Oak Valley Bancorp

Previous wording

Certain matters discussed in this Quarterly Report on Form 10-Q are“forward-looking statements”* within the meaning of the Private Securities Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause the Company*’s actual results to be materially different from the results expressed or implied by the Company’s forward-looking statements. * These statements generally appear with words such as*“will,”* “anticipate,” “target,” “believe,” “estimate,” “forecast”,“may,” “intend,” “plan,” “goal,” “believe,“forecast,” “outlook,” “expect” or other words of similar meaning.* * Forward-looking statements are not statements of historical fact and may include those that discuss, among others, our strategies, goals, plans, outlook, forecasts, expectations, intentions or other non-historical matters; future operations, financial condition, results of operations, or business developments; and the assumptions that underlie these matters. Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.* * Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: the credit exposure of certain loan products and other components of our business that could be impacted by the changing economic and business conditions; changes in monetary, fiscal or tax policy to address changing economic conditions including interest rate policies of the Federal Reserve Board, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; economic conditions (both generally and in the markets where the Company operates) including unemployment levels, energy prices, inflation, supply chain issues, a decline in housing prices or collateral values and the risk of a recession or slowed economic growth in the United States economy; the continuing impact of the changing economic conditions on our employees and customers, including consumer income, creditworthiness, confidence, spending and savings; increasing geopolitical instability, including the war between Russia and Ukraine and the impact of sanctions; the success of our efforts to mitigate the impact of the changing economic conditions; competition from other providers of financial services offered by the Company and our response to competitive pressures; changes in government regulation and legislation; the impact of any failure by the U.S. government to increase the debt ceiling or any federal government shutdown; changes in interest rates and interest rate fluctuations; volatility in the capital markets; the amount and rate of deposit growth and changes in deposit costs; material unforeseen changes in the financial stability and liquidity of the Company*’s credit customers; risks associated with concentrations …

Excerpt shortened here; the source contains the full paragraph.

Current wording

Certain matters discussed in this Quarterly Report on Form 10-Q are“forward-looking statements”* within the meaning of the Private Securities Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause the Company*’s actual results to be materially different from the results expressed or implied by the Company’s forward-looking statements. * These statements generally appear with words such as*“will,”* “anticipate,” “target,” “believe,” “estimate,” “forecast”,“enhance,” “may,” “intend,” “plan,” “goal,” “believe,“forecast,” “project,” “outlook,” “expect” or other words of similar meaning.* * Forward-looking statements are not statements of historical fact and may include those that discuss, among others, our strategies, goals, plans, outlook, forecasts, expectations, intentions or other non-historical matters; future operations, financial condition, results of operations, or business developments; and the assumptions that underlie these matters. Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.* * Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: the credit exposure of certain loan products and other components of our business that could be impacted by the changing economic and business conditions; changes in monetary, fiscal or tax policy to address changing economic conditions including interest rate policies of the Federal Reserve Board, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; economic conditions (both generally and in the markets where the Company operates) including unemployment levels, energy prices, increased energy costs in California, inflation, supply chain issues, a decline in housing prices or collateral values and the risk of a recession or slowed economic growth in the United States economy; the continuing impact of the changing economic conditions on our employees and customers, including consumer income, creditworthiness, confidence, spending and savings; the credit quality of borrowers; increasing geopolitical instability, including the war between Russia and Ukraine and the impact of sanctions; the success of our efforts to mitigate the impact of the changing economic conditions; competition from other providers of financial services offered by the Company and our response to competitive pressures; changes in government regulation and legislation; the impact of any failure by the U.S. government to increase the debt ceiling or any federal government shutdown; changes in interest rates and interest rate fluctuations; volatility in the capital markets; the amount and rate of deposit growth and changes in deposit costs; material unforeseen changes in the financial stab…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

Management believes the following were important factors in the Company’s performance during the three-month period ended March 31, 2024:

Current wording

Management believes the following were important factors in the Company’s performance during the three and six-month periods ended June 30, 2024:

Previous wording

For the three-month period ended March 31, 2024, the Company recorded net income of $5,727,000, representing a decrease of $3,498,000, as compared to the same period in 2023. Return on average assets (annualized) was 1.26% for the three-months ended March 31, 2024, as compared to 1.93% for the same period in 2023. Annualized return on average common equity was 13.86% for the three-months ended March 31, 2024, as compared to 28.36% for the same period in 2023. Net income before provisions for income taxes decreased by $4,670,000 for the three-month period ended March 31, 2024, from the same period in 2023. The income statement components of these variances are as follows:

Current wording

For the three and six-month periods ended June 30, 2024, the Company recorded net income of $5,889,000 and $11,616,000, respectively, representing decreases of $2,515,000 and $6,013,000, as compared to the same periods in 2023. Return on average assets (annualized) was 1.30% and 1.28% for the three and six-months ended June 30, 2024, respectively, as compared to 1.79% and 1.86% for the same periods in 2023. Annualized return on average common equity was 14.19% and 14.03% for the three and six-months ended June 30, 2024, respectively, as compared to 23.48% and 25.80% for the same periods in 2023. Net income before provisions for income taxes decreased by $3,564,000 and $8,235,000 for the three and six-month periods ended June 30, 2024, respectively, from the same periods in 2023. The income statement components of these variances are as follows:

Previous wording

Net interest income is the largest source of the Company’s operating income. For the three-month period ended March 31, 2024, net interest income was $17,241,000, which represents a decrease of $2,302,000 or 11.8%, from the comparable period in 2023. The decrease was due to rising interest rates on deposit accounts, as the average cost of funds increased to 0.67% for the three-month period of 2024, as compared to 0.10% in the same period of 2023. The Company has increased rates on certain accounts and deposit products in order to remain competitive to our peer group and to maintain current liquidity levels, which remains at a high level.

Current wording

Net interest income is the largest source of the Company’s operating income. For the three and six-month periods ended June 30, 2024, net interest income was $17,292,000 and $34,533,000, respectively, which represents decreases of $2,115,000 and $4,417,000, from the comparable periods in 2023. The decrease was due to rising interest rates on deposit accounts, as the average cost of funds increased to 0.73% and 0.70% for the three and six-months ended June 30, 2024, respectively, as compared to 0.16% and 0.13% in the same periods of 2023. The Company has increased rates on certain accounts and deposit products in order to remain competitive to our peer group and to maintain current liquidity levels, which remains at a high level.

Previous wording

The net interest margin (net interest income as a percentage of average interest earning assets) was 4.09% for the three-month period ended March 31, 2024, as compared to 4.39% for the same period in 2023. The decrease in net interest margin is primarily due to the rising interest rates on deposit accounts, as discussed above.

Current wording

The net interest margin (net interest income as a percentage of average interest earning assets) was 4.11% and 4.10% for the three and six-month periods ended June 30, 2024, respectively, as compared to 4.45% and 4.42% for the same periods in 2023. The decrease in net interest margin is primarily due to the rising interest rates on deposit accounts, as discussed above.

Previous wording

The FOMC rate increases in 2022 and 2023, continued to have a positive impact on repricing of earning asset yields, which partially offset the higher cost of funds. The earning asset yield increased by 25 basis points for the three-month period ended March 31, 2024, as compared to the same period of 2023.

Current wording

The FOMC rate increases in 2022 and 2023 and the FOMC’s actions to maintain those elevated interest rates so far in 2024, continued to have a positive impact on repricing of earning asset yields, which partially offset the higher cost of funds. The earning asset yield increased by 25 and 22 basis points for the three and six-month periods ended June 30, 2024, respectively, as compared to the same periods of 2023.

Previous wording

The following table shows the relative impact of changes in average balances of interest earning assets and interest-bearing liabilities, and interest rates earned and paid by the Company on those assets and liabilities for the three-month periods ended March 31, 2024 and 2023:

Current wording

The following table shows the relative impact of changes in average balances of interest earning assets and interest-bearing liabilities, and interest rates earned and paid by the Company on those assets and liabilities for the three and six-month periods ended June 30, 2024 and 2023:

Previous wording

Shown in the following table is the relative impact on net interest income of changes in the average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by the Company on those assets and liabilities for the three-month periods ended March 31, 2024 and 2023. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated to the rate column below.

Current wording

Shown in the following tables is the relative impact on net interest income of changes in the average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by the Company on those assets and liabilities for the three and six-month periods ended June 30, 2024 and 2023. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated to the rate column below.

Previous wording

The table above reflects a decrease of $1,366,000 in net interest income due to changes in volume combined with the overall change in mix of balances during the first quarter of 2024, as compared to the same period of 2023. Changes in earning asset yields and rates on interest-bearing liabilities resulted in a decrease of $1,038,000 to net interest income, over the same period. This decrease was mainly due to higher interest rates paid on deposit accounts.

Current wording

The table above reflects a decrease of $1,031,000 in net interest income due to changes in volume combined with the overall change in mix of balances during the second quarter of 2024, as compared to the same period of 2023. Changes in earning asset yields and rates on interest-bearing liabilities resulted in a decrease of $1,228,000 to net interest income, over the same period. This decrease was mainly due to higher interest rates paid on deposit accounts.

Previous wording

The Company had no provisions for credit losses during the three-month period ended March 31, 2024, as compared to provision reversals of $460,000 during the same period of 2023, as determined by the output of our CECL internal credit risk model. Credit quality remained strong with non-accrual loans remaining at a zero balance throughout the three-month period ending March 31, 2024. Management will continue to closely monitor the credit risks to our loan portfolio and may need to make qualitative adjustments depending on factors that may impact the economy and the financial condition of our borrowers.

Current wording

The Company had no provisions for credit losses during the three and six-month periods ended June 30, 2024, as compared to provision reversals of $0 and $460,000 during the same periods of 2023, as determined by the output of our CECL internal credit risk model. Credit quality remained strong with non-accrual loans remaining at a zero balance throughout the six-month period ending June 30, 2024. Management will continue to closely monitor the credit risks to our loan portfolio and may need to make qualitative adjustments depending on factors that may impact the economy and the financial condition of our borrowers.

Previous wording

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from mortgage commissions and investment service fee income. For the three-month period ended March 31, 2024, non-interest income was $1,519,000, representing a decrease of $136,000 or 8.2%, compared to the same period in 2023.

Current wording

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from mortgage commissions and investment service fee income. For the three and six-month period ended June 30, 2024, non-interest income was $1,760,000 and $3,279,000, respectively, representing an increase of $105,000 or 6.3% and a decrease of $32,000 or 1%, respectively, compared to the same periods in 2023.

Previous wording

Service charges on deposits decreased by $10,000 for the three-months ended March 31, 2024, compared to the same period in 2023. The decrease was due to a change in the fees charged to deposit customers for non-sufficient fund and overdraft items that took effect in January 2024.

Current wording

Service charges on deposits decreased by $50,000 and $61,000 for the three and six-months ended June 30, 2024, respectively, compared to the same periods in 2023. The decrease was due to a change in the fees charged to deposit customers for non-sufficient fund and overdraft items that took effect in January 2024.

Previous wording

Earnings on cash surrender value of life insurance increased by $33,000 for the three-months ended March 31, 2024, compared to the same period in 2023, corresponding to higher yields earned in 2024 and one additional policy that was purchased in July of 2023.

Current wording

Earnings on cash surrender value of life insurance increased by $61,000 and $94,000 for the three and six-months ended June 30, 2024, respectively, compared to the same periods in 2023, corresponding to higher yields earned in 2024 and three additional policies that were purchased during the second quarter of 2024.

Previous wording

Mortgage commissions remained flat at $9,000 for the three-months ended March 31, 2024, as compared to the same period of 2023. Overall, the demand for home purchases and refinancing has decreased in 2023 and 2024 compared to prior years, mainly due to higher interest rates.

Current wording

Mortgage commissions increased by $5,000 for the three and six-months ended June 30, 2024, as compared to the same periods of 2023. Overall, the demand for home purchases and refinancing has decreased in 2023 and 2024 compared to prior years, mainly due to higher interest rates.

Previous wording

Gains on sales and calls of available-for-sale securities decreased by $63,000 in the first quarter of 2024 compared to the same period in 2023, as there was only one security sold during 2024, compared to twenty-four securities sold during the first three months of 2023. Other income decreased by $114,000 for the three-month period ended March 31, 2024, as compared to the same period of 2023. The decrease is mainly due to negative changes in the fair value of one equity security.

Current wording

Gains on sales and calls of available-for-sale securities increased by $34,000 and decreased by $29,000 for the three and six-months ended June 30, 2024, respectively, compared to the same periods in 2023, as there was seventeen securities sold during the first six months of 2024, compared to twenty-four securities sold during the same period of 2023. Other income increased by $75,000 and decreased by $39,000 for the three and six-month periods ended June 30, 2024, respectively, as compared to the same periods of 2023. The second quarter increase is mainly due to higher production from investment advisory services, and the year-to-date decrease is attributable to negative changes in the fair value of one equity security.

Previous wording

Non-interest expenses increased by $1,772,000 or 18.2% for the three-months ended March 31, 2024, as compared to the same period of 2023. Salaries and employee benefits increased $883,000 for the three-months ended March 31, 2024, as compared to the same period of 2023, due to additional staffing expense required to support the continued growth of our business portfolios.

Current wording

Non-interest expenses increased by $1,554,000 or 15.4% and $3,326,000 or 16.8% for the three and six-months ended June 30, 2024, respectively, as compared to the same periods of 2023. Salaries and employee benefits increased by $865,000 and $1,748,000 for the three and six-months ended June 30, 2024, as compared to the same periods of 2023, mainly due to additional staffing expense required to support the continued growth of our business portfolios.

Previous wording

Occupancy expenses decreased by $23,000 for the three-months ended March 31, 2024, as compared to the same period of 2023, due to a decline in fixed asset depreciation and general operating costs related to branch facilities.

Current wording

Occupancy expenses remained flat for the second quarter of 2024 and decreased by $23,000 for the six-months ended June 30, 2024, as compared to the same periods of 2023, due to a decline in fixed asset depreciation and general operating costs related to branch facilities.

Previous wording

Data processing fees increased by $88,000, for the three-month period ended March 31, 2024, as compared to the same period of 2023, primarily due to servicing costs on the growing number of loan and deposit accounts as well as upgrades to our online banking platform.

Current wording

Data processing fees increased by $122,000 and $210,000, for the three and six-month periods ended June 30, 2024, respectively, as compared to the same periods of 2023, primarily due to servicing costs on the growing number of loan and deposit accounts as well as upgrades to our online banking platform.

Previous wording

Federal Deposit Insurance Corporation (“FDIC”) and California Department of Financial Protection and Innovation (“DFPI”) regulatory assessments increased by $95,000 for the three-months ended March 31, 2024, as compared to the same period in 2023. The increase was due to the FDIC increasing the base rate to 0.05%, on an annual basis, for all member banks in order to build up the Deposit Insurance Fund. The FDIC adopted a final rule in June 2022, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023. The final rule became effective as of January 1, 2023, with an invoice payment date of June 30, 2023. The FDIC said that the increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028. The final assessment rate for financial institutions is determined by making adjustments to the base rate for various credit quality factors and other risk metrics of the institution as defined by the FDIC. The Company’s risk profile and the related assessment rate remains at a relatively low level due to our strong credit quality, earnings and risk-based capital ratios. Management recognizes that assessments could increase further depending on deposit growth throughout the remainder of 2024, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis, and based on FDIC’s discretion to increase the base assessment rate as needed to replenish the Deposit Insurance Fund. Moreover, the FDIC retains the authority and discretion to increase base assessment rates for banking entities in the future, as circumstances warrant.

Current wording

Federal Deposit Insurance Corporation (“FDIC”) and California Department of Financial Protection and Innovation (“DFPI”) regulatory assessments increased by $40,000 and $135,000 for the three and six-months ended June 30, 2024, respectively, as compared to the same periods in 2023. The increase was due to the FDIC increasing the base rate to 0.05%, on an annual basis, for all member banks in order to build up the Deposit Insurance Fund. The FDIC adopted a final rule in June 2022, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023. The final rule became effective as of January 1, 2023, with an invoice payment date of June 30, 2023. The FDIC said that the increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028. The final assessment rate for financial institutions is determined by making adjustments to the base rate for various credit quality factors and other risk metrics of the institution as defined by the FDIC. The Company’s risk profile and the related assessment rate remains at a relatively low level due to our strong credit quality, earnings and risk-based capital ratios. Management recognizes that assessments could increase further depending on deposit growth throughout the remainder of 2024, as the FDIC assessment rates are applied to average quarterly total liabilities as the primary basis, and based on FDIC’s discretion to increase the base assessment rate as needed to replenish the Deposit Insurance Fund. Moreover, the FDIC retains the authority and discretion to increase base assessment rates for banking entities in the future, as circumstances warrant.

Previous wording

Other expense increased by $729,000 for the three-month period ended March 31, 2024, as compared to the same period in 2023. The increase was partially due to a change in the provision for off balance sheet loan commitments, in combination with various general operating expense increases, which is expected given the expansion of the Company’s business portfolios.

Current wording

Other expense increased by $527,000 and $1,256,000 for the three and six-month periods ended June 30, 2024, respectively, as compared to the same periods in 2023. The increase was mainly due to advertising expenses from a marketing campaign launched during the first quarter of 2024 to attract new customers, in combination with various general operating expense increases, which is expected given the expansion of the Company’s business portfolios.

Previous wording

The Company recorded provisions for income taxes of $1,504,000 for the three-month period ended March 31, 2024, representing a decrease of $1,172,000 compared to the provisions recorded in the comparable period of 2023. The effective income tax rate on income from continuing operations was 20.8% for the three-months ended March 31, 2024, compared to 22.5% for the comparable period of 2023. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on qualified municipal securities, bank owned life insurance and certain tax-exempt loans). The disparity between the effective tax rates for the year-to-date period of 2023 as compared to 2024 is primarily due to tax credits from low-income housing projects as well as tax free-income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2024 as compared to 2023.

Current wording

The Company recorded provisions for income taxes of $1,547,000 and $3,501,000 for the three and six-month periods ended June 30, 2024, respectively, representing decreases of $1,049,000 and $2,222,000 compared to the provisions recorded in the comparable periods of 2023. The effective income tax rate on income from continuing operations was 20.8% for the three and six-months ended June 30, 2024, compared to 23.6% and 23.0% for the comparable periods of 2023. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on qualified municipal securities, bank owned life insurance and certain tax-exempt loans). The disparity between the effective tax rates for the year-to-date period of 2023 as compared to 2024 is primarily due to tax credits from low-income housing projects as well as tax-free income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2024 as compared to 2023.

Previous wording

Non-accrual loans totaled $0 as of March 31, 2024 and December 31, 2023. At March 31, 2024 and December 31, 2023, there were no loan modifications pursuant to ASU 2022-02, and therefore there were no payment delinquencies on modified loans during the three-months ended March 31, 2024.

Current wording

Non-accrual loans totaled $0 as of June 30, 2024 and December 31, 2023. At June 30, 2024 and December 31, 2023, there were no loan modifications pursuant to ASU 2022-02, and therefore there were no payment delinquencies on modified loans during the three and six-months ended June 30, 2024.

Previous wording

As of March 31, 2024 and December 31, 2023, there were no OREO properties. There were no sales, acquisitions or fair value adjustments of OREO properties during the three-months ended March 31, 2024 and 2023.

Current wording

As of June 30, 2024 and December 31, 2023, there were no OREO properties. There were no sales, acquisitions or fair value adjustments of OREO properties during the three and six-months ended June 30, 2024 and 2023.

Previous wording

Due to credit risk inherent in the lending business, the Company routinely sets aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. Charges for the outstanding loan portfolio have been credited to the allowance for credit losses, whereas charges for off-balance sheet items have been credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The Company recorded no credit loss provisions during the three-months ended March 31, 2024, as compared to provision reversals of $460,000 recorded during the same period of 2023. The Company recorded provision reversals of $78,000 for off-balance sheet items during the three-months ended March 31, 2024, as compared to provision reversals of $352,000 recorded during the same period of 2023.

Current wording

Due to credit risk inherent in the lending business, the Company routinely sets aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. Charges for the outstanding loan portfolio have been credited to the allowance for credit losses, whereas charges for off-balance sheet items have been credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The Company recorded no credit loss provisions during the three and six-months ended June 30, 2024, as compared to provision reversals of $0 and $460,000 recorded during the same periods of 2023. The Company recorded provision reversals of $0 and $78,000 for off-balance sheet items during the three and six-months ended June 30, 2024, respectively, as compared to provision reversals of $70,000 and $423,000 recorded during the same periods of 2023.

Previous wording

The allowance for credit losses increased by $26,000 to $10,922,000 as of March 31, 2024, as compared to $10,896,000 as of December 31, 2023, due to net loan recoveries of $26,000 during the first three months of 2024. This factor combined with the increase in the gross loan balance resulted in a decrease in the allowance for credit losses as a percentage of total loans to 1.05% as of March 31, 2024 from 1.07% as of December 31, 2023.

Current wording

The allowance for credit losses increased by $225,000 to $11,121,000 as of June 30, 2024, as compared to $10,896,000 as of December 31, 2023, due to net loan recoveries of $225,000 during the first six months of 2024. This factor combined with the increase in the gross loan balance resulted in a decrease in the allowance for credit losses as a percentage of total loans to 1.04% as of June 30, 2024 from 1.07% as of December 31, 2023.

Previous wording

The Company holds federal funds sold, unpledged available-for-sale securities and salable government guaranteed loans to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of March 31, 2024, and December 31, 2023, the Company had $169,729,000 and $216,568,000, respectively, in cash and cash equivalents.

Current wording

The Company holds federal funds sold, unpledged available-for-sale securities and salable government guaranteed loans to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of June 30, 2024, and December 31, 2023, the Company had $180,300,000 and $216,568,000, respectively, in cash and cash equivalents.

Previous wording

Management of the investment securities portfolio focuses on providing an adequate level of liquidity and establishing an interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities that the Company intends to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as available-for-sale or equity securities. Currently, all of the investment securities are classified as available-for-sale except for one mutual fund classified as an equity security with a carrying value of $3,102,000 as of March 31, 2024. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. The carrying values of equity securities are adjusted for unrealized gains or losses through noninterest income in the consolidated statement of income.

Current wording

Management of the investment securities portfolio focuses on providing an adequate level of liquidity and establishing an interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities that the Company intends to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as available-for-sale or equity securities. Currently, all of the investment securities are classified as available-for-sale except for one mutual fund classified as an equity security with a carrying value of $3,105,000 as of June 30, 2024. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. The carrying values of equity securities are adjusted for unrealized gains or losses through noninterest income in the consolidated statement of income.

Previous wording

During 2018 and 2022, we committed to invest $5 million and $10.5 million, respectively, in low-income housing tax credit funds (“LIHTC”) to promote our participation in CRA activities, which had unfunded commitments of $9,781,000 as of March 31, 2024 and December 31, 2023. For LIHTC investments, we receive the return in the form of tax credits and tax deductions over a period of approximately 15 years.

Current wording

During 2018 and 2022, we committed to invest $5 million and $10.5 million, respectively, in low-income housing tax credit funds (“LIHTC”) to promote our participation in CRA activities, which had unfunded commitments of $9,326,000 and $9,781,000 as of June 30, 2024 and December 31, 2023. For LIHTC investments, we receive the return in the form of tax credits and tax deductions over a period of approximately 15 years.

Previous wording

Total deposits as of March 31, 2024 were $1,612,400,000, a decrease of $38,134,000 or 2.3% from the deposit total of $1,650,534,000 as of December 31, 2023. Average deposits decreased by $148,022,000 to $1,632,417,000 for the three-month period ended March 31, 2024, as compared to the same period in 2023.

Current wording

Total deposits as of June 30, 2024 were $1,644,748,000, a decrease of $5,786,000 or 0.4% from the deposit total of $1,650,534,000 as of December 31, 2023. Average deposits decreased by $117,768,000 to $1,628,411,000 for the six-month period ended June 30, 2024, as compared to the same period in 2023.

Previous wording

Because the Company’s client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks. Four clients carry deposit balances of more than 1% of total deposits, but none had a deposit balance of more than 3% of total deposits as of March 31, 2024. Management believes that the Company’s funding concentration risk is not significant and is mitigated by the ample sources of funds the Bank has access to.

Current wording

Because the Company’s client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks. Five clients carry deposit balances of more than 1% of total deposits, one of which had a deposit balance of more than 3% of total deposits as of June 30, 2024. Management believes that the Company’s funding concentration risk is not significant and is mitigated by the ample sources of funds the Bank has access to.

Previous wording

The deposit decrease during the first three months of 2024 was related to some movement to higher deposit rates offered by other financial institutions, combined with normal seasonal balance fluctuations for many of our high-balance accounts. Our strong liquidity position allowed us to tolerate some rate-sensitive deposit migration, which mitigated our cost of funds increases. The number of DDA checking accounts has increased over the prior twelve months, demonstrating that our core deposit base has continued to expand. See “Liquidity and Capital Resources” section below for more information.

Current wording

The deposit decrease during the first quarter of 2024 was offset by deposit growth in the second quarter of 2024 for a YTD net decrease of $5.7 million. The first quarter decrease related to some movement to higher deposit rates offered by other financial institutions, combined with normal seasonal balance fluctuations for many of our high-balance accounts. Our strong liquidity position allowed us to tolerate some rate-sensitive deposit migration, which mitigated our cost of funds increases. The second quarter increase is attributable to an advertising campaign that we launched in January-2024, in order to increase our market share of deposit balances. The number of DDA checking accounts has increased over the prior 6 months, demonstrating the effectiveness of this endeavor and that our core deposit base has continued to expand. See “Liquidity and Capital Resources” section below for more information.

Previous wording

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet the Company’s cash flow requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of its customers and to take advantage of investment opportunities as they arise. Liquidity management involves the ability to convert assets into cash or cash equivalents without incurring significant loss, and to raise cash or maintain funds without incurring excessive additional cost. For this purpose, the Company maintains a portion of funds in cash and cash equivalents, salable government guaranteed loans and securities available for sale. The Company obtains funds from the repayment and maturity of loans as well as deposit inflows, investment security maturities and paydowns, Federal funds purchased, FHLB advances, and other borrowings. The Company’s primary use of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificate of deposits, repayment of borrowings and dividends to common stockholders. The Company’s liquid assets as of March 31, 2024 were $439.8 million compared to $489.0 million as of December 31, 2023. The Company’s liquidity level measured as the percentage of liquid assets to total assets was 24.4% as of March 31, 2024, compared to 26.5% as of December 31, 2023. Liquid assets decreased during the first three months of 2024, mainly due to the decrease in deposits and an increase in outstanding gross loans. Management anticipates that cash and cash equivalents on hand and other sources of funds will provide adequate liquidity for operating, investing and financing needs and regulatory liquidity requirements for at least the next twelve months. Management monitors the Company’s liquidity position daily, balancing loan funding/payments with changes in deposit activity and overnight investments.

Current wording

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet the Company’s cash flow requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of its customers and to take advantage of investment opportunities as they arise. Liquidity management involves the ability to convert assets into cash or cash equivalents without incurring significant loss, and to raise cash or maintain funds without incurring excessive additional cost. For this purpose, the Company maintains a portion of funds in cash and cash equivalents, salable government guaranteed loans and securities available for sale. The Company obtains funds from the repayment and maturity of loans as well as deposit inflows, investment security maturities and paydowns, Federal funds purchased, FHLB advances, and other borrowings. The Company’s primary use of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificate of deposits, repayment of borrowings and dividends to common stockholders. The Company’s liquid assets as of June 30, 2024 were $401.8 million compared to $489.0 million as of December 31, 2023. The Company’s liquidity level measured as the percentage of liquid assets to total assets was 21.8% as of June 30, 2024, compared to 26.5% as of December 31, 2023. Liquid assets decreased during the first six months of 2024, mainly due to the decrease in deposits and an increase in outstanding gross loans. Management anticipates that cash and cash equivalents on hand and other sources of funds will provide adequate liquidity for operating, investing and financing needs and regulatory liquidity requirements for at least the next twelve months. Management monitors the Company’s liquidity position daily, balancing loan funding/payments with changes in deposit activity and overnight investments.

Previous wording

As a secondary source of liquidity, the Company relies on advances from the FHLB to supplement the supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are typically secured by a portion of the loan portfolio. The FHLB determines limitations on the amount of advances by assigning a percentage to each eligible loan category that will count towards the borrowing capacity. As of March 31, 2024, the Company’s borrowing capacity from the FHLB was approximately $341.3 million and there were no outstanding advances. The Company also maintains a line of credit with two correspondent banks to purchase up to $70 million in federal funds, and approximately $31.3 million borrowing capacity through the FRB Discount Window, for which there were no advances on either borrowing source as of March 31, 2024.

Current wording

As a secondary source of liquidity, the Company relies on advances from the FHLB to supplement the supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are typically secured by a portion of the loan portfolio. The FHLB determines limitations on the amount of advances by assigning a percentage to each eligible loan category that will count towards the borrowing capacity. As of June 30, 2024, the Company’s borrowing capacity from the FHLB was approximately $346.5 million and there were no outstanding advances. The Company also maintains a line of credit with two correspondent banks to purchase up to $70 million in federal funds, and approximately $31.8 million borrowing capacity through the FRB Discount Window, for which there were no advances on either borrowing source as of June 30, 2024.

Previous wording

As of March 31, 2024 and December 31, 2023, the Company had commitments to extend credit of $179.2 million and $186.3 million, respectively, which includes obligations under letters of credit of $3.7 million and $3.6 million, respectively.

Current wording

As of June 30, 2024 and December 31, 2023, the Company had commitments to extend credit of $163.8 million and $186.3 million, respectively, which includes obligations under letters of credit of $4.3 million and $3.6 million, respectively.