the Company had $120.0 million in overnight borrowings and $35.0 million of term FHLB borrowings, as compared to $222.7 million in overnight borrowings and $80.0 million of term FHLB borrowings at December 31, 2025.

Long-term debt at June 30, 2026, consisted of $49.5 million of subordinated debt.

This remained relatively unchanged from December 31, 2025.

Subordinated debentures related to $36.1 million of trust preferred securities at March 31, 2026, were $0.1 million higher than at December 31, 2025.

Subordinated debentures related to $36.1 million of trust preferred securities at June 30, 2026, were $0.1 million higher than at December 31, 2025.

The small increase resulted from the amortization of the discount on junior subordinated debentures that were part of the Company’s acquisition of Coast Bancorp in 2016.

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Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts.

The Company’s balance of other liabilities was $65.9 million at March 31, 2026, as compared to $68.2 million at December 31, 2025, a decrease of $2.3 million or 3%.

The Company’s balance of other liabilities was $59.2 million at June 30, 2026, as compared to $68.2 million at December 31, 2025, a decrease of $9.1 million or 13%.

LIQUIDITY AND MARKET RISK MANAGEMENT

The Company continues to have substantial liquidity through unencumbered assets and available borrowings.

In addition, the Company’s loan-to-deposit ratio was 84% at March 31, 2026, and 89% at December 31, 2025, compared to an internal policy guideline of less than 90%.

In addition, the Company’s loan-to-deposit ratio was 84% at June 30, 2026, and 89% at December 31, 2025, compared to an internal policy guideline of less than 90%.

Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner.

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To meet these short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances via FHLB lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources.

At March 31, 2026, and December 31, 2025, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

At June 30, 2026, and December 31, 2025, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

Primary and secondary liquidity sources

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Unsecured lines of credit

Secured lines of credit

Funds available through fed discount window

Available funding sources, detailed above, of $2.1 billion represented 73% of total deposits and 302% of estimated uninsured and/or uncollateralized deposits as of March 31, 2026.

Available funding sources, detailed above, of $1.9 billion represented 66% of total deposits and 265% of estimated uninsured and/or uncollateralized deposits as of June 30, 2026.

Unpledged investment securities include $132.6 million of CLOs.

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The Company has a higher level of actual balance sheet liquidity than might otherwise be the case since the Company utilizes a letter of credit from the FHLB rather than investment securities for certain pledging requirements.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at March 31, 2026, and December 31, 2025.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at June 30, 2026, and December 31, 2025.

Other sources of liquidity include the brokered deposit market, deposit listing services, Intrafi, and the ability to offer local time-deposit campaigns.

Management is of the opinion that available investments and other potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.

The Company’s primary liquidity ratio was 20% at March 31, 2026, as compared to an internal policy guideline of “greater than 15%” Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at March 31, 2026, are also periodically reviewed by Management and the Board.

The Company’s primary liquidity ratio was 19.1% at June 30, 2026, as compared to an internal policy guideline of “greater than 15%”.

Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at June 30, 2026, are also periodically reviewed by Management and the Board.

The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that the liquidity position will continue at current strong levels.

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Its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations.

As of March 31, 2026, the holding company maintained a cash balance of $7.1 million.

As of June 30, 2026, the holding company maintained a cash balance of $4.4 million.

Management anticipates that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future.

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The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates.

The Company’s market risk exposure is primarily that of interest rate risk and has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates.

The Company’s market risk exposure is primarily driven by interest rate risk and Management has established policies and procedures to monitor and limit the Company’s exposure to changes in interest rates.

The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.

To identify areas of potential exposure to interest rate changes, the Company utilizes a third-party that uses commercially-available modeling software to perform monthly earnings simulations using a dynamic balance sheet and calculate the Company’s market value of portfolio equity under varying interest rate scenarios.

To identify areas of potential exposure to interest rate changes, the Company utilizes a third-party that uses commercially-available modeling software to perform periodic earnings simulations using a dynamic balance sheet and calculate the Company’s market value of equity under varying interest rate scenarios.

The model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes.

Assumptions regarding deposit betas in the up cycles can range from 25% to 100% and from 0% to 75% in the down cycles, depending on the deposit type.

Deposit decay rate assumptions range from 5% to 26% and are based on the Company’s own historical averages.

Prepayment speeds are based on actual three-year historical averages.

Assumptions regarding deposit betas in a rates up environment can range from 25% to 100% and from 0% to 100% in a rates down environment, depending on the deposit type.

Deposit average life assumptions range from two to nine years based on the Company’s own historical averages.

Prepayment speeds are based on expectations derived from historical market data.

Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments.

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upward shocks of 100, 200, 300, and 400 basis points, and downward shocks of 100, 200, 300, and 400 basis points.

Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations considering economic conditions and expectations at the time.

The Company’s guideline is to limit any projected decline in net interest income relative to the stable rate scenario to no more than 10% for a 100 basis point interest rate shock, 15% for a 200 basis point shock, 20% for a 300 basis point shock, and 25% for a 400 basis point shock.

The Company had the following estimated net interest income sensitivity profiles over one year, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration (dollars in thousands, unaudited):

March 31, 2026

March 31, 2025

June 30, 2026

June 30, 2025

Immediate change in Interest Rates (basis points)

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The table above presents the estimated impact of immediate, parallel shifts in interest rates across all yield curves and represents an extreme scenario.

Management utilizes this analysis as a starting point in assessing the Company’s overall interest rate risk profile.

Based on these modeled interest rate shocks, as of March 31, 2026, Management believes the Company remains asset sensitive, though to a lesser degree than as of March 31, 2025.

In rising rate scenarios, the projected changes in net interest income are relatively modest and consistent across the up 100, 200, 300, and 400 basis point scenarios, reflecting a more balanced repricing profile.

In an immediate 100 basis point increase in interest rates, net interest income is projected to increase $0.4 million, or 0.3%, compared to a stable rate environment.

In higher upward shock scenarios, projected changes in net interest income remain limited, ranging from an increase of $0.3 million in the +300 basis point scenario to a $0.4 million decrease in the +400 basis point scenario.

In contrast, declining rate scenarios have a more pronounced adverse impact on net interest income.

An immediate 100 basis point decrease in interest rates is projected to result in a $4.0 million decline, or 3.0%, in net interest income, with greater sensitivity in more severe down‑rate scenarios.

A 200 basis point decrease results in a projected decline of $8.6 million, or 6.3%, while a 300 basis point decrease results in a projected decline of $13.0 million, or 9.6%.

The Company’s greater sensitivity to declining interest rates reflects the impact of repricing on variable‑rate earning assets, which would adjust downward more rapidly than interest‑bearing liabilities, particularly given the presence of noninterest‑bearing and low‑cost deposit funding.

All modeled interest rate shock scenarios remain within the Company’s internal policy guidelines.

Management also models other interest rate scenarios that do not assume a simultaneous and parallel shock of all points on the yield curve including short-term and long-term rates.

One of these alternate rate change scenarios uses rate forecasts, from a known economist over the next twelve months, which reflect overnight rates moving differently than longer-term treasury rates.

Using this forecast of interest rates, net interest income models close to the base case scenario, indicating that based on a most-likely interest rate forecast the Company’s net interest income is expected to be close to the same level modeled in an unchanged rate environment.

This use of a most-likely interest rate forecast suggests we are less sensitive to interest rate changes, when compared to use of an interest rate shock.

As the Company utilizes a dynamic balance sheet for its interest rate modeling, the Company also uses a static, or no-growth, balance sheet to assess the reasonableness of the interest rate sensitivity in the dynamic balance sheet model;

no significant changes in interest rate risk outside of the base case were noted.

In addition, the Company runs stress scenarios for stresses to average deposits, higher deposit betas than the base case, deposit migration from low-cost to high-cost deposits, and both higher and slower prepayment speeds.

The most significant impact to net interest income in the net interest income simulations is the reduction or migration of low-cost deposits.

Management utilizes this analysis as one tool in evaluating the Company's overall interest rate risk profile.

The Company's interest rate risk profile remained within internal policy limits at June 30, 2026.

Compared to June 30, 2025, the balance sheet exhibited substantially less sensitivity to changes in market interest rates.

In rising-rate scenarios, projected changes in net interest income ranged from a decrease of 0.1% to a decrease of 1.9%, compared to projected increases ranging from 1.5% to 4.9% at June 30, 2025.

The reduction in asset sensitivity reflects changes in the composition and repricing characteristics of the Company's balance sheet, including less longer-term fixed-rate funding.

While the Company remains more sensitive to declining interest rates than rising interest rates, the potential adverse impact of falling rates improved significantly from the prior year.

Under a 400 basis point declining-rate scenario, net interest income is projected to decrease 7.1% at June 30, 2026, compared to a 16.9% decrease at June 30, 2025.

Similarly, the projected decline under a 200 basis point shock improved to 5.7% from 8.1% in the prior year.

Management believes this improvement reflects the benefit of lower funding costs already realized during the current interest rate cycle, as well as a more balanced overall interest rate risk position, with increased levels of funding that will reprice as rates fall.

The simulation results indicate that the Company's primary interest rate risk continues to be associated with declining market rates, as variable-rate earning assets generally reprice downward more rapidly than interest-bearing liabilities.

However, the magnitude of this exposure has moderated compared to prior periods, resulting in a more balanced earnings profile across a wide range of potential interest rate environments.

All modeled interest rate shock scenarios remain within the Company's Board-approved policy limits.

Management also evaluates a variety of alternative interest rate paths and stress scenarios that do not assume instantaneous parallel shifts in the yield curve, including forecasts in which short-term and long-term interest rates move independently.

In addition, the Company evaluates stress assumptions related to deposit balances, deposit pricing, migration from low-cost to higher-cost deposit products, and loan prepayment speeds.

Consistent with prior periods, the most significant modeled risk to future net interest income remains the reduction or migration of low-cost core deposits into higher-cost funding sources.

CAPITAL RESOURCES

The Company had total shareholders’ equity of $363.7 million at March 31, 2026, comprised of $103.0 million in common stock, $4.2 million in additional paid-in capital, $281.4 million in retained earnings, and accumulated other comprehensive loss of $24.9 million.

The Company had total shareholders’ equity of $366.9 million at June 30, 2026, comprised of $102.6 million in common stock, $4.6 million in additional paid-in capital, $283.9 million in retained earnings, and accumulated other comprehensive loss of $24.2 million.

At the end of 2025, total shareholders’ equity was $364.9 million.

The $1.1 million, or 0.3%, decrease in equity during the three months of 2026 was due to $9.5 million in share repurchases, a $3.4 million dividend paid to shareholders, and $1.8 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities’ fair value.

These changes were partially offset by $12.5 million in net income recorded during the quarter.

The remaining difference was related to stock option and restricted stock activity during the year.

At March 31, 2026, the Company had a 2025 Share Repurchase Plan authorizing 1,000,000 shares of common stock, with an expiration date of October 31, 2026.

At March 31, 2026, there were 514,329 shares of common stock remaining available for repurchase under the 2025 Share Repurchase plan.

The $2.0 million, or 0.6%, increase in equity during the first six months of 2026 was primarily attributable to $22.4 million in net income, partially offset by $14.4 million in share repurchases, $6.8 million in cash dividends declared, and a $1.0 million increase in accumulated other comprehensive loss, primarily related to changes in the fair value of investment securities.

The remaining change reflects the impact of share repurchases, stock-based compensation activity, and stock option exercises during the period.

At June 30, 2026, the Company had a 2025 Share Repurchase Plan authorizing 1,000,000 shares of common stock, with an expiration date of October 31, 2026.

At June 30, 2026, there were 381,532 shares of common stock remaining available for repurchase under the 2025 Share Repurchase Plan.

The Company uses a variety of measures to evaluate its capital adequacy, including the leverage ratio which is calculated separately for the Company and the Bank.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis