HAWTHORN BANCSHARES, INC. 10-Q

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, strategy, future performance and business of Hawthorn Bancshares, Inc., and its subsidiaries (collectively, the “Company”, “we”, “our”, or “us”), including, without limitation statements that are not historical in nature, and statements preceded by, followed by or that include the words believes , expects, may, will, should, could, anticipates, estimates, intends, plans, hopes or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, such possible events or factors such as: changes in economic conditions generally or in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, tariffs and trade disruptions, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company’s market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, economic or other disruptions caused by acts of terrorism, war or other conflicts, changes in geopolitical conditions, natural disasters, such as hurricanes, wild fires, freezes, flooding and other man-made disasters, health emergencies, epidemics or pandemics, climate changes or other catastrophic events and such other factors as described in the forward-looking statements under the caption Risk Factors in Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 (the “2025 Form 10-K”), and in other reports filed by us with the Securities and Exchange Commission (“SEC”) from time to time. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made. Except as required by law, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in its business, results of operations or financial condition over time. During the quarter ended June 30, 2026, there were no material changes to the Risk Factors disclosed in the Company’s 2025 Form 10-K. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Certain accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies and estimates require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The Company has identified certain accounting policies as “critical accounting policies and estimates,” consisting of those related to the allowance for credit losses, as described in the section captioned “ Critical Accounting Policies and Estimates” incorporated by reference in Item 7, Management’s Discussion and Analysis of Financial Condition and results of Operations included in the 2025 Form 10-K. There have been no changes in the Company's application of critical accounting policies and estimates since December 31, 2025. Overview Crucial to the Company’s community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through the branch network of its subsidiary bank, Hawthorn Bank (the “Bank”), the Company, with $1.77 billion in assets at June 30, 2026, provides a broad range of commercial and personal banking services. The Bank's specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration (“SBA”) loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. The Company also provides other financial services through its Wealth Management business, including trust services, estate planning, investment and asset management services and a comprehensive suite of cash management services. Beginning with the first quarter of 2025, the Company's Wealth Management business is reported as a separate reporting segment, and the Company operates two reporting segments, consisting of the Bank and the Wealth Management business. The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area. 37 The Company's primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company's business is commercial, commercial real estate development, and residential mortgage lending. The Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity. The success of the Company's growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company's financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control. The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination by the Board of Governors of the Federal Reserve System. On April 29, 2026, the Company entered into an agreement to acquire FSC Bancshares, Inc. (“FSC”) in a cash-and-stock merger valued at approximately $28.3 million, with the transaction expected to close in the third quarter of 2026, subject to FSC shareholder approval and other customary closing conditions. Refer to Note 17, “Pending Acquisition”, in the Company’s consolidated financial statements for further details regarding this pending transaction. The Wealth Management segment was immaterial to the Company’s total consolidated operating results for the periods presented in this report. Accordingly, for presentation purposes, the financial information and discussion below is presented on an aggregated basis, except as otherwise noted. Refer to Note 15, “Segment Information,” in the Company’s consolidated financial statements for further details regarding the financial results of each segment. Executive Summary The Company has prepared all of the consolidated financial information in this report in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) and the rules of the SEC. In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates. 38 As of and for the As of and for the Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands, except per share data) 2026 2025 2026 2025 Net interest income $ 17,258 $ 16,142 $ 34,360 $ 31,436 Provision for (release of) credit losses 238 (51) 311 (391) Non-interest income 5,377 3,545 8,477 7,008 Investment securities gains (losses), net 280 (1) 285 (3) Non-interest expense 13,747 12,269 26,749 24,768 Income before income taxes 8,930 7,468 16,062 14,064 Income tax expense 1,604 1,367 2,993 2,580 Net income $ 7,326 $ 6,101 $ 13,069 $ 11,484 Basic earnings per share $ 1.06 $ 0.88 $ 1.89 $ 1.65 Diluted earnings per share $ 1.06 $ 0.88 $ 1.89 $ 1.65 Performance Ratios Return on average total assets 1.63% 1.36% 1.45% 1.28% Return on average stockholders' equity 16.39 15.85 14.74 15.08 Efficiency ratio (1) 60.73 62.32 62.44 64.43 Net interest margin, fully tax-equivalent 4.16 3.89 4.11 3.78 Average stockholders' equity to total assets 9.94 8.56 9.80 8.49 Market and per share data Book value per share (2) $ 26.50 $ 22.53 Market price per share $ 39.30 $ 29.14 Cash dividends declared on common stock $ 1,448 $ 1,389 $ 2,898 $ 2,717 (1) Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue is calculated as net interest income plus non-interest income. (2) Book value per share is calculated using weighted average shares. 39 As of and for the Three Months Ended As of and for the Six Months Ended June 30, June 30, (dollars in thousands, except per share data) 2026 2025 2026 2025 Capital Ratios Stockholders' equity to assets 10.31% 8.35% Total risk-based capital ratio 16.40 15.12 Tier 1 risk-based capital ratio 15.15 13.87 Common equity Tier 1 capital 12.07 10.82 Tier 1 leverage ratio (1) 12.91 11.87 Asset Quality Non-performing loans $ 6,655 $ 2,761 Non-performing assets $ 7,500 $ 5,186 Net loan charge-offs $ 138 $ 51 $ 196 $ 33 Net charge-offs to average loans (2) 0.04% 0.01% 0.03% —% Allowance for credit losses to total loans 1.46 1.47% Non-performing loans to total loans 0.47 0.19% Non-performing assets to total loans 0.53 0.35% Non-performing assets to total assets 0.42 0.28% (1) Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets. (2) Annualized Results of Operations Highlights: Consolidated net income was $7.3 million, or $1.06 per diluted share, and $13.1 million, or $1.89 per diluted share, for the three and six months ended June 30, 2026, respectively, compared to $6.1 million, or $0.88 per diluted share, and $11.5 million, or $1.65 per diluted share, for the three and six months ended June 30, 2025, respectively. For the three and six months ended June 30, 2026, the return on average assets was 1.63% and 1.45%, respectively, the return on average stockholders’ equity was 16.39% and 14.74%, respectively, and the efficiency ratio was 60.73% and 62.44%, respectively. Net interest income was $17.3 million and $34.4 million for the three and six months ended June 30, 2026, respectively, compared to $16.1 million and $31.4 million for the three and six months ended June 30, 2025, respectively. Net interest margin, on a fully taxable equivalent (“FTE”) basis, was 4.16% and 4.11% for the three and six months ended June 30, 2026, respectively, compared to 3.89% and 3.78% for the three and six months ended June 30, 2025, respectively. The change to net interest margin on an FTE basis is discussed in greater detail under the Average Balance Sheet Data and Rate and Volume Analysis sections. Non-interest income was $5.4 million and $8.5 million for the three and six months ended June 30, 2026, respectively, compared to $3.5 million and $7.0 million for the three and six months ended June 30, 2025, respectively. These changes are discussed in greater detail under the Non-interest Income and Expense section. Non-interest expense was $13.7 million and $26.7 million for the three and six months ended June 30, 2026, respectively, compared to $12.3 million and $24.8 million for the three and six months ended June 30, 2025, respectively. These changes are discussed in greater detail under the Non-interest Income and Expense section. Balance Sheet Highlights: Cash and cash equivalents – Cash and cash equivalents decreased $71.6 million to $32.7 million as of June 30, 2026 compared to $104.3 million as of December 31, 2025, and decreased $67.6 million compared to $100.3 million as of June 30, 2025. See the Liquidity Management section for further discussion. 40 Loans – Loans held for investment decreased $70.4 million to $1.42 billion as of June 30, 2026 compared to $1.49 billion as of December 31, 2025, and decreased $46.5 million compared to $1.46 billion as of June 30, 2025. Asset quality – Non-performing assets totaled $7.5 million, or 0.53% of total loans, at June 30, 2026 compared to $7.0 million, or 0.47% of total loans, at December 31, 2025 and $5.2 million, or 0.35% of total loans, at June 30, 2025. In the second quarter of 2026, the Company had net loan charge-offs of $0.14 million, or 0.04% of average loans, compared to net loan charge-offs of $0.05 million, or 0.01% of average loans, in the same prior year quarter. The allowance for credit losses was $20.7 million, or 1.46% of loans outstanding, at June 30, 2026 compared to $21.1 million, or 1.42% of loans outstanding, at December 31, 2025, and $21.6 million, or 1.47% of loans outstanding, at June 30, 2025. These changes are discussed in greater detail under the Lending and Credit Management section. Deposit s – Total deposits decreased $66.0 million to $1.49 billion as of June 30, 2026 compared to $1.55 billion as of December 31, 2025, and decreased $29.8 million compared to $1.52 billion as of June 30, 2025. Federal Home Loan Bank (“FHLB”) advances and other borrowings – Total FHLB advances and other borrowings decreased $72.7 million to $29.4 million as of June 30, 2026, compared to $102.1 million as of December 31, 2025, and decreased $110.7 million compared to $140.1 million as of June 30, 2025. Capital – The Company maintains its “well-capitalized” regulatory capital position. At June 30, 2026, capital ratios were as follows: total risk-based capital to risk-weighted assets 16.40%; tier 1 capital to risk-weighted assets 15.15%; tier 1 leverage 12.91%; and stockholders’ equity to assets 10.31%. 41 Average Balance Sheet Data Net interest income is the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected both by changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. The following tables present average balance sheet data, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on an FTE basis for each of the three and six month periods ended June 30, 2026 and 2025, respectively. The average balances used in this table and other statistical data were calculated using average daily balances. Three Months Ended June 30, 2026 2025 (dollars in thousands) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1) ASSETS Loans: (2) Commercial $ 200,336 $ 3,498 7.00% $ 207,200 $ 3,502 6.78% Real estate construction - residential 41,617 774 7.46 25,177 526 8.38 Real estate construction - commercial 85,244 1,651 7.77 64,457 1,222 7.60 Real estate mortgage - residential 361,642 5,197 5.76 378,192 5,510 5.84 Real estate mortgage - commercial 728,390 10,726 5.91 765,516 10,702 5.61 Installment and other consumer 8,844 140 6.35 12,049 193 6.42 Total loans 1,426,073 21,986 6.18 1,452,591 21,655 5.98 Loans held for sale 1,325 3 0.91 178 3 6.76 Investment securities: U.S. Treasury 5,951 63 4.25 5,023 53 4.23 U.S. government and federal agency obligations 3,882 32 3.31 13,244 139 4.21 Obligations of states and political subdivisions 101,309 810 3.21 96,830 887 3.67 Mortgage-backed securities 76,323 741 3.89 78,630 761 3.88 Other debt securities 33,472 502 6.02 27,947 419 6.01 Total investment securities 220,937 2,148 3.90 221,674 2,259 4.09 Other investment securities 4,662 99 8.52 4,029 85 8.46 Interest bearing deposits in other financial institutions 44,461 449 4.05 24,429 290 4.76 Total interest earning assets 1,697,458 24,685 5.83% 1,702,901 24,292 5.72% All other assets 126,870 121,652 Allowance for credit losses (21,061) (21,847) Total assets $ 1,803,267 $ 1,802,706 LIABILITIES AND STOCKHOLDERS' EQUITY Savings $ 260,228 $ 882 1.36% $ 275,295 $ 1,227 1.79% NOW accounts 156,590 543 1.39 191,222 650 1.36 Interest checking 170,003 1,319 3.11 137,043 1,288 3.77 Money market 184,785 764 1.66 205,005 921 1.80 Time deposits 299,313 2,177 2.92 302,763 2,422 3.21 Total interest bearing deposits 1,070,919 5,685 2.13 1,111,328 6,508 2.35% Federal funds purchased and securities sold under agreements to repurchase — 13 — 73 1 5.49 Federal Home Loan Bank advances and other borrowings 73,190 617 3.38 59,177 404 2.74 Subordinated notes 49,486 779 6.31 49,486 856 6.94 Total borrowings 122,676 1,409 4.61 108,736 1,261 4.65 Total interest bearing liabilities 1,193,595 7,094 2.38% 1,220,064 7,769 2.55% Demand deposits 412,935 416,296 Other liabilities 17,504 11,983 Total liabilities 1,624,034 1,648,343 Stockholders' equity 179,233 154,363 Total liabilities and stockholders' equity $ 1,803,267 $ 1,802,706 Net interest income (FTE) $ 17,591 $ 16,523 Net interest spread (FTE) 3.45% 3.17% Net interest margin (FTE) 4.16% 3.89% 42 (1) Interest income and yields are presented on an FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for both the three months ended June 30, 2026 and 2025. Such adjustments totaled $0.3 million and $0.4 million for the three months ended June 30, 2026 and 2025, respectively. (2) Non-accruing loans are included in the average amounts outstanding. Six Months Ended June 30, 2026 2025 (dollars in thousands) Average Balance Interest Income/ Expense(1) Rate Earned/ Paid(1) Average Balance Interest Income/ Expense(1) Rate Earned/ Paid(1) ASSETS Loans: (2) Commercial $ 209,020 $ 7,247 6.99% $ 203,966 $ 6,672 6.60% Real estate construction - residential 40,665 1,491 7.39 29,317 1,146 7.88 Real estate construction - commercial 85,237 3,230 7.64 73,268 2,791 7.68 Real estate mortgage - residential 365,980 10,421 5.74 370,800 10,686 5.81 Real estate mortgage - commercial 741,253 21,553 5.86 768,940 21,223 5.57 Installment and other consumer 9,260 302 6.58 12,623 401 6.41 Total loans $ 1,451,415 $ 44,244 6.15% $ 1,458,914 $ 42,919 5.93% Loans held for sale 951 7 1.48% 130 5 7.76% Investment securities: U.S. Treasury 5,514 115 4.21 4,984 105 4.25 U.S. government and federal agency obligations 4,248 73 3.47 13,228 281 4.28 Obligations of states and political subdivisions 103,189 1,615 3.16 99,342 1,671 3.39 Mortgage-backed securities 73,367 1,400 3.85 79,345 1,543 3.92 Other debt securities 29,801 889 6.02 25,091 721 5.79 Total investment securities 216,119 4,092 3.82 221,990 4,321 3.93 Other investment securities 4,901 212 8.72 4,422 205 9.35 Federal funds sold — — — — — — Interest bearing deposits in other financial institutions 44,585 886 4.01 23,818 539 4.56 Total interest earning assets $ 1,717,971 $ 49,441 5.80% $ 1,709,274 $ 47,989 5.66% All other assets 126,320 121,496 Allowance for credit losses (21,226) (22,034) Total assets $ 1,823,065 $ 1,808,736 LIABILITIES AND STOCKHOLDERS' EQUITY Savings $ 261,397 $ 1,776 1.37% $ 273,648 $ 2,505 1.85% NOW accounts 167,456 1,242 1.50 197,537 1,407 1.44 Interest checking 172,568 2,626 3.07 141,637 2,667 3.80 Money market 186,199 1,526 1.65 206,561 1,856 1.81 Time deposits 301,084 4,386 2.94 301,580 4,886 3.27 Total interest bearing deposits 1,088,704 11,556 2.14 1,120,963 13,321 2.40 Federal funds purchased and securities sold under agreements to repurchase 4 26 1310.77 51 1 3.95 Federal Home Loan Bank advances and other borrowings 78,409 1,252 3.22 67,304 903 2.71 Subordinated notes 49,486 1,552 6.32 49,486 1,708 6.96 Total borrowings 127,899 2,830 4.46 116,841 2,612 4.51 Total interest bearing liabilities $ 1,216,603 $ 14,386 2.38% $ 1,237,804 $ 15,933 2.60% Demand deposits 411,607 404,945 Other liabilities 16,116 12,437 Total liabilities $ 1,644,326 $ 1,655,186 Stockholders' equity 178,739 153,550 Total liabilities and stockholders' equity $ 1,823,065 $ 1,808,736 Net interest income (FTE) $ 35,055 $ 32,056 Net interest spread (FTE) 3.42% 3.06% Net interest margin (FTE) 4.11% 3.78% 43 (1) Interest income and yields are presented on an FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for both the six months ended June 30, 2026 and 2025. Such adjustments totaled $0.7 million and $0.6 million for the six months ended June 30, 2026 and 2025, respectively. (2) Non-accruing loans are included in the average amounts outstanding. Rate and Volume Analysis The following table summarizes the changes in net interest income on an FTE basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates for the three and six months ended June 30, 2026 compared to the three and six months ended June 30, 2025. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each. Three Months Ended June 30, Six Months Ended June 30, 2026 vs. 2025 2026 vs. 2025 Change due to Change due to (dollars in thousands) Total Change Average Volume Average Rate Total Change Average Volume Average Rate Interest income on a fully taxable equivalent basis: (1) Loans: (2) Commercial $ (4) $ (118) $ 114 $ 575 $ 168 $ 407 Real estate construction - residential 248 310 (62) 345 420 (75) Real estate construction - commercial 429 402 27 439 454 (15) Real estate mortgage - residential (313) (239) (74) (265) (138) (127) Real estate mortgage - commercial 24 (532) 556 330 (780) 1,110 Installment and other consumer (53) (50) (3) (99) (110) 11 Loans held for sale — 4 (4) 2 9 (7) Investment securities: U.S. Treasury 10 10 — 10 11 (1) U.S. government and federal agency obligations (107) (82) (25) (208) (163) (45) Obligations of states and political subdivisions (77) 40 (117) (56) 63 (119) Mortgage-backed securities (20) (22) 2 (143) (114) (29) Other debt securities 83 83 — 168 139 29 Other investment securities 14 13 1 7 21 (14) Interest bearing deposits in other financial institutions 159 208 (49) 347 420 (73) Total interest income 393 27 366 1,452 400 1,052 Interest expense: Savings $ (345) $ (64) $ (281) $ (729) $ (108) $ (621) NOW accounts (107) (120) 13 (165) (221) 56 Interest checking 31 279 (248) (41) 522 (563) Money market (157) (87) (70) (330) (175) (155) Time deposits (245) (28) (217) (500) (8) (492) Federal funds purchased and securities sold under agreements to repurchase 12 (1) 13 25 (2) 27 FHLB advances and other borrowings 213 107 106 349 162 187 Subordinated notes (77) — (77) (156) — (156) Total interest expense (675) 86 (761) (1,547) 170 (1,717) Net interest income on an FTE basis $ 1,068 $ (59) $ 1,127 $ 2,999 $ 230 $ 2,769 (1) Interest income and yields are presented on an FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for each of the three and six months ended June 30, 2026 and 2025. Such adjustments totaled $0.3 million and $0.7 million for the three and six months ended June 30, 2026, respectively, compared to $0.4 million and $0.6 million for the three and six months ended June 30, 2025, respectively. (2) Non-accruing loans are included in the average amounts outstanding. Financial results for the quarter ended June 30, 2026 compared to the quarter ended June 30, 2025, reflected an increase in net interest income on an FTE basis of $1.1 million, or 6.5%. Measured as a percentage of average earning assets, the net interest margin (expressed on an FTE basis) increased to 4.16% for the quarter ended June 30, 2026 compared to 3.89% for 44 the quarter ended June 30, 2025 and increased to 4.11% for the six months ended June 30, 2026 compared to 3.78% for the six months ended June 30, 2025. Average interest earning assets remained consistent at $1.70 billion for the quarters ended June 30, 2026 and June 30, 2025, and average interest bearing liabilities decreased $26.5 million, or 2.2%, to $1.19 billion for the quarter ended June 30, 2026 compared to $1.22 billion for the quarter ended June 30, 2025. Average interest earning assets increased $8.7 million, or 0.5%, to $1.72 billion for the six months ended June 30, 2026 compared to $1.71 billion for the six months ended June 30, 2025, and average interest bearing liabilities decreased $21.2 million, or 1.7%, to $1.22 billion for the six months ended June 30, 2026 compared to $1.24 billion for the six months ended June 30, 2025. Total interest income (expressed on an FTE basis) was $24.7 million and $49.4 million for the three and six months ended June 30, 2026, respectively, compared to $24.3 million and $48.0 million for the three and six months ended June 30, 2025, respectively. The Company’s rates earned on interest earning assets were 5.83% and 5.80% for the three and six months ended June 30, 2026, respectively, compared to 5.72% and 5.66% for the three and six months ended June 30, 2025, respectively. Interest income on loans held for investment (expressed on an FTE basis) was $22.0 million and $44.2 million for the three and six months ended June 30, 2026, respectively, compared to $21.7 million and $42.9 million for the three and six months ended June 30, 2025, respectively. Average loans outstanding decreased $26.5 million, or 1.8%, to $1.43 billion for the quarter ended June 30, 2026 compared to $1.45 billion for the quarter ended June 30, 2025. The average yield on loans increased to 6.18% for the quarter ended June 30, 2026 compared to 5.98% for the quarter ended June 30, 2025. Average loans outstanding decreased $7.5 million, or 0.5%, to $1.45 billion for the six months ended ended June 30, 2026 compared to $1.46 billion for the six months ended June 30, 2025. The average yield on loans increased to 6.15% for the six months ended June 30, 2026 compared to 5.93% for the six months ended June 30, 2025. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio. Interest income on available-for-sale securities (expressed on an FTE basis) was $2.1 million and $4.1 million for the three and six months ended June 30, 2026, respectively, compared to $2.3 million and $4.3 million for the three and six months ended June 30, 2025, respectively. Average securities decreased $0.8 million, or 0.3%, to $220.9 million for the quarter ended June 30, 2026 compared to $221.7 million for the quarter ended June 30, 2025. The average yield on securities decreased to 3.90% for the quarter ended June 30, 2026 compared to 4.09% for the quarter ended June 30, 2025. Average securities decreased $5.9 million, or 2.6%, to $216.1 million for the six months ended June 30, 2026 compared to $222.0 million for the six months ended June 30, 2025. The average yield on securities decreased to 3.82% for the six months ended June 30, 2026 compared to 3.93% for the six months ended June 30, 2025. See the Liquidity Management section for further discussion. Total interest expense was $7.1 million and $14.4 million for the three and six months ended June 30, 2026, respectively, compared to $7.8 million and $15.9 million for the three and six months ended June 30, 2025, respectively. The Company’s rates paid on interest bearing liabilities were 2.38% for both the three and six months ended June 30, 2026, respectively, compared to 2.55% and 2.60% for the three and six months ended June 30, 2025, respectively. See the Liquidity Management section for further discussion. Interest expense on deposits was $5.7 million and $11.6 million for the three and six months ended June 30, 2026, respectively, compared to $6.5 million and $13.3 million for the three and six months ended June 30, 2025, respectively. Average interest bearing deposits decreased $40.4 million, or 3.6%, to $1.07 billion for the quarter ended June 30, 2026 compared to $1.11 billion for the quarter ended June 30, 2025. The average cost of deposits decreased to 2.13% for the quarter ended June 30, 2026 compared to 2.35% for the quarter ended June 30, 2025. 45 Average interest bearing deposits decreased $32.3 million, or 2.9%, to $1.09 billion for the six months ended June 30, 2026 compared to $1.12 billion for the six months ended June 30, 2025. The average cost of deposits decreased to 2.14% for the six months ended June 30, 2026 compared to 2.40% for the six months ended June 30, 2025. Interest expense on borrowings was $1.4 million and $2.8 million for the three and six months ended June 30, 2026, respectively, compared to $1.3 million and $2.6 million for the three and six months ended June 30, 2025, respectively. Average borrowings increased $14.0 million, or 12.8%, to $122.7 million for the quarter ended June 30, 2026 compared to $108.7 million for the quarter ended June 30, 2025. The average cost of borrowings decreased to 4.61% for the quarter ended June 30, 2026 compared to 4.65% for the quarter ended June 30, 2025. Average borrowings increased $11.1 million, or 9.5%, to $127.9 million for the six months ended June 30, 2026 compared to $116.8 million for the six months ended June 30, 2025. The average cost of borrowings decreased to 4.5% for the six months ended June 30, 2026 compared to 4.51% for the six months ended June 30, 2025. Non-interest Income The following table shows the principal components of non-interest income for the three and six months ended June 30, 2026 and 2025. Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2026 2025 $ Change % Change 2026 2025 $ Change % Change Service charges and other fees $ 815 $ 940 $ (125) (13.3) % $ 1,635 $ 1,853 $ (218) (11.8) % Bank card income and fees 1,018 1,003 15 1.5 1,925 1,929 (4) (0.2) Earnings on bank-owned life insurance 498 509 (11) (2.2) 991 1,019 (28) (2.7) Wealth management revenue 654 542 112 20.7 1,270 1,016 254 25.0 Gain on sales of mortgage loans, net 69 117 (48) (41.0) 146 242 (96) (39.7) Gains (losses) on other real estate owned, net 335 (177) 512 (289.3) 302 (156) 458 (293.6) Other 1,988 611 1,377 225.4 2,208 1,105 1,103 99.8 Total non-interest income $ 5,377 $ 3,545 $ 1,832 51.7 % $ 8,477 $ 7,008 $ 1,469 21.0 % Non-interest income as a % of total revenue (1) 23.8 % 18.0 % 19.8 % 18.2 % (1) Total revenue is calculated as net interest income plus non-interest income. Total non-interest income increased $1.8 million, or 51.7%, to $5.4 million for the quarter ended June 30, 2026 compared to $3.5 million for the quarter ended June 30, 2025, and increased $1.5 million, or 21.0% to $8.5 million for the six months ended June 30, 2026 compared to $7.0 million for the six months ended June 30, 2025. The increase for the three and six months ended June 30, 2026 was primarily due to gains recorded on other real estate owned and premises and equipment held for sale. Service charges and other fees decreased $0.1 million, or 13.3%, to $0.8 million for the quarter ended June 30, 2026 compared to $0.9 million for the quarter ended June 30, 2025, and decreased $0.2 million, or 11.8%, to $1.6 million for the six months ended June 30, 2026 compared to $1.9 million for the six months ended June 30, 2025. The decrease for the three and six months ended June 30, 2026 was primarily attributable to a decrease in overall service charges on accounts and lower NSF charges. Wealth management revenue increased $0.1 million, or 20.7%, to $0.7 million for the quarter ended June 30, 2026 compared to $0.5 million for the quarter ended June 30, 2025, and increased $0.3 million, or 25.0% to $1.3 million for the six months ended June 30, 2026 compared to $1.0 million for the six months ended June 30, 2025. The increase for the three and six months ended June 30, 2026 was primarily attributable to continued growth in accounts. Gains on other real estate owned were $0.3 million for the quarter ended June 30, 2026 compared to losses of $0.2 million for the quarter ended June 30, 2025, and gains of $0.3 million for the six months ended June 30, 2026 compared to losses of $0.2 million for the six months ended June 30, 2025. The increase for the three and six months ended June 30, 2026 is primarily attributed to a large sale of other real estate owned during the quarter ended June 30, 2026. 46 Non-interest Expense The following table shows the principal components of non-interest expense for the three and six months ended June 30, 2026 and 2025. Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2026 2025 $ Change % Change 2026 2025 $ Change % Change Salaries $ 6,179 $ 5,415 $ 764 14.1% $ 11,547 $ 10,780 $ 767 7.1% Employee benefits 1,414 1,288 126 9.8 2,860 2,835 25 0.9 Occupancy expense, net 859 947 (88) (9.3) 1,850 1,883 (33) (1.8) Furniture and equipment expense 791 673 118 17.5 1,561 1,466 95 6.5 Processing, network and bank card expense 1,419 1,443 (24) (1.7) 2,837 2,844 (7) (0.2) Legal, examination, and professional fees 944 428 516 120.6 1,746 921 825 89.6 Advertising and promotion 236 212 24 11.3 439 372 67 18.0 Postage, printing, and supplies 202 342 (140) (40.9) 501 636 (135) (21.2) Other 1,703 1,521 182 12.0 3,408 3,031 377 12.4 Total non-interest expense $ 13,747 $ 12,269 $ 1,478 12.0% $ 26,749 $ 24,768 $ 1,981 8.0% Efficiency ratio (1) 60.7 % 62.3 % 62.4 % 64.4 % Number of full-time equivalent employees 269 250 269 250 (1) Efficiency ratio is calculated as non-interest expense as a percent of revenue. Total revenue is calculated as net interest income plus non-interest income. Total non-interest expense increased $1.5 million, or 12.0%, to $13.7 million for the quarter ended June 30, 2026 compared to $12.3 million for the quarter ended June 30, 2025, and increased $2.0 million, or 8.0%, to $26.7 million for the six months ended June 30, 2026 compared to $24.8 million for the six months ended June 30, 2025. Salaries increased $0.8 million, or 14.1%, to $6.2 million for the quarter ended June 30, 2026 compared to $5.4 million for the quarter ended June 30, 2025, and increased $0.8 million, or 7.1%, to $11.5 million for the six months ended June 30, 2026 compared to $10.8 million for the six months ended June 30, 2025. The increase for the three and six months ended June 30, 2026 is attributed to incentive payouts paid during the periods and increases in number of full-time equivalent employees. Occupancy expense, net, decreased $0.1 million, or 9.3%, to $0.9 million for the quarter ended June 30, 2026 compared to $0.9 million for the quarter ended June 30, 2025, and remained consistent at $1.9 million for the six months ended June 30, 2026 and 2025. The decrease for the quarter ended June 30, 2026 primarily resulted from rental income received from renting a bank property that was held for sale. That property was sold during the quarter ended June 30, 2026. Furniture and equipment expense increased $0.1 million, or 17.5%, to $0.8 million for the quarter ended June 30, 2026 compared to $0.7 million for the quarter ended June 30, 2025 and increased $0.1 million, or 6.5%, to $1.6 million for the six months ended June 30, 2026 compared to $1.5 million for the six months ended June 30, 2025. The increase is attributed to an increase in maintenance fees paid during the quarter. Legal, examination, and professional fees increased $0.5 million, or 120.6%, to $0.9 million for the quarter ended June 30, 2026, compared to $0.4 million for the quarter ended June 30, 2025, and increased $0.8 million, or 89.6%, to $1.7 million for the six months ended June 30, 2026 compared to $0.9 million for the six months ended June 30, 2025. The increase for the three and six months ended June 30, 2026 is attributed to legal and professional fees incurred for the acquisition of FSC Bancshares, Inc. Postage, printing, and supplies decreased $0.1 million, or 40.9%, to $0.2 million for the quarter ended June 30, 2026, compared to $0.3 million for the quarter ended June 30, 2025, and decreased $0.1 million, or 21.2%, to $0.5 million for the six months ended June 30, 2026 compared to $0.6 million for the six months ended June 30, 2025. The decrease is attributed to customer mailings sent in conjunction with an account consolidation project in the prior year quarter. 47 Income Taxes Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements was 18.0% and 18.6% for the three and six months ended June 30, 2026, respectively, compared to 18.3% for both the three and six months ended June 30, 2025. The effective tax rate for each of the three and six months ended June 30, 2026 and 2025 was lower than the U.S. federal statutory rate of 21% primarily due to tax-free revenues. Lending and Credit Management Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 79.9% of total assets as of June 30, 2026 compared to 78.5% as of December 31, 2025. Lending activities are conducted pursuant to an established loan policy approved by the Bank's Board of Directors. The Bank's credit review process is overseen by regional loan committees with established loan approval limits. In addition, the executive loan committee reviews all credit relationships in aggregate over an established dollar amount. The executive loan committee meets weekly and is comprised of senior managers of the Bank. Major classifications within the Company’s held-for-investment loan portfolio as of the dates indicated are as follows: June 30, 2026 December 31, 2025 (dollars in thousands) Amount % of Loans Amount % of Loans Commercial, financial, and agricultural $ 196,084 13.8 % $ 227,584 15.3 % Real estate construction − residential 42,307 3.0 39,609 2.7 Real estate construction − commercial 85,914 6.1 83,846 5.6 Real estate mortgage − residential 370,185 26.1 369,636 24.9 Real estate mortgage − commercial 712,619 50.3 755,892 50.8 Installment and other consumer 9,251 0.7 10,225 0.7 Total loans held for investment $ 1,416,360 100.0 % $ 1,486,792 100.0 % Commercial Real Estate Loans Commercial real estate loans (“CRE”) consist primarily of income-producing investment property loans. Additionally, CRE loans include 1-4 family property loans as well as land and development loans. The following table shows the categories of the Company's non-owner occupied CRE loan portfolio at June 30, 2026 and December 31, 2025: June 30, 2026 December 31, 2025 (dollars in thousands) Amount % of Loans Amount % of Loans Retail $ 167,079 28.7 % $ 171,366 27.9 % Multi Family 145,226 25.0 165,663 27.0 Hotel & Food Service 57,647 9.9 63,279 10.3 Other Construction 52,561 9.0 55,947 9.1 Office Buildings 44,832 7.7 48,028 7.8 1-4 Family Construction 42,307 7.3 39,609 6.4 Other Real Estate 23,421 4.0 24,379 4.0 Land Subdivision 18,511 3.2 15,765 2.6 Industrial 15,275 2.6 18,450 3.0 Residential Building Construction 7,551 1.3 5,906 1.0 Commercial and Institutional Building Construction 7,291 1.3 6,228 1.0 Total Commercial Real Estate - Non Owner Occupied $ 581,701 100.0 % $ 614,620 100.0 % 48 The Company extends credit to its local community markets through traditional real estate mortgage products. The Company does not participate in credit extension to sub-prime residential real estate markets. The Company does not lend funds for transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. Risk Elements of the Loan Portfolio Management, internal loan review and the executive loan committee formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Loans in excess of $2.0 million in the aggregate and all adversely classified credits identified by management are reviewed by the executive loan committee. In addition, all other loans are reviewed on a risk weighted selection process. The executive loan committee reviews and reports to the Board of Directors, at scheduled meetings: past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, special mention, substandard, doubtful, or loss. During this review, management will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is individually analyzed and in conjunction with current economic conditions and loss experience, reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and collectively analyzed. Management determined that segmenting loans not individually analyzed by the federal call report codes represents the most prudent way to consolidate loans by their associated risk qualities. General reserves are recorded for collectively analyzed loans using a consistent methodology. Two different models are used for calculating the general reserve. The Discounted Cash Flow model considers quantitative peer group historic loss experience, forecasts over the estimated life of the loan pools, industry data, and qualitative or environmental factors, such as: lending policies and procedures; economic conditions; the nature, volume and terms of the portfolio; lending staff and management; past due loans; the loan review system; collateral values; concentrations of credit; and external factors. The Remaining Life model applies a long-term average loss rate calculated using peer data that is adjusted for qualitative or environmental factors such as those previously noted. The model used depends on the loan portfolio segment. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. At June 30, 2026 and December 31, 2025, the ACL on loans included a qualitative adjustment of approximately $9.4 million and $10.3 million, respectively. 49 Non-Performing Assets The following table summarizes non-performing assets at the dates indicated: June 30, December 31, (dollars in thousands) 2026 2025 Non-accrual loans: Commercial, financial, and agricultural $ 1,951 $ 1,003 Real estate mortgage − residential 3,036 5,656 Real estate mortgage − commercial 1,502 143 Installment and other consumer 5 34 Total 6,494 6,836 Loans contractually past due 90 days or more and still accruing: Real estate mortgage − residential 156 29 Installment and other consumer 5 — Total 161 29 Total non-performing loans (1) 6,655 6,865 Other real estate owned and repossessed assets 845 98 Total non-performing assets (2) $ 7,500 $ 6,963 Loans held for investment $ 1,416,360 $ 1,486,792 Allowance for credit losses on loans $ 20,730 $ 21,111 Allowance for credit losses to loans 1.46 % 1.42 % Non-accrual loans to total loans 0.46 0.46 Non-performing loans to loans (1) 0.47 0.46 Non-performing assets to loans (2) 0.53 0.47 Non-performing assets to assets (2) 0.42 0.37 Allowance for credit losses to non-accrual loans 319.22 308.82 Allowance for credit losses to non-performing loans 311.50 307.52 (1) Non-performing loans include loans 90 days past due and accruing and non-accrual loans. (2) Non-performing assets include non-performing loans and other real estate owned and repossessed assets. Total non-performing assets were $7.5 million, or 0.53% of total loans, at June 30, 2026 compared to $7.0 million, or 0.47% of total loans, at December 31, 2025. Total non-accrual loans at June 30, 2026 decreased $0.3 million, or 5.0%, to $6.5 million compared to $6.8 million at December 31, 2025. There were $0.16 million in loans past due 90 days and still accruing interest at June 30, 2026 compared to $0.03 million at December 31, 2025. Other real estate and repossessed assets were $0.8 million and $0.1 million at June 30, 2026 and December 31, 2025, respectively. 50 Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Commitments Allowance for Credit Losses The following table is a summary of the allocation of the allowance for credit losses at the end of the periods shown below: June 30, 2026 December 31, 2025 (dollars in thousands) Amount % of loans to total loans Amount % of loans to total loans Commercial, financial, and agricultural $ 3,628 13.8 % $ 3,655 15.3 % Real estate construction − residential 1,041 3.0 975 2.7 Real estate construction − commercial 2,221 6.1 1,719 5.6 Real estate mortgage − residential 4,557 26.1 4,823 24.9 Real estate mortgage − commercial 9,028 50.3 9,839 50.8 Installment and other consumer 93 0.7 100 0.7 Unallocated 162 — — — Total $ 20,730 100.0 % $ 21,111 100.0 % The allowance for credit losses was $20.7 million, or 1.46% of loans outstanding, at June 30, 2026 compared to $21.1 million, or 1.42% of loans outstanding, at December 31, 2025. The ratio of the allowance for credit losses to non-performing loans was 311.50% at June 30, 2026, compared to 307.52% at December 31, 2025. Provision for (Release of) Credit Losses Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2026 2025 2026 2025 Release of credit losses on loans $ (65) $ (159) $ (185) $ (441) Provision for credit losses for off-balance sheet commitments 303 108 496 50 Total provision for (release of) credit losses $ 238 $ (51) $ 311 $ (391) The Company recognized provision for credit losses of $0.2 million and $0.3 million for the three and six months ended June 30, 2026, respectively, compared to release of provision for credit losses $0.1 million and $0.4 million for the three and six months ended June 30, 2025, respectively. 51 The following table summarizes the credit loss experience for the periods indicated: Three Months Ended June 30, 2026 2025 (dollars in thousands) Net (Charge-offs) Recoveries Average Loans Net (Charge-offs) Recoveries / Average Loans (1) Net (Charge-offs) Recoveries Average Loans Net (Charge-offs) Recoveries / Average Loans (1) Commercial, financial, and agricultural $ (137) $ 200,336 (0.27) % $ 13 $ 207,200 0.01 % Real estate construction − residential — 41,617 — — 25,177 — Real estate construction − commercial 22 85,244 0.10 — 64,457 — Real estate mortgage − residential 5 361,642 0.01 4 378,192 — Real estate mortgage − commercial (1) 728,390 — (3) 765,516 — Installment and other consumer (27) 8,844 (1.22) (65) 12,049 (0.54) Total $ (138) $ 1,426,073 (0.04) % $ (51) $ 1,452,591 — % Six Months Ended June 30, 2026 2025 (dollars in thousands) Net (Charge-offs) Recoveries Average Loans Net (Charge-offs) Recoveries / Average Loans (1) Net (Charge-offs) Recoveries Average Loans Net (Charge-offs) Recoveries / Average Loans (1) Commercial, financial, and agricultural $ (143) $ 209,020 (0.14) % $ 68 $ 203,966 0.03 % Real estate construction − residential — 40,665 — — 29,317 — Real estate construction − commercial 22 85,237 0.05 — 73,268 — Real estate mortgage − residential 10 365,980 0.01 5 370,800 — Real estate mortgage − commercial (24) 741,253 (0.01) 22 768,940 — Installment and other consumer (61) 9,260 (1.33) (128) 12,623 (1.01) Total $ (196) $ 1,451,415 (0.03) % $ (33) $ 1,458,914 — % (1) Annualized ratio of net (charge-offs) recoveries to average loans by loan type. Net Loan Charge-Offs/Recoveries The Company’s net charge-offs were $0.1 million and $0.2 million for the three and six months ended June 30, 2026, respectively, compared to $0.05 million and $0.03 million of net charge-offs for the three and six months ended June 30, 2025, respectively. Loans Held for Sale The Company designates certain long-term fixed rate personal real estate loans as held for sale. Loans held for sale are being carried at the lower of cost or estimated fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac and various other secondary market investors. There were $0.2 million of loans held for sale at June 30, 2026, and $0.6 million loans held for sale at December 31, 2025. The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. During the six months ended June 30, 2026, the Company sold approximately $18.1 million of loans to investors compared to $2.9 million for the six months ended June 30, 2025. 52 Liquidity and Capital Resources Liquidity Management The role of liquidity management is to ensure that funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet these demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full-service relationships with customers as the primary sources of funding. The Company’s Asset/Liability Committee (“ALCO”), primarily made up of senior management, has direct oversight responsibility for the Company’s liquidity position and profile. A combination of daily, weekly, and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company’s liquidity. The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company’s most liquid assets are comprised of available-for-sale investment securities, not including other debt securities, federal funds sold, and excess reserves held at the Federal Reserve. The following table shows the Company’s sources of funds as of June 30, 2026 and December 31, 2025. (dollars in thousands) June 30, 2026 December 31, 2025 Other interest bearing deposits $ 9,835 $ 87,680 Certificates of deposit in other banks 1,000 1,000 Available-for-sale investment securities 233,476 209,939 Total $ 244,311 $ 298,619 Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $233.5 million at June 30, 2026 and included an unrealized net loss of $22.2 million. The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $1.4 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s borrowings. The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes as required or permitted by law. At June 30, 2026 and December 31, 2025, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $122.7 million and $108.4 million, respectively. Total investment securities pledged for these purposes were as follows as of June 30, 2026 and December 31, 2025: (dollars in thousands) June 30, 2026 December 31, 2025 Federal Reserve Bank borrowings $ 8,367 $ 8,288 Other deposits 102,395 93,177 Total pledged, at fair value $ 110,762 $ 101,465 Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and time deposits less than $250,000, less all brokered deposits under $250,000. At June 30, 2026, such deposits totaled $1.39 billion and represented 93.5% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships. 53 Core deposits at June 30, 2026 and December 31, 2025 were as follows: (dollars in thousands) June 30, 2026 December 31, 2025 Non-interest bearing demand $ 416,389 $ 423,568 Interest checking 332,732 372,595 Savings and money market 439,035 453,972 Other time deposits 203,864 213,008 Total $ 1,392,020 $ 1,463,143 Estimated uninsured deposits totaled $310.8 million, including $92.1 million of certificates of deposit, at June 30, 2026, compared to $384.6 million, including $90.5 million of certificates of deposit, at December 31, 2025. The Company's brokered deposits were $4.0 million at June 30, 2026 and $0.5 million at December 31, 2025. Other components of liquidity are the level of borrowings from third-party sources and the availability of future credit. The Company’s outside borrowings are comprised of federal funds purchased, advances from the FHLB and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As of June 30, 2026, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $7.9 million on a secured basis. There were no federal funds purchased outstanding at June 30, 2026. The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window, although no such borrowings were outstanding at June 30, 2026. The Bank is a member of the FHLB and has access to credit products of the FHLB. As of June 30, 2026, the Bank had $29.3 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts. Borrowings outstanding at June 30, 2026 and December 31, 2025 were as follows: (dollars in thousands) June 30, 2026 December 31, 2025 Federal Home Loan Bank advances $ 29,291 $ 102,000 Other borrowings 71 86 Subordinated notes 49,486 49,486 Total $ 78,848 $ 151,572 The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and to borrow from these entities. Based on the type and value of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against this collateral. This collateral is also used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window. The following table reflects collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as of June 30, 2026 and December 31, 2025: June 30, 2026 December 31, 2025 (dollars in thousands) FHLB Federal Reserve Bank Federal Funds Purchased Lines Total FHLB Federal Reserve Bank Federal Funds Purchased Lines Total Advance equivalent $ 427,009 $ 7,891 $ 35,000 $ 469,900 $ 437,998 $ 7,796 $ 35,000 $ 480,794 Letters of credit (24,825) — — (24,825) (81,625) — — (81,625) Advances outstanding (29,290) — — (29,290) (102,000) — — (102,000) Total available $ 372,894 $ 7,891 $ 35,000 $ 415,785 $ 254,373 $ 7,796 $ 35,000 $ 297,169 54 At June 30, 2026, loans of $707.7 million were pledged to the FHLB as collateral for borrowings and letters of credit. At June 30, 2026, investments with a market value of $8.4 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank. Based upon the above, management believes the Company has more than adequate liquidity, both on balance sheet and through additional funding capacity with the FHLB, the Federal Reserve Bank and Federal funds purchased lines, to meet future anticipated liquidity needs in both the short- and long-term. Sources and Uses of Funds Cash and cash equivalents were $32.7 million at June 30, 2026 compared to $104.3 million at December 31, 2025 and $100.3 million at June 30, 2025. The $67.6 million decrease since June 30, 2025 resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statements of cash flows for the six months ended June 30, 2026. Cash flow provided by operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided total cash of $18.1 million for the six months ended June 30, 2026. Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, provided total cash of $50.4 million during the six months ended June 30, 2026. The cash inflow primarily consisted of $11.9 million of proceeds from maturities and calls of available-for-sale securities, a $72.2 million net decrease in loans held for investment, and a $3.3 million net increase in FHLB stock, partially offset by $36.5 million in purchases of securities. Financing activities used total cash of $140.1 million during the six months ended June 30, 2026, resulting primarily from a $51.3 million decrease in interest bearing transaction accounts, a $7.5 million decrease in time deposits, a $7.2 million decrease in demand deposits, and a $72.7 million net decrease in FHLB advances, partially offset by a $1.9 million increase from financing obligations. In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company had $404.9 million in unused loan commitments and standby letters of credit as of June 30, 2026. Although the Company’s current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low. The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing liquidity needs primarily include funding its operating expenses, paying cash dividends to its shareholders and, to a lesser extent, repurchasing its shares of common stock. The Company paid cash dividends to its shareholders totaling approximately $2.8 million and $2.7 million during the six months ended June 30, 2026 and 2025, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared $12.0 million and $10.0 million in dividends to the Company during the six months ended June 30, 2026 and 2025, respectively. At June 30, 2026 and December 31, 2025, the Company had cash and cash equivalents totaling $32.7 million and $25.5 million, respectively. Subject to declaration by the Company's Board of Directors, the Company expects to continue paying quarterly cash dividends as a part of its current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of the Company's Board of Directors and compliance with applicable regulatory capital requirements. On June 5, 2025, the Company announced that its Board of Directors approved a new common stock repurchase program under which the Company may repurchase up to $10.0 million of its common stock, which replaced the Company’s prior common stock repurchase program. Pursuant to the repurchase program, management is given discretion to determine the number and pricing of the shares to be repurchased, as well as the timing of any such repurchases. The timing and total amount of stock repurchases will depend on market and other conditions and may be made from time to time in open market purchases or privately negotiated transactions. The program has no termination date, may be suspended or discontinued at any time and does not obligate the Company to acquire any amount of common stock. The Company repurchased 12,000 common shares under its repurchase programs during the first six months of 2026 at an average cost of $32.68 per share totaling $0.4 million. As of June 30, 2026, $8.0 million remained available for share repurchases pursuant 55 to the Company's current repurchase program. On July 29, 2026, the Company’s Board of Directors amended the repurchase program to increase the authorized repurchase limit to $10.0 million. On June 24, 2025, the Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, which became effective on July 2, 2025. The shelf registration statement is intended to provide us with financial flexibility to raise capital from the offering of up to $150 million of any combination of common stock, preferred stock, debt securities, depositary shares, warrants, purchase contracts, purchase units, subscription rights and units in one or multiple offerings while the shelf registration statement is effective. On April 29, 2026, the Company entered into an agreement to acquire FSC Bancshares, Inc. in a cash-and-stock merger valued at approximately $28.3 million, with the transaction expected to close in the third quarter of 2026, subject to FSC shareholder approval and other customary closing conditions. Refer to Note 17, “Pending Acquisition”, in the Company’s consolidated financial statements for further details regarding this pending transaction. Capital Management The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. The Basel III regulatory capital reforms adopted by U.S. federal regulatory authorities (the “Basel III Capital Rules”), among other things, (i) establish the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) require that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) define the scope of the deductions/adjustments to the capital measures. Additionally, the Basel III Capital Rules require that the Company maintain a 2.50% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of June 30, 2026, that the Company and the Bank meet all capital adequacy requirements to which they are subject. Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of both June 30, 2026 and December 31, 2025. Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well-capitalized. The regulatory authorities can apply changes in classification of assets, and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations. In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%. Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue including its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. 56 Under the Basel III Capital Rules, at both June 30, 2026 and December 31, 2025, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as the dates indicated: Actual Minimum Capital Required - Basel III Fully Phased-In Required to be Considered Well- Capitalized (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio June 30, 2026 Total Capital (to risk-weighted assets): Company $ 255,387 16.40 % $ 163,472 10.50 % $ — N.A. Bank 223,609 14.49 162,068 10.50 154,351 10.00 % Tier 1 Capital (to risk-weighted assets): Company $ 235,891 15.15 % $ 132,334 8.50 % $ — N.A. Bank 204,278 13.23 131,198 8.50 123,481 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets): Company $ 187,891 12.07 % $ 108,981 7.00 % $ — N.A. Bank 204,278 13.23 108,045 7.00 100,328 6.50 % Tier 1 leverage ratio (to adjusted average assets): Company $ 235,891 12.91 % $ 73,064 4.00 % $ — N.A. Bank 204,278 11.26 73,064 4.00 91,330 5.00 % December 31, 2025 Total Capital (to risk-weighted assets): Company $ 247,190 15.49 % $ 167,563 10.50 % $ — N/A Bank 222,887 14.08 166,169 10.50 158,256 10.00 % Tier 1 Capital (to risk-weighted assets): Company $ 227,237 14.24 % $ 135,646 8.50 % $ — N/A Bank 203,097 12.83 134,518 8.50 126,605 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets): Company $ 179,237 11.23 % $ 111,709 7.00 % $ — N/A Bank 203,097 12.83 110,779 7.00 102,866 6.50 % Tier 1 leverage ratio: Company $ 227,237 12.12 % $ 74,994 4.00 % $ — N/A Bank 203,097 10.90 74,546 4.00 93,183 5.00 % 57