Item 2. Management’s Discussion and Analysis
ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements that involve inherent risks and uncertainties. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933 (“1933 Act”), as amended and Section 21E of the Securities Exchange Act of 1934 (“1934 Act”), as amended. Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements in order to encourage companies to provide prospective information about their financial performance as long as important factors that could cause actual results to differ significantly from projected results are identified with meaningful cautionary statements. Words such as “expects,” “anticipates,” “believes,” “projects,” “intends,” and “estimates” or variations of such words and similar expressions, as well as future or conditional verbs preceded by “will,” “would,” “should,” “could,” or “may” are intended to identify forward-looking statements. These forward-looking statements are based on certain underlying assumptions and are not guarantees of future performance, as they could be impacted by several potential risks and developments that cannot be predicted with any degree of certainty.
These statements are based on Management’s current expectations regarding economic, legislative, regulatory, and other environmental issues that may affect earnings in future periods. Therefore, actual outcomes and results may differ materially from what is expressed, forecast in, or implied by such forward-looking statements.
A variety of factors could have a material adverse impact on the Company’s financial condition or results of operations and should be considered when evaluating the Company’s potential future financial performance. They include, but are not limited to:
● risks associated with fluctuations in interest rates, including the impact on other comprehensive income, the ability for customers to repay on floating or adjustable rates loans, and the impact on costs and demand of deposits and funding, the impact on interest income on earning assets, the impact on valuations of collateral on loans, and the impact on fair value of longer-term assets;
● risks associated with inflation (including efforts by the Federal Open Market Committee of the Federal Reserve Bank (“FRB”) to control the same);
● the risk of unfavorable economic conditions in the Company’s market areas, or the impact on the Company’s market areas of national or international economic conditions or changes to economic policies, including tariffs and trade agreements;
● liquidity risks, including the ability to effectively manage the potential loss of deposits, the ability to maintain funding lines of credit, and the loss of value of unencumbered investment securities;
● increases in nonperforming assets and credit losses that could occur, particularly in times of weak economic conditions or rising interest rates;
● the impact of adverse developments at other banks, including bank failures, which impact general sentiment regarding the stability and liquidity of banks;
● risks associated with the multitude of, or changes to, current and prospective banking laws and regulations, and related interpretations, to which the Company is and will be subject;
● operational risks including the ability to detect and prevent financial reporting errors, operations errors, and fraud;
● the Company’s ability to diversify and grow its loan portfolio;
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● the Company’s ability to attract and retain skilled employees;
● the Company’s ability to successfully deploy new technology and manage cyber security risks;
● the risk to the Company’s operations and ability to serve customers due to the inability of a vendor to meet its service level agreements;
● the outcome of any existing or future legal action for which the Company or Bank is a defendant;
● risks associated with a U.S. Government shutdown, including delays in regulatory reviews, approvals, or rulemaking from federal agencies, reduced access to government economic data and reports which could affect our ability to assess risk and make informed investment or risk management decisions, heightened volatility or reduced liquidity in financial markets, credit and counterparty risk exposure in connection with clients or counterparties that rely on government funding or contracts, and diminished investor and consumer confidence which could reduce demand for financial products;
● the effects of severe weather events, pandemics, other public health crises, acts of war or terrorism, and other external events; and
● the success of acquisitions or branch expansions, closures, or consolidations.
Risk factors that could cause actual results to differ materially from results that might be implied by forward-looking statements include the risk factors detailed in the Company’s Form 10-K for the fiscal year ended December 31, 2025, and in Item 1A, herein. The Company does not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.
CRITICAL ACCOUNTING POLIC Y AND ACCOUNTING ESTIMATES
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.
Critical accounting policies are those that involve the most complex and subjective decisions and assessments which have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the Company’s has identified one critical accounting policy:
● the establishment of the allowance for credit losses, including the valuation of individually evaluated loans, as explained in detail in Notes 8 and 10 to the consolidated financial statements and in the “Provision for Credit Losses” and “Allowance for Credit Losses” sections of this discussion and analysis
Critical accounting areas are evaluated on an ongoing basis to ensure the Company’s financial statements incorporate its most recent expectations regarding those areas.
OVERVIEW OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
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%,
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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
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
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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.
EARNINGS PERFORMANCE
The Company earns income from two primary sources. 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, 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 $30.4 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%.
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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, $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. 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. The level of net interest income recognized in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities.
The following tables show average balances for significant balance sheet categories and the amount of interest income or interest expense associated with each category for the noted periods. The tables also display calculated yields on each major component of the Company’s investment and loan portfolios, average rates paid on each key segment of the Company’s interest-bearing liabilities, and net interest margin for the noted periods .
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Average Balances and Rates
(dollars in thousands, unaudited)
For the three months ended
For the three months ended
June 30, 2026
June 30, 2025
Assets
Average
Balance (1)
Income/
Expense
Average
Rate/Yield (2)
Average
Balance (1)
Income/
Expense
Average
Rate/Yield (2)
Investments:
Interest-earning due from banks
$
11,265
$
112
3.99%
$
18,122
$
211
4.67%
Taxable
695,359
7,965
4.59%
770,413
9,295
4.84%
Non-taxable
207,513
1,678
4.11%
196,364
1,577
4.08%
Total investments
914,137
9,755
4.48%
984,899
11,083
4.68%
Loans: (3)
Real estate
1,803,504
22,250
4.95%
1,849,725
22,589
4.90%
Agricultural
58,703
723
4.94%
72,933
915
5.03%
Commercial
106,435
1,531
5.77%
109,407
1,612
5.91%
Consumer
2,445
54
8.86%
3,214
64
7.99%
Mortgage warehouse facilities
422,257
6,608
6.28%
368,592
6,440
7.01%
Other
2,393
18
3.02%
2,351
14
2.39%
Total loans
2,395,737
31,184
5.22%
2,406,222
31,634
5.27%
Total interest-earning assets (4)
3,309,874
40,939
5.02%
3,391,121
42,717
5.10%
Other earning assets
17,935
17,062
Non-earning assets
318,610
280,045
Total assets
$
3,646,419
$
3,688,228
Liabilities and shareholders' equity
Interest-bearing deposits:
Demand deposits
$
237,488
$
1,263
2.13%
$
224,649
$
1,420
2.54%
NOW
361,845
97
0.11%
375,695
140
0.15%
Savings accounts
366,475
111
0.12%
354,798
97
0.11%
Money market
171,583
772
1.80%
146,193
608
1.67%
Time deposits
454,295
3,216
2.84%
516,970
4,283
3.32%
Brokered deposits
228,210
2,402
4.22%
244,401
2,778
4.56%
Total interest-bearing deposits
1,819,896
7,861
1.73%
1,862,706
9,326
2.01%
Borrowed funds:
Federal funds purchased
125,005
1,171
3.76%
46,214
517
4.49%
Repurchase agreements
125,120
45
0.14%
124,636
79
0.25%
Short term borrowings
3,606
34
3.78%
24,716
277
4.50%
Long term FHLB advances
40,714
389
3.83%
80,000
780
3.91%
Long-term debt
49,514
430
3.48%
49,424
430
3.49%
Subordinated debentures
36,078
597
6.64%
35,899
655
7.32%
Total borrowed funds
380,037
2,666
2.81%
360,889
2,738
3.04%
Total interest-bearing liabilities
2,199,933
10,527
1.92%
2,223,595
12,064
2.18%
Demand deposits - noninterest-bearing
1,018,453
1,020,374
Other liabilities
63,077
91,191
Shareholders' equity
364,956
353,068
Total liabilities and shareholders' equity
$
3,646,419
$
3,688,228
Interest income/interest-earning assets
5.02%
5.10%
Interest expense/interest-earning assets
1.28%
1.42%
Net interest income and margin (5)
$
30,412
3.74%
$
30,653
3.68%
(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 expected credit losses. Loan fees have been included in the calculation of interest income. Net loan costs and loan acquisition FMV amortization were $(0.3) million and $(0.4) 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.
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Average Balances and Rates
(Dollars in Thousands, Unaudited)
For the six months ended
For the six months ended
June 30, 2026
June 30, 2025
Assets
Average
Balance (1)
Income/
Expense
Average
Rate/Yield (2)
Average
Balance (1)
Income/
Expense
Average
Rate/Yield (2)
Investments:
Interest-earning due from banks
$
17,305
$
323
3.76%
$
36,281
$
799
4.44%
Taxable
702,349
15,957
4.58%
752,903
18,435
4.94%
Non-taxable
205,667
3,302
4.10%
196,957
3,153
4.09%
Total investments
925,321
19,582
4.46%
986,141
22,387
4.75%
Loans: (3)
Real estate
1,813,047
44,642
4.97%
1,837,146
44,576
4.89%
Agricultural
60,738
1,447
4.80%
74,615
1,945
5.26%
Commercial
109,070
3,128
5.78%
106,296
3,127
5.93%
Consumer
2,522
109
8.72%
3,250
133
8.25%
Mortgage warehouse facilities
418,286
13,197
6.36%
341,075
11,970
7.08%
Other
2,270
30
2.67%
2,356
32
2.74%
Total Loans
2,405,933
62,553
5.24%
2,364,738
61,783
5.27%
Total interest-earning assets (4)
3,331,254
82,135
5.03%
3,350,879
84,170
5.12%
Other earning assets
17,504
17,062
Non-earning assets
301,369
277,002
Total assets
$
3,650,127
$
3,644,943
Liabilities and shareholders' equity
Interest-bearing deposits:
Demand deposits
$
230,847
$
2,366
2.07%
$
216,258
$
2,712
2.53%
NOW
359,261
173
0.10%
377,009
259
0.14%
Savings accounts
365,002
216
0.12%
353,727
187
0.11%
Money market
163,073
1,387
1.72%
145,646
1,180
1.63%
Time Deposits
456,874
6,421
2.83%
524,095
8,694
3.35%
Brokered deposits
273,453
5,621
4.15%
244,480
5,665
4.67%
Total interest-bearing deposits
1,848,510
16,184
1.77%
1,861,215
18,697
2.03%
Borrowed funds:
Federal funds purchased
84,121
1,565
3.75%
23,325
519
4.49%
Repurchase agreements
126,765
107
0.17%
118,533
148
0.25%
Short term borrowings
3,796
72
3.82%
14,437
323
4.51%
Long term FHLB advances
59,144
1,138
3.88%
80,000
1,550
3.91%
Long-term debt
49,503
861
3.51%
49,413
860
3.51%
Subordinated debentures
36,056
1,188
6.64%
35,877
1,308
7.35%
Total borrowed funds
359,385
4,931
2.77%
321,585
4,708
2.95%
Total interest-bearing liabilities
2,207,895
21,115
1.93%
2,182,800
23,405
2.16%
Demand deposits - noninterest-bearing
1,012,146
1,011,895
Other liabilities
64,702
96,967
Shareholders' equity
365,384
353,281
Total liabilities and shareholders' equity
$
3,650,127
$
3,644,943
Interest income/interest-earning assets
5.03%
5.12%
Interest expense/interest-earning assets
1.28%
1.41%
Net interest income and margin (5)
$
61,020
3.75%
$
60,765
3.71%
(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.
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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. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates, and rate variances are equal to the change in rates multiplied by prior period average balances. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the mix variance.
Volume & Rate Variances
(dollars in thousands, unaudited)
Three months ended June 30,
Six months ended June 30,
2026 over 2025
2026 over 2025
Increase (decrease) due to
Increase (decrease) due to
Assets:
Volume
Rate
Mix
Net
Volume
Rate
Mix
Net
Investments:
Federal funds sold/due from time
$
(80)
$
(31)
$
12
$
(99)
$
(418)
$
(122)
$
64
$
(476)
Taxable
(906)
(470)
46
(1,330)
(1,238)
(1,329)
89
(2,478)
Non-taxable
22
11
68
101
177
9
(37)
149
Total investments (1)
(964)
(490)
126
(1,328)
(1,479)
(1,442)
116
(2,805)
Loans:
Real estate
(564)
231
(6)
(339)
(585)
660
(9)
66
Agricultural
(178)
(17)
3
(192)
(362)
(167)
31
(498)
Commercial
(44)
(38)
1
(81)
82
(79)
(2)
1
Consumer
(15)
7
(2)
(10)
(29)
7
(2)
(24)
Mortgage warehouse
938
(672)
(98)
168
2,710
(1,209)
(274)
1,227
Other
—
4
—
4
(1)
(1)
—
(2)
Total loans (1)
137
(485)
(102)
(450)
1,815
(789)
(256)
770
Total interest-earning assets (1)
$
(827)
$
(975)
$
24
$
(1,778)
$
336
$
(2,231)
$
(140)
$
(2,035)
Liabilities
Interest-bearing deposits:
Demand deposits
$
81
(225)
(13)
$
(157)
$
183
$
(496)
(33)
$
(346)
NOW
(5)
(39)
1
(43)
(12)
(78)
4
(86)
Savings accounts
3
11
—
14
6
22
1
29
Money market
105
50
9
164
141
59
7
207
Time deposits
(519)
(624)
76
(1,067)
(1,115)
(1,328)
170
(2,273)
Brokered deposits
(184)
(206)
14
(376)
672
(640)
(76)
(44)
Total interest-bearing deposits (1)
(519)
(1,033)
87
(1,465)
(125)
(2,461)
73
(2,513)
Borrowed funds:
Federal funds purchased
881
(84)
(143)
654
1,353
(85)
(222)
1,046
Repurchase agreements
—
(34)
—
(34)
10
(48)
(3)
(41)
Short term borrowings
(237)
(44)
38
(243)
(238)
(49)
36
(251)
Long-term FHLB Advances
(383)
(16)
8
(391)
(404)
(11)
3
(412)
Long term debt
1
(1)
—
—
2
(1)
—
1
Subordinated debentures
3
(61)
—
(58)
7
(126)
(1)
(120)
Total borrowed funds (1)
265
(240)
(97)
(72)
730
(320)
(187)
223
Total interest-bearing liabilities (1)
(254)
(1,273)
(10)
(1,537)
605
(2,781)
(114)
(2,290)
Net interest income (1)
$
(573)
$
298
$
34
$
(241)
$
(269)
$
550
$
(26)
$
255
(1) Subtotals are a sum of the categories above and are not recalculated on the portfolio totals.
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.
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PROVISION FOR CREDIT LOSS EXPENSE
Credit risk is inherent in the business of making loans. The Company sets aside an allowance for credit losses on loans, a contra-asset account, through periodic charges to earnings, which are reflected in the income statement as the provision for credit losses on loans. 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 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.
The Company’s policies for monitoring the adequacy of the allowance, determining loan balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 10 to the consolidated financial statements, and below, under “Allowance for Credit Losses.” The process utilized to establish an appropriate credit allowance for losses on loans can result in a high degree of variability in the Company’s credit loss provision, and consequently in net earnings.
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NONINTEREST INCOME AND NONINTEREST EXPENSE
Noninterest Income/Expense
(dollars in thousands, unaudited)
Three months ended June 30,
Six months ended June 30,
Noninterest income:
2026
2025
2026
2025
Service charges and fees on deposit accounts
Interchange income on debit cards
$
2,077
$
2,056
$
4,018
$
4,008
Business analysis fees
1,174
1,123
2,204
2,157
Overdraft fee income
1,313
1,255
2,637
2,500
Other service charges and fees
1,423
1,421
2,801
2,771
Net gain on sale of securities available-for-sale
—
1
—
124
Gain (loss) on sale of fixed assets
—
(19)
360
(22)
Increase in cash surrender value of life insurance
416
343
835
581
Earnings on separate account life insurance
1,386
973
1,006
470
Other
781
1,400
2,678
2,606
Total noninterest income
$
8,570
$
8,553
$
16,539
$
15,195
As a % of average interest-earning assets (1)
1.04%
1.01%
1.00%
0.91%
Noninterest expense:
Salaries and employee benefits
Salary and incentives
$
10,403
$
10,463
$
20,811
$
21,150
Employee benefits
2,009
1,953
4,297
4,253
Deferred compensation
136
128
139
144
Occupancy costs
3,204
3,142
6,289
6,120
Advertising and marketing costs
338
405
670
753
Data processing costs
1,657
1,566
3,240
3,064
Deposit services costs
1,983
2,118
3,931
4,109
Loan services costs
Loan processing
117
113
231
251
Foreclosed assets
1
(2)
18
2
Other operating costs
772
1,078
1,551
2,006
Professional services costs
Legal and accounting services
572
419
1,129
1,070
Director's costs
337
309
692
619
Deferred directors' fees cost/(benefit)
1,039
948
467
504
Other professional services
694
711
1,394
1,417
Stationery and supply costs
100
132
197
233
Debit card and fraud loss
148
284
278
489
Total noninterest expense
$
23,510
$
23,767
$
45,334
$
46,184
As a % of average interest-earning assets (1)
2.85%
2.81%
2.74%
2.78%
(1) Annualized
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Noninterest Income:
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. 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 on deposit accounts, and a $0.4 million favorable variance from gains on sales of fixed assets. 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.
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 $0.3 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.
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PROVISION FOR INCOME TAXES
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 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
EARNING ASSETS
The Company’s interest-earning assets are comprised of loans and investments, including overnight investments and surplus balances held in interest-earning accounts in its FRB account. The composition, growth characteristics, and credit quality of both of those components are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan portfolio and other factors affecting earning assets are discussed in the sections following investments.
INVESTMENTS
The Company’s investments may at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in its FRB account, and overnight fed funds sold. The Company’s investments can serve several purposes, including the following: 1) they can provide liquidity for potential funding needs; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with structural characteristics that can be changed more readily than loan or deposit portfolios, as might be required for interest rate risk management purposes; 4) they are another interest-earning option for the placement of surplus funds when loan demand is light; and 5) they can provide partially tax exempt income.
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.
The Company carries “available-for-sale” investments at their fair market values and “held-to-maturity” investments at amortized cost, net of allowance for credit losses. 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 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.
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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:
Investment Portfolio
(dollars in thousands, unaudited)
June 30, 2026
December 31, 2025
Carrying Amount
Percent
Carrying Amount
Percent
Available for sale
U.S. government agencies
$
18,083
2.02%
$
32,901
3.59%
Mortgage-backed securities
271,949
30.40%
259,760
28.35%
State and political subdivisions
54,881
6.13%
46,921
5.12%
Corporate bonds
84,019
9.39%
86,467
9.44%
Collateralized loan obligations
182,890
20.44%
199,281
21.75%
Total available for sale
611,822
68.38%
625,330
68.25%
Held to maturity
U.S. government agencies
4,320
0.48%
4,523
0.49%
Mortgage-backed securities
108,476
12.12%
115,228
12.58%
State and political subdivisions
170,084
19.02%
171,060
18.68%
Total held to maturity
282,880
31.62%
290,811
31.75%
Total securities
$
894,702
100.00%
$
916,141
100.00%
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). In addition, the Company owned 100 subordinated debentures issued by bank-holding companies totaling $84.0 million (fair value).
At December 31, 2025, the Company’s investment portfolio included 227 municipal bonds issued by 199 different government municipalities and agencies located within 28 states, with an aggregate fair value of $221.0 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). In addition, the Company owned 109 subordinated debentures issued by bank-holding companies totaling $86.5 million (fair value).
The Company’s investments in bonds issued by corporations, states, municipalities, and political subdivisions are evaluated in accordance with Financial Institution Letter 48-2012, issued by the FDIC, “Revised Standards of Creditworthiness for Investment Securities,” and other regulatory guidance. Credit ratings are considered in Management’s analysis only as a guide to the historical default rate associated with similarly rated bonds. There have been no significant differences in internal analyses compared with the ratings assigned by the third-party credit rating agencies.
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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:
June 30, 2026
December 31, 2025
Amortized
Fair Market
Amortized
Fair Market
General obligation bonds
Cost
Value
Cost
Value
State of issuance
Texas
$
85,929
$
86,220
$
86,922
$
85,424
California
74,235
71,175
50,945
49,130
Other (22 & 22 states, respectively)
47,590
50,077
60,220
61,092
Total general obligation bonds
207,754
207,472
198,087
195,646
Revenue bonds
State of issuance
Texas
4,196
4,021
5,534
5,378
California
2,374
2,182
3,583
3,586
Other (13 & 13 states, respectively)
15,558
16,091
16,481
16,416
Total revenue bonds
22,128
22,294
25,598
25,380
Total obligations of states and political subdivisions
$
229,882
$
229,766
$
223,685
$
221,026
ALLOWANCE FOR CREDIT LOSSES – AFS INVESTMENT SECURITIES
The allowance for credit losses on AFS investment securities, a contra-asset, is established through periodic provisions for credit losses on AFS investment securities. 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 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.
● U.S. 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 June 30, 2026, or December 31, 2025.
● Mortgage-backed securities issued by government-sponsored enterprises (“GSEs”) carry an implicit guarantee by the U.S. federal government, as the GSEs can draw funds from the U.S. 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 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. On a quarterly basis Management receives financial information from a third-party service in order to monitor the underlying issuer’s financial stability. 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 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
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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.
● The Company has invested exclusively in AA and AAA tranches of various collateralized loan obligations, which are securitizations of commercial loans. Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to ongoing quarterly reviews. 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 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
A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances in the table are after deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs. While not reflected in the loan totals and not currently comprising a material segment of lending activities, the Company also occasionally originates and sells, or participates out portions of loans to non-affiliated investors.
Loan Distribution
(dollars in thousands, unaudited)
June 30, 2026
December 31, 2025
Amount
Percent
Amount
Percent
Real estate:
Residential real estate
$
345,575
14.07%
$
359,514
14.12%
Commercial real estate
1,389,730
56.57%
1,390,890
54.61%
Other construction/land
15,851
0.65%
14,414
0.57%
Farmland
65,759
2.68%
68,307
2.68%
Total real estate
1,816,915
73.97%
1,833,125
71.98%
Other commercial
179,164
7.29%
192,577
7.56%
Mortgage warehouse facilities
457,457
18.64%
518,333
20.35%
Consumer loans
2,524
0.10%
2,810
0.11%
Total loans
$
2,456,060
100.00%
$
2,546,845
100.00%
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
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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
(Dollars in Thousands, Unaudited)
For the three months ended:
For the six months ended:
6/30/2026
3/31/2026
6/30/2025
6/30/2026
6/30/2025
Gross loans beginning balance
$
2,466,891
$
2,546,880
$
2,306,762
$
2,546,880
$
2,331,341
New credit extended
49,370
7,811
48,147
57,181
114,517
Changes in line of credit utilization (1)
(4,841)
(22,592)
2,587
(27,433)
(9,542)
Change in mortgage warehouse
(20,997)
(39,880)
118,665
(60,877)
75,496
Pay-downs, maturities, charge-offs and amortization
(34,217)
(25,328)
(41,556)
(59,545)
(77,207)
Gross loans ending balance
2,456,206
2,466,891
2,434,605
$
2,456,206
$
2,434,605
Deferred costs and (fees), net
(146)
(97)
4
(146)
4
Gross loans, amortized cost
$
2,456,060
$
2,466,794
$
2,434,609
$
2,456,060
$
2,434,609
(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 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; $147.7 million of office; and $256.0 million of hospitality. Approximately $25.1 million, or 17% of the office real estate matures or reprices in less than two years.
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NONPERFORMING ASSETS
Nonperforming assets are currently comprised of loans for which the Company is no longer accruing interest and foreclosed assets.
Nonperforming assets
(dollars in thousands, unaudited)
June 30, 2026
December 31, 2025
June 30, 2025
Nonperforming loans:
Real estate:
Residential real estate
$
358
$
210
$
270
Commercial real estate
—
—
1,872
Other construction/land
—
—
—
Farmland
3,105
1,717
1,717
Total real estate nonperforming loans
3,463
1,927
3,859
Other commercial
7,079
11,304
11,122
Consumer loans
2
—
—
Total nonperforming loans
10,544
13,231
14,981
Foreclosed assets
—
1,565
—
Total nonperforming assets
$
10,544
$
14,796
$
14,981
Nonperforming loans as a % of total gross loans
0.43%
0.52%
0.62%
Nonperforming assets as a % of total gross loans and foreclosed assets
0.43%
0.58%
0.62%
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.
An action plan is in place for each non-accruing loan, and they are all being actively managed. 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.
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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ALLOWANCE FOR CREDIT LOSSES – LOANS
The allowance for credit losses on loans, a contra-asset, is established through periodic provisions for credit losses on loans. It is maintained at a level that is considered adequate to measure expected losses on individually identified loans, as well as expected losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off.
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
Balance
Total Allowance
Percent of Portfolio
Coverage Ratio (1)
Real estate:
Commercial real estate
$
1,389,730
$
15,913
56.58%
1.15%
Other construction/land
15,851
307
0.65%
1.94%
Farmland
65,759
532
2.68%
0.81%
Total real estate (2)
1,471,340
16,752
59.91%
1.14%
Other Commercial
179,164
4,895
7.29%
2.73%
Consumer loans (including overdrafts)
2,524
108
0.10%
4.28%
Subtotal (2) (3)
1,653,028
21,755
67.30%
1.32%
Residential real estate
345,575
1,320
14.07%
0.38%
Mortgage warehouse facilities
457,457
525
18.63%
0.11%
Gross loans, amortized cost
$
2,456,060
$
23,600
100.00%
0.96%
As of December 31, 2025
Balance
Total Allowance
Percent of Portfolio
Coverage Ratio (1)
Real estate:
Commercial real estate
$
1,390,890
$
16,354
54.61%
1.18%
Other construction/land
14,414
296
0.57%
2.05%
Farmland
68,307
496
2.68%
0.73%
Total real estate (2)
1,473,611
17,146
57.86%
1.16%
Other Commercial
192,577
2,146
7.56%
1.11%
Consumer loans (including overdrafts)
2,810
112
0.11%
3.99%
Subtotal (2) (3)
1,668,998
19,404
65.53%
1.16%
Residential real estate
359,514
1,411
14.12%
0.39%
Mortgage warehouse facilities
518,333
665
20.35%
0.13%
Gross loans, amortized cost
$
2,546,845
$
21,480
100.00%
0.84%
(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 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
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allocations. 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
(dollars in thousands, unaudited)
For the three
months ended
For the three
months ended
For the six
months ended
For the six
months ended
For the year ended
June 30,
June 30,
June 30,
June 30,
December 31,
Balances:
2026
2025
2026
2025
2025
Average gross loans outstanding during period (1)
$
2,395,737
$
2,406,222
$
2,405,933
$
2,195,352
$
2,409,304
Gross Loans outstanding at end of period
$
2,456,206
$
2,434,605
$
2,456,206
$
2,320,629
$
2,546,880
Allowance for credit losses on loans:
Balance at beginning of period
$
21,250
$
27,050
$
21,480
$
24,830
$
24,830
Provision charged to expense
2,283
1,210
2,360
3,171
6,095
Charge-offs
Real estate
Commercial real estate
—
1,147
90
1,147
1,421
Total real estate
—
1,147
90
1,147
1,421
Other commercial
30
5,418
117
5,475
8,022
Consumer loans
131
166
348
496
907
Total
$
161
$
6,731
$
555
$
7,118
$
10,350
Recoveries
Real estate
Farmland
$
—
$
—
$
—
$
410
$
410
Total real estate
—
—
—
410
410
Other commercial
184
11
226
24
42
Consumer loans
44
140
89
363
453
Total
$
228
$
151
$
315
$
797
$
905
Net loan (recoveries) charge-offs
$
(67)
$
6,580
$
240
$
6,321
$
9,445
Balance at end of period
$
23,600
$
21,680
$
23,600
$
21,680
$
21,480
RATIOS
Net (recoveries) charge-offs to average loans (annualized)
(0.01)%
1.10%
0.02%
0.18%
0.39%
Allowance for credit losses on loans to gross loans at end of period
0.96%
0.89%
0.96%
0.98%
0.84%
Net loan (recoveries) charge-offs to allowance for credit losses on loans at end of period
(0.28)%
30.35%
1.02%
13.42%
43.97%
Net loan (recoveries) charge-offs to provision for credit losses on loans
(2.93)%
543.80%
10.17%
134.99%
154.96%
(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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OFF-BALANCE SHEET ARRANGEMENTS
The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. It is unlikely that all unused commitments will ultimately be drawn down.
A summary of the Company’s unfunded commitments and utilization is presented below (dollars in thousands, unaudited):
June 30, 2026
December 31, 2025
June 30, 2025
Line Available (2)
Utilization %
Line Available (2)
Utilization %
Line Available (2)
Utilization %
Real estate:
Residential real estate
$
12,457
48.15%
$
15,726
44.50%
$
18,792
40.69%
Commercial real estate
20,230
87.59%
23,203
86.93%
29,150
84.50%
Other construction/land
985
92.15%
2,634
79.10%
5,781
54.22%
Farmland
3,372
79.32%
3,126
80.20%
4,968
66.73%
Total real estate
37,044
82.84%
44,689
80.92%
58,691
76.27%
Other commercial
172,504
48.94%
187,084
48.81%
202,473
44.39%
Consumer
4,461
22.62%
4,580
24.29%
4,789
23.81%
Subtotal (1)
214,009
61.75%
236,353
61.00%
265,953
56.94%
Mortgage warehouse facilities
336,543
57.61%
247,667
67.67%
334,604
54.57%
Overdrafts - Commercial and Consumer
66,452
1.46%
69,112
1.40%
69,944
1.24%
Total
$
617,004
56.58%
$
553,132
61.64%
$
670,501
52.95%
Unused commitment as a percent of gross loans, amortized cost
25.12%
21.72%
27.54%
Unused mortgage warehouse facilities as percent of gross loans, amortized cost
13.70%
9.72%
13.74%
(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 $5.7 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 $87.7 million at June 30, 2026. That letter of credit is backed by loans pledged to the FHLB by the Company. For more information on the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements located elsewhere herein.
OTHER ASSETS
Interest-earning cash balances were discussed above in the “Investments” section, but the Company also maintains a certain level of cash on hand in the normal course of business, as well as non-earning deposits at other financial institutions. The Company’s balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the amount of cash held in the branches, and the reserve requirement among other things, and it is subject to significant fluctuations in the normal course of business. 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
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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 tolerances. 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 $0.9 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. The annual goodwill impairment test was last performed on October 1, 2025, and it was determined that no impairment existed. 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 $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.
The remainder of other assets consists primarily of right-of-use assets tied to operating leases, accrued interest receivable, deferred taxes, investments in bank stocks, prepaid assets, investments in low-income housing credits, investments in SBA loan funds, and other miscellaneous assets. Bank stocks include Pacific Coast Bankers Bank (PCBB) stock (marked to market value annually) and restricted stock related to the Federal Home Loan Bank of San Francisco (FHLB SF) stock held in conjunction with our FHLB borrowings. Both the PCBB and FHLB SF stock are not deemed to be marketable or liquid. Our net deferred tax asset is evaluated as of every reporting date pursuant to FASB guidance, and we have determined that no impairment exists.
DEPOSITS AND INTEREST-BEARING LIABILITIES
DEPOSITS
Deposits represent a key balance sheet category impacting the Company’s profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity accounts, such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type is included in the Average Balances and Rates tables appearing above, in the section titled “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits by type, showing the period-end balance and percentage of total deposits, is presented as of the dates indicated in the following table.
Deposit Distribution
(dollars in thousands, unaudited)
June 30, 2026
December 31, 2025
Amount
Percent
Amount
Percent
Noninterest bearing demand deposits
$
1,026,320
35.02%
$
995,623
34.61%
Interest bearing demand deposits
235,042
8.02%
224,745
7.81%
NOW
356,472
12.16%
357,001
12.41%
Savings
364,455
12.43%
365,064
12.69%
Money market
179,706
6.13%
151,760
5.28%
Customer time deposits
451,819
15.42%
462,153
16.07%
Brokered deposits
317,177
10.82%
320,090
11.13%
Total deposits
$
2,930,991
100.00%
$
2,876,436
100.00%
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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 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 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 $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. Monies in that account are used daily by the customer to purchase specific government debt securities from the Company under an agreement from the Company to repurchase the same securities from the customer on the next business day. These accounts are not deposits and are not FDIC insured. However, the repurchase agreement provides a customer with a larger account balance to have their account effectively secured with US government securities.
The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the FHLB, advances from the FRB, securities sold under agreements to repurchase, subordinated notes and/or junior subordinated debentures. The Company uses short-term FHLB advances and fed funds purchased on unsecured lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line consists of both a secured and unsecured component. The secured component depends on the level of pledged collateral.
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 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. Trust preferred securities are variable rate instruments benchmarked against the Secured Overnight Financing Rate (SOFR).
OTHER NONINTEREST-BEARING LIABILITIES
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 $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%.
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LIQUIDITY AND MARKET RISK MANAGEMENT
LIQUIDITY
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 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. Detailed cash flow projections are reviewed by Management on a monthly basis, with various stress scenarios applied to assess the Company’s ability to meet liquidity needs under unusual or adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored; the Company is committed to maintaining adequate liquidity resources to draw upon should unexpected needs arise.
The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. 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 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
6/30/2026
12/31/2025
Cash and cash equivalents
$
142,695
$
135,628
Unpledged investment securities
528,091
551,406
Excess pledged securities
52,540
35,620
FHLB borrowing availability
611,578
629,481
Unsecured lines of credit
366,785
250,785
Funds available through fed discount window
243,782
254,908
Totals
$
1,945,471
$
1,857,828
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. As CLO rates reset every 90 days to current rates, the volatility of pricing of these securities is limited and the Company could sell such securities for liquidity at a significantly lower loss than selling lower-rate fixed term securities such as US government bonds or municipal bonds.
The Company performs regular stress tests on its liquidity, and at this time, Management believes it has sufficient primary and secondary liquidity sources for operations.
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 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 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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Table of Contents
The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, interest on trust preferred securities and subordinated debt, shareholder dividends, and share repurchases. Its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations. 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. Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC.
INTEREST RATE RISK MANAGEMENT
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. 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 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 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 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. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).
In addition to a stable rate scenario, which presumes that there are no changes in interest rates, the Company typically uses at least eight other interest rate scenarios in conducting rolling 12-month net interest income simulations: 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 modeling is performed. 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 or any shifts in the Company’s projected balance sheet in different rate environments (dollars in thousands, unaudited):
June 30, 2026
June 30, 2025
Immediate change in Interest Rates (basis points)
% Change in Net Interest Income
$ Change in Net Interest Income
% Change in Net Interest Income
$ Change in Net Interest Income
+400
(1.9)%
$
(2,522)
4.9%
$
6,787
+300
(1.2)%
$
(1,623)
3.8%
$
5,239
+200
(0.6)%
$
(781)
2.7%
$
3,695
+100
(0.1)%
$
(166)
1.5%
$
2,020
Base
-100
(2.5)%
$
(3,359)
(3.9)%
$
(5,437)
-200
(5.7)%
$
(7,538)
(8.1)%
$
(11,156)
-300
(8.8)%
$
(11,671)
(12.5)%
$
(17,242)
-400
(7.1)%
$
(9,445)
(16.9)%
$
(23,424)
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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 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 $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 $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. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. The following table sets forth the Company’s regulatory capital ratios as of the dates indicated:
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Regulatory Capital Ratios
Minimum
Minimum
Requirement
Required
June 30,
December 31,
to be
Community Bank
2026
2025
Well Capitalized
Leverage Ratio (1)
Bank of the Sierra
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")
12.25
%
11.94
%
9.00
%
9.00
%
Sierra Bancorp
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")
11.02
%
10.80
%
9.00
%
N/A
(1) If the subsidiary bank’s leverage ratio exceeds the minimum ratio under the community bank leverage ratio framework, it is deemed to be “well capitalized” under all other regulatory capital requirements. The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s leverage ratio falls below the minimum under the community bank leverage ratio framework.
The federal banking agencies provide a simplified measure of capital adequacy for qualifying community banking organizations by allowing such banking organizations to opt into the community bank leverage ratio framework. The Company’s subsidiary has opted into the community bank leverage ratio framework. This means that if the Company’s subsidiary maintains a leverage ratio greater than 9%, it will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject. A qualifying community banking organization with a leverage ratio of greater than 9% may opt into the community bank leverage ratio framework if has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5% or less of total consolidated assets. Further, the bank must not be an advanced approaches banking organization.
PART I – FINANCIAL INFORMATION
ITEM 3
QUANTITATIVE & QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”
PART I – FINANCIAL INFORMATION
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