First US Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2026

DESCRIPTION OF THE BUSINESS

First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiary, the “Company”), is a bank holding company formed in 1983 registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancshares operates one wholly owned banking subsidiary, First US Bank, an Alabama banking corporation (the “Bank”). Bancshares and the Bank are headquartered in Birmingham, Alabama.

The Bank conducts a general commercial banking business and offers banking services such as demand, savings, individual retirement account and time deposits, personal and commercial loans, safe deposit box services and remote deposit capture. The Bank operates and serves its customers through 16 full-service banking offices located in Birmingham, Butler, Calera, Centreville, Daphne, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama; Knoxville and Powell, Tennessee; and Rose Hill, Virginia; as well as loan production offices in Mobile, Alabama and the Chattanooga, Tennessee area. The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals. The Bank also performs indirect lending through third-party retailers and currently conducts this lending in 17 states, including Alabama, Arkansas, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. The Bank is the Company’s only reportable operating segment upon which management makes decisions regarding how to allocate resources and assess performance.

Delivery of the best possible financial services to customers remains an overall operational focus of the Company. The Company recognizes that attention to detail and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 152 full-time equivalent employees (as of June 30, 2026), to ensure customer satisfaction and convenience.

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with critical accounting estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking practices. A description of the Company's critical accounting estimates, which significantly affect the determination of the Company’s consolidated financial position, results of operations and cash flows, is set forth in Part II, Item 7 - Critical Accounting Estimates in the Company's 2025 Form 10-K.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of June 30, 2026 to December 31, 2025, while comparing income and expense for the six months ended June 30, 2026 and 2025. All yields and ratios presented and discussed herein are recorded and presented on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.

This information should be read in conjunction with the Company’s unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's 2025 Form 10-K. As used in the following discussion, the words “we,” “us,” “our” and the “Company” refer to Bancshares and its consolidated subsidiaries, unless the context indicates otherwise.

RECENT MARKET CONDITIONS

During the six months ended June 30, 2026, the banking industry continued to operate in an environment characterized by elevated economic uncertainty, inflation remaining above the Federal Reserve’s long-term objective, and generally stable labor market conditions. U.S. economic activity continued to expand during the first half of 2026. According to the U.S. Bureau of Economic Analysis’ advance estimate released on July 30, 2026, real gross domestic product ("GDP") increased at an annual rate of 1.5% during the second quarter of 2026, compared with 2.1% during the first quarter of 2026. This modest second-quarter growth reflected increases in consumer spending, investments and exports that were partially offset by decreased government spending.

Market interest rates, including U.S. Treasury yields, remained volatile and generally increased during the first six months of 2026, with increases accelerating following the inception of the military conflict with Iran in February 2026. The yield on the 10-year U.S. Treasury increased from approximately 4.18% at December 31, 2025 to approximately 4.44% at June 30, 2026, after reaching higher levels during May. This increase in longer-term rates reflected resilient economic data, despite elevated inflation expectations, supply disruptions resulting from the conflict in the Middle East, tariff-related price pressures, and changing market expectations regarding the timing and direction of future monetary policy actions. Kevin Warsh assumed the role of chairman of the Federal Reserve and Chairman of the Federal Open Market Committee (the "FOMC") in May 2026. In this role, Chairman Warsh has created five task forces to reexamine all aspects of monetary policy decision making, including the nature and level of communication by the FOMC, management of the Federal Reserve’s balance sheet, data used by the FOMC, productivity and the job market, and inflation. The timing, magnitude and effects of any changes in the policies or priorities of the Federal Reserve or the FOMC cannot be predicted with certainty at this time. At both its June and July 2026 meetings, the Federal Reserve maintained the target range for the federal funds rate at 3.50% to 3.75% and continued to indicate that inflation remained elevated relative to its long-term objective.

Uncertainty also remained elevated with respect to U.S. fiscal and trade policy, including the current and potential effects of tariffs implemented or announced by the Trump administration and the possibility of additional policy changes. Tariffs, higher energy costs, and other supply-related pressures may affect inflation, consumer demand, business investment, and global supply chains. Geopolitical risks, including the conflict involving Iran, continued unrest elsewhere in the Middle East, and the ongoing war in Ukraine, also contributed to broader global economic uncertainty. These factors may continue to affect business sentiment, commodity and energy markets, supply chains, financial markets, and overall economic activity.

In the Company’s local markets, competitive pressures for both loans and deposits remained elevated during the six months ended June 30, 2026. Commercial lending activity remained measured as business customers continued to assess the effects of elevated borrowing costs, interest rate movements, geopolitical developments, trade policy, and broader economic uncertainty on their operations and investment decisions. Consumer spending trends remained mixed on a macroeconomic basis; however, the Company continued to experience growth in consumer indirect lending, primarily within higher-credit-quality segments.

The competitive environment, together with elevated funding costs and ongoing economic, geopolitical, trade, and policy uncertainty, continues to present challenges to maintaining and improving the Company’s net interest margin. Management continues to closely monitor these conditions and believes the Company remains well positioned to respond to a range of economic outcomes. However, adverse changes in economic conditions, credit quality, loan demand, competitive dynamics, deposit pricing, geopolitical developments, trade or fiscal policy, or interest rate movements could negatively affect the Company’s financial condition and results of operations.

EXECUTIVE OVERVIEW

The Company earned net income of $1.8 million, or $0.31 per diluted common share, during the three months ended June 30, 2026, compared to $0.2 million, or $0.03 per diluted common share, for the three months ended June 30, 2025. For the six months ended June 30, 2026, net income totaled $3.7 million, or $0.64 per diluted share, compared to $1.9 million, or $0.32 per diluted share, for the six months ended June 30, 2025. The increase in net income comparing both the three months and six months ended June 30, 2026 to the corresponding periods of 2025 resulted primarily from a decrease in the Company’s provision for credit losses on loans and leases, and to a lesser extent, realized gains on the sale of investment securities recorded during the 2026 periods. These increases in net income were partially offset by increases in non-interest expense comparing the six months ended June 30, 2026 to the six months ended June 30, 2025.

Summarized condensed consolidated statements of operations are included below for the three and six months ended June 30, 2026 and 2025.

(Dollars in Thousands, Except Per Share Data)

The discussion that follows summarizes the most significant activity that drove changes in the Company’s operating results during the six months ended June 30, 2026, as compared to the six months ended June 30, 2025.

Net Interest Income and Margin

Net interest income increased by $0.3 million, or 1.9%, comparing the six months ended June 30, 2026 to the six months ended June 30, 2025. The increase resulted from growth in average interest-earning asset balances comparing the two periods. Average interest-earning assets increased by $48.2 million, or 4.6%, comparing the six months ended June 30, 2026 to the corresponding period of 2025. Earning asset growth was reflected in total loans, investment securities, federal funds sold and interest-bearing deposits with other financial institutions. The increase in interest income was partially offset by volume-related increases in interest expense associated with interest-bearing liabilities. While the increase in earning assets was favorable to the Company’s net interest income, net interest margin decreased as the average yield on interest-earnings assets declined at a faster pace than the average rate on interest-bearing liabilities. Net interest margin was 3.46% for the six months ended June 30, 2026, compared to 3.56% for the six months ended June 30, 2025.

Provision for Credit Losses

For the six months ended June 30, 2026, the Company recorded a provision for credit losses of $1.2 million, compared to $3.2 million for the six months ended June 30, 2025. The decreased provision comparing the first half of 2026 to the corresponding period of 2025 resulted primarily from provisioning for specifically identified commercial loans in 2025. The credit issues associated with additional provisioning on these loans were resolved later in 2025, and accordingly, the same level of provisioning was not repeated during the six months ended June 30, 2026. As of June 30, 2026, the Company’s allowance for credit losses ("ACL") on loans and leases as a percentage of total loans was 1.26%, compared to 1.25% as of December 31, 2025.

Non-interest Income

Non-interest income totaled $2.2 million for the six months ended June 30, 2026, compared to $1.7 million for the six months ended June 30, 2025. The increase resulted primarily from $0.5 million in gains on sale of investment securities during the six months ended June 30, 2026 that did not occur during the corresponding period of 2025.

Non-interest Expense

Non-interest expense totaled $15.0 million for the six months ended June 30, 2026, compared to $14.4 million for the six months ended June 30, 2025. The increased expense resulted primarily from inflationary increases in various expense categories, as well as increased occupancy expenses associated with expansion of the Company’s banking center footprint.

Total Assets

As of June 30, 2026, the Company’s assets totaled $1,147.6 million, compared to $1,154.8 million as of December 31, 2025, a decrease of 0.6%.

Loans

Total loans increased by $7.6 million, or 0.9%, as of June 30, 2026, compared to December 31, 2025. Loan growth in the construction and consumer indirect categories was partially offset by decreases in other categories, most notably in non-residential commercial real estate. The decrease in commercial real estate loans resulted primarily from the payoff of real estate projects that were anticipated in the normal course of the project life cycle. The growth in the construction category was consistent with economic growth in the Company’s service territories, while the growth in the indirect category was consistent with typical seasonal trends. The indirect lending platform focuses on consumer lending at the higher end of the credit spectrum. Collateral financed in the indirect portfolio primarily includes boats, recreational vehicles, campers, horse trailers and cargo trailers. The weighted average credit score of indirect loans funded was 785 as of June 30, 2026.

The Company remains focused on efforts in multiple commercial and consumer loan categories, seeking to enhance diversification while growing the portfolio. For the six months ended June 30, 2026, average total loan balances increased by $11.3 million, or 1.3%, compared to the six months ended June 30, 2025.

Asset Quality

Nonperforming assets, including loans in non-accrual status, other real estate owned, and repossessed assets, totaled $1.9 million as of June 30, 2026, an increase from $1.6 million as of December 31, 2025. As a percentage of total assets, nonperforming assets increased to 0.17% as of June 30, 2026, compared to 0.14% as of December 31, 2025. Net charge-offs as a percentage of average loans totaled 0.27% during the six months ended June 30, 2026, compared to 0.47% during the six months ended June 30, 2025. The decrease in net charge-offs comparing the six months ended June 30, 2026, to the six months ended June 30, 2025 was due to the partial charge off in the six months ended June 30, 2025 of one individually evaluated commercial loan totaling $1.2 million that was not repeated in the six months ended June 30, 2026.

Deposits

Total deposits decreased by $30.0 million, or 2.9%, during the six months ended June 30, 2026. Included in this decrease were $20.1 million in wholesale brokered time deposits that matured and were not replaced. The remaining decrease was comprised of reductions of $19.2 million in retail time deposits and $4.0 million in non-interest-bearing demand deposits, partially offset by an increase in interest-bearing demand deposits of $13.3 million. The decrease in wholesale deposits, as well as other interest-bearing time deposits, assisted management’s efforts to reduce overall deposit costs, while maintaining an appropriate level of core funding. Core deposits, which exclude time deposits of $250 thousand or more and all wholesale brokered deposits, totaled $835.2 million, or 83.7% of total deposits, as of June 30, 2026, compared to $838.3 million, or 81.6% of total deposits, as of December 31, 2025. The average rate on deposits totaled 2.08% during the six months ended June 30, 2026, compared to 2.07% during the six months ended June 30, 2025. While deposit costs increased slightly comparing the two six-month periods, the more recent trend in 2026 was favorable. Deposit costs decreased to 1.98% during the three months ended June 30, 2026, compared to 2.18% during the three months ended March 31, 2026, and 2.08% during the three months ended June 30, 2025.

In the current environment, significant competitive pressure remains to acquire and maintain deposit balances. The Company remains focused on efforts to grow deposits while maintaining pricing discipline. Part of this strategy includes growth in deposit gathering banking centers. Consistent with these efforts, in May 2026, the Company opened a new banking center office in Daphne, Alabama to the public. This location represents the Bank’s initial deposit gathering facility in the Daphne/Mobile area. In addition, in April 2026, the Company purchased an office in Orange Beach, Alabama, which is expected to serve as a banking center following the completion of renovations. The location is expected to open to the public in 2027.

Cash and Investment Securities

As of June 30, 2026, the Company held cash, federal funds sold and securities purchased under reverse repurchase agreements totaling $63.8 million, or 5.6% of total assets, compared to $78.4 million, or 6.8% of total assets, as of December 31, 2025. Investment securities, including both the available-for-sale and held-to-maturity portfolios, totaled $166.0 million as of June 30, 2026, compared to $168.5 million as of December 31, 2025. During the six months ended June 30, 2026, the Company purchased $25.4 million of investment securities at market rates in existence at the time of purchase. In addition, the Company sold investment securities with a principal balance totaling $7.1 million and recorded a gain on sale totaling $0.5 million during the six months ended June 30, 2026. These purchases and sales, combined with the maturity and paydown of investment securities at lower rates, have led to continued improvement in yield on the portfolio. The average yield on investment securities, including both available-for-sale and held to maturity securities, totaled 3.92% for the six months ended June 30, 2026, compared to 3.45% for the six months ended June 30, 2025. As of June 30, 2026, the expected average life of securities in the investment portfolio was 3.6 years, compared to 3.7 years as of December 31, 2025.

Shareholders’ Equity

As of June 30, 2026, shareholders’ equity totaled $104.3 million, or 9.09% of total assets, compared to $105.6 million, or 9.15% of total assets, as of December 31, 2025. While earnings, net of dividends paid, increased shareholders’ equity during the six months ended June 30, 2026, the increase was fully offset by share repurchases, combined with an increase in the Company’s accumulated other comprehensive loss resulting from the increasing interest rate environment and the sale of investment securities in gain positions during the period.

Cash Dividends

During both the six months ended June 30, 2026 and 2025, the Company declared cash dividends totaling $0.14 per share on its common stock.

Share Repurchases

During the six months ended June 30, 2026, the Company completed the repurchase of 237,500 shares of its common stock at a weighted average price of $15.33 per share. The repurchases were completed under the Company’s previously announced share repurchase program, which was most recently expanded during the fourth quarter of 2025. As of June 30, 2026, 1,547,313 shares remained available for repurchase under the program.

Regulatory Capital

During the six months ended June 30, 2026, the Bank continued to maintain capital ratios at higher levels than required to be considered a “well-capitalized” institution under applicable banking regulations. As of June 30, 2026, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 10.85%. Its total capital ratio was 12.02%, and its Tier 1 leverage ratio was 9.16%.

Liquidity

As of June 30, 2026, the Company continued to maintain funding capacity sufficient to provide adequate liquidity for loan growth, capital expenditures and ongoing operations. The Company benefits from a strong core deposit base, a liquid investment securities portfolio and access to funding from a variety of sources, including federal funds lines with other banking institutions, FHLB advances, the FRB's discount window, and brokered deposits.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company’s earning assets consist of loans, investment securities, Federal Home Loan Bank stock, federal funds sold by the Bank, securities purchased under reverse repurchase agreements and interest-bearing deposits in banks. Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as short- and long-term borrowings.

The following tables show the average balances of each principal category of assets, liabilities and shareholders’ equity for the three and six months ended June 30, 2026 and 2025. Additionally, the tables provide an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net interest margin is calculated for each period presented as net interest income divided by average total interest-earning assets.

(1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $1.4 million and $3.0 million for the three months ended June 30, 2026 and 2025, respectively.

(2) Loan fees are included in interest amounts presented. Loan fees totaled $0.2 million for both the three months ended June 30, 2026 and 2025.

46

(1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $1.4 million and $3.5 million for the six months ended June 30, 2026 and 2025, respectively.

(2) Loan fees are included in interest amounts presented. Loan fees totaled $0.4 million for both the six months ended June 30, 2026 and 2025.

47

The following tables summarize the impact of variances in volume and rate of interest-earning assets and interest-bearing liabilities on components of net interest income.

(Dollars in Thousands)

Interest income increased by $0.7 million, comparing the six months ended June 30, 2026 to the six months ended June 30, 2025. The increase in interest income resulted from a $1.1 million increase attributable to growth in average interest-earning assets, partially offset by a $0.4 million decrease attributable to lower average yields on interest-earning assets. With the exception of investment securities, yields in all earning asset categories declined comparing the six months ended June 30, 2026 to the six months ended June 30, 2025, as short-term interest rates generally declined comparing the two periods.

Interest expense increased by $0.4 million, comparing the six months ended June 30, 2026 to the six months ended June 30, 2025. The increase resulted primarily from an increase in volume associated with money market accounts, and to a lesser extent, increased rates on both money market and time deposits. These increases were partially offset by reductions in average balances of time deposits and borrowings, as well as rates associated with demand deposits, time deposits and borrowings.

The Company’s net interest income and net interest margin during the six months ended June 30, 2026 continued to be impacted by variability in the interest rate environment. Notably, between September and December 2025, the federal funds rate was reduced by 75 basis points, and generally, the Company’s interest-earning assets repriced downward more quickly than interest-bearing liabilities, reducing the Company’s net interest margin to 3.46% during the six months ended June 30, 2026, compared to 3.56% during the six months ended June 30, 2025. While management is continuing efforts to improve net interest margin, the results of these efforts cannot be fully predicted. Should market interest rates increase or decrease at significant levels, particularly over a short period of time, the Company’s net interest margin and net interest income could be negatively impacted.

Provision for Credit Losses

For the six months ended June 30, 2026, the Company recorded a provision for credit losses of $1.2 million, compared to $3.2 million for the six months ended June 30, 2025. The decreased provision comparing the first six months of 2026 to the corresponding period of 2025 resulted primarily from provisioning for specifically identified commercial loans in 2025. The credit issues associated with additional provisioning on these loans were resolved later in 2025 and, accordingly, the same level of provisioning was not repeated during the six months ended June 30, 2026. Net charge-offs totaled $1.1 million and $2.0 million for the six months ended June 30, 2026 and 2025, respectively.

As of June 30, 2026, the Company’s ACL as a percentage of total loans and leases was 1.26%, compared to 1.25% as of December 31, 2025. Comparing June 30, 2026 to December 31, 2025, the ACL was increased by changes in economic forecasting associated with the Company’s credit forecasting model, including the expected impact of higher inflation and a higher Federal funds rate. While we believe that the methodologies and calculations that have been used in the determination of the ACL are adequate, the determination of the appropriateness of the ACL is complex and requires judgment by management about the effects of matters that are inherently uncertain. Factors beyond our control, such as changes in economic forecasts related to the national economy, changes in consumer behavior, or economic deterioration in service areas in which the Company operates, may negatively and materially affect asset quality and the adequacy of the ACL, as well as the resulting provision for credit losses.

Non-Interest Income

Non-interest income represents fees and income derived from sources other than interest-earning assets. The following table presents the major components of non-interest income for the periods indicated:

(Dollars in Thousands)

(Dollars in Thousands)

NM: Not meaningful

Non-interest income increased to $2.2 million for the six months ended June 30, 2026, compared to $1.7 million for the six months ended June 30, 2025, primarily due to gains on the sale of investment securities totaling $0.5 million during the 2026 period. Management continues to evaluate opportunities to add non-interest revenue streams and grow existing streams; however, with the exception of sales of investment securities which cannot be predicted with certainty, significant variation in non-interest income is not expected in the near term.

Non-Interest Expense

Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities. The following table presents the major components of non-interest expense for the periods indicated:

(Dollars in Thousands)

(Dollars in Thousands)

Non-interest expense totaled $15.0 million during the six months ended June 30, 2026, compared to $14.4 million during the six months ended June 30, 2025. The increased expense resulted primarily from an increase in occupancy expenses associated with expansion of the Company’s banking center footprint, as well as inflationary increases in various other expense categories.

Provision for Income Taxes

The provision for income taxes was $1.0 million and $0.6 million for the six months ended June 30, 2026 and 2025, respectively. The Company’s effective tax rate was 21.3% and 22.6%, respectively, for the same periods.

The effective tax rate is impacted by recurring items, such as changes in tax-exempt interest income earned from bank-qualified municipal bonds and loans and the cash surrender value of bank-owned life insurance. Management makes decisions about whether to invest in tax-exempt instruments on a case-by-case basis after considering a number of factors, including investment return, credit quality and the consistency of such investments with the Company’s overall strategy. The Company’s effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.

BALANCE SHEET ANALYSIS

Investment Securities

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 3.6 years and 3.7 years as of June 30, 2026 and December 31, 2025, respectively.

Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive loss, a separate component of shareholders’ equity. As of June 30, 2026, available-for-sale securities totaled $165.6 million, or 99.8% of the total investment portfolio, compared to $168.1 million, or 99.7% of the total investment portfolio, as of December 31, 2025. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, corporate bonds, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions.

Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of June 30, 2026, held-to-maturity securities totaled $0.4 million, or 0.2% of the total investment portfolio, compared to $0.5 million, or 0.3% of the total investment portfolio, as of December 31, 2025. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions.

Net unrealized losses in the available-for-sale portfolio totaled $2.9 million as of June 30, 2026, compared to $1.0 million as of December 31, 2025. The increase in unrealized losses in the portfolio resulted from changes in the interest rate environment, in particular, increases in market rates, particularly in the mid- to long-term part of the Treasury curve between December 31, 2025 and June 30, 2026, as well as the sale of two residential mortgage-backed securities during the period. Management elected to sell these securities in an effort to realize gains, while providing cash flows that assisted in the reduction of wholesale brokered deposits. Net unrealized losses within the available-for-sale portfolio were recognized, net of tax, in accumulated other comprehensive loss.

As of June 30, 2026, the Company evaluated both the available-for-sale and held-to-maturity portfolios for credit losses and concluded that no credit losses were included in either portfolio and that the unrealized losses in both portfolios resulted from the prevailing interest rate environment.

Loans and Leases

The Company’s total loan portfolio increased by $7.6 million, or 0.9%, as of June 30, 2026, compared to December 31, 2025. The tables below summarize loan balances by portfolio category, as well as the ACL, as of the end of each of the most recent five quarters as of June 30, 2026:

(Dollars in Thousands)

As of June 30, 2026 and December 31, 2025, the composition of the non-residential commercial real estate loan portfolio was as follows:

(Dollars in Thousands)

(1) Non-owner occupied office consists of 15 loans with an average loan size of $2.2 million. The properties are located in Tuscaloosa, AL, Birmingham, AL, and Chattanooga, TN.

As of June 30, 2026 and December 31, 2025, the composition of the construction, land development, and other land loans portfolio was as follows:

(Dollars in Thousands)

The following table classifies the Company's fixed and variable rate loans as of June 30, 2026 according to contractual maturities of: (1) one year or less, (2) after one year through five years, (3) after five years through fifteen years, and (4) after fifteen years:

(Dollars in Thousands)

(1) While the Indirect portfolio has contractual maturities of up to 15 years, the weighted average term to payoff has trended at less than 5 years.

Allowance for Credit Losses on Loans and Leases

The tables below summarize changes in the ACL on loans and leases for each of the most recent five quarters as of June 30, 2026:

(Dollars in Thousands)

Allowance for Credit Losses on Unfunded Lending Commitments

The Company records an ACL on unfunded lending commitments in which the Company is exposed to credit risk via a present contractual obligation to extend credit unless the obligation is unconditionally cancellable. Unconditional lending commitments generally include unfunded term loan agreements, home equity lines of credit, lines of credit, and demand deposit account overdraft protection. As of June 30, 2026, the Company’s reserve for unfunded commitments, which is recorded in other liabilities in the Company’s consolidated balance sheets, totaled $0.3 million, compared to $0.4 million as of December 31, 2025.

Nonperforming Assets

Nonperforming assets at the end of the five most recent quarters as of June 30, 2026 were as follows:

(Dollars in Thousands)

Allocation of Allowance for Credit Losses on Loans and Leases

While no portion of the ACL is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table shows an allocation of the ACL for the periods indicated:

(Dollars in Thousands)

Net charge-offs as a percentage of average loans in the three prior full years were as follows: 0.14% (2024), 0.14% (2023), 0.16% (2022).

Deposits

Total deposits decreased by $30.0 million, or 2.9%, during the six months ended June 30, 2026. Included in this decrease were $20.1 million in wholesale brokered time deposits that matured and were not replaced. The remaining decrease was comprised of reductions of $19.2 million in retail time deposits and $4.0 million in non-interest-bearing demand deposits, partially offset by an increase in interest-bearing demand deposits of $13.3 million. The decrease in wholesale deposits, as well as other interest-bearing time deposits, assisted management’s efforts to reduce overall deposit costs, while maintaining an appropriate level of core funding. Core deposits, which exclude time deposits of $250 thousand or more and all wholesale brokered deposits, totaled $835.2 million, or 83.7% of total deposits, as of June 30, 2026, compared to $838.3 million, or 81.6% of total deposits, as of December 31, 2025.

Core deposits have historically been the Company’s primary source of funding and have enabled the Company to successfully meet both short-term and long-term liquidity needs. Management anticipates that core deposits will continue to be the Company’s primary source of funding in the future. Management will continue to monitor deposit levels closely to help ensure an adequate level of funding for the Company’s activities. However, various economic and competitive factors could affect this funding source in the future, including increased competition from other financial institutions in deposit gathering, national and local economic conditions and interest rate policies adopted by the FRB and other central banks.

The following tables present details on the composition of the Company's deposits for the periods indicated:

(Dollars in Thousands)

(Dollars in Thousands)

Other Interest-Bearing Liabilities

Other interest-bearing liabilities that are used by the Company as an alternative source of funds consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances, and subordinated debt. As of June 30, 2026, other interest-bearing liabilities totaled 4.1% of total interest-bearing liabilities, compared to 1.2% as of December 31, 2025.

Shareholders’ Equity

As of June 30, 2026, shareholders’ equity totaled $104.3 million, or 9.09% of total assets, compared to $105.6 million, or 9.15% of total assets, as of December 31, 2025. While earnings, net of dividends paid, increased shareholders’ equity during the six months ended June 30, 2026, the increase was fully offset by share repurchases, combined with an increase in the Company’s accumulated other comprehensive loss resulting from the increasing interest rate environment and the sale of investment securities in gain positions during the period. During both the six months ended June 30, 2026 and 2025, the Company declared cash dividends totaling $0.14 per share on its common stock.

In addition, during the six months ended June 30, 2026, the Company completed the repurchase of 237,500 shares of its common stock at a weighted average price of $15.33 per share. The repurchases were completed under the Company’s previously announced share repurchase program. As of June 30, 2026, 1,547,313 shares remained available for repurchase under the program.

LIQUIDITY AND CAPITAL RESOURCES

The asset portion of the balance sheet provides liquidity primarily from the following sources: (1) excess cash and interest-bearing deposits in banks, (2) federal funds sold and securities purchased under reverse repurchase agreements, (3) principal payments and maturities of loans and (4) principal payments and maturities from the investment portfolio. Loans maturing or repricing in one year or less amounted to $133.2 million as of June 30, 2026 and $274.7 million as of December 31, 2025. Investment securities forecasted to mature or reprice in one year or less were estimated to be $22.6 million and $27.5 million as of June 30, 2026 and December 31, 2025, respectively.

Although some securities in the investment portfolio have final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. The investment securities portfolio had an estimated average life of 3.6 years and 3.7 years as of June 30, 2026 and December 31, 2025, respectively. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts, which represent the Company’s primary sources of funds. In addition, federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of available liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure. The Bank manages the pricing of its deposits to maintain a desired deposit balance.

The Company had outstanding borrowings under FHLB advances of $20.0 million as of June 30, 2026, while as of December 31, 2025, the Company had no balances outstanding under FHLB advances. The Company's use of FHLB advances varies depending on fluctuations in deposits and other funding sources, as well as their use in interest rate hedging strategies. The Company had up to $309.6 million and $324.1 million in remaining unused credit from the FHLB (subject to available collateral, which may include eligible investment securities and loans) as of June 30, 2026 and December 31, 2025, respectively.

The Company also has access to the FRB’s discount window. The discount window allows borrowing on pledged collateral that includes eligible investment securities and loans. The Company maintains pledges of its consumer indirect loan portfolio and selected investment securities with the FRB as collateral to provide immediate access to funding through the discount window. As of June 30, 2026, the Company had $5.0 million in outstanding federal funds purchased from the FRB's discount window, while there were no outstanding federal funds purchased from the discount window as of December 31, 2025. As of June 30, 2026 and December 31, 2025 the Company had $191.6 million and $210.9 million, respectively, in unused borrowing capacity with the FRB’s discount window.

In addition to collateralized funding sources through the FHLB and FRB, the Company had $48.0 million in unused established unsecured lines of credit with banks as of both June 30, 2026 and December 31, 2025.

On October 1, 2021, the Company completed a private placement of $11.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that will mature on October 1, 2031. Net of unamortized debt issuance costs, the subordinated notes were recorded as long-term borrowings totaling $11.0 million and $10.9 million as of June 30, 2026 and December 31, 2025, respectively.

The table below provides information on the Company’s on-balance sheet liquidity, as well as readily available off-balance sheet sources of liquidity, as of both June 30, 2026 and December 31, 2025.

(Dollars in Thousands)

(Unaudited)

(Unaudited)

The table above calculates readily available liquidity by combining cash and cash equivalents, federal funds sold, securities purchased under reverse repurchase agreements and unencumbered investment security values on the Company’s consolidated balance sheet with off-balance sheet liquidity that is readily available through unused collateral pledged to the FHLB and FRB, as well as unsecured lines of credit with other banks. Liquidity from pledgable investment securities and total readily available liquidity are non-GAAP measures used by management and regulators to analyze a portion of the Company's liquidity. Management uses these measures to evaluate the Company's liquidity position.

Pledgable investment securities are considered by management as a readily available source of liquidity since the Company has the ability to pledge the securities with the FHLB or FRB to obtain immediate funding. Both available-for-sale and held-for-maturity securities may be pledged at fair value with the FHLB and through the FRB discount window. The amounts shown as liquidity from pledgable investment securities represent total investment securities as recorded on the consolidated balance sheet, less reductions for securities already pledged and discounts expected to be taken by the lender to determine collateral value. The unused lendable collateral value at the FHLB presented in the table above represents only the amount immediately available to the Company from loans already pledged by the Company to the FHLB as of each consolidated balance sheet date presented.

The Company’s readily available liquidity position decreased to $409.9 million as of June 30, 2026, compared to $467.2 million as of December 31, 2025, due to a number of factors, including a reduction in cash and cash equivalents commensurate with efforts to improve balance sheet efficiency, combined with increased usage of secured short-term borrowings as of June 30, 2026. While readily available liquidity decreased comparing June 30, 2026 to December 31, 2025, the Company maintained ample access to liquidity relative to estimated uninsured deposits. Excluding wholesale brokered deposits, as of June 30, 2026, the Company had approximately 27 thousand deposit accounts with an average balance of approximately $32.2 thousand per account. Estimated uninsured deposits (calculated as deposit amounts per deposit holder in excess of $250 thousand, the maximum amount of federal deposit insurance, and excluding deposits secured by pledged assets) totaled $176.7 million, or 17.6% of total deposits, as of June 30, 2026. As of December 31, 2025, estimated uninsured deposits totaled $218.0 million, or 21.2% of total deposits. Management believes the Company’s on-balance sheet and other readily available liquidity sources as presented in the table above provide strong indicators of the Company’s ability to fund obligations in a stressed liquidity environment, particularly when considered relative to the Company’s uninsured deposit levels. Furthermore, in addition to the liquidity sources noted in the table above, the Company has access to additional sources of liquidity that generally could be obtained over a period of time. For example, the Company has access to unsecured brokered deposits through the wholesale funding markets.

Management believes that the Company has adequate sources of liquidity to cover its contractual obligations and commitments over the next twelve months.

The primary purpose of managing interest rate risk is to invest capital effectively and preserve the value created by the Company’s core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments, subject to liquidity and interest rate risk guidelines. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the effect of such interest rate movements on short- and long-term net interest margin and net interest income.

Financial simulation models are the primary tools used by the Asset/Liability Committee of the Bank’s board of directors to measure interest rate exposure. Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’s balance sheet resulting from both strategic plans and customer behavior. Simulation models also incorporate management’s assumptions regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates paid on deposits and charged on loans. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

Assessing Short-Term Interest Rate Risk – Net Interest Margin Simulation

On a quarterly basis, management simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin and net interest income. The tables below depict how, as of June 30, 2026, pre-tax net interest margin and net interest income are forecasted to change over timeframes of one year and two years under the six listed interest rate scenarios. The interest rate scenarios contemplate immediate and parallel shifts in short- and long-term interest rates.

Average Change in Net Interest Margin from Level Interest Rate Forecast (basis points, pre-tax):

Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax):

58

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Bancshares maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Bancshares’ reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to Bancshares’ management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Bancshares’ management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Bancshares’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2026, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, Bancshares’ management concluded, as of June 30, 2026, that Bancshares’ disclosure controls and procedures were effective at the reasonable assurance level to ensure that the information required to be disclosed in Bancshares’ periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2026 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

A list of factors that could materially affect the Company’s business, financial condition and/or operating results is included in Part I, Item 1A, “Risk Factors” in the Company's 2025 Form 10-K. There have been no material changes to such risk factors. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.