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Item 2. Management’s Discussion and Analysis

2025-05-12 compared with 2024-11-14 · 188 added, 319 removed, 382 unchanged (57% of the section changed)

1 unchanged sentence

Forward-Looking Statements

• statements that are not historical in nature, and

• statements preceded by, followed by or that include the words believes , expects, may, will, should, could, anticipates, estimates, intends, plans, hopes or similar expressions.

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 statements preceded by, followed by or that include the words believes , expects, may, will, should, could, anticipates, estimates, intends, plans, hopes or similar expressions.

Forward-looking statements are not guarantees of future performance or results.

They involve risks, uncertainties and assumptions.

Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• competitive pressures among financial services companies may increase significantly,

• changes in the interest rate environment may reduce interest margins,

• general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

• increases in non-performing assets in the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for credit losses,

• costs or difficulties related to any integration of any business of the Company and its acquisition targets may be greater than expected,

• legislative, regulatory or tax law changes may adversely affect the business in which the Company and its subsidiaries are engaged,

• 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, 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, 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 Company has 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.

Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, such possible events or factors such as:

changes in economic conditions generally or in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, tariffs and trade disruptions, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, and cybersecurity threats and such other factors as described in 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, 2024 (the "2024 Form 10-K"), and in other reports filed by us with the Securities and Exchange Commission ("SEC") from time to time.

2 unchanged sentences

Except as required by law, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in its business, results of operations or financial condition over time.

During the quarter ended March 31, 2025, there were no material changes to the Risk Factors disclosed in the Company's 2024 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 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 2024 Form 10-K.

There have been no changes in the Company's application of critical accounting policies and estimates since December 31, 2024.

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 September 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, a 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.

Through the branch network of its subsidiary bank, Hawthorn Bank (the "Bank"), the Company, with $1.9 billion in assets at March 31, 2025, 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 ("SBA") 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.

The Company also provides other financial services through its Wealth Management business, including trust services, estate planning, investment and asset management services and a comprehensive suite of cash management services.

Beginning with the first quarter of 2025, the Company's Wealth Management business is now reported as a separate reporting segment, and the Company now operates two reporting segments, consisting of the Bank and the Wealth Management business.

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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The Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity.

The success of the Company’s growth strategy depends primarily on the ability of the Bank to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated.

The success of the Company's growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated.

The Company's financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction.

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 Company's subsidiary bank is a full-service bank that conducts 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 and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts.

In addition, the Bank provides trust and brokerage services.

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

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.

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.

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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.

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

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

Executive Summary

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

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

Three Months Ended March 31,

(dollars in thousands, except per share data) 2025 2024

2024 2023 2024 2023

Net interest income $ 15,294 $ 14,748

Provision for credit losses on loans & unfunded commitments 500 110 726 790

Release of provision for credit losses (340) (230)

Non-interest income 3,463 3,019

Investment securities gains (losses), net 8 3 (7) 18

Investment securities losses, net (2) —

Non-interest expense 12,499 12,575

4 unchanged sentences

Diluted earnings per share $ 0.77 $ 0.63

Efficiency ratio (1) 66.23% 79.79% 67.73% 79.79%

Net interest margin (FTE)

3.36% 3.35% 3.36% 3.23%

(1) Efficiency ratio is calculated as non-interest expense as a percentage of revenue.

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

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

September 30, September 30,

As of and for the Three Months Ended

(dollars in thousands, except per share data) 2025 2024

2024 2023 2024 2023

Key financial ratios

Market and per share data

Book value per share (1) $ 21.97 $ 19.43

1 unchanged sentence

Cash dividends paid on common stock $ 1,328 $ 1,197

Performance Ratios

Return on total assets 1.20% 0.97%

Return on stockholders' equity 14.29% 12.49%

Efficiency ratio (2) 66.64% 70.78%

Net interest margin 3.67% 3.39%

Average stockholders' equity to total assets 8.42% 7.41%

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

(2) Efficiency ratio is calculated as non-interest expense as a percentage of revenue.

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) 2025 2024

Capital Ratios

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Asset Quality

Net loan charge-offs $ 636 $ 74 $ 2,682 $ 34

Non-performing loans $ 2,461 $ 8,549

Non-performing assets $ 3,129 $ 10,486

Classified assets $ 13,496 $ 33,342

Net loan (recoveries) charge-offs

Net (recoveries) charge-offs to average loans (4)

Allowance for credit losses to total loans 1.48% 1.56%

Non-performing loans to total loans 0.17% 0.56%

Non-performing assets to total loans 0.21% 0.69%

Allowance for credit losses to total loans

Non-performing assets to total assets 0.17% 0.57%

(3) 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

(4) Annualized

Results of Operations Highlights:

Consolidated net income of $4.6 million, or $0.66 per diluted share, for the third quarter ended September 30, 2024 increased $2.0 million, or 77.4%, compared to $2.6 million, or $0.36 per diluted share, for the third quarter ended September 30, 2023.

For the third quarter 2024, the return on average assets was 1.00%, the return on average stockholders’ equity was 12.87%, and the efficiency ratio was 66.2%.

For the nine months ended September 30, 2024 consolidated net income increased $5.3 million, or 62.6%, to $13.7 million, or $1.95 per diluted share, compared to $8.4 million, or $1.19 per diluted share, for the nine months ended September 30, 2023.

For the nine months ended September 30, 2024, the return on average assets was 1.00%, the return on average stockholders’ equity was 13.24%, and the efficiency ratio was 67.7%.

The Company continues to see a positive impact from focusing on the core business of the Bank and remains committed to expanding our products and services to the core customer base, while managing operating expenses.

Net interest income was $14.3 million for the third quarter ended September 30, 2024 decreased $0.8 million compared to and $15.1 million for the third quarter ended September 30, 2023.

Net interest margin, on a fully taxable equivalent basis ("FTE"), was 3.36% for the third quarter 2024, an increase from 3.35% for the third quarter 2023.

Net interest income was $43.2 million for the nine months ended September 30, 2024 decreased $0.1 million compared to $43.3 million for the nine months ended September 30, 2023.

Net interest margin, on a FTE basis, was 3.36% for the nine months ended September 30, 2024, an increase from 3.23% for the nine months ended September 30, 2023.

Consolidated net income of $5.4 million, or $0.77 per diluted share, for the first quarter ended March 31, 2025 increased $0.9 million, or 20.8%, compared to $4.5 million, or $0.63 per diluted share, for the first quarter ended March 31, 2024.

For the first quarter 2025, the return on average assets was 1.20%, the return on average stockholders’ equity was 14.29%, and the efficiency ratio was 66.6%.

Net interest income of $15.3 million for the first quarter ended March 31, 2025 increased $0.5 million compared to $14.7 million for the first quarter ended March 31, 2024.

Net interest margin, on a fully taxable equivalent ("FTE") basis, was 3.67% for the first quarter 2025, an increase from 3.39% for the first quarter 2024.

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.

Non-interest income was $3.8 million and $10.8 million for the three and nine months ended September 30, 2024, respectively, compared to $0.6 million and $5.4 million for the three and nine months ended September 30, 2023, respectively.

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

Non-interest income was $3.5 million for the three months ended March 31, 2025 compared to $3.0 million for the three months ended March 31, 2024.

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

Non-interest expense was $12.0 million and $36.6 million for the three and nine months ended September 30, 2024, respectively, compared to $12.6 million and $37.8 million for the three and nine months ended September 30, 2023, respectively.

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

Non-interest expense was $12.5 million for the three months ended March 31, 2025 compared to $12.6 million for the three months ended March 31, 2024.

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

Balance Sheet Highlights:

Cash and cash equivalents – Cash and cash equivalents decreased $39.2 million to $54.2 million as of September 30, 2024 compared to $93.4 million as of December 31, 2023 and increased $26.4 million compared to $27.9 million as of September 30, 2023.

The Company purchased $32.9 million securities and $35.0 million in bank-owned life insurance during the nine months ended September 30, 2024.

Cash and cash equivalents – Cash and cash equivalents increased $51.3 million to $102.3 million as of March 31, 2025 compared to $51.0 million as of December 31, 2024 and increased $58.8 million compared to $43.5 million as of March 31, 2024.

See the Liquidity Management section for further discussion.

Loans – Loans held for investment decreased $72.4 million to $1.47 billion as of September 30, 2024 compared to $1.54 billion as of December 31, 2023 and decreased $90.2 million compared to $1.56 billion as of September 30, 2023.

Normal amortizing payments, unscheduled payoffs and a weaker demand for loans have contributed to the variance.

Asset quality – Non-performing assets to total loans was 0.58% at September 30, 2024, compared to 0.53% and 0.48% at December 31, 2023 and September 30, 2023, respectively.

Non-performing assets totaled $8.5 million at September 30, 2024, compared to $8.2 million and $7.4 million at December 31, 2023 and September 30, 2023, respectively.

The increase in non-performing assets in the current quarter is primarily due to a $2.0 million commercial loan relationship moving to non-accrual status and a $1.1 million commercial real estate loan that went to foreclosure during the current quarter.

In the third quarter 2024, the Company had net loan charge-offs of $0.6 million, or 0.04% of average loans, compared to net loan charge-offs $0.1 million, or 0.00% of average loans, in the prior year quarter.

The charge-offs in the current

quarter primarily related to one commercial real estate loan and one commercial loan relationship that were adequately reserved for in the prior quarter.

The allowance for credit losses was $21.9 million, or 1.50%, of loans outstanding at September 30, 2024 compared to $23.7 million, or 1.54%, of loans outstanding at December 31, 2023, and $22.5 million, or 1.44%, of loans outstanding at September 30, 2023.

Loans – Loans held for investment increased $4.2 million to $1.47 billion as of March 31, 2025 compared to $1.47 billion as of December 31, 2024 and decreased $48.5 million compared to $1.52 billion as of March 31, 2024.

Asset quality – Non-performing assets totaled $3.1 million, or 0.21% of total loans, at March 31, 2025 compared to $4.2 million, or 0.29% of total loans, at December 31, 2024 and $10.5 million, or 0.69% of total loans, at March 31, 2024.

In the first quarter 2025, the Company had net loan recoveries of $0.02 million, or 0%, of average loans, compared to net loan charge-offs $0.07 million, or 0.02% of average loans, in the prior year quarter.

The allowance for credit losses was $21.8 million, or 1.48%, of loans outstanding at March 31, 2025 compared to $22.0 million, or 1.50%, of loans outstanding at December 31, 2024, and $23.7 million, or 1.56% of loans outstanding at March 31, 2024.

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

Deposit s – Total deposits decreased $67.3 million to $1.50 billion as of September 30, 2024 compared to $1.57 billion as of December 31, 2023, and decreased $76.9 million compared to $1.58 billion as of September 30, 2023.

The decrease in deposits at September 30, 2024 as compared to December 31, 2023 was primarily a result of a decrease in public funds partially offset by an increase in savings accounts.

Federal Home Loan Bank ("FHLB") advances and other borrowings – Total FHLB advances and other borrowings decreased $10.5 million to $96.5 million as of September 30, 2024 compared to $107.0 million as of December 31, 2023, and decreased $15.5 million compared to $112.0 million as of September 30, 2023

Deposit s – Total deposits increased $10.7 million to $1.54 billion as of March 31, 2025 compared to $1.53 billion as of December 31, 2024, and increased $16.0 million compared to $1.53 billion as of March 31, 2024.

Federal Home Loan Bank ("FHLB") advances and other borrowings – Total FHLB advances and other borrowings increased $42.6 million to $124.1 million as of March 31, 2025, compared to $81.5 million as of December 31, 2024, and increased $15.1 million compared to $109.0 million as of March 31, 2024.

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

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

At March 31, 2025, capital ratios were as follows:

total risk-based capital to risk-weighted assets 14.94%;

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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 FTE basis for each of the three and nine month periods ended September 30, 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 month periods ended March 31, 2025 and 2024, 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 $ 210,783 $ 3,592 6.78% $ 232,516 $ 3,761 6.42%

Real estate construction - residential 35,611 717 8.01 55,289 1,028 7.38

Real estate construction - commercial 61,546 1,269 8.20 129,284 1,899 5.83

Real estate mortgage - residential 369,068 5,235 5.64 376,209 5,185 5.47

Real estate mortgage - commercial 792,668 10,727 5.38 739,225 10,054 5.40

Installment and other consumer 15,977 235 5.85 22,176 279 4.99

Total loans $ 1,485,653 $ 21,775 5.83% $ 1,554,699 $ 22,206 5.67%

Loans held for sale 610 13 8.48 6,351 59 3.69

Investment securities:

Treasury — — — 4,861 52 4.24

government and federal agency obligations 13,218 140 4.21 25,498 103 1.60

Obligations of states and political subdivisions 103,790 745 2.86 108,022 814 2.99

Mortgage-backed securities 61,907 530 3.41 97,274 514 2.10

Other debt securities 13,335 191 5.70 11,566 176 6.04

Total investment securities $ 192,250 $ 1,606 3.32% $ 247,221 $ 1,659 2.66%

Other investment securities 5,844 141 9.60 7,713 121 6.22

Interest bearing deposits in other financial institutions 34,099 469 5.47 7,071 85 4.77

Total interest earning assets $ 1,718,456 $ 24,004 5.56% $ 1,823,055 $ 24,130 5.25%

All other assets 117,429 89,017

Allowance for credit losses (21,923) (22,356)

Total assets $ 1,813,962 $ 1,889,716

LIABILITIES AND STOCKHOLDERS' EQUITY

Savings $ 273,470 $ 1,612 2.35% $ 178,564 $ 229 0.51%

NOW accounts 190,084 677 1.42 182,487 464 1.01

Interest checking 121,423 1,372 4.50 187,732 2,252 4.76

Money market 221,794 1,249 2.24 273,655 1,521 2.21

Time deposits 319,279 2,834 3.53 315,332 2,173 2.73

Total interest bearing deposits $ 1,126,050 $ 7,744 2.74% $ 1,137,770 $ 6,639 2.32%

Federal funds purchased and securities sold under agreements to repurchase 29 — — 6,136 38 2.46

Federal Home Loan Bank advances and other borrowings 99,293 759 3.04 129,758 1,075 3.29

Subordinated notes 49,486 989 7.95 49,486 989 7.93

Total borrowings $ 148,808 $ 1,748 4.67% $ 185,380 $ 2,102 4.50%

Total interest bearing liabilities $ 1,274,858 $ 9,492 2.96% $ 1,323,150 $ 8,741 2.62%

Demand deposits 385,298 426,052

Other liabilities 12,375 13,361

Total liabilities $ 1,672,531 $ 1,762,563

Stockholders' equity 141,431 127,153

Total liabilities and stockholders' equity $ 1,813,962 $ 1,889,716

Net interest income (FTE) $ 14,512 $ 15,389

Net interest spread (FTE) 2.59% 2.63%

Net interest margin (FTE) 3.36% 3.35%

(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, 2024 and 2023.

Such adjustments totaled $0.19 million and $0.24 million for the three months ended September 30, 2024 and 2023, respectively.

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

Nine Months Ended September 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)

Three Months Ended March 31,

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

Commercial $ 200,696 $ 3,171 6.41% $ 220,122 $ 3,604 6.59%

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Allowance for credit losses (22,224) (23,851)

(23,132) (20,124)

Total assets $ 1,814,833 $ 1,843,695

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Net interest margin (FTE) 3.67% 3.39%

(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, 2024 and 2023.

Such adjustments totaled $0.6 million and $0.9 million for the nine months ended September 30, 2024 and 2023, respectively.

Such adjustments totaled $0.24 million and $0.20 million for the three months ended March 31, 2025 and 2024, 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 FTE 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, 2024 compared to the three and nine months ending ended September 30, 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 months ended March 31, 2025 compared to the three months ending ended March 31, 2024, 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,

2023 2024 vs.

Change due to Change due to

(dollars in thousands)

Total Change Average Volume Average Rate Total Change Average Volume Average Rate

Three Months Ended March 31,

Change due to

(dollars in thousands) Total Change Average Volume Average Rate

Interest income on a fully taxable equivalent basis:

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Time deposits (371) (296) (75)

Federal funds purchased and securities sold under agreements to repurchase (38) (19) (19) (82) (153) 71

FHLB advances and other borrowings

4 unchanged sentences

$ 586 $ (683) $ 1,269

(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, 2024 and 2023, respectively.

Such adjustments totaled $0.2 million and $0.6 million for the three and nine months ended September 30, 2024, respectively, compared to $0.2 million and $0.9 million for the three and nine months ended September 30, 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 three months ended March 31, 2025 and 2024, respectively.

Such adjustments totaled $0.24 million for the three months ended March 31, 2025 compared to $0.20 million for the three months ended March 31, 2024.

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

Financial results for the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023 reflected a decrease in net interest income, on a FTE basis, of $0.9 million, or 5.7%, and financial results for the the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 reflected a decrease of $0.3 million, or 0.8%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a FTE basis) increased to 3.36% for the quarter ended September 30, 2024 compared to 3.35% for the quarter ended September 30, 2023, and increased to 3.36% for the nine months ended September 30, 2024 compared to 3.23% for the nine months ended September 30, 2023.

Average interest-earning assets decreased $104.6 million, or 5.7%, to $1.72 billion for the quarter ended September 30, 2024 compared to $1.82 billion for the quarter ended September 30, 2023, and average interest-bearing liabilities decreased $48.3 million, or 3.6%, to $1.27 billion for the quarter ended September 30, 2024 compared to $1.32 billion for the quarter ended September 30, 2023.

Average interest-earning assets decreased $85.1 million, or 4.7%, to $1.74 billion for the nine months ended September 30, 2024 compared to $1.83 billion for the nine months ended September 30, 2023, and average interest-bearing liabilities decreased $35.3 million, or 2.7%, to $1.29 billion for the nine months ended September 30, 2024 compared to $1.33 billion for the nine months ended September 30, 2023.

Total interest income (expressed on a FTE basis) was $24.0 million and $72.0 million for the three and nine months ended September 30, 2024, respectively, compared to $24.1 million and $67.6 million for the three and nine months ended September 30, 2023, respectively.

The Company’s rates earned on interest earning assets were 5.56% and 5.52% for the three and nine months ended September 30, 2024, respectively, compared to 5.25% and 4.95% for the three and nine months ended September 30, 2023, respectively.

Interest income on loans held for investment was $21.8 million and $65.2 million for the three and nine months ended September 30, 2024, respectively, compared to $22.2 million and $61.3 million for the three and nine months ended September 30, 2023, respectively.

Average loans outstanding decreased $69.0 million, or 4.4%, to $1.49 billion for the quarter ended September 30, 2024 compared to $1.55 billion for the quarter ended September 30, 2023.

The average yield on loans increased to 5.83% for the quarter ended September 30, 2024 compared to 5.67% for the quarter ended September 30, 2023.

Average loans outstanding decreased $36.4 million, or 2.4%, to $1.51 billion for the nine months ended September 30, 2024 compared to $1.54 billion for the nine months ended September 30, 2023.

The average yield on loans increased to 5.78% for the nine months ended September 30, 2024 compared to 5.31% for the nine months ended September 30, 2023.

Financial results for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 reflected an increase in net interest income on a FTE basis, of $0.6 million, or 3.9%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a FTE basis) increased to 3.67% for the three months ended March 31, 2025 compared to 3.39% for the three months ended March 31, 2024.

Average interest-earning assets decreased $58.6 million, or 3.3%, to $1.72 billion for the quarter ended March 31, 2025 compared to $1.77 billion for the quarter ended March 31, 2024, and average interest-bearing liabilities decreased $55.2 million, or 4.2%, to $1.26 billion for the quarter ended March 31, 2025 compared to $1.31 billion for the quarter ended March 31, 2024.

Total interest income (expressed on a FTE basis) was $23.7 million for the three months ended March 31, 2025 compared to $24.3 million for the three months ended March 31, 2024.

The Company’s rates earned on interest earning assets were 5.60% for the three months ended March 31, 2025 compared to 5.50% for the three months ended March 31, 2024.

Interest income on loans held for investment was $21.3 million for the three months ended March 31, 2025 compared to $21.8 million for the three months ended March 31, 2024.

Average loans outstanding decreased $59.3 million, or 3.9%, to $1.47 billion for the quarter ended March 31, 2025 compared to $1.52 billion for the quarter ended March 31, 2024.

The average yield on loans increased to 5.89% for the quarter ended March 31, 2025 compared to 5.75% for the quarter ended March 31, 2024.

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 $1.6 million and $4.6 million for the three and nine months ended September 30, 2024, respectively, compared to $1.7 million and $5.1 million for the three and nine months ended September 30, 2023, respectively.

Average securities decreased $55.0 million, or 22.2%, to $192.3 million for the quarter ended September 30, 2024 compared to $247.2 million for the quarter ended September 30, 2023.

The average yield on securities increased to 3.32% for the quarter ended September 30, 2024 compared to 2.66% for the quarter ended September 30, 2023

Average securities decreased $66.4 million, or 26.3%, to $186.3 million for the nine months ended September 30, 2024 compared to $252.7 million for the nine months ended September 30, 2023.

The average yield on securities increased to 3.30% for the nine months ended September 30, 2024 compared to 2.70% for the nine months ended September 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%.

Interest income on available-for-sale securities was $2.1 million for the three months ended March 31, 2025 compared to $1.5 million for the three months ended March 31, 2024.

Average securities increased $37.8 million, or 20.5%, to $222.3 million for the quarter ended March 31, 2025 compared to $184.5 million for the quarter ended March 31, 2024.

The average yield on securities increased to 3.76% for the quarter ended March 31, 2025 compared to 3.22% for the quarter ended March 31, 2024.

See the Liquidity Management section for further discussion.

Total interest expense was $9.5 million and $28.2 million for the three and nine months ended September 30, 2024, respectively, compared to $8.7 million and $23.5 million for the three and nine months ended September 30, 2023, respectively.

The Company’s rates paid on interest bearing liabilities were 2.96% and 2.92% for the three and nine months ended September 30, 2024, respectively, compared to 2.62% and 2.36% for the three and nine months ended September 30, 2023, respectively.

Total interest expense was $8.2 million for the three months ended March 31, 2025 compared to $9.3 million for the three months ended March 31, 2024.

The Company’s rates paid on interest bearing liabilities were 2.64% for the three months ended March 31, 2025 compared to 2.85% for the three months ended March 31, 2024.

See the Liquidity Management section for further discussion.

Interest expense on deposits was $7.7 million and $22.8 million for the three and nine months ended September 30, 2024, respectively, compared to $6.6 million and $18.2 million for the three and nine months ended September 30, 2023, respectively.

Average interest-bearing deposits decreased $11.7 million, or 1.0%, to $1.13 billion for the quarter ended September 30, 2024 compared to $1.14 billion for the quarter ended September 30, 2023.

The average cost of deposits increased to 2.74% for the quarter ended September 30, 2024 compared to 2.32% for the quarter ended September 30, 2023.

Average interest-bearing deposits decreased $21.7 million, or 1.9%, to $1.14 billion for the nine months ended September 30, 2024 compared to $1.16 billion for the nine months ended September 30, 2023.

The average cost of deposits increased to 2.68% for the nine months ended September 30, 2024 compared to 2.10% for the nine months ended September 30, 2023.

Interest expense on borrowings was $1.7 million and $5.4 million for the three and nine months ended September 30, 2024, respectively, compared to $2.1 million and $5.3 million for the three and nine months ended September 30, 2023, respectively.

Average borrowings decreased $36.6 million, or 19.7%, to $148.8 million for the quarter ended September 30, 2024 compared to $185.4 million for the quarter ended September 30, 2023.

The average cost of borrowings increased to 4.67% for the quarter ended September 30, 2024 compared to 4.50% for the quarter ended September 30, 2023.

Average borrowings decreased $13.6 million, or 8.1%, to $154.5 million for the nine months ended September 30, 2024 compared to $168.2 million for the nine months ended September 30, 2023.

The average cost of borrowings increased to 4.67% for the nine months ended September 30, 2024 compared to 4.20% for the nine months ended September 30, 2023.

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

Non-interest Income and Expense

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

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

(dollars in thousands)

2024 2023 $ Change % Change 2024 2023 $ Change % Change

Interest expense on deposits was $6.8 million for the three months ended March 31, 2025 compared to $7.5 million for the three months ended March 31, 2024.

Average interest-bearing deposits decreased $19.6 million, or 1.7%, to $1.13 billion for the quarter ended March 31, 2025 compared to $1.15 billion for the quarter ended March 31, 2024.

The average cost of deposits decreased to 2.44% for the quarter ended March 31, 2025 compared to 2.61% for the quarter ended March 31, 2024.

Interest expense on borrowings was $1.4 million for the three months ended March 31, 2025 compared to $1.8 million for the three months ended March 31, 2024.

Average borrowings decreased $35.5 million, or 22.1%, to $125.0 million for the quarter ended March 31, 2025 compared to $160.6 million for the quarter ended March 31, 2024.

The average cost of borrowings decreased to 4.38% for the quarter ended March 31, 2025 compared to 4.61% for the quarter ended March 31, 2024.

Non-interest Income

The following table shows the principal components of non-interest income.

Three Months Ended March 31,

(dollars in thousands) 2025 2024 $ Change % Change

Service charges and other fees $ 914 $ 817 $ 97 11.9 %

Bank card income and fees 925 973 (48) (4.9) %

Earnings on bank-owned life insurance 520 14 506 NM 1,162 43 1,119 NM

Trust department income 341 283 58 20.5 % 960 820 140 17.1 %

Real estate servicing fees, net 81 125 (44) (35.2) % 33 417 (384) (92.1) %

Earnings on bank-owned life insurance 509 136 373 274.3%

Wealth management revenue 473 380 93 24.5 %

Gain on sales of mortgage loans, net 126 277 (151) (54.5) %

Gains (losses) on other real estate owned, net 262 (2,809) 3,071 (109.3) % 751 (4,592) 5,343 (116.4) %

Gains on other real estate owned, net 21 34 (13) (38.2) %

Other 495 402 93 23.1 %

2 unchanged sentences

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

NM = not meaningful

Total non-interest income increased $3.2 million, or 524.3%, to $3.8 million for the third quarter ended September 30, 2024 compared to $0.6 million for the third quarter ended September 30, 2023, and increased $5.4 million, or 100.6%, to $10.8 million for the nine months ended September 30, 2024 compared to $5.4 million for the nine months ended September 30, 2023.

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

Earnings on bank-owned life insurance increased to $0.5 million for the third quarter ended September 30, 2024 compared to $0.01 million for the third quarter ended September 30, 2023, and increased to $1.2 million for the nine months ended September 30, 2024 compared to $0.04 million for the nine months ended September 30, 2023.

Company purchased $35.0 million in bank-owned life insurance policies in the first quarter of 2024.

Total non-interest income increased $0.4 million, or 14.7%, to $3.5 million for the three months ended March 31, 2025 compared to $3.0 million for the three months ended March 31, 2024.

The increase was primarily due to earnings on bank-owned life insurance, offset by a decrease on gains on sales of mortgage loans during the current quarter.

Earnings on bank-owned life insurance increased to $0.5 million for the three months ended March 31, 2025 compared to $0.1 million for the three months ended March 31, 2024.

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 servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) decreased to $0.08 million for the third quarter ended September 30, 2024 compared to $0.1 million for the third quarter ended September 30, 2023, and decreased to $0.03 million for the nine months ended September 30, 2024 compared to $0.4 million for the nine months ended September 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 remaining servicing fees and costs were settled during the second and third quarter of 2024.

Gain on sales of mortgage loans decreased to $0.1 million for the third quarter ended September 30, 2024 compared to $0.9 million for the third quarter ended September 30, 2023, and decreased to $0.8 million for the nine months ended September 30, 2024 compared to $2.0 million for the nine months ended September 30, 2023.

The Company sold $7.4 million and $45.0 million of mortgage loans for the three and nine months ended September 30, 2024, respectively, compared to $37.2 million and $84.4 million for the three and nine months ended September 30, 2023, respectively.

Gains (losses) on other real estate owned increased to a $0.3 million gain for the third quarter ended September 30, 2024 compared to a $2.8 million loss for the third quarter ended September 30, 2023, and increased to a $0.8 million gain for the nine months ended September 30, 2024 compared to a $4.6 million loss for the nine months ended September 30, 2023.

During the second and third quarter of 2023, the Company recognized $1.8 million and $2.8 million in valuation write-downs, respectively, on foreclosed property in other real estate owned based on current appraisals.

The Company sold the remaining parcel related to one of these properties in the second quarter of 2024, and the Company recognized a $0.4 million release of the valuation write-down.

Moreover, the Company sold land previously intended for a new branch, resulting in a gain of $0.3 million in the third quarter of 2024.

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

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

(dollars in thousands)

2024 2023 $ Change % Change 2024 2023 $ Change % Change

Gain on sales of mortgage loans decreased to $0.1 million for the three months ended March 31, 2025 compared to $0.3 million for the three months ended March 31, 2024.

The Company sold mortgage loans totaling $1.2 million for the three months ended March 31, 2025 compared to $15.1 million for the three months ended March 31, 2024.

Non-interest Expense

The following table shows the principal components of non-interest expense.

Three Months Ended March 31,

(dollars in thousands) 2025 2024 $ Change % Change

Salaries $ 5,366 $ 5,249 $ 117 2.2%

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Postage, printing, and supplies 294 167 127 76.0

Loan expense 126 147 (21) (14.3) 515 771 (256) (33.2)

Other 1,511 1,653 (142) (8.6)

4 unchanged sentences

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

Total non-interest expense decreased $0.6 million, or 4.6%, to $12.0 million for the third quarter ended September 30, 2024 compared to $12.6 million for the third quarter ended September 30, 2023, and decreased $1.2 million, or 3.1%, to $36.6 million for the nine months ended September 30, 2024 compared to $37.8 million for the nine months ended September 30, 2023.

Salaries decreased $0.6 million, or 10.6%, to $5.1 million for the third quarter ended September 30, 2024 compared to $5.7 million for the third quarter ended September 30, 2023, and decreased $1.0 million, or 6.0%, to $15.8 million for the nine months ended September 30, 2024 compared to $16.8 million for the nine months ended September 30, 2023.

The decrease was primarily due to planned reductions of full-time employees during the fourth quarter of 2023 and second quarter of 2024.

Legal, examination and professional fees decreased $0.1 million, or 24.2%, to $0.4 million for the third quarter ended September 30, 2024 compared to $0.5 million for the third quarter ended September 30, 2023, and increased $0.3 million, or 18.4%, to $1.7 million for the nine months ended September 30, 2024 compared to $1.4 million for the nine months ended September 30, 2023.

The increase was primarily due to legal fees related loan workouts.

Advertising and promotion decreased $0.2 million, or 47.2%, to $0.2 million for the third quarter ended September 30, 2024 compared to $0.4 million for the third quarter ended September 30, 2023, and decreased $0.4 million, or 34.4%, to $0.7 million for the nine months ended September 30, 2024 compared to $1.1 million for the nine months ended September 30, 2023.

The decrease in expenses was the result of a strategic decision to discontinue the Company's outsourced marketing efforts.

The Company has hired internal marketing resources and by transitioning to an in-house marketing team, the Company has reduced costs.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements was 18.7% and 18.2% for the three and nine months ended September 30, 2024, respectively, compared to 16.2% and 17.1% for the three and nine months ended September 30, 2023, respectively.

The effective tax rate for each of the three and nine months ended September 30, 2024 and 2023, respectively, is lower than the U.S.

Total non-interest expense decreased $0.1 million, or 0.6%, to $12.5 million for the three months ended March 31, 2025 compared to $12.6 million for the three months ended March 31, 2024.

Occupancy expense increased $0.1 million, or 15.0%, to $0.9 million for the three months ended March 31, 2025 compared to $0.8 million for the three months ended March 31, 2024.

The increase primarily resulted from the opening of two new branch locations and one new operations facility.

Legal, examination and professional fees decreased $0.3 million, or 40.1%, to $0.5 million for the three months ended March 31, 2025 compared to $0.8 million for the three months ended March 31, 2024.

The decrease was primarily due to the costs from a settlement agreement from terminating a contract related to a digital account opening project in the prior year quarter.

Advertising and promotion decreased $0.1 million, or 39.2%, to $0.2 million for the three months ended March 31, 2025 compared to $0.3 million for the three months ended March 31, 2024.

The Company is utilizing internal marketing resources whereas, in the prior year quarter, external resources were used.

Postage, printing and supplies increased $0.1 million, or 76.0%, to $0.3 million for the three months ended March 31, 2025 compared to $0.2 million for the three months ended March 31, 2024.

The increase was primarily a result of customer mailings related to an account consolidation project.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements was 18.4% for the three months ended March 31, 2025 compared to 17.8% for the three months ended March 31, 2024.

The effective tax rate for each of the three months ended March 31, 2025 and 2024 was lower than the U.S.

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

1 unchanged sentence

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

Net loans represented 79.8% of total assets as of September 30, 2024 compared to 80.8% as of December 31, 2023.

Net loans represented 76.9% of total assets as of March 31, 2025 compared to 79.1% as of December 31, 2024.

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 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.

The senior loan committee meets weekly and is comprised of senior managers of the Bank.

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

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

The executive loan committee meets weekly and is comprised of senior managers of the Bank.

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

September 30, 2024 December 31, 2023

(dollars in thousands)

Amount % of Loans Amount % of Loans

March 31, 2025 December 31, 2024

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

Commercial, financial, and agricultural $ 202,405 13.7 % $ 202,329 13.8 %

12 unchanged sentences

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 September 30, 2024 and December 31, 2023:

September 30, 2024 December 31, 2023

The following table shows the categories of the Company's non-owner occupied CRE loan portfolio at March 31, 2025 and December 31, 2024:

March 31, 2025 December 31, 2024

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

Multi Family $ 198,237 31.9 % $ 144,254 22.4 %

Retail $ 183,030 28.9 % $ 190,915 30.0 %

Multi Family 170,429 27.0 168,629 26.5

Hotel & Food Service 70,217 11.1 70,816 11.2

Office Buildings 54,263 8.6 47,042 7.4

1-4 Family Construction 32,344 5.2 58,347 9.0

Other Construction 46,057 7.3 39,696 6.3

1-4 Family Construction 30,670 4.8 32,045 5.0

Other Real Estate 26,581 4.2 27,053 4.3

Industrial 22,043 3.5 18,446 2.9

Residential Building Construction 18,390 3.0 29,149 4.5

Commercial and Institutional Building Construction 10,332 1.7 24,778 3.9

Land Subdivision 10,068 1.6 10,844 1.7

Commercial and Institutional Building Construction 9,538 1.5 9,481 1.5

Residential Building Construction 9,390 1.5 20,413 3.2

Total Commercial Real Estate - Non Owner Occupied $ 632,286 98.5 % $ 635,380 96.8 %

4 unchanged sentences

Risk Elements of the Loan Portfolio

Management, internal loan review and the senior loan committee formally review all loans in excess of certain dollar amounts (periodically established) at least annually.

Loans in excess of $2.0 million in the aggregate and all adversely classified credits identified by management are reviewed by the senior loan committee.

Management, internal loan review and the executive loan committee formally review all loans in excess of certain dollar amounts (periodically established) at least annually.

Loans in excess of $2.0 million in the aggregate and all adversely classified credits identified by management are reviewed by the executive loan committee.

In addition, all other loans are reviewed on a risk weighted selection process.

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

The executive 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, special mention, substandard, doubtful, or loss.

18 unchanged sentences

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

At March 31, 2025 and December 31, 2024, the ACL on loans included a qualitative adjustment of approximately $10.9 million and $11.2 million, respectively.

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) 2025 2024

29 unchanged sentences

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

Total non-performing assets were $8.5 million, or 0.58% of total loans, at September 30, 2024 compared to $8.2 million, or 0.53% of total loans, at December 31, 2023.

Total non-accrual loans at September 30, 2024 decreased $2.6 million, or 41.4%, to $3.7 million compared to $6.3 million at December 31, 2023.

The decrease in non-accrual loans was primarily due to a $1.8 million charged off commercial loan relationship and $3.5 million in commercial real estate loans that went to non-accrual status in the first quarter and proceeded to foreclosure in the second quarter and third quarter of 2024.

In addition, $2.0 million in commercial loans moved to non-accrual status in the third quarter of 2024.

There were $0.4 million in loans past due 90 days and still accruing interest at September 30, 2024 compared to $0.1 million at December 31, 2023.

Other real estate and repossessed assets were $4.4 million and $1.7 million at September 30, 2024 and December 31, 2023, respectively.

There were $3.5 million and $0.04 million in non-accrual loans added to other real estate owned and repossessed assets during the nine months ended September 30, 2024 and 2023, respectively.

Total non-performing assets were $3.1 million, or 0.21% of total loans, at March 31, 2025 compared to $4.2 million, or 0.29% of total loans, at December 31, 2024.

Total non-accrual loans at March 31, 2025 decreased $0.1 million, or 3.7%, to $2.4 million compared to $2.5 million at December 31, 2024.

There were $0.02 million in loans past due 90 days and still accruing interest at March 31, 2025 compared to $0.21 million at December 31, 2024.

Other real estate and repossessed assets were $0.7 million and $1.4 million at March 31, 2025 and December 31, 2024, respectively.

There were no non-accrual loans added to other real estate owned and repossessed assets during the three months ended March 31, 2025 and 2024.

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:

September 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

March 31, 2025 December 31, 2024

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

Allocation of allowance for credit losses at end of period:

7 unchanged sentences

Total $ 21,780 100.0 % $ 22,044 100.0 %

The allowance for credit losses was $21.9 million, or 1.50%, of loans outstanding at September 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 539.52% at September 30, 2024, compared to 370.25% at December 31, 2023.

Provision for Credit Losses

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

The allowance for credit losses was $21.8 million, or 1.48%, of loans outstanding at March 31, 2025 compared to $22.0 million, or 1.50%, of loans outstanding at December 31, 2024.

The ratio of the allowance for credit losses to non-performing loans was 885.01% at March 31, 2025, compared to 802.48% at December 31, 2024.

Release of Provision for Credit Losses

Three Months Ended March 31,

(dollars in thousands) 2025 2024

2024 2023 2024 2023

Provision for credit losses on loans

$ 593 $ 300 $ 875 $ 1,115

Provision for (release of) credit losses for off-balance sheet commitments (93) (190) (149) (325)

Total provision for credit losses $ 500 $ 110 $ 726 $ 790

The Company recognized a provision for credit losses of $0.5 million and $0.7 million for the three and nine months ended September 30, 2024, respectively, compared to a $0.1 million and $0.8 million provision for credit losses for the three and nine months ended September 30, 2023, respectively.

Release of provision for credit losses on loans $ (282) $ —

Release of provision credit losses for off-balance sheet commitments (58) (230)

Total release of provision for credit losses $ (340) $ (230)

The Company recognized a release of provision for credit losses of $0.3 million for the three months ended March 31, 2025 compared to a $0.2 million release of provision for credit losses for the three months ended March 31, 2024.

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 (Charge-offs) Recoveries / Average Loans (Net Charge-offs) Recoveries Average Loans Net (Charge-offs) Recoveries / Average Loans

Commercial, financial, and agricultural $ (254) $ 210,783 (0.12) % $ (7) $ 232,516 — %

Real estate construction − residential

— 35,611 — — 55,289 —

Real estate construction − commercial

— 61,546 — — 129,284 —

Real estate mortgage − residential

7 369,068 — 2 376,209 —

Real estate mortgage − commercial

(343) 792,668 (0.04) (2) 739,225 —

Installment and other consumer (46) 15,977 (0.29) (67) 22,176 (0.30)

Total $ (636) $ 1,485,653 (0.04) % $ (74) $ 1,554,699 — %

Nine Months Ended September 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

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 $ 54 $ 200,696 0.03 % $ (20) $ 220,122 (0.01) %

9 unchanged sentences

Total $ 18 $ 1,465,309 — % $ (69) $ 1,524,644 — %

Net Loan Charge-Offs

The Company’s net charge-offs were $0.6 million and $2.7 million for the three and nine months ended September 30, 2024 compared to $0.1 million and $0.03 million for the three and nine months ended September 30, 2023, respectively.

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

Net Loan Recoveries (Charge-Offs)

The Company’s net recoveries were $0.02 million for the three months ended March 31, 2025 compared to $0.07 million net charge-offs for the three months ended March 31, 2024.

Loans Held for Sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale.

Prior to September 30, 2024, these loans were initially measured at fair value under the fair value option election with subsequent changes in fair value recognized in mortgage banking income.

As of September 30, 2024, loans held for sale are being carried at the lower of cost or estimated fair value.

Loans held for sale are being carried at the lower of cost or estimated fair value.

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

At September 30, 2024, the carrying amount of these loans was $0.3 million compared to $3.9 million at December 31, 2023.

At March 31, 2025, the carrying amount of these loans was $0.2 million compared to no loans at December 31, 2024.

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 nine months ended September 30, 2024, the Company sold approximately $45.0 million of loans to investors compared to $84.4 million for the nine months ended September 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 $226.3 million of loans sold to the secondary market at September 30, 2023.

During the three months ended March 31, 2025, the Company sold approximately $1.2 million of loans to investors compared to $15.1 million for the three months ended March 31, 2024.

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.

(dollars in thousands)

September 30, 2024 December 31, 2023

(dollars in thousands) March 31, 2025 December 31, 2024

Other interest-bearing deposits $ 80,700 $ 27,326

3 unchanged sentences

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 $203.3 million at September 30, 2024 and included an unrealized net loss of $24.7 million.

The fair value of the available-for-sale investment portfolio was $219.6 million at March 31, 2025 and included an unrealized net loss of $30.4 million.

The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $3.3 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, 2024 and December 31, 2023, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $118.4 million and $99.5 million, respectively.

At March 31, 2025 and December 31, 2024, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $130.8 million and $136.3 million, respectively.

Total investment securities pledged for these purposes were as follows:

(dollars in thousands)

September 30, 2024 December 31, 2023

(dollars in thousands) March 31, 2025 December 31, 2024

Federal Reserve Bank borrowings $ 7,694 $ 7,915

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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, 2024, such deposits totaled $1.4 billion and represented 93.5% of the Company’s total deposits.

At March 31, 2025, such deposits totaled $1.4 billion and represented 93.7% 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, 2024 and December 31, 2023 were as follows:

(dollars in thousands)

September 30, 2024 December 31, 2023

Core deposits at March 31, 2025 and December 31, 2024 were as follows:

(dollars in thousands) March 31, 2025 December 31, 2024

Non-interest bearing demand $ 427,107 $ 385,022

3 unchanged sentences

Total $ 1,446,368 $ 1,432,786

Estimated uninsured deposits totaled $325.2 million, including $97.8 million of certificates of deposit, at September 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 $10,000 and $0.2 million at September 30, 2024 and December 31, 2023, respectively.

Included in the uninsured deposits at September 30, 2024 and December 31, 2023 are public fund deposits greater than $250,000 which are collateralized by the Company totaling $95.1 million and $137.7 million, respectively.

Estimated uninsured deposits totaled $349.4 million, including $97.5 million of certificates of deposit, at March 31, 2025, compared to $352.0 million, including $100.4 million of certificates of deposit, at December 31, 2024.

The Company's brokered deposits were consistent at $0.01 million at March 31, 2025 and December 31, 2024.

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

1 unchanged sentence

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

As of September 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 $8.5 million on a secured basis.

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

As of March 31, 2025, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $7.2 million on a secured basis.

There were no federal funds purchased outstanding at March 31, 2025.

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, 2025.

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

As of September 30, 2024, the Bank had $96.4 million in outstanding borrowings with the FHLB.

As of March 31, 2025, the Bank had $124.0 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, 2024 and December 31, 2023 were as follows:

(dollars in thousands)

September 30, 2024 December 31, 2023

Borrowings outstanding at March 31, 2025 and December 31, 2024 were as follows:

(dollars in thousands) March 31, 2025 December 31, 2024

Federal Home Loan Bank advances $ 124,000 $ 81,425

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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:

September 30, 2024 December 31, 2023

(dollars in thousands)

FHLB Federal Reserve Bank Federal Funds Purchased Lines Total FHLB Federal Reserve Bank Federal Funds Purchased Lines Total

March 31, 2025 December 31, 2024

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

Advance equivalent $ 404,441 $ 7,186 $ 35,000 $ 446,627 $ 407,678 $ 7,468 $ 35,000 $ 450,146

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Total available $ 236,441 $ 7,186 $ 35,000 $ 278,627 $ 187,253 $ 7,468 $ 35,000 $ 229,721

At September 30, 2024, loans of $720.7 million were pledged to the FHLB as collateral for borrowings and letters of credit.

At September 30, 2024, investments with a market value of $9.0 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

At March 31, 2025, loans of $733.7 million were pledged to the FHLB as collateral for borrowings and letters of credit.

At March 31, 2025, investments with a market value of $7.7 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 $54.2 million at September 30, 2024 compared to $93.4 million at December 31, 2023.

The $39.2 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, 2024.

Cash and cash equivalents were $102.3 million at March 31, 2025 compared to $51.0 million at December 31, 2024.

The $51.3 million increase 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, 2025.

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

Operating activities provided total cash of $23.7 million for the nine months ended September 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, provided total cash of $19.8 million during the nine months ended September 30, 2024.

The cash flow primarily consisted of a $66.2 million net decrease in loans held for investment and $20.3 million proceeds from maturities and calls of available-for-sale securities, partially offset by $32.9 million in purchases of securities and $35.0 million in purchases of bank owned life insurance policies.

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%.

Financing activities used total cash of $82.6 million during the nine months ended September 30, 2024, resulting primarily from a $34.5 million decrease in interest-bearing transaction accounts, $21.2 million decrease in time deposits, $11.6 million decrease in demand deposits and a $10.5 million net decrease in FHLB advances.

Operating activities provided total cash of $5.7 million for the three months ended March 31, 2025.

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 $6.0 million during the three months ended March 31, 2025.

The cash outflow primarily consisted of a $4.1 million net increase in loans held for investment and $6.7 million in purchases of securities, partially offset by $6.0 million proceeds from maturities and calls of available-for-sale securities.

Financing activities provided total cash of $51.5 million during the three months ended March 31, 2025, resulting primarily from a $42.1 million increase in demand deposits and a $42.6 million net increase in FHLB advances, partially offset by a $27.4 million decrease in interest-bearing transaction accounts and $3.9 million decrease in time deposits.

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.

1 unchanged sentence

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

The Company had $335.0 million in unused loan commitments and standby letters of credit as of September 30, 2024.

The Company had $368.7 million in unused loan commitments and standby letters of credit as of March 31, 2025.

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.

1 unchanged sentence

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 $3.7 million and $3.5 million during the nine months ended September 30, 2024 and 2023, respectively.

The Company paid cash dividends to its shareholders totaling approximately $1.3 million and $1.2 million during the three months ended March 31, 2025 and 2024, respectively.

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

The Bank declared $15.0 million and $9.0 million in dividends to the Company during the nine months ended September 30, 2024 and 2023, respectively.

At September 30, 2024 and December 31, 2023, the Company had cash and cash equivalents totaling $13.8 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

The Bank did not declare a dividend to the Company during the three months ended March 31, 2025 and declared a $5.0 million dividend to the Company during the three months ended March 31, 2024.

At March 31, 2025 and December 31, 2024, the Company had cash and cash equivalents totaling $14.4 million and $15.3 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 repurchased under the plan, as well as the timing of any such repurchases.

The Company repurchased 56,692 common shares under the repurchase plan during the first nine months of 2024 at an average cost of $19.51 per share totaling $1.1 million.

As of September 30, 2024, $3.9 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.

No time limit was set for completion of share repurchases under the plan.

Capital Management

8 unchanged sentences

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 September 30, 2024, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Management believes, as of March 31, 2025, 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 September 30, 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 March 31, 2025 and December 31, 2024.

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

1 unchanged sentence

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.

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%.

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 September 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:

Under the Basel III Capital Rules, at March 31, 2025 and December 31, 2024, 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

September 30, 2024

(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio

March 31, 2025

Total Capital (to risk-weighted assets):

24 unchanged sentences

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