OVERVIEW OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
Third Quarter 2026 Compared to Third Quarter 2025
Third quarter 2026 net income was $15.3 million, and $1.18 per diluted share as compared to $9.7 million and $0.72 per diluted share in the third quarter of 2025. The Company’s annualized return on average equity was 16.49% and annualized return on average assets was 1.66% for the quarter ended September 30, 2026, compared to 10.81% and 1.04%, respectively, for the same quarter in 2025. The primary drivers behind the increase in third quarter net income are as follows:
| ● | Credit loss (benefit) expense on loans improved by $5.7 million, driven primarily by a provision benefit recorded during the third quarter of 2026 resulting from the favorable resolution of a previously reserved agricultural production credit relationship in the lumber industry. |
| ● | Net interest income increased $0.4 million, or 1%, to $32.4 million. Included in net interest income was a $1.1 million recovery of interest on a separate agricultural nonperforming loan that was paid in full. Net interest margin expanded to 3.91% from 3.78% in the third quarter of 2025. |
| ● | Noninterest income and noninterest expense changes included a $0.5 million decrease in earnings from separate-account life insurance and a $0.3 million decrease in deferred compensation expense. Separate-account life insurance income and deferred compensation expense are designed to offset each other. |
| ● | Overall noninterest expense decreased by $1.3 million primarily due to lower salaries and employee benefits expense and reduced deposit service costs. Salaries and employee benefits, excluding deferred compensation, declined $0.6 million, primarily due to a reduction of full-time equivalent staffing levels. |
First Nine Months of 2026 Compared to First Nine Months of 2025
| ● | Net income increased $8.3 million, or 28%, to $37.7 million for the first nine months of 2026. The increase was driven primarily by a $6.8 million reduction in credit loss (benefit) expense, a $2.2 million decline in noninterest expense, a $1.0 million increase in noninterest income, and a $0.7 million improvement in net interest income. Diluted earnings per share increased 35% to $2.90 compared to $2.15 for the same period in 2025. |
| ● | Net interest income increased $0.7 million, or 1%, compared to the first nine months of 2025. Included in the increase was a $1.1 million recovery of interest as described above in the quarterly comparison. Tax-equivalent net interest margin increased seven basis points to 3.80% from 3.73%. Cost of funds declined to 1.32% from 1.47%, while the cost of deposits decreased to 1.16% from 1.31%. |
| ● | Noninterest income increased $1.0 million, or 4%, compared to the first nine months of 2025. The increase was primarily attributable to a $0.4 million gain on the sale of fixed assets, a $0.3 million increase in cash surrender value income from bank-owned life insurance, and higher service charges and fee income. |
| ● | Noninterest expense decreased $2.2 million, or 3%, compared to the first nine months of 2025. The reduction was driven primarily by lower salaries and employee benefits expense, lower deposit service costs, and reduced other operating expenses. |
FINANCIAL CONDITION SUMMARY
September 30, 2026, Relative to December 31, 2025 (unless otherwise noted)
The Company’s assets totaled $3.7 billion at September 30, 2026, a decrease of $154.1 million, or 4% from December 31, 2025. The following provides a summary of key balance sheet changes during the first nine months of 2026:
| ● | Investment securities decreased $53.7 million, or 6%, to $862.5 million, primarily due to principal repayments, maturities, and runoff within the mortgage-backed securities and collateralized loan obligations ("CLO") portfolios. |
| ● | Gross loans decreased $118.3 million, or 5%, to $2.43 billion. The decline was primarily driven by a $158.0 million decrease in mortgage warehouse facility utilization, a $12.9 million decrease in other commercial loans, a $17.5 million decrease in residential real estate loans, and a $5.2 million decrease in farmland loans. These decreases were partially offset by a $74.1 million increase in commercial real estate loans and a $1.5 million increase in other construction and land development loans. |
| ● | Commercial real estate lending activity strengthened during the third quarter of 2026. Commercial real estate balances increased $75.3 million during the quarter, while mortgage warehouse balances declined $97.1 million. Average commercial and industrial loan balances increased 15% from the linked quarter, reflecting continued success in originating relationship-based commercial lending. |
| ● | Mortgage warehouse balances declined $158.0 million, or 30%, from December 31, 2025, as the Company temporarily paused growth in mortgage warehouse to allow our focus to be on enhanced controls amid elevated interest rate volatility and increased market uncertainty. The focus reflects a disciplined approach to managing risk while preserving profitability, as average third quarter mortgage warehouse balances declined only $20.8 million from the linked quarter and associated mortgage warehouse interest income only declined by $0.2 million. |
| ● | Total deposits increased $108.3 million, or 4%, to $2.98 billion. Growth was concentrated in core deposit categories, including a $59.5 million increase in noninterest-bearing demand deposits, a $35.0 million increase in interest-bearing transaction accounts, and a $28.9 million increase in money market deposits. Customer deposits increased $106.3 million, while brokered deposits increased $2.1 million during the period. |
| ● | Other interest-bearing liabilities declined $250.7 million, or 83%, to $52.0 million at September 30, 2026, from $302.7 million at December 31, 2025. The decline primarily reflects a significant reduction in overnight borrowings as mortgage warehouse balances decreased and deposit growth strengthened. |
| ● | Asset quality metrics improved during the first nine months of 2026. Nonperforming assets declined to $9.3 million, or 0.38% of loans plus foreclosed assets, compared to $14.8 million, or 0.58%, at December 31, 2025. Classified loans declined to $27.0 million from $31.4 million at year-end 2025. |
| ● | Total shareholders' equity was $361.7 million at September 30, 2026, compared to $364.9 million at December 31, 2025. The decrease was primarily attributable to an $18.6 million increase in accumulated other comprehensive loss, $14.4 million of share repurchases during the year, and $10.3 million of cash dividends declared, partially offset by $37.7 million of net income during the first nine months of 2026. The remaining difference was related to activity from stock options and restricted stock awards during the year. Despite these factors, regulatory capital ratios remained strong, with the subsidiary Bank's leverage ratio increasing to 12.43% at September 30, 2026. |
