FIRST BANCORP /NC/ 10-Q

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition Highlights of the results for the first quarter of 2025 is presented below. Refer also to additional discussion in the "Results of Operations" and "Financial Condition" sections following. Overview and Highlights at and for Three Months Ended March 31, 2025 We earned net income of $36.4 million, or $0.88 diluted EPS, during the first quarter of 2025 compared to net income of $25.3 million, or $0.61 diluted EPS, for the first quarter of 2024. The increase in net income in the current year was driven primarily by a $13.6 million increase in net interest income due to lower cost of funds and higher yield on interest earning assets, both of which were driven by the overall interest rate environment for the past year. Adjusting for the impact of the $2.0 million reversal of provision related to Hurricane Helene, our adjusted net income, which is a non-GAAP financial measure, was $34.9 million, or $0.84 per diluted share, for the first quarter. • Net interest income for the first quarter of 2025 was $92.9 million, a 17.2% increase from the $79.3 million recorded in the first quarter of 2024. The increase in net interest income from the like quarter was driven by higher yields on earning assets and lower cost of funds. We also grew deposits and repaid the majority of our borrowings, thereby further reducing the cost of borrowings. • Net interest margin ("NIM") on a tax-equivalent basis ("NIM-T/E") increased 47 basis points to 3.27% in the first quarter of 2025 from 2.80% in the first quarter of 2024 as a result of the lower cost of funds and higher yields on loans, securities, and other earning assets. The aforementioned decrease in borrowings along with a reduction in deposit costs further enhanced NIM-T/E from the prior year's like quarter. • We remained well-capitalized by all regulatory standards. Capital grew during the quarter with a total common equity Tier 1 ratio of 14.52%, Tier 1 risk-based capital ratio of 15.34% and total risk-based capital ratio of 16.80% at March 31, 2025, all increasing from March 31, 2024. • The provision for credit losses for the first quarter of 2025 was $1.1 million, driven by $3.3 million of net charge-off activity, partially offset by a $2.0 million reduction in the incremental provision related to potential exposure from Hurricane Helene. Net charge-offs for the first quarter of 2025 included $1.3 million related to the sale of a credit relationship as the result of an accelerated resolution. • Noninterest income for the three months ended March 31, 2025 totaled $12.9 million, which was consistent with the comparable prior year period. Decreases from the like quarter of $0.8 million in SBA loan sale gains and $0.6 million in other income were partially offset by the $1.0 million securities loss in the first quarter of 2024. • Noninterest expense of $57.9 million decreased $1.3 million, or 2.2%, for the quarter ended March 31, 2025 from the prior year. This decrease is attributable to a $1.0 million decrease in other operating expenses and a $0.9 million decrease in occupancy and equipment expenses, partially offset by a $0.8 million increase in personnel costs resulting from increased incentives and commissions driven by improved performance. • The first quarter results include the $2.0 million reversal of provision related to the potential impact of Hurricane Helene. On an after-tax basis, this reversal increased our current quarter earnings by $1.5 million. Adjusted net income and adjusted diluted EPS are non-GAAP financial measures that exclude the effect of the $2.0 million reversal of provision related to Hurricane Helene to GAAP basis net income and diluted EPS. Management believes these non-GAAP financial measures provide additional information that is useful to investors in evaluating our performance and may facilitate comparisons with other institutions in the banking industry as well as period-to-period comparisons. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, are not audited, and may not be comparable to other similarly titled financial measures used by other companies. Investors should not consider non-GAAP measures in isolation or as a substitute for analysis of the Company’s Page 34 Index results or financial condition as reported under GAAP. The following table reconciles net income and diluted EPS to adjusted net income and adjusted diluted EPS for the quarter ended March 31, 2025: Net income $ 36,406 Impact of Hurricane Helene Provision for (benefit from) credit losses (2,000) Less, tax impact 464 After-tax impact of Hurricane Helene (1,536) Adjusted net income $ 34,870 Weighted average shares outstanding - diluted 41,406,525 EPS - diluted $ 0.88 Adjusted EPS - diluted $ 0.84 Total assets were $12.4 billion at March 31, 2025, a 2.4% increase from December 31, 2024. The increase was driven primarily by deposit growth generating investable funds that were deployed in interest-bearing cash, securities and loan balances. The primary balance sheet changes are presented below. • Total cash and cash equivalents amounted to $772.4 million at March 31, 2025, representing a $264.9 million, or 52.2%, increase from December 31, 2024. Interest-bearing cash comprised $193.7 million of this increase. • AFS securities increased $21.5 million, or 1.1%, during the quarter ended March 31, 2025. • Total loans amounted to $8.1 billion at March 31, 2025, reflecting an increase of $8.4 million from December 31, 2024. • Total deposits were $10.7 billion at March 31, 2025, an increase of $214.1 million, or 2.03% , from December 31, 2024. Deposit growth during the quarter was evenly split between noninterest-bearing deposits, which saw an increase of $109.2 million, and interest-bearing deposits, which increased $105.0 million. • Credit quality continued to be strong at March 31, 2025, with NPAs of 0.27% of total assets as of March 31, 2025, down 3 basis points from 0.30% at December 31, 2024. • Our on-balance sheet liquidity ratio was 19.8% at March 31, 2025. Available off-balance sheet sources totaled $2.4 billion at quarter end, resulting in a total liquidity ratio of 36.4%. Critical Accounting Estimates The accounting principles we follow and our methods of applying these principles conform with GAAP and with general practices followed by the banking industry. Certain policies inherently have a greater reliance on the use of estimates, assumptions, or judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of our ACL and related Allowance for Unfunded Commitments, as well as business combinations, related fair value measurements and goodwill determination to be the accounting areas that require the most subjective or complex judgments, estimates, and assumptions, and where changes in those judgments, estimates, and assumptions (based on new or additional information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on our financial statements. See the "Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience" discussion in the Financial Condition section of Management's Discussion and Analysis. There have been no material changes to the Company's significant accounting policies as discussed in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2024. Page 35 Index Current Accounting Matters See Note 1 to the consolidated financial statements for information about recently announced or adopted accounting standards. Page 36 Index RESULTS OF OPERATIONS Net Interest Income Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). Changes in the net interest income are the result of changes in volume and the net interest spread which affects NIM. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. NIM refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. Net interest income is also influenced by external factors such as local economic conditions, competition for loans and deposits, and market interest rates. Net interest income for the first quarter of 2025 amounted to $92.9 million, an increase of $13.6 million, or 17.2%, from the $79.3 million recorded in the first quarter of 2024. The increase was primarily driven by lower cost of funds and higher yields on interest-earning assets. While average interest-earning assets for the first quarter of 2025 increased $38.9 million, or 0.3%, from the comparable period of the prior year, the mix of assets shifted to higher earning assets, with average short-term investments growing $225.4 million, while average taxable securities decreased $186.2 million. While the cost of interest bearing deposits decreased 19 basis points between the first quarter of 2024 and the first quarter of 2025, the biggest decrease within interest expense between the first quarter of 2025 and the like quarter was in cost of short-term borrowings, which decreased $6.5 million. This decrease was mostly attributable to the payoff of FRB Bank Term Funding Program borrowings, which decreased the average borrowing balance by $476.8 million from the like quarter. This resulted in the 47 basis point improvement in our NIM-T/E (see discussion below) from the like quarter to 3.27% for the first quarter of 2025. For internal purposes, we evaluate our NIM-T/E, which is a non-GAAP financial measure, by adding the tax benefit realized from tax-exempt loans and securities to reported interest income then dividing by total average earning assets. We believe that analysis of NIM-T/E is useful and appropriate because it allows a comparison of net interest income in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM to NIM-T/E. For the Three Months Ended March 31, ($ in thousands) 2025 2024 Net interest income, as reported $ 92,883 $ 79,274 Tax-equivalent adjustment 437 731 Net interest income, tax-equivalent $ 93,320 $ 80,005 Net interest margin, as reported 3.25 % 2.77 % Net interest margin, tax-equivalent 3.27 % 2.80 % Page 37 Index The following table presents an analysis of net interest income for the first quarter of 2025 and 2024: Average Balances and Net Interest Income Analysis Three Months Ended March 31, 2025 2024 ($ in thousands) Average Volume Interest Earned or Paid Average Rate Average Volume Interest Earned or Paid Average Rate Assets Loans (1) (2) $ 8,107,394 $ 110,533 5.52 % $ 8,103,387 $ 109,798 5.45 % Taxable securities 2,629,066 15,524 2.36 % 2,815,266 12,728 1.81 % Non-taxable securities 288,905 1,116 1.55 % 293,198 1,117 1.52 % Short-term investments, primarily interest-bearing cash 503,377 5,487 4.42 % 277,945 2,971 4.30 % Total interest-earning assets 11,528,742 132,660 4.65 % 11,489,796 126,614 4.43 % Cash and due from banks 133,756 90,833 Premises and equipment 143,064 151,159 Other assets 421,248 379,413 Total assets $ 12,226,810 $ 12,111,201 Liabilities Interest-bearing checking $ 1,431,556 $ 2,497 0.71 % $ 1,403,484 $ 2,359 0.68 % Money market deposits 4,337,560 29,180 2.73 % 3,704,731 27,813 3.02 % Savings deposits 539,104 240 0.18 % 592,395 308 0.21 % Other time deposits 558,648 3,353 2.43 % 709,517 5,456 3.09 % Time deposits >$250,000 352,174 2,849 3.28 % 355,809 3,199 3.62 % Total interest-bearing deposits 7,219,042 38,119 2.14 % 6,765,936 39,135 2.33 % Short-term borrowings 794 1 0.60 % 477,612 6,121 5.15 % Long-term borrowings 91,166 1,657 7.37 % 100,386 2,084 8.35 % Total interest-bearing liabilities 7,311,002 39,777 2.21 % 7,343,934 47,340 2.59 % Noninterest-bearing checking 3,375,098 3,312,899 Other liabilities 72,839 78,877 Shareholders’ equity 1,467,871 1,375,491 Total liabilities and shareholders’ equity $ 12,226,810 $ 12,111,201 Net yield on interest-earning assets and net interest income $ 92,883 3.25 % $ 79,274 2.77 % Net yield on interest-earning assets and net interest income – tax-equivalent (3) $ 93,320 3.27 % $ 80,005 2.80 % Interest rate spread 2.44 % 1.84 % Average prime rate 7.50 % 8.50 % (1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan fees, including late fees, prepayment fees, and net deferred loan (cost)/fee amortization in the amounts of $(0.4) million, and $(0.1) million for three months ended March 31, 2025 and 2024, respectively. (2) Includes accretion of discount on acquired loans of $2.2 million and $2.9 million for three months ended March 31, 2025 and 2024, respectively. (3) Includes tax-equivalent adjustments to reflect the tax benefit that we receive related to tax-exempt securities and loans as reduced by the related nondeductible portion of interest expense. Page 38 Index Overall, as demonstrated in the table above, the change in the mix of earning assets to higher yielding assets and a decrease in the cost of liabilities drove the expansion in NIM and net interest income. While not impacting NIM-T/E, net interest income was impacted by the one less earning day in the first quarter of 2025 compared to the first quarter of 2024. • Net interest income for the first quarter of 2025 was $92.9 million, an increase of $13.6 million from the like quarter. The increase in net interest income was primarily driven by our focused efforts to reduce borrowings and manage deposit costs after the rate cuts by the Federal Reserve in the second half of 2024, which saw the federal funds rate fall 100 basis points. We also focused on increasing loan yields as new originations were at higher rates than older loans. Further, securities yields increased as a result of the loss-earnback transaction in the fourth quarter of 2024. • The Company’s NIM for the first quarter of 2025 was 3.27%, an increase of 47 basis points from the like quarter. Within interest-earning assets, the loss-earnback transaction in the securities portfolio during the fourth quarter of 2024 resulted in an increase of 50 basis points as compared to the like quarter. In addition, loan yields increased 7 basis points to 5.52%. Following the three rate cuts by the Federal Reserve between September and December of 2024, the rate on interest-bearing deposits fell 19 basis points from the like quarter to the first quarter of 2025. • Average loan volumes for the three months ended March 31, 2025 were $4.0 million higher than the same period in 2024. In addition, interest rates on loans increased 7 basis points to 5.52% for the first quarter of 2025, resulting in an increase in interest income on loans of $0.7 million. • Due to the impact of the aforementioned Federal Reserve rate cuts in 2024 and the resulting decreased market rates partially offset by higher average balances, deposit interest expense for the three months ended March 31, 2025 decreased $1.0 million compared to the same period in 2024. Average interest-bearing deposit balances increased $453.1 million while rates on those deposits decreased 19 basis points basis points as compared to the same period in the prior year. • Average borrowings were $486.0 million lower in the first quarter of 2025 as compared to the first quarter of 2024 due in large part to the decreased utilization of short-term borrowings. This decrease in volume of borrowings between periods was mainly attributable to the pay off of the FRB Bank Term Funding Program and FHLB Fixed Rate Credit borrowings, which,during the first quarter of 2024, had an average balance of approximately $477.6 million and carried an interest rate of 5.15%. Coupled with the payoff of $10.0 million of subordinated debt with an interest rate of 8.99% as of March 31, 2024, these changes resulted in the $6.5 million decrease in interest expense on borrowings. Our NIM for all periods presented benefited from the net accretion income arising from purchase accounting premiums/discounts associated with acquisitions. Presented in the table below is the amount of accretion which increased net interest income in each time period presented. For the Three Months Ended March 31, ($ in thousands) 2025 2024 Interest income – increased by accretion of loan discount on acquired loans $ 1,789 $ 2,437 Total interest income impact 1,789 2,437 Interest expense – increased by discount accretion of deposits (103) (283) Interest expense – increased by discount accretion of borrowings (191) (189) Total net interest expense impact (294) (472) Total impact on net interest income $ 1,495 $ 1,965 The most significant component of the purchase accounting adjustments in each year was loan discount accretion on purchased loans. Generally, the level of loan discount accretion will decline each year due to the natural reduction in outstanding balance of acquired loans. At March 31, 2025 and 2024, unaccreted loan discounts on purchased loans amounted to $13.3 million and $21.6 million, respectively. The portfolio acquired with the GrandSouth Bancorporation acquisition on January 1, 2023 comprised the majority of the remaining unaccreted loan discount. Page 39 Index In addition to the loan discount accretion recorded on acquired loans, we recorded accretion on the discounts associated with the retained unguaranteed portions of SBA loans sold in the secondary market. The level of SBA loan discount accretion will fluctuate relative to the SBA loan portfolio balances. At March 31, 2025 and 2024, the unaccreted loan discounts on SBA loans amounted to $2.5 million and $3.4 million, respectively. Provision for Credit Losses and Provision for Unfunded Commitments The provision for credit losses is comprised of the provision for loan losses and the provision for unfunded commitments. The provision recorded in each period represents the amount required such that the total ACL reflects the current estimate of life of loan credit losses in the loan portfolio and the allowance for unfunded commitments reflects the current expected losses on unfunded loan commitments that are expected to result in outstanding loan balances. Our estimate of credit losses is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and allowance for unfunded commitments. Refer also to “Critical Accounting Estimates” in Item 7 of the 2024 Annual Report on Form 10-K filed with the SEC for more information. The provision for credit losses was $1.1 million and $1.2 million for the three months ended March 31, 2025 and 2024, respectively. The provision for loan losses for the first quarter of 2025 included $2.0 million reversal specifically attributed to Hurricane Helene and totaled $1.4 million as compared to $1.8 million for the first quarter of 2024. The provision for unfunded commitments reflected reversals of $0.3 million and $0.6 million for the three months ended March 31, 2025 and 2024, respectively. Within the portions of Western North and South Carolina that were significantly impacted by Hurricane Helene, the Company identified borrowers with approximately $722 million of loans outstanding. The Company continues to evaluate possible impacts from the storm and has reserved accordingly based upon the information available at each reporting period since September 30, 2024. The Company applied increased reserve rates based upon severe economic factors to the approximately $722 million of loans in the path of Helene. Additionally, the Company performed an evaluation of the largest commercial loans in its impacted markets and applied incremental reserves to those loans that were suspected of having higher potential property damage or economic impact from the storm The incremental reserve related to the potential exposure from Hurricane Helene added 0.14% to the ACL as of March 31, 2025. Additional discussion of the CECL method and our asset quality and credit metrics, which impact our provision for credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience" sections following. Noninterest Income Our noninterest income amounted to $12.9 million for the three months ended March 31, 2025 and 2024. Decreases of $0.8 million in SBA loan sale gains and $0.6 million in Other income were partially offset by the $1.0 million Securities losses, net in the first quarter of 2024. Details of the more significant components of noninterest income are presented in the table below. For the Three Months Ended March 31, ($ in thousands) 2025 2024 Service charges on deposit accounts $ 3,767 $ 3,868 Other service charges and fees - bankcard interchange income, net 2,327 2,314 Other service charges and fees - other 3,556 3,256 Presold mortgage loan fees and gains on sale 450 338 Commissions from sales of financial products 1,408 1,320 SBA loan sale gains 52 895 Bank-owned life insurance income 1,228 1,164 Securities losses, net — (975) Other income, net 114 716 Total noninterest income $ 12,902 $ 12,896 Page 40 Index Noninterest Expenses Total noninterest expenses totaled $57.9 million and $59.2 million for the three months ended March 31, 2025 and 2024, respectively. The primary contributors to the $1.3 million, or 2.2%, decrease in noninterest expense for the first quarter of 2025 were the $0.9 million decrease in Occupancy and equipment expenses, the $0.4 million decrease in FDIC insurance costs, the $0.4 million decrease in Professional fees and the $0.4 million decrease in software licenses and other software costs, partially offset by increases of $0.8 million in Total personnel costs and $0.4 million in Non-credit losses. For the three months ended March 31, 2025, there was a continued overall effort by management to control costs and reduce expenses. The following table presents the primary components of noninterest expenses. For the Three Months Ended March 31, ($ in thousands) 2025 2024 Salaries incentives and commissions expense $ 28,661 $ 27,642 Employee benefit expense 6,095 6,269 Total personnel expense 34,756 33,911 Occupancy and equipment expense 5,192 6,075 Credit card rewards and other bankcard expenses 1,178 1,421 Telephone and data lines 969 1,091 Software licenses and other software costs 1,731 2,102 Data processing expense 2,501 2,164 Professional fees 1,304 1,685 Advertising and marketing 811 940 Non-credit losses 937 564 FDIC insurance costs 1,525 1,946 Corporate insurance costs 536 583 Intangibles amortization expense 1,516 1,759 Foreclosed property (gains) losses, net (18) (2) Other operating expenses 4,955 4,948 Total noninterest expense $ 57,893 $ 59,187 Income Taxes We recorded income tax expense of $10.4 million and $6.5 million for the three months ended March 31, 2025 and 2024, respectively. Our effective tax rate was 22.2% and 20.5% for the three months ended March 31, 2025 and 2024, respectively. FINANCIAL CONDITION Total assets at March 31, 2025 amounted to $12.4 billion, a $288.6 million, or 2.4%, increase from December 31, 2024 and was primarily related to higher interest-bearing cash, investment securities and loan balances. Total loans at March 31, 2025 were $8.1 billion, an increase of $8.4 million, or 0.1%, from December 31, 2024. The mix of our loan portfolio remained substantially the same at March 31, 2025 as compared to December 31, 2024. The majority of our real estate loans were personal mortgages and commercial loans where real estate provides additional security for the loan. Note 3 to the consolidated financial statements presents additional detail regarding our mix of loans. At March 31, 2025, we had no notable concentrations in geographies or industries, including in office or hospitality categories. The Company's exposure to non-owner occupied commercial office loans represented approximately 6.0% of the total portfolio at March 31, 2025, with the largest loan being $26.3 million and the average outstanding loan balance being $1.3 million. Non-owner occupied office loans were generally in non-metro markets and the 10 largest loans in this category represented less than 2% of the total loan portfolio at March 31, 2025. Total investment securities were $2.6 billion at March 31, 2025, a decrease of $19.7 million from December 31, 2024. During the three months ended March 31, 2025, the Company purchased $10.0 million of investment Page 41 Index securities. There were no sales of investment securities during the first quarter of 2025. The unanticipated call of a security during the first quarter of 2024 resulted in a loss of $975 thousand related to the unamortized premium balance. In addition, the Company continues to utilize cash flows from investment securities to fund other earning assets. The composition of our investment portfolio remained substantially the same at March 31, 2025 as at December 31, 2024, with the exception of Corporate bonds, which increased $10.0 million due to the aforementioned purchase. The unrealized loss on AFS securities totaled $321.2 million at March 31, 2025. Refer to Note 2 to the consolidated financial statements for additional detailed information regarding our mix of investments and the unrealized losses for each category. We evaluated the unrealized losses on individual securities at March 31, 2025 and determined them to be of a temporary nature due primarily to interest rate factors and not credit quality concerns. In arriving at this conclusion, we reviewed third-party credit ratings and considered the severity of the impairment. Total deposits amounted to $10.7 billion at March 31, 2025, an increase of $214.1 million, or 2.0%, from December 31, 2024. Organic growth accounted for the growth, as brokered deposits remained flat during the quarter. We continue to have a diversified and granular deposit base which has remained stable with continued growth in customer deposits, primarily money market accounts. Our deposit mix has remained relatively consistent and has not changed significantly. March 31, 2025 December 31, 2024 ($ in thousands) Amount Percentage Amount Percentage Noninterest-bearing checking accounts $ 3,476,786 32 % $ 3,367,624 32 % Interest-bearing checking accounts 1,448,377 14 % 1,398,395 13 % Money market accounts 4,386,469 41 % 4,285,405 41 % Savings accounts 539,632 5 % 542,133 5 % Other time deposits 533,723 5 % 566,514 5 % Time deposits >$250,000 349,990 3 % 360,854 4 % Total customer deposits 10,734,977 100 % 10,520,925 100 % Brokered deposits 9,682 — % 9,600 — % Total deposits $ 10,744,659 100 % $ 10,530,525 100 % As of March 31, 2025, the estimated insured deposits totaled $6.5 billion or 60.2% of total deposits, while approximately $4.3 billion of the Company's total deposits were uninsured. In addition to insured deposits, there were deposits with a balance totaling $725.9 million at March 31, 2025 which were collateralized by investment securities such that approximately 66.9% of our total deposits were insured or collateralized at that date. Page 42 Index Nonperforming Assets NPAs are defined as nonaccrual loans, loans past due 90 or more days and still accruing interest, and foreclosed real estate. NPAs are summarized as follows: ($ in thousands) March 31, 2025 December 31, 2024 Nonperforming assets Nonaccrual loans $ 29,081 $ 31,779 Accruing loans >90 days past due — — Total nonperforming loans 29,081 31,779 Foreclosed real estate 4,769 4,965 Total nonperforming assets $ 33,850 $ 36,744 Asset Quality Ratios Nonperforming loans to total loans 0.36 % 0.39 % Nonperforming assets to total loans and foreclosed properties 0.42 % 0.45 % Nonperforming assets to total assets 0.27 % 0.30 % Allowance for credit losses to total loans 1.49 % 1.51 % Allowance for credit losses to nonperforming loans 414.81 % 385.70 % As shown in the table above, total NPAs at March 31, 2025 decreased to $33.9 million from year end and related primarily to the $2.7 million decrease in nonaccrual loans. Commercial and industrial is the largest category of nonaccrual loans, at $9.7 million, or 33.3%, of total nonaccrual loans, followed by Commercial real estate - owner occupied at $9.4 million, or 32.3% Included in various loan categories are nonaccrual SBA loans totaling $15.4 million at March 31, 2025, or 53.0% of total nonaccrual loans, and which have $6.7 million in guarantees from the SBA. As reflected in Note 3 to the accompanying consolidated financial statements, total classified loans decreased 21.4% to $51.7 million at March 31, 2025 compared to $65.8 million at December 31, 2024. The decrease resulted primarily from improvements in Commercial real estate - owner occupied loans of $8.4 million and Commercial real estate - owner occupied loans of $3.7 million. Special mention loans decreased 14.37% to $31.8 million at March 31, 2025 compared to $37.1 million at December 31, 2024. The majority of the decrease was attributable to Commercial real estate - non owner occupied loans, which decreased $3.7 million. Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience The total allowance for credit losses amounted to $120.6 million at March 31, 2025 compared to $122.6 million at December 31, 2024. Fluctuations in the ACL are based on loan mix and growth, changes in the levels of nonperforming loans, economic forecasts impacting loss drivers, and other assumptions and inputs to the CECL model. As discussed previously in the "Provision for Credit Losses and Provision for Unfunded Commitments" section, much of the change to the level of ACL during the period ended March 31, 2025 was primarily related to the release of $2.0 million of the credit reserves arising from Hurricane Helene. The ACL as a percent of loans at March 31, 2025 was 1.49%, 14 basis points of which was attributable to the potential impact from Hurricane Helene. Within the portions of Western North and South Carolina that were significantly impacted by Hurricane Helene, the Company identified borrowers with approximately $722 million of loans outstanding. The following is a summary of the categories of those loans outstanding as of March 31, 2025: Page 43 Index ($ in thousands) Balance Commercial and industrial $ 16,106 Construction, development & other land loans 22,071 Commercial real estate - owner occupied 94,837 Commercial real estate - non owner occupied 275,421 Multi-family real estate 25,130 Residential 1-4 family real estate 252,647 Home equity loans/lines of credit 35,894 Consumer loans — Total $ 722,106 Given that the recovery from the storm is ongoing in many impacted communities, the Company continues to evaluate possible impacts from the storm on borrowers and has reserved accordingly based upon the information available as of March 31, 2025. The Company applied increased reserve rates based upon severe economic factors to the approximately $722 million of loans in the most impacted path of Hurricane Helene. Additionally, the Company continues to evaluate the largest commercial loans in that area and applied incremental reserves to those loans that were suspected of having higher potential property damage or economic impact from the storm. Due to the potential exposure from Hurricane Helene, the ACL on these impacted loans was $11.0 million as of March 31, 2025, adding 14 basis points to the overall ACL as a percent of total loans,which was 1.49% as of March 31, 2025. The ACL reflects our estimate of life of loan expected credit losses that will result from the inability of our borrowers to make required loan payments. We use systematic methodologies to determine the ACL for loans and the allowance for certain off-balance-sheet credit exposures. We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. The ACL is calculated using collectively evaluated pools for loans with similar risk characteristics applying the discounted cash flow ("DCF") method. When a loan no longer shares similar risk characteristics with its segment, the loan is evaluated on an individual basis applying a DCF or asset approach for collateral-dependent loans. For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, ACL, charge-offs and recoveries, and key ratios: ($ in thousands) Three Months Ended March 31, 2025 Twelve Months Ended December 31, 2024 Three Months Ended March 31, 2024 Loans outstanding at end of period $ 8,103,033 $ 8,094,676 $ 8,076,506 Average amount of loans outstanding 8,107,394 8,046,681 8,103,387 Allowance for credit losses, at period end 120,631 122,572 110,067 Total charge-offs (4,120) (9,587) (2,115) Total recoveries 781 3,555 529 Net charge-offs $ (3,339) $ (6,032) $ (1,586) Ratios: Net charge-offs as a percent of average loans (annualized) 0.17 % 0.07 % 0.08 % Allowance for credit losses as a percent of loans at end of period 1.49 % 1.51 % 1.36 % While our estimate of the ACL involves a high degree of judgment, we believe the ACL was adequate at each period end presented. Our assessment of the ACL involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if the assessment of loan quality or collateral values changes substantially with respect to one or more loan relationships or portfolios or if there is a significant change in the reasonable and supportable forecast or assumptions used to model our expected credit losses. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the ACL or future charges to earnings. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our ACL and the value of our collateral-dependent loans. Such agencies may require us to recognize adjustments to the ACL based on their judgments about Page 44 Index information available at the time of their examinations. Refer also to “Critical Accounting Policies – Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments” in Note 1 to the 2024 Annual Report on Form 10-K filed with the SEC for more information. In addition to the ACL on loans, we maintain an allowance for lending-related commitments such as unfunded loan commitments. We estimate expected credit losses associated with these commitments over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable. The allowance for lending-related commitments on off-balance sheet credit exposures is adjusted as a component of the provision for credit losses expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance for unfunded commitments of $8.8 million and $9.1 million at March 31, 2025 and December 31, 2024, respectively, is classified on the consolidated balance sheets within "Other liabilities." The decline in the level of the allowance between periods was driven by a reduction in reserve rates partially offset by an increase in balances of available lines of credit during the three months ended March 31, 2025. Liquidity, Commitments, and Contingencies Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio has a high percentage of amortizing mortgage-backed securities generating monthly cash flows. In addition, the portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash. We also maintain available lines of credit from the FHLB and the Federal Reserve, as well as federal funds lines from several correspondent banks which are summarized below. At March 31, 2025, the Company had the following sources of readily available borrowing capacity: • A $1.3 billion line of credit with the FHLB that can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity needs. As of March 31, 2025, the line of credit is secured by a blanket lien on portions of the Company's real estate loan portfolio totaling approximately $2.3 billion and the Company's FHLB stock totaling $8.5 million. $0.8 million was outstanding on the line of credit at March 31, 2025 and December 31, 2024; • Federal funds lines of credit with correspondent banks totaling $265.0 million which allow the Company to purchase federal funds on an overnight, unsecured basis. No borrowings were outstanding at March 31, 2025 or December 31, 2024; and • An approximately $801.9 million line of credit through the Federal Reserve's discount window borrowing program, which was secured at March 31, 2025 by a blanket lien on a portion of the Company’s commercial and consumer loan portfolios (excluding those secured by real estate collateral) totaling approximately $338.3 million and specific investment securities with a carrying value of $695.9 million. No borrowings were outstanding at March 31, 2025 or December 31, 2024. Our overall on-balance sheet liquidity ratio was 19.8% at March 31, 2025 compared to 17.6% at December 31, 2024. We define our liquidity ratio as net liquid assets (cash, unpledged securities and other marketable assets) as a percentage of our net liabilities (unpledged deposits and borrowings). Our total liquidity ratio, including the $2.4 billion in available lines of credit, was 36.4% as of March 31, 2025. Not included in these ratios are the readily available sources of funds through brokered deposits. As of March 31, 2025, our brokered deposits availability was $1.9 billion per our internal policy. The amount and timing of our contractual obligations and commercial commitments have not changed materially since December 31, 2024, the detail of w hich is presented in the "Contractual Obligations and Other Commercial Commitments" table of our 2024 Annual Report on Form 10-K. In addition, we are not involved in any legal proceedings that, in our opinion, could have a material effect on our consolidated financial position. Page 45 Index Off-Balance Sheet Arrangements and Derivative Financial Instruments Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities and subordinated debentures. In the normal course of business, we are exposed to certain risks arising from both our business operations and economic conditions. As an element of our risk management strategies, we may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We do not engage in significant derivatives activities. However, in 2023 to accommodate customers, we implemented a program whereby we enter into interest rate swaps with certain commercial loan customers, with offsetting positions to dealers under a back-to-back swap program. At March 31, 2025, the Company's derivative financial instruments consisted entirely of customer back-to-back interest rate swaps which are not designated as hedges. Under this program, the Company executes interest rate swaps with commercial banking customers to facilitate their risk management strategies. Those interest rate swaps are simultaneously economically hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program are not designated as hedging instruments, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. There have been no material changes from the derivative positions discussed in Note 13 of the Company's Annual Report on Form 10-K for the year ended December 31, 2024. Capital Resources The Company is regulated by the Federal Reserve and is subject to the securities registration and public reporting regulations of the SEC. Our Bank is also regulated by the Federal Reserve and the North Carolina Office of the Commissioner of Banks ("NCCOB"). We must comply with regulatory capital requirements established by the Federal Reserve and the NCCOB. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations. Under Basel III standards and capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Federal Reserve's capital standards require us to maintain minimum ratios of “common equity tier 1” capital to total risk-weighted assets, “tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively. Common equity tier 1 capital is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier 1 capital is comprised of common equity tier 1 capital plus "additional tier 1 capital", which includes non-cumulative perpetual preferred stock and trust preferred securities. Total risk-based capital is comprised of tier 1 capital plus qualifying subordinated debentures, and certain adjustments, the largest of which is our ACL and allowance for unfunded commitments. The Company has elected to exclude AOCI related primarily to AFS securities from common equity tier 1 capital. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in Federal Reserve regulations. In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators. The Federal Reserve has not advised us of any requirement specifically applicable to us. Page 46 Index At March 31, 2025, as shown in the table below, we were well-capitalized. The capital ratios at March 31, 2025 increased as compared to 2024 year end ratios related primarily to retention of earnings increasing capital, combined with loan reductions and shifts in asset mix to lower risk-weighted assets. The following table presents the capital ratios for the Company and the regulatory minimums discussed above for the periods indicated: March 31, 2025 December 31, 2024 Minimum required Risk-based capital ratios: Common equity Tier 1 ratio 14.52 % 14.35 % 7.00 % Tier I capital ratio 15.34 % 15.17 % 8.50 % Total risk-based capital ratio 16.80 % 16.63 % 10.50 % Leverage capital ratio: Tier 1 capital to quarterly average total assets 11.41 % 11.15 % 4.00 % The Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above. At March 31, 2025, the Bank exceeded the minimum ratios established by the regulatory authorities. In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity ("TCE") to tangible assets, which is a non-GAAP financial measure. TCE divided by tangible assets excludes the effect of goodwill and other intangible assets, net of related taxes from the GAAP basis total shareholders’ common equity and GAAP basis total assets. Management believes these non-GAAP financial measures provide additional information that is useful to investors in evaluating our performance and may facilitate comparisons with other institutions in the banking industry as well as period-to-period comparisons. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP measures have limitations as analytical tools, are not audited, and may not be comparable to other similarly titled financial measures used by other companies. Investors should not consider non-GAAP measures in isolation or as a substitute for analysis of the Company’s results or financial condition as reported under GAAP. The TCE ratio was 8.55% at March 31, 2025 compared to 8.22% at December 31, 2024. The following table reconciles common equity to TCE and provides the calculation of the TCE ratio: ($ in thousands) March 31, 2025 December 31, 2024 Reconciliation of Common Equity to TCE Total shareholders' common equity $ 1,508,176 $ 1,445,611 Less: Goodwill and other intangibles, net of related taxes (486,749) (487,660) TCE $ 1,021,427 $ 957,951 Reconciliation of Total Assets to Tangible Assets Total assets $ 12,436,245 $ 12,147,694 Less: Goodwill and other intangibles, net of related taxes (486,749) (487,660) Tangible assets $ 11,949,496 $ 11,660,034 TCE divided by Tangible Assets 8.55 % 8.22 % Stock Repurchase Plans The following table discloses shares of our common stock repurchased during the three months ended March 31, 2025. Page 47 Index ($ in millions, except per share data) Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs(1) January 1, 2025 to January 31, 2025 — $ — — $ 40,000,000 February 1, 2025 to February 28, 2025 — $ — — $ 40,000,000 March 1, 2025 to March 31, 2025 24,849 $ 39.87 24,849 $ 39,009,202 Total 24,849 $ 39.87 24,849 $ 39,009,202 (1) In January 2024, the Board of Directors of the Company authorized the repurchase of up to $40 million of the Company’s common stock. Any such repurchases would be made pursuant to a plan approved by and containing provisions about the timing, purchase prices and quantities purchased determined by management in its discretion. The Company did not make any such purchases in 2024. The Board of Directors renewed this authorization in January 2025. As of March 31, 2025, the Company had repurchased a total of 24,849 shares at an average price per share of $39.87.