HAWTHORN BANCSHARES, INC.

Exhibit 13

ANNUAL REPORT

TO

SHAREHOLDERS

Jefferson City, Missouri

March 5, 2026

Dear Shareholder,

The past year marked several important milestones for Hawthorn Bank, and we made meaningful progress on our top priority—growth. By strengthening relationships, expanding business deposits and lending, and expanding our wealth management services, we continued to connect individuals, families, and businesses to their goals. At the same time, these efforts reinforced our role as a trusted community partner and supported long-term value for our shareholders. The changes implemented in 2023 and 2024, and further refined over the past year, are delivering results.

In February, we opened a new banking center in Overland Park—our first location in Kansas. This prominent location in Johnson County enhances our footprint in the Kansas City metro area and contributes to increased brand awareness. That visibility was further strengthened through high-profile sponsorships, including the Titanic exhibit at Union Station in Kansas City, helping introduce Hawthorn Bank to new audiences across the region.

We also completed major initiatives, including the account consolidation project, which improved efficiency. As we continue to invest in technology to enhance the customer experience, we remain focused on what truly differentiates us—our people. The hybrid banking experience—seamless technology paired with personal, trusted relationships—continues to set Hawthorn Bank apart.

In September, we were proud to celebrate our 160th anniversary, reflecting on what it takes to remain relevant through generations of change. That longevity is a testament to our ability to evolve while staying true to our values.

Growth has no finish line, and sustaining it requires discipline. In 2026, my priority is momentum. With a strong foundation and continued alignment with our strategic initiatives, we are positioned to drive wins and move forward with confidence.

I’m incredibly proud of what we accomplished in 2025, and we continue our shared mission of connecting our customers, our communities, and each other to what’s possible.

Thank you for your investment in Hawthorn Bank. We appreciate your continued support and trust.

Sincerely,

Brent M. Giles,

Chief Executive Officer

A WORD CONCERNING 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 the Company, Hawthorn Bancshares, Inc. (the "Company"), and its subsidiaries, 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 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, the following factors:

•competitive pressures among financial services companies may increase significantly;

•changes in the interest rate environment may reduce interest margins;

•general economic conditions, either nationally or in the communities we serve, may be less favorable than expected and may adversely affect the quality of the Company's loans and other assets;

•increases in non-performing assets in the Company's loan portfolios and adverse economic conditions may necessitate increases to the provisions for credit losses;

•costs or difficulties related to the integration of the business of the Company and its acquisition targets may be greater than expected;

•legislative, regulatory, or tax law changes may adversely affect the business in which the Company and its subsidiaries are engaged;

•changes may occur in the securities markets;

•credit and market risks relating to increasing inflation;

•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, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate changes or other catastrophic events;

•changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses; and

•technological changes, including potential cybersecurity incidents and other disruptions, or innovations to the financial services industry.

In addition to the disclosure in this report, we have described additional factors that could cause actual results to be materially different from those 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, 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 or such other reports 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 $1.89 billion in assets at December 31, 2025, 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. Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services. 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.

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 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.

During 2025, the Company identified its Wealth Management business as a strategic opportunity and hired additional management resources to provide the structure for products and processes for this business. As a result, beginning with the first quarter of 2025, the Company identified its Wealth Management Business as a separate reportable segment and now has two reportable segments: the Bank segment and the Wealth Management segment. The Company’s remaining operations are not reportable segments, as defined by applicable accounting standards, and are classified as Non-Bank, and primarily represent the parent holding company, other insignificant non-bank subsidiaries and eliminations. For the years ended December 31, 2024 and 2023, the Company had one reportable segment, the Bank.

The Bank is a full service bank and, through the Bank segment, conducts a general banking business, offering its customers checking and savings accounts, internet banking, debit cards, certificates of deposit, brokerage services, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, single payment personal loans, installment loans and commercial and residential real estate loans. The Bank also offers, through the Wealth Management segment, a broad range of financial and investment planning services for individuals and business owners, as well as trust services formerly included in the Bank segment.

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.

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 20, "Segment Information," in the Company's consolidated financial statements for further details regarding the financial results of each segment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following 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 impact and any associated risks related to the Company's critical accounting policies and estimates on its business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect the reported and expected financial results.

Management has identified the accounting policy related to the allowance for credit losses ("ACL") as critical to the understanding of the Company's results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.

The Company’s ACL represents management’s best estimate of losses inherent in the portfolio. The policy is designed to maintain the allowance at a level sufficient to absorb reasonably estimated and probable losses within the portfolio. A mathematical calculation of an estimate is made to assist in determining the adequacy and reasonableness of management’s recorded ACL.

The Company’s methodology includes qualitative risk factors that allow management to adjust modeled historical losses and to address other limitations in the quantitative component that is based on modeled historical loss rates. Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions, other external factors, the nature, volume and terms of loans in the portfolio, the volume and severity of past due loans, concentrations, trends in collateral values, the quality of the Company’s internal loan review department, lending management, and lending policies and procedures. At December 31, 2025 and 2024, the ACL on loans included a qualitative adjustment of approximately $10.3 million and $11.2 million, respectively.

The ending result of this process is a recorded consolidated ACL that represents management’s best estimate of the total modeled losses included in the portfolio considering available information from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s control, including the performance of its portfolios, the economy, and changes in interest rates. As such, significant downturns in circumstances relating to instrument quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in instrument quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on the Company’s provision for credit losses and ACL reported in its Consolidated Income Statements and Consolidated Balance Sheets, respectively.

Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the Company's business operations is provided in Note 1, "Significant Accounting Policies" to the Company's consolidated financial statements and is also discussed in the Lending and Credit Management section below.

Executive Summary

The Company has prepared all of the consolidated financial information in this report in accordance with United States 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.

(1)Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue includes net interest income and non-interest income.

(1)Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets and still accruing interest.

Results of Operations Highlights

Consolidated net income for the year ended December 31, 2025 was $23.8 million, or $3.43 per diluted share, which improved $5.5 million, or 30.4%, compared to $18.3 million, or $2.61 per diluted share, for the year ended December 31, 2024, an increase of $0.82 per diluted share, or 31.4%. For the year ended December 31, 2025, the return on average assets ("ROA") was 1.30%, the return on average stockholders' equity ("ROE") was 14.95%, and the efficiency ratio was 63.41%.

Consolidated net income increased $17.3 million to $18.3 million, or $2.61 per diluted share, for the year ended December 31, 2024 compared to $1.0 million, or $0.14 per diluted share, for the year ended December 31, 2023. For the year ended December 31, 2024, ROA was 1.00%, ROE was 13.04%, and the efficiency ratio 67.92%.

Net interest incomewas $65.9 million for the year ended December 31, 2025 compared to $58.6 million and $59.1 million for the years ended December 31, 2024 and 2023, respectively. The net interest margin on a fully taxable equivalent ("FTE") basis was 3.89% for the year ended December 31, 2025 compared to 3.41% and 3.29% for the years ended December 31, 2024 and 2023, respectively.

Provision for credit losses recognized during the year ended December 31, 2025 was $0.4 million compared to provision expense of $1.0 million and $2.3 million for the years ended December 31, 2024 and 2023, respectively.

Non-interest incomewas $14.3 million for both of the years ended December 31, 2025 and December 31, 2024. Non-interest income increased $6.8 million, or 90.0%, for the year ended December 31, 2024 compared to $7.5 million the year ended December 31, 2023. These changes are discussed in greater detail below under Non-interest Income.

Non-interest expense increased $1.3 million, or 2.7%, to $50.8 million for the year ended December 31, 2025 compared to $49.5 million for the year ended December 31, 2024. Non-interest expense decreased $2.8 million, or 5.4%, for the year ended December 31, 2024 compared to $52.4 million for the year ended December 31, 2023. These changes are discussed in greater detail below under Non-interest Expense.

Balance Sheet Highlights

Cash and cash equivalents – Cash and cash equivalents increased $53.3 million, or 104.6%, to $104.3 million as of December 31, 2025, compared to $51.0 million as of December 31, 2024, and decreased $42.5 million, or 45.4%, as of December 31, 2024 compared to $93.5 million as of December 31, 2023. See the Liquidity Management section for further discussion.

Loans – Loans held for investment increased $20.6 million, or 1.4%, to $1.49 billion as of December 31, 2025 compared to December 31, 2024, and decreased $73.0 million, or 4.7%, to $1.47 billion as of December 31, 2024 compared to $1.54 billion as of December 31, 2023.

Asset quality – Non-performing assets increased $2.8 million to $7.0 million, or 0.47% of total loans, at December 31, 2025, compared to $4.2 million, or 0.29% of total loans, at December 31, 2024, and decreased $4.0 million at December 31, 2024 compared to $8.2 million, or 0.53% of total loans, at December 31, 2023.

The allowance for credit losses to total loans was 1.42% at December 31, 2025, compared to 1.50% at December 31, 2024 and 1.54% at December 31, 2023. The Company's net charge-offs for the year ended December 31, 2025 were $1.2 million, or 0.08% of average loans, compared to $2.7 million, or 0.18% of average loans, for the year ended December 31, 2024, and $0.3 million, or 0.02% of average loans, for the year ended December 31, 2023. See Lending and Credit Management below for further discussion.

Deposits – Total deposits increased $21.0 million, or 1.4%, to $1.55 billion as of December 31, 2025 compared to December 31, 2024, and decreased $37.7 million, or 2.4%, to $1.53 billion as of December 31, 2024 compared to $1.57 billion as of December 31, 2023.

Federal Home Loan Bank advances and other borrowings– Total FHLB advances and other borrowings increased $20.6 million, or 25.2%, to $102.1 million as of December 31, 2025 compared to $81.5 million as of December 31, 2024, and decreased $25.5 million, or 23.8%, to $81.5 million as of December 31, 2024 compared to $107.0 million as of December 31, 2023.

Capital – The Company maintains its “well-capitalized” regulatory capital position. At December 31, 2025, capital ratios were as follows: total risk-based capital to risk-weighted assets 15.49%; tier 1 capital to risk-weighted assets 14.24%; tier 1 leverage 12.12%; and common equity to assets 9.19%.

Average Balance Sheets

Net interest income is the largest source of revenue resulting from the Company's lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest-earning assets and interest-bearing liabilities. The following table presents average balance sheets, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a FTE basis for each of the years ended December 31, 2025, 2024, and 2023, respectively. The average balances used in this table and other statistical data were calculated using average daily balances.

(1)Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense for the years ended December 31, 2025, 2024 and 2023, respectively. Such adjustments totaled $1.2 million, $0.8 million and $1.1 million for the years ended December 31, 2025, 2024, and 2023, 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 a FTE basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates for the years ended December 31, 2025, compared to December 31, 2024, and for the years ended December 31, 2024 compared to December 31, 2023. 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.

(1)Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense for the years ended December 31, 2025, 2024 and 2023, respectively. Such adjustments totaled $1.2 million, $0.8 million and $1.1 million for the years ended December 31, 2025, 2024, and 2023, respectively.

(2)Non-accruing loans are included in the average amounts outstanding.

Financial results for the year ended December 31, 2025 compared to the year ended December 31, 2024 reflected an increase in net interest income, on a FTE basis, of $7.8 million, or 13.1%, and financial results for the year ended December 31, 2024 compared to the year ended December 31, 2023 reflected a decrease of $0.8 million, or 1.4%, in net interest income, on a FTE basis. Measured as a percentage of average earning assets, the net interest margin, on a FTE basis, was 3.89% for the year ended December 31, 2025, compared to 3.41% and 3.29% for the years ended December 31, 2024 and 2023, respectively.

Average interest-earning assets decreased $16.3 million, or 0.9%, to $1.72 billion for the year ended December 31, 2025 compared to $1.74 billion for the year ended December 31, 2024, and average interest bearing liabilities decreased $47.4 million, or 3.7%, to $1.24 billion for the year ended December 31, 2025 compared to $1.29 billion for the year ended December 31, 2024.

Average interest-earning assets decreased $86.4 million, or 4.7%, to $1.74 billion for the year ended December 31, 2024 compared to $1.83 billion for the year ended December 31, 2023, and average interest bearing liabilities decreased $42.2 million, or 3.2%, to $1.29 billion for the year ended December 31, 2024 compared to $1.33 billion for the year ended December 31, 2023.

Total interest income, on a FTE basis, increased $2.7 million to $98.8 million for the year ended December 31, 2025 compared to $96.2 million for the year ended December 31, 2024 and increased $3.1 million in 2024 compared to $93.1 million for the year ended December 31, 2023. The Company's rate earned on interest earning assets was 5.74% for the year ended December 31, 2025 compared to 5.53% and 5.10% for the years ended December 31, 2024 and 2023, respectively.

Interest income on loans held for investment increased to $88.9 million for the year ended December 31, 2025 compared to $86.7 million and $84.5 million for the years ended December 31, 2024 and 2023, respectively.

Average loans outstanding decreased $21.6 million, or 1.4%, to $1.47 billion for the year ended December 31, 2025 compared to $1.50 billion for the year ended December 31, 2024. The average yield on loans, on a FTE basis, increased to 6.03% during the year ended December 31, 2025 compared to 5.80% for the year ended December 31, 2024, primarily due to pricing discipline.

Average loans outstanding decreased $48.5 million, or 3.1%, to $1.50 billion for the year ended December 31, 2024 compared to $1.54 billion for the year ended December 31, 2023. The average yield on loans, on a FTE basis, increased to 5.80% during the year ended December 31, 2024 compared to 5.47% for the year ended December 31, 2023. The increase in yield as of December 31, 2024 compared to the prior year is reflective of recent market conditions where most loan types have seen an increase in yield, consistent with recent increases in the prime rate. Contributing to the increase in yield was interest accreted into income on three loans returning to accruing status in 2023. 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 increased to $8.3 million for the year ended December 31, 2025 compared to $6.5 million and $6.7 million for the years ended December 31, 2024 and 2023, respectively.

Average securities increased $25.6 million, or 13.2%, to $219.0 million for the year ended December 31, 2025 compared to $193.3 million for the year ended December 31, 2024. The average yield on securities, on a FTE basis, increased to 3.81% for the year ended December 31, 2025 compared to 3.36% for the year ended December 31, 2024.

Average securities decreased $51.6 million, or 21.1%, to $193.3 million for the year ended December 31, 2024 compared to $245.0 million for the year ended December 31, 2023. The average yield on securities, on a FTE basis, increased to 3.36% for the year ended December 31, 2024 compared to 2.74% for the year ended December 31, 2023. During the fourth quarter of 2023, the Company repositioned its balance sheet by selling $83.7 million in book value of investment securities, with an average yield of 1.57%.

Total interest expense decreased $5.1 million to $31.8 million for the year ended December 31, 2025 compared to $36.9 million for the year ended December 31, 2024, and increased $3.9 million in 2024 compared to $32.9 million for the year ended December 31, 2023. The Company's rate paid on interest bearing liabilities was 2.57% for the year ended December 31, 2025 compared to 2.87% and 2.48% for the years ended December 31, 2024 and 2023, respectively. See the Liquidity Management section for further discussion.

Interest expense on depositswas $26.2 million for the year ended December 31, 2025 compared to $29.9 million and $25.8 million for the years ended December 31, 2024 and 2023, respectively.

Average interest bearing deposits decreased $20.7 million, or 1.8%, to $1.11 billion for the year ended December 31, 2025 compared to $1.14 billion for the year ended December 31, 2024. The average cost of deposits decreased to 2.35% during the year ended December 31, 2025 compared to 2.63% for the year ended December 31, 2024.

Average interest bearing deposits decreased $25.6 million, or 2.2%, to $1.14 billion for the year ended December 31, 2024 compared to $1.16 billion for the year ended December 31, 2023. The average cost of deposits increased to 2.63% during the year ended December 31, 2024 compared to 2.22% for the year ended December 31, 2023.

Interest expense on borrowingswas $5.6 million for the year ended December 31, 2025 compared to $7.0 million and $7.1 million for the years ended December 31, 2024 and 2023, respectively.

Average borrowings decreased $26.6 million, or 17.7%, to $123.7 million for the year ended December 31, 2025 compared to $150.4 million for the year ended December 31, 2024. The average cost of borrowings decreased to 4.54% during the year ended December 31, 2025 compared to 4.65% for the year ended December 31, 2024.

Average borrowings decreased $16.6 million, or 10.0%, to $150.4 million for the year ended December 31, 2024 compared to $167.0 million for the year ended December 31, 2023. The average cost of borrowings increased to 4.65% during the year ended December 31, 2024 compared to 4.28% for the year ended December 31, 2023. The Company utilizes funding capacity with the FHLB to meet its short-term liquidity needs. The changes in cost of funds for the years ended December 31, 2025 and 2024 were consistent with changes in prime rates. See the Liquidity Management section for further discussion.

Non-interest Income

Non-interest income for the years ended December 31, 2025, 2024, and 2023 was as follows:

(1)Total revenue is calculated as net interest income plus non-interest income.

Total non-interest income was $14.3 million for both the years ended December 31, 2025 and 2024, and 2024 increased $6.8 million, or 90.0%, from $7.5 million for the year ended December 31, 2023.

Service charges and fees increased $0.4 million, or 11.1%, to $3.7 million for the year ended December 31, 2025 compared to $3.3 million for the year ended December 31, 2024, and increased $0.4 million, or 12.2%, in 2024 compared to $2.9 million for the year ended December 31, 2023 compared to 2024. The increase for both the years ended December 31, 2025 and 2024 was primarily attributable to an increase in service charge rates assessed on customer accounts beginning in the second half of 2024.

Bank card income and fees decreased $0.2 million, or 4.9%, to $3.9 million for the year ended December 31, 2025 compared to $4.1 million for the year ended December 31, 2024, and increased $0.1 million, or 1.7% in 2024 compared to $4.0 million for the year ended December 31, 2023. The decrease for the year ended December 31, 2025 compared to December 31, 2024 was primarily attributable to a reduction in debit card income.

Earnings on bank-owned life insurance increased to $2.1 million for the year ended December 31, 2025 compared to $1.7 million and $0.1 million for the years ended December 31, 2024 and 2023, respectively. The Company purchased $35.0 million in bank-owned life insurance policies in the first quarter of 2024. The earnings generated from these policies are primarily derived from the investment returns on the cash value component.

Wealth management revenue increased $0.5 million, or 27.4%, to $2.2 million for the year ended December 31, 2025 compared to $1.7 million for the year ended December 31, 2024, and increased $0.3 million, or 24.8%, from $1.4 million for the year ended December 31, 2023 compared to 2024. The increases for both the years ended December 31, 2025 and 2024 were primarily attributable to the Company’s identification of a strategic opportunity to add resources and provide a structure for Wealth Management products and services.

Gain on sales of mortgage loanswas $0.4 million for the year ended December 31, 2025 compared to $0.9 million and $2.6 million for the years ended December 31, 2024 and 2023, respectively. In 2025, the Company recorded a gain related to the release of its servicing repurchase liability of $0.2 million. The Company sold loans totaling $11.3 million for the year ended December 31, 2025 compared to $48.9 million and $106.2 million for the years ended December 31, 2024 and 2023, respectively.

(Losses) gains on other real estate owned and other assets, nettotaled net losses of $0.2 million for the year ended December 31, 2025 compared to net gains of $0.9 million and net losses of $4.4 million for the years ended December 31, 2024 and 2023, respectively. During 2025, the Company recorded $0.2 million of write-downs related to property, plant and equipment transferred to held for sale. During 2024, the Company recognized $0.7 million of gains on sales of foreclosed properties, which included land previously intended for a new branch. Partially offsetting these gains, the Company recognized an additional $0.3 million valuation write-down. In 2023, the Company recognized $4.6 million in valuation write-downs on foreclosed property in other real estate owned based on current appraisals. The Company sold the remaining parcel related to one of these properties in the second quarter of 2024 and recognized a $0.4 million release of the valuation write-down.

Investment Securities Gains (Losses), Net

The following table presents the gross realized gains and losses from sales and calls of available-for-sale securities, as well as gains and losses on equity securities from fair value adjustments which have been recognized in earnings for the years ended December 31, 2025, 2024, and 2023:

For the year ended December 31, 2025, the Company recorded net investment securities gains of approximately $0.1 million from called securities. During the fourth quarter of 2023, the Company repositioned its balance sheet by selling $83.7 million in book value of investment securities, with an average yield of 1.57%.

Non-Interest Expense

Non-interest expense for the years ended December 31, 2025, 2024, and 2023 was as follows:

(1)Efficiency ratio is calculated as non-interest expense as a percentage of total revenue. Total revenue includes net interest income and non-interest income.

Total non-interest expense increased $1.3 million, or 2.7%, to $50.8 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, and decreased $2.8 million, or 5.4%, to $49.5 million for the year ended December 31, 2024 compared to the year ended December 31, 2023.

Salaries and employee benefits increased $1.3 million, or 4.8%, to $27.8 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, and decreased $2.4 million, or 8.3%, to $26.6 million for the year ended December 31, 2024 compared to $29.0 million for the year ended December 31, 2023. The increase for the year ended December 31, 2025 was primarily attributable to overall merit increases and focused recruiting efforts to hire more experienced candidates, which aligns with the Company’s overall strategic plan. The decrease for the year ended December 31, 2024 was primarily due to planned reductions of full-time employees during the fourth quarter of 2023 and second quarter of 2024.

In our Wealth Management segment, salaries and employee benefits totaled $0.9 million for the year ended December 31, 2025, which was primarily attributable to the hiring of additional resources.

Occupancy expense, net increased $0.6 million, or 17.6%, to $3.8 million for the year ended December 31, 2025 compared to $3.3 million for the year ended December 31, 2024, which was primarily attributable to the opening of two new branch locations and one new operations facility. Occupancy expense was substantially unchanged for the year ended December 31, 2024 compared to the year ended December 31, 2023.

Legal, examination, and professional fees decreased $0.9 million, or 34.9%, to $1.7 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, and increased $0.1 million, or 4.0%, to $2.6 million for the year ended December 31, 2024 compared to $2.5 million for the year ended December 31, 2023. The higher fees for the year ended December 31, 2024 were primarily due to legal fees related to loan workouts and additional consulting fees, which did not recur in the year ended December 31, 2025.

Advertising and promotion increased $0.1 million, or 9.3%, to $1.1 million for the year ended December 31, 2025 compared to $1.0 million for the year ended December 31, 2024, and decreased $0.5 million, or 35.9%, from $1.5 million for the year ended December 31, 2023 compared to 2024. The lower expenses for 2024 compared to 2023 were the result of a strategic decision to discontinue the Company's outsourced marketing efforts. The Company has hired internal marketing resources and by transitioning to an in-house marketing team, the Company has reduced costs.

Income Tax Expense (Benefit)

Income tax expense (benefit) as a percentage of earnings before income taxes as reported in the consolidated financial statements was 18.21% for the year ended December 31, 2025 compared to 18.35% and (121.49)% for the years ended December 31, 2024 and 2023, respectively. The effective tax rate for each of the years ended December 31, 2025, 2024, and 2023, respectively, is lower than the U.S. federal statutory rate of 21% primarily due to tax-free revenues. In addition, the effective tax rate for the year ended December 31, 2023 was primary attributable to the decrease in earnings.

Segments

During 2025, the Company identified its Wealth Management business as a strategic opportunity and hired additional management resources to provide the structure for products and processes for this business. As a result, beginning with the first quarter of 2025, the Company identified its Wealth Management Business as a separate reportable segment and now has two reportable segments: the Bank segment and the Wealth Management segment. The Company’s CEO is the Chief Operating Decision Maker ("CODM") for both segments. The Company’s remaining operations are not reportable segments, as defined by applicable accounting standards, and are classified as Non-Bank, and primarily represent the parent holding company, other insignificant non-bank subsidiaries and eliminations. For the years ended December 31, 2024 and 2023, the Company had one reportable segment, the Bank, and prior period information has not been recast because it would be impractical to do so.

Refer to Note 20, "Segment Information" for further details regarding the financials results of each segment for the year ended December 31, 2025. Refer to the "Non-Interest Income" and "Non-Interest Expense" sections of Management's Discussion and Analysis for further discussion of material changes and trends impacting the Company's results of operation.

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for the Company. Loans held for investment represented 78.5% of total assets as of December 31, 2025 compared to 80.3% as of December 31, 2024.

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, an 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 were as follows:

The contractual maturities of loan categories at December 31, 2025 and the composition of those loans between fixed rate and floating rate loans are as follows:

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.

Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in CRE is one example of regulatory concern, which has been subject to additional scrutiny by federal banking agencies as well as the SEC (for publicly-traded banking organizations) in recent years. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance ("CRE Guidance") provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant CRE loan concentrations that may warrant greater supervisory scrutiny: (i) CRE loans exceeding 300 percent of capital and increasing 50 percent or more in the preceding three years; or (ii) construction and land development loans exceeding 100 percent of capital. The CRE Guidance does not limit banks’ levels of CRE lending activities but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their CRE concentrations. On December 18, 2015, and again in recent years, the federal banking agencies issued statements to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal banking agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. The Company has historically exceeded, and continues to exceed, the 300 percent guideline for CRE loans and additional monitoring processes have been implemented to manage this increased risk.

The following table shows the categories of the Company's non-owner occupied CRE loan portfolio at December 31, 2025 and 2024:

The Company extends credit to its local community market through traditional real estate mortgage products. The Company does not participate in credit extensions to sub-prime residential real estate markets. The Company does not lend funds for the type of 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.

Non-Performing Assets

The following table summarizes nonperforming assets:

(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 $7.0 million, or 0.47% of total loans, at December 31, 2025 compared to $4.2 million, or 0.29% of total loans, at December 31, 2024.

Total non-accrual loans at December 31, 2025 increased $4.3 million, or 169.4%, to $6.8 million compared to $2.5 million at December 31, 2024, which was primarily attributable to one $3.5 million relationship moving to non-accrual. Total non-accrual loans at December 31, 2024 decreased $3.8 million from $6.3 million at December 31, 2023, which was primarily due to a $1.8 million charged off commercial loan relationship and three commercial real estate relationships totaling $2.3 million returning to accrual status.

Loans past due 90 days and still accruing interest at December 31, 2025 were immaterial compared to $0.2 million at December 31, 2024. Other real estate owned and repossessed assets at December 31, 2025 were $0.1 million compared to $1.4 million at December 31, 2024. During the year ended December 31, 2025, no non-accrual loans moved to other real estate owned and repossessed assets compared to $3.6 million for the year ended December 31, 2024.

Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Commitments

The following table is a summary of the allocation of the allowance for credit losses:

The allowance for credit losses was $21.1 million, or 1.42%, of loans outstanding at December 31, 2025 compared to $22.0 million, or 1.50%, of loans outstanding at December 31, 2024. The ratio of the allowance for credit losses to non-performing loans was 307.52% at December 31, 2025, compared to 802.48% at December 31, 2024.

Provision for (Release of) Credit Losses

The following table summarizes provision for (release of) credit losses for loans and unfunded commitments:

The Company recognized a provision expense for credit losses of $0.4 million for the year ended December 31, 2025 compared to provision expense of $1.0 million and $2.3 million for the years ended December 31, 2024 and 2023, respectively. During the fourth quarter of 2023, an additional $1.3 million of specific reserve resulted from the downgrade of one commercial loan relationship.

The following table is a summary of net (charge-offs) recoveries to average loans:

Net Loan Charge-offs

The Company's net loan charge-offs were $1.2 million, or 0.08% of average loans, for the year ended December 31, 2025 compared to net charge-offs of $2.7 million, or 0.18% of average loans, for the year ended December 31, 2024. In the fourth quarter of 2025, the Company charged off $0.8 million related to one commercial relationship that had been reserved for in a prior period. The charge-offs in 2024 primarily related to one commercial loan and one commercial real estate loan relationship that was adequately reserved for.

Loans Held For Sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale. Prior to September 30, 2024, these loans were initially measured at fair value under the fair value option election with subsequent changes in the fair value recognized as mortgage banking income. Beginning September 30, 2024, loans held for sale are 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. The Company sells loans with servicing retained or released depending on pricing and market conditions. There were $0.6 million of mortgage loans held for sale at December 31, 2025 compared to none at December 31, 2024.

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. For the year ended December 31, 2025, the Company sold approximately $11.3 million of loans to investors compared to $48.9 million and $106.2 million for the years ended December 31, 2024 and 2023, respectively. On January 31, 2024, the Company sold its servicing portfolio and the balance of the serviced loans transferred on April 30, 2024.

Investment Portfolio

The Company's investment portfolio consists of securities classified as available-for-sale, equity or other. Available-for-sale debt securities, the largest component, are carried at estimated fair value. Unrealized holding gains and losses from available-for-sale securities are excluded from earnings and reported, net of applicable taxes, as a separate component of stockholders' equity until realized.

The Company does not engage in trading activities and, accordingly, does not have any debt or equity securities classified as trading securities. Historically, the Company's practice was to purchase and hold debt instruments until maturity unless special circumstances existed. However, since the investment portfolio's major function is to provide liquidity and to balance the Company's interest rate sensitivity position, all debt securities are now classified as available-for-sale.

At December 31, 2025, the investment portfolio classified as available-for-sale represented 11.1% of total consolidated assets compared to 12.0% at December 31, 2024. Future levels of investment securities can be expected to vary depending upon liquidity and interest sensitivity needs as well as other factors.

Available- for-Sale Securities

The following table presents the composition of the investment portfolio and related fair value by major category:

(1)Certain hybrid instruments possessing characteristics typically associated with debt obligations.

As of December 31, 2025, the expected maturity and tax-equivalent yield in the investment portfolio was as follows:

(1)Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the federal statutory income tax rate of 21%.

(2)Mortgage-backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio experience during the 12 months ended December 31, 2025 calculated separately for each mortgage-backed security. These repayment speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage interest rates. The tax equivalent yield is calculated on amortized cost using a level yield method and a 21% tax rate.

At December 31, 2025, $27.4 million of debt securities classified as available-for-sale in the table above had variable rate provisions with adjustment periods ranging from one week to twelve months.

Other investment securities include equity securities with readily determinable fair values and other investments securities that do not have readily determinable fair values. Investments in FHLB stock, and Midwest Independent BankersBank ("MIB") stock, which do not have readily determinable fair values, are required for membership in those organizations.

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, federal funds sold, and excess reserves held at the Federal Reserve Bank. The following table summarizes the Company's sources of funding as of December 31, 2025 and 2024:

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 $209.9 million at December 31, 2025 and included an unrealized net loss of $21.0 million. The portfolio includes projected contractual maturities of approximately $1.1 million over the next 12 months, which offer resources to meet either new loan demand or reductions in the Company's deposit base.

The Company pledges portions of its investment securities portfolio as collateral 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 required by law. The Company's unpledged securities in the available-for-sale portfolio totaled approximately $108.4 million and $136.3 million at December 31, 2025 and 2024, respectively.

Total investment securities pledged for these purposes were as follows:

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. Such deposits totaled $1.46 billion and represented 94.1% of the Company's total deposits at December 31, 2025, compared to $1.43 billion and 93.5% of the Company's total deposits at December 31, 2024. These core deposits are normally less volatile and are often tied to other products of the Company through long-lasting relationships.

Core deposits at December 31, 2025 and 2024 were as follows:

Maturities of uninsured time deposits with balances over $250,000 as of December 31, 2025 were as follows:

Estimated uninsured deposits totaled $384.6 million, including $90.5 million of certificates of deposit, at December 31, 2025, compared to $352.0 million, including $100.4 million of certificates of deposit, at December 31, 2024. The Company had brokered deposits totaling $502,000 and $13,000 at December 31, 2025 and 2024, respectively.

Included in the uninsured deposits at December 31, 2025 and 2024 are public fund deposits greater than $250,000, which are collateralized by the Company totaling $145.8 million and $149.5 million, respectively.

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 securities sold under agreements to repurchase, FHLB advances, 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 December 31, 2025, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $7.8 million on a secured basis. There were no federal funds purchased outstanding at December 31, 2025. 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 December 31, 2025.

As a member of the FHLB, the Bank has access to credit products of the FHLB. As of December 31, 2025, the Bank had $102.0 million in outstanding borrowings with the FHLB. In addition, as of December 31, 2025, the Company had $49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

Borrowings outstanding at December 31, 2025 and 2024 were as follows:

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 borrow from these entities. Based on the type and value of collateral pledged, the Company may draw advances against this collateral.

The following table reflects the advance equivalent of the assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as of December 31, 2025 and 2024.

At December 31, 2025, loans of $730.9 million were pledged to the FHLB as collateral for borrowings and letters of credit. At December 31, 2025, investments with a market value of $8.3 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Sources and Uses of Funds

Cash and cash equivalents were $104.3 million at December 31, 2025 compared to $51.0 million at December 31, 2024. The $53.3 million increase 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 year ended December 31, 2025. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $26.9 million for the year ended December 31, 2025.

Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, used total cash of $6.9 million for the year ended December 31, 2025. The cash flow primarily consisted of a $21.8 million net increase in loans held for investment and $39.0 million proceeds from maturities and calls of available-for-sale securities, partially offset by $20.6 million in purchases of securities.

Financing activities provided cash of $33.3 million for the year ended December 31, 2025, resulting primarily from a $38.5 million net increase in demand deposits and a $1.7 million net increase in time deposit, which was offset by a $19.3 million net decrease in interest-bearing deposits and a $39.4 million net decrease in FHLB advances. Net short-term FHLB borrowing activity provided cash of $60.0 million during 2025.

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 $423.7 million in unused loan commitments and standby letters of credit as of December 31, 2025. Although the Company's current liquidity sources are adequate to fund this commitment level, many of the unused commitments are expected to expire or be partially used, and do not necessarily represent future cash requirements.

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 and paying cash dividends to its shareholders. The Company paid cash dividends to its common shareholders totaling approximately $5.4 million and $5.0 million for the years ended December 31, 2025 and 2024, respectively. A large portion of the Company's liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $22.0 million and $20.0 million in dividends to the Company during the years ended December 31, 2025 and 2024, respectively. At December 31, 2025 and 2024, the Company had cash and cash equivalents totaling $25.5 million and $15.3 million, respectively.

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 the Company 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.

Capital Management

The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Under the Basel III Capital Rules, at 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 table below as of December 31, 2025, 2024 and 2023. Refer to Note 16, "Capital Requirements," in the Company's consolidated financial statements for further details regarding capital requirements.

Commitments, Contractual Obligations, and Off-Balance-Sheet Arrangements

The required payments of material fixed and determinable contractual obligations, not including interest, at December 31, 2025 are as follows:

In the normal course of business, the Company is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in the Company's consolidated financial statements. Such activities include traditional off-balance-sheet credit-related financial instruments.

The Company provides customers with off-balance-sheet credit support through loan commitments and standby letters of credit. Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2025 are as follows:

The total amount of commitments in the preceding table does not necessarily represent future cash requirements because many of the unused commitments are expected to expire or may only be partially used.

Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability and Interest Rate Risk

Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows.

The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee from direction of the Board of Directors. The Asset Liability Committee meets quarterly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.

Instantaneous parallel rate-shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.

Management analyzes the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer-term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 200 and 100 basis point decrease in interest rates on net interest income in year one based on the interest rate risk model at December 31, 2025 and 2024.

The change in the Company's interest rate risk exposure from December 31, 2024 to December 31, 2025 is primarily due to moderately higher rates on interest bearing assets projected to reprice in the next 12 months and projected repricing speeds on interest bearing assets and liabilities. In an immediate and sustained shock, interest bearing assets and liabilities are projected to reprice at relatively the same pace. In up rate scenarios, interest bearing assets are projected to reprice moderately slower than interest bearing liabilities providing slightly less net interest income in a rising rate market. Management believes the change in projected net interest income from interest rate shifts of up 200 bps and down 200 bps is an acceptable level of interest rate risk.

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.

Derivative Instruments for Interest Rate Risk Management

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. See Note 7, "Derivative Instruments" for more information on the effects on the consolidated financial statements.

Effects of Inflation

The effects of inflation on financial institutions are different from the effects on other commercial enterprises because financial institutions make few significant capital or inventory expenditures, which are directly affected by changing prices. Because bank assets and liabilities are virtually all monetary in nature, inflation does not affect a financial institution as much as do changes in interest rates. The general level of inflation does underlie the general level of most interest rates, but interest rates do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy.

Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on the Company's operations for the three months and year ended December 31, 2025.

Impact of New Accounting Standards

Income Statement. In November 2024, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses ("ASU No. 2024-03"). The amendments in this ASU require public companies to disclose, in the notes to the financial statements, specified information about certain costs and expenses at each interim and annual reporting period. Additionally, in January 2025, the FASB issued ASU No. 2025-01, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date. The ASU addresses investors requests for more disaggregated expense information to better understand an entity's performance, better assess the entity's prospects for future cash flows, and compare an entity's performance over time and with that of other entities. This ASU amends the effective date of ASU No. 2024-03 to clarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. Early adoption of ASU No. 2024-03 is permitted. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements.

CONSOLIDATED FINANCIAL STATEMENTS

The following consolidated financial statements of the Company and report of the Company's independent auditors appear on the pages indicated.