November 13, 2025

To begin my Report, I want to take a quick look at our income for the first quarter of our 2025-26 fiscal year. Our Bank had net income before taxes of $62.0 thousand with net income after taxes of $44.2 thousand for the quarter ending September 30, 2025.  Actually, the Bank only owed $3.6 thousand to the Internal Revenue Service for this quarter.  The remaining tax expense of $14.2 thousand was an accounting entry recognizing the decrease in the asset value of our net operating loss carryforward.

This net income of $44.2 thousand in the first quarter of our 2025-26 fiscal year compares quite favorably to our loss of $82.1 thousand last year in the first quarter of our 2024-25 fiscal year.  This improvement of $126.3 thousand is a result of the overall improvement in our core operations that I have been suggesting  would occur in my President's Messages over the past six months.

Right now, our focus is on business development. We are making calls on existing clients of the Bank, other prospects, and our investors. In addition, we are making warm calls on prospects with introductory referrals from our clients and friends and have made pure cold calls on prospects with businesses that might have an interest in learning more about our Bank. We are optimistic that these calls will bring more loans and deposits to our Bank in the months ahead.

Changing the topic, I have concluded that I have erred by not giving you more information about our lending strategy. Obviously, our Bank has outstanding asset quality. Many folks are under the misconception that our pristine asset quality is a result of very conservative  lending practices.  Our competitors would suggest that our outstanding asset quality stems from our Bank being ultra-conservative.

Neither characterization of our asset quality is correct. Our asset quality simply reflects the application of common sense to lending.

During the Great Recession, one businessman put lending in perspective in a telephone conversation with me.  Paraphrasing the conversation, he asked, “Just so I understand, a bank does not receive anything other than the repayment of principal and interest if a bank makes a good loan?”  I answered that he was correct. A bank receives nothing more than the full repayment of principal and interest on a good loan.  He then noted that a bank stands to lose the interest and some or all of its principal when a bank makes a bad loan.  I answered that he was correct at which point he observed that banking doesn’t seem like a very good business!  In other words, traditional bank lending is a very low margin business that should be done carefully.  A bank does not earn an equity return when it makes a loan, so why should a bank take an equity risk when it makes a loan?  Gambling is for entrepreneurs and casinos but not for banks.

But surely some bad loans are inevitable, you may ask.  Aren’t they the cost of doing business?  Isn’t that what a bank's allowance for loan losses is for?  To answer these questions, it is important to understand what the allowance for loan losses is supposed to cover.  It is supposed to cover the risks in a bank's loan portfolio that were both unknown and unknowable when the loans closed.  Known and knowable risks such as a future recession are supposed to be identified, addressed, and ameliorated by the terms and documentation of loans when they are underwritten by a bank.  In other words, known and knowable risks should not be ignored but should be addressed directly in loan terms and documentation.  The allowance for loan losses is not meant to cover ill-informed waivers of loan documentation, limitations of insurance coverages, property title defects, failures to perfect liens, subordinations to other liens, etc.  Those are known and knowable risks that should be acknowledged and addressed in loan underwriting. 

Doubtless the Bank will have loans that go bad at some point, but they will be caused by unknown and unknowable risks when the loans close.  They will not be caused by things that could have been avoided through proper due diligence and best practices.

So how does Integrity underwrite a loan? You may think that Integrity looks first at the proposed collateral for a loan. Many community banks primarily consider the collateral for making a loan. Integrity does the exact opposite.

Our first step for any proposed loan is the verification of the borrower's and any guarantor's cash flow. Simply stated, cash flow is the net funds that are available to a borrower in order to make payments on a loan after the borrower has paid the borrower's taxes, living expenses, existing debt service, and other commitments. This requires us to do some work upfront, but it is the essence of proper lending.  Cash flow provides for the monthly payments on a loan; liquidation of the collateral is the last resort for payment.  Banks should be in the business of lending money, not foreclosures and repossessions to get paid.  That's just common sense.

Next, we verify the total amount of the borrower's and any guarantor's actual liquidity available to support the loan. Cash and marketable securities and bonds are liquidity.  Real estate, private equity investments, and other not readily marketable investments are not liquidity. The amount of a borrower's liquidity to support a new loan should be commensurate with the total amount of the borrower's and any guarantor's existing and prospective financial obligations. A borrower should have sufficient liquidity to handle any new opportunities or unexpected difficulties that might arise in the ordinary course of business. There is no set amount or ratio. It's a matter of judgment by the Bank. Once again, that's just common sense.

Only after we have looked at cash flow and liquidity do we look at the collateral for the proposed loan.  When we do, we focus more on the quality and marketability of the collateral than on any purported loan to value from an appraisal. 

We have never used an appraised value as the primary basis for making a loan.  The Great Recession taught thoughtful bankers the folly of relying on appraised values to make loans. When a recession hits, asset values fall dramatically. Prior appraised values are meaningless. Once again, it's just common sense not to rely on an appraised value at one point in time to protect both the borrower and the bank later in an ever-changing economic environment.

In conclusion, our approach to lending is quite simple. We look at cash flow first, liquidity second, and collateral third. Cash flow and liquidity make the monthly payments on a loan. Collateral is only the backstop for a loan.

From this, it's obvious that Integrity will quickly approve and close a loan to any borrower who has strong cash flow, appropriate liquidity, and high-quality collateral. But the question becomes will Integrity approve a loan to a borrower who does not have all three of these characteristics? The answer is usually Yes if the borrower has two of these three characteristics and usually No if the borrower only has one of these three characteristics. There are, of course, exceptions which is why I say usually rather than a simple Yes or No.  Common sense controls these decisions. 

Lastly, there is one other very important factor in lending that we consider carefully.  Loan structure and terms can make the difference in whether a loan is repaid in a timely manner or goes into default. What is easy, simple, or convenient for a bank may not be in the borrower's or even the bank's best interests.  

During the Great Recession, many businesses suffered greatly from poor loan structures. For example, some banks allowed their borrowers to use operating lines of credit due on demand to finance purchases of equipment and even real estate. This may appear to be beneficial to the borrower because it is quick and easy, but it could be disastrous if the bank has to demand immediate repayment of the entire line of credit in a recession.  This demand for immediate payment could stem more from the bank's issues than the borrower's issues.  Also, the borrower could be having short term issues in a recession that would have had no impact on the borrower's ability to make payments on loans properly structured with longer terms, but these short term issues prevent the borrower from refinancing  the line of credit with properly structured term loans at another bank.

Another example is a bank inappropriately using very short amortizations of principal on term loans.  Sometimes, a borrower will ask for a short amortization of principal to obtain a lower interest rate on the loan.  A short amortization greatly increases the principal portion of the monthly payment on a term loan, which may negatively impact the borrower's cash flow if unforeseen opportunities or difficulties arise. This could later turn what should have been a good loan into a problem loan for the borrower and the bank. 

We are careful to structure our loans for the mutual benefit of our borrowers and the Bank. There are basic banking guidelines for structuring operating lines of credit, equipment loans, and real estate loans. These guidelines for loan structure are the most appropriate way to preserve a borrower's cash flow in changing operating environments. We follow these guidelines for our loans. To do otherwise could place our borrowers and the Bank in difficult situations during the next recession.

With this overall approach to lending, we are growing our loan portfolio safely and soundly. Our net loans before our allowance for loan losses were $48.4 million on September 30, 2025, compared to $42.6 million on September 30, 2024. This is an increase in our loan portfolio of 13.6% over the past year. We can grow our loan portfolio without cutting corners or taking risks inconsistent with proper lending standards. We are already in conversations with prospective borrowers for new loans totaling millions of dollars we hope to close over the next year.

I can best summarize our plans for the future with the nautical phrase, "Steady as she goes, full speed ahead."

Thank you.

Michael S. Ives
President and Chief Executive Officer
Integrity Bank for Business
 
 
The above message from the CEO of Integrity Bank for Business (the “Bank”) may contain “forward looking statements” regarding future events and future results of the Bank. Forward-looking statements can be identified by words such as “anticipates,” “estimates,” “intends,” “plans,” “believes,” “projects,” “will,” “expects,” “may,” and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance, but are based only on the Bank’s current beliefs, expectations, and assumptions regarding the future of its business, plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and outside of the Bank’s control. The Bank’s actual results and financial condition may differ materially from those indicated in forward-looking statements, and therefore you should not rely on forward-looking statements. Any forward-looking statement made by the Bank is based only on information available to the Bank as of the date on which it is made, and the Bank has no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise.