Five Star Bancorp(FSBC) - 2025 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis of Five Star Bancorp for the periods ended June 30, 2025 ITEM 1. Financial Statements (unaudited) This section presents Five Star Bancorp's unaudited consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flows, with detailed accounting notes Consolidated Balance Sheets The consolidated balance sheets show the financial position of Five Star Bancorp at June 30, 2025, and December 31, 2024 Balance Sheet Highlights (June 30, 2025 vs. December 31, 2024): | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :--------------------- | :--------- | | Assets: | | | | | | Cash and cash equivalents | $483,810 | $352,343 | $131,467 | 37.31% | | Loans held for investment, net | $3,717,858 | $3,494,895 | $222,963 | 6.38% | | Total assets | $4,413,473 | $4,053,278 | $360,195 | 8.89% | | Liabilities: | | | | | | Total deposits | $3,894,622 | $3,557,994 | $336,628 | 9.46% | | Total liabilities | $3,996,731 | $3,656,654 | $340,077 | 9.30% | | Shareholders' Equity: | | | | | | Total shareholders' equity | $416,742 | $396,624 | $20,118 | 5.07% | Consolidated Statements of Income The consolidated statements of income detail Five Star Bancorp's financial performance for the three and six months ended June 30, 2025 and 2024 Income Statement Highlights (Three Months Ended June 30, 2025 vs. 2024): | Metric | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Total interest and fee income | $60,580 | $48,998 | $11,582 | 23.64% | | Total interest expense | $24,065 | $19,906 | $4,159 | 20.90% | | Net interest income | $36,515 | $29,092 | $7,423 | 25.52% | | Provision for credit losses | $2,500 | $2,000 | $500 | 25.00% | | Total non-interest income | $1,810 | $1,573 | $237 | 15.07% | | Total non-interest expense | $15,726 | $13,513 | $2,213 | 16.38% | | Net income | $14,508 | $10,782 | $3,726 | 34.55% | | Basic EPS | $0.68 | $0.51 | $0.17 | 33.33% | | Diluted EPS | $0.68 | $0.51 | $0.17 | 33.33% | Income Statement Highlights (Six Months Ended June 30, 2025 vs. 2024): | Metric | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Total interest and fee income | $117,667 | $96,539 | $21,128 | 21.88% | | Total interest expense | $47,175 | $40,703 | $6,472 | 15.90% | | Net interest income | $70,492 | $55,836 | $14,656 | 26.25% | | Provision for credit losses | $4,400 | $2,900 | $1,500 | 51.72% | | Total non-interest income | $3,169 | $3,406 | $(237) | (6.96)% | | Total non-interest expense | $30,771 | $26,229 | $4,542 | 17.32% | | Net income | $27,619 | $21,413 | $6,206 | 28.98% | | Basic EPS | $1.30 | $1.12 | $0.18 | 16.07% | | Diluted EPS | $1.30 | $1.12 | $0.18 | 16.07% | Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income present net income and other comprehensive income for the three and six months ended June 30, 2025 and 2024 Comprehensive Income (Three Months Ended June 30, 2025 vs. 2024): | Metric | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Net income | $14,508 | $10,782 | $3,726 | 34.55% | | Other comprehensive (loss) income | $(312) | $208 | $(520) | (250.00)% | | Total comprehensive income | $14,196 | $10,990 | $3,206 | 29.17% | Comprehensive Income (Six Months Ended June 30, 2025 vs. 2024): | Metric | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Net income | $27,619 | $21,413 | $6,206 | 28.98% | | Other comprehensive (loss) income | $413 | $(465) | $878 | 188.82% | | Total comprehensive income | $28,032 | $20,948 | $7,084 | 33.82% | Consolidated Statements of Shareholders' Equity The consolidated statements of shareholders' equity show changes in equity components for the six months ended June 30, 2025 and 2024 Shareholders' Equity (June 30, 2025 vs. December 31, 2024): | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :--------------------- | :--------- | | Common Stock | $303,155 | $302,531 | $624 | 0.21% | | Retained Earnings | $125,545 | $106,464 | $19,081 | 17.92% | | Accumulated Other Comprehensive Loss | $(11,958) | $(12,371) | $413 | 3.34% | | Total Shareholders' Equity | $416,742 | $396,624 | $20,118 | 5.07% | - Key Activities (Six Months Ended June 30, 2025): * Net income: $27,619 thousand[19] * Other comprehensive income: $413 thousand[19] * Cash dividends paid ($0.40 per share): $(8,538) thousand[19] * Stock compensation expense: $624 thousand[19] Consolidated Statements of Cash Flows The consolidated statements of cash flows detail cash movements from operating, investing, and financing activities for the six months ended June 30, 2025 and 2024 Cash Flow Highlights (Six Months Ended June 30, 2025 vs. 2024): | Metric | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Net cash provided by operating activities | $33,262 | $16,271 | $16,991 | 104.43% | | Net cash used in investing activities | $(229,885) | $(173,378) | $(56,507) | 32.59% | | Net cash provided by financing activities | $328,090 | $25,890 | $302,200 | 1167.25% | | Net change in cash and cash equivalents | $131,467 | $(131,217) | $262,684 | (200.19)% | | Cash and cash equivalents at end of period | $483,810 | $190,359 | $293,451 | 154.16% | - Key Drivers of Cash Flow Changes (Six Months Ended June 30, 2025): * Operating Activities: Higher net income, increased provision for credit losses, and lower loans originated for sale contributed to the increase[22] * Investing Activities: Primarily driven by higher loan originations, net of repayments[22] * Financing Activities: Significant increase in net change in deposits ($336.6 million) was the main driver[22] Notes to Consolidated Financial Statements These notes provide detailed information on accounting policies, fair value measurements, investment securities, loans, deposits, borrowings, and equity Note 1: Basis of Presentation and Summary of Significant Accounting Policies This note outlines Five Star Bancorp's business, accounting principles, emerging growth company status, and the impact of recent accounting standards - Organization: Five Star Bancorp operates through its wholly-owned subsidiary, Five Star Bank, providing financial services primarily to small and middle-market businesses, professionals, and individuals in Northern California[23][24] - Reportable Segment: The Company has one reportable operating segment: banking, managed on a consolidated basis[28] - Emerging Growth Company Status: The Company qualifies as an emerging growth company and has elected to use the extended transition period for complying with new or revised financial accounting standards[31][33] - Recently Issued Accounting Standards: ASU 2023-06 (Disclosure Improvements), ASU 2023-09 (Income Tax Disclosures), ASU 2024-02 (Codification Improvements), and ASU 2024-03 (Expense Disaggregation Disclosures) are not expected to have a significant impact on the Company's consolidated financial statements[35][36][38][39] Note 2: Fair Value of Assets and Liabilities This note details the Company's fair value measurements for assets and liabilities using a three-level hierarchy, with estimates provided for key financial instruments - Fair Value Hierarchy: The Company uses Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs) for fair value measurements[40][41] - Securities Available-for-Sale: Primarily valued using Level 2 inputs (matrix pricing) due to the absence of Level 1 quoted market prices[45] Fair Value Estimates (June 30, 2025): | Financial Instrument | Carrying Amounts (in thousands) | Fair Value (in thousands) | Fair Value Hierarchy | | :-------------------------------- | :------------------------------ | :------------------------ | :------------------- | | Cash and cash equivalents | $483,810 | $483,810 | Level 1 | | Securities available-for-sale | $94,990 | $94,990 | Level 2 | | Securities held-to-maturity | $2,585 | $2,270 | Level 3 | | Loans held for investment, net | $3,717,858 | $3,654,853 | Level 3 | | Time deposits | $772,085 | $770,872 | Level 2 | | Subordinated notes | $73,968 | $73,533 | Level 3 | Note 3: Investment Securities This note describes the investment portfolio, comprising held-to-maturity and available-for-sale securities, detailing their composition, fair value, and unrealized losses - Total Investment Securities: Decreased by $3.3 million from $100.9 million at December 31, 2024, to $97.6 million at June 30, 2025[207] Securities Available-for-Sale (June 30, 2025): | Category | Amortized Cost (in thousands) | Fair Value (in thousands) | Gross Unrealized Losses (in thousands) | | :-------------------------------- | :---------------------------- | :------------------------ | :------------------------------------- | | U.S. government agency securities | $6,909 | $7,002 | $(61) | | Mortgage-backed securities | $59,650 | $49,218 | $(10,447) | | Obligations of states and political subdivisions | $42,498 | $36,588 | $(5,911) | | Total available-for-sale | $111,332 | $94,990 | $(16,512) | - Securities in Unrealized Loss Positions: At June 30, 2025, 144 available-for-sale securities were in unrealized loss positions, with 139 in continuous loss for 12 months or more[66] - Pledged Investment Securities (June 30, 2025): Total pledged securities amounted to $91.06 million, securing deposits of public funds and borrowings[65] - Non-Marketable Securities: FHLB stock remained at $15.0 million, and equity investments increased to $14.5 million at June 30, 2025[70][71] Note 4: Loans and Allowance for Credit Losses This note details the loan portfolio composition, credit quality indicators, non-accrual loans, and the allowance for credit losses Loans Held for Investment (June 30, 2025 vs. December 31, 2024): | Loan Type | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :--------------------- | :--------- | | Commercial Real Estate | $3,066,627 | $2,857,173 | $209,454 | 7.33% | | Commercial Construction | $112,399 | $111,318 | $1,081 | 0.97% | | Secured Commercial | $173,855 | $170,548 | $3,307 | 1.94% | | Consumer and Other | $278,215 | $279,584 | $(1,369) | (0.49)% | | Total Loans Held for Investment | $3,758,025 | $3,532,686 | $225,339 | 6.38% | - Credit Quality Indicators (June 30, 2025): * Loans rated "Pass": $2,966.51 million (97.09% of total loans)[240][241] * Loans rated "Watch": $93.02 million (2.84% of total loans)[240][241] * Loans rated "Substandard": $4.17 million (0.11% of total loans)[240][241] * No loans rated "Doubtful"[240][241] Non-accrual Loans (June 30, 2025 vs. December 31, 2024): | Category | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :--------------------- | :--------- | | Commercial Real Estate | $2,240 | $1,750 | $490 | 28.00% | | Secured Commercial | $38 | $48 | $(10) | (20.83)% | | Total Non-accrual Loans | $2,278 | $1,798 | $480 | 26.70% | - Allowance for Credit Losses (ACL): Increased to $40.17 million at June 30, 2025, from $37.79 million at December 31, 2024[97][244] - ACL to Total Loans Held for Investment: Remained stable at 1.07% at both June 30, 2025, and December 31, 2024[247] - Pledged Loans: $1.9 billion pledged to FHLB and $1.3 billion to Federal Reserve Discount Window at June 30, 2025[103] Note 5: Interest-Bearing Deposits This note details the composition and growth of interest-bearing deposits, including money market and time accounts, and associated interest expenses Interest-Bearing Deposits (June 30, 2025 vs. December 31, 2024): | Deposit Type | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :----------------------------- | :------------------------------- | :--------------------- | :--------- | | Money market accounts | $1,704,652 | $1,525,292 | $179,360 | 11.76% | | Time accounts | $772,085 | $670,154 | $101,931 | 15.21% | | Total interest-bearing deposits | $2,890,561 | $2,635,365 | $255,196 | 9.68% | Interest Expense on Deposits (Six Months Ended June 30, 2025 vs. 2024): | Deposit Type | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Money market accounts | $25,705 | $25,543 | $162 | 0.63% | | Time accounts | $15,419 | $8,737 | $6,682 | 76.48% | | Total interest expense on interest-bearing deposits | $44,852 | $38,228 | $6,624 | 17.33% | - Network Deposits (June 30, 2025 vs. December 31, 2024): Total network deposits (CDARS and ICS) increased to $788.49 million from $693.75 million[108] Note 6: Subordinated Notes and Other Borrowings This note outlines the Company's subordinated notes and significant unused borrowing capacity from FHLB, Federal Reserve, and correspondent banks - Subordinated Notes: Carrying value of $74.0 million at June 30, 2025, bearing interest at 6.00% until September 1, 2027, then floating at three-month Term SOFR plus 329.0 basis points (7.50% as of June 30, 2025)[110][111] - FHLB Financing Availability (June 30, 2025): $557.95 million available, after accounting for $732.5 million in LCs issued[113] - Federal Reserve Discount Window Availability (June 30, 2025): $926.6 million available[113] - Correspondent Bank Lines of Credit (June 30, 2025): $185.0 million available from five unsecured federal funds lines[114] - Outstanding Borrowings: No amounts outstanding on FHLB, Federal Reserve Discount Window, or correspondent bank lines at June 30, 2025[113][114] Note 7: Shareholders' Equity This note details earnings per share, cash dividends, and stock-based compensation expense, including unrecognized compensation related to restricted shares Earnings Per Share (Three Months Ended June 30, 2025 vs. 2024): | Metric | 2025 | 2024 | Change | % Change | | :-------------------------------- | :--- | :--- | :----- | :--------- | | Basic EPS | $0.68 | $0.51 | $0.17 | 33.33% | | Diluted EPS | $0.68 | $0.51 | $0.17 | 33.33% | - Cash Dividends: A cash dividend of $0.20 per share, totaling $4.3 million, was declared on April 17, 2025, and subsequently paid[117] - Stock Compensation Expense: Non-cash stock compensation expense was $0.4 million for the three months ended June 30, 2025, and $0.6 million for the six months ended June 30, 2025[120] - Unrecognized Compensation Expense: Approximately $2.9 million of unrecognized compensation expense related to 129,448 unvested restricted shares as of June 30, 2025[121] Note 8: Commitments and Contingencies This note outlines off-balance sheet commitments, concentrations of credit risk in real estate loans, and significant deposit concentrations Unfunded Loan Commitments and Standby Letters of Credit (June 30, 2025): | Commitment Type | Amount (in thousands) | | :-------------------------------- | :-------------------- | | Commercial lines of credit | $242,896 | | Undisbursed commercial real estate loans | $105,207 | | Undisbursed construction loans | $75,691 | | Total commitments and standby letters of credit | $455,411 | - Allowance for Credit Losses on Unfunded Commitments: Totaled $0.6 million as of June 30, 2025[127] - Concentrations of Credit Risk: Real estate related loans constituted 86.97% of the loan portfolio at June 30, 2025[129] - Deposit Concentrations: 105 deposit relationships exceeded $5.0 million each, totaling $2.3 billion (59.91% of total deposits) at June 30, 2025. The largest single deposit relationship was $366.4 million (9.41% of total deposits)[130] - Equity Investment Commitments: Estimated remaining commitment for venture funds totaled $14.5 million at June 30, 2025[134] Note 9: Subsequent Events This note reports on subsequent events, including new tax law changes and the declaration of a cash dividend - Tax Law Changes: The "One Big Beautiful Bill Act" signed on July 4, 2025, includes changes to federal tax law allowing more favorable deductibility of certain business expenses, which were not reflected in the Q2 2025 income tax provision[136] - Dividend Declaration: On July 17, 2025, the board declared a cash dividend of $0.20 per common share, payable on August 11, 2025[137] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the Company's financial condition, operational results, asset quality, liquidity, and capital adequacy Company Overview This overview outlines Five Star Bancorp's mission and key financial figures as of June 30, 2025 - Mission: To be the top business bank in its markets through exceptional service, connectivity, and customer empathy, serving real estate, agricultural, faith-based, and small to medium-sized enterprises[144] - Key Financial Figures (June 30, 2025): * Total assets: $4.4 billion[144] * Total loans held for investment: $3.8 billion[144] * Total deposits: $3.9 billion[144] Critical Accounting Estimates This section discusses refinements to the Allowance for Credit Losses (ACL) methodology and their impact on reserves - ACL Methodology Refinements: * Segregated Manufactured Home Community (MHC) loans from traditional Multifamily, leading to an approximate $5.8 million decrease in ACL for the MHC pool as of June 30, 2024[152][153] * Increased expected loss rates for C&I SBA loans due to increased charge-offs, increasing required reserves by approximately $4.6 million as of June 30, 2024[152][153] * Segregated RV Park loans from traditional CRE Non-Owner Occupied, resulting in an approximate $3.3 million decrease in ACL for the RV Park pool as of September 30, 2024[152][153] Executive Summary This executive summary highlights key financial performance indicators, including net income, deposits, loans, credit quality, net interest margin, efficiency ratio, and capital adequacy - Net Income: * Three months ended June 30, 2025: $14.5 million (up 34.55% YoY)[154][157] * Six months ended June 30, 2025: $27.6 million (up 28.98% YoY)[154][157] - Deposits: Total deposits increased by $336.6 million (9.46%) to $3.9 billion at June 30, 2025, with non-interest-bearing deposits representing 25.78% of the total[155] - Loans: Total loans held for investment increased by $225.3 million (6.38%) to $3.8 billion at June 30, 2025[155] - Credit Quality: Non-accrual loans were 0.06% of total loans held for investment at June 30, 2025 (up from 0.05% at Dec 31, 2024). Allowance for credit losses to total loans held for investment remained at 1.07%[155][156] - Net Interest Margin (NIM): * Three months ended June 30, 2025: 3.53% (up 14 bps YoY)[155][157] * Six months ended June 30, 2025: 3.49% (up 22 bps YoY)[155][157] - Efficiency Ratio: * Three months ended June 30, 2025: 41.03% (down from 44.07% YoY)[155][157] * Six months ended June 30, 2025: 41.77% (down from 44.27% YoY)[155][157] - Capital Ratios (June 30, 2025): All capital ratios exceeded well-capitalized regulatory thresholds. Total risk-based capital ratio was 13.73%, and Tier 1 leverage ratio was 10.03%[155][156] - Dividends: A cash dividend of $0.20 per share was declared on April 17, 2025[155] Results of Operations This section analyzes the Company's financial performance, including net interest income, provision for credit losses, non-interest income, non-interest expense, and income taxes Net Interest Income Net interest income and margin significantly increased for both three and six-month periods, driven by loan growth and improved yields - Three Months Ended June 30, 2025 vs. 2024: * Net interest income: $36.5 million (up $7.4 million, 25.52%)[162][167] * Net interest margin: 3.53% (up 14 bps)[162][167] * Drivers: $493.7 million (15.44%) increase in average loan balance and 26 bps improvement in average loan yield, partially offset by $4.2 million increase in interest expense due to $686.1 million (22.50%) increase in average deposit balance[162][167] - Six Months Ended June 30, 2025 vs. 2024: * Net interest income: $70.5 million (up $14.7 million, 26.25%)[168][173] * Net interest margin: 3.49% (up 22 bps)[168][173] * Drivers: $21.1 million increase in interest income, primarily from a $490.0 million (15.61%) increase in average loan balances and a 28 bps increase in average loan yield. Partially offset by $6.5 million increase in interest expense due to $478.7 million (21.29%) increase in average interest-bearing deposits[168][173] Provision for Credit Losses The provision for credit losses increased for both periods, primarily driven by higher net charge-offs and loan growth - Three Months Ended June 30, 2025 vs. 2024: Provision for credit losses increased to $2.5 million from $2.0 million, mainly due to an increase in net charge-offs[175] - Six Months Ended June 30, 2025 vs. 2024: Provision for credit losses increased to $4.4 million from $2.9 million, mainly due to increases in loan growth and net charge-offs[176] Non-interest Income Non-interest income increased for the three-month period due to BOLI and other income, but decreased for six months due to lower loan sale gains - Three Months Ended June 30, 2025 vs. 2024: * Total non-interest income: $1.81 million (up $0.24 million, 15.07%)[179][180] * Gain on sale of loans: Decreased by $0.33 million (73.50%) due to lower loan volume sold[179][180] * Other income: Increased by $0.40 million (517.95%) due to improved earnings from venture-backed funds[179][180] - Six Months Ended June 30, 2025 vs. 2024: * Total non-interest income: $3.17 million (down $0.24 million, 6.96%)[182][183][184] * Gain on sale of loans: Decreased by $0.57 million (70.17%) due to lower loan volume sold[182][183][184] * Loan-related fees: Increased by $0.12 million (14.64%)[182][183][184] * Other income: Increased by $0.11 million (24.39%), primarily from improved earnings in venture-backed funds, partially offset by a loss on equity investments[182][183][184] Non-interest Expense Non-interest expense increased for both periods, driven by higher salaries, employee benefits, data processing, professional services, and advertising costs - Three Months Ended June 30, 2025 vs. 2024: * Total non-interest expense: $15.73 million (up $2.21 million, 16.38%)[188][189][190] * Salaries and employee benefits: Increased by $1.11 million (14.19%), mainly due to a 16.58% increase in headcount[188][189][190] * Data processing and software: Increased by $0.27 million (22.11%) due to increased platform usage and transaction volumes[188][189][190] * Advertising and promotional: Increased by $0.25 million (40.65%) to support business development[188][189][190] - Six Months Ended June 30, 2025 vs. 2024: * Total non-interest expense: $30.77 million (up $4.54 million, 17.32%)[193][194][195][196] * Salaries and employee benefits: Increased by $2.66 million (17.32%), mainly due to a 16.58% increase in headcount[193][194][195][196] * Data processing and software: Increased by $0.57 million (23.95%) due to increased platform usage and transaction volumes[193][194][195][196] * Professional services: Increased by $0.36 million (24.22%) due to consulting and recruiter fees[193][194][195][196] * Advertising and promotional: Increased by $0.31 million (29.02%) for business development and sponsored events[193][194][195][196] Provision for Income Taxes The provision for income taxes increased for both periods due to higher taxable income, with a Q2 2025 reduction from a California tax law change - Three Months Ended June 30, 2025 vs. 2024: * Provision for income taxes: $5.6 million (up $1.2 million)[199] * Effective tax rate: 27.82% (down from 28.84%)[199] * Impact of California tax law change: Net $0.2 million reduction to provision (benefit of $0.9 million partially offset by $0.7 million expense for deferred tax assets/liabilities remeasurement)[199] - Six Months Ended June 30, 2025 vs. 2024: * Provision for income taxes: $10.9 million (up $2.2 million)[200] * Effective tax rate: 28.24% (down from 28.89%)[200] * Impact of California tax law change: Net $0.2 million reduction to provision[200] Financial Condition Summary This summary reviews the Company's financial position, including total assets, cash, investment and loan portfolios, asset quality, liabilities, and deposits Total Assets Total assets increased to $4.4 billion, driven by growth in loans held for investment and cash and cash equivalents - Total Assets: $4.41 billion at June 30, 2025 (up $360.2 million, 8.89% from Dec 31, 2024)[203] - Drivers: $225.3 million increase in loans held for investment and $131.5 million increase in cash and cash equivalents[203] - Loan Growth: Resulted from $578.8 million in originations/advances, partially offset by $130.3 million in payoffs and $223.1 million in paydowns. Included $43.9 million in consumer loan purchases[204] Cash and Cash Equivalents Cash and cash equivalents increased to $483.8 million, driven by net cash inflows from financing and operating activities - Cash and Cash Equivalents: $483.8 million at June 30, 2025 (up $131.5 million from Dec 31, 2024)[205] - Drivers: Net cash inflows from financing ($328.1 million) and operating ($33.3 million) activities, partially offset by net cash outflows from investing activities ($229.9 million)[205] Investment Portfolio The investment portfolio decreased to $97.6 million, primarily due to maturities and prepayments, with a composition of high-quality liquid investments - Total Investment Securities: $97.6 million at June 30, 2025 (down $3.3 million from Dec 31, 2024)[207] - Composition (June 30, 2025): * Mortgage-backed securities: 50.44%[209] * Obligations of states and political subdivisions: 37.50%[209] * U.S. government agency securities: 7.18%[209] - Other Comprehensive Gain: $0.4 million for the six months ended June 30, 2025, primarily due to rate changes and market conditions[207] Loan Portfolio The loan portfolio grew to $3.8 billion, primarily commercial real estate, with strong underwriting, concentration limits, and a significant portion of variable-rate loans - Total Loans: $3.8 billion at June 30, 2025 (up from $3.5 billion at Dec 31, 2024)[213] - Composition (June 30, 2025): * Commercial Real Estate: 81.54%[214] * Commercial Construction: 2.99%[214] * Secured Commercial: 4.62%[214] * Consumer and Other: 7.40%[214] - Commercial Real Estate Concentration: 84.57% of loans held for investment at June 30, 2025[222] Commercial Real Estate Loan-to-Value (June 30, 2025): | Collateral Type | Loan Balance (in thousands) | Minimum LTV | Maximum LTV | | :-------------------------------- | :-------------------------- | :---------- | :---------- | | Manufactured home community | $936,047 | 16.34% | 74.52% | | RV Park | $388,531 | 17.78% | 72.96% | | Retail | $282,336 | 4.12% | 72.12% | Interest Rate Sensitivity (June 30, 2025): | Rate Type | Amount (in thousands) | Percentage | | :-------------------------------- | :-------------------- | :--------- | | Fixed Interest Rates | $1,012,848 | 26.93% | | Floating or Adjustable Rates | $2,747,737 | 73.07% | Asset Quality The Company maintains high asset quality through strong underwriting, continuous monitoring, and regular risk classification of its loan portfolio - Underwriting Policies: Strong underwriting practices, continuous evaluation, and regular updates to policies[232] - Risk Monitoring: Loans are assigned risk classifications at origination and reevaluated based on payment patterns, collateral condition, and financial information, especially for the commercial portfolio[232] Nonperforming Assets Nonperforming assets increased to $2.28 million, primarily due to non-accrual commercial real estate loans, though the nonperforming loan ratio remains low - Total Nonperforming Assets: $2.28 million at June 30, 2025 (up from $1.89 million at Dec 31, 2024)[237] - Non-accrual Loans (June 30, 2025): $2.28 million, primarily commercial real estate ($2.24 million)[237] - Nonperforming Loans to Loans Held for Investment: 0.06% at June 30, 2025 (up from 0.05% at Dec 31, 2024)[237] - SBA Loans Sold: During the six months ended June 30, 2025, the Company sold $3.3 million of government-guaranteed SBA 7(a) loans, recognizing $0.2 million in net gains[235] Potential Problem Loans The Company monitors loan quality using a risk grading system, with "watch" or "substandard" loans decreasing and no "doubtful" risk grades - Classified Loans (June 30, 2025 vs. December 31, 2024): * Loans rated "Watch" or "Substandard" (not considered adversely classified): Decreased to $110.7 million from $126.0 million[241] * No loans with "Doubtful" risk grades at either date[241] - Risk Grading System: All loans are assigned a risk rating at origination and reevaluated regularly, especially for commercial real estate loans over $2.0 million[238] Allowance for Credit Losses The Allowance for Credit Losses (ACL) increased to $40.2 million due to provisions, partially offset by net charge-offs, maintaining a stable ACL to total loans ratio - Allowance for Credit Losses (ACL): $40.17 million at June 30, 2025 (up from $37.79 million at Dec 31, 2024)[244] - Drivers: $4.6 million provision for credit losses, partially offset by $2.2 million in net charge-offs for the six months ended June 30, 2025[244] - ACL to Loans Held for Investment Ratio: 1.07% at June 30, 2025 (stable from Dec 31, 2024)[247] - Net Charge-offs to Average Loans Held for Investment: Remained at 0.06% for the six months ended June 30, 2025 and 2024[251] Liabilities Total liabilities increased to $4.0 billion, primarily driven by a significant increase in interest-bearing deposits - Total Liabilities: $4.0 billion at June 30, 2025 (up $340.1 million from Dec 31, 2024)[253] - Primary Driver: $255.2 million increase in interest-bearing deposits, including $179.4 million in money market and $101.9 million in time deposits[253] Deposits Deposits, the primary funding source, increased to $3.9 billion, with a significant portion from large relationships and a stable loan-to-deposit ratio - Total Deposits: $3.9 billion at June 30, 2025 (up $336.6 million, 9.46% from Dec 31, 2024)[255] - Non-interest-bearing Deposits: $1.0 billion (25.78% of total deposits) at June 30, 2025[255] - Loan to Deposit Ratio: 96.50% at June 30, 2025 (down from 99.38% at Dec 31, 2024)[255] - Large Deposit Relationships (June 30, 2025): 48 relationships over $10.0 million, totaling $1.9 billion (49.78% of total deposits)[258] - Largest Single Deposit Relationship: Brokered deposits of $366.4 million (9.41% of total deposits)[260] - Uninsured and Uncollateralized Deposits: Approximately $1.3 billion at June 30, 2025[257] - Time Deposit Maturities: Approximately $768.0 million expected to mature within the next twelve months, including $366.4 million of brokered deposits[280] FHLB Advances and Other Borrowings The Company has no outstanding FHLB advances or other borrowings, maintaining $75.0 million in subordinated notes and significant unused borrowing capacity - Subordinated Notes: $75.0 million issued in 2022, qualifying as Tier 2 capital[264][266] - Outstanding Borrowings: No FHLB advances or other borrowings outstanding at June 30, 2025[263] Shareholders' Equity Shareholders' equity increased to $416.7 million, driven by net income and comprehensive income, partially offset by cash dividends - Shareholders' Equity: $416.7 million at June 30, 2025 (up from $396.6 million at Dec 31, 2024)[267] - Drivers: Net income of $27.6 million and $0.4 million increase in accumulated other comprehensive income, partially offset by $8.5 million in cash dividends paid[267] Liquidity and Capital Resources This section details the Company's liquidity management, sources and uses of cash, investment securities, borrowing capacities, and capital adequacy Liquidity Management The Company manages liquidity through monitoring funding sources, liquid assets, and comprehensive risk management, including stress tests and contingency plans - Liquidity Management Factors: Diversification of funding, deposit composition, unused funding sources, off-balance sheet obligations, cash and liquid securities, and convertibility of assets to cash[268] - Contingency Planning: Comprehensive process for identifying, measuring, monitoring, and controlling liquidity risk, including stress tests and contingency funding plans[270] - Bank Dividends to Company: Statutory and regulatory limitations exist on the Bank's ability to pay dividends to the Company, but these are not expected to impact the Company's short-term cash obligations[270] Sources and Uses of Cash Deposits are the primary funding source, with cash used for loans, operations, and dividends; adequate liquidity is expected for the next twelve months - Principal Funding Source: Cash from deposits[273] - Principal Uses of Cash: Funding loans, operating expenses, income taxes, and dividend payments[273] - 2024 Public Offering: Generated approximately $80.9 million in net proceeds, providing additional cash for corporate purposes and growth[272][273] - Loan Commitments: Off-balance sheet commitments totaled $455.4 million at June 30, 2025, expected to be funded by loan repayments, deposit growth, and liquid assets[276] - Time Deposit Maturities: Approximately $768.0 million of time deposits, including brokered deposits, are expected to mature in the next twelve months[280] Investment Securities The $97.6 million investment securities portfolio provides cash flow, with $7.7 million expected over twelve months, and $91.1 million pledged as collateral - Investment Securities Value: $97.6 million at June 30, 2025[282] - Expected Cash Flow: Approximately $7.7 million from securities over the next twelve months[282] - Pledged Securities: $91.1 million of available-for-sale securities pledged as collateral[283] FHLB Financing The Bank had no outstanding FHLB borrowings but maintained $557.9 million in total financing availability - FHLB Financing: No outstanding borrowings at June 30, 2025[284] - Total Financing Availability: $557.9 million at June 30, 2025[284] Federal Reserve Discount Window The Company had no outstanding Federal Reserve Discount Window borrowings, with $926.6 million in total financing availability - Federal Reserve Discount Window: No outstanding borrowings at June 30, 2025[285] - Total Financing Availability: $926.6 million at June 30, 2025[285] Correspondent Bank Lines of Credit The Company maintained $185.0 million in unused and available correspondent bank lines of credit - Correspondent Bank Lines of Credit: $185.0 million unused and available at June 30, 2025[286] Total Liquidity Total liquidity, including cash and unused borrowing capacity, was approximately $2.2 billion at June 30, 2025 Total Liquidity (June 30, 2025): | Source | Available (in thousands) | | :-------------------------------- | :----------------------- | | FHLB advances | $557,946 | | Federal Reserve Discount Window | $926,573 | | Correspondent bank lines of credit | $185,000 | | Cash and cash equivalents | $483,810 | | Total | $2,153,329 | Future Contractual Obligations Future contractual obligations include operating lease liabilities, time deposits, subordinated notes, and unfunded loan commitments - Operating Lease Liability: $7.7 million[289] - Time Deposits: $772.1 million total, with $768.0 million maturing within 12 months[280][289] - Net Subordinated Notes: $74.0 million (long-term)[289] - Unfunded Loan Commitments and Standby Letters of Credit: $455.4 million[289] Dividends The Company paid $4.3 million in dividends and expects to continue quarterly cash dividends at $0.20 per share - Dividends Paid: $4.3 million during the three months ended June 30, 2025[290] - Future Dividend Practice: Expects to continue quarterly cash dividends at $0.20 per share, subject to board discretion[291] Impact of Inflation The Company's financial performance is more sensitive to interest rate changes than general inflation due to its monetary asset and liability structure - Inflation Impact: Interest rates have a greater impact on performance than general inflation, as nearly all assets and liabilities are monetary[292] Historical Information Net cash from operating activities increased, while investing activities used more cash, and financing activities saw a substantial increase due to deposit growth Cash Flow Activities (Six Months Ended June 30, 2025 vs. 2024): | Activity | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash provided by operating activities | $33,262 | $16,271 | $16,991 | | Net cash used in investing activities | $(229,885) | $(173,378) | $(56,507) | | Net cash provided by financing activities | $328,090 | $25,890 | $302,200 | - Operating Activities Driver: Primarily due to lower loans originated for sale, lower net change in interest payable and other liabilities, higher provision for credit losses, and higher deferred tax provision[295] - Investing Activities Driver: Primarily due to higher originations of loans held for investment, net of repayments[297] - Financing Activities Driver: Primarily due to an increase in deposits and lower borrowings, partially offset by proceeds from the 2024 Public Offering not reoccurring[298] Capital Adequacy Both Bancorp and the Bank maintained strong capital ratios, exceeding all regulatory requirements and qualifying as "well-capitalized" at June 30, 2025 - Regulatory Compliance: Both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements and the Bank qualified as "well-capitalized" at June 30, 2025[300][301] Bancorp Capital Ratios (June 30, 2025): | Ratio | Actual Ratio | Required for Capital Adequacy | | :-------------------------------- | :----------- | :---------------------------- | | Total capital (to risk-weighted assets) | 13.73% | 8.00% | | Tier 1 capital (to risk-weighted assets) | 10.85% | 6.00% | | Common equity Tier 1 capital (to risk-weighted assets) | 10.85% | 4.50% | | Tier 1 leverage | 10.03% | 4.00% | Bank Capital Ratios (June 30, 2025): | Ratio | Actual Ratio | Required for Well-Capitalized | | :-------------------------------- | :----------- | :---------------------------- | | Total capital (to risk-weighted assets) | 13.30% | 10.00% | | Tier 1 capital (to risk-weighted assets) | 12.29% | 8.00% | | Common equity Tier 1 capital (to risk-weighted assets) | 12.29% | 6.50% | | Tier 1 leverage | 11.35% | 5.00% | Non-GAAP Financial Measures The Company uses non-GAAP measures like tangible shareholders' equity and book value per share, which are identical to GAAP due to no goodwill or intangibles - Non-GAAP Measures: Tangible shareholders' equity to tangible assets and tangible book value per share are used[306][307] - Reconciliation: As the Company had no goodwill or other intangible assets, these non-GAAP measures are identical to their most directly comparable GAAP measures (total shareholders' equity to total assets and book value per share, respectively)[306][307] Recent Legislative and Regulatory Developments Recent regulatory developments include changes to bank merger policy, brokered deposit rules, CRA regulations, consumer financial data access, and the new GENIUS Act for stablecoins - Bank Merger Policy: FDIC rescinded its 2024 Policy Statement and reinstated the prior framework, while DOJ maintains more stringent 2023 Merger Guidelines[309] - Brokered Deposits: FDIC withdrew its proposed rule revising regulations on brokered deposits[310] - Community Reinvestment Act (CRA): Agencies issued a proposed rulemaking to rescind the October 2023 final rule and restore the previous CRA framework[311] - Consumer Financial Data Access (CFPB): CFPB filed a motion to vacate its final rule (Section 1033 of Dodd-Frank Act) and plans a new rulemaking process[312] - GENIUS Act: Signed into law on July 18, 2025, establishing a federal licensing and supervisory framework for payment stablecoins and their issuers, potentially impacting banks' payment services and creating new opportunities[313] ITEM 3. Quantitative and Qualitative Disclosure About Market Risk This section details the Company's market risk exposure, primarily interest rate risk, and its management through NII and EVE sensitivity analysis - Primary Market Risk: Interest rate risk, impacting NII and EVE[317] NII and EVE Sensitivity (June 30, 2025): | Change in Interest Rates (in basis points) | Estimated Change in NII (as % of NII) | Estimated Change in EVE (as % of EVE) | | :--------------------------------------- | :------------------------------------ | :------------------------------------ | | +300 (shock) | (4.86)% | (10.34)% | | +200 (shock) | (3.34)% | (7.22)% | | +100 (shock) | (1.76)% | (3.53)% | | -100 (shock) | 1.92% | 3.02% | | -200 (shock) | 4.53% | 5.84% | | -300 (shock) | 7.62% | 8.99% | - Management: Policies and procedures for funds management, with monthly oversight by Management Asset Liability Committee and quarterly by Director Asset Liability Committee[320] - Balance Sheet Repricing: At June 30, 2025, the Company had a slightly higher balance of liabilities than assets that will reprice within the next twelve months if interest rates fall[319] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Disclosure Controls and Procedures: Management concluded that disclosure controls and procedures were effective as of June 30, 2025[325] - Internal Control over Financial Reporting: No material changes in internal control over financial reporting occurred during the three months ended June 30, 2025[326] PART II OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, equity sales, defaults, mine safety, other disclosures, and exhibits ITEM 1. Legal Proceedings The Company is involved in ordinary course legal proceedings, with no anticipated material adverse effects on its financial position or operations - Legal Proceedings: The Company is subject to legal proceedings and claims in the ordinary course of business, but management does not believe they will materially adversely affect the consolidated financial position or results of operations[328] ITEM 1A. Risk Factors No material changes to the risk factors previously disclosed in the Company's 2024 Annual Report on Form 10-K - Risk Factors: No material changes to the risk factors previously disclosed in the 2024 Annual Report on Form 10-K[329] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company had no unregistered sales or issuer purchases of equity securities during the period - Unregistered Sales of Equity Securities: None[330] - Issuer Purchases of Equity Securities: None[332] ITEM 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - Defaults Upon Senior Securities: None[333] ITEM 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures: Not applicable[334] ITEM 5. Other Information No directors or executive officers adopted or terminated Rule 10b5-1 trading arrangements during the three months ended June 30, 2025 - Rule 10b5-1 Trading Arrangements: No directors or executive officers adopted or terminated any Rule 10b5-1 trading arrangements during the three months ended June 30, 2025[335] ITEM 6. Exhibits This section lists all exhibits filed with the report, including employment agreements, stock award vesting agreements, and CEO/CFO certifications - Filed Exhibits: Includes Executive Employment Agreement for James Beckwith, Form of Performance Share Award Vesting Agreement, and Certifications of CEO and CFO (Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350)[338] SIGNATURES This section contains the official signatures of the Company's President & CEO and Executive Vice President & CFO - Signatories: The report was signed by James E. Beckwith, President & Chief Executive Officer, and Heather C. Luck, Executive Vice President & Chief Financial Officer, on August 7, 2025[339]