ServisFirst Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2025

The following discussion and analysis is designed to provide a better understanding of various factors relating to the results of operations and financial condition of ServisFirst Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, ServisFirst Bank (the “Bank”). This discussion is intended to supplement and highlight information contained in the accompanying unaudited consolidated balance sheets as of June 30, 2025 and December 31, 2024 and consolidated statements of income for the three and six months ended June 30, 2025 and June 30, 2024.

Forward-Looking Statements

Statements in this document that are not historical facts, including, but not limited to, statements concerning future operations, results or performance, are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). The words “believe,” “expect,” “anticipate,” “project,” “plan,” “intend,” “will,” “could,” “would,” “might” and similar expressions often signify forward-looking statements. Such statements involve inherent risks and uncertainties. The Company cautions that such forward-looking statements, wherever they occur in this quarterly report or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various factors that could affect the accuracy of such forward-looking statements, including, but not limited to: general economic conditions, especially in the credit markets and in the Southeast; the impact of tariffs and trade wars on general economic conditions, the performance of capital markets; changes in interest rates, yield curves and interest rate spread relationships; changes in accounting and tax principles, policies or guidelines; changes in legislation or regulatory requirements; changes as a result of our reclassification as a large financial institution by the FDIC; changes in our loan portfolio and the deposit base; possible changes in laws and regulations and governmental monetary and fiscal policies, including, but not limited to, the Federal Reserve policies in connection with continued or re-emerging inflationary pressures and the ability of the U.S. Congress to increase the U.S. statutory debt limit as needed; computer hacking or cyber-attacks resulting in unauthorized access to confidential or proprietary information; substantial, unexpected or prolonged changes in the level or cost of liquidity; the cost and other effects of legal and administrative cases and similar contingencies; possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans and the value of collateral; the effect of natural disasters, such as hurricanes and tornados, in our geographic markets; and increased competition from both banks and nonbank financial institutions. The foregoing list of factors is not exhaustive. For discussion of these and other risks that may cause actual results to differ from expectations, please refer to “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K, our subsequent Quarterly Reports on Form 10-Q and our other SEC filings. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. The Company assumes no obligation to update or revise any forward-looking statements that are made from time to time.

Business

We are a bank holding company under the Bank Holding Company Act of 1956 and are headquartered in Birmingham, Alabama. Our wholly-owned subsidiary, ServisFirst Bank, an Alabama banking corporation, provides commercial banking services through full-service banking offices located in Alabama, Florida, Georgia, North and South Carolina, Tennessee, and Virginia. We also operate a loan production office in Florida. Through the Bank, we originate commercial, consumer and other loans and accept deposits, provide electronic banking services, such as online and mobile banking, including remote deposit capture, deliver treasury and cash management services and provide correspondent banking services to other financial institutions.

Our principal business is to accept deposits from the public and to make loans and other investments. Our principal sources of funds for loans and investments are demand, time, savings, and other deposits. Our principal sources of income are interest and fees collected on loans, interest and dividends collected on other investments and service charges. Our principal expenses are interest paid on savings and other deposits, interest paid on our other borrowings, employee compensation, office expenses and other overhead expenses.

Second Quarter Highlights

• Diluted earnings per common share of $1.12 for the second quarter of 2025, an increase of 17.9%, from the second quarter of 2024.
• Average loans of $13.01 billion for the second quarter of 2025, an increase of $947.1 million, or 7.9%, from the second quarter of 2024.
• Average deposits of $13.90 billion for the second quarter of 2025, an increase of $1.03 billion, or 8.0%, from the second quarter of 2024.
• Net interest income of $131.7 million for the second quarter of 2025, increased $25.8 million, or 24.4%, from the second quarter of 2024.
• Net interest margin of 3.10% for second quarter of 2025, increased 31 basis points from 2.79% in the second quarter of 2024.

Overview

As of June 30, 2025, we had consolidated total assets of $17.38 billion, an increase of $27.0 million, or 0.2%, from $17.35 billion at December 31, 2024. Total loans were $13.23 billion, an increase of $626.7 million, or 5.0%, from $12.61 billion at December 31, 2024. Total deposits were $13.86 billion, an increase of $318.9 million, or 2.4%, from $13.54 billion at December 31, 2024.

Net income and net income available to common stockholders was $61.4 million for the quarter ended June 30, 2025, compared to net income and net income available to common stockholders of $52.1 million for the second quarter of 2024. Basic and diluted earnings per common share were both $1.12 for the three months ended June 30, 2025, compared to $0.96 and $0.95, respectively, in the corresponding period in 2024.

Net income and net income available to common stockholders was $124.6 million for the six months ended June 30, 2025, compared to net income of $102.2 million and net income available to common stockholders of $102.1 million for the six months ended June 30, 2024. Basic and diluted earnings per common share were both $2.28 for the six months ended June 30, 2025, compared to $1.87 for both for the corresponding period in 2024. Changes in income and expenses are more fully explained in “Results of Operations” below.

Performance Ratios

The following table presents selected ratios of our results of operations for the three and six months ended June 30, 2025, and 2024.

(1) Net interest margin is the net yield on interest earning assets and is the difference between the interest yield earned on interest-earning assets and interest rate paid on interest-bearing liabilities, divided by average earning assets.

(2) Efficiency ratio is the result of noninterest expense divided by the sum of net interest income and noninterest income.

Financial Condition

Cash and Cash Equivalents

At June 30, 2025, we had $6.0 million in federal funds sold, compared to $1.0 million at December 31, 2024. We also maintain balances at the Federal Reserve Bank of Atlanta, which earn interest. At June 30, 2025, we had $1.22 billion in balances at the Federal Reserve, compared to $2.25 billion at December 31, 2024.

Investment Securities

Debt securities available-for-sale totaled $1.23 billion at June 30, 2025 and $1.16 billion at December 31, 2024. During the second quarter of 2025, the Company sold available-for-sale mortgage-backed securities with an amortized cost basis of $70.5 million and recorded a pre-tax loss of $8.6 million, as a result of a portfolio restructuring. Debt securities held to maturity totaled $686.7 million at June 30, 2025 and $714.9 million at December 31, 2024. We had paydowns of $51.0 million on mortgage-backed securities and government agencies, maturities of $67.5 million on municipal bonds, corporate securities and treasury securities, and calls of $41.6 million on corporate securities during the six months ended June 30, 2025. We purchased $35.7 million in mortgage-backed securities, $147.8 million in U.S. Treasury securities, $3.0 million in municipal bonds, and $61.1 million in corporate securities during the six months ended June 30, 2025. For a tabular presentation of debt securities available for sale and held to maturity at June 30, 2025 and December 31, 2024, see “Note 4 – Securities” in our Notes to Consolidated Financial Statements.

The objective of our investment policy is to invest funds not otherwise needed to meet our loan demand to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. In doing so, we seek to balance the market and credit risks against the potential investment return, make investments compatible with the pledge requirements of any deposits of public funds, maintain compliance with regulatory investment requirements, and assist certain public entities with their financial needs. The investment committee has full authority over the investment portfolio and makes decisions on purchases and sales of securities. The entire portfolio, along with all investment transactions occurring since the previous board of directors meeting, is reviewed by the board at each monthly meeting. The investment policy allows portfolio holdings to include short-term securities purchased to provide us with needed liquidity and longer-term securities purchased to generate level income for us over periods of interest rate fluctuations.

All investment securities in an unrealized loss position as of June 30, 2025 continue to perform as scheduled. We have evaluated the securities and have determined that the decline in fair value, relative to its amortized cost, is not due to credit-related factors. In addition, we have the ability to hold these securities within the portfolio until maturity or until the value recovers, and we believe that it is not likely that we will be required to sell these securities prior to recovery. We continue to monitor all of our securities with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of its securities may be sold or would require a charge to earnings as a provision for credit losses in such periods.

The Company does not invest in collateralized debt obligations (“CDOs”). As of June 30, 2025, we had $338.6 million of bank holding company subordinated notes. If rated, all such bonds were rated BBB or better by Kroll Bond Rating Agency at the time of our initial investment. All other corporate bonds had a Standard and Poor’s or Moody’s rating of A-1 or better when purchased. The total investment portfolio has a combined average credit rating of AA as of June 30, 2025.

The carrying value of investment securities pledged to secure public funds on deposit and for other purposes as required by law was $1.29 billion and $1.43 billion as of June 30, 2025 and December 31, 2024, respectively.

Loans

We had total loans of $13.23 billion, an increase of $626.7 million, or 5.0%, from $12.61 billion at December 31, 2024. Real estate construction loans and non-owner occupied commercial loans increased $224.7 million and $266.7 million, respectively, compared to the prior year period, and $136.0 million and $79.1 million, respectively, during the current quarter. These loan categories comprised the majority of total loan portfolio growth in both comparative periods.

The following table details our loan portfolio and the percentage composition by type at June 30, 2025 and 2024:

(Dollars in Thousands)

The table below summarizes the Company’s commercial real estate portfolio at June 30, 2025 as segregated by industry concentrations based on North American Industry Classification System:

(Dollars in Thousands)

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The table below summarizes the Company’s commercial real estate portfolio at June 30, 2025 as segregated by geographic region in which the property is located:

(Dollars in Thousands)

Asset Quality

The Company assesses the adequacy of its ACL at the end of each calendar quarter. The level of ACL is based on the Company’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors. The ACL is increased by a provision for credit losses, which is charged to expense, and reduced by charge-offs, net of recoveries. We believe the ACL is adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio.

Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method. The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates and gross domestic product. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors. See “Note 1 – General” in the Notes to Consolidated Financial Statements included in Item 1. Consolidated Financial Statements elsewhere in this report.

The expected credit losses for each loan pool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative adjustments either increase or decrease the quantitative model estimation. The Company considers factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions.

Loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and expected credit losses are estimated on an individual basis. Individual evaluations are performed for nonaccrual loans, loans rated substandard, and certain modified loans. The allowance for credit losses on these individually evaluated loans is calculated using methods, such as the estimated fair value of underlying collateral, observable market prices of comparable debt, or the present value of expected future cash flows.

(Dollars in thousands)

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(In Thousands)

(In Thousands)

Nonperforming Assets

Total nonperforming loans at June 30, 2025, which include nonaccrual loans and loans 90 or more days past due and still accruing, increased $29.7 million, or 69.9%, to $72.2 million from $42.5 million at December 31, 2024. Of this total, nonaccrual loans of $68.6 million at June 30, 2025 represented a net increase of $29.1 million from nonaccrual loans at December 31, 2024. The majority of the year-over-year increase in non-performing assets was attributable to two relationships, both of which are secured by real estate. Excluding credit card accounts, there were seven loans 90 or more days past due and still accruing totaling $3.4 million at June 30, 2025, compared to no loans at December 31, 2024. Loans made to borrowers experiencing financial difficulty that were modified during the three months ended June 30, 2025 and 2024 were $0.5 million and $4.7 million, respectively.

The following table details our nonperforming assets at June 30, 2025 and December 31, 2024:

(Dollar Amounts In Thousands)

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OREO and repossessed assets at June 30, 2025 were $311,000, a decrease of $2.2 million, or 87.7%, from $2.5 million at December 31, 2024. The following table summarizes OREO and repossessed asset activity for the six months ended June 30, 2025 and 2024:

(In thousands)

The balance of nonperforming assets can fluctuate due to changes in economic conditions. We have established a policy to discontinue accruing interest on a loan (i.e., place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent if management believes that the collection of interest is not expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. Interest income on nonaccrual loans is recognized only as received. If we believe that a loan will not be collected in full, we will increase the ACL to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal.

Deposits

We rely on increasing our deposit base to fund loan and other asset growth. Each of our markets is highly competitive. We compete for local deposits by offering attractive products with competitive rates. We expect to have a higher average cost of funds for local deposits than competitor banks due to our lack of an extensive branch network. Our management’s strategy is to offset the higher cost of funding with a lower level of operating expense and firm pricing discipline for loan products. We have promoted electronic banking services by providing them without charge and by offering in-bank customer training. At June 30, 2025, our total deposits were $13.86 billion, an increase of $318.9 million, or 2.4%, from $13.54 billion at December 31, 2024.

The following table summarizes balances of our deposits and the percentage of each type to the total at June 30, 2025 and December 31, 2024:

At June 30, 2025 and December 31, 2024, we estimate that we had approximately $9.27 billion and $9.03 billion, respectively, in uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit. The uninsured deposit data for 2025 and 2024 reflects the deposit insurance impact of “combined ownership segregation” of escrow and other accounts at an aggregate level but does not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.

(In Thousands)

Other Borrowings

Our borrowings consist of federal funds purchased and subordinated notes payable. We had $1.60 billion and $1.99 billion at June 30, 2025 and December 31, 2024, respectively, in federal funds purchased from correspondent banks that are clients of our correspondent banking unit. The average rate paid on these borrowings was 4.49% for the quarter ended June 30, 2025. Other borrowings consist of the following:

• $30.0 million of the Company’s 4.5% Subordinated Notes due November 8, 2027, which were issued in a private placement in November 2017 and pay interest semi-annually. The Notes may be prepaid by the Company; and
• $34.75 million of the Company’s 4% Subordinated Notes due October 21, 2030, which were issued in a private placement in October 2020 and pay interest semi-annually. The Notes may not be prepaid by the Company prior to October 21, 2025.

Liquidity

Liquidity is defined as our ability to generate sufficient cash to fund current loan demand, deposit withdrawals, and other cash demands and disbursement needs, and otherwise to operate on an ongoing basis.

The retention of existing deposits and attraction of new deposit sources through new and existing customers is critical to our liquidity position. If our liquidity was to decline due to deposit withdrawals, we have procedures that provide for certain actions under varying liquidity conditions. These actions include borrowing from existing correspondent banks, selling or participating loans, and curtailing loan commitments and funding. At June 30, 2025, our liquid assets, represented by cash and due from banks, federal funds sold and unpledged available-for-sale securities, totaled $2.32 billion. The Bank had loans pledged to both the FHLB and the Federal Reserve Bank of Atlanta, which provided approximately $3.24 billion and $2.21 billion, respectively, in available funding. The Bank’s policy limits on brokered deposits would allow for up to $4.34 billion in available funding for brokered deposits. Additionally, the Bank had approximately $312.0 million in available unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements, to meet short term funding needs.

Our management meets on a quarterly basis to review sources and uses of funding to determine the appropriate strategy to ensure an appropriate level of liquidity. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. Our regular sources of funding are from the growth of our deposit base, repayment of principal and interest on loans, the sale of loans and the renewal of time deposits. In addition, we have issued debt as described above under “Borrowings” and have various other sources of liquidity as discussed herein. We believe these sources of funding are adequate to meet both our immediate (within the next 12 months) and our longer term anticipated funding needs. However, we may need additional funding if we are able to maintain our current growth rate into the future.

We are subject to general FDIC guidelines that require a minimum level of liquidity. Management believes our liquidity ratios meet or exceed these guidelines.

The following table illustrates, during the periods presented, the mix of our funding sources and the assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled $17.63 billion and $17.67 billion, respectively, for the three and six months ended June 30, 2025.

Capital Adequacy

Total stockholders’ equity attributable to us at June 30, 2025 was $1.72 billion, or 9.91% of total assets. At December 31, 2024, total stockholders’ equity attributable to us was $1.62 billion, or 9.32% of total assets.

As of June 30, 2025, our most recent notification from the FDIC categorized us as well-capitalized under the regulatory framework for prompt corrective action. To remain categorized as well-capitalized, we must maintain minimum Common Equity Tier 1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as disclosed in the table below. Our management believes that we are well-capitalized under the prompt corrective action provisions as of June 30, 2025.

The following table sets forth (i) the capital ratios required by the FDIC and the Alabama Banking Department’s leverage ratio requirement and (ii) our actual ratios, not including the applicable 2.5% capital conservation buffer, of capital to total regulatory or risk-weighted assets, as of June 30, 2025, December 31, 2024 and June 30, 2024:

(Dollars in Thousands)

We are a legal entity separate and distinct from the Bank. Our principal source of cash flow, including cash flow to pay dividends to our stockholders, is dividends the Bank pays to us as the Bank’s sole shareholder. Statutory and regulatory limitations apply to the Bank’s payment of dividends to us as well as our payment of dividends to our stockholders. The requirement that a bank holding company must serve as a source of strength to its subsidiary banks also results in the position of the Federal Reserve that a bank holding company should not maintain a level of cash dividends to its stockholders that places undue pressure on the capital of its bank subsidiaries or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions of Delaware corporate law.

The Alabama Banking Department also regulates the Bank’s dividend payments. Under Alabama law, a state-chartered bank may not pay a dividend in excess of 90% of its net earnings until the Bank’s surplus is equal to at least 20% of its capital (our Bank’s surplus currently exceeds 20% of its capital). Moreover, our Bank is also required by Alabama law to obtain the prior approval of the Superintendent of Banks (“Superintendent”) for its payment of dividends if the total of all dividends declared by the Bank in any calendar year will exceed the total of (i) the Bank’s net earnings (as defined by statute) for that year, plus (ii) its retained net earnings for the preceding two years, less any required transfers to surplus. In addition, no dividends, withdrawals or transfers may be made from the Bank’s surplus without the prior written approval of the Superintendent.

The Bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. If, in the opinion of the federal banking regulators, the Bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulators could require, after notice and a hearing, that the Bank stop or refrain from engaging in the questioned practice.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit beyond current fundings, credit card arrangements, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in our balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement we have in those particular financial arrangements. All such credit arrangements bear interest at variable rates and we have no such credit arrangements that bear interest at fixed rates.

Our exposure to credit loss for commitments to extend credit, credit card arrangements and standby letters of credit is represented by the contractual or notional amount of these instruments in the event of non-performance by the other party to such financial instrument. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

As part of our mortgage operations, we originate and sell certain loans to investors in the secondary market. We continue to experience a manageable level of investor repurchase demands. For loans sold, we have an obligation to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations and warranties made by the Bank at the time of the sale. Representations and warranties typically include those made regarding loans that had missing or insufficient file documentation or loans obtained through fraud by borrowers or other third parties such as appraisers.

Financial instruments whose unfunded contract amounts represent credit risk at June 30, 2025 are as follows:

(In Thousands)

Commitments to extend credit beyond current funded amounts are agreements to lend to a customer as long as there is no violation of any condition established in the applicable loan agreement. Such commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by us upon extension of credit is based on our management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. All letters of credit are due within one year or less of the original commitment date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Federal funds lines of credit are uncommitted lines issued to downstream correspondent banks for the purpose of providing liquidity to them. The lines are unsecured, and we have no obligation to sell federal funds to the correspondent, nor does the correspondent have any obligation to request or accept purchases of federal funds from us.

Results of Operations

Summary of Net Income

Net income and net income available to common stockholders was $61.4 million for the quarter ended June 30, 2025, compared to net income and net income available to common stockholders of $52.1 million for the second quarter of 2024. Net income and net income available to common stockholders was $124.6 million for the six months ended June 30, 2025, compared to net income of $102.2 million and net income available to common stockholders of $102.1 million for the six months ended June 30, 2024. The increase in net income for both the three and six months ended months ended June 30, 2025 compared to 2024 was primarily driven by growth in net interest income, partially offset by decreases in non-interest income.

Basic and diluted earnings per common share were both $1.12 for the three months ended June 30, 2025, compared to $0.96 and $0.95, respectively, in the corresponding period in 2024. Basic and diluted earnings per common share were both $2.28 for the six months ended June 30, 2025, compared to $1.87 for both for the corresponding period in 2024. Return on average assets for the three and six months ended June 30, 2025 was 1.4% and 1.42% compared to 1.34% and 1.30%, respectively, for the corresponding periods in 2024. Return on average common stockholders’ equity for the three and six months ended June 30, 2025 was 14.56% and 15.08%, respectively, compared to 14.08% and 13.96%, respectively, for the corresponding periods in 2024.

Net Interest Income and Net Interest Margin Analysis

Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. The major factors that affect net interest income are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities. Management’s ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of our primary source of earnings.

Taxable-equivalent net interest income increased $25.9 million, or 24.4%, to $131.8 million for the three months ended June 30, 2025 compared to $105.9 million for the corresponding period in 2024, and increased $47.0 million, or 22.6%, to $255.4 million for the six months ended June 30, 2025 compared to $208.4 million for the corresponding period in 2024. The taxable-equivalent yield on interest-earning assets decreased to 5.80% for the three months ended June 30, 2025 from 6.01% for the corresponding period in 2024, and decreased to 5.76% for the six months ended June 30, 2025 from 5.94% for the corresponding period in 2024. The yield on loans for the three months ended June 30, 2025 was 6.37% compared to 6.48% for the corresponding period in 2024, and 6.34% compared to 6.44% for the six months ended June 30, 2025 and June 30, 2024, respectively. The cost of total interest-bearing liabilities decreased to 3.50% for the three months ended June 30, 2025 compared to 4.23% for the corresponding period in 2024, and decreased to 3.55% for the six months ended June 30, 2025 from 4.23% for the corresponding period in 2024. Net interest margin for the three months ended June 30, 2025 was 3.10% compared to 2.79% for the corresponding period in 2024, and 3.01% for the six months ended June 30, 2025 compared to 2.73% for the corresponding period in 2024.

The Federal Reserve Bank’s targeted federal funds rate was 5.25 – 5.50% at June 30, 2024 compared to its current range as of June 30, 2025 of 4.25 – 4.50%.

The following tables show, for the three and six months ended June 30, 2025 and June 30, 2024, the average balances of each principal category of our assets, liabilities and stockholders’ equity, and an analysis of net interest revenue. The accompanying tables reflect changes in our net interest margin as a result of changes in the volume and rate of our interest-earning assets and interest-bearing liabilities for the same periods. Changes as a result of mix or the number of days in the periods have been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The tables are presented on a taxable-equivalent basis where applicable:

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Three Months Ended June 30,

(In thousands, except Average Yields and Rates)

(1) Non-accrual loans are included in average loan balances in all periods. Loan fees of $4,430 and $3,317 are included in interest income in the second quarter of 2025 and 2024, respectively.

(2) Amortization of acquired loan premiums of $51 and $46 is included in interest income in 2025 and 2024, respectively.

(3) Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%.

(4) Unrealized losses of $(36,381) and $(66,663) are excluded from the yield calculation in the second quarter of 2025 and 2024, respectively.

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(In Thousands)

Our growth in loans and interest-bearing balances with banks drove the favorable volume component change. The rate component was favorable as loan yields decreased 11 basis points and average rates paid on interest-bearing liabilities decreased 73 basis points.

Average Balance Sheets and Net Interest Analysis

On a Fully Taxable-Equivalent Basis

For the Six Months Ended June 30,

(In thousands, except Average Yields and Rates)

(1) Non-accrual loans are included in average loan balances in all periods. Loan fees of $4,430 and $3,317 are included in interest income in the second quarter of 2025 and 2024, respectively.

(2) Amortization of acquired loan premiums of $51 and $46 is included in interest income in 2025 and 2024, respectively.

(3) Interest income and yields are presented on a fully taxable equivalent basis using a tax rate of 21%.

(4) Unrealized losses of $(36,381) and $(66,663) are excluded from the yield calculation in the second quarter of 2025 and 2024, respectively.

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(In Thousands)

Our growth in loans and interest-bearing balances with banks drove the favorable volume component change. While the overall rate component was favorable, loan yields decreased by 10 basis points, and the average rate paid on interest-bearing liabilities decreased by 68 basis points.

Tax Credit Investments

The Company invests in certain affordable housing projects throughout its market area as a means of supporting local communities. The Company receives tax credits related to these investments, for which it typically acts as a limited partner and therefore does not exert control over the operating or financial policies of the partnerships. The Company typically provides financing during the construction and development of the properties. Tax credits are subject to recapture by taxing authorities based on compliance features required to be met at the project level. The Company’s maximum potential exposure to losses relative to investments in variable interest entities (“VIEs”) is generally limited to the sum of the outstanding balance, future funding commitments and any related loans to the entity, exclusive of any potential tax recapture associated with the investments. Loans to these entities are underwritten in substantially the same manner as the Company’s other loans and are generally secured. The Company invests as a limited partner in certain projects through the New Market Tax Credit program, which is a Federal financial program aimed to stimulate business and real estate investment in underserved communities via a federal tax credit. The Company has investments in and future funding commitments related to private equity and certain other equity method investments. The risk exposure relating to such commitments is generally limited to the amount of investments and future funding commitments made. The following table summarizes certain tax credit and certain equity investments.

(In Thousands)

42

The following table presents a summary of tax credits and amortization expense associated with those investments accounted for using the proportional amortization method for the period indicated.

(In Thousands)

(In Thousands)

Provision for Credit Losses

The provision for credit losses on loans was $11.4 million for the three months ended June 30, 2025, an increase of $6.1 million from $5.4 million for the three months ended June 30, 2024, and was $17.9 million for the six months ended June 30, 2025, an increase of $8.2 million from $9.7 million for the six months ended June 30, 2024. The ACL as of June 30, 2025, March 31, 2025, and June 30, 2024, totaled $170.0 million, $165.0 million, and $158.1 million, or 1.28%, 1.28%, and 1.28% of loans, net of unearned income, respectively. Annualized net credit charge-offs to quarter-to-date average loans were 0.20% for the three months ended June 30, 2025, a 10 basis points increase compared to 0.10% for the second quarter of 2024. Annualized net credit charge-offs to year-to-date average loans were 0.19% for the six months ended June 30, 2025, compared to 0.08% for the corresponding period in 2024. Nonperforming loans decreased to $72.5 million, or 0.55% of total loans, at June 30, 2025 from $74.7 million, or 0.57% of total loans at December 31, 2024, and increased compared to $36.4 million, or 0.28% of total loans, at June 30, 2024. See the section captioned “Asset Quality” located elsewhere in this item for additional discussion related to provision for credit losses.

Noninterest Income

Noninterest income totaled $421,000 for the three months ended June 30, 2025, a decrease of $8.5 million, or 95.3%, compared to the corresponding period in 2024, and totaled $8.7 million for the six months ended June 30, 2025, a decrease of $9.0 million, or 50.9%, from to the corresponding period in 2024. The decrease in non-interest income is due to an $8.6 million loss on the sale of available-for-sale debt securities during the second quarter of 2025 as a result of restructuring the portfolio. Service charges on deposit accounts increased $378,000, or 16.5%, to $2.7 million for the three months ended June 30, 2025 compared to $2.3 million for the same period in 2024, and increased $786,000, or 17.7%, to $5.2 million for the six months ended June 30, 2025 compared to $4.4 million for the same period in 2024. Mortgage banking income decreased $56,000, or 4.1%, to $1.3 million for the three months ended June 30, 2025 compared to $1.4 million for the same period in 2024, and decreased $121,000, or 5.9%, to $1.9 million for the six months ended June 30, 2025 compared to $2.1 million for the same period in 2024. The increase in mortgage banking revenue was primarily attributed to a combination of favorable market conditions and increased staffing levels. Net credit card income decreased $214,000, or 9.2%, to $2.1 million for the three months ended June 30, 2025 compared to $2.3 million for the same period in 2024, and decreased $401,000, or 8.9%, to $4.1 million for the six months ended June 30, 2025 compared to $4.5 million for the same period in 2024. Bank-owned life insurance (“BOLI”) income increased $68,000, or 3.3%, to $2.1 million for the three months ended June 30, 2025 compared to $2.1 million for the same period in 2024, and decreased $1.0 million, or 19.4%, to $4.3 million for the six months ended June 30, 2025 compared to $5.3 million for the same period in 2024.. Other income decreased $83,000, or 10.0%, to $745,000 for the three months ended June 30, 2025 compared to $828,000 for the same period in 2024, and increased $319,000, or 22.4%, to $1.7 million for the six months ended June 30, 2025 compared to $1.4 million for the same period in 2024. Merchant service revenue increased $5,000, or .9%, to $600,000 for the three months ended June 30, 2025 compared to $595,000 for the same period in 2024, and increased $7,000, or .6%, to $1.1 million for the six months ended June 30, 2025 compared to $1.1 million for the same period in 2024.

Noninterest Expense

Noninterest expense totaled $44.2 million for the three months ended June 30, 2025, an increase of $1.4 million, or 3.2%, compared to the corresponding period in 2024, and totaled $90.3 million for the six months ended June 30, 2025, an increase of $1.2 million, or 1.3%, from to the corresponding period in 2024.

Details of expense are as follows:

• Salary and benefit expense decreased $1.6 million, or 6.8%, to $22.6 million for the three months ended June 30, 2025 compared to $24.2 million for the same period in 2024, and decreased $1.7 million, or 3.7%, to $45.5 million for the six months ended June 30, 2025 compared to $47.2 million for the same period in 2024. The number of FTE employees increased by 34, or 5.4%, to 659 at June 30, 2025 compared to 625 at June 30, 2024.
• Third party processing and other services increased $540,000, or 7.2%, to $8.0 million for the three months ended June 30, 2025 compared to $7.5 million for the same period in 2024, and increased $1.1 million, or 7.6%, to $15.7 million for the six months ended June 30, 2025 compared to $14.6 million for the same period in 2024.
• Professional services expense increased $163,000, or 9.4%, to $1.9 million for the three months ended June 30, 2025 compared to $1.7 million for the same period in 2024, and increased $632,000, or 19.7%, to $3.8 million for the six months ended June 30, 2025 compared to $3.2 million for the same period in 2024.
• FDIC and other regulatory assessments increased $551,000, or 25.0%, to $2.8 million for the three months ended June 30, 2025 compared to $2.2 million for the same period in 2024, and decreased $500,000, or 8.2%, to $5.6 million for the six months ended June 30, 2025 compared to $6.1 million for the same period in 2024.
• Other operating expenses increased $1.8 million, or 49.5%, to $5.4 million for the three months ended June 30, 2025 compared to $3.6 million for the same period in 2024, and increased $1.5 million, or 14.3%, to $12.4 million for the six months ended June 30, 2025 compared to $10.8 million for the same period in 2024.

Income Tax Expense

Income tax expense was $15.2 million for the three months ended June 30, 2025 compared to $14.5 million for the same period in 2024, and was $31.1 million for the six months ended June 30, 2025, compared to $25.1 million for the same period in 2024. Our effective tax rate for the three and six months ended June 30, 2025 was 19.82% and 19.94%, respectively, compared to 21.71% and 19.70% for the corresponding periods in 2024, respectively. We recognized excess tax benefits as an income tax credit to our income tax expense from the exercise and vesting of stock options and restricted stock during the three and six months ended June 30, 2025 of $234,000 and $704,000, respectively, compared to no expense for the three months ended June 30, 2024 and $600,000 for the six months ended June 30, 2024, respectively. Our primary permanent differences are related to tax exempt income on securities, state income tax benefit on real estate investment trust dividends, various qualifying tax credits and change in cash surrender value of bank-owned life insurance.

We own real estate investment trusts for the purpose of holding and managing participations in residential mortgages and commercial real estate loans originated by the Bank. The trusts are wholly-owned subsidiaries of a trust holding company, which in turn is an indirect wholly-owned subsidiary of the Bank. The trusts earn interest income on the loans they hold and incur operating expenses related to their activities. They pay their net earnings, in the form of dividends, to the Bank, which receives a deduction for state income taxes.

Critical Accounting Estimates

The accounting principles we follow and our methods for applying these principles conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. To prepare consolidated financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. In management’s opinion, certain accounting policies have a more significant impact than others on the Company’s financial reporting. The allowance for credit losses and income taxes are particularly significant for the Company’s financial reporting. Information concerning our accounting policies and critical accounting estimates with respect to these items is available in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. There were no changes to the accounting policies for the allowance for credit losses or income taxes during the three and six months ended June 30, 2025.

Like all financial institutions, we are subject to market risk from changes in interest rates. Interest rate risk is inherent in the balance sheet due to the mismatch between the maturities of rate-sensitive assets and rate-sensitive liabilities. If rates are rising, and the level of rate-sensitive liabilities exceeds the level of rate-sensitive assets, the net interest margin will be negatively impacted. Conversely, if rates are falling, and the level of rate-sensitive liabilities is greater than the level of rate-sensitive assets, the impact on the net interest margin will be favorable. Managing interest rate risk is further complicated by the fact that all rates do not change at the same pace; in other words, short-term rates may be rising while longer-term rates remain stable. In addition, different types of rate-sensitive assets and rate-sensitive liabilities react differently to changes in rates.

To manage interest rate risk, we must take a position on the expected future trend of interest rates. Rates may rise, fall or remain the same. Our asset-liability committee develops its view of future rate trends and strives to manage rate risk within a targeted range by monitoring economic indicators, examining the views of economists and other experts, and understanding the current status of our balance sheet. Our annual budget reflects the anticipated rate environment for the next 12 months. The asset-liability committee conducts a quarterly analysis of the rate sensitivity position and reports its results to our board of directors.

The asset-liability committee thoroughly analyzes the maturities of rate-sensitive assets and liabilities. This analysis measures the “gap,” which is defined as the difference between the dollar amount of rate-sensitive assets repricing during a period and the volume of rate-sensitive liabilities repricing during the same period. The gap is also expressed as the ratio of rate-sensitive assets divided by rate-sensitive liabilities. If the ratio is greater than one, the dollar value of assets exceeds the dollar value of liabilities; the balance sheet is “asset-sensitive.” Conversely, if the value of liabilities exceeds the value of assets, the ratio is less than one and the balance sheet is “liability-sensitive.” Our internal policy requires management to maintain the gap such that net interest margins will not change more than 6% if interest rates change 100 basis points or more than 12% if interest rates change 200 basis points. There have been no changes to our policies or procedures for analyzing our interest rate risk since December 31, 2024, and there have been no material changes to our sensitivity to changes in interest rates since December 31, 2024, as disclosed in our Annual Report on Form 10-K.

Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our CEO and CFO, as of June 30, 2025. Based upon the evaluation, our CEO and CFO have concluded that, as of June 30, 2025, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control. We have identified a number of these risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.