What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-09 · 271 added, 169 removed, 411 unchanged (52% of the section changed)

18 unchanged sentences

• 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.

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.

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 $1.8 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.

Through the branch network of its subsidiary bank, Hawthorn Bank (the "Bank"), the Company, with $1.8 billion in assets at June 30, 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, comprehensive suite of cash management services, 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.

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.

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Furthermore, the success of the Company’s growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.

The Bank is a full-service bank that conducts a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial, financial and agricultural loans, residential real estate loans, single-payment personal loans, installment loans and credit card accounts.

In addition, the Bank provides trust services.

The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law.

The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance.

Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance.

The Bank is supervised and regulated by the FDIC and the Missouri Division of Finance.

Regular examinations are conducted by representatives of these regulatory bodies.

Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders.

The Company is subject to supervision and examination by the Board of Governors of the Federal Reserve System.

The Company is also subject to supervision and examination by the Board of Governors of the Federal Reserve System.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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There can be no assurances that actual results will not differ from those estimates.

The Three Months Ended

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

Three Months Ended June 30, Six Months Ended June 30,

(In thousands, except per share data) 2024 2023 2024 2023

Net interest income $ 14,172 $ 14,202 $ 28,920 $ 28,150

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

(230) 1,550 680

Provision for credit losses on loans & unfunded commitments 457 — 227 680

Non-interest income 3,996 1,596 7,015 4,778

Investment securities gains (losses), net

Investment securities (losses) gains, net (15) 7 (15) 15

Non-interest expense 12,034 12,725 24,609 25,202

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

Income before income taxes 5,662 3,080 11,084 7,061

Income tax expense 1,033 531 1,999 1,241

Net income $ 4,629 $ 2,549 $ 9,085 $ 5,820

Basic earnings per share $ 0.66 $ 0.36 $ 1.29 $ 0.83

Diluted earnings per share $ 0.66 $ 0.36 $ 1.29 $ 0.83

Efficiency ratio (1) 66.2% 80.5% 68.5% 80.5%

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

As of and for the Three Months Ended

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

As of and for the Three Months Ended As of and for the Six Months Ended

June 30, June 30,

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

Key financial ratios

Book value per share (2)

$ 19.71 $ 17.97

Market price per share $ 19.80 $ 17.95

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Asset Quality

Net loan charge-offs

$ 69 $ 268 $ 52

Net loan charge-offs (recoveries) $ 1,977 $ (92) $ 2,046 $ (40)

Non-performing loans $ 4,437 $ 3,847

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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

(2) Book value per share is calculated using weighted average shares

Results of Operations Highlights:

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 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.

Consolidated net income of $4.6 million, or $0.66 per diluted share, for the second quarter ended June 30, 2024 increased $2.1 million, or 81.6%, compared to $2.5 million, or $0.36 per diluted share, for the second quarter ended June 30, 2023.

For the second quarter 2024, the return on average assets was 1.02%, the return on average stockholders’ equity was 13.75%, and the efficiency ratio was 66.2%.

For the six months ended June 30, 2024 consolidated net income increased $3.3 million, or 56.1%, to $9.1 million, or $1.29 per diluted share, compared to $5.8 million, or $0.83 per diluted share, for the six months ended June 30, 2023.

For the six months ended June 30, 2024, the return on average assets was 0.99%, the return on average stockholders’ equity was 13.43%, and the efficiency ratio was 68.5%.

The Company continues to see a positive impact from focusing on the core business of the Bank.

The Company's sale of its mortgage servicing rights portfolio closed during the second quarter 2024, and the Company remains committed to expanding our products and services to our core customer base, while managing operating expenses.

Net interest income was consistent at $14.2 million for both the second quarter ended June 30, 2024 and June 30, 2023.

Net interest margin, on a fully taxable equivalent basis ("FTE"), was 3.33% for the second quarter 2024, an increase from 3.19% for the second quarter 2023.

Net interest income of $28.9 million for the six months ended June 30, 2024 increased $0.7 million compared to $28.2 million for the six months ended June 30, 2023.

Net interest margin, on a FTE basis, was 3.36% for the six months ended June 30, 2024, an increase from 3.17% for the six months ended June 30, 2023.

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

Non-interest income was $4.0 million and $7.0 million for the three and six months ended June 30, 2024, respectively, compared to $1.6 million and $4.8 million for the three and six months ended June 30, 2023, respectively.

The increases were primarily due to earnings on bank-owned life insurance and the gain on sale of other real estate.

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

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.

Non-interest expense was $12.0 million and $24.6 million the three and six months ended June 30, 2024, respectively, compared to $12.7 million and $25.2 million for the three and six months ended June 30, 2023, respectively.

The decreases are primarily due to operating within a unified company culture, focusing on core business lines and improving operational efficiencies.

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

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Balance Sheet Highlights:

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.

Cash and cash equivalents – Cash and cash equivalents decreased $17.6 million to $75.8 million as of June 30, 2024 compared to $93.4 million as of December 31, 2023 and increased $51.2 million compared to $24.6 million as of June 30, 2023.

The Company purchased $19.0 million in securities and $35.0 million in bank-owned life insurance during the six months ended June 30, 2024.

See the Liquidity Management section for further discussion.

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.

Loans – Loans held for investment decreased $40.6 million to $1.50 billion as of June 30, 2024 compared to $1.54 billion as of December 31, 2023 and decreased $64.7 million compared to $1.56 billion as of June 30, 2023.

Asset quality – Non-performing loans totaled $4.4 million as of June 30, 2024, a decrease from $6.4 million as of December 31, 2023, and an increase from $3.8 million as of June 30, 2023.

The decrease in non-performing loans at June 30, 2024 compared to December 31, 2023 is primarily due to a $1.8 million charged off commercial loan relationship and a $2.7 million commercial real estate loan that was placed in non-accrual status in the first quarter and proceeded to foreclosure in the second quarter.

The allowance for credit losses to total loans was 1.47% at June 30, 2024, compared to 1.54% at December 31, 2023 and 1.42% at June 30, 2023.

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

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.

Deposit s – Total deposits decreased $20.6 million to $1.55 billion as of June 30, 2024 compared to $1.57 billion as of December 31, 2023, and increased $7.0 million compared to $1.54 billion as of June 30, 2023.

The decrease in deposits at June 30, 2024 as compared to December 31, 2023 was primarily a result of a decrease in public funds partially offset by a high interest savings promotion.

Federal Home Loan Bank ("FHLB") advances and other borrowings – Total FHLB advances and other borrowings decreased $7.9 million to $99.1 million as of June 30, 2024 compared to $107.0 million as of December 31, 2023, and decreased $65.2 million compared to $164.3 million as of June 30, 2023

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

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

At June 30, 2024, capital ratios were as follows:

total risk-based capital to risk-weighted assets 14.30%;

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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 month periods ended March 31, 2024 and 2023, 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 FTE basis for each of the three and six month periods ended June 30, 2024 and 2023, respectively.

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

Three Months Ended March 31, 2024

Three Months Ended June 30,

(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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Other investment securities 6,106 150 9.88 7,026 108 6.17

Interest bearing deposits in other financial institutions 32,838 452 5.54 6,835 103 6.04

Total interest earning assets $ 1,735,506 $ 23,753 5.50% $ 1,825,782 $ 22,226 4.88%

All other assets 117,687 88,824

Allowance for credit losses (23,635) (22,160)

Total assets $ 1,829,558 $ 1,892,446

LIABILITIES AND STOCKHOLDERS' EQUITY

Savings $ 246,339 $ 1,276 2.08% $ 166,713 $ 16 0.04%

NOW accounts 196,667 650 1.33 197,469 490 1.00

Interest checking 119,545 1,361 4.58 141,626 1,550 4.39

Money market 222,410 1,206 2.18 300,564 1,586 2.12

Time deposits 346,615 3,075 3.57 349,271 2,335 2.68

Total interest bearing deposits $ 1,131,576 $ 7,568 2.69% $ 1,155,643 $ 5,977 2.07%

Federal funds purchased and securities sold under agreements to repurchase — — — 5,192 24 1.85

Federal Home Loan Bank advances and other borrowings 104,832 831 3.19 112,651 815 2.90

Subordinated notes 49,486 985 8.01 49,486 909 7.37

Total borrowings $ 154,318 $ 1,816 4.73% $ 167,329 $ 1,748 4.19%

Total interest bearing liabilities $ 1,285,894 $ 9,384 2.94% $ 1,322,972 $ 7,725 2.34%

Demand deposits 397,180 430,959

Other liabilities 11,104 10,633

Total liabilities $ 1,694,178 $ 1,764,564

Stockholders' equity 135,380 127,882

Total liabilities and stockholders' equity $ 1,829,558 $ 1,892,446

Net interest income (FTE) $ 14,369 $ 14,501

Net interest spread (FTE) 2.57% 2.54%

Net interest margin (FTE) 3.33% 3.19%

(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 June 30, 2024 and 2023.

Such adjustments totaled $0.2 million and $0.3 million for the three months ended June 30, 2024 and 2023, respectively.

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

Six Months Ended June 30, 2024

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

Commercial $ 221,010 $ 7,257 6.60% $ 231,271 $ 6,941 6.05%

Real estate construction - residential 51,624 1,988 7.74 43,185 1,487 6.94

Real estate construction - commercial 74,953 2,519 6.76 142,093 3,687 5.23

Real estate mortgage - residential 372,085 10,481 5.66 364,886 9,339 5.16

Real estate mortgage - commercial 779,558 20,601 5.31 733,666 17,203 4.73

Installment and other consumer 18,896 545 5.80 22,849 483 4.26

Total loans $ 1,518,126 $ 43,391 5.75% $ 1,537,950 $ 39,140 5.13%

Loans held for sale 2,463 66 5.39 2,559 60 4.73

Investment securities:

Treasury 988 26 5.29 4,153 81 3.93

government and federal agency obligations 15,892 362 4.58 25,360 202 1.61

Obligations of states and political subdivisions 103,634 1,510 2.93 110,996 1,773 3.22

Mortgage-backed securities 50,539 740 2.94 103,084 1,051 2.06

Other debt securities 12,289 359 5.87 11,957 344 5.80

Total investment securities $ 183,342 $ 2,997 3.29% $ 255,550 $ 3,451 2.72%

Other investment securities 6,268 287 9.21 6,660 200 6.06

Federal funds sold 2 — — 56 1 3.60

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Net interest margin (FTE) 3.36% 3.17%

(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.

(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 six months ended June 30, 2024 and 2023.

Such adjustments totaled $0.4 million and $0.6 million for the six months ended June 30, 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 months ended March 31, 2024 compared to the three months ended March 31, 2023, respectively.

The following table summarizes the changes in net interest income on a FTE basis, by major category of interest earning assets and interest-bearing liabilities, identifying changes related to volumes and rates for the three and six months ended June 30, 2024 compared to the three and six months ending ended June 30, 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 March 31,

Change due to

(in thousands) Total Change Average Volume Average Rate

Three Months Ended June 30, Six Months Ended June 30,

2023 2024 vs.

Change due to Change due to

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

Interest income on a fully taxable equivalent basis:

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Other investment securities 42 (16) 58 87 (12) 99

Federal funds sold — — — (1) — (1)

Interest bearing deposits in other financial institutions 349 358 (9) 623 466 157

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FHLB advances and other borrowings

16 (59) 75 325 43 282

Subordinated notes 76 — 76 194 — 194

Total interest expense $ 1,659 $ (751) $ 2,410 $ 3,978 $ (1,260) $ 5,238

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

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.

Net interest income on a FTE basis

$ (132) $ (344) $ 212 $ 534 $ (73) $ 607

(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 six months ended June 30, 2024 and 2023.

Such adjustments totaled $0.2 million and $0.4 million for the three and six months ended June 30, 2024, respectively, compared to $0.3 million and $0.6 million for the three and six months ended June 30, 2023, respectively.

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

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.

Financial results for the quarter ended June 30, 2024 compared to the quarter ended June 30, 2023 reflected a decrease in net interest income, on a FTE basis, of $0.1 million, or 0.9%, and financial results for the the six months ended June 30, 2024 compared to the six months ended June 30, 2023 reflected an increase of $0.5 million, or 1.9%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a FTE basis) increased to 3.33% for the quarter ended June 30, 2024 compared to 3.19% for the quarter ended June 30, 2023, and increased to 3.36% for the six months ended June 30, 2024 compared to 3.17% for the six months ended June 30, 2023.

Average interest-earning assets decreased $90.3 million, or 4.9%, to $1.74 billion for the quarter ended June 30, 2024 compared to $1.83 billion for the quarter ended June 30, 2023, and average interest-bearing liabilities decreased $37.1 million, or 2.8%, to $1.29 billion for the quarter ended June 30, 2024 compared to $1.32 billion for the quarter ended June 30, 2023.

Average interest-earning assets decreased $75.3 million, or 4.1%, to $1.75 billion for the six months ended June 30, 2024 compared to $1.83 billion for the six months ended June 30, 2023, and average interest-bearing liabilities decreased $28.8 million, or 2.2%, to $1.30 billion for the six months ended June 30, 2024 compared to $1.33 billion for the six months ended June 30, 2023.

Total interest income (expressed on a FTE basis) was $23.8 million and $48.0 million for the three and six months ended June 30, 2024, respectively, compared to $22.2 million and $43.5 million for the three and six months ended June 30, 2023, respectively.

The Company’s rates earned on interest earning assets were consistent at 5.50% for the three and six months ended June 30, 2024, respectively, compared to 4.88% and 4.79% for the three and six months ended June 30, 2023, respectively.

Interest income on loans held for investment was $21.6 million and $43.4 million for the three and six months ended June 30, 2024, respectively, compared to $20.2 million and $39.1 million for the three and six months ended June 30, 2023, respectively.

Average loans outstanding decreased $41.9 million, or 2.7%, to $1.51 billion for the quarter ended June 30, 2024 compared to $1.55 billion for the quarter ended June 30, 2023.

The average yield on loans increased to 5.75% for the quarter ended June 30, 2024 compared to 5.23% for the quarter ended June 30, 2023.

Average loans outstanding decreased $19.8 million, or 1.3% , to $1.52 billion for the six months ended June 30, 2024 compared to $1.54 billion for the six months ended June 30, 2023.

The average yield on loans increased to 5.75% for the six months ended June 30, 2024 compared to 5.13% for the six months ended June 30, 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 $1.5 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%.

Interest income on available-for-sale securities was $1.5 million and $3.0 million for the three and six months ended June 30, 2024, respectively, compared to $1.7 million and $3.5 million for the three and six months ended June 30, 2023, respectively.

Average securities decreased $73.9 million, or 28.9%, to $182.2 million for the quarter ended June 30, 2024 compared to $256.1 million for the quarter ended June 30, 2023.

The average yield on securities increased to 3.35% for the quarter ended June 30, 2024 compared to 2.71% for the quarter ended June 30, 2023

Average securities decreased $72.2 million, or 28.3%, to $183.3 million for the six months ended June 30, 2024 compared to $255.6 million for the six months ended June 30, 2023.

The average yield on securities increased to 3.29% for the six months ended June 30, 2024 compared to 2.72% for the six months ended June 30, 2023.

During the fourth quarter of 2023, the Company repositioned its balance sheet 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 $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.

Total interest expense was $9.4 million and $18.7 million for the three and six months ended June 30, 2024, respectively, compared to $7.7 million and $14.7 million for the three and six months ended June 30, 2023, respectively.

The Company’s rates paid on interest bearing liabilities were 2.94% and 2.89% for the three and six months ended June 30, 2024, respectively, compared to 2.34% and 2.24% for the three and six months ended June 30, 2023, respectively.

See the Liquidity Management section for further discussion.

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.

Interest expense on deposits was $7.6 million and $15.0 million for the three and six months ended June 30, 2024, respectively, compared to $6.0 million and $11.5 million for the three and six months ended June 30, 2023, respectively.

Average interest-bearing deposits decreased $24.1 million, or 2.1%, to $1.13 billion for the quarter ended June 30, 2024 compared to $1.16 billion for the quarter ended June 30, 2023.

The average cost of deposits increased to 2.69% for the quarter ended June 30, 2024 compared to 2.07% for the quarter ended June 30, 2023.

Average interest-bearing deposits decreased $26.8 million, or 2.3%, to $1.14 billion for the six months ended June 30, 2024 compared to $1.17 billion for the six months ended June 30, 2023.

The average cost of deposits increased to 2.65% for the six months ended June 30, 2024 compared to 1.99% for the six months ended June 30, 2023.

Interest expense on borrowings was $1.8 million and $3.7 million for the three and six months ended June 30, 2024, respectively, compared to $1.7 million and $3.2 million for the three and six months ended June 30, 2023, respectively.

Average borrowings decreased $13.0 million, or 7.8%, to $154.3 million for the quarter ended June 30, 2024 compared to $167.3 million for the quarter ended June 30, 2023.

The average cost of borrowings increased to 4.73% for the quarter ended June 30, 2024 compared to 4.19% for the quarter ended June 30, 2023.

Average borrowings decreased $2.0 million, or 1.2%, to $157.4 million for the six months ended June 30, 2024 compared to $159.4 million for the six months ended June 30, 2023.

The average cost of borrowings increased to 4.67% for the six months ended June 30, 2024 compared to 4.02% for the six months ended June 30, 2023.

The increase in average cost of borrowings was primarily a result from higher market interest rates.

Non-interest Income and Expense

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

Three Months Ended March 31,

(Dollars in thousands) 2024 2023 $ Change % Change

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in thousands) 2024 2023 $ Change % Change 2024 2023 $ Change % Change

Service charges and other fees $ 777 $ 737 $ 40 5.4 % $ 1,594 $ 1,420 $ 174 12.3 %

Bank card income and fees 1,075 1,055 20 1.9 % 2,048 2,015 33 1.6 %

Earnings on bank-owned life insurance 505 14 491 NM 641 29 612 NM

Trust department income 317 266 51 19.2 % 619 538 81 15.1 %

Real estate servicing fees, net 3 193 (190) (98.4) %

Real estate servicing (costs) fees, net (51) 99 (150) (151.5) % (48) 292 (340) (116.4) %

Gain on sales of mortgage loans, net 398 667 (269) (40.3) % 675 1,162 (487) (41.9) %

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

Gains (losses) on other real estate owned, net 454 (1,793) 2,247 (125.3) % 488 (1,783) 2,271 (127.4) %

Other 521 551 (30) (5.4) % 998 1,105 (107) (9.7) %

2 unchanged sentences

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

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.

NM = not meaningful

Total non-interest income increased $2.4 million, or 150.4%, to $4.0 million for the second quarter ended June 30, 2024 compared to $1.6 million for the second quarter ended June 30, 2023, and increased $2.2 million, or 46.8%, to $7.0 million for the six months ended June 30, 2024 compared to $4.8 million for the six months ended June 30, 2023.

The increases are primarily due to earnings on bank-owned life insurance and the gain on sale of other real estate.

During the second quarter of 2023, the Company recognized a $1.8 million valuation write-down on foreclosed property in other real estate owned based on a current appraisal.

The remaining acres related to this property were sold in the second quarter of 2024, and the Company recognized a $0.4 million release of the valuation write-down.

Earnings on bank-owned life insurance increased to $0.5 million for the second quarter ended June 30, 2024 compared to $0.01 million for the second quarter ended June 30, 2023, and increased to $0.6 million for the six months ended June 30, 2024 compared to $0.03 million for the six months ended June 30, 2023.

The Company purchased $35.0 million in bank-

owned life insurance policies in the first quarter of 2024.

The earnings generated from these polices are primarily derived from the investment returns on the cash value component.

Real estate (costs) servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) decreased to $(0.05) million for the second quarter ended June 30, 2024 compared to $0.1 million for the second quarter ended June 30, 2023, and decreased to $(0.05) million for the six months ended June 30, 2024 compared to $0.3 million for the six months ended June 30, 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.

The remaining servicing fees and costs were settled during the second quarter of 2024.

Gain on sales of mortgage loans decreased to $0.4 million for the second quarter ended June 30, 2024 compared to $0.7 million for the second quarter ended June 30, 2023, and decreased to $0.7 million for the six months ended June 30, 2024 compared to $1.2 million for the six months ended June 30, 2023.

The Company sold $21.7 million and $38.0 million of mortgage loans for the three and six months ended June 30, 2024, respectively, compared to $26.9 million and $47.2 million for the three and six months ended June 30, 2023, respectively.

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

Three Months Ended March 31,

(Dollars in thousands) 2024 2023 $ Change % Change

Three Months Ended June 30, Six Months Ended June 30,

(Dollars in thousands) 2024 2023 $ Change % Change 2024 2023 $ Change % Change

Salaries $ 5,392 $ 5,560 $ (168) (3.0)% $ 10,642 $ 11,045 $ (403) (3.6)%

13 unchanged sentences

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

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.

Total non-interest expense decreased $0.7 million, or 5.4%, to $12.0 million for the second quarter ended June 30, 2024 compared to $12.7 million for the second quarter ended June 30, 2023, and decreased $0.6 million, or 2.4%, to $24.6 million for the six months ended June 30, 2024 compared to $25.2 million for the six months ended June 30, 2023.

Salaries decreased $0.2 million, or 3.0%, to $5.4 million for the second quarter ended June 30, 2024 compared to $5.6 million for the second quarter ended June 30, 2023, and decreased $0.4 million, or 3.6%, to $10.6 million for the six months ended June 30, 2024 compared to $11.0 million for the six months ended June 30, 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.

Legal, examination and professional fees increased $0.1 million, or 15.6%, to $0.5 million for the second quarter ended June 30, 2024 compared to $0.4 million for the second quarter ended June 30, 2023, and increased $0.4 million, or 40.8%, to $1.3 million for the six months ended June 30, 2024 compared to $0.9 million for the six months ended June 30, 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.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements was 18.2% and 18.0% for the three and six months ended June 30, 2024, respectively, compared to 17.2% and 17.6% for the

three and six months ended June 30, 2023, respectively.

The effective tax rate for each of the three and six months ended June 30, 2024 and 2023, respectively, 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 $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.

Lending and Credit Management

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

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

Net loans represented 79.9% of total assets as of June 30, 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.

3 unchanged sentences

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

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

10 unchanged sentences

Total loans held for investment $ 1,498,504 100.0 % $ 1,539,147 100.0 %

Commercial Real Estate Loans

Commercial real estate loans ("CRE") consist primarily of income-producing investment property loans.

Additionally, CRE loans include 1-4 family property loans as well as land and development loans.

The following table shows the categories of the Company's non-owner occupied CRE loan portfolio at June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

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

1-4 Family Construction $ 37,048 6.1 % $ 58,347 9.1 %

Residential Building Construction 19,220 3.2 29,149 4.5

Commercial and Institutional Building Construction 7,259 1.2 24,778 3.9

Land Subdivision 5,289 0.9 42,561 6.6

Other Construction 23,747 3.9 33,807 5.3

Multi Family 202,589 33.3 144,254 22.4

Hotel & Food Service 64,167 10.5 66,244 10.3

Retail 169,993 28.0 157,890 24.5

Industrial 18,856 3.1 14,741 2.3

Office Buildings 47,320 7.8 49,991 7.8

Other Real Estate 12,342 2.0 21,445 3.3

Total Commercial Real Estate - Non Owner Occupied $ 607,830 100.0 % $ 643,207 100.0 %

The Company extends credit to its local community markets through traditional real estate mortgage products.

The Company does not participate in credit extension to sub-prime residential real estate markets.

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.

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.

The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio.

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 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.

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.

Risk Elements of the Loan Portfolio

25 unchanged sentences

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

March 31, December 31,

June 30, December 31,

(Dollars in thousands) 2024 2023

9 unchanged sentences

Real estate mortgage − residential $ 293 $ 115

Real estate mortgage − commercial 709 —

Installment and other consumer 15 4

18 unchanged sentences

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

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.

Total non-performing assets were $8.1 million, or 0.54% of total loans, at June 30, 2024 compared to $8.2 million, or 0.53% of total loans, at December 31, 2023.

Total non-accrual loans at June 30, 2024 decreased $2.9 million, or 45.7%, to $3.4 million compared to $6.3 million at December 31, 2023.

The decrease in non-accrual loans is primarily due to a $1.8 million charged off commercial loan relationship and a $2.7 million commercial real estate loan that went to non-accrual status in the first quarter and proceeded to foreclosure in the second quarter.

There were $1.0 million in loans past due 90 days and still accruing interest at June 30, 2024 compared to $0.1 million at December 31, 2023.

Other real estate and repossessed assets were $3.6 million and $1.7 million at June 30, 2024 and December 31, 2023, respectively.

There were $2.7 million and $0.04 million in non-accrual loans added to other real estate owned and repossessed assets during the six months ended June 30, 2024 and 2023, respectively.

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

1 unchanged sentence

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

March 31, 2024 December 31, 2023

June 30, 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 $ 21,980 100.0 % $ 23,744 100.0 %

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,

The allowance for credit losses was $22.0 million, or 1.47%, of loans outstanding at June 30, 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 495.38% at June 30, 2024, compared to 370.25% at December 31, 2023.

Provision for Credit Losses

Three Months Ended June 30, Six Months Ended June 30,

(In thousands) 2024 2023 2024 2023

Provision for credit losses on loans

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

Total (release of) provision for credit losses

$ 282 $ 165 $ 282 $ 815

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.

Provision for (release of) credit losses for off-balance sheet commitments 175 (165) (55) (135)

Total provision for credit losses $ 457 $ — $ 227 $ 680

The Company recognized a provision for credit losses of $0.5 million and $0.2 million for the three and six months ended June 30, 2024, respectively, compared to no provision and a $0.7 million provision for credit losses for the three and six months ended June 30, 2023, respectively.

The increase in provision expense resulted from the increase in reserves related to unfunded commitments.

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

Three Months Ended March 31,

Three Months Ended June 30,

(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

10 unchanged sentences

Total $ (1,977) $ 1,511,609 (0.13) % $ 92 $ 1,553,486 0.01 %

Six Months Ended June 30,

(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 $ (1,868) $ 221,010 (0.85) % $ 131 $ 231,271 0.06 %

Real estate construction − residential

— 51,624 — — 43,185 —

Real estate construction − commercial

— 74,953 — — 142,093 —

Real estate mortgage − residential

(18) 372,085 — 4 364,886 —

Real estate mortgage − commercial

(89) 779,558 (0.01) (24) 733,666 —

Installment and other consumer (71) 18,896 (0.38) (71) 22,849 (0.31)

Total $ (2,046) $ 1,518,126 (0.13) % $ 40 $ 1,537,950 — %

Net Loan (Charge-Offs) Recoveries

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

The Company’s net charge-offs were comparable at $2.0 million for both the three and six months ended June 30, 2024 compared to net recoveries of $0.1 million and $0.04 million for the three and six months ended June 30, 2023, respectively.

The charge-offs in the current quarter primarily related to one commercial loan relationship that was completely reserved for in the prior quarter.

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

At June 30, 2024, the carrying amount of these loans was $1.4 million compared to $3.9 million at December 31, 2023.

The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio.

During the six months ended June 30, 2024, the Company sold approximately $38.0 million of loans to investors compared to $47.2 million for the six months ended June 30, 2023.

On January 31, 2024, the Company sold its servicing portfolio and the

balance of the serviced loans transferred on April 30, 2024.

The Company was servicing approximately $231.1 million of loans sold to the secondary market at June 30, 2023.

Liquidity and Capital Resources

9 unchanged sentences

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) March 31, 2024 December 31, 2023

(in thousands) June 30, 2024 December 31, 2023

Other interest-bearing deposits $ 59,088 $ 77,775

Certificates of deposit in other banks 1,000 —

Available-for-sale investment securities 185,325 188,742

Total $ 245,413 $ 266,517

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.

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 $185.3 million at June 30, 2024 and included an unrealized net loss of $31.2 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $2.1 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 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.

At June 30, 2024 and December 31, 2023, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $93.7 million and $99.5 million, respectively.

Total investment securities pledged for these purposes were as follows:

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

(in thousands) June 30, 2024 December 31, 2023

Federal Reserve Bank borrowings $ 8,683 $ 9,048

2 unchanged sentences

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

At June 30, 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 March 31, 2024 and December 31, 2023 were as follows:

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

Core deposits at June 30, 2024 and December 31, 2023 were as follows:

(in thousands) June 30, 2024 December 31, 2023

Non-interest bearing demand $ 401,618 $ 402,241

3 unchanged sentences

Total $ 1,418,846 $ 1,462,536

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.

Estimated uninsured deposits totaled $366.3 million, including $101.0 million of certificates of deposit, at June 30, 2024, compared to $387.1 million, including $108.1 million of certificates of deposit, at December 31, 2023.

The Company had brokered deposits totaling $30.4 million and $0.2 million at June 30, 2024 and December 31, 2023, respectively.

Included in the uninsured deposits at June 30, 2024 and December 31, 2023 are public fund deposits greater than $250,000 which are collateralized by the Company totaling $106.5 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.

The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (FHLB), and subordinated notes.

The Company’s outside borrowings are comprised of federal funds purchased, advances from the Federal Home Loan Bank (FHLB) and subordinated notes.

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

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.

As of June 30, 2024, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $8.2 million on a secured basis.

There were no federal funds purchased outstanding at June 30, 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 June 30, 2024.

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

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

As of June 30, 2024, the Bank had $99.0 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 March 31, 2024 and December 31, 2023 were as follows:

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

Borrowings outstanding at June 30, 2024 and December 31, 2023 were as follows:

(in thousands) June 30, 2024 December 31, 2023

Federal Home Loan Bank advances $ 99,000 $ 107,000

Other borrowings 100 —

Subordinated notes 49,486 49,486

4 unchanged sentences

The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window.

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:

March 31, 2024 December 31, 2023

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:

June 30, 2024 December 31, 2023

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

3 unchanged sentences

Total available $ 271,640 $ 8,167 $ 35,000 $ 314,807 $ 210,867 $ 8,563 $ 35,000 $ 254,430

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.

At June 30, 2024, loans of $709.0 million were pledged to the FHLB as collateral for borrowings and letters of credit.

At June 30, 2024, investments with a market value of $8.7 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 $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 and cash equivalents were $75.8 million at June 30, 2024 compared to $93.4 million at December 31, 2023.

The $17.6 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 six months ended June 30, 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.

Operating activities provided total cash of $14.5 million for the six months ended June 30, 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 $0.3 million during the six months ended June 30, 2024.

During the fourth quarter of 2023, the Company repositioned its balance sheet by selling $83.7 million in book value of investment securities, with an average yield of 1.57%.

The cash flow primarily consisted of $19.0 million in purchases of securities and $35.0 million in purchases of bank owned life insurance policies, partially offset by a $35.9 million net decrease in loans held for investment.

Financing activities used total cash of $31.9 million during the six months ended June 30, 2024, resulting primarily from a $42.3 million decrease in interest-bearing transaction accounts.

These decreases were partially offset by a $22.3 million increase in time deposits.

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

The Company had $362.3 million in unused loan commitments and standby letters of credit as of June 30, 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 $1.2 million during each of the three months ended March 31, 2024 and 2023.

The Company paid cash dividends to its shareholders totaling approximately $2.4 million and $2.3 million during the six months ended June 30, 2024 and 2023, respectively.

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

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.

The Bank declared $10.0 million and $3.0 million in dividends to the Company during the six months ended June 30, 2024 and 2023, respectively.

At June 30, 2024 and December 31, 2023, the Company had cash and cash equivalents totaling $6.4 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

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 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.

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

The Company repurchased 51,692 common shares under the repurchase plan during the first six months of 2024 at an average cost of $19.46 per share totaling $1.0 million.

As of June 30, 2024, $4.0 million remained 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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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.

Management believes, as of June 30, 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.

As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of June 30, 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.

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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 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:

Under the Basel III Capital Rules, at June 30, 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 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

March 31, 2024

June 30, 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