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, 2023 to 2022 is found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Annual Report on Form 10-K filed with the SEC on March 14, 2024. 43 Table of Contents 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 108 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, Napa, and Danville. 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, 2024, consisted of 699,798 shares of common stock, $0.01 par value. No shares of preferred stock were issued or outstanding as of December 31, 2024. 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 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. 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. 44 Table of Contents Selected Financial Data The following condensed consolidated statements of financial condition and operations and selected performance ratios as of December 31, 2024, 2023, and 2022 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 Statements and Supplementary Data.” Years Ended December 31 (Dollars in thousands, except per share data) 2024 2023 2022 Selected Income Statement Information: Interest income $ 271,977 $ 253,754 $ 198,413 Interest expense 65,301 38,369 4,840 Net interest income 206,676 215,385 193,573 Provision for credit losses - 9,407 6,450 Net interest income after provision for credit losses 206,676 205,978 187,123 Non-interest income 20,700 14,914 6,178 Non-interest expense 105,132 104,339 93,560 Income before income tax expense 122,244 116,553 99,741 Income tax expense 33,787 28,239 24,651 Net income $ 88,457 $ 88,314 $ 75,090 Selected financial ratios: Basic and diluted earnings per share $ 121.02 $ 116.61 $ 96.55 Cash dividends per common share 18.10 17.10 16.15 Dividend payout ratio 14.96 % 14.66 % 16.73 % Net interest margin (tax equivalent) 4.05 % 4.30 % 3.81 % Non-interest income to average assets 0.38 % 0.28 % 0.12 % Non-interest expense to average assets 1.95 % 1.98 % 1.75 % Efficiency ratio 46.24 % 45.31 % 46.84 % Return on average assets 1.64 % 1.68 % 1.41 % Return on average equity 15.49 % 17.05 % 16.04 % Net charge-offs (recoveries) to average loans 0.02 % (0.01 %) 0.01 % 45 Table of Contents As of December 31, (Dollars in thousands, except per share data) 2024 2023 2022 Selected Balance Sheet Information: Cash and cash equivalents $ 212,563 $ 410,642 $ 588,257 Investment securities 1,233,407 999,750 997,817 Gross loans held for investment 3,690,221 3,665,397 3,521,718 Total assets 5,370,196 5,308,928 5,327,399 Total deposits 4,699,139 4,668,095 4,759,269 Shareholders' equity 573,072 549,755 485,308 Average Balances: Average earning assets 5,118,165 5,027,990 5,091,684 Average assets 5,389,132 5,270,352 5,341,901 Average shareholders' equity 571,086 518,035 468,001 Selected financial ratios: Book value per share $ 818.91 $ 735.00 $ 631.63 Tangible book value per share $ 800.52 $ 717.05 $ 613.42 Allowance for credit losses to total loans 2.04 % 2.05 % 1.90 % Non-performing assets to total assets 0.03 % 0.02 % 0.03 % Loans held for investment to deposits 78.53 % 78.52 % 74.00 % Capital ratios: Common equity tier 1 capital to risk-weighted assets 13.04 % 12.30 % 11.57 % Tier 1 capital to risk-weighted assets 13.26 % 12.53 % 11.80 % Risk-based capital to risk-weighted assets 14.52 % 13.78 % 13.06 % Tier 1 leverage capital ratio 10.95 % 10.38 % 9.36 % Tangible common equity ratio (1) 10.46 % 10.13 % 8.87 % (1) See “Non-GAAP Measurements”. Critical Accounting Policies and Estimates The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may ultimately differ significantly from these estimates and assumptions, which could have a material adverse effect on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods. Our significant accounting policies and practices are described in Note 1 “Summary of Significant Accounting Policies”, located in Item 8: “Financial Statements and Supplementary Data” in this Form 10-K. We have identified one policy and estimate as being critical because it requires management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. This policy relates to the allowance for credit losses on loans and leases held for investment. 46 Table of Contents Allowance for Credit Losses on Loans and Leases Held for Investment — The allowance for credit losses (“ACL”) on loans and leases represents management’s estimate of all expected credit losses over the expected life of the loan portfolio, utilizing the current expected credit loss (“CECL”) accounting standard as prescribed under GAAP. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The provision for credit losses reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of the adequacy of the current expected credit losses. The Company increases its ACL by charging provisions for credit losses on its consolidated statement of income. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the ACL when management believes a loan balance is uncollectable. Recoveries on previously charged off loans are credited to the ACL. Determining the appropriateness of the ACL is complex and requires judgment by management about inherently uncertain factors. Management utilizes the weighted average remaining maturity (“WARM”) methodology given its size and level of complexity. Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool, and then applying a loss rate over the remaining life of the loan pool. The methodology considers historical loss experience to estimate credit losses for the remaining balance of the loan pool. The calculated loss rate is applied to the contractual term (adjusted for prepayments) to determine the loan pool’s current expected credit losses. Among the significant estimates required to establish the ACL are: (i) a weighted average loss estimate categorized by loan segmentation; (ii) average duration calculations in order to assess the loss factors over the life of the loan segment; (iii) application of a reasonable and supportable forecast based on macro- and micro-economic factors expected to influence losses; (iv) value of collateral and strength of borrowers; and (v) the determination of the qualitative loss factors. All of these estimates are susceptible to significant change. Qualitative factors are evaluated each period and applied in instances when management assesses that additional risks not captured in the quantitative estimate should be factored into the overall ACL estimate. These risks include loan performance trends, collateral value risk and changes in the nature and volume of the loan portfolio. Changes in the assessment of these qualitative factors could significantly impact the calculated estimated credit loss. The ACL represents management’s best estimate of potential loan losses, but significant changes in prevailing economic conditions could result in material changes in the allowance. Generally, an improving economic environment generates a lower ACL estimate than a weakening economic environment. Changes in the macro-economic and micro-economic conditions, especially those impacting the agricultural industry in California, could significantly impact the calculated estimated credit loss. Changes in economic conditions and/or interest rates can also impact the duration assumption. An increase in the duration of loans would increase the allowance while a decrease in the duration would decrease the allowance. The economic information utilized in the ACL process is inherently uncertain and many external factors could impact the information. Management reviews the inputs to the WARM model to ensure they are reasonable and supportable; however, changes in local and national economic conditions will impact the allowance level. While management utilizes its best judgment and current information available, the adequacy of the ACL is significantly determined by certain factors outside the Company’s control, such as the performance of our loan portfolio, changes in the economic environment including economic uncertainty, changes in interest rates, and any regulatory changes. Additionally, the level of ACL may fluctuate based on the balance and mix of the loan portfolio. See Note 1 “Summary of Significant Accounting Policies”, 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. 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. 47 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 2024 2023 2022 (Dollars in thousands, except per share data) Shareholders' equity $ 573,072 $ 549,755 $ 485,308 Less: Intangible assets 12,870 13,419 13,992 Tangible common equity $ 560,202 $ 536,336 $ 471,316 Total Assets $ 5,370,196 $ 5,308,928 $ 5,327,399 Less: Intangible assets 12,870 13,419 13,992 Tangible assets $ 5,357,326 $ 5,295,509 $ 5,313,407 Tangible common equity ratio (1) 10.46 % 10.13 % 8.87 % Book value per common share (2) $ 818.91 $ 735.00 $ 631.63 Tangible book value per common share (3) $ 800.52 $ 717.05 $ 613.42 Common shares outstanding 699,798 747,971 768,337 (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. 48 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, 2024 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, 2023 and 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Annual Report on Form 10-K filed with the SEC on March 14, 2024. 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) 2024 2023 Earnings Summary: Interest income $ 271,977 $ 253,754 Interest expense 65,301 38,369 Net interest income 206,676 215,385 Provision for credit losses - 9,407 Non-interest income 20,700 14,914 Non-interest expense 105,132 104,339 Income before taxes 122,244 116,553 Income tax expense 33,787 28,239 Net Income $ 88,457 $ 88,314 Per Common Share Data: Diluted earnings per common share $ 121.02 $ 116.61 Book value per common share $ 818.91 $ 735.00 Tangible book value per common share (1) $ 800.52 $ 717.05 Performance Ratios: Return on average assets 1.64 % 1.68 % Return on average equity 15.49 % 17.05 % Net interest margin (tax equivalent) 4.05 % 4.30 % Yield on average loans and leases (tax equivalent) 6.08 % 5.84 % Cost of average total deposits 1.35 % 0.80 % Efficiency ratio 46.24 % 45.31 % Loan-to-deposit ratio 78.53 % 78.52 % Percentage of checking deposits to total deposits 51.08 % 51.76 % Capital Ratios Bancorp: Common equity tier 1 capital to risk-weighted assets 13.04 % 12.30 % Tier 1 capital to risk-weighted assets 13.26 % 12.53 % Risk-based capital to risk-weighted assets 14.52 % 13.78 % Tier 1 leverage capital ratio 10.95 % 10.38 % Tangible common equity ratio (1) 10.46 % 10.13 % (1) See "Non-GAAP Measurements" 49 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, 2024 2023 (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 $ 314,892 $ 16,860 5.35 % $ 519,331 $ 26,872 5.17 % Investment securities: (1) Taxable securities 1,053,601 28,074 2.66 % 929,503 18,886 2.03 % Non-taxable securities (2) 61,863 2,994 4.84 % 61,029 2,888 4.73 % Total investment securities 1,115,464 31,068 2.79 % 990,532 21,774 2.20 % Loans: (3) Real estate: Commercial 1,342,623 72,091 5.37 % 1,295,101 67,955 5.25 % Agricultural 729,648 41,426 5.68 % 732,241 40,446 5.52 % Residential and home equity 403,736 19,646 4.87 % 393,100 17,605 4.48 % Construction 212,941 14,904 7.00 % 179,297 12,638 7.05 % Total real estate 2,688,948 148,067 5.51 % 2,599,739 138,644 5.33 % Commercial & industrial 498,898 37,319 7.48 % 479,552 33,941 7.08 % Agricultural 305,703 25,378 8.30 % 292,079 23,399 8.01 % Commercial leases 173,208 12,131 7.00 % 125,680 8,160 6.49 % Consumer and other 5,503 371 6.74 % 5,528 338 6.11 % Total loans and leases 3,672,260 223,266 6.08 % 3,502,578 204,482 5.84 % Non-marketable securities 15,549 1,374 8.84 % 15,549 1,213 7.80 % Total interest earning assets 5,118,165 272,568 5.33 % 5,027,990 254,341 5.06 % Allowance for credit losses (75,674 ) (71,461 ) Non-interest earning assets 346,641 313,823 Total average assets $ 5,389,132 $ 5,270,352 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing deposits: Demand $ 908,561 $ 4,277 0.47 % $ 983,340 $ 2,357 0.24 % Savings and money market accounts 1,614,117 30,304 1.88 % 1,631,818 21,831 1.34 % Certificates of deposit greater than $250,000 413,077 13,579 3.29 % 245,094 7,680 3.13 % Certificates of deposit less than $250,000 349,933 15,284 4.37 % 273,281 5,655 2.07 % Total interest bearing deposits 3,285,688 63,444 1.93 % 3,133,533 37,523 1.20 % Short-term borrowings 16,940 986 5.82 % 1 - 0.00 % Subordinated debentures 10,310 871 8.45 % 10,310 846 8.21 % Total interest bearing liabilities 3,312,938 65,301 1.97 % 3,143,844 38,369 1.22 % Non-interest bearing deposits 1,417,121 1,528,375 Total funding 4,730,059 65,301 1.38 % 4,672,219 38,369 0.82 % Other non-interest bearing liabilities 87,987 80,098 Shareholders' equity 571,086 518,035 Total average liabilities and shareholders' equity $ 5,389,132 $ 5,270,352 Net interest income and margin (4) $ 207,267 4.05 % $ 215,972 4.30 % Interest rate spread 3.36 % 3.84 % Tax equivalent adjustment (591 ) (587 ) Net interest income $ 206,676 4.04 % $ 215,385 4.28 % (1) Excludes average unrealized losses of ($19.5) million and ($25.8) million for the years ended December 31, 2024, and 2023, 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 of 21%. (3) Loan interest income includes loan fees of $5.6 million and $6.1 million for the years ended December 31, 2024 and 2023, respectively. (4) Net interest margin is computed by dividing net interest income by average interest earning assets. 50 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 5.35% and 5.17% for the years ended December 31, 2024 and 2023, respectively. The increase was primarily the result of the Federal Reserve increasing rates by 100 basis points from February 2023 to July 2023. The Federal Reserve dropped rates 100 basis points from September 2024 to December 2024. Average interest-bearing deposits with banks was $314.9 million and $519.3 million for the years ended December 31, 2024 and 2023, respectively, and decreased primarily to fund loan and lease growth and the purchases of investment securities. Interest income on interest-bearing deposits with banks was $16.9 million and $26.9 million for the years ended December 31, 2024 and 2023, 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 $1.1 billion and $990.5 million for the years ended December 31, 2024 and 2023, respectively. The average yield on total investment securities was 2.79% and 2.20% for the years ended December 31, 2024 and 2023, respectively. The increase in the yield reflects the higher yields on investment purchases during the year. See “Investment Securities” for a discussion of the Company’s investment strategy in 2024. Average loans and leases held for investment were $3.7 billion and $3.5 billion for the years ended December 31, 2024 and 2023, respectively. The average yield on the loan and lease portfolio was 6.08% and 5.84% for the years ended December 31, 2024 and 2023, respectively. The increase in the loan yield reflects the increase in market interest rates over the prior year. Average interest-bearing deposits were $3.3 billion and $3.1 billion for the years ended December 31, 2024 and 2023, respectively. The average rate paid on interest-bearing deposits was 1.93% and 1.20% for the years ended December 31, 2024 and 2023, respectively. Total interest expense on interest-bearing deposits was $63.4 million and $37.5 million for the years ended December 31, 2024 and 2023, respectively, with the increase driven by increases in short-term market interest rates during 2023 and customers seeking higher rates on deposit products. The average rate paid on total funding costs was 1.38% and 0.82% for the years ended December 31, 2024 and 2023, respectively. 51 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, 2024 compared with 2023 Increase (Decrease) Due to: (Dollars in thousands) Volume Rate Net Interest income: Interest earnings deposits in other banks and federal funds sold $ (10,916 ) $ 904 $ (10,012 ) Investment securities: Taxable securities 2,757 6,431 9,188 Non-taxable securities 40 66 106 Total investment securities 2,797 6,497 9,294 Loans: Real estate: Commercial 2,529 1,607 4,136 Agricultural (144 ) 1,124 980 Residential and home equity 486 1,555 2,041 Construction 2,355 (89 ) 2,266 Total real estate 5,226 4,197 9,423 Commercial & industrial 1,402 1,976 3,378 Agricultural 1,114 865 1,979 Commercial leases 3,287 684 3,971 Consumer and other (2 ) 35 33 Total loans and leases 11,027 7,757 18,784 Non-marketable securities - 161 161 Total interest income 2,908 15,319 18,227 Interest expense: Interest bearing deposits: Demand (192 ) 2,112 1,920 Savings and money market accounts (239 ) 8,712 8,473 Certificates of deposit greater than $250,000 5,505 394 5,899 Certificates of deposit less than $250,000 1,941 7,688 9,629 Total interest bearing deposits 7,015 18,906 25,921 Short-term borrowings 985 1 986 Subordinated debentures - 25 25 Total interest expense 8,000 18,932 26,932 Net interest income $ (5,092 ) $ (3,613 ) $ (8,705 ) 52 Table of Contents Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023 Years Ended December 31 (Dollars in thousands) 2024 2023 $ Better / (Worse) % Better / (Worse) Selected Income Statement Information: Interest income $ 271,977 $ 253,754 $ 18,223 7.18 % Interest expense 65,301 38,369 (26,932 ) (70.19 %) Net interest income 206,676 215,385 (8,709 ) (4.04 %) Provision for credit losses - 9,407 9,407 100.00 % Net interest income after provision for credit losses 206,676 205,978 698 0.34 % Non-interest income 20,700 14,914 5,786 38.80 % Non-interest expense 105,132 104,339 (793 ) (0.76 %) Income before income tax expense 122,244 116,553 5,691 4.88 % Income tax expense 33,787 28,239 (5,548 ) (19.65 %) Net income $ 88,457 $ 88,314 $ 143 0.16 % For the years ended December 31, 2024 and 2023, net income was $88.5 million compared with $88.3 million, respectively. The increase in net income was primarily the result of no provision for credit losses in 2024 compared to $9.4 million in 2023 and an increase in non-interest income of $5.8 million. This increase was offset by a decrease in net interest income of $8.7 million, higher income tax expense of $5.5 million and a higher non-interest expense $0.8 million. Net Interest Income and Net Interest Margin For the year ended December 31, 2024, net interest income decreased $8.7 million, or 4.04%, to $206.7 million compared with $215.4 million for the same period a year earlier. The decrease was primarily due to an increase in interest expense from $37.5 million to $63.4 million in 2024 as the average cost of total deposits increased from 0.80% in 2023 to 1.35% in 2024 and average total deposits increased from $4.66 billion for 2023 to $4.70 billion in 2024. The cost of funds for the year ended December 31, 2024, increased by 56 basis points from 0.82% to 1.38% compared to the same period a year earlier. The increase in interest expense was partially offset by an increase in loan and lease interest and fee income from $204.5 million in 2023 to $223.3 million in 2024 as the average loan yield increased from 5.84% in 2023 to 6.08% in 2024 and average loan and lease balances increased from $3.50 billion in 2023 to $3.67 billion in 2024. 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. Based on the Company’s credit quality of the loan and lease portfolio, modest loan growth of 0.65% and the calculations of the allowance for credit losses under CECL, no provision for credit losses for the year ended December 31, 2024 was necessary compared with $9.4 million for the same period a year earlier comprised of $7.8 million for the provision for credit losses on loans and leases and $1.6 million for the provision for credit losses on unfunded commitments. Net charge-offs for the year ended December 31, 2024 were $0.7 million compared to net recoveries of $0.3 million for the same period a year earlier. The provision of $9.4 million in 2023 was due to loan growth of 4.05% and higher estimated losses inherent in the loan and lease portfolio based on the then current economic environment. 53 Table of Contents Non-interest Income Years Ended December 31 (Dollars in thousands) 2024 2023 $ Better / (Worse) % Better / (Worse) Non-interest Income: Card processing $ 6,950 $ 6,686 $ 264 3.95 % Gain on BOLI death benefit 4 4,346 (4,342 ) (99.91 %) Net gain on deferred compensation benefits 3,270 2,974 296 9.95 % Service charges on deposit accounts 3,054 2,755 299 10.85 % Increase in cash surrender value of BOLI 2,430 2,027 403 19.88 % Net gain/(loss) on sale of securities available-for-sale 743 (8,199 ) 8,942 109.06 % Other 4,249 4,325 (76 ) (1.76 %) Total non-interest income $ 20,700 $ 14,914 $ 5,786 38.80 % Non-interest income increased $5.8 million to $20.7 million for 2024 compared with $14.9 million for the same period a year earlier. The year-over-year increase in non-interest income was primarily a result of recording a $0.7 million gain on sale of available-for-sale securities in 2024 compared to a loss on sale of available-for-sale securities of $8.2 million in 2023, offset by a reduction of $4.3 million in non-taxable death benefit gains on bank-owned life insurance (“BOLI”) as 2023 included the death of a former employee with a significant BOLI policy. The Company recorded net gains on deferred compensation plan investments of $3.3 million in 2024 compared to net gains of $3.0 million in 2023. See Note 10 “Employee Benefit Plans”, located in Item 8. “Financial Statements and Supplementary Data” in this Form 10-K 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) 2024 2023 $ Better / (Worse) % Better / (Worse) Non-interest Expense: Salaries and employee benefits $ 72,472 $ 70,883 $ (1,589 ) (2.24 %) Data Processing 6,055 5,293 (762 ) (14.40 %) Occupancy 5,090 4,837 (253 ) (5.23 %) Net gain on deferred compensation benefits 3,270 2,974 (296 ) (9.95 %) Deposit insurance 2,852 2,769 (83 ) (3.00 %) Professional services 3,587 2,334 (1,253 ) (53.68 %) Marketing 1,967 1,885 (82 ) (4.35 %) Other 9,839 13,364 3,525 26.38 % Total non-interest expense $ 105,132 $ 104,339 $ (793 ) (0.76 %) Non-interest expense increased $0.8 million to $105.1 million for 2024 compared with $104.3 million for the same period a year earlier. The year-over-year increase was primarily comprised of a $1.6 million increase in salaries and employee benefits, a $1.3 million increase in professional services and a $0.8 million increase in data processing. The increase in professional services was due primarily to an increase in legal services related to corporate initiatives. The increase in data processing was due primarily to upgrades in technology systems. These increases were partially offset by a decrease in other non-interest expense of $3.5 million primarily from the adoption of the proportional amortization approach under GAAP which shifts the amortization of low-income housing tax credits from other non-interest expense to income tax expense. For the year ended December 31, 2024, the Company’s expense efficiency ratio was 46.24% compared with 45.31% for the same period a year earlier as the reduction in revenue outpaced the slight increase in expenses. 54 Table of Contents Net gains on deferred compensation plan obligations were $3.3 million in 2024 compared to net gains of $3.0 million in 2023. See Note 10 “Employee Benefit Plans”, located in “Item 8. “Financial Statements and Supplementary Data” in this Form 10-K, 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, 2024, income tax expense was $33.8 million, compared with $28.2 million for the same period a year earlier. For the year ended December 31, 2024, the effective tax rate was 27.64% compared with 24.23% for the same period a year earlier. The Company’s higher income tax expense and effective tax rates for 2024 compared to 2023 was due in part to the adoption of ASC 2023-02 which shifts the amortization of low-income housing tax credits from other non-interest expense to the income tax line under the proportional amortization method thereby increasing income tax expense resulting in an increase in the effective tax rate. The Company’s effective tax rate for 2023 was also lower than normal due to the non-taxable BOLI death benefit gain of $4.3 million in 2023. The Company’s effective tax rate can also fluctuate from year to year due to changes in the mix of taxable and tax-exempt earning sources. Balance Sheet Analysis Total assets were $5.37 billion at December 31, 2024, an increase of $61.3 million or 1.15% compared to December 31, 2023. Loans and leases held for investment grew $23.7 million or 0.65% to $3.68 billion at December 31, 2024, compared with $3.65 billion at December 31, 2023. Total deposits were $4.70 billion at December 31, 2024 compared with $4.67 billion at December 31, 2023, an increase of $31.0 million, or 0.67%. 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 $141.5 million at December 31, 2024 and $338.4 million at December 31, 2023. The decrease was primarily due to funding loan and lease growth and the purchase of available-for-sale securities during the year. The Company’s total cash and cash equivalents as of December 31, 2024 represented 4.0% of the Company’s total assets as compared to 7.7% as of December 31, 2023. 55 Table of Contents Investment Securities The Company’s net investment portfolio increased by $233.7 million to $1.2 billion at December 31, 2024 compared to $1.0 billion at December 31, 2023. The increase was due to the purchase of $389.5 million in investment securities during 2024 offset by normal principal maturities and pay downs and the sale of $69.5 million in available-for-sale securities. During 2024, as part of managing the investment portfolio and balance sheet, the portfolio mix shifted as available-for-sale securities increased from $182.5 million as of December 31, 2023 to $464.4 million as of December 31, 2024 while the held-to-maturity securities decreased from $817.7 million as of December 31, 2023 to $769.4 million as of December 30, 2024. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company's total investment portfolio as of December 31, 2024 represented 22.98% of the Company’s total assets as compared to 18.84% at December 31, 2023. Available-for-sale securities are carried at fair value and held-to-maturity securities are carried at amortized cost under GAAP. The carrying value of our portfolio of investment securities was as follows: As of December 31, (Dollars in thousands) 2024 2023 Available-for-Sale Securities U.S. Government-sponsored securities $ 2,644 $ 3,224 Mortgage-backed securities (1) 439,858 161,681 Commercial mortgage-backed securities (1) 1,212 2,157 Collateralized mortgage obligations (1) 5,497 535 Corporate securities 14,856 14,605 Other 347 310 Total available-for-sale securities $ 464,414 $ 182,512 (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) 2024 2023 Held-to-Maturity Securities Mortgage-backed securities (1) $ 626,427 $ 664,728 Collateralized mortgage obligations (1) 68,377 74,170 Municipal securities 74,639 78,790 Total held-to-maturity securities $ 769,443 $ 817,688 Allowance for credit losses (450 ) (450 ) Total held-to-maturity securities $ 768,993 $ 817,238 (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 final contractual maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities: As of December 31, 2024 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 $ 2 3.00 % $ 33 5.64 % $ 279 6.15 % $ 2,330 5.89 % 2,644 5.92 % Mortgage-backed securities (1) 74 2.83 % 3,074 2.57 % 1,949 3.92 % 434,761 4.70 % 439,858 4.70 % Commercial mortgage-backed securities (1) - 0.00 % - 0.00 % - 0.00 % 1,212 0.00 % 1,212 0.00 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 5,497 6.01 % 5,497 6.01 % Corporate securities - 0.00 % 14,856 5.63 % - 0.00 % - 0.00 % 14,856 5.63 % Other 347 3.72 % - 0.00 % - 0.00 % - 0.00 % 347 3.72 % Total securities available-for-sale $ 423 3.56 % $ 17,963 5.10 % $ 2,228 4.20 % $ 443,800 4.71 % $ 464,414 4.74 % (1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. 56 Table of Contents As of December 31, 2024 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 % $ 3,426 0.82 % $ 7,756 1.66 % $ 615,245 1.89 % $ 626,427 1.88 % Collateralized mortgage obligations (1) - 0.00 % - 0.00 % - 0.00 % 68,377 1.75 % 68,377 1.75 % Municipal securities 1,180 2.62 % 18,365 3.64 % 6,733 3.95 % 48,361 2.60 % 74,639 3.93 % Total securities held-to-maturity $ 1,180 2.62 % $ 21,791 3.19 % $ 14,489 2.72 % $ 731,983 1.92 % $ 769,443 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, 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 % 3,982 3.61 % 151,392 3.50 % 161,681 3.44 % Commercial mortgage-backed securities (1) - 0.00 % - 0.00 % 934 4.52 % 1,223 5.89 % 2,157 5.30 % 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 3.70 % (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, 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. 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. 57 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. 58 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. The Company's loan and lease portfolio at December 31, 2024 totaled $3.7 billion, an increase of $23.7 million or 0.65% over December 31, 2023. 59 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, 2024 2023 (Dollars in thousands) Dollars Percent of Total Dollars Percent of Total Gross Loans and Leases Real estate: Commercial $ 1,360,841 36.88 % $ 1,323,038 36.10 % Agricultural 751,026 20.35 % 742,009 20.24 % Residential and home equity 404,399 10.96 % 399,982 10.91 % Construction 194,903 5.28 % 212,362 5.80 % Total real estate 2,711,169 73.47 % 2,677,391 73.05 % Commercial & industrial 504,403 13.67 % 499,373 13.62 % Agricultural 289,847 7.85 % 313,737 8.56 % Commercial leases 179,718 4.87 % 169,684 4.63 % Consumer and other 5,084 0.14 % 5,212 0.14 % Total gross loans and leases $ 3,690,221 100.00 % $ 3,665,397 100.00 % The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of December 31, 2024. 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 $ 108,988 $ 428,896 $ 787,878 $ 35,079 $ 1,360,841 Agricultural 64,271 156,759 487,567 42,429 751,026 Residential and home equity 46 4,419 113,101 286,833 404,399 Construction 185,689 9,214 - - 194,903 Total real estate 358,994 599,288 1,388,546 364,341 2,711,169 Commercial & industrial 202,174 198,271 101,664 2,294 504,403 Agricultural 183,017 93,816 13,014 - 289,847 Commercial leases 3,857 52,909 122,952 - 179,718 Consumer and other 652 3,786 184 462 5,084 Total gross loans and leases $ 748,694 $ 948,070 $ 1,626,360 $ 367,097 $ 3,690,221 Rate Structure for Loans Fixed Rate $ 241,953 $ 619,494 $ 1,048,539 $ 202,940 $ 2,112,926 Variable Rate 506,741 328,576 577,821 164,157 1,577,295 Total gross loans and leases $ 748,694 $ 948,070 $ 1,626,360 $ 367,097 $ 3,690,221 60 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) 2024 2023 Non-performing assets: Non-accrual loans and leases Real estate: Commercial $ 170 $ - Agricultural - - Residential and home equity - - Construction - - Total real estate 170 - Commercial & industrial 759 - Agricultural - - Commercial leases - - Consumer and other - - Total non-performing loans and leases 929 - Other real estate owned ("OREO") 873 873 Total non-performing assets $ 1,802 $ 873 Selected ratios: Non-performing loans to total loans and leases 0.03 % 0.00 % Non-performing assets to total assets 0.03 % 0.02 % 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. The Company had $929,000 in non-accrual loans and leases as of December 31, 2024, and no non-accrual loans or leases at December 31, 2023. 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. 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, 2024, and 2023. 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. 61 Table of Contents The Company modified six loans, with two borrowers, in the aggregate amount of $13.2 million, during the year ended December 31, 2024. These loans were current as of December 31, 2024. 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 individually evaluated 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 individually evaluated. The Company uses the Weighted Average Remaining Maturity (“WARM”) methodology to calculate the ACL, as this method is deemed the most appropriate given the Company’s size and complexity. See “ – Critical Accounting Policies and Estimates” above, and Note 1 “Summary of Significant Accounting Policies”, 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. The allowance for credit losses is the combination of the allowance for credit losses on loan and lease losses and the allowance for credit losses on unfunded loan commitments. The ACL for unfunded loan commitments is included within “Interest payable and other liabilities” on the consolidated balance sheets. 62 Table of Contents The following table sets forth the activity in our allowance for credit losses on loans and leases held for investment and unfunded loan commitments for the periods indicated: Year Ended December 31, (Dollars in thousands) 2024 2023 Allowance for credit losses: Balance at beginning of year $ 78,655 $ 68,975 Provision for credit losses: Allowance for credit losses- loans and leases 1,000 7,750 Allowance for credit losses- unfunded loan commitments (1,000 ) 1,600 Total provision for credit losses - 9,350 Provision for credit losses Charge-offs: Real estate: Commercial - - Agricultural - - Residential and home equity (29 ) (14 ) Construction - - Total real estate (29 ) (14 ) Commercial & industrial (736 ) - Agricultural - - Commercial leases - - Consumer and other (93 ) (46 ) Total charge-offs (858 ) (60 ) Recoveries: Real estate: Commercial - 170 Agricultural - - Residential and home equity 23 65 Construction - - Total real estate 23 235 Commercial & industrial 86 73 Agricultural 16 51 Commercial leases - - Consumer and other 51 31 Total recoveries 176 390 Net (charge-offs) / recoveries (682 ) 330 Balance at end of year $ 77,973 $ 78,655 Allowance for credit losses - loans and leases 75,283 74,965 Allowance for credit losses - unfunded loan commitments 2,690 3,690 Total allowance for credit losses $ 77,973 $ 78,655 Selected financial information: Net loans and leases held for investment $ 3,678,388 $ 3,654,689 Average loans and leases $ 3,672,260 $ 3,502,578 Non-performing loans and leases $ 929 $ - Allowance for credit losses to non-performing loans and leases N/M (1) 0.00 % Net (charge-offs) / recoveries to average loans and leases 0.02 % (0.01 %) Provision for credit losses to average loans and leases 0.00 % 0.27 % Allowance for loan and lease losses to loans and leases held for investment 2.04 % 2.05 % (1) Not meaningful 63 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, 2024 2023 (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 $ 20,382 36.88 % 1.50 % $ 26,093 36.10 % 1.97 % Agricultural 23,615 20.35 % 3.14 % 7,744 20.24 % 1.04 % Residential and home equity 7,340 10.96 % 1.82 % 7,770 10.91 % 1.94 % Construction 3,055 5.28 % 1.57 % 4,432 5.80 % 2.09 % Total real estate 54,392 73.47 % 2.01 % 46,039 73.05 % 1.72 % Commercial & industrial 7,791 13.67 % 1.54 % 13,380 13.62 % 2.68 % Agricultural 6,725 7.85 % 2.32 % 8,872 8.56 % 2.83 % Commercial leases 6,153 4.87 % 3.42 % 6,537 4.63 % 3.85 % Consumer and other 222 0.14 % 4.37 % 137 0.14 % 2.63 % Total allowance for credit losses $ 75,283 100.00 % 2.04 % $ 74,965 100.00 % 2.05 % Deposits Total deposits were $4.70 billion and $4.67 billion at December 31, 2024 and 2023, respectively, or an increase of $31.0 million or 0.67%. The modest increase in total deposits was primarily due to a $35.7 million or 2.41% increase in non-interest bearing deposits. The Company experienced fluctuations in deposits during the year due in part to the seasonality within our agriculture client base along with changes in customer behavior over the last year as customers were seeking 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 grew $35.7 million from $1.48 billion at December 31, 2023 to $1.52 billion at December 31, 2024. Non-interest bearing deposits were 32.31% and 31.76% of total deposits, at December 31, 2024 and 2023, respectively. Interest bearing deposits were $3.18 billion and $3.19 billion as of December 31, 2024 and 2023, respectively. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. Interest-bearing transaction accounts decreased $51.3 million, or 5.5%, to $882.1 million at December 31, 2024, compared with $933.4 million at December 31, 2023. Savings and money market accounts decreased $24.3 million, or 1.51%, to $1.58 billion at December 31, 2024 compared with $1.61 billion at December 31, 2023. Certificates of deposit accounts increased $70.9 million, or 11.0%, to $715.5 million at December 31, 2024, compared with $664.6 million at December 31, 2023. 64 Table of Contents The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented: As of December 31, 2024 2023 2022 (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 $ 908,561 $ 4,277 0.47 % $ 983,340 $ 2,357 0.24 % $ 1,120,198 $ 1,497 0.13 % Savings and money market 1,614,117 30,304 1.88 % 1,631,818 21,831 1.34 % 1,542,310 1,981 0.13 % Certificates of deposit greater than $250,000 413,077 13,579 3.29 % 245,094 7,680 3.13 % 157,623 460 0.29 % Certificates of deposit less than $250,000 349,933 15,284 4.37 % 273,281 5,655 2.07 % 215,044 411 0.19 % Total interest bearing deposits 3,285,688 63,444 1.93 % 3,133,533 37,523 1.20 % 3,035,175 4,349 0.14 % Non-interest bearing deposits 1,417,121 1,528,375 1,751,797 Total deposits $ 4,702,809 $ 63,444 1.35 % $ 4,661,908 $ 37,523 0.80 % $ 4,786,972 $ 4,349 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 increase in short-term interest rates during 2023 and customers seeking higher yielding deposit products continued to place pressure on deposit pricing during 2024. The Company did reduce interest rates during the last four months of 2024 after the Federal Reserve cut interest rates by 100 basis points between September and December. The average cost of total deposits, including non-interest bearing deposits, increased to 1.35% for 2024 compared to 0.80% for 2023 due to the higher interest rate environment during the year before the Federal Reserve rate cuts. The Company had no brokered deposits at December 31, 2024. The following table shows deposits with a balance greater than $250,000 at December 31, 2024 and 2023: December 31 (Dollars in thousands) 2024 2023 Non-Maturity Deposits greater than $250,000 $ 2,486,450 $ 2,496,749 Certificates of deposit greater than $250,000, by maturity: Less than 3 months 153,662 84,460 3 months to 6 months 146,341 111,866 6 months to 12 months 81,643 107,080 More than 12 months 3,427 15,423 Total certificates of deposit greater than $250,000 $ 385,073 $ 318,829 Total deposits greater than $250,000 $ 2,871,523 $ 2,815,578 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, 2024 and 2023, the Bank had $3.0 million of these deposits. Total estimated uninsured deposits based on our regulatory reporting amounted to $2.3 billion and $2.2 billion at December 31, 2024 and December 31, 2023, 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, 2024 or 2023. There were no Federal Funds purchased or advances from the FRB at December 31, 2024 or 2023. 65 Table of Contents 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 continue to qualify as regulatory capital. 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 17, 2025) and the rate was 7.35% as of December 31, 2024. The average rate paid for these securities was 8.45% in 2024 and 8.21% in 2023. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited, by the terms of the debentures, 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 $573.1 million at December 31, 2024, and $549.8 million at the end of 2023, an increase of $23.3 million or 4.24%. 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, 2024, 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, 2024 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, 2024 and 2023. The Company’s and the Bank’s actual and required capital amounts and ratios are as follows: December 31, 2024 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 $ 579,602 13.04 % $ 200,046 4.50 % N/A N/A Tier 1 capital to risk-weighted assets 589,602 13.26 % 266,728 6.00 % N/A N/A Risk-based capital to risk-weighted assets 645,453 14.52 % 355,637 8.00 % N/A N/A Tier 1 leverage capital ratio 589,602 10.95 % 215,379 4.00 % N/A N/A Bank CET1 capital to risk-weighted assets $ 591,072 13.30 % $ 200,038 4.50 % $ 288,944 6.50 % Tier 1 capital to risk-weighted assets 591,072 13.30 % 266,718 6.00 % 355,624 8.00 % Risk-based capital to risk-weighted assets 646,920 14.55 % 355,624 8.00 % 444,530 10.00 % Tier 1 leverage capital ratio 591,072 10.99 % 215,213 4.00 % 269,016 5.00 % 66 Table of Contents 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 % On September 10, 2024 the Board of Directors authorized a new share repurchase program (the “Repurchase Plan”) in which the Company may repurchase up to $55.0 million of the Company’s common stock, which represented approximately 9% of outstanding shareholders’ equity at the time of approval. The new Repurchase Plan extends through December 31, 2026. The Board concurrently terminated the existing $25.0 million repurchase plan previously approved on November 14, 2023. Repurchases by the Company under the Repurchase Plan may be made from time to time 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. During 2024, the Company repurchased 48,173 shares under the Repurchase Plan, for a total of $45.3 million, inclusive of the excise tax. The largest repurchase transaction occurred on October 3, 2024, when the Company entered into and executed a Stock Purchase Agreement with the living trust of one of the Company’s largest shareholders under which the Company repurchased 37,990 shares of common stock of the Company at a cost of $34.8 million. At the time of purchase, this transaction represented the repurchase of 5.15% of the Company’s outstanding shares of common stock. As of December 31, 2024, there remains $19.9 million authorized for repurchases under the new Repurchase Plan. 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. 67 Table of Contents The following table sets forth our off-balance sheet lending commitments as of December 31, 2024: 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 $ 1,006,649 $ 469,573 $ 343,508 $ 27,956 $ 165,612 Standby letters of credit 15,411 11,568 3,343 500 - Total off-balance sheet commitments $ 1,022,060 $ 481,141 $ 346,851 $ 28,456 $ 165,612 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 $2.7 million and $3.7 million at December 31, 2024 and December 31, 2023, 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 48 months with final expiration in October 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 and non-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 $212.6 million or 4.0% of total assets as of December 31, 2024. The majority of cash is on deposit with the FRB and amounted to $141.5 million. Potential sources of liquidity also include our ability to sell or pledge our available-for-sale securities portfolio, our held-to-maturity portfolio which can be pledged for borrowing purposes, 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. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We actively monitor our liquidity on a daily basis and manage our liquidity and overall balance sheet positions through both our management and Board level Asset and Liability Management committees (ALCO), which meet regularly during the year. 68 Table of Contents We had the following borrowing lines available at December 31, 2024: As of December 31, 2024 (Dollars in thousands) Total Credit Line Limit Outstanding Amount Remaining Credit Line Available Value of Collateral Pledged Additional liquidity sources: Federal Reserve BIC $ 1,149,330 $ - $ 1,149,330 $ 1,439,235 Federal Home Loan Bank 803,208 - 803,208 1,033,427 US Bank Fed Funds 50,000 - 50,000 - PCBB Fed Funds 50,000 - 50,000 - FHLB Fed Funds 18,000 - 18,000 - Total additional liquidity sources $ 2,070,538 $ - $ 2,070,538 $ 2,472,662 We continued our focus on maintaining a strong liquidity position throughout 2024 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, 2024, we had internal sources of liquidity comprised of $212.6 million in cash and $465.8 million of unencumbered investment securities, which represented in the aggregate 12.63% of total assets. We also had $2.1 billion in external sources of liquidity as outlined in the table above, bringing our total available liquidity to $2.7 billion. Our pledged collateral on short-term borrowing lines was comprised of $2.5 billion in loans and $1.6 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 can, as needed, 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 can increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the Federal Reserve and 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 our liquidity 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 net cash provided by operating activities for 2024 was $103.7 million driven by record net income of $88.5 million. Our primary investing activities are the origination of loans and leases and purchases and sales of investment securities. Net cash used in investing activities was $274.6 million during 2024 driven by a net increase in loans and leases of $24.3 million and activity in our investment portfolio, including purchases of $389.5 million in available-for-sale securities offset by proceeds from the sale, maturities, calls, and pay downs of investment securities of $152.6 million. As of December 31, 2024, we had unfunded loan commitments of $1.0 billion and unfunded letters of credit of $15.4 million. At December 31, 2024, we believe that we had sufficient funds available to meet current loan commitments. Net cash used in financing activities totaled $27.2 million in 2024 driven by the repurchase of $45.3 million in common stock, $13.0 million in cash dividends paid to shareholders offset by an increase in deposits of $31.0 million. 69 Table of Contents