BSRR 10-K & 10-Q changes, risk factors and insider trading
Sierra Bancorp · Nasdaq · State Commercial Banks · CIK 1130144 · All filings on SEC.gov
At a glance
What changed in the latest 10-K
Risk Factors
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Management's Discussion & Analysis (MD&A)
Largest changes
With the credit loss expense on loans recorded insee in full comparison20242025, we were able to maintain our allowance for credit losses on loans at a level that, in Management’s judgment, is adequate to absorb expected credit losses over the remaining contractual life onloans related toboth individuallyidentifiedandloanscollectivelyasevaluatedwell as expected credit losses over the remaining contractual life in the remaining loan portfolio.loans. Specifically identifiable and quantifiable credit losses on loans are immediately charged off against the allowance. The Company experienced net loancharge offscharge-offs of $9.4 million in 2025, $3.3 million in 2024, and $3.6 million in2023, and $11.5 million in 2022. The provision for credit losses on loans for 2022 was elevated due to the impact of two loan relationships; one dairy loan relationship with total charge-offs of $8.7 million and a single office building loan relationship that was sold at a $1.9 million discount due to an increased risk of default that would have likely led to a prolonged collection period.2023.
The allowance for credit losses on loans, a contra-asset, is established through a provision for credit losses on loans. The allowance for credit losses on loans is estimated at a level that, in Management’s judgment, is adequate to absorb expected credit losses on loanssee in full comparisonrelated toboth individuallyidentifiedandloanscollectivelyasevaluatedwellforas expected credit losses in the remaining loan portfolio.reserves. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off. Note 2 to the consolidated financial statements provides a more comprehensive discussion of the accounting guidance weconform toapply and the methodology we use to determine an appropriate allowance for credit losses on loans.The Company’s allowance for credit losses on loans was $24.8 million, or 1.07% of gross loans at December 31, 2024, relative to $23.5 million, or 1.12% of gross loans at December 31, 2023. The increase in the allowance resulted from an increase in individual loan reserves, primarily as a result of a downgrade in the fourth quarter of 2024 of one agricultural loan relationship. This increase was partially offset by a 29 basis point decrease in historical loss rates that drive the quantitative reserves. At December 31, 2024, nonaccrual loans totaled $19.7 million compared to $8.0 million at December 31, 2023. All of the Company’s nonperforming assets are periodically reviewed and are either well-reserved based on current loss expectations or are carried at the fair value of the underlying collateral, net of expected disposition costs. The ratio of the allowance to nonperforming loans was 126% at December 31, 2024, relative to 294% at December 31, 2023, and 118% at December 31, 2022. As described above, a separate allowance of $0.7 million for potential losses inherent in unused commitments is included in other liabilities at December 31, 2024.
“Gain on the sale of fixed assets for $3.8 million, and $15.3 million, for the years ending 2024, and 2023 respectively, was due to the sale of Bank owned branch buildings that were subsequently leased back. Both of these transactions and related gains were part of an overall balance sheet restructuring. A securities strategy identified $196.7 million in bonds yielding 2.61%, sold in January 2024 at a loss of $14.5 million. There were also $53.8 million in bonds sold during the first quarter of 2024, at a loss of $2.9 million. …”see in full comparison
Thesee in full comparisonincreasedecrease in average earning assets in20232024 over20222023 was due primarily topurchasesthe strategic restructuring ofinvestmentoursecurities,lower-yieldingaugmentedbondwithportfolio in the first quarter of 2024, partially offset by increases intheloanaverage balance of loans.balances. The average balance of investment securitiesincreaseddecreased$212.3$285.1 million while average gross loan balances increased$57.7$161.5 million. We experienced an increase of$22.4$176.5 millionin real estate loans, $27.1 million increasein mortgage warehouse line utilization, and a$7.9$39.6 million increase inother commercialfarmland loans.TheHigherpositivecostimpactaverage borrowed funds declined $153.6 million, enabled by the sale ofaveragelower-yieldingasset growth in 2023 along with a 100 basis points increase in yield was negatively impacted by a 161 basis points increase in yield on interest bearing liabilities due to a shift by our customers into higher cost certificates of deposits coupled with an increase in more expensive borrowed funds.bonds. The net interest margin in20232024 was1029 basis pointslowerhigher than2022.in 2023, as a result of the balance sheet restructuring.
Thesee in full comparisoninstantaneousinterest rate sensitivity results indicate the Company remained generally asset sensitive to a parallel rate shocksimulationasfor the period endingof December 31,2024,2025;indicates thathowever, theCompanybalanceissheet’sassetsensitivitysensitive, with net interest income increasing into risingrate scenarios and declining in decreasing rate scenarios, with a continued drop in interestrateshavingwasthesubstantiallymost substantial negative impact. The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at December 31, 2024, asreduced compared to December 31,2023,2024,isandduewasmostlynear neutral across moderate upward rate shocks. The reduced sensitivity totheparalleldecreaserate shock compared to December 31, 2024, was driven primarily by changes in funding composition and deposit pricing dynamics. In particular, thelevelincreased use ofovernightshort-termborrowingswholesalebothfunding, including federal funds purchased, resulted inFedaFundslargerpurchasedportion of liabilities repricing immediately with market rate changes. In addition, the Company’s strategic actions to reposition its deposit mix andovernightreduceFHLBtimeborrowings,depositwhichbalanceshadshiftedanaaveragegreaterrateportion of5.52%.theTheinterest-bearingdecreasedeposit base toward products with higher sensitivity to market rates. Collectively, these factors caused liability costs to reprice more quickly than earning asset yields over the simulation horizon, reducing the Company’s net interest income benefit intheserising-rateborrowingsscenarioswasandfacilitatedcontributingbytothereducedsalenetofinterestbondsincome pressure inlatedeclining-rate2023 and early 2024 having an average book yield of 2.61%.scenarios. In addition, adding to our asset sensitivity, utilization on variable rate mortgage warehouse linesincreased,increased$210.4$191.9million,millionatduringDecember202531,and2024. Thethe Company had approximately$311.6$247.6 million of unfunded mortgage warehouse lines at December 31,2024.2025. If rates decrease, it would be expected that a significant portion of the unfunded mortgage warehouse lines would become funded andthereby,thereby mitigate the impact of lower rates on the balance sheet through higher utilization.
“Assets totaled $3.6 billion at December 31, 2024, a decrease of $115.5 million, or 3%, for the year. Assets decreased in 2024 mostly a result of a strategic balance sheet restructuring, substantially offset by loan growth in 2024. Investment securities declined $377.8 million, primarily from the sale of bonds from the strategic securities transaction that was part of the balance sheet restructuring, as well as other maturities and calls of investment securities. …”see in full comparison
Full comparison: every changed paragraph (121)
Statements contained in this report or incorporated by reference that are not purely historical are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, including the Company’s expectations, intentions, beliefs, or strategies regarding the future. These forward-looking statements include, but are not limited to, statements about the Company’s plans, objectives, expectationsexpectations, and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. All forward-looking statements concerning economic conditions, growth rates, income, expenses, or other values which are included in this document are based on information available to the Company on the date noted, and the Company assumes no obligation to correct, revise, or update any such forward-looking statements. It is important to note that the Company’s actual results could materially differ from those in such forward-looking statements, and you should not place undue reliance on these forward-looking statements. Risk factors and the Company’s ability to manage that risk could cause actual results to differ materially from those in forward-looking statements include but are not limited to those outlined previously in Item 1A.
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States and prevailing practices within the banking industry. All significant intercompany balances and transactions have been eliminated. Certain reclassifications may have been made to prior year’s balances to conform to classifications used in 2024.2025. Actual results may differ from those estimates under divergent conditions.
The increasedecrease in average earning assets in 20232024 over 20222023 was due primarily to purchasesthe strategic restructuring of investmentour securities,lower-yielding augmentedbond withportfolio in the first quarter of 2024, partially offset by increases in theloan average balance of loans.balances. The average balance of investment securities increaseddecreased $212.3$285.1 million while average gross loan balances increased $57.7$161.5 million. We experienced an increase of $22.4$176.5 million in real estate loans, $27.1 million increase in mortgage warehouse line utilization, and a $7.9$39.6 million increase in other commercialfarmland loans. TheHigher positivecost impactaverage borrowed funds declined $153.6 million, enabled by the sale of averagelower-yielding asset growth in 2023 along with a 100 basis points increase in yield was negatively impacted by a 161 basis points increase in yield on interest bearing liabilities due to a shift by our customers into higher cost certificates of deposits coupled with an increase in more expensive borrowed funds.bonds. The net interest margin in 20232024 was 1029 basis points lowerhigher than 2022.in 2023, as a result of the balance sheet restructuring.
The year over year increase in 2024 was mostly due to $1.1 million increase in service charges and a $0.9 million increase in bank-owned life insurance income. These two favorable improvements were partially offset by a $0.8 million decline in other noninterest income items.
While operational efficiencies gained in 2024 from strategic decisions made by the Company in personnel expenses, and other noninterest expenses, helped contain noninterest expense, these positive variances were offset by increased occupancy costs as a result of the sale/leaseback transactions in the fourth quarter of 2023 and the first quarter of 2024 resulting in a slight increase in noninterest expense in 2024 compared to 2023.
The year over year decrease in 2023 was negatively impacted by 2022 events that did not recur in 2023, including $3.6 million in gains on the sale of other assets, and the $1.0 million recovery of prior period legal expenses. These unfavorable variances were partially offset by favorable fluctuations in income on bank-owned life insurance (BOLI) with underlying investments mapped directly to the Company’s deferred compensation plan. Also favorably impacting noninterest income was a $15.3 million gain on the sale of Bank owned branch buildings (subsequently leased back), mostly offset by realizing a $14.5 million loss on a securities strategy which identified $196.7 million in available-for-sale securities sold in January 2024.
The increase in noninterest expense in 2023 was due mostly to a $3.9 million increase in salary and benefits expense for new lending teams and management staff along with reduction in force severance payments as discussed in the quarterly comparison, an unfavorable variance in director’s deferred compensation expense which is linked to the favorable changes in bank-owned life insurance income, mentioned above in the discussion of noninterest income, a $0.8 million increase in FDIC assessment costs and $0.5 million increase in fraud losses primarily due to our debit card conversion from Mastercard to VISA earlier in the year.
Net interest income was $120.0$124.7 million in 20242025, as compared to $120.0 million in 2024, and $112.4 million in 2023, and $109.6 million in 2022.2023. This equates to increases of 4% in 2025, and 7% in 2024, and 3% in 2023.2024. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield forof interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the acceleration of net deferred loan fees and costs for loans paid off early, reversal of interest for loans placed on non-accrual status, and the recovery of interest on loans that had been on non-accrual and were paid off, sold, or returned to accrual status.
Net interest income increased in 2025 primarily due to a favorable volume variance of $4.5 million, as higher loan and interest-bearing deposit volumes more than offset lower volumes in the investment portfolio and borrowed funds. The decline in investment volume was mainly caused by runoff and early calls on CLOs. The favorable loan volume variance reflected loan growth during the year, led by higher balances in mortgage warehouse, commercial real estate, and commercial loans.
The unfavorable rate variance of $0.4 million for 2025 was driven largely by an $7.5 million unfavorable rate impact on investment securities, primarily related to variable-rate CLOs affected by 75 basis points of Federal Reserve rate cuts between September and December 2025. This unfavorable impact was partially offset by a favorable rate variance on total loans. The negative rate variance on earning assets was mostly offset by favorable rate variances of $5.2 million on interest-bearing deposits and $0.5 million on borrowed funds, as the yields on these interest bearing liabilities also fell as a result of the Federal Reserve rate cuts.
The positive mix variance of approximately $0.6 million was attributable primarily to the deployment of new borrowed funds at lower interest rates, including increased use of federal funds purchased.
The 2024 favorable volume variance of $8.5 millionmillion, as compared to 2023, is due to the favorable loan volume variance and favorable borrowed fund volume variance exceeding the unfavorable volume variances related to investments and deposits. The decline in investment volume and favorable reduction in borrowed funds was facilitated by the balance sheet restructuring strategy in late 2023. The favorable loan volume variance was due to loan growth in 2024, primarily from mortgage warehouse.
The 2024 favorable rate variance of $0.2 millionmillion, as compared to 2023, is comprised mostly of favorable rate variances related to earning assets being mostly offset by unfavorable deposit and borrowed fund costs due to overall higher rates on assets being offset by higher funding rates. The 2024 unfavorable mix variance of $1.1 million is driven by lower investment balances, and higher loan balances, compounded by higher rates paid on interest bearinginterest-bearing deposits. Some of this unfavorable mix was mitigated by the decrease in borrowed funds.
The Company’s net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, increased by 9 basis points to 3.75% in 2025 and increased by 29 basis points to 3.66% in 2024 as compared to 2023.
The expansion of net interest margin in 2025, as compared to 2024, was driven primarily by a shift in the mix of interest-earning assets and lower funding costs. Higher-yielding loan balances, particularly mortgage warehouse, commercial real estate, and commercial loans, replaced lower-yielding investment securities that declined due to runoff and early calls on CLOs. Additionally, the Company strategically reduced both balances and the cost of time deposits, shifting funding toward lower-cost transaction accounts and federal funds purchased.
Rates paid on non-maturity deposits remained relatively stable in 2025, as compared to 2024, though interest-bearing demand balances continued to reflect rate sensitivity from customers. Short-term borrowings, including federal funds purchased, carried lower rates in 2025 compared to 2024 as market rates declined, contributing to a more favorable overall funding mix. Reduced average balances of higher-cost brokered deposits also contributed to overall improvement in funding costs, supporting margin expansion. These benefits more than offset the reduction in yields on variable-rate CLOs resulting from the 75 basis-point decline in the federal funds rate in the second half of 2025.
The improvement in net interest margin during 2024, as compared to 2023, was largely attributable to the Company’s balance sheet restructuring executed in late 2023 and early 2024. The sale of lower-yielding securities and the paydown of higher-cost borrowed funds resulted in a more favorable earning-asset mix, with loan growth, particularly in mortgage warehouse balances, further contributing to higher yields.
Deposit costs, however, increased meaningfully during 2024 due to sustained competitive pressures. Rates paid on non-maturity deposits increased 41 basis points in 2024 compared to 2023, reflecting heightened customer rate sensitivity. Interest-bearing demand deposits increased 146 basis points, and money market rates rose 96 basis points during the same period. While customer time deposit rates decreased 23 basis points in 2024 due to product repricing, particularly those tied to prime, this decrease was offset by higher non-maturity deposit costs. The overall weighted-average cost of interest-bearing liabilities increased 16 basis points in 2024.
For 2023 as compared to 2022, net interest income was impacted by a favorable rate variance of $15.3 million, partially offset by an unfavorable mix variance of $11.0 million, and an unfavorable volume variance of $1.6 million. The 2023 versus 2022 favorable rate variance is due mostly to a 100 basis point increase in the yield on average earning assets, mostly in higher yielding floating rate commercial loan obligations (CLO), partially offset by a 161 basis point increase in interest expense on interest bearing liabilities. The 2023 versus 2022 unfavorable volume variance mostly is due to larger increases in borrowed funds and interest-bearing deposits over the increases in average earning assets. There was also an unfavorable mix variance of $11.0 million which was mostly from the shift of non or low interest bearing deposits into higher rate time deposits as customers became more rate sensitive and higher volumes of borrowed funds at higher rates than the increases in rates on new volumes of interest earning assets. Increases in higher yielding investment securities and an increase in usage of mortgage warehouse lines offset some of the unfavorable mix variance.
The Company’s net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, increased by 29 basis points to 3.66% in 2024 and declined by 10 basis points to 3.37% in 2023 as compared to 2022. The favorable variance in net interest margin was mostly caused by an increase in yield and volume of higher yielding interest earning assets over the decrease of volume on interest bearing liabilities in 2024 as compared to 2023. The net interest margin compression was mostly caused by an increase in rate and volume (mix) of higher cost of interest bearing liabilities over the increase of volume and yield (mix) on interest earning assets in 2023 as compared to 2022.
Rates paid on non-maturity deposits increased 41 basis points in 2024 over the same period in 2023, and increased 15 points in 2023 over the same period in 2022 as competition for deposits has increased with customers becoming more rate sensitive. Interest bearing demand deposits increased 146 basis points in 2024 over 2023 and increased 75 basis points in 2023 over 2022, an indication of the fierce competition for deposits industry wide. Money market accounts increased 96 basis points in 2024 over 2023 but increased 47 basis points in 2023 over 2022. The weighted average cost of interest-bearing liabilities increased 16 points in 2024 over 2023 and increased 161 basis points in 2023 over 2022. Customer time deposit rates decreased 23 basis points in 2024 over 2023, but increased 285 basis points in 2023 over 2022, due partly to a time deposit product with a rate set to a spread to prime. The current spreads on our floating rate time deposits range from prime minus 500 basis points to prime minus 375 basis points subject to a floor. Three prime rate decreases in 2024, and two prime rate increases earlier in 2023, created rate variances on such accounts.
Rates paid on short-term borrowings, which are tied to short-term borrowing rates, increased 38 basis points during 2024 over 2023, and increased 167 basis points during 2023 over 2022. Rates paid on adjustable-rate trust preferred securities are tied to 3-month CME SOFR and increased 20 basis points during 2024 over 2023 and increased 358 basis points during 2023 over 2022.
During the year, adjustmentsAdjustments to interest income generally occur due to the following adjustments: interest income recovered upon the resolution of nonperforming loans, the reversal of interest income when a loan is placed on non-accrual status, and accelerated fees or prepayment penalties recognized for early payoffs of loans. Such adjustments hadtotaled no$0.7 impactmillion, on$0.5 interestmillion, income in 2024, totaledand $0.9 million of additional interest income in 2023,2025, 2024, and amounted2023, to $1.6 million of interest reversals in 2022.respectively.
Credit risk is inherent in the business of making loans. The Company sets aside an allowance for credit losses on loans, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for credit losses on loans. The Company recorded credit loss expense on loans of $6.1 million in 2025, $4.6 million in 2024, and $4.1 million in 2023,2023. andThe $10.9higher millioncredit loss expense in 2022.2025 Thecompared Companyto 2024 was subjectdue mostly to theincreased adoptionprovision related to a single agricultural lending relationship with total charge-offs of the$7.5 Current Expected Credit Loss ("CECL") accounting method under FASB Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) and implemented the update on January 1, 2022. Upon implementation the Company recorded a $10.4 million pre-tax increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.million. The Company’s $0.5 million increase in credit loss expense for the year ending 2024 over 2023, was due to aan unfavorable increase in the allowance for credit losses on loans individually evaluated, partially offset by the impact of lower net loan charge-offs and a favorable improvement in underlying economic forecasts used as part of our allowance for credit losses model. There was a $6.8 million favorable decrease for the year ending 2023 compared to the same period in 2022 is primarily due to the impact of lower net charge-offs during the year ending 2023.
With the credit loss expense on loans recorded in 20242025, we were able to maintain our allowance for credit losses on loans at a level that, in Management’s judgment, is adequate to absorb expected credit losses over the remaining contractual life on loans related toboth individually identifiedand loanscollectively asevaluated well as expected credit losses over the remaining contractual life in the remaining loan portfolio.loans. Specifically identifiable and quantifiable credit losses on loans are immediately charged off against the allowance. The Company experienced net loan charge offscharge-offs of $9.4 million in 2025, $3.3 million in 2024, and $3.6 million in 2023, and $11.5 million in 2022. The provision for credit losses on loans for 2022 was elevated due to the impact of two loan relationships; one dairy loan relationship with total charge-offs of $8.7 million and a single office building loan relationship that was sold at a $1.9 million discount due to an increased risk of default that would have likely led to a prolonged collection period.2023.
Noninterest income increaseddecreased $0.9 million, or 3%, in 2025 over 2024, following an increase of $1.1 million, or 4%, in 2024 overcompared 2023,to and2023. decreased $0.4 million, or 1%, in 2023 over 2022. Total noninterestNoninterest income wasrepresented 0.95%0.91% of average interest-earning assets in 20242025 asdown comparedfrom to a ratio of 0.89%0.95% in 2023.2024. The ratio increaseddecline in 20242025 mostlywas dueprimarily attributable to noninterestlower incomenet includingnon-recurring service charges on deposit accounts increasing 4%, or $1.1 million,gains along with aan decreaseincrease in interest-earning assets.
The principal component of the Company’s noninterest income, service charges on deposit accounts increaseddecreased 5%,3%, or $0.7 million in 2025 compared to 2024. The decrease was driven primarily by lower overdraft fee income and lower business analysis fees. In 2024, service charges increased $1.1 million, andor were flat in 2023 as5%, compared to 2022.2023, Thisreflecting linehigher item is primarily driven by the volumes of debit card transactions, overdraft transactions, andbusiness analysis fees whichand other service charges, as well as growth in overdraft income. A significant portion of the business analysis fees are drivencharges primarily on the volume of cash orders byto money service businesses.business customers related to cash handling fees. As a percentpercentage of average transaction account balances, service charge income was 1.4% in 2025, 1.6% in 2024, and 1.4% in 2023, and 1.3% in 2022.2023. Overdraft income on both consumer and corporate accounts totaled $5.2 million in 2025, $5.5 million in 2024, and $5.3 million in 2023; and $4.6 million (net of restitution related to NSF fees) in 2022. The Company stopped charging NSF fees in 2022.2023.
Interchange income from debit cards (included in service charges on deposit accounts) was $8.3$8.1 million,million in 2025, consistent with 2024 and was mostly flat in 2024 over 2023, but decreased in 2023 over 2022 by $0.2 million. The unfavorable variance in 2023 was a result of a brand change later in the year from Mastercard to VISA.2023.
BOLI income consists of two components. The first component is a relatively stable investment in “general account” BOLI that receives a standard crediting rate from the carrier which remains relatively stable year over year. The Company’s books reflect a net cash surrender value for general account BOLI of $56.1 million and $41.3 million, respectively as of December 31, 2025 and 2024. General account BOLI produces income that is used to help offset expenses associated with overall employee benefits. Interest credit rates on general account BOLI do not change frequently so the income has typically been fairly consistent with $1.4 million of general account BOLI income recorded for the year ending December 31, 2025, $1.0 million recorded for the year ending December 31, 2024, and $0.9 million recorded for the year ending December 31, 2023. The increase in 2025 was due to the purchase of $15 million in new BOLI polices in April 2025 on senior and executive officers of the Company.
The second component of BOLI is “separate account” which consists of specific directed investments in underlying assets (generally equity and bond funds) that closely mirror investment choices of deferred compensation participants. Deferred compensation participants can make investment choices similar to a traditional 401k plan; as the deferred compensation plan is a nonqualified plan, the liability is a corporate liability. To offset this deferred compensation plan, the Company has chosen to use separate account BOLI designed to be an economic hedge against deferred compensation. Therefore, the income on BOLI generally offsets the deferred compensation expense each year. Separate account BOLI income declined $0.5 million in 2025 which closely matched the $0.6 million decline in deferred compensation expense (including deferred directors fees) for 2025. Similarly, the $0.8 million increase in separate account BOLI income in 2024 closely matched the $0.9 million increase in deferred compensation expense (including deferred directors fees) for 2024. The separate account BOLI earnings are decreased by the underlying cost of life insurance, however, the earnings on separate account BOLI income are tax-free, whereas the related deferred compensation expense is tax deductible. The Company had $13.2 million invested in separate account BOLI at December 31, 2025, which offset approximately $13.7 million of deferred compensation liability.
Net gains (losses) on sale of securities were a $0.1 million gain in 2025, as compared to a $2.6 million loss in 2024 and a $14.1 million loss in 2023. The losses in 2024 and 2023 were primarily attributable to strategic securities sales executed as part of balance sheet repositioning initiatives.
(Loss) gain on sale of fixed assets was $(0.1) million in 2025, as compared to gains of $3.8 million in 2024 and $15.3 million in 2023. The gains in 2024 and 2023 were due primarily to the sale and leaseback of bank-owned branch buildings; no comparable transactions occurred in 2025.
Noninterest income also includes one general category of “other income” of which the following are major components (dollars in thousands):
The “other” category in other noninterest income increased $0.7 million in 2025 compared to 2024 and decreased $0.8 million in 2024 compared to 2023. The fluctuation over the three-year period was driven largely by life insurance proceeds, which contributed to higher income in both 2025 and 2023.
BOLI income generally fluctuates based on the market due to the Company’s “separate account” BOLI being invested in assets that closely mirror investments choices of deferred compensation participants. There is also a part of BOLI that is “general account” and receives a standard crediting rate from the carrier which remains relatively stable year over year. However, the separate-account BOLI used to offset deferred compensation fluctuates significantly from year-to-year as many of our deferred compensation participants are invested in equity-index style funds. In the comparative years ending 2024 over 2023, BOLI income increased $0.9 million; however, in 2023 over 2022, BOLI income increased $2.8 million. The Company had $11.8 million invested in separate account BOLI at December 31, 2024. This separate account BOLI closely matched participant-directed investment allocations that can include equity, bond, or real estate indices, and are thus subject to gains or losses which often contribute to significant fluctuations in income (and associated expense accruals). Net gains on separate account BOLI totaled $1.7 million in 2024, and $0.9 million in 2023, as compared to net losses of $2.0 million in 2022. This resulted in a favorable variance of $0.8 million for the comparative years ending 2024 as compared to 2023, and $2.9 million for the comparative years ending 2023 as compared to 2022. As noted, gains and losses on separate account BOLI are related to expense accruals or reversals associated with participant gains and losses on deferred compensation balances, thus the overall net impact on taxable income tends to be minimal. The Company’s books also reflect a net cash surrender value for general account BOLI of $41.3 million and $41.7 million, respectively for the years ending December 31, 2024 and 2023. General account BOLI produces income that is used to help offset expenses associated with executive salary continuation plans, director retirement plans and other employee benefits. Interest credit rates on general account BOLI do not change frequently so the income has typically been fairly consistent with $1.0 million of general account BOLI income recorded for the year ending December 31, 2024, $0.9 million recorded for the year ending December 31, 2023, and $1.0 million recorded for the year ending December 31, 2022.
Gain on the sale of fixed assets for $3.8 million, and $15.3 million, for the years ending 2024, and 2023 respectively, was due to the sale of Bank owned branch buildings that were subsequently leased back. Both of these transactions and related gains were part of an overall balance sheet restructuring. A securities strategy identified $196.7 million in bonds yielding 2.61%, sold in January 2024 at a loss of $14.5 million. There were also $53.8 million in bonds sold during the first quarter of 2024, at a loss of $2.9 million. The proceeds from the securities strategy went to paydown a portion of other borrowed funds with an average rate of 5.52%. The Company also realized a $0.2 million and $0.4 million gain on the sale or call of securities during the years ending December 31, 2024 and 2023 respectively, and, a $1.5 million gain for the same period in 2022 from a portfolio restructure to decrease effective duration, taking advantage of slight rallies in the Treasury market in early and late 2022.
The other category, decreased $0.8 million to $3.5 million in 2024, $2.8 million to $4.4 million in 2023 and increased to $7.2 million in 2022. The year over year decrease in 2024 over 2023, and in 2023 over 2022 was a result of events that did not recur in 2024 and 2023. For 2024 over 2023, the variance is mostly due to gain on life insurance proceeds while the variance for 2023 over 2022, was primarily due to a $3.6 million gain on the sale of other assets.
Total operating expense, or noninterest expense, decreased $0.1 million, or 0.1%, in 2025 as compared to 2024, and increased slightly by $0.2 million, or 0.2%, in 2024 ascompared to 2023. Noninterest expense was 2.75% of average interest-earning assets in 2025, compared to 2023,2.79% in 2024 and by $7.9 million, or 9%,2.71% in 2023 as compared to 2022.2023.
The largest component of noninterest expense, salaries,salaries and employee benefitsbenefits, increased $0.7 million, or 1%, in 2025 compared to 2024, and decreased $0.6 million, or 1%1%, in 2024 as compared to 2023, and increased $3.9 million, or 8% in 2023 as compared to 2022. The decrease in 2024 was due to strategic decisions in 2023 that created operational efficiencies and reduced noninterest expense, as discussed below.2023. The increase in 20232025 was duedriven toprimarily theby strategichigher hiringemployee ofbenefit newcosts, partially offset by lower deferred compensation expense. Salaries, identified as loan production teams and certain management positions, and standard annual increases to our employee’s base compensation. Loan origination salariescosts, that were deferred from current expense for recognition over the life of related loans totaled $3.0 million in 2025, $3.0 million in 2024, and $2.7 million in 2023, and $2.3 million in 2022.2023.
Salaries and benefits were 56%55% of total operating expense in 2024,2025 and 55% in 2023, and 2022.54% in 2024. The number of full-time equivalent staff employed by the Company totaled 485465 at the end of 2024,2025, as compared to 485 at December 31, 2024, and 489 at December 31, 2023,2023. andThe 491decrease atin full-time equivalent staff for the three-years ending December 31, 2022. The decrease for the years ending 2024, and 2023 in FTE2025 was due to ongoing efficiency initiatives across the reduction in force as several management positions were eliminated due to operational efficiencies.Bank.
Total rent and occupancy expense, including furniture and equipment costs, increased $0.2 million in 2025 compared to 2024, and increased $2.2 million in 2024 as compared to 2023, and $0.4 million in 2023 as compared to 2022.2023. The increase in 2024 was primarily due to higher rent expense fromassociated with the sale/leaseback transactions completed in the fourth quarter oflate 2023 and first quarter ofearly 2024. The increase in 2023 was due to a one-time payment of $0.2 million for home office stipends for staff that work remotely and regular rent escalations.
Advertising and promotionmarketing costs increased $0.1 million in 2025 compared to 2024 and decreased $0.8 million or 36%, in 2024,2024 overcompared 2023,to and increased $0.5 million or 28%, in 2023, over 2022.2023. The decrease in 2024 was a result of a change in the Company’s marketing strategy, while the increase in 2023 was mostly due to a $0.3 millioninconsequential increase in deposit2025 programreflected costsstability duein tothat a deposit acquisition campaign.strategy.
Data processing costs declined slightly in 2025, decreasing $0.1 million from 2024, reflecting management’s disciplined approach to controlling operating expenses. In contrast, costs increased $0.4 million in 2024 relative to 2023, primarily due to the rollout of new loan-origination technology to support customer experience and operational efficiency initiatives, along with increased expenditures related to data-storage capacity.
Deposit services costs decreased $0.1 million in 2025 compared to 2024 and decreased $0.4 million in 2024 compared to 2023. The decrease in 2025 reflects the Company’s continued focus on expense management, as ongoing reductions in debit card processing costs, primarily attributable to the prior conversion from Mastercard to VISA, lower ATM servicing costs, and reduced amortization of core deposit intangibles more than offset increases in armored car and internet banking costs. The decrease in 2024, as compared to 2023, was due to favorable variances in debit card processing and ATM networks costs, from the branding change to VISA from Mastercard in 2023.
Data processing costs increased $0.4 million, or 6% in 2024, as compared to 2023, and decreased by $0.4 million or 6% in 2023 as compared to 2022. The increase in 2024 was primarily from new loan origination software to better serve our customers and create operational efficiencies in the near term, along with increased costs for data storage. The decrease in 2023 was mostly from a $0.6 million decrease in core processing costs and lower internet banking costs, partially offset by higher Visa conversion costs. The Company renegotiated its core processing contract which resulted in overall savings.
Deposit services costs decreased by $0.4 million, or 4% in 2024 as compared to 2023, and decreased by $0.7 million or 8% in 2023 as compared to 2022. The decrease in 2024 was due to favorable variances in debit card processing and ATM networks costs, from a branding change to VISA from Mastercard in 2023. Deposit costs favorable variance in 2023, over 2022 were due to a decrease in deposit statement costs, and lower ATM network costs.
Loan services costs are comprised of loan processing costs, and net costs associated with foreclosed assets. Loan processing costs, which include expenses for property appraisals and inspections, loan collections, demand and foreclosure activities, loan servicing, loan sales, and other miscellaneous lending costs, decreasedexperienced bymodest $0.1declines millionin orboth 11%,2025 relative to 2024 and in 2024 as comparedrelative to 2023, and increased by $0.1 million or 9%, in 2023 as compared to 2022.2023. The decrease in 20242025 over 2023, as well as the increase in 2023 over 2022,2024 was due to fluctuationsdeclines in appraisal costs and credit reporting costs while the 2024 decline over 2023 was mainly related to reduced appraisal costs. Foreclosed assets costs are comprised of write-downs taken subsequent to reappraisals, OREO operating expense (including property taxes), and losses on the sale of foreclosed assets, net of rental income on OREO properties and gains on the sale of foreclosed assets. ThereForeclosed asset expenses were no expensesinconsequential in 2025 and 2024, and $0.7 million expenses in 2023 and $0.1 million in expenses in 2022.2023. These costs fluctuate based on market conditions of OREO relative to our holding value, the nature of the underlying properties and the volume of OREO properties in inventory. At the end of 2024,2025, the Company had noone OREO propertiesproperty remaining in inventory.inventory at a fair value of $1.6 million. The property is currently in the process of sale with no additional expected losses on the sale.
The “other operating costs” category includes telecommunications expense, postage, and other miscellaneous costs. TelecommunicationsOther expenseoperating decreasedcosts remained flat in 2025 as compared to a decrease of $0.5 million, or 13%, in 2024, as compared to 2023, and was flat at $1.6 million in 2023, as compared to 2022.2024. The decrease in 2024 was due to payments in 2023 that did not reoccur in 2024, mainly restitution payments made in 2023 to analysis customers, and hiring and recruiting costs.
Total Professional Services costs, which consist of legal and accounting, acquisition, directors’ fees, and other professional services costs, decreased $0.6 million in 2025 compared to 2024, and increased $0.9 million in 2024 compared to 2023. The decrease in 2025 was driven primarily by lower deferred directors’ fees and lower directors’ costs, partially offset by higher other professional services costs. The increase in 2024, as compared to 2023, was primarily due to an unfavorable variance in directors’ deferred compensation. Other professional services costs include FDIC assessments and other regulatory expenses, and certain insurance costs.
Stationery and supply costs have trended downward over the three-year period ending in 2025, consistent with the Company’s ongoing strategic emphasis on disciplined expense management.
Debit card and fraud losses totaled $0.9 million in 2025, $1.2 million in 2024, and $1.3 million in 2023. The year-over-year reductions are attributable in part to the Company’s hiring of a full-time fraud manager focused on addressing fraud losses, including debit card fraud.
The Company’s tax-equivalent overhead efficiency ratio improved to 58.9% in 2025, from 60.8% in 2024, and 63.9% in 2023. The efficiency ratio is a calculation of noninterest expense as a percentage of the sum of net interest income and noninterest income excluding net gains (losses) from debt securities and bank owned life insurance income. The Company is strategically focused on strengthening discipline around expenses, as well as increasing income which is the denominator of the equation. The improvement in 2025 primarily reflected higher core revenue generation and continued expense management. Tax-equivalent net interest income increased in 2025, while total noninterest expense remained essentially flat year over year, resulting in a more favorable expense-to-revenue relationship. The improvement in 2024, as compared to 2023, was driven primarily by meaningful growth in core pre-provision revenue, particularly through higher net interest income following balance sheet actions executed in late 2023 and early 2024, combined with a relatively stable operating expense base. Although certain expense categories increased in 2024 (including occupancy and other operating costs), the overall revenue improvement more than offset these changes, resulting in a lower efficiency ratio compared to 2023.
Total Professional Services costs, which consists of legal and accounting, acquisition, directors fees, and other professional services costs, increased by $0.9 million, or 12%, in 2024 as compared to 2023, and $3.1 million in 2023, as compared to 2022. Legal and Accounting costs were flat in 2024, but increased $0.1 million, or 5% in 2023, as compared to 2022. The increase in 2024 was primarily due to an unfavorable variance in directors’ deferred compensation expense while the increase in 2023 was primarily from an increase in audit costs, which were previously outsourced. Directors’ costs increased $0.7 million, or 33%, in 2024 over 2023, and $2.1 million in 2023 as compared to 2022 primarily due to an increase in deferred compensation expense which is linked to the favorable fluctuation in BOLI income. Other professional services costs include FDIC assessments and other regulatory expenses, and certain insurance costs among other things. This category increased $0.1 million, or 4%, in 2024 as compared to 2023, and $0.9 million or 46%, a decrease in interest-earning assets while in 2023, as compared to 2022. The increase in 2024 as compared to 2023, is primarily due to an increase in insurance and bond rating costs. The increase in 2023 was primarily from an increase in FDIC assessment expenses.
Employee deferred compensation expense accruals totaled $0.4 million in 2024, $0.2 million in 2023, and $0.1 million in 2022, and are included in “salaries and employee benefits’ noted above. Directors deferred compensation plan accruals totaled $1.6 million in 2024, $0.8 million in 2023, and $(1.1) million in 2022, and are included in “other professional services” above. As previously mentioned in our discussion of BOLI income, deferred compensation plan accruals are related to separate account BOLI income and losses and the net income impact of all income/expense accruals related to deferred compensation is usually minimal.
Stationery and supply costs were mostly unchanged both in 2024, as compared to 2023, and for 2023, as compared to 2022.
Sundry and teller costs were $1.2 million in 2024, $1.3 million in 2023, and $0.7 million in 2022. In 2024, as well as 2023 and 2022, debit card losses are elevated and consistent with the higher volume of debit card transactions. These debit card dispute and fraud costs increased in 2023 with our debit card conversion from Mastercard to Visa earlier in the year and declined 8% or $0.1 million in 2024.
The Company’s tax-equivalent overhead efficiency ratio was 60.8% in 2024, 63.9% in 2023, and 60.2% in 2022. The overhead efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income, with the provision for credit losses on loans and gains/losses excluded from the equation. The Company is continually working on efforts to control costs, as well as increase income which is the denominator of the equation.
Income tax provision was $14.0 million in 2025, $13.3 million in 2024, and $11.6 million in 2023 resulting in effective tax rates of 24.9%, 24.7%, and 25.0% respectively. The effective tax rate increased modestly by approximately 18 basis points in 2025 compared to 2024. The increase primarily reflected a lower benefit from tax-exempt municipal income in 2025, partially offset by a higher level of affordable housing tax credits and lower nondeductible interest expense. The tax accrual rate was lower in 2024 due to an increase in the net benefit from tax credits but was higher in 2023 due to a lower proportion of non-taxable income to taxable income.
OurThe Company records income tax provisionexpense wasthroughout $13.3the million,year orbased 24.7%on an estimated effective tax rate (“ETR”). The estimated ETR reflects management’s current expectation of pre-taxthe incomefull-year intax 2024,rate, $11.6considering million,the or 25.0%mix of pre-tax income in 2023,taxable and $11.3tax-exempt million,income, orpermanent 25.1%differences, oftax credits, and other items impacting the overall tax rate. Income tax expense is recognized by applying the estimated ETR to pre-tax incomeincome, inwith 2022.adjustments Therecorded taxas accrual rate was lower in 2024 dueneeded to anreflect increasechanges in the netestimated benefitannual fromETR and any discrete tax credits,items butidentified was higher in 2023 and in 2022 due to a lower proportion of non-taxable income to taxable income The Company sets aside a provision for income taxes on a monthly basis. The amount of that provision is determined by first applyingduring the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits.period. Permanent differences include but are not limited to tax-exempt interest income, BOLI income or loss, and certain book expenses that are not allowed as tax deductions. The Company’s investments in state, countycounty, and municipal bonds provided $6.7$6.4 million of federal tax-exempt income in 2025, $6.7 million in 2024, and $10.9 million in 2023, and $8.8 million in 2022.2023. Moreover, in addition to life insurance proceeds of $0.9 million in 2025, $0.2 million in 2024,2024 and $0.9 million in 2023 and $0.4 million in 2022,2023, net increases in the cash surrender value of bank-owned life insurance added $2.7$2.6 million to tax-exempt income in 2025, $2.7 million in 2024, and $1.8 million to tax-exempt income in 2023, but reduced tax-exempt income by $1.0 million in 2022.2023.
Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds. We had a total of $25.4$22.6 million invested in low-income housing tax credit funds as of December 31, 2024,2025, and $14.4$25.4 million as of December 31, 2023,2024, which are included in other assets rather than in our investment portfolio. Those investments have generated substantial tax credits over the past few years, with about $1.8$2.9 million, $0.6$1.7 million, and $0.5$0.6 million in credits available for the for the tax years 2025, 2024, 2023, and 2022,2023, respectively. The credits are dependent upon the occupancy level of the housing projects and income of the tenants and cannot be projected with certainty. Furthermore, our capacity to utilize them will continue to depend on our ability to generate sufficient pre-tax income. We plan to invest in additional tax credit funds in the future, but if the economics of such transactions do not justify continued investments, then the level of low-income housing tax credits will taper off in future years until they are substantially utilized by the end of 2036. That means that even if taxable income stayed at the same level through 2036, our tax accrual rateETR would gradually increase.
What changed in the latest 10-Q
Risk Factors
There were no material changes from the risk factors disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2025.
No wording changes found in this section.
Full comparison: every changed paragraph (0)
Management's Discussion & Analysis (MD&A)
New heading “First Half of 2026 Compared to First Half of 2025”
Largest changes
“For the first six months of 2026, noninterest expense decreased $0.9 million, or 2%, to $45.3 million from $46.2 million for the same period in 2025. Salaries and benefits decreased $0.3 million, while other noninterest expense declined $0.7 million. The improvement was primarily attributable to lower deposit service costs, lower operating expenses, and reduced sundry and teller expenses, partially offset by higher occupancy costs, legal and accounting expenses, and director-related costs. …”see in full comparison
“The volume variance was favorable at $0.2 million, primarily driven by higher average loan balances, most notably within the mortgage warehouse portfolio, which contributed a favorable volume variance of $1.8 million. This was partially offset by lower average balances in investment securities, which resulted in an unfavorable volume variance of $0.6 million, as excess liquidity was redeployed and certain securities, including collateralized loan obligations, experienced pay‑downs.”see in full comparison
“Management also models other interest rate scenarios that do not assume a simultaneous and parallel shock of all points on the yield curve including short-term and long-term rates. One of these alternate rate change scenarios uses rate forecasts, from a known economist over the next twelve months, which reflect overnight rates moving differently than longer-term treasury rates. …”see in full comparison
see in full comparisonAsManagementthealsoCompany utilizesevaluates adynamicvarietybalanceofsheet for itsalternative interest ratemodeling,pathstheandCompanystressalsoscenariosusesthatadostatic,notorassumeno-growth,instantaneousbalanceparallelsheet to assess the reasonableness of the interest rate sensitivityshifts in thedynamicyieldbalancecurve,sheetincludingmodel; no significant changesforecasts in which short-term and long-term interestrateratesriskmoveoutside of the base case were noted.independently. In addition, the Companyrunsevaluates stressscenariosassumptionsfor stressesrelated toaveragedepositdeposits, higherbalances, depositbetas than the base case, depositpricing, migration from low-cost tohigh-costhigher-costdeposits,deposit products, andboth higher and slowerloan prepayment speeds.TheConsistent with prior periods, the most significantimpactmodeled risk to future net interest incomein the net interest income simulations isremains the reduction or migration of low-costdeposits.core deposits into higher-cost funding sources.
“While the Company remains more sensitive to declining interest rates than rising interest rates, the potential adverse impact of falling rates improved significantly from the prior year. Under a 400 basis point declining-rate scenario, net interest income is projected to decrease 7.1% at June 30, 2026, compared to a 16.9% decrease at June 30, 2025. Similarly, the projected decline under a 200 basis point shock improved to 5.7% from 8.1% in the prior year. …”see in full comparison
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FirstSecond Quarter 2026 Compared to FirstSecond Quarter 2025
FirstSecond quarter 2026 net income was $12.5$9.9 million, and $0.96$0.77 per diluted share as compared to $9.1$10.6 million and $0.65$0.78 per diluted share in the firstsecond quarter of 2025. The Company’s annualized return on average equity was 13.88%10.90% and annualized return on average assets was 1.39%1.09% for the quarter Marchended 31,June 30, 2026, compared to 10.44%12.08% and 1.02%,1.16%, respectively, for the same quarter in 2025. The primary drivers behind the variance in firstsecond quarter net income are as follows:
First Half of 2026 Compared to First Half of 2025
MarchJune 31,30, 2026, Relative to December 31, 2025 (unless otherwise noted)
The Company’s assets totaled $3.8$3.7 billion at MarchJune 31,30, 2026, a decrease of $74.8$108.7 million, or 2.0%3% from December 31, 2025. The following provides a summary of key balance sheet changes during the first threesix months of 2026:
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as BOLI, equityinvestments investments,in bank stocks, and investment gains. The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a full range of banking services to its customers.
Net interest income was $30.4 million for the second quarter of 2026, a decrease of $0.2 million, or 1%, compared to the second quarter of 2025. The decrease was primarily attributable to lower average interest-earning asset balances and yields, substantially offset by lower funding costs. Interest expense declined $1.5 million, or 13%, from the prior-year quarter, reflecting the benefits of lower deposit and wholesale funding costs.
For the second quarter of 2026, average interest-earning assets decreased $81.2 million, or 2%, from the same period in 2025, while the yield on those assets declined eight basis points to 5.02%. The decline in average earning assets was driven primarily by lower investment securities balances and decreases in real estate loans and agricultural production loans.
Average interest-bearing liabilities decreased $23.7 million in the second quarter of 2026 compared to the same period in 2025, while the cost of those liabilities declined 26 basis points to 1.92%. The quarterly decrease was primarily attributable to a 28 basis point reduction in the cost of interest-bearing deposits and a 23 basis point reduction in the cost of borrowed funds to 1.73% and 2.81%, respectively. Average interest-bearing deposit balances declined $42.8 million from the prior-year quarter, comprised primarily of a decline in higher-cost customer time deposits which decreased $62.7 million and brokered deposits which declined $16.2 million. These changes were partially offset by higher average balances of federal funds purchased, which also increased to fund mortgage warehouse lending activity.
The reduction in funding costs more than offset the modest decline in earning asset yields, resulting in a six basis point increase in the net interest margin to 3.74% from 3.68% in the second quarter of 2025.
Net interest income for the first six months of 2026 increased $0.3 million to $61.0 million, compared to the same period in 2025. The increase resulted primarily from an improved net interest margin, driven by lower funding costs and partially offset by a modest decline in average earning assets. Average interest-earning assets decreased $19.6 million, or 1%, and the yield on those assets decreased nine basis points to 5.03%.
For the first six months of 2026, interest expense decreased $2.3 million to $21.1 million, compared to $23.4 million during the same period in 2025. The decrease was driven by a 23 basis point reduction in the cost of interest-bearing liabilities to 1.93%, partially offset by a $25.1 million increase in average interest-bearing liabilities. The reduction in funding costs contributed to a four basis point increase in net interest margin to 3.75% for the first six months of 2026, compared to 3.71% for the same period in 2025.
Net interest income was $30.6 million for the first quarter of 2026, a $0.5 million increase, or 2% over the first quarter of 2025. Interest expense decreased $0.8 million compared to the first quarter of 2025, primarily due to a reduction in the cost of interest‑bearing liabilities and a modest decline in average interest‑bearing liability balances. The cost of interest‑bearing liabilities decreased approximately 21 basis points, while average interest‑bearing liabilities increased by $74.4 million. Although average interest‑earning assets increased $42.7 million during the period, the yield on those assets declined by approximately 9 basis points compared to the first quarter of 2025, partially offsetting the favorable impact from lower funding costs.
The Company had $1.8 billion in adjustable and variable rate loans and $232.6$214.4 million in floating rate bonds, as compared to $227.0$220.5 million in floating rate CDs and $36.1 million in floating rate trust preferred securities at MarchJune 31,30, 2026. The adjustable-rate loans have repricing frequencies ranging from 30-days to 10-years. Of the $1.8 billion in adjustable and variable rate loans, $797.4$793.3 million reprice or mature in the next twelve months.months, including $457.5 million in mortgage warehouse facilities, which generally reprice immediately as interest rates change. In addition, there were $513.3$620.2 million of fixed-term deposits that reprice or mature within twelve months. Based on current rates ofOf the $797.4$793.3 million in adjustable and variable rate loans that reprice or mature over the next twelve months, $197.6$270.5 million, or 25%,34%, have a pricing index rate higher than the current index, while $49.0$12.7 million, or 6%,2%, have a pricing index rate lower than the current index. The remaining balance of $550.8$510.1 million in loans are priced at the current index rate or are expected to mature.rate.
Net interest margin was 3.75% for the first quarter of 2026, as compared to 3.74% for the first quarter of 2025. Compared to the first quarter of 2025, the net interest margin increased one basis point, reflecting the benefit of lower funding costs, partially offset by modest pressure on asset yields. The cost of average total deposits declined to 1.17%, from 1.33% in the first quarter of 2025, while the cost of interest-bearing liabilities declined to 1.94%, from 2.15%, reflecting improved funding mix and lower average balances of higher-cost deposits and borrowings.
The volume and rate analysis indicates that lower funding costs remained the primary driver of earnings performance during both the quarterly and year-to-date periods. Favorable deposit and borrowing cost repricing largely offset pressure from lower investment balances and reduced earning asset yields, while growth in mortgage warehouse lending provided a meaningful positive volume contribution.
The volume variance was favorable at $0.2 million, primarily driven by higher average loan balances, most notably within the mortgage warehouse portfolio, which contributed a favorable volume variance of $1.8 million. This was partially offset by lower average balances in investment securities, which resulted in an unfavorable volume variance of $0.6 million, as excess liquidity was redeployed and certain securities, including collateralized loan obligations, experienced pay‑downs.
The rate variance was a favorable $0.2 million, as favorable rate impacts on loans and interest‑bearing liabilities more than offset unfavorable rate variances on investment securities. Loan yields contributed positively to the rate variance, while interest‑bearing liabilities benefited from lower overall funding costs. These favorable impacts were partially offset by lower yields on variable‑rate investment securities.
The mix variance was a favorable $0.1 million, reflecting changes in the composition of interest‑earning assets and interest‑bearing liabilities, including growth in higher‑yielding loan categories and changes in funding mix.
Overall, the combined impact of these factors resulted in a $0.5 million increase in net interest income for the first quarter of 2026 compared to the prior‑year quarter.
Variances in net interest expenseincome were the result of changes discussed under the “Net Interest Income and Net Interest Margin” heading.
PROVISION FOR CREDIT LOSSESLOSS ON LOANSEXPENSE
Credit risk is inherent in the business of making loans. The Company sets aside an allowance for credit losses on loans, a contra-asset account, through periodic charges to earnings, which are reflected in the income statement as the provision for credit losses on loans. Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance. The Company recorded a provision for credit lossesloss expense on loans of $0.1$2.3 million for the firstsecond quarter of 2026, compared to a credit loss benefit of $0.8$1.2 million infor the fourth quarter of 2025 and a provision of $2.0 million in the firstsecond quarter of 2025. TheFor $0.8the millionfirst releasesix inmonths allowanceof 2026, the provision for credit losses duringon loans was $2.4 million, compared to $3.2 million for the fourthsame quarterperiod ofin 20252025. wasA due mostly to the $1.5$2.5 million release of specific reserve on loans individually evaluated, partially offset by higher reserveestablished on loansan collectivelyagricultural evaluated.production The provision recordedloan during the firstsecond quarter of 2026 iswas duethe toprimary driver of the increase in specificcredit reserveloss expense for the quarterly comparison. Following the end of the second quarter, the Company received a $0.5 million payment on this loan. Management continues to work with the borrower to evaluate and changespursue tovarious certainresolution assumptionsalternatives used,for partiallythis offset by lower loan balances and net loan charge-offs.credit.
Total noninterest income was unchanged at $8.6 million compared to the second quarter of 2025. Favorable variances included a $0.4 million increase in earnings on separate account BOLI, a $0.1 million increase in service charges and fees on deposit accounts, and a modest increase in cash surrender value income from life insurance. These improvements were largely offset by a $0.6 million decrease in other income, mainly due to a decrease in gain on life insurance proceeds.
For the first six months of 2026, noninterest income increased $1.3 million, or 9%, to $16.5 million compared to $15.2 million for the same period in 2025. The increase was driven primarily by a $0.5 million increase in earnings on separate account life insurance, a $0.3 million increase in cash surrender value income from life insurance, a $0.2 million increase in service charges and fees on deposit accounts, and a $0.4 million favorable variance from gains on sales of fixed assets. These favorable changes were partially offset by lower gains on sale of investment securities.
Noninterest income increased $1.3 million, or 20%, to $8.0 million in the first quarter of 2026 compared to the same period in 2025. The $1.3 million increase in noninterest income in the first quarter of 2026 as compared to the same quarter in 2025 was due to higher service charge and fee income, an increase in cash surrender value of life insurance due to purchases of additional life insurance in the second quarter of 2025, and other increases related to higher FHLB dividend income, an increase in the fair value of bank stocks, and a gain on sale of fixed assets.
Service charges and fees on customer deposit accounts increased by $0.1 million, or 2%, to $5.7 million in the first quarter of 2026 as compared to the same quarter in 2025. Higher overdraft income and a decrease in costs related to our VISA debit card program were the primary drivers of the favorable variance.
The Company maintains aCompany’s non-qualified deferred compensation plan for officers and directors, under whichallows participants mayto defer a portion of their earnings and select from various hypothetical investment alternatives to determine their individual returns. The Company economically offsets this liability with separate account life insurance policies that are invested in similar underlying fund types within the life insurance policy. Because the deferred compensation liability and the separate account life insurance asset are not contractually linked, differences in balances, fund performance, and insurance costs can result in temporary timing mismatches between changes in separate account life insurance income and the related deferred compensation expense.
Earnings on separate account life insurance were $1.4 million for the second quarter of 2026, compared to a loss of $0.4 million in the linked quarter and earnings of $1.0 million in the second quarter of 2025. For the first six months of 2026, earnings on separate account life insurance totaled $1.0 million, compared to $0.5 million for the same period in 2025. These changes reflect market-driven fluctuations in the value of the underlying investment alternatives and do not represent changes in the operating performance or credit quality of the Company.
During the first quarter of 2026, declines in market values of investments inside the life insurance policy to offset employee and director deferred compensation plan elections resulted in a $0.4 million net loss related to separate account life insurance, while the related deferred compensation liability experienced a $0.6 million benefit as the funds that the plan participants elected declined in value. These offsetting movements reflect market-driven changes in the underlying investment alternatives and do not represent credit- or performance-related deterioration.
The majority of the related deferred compensation expense or benefit is reported within professional fees,services expense under deferred directors’directors' fees, as it primarily relates to directors' deferred compensation elections. Deferred directors' fee expense was $1.0 million during the deferralsecond quarter of directors’2026, compensation.compared Specifically,to a benefit of $0.6 million in the linked quarter and expense of deferred$0.9 compensationmillion benefitin wasthe recordedsecond asquarter deferredof directors’2025. fees duringFor the first quartersix months of 2026. The related tax shortfall associated with the loss associated with separate account life insurance2026 and taxable2025, deferred compensationdirectors' fee expense/(benefit) totaled $0.3$0.5 million for the quarter.million.
Total noninterest expense decreased $0.3 million, or 1%, compared to the second quarter of 2025. Salaries and benefits expense remained essentially unchanged from the prior year quarter. Other noninterest expense decreased $0.3 million, primarily due to lower deposit service costs and other operating expenses. These favorable variances were partially offset by higher deferred compensation expense, legal and accounting costs, and directors' fees.
For the first six months of 2026, noninterest expense decreased $0.9 million, or 2%, to $45.3 million from $46.2 million for the same period in 2025. Salaries and benefits decreased $0.3 million, while other noninterest expense declined $0.7 million. The improvement was primarily attributable to lower deposit service costs, lower operating expenses, and reduced sundry and teller expenses, partially offset by higher occupancy costs, legal and accounting expenses, and director-related costs. In addition, we had $0.5 million in severance and recruiting costs related to an executive leadership restructuring during the quarter, which was offset by a reduction in overall staff. These results reflect management's continued focus on maintaining a relatively flat expense base while selectively investing in strategic growth initiatives, technology enhancements, regulatory compliance, and customer service capabilities.
Overall full-time equivalent employees were 452 at June 30, 2026, as compared to 465 at December 31, 2025, and 494 at June 30, 2025.
Total noninterest expense decreased $0.6 million, or 3%, to $21.8 million in the first quarter of 2026, compared to the first quarter of 2025. The primary driver of lower noninterest expense was lower deferred compensation expense, reflecting market-driven changes in the related deferred compensation liability. Excluding the change in deferred compensation, total noninterest expense declined $1.0 million in the first quarter of 2026 as compared to the fourth quarter of 2025.
The decrease in deferred compensation expense was mostly offset by lower separate account life insurance income, as declines in market values during the quarter resulted in a loss related to separate account life insurance policies, consistent with the discussion above. These offsetting movements reflect normal market-related volatility between the separate account life insurance asset and the deferred compensation liability.
Salaries and benefits were relatively stable compared to both the linked quarter and the same period last year, with modest period-to-period changes primarily related to normal compensation timing and benefit costs. Occupancy expense declined modestly compared to the linked quarter and remained relatively consistent year over year, reflecting disciplined expense management.
Other noninterest expense declined compared to both the linked quarter and the prior year, driven primarily by lower deferred directors’ compensation expense/(benefit) and continued cost control across operating expense categories.
The Company setsrecords aside aits provision for income taxes onusing athe monthlyannual basis.effective Thetax amountrate ofmethod thatprescribed provisionby ASC 740, Income Taxes. Under this methodology, income tax expense is determineddetermined by first applying the Company’sCompany's statutoryestimated annual effective tax rate to year-to-date pre-tax income and adjusting for discrete tax ratesitems torecognized in the period in which they occur. The estimated taxableannual effective tax rate reflects the impact of tax-exempt income, whichtax iscredits, pre-taxand other permanent differences between book income adjusted for permanent differences, and thentaxable subtracting available tax credits.income. Permanent differences include, but are not limited to, tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax deductions. Tax credits consist primarily of those generated by investments in low-income housing tax credit funds. The Company's provisioneffective tax rate was 25.3% for incomethe taxessecond was 25.2%quarter of pre-tax2026, incomeunchanged from the second quarter of 2025 and as compared to 25.2% in the linked first quarter of 2026,2026. relative to 25.8% inFor the first quartersix months of 2025.2026, The decrease inthe effective tax rate was 25.2%, compared to 25.5% for both the quarterlysame andperiod in 2025. The lower year-to-date comparisonseffective wastax duerate toreflects the taxcontinued creditsbenefit andof tax-exempt income representingand tax credit investments as a larger percentage of totalpre-tax taxable income.earnings.
The investment portfolio is reflected on the balance sheet as investment securities and totaled $903.0$894.7 million, or 24% of total assets at MarchJune 31,30, 2026, and $916.1 million, or 24% of total assets at December 31, 2025. The modest decrease was due to regularly scheduled maturities and paydowns.
The Company carries “available-for-sale” investments at their fair market values and “held-to-maturity” investments at amortized cost, net of allowance for credit losses. The Company currently has the intent and ability to hold investment securities to maturity, but the securities are all marketable. The expected effective duration was 2.83.1 years for available-for-sale investments and 5.75.2 years for held-to-maturity investments at MarchJune 31,30, 2026, as compared to 2.8 years for available-for-sale investments and 5.6 years for held-to-maturity investments at December 31, 2025.
InvestmentThe fair value of investment securities pledged as collateral for borrowings and/or potential borrowings from the FHLB and the FRB, customer repurchase agreements, and other purposes as required or permitted by law totaled $363.5$362.5 million at MarchJune 31,30, 2026, and $367.5 million at December 31, 2025, leaving $539.5$528.1 million in unpledged debt securities at MarchJune 31,30, 2026, and $548.6 million at December 31, 2025. Securities pledged in excess of actual pledging needs and thus available for liquidity purposes, if needed, totaled $191.1$204.3 million at MarchJune 31,30, 2026, and $192.3 million at December 31, 2025.
At MarchJune 31,30, 2026, the Company’s investment portfolio included 229231 municipal bonds issued by 199201 different government municipalities and agencies located within 28 different states, with an aggregate fair value of $221.9$229.8 million. The largest exposure to any single municipality or agency was a combined $5.1$5.2 million (fair value) in general obligation bonds issued by the City of New York (NY). In addition, the Company owned 94100 subordinated debentures issued by bank-holding companies totaling $86.8$84.0 million (fair value).
The allowance for credit losses on AFS investment securities, a contra-asset, is established through periodic provisions for credit losses on AFS investment securities. It is maintained at a level that is considered adequate to measure expected losses across the classes of major investment security types related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value. The Company maintains it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both MarchJune 31,30, 2026, and December 31, 2025, that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold. The following bullets outline additional support for Management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of MarchJune 31,30, 2026, and December 31, 2025, was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.
The decrease in gross loan balances compared to December 31, 2025, was primarily driven by a $60.9 million reduction in mortgage warehouse facilities balances, reflecting normal fluctuations in mortgage origination activity and secondary market demand. Other changes in loan balances were primarily attributable to scheduled paydowns, payoffs, and normal customer activity. Despite the decline in period-end balances, mortgage warehouse average balances increased $8.0 million during the second quarter of 2026 compared to the linked quarter. Average balances of commercial real estate and commercial and industrial loans declined modestly during the quarter, while period-end balances remained relatively stable. As the quarter progressed, however, loan production strengthened significantly, that we believe reflects a shift in momentum entering the third quarter of 2026. This improvement was particularly evident within the commercial real estate and commercial and industrial portfolios and resulted in an enhanced pipeline of lending opportunities entering the second half of the year.
The Company's loan portfolio remains diversified, with commercial real estate representing 57% of total loans, mortgage warehouse facilities representing 19%, residential real estate comprising 14%, and other commercial loans representing 7% of the portfolio at June 30, 2026. Commercial real estate balances remained relatively stable during the first six months of the year despite elevated payoff activity, reflecting continued success in replacing runoff with new production.
Gross loan balances decreased $80.1 million, or 3%, during the first quarter of 2026, reflecting lower mortgage warehouse line utilization, portfolio runoff, changes in commercial line utilization, and lower volumes of new credit extended. Mortgage warehouse balances declined $39.9 million, driven by seasonal activity and late-quarter paydowns. Excluding mortgage warehouse activity, loan balances declined modestly across several portfolios, including decreases of $9.1 million in commercial real estate loans, $19.9 million in other commercial loans, $9.7 million in residential real estate loans, $2.1 million in farmland loans, and $0.2 million in consumer loans. Other construction loans increased $0.8 million during the quarter.
As indicated in the loan rollforward table below, new credit extended for the firstsecond quarter of 2026 decreasedincreased $19.0$41.6 million over the linked quarter comparisonto $49.4 million and $58.6increased $1.2 million over the same period in 2025. ForThe theCompany first three months ended 2026, wealso had $25.3$59.6 million in loan paydowns and maturities, along with a $22.6$27.4 million decreasedecline in line of credit utilization, and a $39.9decrease of $60.9 million decrease in mortgage warehouse utilization.facilities Theutilization reduction in new credit extended is primarily due to a strategic shift in our target customer base with a change to increase granularity withinfor the portfoliofirst by focusing more on serving our local communities, as well as expanded commercial real estate lending. It is taking time to refresh the pipeline, but our pipeline had returned to prior quarter levels by the endhalf of March 2026.
At MarchJune 31,30, 2026, the total regulatory CRE concentration ratio of total CRE over Tier 1 Capital plus allowance was 238.7%235.9% as compared to 242.1% at December 31, 2025. The overall level of construction and land development lending was 3.3%3.4% of regulatory capital plus allowance for credit losses at MarchJune 31,30, 2026. At MarchJune 31,30, 2026, non-owner occupied commercial real estate included $305.1$304.7 million of retail; $136.6$137.2 million of warehouse/industrial; $150.0$147.7 million of office; and $235.3$256.0 million of hospitality. Approximately $25.5$25.1 million, or 17% of the office real estate matures or reprices in less than two years.
Total nonperforming assets, comprised of nonaccrual loans and foreclosed assets, declined $4.4$4.3 million to $10.4$10.5 million at MarchJune 31,30, 2026, compared to $14.8 million at December 31, 2025. ThisThe improvement was drivenprimarily byattributable ato reduction inlower nonaccrual loan balances, reflecting resolutions and paydowns within the Company’sCompany's criticized loan portfolio. The Company’sincrease in nonaccrual Farmland balances was primarily attributable to a single relationship which management believes is well secured and has a current loan-to-value ratio of nonperforming loans to gross loans decreased to approximately 0.42%61%. at March 31, 2026, compared to approximately 0.52% at December 31, 2025, reflecting bothAdditionally, the reductionCompany insold nonperformingits loanonly balancesforeclosed and a modest decline in total loan balancesasset during the quarter.first six months of 2026, eliminating foreclosed assets from the balance sheet.
The Company’s ratio of nonperforming loans to gross loans decreased to 0.43% at June 30, 2026, compared to 0.52% at December 31, 2025, reflecting both the reduction in nonperforming loan balances and a modest decline in total loan balances during the quarter.
The Company had no foreclosed assets at MarchJune 31,30, 2026, compared to $1.6 million at December 31, 2025, as the remaining foreclosed property was resolved during the quarter.first quarter of 2026. All nonperforming assets are individually evaluated for credit losses on a quarterly basis, and Management believes the allowance for credit losses allocated to these loans is appropriate.
TheAt CompanyJune had30, $0.9 million in2026, loans past due 30-8930 to 89 days and still accruing attotaled March 31, 2026. This was a decrease of $5.9$5.4 million compared to the$6.8 balancemillion at December 31, 2025. Approximately $4.6 million of this balance related to a single commercial real estate loan that became 30 days past due near the end of the second quarter of 2026. Management believes the loan is well secured, with an estimated current loan-to-value ratio of approximately 51%, and therefore does not consider the credit to present a significant loss exposure. All of these past due loans are under Management supervision, and every effort is being taken to assist the borrowers and manage credit risk in this regard.
The Company's allowance for credit losses on loans and leases was $21.3 million at March 31, 2026, as compared to $21.5 million at December 31, 2025. The decrease resulted from net charge‑offs during the quarter of $0.3 million, partially offset by a provision for credit losses of $0.1 million, reflecting Management’s assessment of credit quality, portfolio composition, and current economic conditions.
The following tables highlight the coverage ratios by loan category at MarchJune 31,30, 2026, and December 31, 2025 (dollars in thousands, unaudited):
The allowance for credit losses on loans was $23.6 million, or 0.96% of gross loans, at June 30, 2026, compared to $21.5 million, or 0.84% of gross loans, at December 31, 2025. The Company's overall coverage ratio is influenced by the composition of its loan portfolio, which includes significant concentrations in mortgage warehouse and residential real estate loans that have historically experienced minimal credit losses and therefore require comparatively low reserve allocations. At June 30, 2026, mortgage warehouse and residential real estate loans totaled $803.0 million, representing approximately 33% of total loans, while the related allowance was $1.8 million, or 0.23% of the outstanding balances. As a result, these portfolios reduce the Company's overall allowance coverage ratio. Excluding mortgage warehouse and residential real estate loans, the allowance for credit losses totaled $21.8 million and represented 1.32% of the remaining loan portfolio, compared to 1.16% at December 31, 2025. The Company's commercial real estate portfolio, which represents its largest loan segment, maintained a reserve coverage ratio of 1.15% at June 30, 2026. The increase in the allowance during the first six months of 2026 was driven primarily by higher reserve levels within the other commercial loan portfolio, including increased specific reserves related to individually evaluated credits and changes in management's assessment of credit risk.
The allowance as a percentage of gross loans was 0.86% and 0.84%, at March 31, 2026, and December 31, 2025, respectively. Management's detailed analysis indicates that the Company's allowance for credit losses on loans should be sufficient to cover credit losses for the life of the loans outstanding as of March 31, 2026, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the credit loss allowance for loans. The total allowance for credit losses on loans of $21.3 million at March 31, 2026, included $0.6 million of allowance related to $478.5 million of mortgage warehouse lines. A separate allowance of $0.7 million for potential credit losses inherent in unused commitments is included in other liabilities at March 31, 2026, a decrease of $0.1 million, from December 31, 2025.
Included in unused commitments are mortgage warehouse lines,facilities, which are mostly in the form of repurchase lines. The repurchase agreement structure provides stronger credit protection to the Company, as well as more favorable regulatory capital treatment, as these repurchase lines are not considered off-balance sheet commitments for regulatory capital purposes as they are unconditionally cancellable.
The Company also had undrawn letters of credit issued to customers totaling $5.8$5.7 million at MarchJune 31,30, 2026, and $5.7 million at December 31, 2025. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should the Company be required to fund a significant portion of unused commitments.
In addition to unused commitments to provide credit, the Company is utilizing a $125 million letter of credit issued by the FHLB on the Company’s behalf as security for certain local agency deposits which totaled $80.1$87.7 million at MarchJune 31,30, 2026. That letter of credit is backed by loans pledged to the FHLB by the Company. For more information on the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements located elsewhere herein.
BSRR insider buying and selling (Form 4)
Since 2026-04-11, insiders reported open-market purchases in 0 Form 4 filings and open-market sales in 5 filings (4 insiders, 5 trade dates, 26,000 shares, about $994.8K). Net open-market shares: -26,000 (purchases minus sales); net value about -$994.8K.Totals add up every open-market (code P and S) line in those filings, using the prices reported in the filings. Awards, option exercises, tax withholding and gifts are listed below but not counted.
| Trade date | Insider | Transaction | Shares | Price | Value |
|---|---|---|---|---|---|
| 2026-07-31 | Castle Julie G |
Open-market sale | 1,000 | $40.70 | $40.7K |
| 2026-05-29 | Boyle Hugh F |
Open-market sale | 10,000 | $38.21 | $382.1K |
| 2026-05-22 | Treece Christopher G |
Open-market sale | 10,000 | $38.18 | $381.8K |
| 2026-05-22 | Treece Christopher G |
Option exercise | 10,000 | $27.11 | $271.1K |
| 2026-05-18 | Christenson Vonn R |
Open-market sale | 1,053 | $38.01 | $40.0K |
| 2026-05-18 | Christenson Vonn R |
Option exercise | 1,053 | $28.21 | $29.7K |
| 2026-05-08 | Christenson Vonn R |
Option exercise | 3,947 | $28.21 | $111.3K |
| 2026-05-08 | Christenson Vonn R |
Open-market sale | 3,947 | $38.05 | $150.2K |
Well-known investors holding BSRR (13F)
| Investor | Quarter | Shares | Reported value | % of their 13F | Change vs prior quarter |
|---|---|---|---|---|---|
| Renaissance Technologies | 2026-06-30 | 185,812 | $7.6M | 0.01% | Added 3% |
| AQR Capital Management (Cliff Asness) | 2026-06-30 | 33,058 | $1.3M | 0.0% | Reduced 1% |
| D. E. Shaw & Co. | 2026-06-30 | 21,615 | $881.0K | 0.0% | Added 198% |
| Two Sigma Investments | 2026-06-30 | 19,101 | $778.6K | 0.0% | Reduced 22% |
| Millennium Management (Israel Englander) | 2026-06-30 | 11,567 | $471.5K | 0.0% | Reduced 67% |
| Citadel Advisors (Ken Griffin) | 2026-06-30 | 5,474 | $223.1K | 0.0% | New position |