What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-02 compared with 2024-11-07 · 224 added, 309 removed, 399 unchanged (57% of the section changed)

14 unchanged sentences

● risks associated with inflation (including efforts by the FOMC of the FRB to control the same);

● the risk of unfavorable economic conditions in the Company’s market areas, or the impact on the Company’s market areas of national or international economic conditions;

● the risk of unfavorable economic conditions in the Company’s market areas, or the impact on the Company’s market areas of national or international economic conditions or changes to economic policies, including tariffs;

● liquidity risks, including the ability to effectively manage the potential loss of deposits, the ability to maintain funding lines of credit, and the loss of value of unencumbered investment securities;

● increases in nonperforming assets and credit losses that could occur, particularly in times of weak economic conditions or rising interest rates;

● the impact of adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks;

● the impact of adverse developments at other banks, including bank failures, which impact general sentiment regarding the stability and liquidity of banks;

● risks associated with the multitude of or changes to current and prospective banking laws and regulations, and related interpretations, to which the Company is and will be subject;

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The Company does not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.

CRITICAL ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States.

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● the establishment of the allowance for credit losses, as explained in detail in Note 10 to the consolidated financial statements and in the “Provision for Credit Losses” and “Allowance for Credit Losses” sections of this discussion and analysis;

● the valuation of individually evaluated loans and foreclosed assets, as discussed in Notes 8 and 10 to the consolidated financial statements;

● income taxes and related deferred tax assets and liabilities, regarding the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this discussion and analysis;

● goodwill and other intangible assets, which are evaluated annually for impairment and for which the Company has determined that no impairment exists, as discussed in the “Other Assets” section of this discussion and analysis.

● the valuation of individually evaluated loans, as discussed in Notes 8 and 10 to the consolidated financial statements;

Critical accounting areas are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate its most recent expectations regarding those areas.

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RESULTS OF OPERATIONS SUMMARY

Third Quarter 2024 Compared to Third Quarter 2023

Third quarter 2024 net income was $10.6 million, and $0.74 per diluted share in the third quarter of 2024 as compared to $0.68 per diluted share in the third quarter of 2023.

The Company’s annualized return on average equity was 11.95% and annualized return on average assets was 1.14% for the quarter ended September 30, 2024, compared to 12.62% and 1.04%,

respectively, for the same quarter in 2023.

The primary drivers behind the increase in third quarter net income are as follows:

● Net income increased 7%, or $0.7 million, to $10.6 million due to higher net interest income, partially offset by an increase in the provision for credit losses.

● The $2.7 million increase in net interest income was driven by a 36 basis point increase in net interest margin.

This is primarily a result of a balance sheet restructuring, including a bond sale, in the first quarter of 2024, along with higher loan yields.

Noninterest income was mostly flat for the quarter, with increases in service charge income offset by decreases in other noninterest income, primarily from life insurance proceeds received in 2023 that did not reoccur in 2024.

● Noninterest expense was $0.2 million higher in the third quarter over the same quarter last year.

While salary and benefit costs decreased due to a strategic internal reorganization in the fourth quarter of 2023, this was offset by an increase in occupancy costs, due to the sale leaseback of certain branches in the fourth quarter of 2023.

First Nine Months of 2024 Compared to First Nine Months of 2023

● Net income increased $1.6 million, or 6%.

This was primarily driven by an increase of $5.1 million or 6% in net interest income, due mostly to an overall increase in interest rates on earning assets.

While the Company experienced higher yields and balances on loans, this was complemented by a decrease in borrowed funds and a decrease in the rate paid on the remaining balance of borrowed funds.

Partially offsetting these positive variances was an increase in the provision for credit losses, and an increase in occupancy expenses from the sale/leaseback of branch buildings in late 2023.

● The provision for credit losses was $2.4 million, an increase of $2.2 million, primarily due to an increase in net charge-offs in the second quarter of 2024, due to a foreclosure of a single property.

● Noninterest income increased by $1.7 million, or 7%.

Service charges on deposit accounts were $1.0 million higher, due mostly to higher interchange income, an increase in analysis fees, and other transaction-based fees, combined with a net $0.6 million gain, from the balance sheet restructuring earlier in the year.

● Noninterest expense increased $1.5 million, or 2%, due mostly to increases in rent expense from the sale/ leaseback of branch buildings at the end of 2023.

First Quarter 2025 Compared to First Quarter 2024

First quarter 2025 net income was $9.1 million, and $0.65 per diluted share as compared to $9.3 million, and $0.64 per diluted share in the first quarter of 2024.

The Company’s annualized return on average equity was 10.44% and annualized return on average assets was 1.02% for the quarter ended March 31, 2025, compared to 11.09% and 1.06%, respectively, for the same quarter in 2024.

The primary drivers behind the variance in first quarter net income are as follows:

● Net income for the first quarter of 2025 decreased $0.2 million, or 2%, to $9.1 million.

There was a favorable increase in net interest income for $1.4 million and a $2.1 million reduction in noninterest expense, which were offset by an increase in the provision for credit losses of $1.9 million as well as reduction of noninterest income of $1.9 million.

● The $1.4 million increase in net interest income for the quarter was driven by a 12 basis point increase in the net interest margin due to lower cost of deposits and borrowings and an increase in yield on loans, partially offset by lower yields on investments.

● Noninterest income for the first quarter of 2025 as compared to the same period in 2024 decreased $1.9 million or 23%.

In the first quarter of 2024 we had a loss on the sale of bonds from a balance sheet restructure for $3.0 million offset by a gain on the sale/leaseback of two bank owned branch buildings for $3.8 million, with no like transaction in the first quarter of 2025.

We experienced an unfavorable variance of $1.5 million in bank owned life insurance (BOLI), but had increases in other noninterest income, primarily life insurance proceeds, and dividends for $0.5 million.

● Noninterest expense decreased $2.1 million, or 9%, compared to the first quarter of 2024.

The primary driver of lower expense in the first quarter of 2025 as compared to the same period in 2024 is deferred directors’ fees as part of the Company’s deferred compensation plan.

The lower deferred compensation expense was offset by lower bank-owned life insurance income, mostly due to fluctuations in underlying values of assets in the separate account BOLI policies that are designed to have similar assets to those in the deferred compensation plans.

FINANCIAL CONDITION SUMMARY

September 30, 2024 Relative to December 31, 2023

The Company’s assets totaled $3.7 billion at September 30, 2024, a decrease of $33.6 million, or 1.0% from December 31, 2023.

The following provides a summary of key balance sheet changes during the first nine months of 2024:

● Investment securities decreased $324.0million, or 24.0%, to $1.0 billion primarily due to the sale of bonds from the strategic securities transaction and balance sheet restructuring.

● Gross loans increased $230.6 million, due to a $219.8 million increase in mortgage warehouse line utilization, a $10.6 million increase in commercial real estate loans, a $13.3 million increase in farmland loans, and a $12.0 million increase in commercial loans.

This favorable growth was partially offset by a $23.9 million decrease in residential real estate loans, due to payoffs and paydowns, and smaller declines in construction and consumer loans.

● Deposits totaled $3.0 billion at September 30, 2024, representing a year-to-date increase of $200.9 million, or 7%.

The growth in deposits came mostly from a $175.0 million increase in brokered deposits to fund mortgage

warehouse lines, and a $40.6 million increase in transaction accounts offset by smaller declines in customer non-transaction accounts.

● Other interest-bearing liabilities decreased $262.1 million, from a decrease in overnight borrowings facilitated by the strategic balance sheet restructuring in the first quarter of 2024, and a decrease in FHLB advances, as the Company utilized brokered deposits not only to fund mortgage lines, but to pay down more costly FHLB lines of credit.

Total capital of $358.7 million at September 30, 2024, reflects an increase of $20.6 million, or 6%, compared to December 31, 2023.

The increase in capital was due to the addition of $30.2 million in net income, a $7.4 million favorable swing in accumulated other comprehensive income/loss, due principally to changes in investment securities’ fair value, offset by $8.3 million in share repurchases, and $10.2 million in dividends paid.

The remaining difference is related to the impact of equity compensation recognized during the first nine months of 2024.

March 31, 2025 Relative to December 31, 2024

The Company’s assets totaled $3.6 billion at March 31, 2025, a decrease of $8.1 million, or 0.2% from December 31, 2024.

The following provides a summary of key balance sheet changes during the first three months of 2025:

● Investment securities decreased $39.1 million, or 4.0%, to $922.4 million primarily due to paydowns in the portfolio, which were partially used to offset brokered deposit maturities.

● Gross loans decreased $24.6 million, due to a $43.2 million decrease in mortgage warehouse line utilization, due to seasonality and two large line paydowns shortly before quarter-end, partially offset by a favorable increase in organic loan growth of $18.6 million, mostly commercial real estate.

During the final week of the quarter, two mortgage warehouse customers paid down their lines by $41.3 million as part of normal operations.

● Deposits decreased by $41.8 million, or 1%.

The decline in deposits came from an $85.0 million, planned decrease in brokered deposits, while overall customer deposits increased $43.2 million.

● Other interest-bearing liabilities increased $9.9 million, from an increase in repurchase agreements.

Total capital of $351.8 million at March 31, 2025, reflects a decrease of $5.5 million, or 2%, compared to December 31, 2024.

The decrease in equity during the first quarter of 2025 is due to net income of $9.1 million, offset by a $3.5 million dividend paid to shareholders, $14.2 million in share repurchases, and a $2.4 million favorable swing in other comprehensive income due principally to positive changes in investment securities’ fair value.

The remaining difference is related to equity compensation recognized during the quarter.

EARNINGS PERFORMANCE

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NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income was $30.8 million, for the third quarter of 2024, a $2.7 million increase, or 10% over the third quarter of 2023.

This increase in interest income for the quarterly comparison was due primarily to an increase in interest income on loans of $5.1 million, augmented by a $0.3 million decrease in interest expense due to the reduction in borrowed funds facilitated by a balance sheet restructuring, partially offset by a related decline in interest income on investments of $2.7 million due to the sale of low yielding investments.

For the third quarter of 2024, although the balance of average interest-earning assets was $74.0 million lower due mostly to lower investment securities, the yield was 37 basis points higher as compared to the same period in 2023.

There was a 4 basis point increase in the cost of the Company’s interest-bearing liabilities for the same period, which partially offset some of the higher yields on the asset side.

Net interest income for the comparative year-to-date periods increased $5.1 million, or 6%, due to a strategic change in mix of average interest-earning assets in the fourth quarter of 2023 and the first quarter of 2024.

Although the Company realized a $6.7 million increase in income on interest-earning assets due to an increase in interest rates, this change was moderated by a$3.3 million increase in interest expense for rates paid on interest bearing liabilities.

There was a $136.1 million, or 7%, increase in average loan and lease balances yielding 45 basis points higher for the same period, while average investment balances decreased $238.5 million, yielding 52 basis points higher for the same period.

Average interest-bearing liabilities decreased $82.2 million, mostly in borrowed funds.

The cost of interest-bearing liabilities was 28 basis points higher for the comparative periods.

The favorable net impact of the mix and rate change was a 27 basis point increase in the Company’s net interest margin for the nine-months ending September 30, 2024, as compared to the same period in 2023.

Interest expense was $14.0 million for the third quarter of 2024, a decrease of $0.3 million, relative to the third quarter of 2023.

For the first nine months of 2024, compared to the same period in 2023, interest expense increased $3.4 million to $39.6 million.

The increase in interest expense was attributable to an increase in higher cost brokered deposits to fund mortgage warehouse lines, along with a net overall interest rate increases in customer deposit account balances.

Compounding the effect of interest rate increases, there was a shift in the mix of average deposits with increase in higher yielding money market and time deposit account types.

These increases were partially offset by decreases in other borrowed funds.

For the first nine months of 2024 compared to the same period in 2023, the average balance of higher cost customer time deposits, interest bearing demand and money market deposits increased $51.4 million, while wholesale brokered deposits increased $112.5 million.

Borrowed funds decreased $126.1 million, and lower cost or no cost deposits decreased $194.0 million.

The Company had $1.3 billion in adjustable and variable rate loans and $539.1million in floating rate bonds, as compared to $269.4 million in floating rate CDs and $35.8 million in floating rate trust preferred securities at September 30, 2024.

Net interest income was $30.1 million for the first quarter of 2025, a decrease of $0.2 million, or 1%, as compared to the fourth quarter of 2024, and an increase of $1.4 million, or 5%, as compared to the first quarter of 2024.

Although interest

expense improved by $1.4 million due to a 14 basis points favorable cost of funds, interest income declined by $1.6 million, due to a decline in both volume and interest rates on investments and a slight decline in loan interest income, mostly from the decrease in line utilization of mortgage warehouse lines discussed in the “Balance Sheet Analysis – Earning Assets – Loan Portfolio” section below.

The $1.4 million increase in interest income for the first quarter of 2025, as compared to the same quarter in 2024, is due primarily to a $232.2 million increase in average loan balances, as well as a 37 basis point increase in yield.

This was complemented by a $0.9 million decrease in interest expense due to the movement of deposits from higher cost time deposits, including wholesale brokered deposits to lower or no cost transaction accounts.

Interest bearing deposit costs decreased 9 basis points in the first quarter of 2025 as compared to the same quarter in 2024, along with a 47 basis points decrease in the cost of borrowed funds.

Additionally average borrowed funds were $35.0 million lower in the first quarter of 2025 as compared to the same quarter in 2024.

Interest expense was $11.3 million for the first quarter of 2025, a decrease of $0.9 million, relative to the first quarter of 2024.

The favorable change in the quarterly comparison was primarily due to a decrease in rates paid on customer variable rate Certificates of Deposit.

The positive interest rate variance on Certificates of Deposit were complemented by a decrease in volume and rate on borrowed funds.

Borrowed funds decreased $35.0 million, and lower cost or no cost deposits increased $62.4 million.

The Company had $1.3 billion in adjustable and variable rate loans and $339.9 million in floating rate bonds, as compared to $251.5 million in floating rate CDs and $35.9 million in floating rate trust preferred securities at March 31, 2025.

The adjustable-rate loans have repricing frequencies ranging from 30-days to 10-years.

Of the $1.3 billion in adjustable and variable rate loans, $696.1 million of such adjustable and variable rate loans reprice or mature in the next twelve months.

Based on current rates, of the $719.2 million in adjustable and variable rate loans that reprice or mature over the next twelve months, $153.1 million, or 21%, are expected to reprice higher, while $157.1 million, or 22%, are expected to reprice lower.

The remaining balance of $409.0 million is neutral to any repricing adjustment due to maturity or other factors.

The Company’s net interest margin was 3.66% for the third quarter of 2024, and 3.30% for the third quarter of 2023, an increase of 36 basis points, and 3.66% for the first nine months of 2024, as compared to 3.39% for the first nine months of 2023, an increase of 27 basis points.

While the yield on interest-earning assets increased 37 basis points for the third quarter of 2024, the cost of interest-bearing liabilities increased four basis points for the same period of comparison.

The average balance of interest-earning assets decreased $74.0 million, while the decrease in interest-bearing liabilities was $79.1 million for the same period.

The decrease in higher cost borrowed funds over the increase in yield on interest-earning assets improved the net interest margin in the third quarter of 2024 over the same period in 2023.

For the year-to-date comparison the increase in net interest margin of 27 basis points comes from an increase in yield on interest-earning assets of 45 basis points partially offset by an increase in interest rates paid on interest-bearing liabilities of 28 basis points.

The average balance of interest-earning assets decreased $102.4 million, while the decrease in interest-bearing liabilities was $82.2 million for the same period.

The increase in yield on interest earning assets is over a much larger volume base than of interest-bearing liabilities reflecting the positive change in the net interest margin for the first nine months of 2024.

In addition, there are $618.3 million of fixed-term deposits that reprice or mature within twelve months.

Based on current rates, of the $696.1 million in adjustable and variable rate loans that reprice or mature over the next twelve months, $303.5 million, or 44%, have a current pricing index rate that is higher than the current index, while $24.8 million, or 4%, have lower pricing index rates as compared to the current index.

The remaining balance of $367.8 million are priced at the current index rate or are expected to mature.

The Company’s net interest margin was 3.74% for the first quarter of 2025, as compared to 3.62% for the quarter ending March 31, 2024.

While the change in yield on interest earning assets was negligible, there was a 16 basis point positive variance on interest bearing liabilities.

The level of net interest income recognized 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.

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For the three months ended

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Rate/Yield (2)

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Borrowed funds:

Federal funds purchased

Repurchase agreements

Other borrowings

Short term borrowings

Long term FHLB advances

Long-term debt

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Loan fees have been included in the calculation of interest income.

Net loan (costs) fees and loan acquisition FMV amortization were $(0.4) million and $(0.3) million for the quarters ended September 30, 2024 and 2023, respectively.

(4) Nonaccrual loans have been included in total loans for purposes of computing total earning assets.

(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.

Average Balances and Rates

(Dollars in Thousands, Unaudited)

For the nine months ended

September 30, 2024

September 30, 2023

Rate/Yield (2)

Interest-earning due from banks

Total investments

Mortgage warehouse lines

Total interest-earning assets (4)

Other earning assets

Non-earning assets

Liabilities and shareholders' equity

Interest-bearing deposits:

Demand deposits

Savings accounts

Time Deposits

Brokered deposits

Total interest-bearing deposits

Borrowed funds:

Repurchase agreements

Other borrowings

Long-term debt

Subordinated debentures

Total borrowed funds

Total interest-bearing liabilities

Demand deposits - noninterest-bearing

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Interest income/interest-earning assets

Interest expense/interest-earning assets

Net interest income and margin (5)

(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(2) Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective federal tax rate.

(3) Loans are gross of the allowance for possible loan losses.

Loan fees have been included in the calculation of interest income.

Net loan fees and loan acquisition FMV amortization were $(1.1) million and $(0.7) million for the nine months ended September 30, 2024 and 2023, respectively.

Net loan (costs) fees and loan acquisition FMV amortization were $(0.3) million and $(0.3) million for the quarters ended March 31, 2025 and 2024, respectively.

(4) Nonaccrual loans have been included in total loans for purposes of computing total earning assets.

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(dollars in thousands, unaudited)

Three months ended September 30,

Nine months ended September 30,

2024 over 2023

Three months ended March 31,

2025 over 2024

Increase (decrease) due to

Federal funds sold/due from time

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Borrowed funds:

Federal funds purchased

Repurchase agreements

Other Borrowings

Short term borrowings

Long-term FHLB Advances

Long term debt

Subordinated debt

Subordinated debentures

Total borrowed funds (1)

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(1) Subtotals are a sum of the categories above and are not recalculated on the portfolio totals.

The volume variance calculated for the third quarter of 2024 relative to the third quarter of 2023 was a favorable $3.1 million;

The volume variance calculated for the first quarter of 2025 relative to the first quarter of 2024 was a favorable $2.6 million;

this is primarily from a favorable loan volume variance of $4.4 million augmented by a favorable reduction in other borrowed funds.

There was a favorable rate variance of $1.1 million from the comparative quarter since the weighted average yield on interest-earning assets more than offset the increase in the average yield unfavorable variance on interest-bearing liabilities.

There was an unfavorable mix variance of $1.5 million primarily from the sale of bonds with lower yields that has yet to be deployed into higher yielding assets combined with higher interest rates paid on customer time

and brokered deposits.

The Company’s net interest margin for the third quarter of 2024 was 3.66%, as compared to 3.30% for the third quarter of 2023.

The volume variance calculated for the first nine months of 2024 relative to the first nine months of 2023 reflects a favorable variance of $3.9 million, a favorable rate variance of $3.3 million, and an unfavorable mix variance of $2.1 million.

There were increases in loan balances for a favorable volume variance of $9.4 million which was mostly offset by a $7.3 million decrease in investments, due to the balance sheet restructure in 2023.

There was a $6.0 million decrease in borrowed funds, partially offset by a $4.2 million increase in interest-bearing deposits.

There was a positive rate variance on interest earning assets of $6.7 million for the first nine months of 2024 partially offset by a $3.3 million rate increase in interest earning liabilities.

The Company’s net interest margin for the first nine months of 2024 was 3.66%, as compared to 3.39% in the first nine months of 2023.

At September 30, 2024, approximately 17% of the Company’s total portfolio, or $403.8 million, consists of variable rate loans.

At September 30, 2024, outstanding fixed rate loans represented 31% of the loan portfolio.

The remaining 52% of the loan portfolio at September 30, 2024, consists of adjustable-rate loans;

59% of these loans (approximately $713.7 million) will not have the ability to reprice for at least another 3 years.

Adjustable-rate loans have maturities up to 25 years and are generally adjustable every five years after the initial adjustment, which can vary from 5 to 10 years to initial adjustment.

Approximately $162.6 million of these adjustable-rate loans have the ability to reprice in 2024, which is expected to have a positive impact on earnings as most of these adjustable-rate loans were made when rates were lower.

Average interest earning cash balances for the quarter and year-to-date comparisons have increased and have a positive impact on the net interest margin since cash balances have been earning approximately 5.5%.

Average cash and due from banks was $88.5 million, an increase of $64.7 million for the third quarter of 2024 as compared to the same period last year, and was $28.3 million higher for the first nine months of 2024 as compared to the same period in 2023.

Overall average investment securities decreased by $321.7 million for the third quarter of 2024, as compared to the same period in 2023, and decreased by $266.8 million for the first nine months of 2024, from the sale of lower yielding bonds from a strategic securities transaction, the proceeds of which were used to paydown higher cost borrowings.

The overall investment portfolio had a tax-equivalent yield of 5.27% at September 30, 2024, with an average life of 4.44 years and average effective duration of 1.0 years for available-for-sale securities.

There was an unfavorable rate variance of $0.3 million from the comparative quarter primarily driven from an unfavorable rate variance on investment securities, partially offset by favorable rate variances in loans and interest bearing liabilities.

There was an unfavorable mix variance of $1.0 million primarily from an increase in mortgage

warehouse originations at lower interest rates.

The Company’s net interest margin for the first quarter of 2025 was 3.74%, as compared to 3.62% for the first quarter of 2024.

Average interest earning cash balances for the quarterly comparisons have increased and have a positive impact on the net interest margin since cash balances have been earning approximately 4.4%.

Average cash and due from banks was $54.6 million, an increase of $37.6 million for the first quarter of 2025 as compared to the same period last year.

Overall average investment securities decreased by $205.4 million for the first quarter of 2025, as compared to the same period in 2024, as paydowns and maturities, exceeded purchases, with the excess used to partially offset brokered deposit maturities.

The overall investment portfolio had a tax-equivalent yield of 4.52% at March 31, 2025, with an average life of 5.88 years and average effective duration of 2.1 years for available-for-sale securities.

Approximately $266.7 million of the investment securities reprice every 90 days and $74.6 million are subordinated debt with an initial fixed rate period of 5 years and floating thereafter.

Variances in interest expense were the result of changes discussed under the “Net Interest Income and Net Interest Margin” heading.

In addition, average noninterest-bearing demand deposits decreased $69.6 million or 7% for the third quarter of 2024 as compared to the third quarter of 2023 and decreased $74.0 million or 7% for the first nine months of 2024 as compared to the first nine months of 2023.

PROVISION FOR CREDIT LOSSES ON LOANS

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Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance.

The Company recorded a provision for credit losses of $1.2 million for the third quarter of 2024, as compared to a $0.1 million in the third quarter of 2023.

There was a year-to-date provision for credit losses on loans of $2.3 million in 2024, as compared to $0.4 million for the same period in 2023.

The Company's $1.1 million increase in the provision for credit losses on loans in the third quarter of 2024, as compared to the third quarter of 2023, and the $1.8 million year to date increase in the provision for credit losses on loans, compared to the same period in 2023, was primarily due to the impact of $3.0 million in net charge-offs in the first nine months of 2024, with only $0.4 million in net charge-offs for the first nine months of 2023.

The increase in net charge-offs was primarily related to a single office building, which was subsequently foreclosed upon and sold.

The Company recorded a provision for credit losses of $2.0 million in the first quarter of 2025, as compared to $0.1 million in the first quarter of 2024.

The increased provision for credit losses in the first quarter of 2025 over the first quarter of 2024, was primarily due to an increased specific reserve on an individually evaluated loan related to a single loan relationship of a wine grape grower.

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

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(dollars in thousands, unaudited)

For the three months ended September 30,

For the nine months ended September 30,

For the three months ended March 31,

Noninterest income:

1 unchanged sentence

Net gain (loss) on sale of securities available-for-sale

Gain on sale of fixed assets

(Loss) gain on sale of fixed assets

Bank-owned life insurance

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Noninterest Income:

Total noninterest income was unchanged for the quarter ended September 30, 2024, as compared to the same quarter in 2023, and increased $1.7 million, or 7% for the year-to-date period ended September 30, 2024, as compared to the same period in 2023.

The year-to-date comparison was impacted by an increase in service charge income on deposit accounts, favorable fluctuations in income on Bank-Owned Life Insurance (BOLI) with underlying investments mapped directly to the Company’s deferred compensation plan and a net gain on the balance sheet restructure earlier in the year.

Offsetting these positive variances was a decrease in other income which is related to life insurance proceeds received in 2023 with no like proceeds in 2024.

Noninterest income decreased by $1.9 million, or 23%, in the first quarter of 2025 as compared to the same quarter in 2024.

The decrease in the first quarter 2025, is due mostly to a $1.5 million unfavorable change in bank owned life insurance associated with deferred compensation plans (as described further below) as well as $0.9 million in year-over-year differences due to the first quarter of 2024 strategic balance sheet restructure, which included a bond sale and sale leaseback of branch properties.

Partially offsetting these unfavorable variances were $0.3 million in additional life insurance death benefits.

Within noninterest income and noninterest expense are mostly offsetting amounts related to bank owned life insurance and non-qualified deferred compensation.

This created a year-over-year unfavorable variance of $1.5 million within noninterest income and a favorable year-over-year $1.5 million variance for noninterest expense.

The Company maintains a non-qualified deferred compensation plan for officers and directors, which allows the participant to defer a portion of their earnings tax-free.

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There is some inefficiency in net earnings of the BOLI asset as compared to the deferred compensation liability created by the cost of insurance, differences in balances, and differences in individual fund performance.

During the third quarter, and first nine months of 2024, earnings from the BOLI was $0.3 million, and $1.5 million, respectively, while additional expense from the related deferred compensation liability was $0.3 million, and $1.7 million, respectively.

During the first quarter of 2025, reversal of earnings from the BOLI was $0.3 million, while reversal of expense from the related deferred compensation liability was $0.4 million.

Most of such expense is reported as professional fees under directors’ fees as such expense is related to deferral of past directors’ fees.

Specifically, $0.2 million for the quarterly comparison, and $1.4 million for the year-to-date comparison, respectively, is reflected as directors’ fees as part of the overall professional fees expense line item.

The tax benefit of having tax-free earnings with tax-deductible expense was $0.2 million during the third quarter of 2024, and $1.0 million for the first nine-months of 2024.

Service charges on customer deposit account income increased by $0.2 million, or 2%, to $6.2 million in the third quarter of 2024 as compared to the third quarter of 2023 and by $1.0 million, or 6%, in the first nine months of 2024, as compared to the same period in 2023.

These increases in the quarterly comparison are primarily from overdraft fees while the year-to-date comparisons are primarily a result of higher interchange and ATM fees, along with increased service charges on analysis accounts.

In the “other” category of noninterest income there was a $0.2 million decrease in the third quarter of 2024 as compared to the third quarter of 2023, and a $0.8 million decrease in the first nine months of 2024 as compared to the same period in 2023.

Both the quarterly and year-to-date comparisons were negatively impacted by a decrease in life insurance proceeds.

Specifically, $0.4 million for the quarterly comparison is reflected as a reversal of directors’ fees as part of the overall professional fees expense line item.

Service charges and fees on customer deposit accounts declined by $0.1 million, or 3%, to $5.6 million in the first quarter of 2025 as compared to the first quarter of 2024.

Lower returned check charges was the primary driver of the unfavorable variance.

In the “other” category of noninterest income there was a $0.5 million increase in the first quarter of 2025 as compared to the first quarter of 2024.

Life insurance proceeds and a 2024 first quarter loss on the valuation of equity securities account accounted for most of the favorable variance.

Noninterest Expense:

Total noninterest expense increased by $0.2 million, or 1%, in the third quarter of 2024, relative to the third quarter of 2023, and by $1.5 million, or 2%, for the first nine months of 2024, as compared to the same period in 2023.

Salaries and Benefits were $0.3 million, or 2%, lower in the third quarter of 2024 as compared to the third quarter of 2023, and unchanged for the first nine months of 2024, compared to the same period in 2023.

The Company made strategic decisions in 2023, that created operational efficiencies and reduced costs.

While the number of full-time equivalent employees did not change for the first nine months of 2024, compared to the year ending December 31, 2023, the composition of the workforce changed resulting in reduced salaries and benefits costs, during the third quarter of 2024.

There were 489 full-time equivalent employees at September 30, 2024 as compared to 489 at December 31, 2023, and 487 at September 30, 2023.

Occupancy expenses increased by $0.5 million, and $1.9 million for the third quarter, and the first nine months of 2024 as compared to the same periods in 2023.

The reason for the increases in both comparisons is due to increased rent expense from the sale/leaseback transactions in the fourth quarter of 2023, and first quarter of 2024.

Other noninterest expense was unchanged for the third quarter 2024, as compared to the third quarter in 2023, and decreased $0.4 million, or 2% for the first nine months of 2024, as compared to the same period in 2023.

While the variances for the third quarter of 2024, compared to the same period in 2023 offset each other, the primary differences were decreases in marketing costs, which is timing related, and a favorable variance in directors deferred compensation expense, linked to the changes in BOLI income.

These favorable variances were offset by higher communications costs, audit and review costs and loan management software costs.

The Company implemented new loan origination and management software to better serve its customers, and to create operational efficiencies.

For the year-over-year comparison, the categories of variance were the same as with the quarterly comparison, except for an unfavorable variance in directors deferred compensation expense, offset by favorable variances in debit card processing and ATM network costs, from a branding change to VISA from Mastercard last year, and the subsequent costs in 2023 related to that change.

Additionally, there was a decrease in foreclosed asset costs, due to a foreclosure and subsequent sale of one large credit relationship in early 2023.

Total noninterest expense decreased $2.1 million, or 9%, compared to the first quarter of 2024.

The primary driver of the positive variance as compared to the same period of 2024 is $1.5 million favorable change of deferred directors’ fees and officers’ deferred compensation expense as part of the Company’s deferred compensation plan as described above.

Salaries and benefits were $0.2 million lower than the first quarter of 2024.

The decrease in the year-over-year quarterly comparison is due to several factors, including severance payments in the first quarter of 2024, with no like payments in the first quarter of 2025, and a decrease in deferred compensation expense.

Overall full-time equivalent employees were 489 at March 31, 2025, as compared to 492 at March 31, 2024.

Occupancy expense was mostly unchanged for the first quarter of 2025 as compared to the same quarter last year.

Other noninterest expense decreased $1.9 million over the first quarter of 2024.

The primary reason for the positive variance was decreased directors deferred compensation expense which is linked to the fluctuation in BOLI income.

Additionally, debit card processing costs and debit card losses were $0.4 million lower in the year-over-year quarterly comparison because of the Company’s conversion from Mastercard to VISA.

PROVISION FOR INCOME TAXES

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

The Company's provision for income taxes was 26.4% of pre-tax income in the third quarter of 2024, relative to 25.8% in the third quarter of 2023, and 26.8% of pre-tax income for the first nine months of 2024, relative to 25.3% for the same period in 2023.

The increase in effective tax rate for both the quarterly and year-to-date comparisons is due to the tax credits, and tax-exempt income representing a smaller percentage of total taxable income.

The Company's provision for income taxes was 25.8% of pre-tax income in the first quarter of 2025, relative to 26.3% in the first quarter of 2024.

The variance in the effective tax rate, is due to fluctuations in tax credits and related amortization, as well as tax-exempt income as a percentage of total taxable income.

BALANCE SHEET ANALYSIS

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and 5) they can provide partially tax exempt income.

The investment portfolio is reflected on the balance sheet as investment securities and totaled $1.0 billion, or 27% of total assets at September 30, 2024, and $1.3 billion, or 36% of total assets at December 31, 2023.

The decrease was due to the sale of bonds from the strategic securities transaction.

The bonds sold had an average book yield of 2.61% and were used to paydown borrowed funds at an average rate of 5.52%.

The investment portfolio is reflected on the balance sheet as investment securities and totaled $922.4 million, or 26% of total assets at March 31, 2025, and $1.0 billion, or 27% of total assets at December 31, 2024.

The decrease was due to maturities and paydowns, partially used to offset brokered deposit maturities.

The Company carries “available-for-sale” investments at their fair market values and “held-to-maturity” investments at amortized cost, net of allowance for credit losses.

The Company currently has the intent and ability to hold investment securities to maturity, but the securities are all marketable.

The expected effective duration was 1.0 years for available-

for-sale investments and 5.6 years for held-to-maturity investments at September 30, 2024, as compared to 1.4 years for available-for-sale investments and 5.9 years for held-to-maturity investments at December 31, 2023.

The expected effective duration was 2.1 years for available-for-sale investments and 6.2 years for held-to-maturity investments at March 31, 2025, as compared to 1.5 years for available-for-sale investments and 6.0 years for held-to-maturity investments at December 31, 2024.

The following table sets forth the carrying amount for available-for-sale securities, at fair value, and held-to-maturity securities, at amortized cost, net of the allowance for credit losses of the Company’s investment portfolio by investment type as of the dates noted:

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(dollars in thousands, unaudited)

September 30, 2024

March 31, 2025

December 31, 2024

14 unchanged sentences

Total securities

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the FHLB and the FRB, customer repurchase agreements, and other purposes as required or permitted by law totaled $463.9 million at September 30, 2024, and $551.5 million at December 31, 2023, leaving $551.4 million in unpledged debt securities at September 30, 2024, and $787.8 million at December 31, 2023.

Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $286.4 million at September 30, 2024, and $383.0 million at December 31, 2023.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the FHLB and the FRB, customer repurchase agreements, and other purposes as required or permitted by law totaled $353.0 million at March 31, 2025, and $403.4 million at December 31, 2024, leaving $569.4 million in unpledged debt securities at March 31, 2025, and $558.1 million at December 31, 2024.

Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $181.0 million at March 31, 2025, and $242.2 million at December 31, 2024.

ALLOWANCE FOR CREDIT LOSSES – AFS INVESTMENT SECURITIES

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It is maintained at a level that is considered adequate to measure expected losses across the classes of major investment security types related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value.

The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both September 30, 2024 and December 31, 2023 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold.

The following bullets outline additional support for Management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of September 30, 2024 and December 31, 2023, was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.

The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both March 31, 2025 and December 31, 2024 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold.

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

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

Federal Government and the management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either September 30, 2024, or December 31, 2023.

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

● Mortgage-backed securities issued by government sponsored entities (“GSEs”) carry an implicit guarantee by the U.S.

1 unchanged sentence

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 September 30, 2024, or December 31, 2023.

Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either March 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.

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 September 30, 2024 or 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.

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 March 31, 2025 and December 31, 2024 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.

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

1 unchanged sentence

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

Following review of the financial metrics available for each of the underlying institutions as of September 30, 2024 or December 31, 2023 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution.

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

These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to ongoing quarterly reviews.

2 unchanged sentences

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 September 30, 2024 or 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 due to changes in supply or demand, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

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

LOAN PORTFOLIO

4 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2024

March 31, 2025

December 31, 2024

6 unchanged sentences

Consumer loans

Gross loans at $2.3 billion, increased $230.6 million or 11% during the first nine months of 2024.

There was a $219.8 million favorable change in mortgage warehouse lines, a $13.2 million increase in farmland loans, a $10.7 million increase

in commercial real estate loans, and a $12.0 million increase in other commercial loans.

Counterbalancing these positive loan variances were loan paydowns and maturities resulting in net declines in residential real estate loans.

As indicated in the loan roll forward below, new credit extended for the third quarter of 2024, increased on a linked-quarter basis, but decreased $7.7 million over the same period in 2023, and decreased $22.1 million for the year-to-date comparisons.

The Company also had $48.4 million in loan paydowns and maturities;

however, increases in mortgage warehouse and credit line utilization of $73.3 million had a positive impact in the third quarter.

The year-to-date decline in new credit extended compared to the same period in 2023, is attributable to competitive pressures in the Company’s market for strong credit relationships, combined with a lower loan demand overall due to the current high interest rate environment.

Gross loan balances at $2.3 billion, decreased $24.6 million, or 1%, during the first quarter of 2025.

Organic loan growth contributed to a $22.5 million increase in commercial real estate loans, a $2.3 million increase in other construction loans and a $3.4 million increase in commercial loans.

Consumer loans had a modest decline, while residential real estate loans decreased $4.9 million, and farmland loans decreased $4.3 million.

Mortgage warehouse line utilization decreased $43.2

million, or 13%, due to a combination of seasonality and two large line paydowns shortly before quarter-end.

The Company continues to see an increased pipeline of new mortgage warehouse customers.

As indicated in the loan rollforward below, new credit extended for the first quarter of 2025 decreased $13.6 million over the linked quarter comparison and increased $31.4 million over the same period in 2024.

For the first three months ended 2025, we had $32.7 million in loan paydowns and maturities, along with a $12.1 million decrease in line of credit utilization, and a $46.1 million decrease in mortgage warehouse utilization.

LOAN ROLLFORWARD

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For the three months ended:

For the nine months ended:

September 30, 2024

June 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

March 31, 2025

December 31, 2024

March 31, 2024

Gross loans beginning balance

5 unchanged sentences

(1) Change does not include new balances on lines of credit extended during the respective periods as such balances are included as part of “New credit extended” line above.

Over the past several years, the Company has strategically focused on reducing concentrations in commercial real estate, especially amongst areas management deemed to be higher risk such as construction, office real estate, and hospitality.

At September 30, 2024, the total regulatory CRE concentration ratio of total CRE over Tier 1 Capital plus allowance was 236.43% as compared to 242.88% at December 31, 2023, and 243.07% at September 30, 2023.

Further, the overall level of construction and land development lending had declined to 1% of regulatory capital plus allowance for credit losses at September 30, 2024.

At September 30, 2024, non-owner occupied commercial real estate includes $304.7 million of retail;

At March 31, 2025, the total regulatory CRE concentration ratio of total CRE over Tier 1 Capital plus allowance was 237.1% as compared to 236.3% at December 31, 2024, and 248.4% at March 31, 2024.

Further, the overall level of construction and land development lending had declined to 1% of regulatory capital plus allowance for credit losses at March 31, 2025.

At March 31, 2025, non-owner occupied commercial real estate includes $301.4 million of retail;

$150.7 million of warehouse/industrial;

2 unchanged sentences

Approximately $29.5 million, or $19% of the office real estate matures in less than two years.

Unused commitments, excluding mortgage warehouse and overdraft lines, were $237.7 million at September 30, 2024, compared to $203.6 million at December 31, 2023.

Total line utilization, excluding mortgage warehouse and overdraft lines, was 59.2% at September 30, 2024, and 62.3% at December 31, 2023.

Mortgage warehouse utilization increased to 54.6% at September 30, 2024, as compared to 36.2% at December 31, 2023.The increase in mortgage warehouse utilization during the first nine months of 2024 was due to $297.6 million in new mortgage warehouse lines and subsequent utilization of those lines.

It should be noted that the mortgage warehouse lines were moved to repurchase agreement lines in 2022 and 2023.

The repurchase agreement structure provides stronger credit protection to the Company, as well as more favorable regulatory capital treatment as these repurchase lines are not considered off-balance sheet commitments as they are unconditionally cancellable.

Unused commitments, excluding mortgage warehouse and overdraft lines, were $267.4 million at March 31, 2025, compared to $256.9 million at December 31, 2024.

Total line utilization, excluding mortgage warehouse and overdraft lines, was 56.3% at March 31, 2025, and 57.0% at December 31, 2024.

Mortgage warehouse utilization decreased to 40.6% at March 31, 2025, as compared to 51.2% at December 31, 2024.

The decrease in mortgage warehouse utilization during the first quarter of 2025 was due to seasonality and approximately $41.3 million in late quarter line paydowns by two customers.

The mortgage warehouse lines are structured as repurchase agreement lines.

NONPERFORMING ASSETS

Nonperforming assets currently is comprised of loans for which the Company is no longer accruing interest, but can include OREO and other foreclosed assets.

Nonperforming assets currently is comprised of loans for which the Company is no longer accruing interest but can include OREO and other foreclosed assets, when applicable.

Nonperforming assets

(dollars in thousands, unaudited)

September 30, 2024

March 31, 2025

December 31, 2024

September 30, 2023

March 31, 2024

Nonperforming Loans:

1 unchanged sentence

Commercial real estate

Other construction/land

Total Real Estate nonperforming loans

Other commercial

Consumer loans

Total Nonperforming Loans

Foreclosed assets

Total Nonperforming Assets

1 unchanged sentence

Nonperforming assets as a % of total gross loans and foreclosed assets

Total nonperforming assets, comprised of nonaccrual loans, increased by $2.4 million to $10.3 million for the first nine months of 2024.

The Company's ratio of nonperforming loans to gross loans increased to 0.45% at September 30, 2024, from 0.38% at December 31, 2023.

The increase in nonperforming loans resulted from a loan collateralized by agricultural property specifically related to dairy farming and an office commercial real estate loan.

This increase was offset by the foreclosure, and subsequent first quarter 2024 sale of an office commercial real estate property which was nonperforming at December 31, 2023.

Total nonperforming assets, comprised of non-accrual loans, decreased by $1.5 million, or 7%, during the first quarter of 2025.

The decrease in non-accrual loans, was from the successful payoff and paydown of a couple of loans secured by farmland.

The Company's ratio of nonperforming assets to loans plus foreclosed assets decreased to 0.79% at March 31, 2025, from 0.84% at December 31, 2024.

All the Company's nonperforming assets are individually evaluated for credit loss quarterly and management believes the established allowance for credit loss on such loans is appropriate.

There were no foreclosed assets at September 30, 2024, and December 31, 2023, however, when the Company does own 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.

Subsequent to March 31, 2025, the Company received payment in full on a $5.9 million non-accrual loan secured by commercial real estate.

The $6.5 million payoff included all principal, interest, and fees due, bringing the total of non-accrual loans to $12.3 million.

There were no foreclosed assets at March 31, 2025, and December 31, 2024, however, when the Company does own 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.

An action plan is in place for each non-accruing loan, and they are all being actively managed.

Collection efforts are continuously pursued for all nonperforming loans, but the Company cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company had $0.4 million in loans past due 30-89 days at September 30, 2024.

This is a decrease of $1.7 million over the balance at December 31, 2023.

The Company had $3.1 million in loans past due 30-89 days and still accruing at March 31, 2025.

This is an increase of $1.7 million over the balance at December 31, 2024.

All of these past due loans are under management supervision and every effort is being taken to assist the borrowers and manage credit risk in this regard.

2 unchanged sentences

It is maintained at a level that is considered adequate to measure expected losses on individually identified loans, as well as expected losses inherent in the remaining loan portfolio.

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

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.

The Company's allowance for credit losses on loans was $22.7 million at September 30, 2024, and $23.5 million at December 31, 2023.

The allowance was 0.98% of gross loans at September 30, 2024, and 1.12% of total loans at December 31, 2023.

The decrease in the allowance resulted from a reduction in specific individual reserves on individually evaluated loans due to the charge-off associated with one commercial real estate loan.

Management's detailed analysis indicates that the Company's allowance for credit losses on loans should be sufficient to cover credit losses for the life of the loans outstanding as of September 30, 2024, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the credit loss allowance for loans.

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

The Company calculates the allowance for credit losses using a combination of quantitative and qualitative factors applied to loans segmented by call report category.

The largest increase in loan balances was from mortgage warehouse lines which has the lowest reserve rate in the allowance for credit losses at 0.14%.

Therefore, at September 30, 2024, approximately $0.5 million of the allowance for credit losses is attributable to mortgage warehouse lines.

A separate allowance of $0.06 million for potential credit losses inherent in unused commitments is included in other liabilities at September 30, 2024, an increase of $0.1 million, from December 31, 2023.

The Company's allowance for credit losses on loans was $27.1 million at March 31, 2025, as compared to $24.8 million at December 31, 2024, and $23.1 million at March 31, 2024.

The increase is primarily attributable to an increase in the allowance for loans individually evaluated and was specifically related to a $11.9 million single loan relationship of a wine grape grower.

The allowance was 1.17% of total loans at March 31, 2025, 1.07% of total loans at December 31, 2024, and 1.07% of total loans at March 31, 2024.

Management's detailed analysis indicates that the Company's allowance for credit losses on loans should be sufficient to cover credit losses for the life of the loans outstanding as of March 31, 2025, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the credit loss allowance for loans.

The total allowance for credit losses on loans of $27.1 million at March 31, 2025, included $0.3 million of allowance related to $283.2 million of mortgage warehouse lines.

A separate allowance of $0.8 million for potential credit losses inherent in unused commitments is included in other liabilities at March 31, 2025, an increase of $0.1 million, from December 31, 2024.

Allowance for Credit Losses on Loans

3 unchanged sentences

For the year ended

September 30,

Average gross loans outstanding during period (1)

13 unchanged sentences

Consumer loans

Net loan charge-offs

Net loan (recoveries) charge offs

Balance at end of period

Net charge-offs to average Loans (annualized)

Net (recoveries) charge-offs to average Loans (annualized)

Allowance for credit losses on Loans to gross Loans at end of period

Net loan charge-offs to allowance for credit losses on Loans at end of period

Net loan charge-offs to provision for credit losses on Loans

Net loan (recoveries) charge-offs to allowance for credit losses on Loans at end of period

Net loan (recoveries) charge-offs to provision for credit losses on Loans

(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

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.

It is unlikely that all unused commitments will ultimately be drawn down.

Unused commitments to extend credit, which included standby letters of credit, totaled $589.7 million at September 30, 2024, and $487.1 million at December 31, 2023, representing approximately 25% of gross loans outstanding at September 30, 2024, and 23% at December 31, 2023.

It is unlikely that all unused commitments will

ultimately be drawn down.

Unused commitments to extend credit, which included standby letters of credit, totaled $754.4 million at March 31, 2025, and $641.5 million at December 31, 2024, representing approximately 33% of gross loans outstanding at March 31, 2025, and 28% at December 31, 2024.

Included in unused commitments are mortgage warehouse lines which are mostly in the form of repurchase lines and are unconditionally cancellable.

Unused commitments on mortgage warehouse lines were $279.2 million at September 30, 2024, and $204.5 million at December 31, 2023, while utilization was 55% and 36%, respectively.

The increase in utilization during the first nine months of 2024 was due to new customers in the mortgage warehouse product that ramped up their utilization.

Unused commitments exclusive of mortgage warehouse lines and overdraft lines of credit, have increased $34.1 million or 17% for the first nine months of 2024 and are due to an increase in new lines of credit and higher utilization on existing lines of credit.

The Company also had undrawn letters of credit issued to customers totaling $5.3 million at September 30, 2024, and $5.0 million at December 31, 2023.

Unused commitments on mortgage warehouse lines were $414.8 million at March 31, 2025, and $311.6 million at December 31, 2024, while utilization was 41% and 51%, respectively.

The decrease in utilization during the first three months of 2025 was due to new customers in the mortgage warehouse product that had not yet ramped up their utilization as well as two large mortgage warehouse line paydowns during the final week of the quarter.

Unused commitments exclusive of mortgage warehouse lines and overdraft lines of credit, were nearly flat at 57% at December 31, 2024 and 56% at March 31, 2025.

The Company also had undrawn letters of credit issued to customers totaling $5.2 million at March 31, 2025, and $5.0 million at December 31, 2024.

The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used.

However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should the Company be required to fund a significant portion of unused commitments.

In addition to unused commitments to provide credit, the Company is utilizing a $125 million letter of credit issued by the FHLB on the Company’s behalf as security for certain local agency deposits which totaled $77.7 million at September 30, 2024.

That letter of credit is backed by loans that are pledged to the FHLB by the Company.

5 unchanged sentences

If a “long” position is prevalent, the Company could let brokered deposits or other wholesale borrowings roll off as they mature, or invest excess liquidity into investments or loans, subject to the Company’s risk tolerances.

The Company’s balance of non-earning cash and due from banks was $97.6 million at September 30, 2024, relative to $73.7 million at December 31, 2023.

The Company’s balance of non-earning cash and due from banks was $80.4 million at March 31, 2025, relative to $79.6 million at December 31, 2024.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”

Net premises and equipment decreased by $1.3 million during the first nine months of 2024, to $15.6 million.

This decline was a result of the sale/leaseback of two bank-owned branch locations in the first quarter of 2024.

Goodwill was $27.4 million at September 30, 2024, unchanged during the first nine months of 2024.

Net premises and equipment decreased by $0.1 million during the first three months of 2025, to $15.3 million.

This decline was mostly a result of depreciation in the first quarter of 2025.

Goodwill was $27.4 million at March 31, 2025, unchanged during the first three months of 2025.

Goodwill is tested for impairment annually, unless events and circumstances exist which indicate that an impairment test should be performed.

1 unchanged sentence

Management continues to evaluate whether or not a triggering event occurs, or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount before the next annual test in 2025.

Bank-owned life insurance, with a balance of $54.0 million at September 30, 2024, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

Bank-owned life insurance, with a balance of $52.7 million at March 31, 2025, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

DEPOSITS AND INTEREST-BEARING LIABILITIES

4 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2024

March 31, 2025

December 31, 2024

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Total deposits

Deposit balances grew by $200.9 million, or 7%, during the first nine months of 2024 to $3.0 billion at September 30, 2024.

Core non-maturity deposits increased by $31.0 million, or 6%, for the first nine months of 2024, while customer time deposits decreased by $5.0 million, or 1%.

Wholesale brokered deposits increased $175.0 million during the first nine months of 2024, or 130%.

This was a strategic decision to fund increased usage on mortgage warehouse lines.

Overall noninterest-bearing deposits as a percent of total deposits decreased to 34.2%, at September 30, 2024, compared to 37.0% at December 31, 2023.

Overall uninsured deposits are estimated to be approximately $816.2 million, or 28% of total deposit balances, excluding public agency deposits that are subject to collateralization through a letter of credit issued by the FHLB.

In addition, uninsured deposits of the Bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep (ICS) account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (CDARS).

IntraFi allows for up to $265 million per customer of pass-through FDIC insurance, which would more than cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance.

Deposit balances declined by $41.8 million, or 1%, during the first three months of 2025 to $2.8 billion at March 31, 2025 due mostly to an $85.0 million reduction in brokered deposits.

Core non-maturity deposits increased $52.6 million, or 3%, for the first three months of 2025, while customer time deposits decreased by $9.4 million.

Brokered deposits decreased significantly during the quarter, as the Company utilized some paydowns in the investment portfolio and changes in mortgage warehouse line utilization to offset recent brokered deposit maturities.

Noninterest-bearing deposits as a percent of total deposits increased to 36.4% at March 31, 2025, compared to 34.8% at December 31, 2024, and from 34.0% at March 31, 2024.

Overall uninsured deposits are estimated to be $788.6 million, or 28% of total deposit balances, excluding public agency deposits that are subject to collateralization through a letter of credit issued by the FHLB.

In addition, uninsured deposits of the bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (CDARS).

IntraFi allows for up to $275 million of combined pass-through FDIC insurance which would more than cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance.

The Bank maintains a diversified deposit base with no significant customer concentrations and does not bank any cryptocurrency companies.

At September 30, 2024, the Company had approximately 120,000 accounts and the 25 largest deposit balance customers had balances of approximately 15% of overall deposits .

At March 31, 2025, the Company had approximately 119,000 accounts and the 25 largest deposit balance customers had balances of less than 10% of overall deposits .

Other interest-bearing liabilities of $198.8 million on March 31, 2025, consist of $118.8 million in customer repurchase agreements and $80.0 million of term FHLB borrowings, as compared to $108.9 million in customer repurchase agreements, and $80.0 million of term FHLB borrowings on December 31, 2024.

OTHER INTEREST-BEARING LIABILITIES

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The secured component depends on the level of pledged collateral.

Total non-deposit interest-bearing liabilities decreased by $262.1 million, during the first nine months of 2024 primarily due to a decrease in overnight fed funds and short term FHLB borrowings.

This was a result of a balance sheet restructure in which bonds with a book yield of 2.61% were sold to pay off higher cost borrowed funds at an average rate of 5.52%.

Customer repurchase agreements increased from $107.1 million at December 31, 2023, to $125.5 million at September 30, 2024.

Customer repurchase agreements provide collateral for customers that sweep excess deposit balances each day into a separate repurchase agreement account where the Company effectively sells certain government bonds to customers daily and then repurchases the same bonds on the next business day.

Although these accounts are not deposits and are not FDIC insured, they provide customers with larger account balances the ability to have their account secured with collateral.

Overnight and short-term borrowings decreased $280.5 million and were paid in full at September 30, 2024, from $280.5 million at December 31, 2023, as mentioned previously as a result of a balance sheet restructure.

Long-term debt at September 30, 2024, consisted of $49.4 million of subordinated debt.

Total non-deposit interest-bearing liabilities increased by $9.9 million, during the first three months of 2025 primarily due to an increase in customer repurchase agreements.

Customer repurchase agreements were $118.8 million at March 31, 2025, as compared to $108.9 million at December 31, 2024.

Customer repurchase agreements provide collateral for customers that sweep excess deposit balances each day into a separate repurchase agreement account where the Company sells certain government bonds to customers daily under an agreement to repurchases the same bonds on the next business day.

Although these accounts are not deposits and are not FDIC insured, they provide customers with larger account balances the ability to have their account effectively secured with collateral.

Long-term debt at March 31, 2025, consisted of $49.4 million of subordinated debt.

This remained relatively unchanged from December 31, 2024.

Subordinated debentures related to $35.8 million of trust preferred securities at both September 30, 2024, and December 31, 2023.

Subordinated debentures related to $35.9 million of trust preferred securities at March 31, 2025, was $0.1 million higher than at December 31, 2024.

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

Trust preferred securities are variable rate instruments benchmarked against the Secured Overnight Financing Rate (SOFR).

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Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts.

The Company’s balance of other liabilities was $84.0 million at September 30, 2024, as compared to $77.4 million at December 31, 2023, an increase of $6.6 million or 8%.

The increase was primarily driven by accrued payables that as of September 30, 2024, had not settled .

The Company’s balance of other liabilities was $119.7 million at March 31, 2025, as compared to $90.5 million at December 31, 2024, an increase of $29.2 million or 32%.

The increase was primarily driven by investment security purchases that as of March 31, 2025, had not settled .

LIQUIDITY AND MARKET RISK MANAGEMENT

The Company continues to have substantial liquidity though unencumbered assets and available borrowings.

In addition, the Company’s loan-to-deposit ratio was 78% at September 30, 2024, and 76% at December 31, 2023.

The Company continues to have substantial liquidity through unencumbered assets and available borrowings.

In addition, the Company’s loan-to-deposit ratio was 81% at both March 31, 2025, and December 31, 2024, compared to an internal policy guideline of less than 90%.

Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner.

Detailed cash flow projections are reviewed by Management on a monthly basis, with various stress scenarios applied to assessthe Company’s ability to meet liquidity needs under unusual or adverse conditions.

Detailed cash flow projections are reviewed by Management on a monthly basis, with various stress scenarios applied to assess the Company’s ability to meet liquidity needs under unusual or adverse conditions.

Liquidity ratios are also calculated and reviewed on a regular basis.

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To meet these short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances via FHLB lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources.

At September 30, 2024, and December 31, 2023, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

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

Primary and secondary liquidity sources

September 30, 2024

March 31, 2025

December 31, 2024

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Unsecured lines of credit

Secured lines of credit

Funds available through fed discount window

Available funding sources detailed above of $2.4 billion represented 82% of total deposits and 299% of estimated uninsured and/or uncollateralized deposits as of September 30, 2024.

Available funding sources detailed above of $2.3 billion represented 79% of total deposits and 287% of estimated uninsured and/or uncollateralized deposits as of March 31, 2025.

Unpledged investment securities include $160.4 million of CLOs.

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The Company has a higher level of actual balance sheet liquidity than might otherwise be the case since the Company utilizes a letter of credit from the FHLB rather than investment securities for certain pledging requirements.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at September 30, 2024, and December 31, 2023.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at March 31, 2025, and December 31, 2024.

Other sources of liquidity include the brokered deposit market, deposit listing services, Intrafi, and the ability to offer local time-deposit campaigns.

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 primary liquidity ratio and gross loans to deposits were 22.59% and 78.34%, respectively, at September 30, 2024, as compared to internal policy guidelines of “greater than 15%” and “less than 95%.” Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at September 30, 2024, are also periodically reviewed by Management and the Board.

The Company’s primary liquidity ratio was 20% at March 31, 2025, as compared to an internal policy guideline of “greater than 15%” Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at March 31, 2025, are also periodically reviewed by Management and the Board.

The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that the liquidity position will continue at current strong levels.

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Its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations.

As of September 30, 2024, the holding company maintained a cash balance of $11.0 million.

As of March 31, 2025, the holding company maintained a cash balance of $2.4 million.

Management anticipates that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future.

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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.

To identify areas of potential exposure to interest rate changes, the Company utilizes 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.

To identify areas of potential exposure to interest rate changes, the Company utilizes commercially available modeling software to perform monthly earnings simulations using a dynamic balance sheet 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.

Assumptions regarding deposit betas in the up cycles can range from 25 to 100% and from 0 to 50% in the down cycles depending on the deposit type.

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The Company had the following estimated net interest income sensitivity profiles over one year, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Immediate change in Interest Rates (basis points)

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Management utilizes this as a starting point for determining its overall interest rate risk strategy.

Based on the interest rate shocks, for the period ending September 30, 2024, management believes that the Company is more asset sensitive than is was a year ago.

This shift is due mostly to the decrease in the level of overnight borrowings both in Fed Funds purchased and overnight FHLB borrowings, a decrease in fixed rate bonds (which were sold to payoff higher cost borrowings that reprice daily), combined with an increase in mortgage warehouse line utilization which is very short-term.

The change in net interest income is similar for the up 100, 200, 300, and 400 basis point scenarios.

Based on the interest rate shocks, for the period ending March 31, 2025, management believes that the Company is asset sensitive, slightly more asset sensitive than the same period a year ago.

The incremental changes in net interest income are similar between the up 100, 200, 300, and 400 basis point scenarios.

If there were an immediate and sustained upward adjustment of 100 basis points in interest rates, all else being equal, net interest income over the next 12 months is projected to increase by $3.3 million, or 2.4%, relative to a stable interest rate scenario, with the favorable variance increasing as interest rates rise higher.

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The change in net interest income in the down 200 basis point scenario is a decrease of $15.0 million or 10.8%.

As a significant portion of the Company’s deposits remain in noninterest-bearing accounts or low-cost deposit accounts, in a down rate scenario, these rates would not change or only change slightly.

As a significant portion of the Company’s deposits remain in noninterest-bearing accounts or low-cost deposit accounts, in a downrate scenario, these rates would not change or only change slightly.

However, floating rate earning assets (loans and deposits) would reprice downward more than the decline in floating rate liabilities.

All interest rate downward shock scenarios are outside of internal policy guidelines, and all upward rate shock scenarios are within internal policy guidelines.

Although interest rate downward parallel shock scenarios are outside of internal policy guidelines, the starting point has also increased as a result of the aforementioned balance sheet restructuring.

Management also models other interest rate scenarios that do not assume a simultaneous shock of all rate curves including short-term and long-term curves.

these scenarios uses rate forecasts from a known economist over the next twenty-four months.

Using this forecast of rates, net interest income models close to the base case scenario which indicates less sensitivity to expected interest rate changes.

Management believes these alternative scenarios are an important part of interest rate risk management given the current inverted rate curve, In an inverted rate curve, shocking all rate curves tends to overstate the sensitivity to a change in rate.

Thus, management has isolated the parts of the rate curve its balance sheet is most sensitive to r and is strategically focused on those parts.

In addition to the net interest income simulations shown above, the Company runs stress scenarios for the unconsolidated Bank where it models 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).

All interest rate shock scenarios are within internal policy guidelines.

Management also models other interest rate scenarios that do not assume a simultaneous and parallel shock of all points on the yield curve including short-term and long-term rates.

One of these alternate rate change scenarios uses rate forecasts from a known economist over the next twelve months which reflect overnight rates moving differently than longer-term treasury rates.

Using this forecast of interest rates, net interest income models close to the base case scenario, indicating that based on a most likely interest rate forecast the Company’s net interest income is expected to be close to the same

level modeled in an unchanged rate environment.

This use of a most likely interest rate forecast suggests that we are less sensitive to interest rate changes, when compared to an interest rate shock.

Management believes modeling alternative scenarios is an important part of interest rate risk management given the current shape of the yield curve, with an inversion between the overnight rate and five-year rate.

In an inverted yield curve, shocking all points on the yield curve in parallel tends to overstate the sensitivity to a change in rate.

Thus, management has isolated the parts of the yield curve its balance sheet is most sensitive to and is strategically focused on those parts.

As the Company utilizes a dynamic balance sheet for its interest rate modeling, the Company also models using a static, or no-growth, balance sheet to validate the interest rate sensitivity in the dynamic balance sheet model and noted no significant changes in interest rate risk outside of the base case.

In addition, the Company runs stress scenarios for stresses to average deposits, higher deposit betas than the base case, deposit migration from low cost to high cost deposits, and both higher and slower prepayment speeds.

The most significant impact to net interest income in the net interest income simulations is the reduction or migration of low-cost deposits.

CAPITAL RESOURCES

The Company had total shareholders’ equity of $358.7 million at September 30, 2024, comprised of $108.4 million in common stock, $5.3 million in additional paid-in capital, $273.6 million in retained earnings, and accumulated other comprehensive loss of $28.6 million.

The Company had total shareholders’ equity of $351.8 million at March 31, 2025, comprised of $106.3 million in common stock, $4.4 million in additional paid-in capital, $270.0 million in retained earnings, and accumulated other comprehensive loss of $28.9 million.

At the end of 2024, total shareholders’ equity was $357.3 million.

The increase in equity during the first nine months of 2024 is due to net income of $30.2 million, offset by $10.2 million in dividends paid to shareholders, $8.3 million in share repurchases and a $7.4 million favorable swing in other comprehensive income due principally to changes in investment securities’ fair value.

The remaining difference is related to equity compensation recognized during the first nine months of 2024.

The Company approved a new share repurchase program in October 2023 that authorized 1,000,000 shares of common stock for repurchase beginning at the end of the expiration of the share repurchase program on October 31, 2023, and expiring on October 31, 2024.

Under the 2023 Share Repurchase Program, there were 406,809 shares repurchased in the first nine months of 2024 under a Rule 10b5-1 Plan.

A new Share Repurchase Program was approved in October 2024 authorizing 1,000,000 shares of common stock for repurchase beginning at the end of the expiration of the share repurchase program on October 31, 2024, and expiring on October 31, 2025.

The decrease in equity during the first quarter of 2025 is due to net income of $9.1 million, offset by a $3.5 million dividend paid to shareholders, $14.2 million in share repurchases, and a $2.4 million favorable swing in other comprehensive income/loss due principally to positive changes in investment securities’ fair value.

The remaining difference is related to equity compensation recognized during the quarter.

At March 31, 2025, the Company had a 2024 Share Repurchase Plan authorizing 1,000,000 shares of common stock, with an expiration date of October 31, 2025.

At March 31, 2025, 325,983 shares of common stock remain available for repurchase under the 2024 Share Repurchase plan.

The Company uses a variety of measures to evaluate its capital adequacy, including the leverage ratio which is calculated separately for the Company and the Bank.

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Regulatory Capital Ratios

September 30,

Community Bank

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Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") (2)

(1) The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.

(1) If the subsidiary bank’s leverage ratio exceeds the minimum ratio under the community bank leverage ratio framework, it is deemed to be “well capitalized” under all other regulatory capital requirements.

The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s leverage ratio falls below the minimum under the community bank leverage ratio framework.

(3) The Company has elected to phase in the impact of implementing CECL on regulatory capital over a three-year period.

(2) The Company has elected to phase in the impact of implementing CECL on regulatory capital over a three-year period, which ended December 31, 2024.

The federal banking agencies provide a simplified measure of capital adequacy for qualifying community banking organizations by allowing such banking organizations to opt into the community bank leverage ratio framework.

The Company’s subsidiary has opted into the community bank leverage ratio framework.

This means that if the Company’s

subsidiary maintains a leverage ratio greater than 9% , it will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject.

This means that if the Company’s subsidiary maintains a leverage ratio greater than 9% , it will be considered to have met the minimum capital requirements,

the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject.

A qualifying community banking organization with a leverage ratio of greater than 9% may opt into the community bank leverage ratio framework if has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5% or less of total consolidated assets.

Further, the bank must not be an advance approaches banking organization.

Further, the bank must not be an advanced approaches banking organization.

PART I – FINANCIAL INFORMATION

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What changed 10-Q

Item 2. Management’s Discussion and Analysis