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Item 7. Management’s Discussion and Analysis

2026-02-27 compared with 2025-03-03 · 351 added, 279 removed, 559 unchanged (53% of the section changed)

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It is important to note that the Company’s actual results could materially differ from those in such forward-looking statements, and you should not place undue reliance on these forward-looking statements.

Risk factors and the Company’s ability to manage that risk could cause actual results to differ materially from those in forward-looking statements include but are not limited to those outlined previously in Item 1A.

Risk factors and the Company’s ability to manage that risk could cause actual results to differ materially from those in forward-looking statements but are not limited to those outlined previously in Item 1A.

Critical Accounting Estimates

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All significant intercompany balances and transactions have been eliminated.

Certain reclassifications have been made to prior year’s balances to conform to classifications used in 2024.

Certain reclassifications may have been made to prior year’s balances to conform to classifications used in 2025.

Actual results may differ from those estimates under divergent conditions.

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Net income per diluted share

Cash dividends

Book value per share

Cash dividends per share

Weighted average common shares outstanding basic

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Non-performing assets to total loans and other real estate owned

Net (recoveries) charge-offs to average loans

Net charge-offs to average loans

Allowance for credit losses on loans to total loans at period end

Allowance for credit losses on loans to nonaccrual loans

Regulatory Capital Ratios:

Regulatory Capital Ratio:

Tier 1 capital to adjusted average assets (leverage ratio)

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The following is a summary of the major factors that impacted the Company’s results of operations for the years presented in the consolidated financial statements.

● Net interest income improved by 7% in 2024 over 2023, and by 3% in 2023 over 2022, due to a change in the mix of earning assets partially offset by an increase in the cost of interest-bearing liabilities.

Average interest earning assets decreased $93.4 million in 2024 over 2023, due primarily to the strategic restructuring of our lower-yielding bond portfolio in the first quarter of 2024, partially offset by increases in loan balances.

● Net interest income improved by 4% in 2025 over 2024, and by 7% in 2024 over 2023.

The change in 2025 was due primarily to a decrease of 26 basis points in the cost of interest-bearing liabilities.

Average interest earning assets increased $40.9 million in 2025 over 2024, and average interest-bearing liabilities remained relatively flat.

The average balance of investment securities decreased $123.0 million while average gross loan balances increased $183.9 million.

We experienced an increase of $121.4 million in mortgage warehouse line utilization, a $35.6 million increase in real estate loans, and a $31.4 million increase in commercial loans.

Average balances on higher-cost time deposits and brokered deposits decreased by $93.8 million, offset by increases in lower cost customer transaction accounts of $51.6 million and average borrowed funds of $42.2 million.

The net interest margin in 2025 was 9 basis points higher than in 2024, as a result of the change in mix of interest-bearing liabilities.

The decrease in average earning assets in 2024 over 2023 was due primarily to the strategic restructuring of our lower-yielding bond portfolio in the first quarter of 2024, partially offset by increases in loan balances.

The average balance of investment securities decreased $285.1 million while average gross loan balances increased $161.5 million.

We experienced an increase of $176.5 million in mortgage warehouse line utilization, and a $39.6 million increase in farmland loans.

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The net interest margin in 2024 was 29 basis points higher than in 2023, as a result of the balance sheet restructuring.

The increase in average earning assets in 2023 over 2022 was due primarily to purchases of investment securities, augmented with increases in the average balance of loans.

The average balance of investment securities increased $212.3 million while average gross loan balances increased $57.7 million.

We experienced an increase of $22.4 million in real estate loans, $27.1 million increase in mortgage warehouse line utilization, and a $7.9 million increase in other commercial loans.

The positive impact of average asset growth in 2023 along with a 100 basis points increase in yield was negatively impacted by a 161 basis points increase in yield on interest bearing liabilities due to a shift by our customers into higher cost certificates of deposits coupled with an increase in more expensive borrowed funds.

The net interest margin in 2023 was 10 basis points lower than 2022.

● We recorded a credit loss expense on loans of $6.1 million in 2025, as compared to a $4.6 million expense in 2024, and $4.1 million expense in 2023.

The $0.5 million increase in the credit loss expense for the year ending 2024, as compared to the same period in 2023 was due to an unfavorable increase in the allowance for credit losses on loans individually evaluated.

The $1.5 million increase in credit loss expense for 2025, as compared to 2024, was due primarily to the workout of a single agricultural production loan relationship in 2025, which resulted in charge-offs of $7.5 million.

The $0.5 million increase in credit loss expense for 2024, as compared to 2023, was due to an unfavorable increase in the allowance for credit losses on loans individually evaluated.

This unfavorable increase was partially offset by the impact of lower net charge-offs, along with a favorable improvement in underlying economic forecasts used as part of the Company’s allowance for credit losses model.

The Company's $6.8 million favorable decrease in credit loss expense on loans for the year ending 2023 as compared to the same period in 2022, is primarily due to the impact of lower net charge-offs during the year ending 2023.

The 2022 credit loss expense on loans arose from the impact of $11.5 million in net charge-offs during the year ending 2022.

The elevated net charge-offs were mostly due to two loan relationships;

one dairy loan relationship with total charge-offs of $8.7 million and a single office building loan relationship that was sold at a $1.9 million discount due to an increased risk of default that would have likely led to a prolonged collection period.

● Noninterest income increased by $1.1 million, or 4%, in 2024 over 2023, and decreased by $0.4 million, or 1%, in 2023 over 2022.

● Noninterest income decreased by $0.9 million, or 3%, in 2025 over 2024, and increased by $1.1 million, or 4%, in 2024 over 2023.

The year over year decrease in 2025 was mostly due to $1.1 million unfavorable change in non-recurring gains, as well as a decrease in service charges on deposit accounts of $0.7 million.

These decreases were partially offset by an increase in gains recorded on life insurance proceeds during 2025.

The year over year increase in 2024 was mostly due to $1.1 million increase in service charges and a $0.9 million increase in bank-owned life insurance income.

These two favorable improvements were partially offset by a $0.8 million decline in other noninterest income items.

The year over year decrease in 2023 was negatively impacted by 2022 events that did not recur in 2023, including $3.6 million in gains on the sale of other assets, and the $1.0 million recovery of prior period legal expenses.

These unfavorable variances were partially offset by favorable fluctuations in income on bank-owned life insurance (BOLI) with underlying investments mapped directly to the Company’s deferred compensation plan.

Also favorably impacting noninterest income was a $15.3 million gain on the sale of

Bank owned branch buildings (subsequently leased back), mostly offset by realizing a $14.5 million loss on a securities strategy which identified $196.7 million in available-for-sale securities sold in January 2024.

● Noninterest expense increased by $0.2 million, or 0.2%, in 2024 as compared to 2023, and increased by $7.9 million, or 9%, in 2023 over 2022.

While operational efficiencies gained in 2024 from strategic decisions made by the Company in personnel expenses, and other noninterest expenses, helped contain noninterest expense, these positive variances were offset by increased occupancy costs as a result of the sale/leaseback transactions in the fourth quarter of 2023 and the first quarter of 2024 resulting in a slight increase in noninterest expense in 2024.

The increase in noninterest expense in 2023 was due mostly to a $3.9 million increase in salary and benefits expense for new lending teams and management staff along with reduction in force severance payments as discussed in the quarterly comparison, an unfavorable variance in director’s deferred compensation expense which is linked to the favorable changes in bank-owned life insurance income, mentioned above in the discussion of noninterest income, a $0.8 million increase in FDIC assessment costs and $0.5 million increase in fraud losses primarily due to our debit card conversion from Mastercard to VISA earlier in the year.

● Noninterest expense decreased by $0.1 million, or 0.1%, in 2025 as compared to 2024, and increased by $0.2 million, or 0.2%, in 2024 over 2023.

Maintaining relatively flat expenses in 2024 and 2025 was the result of a strategic focus on expense management.

offset by increased occupancy costs as a result of the sale/leaseback transactions in the fourth quarter of 2023 and the first quarter of 2024 resulting in a slight increase in noninterest expense in 2024 compared to 2023.

● The Company recorded income tax provisions of $14.0 million, $13.3 million, and $11.6 million for the years ending 2025, 2024, and 2023 respectively, or approximately 25% of pre-tax income each year.

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The following is a summary of key balance sheet changes during 2025.

● Total assets decreased by $115.5 million, or 3%.

This was mostly a result of a $377.8 million decrease in investment securities, due to a balance sheet restructuring partially offset by a $241.3 million increase in gross loans.

● Total assets increased by $215.0 million, or 6%, to $3.8 billion.

This was mostly a result of an increase in outstanding loan balances.

● Investment securities decreased $45.3 million, or 5%.

This decrease consisted primarily from the sale of bonds from the strategic securities transaction, in which lower yielding bonds were sold to paydown higher cost other borrowings, as well as other normal maturities and calls of investment securities.

● Gross loans increased $241.3 million, or 12%.

This increase was a result of organic growth led by $210.4 million of growth of mortgage warehouse outstandings.

The remaining growth came from a $32.2 million increase in commercial real estate loans, a $20.7 million increase in other commercial loans, and a $10.1 million increase in farmland loans, partially offset by a $30.6 million decline in residential real estate loans.

● Deposit balances increased $130.4 million, or 5%.

Core non-maturity deposits increased by $12.0 million, or 1%, while customer time deposits decreased by $21.5 million, or 4%.

Wholesale brokered deposits increased by $140.0 million, or 104%.

As stated previously, the increase in brokered deposits was primarily to fund increases in the utilization of mortgage warehouse lines.

Overall noninterest-bearing deposits as a percent of total deposits at December 31, 2024, decreased to 34.8%, as compared to 37.0% at December 31, 2023.

● Total capital increased by $19.2 million, or 6%, ending the year with a balance of $357.3 million.

The increase in equity during the year ended December 31, 2024, was primarily due to $40.6 million in net income and a $4.7 million favorable swing in accumulated other comprehensive income (loss) partially offset by $13.6 million in dividends paid, and $15.0 million in share repurchases.

This decrease consisted primarily of paydowns and early calls of variable rate collateralized loan obligations (“CLOs”), offset by purchases of mortgage-backed securities and corporate bonds.

● Gross loans at amortized cost increased $215.4 million, or 9%.

This increase was a result of organic growth led by a $191.9 million increase in mortgage warehouse outstandings.

There were also increases of $33.1 million in commercial real estate loans, $14.2 million in other commercial loans, and $8.9 million in construction/land loans, partially offset by decreases of $23.0 million in residential real estate loans, $9.2 million in farmland loans, and $0.5 million in consumer loans.

● Deposit balances decreased $15.2 million, or 0.5%.

The decline in deposits came mostly from decreases of $71.4 million in higher-cost customer time deposits, partially offset by an increase in brokered deposits of $45.1 million and smaller increases in customer transaction accounts.

Overall noninterest-bearing deposits as a percent of total deposits at December 31, 2025, decreased slightly to 34.6%, as compared to 34.8% at December 31, 2024.

● Total capital increased by $7.6 million, or 2%, ending the year at $364.9 million.

The increase in equity during the year ended December 31, 2025, was primarily due to $42.3 million in net income and an $8.1 million improvement in accumulated other comprehensive income (loss) partially offset by $13.7 million in dividends paid, and $30.8 million in share repurchases.

The remaining difference was related to stock options exercised and restricted stock activity during the year.

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This equates to increases of 4% in 2025, and 7% in 2024.

The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities.

Net interest income is also impacted by the acceleration of net deferred loan fees and costs for loans paid off early, reversal of interest for loans placed on non-accrual status, and the recovery of interest on loans that had been on non-accrual and were paid off, sold, or returned to accrual status.

The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield of interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities.

Net interest income is also impacted by the acceleration of net deferred loan fees and

costs for loans paid off early, reversal of interest for loans placed on non-accrual status, and the recovery of interest on loans that had been on non-accrual and were paid off, sold, or returned to accrual status.

The following table shows average balances for significant balance sheet categories and the amount of interest income or interest expense associated with each category for each of the past three years.

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Net interest income

The 2024 favorable volume variance of $8.5 million is due to the favorable loan volume variance and favorable borrowed fund volume variance exceeding the unfavorable volume variances related to investments and deposits.

Net interest income increased in 2025 primarily due to a favorable volume variance of $4.5 million, as higher loan and interest-bearing deposit volumes more than offset lower volumes in the investment portfolio and borrowed funds.

The decline in investment volume was mainly caused by runoff and early calls on CLOs.

The favorable loan volume variance reflected loan growth during the year, led by higher balances in mortgage warehouse, commercial real estate, and commercial loans.

The unfavorable rate variance of $0.4 million for 2025 was driven largely by an $7.5 million unfavorable rate impact on investment securities, primarily related to variable-rate CLOs affected by 75 basis points of Federal Reserve rate cuts between September and December 2025.

This unfavorable impact was partially offset by a favorable rate variance on total loans.

The negative rate variance on earning assets was mostly offset by favorable rate variances of $5.2 million on interest-bearing deposits and $0.5 million on borrowed funds, as the yields on these interest bearing liabilities also fell as a result of the Federal Reserve rate cuts.

The positive mix variance of approximately $0.6 million was attributable primarily to the deployment of new borrowed funds at lower interest rates, including increased use of federal funds purchased.

The 2024 favorable volume variance of $8.5 million, as compared to 2023, is due to the favorable loan volume variance and favorable borrowed fund volume variance exceeding the unfavorable volume variances related to investments and deposits.

The decline in investment volume and favorable reduction in borrowed funds was facilitated by the balance sheet restructuring strategy in late 2023.

The favorable loan volume variance was due to loan growth in 2024, primarily from mortgage warehouse.

The 2024 favorable rate variance of $0.2 million is comprised mostly of favorable rate variances related to earning assets being mostly offset by unfavorable deposit and borrowed fund costs due to overall higher rates on assets being offset by higher funding rates.

The 2024 favorable rate variance of $0.2 million, as compared to 2023, is comprised mostly of favorable rate variances related to earning assets being mostly offset by unfavorable deposit and borrowed fund costs due to overall higher rates on assets being offset by higher funding rates.

The 2024 unfavorable mix variance of $1.1 million is driven by lower investment balances, and higher loan balances, compounded by higher rates paid on interest-bearing deposits.

Some of this unfavorable mix was mitigated by the decrease in borrowed funds.

For 2023 as compared to 2022, net interest income was impacted by a favorable rate variance of $15.3 million, partially offset by an unfavorable mix variance of $11.0 million, and an unfavorable volume variance of $1.6 million.

The 2023 versus 2022 favorable rate variance is due mostly to a 100 basis point increase in the yield on average earning assets, mostly in higher yielding floating rate commercial loan obligations (CLO), partially offset by a 161 basis point increase in interest expense on interest bearing liabilities.

The 2023 versus 2022 unfavorable volume variance mostly is due to larger increases in borrowed funds and interest-bearing deposits over the increases in average earning assets.

There was also an unfavorable mix variance of $11.0 million which was mostly from the shift of non or low interest bearing deposits into higher rate time deposits as customers became more rate sensitive and higher volumes of borrowed funds at higher rates than the increases in rates on new volumes of interest earning assets.

Increases in higher yielding investment securities and an increase in usage of mortgage warehouse lines offset some of the unfavorable mix variance.

The Company’s net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, increased by 29 basis points to 3.66% in 2024 and declined by 10 basis points to 3.37% in 2023 as compared to 2022.

The favorable variance in net interest margin was mostly caused by an increase in yield and volume of higher yielding interest earning assets over the decrease of volume on interest bearing liabilities in 2024 as compared to 2023.

The net interest margin compression was mostly caused by an increase in rate and volume (mix) of higher cost of interest bearing liabilities over the increase of volume and yield (mix) on interest earning assets in 2023 as compared to 2022.

Rates paid on non-maturity deposits increased 41 basis points in 2024 over the same period in 2023, and increased 15 points in 2023 over the same period in 2022 as competition for deposits has increased with customers becoming more rate sensitive.

Interest bearing demand deposits increased 146 basis points in 2024 over 2023 and increased 75 basis points in 2023 over 2022, an indication of the fierce competition for deposits industry wide.

Money market accounts increased 96 basis points in 2024 over 2023 but increased 47 basis points in 2023 over 2022.

The weighted average cost of interest-bearing liabilities increased 16 points in 2024 over 2023 and increased 161 basis points in 2023 over 2022.

Customer time deposit rates decreased 23 basis points in 2024 over 2023, but increased 285 basis points in 2023 over 2022, due partly to a time deposit product with a rate set to a spread to prime.

The current spreads on our floating rate time deposits range from prime minus 500 basis points to prime minus 375 basis points subject to a floor.

Three prime rate decreases in 2024, and two prime rate increases earlier in 2023, created rate variances on such accounts.

Rates paid on short-term borrowings, which are tied to short-term borrowing rates, increased 38 basis points during 2024 over 2023, and increased 167 basis points during 2023 over 2022.

Rates paid on adjustable-rate trust preferred securities are tied to 3-month CME SOFR and increased 20 basis points during 2024 over 2023 and increased 358 basis points during 2023 over 2022.

During the year, adjustments to interest income occur due to the following adjustments:

The Company’s net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, increased by 9 basis points to 3.75% in 2025 and increased by 29 basis points to 3.66% in 2024 as compared to 2023.

The expansion of net interest margin in 2025, as compared to 2024, was driven primarily by a shift in the mix of interest-earning assets and lower funding costs.

Higher-yielding loan balances, particularly mortgage warehouse, commercial real estate, and commercial loans, replaced lower-yielding investment securities that declined due to runoff and early calls on CLOs.

Additionally, the Company strategically reduced both balances and the cost of time deposits, shifting funding toward lower-cost transaction accounts and federal funds purchased.

Rates paid on non-maturity deposits remained relatively stable in 2025, as compared to 2024, though interest-bearing demand balances continued to reflect rate sensitivity from customers.

Short-term borrowings, including federal funds purchased, carried lower rates in 2025 compared to 2024 as market rates declined, contributing to a more favorable overall funding mix.

Reduced average balances of higher-cost brokered deposits also contributed to overall improvement in funding costs, supporting margin expansion.

These benefits more than offset the reduction in yields on variable-rate CLOs resulting from the 75 basis-point decline in the federal funds rate in the second half of 2025.

The improvement in net interest margin during 2024, as compared to 2023, was largely attributable to the Company’s balance sheet restructuring executed in late 2023 and early 2024.

The sale of lower-yielding securities and the paydown of higher-cost borrowed funds resulted in a more favorable earning-asset mix, with loan growth, particularly in mortgage warehouse balances, further contributing to higher yields.

Deposit costs, however, increased meaningfully during 2024 due to sustained competitive pressures.

Rates paid on non-maturity deposits increased 41 basis points in 2024 compared to 2023, reflecting heightened customer rate sensitivity.

Interest-bearing demand deposits increased 146 basis points, and money market rates rose 96 basis points during the same period.

While customer time deposit rates decreased 23 basis points in 2024 due to product repricing, particularly those tied to prime, this decrease was offset by higher non-maturity deposit costs.

The overall weighted-average cost of interest-bearing liabilities increased 16 basis points in 2024.

Adjustments to interest income generally occur due to the following adjustments:

interest income recovered upon the resolution of nonperforming loans, the reversal of interest income when a loan is placed on non-accrual status, and accelerated fees or prepayment penalties recognized for early payoffs of loans.

Such adjustments had no impact on interest income in 2024, totaled $0.9 million of additional interest income in 2023, and amounted to $1.6 million of interest reversals in 2022.

Such adjustments totaled $0.7 million, $0.5 million, and $0.9 million of additional interest income in 2025, 2024, and 2023, respectively.

Credit Loss Expense and Provision for Loan Losses

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The Company recorded credit loss expense on loans of $6.1 million in 2025, $4.6 million in 2024, and $4.1 million in 2023.

The Company was subject to the adoption of the Current Expected Credit Loss ("CECL") accounting method under FASB Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) and implemented the update on January 1, 2022.

Upon implementation the Company recorded a $10.4 million pre-tax increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.

The Company’s $0.5 million increase in credit loss expense for the year ending 2024 over 2023, was due to a unfavorable increase in the allowance for credit losses on loans individually evaluated, partially offset by the impact of lower net loan charge-offs and a favorable improvement in underlying economic forecasts used as part of our allowance for credit losses model.

There was a $6.8 million favorable decrease for the year ending 2023 compared to the same period in 2022 is primarily due to the impact of lower net charge-offs during the year ending 2023.

With the credit loss expense on loans recorded in 2024 we were able to maintain our allowance for credit losses on loans at a level that, in Management’s judgment, is adequate to absorb expected credit losses over the remaining contractual life on loans related to individually identified loans as well as expected credit losses over the remaining contractual life in the remaining loan portfolio.

The higher credit loss expense in 2025 compared to 2024 was due mostly to increased provision related to a single agricultural lending relationship with total charge-offs of $7.5 million.

The Company’s $0.5 million

increase in credit loss expense for the year ending 2024 over 2023, was due to an unfavorable increase in the allowance for credit losses on loans individually evaluated, partially offset by the impact of lower net loan charge-offs and a favorable improvement in underlying economic forecasts used as part of our allowance for credit losses model.

With the credit loss expense on loans recorded in 2025, we were able to maintain our allowance for credit losses on loans at a level that, in Management’s judgment, is adequate to absorb expected credit losses over the remaining contractual life on both individually and collectively evaluated loans.

Specifically identifiable and quantifiable credit losses on loans are immediately charged off against the allowance.

The Company experienced net loan charge-offs of $9.4 million in 2025, $3.3 million in 2024, and $3.6 million in 2023.

The provision for credit losses on loans for 2022 was elevated due to the impact of two loan relationships;

The Company’s policies for monitoring the adequacy of the allowance and determining loan amounts that should be charged off, and other detailed information with regard to changes in the credit allowance, are discussed in Note 2 to the consolidated financial statements and below under “Allowance for Credit Losses on Loans.” The process utilized to establish an appropriate allowance for credit losses on loans can result in a high degree of variability in the Company’s provision for credit losses on loans, and consequently in our net earnings.

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Service charges on deposit accounts

(Loss) gain on sale of securities

Gain (loss) on sale of fixed assets

Bank owned life insurance income (loss)

Realized gain (loss) on available-for-sale securities

Interchange income on debit cards

Business analysis fees

Overdraft fee income

Other service charges and fees

Gain (loss) on sale of securities

(Loss) gain on sale of fixed assets

Increase in cash surrender value of life insurance

Earnings on separate account life insurance

Total noninterest income

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Salaries and employee benefits

Salary and incentives

Employee benefits

Deferred compensation

Occupancy and equipment costs

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Director's cost

Deferred directors' fees

Other professional services costs

Stationery and supply costs

Sundry & tellers

Debit card and fraud loss

Total noninterest expense

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(2) The efficiency ratio is a non-GAAP measure and is a calculation of noninterest expense as a percentage of the sum of net interest income and noninterest income excluding net gains (losses) from securities and bank owned life insurance income.

Noninterest income increased $1.1 million, or 4%, in 2024 over 2023, and decreased $0.4 million, or 1%, in 2023 over 2022.

Total noninterest income was 0.95% of average interest-earning assets in 2024 as compared to a ratio of 0.89% in 2023.

The ratio increased in 2024 mostly due to noninterest income including service charges on deposit accounts increasing 4%, or $1.1 million, along with a decrease in interest-earning assets.

The principal component of the Company’s noninterest income, service charges on deposit accounts increased 5%, or $1.1 million, and were flat in 2023 as compared to 2022.

This line item is primarily driven by the volumes of debit card transactions, overdraft transactions, and analysis fees which are driven primarily on the volume of cash orders by money service businesses.

As a percent of average transaction account balances, service charge income was 1.6% in 2024, 1.4%

in 2023, and 1.3% in 2022.

Overdraft income on both consumer and corporate accounts totaled $5.5 million in 2024, $5.3 million in 2023;

and $4.6 million (net of restitution related to NSF fees) in 2022.

The Company stopped charging NSF fees in 2022.

Interchange income from debit cards (included in service charges on deposit accounts) was $8.3 million, and was mostly flat in 2024 over 2023, but decreased in 2023 over 2022 by $0.2 million.

The unfavorable variance in 2023 was a result of a brand change later in the year from Mastercard to VISA.

BOLI income generally fluctuates based on the market due to the Company’s “separate account” BOLI being invested in assets that closely mirror investments choices of deferred compensation participants.

There is also a part of BOLI that is “general account” and receives a standard crediting rate from the carrier which remains relatively stable year over year.

However, the separate-account BOLI used to offset deferred compensation fluctuates significantly from year-to-year as many of our deferred compensation participants are invested in equity-index style funds.

In the comparative years ending 2024 over 2023, BOLI income increased $0.9 million;

however, in 2023 over 2022, BOLI income increased $2.8 million.

The Company had $11.8 million invested in separate account BOLI at December 31, 2024.

This separate account BOLI closely matched participant-directed investment allocations that can include equity, bond, or real estate indices, and are thus subject to gains or losses which often contribute to significant fluctuations in income (and associated expense accruals).

Net gains on separate account BOLI totaled $1.7 million in 2024, and $0.9 million in 2023, as compared to net losses of $2.0 million in 2022.

This resulted in a favorable variance of $0.8 million for the comparative years ending 2024 as compared to 2023, and $2.9 million for the comparative years ending 2023 as compared to 2022.

As noted, gains and losses on separate account BOLI are related to expense accruals or reversals associated with participant gains and losses on deferred compensation balances, thus the overall net impact on taxable income tends to be minimal.

The Company’s books also reflect a net cash surrender value for general account BOLI of $41.3 million and $41.7 million, respectively for the years ending December 31, 2024 and 2023.

General account BOLI produces income that is used to help offset expenses associated with executive salary continuation plans, director retirement plans and other employee benefits.

Noninterest income decreased $0.9 million, or 3%, in 2025 over 2024, following an increase of $1.1 million, or 4%, in 2024 compared to 2023.

Noninterest income represented 0.91% of average interest-earning assets in 2025 down from 0.95% in 2024.

The ratio decline in 2025 was primarily attributable to lower net non-recurring gains along with an increase in interest-earning assets.

The principal component of the Company’s noninterest income, service charges on deposit accounts decreased 3%, or $0.7 million in 2025 compared to 2024.

The decrease was driven primarily by lower overdraft fee income and lower business analysis fees.

In 2024, service charges increased $1.1 million, or 5%, compared to 2023, reflecting higher business analysis fees and other service charges, as well as growth in overdraft income.

A significant portion of the business analysis fees are charges to money service business customers related to cash handling fees.

As a percentage of average transaction

account balances, service charge income was 1.4% in 2025, 1.6% in 2024, and 1.4% in 2023.

Overdraft income on both consumer and corporate accounts totaled $5.2 million in 2025, $5.5 million in 2024, and $5.3 million in 2023.

Interchange income from debit cards (included in service charges on deposit accounts) was $8.1 million in 2025, consistent with 2024 and 2023.

BOLI income consists of two components.

The first component is a relatively stable investment in “general account” BOLI that receives a standard crediting rate from the carrier which remains relatively stable year over year.

The Company’s books reflect a net cash surrender value for general account BOLI of $56.1 million and $41.3 million, respectively as of December 31, 2025 and 2024.

General account BOLI produces income that is used to help offset expenses associated with overall employee benefits.

Interest credit rates on general account BOLI do not change frequently so the income has typically been fairly consistent with $1.4 million of general account BOLI income recorded for the year ending December 31, 2025, $1.0 million recorded for the year ending December 31, 2024, and $0.9 million recorded for the year ending December 31, 2023.

Gain on the sale of fixed assets for $3.8 million, and $15.3 million, for the years ending 2024, and 2023 respectively, was due to the sale of Bank owned branch buildings that were subsequently leased back.

Both of these transactions and related gains were part of an overall balance sheet restructuring.

A securities strategy identified $196.7 million in bonds yielding 2.61%, sold in January 2024 at a loss of $14.5 million.

There were also $53.8 million in bonds sold during the first quarter of 2024, at a loss of $2.9 million.

The proceeds from the securities strategy went to paydown a portion of other borrowed funds with an average rate of 5.52%.

The Company also realized a $0.2 million and $0.4 million gain on the sale or call of securities during the years ending December 31, 2024 and 2023 respectively, and, a $1.5 million gain for the same period in 2022 from a portfolio restructure to decrease effective duration, taking advantage of slight rallies in the Treasury market in early and late 2022.

The other category, decreased $0.8 million to $3.5 million in 2024, $2.8 million to $4.4 million in 2023 and increased to $7.2 million in 2022.

The year over year decrease in 2024 over 2023, and in 2023 over 2022 was a result of events that did not recur in 2024 and 2023.

For 2024 over 2023, the variance is mostly due to gain on life insurance proceeds while the variance for 2023 over 2022, was primarily due to a $3.6 million gain on the sale of other assets.

Total operating expense, or noninterest expense, increased slightly by $0.2 million, or 0.2%, in 2024 as compared to 2023, and by $7.9 million, or 9%, in 2023 as compared to 2022.

The largest component of noninterest expense, salaries, and employee benefits decreased $0.6 million, or 1% in 2024 as compared to 2023, and increased $3.9 million, or 8% in 2023 as compared to 2022.

The decrease in 2024 was due to strategic decisions in 2023 that created operational efficiencies and reduced noninterest expense, as discussed below.

The increase in 2023 was due to the strategic hiring of new loan production teams and certain management positions, and standard annual increases to our employee’s base compensation.

Loan origination salaries that were deferred from current expense for recognition over the life of related loans totaled $3.0 million in 2024, $2.7 million in 2023, and $2.3 million in 2022.

Salaries and benefits were 56% of total operating expense in 2024, and 55% in 2023, and 2022.

The increase in 2025 was due to the purchase of $15 million in new BOLI polices in April 2025 on senior and executive officers of the Company.

The second component of BOLI is “separate account” which consists of specific directed investments in underlying assets (generally equity and bond funds) that closely mirror investment choices of deferred compensation participants.

Deferred compensation participants can make investment choices similar to a traditional 401k plan;

as the deferred compensation plan is a nonqualified plan, the liability is a corporate liability.

To offset this deferred compensation plan, the Company has chosen to use separate account BOLI designed to be an economic hedge against deferred compensation.

Therefore, the income on BOLI generally offsets the deferred compensation expense each year.

Separate account BOLI income declined $0.5 million in 2025 which closely matched the $0.6 million decline in deferred compensation expense (including deferred directors fees) for 2025.

Similarly, the $0.8 million increase in separate account BOLI income in 2024 closely matched the $0.9 million increase in deferred compensation expense (including deferred directors fees) for 2024.

The separate account BOLI earnings are decreased by the underlying cost of life insurance, however, the earnings on separate account BOLI income are tax-free, whereas the related deferred compensation expense is tax deductible.

The Company had $13.2 million invested in separate account BOLI at December 31, 2025, which offset approximately $13.7 million of deferred compensation liability.

Net gains (losses) on sale of securities were a $0.1 million gain in 2025, as compared to a $2.6 million loss in 2024 and a $14.1 million loss in 2023.

The losses in 2024 and 2023 were primarily attributable to strategic securities sales executed as part of balance sheet repositioning initiatives.

(Loss) gain on sale of fixed assets was $(0.1) million in 2025, as compared to gains of $3.8 million in 2024 and $15.3 million in 2023.

The gains in 2024 and 2023 were due primarily to the sale and leaseback of bank-owned branch buildings;

no comparable transactions occurred in 2025.

Noninterest income also includes one general category of “other income” of which the following are major components (dollars in thousands):

Year Ended December 31,

Included in other income:

Dividends on equity investments

Unrealized losses recognized on equity investments

SBA loan fund income

Credit card and other loan fees

Total other noninterest income

The “other” category in other noninterest income increased $0.7 million in 2025 compared to 2024 and decreased $0.8 million in 2024 compared to 2023.

The fluctuation over the three-year period was driven largely by life insurance proceeds, which contributed to higher income in both 2025 and 2023.

Total operating expense, or noninterest expense, decreased $0.1 million, or 0.1%, in 2025 as compared to 2024, and increased $0.2 million, or 0.2%, in 2024 compared to 2023.

Noninterest expense was 2.75% of average interest-earning assets in 2025, compared to 2.79% in 2024 and 2.71% in 2023.

The largest component of noninterest expense, salaries and employee benefits, increased $0.7 million, or 1%, in 2025 compared to 2024, and decreased $0.6 million, or 1%, in 2024 compared to 2023.

The increase in 2025 was driven primarily by higher employee benefit costs, partially offset by lower deferred compensation expense.

Salaries, identified as loan origination costs, that were deferred from current expense for recognition over the life of related loans totaled $3.0 million in 2025, $3.0 million in 2024, and $2.7 million in 2023.

Salaries and benefits were 55% of total operating expense in 2025 and 2023, and 54% in 2024.

The number of full-time equivalent staff employed by the Company totaled 465 at the end of 2025, as compared to 485 at December 31, 2024, and 489 at December 31, 2023.

The decrease for the years ending 2024, and 2023 in FTE was due to the reduction in force as several management positions were eliminated due to operational efficiencies.

Total rent and occupancy expense, including furniture and equipment costs, increased $2.2 million in 2024 as compared to 2023, and $0.4 million in 2023 as compared to 2022.

The increase in 2024 was due to higher rent expense from the sale/leaseback transactions in the fourth quarter of 2023 and first quarter of 2024.

The increase in 2023 was due to a one-time payment of $0.2 million for home office stipends for staff that work remotely and regular rent escalations.

Advertising and promotion costs decreased $0.8 million or 36%, in 2024, over 2023, and increased $0.5 million or 28%, in 2023, over 2022.

The decrease in 2024 was a result of a change in the Company’s marketing strategy, while the increase in 2023 was mostly due to a $0.3 million increase in deposit program costs due to a deposit acquisition campaign.

Data processing costs increased $0.4 million, or 6% in 2024, as compared to 2023, and decreased by $0.4 million or 6% in 2023 as compared to 2022.

The increase in 2024 was primarily from new loan origination software to better serve our customers and create operational efficiencies in the near term, along with increased costs for data storage.

The decrease in 2023 was mostly from a $0.6 million decrease in core processing costs and lower internet banking costs, partially offset by higher Visa conversion costs.

The Company renegotiated its core processing contract which resulted in overall savings.

Deposit services costs decreased by $0.4 million, or 4% in 2024 as compared to 2023, and decreased by $0.7 million or 8% in 2023 as compared to 2022.

The decrease in 2024 was due to favorable variances in debit card processing and ATM networks costs, from a branding change to VISA from Mastercard in 2023.

Deposit costs favorable variance in 2023, over 2022 were due to a decrease in deposit statement costs, and lower ATM network costs.

The decrease in full-time equivalent staff for the three-years ending December 31, 2025 was due to ongoing efficiency initiatives across the Bank.

Total rent and occupancy expense, including furniture and equipment costs, increased $0.2 million in 2025 compared to 2024, and increased $2.2 million in 2024 compared to 2023.

The increase in 2024 was primarily due to higher rent expense associated with the sale/leaseback transactions completed in late 2023 and early 2024.

Advertising and marketing costs increased $0.1 million in 2025 compared to 2024 and decreased $0.8 million in 2024 compared to 2023.

The decrease in 2024 was a result of a change in the Company’s marketing strategy, while the inconsequential increase in 2025 reflected stability in that strategy.

Data processing costs declined slightly in 2025, decreasing $0.1 million from 2024, reflecting management’s disciplined approach to controlling operating expenses.

In contrast, costs increased $0.4 million in 2024 relative to 2023, primarily due to the rollout of new loan-origination technology to support customer experience and operational efficiency initiatives, along with increased expenditures related to data-storage capacity.

Deposit services costs decreased $0.1 million in 2025 compared to 2024 and decreased $0.4 million in 2024 compared to 2023.

The decrease in 2025 reflects the Company’s continued focus on expense management, as ongoing reductions in debit card processing costs, primarily attributable to the prior conversion from Mastercard to VISA, lower ATM servicing costs, and reduced amortization of core deposit intangibles more than offset increases in armored car and internet banking costs.

The decrease in 2024, as compared to 2023, was due to favorable variances in debit card processing and ATM networks costs, from the branding change to VISA from Mastercard in 2023.

Loan services costs are comprised of loan processing costs, and net costs associated with foreclosed assets.

Loan processing costs, which include expenses for property appraisals and inspections, loan collections, demand and foreclosure activities, loan servicing, loan sales, and other miscellaneous lending costs, decreased by $0.1 million or 11%, in 2024 as compared to 2023, and increased by $0.1 million or 9%, in 2023 as compared to 2022.

The decrease in 2024 over 2023, as well as the increase in 2023 over 2022, was due to fluctuations in appraisal costs.

Loan processing costs, which include expenses for property appraisals and inspections, loan collections, demand and foreclosure activities, loan servicing, loan sales, and other miscellaneous lending costs, experienced modest declines in both 2025 relative to 2024 and in 2024 relative to 2023.

The decrease in 2025 over 2024 was due to declines in appraisal costs and credit reporting costs while the 2024 decline over 2023 was mainly related to reduced appraisal costs.

Foreclosed assets costs are comprised of write-downs taken subsequent to reappraisals, OREO operating expense (including property taxes), and losses on the sale of foreclosed assets, net of rental income on OREO properties and gains on the sale of foreclosed assets.

There were no expenses in 2024, $0.7 million expenses in 2023 and $0.1 million in expenses in 2022.

Foreclosed asset expenses were inconsequential in 2025 and 2024, and $0.7 million in 2023.

These costs fluctuate based on market conditions of OREO relative to our holding value, the nature of the underlying properties and the volume of OREO properties in inventory.

At the end of 2024, the Company had no OREO properties remaining in inventory.

At the end of 2025, the Company had one OREO property remaining in inventory at a fair value of $1.6 million.

The property is currently in the process of sale with no additional expected losses on the sale.

The “other operating costs” category includes telecommunications expense, postage, and other miscellaneous costs.

Telecommunications expense decreased $0.5 million, or 13%, in 2024, as compared to 2023, and was flat at $1.6 million in 2023, as compared to 2022.

The decrease in 2024 was due to payments in 2023 that did not reoccur in 2024, mainly restitution payments made in 2023 to analysis customers, and hiring and recruiting costs.

Total Professional Services costs, which consists of legal and accounting, acquisition, directors fees, and other professional services costs, increased by $0.9 million, or 12%, in 2024 as compared to 2023, and $3.1 million in 2023, as compared to 2022.

Legal and Accounting costs were flat in 2024, but increased $0.1 million, or 5% in 2023, as compared to 2022.

The increase in 2024 was primarily due to an unfavorable variance in directors’ deferred compensation expense while the increase in 2023 was primarily from an increase in audit costs, which were previously outsourced.

Directors’ costs increased $0.7 million, or 33%, in 2024 over 2023, and $2.1 million in 2023 as compared to 2022 primarily due to an increase in deferred compensation expense which is linked to the favorable fluctuation in BOLI income.

Other professional services costs include FDIC assessments and other regulatory expenses, and certain insurance costs among other things.

This category increased $0.1 million, or 4%, in 2024 as compared to 2023, and $0.9 million or 46%, a decrease in interest-earning assets while in 2023, as compared to 2022.

The increase in 2024 as compared to 2023, is primarily due to an increase in insurance and bond rating costs.

The increase in 2023 was primarily from an increase in FDIC assessment expenses.

Employee deferred compensation expense accruals totaled $0.4 million in 2024, $0.2 million in 2023, and $0.1 million in 2022, and are included in “salaries and employee benefits’ noted above.

Directors deferred compensation plan accruals totaled $1.6 million in 2024, $0.8 million in 2023, and $(1.1) million in 2022, and are included in “other professional services” above.

As previously mentioned in our discussion of BOLI income, deferred compensation plan accruals are related to separate account BOLI income and losses and the net income impact of all income/expense accruals related to deferred compensation is usually minimal.

Stationery and supply costs were mostly unchanged both in 2024, as compared to 2023, and for 2023, as compared to 2022.

Sundry and teller costs were $1.2 million in 2024, $1.3 million in 2023, and $0.7 million in 2022.

In 2024, as well as 2023 and 2022, debit card losses are elevated and consistent with the higher volume of debit card transactions.

These debit card dispute and fraud costs increased in 2023 with our debit card conversion from Mastercard to Visa earlier in the year and declined 8% or $0.1 million in 2024.

The Company’s tax-equivalent overhead efficiency ratio was 60.8% in 2024, 63.9% in 2023, and 60.2% in 2022.

The overhead efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income, with the provision for credit losses on loans and gains/losses excluded from the equation.

The Company is continually working on efforts to control costs, as well as increase income which is the denominator of the equation.

Our income tax provision was $13.3 million, or 24.7% of pre-tax income in 2024, $11.6 million, or 25.0% of pre-tax income in 2023, and $11.3 million, or 25.1% of pre-tax income in 2022.

The tax accrual rate was lower in 2024 due to an increase in the net benefit from tax credits, but was higher in 2023 and in 2022 due to a lower proportion of non-taxable income to taxable income

The Company sets aside a provision for income taxes on a monthly basis.

The amount of that provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits.

Other operating costs remained flat in 2025 as compared to a decrease of $0.5 million, or 13%, in 2024.

The decrease in 2024

was due to payments in 2023 that did not reoccur in 2024, mainly restitution payments made in 2023 to analysis customers, and hiring and recruiting costs.

Total Professional Services costs, which consist of legal and accounting, acquisition, directors’ fees, and other professional services costs, decreased $0.6 million in 2025 compared to 2024, and increased $0.9 million in 2024 compared to 2023.

The decrease in 2025 was driven primarily by lower deferred directors’ fees and lower directors’ costs, partially offset by higher other professional services costs.

The increase in 2024, as compared to 2023, was primarily due to an unfavorable variance in directors’ deferred compensation.

Other professional services costs include FDIC assessments and other regulatory expenses, and certain insurance costs.

Stationery and supply costs have trended downward over the three-year period ending in 2025, consistent with the Company’s ongoing strategic emphasis on disciplined expense management.

Debit card and fraud losses totaled $0.9 million in 2025, $1.2 million in 2024, and $1.3 million in 2023.

The year-over-year reductions are attributable in part to the Company’s hiring of a full-time fraud manager focused on addressing fraud losses, including debit card fraud.

The Company’s tax-equivalent overhead efficiency ratio improved to 58.9% in 2025, from 60.8% in 2024, and 63.9% in 2023.

The efficiency ratio is a calculation of noninterest expense as a percentage of the sum of net interest income and noninterest income excluding net gains (losses) from debt securities and bank owned life insurance income.

The Company is strategically focused on strengthening discipline around expenses, as well as increasing income which is the denominator of the equation.

The improvement in 2025 primarily reflected higher core revenue generation and continued expense management.

Tax-equivalent net interest income increased in 2025, while total noninterest expense remained essentially flat year over year, resulting in a more favorable expense-to-revenue relationship.

The improvement in 2024, as compared to 2023, was driven primarily by meaningful growth in core pre-provision revenue, particularly through higher net interest income following balance sheet actions executed in late 2023 and early 2024, combined with a relatively stable operating expense base.

Although certain expense categories increased in 2024 (including occupancy and other operating costs), the overall revenue improvement more than offset these changes, resulting in a lower efficiency ratio compared to 2023.

Income tax provision was $14.0 million in 2025, $13.3 million in 2024, and $11.6 million in 2023 resulting in effective tax rates of 24.9%, 24.7%, and 25.0% respectively.

The effective tax rate increased modestly by approximately 18 basis points in 2025 compared to 2024.

The increase primarily reflected a lower benefit from tax-exempt municipal income in 2025, partially offset by a higher level of affordable housing tax credits and lower nondeductible interest expense.

The tax accrual rate was lower in 2024 due to an increase in the net benefit from tax credits but was higher in 2023 due to a lower proportion of non-taxable income to taxable income.

The Company records income tax expense throughout the year based on an estimated effective tax rate (“ETR”).

The estimated ETR reflects management’s current expectation of the full-year tax rate, considering the mix of taxable and tax-exempt income, permanent differences, tax credits, and other items impacting the overall tax rate.

Income tax expense is recognized by applying the estimated ETR to pre-tax income, with adjustments recorded as needed to reflect changes in the estimated annual ETR and any discrete tax items identified during the period.

Permanent differences include but are not limited to tax-exempt interest income, BOLI income or loss, and certain book expenses that are not allowed as tax deductions.

The Company’s investments in state, county, and municipal bonds provided $6.4 million of federal tax-exempt income in 2025, $6.7 million in 2024, and $10.9 million in 2023.

Moreover, in addition to life insurance proceeds of $0.2 million in 2024, $0.9 million in 2023 and $0.4 million in 2022, net increases in the cash surrender value of bank-owned life insurance added $2.7 million to tax-exempt income in 2024, and $1.8 million to tax-exempt income in 2023, but reduced tax-exempt income by $1.0 million in 2022.

Moreover, in addition to life insurance proceeds of $0.9 million in 2025, $0.2 million in 2024 and $0.9 million in 2023, net increases in the cash surrender value of bank-owned life insurance added $2.6 million to tax-exempt income in 2025, $2.7 million in 2024, and $1.8 million in 2023.

Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds.

We had a total of $22.6 million invested in low-income housing tax credit funds as of December 31, 2025, and $25.4 million as of December 31, 2024, which are included in other assets rather than in our investment portfolio.

Those investments have generated substantial tax credits over the past few years, with about $1.8 million, $0.6 million, and $0.5 million in credits available for the for the tax years 2024, 2023, and 2022, respectively.

The credits are dependent upon the occupancy level of the housing projects and income of the tenants and cannot be projected with certainty.

Those investments have generated substantial tax credits over the past few years, with about $2.9 million, $1.7 million, and $0.6 million in credits available for the tax years 2025, 2024, and 2023, respectively.

The credits are dependent upon the occupancy level of the

housing projects and income of the tenants and cannot be projected with certainty.

Furthermore, our capacity to utilize them will continue to depend on our ability to generate sufficient pre-tax income.

We plan to invest in additional tax credit funds in the future, but if the economics of such transactions do not justify continued investments, then the level of low-income housing tax credits will taper off in future years until they are substantially utilized by the end of 2036.

That means that even if taxable income stayed at the same level through 2036, our tax accrual rate would gradually increase.

That means that even if taxable income stayed at the same level through 2036, our ETR would gradually increase.

Financial Condition

Assets totaled $3.6 billion at December 31, 2024, a decrease of $115.5 million, or 3%, for the year.

Assets decreased in 2024 mostly a result of a strategic balance sheet restructuring, substantially offset by loan growth in 2024.

securities declined $377.8 million, primarily from the sale of bonds from the strategic securities transaction that was part of the balance sheet restructuring, as well as other maturities and calls of investment securities.

The decreases in investment securities were partially offset by a $241.3 million increase in gross loans, and a $22.1 million increase in cash on hand.

Deposits increased $130.4 million, or 5%.

Total capital increased by $19.2 million, or 6%.

The major components of the Company’s balance sheet are individually analyzed below, along with information on off-balance sheet activities and exposure.

Assets totaled $3.8 billion at December 31, 2025, an increase of $215.0 million, or 6%, from December 31, 2024.

The 2025 increase in assets was driven primarily by growth in loans, partially offset by a reduction in investment securities.

Assets totaled $3.6 billion at December 31, 2024, a decrease of $115.5 million, or 3%, from December 31, 2023.

The 2024 decline in assets was primarily attributable to the Company’s strategic balance sheet restructuring, which included a reduction in investment securities, partially offset by loan growth.

Deposits totaled $2.9 billion at December 31, 2025, decreasing $15.2 million, or 0.5%, from December 31, 2024, due primarily to a shift in mix away from higher-cost time deposits.

Deposits increased $130.4 million, or 5%, in 2024 compared to 2023, driven primarily by brokered deposits used to incrementally fund mortgage warehouse lending.

Total shareholders’ equity was $364.9 million at December 31, 2025, up from $357.3 million at December 31, 2024.

The 2025 increase reflected net income and an improvement in accumulated other comprehensive income, partially offset by dividends paid and share repurchases.

Total shareholders’ equity increased to $357.3 million at December 31, 2024, from $338.1 million at December 31, 2023.

Loan Portfolio

The Company’s loan portfolio represents the single largest portion of invested assets, substantially greater than the investment portfolio or any other asset category, and the quality and diversification of the loan portfolio are important considerations when reviewing the Company’s financial condition.

The Loan Distribution table that follows sets forth by loan type the Company’s gross loans outstanding and the percentage distribution in each category at the dates indicated.

The balances for each loan type include nonperforming loans, if any, but do not reflect any deferred or unamortized loan origination, extension, or commitment fees, or deferred loan origination costs.

The Company’s loan portfolio represents the single largest portion of invested assets, substantially larger than the investment portfolio or any other asset category, and the quality and diversification of the loan portfolio are important considerations when reviewing the Company’s financial condition.

The Loan Distribution table that follows sets forth by loan type the Company’s gross loans outstanding at amortized cost and the percentage distribution in each category at the dates indicated.

The balances for each loan type include nonperforming loans, if any.

Although not reflected in the loan totals below and not currently comprising a material part of our lending activities, the Company also occasionally originates and sells, or participates out portions of loans to non-affiliated investors.

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Consumer loans

The Company’s loan balances increased $239.7 million, or 12% in 2024.

The increase was primarily a result of a $210.4 million increase in mortgage warehouse utilization, $32.2 million increase in commercial real estate loans, $10.1 million increase in farmland loans, and a $20.7 million increase in other commercial loans.

Negatively impacting these positive variances were loan paydowns and maturities in many categories despite solid loan production.

In particular there was a $30.6 million decrease in residential real estate, a $0.8 million decrease in other construction, and $0.7 million decrease in consumer loans.

The increase in 2023 was primarily a result of a $50.6 million increase in mortgage warehouse utilization, $17.1 million increase in commercial real estate, and a $53.3 million increase in other commercial loans offset by a $46.1 million decrease in farmland, a $12.2 million decrease in other construction and a $25.4 million decrease in residential real estate.

For 2022, the Company had $173.1 million in residential mortgage loan purchases which were designed as a bridge to organic loan growth with the hiring of loan production teams.

These new loan production teams were hired to develop relationships within our footprint for both loans and deposits.

These new loans provide additional diversification of the loan portfolio and are mostly floating rate loan products which complement the fixed rate real estate loans.

As demonstrated by the expansion of the lending teams both in 2023 and 2022, management remains focused on organic loan growth which totaled $216.5 million and $185.3 million, respectively during the years ending 2024 and 2023.

The Company’s gross loan balances at amortized cost increased $215.4 million, or 9%, in 2025.

The increase was primarily a result of a $191.9 million increase in mortgage warehouse utilization and continued organic growth of $33.1 million in commercial real estate loans, $14.2 million in other commercial loans, and $8.9 million in other construction/land loans.

This growth was partially offset by declines of $23.0 million in residential real estate loans, $9.2 million in farmland loans, and $0.5 million in consumer loans.

Gross loans increased $241.0 million, or 12%, in 2024 compared to 2023.

The increase was driven primarily by higher mortgage warehouse utilization and growth in select commercial categories, partially offset by declines in residential real estate.

No assurance can be provided with regard to future net growth in aggregate loan balances given occasional surges in prepayments, fluctuations in mortgage warehouse lending and maintaining concentrations in certain sectors within our risk management parameters.

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or (2) total CRE loans as defined in the regulatory guidelines represent 300% or more of Tier 1 risk-based capital plus allowance for credit losses on loans, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36 month period.

This ratio was 243% at December 31, 2023, and declined to 236% at December 31, 2024.

At December 31, 2024, the Bank’s total construction, land development and other land loans represented 1% of Tier 1 risk-based capital plus allowance for credit losses on loans.

The Bank believes that it does not have a concentration in CRE loans at December 31, 2024, above the prudential regulatory guidelines note above.

This ratio was 236% at December 31, 2024, and increased to 242% at December 31, 2025.

At December 31, 2025, the Bank’s total construction,

land development, and other land loans represented 3% of Tier 1 risk-based capital plus allowance for credit losses on loans.

The Bank believes that it does not have a concentration in CRE loans at December 31, 2025, above the prudential regulatory guidelines noted above.

The Bank and its board of directors have discussed the guidelines and believe that the Bank’s underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are sufficient to address the risk management of CRE under the guidelines.

The following table presents future loan maturities as of December 31, 2025:

Loan Maturities

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Consumer loans

Rates on nonresidential loans longer than five years typically adjust starting before ten years and each five years thereafter.

Rates on nonresidential loans longer than five years typically adjust at or before ten years from origination and each five years thereafter.

Included in the $576.5 million of loans due after 5 years through fifteen years are $375.6 million of adjustable-rate loans subject to periodic rate adjustments.

Similarly, included in the $1.0 billion of loans that do not mature for more than fifteen years are $714.5 million of adjustable-rate loans subject to periodic rate adjustments.

Generally, the Company’s contractual life of loans matches the loan’s amortization period, which is generally 25 years.

Generally, the Company’s contractual life of loans matches the loan’s amortization period.

For a comprehensive discussion of the Company’s liquidity position, balance sheet repricing characteristics, and sensitivity to interest rates changes, refer to the “Liquidity and Market Risk” section of this discussion and analysis.

1 unchanged sentence

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements.

Unused commitments, excluding mortgage warehouse and overdraft lines, were $256.9 million at December 31, 2024, compared to $203.6 million at December 31, 2023.

Total line utilization, excluding mortgage warehouse and overdraft lines, was 57% at December 31, 2024, and 62% at December 31, 2023.

Including mortgage warehouse utilization, overall utilization was 51% at December 31, 2024, as compared to 53% at December 31, 2023.

Mortgage warehouse utilization increased to 51% at December 31, 2024, as compared to 36% at December 31, 2023.

Due to new customer growth, total mortgage warehouse availability increased to $311.6 million at December 31, 2024, as compared to $204.5 million at December 31, 2023.

The Bank increased the number of mortgage warehouse customers by 60% in 2024.

This has facilitated an increase in outstanding balances in 2024 by $210.4 million, or 181%, to $326.4 million at December 31, 2024.

It is not likely that all of those commitments will ultimately be drawn down.

Unused commitments represented approximately 28% of gross loans outstanding at December 31, 2024, and 23% at December 31, 2023.

Included in used commitments are undrawn letters of credit issued to customers totaling $5.0 million at both December 31, 2024 and 2023.

Off-balance sheet obligations pose potential credit risk to the Company, and a $0.7 million reserve for unfunded commitments is reflected as a liability in our consolidated balance sheet at December 31, 2024, an increase of $0.2 million from the previous year.

A summary of the Company’s unfunded commitments and utilization is presented below:

Unused Loan Commitments

(dollars in thousands)

As of December 31,

Utilization %

Residential real estate

Commercial real estate

Other construction/land

Total real estate

Other commercial

Mortgage warehouse lines

Overdrafts - Commercial and Consumer

Unused commitment as a percent of gross loans

Unused mortgage warehouse commitments as percent of gross loans

(1) Excludes mortgage warehouse lines and overdraft lines.

The unused commitments related to mortgage warehouse are unconditionally cancellable at any time.

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Contractual Obligations

At the end of 2024, the Company had contractual obligations for the following payments, by type and period due:

At December 31, 2025, the Company had contractual obligations for the following payments, by type and period due:

Contractual Obligations

2 unchanged sentences

Subordinated debentures

Long term debt

Long term debt, net

Operating leases

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NPAs totaled $14.8 million, or 0.6% of gross loans plus foreclosed assets at the end of 2025, as compared to $19.7 million, or 0.8% of gross loans plus foreclosed assets at the end of 2024.

NPAs at the end of 2024 consist primarily of an operating line of credit collateralized with receivables from wine grape production and other assets with a balance of $16.3 million at December 31, 2024, and a current balance of $14.1 million, due to principal paydowns made by the customer during the month of January 2025.

NPAs decreased $11.6 million, or 59% in 2023 over 2022.

At December 31, 2025, NPAs were comprised primarily of two agricultural relationships totaling $13.0 million and a single other real estate owned property of $1.6 million.

NPAs increased $11.7 million in 2024 over 2023 due mostly to the same two agricultural relationships.

Nonperforming loans secured by real estate comprised $1.9 million of total nonperforming loans at December 31, 2025, a decrease of $3.2 million, since December 31, 2024.

Nonperforming loans secured by real estate at December 31, 2024, is primarily composed of two real estate loans secured by farmland, with a combined book balance of $5.1 million.

The Company had no foreclosed assets at December 31, 2024 and 2023.

When the Company has foreclosed assets, they are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

Nonperforming loans secured by real estate at December 31, 2025, are

primarily composed of one real estate loan secured by farmland with a book balance of $1.7 million and two smaller residential real estate loans with a combined book balance of $0.2 million.

The balance of foreclosed assets had a carrying value of $1.6 million at December 31, 2025, comprised of one property classified as OREO.

The Company had no foreclosed assets at December 31, 2024.

All foreclosed assets are periodically evaluated and written down to their fair value, less expected disposition costs, if lower than the then-current carrying value.

Allowance for Credit Losses/Allowance for Loan Losses

The allowance for credit losses on loans, a contra-asset, is established through a provision for credit losses on loans.

The allowance for credit losses on loans is at a level that, in Management’s judgment, is adequate to absorb expected credit losses on loans related to individually identified loans as well as expected credit losses in the remaining loan portfolio.

The allowance for credit losses on loans is estimated at a level that, in Management’s judgment, is adequate to absorb expected credit losses on loans both individually and collectively evaluated for reserves.

Specifically identifiable and quantifiable losses are immediately charged off against the allowance;

recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off.

Note 2 to the consolidated financial statements provides a more comprehensive discussion of the accounting guidance we conform to and the methodology we use to determine an appropriate allowance for credit losses on loans.

The Company’s allowance

for credit losses on loans was $24.8 million, or 1.07% of gross loans at December 31, 2024, relative to $23.5 million, or 1.12% of gross loans at December 31, 2023.

The increase in the allowance resulted from an increase in individual loan reserves, primarily as a result of a downgrade in the fourth quarter of 2024 of one agricultural loan relationship.

This increase was partially offset by a 29 basis point decrease in historical loss rates that drive the quantitative reserves.

Note 2 to the consolidated financial statements provides a more comprehensive discussion of the accounting guidance we apply and the methodology we use to determine an appropriate allowance for credit losses on loans.

The Company's allowance for credit losses on loans was $21.5 million at December 31, 2025, as compared to a balance of $24.8 million at December 31, 2024.

The decline in the Company’s allowance in total dollar amount and as a percentage of total loans was primarily the result of the workout of the single, large agricultural loan relationship resulting in $7.5 million in charge-offs during 2025.

At December 31, 2024, the Company’s specific reserves were primarily comprised of a $3.0 million specific reserve on this same loan relationship.

At December 31, 2025, there was an inconsequential specific reserve on this loan relationship.

The allowance was 0.84% of total loans at December 31, 2025, and 1.07% of total loans at December 31, 2024.

The Company experienced higher net charge offs during the year, offset by the release of $1.6 million in specific reserves on three separate other commercial loans in the fourth quarter of 2025.

The following tables highlight the coverage ratios by loan category at December 31, 2025, 2024, and 2023:

As of December 31, 2025

Total Allowance

Percent of Portfolio

Coverage Ratio (1)

Commercial real estate

Other construction/land

Total real estate (2)

Other Commercial

Consumer loans (including overdrafts)

Subtotal (2) (3)

Residential real estate

Mortgage warehouse lines

As of December 31, 2024

Total Allowance

Percent of Portfolio

Coverage Ratio (1)

Commercial real estate

Other construction/land

Total real estate (2)

Other Commercial

Consumer loans (including overdrafts)

Subtotal (2) (3)

Residential real estate

Mortgage warehouse lines

As of December 31, 2023

Total Allowance

Percent of Portfolio

Coverage Ratio (1)

Commercial real estate

Other construction/land

Total real estate (2)

Other Commercial

Consumer loans (including overdrafts)

Subtotal (2) (3)

Residential real estate

Mortgage warehouse lines

(1) Coverage ratio equals allowance for credit losses on loans divided by total loans on the amortized cost basis.

(2) Does not include residential real estate.

(3) Does not include mortgage warehouse lines.

At December 31, 2025, nonaccrual loans totaled $13.2 million compared to $19.7 million at December 31, 2024.

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The ratio of the allowance to nonperforming loans was 162% at December 31, 2025, relative to 126% at December 31, 2024, and 294% at December 31, 2023.

As described above, a separate allowance of $0.7 million for potential losses inherent in unused commitments is included in other liabilities at December 31, 2024.

As described above, a separate allowance of $0.7 million for potential losses on unused commitments is included in other liabilities at both December 31, 2025 and 2024.

The Company recorded a provision for credit losses on loans of $6.1 million in 2025 as compared to $4.6 million in 2024, and $4.1 million in 2023.

Our credit allowance for expected losses on individually identified loans increased $1.4 million, or 73%, during 2024, and increased $1.5 million, or 351%, during 2023.

The allowance for expected losses inherent in the remaining portfolio decreased by $0.1 million, or 0.5%.

Our credit allowance for expected losses on individually evaluated loans decreased $3.3 million, or 97%, during 2025, and increased $1.4 million, or 73%, during 2024.

The allowance for expected losses on collectively evaluated loans increased by an inconsequential amount.

The following table sets forth the Company’s net charge-offs as a percentage to the average loan balances in each loan category, as well as other credit-related ratios at or for the periods indicated:

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The Company’s allowance for credit losses on loans at December 31, 2025, represents Management’s best estimate of expected losses over the remaining contractual life of loans in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance.

Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting, or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting, or regulatory requirements, and/or other factors could require us to augment or reduce the allowance.

The Company’s investments may at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our Federal Reserve Bank of San Francisco (“FRBSF”) account, and overnight fed funds sold.

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2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral;

3) they constitute a large base of assets with maturity and interest rate characteristics that can be changed more readily than the loan portfolio, to better match changes in the deposit base and other funding sources of the Company;

4) they are another interest-earning option for surplus funds when loan demand is light;

and 5) they can provide partially tax exempt income.

Aggregate investments totaled $961.5 million, or 27% of total assets at December 31, 2024, as compared to $1.3 billion, or 36% of total assets at December 31, 2023.

3) they can be used for interest rate risk management as they constitute a large base of assets with maturity and interest rate characteristics that can be changed more readily than the loan portfolio, to better match changes in the deposit base and other funding sources of the Company;

4) they provide a source of investments that provide credit for Community Reinvestment Act purposes and 5) they provide an important source of earnings, some of which is tax exempt.

Aggregate securities totaled $916.1 million, or approximately 24% of total assets, at December 31, 2025, as compared to $961.5 million, or 27%, at December 31, 2024.

Approximately $197 million in investments, with an unrealized loss of $14.5 million, were identified with an intent to sell at December 31, 2023, and were sold in January 2024 as part of the balance sheet restructuring discussed above.

We had no federal funds sold at the end of the reporting periods, and interest-bearing balances held primarily in our FRBSF account totaled $62.3 million at December 31, 2025, as compared to $19.8 million at December 31, 2024.

The average rate on the interest-bearing balances was 5.34% for 2024.

The Company’s investment securities portfolio had a book balance of $961 million at December 31, 2024, and $1.3 billion at December 31, 2023.

The average yield on the interest-bearing and due from bank balances was 4.37% for 2025.

The Company carries “available for sale” investments at their fair market values and “held to maturity” investments at amortized cost.

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The expected effective duration was 2.81 years for available-for-sale investments and 5.57 years for held-to-maturity investments at December 31, 2025, as compared to 1.47 years for available-for-sale investments and 5.98 years for held-to-maturity investments at December 31, 2024.

The Company’s investment portfolio continued to shift away from CLOs, with CLO balances decreasing to $199.3 million at December 31, 2025, from $412.9 million at December 31, 2024, and $570.7 million at December 31, 2023.

compression of credit spreads, resulting from increased investor demand, many issuers called higher yielding CLOs in order to reissue at lower rates.

Due to the spread compression, combined with growth in variable rate mortgage warehouse lending, Management allowed the CLO portfolio to run-off with limited reinvestment.

Mortgage-backed securities increased to $259.8 million (AFS) at December 31, 2025, from $93.5 million at December 31, 2024, due in part to the reinvestment of funding from CLO calls into instruments expected to perform better in a falling rate environment and move the Company closer to asset neutrality.

In early 2024, the Company initiated a strategic securities transaction by selling $196.7 million of bonds.

These securities were identified as an intent to be sold at December 31, 2023.

This transaction realized a $14.5 million loss in the fourth quarter of 2023.

average yield on these bonds was 2.61% and the proceeds were used to paydown short-term borrowings at an average rate of 5.52%.

As, these securities were intended for sale at December 31, 2023, the related $14.5 million loss on sale was realized in the fourth quarter of 2023.

The average yield on these bonds was 2.61% and the proceeds were used to paydown short-term borrowings at an average rate of 5.52%.

In the first quarter of 2024, the Company sold an additional $53.8 million in bonds, at a loss of $2.9 million.

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The fair value of debt securities is expected to recover as payments are received and the debt securities approach maturity.

The following points outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of December 31, 2024, and December 31, 2023 was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.

The following points outline additional support for management’s conclusion that no portion of the unrealized loss of the securities in an unrealized loss position as of December 31, 2025, and December 31, 2024, was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.

Government Agencies are supported by the full faith and creditworthiness of the U.S.

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Federal Government, as the GSEs can draw funds from the U.S.

Federal Government up to a limit, with an implied ability to draw funds beyond the limit.

Federal Government up to a limit, with an

implied ability to draw funds beyond the limit.

Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either December 31, 2025, or December 31, 2024.

● Management routinely monitors third-party credit grades of the municipal issuers in the Company’s state and political subdivisions portfolio and as of both December 31, 2025, and December 31, 2024, noted that all municipal securities in an unrealized loss position were either investment grade rated or guaranteed.

On a quarterly basis management receives financial information from a third-party service in order to monitor the underlying issuer’s financial stability.

In addition, management performs annual reviews of the underlying municipal issuers financial statements in order to evaluate stability and repayment capacity and has noted no

concerns with any of the bonds in the Company’s State and Local portfolio.

As of both December 31, 2024, and December 31, 2023, management concluded that no allowance for credit losses was warranted on any of the Company’s municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.

Periodically, management receives financial information from a third-party service to monitor the underlying issuer’s financial stability.

In addition, management performs an annual review of the Bank’s municipal holdings, which includes consideration of debt levels, financial performance and demographic trends to evaluate the stability and repayment capacity and has noted no concerns with any of the bonds in the Company’s State and Local portfolio.

As of both December 31, 2025, and December 31, 2024, management had established a 100% collectively evaluated allowance for credit losses of $15,000 on municipal bonds designated as HTM.

With the exception of the immaterial allowance for credit losses on HTM designated municipal bonds, that as of both December 31, 2024 and 2025 the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.

● The Company has invested in corporate debt issuances of other financial institutions.

Various financial metrics of each of the issuing financial institutions are reviewed by management quarterly.

These metrics include credit quality, reserve adequacy, profitability, and capital.

These metrics include credit quality, reserve adequacy, profitability, liquidity and capital.

Following review of the financial metrics available for each of the underlying institutions as of December 31, 2025, and December 31, 2024, management concluded that the unrealized loss position of these securities related primarily to the fluctuation in market conditions, including interest rates and other factors, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution affecting the subordinated debt.

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Management monitors the credit rating of these investments on a quarterly basis in addition to various performance metrics available through a third-party informational service.

Following review of financial metrics as of both December 31, 2024, and December 31, 2023 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rate spreads, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

In addition, the Company determined there was a $0.02 million credit loss expected on the held-to-maturity debt securities portfolio at both December 31, 2024, and December 31, 2023, which was recorded as an allowance for credit losses on held-to-maturity securities.

Following review of financial metrics as of both December 31, 2025, and December 31, 2024, management concluded that any unrealized loss on these securities related exclusively to the fluctuation in market conditions, primarily interest rate spreads, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

Investment securities that were pledged as collateral for Federal Home Loan Bank borrowings, repurchase agreements, public deposits and other purposes as required or permitted by law totaled $367.5 million at December 31, 2025, and $403.4 million at December 31, 2024, leaving $548.6 million in unpledged debt securities at December 31, 2025, and $558.1 million in unpledged debt securities at December 31, 2024.

Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $192.3 million at December 31, 2025, and $242.5 million at December 31, 2024.

The table below groups the Company’s investment securities by their remaining time to maturity as of December 31, 2024, and provides weighted average yields for each segment.

The table below groups the Company’s held-to-maturity investment securities by their remaining time to maturity as of December 31, 2025, and provides weighted average yields for each segment.

Maturity and Yield of Held-to-Maturity Investment Portfolio

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While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to, and borrowings from, correspondent banks, including the FRBSF and the Federal Home Loan Bank.

Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits.

Should a large “short” overnight position persist for any length of time, the Company typically raises money by adding brokered deposits.

If a “long” position is prevalent, we will let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity into longer-term, higher-yielding bonds or wait to see if the excess funding will be absorbed by an increase in mortgage warehouse balances.

The Company’s balance of noninterest earning cash and balances due from correspondent banks totaled $71.4 million, or 2% of total assets at December 31, 2025, and $79.6 million, or 2% of total assets at December 31, 2024.

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Leasehold improvements

The net book value of the Company’s premises and equipment was 0.4% of total assets at December 31, 2024, and 0.5% of total assets at December 31, 2023.

Depreciation and amortization included in occupancy and equipment expense totaled $1.9 million in 2024 and $2.2 million in 2023.

Construction in progress

The net book value of the Company’s premises and equipment was 0.4% of total assets at both December 31, 2025 and 2024.

Depreciation and amortization included in occupancy and equipment expense totaled $1.9 million in 2025 and 2024, and $2.2 million in 2023.

In January 2024, the Company sold two Bank owned buildings with a book value of $0.7 million, for a gain of $3.8 million and in December 2023, the Company sold 11 Bank owned branch buildings with a book value of $5.6 million, for a gain on sale of $15.3 million.

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Goodwill totaled $27.4 million at December 31, 2025, unchanged for the year and other intangible assets were $0.1 million, a decrease of $0.6 million, or 92%, as a result of amortization expense recorded on core deposit intangibles.

Company’s goodwill and other intangible assets are evaluated annually for potential impairment following FASB guidelines and based on those analytics Management has determined that no impairment exists as of December 31, 2024.

The net cash surrender value of bank-owned life insurance policies increased to $53.2 million at December 31, 2024, from $51.6 million at December 31, 2023, due to the favorable fluctuation in the underlying values of assets in the separate account BOLI policy.

The Company’s goodwill and other intangible assets are evaluated annually for potential impairment following FASB guidelines and based on those analytics Management has determined that no impairment exists as of December 31, 2025.

The net cash surrender value of bank-owned life insurance policies increased to $69.3 million at December 31, 2025, from $53.2 million at December 31, 2024, due to the favorable fluctuation in the underlying values of assets in the separate account BOLI policy, and the purchase of $15.0 million in new life insurance policies and senior and executive officers.

Refer to the “Noninterest Revenue and Operating Expense” section above for a more detailed discussion of BOLI and the income/expense it generates.

The remainder of other assets consists primarily of right-of-use assets tied to operating leases, accrued interest receivable, deferred taxes, investments in bank stocks, prepaid assets, investments in low-income housing credits, investments in SBA loan funds, and other miscellaneous assets.

The total operating lease right-of-use asset recorded on the books is $34.4 million less accumulated amortization of $6.6 million.

The total operating lease right-of-use asset recorded on the books was $34.7 million less accumulated amortization of $8.2 million as of December 31, 2025.

The bank stocks include Pacific Coast Bankers Bank (PCBB) stock (marked to market value annually) and restricted stock related to the Federal Home Loan Bank of San Francisco (FHLB SF) stock held in conjunction with our FHLB borrowings.

Both the PCBB and FHLB SF stock is not deemed to be marketable or liquid.

Both the PCBB and FHLB SF stock are not deemed to be marketable or liquid.

Our net deferred tax asset is evaluated as of every reporting date pursuant to FASB guidance, and we have determined that no impairment exists.

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Brokered deposits

Deposit balances reflected an increase of $130.4 million, or 5%, in 2024 and a decline of $84.9 million, or 3%, in 2023.

The 2024 increase was mostly from brokered deposits as the Company primarily relies on brokered deposits to incrementally fund mortgage warehouse lending.

The 2023 decline in deposits came primarily from a $175.1 million decrease in transaction accounts, an $80.4 million decrease in savings and money market accounts offset by an increase in

customer time deposit balances of $155.5 million as customers moved their funds to higher interest-bearing type accounts and a $15.0 million increase in wholesale brokered deposits.

In 2024, noninterest bearing demand deposit balances declined $13.6 million, or 1%;

while interest-bearing NOW and demand accounts increased by $53.8 million, or 10% , as customers again sought a higher rate on a portion of their deposits.

Overall non-maturity deposits increased by $12.0 million, or 1%, to $2.1 billion at December 31, 2024.

Deposits totaled $2.9 billion at December 31, 2025, decreasing $15.2 million, or 0.5%, from December 31, 2024.

The decline in 2025 was driven primarily by a $71.4 million decrease in customer time deposits, reflecting the Company’s strategic focus on lowering higher-cost time deposit balances, partially offset by a $45.1 million increase in brokered deposits and modest changes in customer transaction accounts.

Deposit balances reflected an increase of $130.4 million, or 5%, in 2024, mostly from brokered deposits as the Company primarily relies on brokered deposits to incrementally fund mortgage warehouse lending.

In 2025, noninterest bearing demand deposit balances declined $11.6 million, or 1%, and overall non-maturity deposits increased by $11.1 million, or 1%, to $2.1 billion at December 31, 2025.

Management is of the opinion that a relatively high level of core customer deposits is one of the Company’s key strengths, and we continue to strive for core deposit retention and growth, with a focus on small business and consumer deposits.

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Estimated uninsured deposits

Included in the above, the estimated aggregate amount of time deposits in excess of the FDIC insurance limit is $148.3 million.

Included in the above, the estimated aggregate amount of time deposits in excess of the FDIC insurance limit at December 31, 2025 was $124.2 million.

The following table presents the maturity distribution of the estimated uninsured time deposits:

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Estimated uninsured time deposits

See Liquidity and Market Risk Management below in this 10-K for a discussion on liquidity management the Company maintains to meet liquidity needs under unusual conditions such as uncommon deposit outflows of uninsured deposits.

See Liquidity and Market Risk Management below in this 10-K for a discussion on sources of liquidity the Company maintains to meet liquidity needs under unusual conditions such as uncommon deposit outflows of uninsured deposits.

Other Borrowings

The Company’s non-deposit other borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the FRB, and securities sold under agreements to repurchase.

The Company’s other borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the FRB, and securities sold under agreements to repurchase.

In addition, the Company has long-term debt and junior subordinated debentures.

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The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

Other borrowings decreased $280.5 million, or 78%, in 2024, due primarily to decreases in higher-cost short-term borrowings as a result of the overall balance sheet restructuring in early 2024.

Other borrowings increased $222.7 million in 2025, due primarily to an increase in short-term borrowings, reflecting increased use of federal funds purchased to support loan growth.

At December 31, 2025, federal funds purchased totaled $210.0 million, while short-term FHLB advances were $12.7 million.

In early 2024, the Company sold approximately $233.2 million in bonds and used the proceeds to pay down overnight and short-term advances.

At December 31, 2024, the Company had no overnight fed funds purchased, or short-term FHLB advances, compared to $130.0 million in overnight fed funds purchased and $150.5 million in short-term FHLB advances, respectively, at December 31, 2023.

At December 31, 2024, the Company had no overnight fed funds purchased or short-term FHLB advances.

Long-term FHLB borrowings were $80 million at both December 31, 2025, and December 31, 2024.

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Repurchase agreements represent “sweep accounts,” where commercial deposit balances above a specified threshold are transferred at the close of each business day into non-deposit accounts secured by investment securities.

The Company had junior subordinated debentures totaling $35.8 million at December 31, 2024, and $35.7 million December 31, 2023, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

small increase resulted from the amortization of discount on junior subordinated debentures that were part of our acquisition of Coast Bancorp in 2016.

The Company had junior subordinated debentures totaling $36.0 million at December 31, 2025, and $35.8 million at December 31, 2024, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

The small increase resulted from the amortization of discount on junior subordinated debentures that were part of our acquisition of Coast Bancorp in 2016.

Long term subordinated debt was $49.5 million at December 31, 2025, as compared to $49.4 million for the year ended December 31, 2024.

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Other liabilities are principally comprised of accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts.

The Company’s balance of other liabilities increased by $13.1 million, or 17%, during 2024.

The primary reason for this increase was due to committed funds to a new Low Income Housing Tax Credit (LIHTC) Fund.

Additionally, there was an increase in operating lease liabilities stemming from the sale leaseback transaction of two Bank-owned buildings discussed in “ Premises and Equipment .”

The Company’s balance of other liabilities decreased by $22.3 million, or 25%, during 2025.

The primary reason for this decrease was due to a decrease in accrued interest payable and principal contributions on various Low Income Housing Tax Credit (LIHTC) funds.

Capital Resources

The Company had total shareholders’ equity of $364.9 million at December 31, 2025, as compared to $357.3 million at December 31, 2024.

The increase of $19.2 million, or 6%, is due to $40.6 million in net income and a $4.7 million favorable swing in accumulated other comprehensive income (loss) partially offset by $13.6 million in dividends paid, and $15.0 million in share repurchases.

The increase in 2025 of $7.6 million, or 2%, is due to $42.3 million in net income and an $8.1 million favorable swing in accumulated other comprehensive income (loss) partially offset by $13.7 million in dividends paid, and $30.8 million in share repurchases totaling 1,024,792 shares during 2025.

The remaining difference was related to stock options exercised and restricted stock activity during the year.

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Bank of the Sierra

At the end of 2024, as our Community Bank Leverage Ratio exceeded 9.0%, the Company and the Bank were both classified as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991, and our regulatory capital ratios remained above the median for peer financial institutions.

At December 31, 2025, as our Community Bank Leverage Ratio exceeded 9.0%, the Company and the Bank were both classified as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991, and our regulatory capital ratios remained above the median for peer financial institutions.

We do not foresee any circumstances that would cause the Company or the Bank to be less than “well capitalized,” although no assurance can be given that this will not occur.

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While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored, and we are committed to maintaining adequate liquidity resources to draw upon should unexpected needs arise.

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments.

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases, or borrowing repayments.

To meet short-term needs, we can borrow overnight funds from other financial institutions, draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources.

Availability on lines of credit from correspondent banks and the FHLB totaled $1.1 billion at December 31, 2024.

Availability on lines of credit from correspondent banks and the FHLB totaled $905.3 million at December 31, 2025.

The Company was also eligible to borrow approximately $254.9 million at the Federal Reserve Discount Window based on pledged assets at December 31, 2025.

Furthermore, funds can be obtained by drawing down excess cash that might be available in the Company’s correspondent bank deposit accounts, or by liquidating unpledged

investments or other readily saleable assets.

Furthermore, funds can be obtained by drawing down excess cash that might be available in the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets.

In addition, the Company can raise immediate cash for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral.

As of December 31, 2024, unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $794.3 million of the Company’s investment balances, as compared to $1.2 billion at December 31, 2023.

of December 31, 2025, unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $743.7 million of the Company’s investment balances, as compared to $794.6 million at December 31, 2024.

Other sources of potential liquidity include but are not necessarily limited to any outstanding fed funds sold and vault cash.

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Management is of the opinion that available investments and other potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.

The company’s use of wholesale funding is largely due to its mortgage warehouse lending.

In order to match the relatively short-term nature of underlying mortgage warehouse loans, the Company uses short-term wholesale funding including brokered deposits, federal funds purchased, and overnight borrowings.

As mortgage warehouse lending can have seasonal or cyclical volatility, utilizing wholesale funding with durations that closely match those of the underlying mortgage warehouse loans enables management to limit interest rate risk of variable rate mortgage warehouse lending.

At December 31, 2025, and December 31, 2024, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

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Funds available through fed discount window

The decrease in the availability of unsecure lines of credit in the table above is due to the utilization of those lines as of December 31, 2025, compared to no utilization as of December 31, 2024.

The Company’s primary liquidity ratio and net loans to deposits ratio was 19% and 89%, respectively, at December 31, 2025, as compared to internal policy guidelines of “greater than 15%” and “less than 90%.” Other liquidity ratios reviewed periodically by Management and the Board include the Community Bank leverage ratio, net change in overnight position and wholesale funding to total assets (including ratios and sub-limits for the various components comprising wholesale funding).

All ratios were within policy guidelines at December 31, 2024.

Management closely watches all Company liquidity metrics and will take appropriate action if deemed necessary.

All ratios, with the exception of the non-core funding dependence ratio, were within policy guidelines at December 31, 2025.

The non-core funding dependence ratio slightly exceeded the policy guideline at December 31, 2025, due to the large increase in mortgage warehouse utilization at the end of the year.

This ratio is carefully monitored given that the Company utilized wholesale funding to fund mortgage warehouse lines as described further above.

Management closely monitors all Company liquidity metrics and will take appropriate action if deemed necessary.

The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, debt servicing, shareholder dividends, and stock repurchases.

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Market risk arises from changes in interest rates, exchange rates, commodity prices, and equity prices.

The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates.

The Company does not engage in the trading of financial instruments, nor does it have exposure to foreign currency exchange rates.

Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates.

The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.

The principal objective of interest rate risk

management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward balance for earnings and capital under a variety of interest rate scenarios.

To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform monthly earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios.

The model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes.

Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments.

projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).

Various rate scenarios consisting of key rate and yield curve projections are then applied to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments.

The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models), or stable (unchanged from current actual levels).

In addition to a stable rate scenario, which presumes that there are no changes in interest rates, we typically use at least eight other interest rate scenarios in conducting our rolling 12-month net interest income simulations:

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$ Change in Net Interest Income

The instantaneous rate shock simulation for the period ending December 31, 2024, indicates that the Company is asset sensitive, with net interest income increasing in rising rate scenarios and declining in decreasing rate scenarios, with a continued drop in interest rates having the most substantial negative impact.

The interest rate sensitivity results indicate the Company remained generally asset sensitive to a parallel rate shock as of December 31, 2025;

however, the balance sheet’s sensitivity to rising rates was substantially reduced compared to December 31, 2024, and was near neutral across moderate upward rate shocks.

The reduced sensitivity to parallel rate shock compared to December 31, 2024, was driven primarily by changes in funding composition and deposit pricing dynamics.

In particular, the increased use of short-term wholesale funding, including federal funds purchased, resulted in a larger portion of liabilities repricing immediately with market rate changes.

In addition, the Company’s strategic actions to reposition its deposit mix and reduce time deposit balances shifted a greater portion of the interest-bearing deposit base toward products with higher sensitivity to market rates.

Collectively, these factors caused liability costs to reprice more quickly than earning asset yields over the simulation horizon, reducing the Company’s net interest income benefit in rising-rate scenarios and contributing to reduced net interest income pressure in declining-rate scenarios.

In addition, adding to our asset sensitivity, utilization on variable rate mortgage warehouse lines increased $191.9 million during 2025 and the Company had approximately $247.6 million of unfunded mortgage warehouse lines at December 31, 2025.

If rates decrease, it would be expected that a significant portion of the unfunded mortgage warehouse lines would become funded and thereby mitigate the impact of lower rates on the balance sheet through higher utilization.

continued drop in interest rates having the most substantial negative impact.

The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at December 31, 2024, as compared to December 31, 2023, is due mostly to the decrease in the level of overnight borrowings both in Fed Funds purchased and overnight FHLB borrowings, which had an average rate of 5.52%.

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The instantaneous rate shock simulation for the period ending December 31, 2023, indicates that the Company was asset sensitive, with net interest income increasing in rising rate scenarios and declining in decreasing rate scenarios, with a continued drop in interest rates having the most substantial negative impact.

The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at December 31, 2023, as compared to December 31, 2022, is due mostly to the decrease in the level of overnight borrowings both in Fed Funds purchased and overnight FHLB borrowings.

In addition, adding to our asset sensitivity, variable rate investment securities in the form of CLOs increased $72.3 million along with a change in the mix of fixed rate versus variable rate loans in 2023 as compared to 2022.

At December 31, 2023, the Company had $155.0 million in overnight borrowings as compared to $219.0 million in overnight borrowings at December 31, 2022.

The securities strategy enabled most of the overnight borrowings to be paid off in early January 2024, as mentioned earlier.

The Company has approximately $204.5 million of unfunded mortgage warehouse lines at December 31, 2023.

most recent economic cycle, and unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas).

In addition to the instantaneous simulations shown above, we run stress scenarios for the unconsolidated Bank modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the Bank in the most recent economic cycle, and unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas).

These stress tests are run primarily to determine what factors create the most risk to net interest income.

When no balance sheet growth is incorporated and a stable interest rate environment is assumed, projected annual net interest income is about $3.8 million lower, or 2.7% than in our standard simulation.

However, the stressed simulations reveal that the Company’s greatest potential pressure on net interest income would result from the declining rate scenarios, in which our net interest income could reduce by 11% in the event of a 300 basis point downward shock.

However, the stressed simulations reveal that the Company’s greatest potential pressure on net interest income would result from a deposit migration where noninterest bearing deposits decline by 15% and interest-bearing deposits decline by 10% over a six-month period.

In such a scenario, our net income would decline $7.1 million, or 5.3%.

In addition to the stress tests, management also models scenario testing where rates are shocked gradually (i.e., a rate ramp) as well as three scenarios with the short-term and long-term rate curves moving in a non-parallel manner.

These non-parallel scenarios include a bear flattener forecast with overnight rates moving up faster than the 10-Year Treasury, a bull flattener where the overnight rates stay the same and long-term rates fall, and a generally accepted economic forecast where overnight and 10-year rates change based on current economic forecasts.

The rate ramp shows the Company as being less asset sensitive with less than a 1% increase in net interest income in a rising rate environment and less than half of the decline in a falling rate scenario.

For the non-parallel scenarios, net interest income remains at or above the base case scenario of no rate changes.

These non-parallel scenarios include a bear flattener forecast with overnight rates moving up faster than the 10-Year Treasury, a bull steepener where the overnight rates fall and long-term rates stay relatively level, and a generally accepted economic forecast where overnight and 10-year rates change based on current economic forecasts.

The rate ramp shows the Company as being less asset sensitive with a 0.3% decline in an up 100 bp rate environment and about a 1.3% decline in a falling rate environment.

For the non-parallel scenarios, net interest income remains close to but below the base case scenario which assumes no rate changes.

In other words, based on current economic forecasts, there would not be a significant change in net interest income as compared to our base case scenario.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis