FARMERS & MERCHANTS BANCORP 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to provide a comprehensive review of the Company’s operating results and financial condition. The information contained in this section should be read in conjunction with the Audited Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in this Form 10-K. Information related to the comparison of the results of operations for the years December 31, 2022 to 2021 is found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2022 Annual Report on Form 10-K filed with the SEC on March 15, 2023. Overview Farmers & Merchants Bancorp (the “Company” or “FMCB”) is a Delaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by the Federal Reserve and by the California Department of Financial Protection and Innovation (“DFPI”). The Company’s principal business is to serve as a holding company for Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank”) and for other banking or banking related subsidiaries, which the Company may establish or acquire. Over 107 years ago, August 1, 1916, marked the first day of business for Farmers & Merchants Bank (the “Bank”). The Bank was incorporated under the laws of the State of California and licensed as a state-chartered bank. The Bank’s first venture out of Lodi occurred when the Galt office opened in 1948. Since then the Bank has opened full-service branches in Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Walnut Grove, Oakland and Napa. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company. In March 2002, F & M Bancorp, Inc. was created to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition. Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank.” The Company’s outstanding common stock as of December 31, 2023, consisted of 747,971 shares of common stock, $0.01 par value. No shares of preferred stock were issued or outstanding as of December 31, 2023. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.” The primary source of funding for the Company’s growth has been the generation of core deposits, which the Company raises through its existing branch locations, newly opened branch locations, or through acquisitions. Loan growth over the years is the result of organic growth generated by the Company’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to the Company’s clients. The Company’s results of operations are largely dependent on net interest income. Net interest income is the difference between interest income earned on interest earning assets, which are comprised of loans and leases, investment securities, short-term investments and interest bearing deposits at other banks, and the interest the Company pays on interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. 43 Table of Contents The Company measures its performance by calculating the net interest margin, return on average assets, return on average equity and the efficiency ratio. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is the Company’s largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. The return on average assets is calculated by dividing the Company’s net income by its total average assets and the return on average equity is calculated by dividing the Company’s net income by its shareholder equity. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income. Selected Financial Data The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2023, 2022, and 2021 and for the years then ended have been derived from our audited consolidated financial statements. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8, Financial Statement and Supplementary Data.” Years Ended December 31 (Dollars in thousands, except per share data) 2023 2022 2021 Selected Income Statement Information: Interest income $ 253,754 $ 198,413 $ 165,268 Interest expense 38,369 4,840 4,332 Net interest income 215,385 193,573 160,936 Provision for credit losses 9,407 6,450 1,910 Net interest income after provision for credit losses 205,978 187,123 159,026 Non-interest income 14,914 6,178 21,056 Non-interest expense 104,339 93,560 91,761 Income before income tax expense 116,553 99,741 88,321 Income tax expense 28,239 24,651 21,985 Net income $ 88,314 $ 75,090 $ 66,336 Selected financial ratios: Basic and diluted earnings per share $ 116.61 $ 96.55 $ 84.01 Cash dividends per common share 17.10 16.15 15.30 Dividend payout ratio 14.66 % 16.73 % 18.21 % Net interest margin (tax equivalent) 4.30 % 3.81 % 3.46 % Non-interest income to average assets 0.28 % 0.12 % 0.43 % Non-interest expense to average assets 1.98 % 1.75 % 1.87 % Efficiency ratio 45.31 % 46.84 % 50.42 % Return on average assets 1.68 % 1.41 % 1.35 % Return on average equity 17.05 % 16.04 % 15.00 % Net charge-offs (recoveries) to average loans (0.01 %) 0.01 % (0.01 %) 44 Table of Contents As of December 31, (Dollars in thousands, except per share data) 2023 2022 2021 Selected Balance Sheet Information: Cash and cash equivalents $ 410,642 $ 588,257 $ 715,460 Investment securities 999,750 997,817 1,007,506 Gross loans held for investment 3,665,397 3,521,718 3,247,911 Total assets 5,308,928 5,327,399 5,177,720 Total deposits 4,668,095 4,759,269 4,640,152 Shareholders' equity 549,755 485,308 463,136 Average Balances: Average earning assets 5,027,990 5,091,684 4,656,337 Average assets 5,270,352 5,341,901 4,913,999 Average shareholders' equity 518,035 468,001 442,246 Selected financial ratios: Book value per share $ 735.00 $ 631.63 $ 586.51 Tangible book value per share $ 717.05 $ 613.42 $ 568.04 Allowance for credit losses to total loans 2.05 % 1.90 % 1.88 % Non-performing assets to total assets 0.02 % 0.03 % 0.03 % Loans held for investment to deposits 78.52 % 74.00 % 70.00 % Capital ratios: Common equity tier 1 capital to risk-weighted assets 12.30 % 11.57 % 11.68 % Tier 1 capital to risk-weighted assets 12.53 % 11.80 % 11.94 % Risk-based capital to risk-weighted assets 13.78 % 13.06 % 13.19 % Tier 1 leverage capital ratio 10.38 % 9.36 % 8.92 % Tangible common equity ratio(1) 10.13 % 8.87 % 8.69 % (1) See "Non-GAAP Measurements" Summary of Critical Accounting Policies and Estimates In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified certain accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. Management believes the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods. For additional information concerning critical accounting policies, see Note 1 located in Item 8: “Financial Statements and Supplementary Data” in this Form 10-K and the following: Use of Estimates — The preparation of our financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances and the actual results may differ from these estimates under different assumptions. The allowance for credit losses, deferred income taxes, and fair values of financial instruments are estimates, which are particularly subject to change. 45 Table of Contents Allowance for Credit Losses — The Company recognizes there is risk of credit losses with financial instruments, such as loans and unfunded loan commitments, where the Company advances funds to a counterparty. The risk of credit losses varies with, among other things, the type of financial instrument, the creditworthiness and cash flows of the counterparty, any guarantees from government agencies, and the collateral, if any, used to secure the financial instrument. The Company maintains an allowance for credit losses on loans and unfunded commitments held in accordance with GAAP. The allowance for credit losses represents our estimate of current expected credit losses inherent in our existing loan portfolio. The allowance for credit losses is increased by charging a provision for credit losses against income and reduced by charge-offs, net of recoveries. Under the guidance of Financial Accounting Standards Board Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“CECL”), we evaluate our allowance for credit losses quarterly based on a number of quantitative and qualitative factors. Allowance for credit losses is provided on both a specific and general basis. Specific allowances are provided for impaired credits for which the expected/anticipated loss is measurable. General valuation allowances are based on a portfolio segmentation based on risk grading, with a further evaluation of various quantitative and qualitative factors. The Company uses the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL, as this method is deemed the most appropriate given the Company’s current size and complexity. The Company begins its determination of credit losses by evaluating historical credit loss experience by loan segment. The Company analyzes historical credit loss criteria over a fifteen-year history for both the Company’s loss history and its peers. Due to a growth cycle that has expanded the Company’s geographical service area and product mix as it has expanded into the San Francisco Bay Area, the Company’s peer group losses have been determined to better align with the Company’s loss profile in loans related to commercial, industrial, and personal segments. However, given the low concentration in agricultural industry related loans in the peer group, the Company’s own loss history in agricultural loans is more suitable. These loss factors are analyzed in conjunction with weighted average duration calculations in order to assess the loss factors over the life of the loan segment. Historical loss information may be adjusted based on specific risk characteristics by loan segment. Such risk characteristics may include, but are not necessarily limited to, changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; changes in national and local economic conditions and forecasts; changes in the nature and volume of the loans and in the terms of such instruments; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due status, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; changes in the quality of the institution’s loan review system; changes in the value of underlying collateral for collateral-dependent loans; the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses. While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates. The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known. For additional information, see Note 4, located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K. The allowance for credit losses on unfunded loan commitments is classified in other liabilities on the Consolidated Statements of Financial Condition. The Company analyzes the unfunded loan commitments utilizing historical utilization rates from the prior 12 months to predict losses. The allowance for credit losses on unfunded loan commitments is increased by charging the provision for credit losses. The provision for credit-losses – unfunded loan commitments was recognized in non-interest expense in 2022. 46 Table of Contents We believe that our allowance for credit losses was adequate to absorb probable losses inherent in the loan and lease portfolio as of December 31, 2023 and 2022. Investment Securities — Investment securities are classified as held-to-maturity (“HTM”) when the Company has the positive intent and ability to hold the securities to maturity. Investment securities are classified as available-for-sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity. The Company determines the appropriate classification at the time of purchase, and periodically thereafter. Investment securities classified at HTM are carried at amortized cost. Investment securities classified as AFS are reported at fair value. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified as HTM are carried at cost, net of the allowance for credit losses - securities, adjusted for amortization of premiums and discounts to the earliest callable date. Debt securities classified as AFS are measured at fair value. Unrealized holding gains and losses on debt securities classified as AFS are excluded from earnings and are reported net of tax as accumulated other comprehensive income (“AOCI”), a component of shareholders’ equity, until realized. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income. Management measures expected credit losses on HTM debt securities on a collective basis by major security type. The Company’s HTM portfolio contains securities issued by U.S. government entities and agencies and municipalities. The Company uses industry historical credit loss information adjusted for current conditions to establish the allowance for credit losses on its HTM municipal bond portfolio. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security, before recovering its cost basis, the entire impairment loss would be recognized in earnings. If the Company does not intend to sell the security, and it is not more likely than not that the Company will be required to sell the security, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI. Changes in the allowance for credit losses-securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the non-collectability of an AFS security is confirmed or when either criteria regarding intent or requirement to sell is met. At December 31, 2023, the Company had no investment securities that were impaired. Fair Value Measurements — The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those fair values. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period between origination of the instrument and its expected realization. For additional information, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” and Note 11 located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K. 47 Table of Contents Income Taxes — Income taxes are filed on a consolidated basis with our subsidiaries and we allocate income tax expense (benefit) based on each entity’s proportionate share of the consolidated provision for income taxes. Deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The determination of the amount of deferred income tax assets that are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred income tax asset will not be realized. “More likely than not” is defined as greater than a 50% probability. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Only tax positions that meet the “more likely than not” recognition threshold are recognized. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the “more likely than not” recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated statements of financial condition along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with unrecognized tax benefits are classified as income tax expense in the consolidated statements of income. Impact of Recently Issued Accounting Standards See Note 1. “Summary of Significant Accounting Policies” to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K. 48 Table of Contents Non-GAAP Measurements We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-K: • Tangible common equity ratio and tangible book value per common share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP measures of return on average equity and book value per common share. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented. Tangible Common Equity Ratio and December 31, Tangible Book Value Per Common Share 2023 2022 2021 (Dollars in thousands, except per share data) Shareholders' equity $ 549,755 $ 485,308 $ 463,136 Less: Intangible assets 13,419 13,992 14,585 Tangible common equity $ 536,336 $ 471,316 $ 448,551 Total Assets $ 5,308,928 $ 5,327,399 $ 5,177,720 Less: Intangible assets 13,419 13,992 14,585 Tangible assets $ 5,295,509 $ 5,313,407 $ 5,163,135 Tangible common equity ratio (1) 10.13 % 8.87 % 8.69 % Book value per common share (2) $ 735.00 $ 631.63 $ 586.51 Tangible book value per common share (3) $ 717.05 $ 613.42 $ 568.04 Common shares outstanding 747,971 768,337 789,646 (1) Tangible common equity divided by tangible assets (2) Total common equity divided by common shares outstanding. (3) Tangible common equity divided by common shares outstanding. 49 Table of Contents Results of Operations The following discussion and analysis is intended to provide a better understanding of the Company’s performance during each of the years in the two-year period ended December 31, 2023 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying consolidated financial statements. Information related to the comparison of the results of operations for the years ended December 31, 2022 and 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2022 Annual Report on Form 10-K filed with the SEC on March 15, 2023. Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the sale of investment securities, and gains/losses on deferred compensation plan investments. Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing, deposit insurance, marketing, professional services, and other expenses. Earnings Performance The following table presents performance metrics for the periods indicated: December 31, (dollars in thousands, except per share amounts) 2023 2022 Earnings Summary: Interest income $ 253,754 $ 198,413 Interest expense 38,369 4,840 Net interest income 215,385 193,573 Provision for credit losses 9,407 6,450 Non-interest income 14,914 6,178 Non-interest expense 104,339 93,560 Income before taxes 116,553 99,741 Income tax expense 28,239 24,651 Net Income $ 88,314 $ 75,090 Per Common Share Data: Diluted earnings per common share $ 116.61 $ 96.55 Book value per common share $ 735.00 $ 631.63 Tangible book value per common share (1) $ 717.05 $ 613.42 Performance Ratios: Return on average assets 1.68 % 1.41 % Return on average equity 17.05 % 16.04 % Net interest margin (tax equivalent) 4.30 % 3.81 % Yield on average loans and leases (tax equivalent) 5.84 % 5.00 % Cost of average total deposits 0.80 % 0.09 % Efficiency ratio 45.31 % 46.84 % Loan-to-deposit ratio 78.52 % 74.00 % Percentage of checking deposits to total deposits 51.76 % 60.59 % Capital Ratios Bancorp: Common equity tier 1 capital to risk-weighted assets 12.30 % 11.57 % Tier 1 capital to risk-weighted assets 12.53 % 11.80 % Risk-based capital to risk-weighted assets 13.78 % 13.06 % Tier 1 leverage capital ratio 10.38 % 9.36 % Tangible common equity ratio (1) 10.13 % 8.87 % (1) See "Non-GAAP Measurements" 50 Table of Contents Average Balance and Yields The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances. Year ended December 31, 2023 2022 (Dollars in thousands) Average Balance Interest Income / Expense Average Yield / Rate Average Balance Interest Income / Expense Average Yield / Rate ASSETS Interest earnings deposits in other banks and federal funds sold $ 519,331 $ 26,872 5.17 % $ 704,082 $ 12,102 1.72 % Investment securities: (1) Taxable securities 929,503 18,886 2.03 % 1,044,954 19,678 1.88 % Non-taxable securities (2) 61,029 2,888 4.73 % 48,168 1,984 4.12 % Total investment securities 990,532 21,774 2.20 % 1,093,122 21,662 1.98 % Loans: (3) Real estate: Commercial 1,295,101 67,955 5.25 % 1,202,548 58,966 4.90 % Agricultural 732,241 40,446 5.52 % 705,222 35,010 4.96 % Residential and home equity 393,100 17,605 4.48 % 369,619 14,551 3.94 % Construction 179,297 12,638 7.05 % 182,523 9,788 5.36 % Total real estate 2,599,739 138,644 5.33 % 2,459,912 118,315 4.81 % Commercial & industrial 479,552 33,941 7.08 % 440,510 22,452 5.10 % Agricultural 292,079 23,399 8.01 % 262,461 14,084 5.37 % Commercial leases 125,680 8,160 6.49 % 94,040 5,702 6.06 % Consumer and other 5,528 338 6.11 % 22,008 3,469 15.76 % Total loans and leases 3,502,578 204,482 5.84 % 3,278,931 164,022 5.00 % Non-marketable securities 15,549 1,213 7.80 % 15,549 1,042 6.70 % Total interest earning assets 5,027,990 254,341 5.06 % 5,091,684 198,828 3.90 % Allowance for credit losses (71,461 ) (62,588 ) Non-interest earning assets 313,823 312,805 Total average assets $ 5,270,352 $ 5,341,901 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Demand $ 983,340 2,357 0.24 % $ 1,120,198 1,497 0.13 % Savings and money market accounts 1,631,818 21,831 1.34 % 1,542,310 1,981 0.13 % Certificates of deposit greater than $250,000 245,094 7,680 3.13 % 157,623 460 0.29 % Certificates of deposit less than $250,000 273,281 5,655 2.07 % 215,044 411 0.19 % Total interest bearing deposits 3,133,533 37,523 1.20 % 3,035,175 4,349 0.14 % Short-term borrowings 1 - 0.00 % 1 - 0.00 % Subordinated debentures 10,310 846 8.21 % 10,310 491 4.76 % Total interest bearing liabilities 3,143,844 38,369 1.22 % 3,045,486 4,840 0.16 % Non-interest bearing deposits 1,528,375 1,751,797 Total funding 4,672,219 38,369 0.82 % 4,797,283 4,840 0.10 % Other non-interest bearing liabilities 80,098 76,617 Shareholders' equity 518,035 468,001 Total average liabilities and shareholders' equity $ 5,270,352 $ 5,341,901 Net interest income and margin (4) $ 215,972 4.30 % $ 193,988 3.81 % Interest rate spread 3.84 % 3.75 % Tax Equivalent Adjustment (587 ) (415 ) Net interest income 215,385 4.28 % 193,573 3.80 % (1) Excludes average unrealized (losses) of ($25.8) million and $(24.5) million for the years ended December 31, 2023, and 2022, respectively, which are included in non-interest earning assets. (2) Yields and interest income are calculated on a fully taxable equivalent basis using the current statutory federal tax rate. (3) Loan interest income includes loan fees of $6.1 million and $11.6 million for the years ended December 31, 2023 and 2022, respectively. (4) Net interest margin is computed by dividing net interest income by average interest earning assets. 51 Table of Contents Interest-bearing deposits with banks and FRB balances are earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.17% and 1.72% for the years ended December 31, 2023 and 2022, respectively. The increase was primarily the result of the Federal Reserve increasing rates by 425 basis points from March 2022 to December 2022 and 100 basis points from February 2023 to July 2023. Average interest-bearing deposits with banks was $519.3 million and $704.1 million for the years ended December 31, 2023 and 2022, respectively and decreased primarily to fund loan growth. Interest income on interest-bearing deposits with banks was $26.9 million and $12.1 million for the years ended December 31, 2023 and 2022, respectively. The investment portfolio is also a component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans and leases, the yield earned on investments is generally less than that of loans and leases. Average total investment securities were $990.5 million and $1.1 billion for the years ended December 31, 2023 and 2022, respectively. The average yield on total investment securities was 2.20% and 1.98% for the years ended December 31, 2023 and 2022, respectively. See “Investment Securities” for a discussion of the Company’s investment strategy in 2023. Average loans and leases held for investment were $3.5 billion and $3.3 billion for the years ended December 31, 2023 and 2022, respectively. The average yield on the loan and lease portfolio was 5.84% and 5.00% for the years ended December 31, 2023 and 2022, respectively. The increase in the loan yield reflects the increase in market interest rates over the prior year. Average interest-bearing deposits were $3.1 billion and $3.0 billion for the years ended December 31, 2023 and 2022, respectively. The average rate paid on interest-bearing deposits was 1.20% and 0.14% for the years ended December 31, 2023 and 2022, respectively. Total interest expense on interest-bearing deposits was $37.5 million and $4.3 million for the years ended December 31, 2023 and 2022, respectively, with the increase driven by increases in short-term market interest rates during 2023. The average rate paid on total funding costs was 0.82% and 0.10% for the years ended December 31, 2023 and 2022, respectively. 52 Table of Contents Rate/Volume Analysis The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each. Year Ended December 31, 2023 compared with 2022 Increase (Decrease) Due to: (Dollars in thousands) Volume Rate Net Interest income: Interest earnings deposits in other banks and federal funds sold $ (3,913 ) $ 18,683 $ 14,770 Investment securities: Taxable securities (2,274 ) 1,482 (792 ) Non-taxable securities 581 324 904 Total investment securities (1,694 ) 1,805 112 Loans: Real estate: Commercial 4,704 4,285 8,989 Agricultural 1,379 4,057 5,436 Residential and home equity 964 2,089 3,054 Construction (176 ) 3,026 2,850 Total real estate 6,872 13,457 20,329 Commercial & industrial 2,134 9,356 11,489 Agricultural 1,735 7,579 9,315 Commercial leases 2,030 428 2,458 Consumer and other (1,723 ) (1,408 ) (3,131 ) Total loans and leases 11,049 29,411 40,460 Non-marketable securities - 171 171 Total interest income 5,443 50,071 55,513 Interest expense: Interest bearing deposits: Demand (202 ) 1,062 860 Savings and money market accounts 122 19,729 19,850 Certificates of deposit greater than $250,000 389 6,831 7,220 Certificates of deposit less than $250,000 140 5,103 5,244 Total interest bearing deposits 450 32,725 33,174 Subordinated debentures - 355 355 Total interest expense 450 33,080 33,529 Net interest income $ 4,993 $ 16,991 $ 21,984 53 Table of Contents Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022 Years Ended December 31 (Dollars in thousands) 2023 2022 $ Better / (Worse) % Better / (Worse) Selected Income Statement Information: Interest income $ 253,754 $ 198,413 $ 55,341 27.89 % Interest expense 38,369 4,840 (33,529 ) (692.75 %) Net interest income 215,385 193,573 21,812 11.27 % Provision for credit losses 9,407 6,450 (2,957 ) (45.84 %) Net interest income after provision for credit losses 205,978 187,123 18,855 10.08 % Non-interest income 14,914 6,178 8,736 141.40 % Non-interest expense 104,339 93,560 (10,779 ) (11.52 %) Income before income tax expense 116,553 99,741 16,812 16.86 % Income tax expense 28,239 24,651 (3,588 ) (14.56 %) Net income $ 88,314 $ 75,090 $ 13,224 17.61 % For the years ended December 31, 2023 and 2022, net income was $88.3 million compared with $75.1 million, respectively. The increase in net income was primarily the result of higher net interest income of $21.8 million and an increase in non-interest income of $8.7 million, which included a $4.3 million death benefit gain on bank-owned life insurance (“BOLI”) that was not present during 2022. This increase was offset by an increase in non-interest expense of $10.8 million, higher income tax expense of $3.6 million and a higher provision for credit losses of $3.0 million. Net Interest Income and Net Interest Margin For the year ended December 31, 2023, net interest income increased $21.8 million, or 11.27%, to $215.4 million compared with $193.6 million for the same period a year earlier. The increase is primarily the result of the net interest margin (tax equivalent basis) increasing 49 basis points to 4.30% compared with 3.81% for the same period a year earlier. The increase in the net interest margin was primarily the result of the Federal Reserve increasing the federal funds rate by 425 basis points from March 2022 to December 2022 and 100 basis points from February 2023 to July 2023. The loan yield for the year ended December 31, 2023, increased 84 basis points from 5.00% to 5.84% compared to the same period a year earlier. The cost of funds for the year ended December 31, 2023, increased by 72 basis points from 0.10% to 0.82% compared to the same period a year earlier. Provision for Credit Losses. The provision for credit losses in each period is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb expected losses, over the life of the loans and leases, unfunded loan commitments and HTM securities portfolios. The provision for credit losses for the year ended December 31, 2023, was $9.4 million compared with $6.5 million for the same period a year earlier. The increase in 2023 was primarily due to higher estimated losses inherent in the loan and lease portfolio directly related to quantitative and qualitative factors associated with the current economic environment. For the year ended December 31, 2023, the Company incurred net recoveries of $0.3 million compared with net charge-offs of $0.2 million for the same period a year earlier. 54 Table of Contents Non-interest Income Years Ended December 31 (Dollars in thousands) 2023 2022 $ Better / (Worse) % Better / (Worse) Non-interest Income: Card processing 6,686 7,123 $ (437 ) (6.14 %) Gain on BOLI death benefit 4,346 - 4,346 - Net gain on deferred compensation benefits 2,974 451 2,523 559.42 % Service charges on deposit accounts 2,755 2,794 (39 ) (1.40 %) Increase in cash surrender value of BOLI 2,027 2,233 (206 ) 9.23 % Net loss on sale of securities available-for-sale (8,199 ) (10,689 ) 2,490 (23.29 %) Other 4,325 4,266 59 1.38 % Total non-interest income $ 14,914 $ 6,178 $ 8,736 141.40 % Non-interest income increased $8.7 million to $14.9 million for 2023 compared with $6.2 million for the same period a year earlier. The year-over-year increase in non-interest income was primarily due to a $4.3 million BOLI death benefit gain, a $2.5 million increase in net gains on deferred compensation plan investments and a $2.5 million decrease in net losses on the sale of investment securities during 2023 for interest rate risk management purposes to reposition the balance sheet. The Company recorded net gains on deferred compensation plan investments of $3.0 million in 2023 compared to net gains of $0.5 million in 2022. See Note 10, located in Item 8. “Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income. Non-interest Expense Years Ended December 31 (Dollars in thousands) 2023 2022 $ Better / (Worse) % Better / (Worse) Non-interest Expense: Salaries and employee benefits 70,883 64,250 $ (6,633 ) (10.32 %) Data Processing 5,293 4,968 (325 ) (6.54 %) Occupancy 4,837 4,717 (120 ) (2.54 %) Net gain on deferred compensation benefits 2,974 451 (2,523 ) (559.42 %) Deposit insurance 2,769 1,771 (998 ) (56.35 %) Professional services 2,334 2,459 125 5.08 % Marketing 1,885 1,324 (561 ) (42.37 %) Other 13,364 13,620 256 1.88 % Total non-interest expense $ 104,339 $ 93,560 $ (10,779 ) (11.52 %) Non-interest expense increased $10.8 million to $104.3 million for 2023 compared with $93.6 million for the same period a year earlier. The year-over-year increase was primarily comprised of a $6.6 million increase in salaries and employee benefits, a $2.5 million increase in net gains on deferred compensation plan investments, a $1.0 million increase in deposit insurance and a $0.6 million increase in marketing expenses. For the year ended December 31, 2023, the Company’s expense efficiency ratio was 45.31% compared with 46.84% for the same period a year earlier as the increase in revenues outpaced the increase in expenses. 55 Table of Contents Net gains on deferred compensation plan obligations were $3.0 million in 2023 compared to net gains of $0.5 million in 2022. See Note 10, located in “tem 8. “Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income. Income Tax Expense For the year ended December 31, 2023, income tax expense was $28.2 million, compared with $24.7 million for the same period a year earlier. For the year ended December 31, 2023, the effective tax rate was 24.23% compared with 24.72% for the same period a year earlier. The Company’s effective tax rate for 2023 was lower, primarily due to a non-taxable BOLI death benefit gain of $4.3 million recognized during the year. The Company’s effective tax rate can fluctuate from year to year due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% due primarily to BOLI death benefits, the cash surrender value of life insurance, credits associated with low income housing tax credit investments (“LIHTC”), and tax-exempt interest income on municipal securities and loans. Balance Sheet Analysis Total assets were $5.3 billion at December 31, 2023, a decrease of $18.5 million or 0.35% compared to December 31, 2022. Loans held for investment grew $142.3 million or 4.05% to $3.7 billion at December 31, 2023, compared with $3.5 billion at December 31, 2022. Total deposits were $4.7 billion at December 31, 2023 compared with $4.8 billion at December 31, 2022, a decrease of $91.2 million, or 1.92%. Cash and Cash Equivalents The Company’s cash and cash equivalents consist of interest bearing deposits with banks and overnight investments in Federal Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $338.4 million at December 31, 2023 and $514.9 million at December 31, 2022. The decrease was primarily due to funding loan growth during the year. The Company’s total cash and cash equivalents as of December 31, 2023 represented 7.7% of the Company’s total assets as compared to 11.0% as of December 31, 2022. 56 Table of Contents Investment Securities The Company’s net investment portfolio increased slightly by $2.0 million to $1.0 billion at December 31, 2023 compared to $998.2 million at December 31, 2022. During 2023, the Company purchased $85.3 million of` investment securities and sold $39.9 million for interest rate risk management purposes to reposition the balance sheet. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company's total investment portfolio as of December 31, 2023 represented 18.84% of the Company’s total assets as compared to 18.74% at December 31, 2022. The carrying value of our portfolio of investment securities was as follows: As of December 31, (Dollars in thousands) 2023 2022 Available-for-Sale Securities U.S. Treasury notes $ - $ 4,964 U.S. Government-sponsored securities 3,224 4,427 Mortgage-backed securities (1) 163,838 132,528 Collateralized mortgage obligations (1) 535 1,054 Corporate securities 14,605 9,581 Other 310 310 Total available-for-sale securities $ 182,512 $ 152,864 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. As of December 31, (Dollars in thousands) 2023 2022 Held-to-Maturity Securities Mortgage-backed securities (1) $ 664,728 $ 702,858 Collateralized mortgage obligations (1) 74,170 80,186 Municipal securities (2) 78,790 62,302 Total held-to-maturity securities $ 817,688 $ 845,346 (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. The following table shows the carrying value for contractual maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities: As of December 31, 2023 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale U.S. Government-sponsored securities $ 1 5.91 % $ 99 6.47 % $ 269 6.65 % $ 2,855 6.44 % 3,224 6.46 % Mortgage-backed securities (1) 169 1.79 % 6,138 2.57 % 4,916 3.78 % 152,615 3.52 % 163,838 3.44 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 535 2.27 % 535 2.27 % Corporate securities - 0.00 % 14,605 5.71 % - 0.00 % - 0.00 % 14,605 5.71 % Other 310 8.20 % - 0.00 % - 0.00 % - 0.00 % 310 8.20 % Total securities available-for-sale $ 480 5.94 % $ 20,842 4.79 % $ 5,185 3.93 % $ 156,005 3.57 % $ 182,512 3.68 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 57 Table of Contents As of December 31, 2023 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities held-to-maturity Mortgage-backed securities (1) $ - 0.00 % $ 2,058 0.78 % $ 12,418 1.41 % $ 650,252 1.90 % $ 664,728 1.88 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 74,170 1.75 % 74,170 1.75 % Municipal securities 875 4.01 % 15,962 4.23 % 10,703 3.76 % 51,250 3.88 % 78,790 3.93 % Total securities held-to-maturity $ 875 4.01 % $ 18,020 3.84 % $ 23,121 2.50 % $ 775,672 2.02 % $ 817,688 2.07 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. As of December 31, 2022 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale U.S. Treasury notes $ 4,964 2.37 % $ - 0.00 % $ - 0.00 % $ - 0.00 % $ 4,964 2.37 % U.S. Government-sponsored securities 3 2.17 % 53 2.29 % 380 4.52 % 3,991 4.52 % 4,427 4.29 % Mortgage-backed securities (1) 13 2.82 % 16,460 2.31 % 15,156 2.41 % 100,899 1.82 % 132,528 1.95 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 1,054 2.35 % 1,054 2.35 % Corporate securities - 0.00 % 9,581 3.13 % - 0.00 % - 0.00 % 9,581 3.13 % Other 310 4.60 % - 0.00 % - 0.00 % - 0.00 % 310 4.60 % Total securities available-for-sale $ 5,290 2.50 % $ 26,094 2.61 % $ 15,536 2.46 % $ 105,944 1.93 % $ 152,864 2.11 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. As of December 31, 2022 Within One Year After One but Within Five Years After Five but Within Ten Years After Ten Years Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities held-to-maturity Mortgage-backed securities (1) $ - 0.00 % $ - 0.00 % $ 18,197 1.22 % $ 684,661 1.90 % $ 702,858 1.88 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 80,186 1.80 % 80,186 1.80 % Municipal securities 883 5.92 % 8,058 3.98 % 15,670 3.70 % 37,691 4.83 % 62,302 4.45 % Total securities held-to-maturity $ 883 5.92 % $ 8,058 3.98 % $ 33,867 2.37 % $ 802,538 2.03 % $ 845,346 2.07 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without penalties. The Company evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. 58 Table of Contents Loans and Leases Loans and leases can be categorized by borrowing purpose and use of funds. Common examples of loans and leases made by the Company include: Commercial and Agricultural Real Estate – These are loans secured by owner-occupied real estate, non-owner-occupied real estate, owner-occupied farmland, and multifamily residential properties. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, or the income will be the Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; maturities generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); amortizations of up to 25 years (30 years for multifamily residential properties); have debt service coverage ratios of 1.00 or better with a target of 1.25 or greater; and fixed rates that are most often tied to Treasury indices with an appropriate spread based on the amount of perceived risk in the loan. Real Estate Construction – These are loans for acquisition, development and construction and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with a successful track record; for projects in our service area; with Loan to Value (“LTV”) below 75%; and where the property can generally be developed and sold within 2 years. Commercial construction loans are generally made only when there is an approved take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Single Family Residential Real Estate – These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC. However, the Company will make loans on rural residential properties up to 41 acres. Most residential loans have terms from ten to thirty years and carry fixed or variable rates priced to Treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income” loans. Home Equity Lines and Loans – These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $500,000; but can be made for up to $1,000,000 in high cost counties. Combined Loan to Value (“CLTV”) does not exceed 75%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1 st lien position. Agricultural – These are non-real estate loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 36 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to Treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Commercial – These are non-real estate loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 36 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from three to seven years; and fixed rates that are most often tied to Treasury indices or variable rates tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. 59 Table of Contents Consumer – These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a minimal consumer loan portfolio. Commercial Leases – These are leases primarily to businesses and farmers for financing the acquisition of equipment. They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to Treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed with qualified, independent appraisers that establish the residual values the Company uses in structuring a lease. The Company accounts for leases with Investment Tax Credits (“ITC”) under the deferred method as established in ASC 740-10. ITCs are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income in the Company’s financial statements. Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan or lease structure. See “Results of Operations - Allowance for Credit Losses – Loans and Leases” for a more detailed discussion of risks by loan and lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan and lease type. The Company’s policies require that loans and leases be approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan and lease types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan or lease. Most loans and leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan or lease is made. In order to be responsive to borrower needs, the Company prices loans and leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices as long as these structures are consistent with the Company’s interest rate risk management policies and procedures. See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in this Form 10-K for further details. Overall, the Company's loan and lease portfolio at December 31, 2023 totaled $3.7 billion, an increase of $142.3 million or 4.05% over December 31, 2022. 60 Table of Contents The following table sets forth the distribution of the loan and lease portfolio by type and percent at the end of each period presented: December 31, 2023 2022 (Dollars in thousands) Dollars Percent of Total Dollars Percent of Total Gross Loans and Leases Real estate: Commercial $ 1,323,038 36.10 % $ 1,328,691 37.73 % Agricultural 742,009 20.24 % 726,938 20.64 % Residential and home equity 399,982 10.91 % 387,753 11.01 % Construction 212,362 5.80 % 166,538 4.73 % Total real estate 2,677,391 73.05 % 2,609,920 74.11 % Commercial & industrial 499,373 13.62 % 478,758 13.59 % Agricultural 313,737 8.56 % 314,525 8.93 % Commercial leases 169,684 4.63 % 112,629 3.20 % Consumer and other 5,212 0.14 % 5,886 0.17 % Total gross loans and leases $ 3,665,397 100.00 % $ 3,521,718 100.00 % The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of December 31, 2023. Loan Contractual Maturity (Dollars in thousands) One Year or Less After One But Within Five Years After Five But Within Fifteen Years After Fifteen Years Total Gross loan and leases: Real estate: Commercial $ 47,563 $ 399,501 $ 840,304 $ 35,670 $ 1,323,038 Agricultural 30,304 187,603 448,403 75,699 742,009 Residential and home equity 142 4,326 112,464 283,050 399,982 Construction 150,149 61,688 525 - 212,362 Total real estate 228,158 653,118 1,401,696 394,419 2,677,391 Commercial & industrial 198,044 207,202 91,786 2,341 499,373 Agricultural 192,404 100,159 19,499 1,675 313,737 Commercial leases 4,857 52,136 112,691 - 169,684 Consumer and other 526 3,662 1,024 - 5,212 Total gross loans and leases $ 623,989 $ 1,016,277 $ 1,626,696 $ 398,435 $ 3,665,397 Rate Structure for Loans Fixed Rate $ 107,576 $ 636,123 $ 1,156,382 $ 229,512 $ 2,129,593 Adjustable Rate 516,413 380,154 470,314 168,923 1,535,804 Total gross loans and leases $ 623,989 $ 1,016,277 $ 1,626,696 $ 398,435 $ 3,665,397 61 Table of Contents The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, and OREO (as hereinafter defined): December 31, (Dollars in thousands) 2023 2022 Non-performing assets: Non-accrual loans and leases Real estate: Commercial $ - $ 403 Agricultural - - Residential and home equity - - Construction - 168 Total real estate - 571 Commercial & industrial - - Agricultural - - Commercial leases - - Consumer and other - - Total non-performing loans and leases $ - $ 571 Other real estate owned ("OREO") $ 873 $ 873 Total non-performing assets $ 873 $ 1,444 Selected ratios: Non-performing loans to total loans and leases 0.00 % 0.02 % Non-performing assets to total assets 0.02 % 0.03 % Non-Accrual Loans and Leases - Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans and leases were zero at December 31, 2023, and $571,000 at December 31, 2022. Other Real Estate Owned – OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. The Company records all OREO properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The Company reported $873,000 of foreclosed OREO at December 31, 2023, and 2022. Although management believes that non-performing loans and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 4. “Loans and Leases”, located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K for an allocation of the allowance classified to collateral dependent loans and leases. Loan Modifications to Borrowers Experiencing Financial Difficulties – In the normal course of business, the Company may execute loan modifications to borrowers experiencing financial difficulties. Some of these modifications include: term extension, principal forgiveness, rate reduction, other-than-insignificant payment delay, or any combination of those. ASU 2022-02 requires certain disclosure of loans and leases that have been modified within the past 12 months and the effects that those modifications had on the modified loans and leases. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses and because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectable; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. 62 Table of Contents The Company modified four loans, with two borrowers, in the aggregate amount of $6.4 million, during the year ended December 31, 2023. These loans are current and have no loss exposure as of December 31, 2023. Allowance for Credit Losses—Loans and Leases The Company maintains an allowance for credit losses (“ACL”) under ASC Topic 326, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“CECL”). The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan and lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components: specific reserves related to impaired loans and leases and general reserves comprised of both quantitative and qualitative factors for current expected credit losses related to loans and leases that are not collateral dependent. The Company uses the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL, as this method is deemed the most appropriate given the Company’s current size and complexity. See Note 1, located in Item 8. “Financial Statements and Supplementary Data” of this Form 10-K for a detailed discussion of the Company’s allowance for credit losses. 63 Table of Contents The following table sets forth the activity in our ACL for loans and leases for the periods indicated: Year Ended December 31, (Dollars in thousands) 2023 2022 Allowance for credit losses: Balance at beginning of year $ 66,885 $ 61,007 Provision for credit losses 7,750 6,057 Charge-offs: Real estate: Commercial - (170 ) Agricultural - - Residential and home equity (14 ) (25 ) Construction - - Total real estate (14 ) (195 ) Commercial & industrial - (324 ) Agricultural - - Commercial leases - - Consumer and other (46 ) (62 ) Total charge-offs (60 ) (581 ) Recoveries: Real estate: Commercial 170 - Agricultural - - Residential and home equity 65 131 Construction - - Total real estate 235 131 Commercial & industrial 73 195 Agricultural 51 53 Commercial leases - - Consumer and other 31 23 Total recoveries 390 402 Net recoeries / (charge-offs) 330 (179 ) Balance at end of year $ 74,965 $ 66,885 Selected financial information: Net loans and leases held-for-investment $ 3,654,689 $ 3,512,361 Average loans and leases 3,502,578 3,278,931 Non-performing loans and leases - 571 Allowance for credit losses to non-performing loans and leases 0.00 % 11713.66 % Net charge-offs / (recoveries) to average loans and leases (0.01 %) 0.01 % Provision for credit losses to average loans and leases 0.22 % 0.18 % Allowance for credit losses to gross loans and leases held-for-investment 2.05 % 1.90 % The increase in ACL during the year ended 2023 was primarily related to higher estimated losses inherent in the loan and lease portfolio directly related to quantitative and qualitative factors associated with the current economic environment. In 2023, the Company recorded a provision for credit losses on unfunded commitments of $1.6 million due to changes in the utilization factors and a slight increase in unfunded commitments. Year Ended December 31, (Dollars in thousands) 2023 2022 ACL - Loans and leases $ 74,965 $ 66,885 ACL - Unfunded commitments 3,690 2,089 Total ACL 78,655 68,974 64 Table of Contents The following table indicates management’s allocation of the ACL for loan and leases by loan type as of each of the following dates: December 31, 2023 2022 (Dollars in thousands) Dollars Percent of Each Loan Type to Total Loans Percent of ACL to Each Loan Type Dollars Percent of Each Loan Type to Total Loans Percent of ACL to Each Loan Type Allowance for credit losses: Real estate: Commercial $ 26,093 36.10 % 1.97 % $ 18,055 37.73 % 1.36 % Agricultural 7,744 20.24 % 1.04 % 14,496 20.64 % 1.99 % Residential and home equity 7,770 10.91 % 1.94 % 7,508 11.01 % 1.94 % Construction 4,432 5.80 % 2.09 % 3,026 4.73 % 1.82 % Total real estate 46,039 73.05 % 1.72 % 43,085 74.11 % 1.65 % Commercial & industrial 13,380 13.62 % 2.68 % 11,503 13.59 % 2.40 % Agricultural 8,872 8.56 % 2.83 % 10,202 8.93 % 3.24 % Commercial leases 6,537 4.63 % 3.85 % 1,924 3.20 % 1.71 % Consumer and other 137 0.14 % 2.63 % 171 0.17 % 2.91 % Total allowance for credit losses $ 74,965 100.00 % 2.05 % $ 66,885 100.00 % 1.90 % Deposits Total deposits were $4.67 billion and $4.76 billion at December 31, 2023 and 2022, respectively or a decrease of $91.2 million or 1.92%. Deposits ebbed and flowed during the year with decreases in the first and fourth quarters of 2023 partially offset by increases in the second and third quarters of 2023. Our deposit base has some seasonality from the agricultural portfolio, but the year-over-year decrease in 2023 was primarily due to a shift in customer behavior to higher yielding deposit products or other investment alternatives such as U.S. Treasuries or money market funds given the interest rate environment. Non-interest bearing demand deposits were $1.48 billion and $1.76 billion at December 31, 2023 and 2022, respectively. Non-interest bearing deposits were 31.76% and 36.96% of total deposits, at December 31, 2023 and 2022, respectively. Interest bearing deposits were $3.19 billion and $3.00 billion as of December 31, 2023 and 2022, respectively. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. The decrease in non-interest bearing deposits and the increase in interest-bearing deposits primarily reflects changes in customer behavior as customers shifted from non-interest bearing accounts to higher interest earning accounts given the interest rate environment during 2023. Certificates of deposit accounts increased $313.2 million, or 94.52%, to $664.6 million at December 31, 2023 compared with $331.4 million at December 31, 2022. Savings and money market accounts increased $63.4 million, or 4.11%, to $1.61 billion at December 31, 2023 compared with $1.54 billion at December 31, 2022. Demand and non-interest bearing transaction accounts totaled $2.42 billion at December 31, 2023, a decrease of $467.8 million, or 16.22%, from $2.88 billion at December 31, 2022. 65 Table of Contents The following table shows the average balances and average rate paid on the categories of deposits for each of the periods presented: As of December 31, 2023 2022 2021 (Dollars in thousands) Average Balance Interest Expense Average Rate Average Balance Interest Expense Average Rate Average Balance Interest Expense Average Rate Total deposits: Interest bearing deposits: Demand $ 983,340 $ 2,357 0.24 % $ 1,120,198 $ 1,497 0.13 % $ 1,024,009 $ 1,128 0.11 % Savings and money market 1,631,818 21,831 1.34 % 1,542,310 1,981 0.13 % 1,352,258 1,458 0.11 % Certificates of deposit greater than $250,000 245,094 7,680 3.13 % 157,623 460 0.29 % 170,040 701 0.41 % Certificates of deposit less than $250,000 273,281 5,655 2.07 % 215,044 411 0.19 % 235,746 730 0.31 % Total interest bearing deposits 3,133,533 37,523 1.20 % 3,035,175 4,349 0.14 % 2,782,053 4,017 0.14 % Non-interest bearing deposits 1,528,375 1,751,797 1,610,611 Total deposits $ 4,661,908 $ 37,523 0.80 % $ 4,786,972 $ 4,349 0.09 % $ 4,392,664 $ 4,017 0.09 % Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. The significant increase in short-term interest rates during 2022 and 2023 placed pressure on deposit pricing. The average cost of total deposits, including non-interest bearing deposits, increased to 0.80% for 2023 compared to 0.09% for 2022. The Company had no brokered deposits during 2023. The following table shows deposits with a balance greater than $250,000 at December 31, 2023 and 2022: December 31 (Dollars in thousands) 2023 2022 Non-Maturity Deposits greater than $250,000 $ 2,496,749 $ 2,872,754 Certificates of deposit greater than $250,000, by maturity: Less than 3 months 84,460 45,078 3 months to 6 months 111,866 30,426 6 months to 12 months 107,080 44,189 More than 12 months 15,423 9,153 Total certificates of deposit greater than $250,000 $ 318,829 $ 128,846 Total deposits greater than $250,000 $ 2,815,578 $ 3,001,600 Refer to the Average Balance and Yield Schedule located in this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on separate deposit categories. The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. At December 31, 2023 and 2022, the Bank had $3.0 million of these deposits. Total estimated uninsured deposits based on our regulatory reporting amounted to $2.2 billion and $2.3 billion at December 31, 2023 and December 31, 2022, respectively. Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings Lines of Credit with the Federal Home Loan Bank and FRB are other key sources of funds to support earning assets and liquidity. These sources of funds are also used to manage the Company’s interest rate risk exposure and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB advances at December 31, 2023 or 2022. There were no Federal Funds purchased or advances from the FRB at December 31, 2023 or 2022. Long-Term Subordinated Debentures On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance sheet trust and its sale of trust-preferred securities. See Note 9. “Long-Term Subordinated Debentures” located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our Trust Preferred Securities will continue to qualify as regulatory capital. 66 Table of Contents These securities accrue interest at a variable rate based upon 3-month SOFR plus 2.85%. Interest rates reset quarterly (the next reset is March 18, 2024) and the rate was 8.49% as of December 31, 2023. The average rate paid for these securities was 8.21% in 2023 and 4.76% in 2022. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock. Capital Resources The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to ensure depositor protection. Shareholders’ Equity totaled $549.8 million at December 31, 2023, and $485.3 million at the end of 2022, an increase of $64.5 million or 13.3%. The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of December 31, 2023, the Company was in compliance with all of these capital requirements and there were no restrictions on the Company’s business activity. As of December 31, 2023 the Bank met the requirements to be categorized as “well capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables as of December 31, 2023 and 2022. The Company’s and the Bank’s actual and required capital amounts and ratios are as follows: December 31, 2023 Actual Required for Capital Adequacy Purposes Minimum to be Categorized as "Well Capitalized" Under Prompt Corrective Action Regulation (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Bancorp: CET1 capital to risk-weighted assets $ 546,045 12.30 % $ 199,724 4.50 % N/A N/A Tier 1 capital to risk-weighted assets 556,045 12.53 % 266,298 6.00 % N/A N/A Risk-based capital to risk-weighted assets 611,815 13.78 % 355,064 8.00 % N/A N/A Tier 1 leverage capital ratio 556,045 10.38 % 214,267 4.00 % N/A N/A Bank: CET1 capital to risk-weighted assets $ 557,500 12.56 % $ 199,722 4.50 % $ 288,487 6.50 % Tier 1 capital to risk-weighted assets 557,500 12.56 % 266,295 6.00 % 355,061 8.00 % Risk-based capital to risk-weighted assets 613,270 13.82 % 355,061 8.00 % 443,826 10.00 % Tier 1 leverage capital ratio 557,500 10.42 % 214,078 4.00 % 267,597 5.00 % 67 Table of Contents December 31, 2022 Actual Required for Capital Adequacy Purposes Minimum to be Categorized as "Well Capitalized" Under Prompt Corrective Action Regulation (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Bancorp: CET1 capital to risk-weighted assets $ 493,438 11.57 % $ 191,984 4.50 % N/A N/A Tier 1 capital to risk-weighted assets 503,438 11.80 % 255,978 6.00 % N/A N/A Risk-based capital to risk-weighted assets 556,964 13.06 % 341,305 8.00 % N/A N/A Tier 1 leverage capital ratio 503,438 9.36 % 215,201 4.00 % N/A N/A Bank: CET1 capital to risk-weighted assets $ 502,838 11.79 % $ 191,970 4.50 % $ 277,290 6.50 % Tier 1 capital to risk-weighted assets 502,838 11.79 % 255,960 6.00 % 341,280 8.00 % Risk-based capital to risk-weighted assets 556,361 13.04 % 341,280 8.00 % 426,600 10.00 % Tier 1 leverage capital ratio 502,838 9.35 % 215,018 4.00 % 268,772 5.00 % On November 8, 2022, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $20.0 million of the Company’s common stock (“Repurchase Plan”), which represented approximately 4% of outstanding shareholders’ equity at the time of approval. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. On November 14, 2023, the Board of Directors authorized a further extension to its share repurchase program through December 31, 2024 for an additional $25.0 million of the Company’s common stock, which represented approximately 4% of outstanding shareholders’ equity as of December 31, 2023. During 2023, the Company repurchased 20,366 shares under the Repurchase Plan, for a total of $20.2 million under the combined $20.0 million share repurchase program authorized in November 2022 and the additional $25.0 million share repurchase program authorized in November 2023. As of December 31, 2023, there remains $24.5 million authorized for repurchases under the Repurchase Plan. From January 2022 through December 31, 2023, the Company reduced the number of shares outstanding by 41,675 shares or 5.28%, due to share repurchases. Repurchases are made at market prices through open market purchases, trading plans established in accordance with SEC rules and privately negotiated transactions. In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted. Among other things, the IRA imposes an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. Off-Balance-Sheet Arrangements Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company. The Company had the following off balance sheet commitments as of the dates indicated. 68 Table of Contents The following table sets forth our off-balance sheet lending commitments as of December 31, 2023: Amount of Commitment Expiration per Period (Dollars in thousands) Total Committed Amount Less than One Year One to Three Years Three to Five Years After Five Years Off-balance sheet commitments Commitments to extend credit $ 1,150,142 $ 584,486 $ 337,252 $ 43,055 $ 185,349 Standby letters of credit 16,858 11,657 3,781 920 500 Total off-balance sheet commitments $ 1,167,000 $ 596,143 $ 341,033 $ 43,975 $ 185,849 The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis. Additionally, the Company maintains an allowance for credit losses for unfunded loan commitments, which totaled $3.7 million and $2.1 million at December 31, 2023 and December 31, 2022, respectively. Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Most standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in August 2028. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Liquidity The ability to have readily available funds sufficient to repay maturing liabilities is of primary importance to depositors, creditors and regulators. In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have access to immediate liquid resources in the form of cash, which totaled $410.6 million or 7.73% of total assets as of December 31, 2023. The majority of cash is on deposit with the FRB and amounted to $338.4 million. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and our ability to borrow from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a long-term source of stable low cost funding. Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Our liquidity, represented by cash borrowing lines, federal funds and available for sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting the amount of funds that will be required and we maintain relationships with a diversified client base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. 69 Table of Contents We had the following borrowing lines available at December 31, 2023: As of December 31, 2023 (Dollars in thousands) Total Credit Line Limit Current Credit Line Available Outstanding Amount Remaining Credit Line Available Value of Collateral Pledged Additional liquidity sources: Federal Reserve BIC $ 1,141,910 $ 1,141,910 $ - $ 1,141,910 $ 1,513,447 Federal Home Loan Bank 760,054 760,054 - 760,054 1,271,227 FRB Bank Term Funding Program 134,910 134,910 - 134,910 134,910 US Bank Fed Funds 50,000 50,000 - 50,000 - PCBB Fed Funds 50,000 50,000 - 50,000 - FHLB Fed Funds 18,000 18,000 - 18,000 - Total additional liquidity sources $ 2,154,874 $ 2,154,874 $ - $ 2,154,874 $ 2,919,584 We continued our focus on maintaining a strong liquidity position throughout 2023 and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawal for the foreseeable future. As of December 31, 2023, we had internal sources of liquidity comprised of $410.6 million in cash and $242.9 million of unencumbered investment securities, which represented in the aggregate 12.31% of total assets. We also had $2.2 billion in external sources of liquidity as outlined in the table above bringing our total available liquidity to $2.8 billion. Our pledged collateral on short-term borrowing lines was comprised of $2.8 billion in loans, $135.0 million in investment securities pledged at par value and $1.9 million in investment securities held at market value. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs. On a long-term basis, we intend to meet our liquidity needs by changing the relative distribution of our asset portfolios by reducing our investment or loan and lease volumes, or selling or encumbering assets. Further, we would increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan and lease originations and commitments and deposit withdrawals. We believe we can meet all of these needs from existing liquidity sources. Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities. Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other amortization and depreciation. Our primary investing activities are the origination of loans and leases and purchases and sales of investment securities. As of December 31, 2023, we had unfunded loan commitments of $1.15 billion and unfunded letters of credit of $16.9 million. At December 31, 2023, we believe that we had sufficient funds available to meet current loan commitments. 70 Table of Contents