Overview

The Company’s earnings depend primarily on net interest income, which is the difference between interest income and interest expense. The Company’s earnings are also affected by non-interest income and expenses, as well as provisions for credit losses and income taxes.

For the three months ended March 31, 2025, the Company reported net income of $6.0 million, or $1.03 diluted earnings per share, an 18% increase compared to the same period in 2024. This increase was driven by a $2.1 million rise in net interest income, a $0.4 million increase in non-interest income, partially offset by a $0.9 million rise in non-interest expenses, a $0.4 million increase in the provision for income tax, and a $0.3 million increase in the provision for credit losses.

The Company’s return on average assets (ROA) was 0.93% and return on average shareholders’ equity (ROE) was 11.66% for the first quarter of 2025, up from 0.83% and 10.71% respectively in the same period of 2024. Pre-provision net revenue to average assets (non-GAAP) also increased to 1.16% from 0.96% over the same time period.

Net Interest Income and Interest Sensitive Assets/Liabilities

Net interest income increased 14% to $17.0 million in the first quarter of 2025 compared to the same period in 2024. This was driven by a $2.7 million increase in interest income, primarily due to a $148.0 million increase in the average balance of interest-earning assets and a 21 basis point increase in the fully-taxable equivalent (FTE) yield. The loan portfolio had the most significant impact, producing a $2.5 million increase in FTE interest income.

Partially offsetting the higher interest income was a $0.6 million increase in interest expense due to a $124.3 million quarter-over-quarter increase in average interest-bearing liability balances. This was due to growth of $179.3 million in average interest-bearing deposit balances, partially offset by a decrease in average short-term borrowings.

The FTE yield on interest-earning assets increased 21 basis points to 4.73% in the first quarter of 2025 compared to the same period in 2024. The overall cost of interest-bearing liabilities decreased 2 basis points to 2.49%. As a result, the Company’s FTE net interest spread increased 23 basis points to 2.24% and the FTE net interest margin increased 20 basis points to 2.89%.

For the remainder of 2025, the Company expects to operate in a moderately declining interest rate environment. Management plans to focus on enhancing margin by reallocating cash flow, being proactive with loan pricing, and managing deposit costs.

Provision for Credit Losses

The provision for credit losses on loans was $455 thousand in the first quarter of 2025, compared to $125 thousand in the same period of 2024. This increase was due to higher loan growth and higher net charge-offs. The provision for unfunded commitments saw a $85 thousand net benefit in the first quarter of 2025, compared to a $50 thousand net benefit in the prior year period, due to a larger reduction in unfunded commitments.

The allowance for credit losses increased to $20.0 million, or 1.10% of total loans, at March 31, 2025 from $19.7 million, or 1.09% of total loans, at December 31, 2024. The increase was based on the $0.5 million provision, partially offset by $0.1 million in net charge-offs.

Other Income

Total non-interest income increased 9% to $5.0 million in the first quarter of 2025 compared to the same period in 2024. This was primarily due to increases of $0.2 million in wealth management fees and $0.1 million in interchange fees. The Company also recognized $0.5 million in gains on the sale of a commercial loan and $0.3 million from the sale of a property, which were offset by $0.8 million in losses on the sale of securities.

Operating Expenses

Non-interest expenses increased 6% to $14.6 million in the first quarter of 2025 compared to the same period in 2024. This was driven by a $0.6 million increase in salaries and benefits expense due to an increase in the number of bankers, group insurance costs, and banker incentives. Advertising and marketing expenses also increased $0.3 million primarily due to an increase in Neighborhood Assistance Program donations.

Provision for Income Taxes

The provision for income taxes increased $0.4 million in the first quarter of 2025 compared to the same period in 2024, primarily due to a $1.3 million increase in income before taxes and $0.1 million less in tax credits. The Company’s effective tax rate was 15.4% at March 31, 2025 compared to 12.1% at March 31, 2024.

Financial Condition

Investments

As of March 31, 2025, the investment securities portfolio totaled $541.0 million, or 20% of total assets, compared to $557.2 million, or 22% of total assets, as of December 31, 2024. The portfolio is primarily comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (34%), tax-exempt municipal bonds (33%), and taxable municipal bonds (15%).

During the first three months of 2025, the carrying value of total investments decreased $16.3 million, or 3%, primarily due to $17.5 million in sales of available-for-sale securities and $5.2 million in paydowns, partially offset by $4.6 million in purchases.

The available-for-sale securities portfolio had a net unrealized loss of $48.9 million as of March 31, 2025, an improvement of $3.9 million from December 31, 2024. This was primarily due to a $5.1 million improvement in the value of mortgage-backed securities and a $0.5 million improvement in agency securities, partially offset by a $1.7 million decrease in municipal securities.

Loans and Leases

As of March 31, 2025, the Company had gross loans and leases totaling $1.8 billion, an increase of $17 million, or 1%, compared to December 31, 2024. The growth was primarily driven by a $24.9 million increase in the commercial portfolio, partially offset by a $10.6 million reduction in the consumer portfolio.

The commercial portfolio, which includes commercial and industrial (C&I) and commercial real estate (CRE) loans, increased 2% to $1.0 billion as of March 31, 2025. This was due to growth of $10.0 million in C&I loans and $14.9 million in CRE loans. The consumer portfolio decreased 4% to $240.2 million, primarily due to a $12 million reduction in the indirect auto portfolio. The residential portfolio increased less than 1% to $527.5 million.

The allowance for credit losses increased to $20.0 million, or 1.10% of total loans, at March 31, 2025 from $19.7 million, or 1.09% of total loans, at December 31, 2024. The increase was based on the $0.5 million provision, partially offset by $0.1 million in net charge-offs.

Non-performing assets decreased to $6.1 million, or 0.23% of total assets, at March 31, 2025 from $7.8 million, or 0.30% of total assets, at December 31, 2024. This was primarily due to the sale of a $1.3 million commercial owner occupied real estate loan.

Deposits

Total deposits increased $116.6 million, or 5%, to $2.5 billion at March 31, 2025 from $2.3 billion at December 31, 2024. This was driven by growth of $54.1 million in money market accounts, $27.6 million in interest-bearing checking accounts, and $21.7 million in non-interest bearing checking accounts.

As of March 31, 2025, total uninsured deposits were estimated to be $959.1 million, or 39% of total deposits. Collateralized deposits totaled $334.8 million, or 14%, of total deposits.

Approximately 69% of the Company’s certificates of deposit (CDs) are scheduled to mature in 2025, with a weighted-average interest rate of 4.25%. An additional 28% are scheduled to mature in 2026, with a weighted-average interest rate of 3.82%. The Company will consider customer needs, liquidity levels, borrowing rates, and interest rate sensitivity when addressing maturing CDs.

Borrowings

The Company had no FHLB advances as of March 31, 2025 and December 31, 2024. As of March 31, 2025, the Company had the ability to borrow up to $752.5 million from the FHLB, net of any overnight borrowings utilized.

The Company had 5 secured borrowing agreements with third parties totaling $6.1 million as of March 31, 2025, compared to 5 agreements totaling $6.2 million as of December 31, 2024. These secured borrowings are expected to decrease throughout 2025 from scheduled amortization and early pay-offs.

Liquidity

During the three months ended March 31, 2025, the Company grew cash and cash equivalents by $127.8 million. Cash inflow from operations, interest-earning assets, deposit growth, and loan payments were used to fund the loan portfolio, pay down short-term borrowings, invest in premises and equipment, and make dividend payments.

The Company closely monitors its liquidity position and has a contingency funding plan in place to handle any potential liquidity issues. As of March 31, 2025, the Company had not experienced any adverse liquidity conditions.

Outlook

The Company expects to operate in a moderately declining interest rate environment for the remainder of 2025. Management plans to focus on enhancing net interest margin through strategies such as reallocating cash flow, proactive loan pricing, and deposit cost management.

The Company will continue to closely monitor economic conditions in its market areas, particularly trends in unemployment, real estate values, and other key indicators. Management will scrutinize growth prospects with credit quality as a principal consideration.

Overall, the Company’s financial performance in the first quarter of 2025 was strong, with increases in net income, net interest income, and pre-provision net revenue. The Company’s balance sheet remains well-capitalized, with solid asset quality metrics. However, the Company faces challenges from the evolving regulatory environment and the potential for a declining interest rate environment. Management remains focused on prudent risk management, enhancing profitability, and delivering value to shareholders.