PLUMAS BANCORP

Previous wording

The following discussion and analysis sets forth certain statistical information relating to the Company as of March 31, 2024 and December 31, 2023 and for the three-month periods ended March 31, 2024 and 2023. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2023.

Current wording

The following discussion and analysis sets forth certain statistical information relating to the Company as of June 30, 2024 and December 31, 2023 and for the three and six-month periods ended June 30, 2024 and 2023. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2023.

Previous wording

On January 19, 2024, Plumas Bank entered into two agreements for the purchase and sale of real property (the “Sale Agreements”). One Sale Agreement provided for the sale to MountainSeed of nine properties owned and operated by the Plumas Bank as branches (the “Branches”) for an aggregate cash purchase price of approximately $25.7 million. The branch portion of the sale was completed on February 14, 2024 resulting in a net gain on sale of $19.9 million, recording of right-of-use assets totaling $22.3 million and recording a lease liability of $22.3 million. The second Sale Agreement provides for the sale to MountainSeed of up to three properties operated as non-branch administrative offices (the “Non-Branch Offices”) for an aggregate cash purchase price of $7.9 million, assuming all of the Non-Branch Offices are sold. The closing date on the Non-Branch Offices has been extended to September 16, 2024.

Current wording

On January 19, 2024, Plumas Bank entered into two agreements for the purchase and sale of real property (the “Sale Agreements”). One Sale Agreement provided for the sale to MountainSeed of nine properties owned and operated by Plumas Bank as branches (the “Branches”) for an aggregate cash purchase price of approximately $25.7 million. The branch portion of the sale was completed on February 14, 2024 resulting in a net gain on sale of $19.9 million, recording of right-of-use assets totaling $22.3 million and recording a lease liability of $22.3 million. The second Sale Agreement provides for the sale to MountainSeed of up to three properties operated as non-branch administrative offices (the “Non-Branch Offices”) for an aggregate cash purchase price of $7.9 million, assuming all of the Non-Branch Offices are sold. MountianSeed has indicated that is it unlikely that they will complete the Non-Branch transaction given the current market for office space. We are reviewing other sources for the Non-Branch Offices transaction.

Previous wording

The gain on sales of the branches was offset by losses on the sale of approximately $115 million in investment securities. During the three months ended March 31, 2024 we sold $115 million in investment securities having a weighted average tax equivalent yield of 2.24% recording a $19.8 million loss the sales. Beginning in December 2023 and ending on March 27, 2024 we purchased $120 million in investments securities having a weighted average tax equivalent yield of 5.25%.

Current wording

The gain on sales of the branches was offset by losses on the sale of approximately $115 million in investment securities. During the six months ended June 30, 2024 we sold $115 million in investment securities having a weighted average tax equivalent yield of 2.24% recording a $19.8 million loss on the sales. As part of the restructuring, beginning in December 2023 and ending on March 27, 2024, we purchased $120 million in investments securities having a weighted average tax equivalent yield of 5.25%.

Previous wording

**Net interest income before provision for credit losses.**Driven by an increase in market rates and growth in the loan portfolio, net interest income increased by $308,000 from $17.1 million during the three months ended March 31, 2023, to $17.4 million for the three months ended March 31, 2024. The increase in net interest income includes an increase of $2.2 million in interest income partially offset by an increase of $1.9 million in interest expense. Interest and fees on loans increased by $1.9 million related both to an increase in average balance and an increase in yield. Average loan balances increased by $49 million, while the average yield on loans increased by 46 basis points from 5.63% during the first quarter of 2023 to 6.09% during the current quarter. The average prime interest rate increased from 7.69% during the first quarter of 2023 to 8.5% during the current quarter. Approximately 19% of the Company's loans are tied to the prime interest rate and most of these reprice within one to three months with a change in prime.

Current wording

**Net interest income before provision for credit losses.**Driven by an increase in market rates, growth in the loan portfolio, and the restructuring of a portion of our investment portfolio partially offset by an increase in interest expense, net interest income increased by $1.5 million from $34.4 million during the six months ended June 30, 2023, to $35.9 million for the six months ended June 30, 2024. The increase in net interest income includes an increase of $5.2 million in interest income partially offset by an increase of $3.7 million in interest expense.

Previous wording

The following tables present the activity in the allowance for credit losses and the reserve for unfunded commitments during the three months ended March 31, 2024 and 2023 (in thousands).

Current wording

The following tables present the activity in the allowance for credit losses and the reserve for unfunded commitments during the six months ended June 30, 2024 and 2023 (in thousands).

Previous wording

**Non-interest income.**During the three months ended March 31, 2024, non-interest income totaled $2.1 million, a decrease of $1.8 million from the three months ended March 31, 2023. The largest component of this decrease was a $1.7 million gain on termination of our interest rate swaps during the 2023 quarter. On May 26, 2020 we entered into two separate interest rate swap agreements with notional amounts totaling $10 million, effectively converting $10 million in Subordinated Debentures related to Trust Preferred Securities to fixed rate obligations. During the first quarter of 2023 we terminated these swaps, redeemed the Trust Preferred Securities and paid all principal and interest due under the debentures. As discussed earlier, during the current period, a $19.9 million gain on sale of buildings was offset by a $19.8 million loss on investment securities.

Current wording

**Non-interest income.**During the six months ended June 30, 2024, non-interest income totaled $4.3 million, a decrease of $1.7 million from the six months ended June 30, 2023. The largest component of this decrease was a $1.7 million gain on termination of our interest rate swaps during the 2023 period. As discussed earlier, during the first quarter of 2024, a $19.9 million gain on sale of buildings was offset by a $19.8 million loss on investment securities.

Previous wording

**Net Income.**The Company recorded net income of $6.3 million for the three months ended March 31, 2024, down from net income of $7.6 million for the three months ended March 31, 2023. An increase of $308,000 in net interest income and declines of $704,000 in the provision for credit losses and $574,000 in the provision for income taxes were offset by a decline of $1.8 million in non-interest income and an increase of $1.2 million in non-interest expense. The annualized return on average assets was 1.55% for the three months ended March 31, 2024, down from 1.93% for the three months ended March 31, 2023. The annualized return on average equity decreased from 25.0% during the first quarter of 2023 to 16.4% during the current quarter.

Current wording

**Net Income.**The Company recorded net income of $6.8 million for the three months ended June 30, 2024, up slightly from net income of $6.7 million for the three months ended June 30, 2023. An increase of $1.2 million in net interest income and $59,000 in non-interest income and a decline of $425,000 in the provision for credit losses were mostly offset by increases of $1.3 million in non-interest expense and $226,000 in the provision for income taxes. The annualized return on average assets was 1.67% for the three months ended June 30, 2024, down from 1.70% for the three months ended June 30, 2023. The annualized return on average equity decreased from 20.5% during the second quarter of 2023 to 17.1% during the current quarter.

Previous wording

Interest on investment securities increased by $668,000 related to an increase in average investment securities of $13.4 million to $480 million and an increase in yield of 44 basis points to 3.68%. The increase in loan and investment yields is consistent with the increase in market rates during 2023 and into the first quarter of 2024 and the restructuring of the investment portfolio discussed earlier. Interest on cash balances decreased by $327,000 related to a decline in average balance of $44.2 million. This was partially offset by an increase in the rate paid on these balances which increased from 4.64% during the first quarter of 2023 to 5.57% during the current quarter mostly related to an increase in the rate paid on balances held at the Federal Reserve Bank (FRB). The average rate earned on FRB balances increased from 4.59% during the first quarter of 2023 to 5.40% during the current quarter.

Current wording

Interest on investment securities increased by $669 thousand related to an increase in yield of 86 basis points to 4.11%. The increase in investment yields is consistent with the increase in market rates and the restructuring of the investment portfolio discussed earlier. Average investment securities declined from $478 million during the three months ended June 30, 2023, to $444 million during the current quarter. Interest on cash balances increased by $249 thousand related to an increase in average balance of $13 million and an increase in rate earned on these balances of 37 basis points from 5.14% during the three months ended June 30, 2023 to 5.51%. during the current quarter. The increase in rate earned was mostly related to an increase in the rate paid on balances held at the Federal Reserve Bank (FRB). The average rate earned on FRB balances increased from 5.06% during the second quarter of 2023 to 5.40% during the current quarter.

Previous wording

Interest expense increased from $638,000 during the three months ended March 31, 2023 to $2.6 million during the current period related to an increase in rate paid on interest bearing liabilities and an increase in borrowings. The average rate paid on interest bearing liabilities increased from 0.36% during the 2023 quarter to 1.33% in 2024 related mainly to an increase in market interest rates, an increase in borrowings and the effect of a 4% time deposit promotion.

Current wording

Interest expense increased from $984 thousand during the three months ended June 30, 2023, to $2.8 million during the current period related to an increase in rate paid on interest bearing liabilities and an increase in borrowings. The average rate paid on interest bearing liabilities increased from 0.56% during the 2023 quarter to 1.44% in 2024 related mainly to an increase in market interest rates, an increase in borrowings and the effect of a 4% time deposit promotion.

Previous wording

Interest paid on deposits increased by $720,000 and is broken down by product type as follows: money market accounts - $159,000 and time deposits - $580,000. Related to a decline of average balance of $67 million, interest on savings deposits declined by $19,000. The average rate paid on interest-bearing deposits increased from 0.28% during the first quarter of 2023 to 0.75% during the current quarter.

Current wording

Interest paid on deposits increased by $452 thousand and is broken down by product type as follows: money market accounts - $130 thousand and time deposits - $356 thousand. Related to a decline in average balance of $61 million, interest on savings deposits declined by $34 thousand. The average rate paid on interest-bearing deposits increased from 0.51% during the second quarter of 2023 to 0.84% during the current quarter.

Previous wording

Net interest margin for the three months ended March 31, 2024 decreased 2bp to 4.62%, down from 4.64% for the same period in 2023.

Current wording

Net interest margin for the three months ended June 30, 2024 increased 20bp to 4.89%, up from 4.69% for the same period in 2023.

Previous wording

**Provision for credit losses.**During the first quarter of 2024 we recorded a provision for credit losses of $821,000 consisting of a provision for credit losses on loans of $900,000 and a decrease in the reserve for unfunded commitments of $79,000. This compares to a provision for credit losses of $1,525,000 consisting of a provision for credit losses on loans of $1,250,000 and an increase in the reserve for unfunded commitments of $275,000 during the first quarter of 2023. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified. See “Analysis of Asset Quality and Allowance for Loan Losses” for a discussion of loan quality trends and the provision for credit losses.

Current wording

**Provision for credit losses.**During the second quarter of 2024 we recorded a provision for credit losses of $925,000 consisting of a provision for credit losses on loans of $925,000. This compares to a provision for credit losses of $1,350,000 during the 2023 quarter consisting of a provision for credit losses on loans of $1,300,000 and an increase in the reserve for unfunded commitments of $50,000. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified. See “Analysis of Asset Quality and Allowance for Credit Losses” for a discussion of loan quality trends and the provision for credit losses.

Previous wording

Non-interest expense. During the three months ended March 31, 2024, total non-interest expense increased by $1.2 million from $9.2 million during the first quarter of 2023 to $10.4 million during the current quarter. The largest components of this increase were increases in occupancy and equipment costs of $350,000, salary and benefit expense of $299,000 and an increase in other expense of $261,000. The increase in salary and benefit expense includes a 5% increase in salary expense and an increase in commissions of $107 thousand that relates to an increase in SBA 7(a) loan production. Deferral of loan origination costs increased by $138,000 also related to the increase in SBA 7(a) loan production. The increase in occupancy and equipment costs relates to an increase in rental expense related to the sales/leaseback. The Company leases twelve depository branches, one of which is a land lease on which we own the building, two lending offices, three administrative offices and two non-branch automated teller machine locations. The expiration dates of the leases vary, with the first such lease expiring during 2025 and the last such lease expiring during 2044. Including variable lease expense, total rent expense was $514,000 and $168,000 during the three months ended March 31, 2024 and 2023, respectively. The increase in other expense mostly relates to nonrecurring expenses.

Current wording

**Non-interest expense.**During the three months ended June 30, 2024, total non-interest expense increased by $1.3 million from $9.1 million during the second quarter of 2023 to $10.4 million during the current quarter. The largest components of this increase were an increase in salary and benefit expense of $417 thousand and an increase in occupancy and equipment costs of $696 thousand. The increase in salary and benefit expense primarily relates to an increase in salary expense and commissions. Salary expense increased by $197 thousand which we attribute primarily to merit and promotional salary increases and an increase in employees. Commissions increased by $328 thousand related mostly to SBA production which has been quite strong during 2024. Partially offsetting the increase in salary and commission expense was an increase in the deferral of loan origination cost of $254 thousand related to the increase in SBA loan production. Occupancy and equipment costs increased by $696 thousand related to an increase in rent expense of $685 thousand related to the sales/leaseback transaction.

Previous wording

Provision for income taxes. The Company recorded an income tax provision of $2.1 million, or 25.4% of pre-tax income, for the three months ended March 31, 2024. This compares to an income tax provision of $2.7 million, or 26.2% of pre-tax income, for the three months ended March 31, 2023. The percentages for 2024 and 2023 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal securities interest decrease taxable income.

Current wording

Provision for income taxes. The Company recorded an income tax provision of $2.5 million, or 26.9% of pre-tax income, for the three months ended June 30, 2024. This compares to an income tax provision of $2.3 million, or 25.5% of pre-tax income, for the three months ended June 30, 2023. The percentages for 2024 and 2023 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal securities interest decrease taxable income.

Previous wording

Total assets on March 31, 2024, were $1.6 billion, an increase of $29.9 million from December 31, 2023. Net loans increased by $17.5 million from $948.6 million on December 31, 2023, to $966.1 million at March 31, 2024. Cash and cash equivalents increased by $42.6 million to $128.2 million on December 31,2023. Related to the sales/leaseback transaction right-of use assets increased by $22.4 million. These increases were offset by declines of $41.7 million in investment securities, $6.0 million in property and equipment and $4.9 million in all other assets. Deposits totaled $1.3 billion March 31, 2024, a decrease of $34.0 million from December 31, 2023. Borrowings increased from $90 million on December 31, 2023, to $120 million on March 31, 2024. Shareholders’ equity increased by $14.2 million from $147.3 million on December 31, 2023, to $161.5 million on March 31, 2024. A detailed discussion of each of these changes follows.

Current wording

Total assets on June 30, 2024, were $1.6 billion, an increase of $32 million from December 31, 2023. Net loans increased by $38 million from $949 million on December 31, 2023, to $987 million at June 30, 2024. Cash and cash equivalents increased by $24 million to $110 million on June 30, 2024. Related to the sales/leaseback transaction right-of use assets increased by $22 million. These increases were offset by declines of $44 million in investment securities, $6.0 million in property and equipment and $2 million in all other assets. Deposits totaled $1.3 billion June 30, 2024, a decrease of $29 million from December 31, 2023. Borrowings increased by $30 million from $90 million on December 31, 2023, to $120 million on June 30, 2024. Shareholders’ equity increased by $18 million from $147 million on December 31, 2023, to $165 million on June 30, 2024. A detailed discussion of each of these changes follows.

Previous wording

**Loan Portfolio.**Gross loans increased by $17 million, or 2%, from $959 million at December 31, 2023, to $976 million at March 31, 2024. Increases in loans included $19 million in commercial real estate loans, $7 million in construction loans, and $7 million in commercial loans; these items were offset by declines of $9 million in automobile loans, $6 million in agricultural loans and $1 million in equity lines of credit. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment. In the fourth quarter of 2023 we terminated our indirect auto loan program. Ending this program, which was our lowest yielding loan segment, also improved our loan loss risk profile since this program had historically higher charge-off rates. Terminating this program also improved our consumer compliance risk profile.

Current wording

**Loan Portfolio.**Gross loans increased by $39 million, or 4%, from $958.6 million at December 31, 2023, to $997.3 million at June 30, 2024. Increases in loans included $44 million in commercial real estate loans, $10 million in construction loans, and $7 million in commercial loans and $1 million in equity lines of credit; these items were offset by declines of $17 million in automobile loans and $6 million in agricultural loans. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment. In the fourth quarter of 2023 we terminated our indirect auto loan program. Ending this program, which was our lowest yielding loan segment, also improved our loan loss risk profile since this program had historically higher charge-off rates. Terminating this program also improved our consumer compliance risk profile.

Previous wording

The Company’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate, comprised 78% of the total loan portfolio at March 31, 2024. Moreover, the business activities of the Company currently are focused in the California counties of Butte, Lassen, Modoc, Nevada, Placer, Plumas, Shasta and Sutter and in Washoe and Carson City Counties in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions.

Current wording

The Company’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate, comprised 79% of the total loan portfolio at June 30, 2024. Moreover, the business activities of the Company currently are focused in the California counties of Butte, Lassen, Modoc, Nevada, Placer, Plumas, Shasta and Sutter and in Washoe and Carson City Counties in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions.

Previous wording

The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At March 31, 2024 and December 31, 2023, approximately 76% and 78% respectively, of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate were approximately 19% of the Company’s loan portfolio; these loans reprice within one day to three months of a change in the prime rate. The remainder of the Company's variable rate loans mostly consist of commercial real estate loans tied to U.S. Treasury rates and reprice every five years. While real estate mortgage, agricultural, commercial and consumer lending remain the foundation of the Company's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types.

Current wording

The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At June 30, 2024 and December 31, 2023, approximately 75% and 78%, respectively, of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate were approximately 25% of the Company’s variable rate loan portfolio; these loans reprice within one day to three months of a change in the prime rate. The remainder of the Company's variable rate loans mostly consist of commercial real estate loans tied to U.S. Treasury rates and reprice every five years. Approximately 72% of the variable rate loans are indexed to the five-year T-Bill rate and reprice every five years. While real estate mortgage, agricultural, commercial and consumer lending remain the foundation of the Company's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types.

Previous wording

The allowance for credit losses totaled $13.2 million at March 31, 2024, and $12.9 million at December 31, 2023. At least quarterly, the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. Specific reserves related to collateral dependent loans totaled $28,000 at March 31, 2024, and December 31, 2023. The allowance for credit losses as a percentage of total loans was 1.35% on March 31, 2024, and 1.34% on December 31, 2023.

Current wording

The allowance for credit losses totaled $14.1 million at June 30, 2024, and $12.9 million at December 31, 2023. At least quarterly, the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. Specific reserves related to collateral dependent loans totaled $27,000 and $28,000 at June 30, 2024, and December 31, 2023, respectively. The allowance for credit losses as a percentage of total loans was 1.41% on June 30, 2024, and 1.34% on December 31, 2023.

Previous wording

Nonperforming loans at March 31, 2024 were $5.6 million, an increase of $790,000 from $4.8 million at December 31, 2023.

Current wording

Nonperforming loans at June 30, 2024 were $9.0 million, an increase of $4.2 million from $4.8 million at December 31, 2023. Included in nonperforming loans at June 30, 2024 were agricultural loans from one borrower totaling $6.2 million which were over 90 days past due but not nonaccrual. We received payments on these loans totaling $1.6 million in July and concurrently with these payments we extended the maturity of the loans to August 15, 2024 which allows time for the borrower to sell the crops securing the remaining balance of principal and interest on the loans. Nonaccrual loans totaled $2.5 million at June 30, 2024, and $4.8 million at December 31, 2023.

Previous wording

A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Total substandard loans decreased by $0.3 million from $21.7 million on December 31, 2023 to $21.4 million on March 31, 2024. Loans classified as special mention increased by $1.3 million from $9.3 million on December 31, 2023 to $10.6 million on March 31, 2024.

Current wording

A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Total substandard loans decreased by $3.7 million from $21.7 million on December 31, 2023, to $18.0 million on June 30, 2024. Loans classified as special mention increased by $0.4 million from $9.3 million on December 31, 2023, to $9.7 million on June 30, 2024.

Previous wording

OREO represent real property acquired by the Bank either through foreclosure or through a dead in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. OREO holdings represented one property totaling $357,000 on March 31, 2024, and December 31, 2023.

Current wording

OREO represent real property acquired by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. OREO holdings represented one property totaling $141,000 on June 30, 2024, and one property totaling $357,000 at December 31, 2023.

Previous wording

Nonperforming assets as a percentage of total assets were 0.37% at March 31, 2024 and 0.33% at December 31, 2023.

Current wording

Nonperforming assets as a percentage of total assets were 0.56% at June 30, 2024 and 0.33% at December 31, 2023.

Previous wording

The following table provides a summary of the change in the number and balance of OREO properties for the three months ended March 31, 2024 and 2023 (dollars in thousands):

Current wording

The following table provides a summary of the change in the number and balance of OREO properties for the six months ended June 30, 2024 and 2023 (dollars in thousands):

Previous wording

Investment Portfolio and Federal Funds Sold. Total investment securities were $447.4 million as of March 31, 2024 and $489.2 million at December 31, 2023. Net unrealized losses on available-for-sale investment securities totaling $33.2 million were recorded, net of $9.8 million in tax benefit, as accumulated other comprehensive income within shareholders' equity at March 31, 2024. Net unrealized losses on available-for-sale investment securities totaling $46.1 million were recorded, net of $13.6 million in tax benefit, as accumulated other comprehensive loss within shareholders' equity at December 31, 2023. During the three months ended March 31, 2024 we sold $115 million in investment securities having a weighted average tax equivalent yield of 2.24% recording a $19.8 million loss on sale. Beginning in December 2023 and ending on March 27, 2024 we purchased $120 million in investments securities having a weighted average tax equivalent yield of 5.25%. No securities were sold during the three months ended March 31, 2023.

Current wording

Investment Portfolio and Federal Funds Sold. Total investment securities were $445.1 million as of June 30, 2024, and $489.2 million at December 31, 2023. Unrealized losses on available-for-sale investment securities totaling $35,645,000 were recorded, net of $10,536,000 in tax benefit, as accumulated other comprehensive loss within shareholders' equity at June 30, 2024. Net unrealized losses on available-for-sale investment securities totaling $46.1 million were recorded, net of $13.6 million in tax benefit, as accumulated other comprehensive loss within shareholders' equity at December 31, 2023. During the six months ended June 30, 2024 we sold $115 million in investment securities having a weighted average tax equivalent yield of 2.24% recording a $19.8 million loss on sale. Beginning in December 2023 and ending on March 27, 2024 we purchased $120 million in investments securities having a weighted average tax equivalent yield of 5.25%. These sales and purchases were made as part of the investment restructure described earlier. No securities were sold during the six months ended June 30, 2023.

Previous wording

The investment portfolio at March 31, 2024 consisted of $6.9 million in U.S. Treasury securities, $229.6 million in securities of U.S. Government-sponsored agencies, $123.1 million in securities of U.S. Government-agencies and 171 municipal securities totaling $87.8 million. The investment portfolio at December 31, 2023 consisted of $6.9 million in U.S. Treasury securities, $235.9 million in securities of U.S. Government-sponsored agencies, $116.0 million in securities of U.S. Government-agencies and 244 municipal securities totaling $130.4 million.

Current wording

The investment portfolio at June 30, 2024, consisted of $3.9 million in U.S. Treasury securities, $352.6 million in securities of U.S. Government-sponsored agencies and U.S. Government agencies, and 173 municipal securities totaling $88.6 million. The investment portfolio at December 31, 2023 consisted of $6.9 million in U.S. Treasury securities, $351.9 million in securities of U.S. Government-sponsored agencies and U.S. Government agencies and 244 municipal securities totaling $130.4 million.

Previous wording

There were no Federal funds sold at March 31, 2024 and December 31, 2023; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $100.2 million at March 31, 2024 and $52.9 million at December 31, 2023. The balance, on March 31, 2024, earns interest at the rate of 5.40%.

Current wording

There were no Federal funds sold at June 30, 2024, and December 31, 2023; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $75.2 million at June 30, 2024 and $52.9 million at December 31, 2023. The balance, on June 30, 2024, earns interest at the rate of 5.40%.

Previous wording

Total deposits were $1.3 billion at March 31, 2024, a decrease of $34.0 million from December 31, 2023. The decrease in deposits includes decreases of $26.8 million in demand deposits, $6.2 million in savings, and $1.0 million in time deposits. Partially offsetting these decreases was an increase in time deposit of $43 million. We attribute much of the decrease to the current interest rate environment as we have seen some deposits leave for higher rates and some customers reluctant to borrow to fund operating expense and instead have drawn down their excess deposit balances. Beginning in April 2023 we began offering a time deposit promotion offering 7-month and 11-month time deposits at an interest rate of 4%. Effective June 30, 2023 we discontinued this promotion which generated $46 million in deposits. However, beginning in the fourth quarter of 2023 we allowed those customers who had promotional time deposits to renew those deposits at similar terms. At March 31, 2024, 51% of the Company’s deposits were in the form of non-interest-bearing demand deposits. The Company has no brokered deposits.

Current wording

Total deposits were $1.3 billion at June 30, 2024, a decrease of $29 million from December 31, 2023. The decrease in deposits includes decreases of $22 million in demand deposits and $13 million in savings. Partially offsetting these decreases was an increase in time deposits of $6 million. We attribute much of the decrease to the current interest rate environment as we have seen some deposits leave for higher rates and some customers reluctant to borrow to fund operating expense and instead have drawn down their excess deposit balances. Beginning in April 2023 we began offering a time deposit promotion offering 7-month and 11-month time deposits at an interest rate of 4%. Effective June 30, 2023 we discontinued this promotion which generated $46 million in deposits. However, beginning in the fourth quarter of 2023 we allowed those customers who had promotional time deposits to renew those deposits at similar terms. At June 30, 2024, 51% of the Company’s deposits were in the form of non-interest-bearing demand deposits. The Company has no brokered deposits.

Previous wording

Deposits represent the Bank's primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. However, during 2023 and continuing into the first quarter of 2024 we have experienced a decline in these core deposits. The Company experiences, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October. To assist in meeting any funding demands, the Company maintains several borrowing agreements as described below.

Current wording

Deposits represent the Bank's primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. However, during 2023 and continuing into 2024 we have experienced a decline in these core deposits. The Company experiences, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October. To assist in meeting any funding demands, the Company maintains several borrowing agreements as described below.

Previous wording

Estimated uninsured deposits totaled $400 million and $416 million at March 31, 2024, and December 31, 2023, respectively. Uninsured amounts are estimated based on the portion of the account balances in excess of FDIC insurance limits.

Current wording

Estimated uninsured deposits totaled $423 million and $416 million at June 30, 2024, and December 31, 2023, respectively. Uninsured amounts are estimated based on the portion of the account balances in excess of FDIC insurance limits.

Previous wording

**Repurchase Agreements.**The Bank offers a repurchase agreement product for its larger customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. Securities sold under agreements to repurchase totaling $19.3 million and $23.1 million at March 31, 2024 and December 31, 2023, respectively are secured by U.S. Government agency securities with a carrying amount of $30.2 million and $34.1 million at March 31, 2024 and December 31, 2023, respectively. Interest paid on this product is similar to, but less than, that which is paid on the Bank’s money market accounts; however, these are not deposits and are not FDIC insured.

Current wording

**Repurchase Agreements.**The Bank offers a repurchase agreement product for its larger customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. Securities sold under agreements to repurchase totaling $13.9 million and $23.1 million at June 30, 2024 and December 31, 2023, respectively, are secured by U.S. Government agency securities with a carrying amount of $29.8 million and $34.1 million at June 30, 2024 and December 31, 2023, respectively. Interest paid on this product is similar to, but less than, that which is paid on the Bank’s money market accounts; however, these are not deposits and are not FDIC insured.

Previous wording

**Short-term Borrowing Arrangements.**The Company is a member of the Federal Home Loan Bank of San Francisco (FHLB) and can borrow up to $237 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $431 million. The Company is required to hold FHLB stock as a condition of membership. At March 31, 2024, the Company held $6.2 million of FHLB stock which is recorded as a component of other assets.

Current wording

**Short-term Borrowing Arrangements.**The Company is a member of the Federal Home Loan Bank of San Francisco (FHLB) and can borrow up to $234 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $431 million. The Company is required to hold FHLB stock as a condition of membership. At June 30, 2024, the Company held $6.2 million of FHLB stock which is recorded as a component of other assets.

Previous wording

The Federal Reserve Board, on March 12, 2023, announced the creation of the Bank Term Funding Program (BTFP). The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. At December 31, 2023, the Company had outstanding borrowings under the BTFP totaling $80 million. In January 2024 the Company borrowed an additional $25 million under the BTFP for a total of $105 million outstanding at March 31, 2024. This borrowing accrues interest at the rate of 4.85% and is payable on January 17, 2025. Borrowings under the BTFP can be prepaid without penalty. Interest expense recognized on the BTFP borrowings for the three months ended March 31, 2024, totaled $1.2 million. In addition to its FHLB borrowing line and the BTFP, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB or the correspondent banks at March 31, 2024, and December 31, 2023.

Current wording

The Federal Reserve Board, on March 12, 2023, announced the creation of the Bank Term Funding Program (BTFP). The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. At December 31, 2023, the Company had outstanding borrowings under the BTFP totaling $80 million. In January 2024 the Company borrowed an additional $25 million under the BTFP for a total of $105 million outstanding at June 30, 2024. This borrowing accrues interest at the rate of 4.85% and is payable on January 17, 2025. Borrowings under the BTFP can be prepaid without penalty. Interest expense recognized on the BTFP borrowings for the six months ended June 30, 2024 and 2023, totaled $2.5 million and $0, respectively. In addition to its FHLB borrowing line and the BTFP, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings from the FHLB or the correspondent banks at June 30, 2024, and December 31, 2023.

Previous wording

**Note Payable.**On January 25, 2022 the Company replaced its existing $15 million line of credit facility with a $15 million Loan Agreement (the “Loan Agreement”) and Promissory Note (the “Term Note”). The Term Note matures on January 25, 2035 and can be prepaid at any time. During the initial three years of the Loan Agreement the Term Note functions as an interest only revolving line of credit. Beginning on year four the Term Note converts into a term loan requiring semi-annual principal and interest payments and no further advances can be made. The proceeds of this lending facility shall be used by the Company for general corporation purposes, and to provide capital injections into the Bank. The Term Note bears interest at a fixed rate of 3.85% for the first 5 years and then at a floating interest rate linked to WSJ Prime Rate for the remaining eight year term. The Loan Agreement provides for a $187,500 loan fee. The Note is secured by the common stock of the Bank. The Loan Agreement contains certain financial and non-financial covenants, which include, but are not limited to, a minimum leverage ratio at the Bank, a minimum total risk-based capital ratio at the Bank, a maximum Texas Ratio at the Bank, a minimum level of Tier 1 capital at the Bank and a return on average assets needed to generate a 1.25X debt service coverage ratio. The Loan Agreement also contains customary events of default, including, but not limited to, failure to pay principal or interest, the commencement of certain bankruptcy proceedings, and certain adverse regulatory events affecting the Company or the Bank. Upon the occurrence of an event of default under the Loan Agreement, the Company’s obligations under the Loan Agreement may be accelerated. In March 2023 the Company borrowed $10 million on this note and used the proceeds to redeem its Trust Preferred securities as described below. During the first quarter of 2024 the Company borrowed an additional $5 million under this note for general corporate purposes. The Company was in compliance with all covenants related to the Term Note at March 31, 2024. Interest expense recognized on the Term Note for the three months ended March 31, 2024 and 2023 totaled $151,000 and $55,000, respectively.

Current wording

**Note Payable.**On January 25, 2022 the Company replaced its existing $15 million line of credit facility with a $15 million Loan Agreement (the “Loan Agreement”) and Promissory Note (the “Term Note”). The Term Note matures on January 25, 2035 and can be prepaid at any time. During the initial three years of the Loan Agreement the Term Note functions as an interest only revolving line of credit. Beginning on year four the Term Note converts into a term loan requiring semi-annual principal and interest payments and no further advances can be made. The proceeds of this lending facility shall be used by the Company for general corporation purposes, and to provide capital injections into the Bank. The Term Note bears interest at a fixed rate of 3.85% for the first 5 years and then at a floating interest rate linked to WSJ Prime Rate for the remaining eight year term. The Loan Agreement provides for a $187,500 loan fee. The Note is secured by the common stock of the Bank. The Loan Agreement contains certain financial and non-financial covenants, which include, but are not limited to, a minimum leverage ratio at the Bank, a minimum total risk-based capital ratio at the Bank, a maximum Texas Ratio at the Bank, a minimum level of Tier 1 capital at the Bank and a return on average assets needed to generate a 1.25X debt service coverage ratio. The Loan Agreement also contains customary events of default, including, but not limited to, failure to pay principal or interest, the commencement of certain bankruptcy proceedings, and certain adverse regulatory events affecting the Company or the Bank. Upon the occurrence of an event of default under the Loan Agreement, the Company’s obligations under the Loan Agreement may be accelerated. In March 2023 the Company borrowed $10 million on this note and used the proceeds to redeem its Trust Preferred securities. During January of 2024 the Company borrowed an additional $5 million under this note for general corporate purposes. The Company was in compliance with all covenants related to the Term Note at June 30, 2024. Interest expense recognized on the Term Note for the six months ended June 30, 2024 and 2023 totaled $313,000 and $141,000, respectively.

Previous wording

Shareholders’ equity increased by $14.2 million from $147.3 million at December 31, 2023 to $161.5 million at March 31, 2024. The $14.2 million increase was related to net income during the three months ended March 31, 2024, of $6.2 million, stock option activity of $459,000, a decrease of other compressive loss of $9.0 million related to the investment portfolio restructuring. partially offset by shareholder dividends of $1.6 million.

Current wording

Shareholders’ equity increased by $17.8 million from $147.3 million at December 31, 2023 to $165.1 million at June 30, 2024. The $17.8 million increase was related to net income during the six months ended June 30, 2024, of $13.0 million, stock option activity of $623,000 and a decrease of other comprehensive loss of $7.4 million related to the investment portfolio restructuring partially offset by shareholder dividends of $3.2 million.

Previous wording

It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. The Company is subject to various restrictions on the payment of dividends. The Company paid a quarterly cash dividend of $0.27 per share on February 15, 2024, and a quarterly cash dividend of $0.25 per share on November 15, 2023, August 15, 2023, May 15, 2023, and February 15, 2023.

Current wording

It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. The Company is subject to various restrictions on the payment of dividends. The Company paid a quarterly cash dividend of $0.27 per share on May 15, 2024 and February 15, 2024, and a quarterly cash dividend of $0.25 per share on November 15, 2023, August 15, 2023, May 15, 2023, and February 15, 2023.

Previous wording

**Loan Commitments.**In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of March 31, 2024, the Company had $165.6 million in unfunded loan commitments and no letters of credit. This compares to $174.6 million in unfunded loan commitments and $108,000 in letters of credit at December 31, 2023. Of the $165.6 million in unfunded loan commitments, $102.4 million and $63.2 million represent commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at March 31, 2024, $99.6 million were secured by real estate, of which $45.5 million was secured by commercial real estate and $54.1 million was secured by residential real estate mostly in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.

Current wording

**Loan Commitments.**In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of June 30, 2024, the Company had $162.4 million in unfunded loan commitments and no letters of credit. This compares to $174.6 million in unfunded loan commitments and $108,000 in letters of credit at December 31, 2023. Of the $162.4 million in unfunded loan commitments, $98.5 million and $63.9 million represent commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at June 30, 2024, $100.6 million were secured by real estate, of which $45.8 million was secured by commercial real estate and $54.8 million was secured by residential real estate mostly in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.

Previous wording

The Company is a member of the Federal Home Loan Bank of San Francisco (FHLB) and can borrow up to $237 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $431 million. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB, or the correspondent banks at March 31, 2024, and December 31, 2023.

Current wording

The Company is a member of the FHLB and can borrow up to $234 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $431 million. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $50 million and $20 million. There were no outstanding borrowings to the FHLB, or the correspondent banks at June 30, 2024, and December 31, 2023.

Previous wording

Customer deposits are the Company’s primary source of funds. Total deposits were $1.3 billion at March 31, 2024, a decrease of $34 million from December 31, 2023. Deposits are held in various forms with varying maturities. The Company estimates that it has approximately $400 million in uninsured deposits. Of this amount, $94 million represents deposits that are collateralized such as deposits of states, municipalities and tribal accounts.

Current wording

Customer deposits are the Company’s primary source of funds. Total deposits were $1.3 billion at June 30, 2024, a decrease of $29 million from December 31, 2023. Deposits are held in various forms with varying maturities. The Company estimates that it has approximately $423 million in uninsured deposits. Of this amount, $100 million represents deposits that are collateralized such as deposits of states, municipalities and tribal accounts.