What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-01 compared with 2025-05-02 · 262 added, 206 removed, 417 unchanged (53% of the section changed)

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● 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 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;

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In Management’s opinion, the Company’s critical accounting policies deal with the following areas:

● 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, as discussed in Notes 8 and 10 to the consolidated financial statements;

● the establishment of the allowance for credit losses, including the valuation of individually evaluated loans, as explained in detail in Notes 8 and 10 to the consolidated financial statements and in the “Provision for Credit Losses” and “Allowance for Credit Losses” sections of this discussion and analysis.

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

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.

Second Quarter 2025 Compared to Second Quarter 2024

Second quarter 2025 net income was $10.6 million, and $0.78 per diluted share as compared to $10.3 million, and $0.71 per diluted share in the second quarter of 2024.

The Company’s annualized return on average equity was 12.08% and annualized return on average assets was 1.16% for the quarter ended June 30, 2025, compared to 11.95% and 1.14%, 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.

● Net income for the second quarter of 2025 increased $0.4 million, or 4%, to $10.6 million.

Net interest income improved $0.5 million and noninterest income increased $0.9 million, or 12%.

These favorable changes were partially offset by an increase in the provision for credit losses of $0.3 million, and an increase in noninterest expense of $1.1 million, or 5%.

● The $0.5 million increase in net interest income for the quarter was mostly driven by a 23 basis point decrease in the cost of deposits and borrowings.

The yield on interest earning assets declined 20 basis points, counterbalancing some of the improvements in the cost of funds.

● Included in the above $0.9 million increase in noninterest income and $1.1 million increase in noninterest expense was an $0.8 million increase in bank-owned life insurance (BOLI) designed to offset changes to deferred compensation expense.

Deferred compensation expense increased $0.7 million in the second quarter of 2025 as compared to the same period in 2024 primarily due to increases in the value of participants accounts as a result of market conditions.

FINANCIAL CONDITION SUMMARY

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.

June 30, 2025 Relative to December 31, 2024

The Company’s assets totaled $3.8 billion at June 30, 2025, an increase of $156.0 million, or 4.0% from December 31, 2024.

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

● Investment securities increased $5.8 million, or 1.0%, to $967.3 million primarily due to purchases of mortgage-backed securities and corporate bonds.

Corporate bonds have preferential yields over other types of securities, and fixed-rate mortgage backed securities fit the Company’s asset neutrality position.

Collateralized loan obligations (CLOs), continue to aggressively payoff due to tightening spreads and the ability of the issuers to reissue with a lower spread.

● Gross loans increased $103.3 million, or 4%, due to a $75.5 million increase in mortgage warehouse loans, a $34.1 million increase in commercial real estate loans, a $6.3 million increase in construction loans and an $8.4 million increase in other commercial loans, partially offset by declines in other categories.

Specifically, there was an $11.1 million decrease in residential real estate loans, a $9.6 million decrease in farmland loans, and a $0.4 million reduction in consumer loans.

In addition to strong favorable growth in mortgage warehouse, new credit extended, including new fundings on non-mortgage warehouse lines of credit, was $114.5 million year-to-date in 2025 versus $75.3 million year-to-date in 2024.

● Deposits increased by $82.8 million, or 3%.

The growth in deposits came primarily from noninterest bearing demand deposits.

There was also a $15.0 million increase in brokered deposits.

Overall customer deposits increased $67.8 million.

● Other interest-bearing liabilities increased $92.0 million;

$74.4 million from an increase in overnight borrowings, and $17.6 million from increased customer repurchase balances.

Overnight borrowings are used to fund mortgage warehouse line advances.

● Total capital of $355.7 million at June 30, 2025, reflects a decrease of $1.6 million, relative to year-end 2024.

The decrease in equity during the first half of 2025 was due to the addition of $19.7 million in net income, a $2.6 million favorable swing in accumulated other comprehensive income/loss due principally to changes in investment securities’ fair value, $18.0 million in share repurchases and $7.0 million in dividends paid.

The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

EARNINGS PERFORMANCE

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NET INTEREST INCOME AND NET INTEREST MARGIN

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.

Net interest income was $30.7 million for the second quarter of 2025, a $0.5 million increase, or 2%, over the second quarter of 2024.

This increase in net interest income for the quarterly comparison was due primarily to a 23 basis point decrease in interest expense on interest-bearing liabilities.

For the second quarter of 2025, although the balance of average interest-earning assets was $58.5 million higher, the yield was 20 basis points lower as compared to the same period in 2024.

The primary reason for the decrease in yield came from variable rate investments, in the form of CLO, that had rate resets due to the 100 basis decline in the prime rate in late 2024, and CLO prepayments where the funds could not be reinvested at the original spread or similar rate.

There was a 23 basis point decrease in the cost of interest-bearing liabilities for the same period, which had a greater impact than the lower yields on the interest-earning asset side of the balance sheet.

Net interest income for the comparative year-to-date periods increased $1.9 million.

As with the quarterly comparison the decrease in the cost of interest-bearing liabilities was greater than the decrease in yield on interest-bearing assets.

There was a $61.7 million, or 2%, increase in average interest-earning asset balances yielding 10 basis points lower for the same period, while average interest-bearing liability balances increased $1.7 million, yielding 20 basis points lower for the same period.

The favorable net impact of the mix and rate change was a five basis point increase in our net interest margin for the six months ending June 30, 2025, as compared to the same period in 2024.

Interest expense was $12.1 million for the second quarter of 2025, a decrease of $1.3 million, relative to the second quarter of 2024.

For the first six months of 2025, compared to the first six months of 2024, interest expense decreased $2.2 million, to $23.4 million.

The decrease in interest expense for the quarterly comparison is primarily attributable to a $49.8 million average volume decrease in interest-bearing deposit balances and a 31 basis point decrease in interest rates paid on those balances.

This positive variance was partially offset by $45.6 million in higher average balances of borrowed funds, combined with an 11 basis point increase in cost.

There was a favorable shift in the deposit mix in the second quarter of 2025 as compared to the same period in 2024 with transaction accounts increasing $112.6 million while higher cost time and brokered deposits decreased.

Higher cost customer time deposits decreased by $46.6 million, and wholesale brokered deposits decreased by $63.6 million.

There was also a $10.5 million decrease in the average balance of savings and money market accounts.

For the first half of 2025, as compared to the same period in 2024, customer time deposits and wholesale brokered deposits decreased $38.6 million, and $12.1 million respectively, while borrowed funds increased $5.5 million.

Other deposits increased $74.2 million for the year-to-date comparison.

The Company had $1.7 billion in adjustable and variable rate loans and $359.7 million in floating rate bonds, as compared to $255.3 million in floating rate CDs and $35.9 million in floating rate trust preferred securities at June 30, 2025.

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

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In addition, there are $710.2 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.

Based on current rates, of the $751.8 million in adjustable and variable rate loans that reprice or mature over the next twelve months, $263.1 million, or 35%, have a pricing index rate higher than the current index, while $14.3 million, or 2%, have a pricing index rate lower than the current index.

The remaining balance of $474.5 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 Company’s net interest margin was 3.68% for the second quarter of 2025, as compared to 3.69% for the second quarter of 2024.

Although there was a 20 basis point decrease in the yield on interest earning assets, there was a 23 basis point

decrease in the cost of interest-bearing liabilities.

The decrease in cost mitigated most of the decrease in yield on earning assets resulting in a one basis point decrease in net interest margin.

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

March 31, 2025

March 31, 2024

June 30, 2025

June 30, 2024

Rate/Yield (2)

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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 $(0.3) million and $(0.3) million for the quarters ended March 31, 2025 and 2024, respectively.

Net loan (costs) fees and loan acquisition FMV amortization were $(0.4) million and $(0.3) million for the quarters ended June 30, 2025 and 2024, 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 six months ended

June 30, 2025

June 30, 2024

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:

Federal funds purchased

Repurchase agreements

Short term borrowings

Long term FHLB advances

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 $(0.7) million and $(0.7) million for the six months ended June 30, 2025, and 2024, respectively.

(4) Non-accrual 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.

The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest-earning assets and interest-bearing liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average interest rates.

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(dollars in thousands, unaudited)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

2025 over 2024

Increase (decrease) due to

Federal funds sold/due from time

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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 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 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.

The volume variance calculated for the second quarter of 2025 relative to the second quarter of 2024 was a favorable $0.5 million;

this is primarily from the net impact of a favorable loan volume variance of $3.1 million augmented by a favorable rate reduction in interest bearing liabilities.

There was an overall unfavorable rate and volume variance on investment securities, which mostly came from the variable rate investments, in the form of CLOs, partially offsetting the favorable variances in loans and interest-bearing liabilities.

There was a modest favorable mix variance of $0.1 million.

Company’s net interest margin for the second quarter of 2025 was 3.68%, as compared to 3.69% for the second quarter of 2024.

Average interest earning cash balances for the quarterly comparisons have decreased and have a positive impact on the net interest margin since cash balances have been earning approximately 4.7% and have been deployed into mortgage warehouse line advances yielding 7.01%.

Average interest-earning cash and due from banks was $18.1 million, a decrease of $25.3 million for the second quarter of 2025 as compared to the same period last year.

Overall average investment securities decreased by $99.4 million for the second 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 4.68% at June 30, 2025, with an average life of 5.99 years and average effective duration of 2.09 years for available-for-sale securities.

Approximately $320.4 million of the investment securities reprice every 90 days and $80.1 million are subordinated debt with an initial fixed rate period of 5 years and floating thereafter.

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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 $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 Company recorded a provision for credit losses of $1.2 million in the second quarter of 2025, as compared to $0.9 million in the second quarter of 2024.

The increase in net charge-offs in the second quarter of 2025, as compared to the second quarter of 2024, was primarily related to the $5.3 million prior allowance on an individually-evaluated agricultural production loan.

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 March 31,

Three months ended June 30,

Six months ended June 30,

Noninterest income:

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Noninterest Income:

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.

Total noninterest income increased by $0.9 million, or 12%, for the quarter ended June 30, 2025, as compared to the same quarter in 2024 and decreased $1.0 million, or 6%, for the comparable year-to-date periods.

The quarterly comparison increase primarily resulted from a $0.7 million positive variance in the value of separate account corporate-owned life insurance assets tied to non-qualified deferred compensation plans, and a $0.5 million increase in death benefit on life insurance proceeds, partially offset by lower service charges on deposit accounts.

The year-to-date decrease reflects the net impact of the loss on the sale of investment securities in 2024, offset by the gain on the sale/leaseback of bank owned branch locations, with no like transactions in 2025.

There was also an unfavorable variance of $0.8 million associated with the decrease in value of separate account corporate-owned life insurance assets tied to non-qualified deferred compensation plans, and a decrease of $0.5 million in service charges on deposits.

These unfavorable variances to the year-to-date comparisons were partially offset by $0.8 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.

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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 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, $0.4 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.

Service charges and fees on customer deposit accounts declined by $0.3 million, or 5%, to $5.9 million in the second quarter of 2025 as compared to the second quarter of 2024, and declined by $0.5 million, or 4% for the year-to-date comparison.

Lower analysis fees, returned check charges, and interchange on debit cards were the primary drivers of the unfavorable variance in both the quarterly and year-to-date variances.

In the “other” category of noninterest income there was a $0.5 million increase in the second quarter of 2025 as compared to the second quarter of 2024, and a $1.0 million increase for the first six months of 2025 as compared to the same period in 2024.

Life insurance proceeds accounted for most of the favorable variance for both the quarterly and year-to-date comparisons.

Noninterest Expense:

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.

Total noninterest expense increased by $1.1 million, or 5%, in the second quarter of 2025, relative to the second quarter of 2024, but favorably declined by $1.0 million, or 2%, in the first six months of 2025, as compared to the first six months of 2024.

Salaries and Benefits were $0.5 million, or 4%, higher in the second quarter of 2025, as compared to the second quarter of 2024, and were $0.3 million, or 1%, higher for the first six months of 2025, compared to the same period in 2024.

The quarterly increase is due to increased officer bonus and group health insurance costs.

The year-over-year increase is primarily due to the same reasons as the quarterly but also included an overall increase in officer salary costs and 401(k) company contributions, partially offset by an increase in deferred salary loan costs, due to the hiring of lending and lending support officers.

Full-time equivalent employees were 494 at June 30, 2025, as compared to 485 at December 31, 2024, and 501 at June 30, 2024.

Included in the June 30, 2025, figures were 10 summer interns and temporary employees.

Occupancy expenses were mostly unchanged for the second quarter and the first half of 2025, as compared to the same periods in 2024.

Other noninterest expense increased $0.6 million, or 8%, for the second quarter 2025, as compared to the second quarter in 2024, and decreased $1.3 million, or 8%, for the first half of 2025, as compared to the same period in 2024.

Deferred compensation expense for directors increased $0.7 million for the quarterly comparison but decreased $0.7 million for the year-to-date comparison, which is linked to the changes in life insurance income.

For the year-to-date comparison there were also decreases in marketing expenses.

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 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.

The Company's provision for income taxes was 25.3% of pre-tax income in the second quarter of 2025, relative to 27.8% in the second quarter of 2024, and 25.5% of pre-tax income for the first half of 2025 relative to 27.1% for the same period in 2024.

The decrease 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 larger 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 $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 investment portfolio is reflected on the balance sheet as investment securities and totaled $967.3 million, or 26% of total assets at June 30, 2025, and $961.5 million, or 27% of total assets at December 31, 2024.

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

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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 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 expected effective duration was 2.1 years for available-for-sale investments and 6.1 years for held-to-maturity investments at June 30, 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)

March 31, 2025

June 30, 2025

December 31, 2024

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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 $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.

Investment securities 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 $433.8 million at June 30, 2025, and $403.4 million at December 31, 2024, leaving $533.5 million in unpledged debt securities at June 30, 2025, and $558.1 million at December 31, 2024.

Securities pledged in excess of actual pledging needs and thus available for liquidity purposes, if needed, totaled $253.4 million at June 30, 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 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 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.

The Company maintains 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 June 30, 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 June 30, 2025, and December 31, 2024, was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.

government agencies are supported by the full faith and creditworthiness of the U.S.

federal government and Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either June 30, 2025, or December 31, 2024.

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

federal government, as the GSEs can draw funds from the U.S.

federal government up to a limit, with an implied ability to draw funds beyond the limit.

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 did not consider a default, much less a loss on these securities to be a reasonable possibility as of either June 30, 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 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.

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 June 30, 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.

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

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

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.

Various financial metrics, including credit quality, reserve adequacy, profitability and capital, of each of the issuing financial institutions are reviewed by Management quarterly.

Following review of the financial metrics available for each of the underlying institutions as of June 30, 2025, and December 31, 2024, Management concluded the unrealized loss position of these securities were 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.

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Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to ongoing quarterly reviews.

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 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.

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

Following review of financial metrics as of both June 30, 2025, and 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)

March 31, 2025

June 30, 2025

December 31, 2024

6 unchanged sentences

Consumer loans

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.

Gross loan balances at $2.4 billion, increased $103.3 million, or 4%, during the first half of 2025.

Organic loan growth contributed to increases of $34.1 million in commercial real estate loans, $6.3 million in construction loan balances, and $8.4 million in other commercial loans.

Mortgage warehouse line utilization increased $75.5 million, or 23%.

Consumer loans had a modest decline, while residential real estate loans decreased $11.1 million, and farmland loans decreased $9.6 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.

As indicated in the loan rollforward below, new credit extended for the second quarter of 2025 decreased $18.2 million over the linked quarter comparison and increased $7.8 million over the same period in 2024.

For the six months ended June 30, 2025, new credit extended increased $39.2 million, or 52% over the same period in 2024.

For the first six months ended 2025, we had $77.2 million in loan paydowns and maturities, along with a $9.5 million decrease in line of credit utilization, partially offset by a $75.5 million increase in mortgage warehouse utilization for the first half of 2025.

LOAN ROLLFORWARD

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For the three months ended:

March 31, 2025

December 31, 2024

For the six months ended:

June 30, 2025

March 31, 2025

June 30, 2024

June 30, 2025

June 30, 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.

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;

At June 30, 2025, the total regulatory CRE concentration ratio of total CRE over Tier 1 Capital plus allowance was 243.6% as compared to 236.3% at December 31, 2024, and 241.1% at June 30, 2024.

The overall level of construction and land development lending is 2.6% of regulatory capital plus allowance for credit losses at June 30, 2025.

At June 30, 2025, non-owner occupied commercial real estate includes $306.5 million of retail;

$145.6 million of warehouse/industrial;

2 unchanged sentences

Approximately $35.8 million, or 23% of the office real estate matures in less than two years.

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.

1 unchanged sentence

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, when applicable.

Nonperforming assets is currently 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)

March 31, 2025

June 30, 2025

December 31, 2024

March 31, 2024

June 30, 2024

Nonperforming Loans:

10 unchanged sentences

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

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.

Total nonperforming assets, comprised of nonaccrual loans and foreclosed assets, decreased by $4.7 million to $15.0 million for the first half of 2025.

The Company's ratio of nonperforming loans to gross loans decreased to 0.62% at June 30, 2025, from 0.84% at December 31, 2024.

The decrease resulted from a decrease in non-accrual loan balances, due to the partial charge-off of one agricultural production loan.

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.

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.

There were no foreclosed assets at June 30, 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 $3.1 million in loans past due 30-89 days and still accruing at March 31, 2025.

The Company had $3.0 million in loans past due 30-89 days and still accruing at June 30, 2025.

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

3 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 $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.

The Company's allowance for credit losses on loans was $21.7 million at June 30, 2025, as compared to $24.8 million at December 31, 2024, and $21.6 million at June 30, 2024.

The decrease for the first half of 2025 is primarily attributable to a decrease in the allowance for loans individually evaluated and was specifically related to the partial charge-off of one agricultural production loan, reflected in the other commercial category in the table below.

The allowance as a percentage of gross loans was 0.89%, 1.07%, and 0.97%, at June 30, 2025, December 31, 2024, and June 30, 2024, respectively.

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 June 30, 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 $21.7 million at June 30, 2025, included $0.5 million of allowance related to $401.9 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 June 30, 2025, an increase of $0.1 million, from December 31, 2024.

Allowance for Credit Losses on Loans

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Provision charged to expense

Residential real estate

Commercial real estate

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Residential real estate

Commercial real estate

Total real estate

1 unchanged sentence

Consumer loans

Net loan (recoveries) charge offs

Net loan charge-offs

Balance at end of period

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

Net charge-offs to average loans (annualized)

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

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

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

(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 $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 $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.

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

Unused commitments to extend credit, which included standby letters of credit, totaled $671.4 million at June 30, 2025, and $641.5 million at December 31, 2024, representing approximately 28% of gross loans outstanding at both June 30, 2025, and 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 $334.6 million at June 30, 2025, and $311.6 million at December 31, 2024, while mortgage warehouse utilization was 55% and 51%, respectively.

The increase in mortgage warehouse utilization during the first half of 2025 was due to new customers added in the mortgage warehouse product that ramped up their utilization.

Unused commitments, exclusive of mortgage warehouse lines and overdraft lines of credit, were flat at 57% at December 31, 2024, and June 30, 2025.

Total mortgage warehouse commitments increased by $38.5 million and $98.5 million for the three-and-six-month periods ending June 30, 2025, respectively.

The Company also had undrawn letters of credit issued to customers totaling $5.3 million at June 30, 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 $83.4 million at March 31, 2025.

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

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

For more information on the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements located elsewhere herein.

4 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 $80.4 million at March 31, 2025, relative to $79.6 million at December 31, 2024.

The Company’s balance of non-earning cash and due from banks was $112.9 million at June 30, 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 $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.

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

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

Goodwill was $27.4 million at June 30, 2025, unchanged during the first half 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 $52.7 million at March 31, 2025, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

Bank-owned life insurance, with a balance of $67.7 million at June 30, 2025, increased $14.5 million during the first half of 2025, primarily due to the purchase of additional life insurance policies.

Additional details are discussed above in the “Noninterest Income and Noninterest Expense” section.

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

loan funds, and other miscellaneous assets.

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

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

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

DEPOSITS AND INTEREST-BEARING LIABILITIES

Deposits represent another key balance sheet category impacting the Company’s net interest income and profitability metrics.

Deposits represent a key balance sheet category impacting the Company’s profitability metrics.

Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity accounts, such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts.

2 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2025

June 30, 2025

December 31, 2024

3 unchanged sentences

Total deposits

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.

Deposit balances increased by $82.8 million, or 3%, during the first half of 2025 to $3.0 billion at June 30, 2025.

Core non-maturity deposits increased $86.8 million, or 4%, for the first half of 2025, while customer time deposits decreased by $19.0 million.

Brokered deposits increased $15.0 million to fund mortgage warehouse lines.

Noninterest-bearing deposits as a percent of total deposits increased to 35.8% at June 30, 2025, compared to 34.8% at December 31, 2024, and from 33.5% at June 30, 2024.

Overall uninsured deposits are estimated to be $751.1 million, or 26% 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.

IntraFi allows for up to $285 million of combined pass-through FDIC insurance which would more than cover each of the Bank’s deposit customers if a 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 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.

At June 30, 2025, the Company had approximately 118,000 accounts, and the 25 largest deposit balance customers had balances of approximately 11% of overall deposits .

OTHER INTEREST-BEARING LIABILITIES

Customer repurchase agreements were $126.5 million at June 30, 2025, as compared to $108.9 million at December 31, 2024.

Customer repurchase agreements allow customers to sweep excess deposit balances over the FDIC insurance limit each day into a separate repurchase agreement account.

Monies in that account are used daily by the customer to purchase specific government debt securities from the Company under an agreement from the Company to repurchase the same

securities from the customer on the next business day.

These accounts are not deposits and are not FDIC insured.

However, the repurchase agreement provides a customer with a larger account balance to have their account effectively secured with US government securities.

The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the FHLB, advances from the FRB, securities sold under agreements to repurchase, subordinated notes and/or junior subordinated debentures.

The Company uses short-term FHLB advances and fed funds purchased on unsecured lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from

increased loan demand, and for other short-term purposes.

The Company uses short-term FHLB advances and fed funds purchased on unsecured lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes.

The FHLB line consists of both a secured and unsecured component.

The secured component depends on the level of pledged collateral.

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.

At June 30, 2025 the Company had $74.4 million in overnight borrowings, and $80.0 million of term FHLB borrowings, as compared to $80.0 million of term FHLB borrowings on December 31, 2024.

Long-term debt at June 30, 2025, consisted of $49.4 million of subordinated debt.

This remained relatively unchanged from December 31, 2024.

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.

Subordinated debentures related to $35.9 million of trust preferred securities at June 30, 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.

2 unchanged sentences

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 $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 .

The Company’s balance of other liabilities was $73.0 million at June 30, 2025, as compared to $90.5 million at December 31, 2024, a decrease of $17.5 million or 19%.

The decrease was primarily driven by investment security purchases in process that settled, ICS transactions in process that settled, funds advanced on low-income housing tax credit investments, and a decrease in accrued interest on time deposits.

LIQUIDITY AND MARKET RISK MANAGEMENT

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%.

In addition, the Company’s loan-to-deposit ratio was 82% at June 30, 2025, and 81% at 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.

4 unchanged sentences

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

At June 30, 2025, and December 31, 2024, the Company had the following sources of primary and secondary liquidity (dollars in thousands):

Primary and secondary liquidity sources

March 31, 2025

June 30, 2025

December 31, 2024

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Funds available through fed discount window

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.

Available funding sources, detailed above of, $2.3 billion represented 77% of total deposits and 307% of estimated uninsured and/or uncollateralized deposits as of June 30, 2025.

Unpledged investment securities include $123.2 million of CLOs.

As CLO’s have a rate that resets every 90 days to current rates, the volatility of pricing of these securities is limited and the Company could sell such securities for liquidity at a significantly lower loss than selling lower rate fixed term securities such as US government bonds or municipal bonds.

The Company performs regular stress tests on its liquidity and at this time, Management believes that it has sufficient primary and secondary liquidity sources for operations.

As CLO rates reset every 90 days to current rates, the volatility of pricing of these securities is limited and the Company could sell such securities for liquidity at a significantly lower loss than selling lower-rate fixed term securities such as US government bonds or municipal bonds.

The Company performs regular stress tests on its liquidity, and at this time, Management believes it has sufficient primary and secondary liquidity sources for operations.

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 March 31, 2025, and December 31, 2024.

That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at June 30, 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 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’s primary liquidity ratio was 21% at June 30, 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 June 30, 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 March 31, 2025, the holding company maintained a cash balance of $2.4 million.

As of June 30, 2025, the holding company maintained a cash balance of $8.6 million.

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

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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.

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

Assumptions regarding deposit betas in the up cycles can range from 25% to 100% and from 0% to 75% in the down cycles, depending on the deposit type.

Deposit decay rate assumptions range from 5 to 10% and are based on historical averages.

Prepayment speeds are based on three-year historical averages.

Deposit decay rate assumptions range from 5% to 26% and are based on the Company’s own historical averages.

Prepayment speeds are based on actual three-year historical averages.

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

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Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations considering economic conditions and expectations at the time.

Pursuant to policy guidelines, the Company generally attempts to limit the projected decline in net interest income relative to the stable rate scenario to no more than 10% for a 100 basis point interest rate shock, 15% for a 200 basis point shock, 20% for a 300 basis point shock, and 25% for a 400 basis point shock.

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:

March 31, 2025

March 31, 2024

The Company’s guideline is to limit any projected decline in net interest income relative to the stable rate scenario to no more than 10% for a 100 basis point interest rate shock, 15% for a 200 basis point shock, 20% for a 300 basis point shock, and 25% for a 400 basis point shock.

June 30, 2025

June 30, 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 March 31, 2025, management believes that the Company is asset sensitive, slightly more asset sensitive than the same period a year ago.

Based on the interest rate shocks, for the period ending June 30, 2025, Management believes that the Company is asset sensitive and is, slightly less 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.

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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.

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 we are less sensitive to interest rate changes, when compared to use of an interest rate shock.

As the Company utilizes a dynamic balance sheet for its interest rate modeling, the Company also uses a static, or no-growth, balance sheet to assess the reasonableness of the interest rate sensitivity in the dynamic balance sheet model;

no significant changes in interest rate risk outside of the base case were noted.

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.

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CAPITAL RESOURCES

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.

The Company had total shareholders’ equity of $355.7 million at June 30, 2025, comprised of $105.0 million in common stock, $5.0 million in additional paid-in capital, $274.4 million in retained earnings, and accumulated other comprehensive loss of $28.7 million.

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

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 $1.6 million, or 0.4%, decrease in equity during the first half of 2025 is due to a $7.0 million dividend paid to shareholders and, $18.0 million in share repurchases, mostly offset by net income of $19.7 million, and a $2.6 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 first half of 2025.

At June 30, 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 June 30, 2025, 190,342 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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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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis