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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-09 · 201 added, 316 removed, 379 unchanged (58% of the section changed)

1 unchanged sentence

Forward-Looking Statements

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Hawthorn Bancshares, Inc., and its subsidiaries (collectively, the Company, we, our, or us), including, without limitation:

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, strategy, future performance and business of Hawthorn Bancshares, Inc., and its subsidiaries (collectively, the "Company," "we," "our," or "us"), including, without limitation:

• statements that are not historical in nature, and

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• credit and market risks relating to increasing inflation,

• economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine conflict, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate changes or other catastrophic events,

• economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine conflict, and the Israel-Hamas conflict, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate changes or other catastrophic events,

• changes may occur in the securities markets,

• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses, including after implementation of the credit impairment model for Current Expected Credit Losses (CECL),

• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses, and

• technological changes, including potential cyber-security incidents and other disruptions, or innovations to the financial services industry, including as a result of the increased telework environment.

• the continued use, availability, and reliability of the London Interbank Offered Rate (LIBOR) and the risks related to the transition from LIBOR to any alternate reference rate we may use, and

• our ability to maintain sufficient liquidity, primarily through deposits, in light of recent events in the banking industry.

We have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and in other reports filed with the Securities and Exchange Commission (SEC) from time to time.

We have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements under the caption Risk Factors in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Form 10-K"), and in other reports filed by us with the Securities and Exchange Commission ("SEC") from time to time.

Other factors that have not been identified in this report could also have this effect.

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Crucial to the Company’s community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services.

Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.9 billion in assets at September 30, 2023, provides a broad range of commercial and personal banking services.

Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.8 billion in assets at March 31, 2024, provides a broad range of commercial and personal banking services.

The Bank’s specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts.

Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services.

The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St.

Louis, and the greater Kansas City metropolitan area.

The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area.

The Company’s primary source of revenue is net interest income derived primarily from lending and deposit taking activities.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations.

These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain.

Certain accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations.

These critical accounting policies and estimates require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain.

Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences.

In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected.

The impact and any associated risks related to the critical accounting policies on the business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations , where such policies affect the reported and expected financial results.

Allowance for Credit Losses

Management has identified the accounting policy related to the allowance for credit losses as critical to the understanding of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.

Further discussion of the methodology used in establishing the allowance for credit losses and the impact of any associated risks related to these policies and estimates on the Company’s business operations is provided in Note 1 - Summary of Significant Accounting Policies and is also discussed in the Lending and Credit Management section below.

Many of the loans are deemed collateral-dependent for purposes of the measurement of expected losses, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time.

Such volatility can have an impact on the financial performance of the Company.

The Company has identified certain accounting policies as "critical accounting policies and estimates," consisting of those related to the allowance for credit losses, as described in the section captioned "Critical Accounting Policies and Estimates" incorporated by reference in Item 7, Management's Discussion and Analysis of Financial Condition and results of Operations included in the 2023 Form 10-K.

There have been no changes in the Company's application of critical accounting policies and estimates since December 31, 2023.

Executive Summary

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The Three Months Ended

(In thousands, except per share data) September 30, 2023 June 30, 2023 September 30, 2022

Net interest income $ 15,147 $ 14,202 $ 15,067

Provision for credit losses on loans & unfunded commitments 110 — 300

Non-interest income 606 1,596 3,485

Investment securities gains, net 3 7 1

Non-interest expense 12,569 12,725 12,195

Income before income taxes 3,077 3,080 6,058

Income tax expense 498 531 1,131

Net income $ 2,579 $ 2,549 $ 4,927

Basic earnings per share $ 0.36 $ 0.36 $ 0.70

Diluted earnings per share $ 0.36 $ 0.36 $ 0.70

Efficiency ratio (1) 79.79% 80.55% 65.73%

Net interest margin 3.35% 3.19% 3.56%

Nine Months Ended

September 30,

(Dollars in thousands, except per share data) 2023 2022

(In thousands, except per share data) March 31, 2024 December 31, 2023 March 31, 2023

Net interest income $ 14,748 $ 15,844 $ 13,948

Provision for (release of) credit losses on loans & unfunded commitments 790 (1,000)

(Release of) provision for credit losses on loans & unfunded commitments

(230) 1,550 680

Non-interest income 3,019 2,152 3,182

Investment securities (losses) gains, net 18 (12)

Investment securities gains (losses), net

Non-interest expense 12,575 14,587 12,478

Income before income taxes 10,137 19,658

Income tax expense 1,738 3,633

Net income $ 8,399 $ 16,025

Basic earnings per share $ 1.19 $ 2.27

Diluted earnings per share $ 1.19 $ 2.27

Income (loss) before income taxes 5,422 (9,706) 3,980

Income tax expense (benefit) 966 (2,263) 709

Net income (loss) $ 4,456 $ (7,443) $ 3,271

Basic earnings (loss) per share $ 0.63 $ (1.05) $ 0.47

Diluted earnings (loss) per share $ 0.63 $ (1.05) $ 0.47

Efficiency ratio (1) 70.78% 81.06% 72.84%

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Total revenue is calculated as net interest income plus non-interest income.

As of and for the Three Months Ended For the Nine Months Ended

(Dollars in thousands, except per share data) September 30, 2023 June 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

As of and for the Three Months Ended

(Dollars in thousands, except per share data) March 31, 2024 December 31, 2023 March 31, 2023

Key financial ratios

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Asset Quality

Net-charge-offs (recoveries) $ 74 $ (92) $ 148 $ 34 $ 398

Net loan charge-offs

$ 69 $ 268 $ 52

Non-performing loans $ 8,549 $ 6,413 $ 19,599

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Non-performing assets to total assets 0.57% 0.43% 1.47%

Allowance for loan losses to total loans 1.44% 1.42% 1.04%

Allowance for credit losses to total loans

1.56% 1.54% 1.43%

(1) Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets

Results of Operations Highlights:

Consolidated net income of $2.6 million for the third quarter 2023 increased $0.03 million, or 1.2%, compared to the second quarter 2023 ("linked quarter") and decreased $2.3 million, or 47.7%, from the third quarter 2022 (the "prior year quarter").

Earnings per diluted share was consistent at $0.36 for each of the third quarter 2023 and linked quarter compared to $0.70 for the prior year quarter.

For the third quarter 2023, the return on average assets was 0.54%, the return on average stockholders’ equity was 8.05%, and the efficiency ratio was 79.8%.

Consolidated net income of $8.4 million, or $1.19 per diluted share, for the nine months ended September 30, 2023 decreased $7.6 million, or 47.6%, compared to $16.0 million, or $2.27 per diluted share, for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, the return on average assets was 0.59%, the return on average stockholders’ equity was 8.73%, and the efficiency ratio was 77.6%.

Net interest income of $15.1 million for the third quarter 2023, increased $0.9 million from the linked quarter, and increased $0.1 million from the prior year quarter.

Net interest margin, on a fully taxable equivalent ("FTE") basis, was 3.35% for the third quarter compared to 3.19% and 3.56% for the linked quarter and the prior year quarter, respectively.

Net interest income of $43.3 million for the nine months ended September 30, 2023 decreased $0.5 million compared to $43.8 million for the nine months ended September 30, 2022.

Net interest margin, on a fully taxable equivalent basis, was 3.23% for the nine months ended September 30, 2023, a decrease from 3.57% for the nine months ended September 30, 2022.

Consolidated net income of $4.5 million, or $0.63 per diluted share, for the three months ended March 31, 2024 increased $1.2 million, or 36.2%, compared to $3.3 million, or $0.47 per diluted share, for the three months ended March 31, 2023.

The results reflect the Company's focus to improve profitability from core businesses while managing expenses.

For the three months ended March 31, 2024, the return on average assets was 0.97%, the return on average stockholders’ equity was 13.12%, and the efficiency ratio was 70.8%.

Net interest income of $14.7 million for the three months ended March 31, 2024 increased $0.8 million compared to $13.9 million for the three months ended March 31, 2023.

Net interest margin, on a fully taxable equivalent basis ("FTE"), was 3.39% for the three months ended March 31, 2024, an increase from 3.16% for the three months ended March 31, 2023.

The change to net interest margin on a fully taxable equivalent basis is discussed in greater detail under the Average Balance Sheet Data and Rate and Volume Analysis sections below.

Non-interest income for the third quarter 2023 was $0.6 million, a decrease of $1.0 million, or 62.0%, from the linked quarter, and a decrease of $2.9 million, or 82.6%, from the prior year quarter.

The change in the current quarter compared to the prior year quarter is primarily due to the recognition of a $2.8 million valuation allowance on property in other real estate owned.

Non-interest income of $5.4 million for the nine months ended September 30, 2023 decreased $5.5 million, or 50.4%, compared to $10.9 million for the nine months ended September 30, 2022.

The decrease is primarily due to the recognition of a $4.6 million valuation allowance in the second and third quarter 2023 on property in other real estate owned, a decrease in real estate servicing fees, and the gains on sales of real estate mortgages.

Non-interest income of $3.0 million for the three months ended March 31, 2024 decreased $0.2 million, or 5.1%, compared to $3.2 million for the three months ended March 31, 2023.

The decrease is primarily due to the sale of the mortgage servicing portfolio resulting in a decrease in real estate servicing fees and the gains on sales of real estate mortgages.

These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Non-interest expense for the third quarter 2023 was $12.6 million, a decrease of $0.2 million, or 1.2%, from the linked quarter, and an increase of $0.4 million, or 3.1%, from the prior year quarter.

Non-interest expense for the nine months ended September 30, 2023 was $37.8 million, an increase of $1.8 million, or 5.0%, from the nine months ended September 30, 2022.

Non-interest expense for the three months ended March 31, 2024 was $12.6 million, an increase of $0.1 million, or 0.8%, from the three months ended March 31, 2023.

The Company continues to establish a unified company culture and improving operational efficiencies.

The Company began investing in new technologies and utilizing consulting and professional services to accomplish these goals.

These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Balance Sheet Highlights:

Cash and cash equivalents – Cash and cash equivalents increased $3.2 million, or 13.0%, to $27.9 million at the end of the current quarter compared to the end of the linked quarter.

Year-over-year, cash and cash equivalents decreased $13.5 million, or 32.7%, from $41.4 million at the end of the prior-year quarter.

Cash and cash equivalents – Cash and cash equivalents decreased $50.0 million, or 53.5%, to $43.5 million as of March 31, 2024 compared to December 31, 2023 and increased $9.7 million, or 28.8%, from March 31, 2023.

The Company elected to reposition its balance sheet during the fourth quarter of 2023 by selling $83.7 million in book value of investment securities, with an average yield of 1.57%, for an after-tax realized loss of $9.1 million.

Proceeds from the sale of investments were reinvested into the securities portfolio and bank-owned life insurance during the first quarter of 2024.

See the Liquidity Management section for further discussion.

Loans – Loans held for investment decreased by $6.2 million, or 0.4%, to $1.6 billion as of September 30, 2023 compared to the end of the linked quarter.

Year-over-year, loans held for investment increased $65.0 million, or 4.4%, from $1.5 billion as of September 30, 2022.

The yield earned on average loans held for investment was 5.67%, on an FTE basis, for the third quarter 2023 compared to 5.23% for the linked quarter and 4.51% for the prior year quarter.

Asset quality – Non-performing loans remained steady at $3.8 million at September 30, 2023 and at the end of the linked quarter, compared to $17.3 million at the end of the prior year quarter.

The decrease in non-performing loans in the current quarter as compared to the prior year quarter was primarily due to three large non-accrual loan relationships returning to accruing status.

The allowance for credit losses to total loans was 1.44% at September 30, 2023, compared to the allowance for loan losses to total loans of 1.02% at December 31, 2022 and 1.04% at September 30, 2022.

Loans – Loans held for investment decreased $20.3 million, or 1.3%, to $1.5 billion as of March 31, 2024 as compared to December 31, 2023 and decreased $23.2 million, or 1.5%, from March 31, 2023.

Asset quality – Non-performing loans totaled $8.5 million at March 31, 2024, an increase from $6.4 million at December 31, 2023, and a decrease of $11.1 million from $19.6 million at March 31, 2023.

The decrease in non-performing loans in the current quarter compared to the prior year quarter is primarily due to three large non-accrual loan relationships returning to accruing status.

The allowance for credit losses to total loans was 1.56% at March 31, 2024, compared to 1.54% at December 31, 2023 and 1.43% at March 31, 2023.

These changes are discussed in greater detail under the Lending and Credit Management section below.

Deposit s – Total deposits increased $37.1 million, or 2.4%, to $1.6 billion as of September 30, 2023 compared to the end of the linked quarter.

Year-over-year deposits decreased $12.4 million, or 0.8%, from $1.6 billion as of September 30, 2022.

The yield earned on average deposits was 2.32%, on an FTE basis, for the third quarter 2023 compared to 2.07% for the linked quarter and 0.73% for the prior year quarter.

Federal Home Loan Bank advances and other borrowings – FHLB advances and other borrowings decreased $52.3 million, or 31.8%, to $112.0 million as of September 30, 2023 compared to the end of the linked quarter.

Year-over-year FHLB advances and other borrowing increased $39.0 million, or 53.4%, from $73.0 million as of September 30, 2022.

The Company utilized funding capacity with the FHLB to meet its short-term liquidity needs.

Capital – On January 1, 2023, the Company adopted Accounting Standard Update (ASU) 2016-13 and recorded a one-time cumulative effect adjustment to retained earnings totaling $5.6 million.

Total stockholders' equity was $118.4 million and the common equity to assets ratio was 6.30% at September 30, 2023 compared to 6.65% and 6.25% at the end of the linked quarter and the prior year quarter, respectively.

Regulatory capital ratios remain “well-capitalized”, with a tier 1 leverage ratio of 10.43% and a total risk-based capital ratio of 14.20% at September 30, 2023.

Deposit s – Total deposits at March 31, 2024 were $1.5 billion, a decrease of $43.0 million, or 2.7%, from December 31, 2023, and a decrease of $80.1 million, or 5.0%, from March 31, 2023.

The decrease in deposits at March 31, 2024 as compared to December 31, 2023 and March 31, 2023 was primarily a result of the Company's strategy to reduce exposure to public funds.

Also, the Company elected to discontinue the repurchase agreement product during 2023 and began migrating accounts to reciprocal deposit products within the Company's deposit mix.

Federal Home Loan Bank ("FHLB") advances and other borrowings – Total FHLB advances and other borrowings increased $2.0 million, or 1.9%, to $109.0 million as of March 31, 2024 compared to $107.0 million as of December 31, 2023, and increased $16.0 million, or 17.2%, compared to $93.0 million as of March 31, 2023.

Capital – The Company maintains its “well capitalized” regulatory capital position.

At March 31, 2024, capital ratios were as follows:

total risk-based capital to risk-weighted assets 13.92%;

tier 1 capital to risk-weighted assets 12.51%;

tier 1 leverage 10.71%;

and common equity to assets 7.45%.

Average Balance Sheet Data

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It is affected both by changes in the level of interest rates and changes in the amounts and mix of interest-earning assets and interest-bearing liabilities.

The following table presents average balance sheet data, net interest income, average yields of earning assets, average costs of interest-bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three and nine month periods ended September 30, 2023 and 2022, respectively.

The following table presents average balance sheet data, net interest income, average yields of earning assets, average costs of interest-bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three month periods ended March 31, 2024 and 2023, respectively.

The average balances used in this table and other statistical data were calculated using average daily balances.

Three Months Ended September 30,

(Dollars in thousands) Average Balance Interest Income/ Expense(1) Rate Earned/ Paid(1) Average Balance Interest Income/ Expense(1) Rate Earned/ Paid(1)

Commercial $ 232,516 $ 3,761 6.42% $ 245,877 $ 3,211 5.18%

Real estate construction - residential 55,289 1,028 7.38 24,249 333 5.45

Real estate construction - commercial 129,284 1,899 5.83 127,594 1,522 4.73

Real estate mortgage - residential 376,209 5,185 5.47 323,158 3,570 4.38

Real estate mortgage - commercial 739,225 10,054 5.40 702,139 7,608 4.30

Installment and other consumer 22,176 279 4.99 23,738 206 3.44

Total loans $ 1,554,699 $ 22,206 5.67% $ 1,446,755 $ 16,450 4.51%

Loans held for sale 6,351 59 3.69 1,560 23 5.85

Investment securities:

Treasury 4,861 52 4.24 3,586 12 1.33

government and federal agency obligations 25,498 103 1.60 25,440 87 1.36

Obligations of states and political subdivisions 108,022 814 2.99 113,003 1,040 3.65

Mortgage-backed securities 97,274 514 2.10 111,616 493 1.75

Other debt securities 11,566 176 6.04 12,781 163 5.06

Total investment securities 247,221 1,659 2.66 266,426 1,795 2.67

Other investment securities 7,713 121 6.22 5,431 64 4.68

Federal funds sold 42 — — 46 — —

Interest bearing deposits in other financial institutions 7,029 85 4.80 15,462 76 1.95

Total interest earning assets $ 1,823,055 $ 24,130 5.25% $ 1,735,680 $ 18,408 4.21%

All other assets 89,159 88,350

Allowance for loan losses (22,356) (15,431)

Total assets $ 1,889,858 $ 1,808,599

LIABILITIES AND STOCKHOLDERS' EQUITY

Savings $ 178,564 $ 229 0.51% $ 182,364 $ 16 0.03%

NOW accounts 182,487 464 1.01 268,780 646 0.95

Interest checking 187,732 2,252 4.76 47,788 264 2.19

Money market 273,655 1,521 2.21 302,773 456 0.60

Time deposits 315,332 2,173 2.73 273,550 584 0.85

Total interest bearing deposits $ 1,137,770 $ 6,639 2.32% $ 1,075,255 $ 1,966 0.73%

Federal funds purchased and securities sold under agreements to repurchase 6,137 38 2.46 6,181 13 0.83

Federal Home Loan Bank advances and other borrowings 129,758 1,075 3.29 75,262 277 1.46

Subordinated notes 49,486 989 7.93 49,486 570 4.57

Total borrowings 185,381 2,102 4.50 130,929 860 2.61

Total interest bearing liabilities $ 1,323,151 $ 8,741 2.62% $ 1,206,184 $ 2,826 0.93%

Demand deposits 426,052 464,377

Other liabilities 13,502 10,291

Total liabilities $ 1,762,705 $ 1,680,852

Stockholders' equity 127,153 127,747

Total liabilities and stockholders' equity $ 1,889,858 $ 1,808,599

Net interest income (FTE) $ 15,389 $ 15,582

Net interest spread 2.63% 3.28%

Net interest margin 3.35% 3.56%

(1) Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for both the three months ended September 30, 2023 and 2022.

Such adjustments totaled $0.2 million and $0.5 million for the three months ended September 30, 2023 and 2022, respectively.

(2) Non-accruing loans are included in the average amounts outstanding.

Nine Months Ended September 30, 2023

Three Months Ended March 31, 2024

(Dollars in thousands) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1) Average Balance Interest Income/ Expense (1) Rate Earned/ Paid (1)

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All other assets 93,227 87,307

Allowance for loan losses (20,124) (15,575)

Allowance for credit losses

(23,852) (15,783)

Total assets $ 1,843,695 $ 1,906,191

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Net interest income (FTE) $ 14,947 $ 14,281

Net interest spread 2.59% 3.36%

Net interest margin 3.23% 3.57%

(1) Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the nine months ended September 30, 2023 and 2022.

Such adjustments totaled $0.9 million and $1.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Net interest spread (FTE)

Net interest margin (FTE)

(1) Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three months ended March 31, 2024 and 2023.

Such adjustments totaled $0.2 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively.

(2) Non-accruing loans are included in the average amounts outstanding.

Rate and Volume Analysis

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest-bearing liabilities, identifying changes related to volumes and rates for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, respectively.

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest-bearing liabilities, identifying changes related to volumes and rates for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, respectively.

The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.

Three Months Ended September 30, Nine Months Ended September 30,

2022 2023 vs.

Change due to Change due to

(in thousands) Total Change Average Volume Average Rate Total Change Average Volume Average Rate

Three Months Ended March 31,

Change due to

(in thousands) Total Change Average Volume Average Rate

Interest income on a fully taxable equivalent basis:

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Other investment securities 44 2 42

Federal funds sold — — — (3) (9) 6

Interest bearing deposits in other financial institutions 275 102 173

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Federal funds purchased and securities sold under agreements to repurchase (21) (10) (11)

Federal Home Loan Bank advances and other borrowings 798 293 505 1,652 503 1,149

FHLB advances and other borrowings

Subordinated notes 118 — 118

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Net interest income on a fully taxable equivalent basis $ 666 $ 222 $ 444

(1) Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three and nine months ended September 30, 2023 and 2022, respectively.

Such adjustments totaled $0.2 million and $0.9 million for the three and nine months ended September 30, 2023, respectively, compared to $0.5 million and $1.6 million for the three and nine months ended September 30, 2022, respectively.

Such adjustments totaled $0.2 million for the three months ended March 31, 2024 compared to $0.3 million for the three months ended March 31, 2023.

(2) Non-accruing loans are included in the average amounts outstanding.

Financial results for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 reflected a decrease in net interest income, on a fully taxable equivalent basis, of $0.2 million, or 1.2%, and financial results for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 reflected a decrease of $1.2 million, or 2.7%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.35% for the quarter ended September 30, 2023 compared to 3.56% for the quarter ended September 30, 2022, and decreased to 3.23% for the nine months ended September 30, 2023 compared to 3.57% for the nine months ended September 30, 2022.

The increase in margin for the third quarter of 2023 compared to the linked quarter was due to $0.6 million of interest accreted into income on three loans returning to accruing status in June 2023, representing approximately 14 basis points.

Interest income on a fully taxable equivalent basis increased $5.7 million in the current quarter compared to the prior year quarter, and increased $16.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, while interest expense increased $5.9 million and $17.8 million for the three and nine months ended September 30, 2023, respectively, resulting in a decrease in net interest income on an FTE basis.

Average interest-earning assets increased $87.4 million, or 5.0%, to $1.82 billion for the quarter ended September 30, 2023 compared to $1.74 billion for the quarter ended September 30, 2022, and average interest-bearing liabilities increased $117.0 million, or 9.7%, to $1.32 billion for the quarter ended September 30, 2023 compared to $1.21 billion for the quarter ended September 30, 2022.

Average interest-earning assets increased $125.4 million, or 7.4%, to $1.83 billion for the nine months ended September 30, 2023 compared to $1.70 billion for the nine months ended September 30, 2022, and average interest-bearing liabilities increased $153.9 million, or 13.1%, to $1.33 billion for the nine months ended September 30, 2023 compared to $1.17 billion for the nine months ended September 30, 2022.

Total interest income (expressed on a fully taxable equivalent basis) was $24.1 million and $67.6 million for the three and nine months ended September 30, 2023, respectively, compared to $18.4 million and $51.1 million for the three and nine months ended September 30, 2022, respectively.

The Company’s rates earned on interest earning assets were 5.25% and 4.95% for the three and nine months ended September 30, 2023, respectively, compared to 4.21% and 4.01% for the three and nine months ended September 30, 2022, respectively.

Interest income on loans held for investment was $22.2 million and $61.3 million for the three and nine months ended September 30, 2023, respectively, compared to $16.5 million and $45.2 million for the three and nine months ended September 30, 2022, respectively.

Average loans outstanding increased $107.9 million, or 7.5%, to $1.55 billion for the quarter ended September 30, 2023 compared to $1.45 billion for the quarter ended September 30, 2022.

The average yield on loans increased to 5.67% for the quarter ended September 30, 2023 compared to 4.51% for the quarter ended September 30, 2022.

The increase in yield was due to $0.6 million of interest accreted into income on three loans returning to accruing status in June 2023, representing approximately 16 basis points.

Average loans outstanding increased $167.8 million, or 12.2%, to $1.54 billion for the nine months ended September 30, 2023 compared to $1.38 billion for the nine months ended September 30, 2022.

The average yield on loans increased to 5.31% for the nine months ended September 30, 2023 compared to 4.40% for the nine months ended September 30, 2022.

Financial results for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 reflected an increase in net interest income, on a fully taxable equivalent basis, of $0.7 million, or 4.7%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) increased to 3.39% for the three months ended March 31, 2024 compared to 3.16% for the three months ended March 31, 2023.

Interest income on a fully taxable equivalent basis increased $3.0 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, while interest expense increased $2.3 million for the three months ended March 31, 2024, resulting in an increase in net interest income on a fully taxable equivalent basis.

Average interest-earning assets decreased $60.3 million, or 3.3%, to $1.77 billion for the three months ended March 31, 2024 compared to $1.83 billion for the three months ended March 31, 2023, and average interest-bearing liabilities decreased $20.5 million, or 1.5%, to $1.31 billion for the three months ended March 31, 2024 compared to $1.33 billion for the three months ended March 31, 2023.

Total interest income (expressed on a fully taxable equivalent basis) was $24.3 million for the three months ended March 31, 2024 compared to $21.3 million for the three months ended March 31, 2023.

The Company’s rates earned on interest earning assets were 5.50% for the three months ended March 31, 2024 compared to 4.70% for the three months ended March 31, 2023.

Interest income on loans held for investment was $21.8 million for the three months ended March 31, 2024 compared to $18.9 million for the three months ended March 31, 2023.

Average loans outstanding remained consistent at $1.52 billion for both the three months ended March 31, 2024 and 2023.

The average yield on loans increased to 5.75% for the three months ended March 31, 2024 compared to 5.03% for the three months ended March 31, 2023.

See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio.

Interest income on available-for-sale securities was $1.7 million and $5.1 million for the three and nine months ended September 30, 2023, respectively, compared to $1.8 million and $5.4 million for the three and nine months ended September 30, 2022, respectively.

Average securities decreased $19.2 million, or 7.2%, to $247.2 million for the quarter ended September 30, 2023 compared to $266.4 million for the quarter ended September 30, 2022.

The average yield on securities decreased to 2.66% for the quarter ended September 30, 2023 compared to 2.67% for the quarter ended September 30, 2022.

Average securities decreased $30.1 million, or 10.7%, to $252.7 million for the nine months ended September 30, 2023 compared to $282.8 million for the nine months ended September 30, 2022.

The average yield on securities increased to

2.70% for the nine months ended September 30, 2023 compared to 2.57% for the nine months ended September 30, 2022.

Interest income on available-for-sale securities was $1.5 million for the three months ended March 31, 2024 compared to $1.7 million for the three months ended March 31, 2023.

Average securities decreased $70.5 million, or 27.6%, to $184.5 million for the three months ended March 31, 2024 compared to $255.0 million for the three months ended March 31, 2023.

The average yield on securities increased to 3.22% for the three months ended March 31, 2024 compared to 2.73% for the three months ended March 31, 2023.

The Company elected to reposition its balance sheet during the fourth quarter of 2023 by selling $83.7 million in book value of investment securities, with an average yield of 1.57%.

See the Liquidity Management section for further discussion.

Total interest expense increased to $8.7 million and $23.5 million for the three and nine months ended September 30, 2023, respectively, compared to $2.8 million and $5.7 million for the three and nine months ended September 30, 2022, respectively.

The Company’s rates paid on interest bearing liabilities were 2.62% and 2.36% for the three and nine months ended September 30, 2023, respectively, compared to 0.93% and 0.65% for the three and nine months ended September 30, 2022, respectively.

Total interest expense increased to $9.3 million for the three months ended March 31, 2024 compared to $7.0 million for the three months ended March 31, 2023.

The Company’s rates paid on interest bearing liabilities were 2.85% for the three months ended March 31, 2024 compared to 2.13% for the three months ended March 31, 2023.

See the Liquidity Management section for further discussion.

Interest expense on deposits increased to $6.6 million and $18.2 million for the three and nine months ended September 30, 2023, respectively, compared to $2.0 million and $3.6 million for the three and nine months ended September 30, 2022, respectively.

Average interest-bearing deposits increased $62.5 million, or 5.8%, to $1.14 billion for the quarter ended September 30, 2023 compared to $1.08 billion for the quarter ended September 30, 2022.

The average cost of deposits increased to 2.32% for the quarter ended September 30, 2023 compared to 0.73% for the quarter ended September 30, 2022.

Average interest-bearing deposits increased $120.3 million, or 11.6%, to $1.16 billion for the nine months ended September 30, 2023 compared to $1.04 billion for the nine months ended September 30, 2022.

The average cost of deposits increased to 2.10% for the nine months ended September 30, 2023 compared to 0.46% for the nine months ended September 30, 2022.

Interest expense on borrowings increased to $2.1 million and $5.3 million for the three and nine months ended September 30, 2023, respectively, compared to $0.9 million and $2.1 million for the three and nine months ended September 30, 2022, respectively.

Average borrowings increased $54.5 million, or 41.6%, to $185.4 million for the quarter ended September 30, 2023 compared to $130.9 million for the quarter ended September 30, 2022.

The average cost of borrowings increased to 4.50% for the quarter ended September 30, 2023 compared to 2.61% for the quarter ended September 30, 2022.

Average borrowings increased $33.6 million, or 25.0%, to $168.2 million for the nine months ended September 30, 2023 compared to $134.6 million for the nine months ended September 30, 2022.

The Company utilized funding capacity with the FHLB to meet its short-term liquidity needs.

The average cost of borrowings increased to 4.20% for the nine months ended September 30, 2023 compared to 2.11% for the nine months ended September 30, 2022.

Interest expense on deposits increased to $7.5 million for the three months ended March 31, 2024 compared to $5.6 million for the three months ended March 31, 2023.

Average interest-bearing deposits decreased $29.6 million, or 2.5%, to $1.15 billion for the three months ended March 31, 2024 compared to $1.18 billion for the three months ended March 31, 2023.

The average cost of deposits increased to 2.61% for the three months ended March 31, 2024 compared to 1.91% for the three months ended March 31, 2023.

Interest expense on borrowings increased to $1.8 million for the three months ended March 31, 2024 compared to $1.4 million for the three months ended March 31, 2023.

Average borrowings increased $9.1 million, or 6.0%, to $160.6 million for the three months ended March 31, 2024 compared to $151.5 million for the three months ended March 31, 2023.

The average cost of borrowings increased to 4.61% for the three months ended March 31, 2024 compared to 3.84% for the three months ended March 31, 2023.

The increase in cost of funds primarily resulted from higher market interest rates.

1 unchanged sentence

Non-interest income for the periods indicated was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Three Months Ended March 31,

(Dollars in thousands) 2024 2023 $ Change % Change

Service charges and other fees $ 817 $ 684 $ 133 19.4 %

3 unchanged sentences

Gain on sales of mortgage loans, net 277 496 (219) (44.2) %

Losses (gains) on other real estate owned, net (2,809) — (2,809) NM (4,592) 30 (4,622) NM

Gains on other real estate owned, net 34 9 25 277.8 %

Other 613 569 44 7.7 %

2 unchanged sentences

* Total revenue is calculated as net interest income plus non-interest income.

NM = not meaningful

Total non-interest income decreased $2.9 million, or 82.6%, to $0.6 million for the third quarter ended September 30, 2023 compared to $3.5 million for the third quarter ended September 30, 2022, and decreased $5.5 million, or 50.4%, to $5.4 million for the nine months ended September 30, 2023 compared to $10.9 million for the nine months ended September 30, 2022.

The Company recognized a $2.8 million and $4.6 million valuation allowance for other real estate owned in the quarter and nine months ended September 30, 2023, respectively.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) decreased to $0.1 million for the quarter ended September 30, 2023 compared to $0.4 million for the quarter ended September 30, 2022, and decreased to $0.4 million for the nine months ended September 30, 2023 compared to $0.9 million for the nine months ended September 30, 2022.

The Company was servicing $226.3 million of mortgage loans at September 30, 2023 compared to $240.5 million and $247.6 million at December 31, 2022 and September 30, 2022, respectively.

Gain on sales of mortgage loans increased to $0.9 million for the third quarter ended September 30, 2023 compared to $0.6 million for the third quarter ended September 30, 2022, and decreased to $2.0 million for the nine months ended September 30, 2023 compared to $2.3 million for the nine months ended September 30, 2022.

The Company sold $37.2 million and $84.4 million of loans for the three and nine months ended September 30, 2023, respectively, compared to $21.4 million and $76.1 million for the three and nine months ended September 30, 2022, respectively.

Investment Security Gains (Losses)

The following table presents the gross realized gains and losses from sales and calls of available-for-sale securities, as well as gains and losses on equity securities from fair value adjustments, which were recognized in earnings:

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2023 2022 2023 2022

Gross realized gains $ — $ — $ — $ —

Gross realized losses — — — —

Other-than-temporary impairment recognized — — — —

Other investment securities:

Fair value adjustments, net 3 1 18 (12)

Investment securities gains (losses), net $ 3 $ 1 $ 18 $ (12)

Total non-interest income decreased $0.2 million, or 5.1%, to $3.0 million for the three months ended March 31, 2024 compared to $3.2 million for the three months ended March 31, 2023.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) decreased $0.2 million, or 98.4% , from the three months ended March 31, 2023.

On January 31, 2024 the Company sold its servicing portfolio and the balance of the serviced loans transferred on April 30, 2024.

At March 31, 2024, the balance of the servicing portfolio for loans sold to the secondary market was $215.2 million of mortgage loans at March 31, 2024 compared to $220.7 million and $235.2 million at December 31, 2023 and March 31, 2023, respectively.

Gain on sales of mortgage loans decreased to $0.3 million for the three months ended March 31, 2024 compared to $0.5 million for the three months ended March 31, 2023.

The Company sold $15.1 million of loans for the three months ended March 31, 2024 compared to $20.2 million for the three months ended March 31, 2023.

Non-interest expense for the periods indicated was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in thousands) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Three Months Ended March 31,

(Dollars in thousands) 2024 2023 $ Change % Change

Salaries $ 5,249 $ 5,484 $ (235) (4.3)%

13 unchanged sentences

Total revenue is calculated as net interest income plus non-interest income.

Total non-interest expense increased $0.4 million to $12.6 million for the quarter ended September 30, 2023 compared to $12.2 million for the quarter ended September 30, 2022 and increased $1.8 million to $37.8 million for the nine months ended September 30, 2023 compared to $36.0 million for the nine months ended September 30, 2022.

Salaries increased $0.5 million, or 11.0%, to $5.7 million for the quarter ended September 30, 2023 compared to $5.2 million for the quarter ended September 30, 2022, and increased $1.5 million, or 9.5%, to $16.8 million for the nine months ended September 30, 2023 compared to $15.3 million for the nine months ended September 30, 2022.

The increase was primarily due to annual merit increases and an increase in full-time equivalent employees.

Employee benefits decreased $0.2 million, or 12.0%, to $1.4 million for the quarter ended September 30, 2023 compared to $1.6 million for the quarter ended September 30, 2022, and decreased $0.7 million, or 14.6%, to $4.2 million for the nine months ended September 30, 2023 compared to $4.9 million for the nine months ended September 30, 2022.

The decrease was primarily due to a decrease in 401(k) plan contributions and pension cost due to higher annual discount rate assumptions compared to the prior year's annual assumptions.

Loan expense increased $0.02 million, or 19.5%, to $0.1 million for the quarter ended September 30, 2023 compared to $0.1 million for the quarter ended September 30, 2022, and increased $0.4 million, or 81.0%, to $0.8 million for the nine months ended September 30, 2023 compared to $0.4 million for the nine months ended September 30, 2022.

The increase was primarily due to recognition of an adjustment to an unearned dealers reserve related to prior years' activity in the first quarter of 2023.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 16.2% and 17.1% for the three and nine months ended September 30, 2023, respectively, compared to 18.7% and 18.5% for the three and nine months ended September 30, 2022, respectively.

The decrease in the effective tax rate for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily attributable to the decrease in earnings, an increase in tax-exempt income and a return to provision adjustment resulting in a net benefit related to the 2022 tax return.

The effective tax rate for each of the three and nine months ended September 30, 2023 and 2022, respectively, is lower than the U.S.

Total non-interest expense increased $0.1 million, or 0.8%, to $12.6 million for the three months ended March 31, 2024 compared to $12.5 million for the three months ended March 31, 2023.

Salaries decreased $0.2 million, or 4.3%, to $5.2 million for the three months ended March 31, 2024 compared to $5.5 million for the three months ended March 31, 2023.

The decrease was primarily due to a planned reduction of full-time employees during the fourth quarter of 2023.

Processing, network, and bank card expense increased $0.2 million, or 18.4%, to $1.4 million for the three months ended March 31, 2024 compared to $1.2 million for the three months ended March 31, 2023.

The increase was primarily a result of ATM and debit card interchange fees as well as increases in processing expense.

Legal, examination and professional fees increased $0.3 million, or 63.0%, to $0.8 million for the three months ended March 31, 2024 compared to $0.5 million for the three months ended March 31, 2023.

The increase was primarily due to consulting, audit, and legal fees related to strategic planning initiatives.

Included in this increase was a settlement agreement resulting from terminating a contract related to a digital account opening project canceled in the fourth quarter of 2023.

Loan expense decreased $0.2 million, or 54.8%, to $0.2 million for the three months ended March 31, 2024 compared to $0.4 million for the three months ended March 31, 2023.

The decrease was primarily due to recognition of an adjustment to an unearned dealers reserve related to prior years' activity in the first quarter of 2023.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements was 17.8% for both the three months ended March 31, 2024 and 2023.

The effective tax rate for each of the three months ended March 31, 2024 and 2023, is lower than the U.S.

federal statutory rate of 21% primarily due to tax-free revenues.

Included in the effective tax rate is a $13,000 and $40,000 benefit associated with a historic tax credit investment for the three and nine months ended September 30, 2023, respectively.

Included in the effective tax rate is a $0.01 million benefit associated with a historic tax credit investment for each of the three months ended March 31, 2024 and 2023.

The investment is expected to generate a $0.3 million tax benefit over the life of the project and is being recognized under the deferral method of accounting.

1 unchanged sentence

Interest earned on the loan portfolio is a primary source of interest income for the Company.

Net loans represented 81.7% of total assets as of September 30, 2023 compared to 78.3% as of December 31, 2022.

Net loans represented 81.5% of total assets as of March 31, 2024 compared to 80.8% as of December 31, 2023.

Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors.

The Bank’s credit review process is overseen by regional loan committees with established loan approval limits.

The Bank’s credit review process is overseen by market loan committees with established loan approval limits.

In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount.

1 unchanged sentence

Major classifications within the Company’s held-for-investment loan portfolio as of the dates indicated is as follows:

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

(Dollars in thousands) Amount % of Loans Amount % of Loans

13 unchanged sentences

The Company does not lend funds for transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans.

Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table.

Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the

loan portfolio composition table.

The Company does not have any interest-earning assets that would have been included in non-accrual, past due, or restructured loans if such assets were loans.

1 unchanged sentence

Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price.

During the nine months ended September 30, 2023, the Company sold approximately $84.4 million of loans to investors compared to $76.1 million for the nine months ended September 30, 2022.

At September 30, 2023, the Company was servicing approximately $226.3 million of loans sold to the secondary market compared to $240.5 million at December 31, 2022, and $247.6 million at September 30, 2022.

During the three months ended March 31, 2024, the Company sold approximately $15.1 million of loans to investors compared to $20.2 million for the three months ended March 31, 2023.

On January 31, 2024 the Company sold its servicing portfolio and the balance of the serviced loans transferred on April 30, 2024.

At March 31, 2024, the Company was servicing approximately $215.2 million of loans sold to the secondary market compared to $220.7 million at December 31, 2023, and $235.2 million at March 31, 2023.

Risk Elements of the Loan Portfolio

3 unchanged sentences

The senior loan committee reviews and reports to the Board of Directors, at scheduled meetings:

past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss.

past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, special mention, substandard, doubtful, or loss.

During this review, management will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis.

Management follows the guidance provided in the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) Topic 326-20-30-2.

If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is individually analyzed and in conjunction with current economic conditions and loss experience, reserves are estimated as further discussed below.

Loans not individually evaluated are aggregated and collectively analyzed.

Under ASC 326-20-30-2 and ASC 326-20-55-5, the Company should aggregate financial assets based on similar risk characteristics.

Management determined that segmenting loans not individually analyzed by the federal call report codes represents the most prudent way to consolidate loans by their associated risk qualities.

14 unchanged sentences

Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans.

Based upon these procedures, both the allowance and provision for credit losses are adjusted to maintain the allowance at a level considered necessary by management to provide for expected losses inherent in the loan portfolio.

Non-Performing Assets

The following table summarizes non-performing assets at the dates indicated:

September 30, December 31,

March 31, December 31,

(Dollars in thousands) 2024 2023

Non-accrual loans (c):

Non-accrual loans:

Commercial, financial, and agricultural $ 2,423 $ 2,228

Real estate construction − residential 456 432

Real estate construction − commercial 64 69

9 unchanged sentences

Other real estate owned and repossessed assets 1,937 1,744

Total non-performing assets $ 7,411 $ 27,496

Total non-performing assets (b)

$ 10,486 $ 8,157

Loans held for investment $ 1,518,853 $ 1,539,147

Allowance for credit losses on loans $ 23,675 $ 23,744

Restructured loans accruing 1,435 1,661

Allowance for credit and loan losses to loans, respectively 1.44 % 1.02 %

Allowance for credit losses to loans

1.56 % 1.54 %

Non-accrual loans to total loans 0.52 % 0.41 %

2 unchanged sentences

Non-performing assets to assets (b) 0.57 % 0.43 %

Allowance for credit and loan losses to non-accrual loans, respectively 589.55 % 83.36 %

Allowance for credit and loan losses to non-performing loans, respectively 583.88 % 83.35 %

Allowance for credit losses to non-accrual loans

297.31 % 377.25 %

Allowance for credit losses to non-performing loans

276.93 % 370.25 %

(a) Non-performing loans include loans 90 days past due and accruing, non-accrual loans, and non-performing TDRs included in non-accrual loans and 90 days past due.

(b) Non-performing assets include non-performing loans and other real estate owned and repossessed assets.

Total non-performing assets were $7.4 million, or 0.48% of total loans, at September 30, 2023 compared to $27.5 million, or 1.81% of total loans, at December 31, 2022.

Total non-accrual loans at September 30, 2023 decreased $14.9 million, or 79.6%, to $3.8 million compared to $18.7 million at December 31, 2022 primarily due to three large non-accrual loan relationships returning to accruing status.

were $37,000 in loans past due 90 days and still accruing interest at September 30, 2023 compared to $1,000 at December 31, 2022.

Other real estate and repossessed assets were $3.6 million and $8.8 million at September 30, 2023 and December 31, 2022, respectively.

During the nine months ended September 30, 2023, there were $44,000 of non-accrual loans, net of charge-offs taken, added to other real estate owned and repossessed assets compared to $3,000 during the nine months ended September 30, 2022.

Total non-performing assets were $10.5 million, or 0.69% of total loans, at March 31, 2024 compared to $8.2 million, or 0.53% of total loans, at December 31, 2023.

Total non-accrual loans at March 31, 2024 increased $1.7 million, or 26.5%, to $8.0 million compared to $6.3 million at December 31, 2023.

There were $0.6 million in loans past due 90 days and still accruing interest at March 31, 2024 compared to $0.1 million at December 31, 2023.

Other real estate and repossessed assets were $1.9 million and $1.7 million at March 31, 2024 and December 31, 2023, respectively.

There were no non-accrual loans added to other real estate owned and repossessed assets during either of the three months ended March 31, 2024 and 2023.

Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Commitments

Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides for the CECL credit loss model.

The adoption of the standard resulted in an increase to the allowance for credit losses of $5.8 million and a liability for unfunded commitments totaling $1.3 million.

These one-time cumulative adjustments resulted in a $5.6 million tax-effected decrease to retained earnings.

The following table is a summary of the allocation of the allowance for credit losses:

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

(Dollars in thousands) Amount % of loans in each category to total loans Amount % of loans in each category to total loans

8 unchanged sentences

Total $ 23,675 100.0 % $ 23,744 100.0 %

The allowance for credit losses was $22.5 million, or 1.44%, of loans outstanding at September 30, 2023 compared to $15.6 million, or 1.02%, of loans outstanding at December 31, 2022.

The ratio of the allowance for credit losses to non-performing loans was 583.88% at September 30, 2023, compared to the allowance for loan losses of 83.35% at December 31, 2022.

Provision for (Release of) Credit Losses / Loan Losses

Three Months Ended September 30, Nine Months Ended September 30,

The allowance for credit losses was $23.7 million, or 1.56%, of loans outstanding at March 31, 2024 compared to $23.7 million, or 1.54%, of loans outstanding at December 31, 2023.

The ratio of the allowance for credit losses to non-performing loans was 276.93% at March 31, 2024, compared to 370.25% at December 31, 2023.

(Release of) Provision for Credit Losses

Three Months Ended March 31,

(In thousands) 2024 2023

Provision for (release of) credit / loan losses on loans, respectively $ 300 $ 300 $ 1,115 $ (1,000)

Provision for available-for-sale securities — — — —

Provision for (release of) credit losses for off-balance sheet commitments (190) — (325) —

Total Provision for (release of) credit losses $ 110 $ 300 $ 790 $ (1,000)

The Company recognized a provision for credit losses of $0.1 million and $0.8 million for the three and nine months ended September 30, 2023, respectively, compared to a $0.3 million provision and a $1.0 million release of provision for loan losses for the three and nine months ended September 30, 2022, respectively.

The release of provision expense primarily resulted from the release of specific reserves totaling $2.8 million in the first quarter of 2022 due to returning the balances related to one loan relationship to accrual status from non-accrual status.

The following table summarizes credit loss experience for the periods indicated:

Three Months Ended September 30,

(Dollars in thousands) Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans

Commercial, financial, and agricultural $ 7 $ 232,516 — % $ 33 $ 245,877 0.01 %

Real estate construction − residential

— 55,289 — — 24,249 —

Real estate construction − commercial

— 129,284 — — 127,594 —

Real estate mortgage − residential

(2) 376,209 — (4) 323,158 —

Real estate mortgage − commercial

Provision for credit losses on loans

(Release of) provision for credit losses for off-balance sheet commitments

Total (release of) provision for credit losses

$ (230) $ 680

Installment and other consumer 67 22,176 0.30 125 23,738 0.53

Total $ 74 $ 1,554,699 — % $ 148 $ 1,446,755 0.01 %

Nine Months Ended September 30,

(Dollars in thousands) Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans Net Charge-offs (Recoveries) Average Loans Net (Recoveries) Charge-offs / Average Loans

The Company recognized a release of provision for credit losses of $0.2 million for the three months ended March 31, 2024, compared to a $0.7 million provision for credit losses for the three months ended March 31, 2023.

The release of the provision expense was a result of a decrease in overall unfunded commitments and a reduction in pooled reserves on primarily commercial, residential construction and multifamily commitments.

The following table summarizes credit loss experience for the periods indicated:

Three Months Ended March 31,

(Dollars in thousands) (Net Charge-offs) Recoveries Average Loans Net (Charge-offs) Recoveries / Average Loans (Net Charge-offs) Recoveries Average Loans Net (Charge-offs) Recoveries / Average Loans

Commercial, financial, and agricultural $ (20) $ 220,122 (0.01) % $ (21) $ 232,467 (0.01) %

10 unchanged sentences

Net Loan (Charge-Offs) Recoveries

The Company’s net charge-offs were $0.1 million and $34,000 for the three and nine months ended September 30, 2023, respectively, compared to net charge-offs of $0.1 million and $0.4 million for the three and nine months ended September 30, 2022, respectively.

The Company’s net charge-offs were comparable at $0.1 million for both the three months ended March 31, 2024 and 2023.

Loans Held for Sale

2 unchanged sentences

The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and other various secondary market investors.

At September 30, 2023, the carrying amount of these loans was $3.0 million compared to $0.6 million at December 31, 2022.

At March 31, 2024, the carrying amount of these loans was $2.9 million compared to $3.9 million at December 31, 2023.

Liquidity and Capital Resources

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This is accomplished by balancing changes in demand for funds with changes in the supply of those funds.

Liquidity to meet these demands is provided by maturing assets, short-term

liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors.

Liquidity to meet these demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors.

Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full-service relationships with customers as the primary sources of funding.

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The Company’s most liquid assets are comprised of available-for-sale investment securities, not including other debt securities, federal funds sold, and excess reserves held at the Federal Reserve.

(in thousands) September 30, 2023 December 31, 2022

Federal funds sold $ — $ 46

(in thousands) March 31, 2024 December 31, 2023

Other interest-bearing deposits $ 28,225 $ 77,775

Certificates of deposit in other banks 735 2,955

Available-for-sale investment securities 183,454 188,742

Total $ 211,679 $ 266,517

Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes.

The fair value of the available-for-sale investment portfolio was $233.5 million at September 30, 2023 and included an unrealized net loss of $56.5 million.

The fair value of the available-for-sale investment portfolio was $183.5 million at March 31, 2024 and included an unrealized net loss of $30.0 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $3.1 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s borrowings.

The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes as required or permitted by law.

At September 30, 2023 and December 31, 2022, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $116.1 million and $139.2 million, respectively.

At March 31, 2024 and December 31, 2023, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $92.0 million and $99.5 million, respectively.

Total investment securities pledged for these purposes were as follows:

(in thousands) September 30, 2023 December 31, 2022

Investment securities pledged for the purpose of securing:

(in thousands) March 31, 2024 December 31, 2023

Federal Reserve Bank borrowings $ 8,852 $ 9,048

Federal funds purchased and securities sold under agreements to repurchase 8,505 8,601

Other deposits 82,568 80,175

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Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and time deposits less than $250,000, less all brokered deposits under $250,000.

At September 30, 2023, such deposits totaled $1.4 billion and represented 90.0% of the Company’s total deposits.

At March 31, 2024, such deposits totaled $1.4 billion and represented 91.5% of the Company’s total deposits.

These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships.

Core deposits at September 30, 2023 and December 31, 2022 were as follows:

(in thousands) September 30, 2023 December 31, 2022

Core deposit base:

Core deposits at March 31, 2024 and December 31, 2023 were as follows:

(in thousands) March 31, 2024 December 31, 2023

Non-interest bearing demand $ 392,588 $ 402,241

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Total $ 1,397,317 $ 1,462,536

Estimated uninsured deposits totaled $358.7 million, including $115.2 million of certificates of deposit, at September 30, 2023, compared to $420.3 million, including $94.9 million of certificates of deposit, at December 31, 2022.

The Company had brokered deposits totaling $42.5 million and $40.1 million at September 30, 2023 and December 31, 2022, respectively.

Included in the uninsured deposits at September 30, 2023 and December 31, 2022 are public fund deposits greater than $250,000, which are collateralized by the Company totaling $96.6 million and $111.6 million, respectively.

The estimated uninsured and uncollateralized deposits ratio to total deposits at September 30, 2023 and December 31, 2022 was 17% and 19%, respectively.

Estimated uninsured deposits totaled $345.3 million, including $100.3 million of certificates of deposit, at March 31, 2024, compared to $387.1 million, including $108.1 million of certificates of deposit, at December 31, 2023.

The Company had brokered deposits totaling $30.3 million and $0.2 million at March 31, 2024 and December 31, 2023, respectively.

Included in the uninsured deposits at March 31, 2024 and December 31, 2023 are public fund deposits greater than $250,000 which are collateralized by the Company totaling $96.1 million and $137.7 million, respectively.

Other components of liquidity are the level of borrowings from third-party sources and the availability of future credit.

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Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines.

As of September 30, 2023, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $7.5 million on a secured basis.

There were no federal funds purchased outstanding at September 30, 2023.

Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio.

At September 30, 2023, there were $6.2 million in repurchase agreements.

The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window, although no such borrowings were outstanding at September 30, 2023.

As of March 31, 2024, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $8.3 million on a secured basis.

There were no federal funds purchased outstanding at March 31, 2024.

The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window, although no such borrowings were outstanding at March 31, 2024.

The Bank is a member of the FHLB and has access to credit products of the FHLB.

As of September 30, 2023, the Bank had $112.0 million in outstanding borrowings with the FHLB.

As of March 31, 2024, the Bank had $109.0 million in outstanding borrowings with the FHLB.

In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

Borrowings outstanding at September 30, 2023 and December 31, 2022 were as follows:

(in thousands) September 30, 2023 December 31, 2022

Federal funds purchased and securities sold under agreements to repurchase $ 6,196 $ 5,187

Borrowings outstanding at March 31, 2024 and December 31, 2023 were as follows:

(in thousands) March 31, 2024 December 31, 2023

Federal Home Loan Bank advances $ 109,000 $ 107,000

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The following table reflects collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as follows:

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

(in thousands) FHLB Federal Reserve Bank Federal Funds Purchased Lines Total FHLB Federal Reserve Bank Federal Funds Purchased Lines Total

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Total available $ 276,823 $ 8,324 $ 35,000 $ 320,147 $ 210,867 $ 8,563 $ 35,000 $ 254,430

At September 30, 2023, loans of $719.9 million were pledged to the FHLB as collateral for borrowings and letters of credit.

At September 30, 2023, investments with a market value of $8.0 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

At March 31, 2024, loans of $696.8 million were pledged to the FHLB as collateral for borrowings and letters of credit.

At March 31, 2024, investments with a market value of $8.9 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Based upon the above, management believes the Company has more than adequate liquidity, both on balance sheet and through the additional funding capacity with the FHLB, the Federal Reserve Bank and Federal funds purchased lines to meet future anticipated liquidity needs in both the short and long-term.

Sources and Uses of Funds

Cash and cash equivalents were $27.9 million at September 30, 2023 compared to $83.7 million at December 31, 2022.

The $55.8 million decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the nine months ended September 30, 2023.

Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items.

Operating activities provided cash flow of $12.3 million for the nine months ended September 30, 2023.

Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, used total cash of $28.0 million during the nine months ended September 30, 2023.

The cash outflow primarily consisted of a net increase in loans held for investment of $35.5 million and $9.5 million in purchases of investment securities, partially offset by $15.9 million from maturities and calls of investment securities.

Financing activities used total cash of $40.2 million during the nine months ended September 30, 2023, resulting primarily from a $149.3 million decrease in demand deposits and interest-bearing transaction accounts.

Cash and cash equivalents were $43.5 million at March 31, 2024 compared to $93.5 million at December 31, 2023.

The $50.0 million decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the three months ended March 31, 2024.

Cash flow provided by operating activities consists mainly of net income adjusted for certain non-cash items.

Operating activities provided total cash of $5.6 million for the three months ended March 31, 2024.

Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, used total cash of $13.0 million during the three months ended March 31, 2024.

The cash flow primarily consisted of a $20.2 million net decrease in loans held for investment.

Financing activities used total cash of $42.6 million during the three months ended March 31, 2024, resulting primarily from a $66.3 million decrease in demand deposits and interest-bearing transaction accounts.

These decreases were partially offset by a $23.4 million increase in time deposits.

The Company utilized funding capacity with the FHLB by drawing advances of $342.9 million and repaying $328.9 million to meet its short-term liquidity needs during the year.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit.

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Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity.

The Company had $339.8 million in unused loan commitments and standby letters of credit as of September 30, 2023.

The Company had $335.7 million in unused loan commitments and standby letters of credit as of March 31, 2024.

Although the Company’s current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low.

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The Company’s ongoing liquidity needs primarily include funding its operating expenses, paying cash dividends to its shareholders and, to a lesser extent, repurchasing its shares of common stock.

The Company paid cash dividends to its shareholders totaling approximately $3.5 million and $3.1 million for the nine months ended September 30, 2023 and 2022, respectively.

The Company paid cash dividends to its shareholders totaling approximately $1.2 million during each of the three months ended March 31, 2024 and 2023.

A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends.

The Bank declared and paid $9.0 million in dividends to the Company during each of the nine months ended September 30, 2023 and 2022, respectively.

At September 30, 2023 and December 31, 2022, the Company had cash and cash equivalents totaling $5.9 million and $2.5 million, respectively.

Subject to declaration by the Company's Board of Directors, the Company expects to continue paying quarterly cash dividends as a part of its current capital allocation

The Bank declared and paid $5.0 million and $1.5 million in dividends to the Company during the three months ended March 31, 2024 and 2023, respectively.

At March 31, 2024 and December 31, 2023, the Company had cash and cash equivalents totaling $8.9 million and $6.8 million, respectively.

Subject to declaration by the Company's Board of Directors, the Company expects to continue paying quarterly cash dividends as a part of its current capital allocation strategy.

Future dividends will be subject to the determination, declaration and discretion of the Company's Board of Directors and compliance with applicable regulatory capital requirements.

Pursuant to the Company's 2019 Repurchase Plan, management is given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

The Company did not repurchase any shares during the three months ended September 30, 2023.

As of September 30, 2023, $2.1 million remained available for share repurchases pursuant to the plan.

Pursuant to the Company's 2019 Repurchase Plan, management is given discretion to determine the number and pricing of the shares to be purchased under the plan by the Company from time to time, as well as the timing of any such purchases.

The Company repurchased 20,995 common shares under the repurchase plan during the first quarter of 2024 at an average cost of $19.73 per share totaling $0.4 million.

As of March 31, 2024, $4.6 million remains available for share repurchases pursuant to the plan.

Repurchases under the plan may be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof.

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The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act (the "Basel III Rules").

The phase-in period for the Company began on January 1, 2015.

The Federal Reserve System's capital adequacy guidelines require that bank holding companies maintain a common equity Tier 1 risk-based capital ratio equal to at least 4.5% of its risk-weighted assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital ratio equal to at least 8% of its risk-weighted assets.

The Basel III regulatory capital reforms adopted by U.S.

federal regulatory authorities (the "Basel III Capital Rules"), among other things, (i) establish the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consists of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) require that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) define the scope of the deductions/adjustments to the capital measures.

Additionally, the Basel III Capital Rules require that the Company maintain a 2.50% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements.

A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations.

Management believes, as of March 31, 2024, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios.

As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of March 31, 2024 and December 31, 2023.

Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well-capitalized.

The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios.

Any such change could reduce one or more capital ratios below well-capitalized status.

In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations.

In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%.

In addition to the higher requirements, the Basel III Rules established that bank holding companies are required to maintain a common equity Tier 1 capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements.

Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

The capital conservation buffer requirement was phased in over four years beginning in 2016.

On January 1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and increased each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk-weighted assets on January 1, 2019.

At December 31, 2019, the capital conservation buffer requirement of 2.5% effectively raised the minimum required risk-based capital ratios to 7% common equity Tier 1 capital, 8.5% Tier 1 capital and 10.5% total capital on a fully phased-in basis.

Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

Under the Basel III Rules, at September 30, 2023 and December 31, 2022, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of periods indicated:

Under the Basel III Capital Rules, at March 31, 2024 and December 31, 2023, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of the dates indicated:

Actual Minimum Capital Required - Basel III Fully Phased-In Required to be Considered Well- Capitalized

(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio

September 30, 2023

March 31, 2024

Total Capital (to risk-weighted assets):

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis