United Security Bancshares

11/07/2025 | Press release | Distributed by Public on 11/07/2025 16:08

Quarterly Report for Quarter Ending SEPTEMBER 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Certain matters discussed, or incorporated by reference in this Quarterly Report of Form 10-Q,contain forward-looking statements about the Company that are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995 and are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the following factors:
•adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures, labor shortages, and global conflict and unrest;
•geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets;
•the current administration's policy pronouncements, executive orders and imposition of tariffs (and the threat thereof) create an unpredictable regulatory landscape and have increased market volatility that could affect the availability and cost of capital, the valuation of our assets, the stability of our funding sources, and the financial health and operations of our borrowers, particularly our borrowers connected to agriculture and construction;
•the impact of natural disasters, droughts, earthquakes, floods, wildfires, terrorist attacks, health epidemics, and threats of war or actual war, including current military actions involving the Russian Federation and Ukraine and the conflict in the Middle East, which may impact the local economy and/or the condition of real estate collateral;
•changes in general economic and financial market conditions, either nationally or locally;
•fiscal policies of the U.S. government, including interest rate policies of the Board of Governors of the Federal Reserve System and the resulting impact on the Company's interest-rate sensitive assets and liabilities;
•changes in banking laws or regulations and government policies that could lead to a tightening of credit and/or a requirement that the Company raise additional capital;
•increased competition in the Company's markets, impacting the ability to execute its business plans;
•continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than the Company is, and the Company's response to competitive pressure;
•loss of, or inability to attract, key personnel;
•unanticipated deterioration in the loan portfolio, credit losses, and the sufficiency of the allowance for credit losses;
•the ability to grow the loan portfolio due to constraints on concentrations of credit;
•challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;
•the impact of technological changes and the ability to develop and maintain secure and reliable electronic communication systems, including failures in or breaches of the Company's operational and/or security systems or infrastructure, and the Company's ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on the Company's information technology systems or on the third-party vendors who perform functions for the Company;
•the failure to maintain effective controls over financial reporting;
•risks related to the sufficiency of liquidity, including the quality and quantity of the Company's deposits and the ability to attract and retain deposits and other sources of funding and liquidity;
•adverse developments in the financial services industry generally, such as the bank failures in 2023 and 2024 and any related impact on depositor behavior or investor sentiment;
•the possibility that the recorded goodwill could become impaired which may have an adverse impact on earnings and capital;
•asset/liability matching risks; and
•changes in accounting policies or procedures.
The information set forth herein should be carefully considered when evaluating the business prospects of the Company. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company's Annual Report on Form 10-Kfor the year ended December 31, 2024.
The Company
United Security Bancshares, a California corporation, is a bank holding company registered under the Bank Holding Company Act (BHCA) with corporate headquarters located in Fresno, California. The principal business of United Security Bancshares is to serve as the holding company for its wholly-owned subsidiary, United Security Bank. References to the "Bank" refer to United Security Bank together with its wholly-owned subsidiary, York Monterey Properties, Inc. References to the "Company"
refer to United Security Bancshares together with its subsidiaries on a consolidated basis. References to the "Holding Company" refer to United Security Bancshares, the parent company, on a stand-alone basis. The Bank currently maintains 13 banking branches, which provide banking services in Fresno, Madera, Kern, and Santa Clara counties, in the state of California. In addition to full-service branches, the Bank has several stand-alone interactive teller machines (ITMs) within its geographic footprint.
Executive Summary
During 2025, the Company has worked closely with long-term, core customers to provide deposit and lending solutions that meet their business and individual needs. The Company has also focused on maintaining adequate liquidity, managing credit risk, and responsibly managing growth on the balance sheet.
Third Quarter 2025 Highlights (as of, or for, the quarter ended September 30, 2025, except where noted):
▪Net interest margin increased to 4.35% for the quarter ended September 30, 2025, compared to 4.20% for the quarter ended September 30, 2024.
▪Annualized average cost of deposits was 1.12% for the quarter ended September 30, 2025, compared to 1.18% for the quarter ended September 30, 2024.
▪Net income for the quarter increased 5.07% to $4.0 million, compared to $3.8 million for the quarter ended September 30, 2024.
▪Loan interest and fees decreased 0.94% to $14.3 million, compared to $14.4 million for the third quarter of 2024.
▪Interest income decreased 0.82% to $15.6 million, compared to $15.8 million for the third quarter of 2024, due to the decrease in loan and fee income and a decrease in investment securities income, partially offset by an increase in interest income on overnight investments held at the Federal Reserve.
▪Interest expense decreased 18.67% to $3.2 million, as a result of decreases in short-term borrowing costs, compared to $3.9 million for the third quarter of 2024.
▪Noninterest income decreased 20.02% to $1.6 million, compared to $2.0 million for the quarter ended September 30, 2024. This decrease was primarily due to a decrease in the gain on the fair value of the junior subordinated debentures ("TruPS") of $414,000.
▪On July 1, 2025, a partial redemption of $3.0 million was recorded on TruPS, leaving a remaining contractual balance of $9.0 million at September 30, 2025. The partial redemption resulted in a realized gain of $241,000, which was recorded in the income statement.
▪Following the partial redemption, the total fair value of TruPS, inclusive of a change in accrued interest of $44,000, changed by $155,000 during the quarter ended September 30, 2025. A realized gain of $6,000 was recorded through the income statement, and a loss of $161,000 was recorded through accumulated other comprehensive income. For the quarter ended September 30, 2024, the total fair value of TruPS, inclusive of a change in accrued interest of $3,000, changed by $65,000. A realized gain of $661,000 was recorded through the income statement, and an unrealized $596,000 loss was recorded through accumulated other comprehensive income.
▪The Company recorded a provision for credit losses of $948,000 for the quarter ended September 30, 2025, compared to $1.6 million for the quarter ended September 30, 2024. The decreased credit provision was due to a decrease in charge-offs within the student loan portfolio.
▪Noninterest expense increased 4.09% to $7.4 million, compared to $7.1 million for the quarter ended September 30, 2024. This increase was due primarily to increases in technology expense and expenses on salaries and employee benefits.
▪Annualized return on average assets (ROAA) increased to 1.29% for the quarter ended September 30, 2025, compared to 1.24% for the quarter ended September 30, 2024.
▪Annualized return on average equity (ROAE) increased to 11.68% for the quarter ended September 30, 2025, compared to 11.63% for the quarter ended September 30, 2024.
▪Total loans, net of unearned fees, increased 3.22% to $958.3 million, compared to $928.5 million at December 31, 2024.
▪Total deposits increased 1.73% to $1.08 billion, compared to $1.06 billionat December 31, 2024.
Trends Affecting Results of Operations and Financial Position
The Company's operations are influenced by various factors, including interest rates, margin spreads, and the composition of the consolidated balance sheet. One of the Company's primary strategic goals is to maintain a mix of assets that generate a reasonable return without undue risk, and to finance those assets with low-cost, stable funds. Liquidity and capital resources are also considered to mitigate risk and support growth.
The Bank's operations and cash flows are subject to economic changes in California's Central Valley and its business results depend largely on local business activity, population, income levels, deposits, and real estate activity. Economic declines can adversely affect the Bank. The Central Valley's dependence on agriculture means downturns in this sector can indirectly impact the Company. Declines in agricultural prices and yields, and increases in operating costs can reduce farm cash flows and land values, increasing default risks and reducing collateral values. Weaker prices coupled with increased production costs may stress farming operations and reduce demand for agricultural lending, and the recent declines in farm income and farmland prices reflect this trend. While most borrowers are not directly involved in agriculture, many local jobs are related to agricultural production, processing, marketing, and sales.
Despite recent normal precipitation, California has experienced severe droughts, leading to water-allocation reductions for Central Valley farmers. The impact of water issues on local businesses and consumers is unpredictable. The Sustainable Groundwater Management Act, passed in 2014, aims for sustainable groundwater management by 2042, with effects yet to be determined.
Recent tariffs and trade wars may negatively impact the Central Valley's agricultural and construction industries. Increased prices for imported agricultural goods and construction materials and decreased exports, especially to China, could significantly affect the local economy.
The Company's earnings are influenced by U.S. government monetary and fiscal policies. The Federal Reserve Bank (FRB) impacts depository institutions by implementing national monetary policy to curb inflation and combat recession. The FRB controls bank loans, investments, and deposits through the issuance of government securities and regulation of the discount rate. Since 2024, the Federal Open Market Committee (FOMC) has lowered interest rates four times, totaling a 125-basis point decrease, and is expected to continue lowering rates at present. However, concerns about inflation and unemployment have lead to some economic uncertainty. It is unknown what effect these factors, alongside international instability, will have on FRB monetary policy.
The Company continuously evaluates its strategic business plan in response to changing economic and market conditions. Key priorities include managing the balance sheet, enhancing revenue sources, attracting and retaining deposit customers, and maintaining market share.
Results of Operations
On a year-to-date basis, the Company reported net income of $8.9 million, or $0.51 per share ($0.51 diluted), for the nine months ended September 30, 2025, compared to $12.3 million, or $0.72 per share ($0.72 diluted), for the same period in 2024. The decrease in net income was primarily due to an increase in the provision for credit losses related to deterioration within the student loan portfolio as well as increases in deposit interest expense. The decrease was partially offset by decreases in short-term borrowing expenses and income tax expenses, a change in the fair value of TruPS, a gain realized on partial redemption of TruPS, an increase in loan and fee income, and interest on overnight investments held at the Federal Reserve. Additionally, a gain on proceeds from life insurance of $573,000 was realized during the nine months ended September 30, 2024, increasing income for that period. Noninterest expenses increased on a year-over-year basis due to increases in salaries and employee benefit expenses and data processing expenses. Included in the increase in loan and fee income for the nine months ended September 30, 2025, was the collection of $890,000 in foregone interest related to a nonaccrual loan payoff. The Company's annualized return on average assets was 0.98% for the nine months ended September 30, 2025, compared to 1.36% for the nine months ended September 30, 2024. The Company's annualized return on average equity was 8.79% for the nine months ended September 30, 2025, compared to 12.95% for the nine months ended September 30, 2024. The decrease in the return on average assets was primarily attributable to the decrease in income. The decrease in the return on average equity was primarily due to a decrease in net income and an increase in average equity.
Net Interest Income
The following table presents condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities for the three and nine month periods ended September 30, 2025, and 2024.
Distribution of Average Assets, Liabilities and Shareholders' Equity:
Three Months Ended
September 30, 2025 September 30, 2024
(Dollars in thousands) Average Balance Interest Yield/Rate (2) Average Balance Interest Yield/Rate (2)
Assets:
Interest-earning assets:
Loans (1) (2) $ 956,832 $ 14,266 5.92 % $ 949,207 $ 14,401 6.04 %
Investment securities (3) 147,049 1,040 2.81 % 166,977 1,298 3.09 %
Interest-bearing deposits in other banks 29,172 320 4.35 % 3,896 56 5.72 %
Total interest-earning assets 1,133,053 $ 15,626 5.47 % 1,120,080 $ 15,755 5.60 %
Allowance for credit losses (15,953) (15,296)
Noninterest-earning assets:
Cash and due from banks 32,320 34,113
Nonaccrual loans 5,685 12,053
Premises and equipment, net 8,812 9,014
Accrued interest receivable 6,517 7,293
Other real estate owned 7,852 4,582
Other non-earning assets 59,901 59,443
Total average assets $ 1,238,187 $ 1,231,282
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts $ 84,372 $ 30 0.14 % $ 118,014 $ 196 0.66 %
Money market accounts 410,359 2,471 2.39 % 368,369 2,258 2.44 %
Savings accounts 118,018 33 0.11 % 114,839 32 0.11 %
Time deposits 76,695 511 2.64 % 77,112 578 2.98 %
Other borrowings 2,364 28 4.70 % 44,704 667 5.94 %
Junior subordinated debentures (4) 9,464 134 5.62 % 12,464 211 6.73 %
Total interest-bearing liabilities 701,272 $ 3,207 1.81 % 735,502 $ 3,942 2.13 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits 387,108 353,944
Other liabilities 13,104 10,907
Total liabilities 1,101,484 1,100,353
Total shareholders' equity 136,703 130,929
Total average liabilities and shareholders' equity $ 1,238,187 $ 1,231,282
Interest income as a percentage of average earning assets 5.47 % 5.60 %
Interest expense as a percentage of average earning assets 1.12 % 1.40 %
Net interest margin 4.35 % 4.20 %
(1)Loan interest income includes loan fee costs of approximately $253,000 for the three months ended September 30, 2025, and loan fee costs of $161,000 for the three months ended September 30, 2024.
(2)Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation.
(3)Yields on investment securities, aside from marketable equity securities, are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.
(4)Yields on junior subordinated debentures are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.
Nine Months Ended
September 30, 2025 September 30, 2024
(Dollars in thousands) Average Balance Interest Yield/Rate (2) Average Balance Interest Yield/Rate (2)
Assets:
Interest-earning assets:
Loans (1) (2) $ 935,727 $ 41,973 6.00 % $ 921,454 $ 41,457 6.01 %
Investment securities (3) 154,025 3,386 2.94 % 169,924 3,955 3.11 %
Interest-bearing deposits in other banks 16,733 554 4.43 % 4,634 193 5.56 %
Total interest-earning assets 1,106,485 $ 45,913 5.55 % 1,096,012 $ 45,605 5.56 %
Allowance for credit losses (15,750) (15,476)
Noninterest-earning assets:
Cash and due from banks 32,983 33,140
Nonaccrual loans 5,685 11,995
Premises and equipment, net 8,634 9,066
Accrued interest receivable 7,047 7,255
Other real estate owned 7,572 4,582
Other non-earning assets 59,868 60,083
Total average assets $ 1,212,524 $ 1,206,657
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts $ 102,808 $ 324 0.42 % $ 127,264 $ 569 0.60 %
Money market accounts 388,617 6,771 2.33 % 305,665 4,354 1.90 %
Savings accounts 115,647 95 0.11 % 117,716 97 0.11 %
Time deposits 76,730 1,504 2.62 % 74,054 1,624 2.93 %
Other borrowings 4,406 155 4.71 % 77,417 3,286 5.67 %
Junior subordinated debentures (4) 11,453 488 5.69 % 12,464 628 6.73 %
Total interest-bearing liabilities 699,661 $ 9,337 1.78 % 714,580 $ 10,558 1.97 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits 365,386 355,599
Other liabilities 12,470 9,721
Total liabilities 1,077,517 1,079,900
Total shareholders' equity 135,007 126,757
Total average liabilities and shareholders' equity $ 1,212,524 $ 1,206,657
Interest income as a percentage of average earning assets 5.55 % 5.56 %
Interest expense as a percentage of average earning assets 1.13 % 1.29 %
Net interest margin 4.42 % 4.27 %
(1)Loan interest income includes loan fee costs of approximately $778,000 for the nine months endedSeptember 30, 2025, and loan fee costs of $533,000 for the nine months endedSeptember 30, 2024.
(2)Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation.
(3)Yields on investment securities, aside from marketable equity securities, are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.
(4)Yields on junior subordinated debentures are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.
The prime rate decreased from 8.00% at September 30, 2024, to 7.25% at September 30, 2025. Future increases or decreases will affect both interest income and expense and the resultant net interest margin.
Both net interest income and net interest margin are affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as volume change. Both are also affected by changes in yields on interest-earning assets and rates paid on interest-bearing liabilities, referred to as rate change. The following table sets forth the changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the periods indicated.
Rate and Volume Analysis:
Three Months Ended
September 30, 2025, compared to September 30, 2024
(In thousands) Rate Volume Total
Increase (decrease) in interest income:
Loans $ (261) $ 126 $ (135)
Investment securities available for sale (113) (145) (258)
Interest-bearing deposits in FRB 70 194 264
Total interest income (304) 175 (129)
Increase (decrease) in interest expense:
Interest-bearing demand accounts (1) 49 48
Savings and money market accounts - 1 1
Time deposits (65) (3) (68)
Other borrowings (116) (524) (640)
Junior subordinated debentures (31) (46) (77)
Total interest expense (213) (523) (736)
(Decrease) increase in net interest income
$ (91) $ 698 $ 607
For the three months ended September 30, 2025, total interest income decreased $129,000, or 0.82%, compared to the three months ended September 30, 2024. In comparing the two periods, average interest-earning assets increased $13.0 million, with an increase of $25.3 million in average balances held at the Federal Reserve Bank and an increase of $7.6 million in average loan balances, offset by a decrease of $19.9 million in average investment securities balances. The increase in average loan balances is attributed primarily to increases in the real estate construction and development portfolio and the agricultural portfolio, offset by decreases in the real estate mortgage portfolio, commercial and industrial portfolio, and the installment portfolio. Loan yields decreased 12 basis points and investment securities yields decreased 28 basis points. The average yield on total interest-earning assets decreased 13 basis points. The decrease in yields was primarily the result of decreases in the prime rate due to the interest rate cuts made by the Federal Reserve.
Nine Months Ended
September 30, 2025, compared to September 30, 2024
(In thousands) Rate Volume Total
Increase (decrease) in interest income:
Loans $ (91) 607 $ 516
Investment securities available for sale (210) (359) (569)
Interest-bearing deposits in FRB 56 305 361
Total interest income (245) 553 308
Increase (decrease) in interest expense:
Interest-bearing demand accounts 1,448 723 2,171
Savings and money market accounts - (2) (2)
Time deposits (177) 57 (120)
Other borrowings (476) (2,655) (3,131)
Junior subordinated debentures (92) (48) (140)
Total interest expense 703 (1,925) (1,222)
(Decrease) increase in net interest income
$ (948) $ 2,478 $ 1,530
For the nine months ended September 30, 2025, total interest income increased $308,000, or 0.68%, compared to the nine months ended September 30, 2024. In comparing the two periods, average interest-earning assets increased $10.5 million, with an increase of $12.1 million in average balances held at the Federal Reserve Bank and an increase of $14.3 million in average loan balances, offset by a decrease of $15.9 million in average investment securities balances. The increase in average loan balances is attributed primarily to increases in the real estate construction and development portfolio, the real estate mortgage portfolio, and the agricultural portfolio, offset by decreases in the commercial and industrial portfolio and the installment portfolio. Loan yields decreased 1 basis point and investment securities yields decreased 17 basis points. The average yield on total interest-earning assets decreased 1 basis point. This decrease in yields was primarily the result of decreases in the prime rate due to the interest rate cuts made by the Federal Reserve. Included in the increase in net interest income was the collection of $890,000 in foregone interest related to a nonaccrual loan payoff in 2025.
The overall average yield on the loan portfolio decreased to 6.00% for the nine months ended September 30, 2025, compared to 6.01% for the nine months ended September 30, 2024. At September 30, 2025, 29.72% of the Company's loan portfolio consisted of floating rate instruments, compared to 29.40% of the portfolio at December 31, 2024, with the majority of those tied to the prime rate. Approximately 67.38%, or $191.9 million, of the floating-rate loans had rate floors at September 30, 2025. Approximately 59.42%, or $162.2 million, of the floating-rate loans had rate floors at December 31, 2024.
The Company's net interest margin increased to 4.42% for the nine months ended September 30, 2025, compared to 4.27% for the nine months ended September 30, 2024. The net interest margin increased primarily as a result of decreases in yields on interest-bearing liabilities outpacing decreases in yields on interest-earning assets. While loan yields, investment securities yields, and yields on short-term borrowings decreased, yields on deposits increased during the period. The increase in deposit yields was primarily due to increases in money market rates, offset by decreases in rates paid on NOW accounts and time deposits. The yield on average interest-earning assets decreased from 5.56% to 5.55%. Yields on average interest-bearing liabilities decreased from 1.97% to 1.78%.
The Company's disciplined deposit pricing efforts have helped keep the Company's cost of funds relatively low. The cost of deposits increased from 0.91% September 30, 2024 to 1.11% at September 30, 2025, primarily due to the higher rates paid for money market accounts. The rates paid on interest-bearing liabilities, which includes interest-bearing deposits, short-term borrowings, and TruPS, decreased to 1.78% for the nine months ended September 30, 2025, compared to 1.97% for the nine months ended September 30, 2024. For the nine months ended September 30, 2025, total interest expense decreased approximately $1.2 million, or 11.57%, compared to the nine months ended September 30, 2024. Between those two periods, average interest-bearing liabilities decreased by $14.9 million due to decreases in NOW accounts, savings accounts, and short-term borrowings, partially offset by increases in money market accounts and time deposits. Included in the balance of money market accounts at September 30, 2025 and December 31, 2024, were $100.3 million in purchased brokered deposits. The Company held $100.3 million in brokered deposits at September 30, 2024. The average rate paid on brokered deposits was 4.53% for the nine months ended September 30, 2025, and 5.51% for the nine months ended September 30, 2024.
Interest-Earning Assets and Liabilities:
The following table summarizes the year-to-date (YTD) averages of the components of interest-earning assets as a percentage of total interest-earning assets and the components of interest-bearing liabilities as a percentage of total interest-bearing liabilities:
YTD Averages
September 30, 2025
December 31, 2024
September 30, 2024
Loans 84.57% 84.13% 84.08%
Investment securities available for sale 13.92% 15.33% 15.50%
Interest-bearing deposits in other banks 1.51% 0.54% 0.42%
Total interest-earning assets 100.00% 100.00% 100.00%
NOW accounts 14.69% 17.55% 17.82%
Money market accounts 55.54% 45.04% 42.78%
Savings accounts 16.53% 16.36% 16.47%
Time deposits 10.97% 10.60% 10.36%
Other borrowings 0.63% 8.71% 10.83%
Junior subordinated debentures 1.64% 1.74% 1.74%
Total interest-bearing liabilities 100.00% 100.00% 100.00%
Noninterest Income
Changes in Noninterest Income:
The following tables set forth the amount and percentage changes in the categories presented for the three and nine month periods ended September 30, 2025, and 2024:
Three Months Ended
(In thousands) September 30, 2025 September 30, 2024 $ Change % Change
Customer service fees $ 847 $ 719 $ 128 17.80 %
Increase in cash surrender value of bank-owned life insurance 135 132 3 2.27 %
Gain (loss) on fair value and partial redemption of junior subordinated debentures (TruPS) 247 661 (414) 62.63 %
Other 389 511 (122) (23.87) %
Total noninterest income $ 1,618 $ 2,023 $ (405) (20.02) %
Noninterest income for the quarter ended September 30, 2025, decreased $405,000 to $1.6 million compared to the quarter ended September 30, 2024. The change in fair value of junior subordinated debentures, including the change in fair value due to the partial redemption of junior subordinated debentures, caused a $247,000 gain for the quarter ended September 30, 2025, compared to a $661,000 gain for the quarter ended September 30, 2024, resulting in a decrease in income of $414,000 between the two periods. The change in the fair value of junior subordinated debentures was caused by fluctuations in the SOFR yield curve and the partial redemption. Customer service fees for the quarter ended September 30, 2025 increased $128,000 when compared to the quarter ended September 30, 2024.
Nine Months Ended
(In thousands) September 30, 2025 September 30, 2024 $ Change % Change
Customer service fees $ 2,211 $ 2,143 $ 68 3.17 %
Increase in cash surrender value of bank-owned life insurance 400 399 1 0.25 %
Gain on death benefit proceeds from bank-owned life insurance - 573 (573) (100.00) %
Gain (loss) on fair value and partial redemption of junior subordinated debentures (TruPS) 200 141 59 (41.84) %
(Loss) gain on sale of assets (54) 11 (65) (590.91) %
Other 982 1,324 (342) (25.83) %
Total noninterest income $ 3,739 $ 4,591 $ (852) (18.56) %
Noninterest income for the nine months ended September 30, 2025, decreased $852,000 to $3.7 million compared to the nine months ended September 30, 2024. The change in fair value of junior subordinated debentures, including the partial redemption of junior subordinated debentures, caused a $200,000 gain for the nine months ended September 30, 2025, compared to a $141,000 gain for the nine months ended September 30, 2024, resulting in a difference of $59,000. The change in the fair value of junior subordinated debentures was caused by fluctuations in the SOFR yield curve and the partial redemption of junior subordinated debentures. A gain on proceeds from life insurance of $573,000 was realized during the nine months ended September 30, 2024, with no similar gain realized during 2025. Customer service fees for the nine months ended September 30, 2025 increased $68,000 when compared to the nine months ended September 30, 2024.
Noninterest Expense
Changes in Noninterest Expense:
The following tables set forth the amount and percentage changes in the categories presented for the three and nine month periods ended September 30, 2025, and 2024:
Three Months Ended
(In thousands) September 30, 2025 September 30, 2024 $ Change % Change
Salaries and employee benefits $ 3,619 $ 3,526 $ 93 2.64 %
Occupancy expense 997 990 7 0.71 %
Data processing 414 467 (53) (11.35) %
Technology 704 604 100 16.56 %
Professional fees 331 318 13 4.09 %
Loan-related expenses 110 205 (95) (46.34) %
Regulatory assessments 176 159 17 10.69 %
Director expenses
190 105 85 80.95 %
Other 893 768 125 16.28 %
Total expense $ 7,434 $ 7,142 $ 292 4.09 %
Noninterest expense for the quarter ended September 30, 2025, increased $292,000 to $7.4 million, compared to the quarter ended September 30, 2024. The increase was primarily attributed to increases in technology expense and salaries and employee benefits, and was partially offset by decreases in loan-related expenses and data processing expense. The increase in salaries and employee benefits was caused by increases in group insurance expense, employee salary expense, and 401(k) expenses. Technology expense increased due to increases in technology-related annual service contract expenses. Loan-related expenses decreased due to decreases in loan-related legal expenses during the quarter ended September 30, 2025.
Nine Months Ended
(In thousands) September 30, 2025 September 30, 2024 $ Change % Change
Salaries and employee benefits $ 11,391 $ 10,414 $ 977 9.38 %
Occupancy expense 2,892 2,731 161 5.90 %
Data processing 1,220 776 444 57.22 %
Technology 2,042 2,017 25 1.24 %
Professional fees 1,327 1,204 123 10.22 %
Loan-related expenses 243 637 (394) (61.85) %
Regulatory assessments 518 493 25 5.07 %
Director expenses
581 336 245 72.92 %
Other 2,564 2,241 323 14.41 %
Total expense $ 22,778 $ 20,849 $ 1,929 9.25 %
Noninterest expense for the nine months ended September 30, 2025, increased $1.9 million to $22.8 million, compared to the nine months ended September 30, 2024. The increase was primarily attributed to increases in salaries and employee benefits and data processing expenses, and was partially offset by a decrease in loan-related expenses. The increase in salaries and employee benefits was caused by increases in group insurance expense, employee salary expense, and stock-based compensation expense. The increase in data processing expense was due to increases in core processing expense. Loan-related expenses decreased partially due to the recovery of loan-related legal expenses totaling $168,000 during the nine months ended September 30, 2025, related to the payoff of one nonaccrual loan. Other expenses increased primarily due to increases in OREO expense.
Income Taxes
The Company's income tax expense is impacted to some degree by permanent taxable differences between income reported for book purposes and income reported for tax purposes, as well as certain tax credits which are not reflected in the Company's pretax income or loss shown in the statements of operations and comprehensive income. As pretax income or loss amounts become smaller, the impact of these differences becomes more significant and are reflected as variances in the Company's effective tax rate for the periods presented. In general, the permanent differences and tax credits affecting tax expense have a positive impact and tend to reduce the effective tax rates shown in the Company's statements of income and comprehensive income.
The Company reviews its current tax positions at least quarterly based on the accounting standards related to uncertainty in income taxes. These standards identify the individual tax position criteria that would have to be met to recognize an income tax benefit on a taxable entity's financial statements. Under the income tax guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term "more likely than not" means a likelihood of more than 50 percent. In assessing whether the more likely than not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority.
The Company has reviewed all of its tax positions as of September 30, 2025, and has determined that there are no material additional amounts to be recorded under the current income tax accounting guidelines.
The Company's effective tax rate for the three months ended September 30, 2025, was 28.86% compared to 25.43% for the three months ended September 30, 2024. The effective tax rates for the nine months ended September 30, 2025 and September 30, 2024, were 28.61% and 27.88%, respectively.
Financial Condition
The following table illustrates the changes in balances as of and for the periods ended:
(In thousands) September 30, 2025 December 31, 2024 September 30, 2024 Year-to-Date $ Change Prior Period $ Change
Cash and cash equivalents $ 66,767 $ 56,211 $ 47,915 $ 10,556 $ 18,852
Net loans 942,113 912,416 958,628 29,697 (16,515)
Investment securities 144,342 160,708 168,835 (16,366) (24,493)
Total assets 1,235,620 1,211,718 1,255,376 23,902 (19,756)
Total deposits 1,075,900 1,057,622 1,065,021 18,278 10,879
Total liabilities 1,098,238 1,081,356 1,122,520 16,882 (24,282)
Average interest-earning assets 1,106,485 1,100,634 1,096,012 5,851 10,473
Average interest-bearing liabilities 699,661 714,403 714,580 (14,742) (14,919)
Net loans increased on a year-to-date basis due to organic growth and decreased on a year-over-year basis due to loan payoffs and principal paydowns. Investment securities decreased on a year-to-date and year-over-year basis due to repayments of principal and calls on, and maturities of, four corporate securities during 2025. Deposits increased on a year-to-date basis due to increases in non-interest bearing deposits and savings accounts. On a year-over-year basis, deposits also increased due to increases in non-interest bearing deposits and savings accounts. Deposits at September 30, 2024 included $100.3 million in purchased brokered deposits, compared to $100.3 million in brokered deposits held at December 31, 2024 and September 30, 2025. The balance changes in cash and cash equivalents were reflective of the changes in deposit balances as well as changes in short-term borrowings. There were no short-term borrowings at September 30, 2025 or December 31, 2024. Short-term borrowing totaled $34.0 million at September 30, 2024.
Earning assets averaged $1.11 billion during the nine months ended September 30, 2025, compared to $1.10 billion for the same period in 2024 and $1.10 billion for the year ended December 31, 2024. Average interest-bearing liabilities decreased to $699.7 million for the nine months ended September 30, 2025, from $714.6 million for the comparative period of 2024. Average Interest-bearing liabilities totaled $714.4 million at December 31, 2024.
Loans
The Company's primary business is that of acquiring deposits and making loans, with the loan portfolio representing the largest and most important component of earning assets. Gross loans totaled $958.3 million at September 30, 2025, an increase of $29.9 million, or 3.22%, when compared to the balance of $928.5 million at December 31, 2024, and a decrease of $16.8 million, or 1.72%, when compared to the balance of $975.2 million reported at September 30, 2024. Loans on average increased $14.3 million, or 1.55%, between the nine months ended September 30, 2024 and September 30, 2025, with loans, excluding nonaccrual loans, averaging $935.7 million for the nine months ended September 30, 2025, as compared to $921.5 million for the same period in 2024.
The following table sets forth the amounts of loans, net of unearned income, outstanding by category and the category percentages for the periods presented:
September 30, 2025 December 31, 2024 September 30, 2024
(In thousands) Amount % of Loans Amount % of Loans Amount % of Loans
Commercial and industrial $ 43,366 4.50 % $ 63,715 6.86 % $ 56,686 5.81 %
Real estate - mortgage 666,792 69.60 % 666,694 71.81 % 687,908 70.54 %
Real estate construction and development 142,537 14.90 % 111,145 11.97 % 123,624 12.68 %
Agricultural 72,132 7.50 % 49,462 5.33 % 66,547 6.82 %
Installment and student loans 33,521 3.50 % 37,446 4.03 % 40,386 4.15 %
Total gross loans $ 958,348 100.00 % $ 928,462 100.00 % $ 975,151 100.00 %
Loan volume continues to be highest in what has historically been the Bank's primary lending emphasis: real estate mortgage and real estate construction and development lending. Total loans increased $29.9 million during the nine months ended September 30, 2025. There were increases of $22.7 million, or 45.83%, in agricultural loans, $31.4 million, or 28.24%, in real
estate construction and development loans, and $98,000, or 0.01%, in real estate mortgage loans. Commercial and industrial loans decreased $20.3 million, or 31.94%, and installment loans decreased $3.9 million, or 10.48%.
The real estate mortgage loan portfolio, totaling $666.8 million at September 30, 2025, consists of commercial real estate, residential mortgages, and home equity loans. Commercial real estate loans have remained a significant percentage of total loans over the past year, amounting to 44.56%, 45.17%, and 45.04% of the total loan portfolio at September 30, 2025, December 31, 2024, and September 30, 2024, respectively. Commercial real estate balances increased to $427.1 million at September 30, 2025, from $419.4 million at December 31, 2024. Commercial real estate loans are generally a mix of short- to medium-term, fixed- and floating-rate instruments and are mainly secured by commercial income and multi-family residential properties.
Residential mortgage loans are generally 30-year amortizing loans with an average life of nine to 11 years. These loans totaled $239.7 million, or 25.01%, of the portfolio at September 30, 2025, $247.2 million, or 26.63%, of the portfolio at December 31, 2024, and $248.7 million, or 25.50%, of the portfolio at September 30, 2024. Included in the residential mortgage portfolio are purchased home-mortgage loan pools with aggregate balances of $212.3 million, comprising 88.56% of the total residential mortgage portfolio at September 30, 2025. These loans were purchased in whole-loan form, in several pools, during 2021 and 2022. Dovenmuehle Mortgage, Inc., (DMI) is the third-party sub-servicer for the Company's purchased residential mortgage portfolio. DMI's services include administration, Company-approved modification, escrow management, monitoring, and collection. DMI is paid a monthly servicing fee based primarily upon the number of loans being serviced which, at September 30, 2025, totaled 245.
Real estate construction and development loans, representing 14.87%, 11.97%, and 12.68% of total loans at September 30, 2025, December 31, 2024, and September 30, 2024, respectively, consisted of loans for residential and commercial construction projects, as well as land acquisition and development, and land held for future development. Loans in this category are secured by real estate, including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at the completion of the project or from the sale of the constructed homes to individuals.
Commercial and industrial loans decreased $20.3 million between December 31, 2024, and September 30, 2025, and decreased $13.3 million between September 30, 2024, and September 30, 2025. Agricultural loans increased $22.7 million between December 31, 2024, and September 30, 2025, and increased $5.6 million between September 30, 2024, and September 30, 2025. Installment loans decreased $3.9 million between December 31, 2024, and September 30, 2025, and decreased $6.9 million between September 30, 2024, and September 30, 2025, primarily due to decreases in student loan balances.
Included in installment loans are $28.8 million in unsecured student loans made to medical and pharmacy school students in the US and Caribbean, all of which are exclusively US citizens. Student loans decreased $7.3 million between the nine months ended September 30, 2025, and 2024, due to paydowns, consolidations with other lenders, and charge-offs totaling $4.8 million. The outstanding balance of loans for students who are in school or in a grace period and have not entered repayment status totaled $827,000 at September 30, 2025. At September 30, 2025, there were 571 loans within repayment, deferment, and forbearance which represented $15.0 million, $7.8 million, and $5.2 million in outstanding balances, respectively. Student loans have not been originated or purchased since 2019.
Repayment of the unsecured student loans is premised on the medical and pharmacy students graduating and becoming high-income earners. Under program guidelines, repayment terms can vary per borrower; however, repayment occurs on average within 10 to 20 years. Additional repayment capacity is provided by non-student, co-borrowers for roughly one-third of the portfolio. The average student loan balance per borrower as of September 30, 2025, was approximately $118,700. At September 30, 2024, the average balance per borrower was approximately $112,400. Loan interest rates are primarily variable and ranged from 6.00% to 12.125% at September 30, 2025.
ZuntaFi is the third-party servicer for the student loan portfolio. ZuntaFi's services include application administration, processing, approval, documenting, funding, collection, and borrower file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements or extreme delinquency, ZuntaFi is responsible for complete program management. ZuntaFi is paid a monthly servicing fee based on the outstanding principal balance and a collection fee on successful recoveries.
The Company classifies student loans delinquent more than 90 days as substandard. At September 30, 2025, the substandard category included ten loans made to three borrowers, totaling $555,000. At December 31, 2024, ten loans made to two borrowers, totaling $421,000, were included in the substandard category. As of September 30, 2025, and December 31, 2024,
reserves against the student loan portfolio totaled $7.7 million and $7.0 million, respectively. For the nine months ended September 30, 2025, $344,000 in accrued interest receivable was reversed, due to charge-offs of $4.8 million. For the nine months ended September 30, 2024, $131,000 in accrued interest receivable was reversed, due to charge-offs of $1.4 million.
The following table sets forth the Bank's student loan portfolio with activity from December 31, 2024, to September 30, 2025:
(In thousands) Balance
Balance at December 31, 2024
$ 33,889
Capitalized interest 1,978
Loan consolidations/payoffs (1,282)
Payments received (909)
Loans charged-off (4,829)
Balance at September 30, 2025
$ 28,847
Loan participations purchased totaled $8.0 million, or 0.83%, of the portfolio, at September 30, 2025, $3.6 million, or 0.39%, of the portfolio at December 31, 2024, and $13.2 million, or 1.35%, of the portfolio at September 30, 2024. Loan participations sold totaled $2.3 million, or 0.24%, of the portfolio, at September 30, 2025, $4.2 million, or 0.45%, of the portfolio, at December 31, 2024, and $4.2 million, or 0.43%, of the portfolio at September 30, 2024.
Deposits
Deposit balances totaled $1.08 billion at September 30, 2025, representing a increase of $18.3 million, or 1.73%, from the balance of $1.06 billion reported at December 31, 2024, and an increase of $10.9 million, or 1.02%, from the balance of $1.07 billion at September 30, 2024. Included in the balances reported at September 30, 2025 and December 31, 2024 were $100.3 million in purchased brokered deposits.
The following table sets forth the amounts of deposits outstanding by category at September 30, 2025 and December 31, 2024, and the net change between the two periods presented:
(In thousands) September 30, 2025 December 31, 2024 $ Change
Noninterest-bearing deposits $ 384,367 35.73 % $ 360,152 34.05 % $ 24,215
Interest-bearing deposits:
NOW and money market accounts 498,516 46.33 % 504,466 47.70 % (5,950)
Savings accounts 116,829 10.86 % 114,648 10.84 % 2,181
Time deposits:
Under $250,000 43,553 4.05 % 45,141 4.27 % (1,588)
$250,000 and over 32,635 3.03 % 33,215 3.14 % (580)
Total interest-bearing deposits 691,533 64.27 % 697,470 65.95 % (5,937)
Total deposits $ 1,075,900 100.00 % $ 1,057,622 100.00 % $ 18,278
The following tables set forth estimated deposit balances exceeding the FDIC insurance limits as of:
(In thousands) September 30, 2025 December 31, 2024
Uninsured deposits (1)
$ 447,027 $ 524,116
(1) Represents the estimated amount over the FDIC insurance limit.
September 30, 2025
(In thousands) Three months or less Over three months through six months Over six months through 12 months Over 12 months Total
Uninsured time deposits (1) (2)
$ 2,610 $ 5,201 $ 2,393 $ 10,201 $ 20,405
(1) Represents the estimated amount over the FDIC insurance limit.
(2) Uninsured time deposits are a subset of the above table.
December 31, 2024
(In thousands) Three months or less Over three months through six months Over six months through 12 months Over 12 months Total
Uninsured time deposits (1) (2)
$ 2,142 $ 7,946 $ 2,201 $ 10,002 $ 22,291
(1) Represents the estimated amount over the FDIC insurance limit.
(2) Uninsured time deposits are a subset of the above table.
Core deposits, defined by the Company as consisting of all deposits other than time deposits of more than $250,000 and brokered deposits, continue to provide the foundation of the Company's principal sources of funding and liquidity. These core deposits amounted to 87.65% and 87.38% of total deposits at September 30, 2025, and December 31, 2024, respectively. The Company held $100.3 million in brokered deposits at September 30, 2025, and December 31, 2024.
On a year-to-date average basis, the Company experienced an increase of $68.9 million, or 7.03%, in total deposits between the nine months ended September 30, 2025, and the nine months ended September 30, 2024. Between these two periods, interest-bearing deposits increased $59.1 million, or 9.46%, and noninterest-bearing deposits increased $9.8 million, or 2.75%. Included in the balance of average interest-bearing deposits at September 30, 2025 and September 30, 2024, are $100.0 million in purchased brokered deposits.
Short-Term Borrowings
At September 30, 2025, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $492.3 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $125.3 million. At September 30, 2025, the Company had uncollateralized lines of credit with Pacific Coast Bankers Bank (PCBB), Zions Bank, and US Bank totaling $50.0 million, $20.0 million, and $20.0 million, respectively. These lines of credit generally have interest rates tied to either the Federal Funds rate or short-term U.S. Treasury rates. All lines of credit are on an "as available" basis and can be revoked by the grantor at any time. The Company held no outstanding borrowings at September 30, 2025, and $34.0 million in outstanding borrowings at September 30, 2024. The Company had collateralized FRB lines of credit of $499.1 million, collateralized FHLB lines of credit totaling $135.6 million, and uncollateralized lines of credit of $50.0 million with PCBB, $20.0 million with Zion's Bank, and $20.0 million with US Bank at December 31, 2024.
Asset Quality and Allowance for Credit Losses
Lending money is the Company's principal business activity, and ensuring appropriate evaluation, diversification, and control of credit risks is a primary management responsibility. Losses are implicit in lending activities and the amount of such losses will vary, depending on the risk characteristics of the loan portfolio as affected by local economic conditions and the financial experience of borrowers.
The Company utilizes a current expected credit loss (CECL) methodology which relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience. The allowance for credit losses on most loans is measured on a collective (pool) basis for loans with similar characteristics. The Company estimates the appropriate level of allowance for credit losses for collateral-dependent loans by evaluating them separately. The Company also uses the CECL model to calculate the allowance for credit losses on off-balance sheet credit exposures, such as undrawn amounts on lines of credit. While the allowance for credit losses on loans is reported as a contra-asset for loans, the allowance for credit losses on off-balance sheet credit exposure is reported as a liability.
The eight (8) segments of the loan portfolio are as follows, net of unearned fees and unamortized loan origination costs (subtotals are provided as needed to allow the reader to reconcile the amounts to loan classifications reported elsewhere in this report):
Loan Segments for Allowance for Credit Loss Analysis September 30, 2025 December 31, 2024
(In thousands)
Commercial and business loans $ 43,312 $ 63,653
Government program loans 54 62
Total commercial and industrial 43,366 63,715
Real estate - mortgage:
Commercial real estate 427,077 419,422
Residential mortgages 239,698 247,248
Home improvement and home equity loans 17 24
Total real estate mortgage 666,792 666,694
Real estate construction and development 142,537 111,145
Agricultural 72,132 49,462
Installment and student loans 33,521 37,446
Total loans $ 958,348 $ 928,462
Individually-Evaluated Loans and Specific Reserves:
The following table summarizes the components of individually-evaluated loans and related specific reserves:
September 30, 2025 December 31, 2024
(In thousands) Individually-Evaluated Loan Balances Specific Reserve Individually-Evaluated Loan Balances Specific Reserve
Real estate construction and development $ 5,685 $ - $ 12,185 $ -
Agricultural - - 390 -
Total individually-evaluated loans $ 5,685 $ - $ 12,575 $ -
Individually-evaluated loans decreased $6.9 million to $5.7 million at September 30, 2025, compared to $12.6 million at December 31, 2024. This decline was related to the payoff of one nonaccrual loan and the transfer of one nonaccrual loan to OREO. There were no reserves for individually-evaluated loans using the discounted cash flow method at September 30, 2025 or December 31, 2024.
Collateral-Dependent Loans:
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
The following table presents the recorded investment in collateral-dependent loans by type of loan:
September 30, 2025 December 31, 2024
(Dollars in thousands) Amount Number of Collateral-Dependent Loans Amount Number of Collateral-Dependent Loans
Real estate construction and development loans $ 5,685 1 $ 12,185 3
Agricultural loans - - 390 1
Total $ 5,685 1 $ 12,575 4
Credit Quality Indicators for Outstanding Student Loans:
The following table summarizes the credit quality indicators for outstanding student loans as of:
September 30, 2025 December 31, 2024
(Dollars in thousands) Number of Loans Amount Accrued Interest Number of Loans Amount Accrued Interest
School 20 $ 614 $ 491 26 $ 692 $ 512
Grace 10 213 186 3 100 63
Repayment 315 15,030 209 406 19,647 324
Deferment 158 7,795 1,848 219 9,954 2,593
Forbearance 98 5,195 171 65 3,496 133
Total 601 $ 28,847 $ 2,905 719 $ 33,889 $ 3,625
Included in installment loans are $28.8 million and $33.9 million in student loans at September 30, 2025, and December 31, 2024, respectively, made to medical and pharmacy school students. As of September 30, 2025, and December 31, 2024, the reserve against the student loan portfolio totaled $7.7 million and $7.0 million, respectively. Loan interest rates on the student loan portfolio are primarily variable and ranged from 6.00% to 12.125% at September 30, 2025, and 6.00% to 12.875% at December 31, 2024.
Nonperforming Assets:
The following table summarizes the components of nonperforming assets as of September 30, 2025, and December 31, 2024, and the percentage of nonperforming assets to total gross loans, total assets, and the percentage of nonperforming assets to allowance for loan losses:
(In thousands) September 30, 2025 December 31, 2024
Nonaccrual loans $ 5,699 $ 12,198
Loans past due 90 days or more, still accruing 555 421
Total nonperforming loans 6,254 12,619
Other real estate owned 7,852 4,582
Total nonperforming assets $ 14,106 $ 17,201
Nonperforming loans to total gross loans 0.65 % 1.36 %
Nonperforming assets to total assets 1.14 % 1.42 %
Allowance for credit losses to nonperforming loans
259.59 % 127.16 %
Nonperforming assets, which are primarily related to the real estate loan and other-real-estate-owned portfolio, decreased $3.1 million from $17.2 million at December 31, 2024, to $14.1 million at September 30, 2025. Nonaccrual loan balances decreased to $5.7 million between the two periods. The decrease in nonaccrual loans was related to the transfer of one nonaccrual loan to other-real-estate-owned and the payoff of one nonaccrual loan with a book balance of $3.2 million. The increase in other-real-estate-owned was due to the foreclosure on the transferred nonaccrual loan totaling $3.3 million. Nonaccrual loan totals at September 30, 2025, consisted of one loan which was well-collateralized and in the process of collection.
The following table summarizes the nonaccrual totals by loan category for the periods shown:
(In thousands) September 30, 2025 December 31, 2024 $ Change
Nonaccrual Loans:
Real estate construction and development $ 5,699 $ 12,198 $ (6,499)
Loans past due more than 30 days receive increased management attention and are monitored for increased risk. The Company continues to move past-due loans to nonaccrual status in an ongoing effort to recognize and address loan problems as early and most effectively as possible and appropriate. As individually-evaluated loans, nonaccrual, and modified loans are reviewed for specific reserve allocations, the allowance for credit losses is adjusted accordingly.
Except for nonaccrual and individually-evaluated loans, there were no loans at September 30, 2025, where the known credit problems of a borrower caused the Company to have serious doubts as to the ability of such borrower to comply with loan repayment terms.
Nonaccrual loans, consisting of one real estate construction loan, totaled $5.7 million at September 30, 2025, a decrease of $6.5 million from the $12.2 million reported at December 31, 2024. Of the three nonaccrual loans held at December 31, 2024, one loan, totaling $3.2 million was paid off during the first quarter of 2025, and one loan, totaling $3.3 million, was transferred to the York Monterey Properties investment (please see "Note 17- Investment in York Monterey Properties" for additional information). In determining the adequacy of the underlying collateral related to the remaining loan, management monitors trends within specific geographical areas, the loan-to-value ratio, appraisals, and other credit-related issues. Nonaccrual loans represented 0.59% of total loans at September 30, 2025 and 1.31% at December 31, 2024. The allowance for credit losses represented 284.87% and 131.55%, respectively, of nonaccrual loans for the same periods.
Other real estate owned through foreclosure increased to $7.9 million at September 30, 2025, compared to $4.6 million at December 31, 2024. This was due to the transfer of the nonaccrual loan to the York Monterey Properties investment. Nonperforming assets as a percentage of total assets decreased from 1.42% at December 31, 2024, to 1.14% at September 30, 2025.
Management continues to monitor economic conditions in the real estate market for signs of deterioration or improvement which may impact the level of the allowance for credit losses required to cover identified and potential losses in the loan portfolio. Focus has been placed on monitoring and reducing the level of problem assets.
The following table summarizes special mention loans by type as of:
(In thousands) September 30, 2025 December 31, 2024
Commercial and industrial $ - $ 2,000
Commercial real estate mortgage 13,349 5,653
Agricultural 4,629 2,228
Total special mention loans $ 17,978 $ 9,881
The following table summarizes substandard loans by type as of:
(In thousands) June 30, 2025 December 31, 2024
Commercial and industrial $ 22,356 $ 22,701
Commercial real estate mortgage 535 552
Real estate construction and development 5,699 12,198
Agricultural - 390
Installment and student loans 555 421
Total special mention loans $ 29,145 $ 36,262
The Company remains focused on competition and other economic conditions within its market area which may ultimately affect the risk assessment of the portfolio. The Company continues to experience increased competition from major banks, local independents, and non-bank institutions, which creates pressure on loan pricing. Increased emphasis has been placed on reducing both the level of nonperforming assets and potential losses on the disposition of those assets. It is in the best interest of both the Company and the borrowers to seek alternative options to foreclosure to reduce the impacts on the real estate market. As part of this strategy, the Company enters into loan modifications when it improves collection prospects. Management recognizes the increased risk of loss due to the Company's exposure to local and worldwide economic conditions, as well as potentially volatile real estate markets, and takes these factors into consideration when analyzing the adequacy of the allowance for credit losses.
The following table provides a summary of the Company's allowance for loan credit losses, loan loss provisions, and charge-off and recovery activity affecting the allowance for credit losses for the nine months ended September 30, 2025, and September 30, 2024.
Allowance for Credit Losses - Summary of Activity:
(In thousands) September 30, 2025 September 30, 2024
Total loans outstanding at end of period before deducting allowances for credit losses $ 958,348 $ 975,151
Average loans outstanding during period 941,412 933,449
Balance of allowance at beginning of period $ 16,046 $ 15,658
Loans charged-off:
Installment and student loans (4,829) (1,471)
Total loans charged-off (4,829) (1,471)
Recoveries of loans previously charged off:
Real estate 2 5
Commercial and industrial 1 1
Installment and student loans 193 190
Total loan recoveries 196 196
Net loans charged-off (4,633) (1,275)
Provision charged to operating expense (1) 4,822 2,140
Balance of allowance for credit losses at end of period $ 16,235 $ 16,523
Net loan charged-off to total average loans (annualized) 0.66 % 0.18 %
Net loan charged-off to loans at end of period (annualized) 0.64 % 0.13 %
Allowance for credit losses to total loans at end of period 1.69 % 1.69 %
Net loan charged-off to allowance for credit losses (annualized) 38.06 % 30.04 %
Provision for credit losses to net charge-offs
104.08 % 167.84 %
(1) There was a provision of $284,000 for unfunded loan commitments made during the nine months ended September 30, 2025. There was a reversal of provision of $373,000 for unfunded loan commitments made during the nine months ended September 30, 2024.
Provisions for credit losses are determined based on management's periodic credit review of the loan portfolio, consideration of past loan loss experience, expected losses within the portfolio, current and future economic conditions, and reasonable and supportable forecasts. Credit losses expected over the lifetime of a financial asset are determined when the asset is recognized rather than when the probable loss event occurs. Management believes its estimate of the allowance for credit losses adequately covers estimated losses inherent in the loan portfolio and, based on the condition of the loan portfolio, management believes the allowance is sufficient to cover risk elements in the loan portfolio. For the nine months ended September 30, 2025, a $4.8 million provision was recorded to the allowance for credit losses compared to a $2.1 million provision for the nine months ended September 30, 2024. The persistent high rate of student loan charge-offs is mainly due to the end of pandemic-related payment forbearance programs, leading to increased provisions. Despite potential future charge-offs, the overall credit loss allowance is deemed sufficient.
The following provides a summary of the Company's net charge-offs as a percentage of average loan balances (including nonaccrual loans) in each category for the nine months ended September 30, 2025 and September 30, 2024:
September 30, 2025 September 30, 2024
(In thousands) Net Charge-offs (Recoveries) Average Loan Balance Percentage Net Charge-offs (Recoveries) Average Loan Balance Percentage
Commercial and industrial $ (1) $ 53,954 <0.01% $ (1) $ 56,324 <0.01%
Real estate mortgages (2) 664,399 <0.01% (5) 662,786 <0.01%
Real estate construction and development - 124,178 - % - 119,171 - %
Agricultural - 62,593 - % - 53,747 - %
Installment and student loans 4,636 36,288 12.78 % 1,281 41,421 3.09 %
Total $ 4,633 $ 941,412 0.49 % $ 1,275 $ 933,449 0.14 %
Net charge-offs during the nine months ended September 30, 2025, totaled $4.6 million as compared to net charge-offs of $1.2 million for the nine months ended September 30, 2024. The Company charged off or had partial charge-offs on 79 loans to 25 borrowers during the nine months ended September 30, 2025, compared to 27 loans to 14 borrowers during the same period ended September 30, 2024. Most of these charge-offs were the result of delinquencies within the student loan portfolio where borrowers typically carry more than one loan. The annualized percentage of net charge-offs to average loans was 0.66% for the nine months ended September 30, 2025, 0.28% for the year ended December 31, 2024, and 0.18% for the nine months ended September 30, 2024. The Company's loans, net of unearned fees, decreased from $975.2 million at September 30, 2024, to $958.3 million at September 30, 2025.
The allowance for credit losses at September 30, 2025, was 1.69% of outstanding loan balances, as compared to 1.72% at December 31, 2024, and 1.69% at September 30, 2024. At September 30, 2025, and September 30, 2024, unfunded loan commitment reserves of $1.06 million and $462,000, respectively, were reported in other liabilities.
Management believes that the loan allowance for credit losses, totaling 1.69% of the loan portfolio at September 30, 2025, is adequate to absorb both known and inherent risks in the loan portfolio. No assurance can be given, however, regarding future economic conditions, or other circumstances, which may adversely affect the Company's service areas and result in losses in the loan portfolio not captured by the current allowance for credit losses. Management is not currently aware of any conditions that may adversely affect the levels of losses incurred in the Company's loan portfolio.
Liquidity and Capital Resources
The Company's asset/liability management, liquidity strategy, and capital planning are guided by policies formulated and monitored by the Asset and Liability Management Committee (ALCO) and Management, to provide adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities.
Liquidity
Liquidity management may be described as the ability to maintain sufficient cash flows to fulfill both on- and off-balance sheet financial obligations, including loan funding commitments and customer deposit withdrawals, without straining the Company's equity structure. To maintain an adequate liquidity position, the Company relies on, in addition to cash and cash equivalents, cash inflows from deposits and short-term borrowings, repayments of principal on loans and investments, and interest income received. The Company's principal cash outflows are for loan originations, purchases of investment securities, depositor withdrawals, and payment of operating expenses.
The Company's liquid asset base, which generally consists of cash and due from banks, federal funds sold, and investment securities, is maintained at levels deemed sufficient to provide the cash necessary to fund loan growth, unfunded loan commitments, and deposit runoff. Included in this framework is the objective of maximizing the yield on earning assets. This is generally achieved by maintaining a high percentage of earning assets in loans and investment securities, which typically provide higher yields than cash balances.
The following table sets forth asset balances as of:
September 30, 2025 December 31, 2024
(Dollars in thousands) Balance % Total Assets Balance % Total Assets
Cash and cash equivalents $ 66,767 5.40 % $ 56,211 4.64 %
Loans, net of unearned income 958,348 77.56 % 928,462 76.62 %
Unpledged investment securities 65,124 5.27 % 79,623 6.57 %
At September 30, 2025, the loan-to-deposit ratio was 89.07%, compared to a loan-to-deposit ratio of 87.79% at December 31, 2024.
Liabilities used to fund liquidity sources include core and non-core deposits as well as short-term borrowing capabilities. Core deposits, which comprised approximately 87.65% of total deposits at September 30, 2025, provide a significant and stable funding source for the Company. The Bank held no borrowings at September 30, 2025. Unused lines of credit with the Federal Reserve Bank and FHLB, totaling $707.6 million, were collateralized by investment securities and certain qualifying loans in the Company's portfolio. The carrying value of loans pledged on these borrowing lines totaled $820.9 million at September 30, 2025. For further detail on the Company's borrowing arrangements, please see "Note 6 - Short-term Borrowings/Other Borrowings" in the notes to the consolidated financial statements.
The balances of cash and cash equivalents for the dates shown are as follows(from Consolidated Statements of Cash Flows):
(In thousands) Balance
December 31, 2023 $ 40,784
September 30, 2024 47,915
December 31, 2024 56,211
September 30, 2025 66,767
Capital and Dividends
The Company and the Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System (the "Board of Governors"). Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework, the Company and the Bank must meet specific capital guidelines that include quantitative measures of their assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. Capital levels and classifications are also subject to qualitative judgments by the regulators regarding components, risk weightings, and other factors.
The Company's capital plan includes guidelines and trigger points designed to ensure sufficient capital is maintained at both the Bank and Company levels. Capital ratios are maintained at a level deemed appropriate under regulatory guidelines given the Bank's level of classified assets, concentrations of credit, allowance for credit losses, current and projected growth, and projected retained earnings. The capital plan contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company, on a consolidated basis. The capital plan requires the Bank to maintain a Tier 1 Leverage Ratio equal to or greater than 9.00%. The Bank's Tier 1 Leverage Ratio was 12.11% and 12.35% at September 30, 2025, and 2024, respectively.
The following table sets forth the Company's and the Bank's actual capital positions at September 30, 2025 and December 31, 2024:
Capital Ratios:
September 30, 2025 December 31, 2024 Minimum Requirement to be Well Capitalized Minimum requirement for CBLR (1)
Tier 1 capital to adjusted average assets (Leverage Ratio)
Company 12.42% 12.57% 5.00% 9.00%
Bank 12.11% 12.59% 5.00% 9.00%
(1) If the Bank's Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework (CBLR), it is deemed to be "well capitalized" under all other regulatory capital requirements. If the Bank's leverage ratio falls below the minimum required, it would no longer be eligible to elect the use of the CBLR framework.
As of September 30, 2025, the Company and the Bank meet all capital adequacy requirements to which they are subject. Management believes that, under the current regulations, both the Company and the Bank will continue to meet their minimum capital requirements for the foreseeable future.
Dividends
Dividends paid to shareholders by the Holding Company are subject to restrictions set forth under the California General Corporation Law. As applicable to the Holding Company, the California General Corporation Law provides that the Holding Company may make a distribution to its shareholders if either retained earnings immediately prior to the dividend payout are at least equal to the amount of the proposed distribution or, following the distribution, the value of the Holding Company's assets would equal or exceed the sum of its total liabilities. The primary source of funds for dividends paid to shareholders is cash dividends received by the Holding Company from the Bank.
On April 25, 2017, the Board of Directors announced the authorization of the repurchase of up to $3.0 million of the outstanding stock of the Holding Company. This amount represents 2.18% of total shareholders' equity of $137.4 million at September 30, 2025. The timing of the purchases will depend on certain factors including, but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. During the nine months ended September 30, 2025, there were no repurchases of any available shares.
During the nine months ended September 30, 2025, the Bank paid $13.2 million in cash dividends to the Holding Company which funded the Holding Company's operating costs, payments of interest on TruPS, a partial redemption of TruPS, and dividend payments to shareholders.
On September 23, 2025, the Company's Board of Directors declared a cash dividend of $0.12 per share on the Company's common stock. The dividend was paid on October 21, 2025, to shareholders of record as of October 3, 2025. Approximately $2.1 million was transferred from retained earnings to dividends payable to allow for the distribution of the dividend to shareholders.
The Bank, as a state-chartered bank, is subject to dividend restrictions set forth in the California Financial Code, as administered by the Commissioner of the Department of Financial Protection and Innovation (the "Commissioner"). As applicable to the Bank, the Financial Code provides that the Bank may not pay cash dividends in an amount that exceeds the lesser of the retained earnings of the Bank or the Bank's net income for the last three fiscal years less the amount of distributions to the Holding Company during that period of time. If the above test is not met, cash dividends may only be paid with the prior approval of the Commissioner, in an amount not exceeding the Bank's net income for its last fiscal year or the amount of its net income for the current fiscal year. Such restrictions do not apply to stock dividends, which generally require neither the satisfaction of any tests nor the approval of the Commissioner. Notwithstanding the foregoing, if the Commissioner finds that the shareholders' equity of the Bank is not adequate or that the declaration of a dividend would be unsafe or unsound, the Commissioner may order the Bank not to pay any dividend. The Federal Reserve Bank may also limit dividends paid by the Bank.
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