What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-02 · 199 added, 103 removed, 238 unchanged (56% of the section changed)

20 unchanged sentences

The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets.

Subsequently, continuing supply-chain disruption and rising inflation has caused the Federal Reserve Federal Open Market Committee (“FOMC”) to increase the target federal funds rate 500 basis points since March 1, 2022 to a range of 5.25% to 5.50% at March 31, 2024.

Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends.

17 unchanged sentences

Results of Operations

Net earnings were $3.9 million or $0.74 per share and $0.72 per diluted share for the three months ended March 31, 2024, compared to $3.2 million or $0.58 per share and $0.56 per diluted share for the prior year period.

The increase in first quarter 2024 net earnings is primarily the result of an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

The annualized return on average assets was 0.96% for the three months ended March 31, 2024, compared to 0.81% for the same period one year ago, and annualized return on average shareholders’ equity was 13.51% for the three months ended March 31, 2024, compared to 11.78% for the same period one year ago.

Net earnings were $4.9 million or $0.93 per share and $0.89 per diluted share for the three months ended June 30, 2024, compared to $4.8 million or $0.88 per share and $0.85 per diluted share for the prior year period.

The increase in second quarter 2024 net earnings is primarily the result of an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

Net earnings were $8.8 million or $1.67 per share and $1.61 per diluted share for the six months ended June 30, 2024, compared to $8.0 million or $1.46 per share and $1.41 per diluted share for the prior year period.

The increase in second quarter net earnings is primarily attributable to an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

The annualized return on average assets was 1.08% for the six months ended June 30, 2024, compared to 1.01% for the same period one year ago, and annualized return on average shareholders’ equity was 14.69% for the six months ended June 30, 2024, compared to 14.12% for the same period one year ago.

Net Interest Income.

2 unchanged sentences

Net interest margin is calculated by dividing tax-equivalent net interest income by average interest-earning assets, and represents the Company’s net yield on its interest-earning assets.

Net interest income was $13.3 million for the three months ended March 31, 2024, compared to $14.3 million for the three months ended March 31, 2023.

Net interest income was $13.4 million for the three months ended June 30, 2024, compared to $13.8 million for the three months ended June 30, 2023.

The decrease in net interest income is due to a $2.8 million increase in interest expense, partially offset by a $2.5 million increase in interest income.

Net interest income after the provision for credit losses was $13.2 million for the three months ended March 31, 2024, compared to $14.1 million for the three months ended March 31, 2023.

The provision for credit losses for the three months ended March 31, 2024 was $91,000, compared to $224,000 for the three months ended March 31, 2023.

The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on unfunded loan commitments, which was partially offset by reserves on loans individually evaluated at March 31, 2024.

Interest income was $19.8 million for the three months ended March 31, 2024, compared to $16.8 million for the three months ended March 31, 2023.

The increase in interest income reflects a $1.9 million increase in interest income and fees on loans, a $208,000 increase in interest income on balances due from banks and a $359,000 increase in interest income on investment securities.

The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve.

The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and rate increases by the Federal Reserve.

The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities and higher yields on securities purchased since June 30, 2023.

The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities.

Net interest income after the provision for credit losses was $13.9 million for the three months ended June 30, 2024, compared to $13.4 million for the three months ended June 30, 2023.

The provision for credit losses for the three months ended June 30, 2024 was a recovery of $468,000, compared to an expense of $375,000 for the three months ended June 30, 2023.

The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $12.7 million in loans being paid off or transitioning to permanent financing in loan categories within the portfolio with lower loss rates than the construction pool during the three months ended June 30, 2024.

In addition, the high rate environment is slowing additional construction activity resulting in a decrease combined with a decrease in unfunded construction loan commitments with approximately $4.9 million in new commitments offset by the $9.9 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the three months ended June 30, 2024.

Provision for credit loss recoveries noted above were partially offset by an increase in net charge-offs during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to commercial and industrial loan charge-offs during the three months ended June 30 2024, which were previously reflected in reserves on individually evaluated loans.

Interest income was $20.1 million for the three months ended June 30, 2024, compared to $17.6 million for the three months ended June 30, 2023.

The increase in interest income is due to a $1.9 million increase in interest income and fees on loans, a $208,000 increase in interest income on balances due from banks and a $359,000 increase in interest income on investment securities.

The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve from February 2023 through July 2023.

The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve.

The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and rate increases by the Federal Reserve.

The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities, and higher yields on securities purchased during the six months ended June 30, 2024.

During the three months ended June 30, 2024, average loans were $1.11 billion, an increase of $52.6 million from average loans of $1.06 billion for the three months ended June 30, 2023.

During the three months ended June 30, 2024, average investment securities available for sale were $445.1 million, a decrease of $5.6 million from average investment securities available for sale of $450.7 million for the three months ended June 30, 2023.

The average yield on loans for the three months ended June 30, 2024 and 2023 was 5.65% and 5.19%, respectively.

The average yield on investment securities available for sale was 3.36% and 3.01% for the three months ended June 30, 2024 and 2023, respectively.

The average yield on earning assets was 5.01% and 4.55% for the three months ended June 30, 2024 and 2023, respectively.

Interest expense was $6.7 million for the three months ended June 30, 2024, compared to $3.8 million for the three months ended June 30, 2023.

The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities.

During the three months ended June 30, 2024, average interest-bearing non-maturity deposits were $684.8 million, a decrease of $18.7 million from average interest-bearing non-maturity deposits of $703.5 million for the three months ended June 30, 2023.

During the three months ended June 30, 2024, average certificates of deposit were $349.5 million, an increase of $143.8 million from average certificates of deposit of $205.7 million for the three months ended June 30, 2023.

The average rate paid on interest-bearing checking and savings accounts was 1.43% and 0.94% for the three months ended June 30, 2024 and 2023, respectively.

The average rate paid on certificates of deposit was 4.17% for the three months ended June 30, 2024, compared to 3.19% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.46% for the three months ended June 30, 2024, compared to 1.56% for the same period one year ago.

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended June 30, 2024 and 2023.

The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods.

Yield information does not give effect to changes in fair value of available for sale investment securities that are reflected as a component of shareholders’ equity.

Yields and interest income on tax-exempt investments for the three months ended June 30, 2024 and 2023 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported.

The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry.

Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.

The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Three months ended

June 30, 2024

June 30, 2023

(Dollars in thousands)

Average Balance

Interest-earning assets:

Loans receivable

Investments - taxable

Investments - nontaxable*

Due from banks

Total interest-earning assets

Non-interest earning assets:

Cash and due from banks

Allowance for credit losses

Interest-bearing liabilities:

Interest-bearing demand, MMDA & savings deposits

Time deposits

Junior subordinated debentures

Total interest-bearing liabilities

Non-interest bearing liabilities and shareholders' equity:

Demand deposits

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Net interest spread

Net yield on interest-earning assets

Taxable equivalent adjustment

Investment securities

Net interest income

*Includes U.S.

Government agency securities that are non-taxable for state income tax purposes of $10.4 million in 2024 and $11.8 million in 2023.

A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities.

Year to date net interest income was $26.7 million for the six months ended June 30, 2024, compared to $28.1 million for the six months ended June 30, 2023.

The decrease in net interest income is due to a $6.9 million increase in interest expense, partially offset by a $5.5 million increase in interest income.

The increase in interest income reflects a $4.2 million increase in interest income and fees on loans, a $732,000 increase in interest income on balances due from banks and a $589,000 increase in interest income on investment securities.

The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve.

The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and rate increases by the Federal Reserve.

The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities and higher yields on securities purchased since June 30, 2023.

The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities.

Net interest income after the provision for credit losses was $27.1 million for the six months ended June 30, 2024, compared to $27.5 million for the six months ended June 30, 2023.

The provision for credit losses for the six months ended June 30, 2024 was a recovery of $377,000, compared to an expense of $599,000 for the six months ended June 30, 2023.

The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $29.1 million in loans being paid off or transitioning to permanent financing in loan categories within the portfolio with lower loss rates than the construction pool during the first six months ending June 30, 2024.

In addition, the high rate environment is slowing additional construction activity resulting in a decrease in unfunded construction loan commitments with approximately $12.4 million in new commitments offset by the $19.5 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the six months ended June 30, 2024.

Provision for credit loss recoveries noted above were partially offset by an increase in net charge-offs during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to commercial and industrial loan charge-offs during the six months ended June 30 2024, which were previously reflected in reserves on individually evaluated loans.

Interest income was $39.9 million for the six months ended June 30, 2024, compared to $34.4 million for the six months ended June 30, 2023.

The increase in interest income is due to a $4.2 million increase in interest income and fees on loans, a $732,000 increase in interest income on balances due from banks and a $589,000 increase in interest income on investment securities.

The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve.

The increase in interest income on balances due from banks is also due to an increase in balances outstanding and rate increases by the Federal Reserve.

The increase in interest income on investment securities is primarily due to higher yields on securities purchased during the three months ended March 31, 2024.

During the three months ended March 31, 2024, average loans were $1.09 billion, an increase of $55.5 million from average loans of $1.0 million for the three months ended March 31, 2023.

During the three months ended March 31, 2024, average investment securities available for sale were $443.5 million, a decrease of $32.8 million from average investment securities available for sale of $476.3 million for the three months ended March 31, 2023.

The average yield on loans for the three months ended March 31, 2024 and 2023 was 5.57% and 5.04%, respectively.

The average yield on investment securities available for sale was 3.36% and 2.98% for the three months ended March 31, 2024 and 2023, respectively.

The average yield on earning assets was 4.96% and 4.41% for the three months ended March 31, 2024 and 2023, respectively.

Interest expense was $6.5 million for the three months ended March 31, 2024, compared to $2.5 million for the three months ended March 31, 2023.

During the six months ended June 30, 2024, average loans were $1.10 billion, an increase of $54.0 million from average loans of $1.05 billion for the six months ended June 30, 2023.

During the six months ended June 30, 2024, average investment securities available for sale were $444.3 million, a decrease of $19.1 million from average investment securities available for sale of $463.4 million for the six months ended June 30, 2023.

The average yield on loans for the six months ended June 30, 2024 and 2023 was 5.61% and 5.12%, respectively.

The average yield on investment securities available for sale was 3.36% and 3.00% for the six months ended June 30, 2024 and 2023, respectively.

The average yield on earning assets was 4.99% and 4.48% for the six months ended June 30, 2024 and 2023, respectively.

Interest expense was $13.2 million for the six months ended June 30, 2024, compared to $6.3 million for the six months ended June 30, 2023.

The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities.

During the three months ended March 31, 2024, average interest-bearing non-maturity deposits were $648.3 million, a decrease of $126.8 million from average interest-bearing non-maturity deposits of $775.1 million for the three months ended March 31, 2023.

During the three months ended March 31, 2024, average certificates of deposit were $352.2 million, an increase of $233.5 million from average certificates of deposit of $118.8 million for the three months ended March 31, 2023.

The average rate paid on interest-bearing checking and savings accounts was 1.28% and 0.78% for the three months ended March 31, 2024 and 2023, respectively.

The average rate paid on certificates of deposit was 4.20% for the three months ended March 31, 2024, compared to 1.76% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.40% for the three months ended March 31, 2024, compared to 1.05% for the same period one year ago.

During the six months ended June 30, 2024, average interest-bearing non-maturity deposits were $666.5 million, a decrease of $72.6 million from average interest-bearing non-maturity deposits of $739.1 million for the six months ended June 30, 2023.

During the six months ended June 30, 2024, average certificates of deposit were $350.9 million, an increase of $188.4 million from average certificates of deposit of $162.5 million for the six months ended June 30, 2023.

The average rate paid on interest-bearing checking and savings accounts was 1.36% and 0.86% for the six months ended June 30, 2024 and 2023, respectively.

The average rate paid on certificates of deposit was 4.19% for the six months ended June 30, 2024, compared to 2.67% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.43% for the six months ended June 30, 2024, compared to 1.31% for the same period one year ago.

Yield information does not give effect to changes in fair value of available for sale investment securities that are reflected as a component of shareholders’ equity.

Yields and interest income on tax-exempt investments for the three months ended March 31, 2024 and 2023 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

Yields and interest income on tax-exempt investments for the six months ended June 30, 2024 and 2023 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported.

2 unchanged sentences

The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Three months ended March 31, 2024

Three months ended March 31, 2023

Six months ended

June 30, 2024

June 30, 2023

(Dollars in thousands)

31 unchanged sentences

The changes in net interest income due to both volume and rate changes have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

Three months ended March 31, 2024 compared to

three months ended March 31, 2023

Three months ended March 31, 2023 compared to

three months ended March 31, 2022

Three months ended June 30, 2024 compared to three months ended June 30, 2023

Six months ended June 30, 2024 compared to six months ended June 30, 2023

(Dollars in thousands)

4 unchanged sentences

Changes in average rates

Total Increase (Decrease)

Interest income:

12 unchanged sentences

Provision for Credit Losses .

The provision for credit losses for the three months ended March 31, 2024 was $91,000, compared to $224,000 for the three months ended March 31, 2023.

The decrease in the provision for credit losses is primarily attributable to a provision reduction of $337,000 for other construction loans and all land development and other land loans as a result of an overall decrease in funded loan balances and unfunded commitments in this category, a decrease in provision of $224,000 for loans secured by owner-occupied, nonfarm nonresidential properties as a result of a $200,000 recovery during the first quarter of 2024, partially offset by an increase in provision for individually evaluated loans of $321,000 for commercial and industrial loans and $94,000 for 1-4 family loans secured by first liens during the three months ended March 31, 2024.

The provision for credit losses for the three months ended June 30, 2024 was a recovery of $468,000, compared to an expense of $375,000 for the three months ended June 30, 2023.

The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $12.7 million in loans being paid off or transitioning to permanent financing in other loan categories within the portfolio with lower loss rates than the construction pool during the three months ended June 30, 2024.

In addition, the high rate environment is slowing additional construction activity resulting in a decrease in unfunded construction loan commitments with approximately $4.9 million in new commitments offset by the $9.9 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the three months ended June 30, 2024.

The provision for credit losses for the six months ended June 30, 2024 was a recovery of $377,000, compared to an expense of $599,000 for the six months ended June 30, 2023.

The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $29.1 million in loans being paid off or transitioning to permanent financing in other loan categories within the portfolio with lower loss rates than the construction pool during the first six months ending June 30, 2024.

In addition, the high rate environment is slowing additional construction activity resulting in a decrease in unfunded construction loan commitments with approximately $12.4 million in new commitments offset by $19.5 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the six months ended June 30, 2024.

Non-Interest Income.

Non-interest income was $6.0 million for the three months ended March 31, 2024, compared to $3.6 million for the three months ended March 31, 2023.

The increase in non-interest income is primarily attributable to a $2.5 million net loss on the sales of securities during the three months ended March 31, 2023, and no comparable losses in the three months ended March 31, 2024.

Non-interest income was $7.5 million for the three months ended June 30, 2024, compared to $6.4 million for the three months ended June 30, 2023.

The increase in non-interest income is primarily attributable to a $591,000 increase in appraisal management fee income due to an increase in appraisal volume and a $444,000 increase in miscellaneous non-interest income primarily due to an increase in income on Small Business Investment Company (SBIC) investments.

Non-interest income was $13.6 million for the six months ended June 30, 2024, compared to $10.0 million for the six months ended June 30, 2023.

The increase in non-interest income is primarily attributable to a $2.5 million net loss on the sales of securities during the six months ended June 30, 2023 compared to no losses in the six months ended June 30, 2024, and a $911,000 increase in appraisal management fee income due to an increase in appraisal volume.

Non-Interest Expense.

Non-interest expense was $14.5 million for the three months ended March 31, 2024, compared to $13.7 million for the three months ended March 31, 2023.

The increase in non-interest expense is primarily attributable to a $480,000 increase in salaries and employee benefits expense primarily due to an increase in insurance expense and a $254,000 increase in appraisal management fee expense due to an increase in appraisal volume.

Non-interest expense was $15.1 million for the three months ended June 30, 2024, compared to $13.6 million for the three months ended June 30, 2023.

The increase in non-interest expense is primarily attributable to a $541,000 increase in salaries and employee benefits expense primarily due to increases in salary and restricted stock expenses, a $474,000 increase in appraisal management fee expense due to an increase in appraisal volume, a $185,000 increase in professional fees, a $143,000 increase in debit card expense and a $174,000 increase in miscellaneous non-interest expense.

Non-interest expense was $29.6 million for the six months ended June 30, 2024, compared to $27.3 million for the six months ended June 30, 2023.

The increase in non-interest expense is primarily attributable to a $1.0 million increase in salaries and employee benefits expense primarily due to increases in salary, medical insurance and restricted stock expenses, a $728,000 increase in appraisal management fee expense due to an increase in appraisal volume, A $221,000 increase in occupancy expense, a $178,000 increase in professional fees and a $182,000 increase in debit card expense.

Income Taxes.

Income tax expense was $787,000 for the three months ended March 31, 2024, compared to $851,000 for the three months ended March 31, 2023.

The effective tax rate was 16.62% for the three months ended March 31, 2024, compared to 21.15% for the three months ended March 31, 2023.

The decrease in the effective tax rate is primarily due to a $322,000 interest receivable booked during the three months ended March 31, 2024 on a deposit for taxes paid prior to a recent settlement with the North Carolina Department of Revenue (“NCDOR”) to withdraw the disallowance of certain tax credits previously purchased by the Bank.

Income tax expense was $1.4 million for the three months ended June 30, 2024 and 2023.

The effective tax rate was 22.09% for the three months ended June 30, 2024, compared to 22.20% for the three months ended June 30, 2023.

Income tax expense was $2.2 million for the six months ended June 30, 2024 and 2023.

The effective tax rate was 19.74% for the six months ended June 30, 2024, compared to 21.79% for the six months ended June 30, 2023.

Analysis of Financial Condition

Investment Securities.

Available for sale securities were $394.7 million as of March 31, 2024, compared to $391.9 million as of December 31, 2023.

Average investment securities available for sale for the three months ended March 31, 2024 were $443.5 million, compared to $454.8 million for the year ended December 31, 2023.

Total loans were $1.09 billion as of March 31, 2024, compared to $1.08 billion at December 31, 2023.

Average loans represented 68% of average earning assets for the three months ended March 31, 2024 and the year ended December 31, 2023.

The Bank had $1.3 million and $686,000 in mortgage loans held for sale as of March 31, 2024 and December 31, 2023, respectively.

Available for sale securities were $393.3 million as of June 30, 2024, compared to $391.9 million as of December 31, 2023.

Average investment securities available for sale for the six months ended June 30, 2024 were $444.3 million, compared to $454.8 million for the year ended December 31, 2023.

Total loans were $1.11 billion as of June 30, 2024, compared to $1.09 billion at December 31, 2023.

Average loans represented 68% of average earning assets for the three months ended June 30, 2024 and the year ended December 31, 2023.

The Bank had $1.3 million and $686,000 in mortgage loans held for sale as of June 30, 2024 and December 31, 2023, respectively.

Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market.

Real estate mortgage loans include both commercial and residential mortgage loans.

At March 31, 2024, the Bank had $116.6 million in residential mortgage loans, $107.8 million in home equity loans and $659.5 million in commercial mortgage loans, which include $510.2 million secured by commercial property and $149.3 million secured by residential property.

At June 30, 2024, the Bank had $117.9 million in residential mortgage loans, $108.6 million in home equity loans and $675.8 million in commercial mortgage loans, which include $256.8 million secured by commercial property and $149.0 million secured by residential property.

At December 31, 2023, the Bank had $112.8 million in residential mortgage loans, $107.7 million in home equity loans and $639.9 million in commercial mortgage loans, which include $488.9 million secured by commercial property and $151.0 million secured by residential property.

8 unchanged sentences

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of March 31, 2024.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of June 30, 2024.

The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

1 unchanged sentence

The Company calculates the allowance for credit losses using a Weighted Average Remaining Maturity (“WARM”) methodology.

The ACL balance was $10.8 million at March 31, 2024 as compared to $11.0 million at December 31, 2023.

The decrease is primarily composed of a $213,000 decrease in allowance for other construction loans all land development, and other land loans as a result of loan balance decreases in this category during the first quarter of 2024, a decrease of $57,000 in reserves in loans secured by owner-occupied, nonfarm nonresidential properties as a result of a $200,000 recovery during the first quarter of 2024, partially offset by an increase in reserves of $85,000 in loans secured by other nonfarm nonresidential properties caused by an increase in balances for loans in this category at March 31, 2024 as compared to December 31, 2023.

The ACL balance was $10.0 million at June 30, 2024 as compared to $11.0 million at December 31, 2023.

The decrease is primarily composed of a $541,000 decrease in allowance for other construction loans, all land development, and other land loans as a result of loan balance decreases in this category during the six months ended June 30, 2024 and a $442,000 decrease in allowance for commercial and industrial loans primarily due to a $432,000 decrease in reserves on individually evaluated loans in this category at June 30, 2024 as compared to December 31, 2023.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience.

7 unchanged sentences

and interest rate risk.

The portion of the ACL balance attributable to qualitative factors was $5.2 million at March 31, 2024 and December 31, 2023.

A decrease of $36,000 between these periods is mainly attributable to the decrease in reserves of $109,000 for other construction loans and all land development and other land loans as a result of decreases in loan balances for this category, partially offset by an increase in reserves of $84,000 for loans secured by other nonfarm nonresidential properties as a result of balance increases for this category.

No changes to the risk status of any of the risk factors was made during the first quarter of 2024.

The portion of the ACL balance attributable to qualitative factors was $4.9 million at June 30, 2024, compared to $5.2 million at December 31, 2023.

The decrease of $284,000 between these periods is mainly attributable to the decrease in reserves of $299,000 for other construction loans and all land development and other land loans as a result of decreases in loan balances for this category.

No changes to the risk status of any of the risk factors was made during the second quarter of 2024.

Loans that do not share risk characteristics are evaluated on an individual basis.

When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate.

Three loans, totaling $891,000, were individually evaluated as of March 31, 2024, and two loans totaling $432,000 were individually evaluated as of December 31, 2023.

Reserves on individually evaluated loans were $424,000 and $432,000 at March 31, 2024 and December 31, 2023, respectively.

There were no loans individually evaluated as of June 30, 2024, and two loans totaling $432,000 were individually evaluated as of December 31, 2023.

Reserves on individually evaluated loans were $432,000 at December 31, 2023.

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs.

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The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

The allowance for credit losses on off-balance sheet credit exposures was $1.7 million and $1.8 million at March 31, 2024 and December 31, 2023, respectively.

The decrease of $72,000 in the first quarter of 2024 was the result of a decrease in the allowance balance of $69,000 for other construction loans and all land development and other land loans.

The overall balances in this category decreased in the first quarter of 2024.

The allowance for credit losses on off-balance sheet credit exposures was $1.6 million and $1.8 million at June 30, 2024 and December 31, 2023, respectively.

The decrease of $205,000 during the six months ended June 30, 2024 was primarily due to a $239,000 decrease in the allowance balance for other construction loans and all land development and other land loans.

The overall balances in this category decreased $22.4 million during the six months ended June 30, 2024.

While off balance sheet credit exposures increased in total from December 31, 2023 to June 30, 2024, the majority of the increase was in unfunded commitments on commercial real estate loans and commercial loans not secured by real estate that have lower reserve rates than other construction loans and all land development and other land loans, which resulted in the overall decrease in the allowance for credit losses on off-balance sheet credit exposures.

Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectability becomes doubtful.

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Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan.

The Bank Board reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

The board of directors of the Bank (“the Bank Board”) reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses.

This independent third party reviews and evaluates loan relationships greater than or equal to $1.5 million as well as a periodic sample of commercial relationships with exposures below $1.5 million, excluding loans in default, and loans in process of litigation or liquidation.

The third party’s evaluation and report is shared with management and the board of directors of the Bank (the “Bank Board”).

The third party’s evaluation and report is shared with management and the Bank Board.

Management considers certain commercial loans with weak credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral.

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Non-performing Assets.

Non-performing assets were $4.0 million or 0.23% of total assets at March 31, 2024, compared to $3.9 million or 0.24% of total assets at December 31, 2023.

Non-accrual loans were $4.0 million at March 31, 2024, compared to $3.8 million at December 31, 2023.

As a percentage of total loans outstanding, non-accrual loans were 0.36% at March 31, 2024 and December 31, 2023.

Non-accrual loans over $250,000 are individually evaluated for impairment.

Non-performing assets include $3.4 million in commercial and residential mortgage loans and $553,000 in other loans at March 31, 2024, compared to $3.4 million in commercial and residential mortgage loans and $464,000 in other loans at December 31, 2023.

The Bank had no loans 90 days past due and still accruing at March 31, 2024 and December 31, 2023.

The Bank had no other real estate owned at March 31, 2024 and December 31, 2023.

Deposits were $1.45 billion as of March 31, 2024, compared to $1.39 billion as of December 31, 2023.

Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.30 billion at March 31, 2024, compared to $1.24 billion at December 31, 2023.

Non-performing assets were $4.2 million or 0.25% of total assets at June 30, 2024, compared to $3.9 million or 0.24% of total assets at December 31, 2023.

Non-accrual loans were $4.2 million at June 30, 2024, compared to $3.9 million at December 31, 2023.

As a percentage of total loans outstanding, non-accrual loans were 0.37% at June 30, 2024, compared to 0.36% at December 31, 2023.

Non-accrual loans over $250,000 are individually evaluated for specific reserves.

Non-performing assets include $3.9 million in commercial and residential mortgage loans and $267,000 in other loans at June 30, 2024, compared to $3.4 million in commercial and residential mortgage loans and $464,000 in other loans at December 31, 2023.

The Bank had no loans 90 days past due and still accruing at June 30, 2024 and December 31, 2023.

The Bank had no other real estate owned at June 30, 2024 and December 31, 2023.

Deposits were $1.48 billion as of June 30, 2024, compared to $1.39 billion as of December 31, 2023.

Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.33 billion at June 30, 2024, compared to $1.24 billion at December 31, 2023.

Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s overall cost of funds and profitability.

Certificates of deposit in amounts of more than $250,000 totaled $148.8 million at March 31, 2024, compared to $148.9 million December 31, 2023.

Estimated uninsured deposits totaled $390.2 million, or 26.86% of total deposits, at March 31, 2024, compared to $382.1 million, or 27.45% of total deposits, at December 31, 2023.

Certificates of deposit in amounts of more than $250,000 totaled $147.3 million at June 30, 2024, compared to $148.9 million December 31, 2023.

Estimated uninsured deposits totaled $378.6 million, or 25.65% of total deposits, at June 30, 2024, compared to $382.1 million, or 27.45% of total deposits, at December 31, 2023.

Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits.

The Bank did not have any significant deposit concentrations at March 31, 2024.

The Bank did not have any significant deposit concentrations at June 30, 2024.

Borrowed Funds.

There were no FHLB borrowings outstanding at March 31, 2024 and December 31, 2023.

Securities sold under agreements to repurchase were $59.2 million at March 31, 2023, compared to $86.7 million at December 31, 2023.

The decrease in securities sold under agreements to repurchase is primarily due to customers transferring funds from securities sold under agreements to repurchase to deposits via the IntraFi network’s Insured Cash Sweep (“ICS”) during the three months ended March 31, 2024

There were no FHLB borrowings outstanding at June 30, 2024 and December 31, 2023.

Securities sold under agreements to repurchase were $18.8 million at June 30, 2023, compared to $86.7 million at December 31, 2023.

Junior Subordinated Debentures (related to Trust Preferred Securities).

Junior subordinated debentures were $15.5 million at March 31, 2024 and December 31, 2023.

Junior subordinated debentures were $15.5 million at June 30, 2024 and December 31, 2023.

Asset Liability and Interest Rate Risk Management.

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Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds.

Average rate sensitive assets for the three months ended March 31, 2024 totaled $1.61 billion, exceeding average rate sensitive liabilities of $1.09 billion by $517.3 million.

Average rate sensitive assets for the six months ended June 30, 2024 totaled $1.61 billion, exceeding average rate sensitive liabilities of $1.09 billion by $519.4 million.

The Company has an overall interest rate risk management strategy that may incorporate the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility.

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The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company.

The Company did not have any interest rate derivatives outstanding as of March 31, 2024.

The Company did not have any interest rate derivatives outstanding as of June 30, 2024.

Included in the rate sensitive assets are $181.5 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC.

Certain variable rate loans are structured to establish floors on interest rates charged to protect against downward movements in the prime rate.

At March 31, 2024, the Company had $118.7 million in loans with interest rate floors.

No floors were in effect on loans with floors on interest rates charged at March 31, 2024.

At June 30, 2024, the Company had $124.1 million in loans with interest rate floors.

No floors were in effect on loans with floors on interest rates charged at June 30, 2024.

The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements.

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In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit.

As of March 31, 2024, such unfunded commitments to extend credit were $370.5 million, while commitments in the form of standby letters of credit totaled $3.3 million.

As of June 30, 2024, such unfunded commitments to extend credit were $372.8 million, while commitments in the form of standby letters of credit totaled $3.8 million.

As of December 31, 2023, such unfunded commitments to extend credit were $367.5 million, while commitments in the form of standby letters of credit totaled $3.7 million.

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The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships.

As of March 31, 2024, the Bank’s core deposits, a non-GAAP measure, totaled $1.30 billion, or 90% of total deposits.

As of June 30, 2024, the Bank’s core deposits, a non-GAAP measure, totaled $1.33 billion, or 90% of total deposits.

As of December 31, 2023, the Bank’s core deposits totaled $1.24 billion, or 89% of total deposits.

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The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina.

The Bank’s ratio of wholesale funding to total assets was 0.49% and 0.50% as of March 31, 2024 and December 31, 2023, respectively.

The Bank’s ratio of wholesale funding to total assets was 0.49% and 0.50% as of June 30, 2024 and December 31, 2023, respectively.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets.

There were no FHLB borrowings outstanding at March 31, 2024 and December 31, 2023.

At March 31, 2024, the carrying value of loans pledged as collateral to the FHLB totaled $217.4 million compared to $214.1 million at December 31, 2023.

The remaining availability under the line of credit with the FHLB was $126.5 million at March 31, 2024 compared to $122.2 million at December 31, 2023.

The Bank had no borrowings from the FRB at March 31, 2024 or December 31, 2023.

There were no FHLB borrowings outstanding at June 30, 2024 and December 31, 2023.

At June 30, 2024, the carrying value of loans pledged as collateral to the FHLB totaled $215.9 million compared to $214.1 million at December 31, 2023.

The remaining availability under the line of credit with the FHLB was $125.0 million at June 30, 2024 compared to $122.2 million at December 31, 2023.

The Bank had no borrowings from the FRB at June 30, 2024 or December 31, 2023.

FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB.

At March 31, 2024, the carrying value of loans pledged as collateral to the FRB totaled $612.1 million compared to $611.2 million at December 31, 2023.

Availability under the line of credit with the FRB was $477.0 million at March 31, 2024 compared to $445.1 million at December 31, 2023.

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of March 31, 2024.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 27.33% at March 31, 2024 and 25.39% at December 31, 2023.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, 2024 and December 31, 2023.

At June 30, 2024, the carrying value of loans pledged as collateral to the FRB totaled $619.3 million compared to $611.2 million at December 31, 2023.

Availability under the line of credit with the FRB was $483.9 million at June 30, 2024 compared to $445.1 million at December 31, 2023.

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of June 30, 2024.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 28.91% at June 30, 2024 and 25.39% at December 31, 2023.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at June 30, 2024 and December 31, 2023.

Contractual Obligations and Off-Balance Sheet Arrangements.

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Capital Resources.

Shareholders’ equity was $121.1 million, or 7.25% of total assets, at March 31, 2024, compared to $121.0 million, or 7.40% of total assets, at December 31, 2023.

Annualized return on average equity for the three months ended March 31, 2024 was 13.51%, compared to 11.78% for the three months ended March 31, 2023.

Total cash dividends paid on common stock were $1.9 million for the three months ended March 31, 2024 and 2023.

Shareholders’ equity was $124.3 million, or 7.51% of total assets, at June 30, 2024, compared to $121.0 million, or 7.40% of total assets, at December 31, 2023.

Annualized return on average equity for the six months ended June 30, 2024 was 14.69%, compared to 14.12% for the six months ended June 30, 2023.

Total cash dividends paid on common stock were $3.0 million for the six months ended June 30, 2024 and 2023.

In the first quarter of 2023, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million was allocated to repurchase the Company’s common stock.

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The Company repurchased approximately $4.0 million, or 181,022 shares of its common stock, under this stock repurchase program through March 31, 2024, when the program expired.

In June of 2024, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million may be allocated to repurchase the Company’s common stock.

Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions.

The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors.

The stock repurchase program may be suspended at any time or from time-to-time without prior notice.

The Company had not repurchased any shares of its common stock under this stock repurchase program as of June 30, 2024.

In 2013, the FRB approved its final rule on the Basel III capital standards, which implement changes to the regulatory capital framework for banking organizations.

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Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill.

Tier 1 capital includes $15.0 million in trust preferred securities at March 31, 2024 and December 31, 2023.

The Company’s Tier 1 capital ratio was 13.84% and 13.94% at March 31, 2024 and December 31, 2023, respectively.

Tier 1 capital includes $15.0 million in trust preferred securities at June 30, 2024 and December 31, 2023.

The Company’s Tier 1 capital ratio was 14.15% and 13.94% at June 30, 2024 and December 31, 2023, respectively.

Total risk-based capital is defined as Tier 1 capital plus supplementary capital.

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Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets.

The Company’s total risk-based capital ratio was 14.83% and 14.96% at March 31, 2024 and December 31, 2023, respectively.

The Company’s total risk-based capital ratio was 15.07% and 14.96% at June 30, 2024 and December 31, 2023, respectively.

The Company’s common equity Tier 1 capital consists of common stock and retained earnings.

The Company’s common equity Tier 1 capital ratio was 12.66% and 12.75% at March 31, 2024 and December 31, 2023, respectively.

The Company’s common equity Tier 1 capital ratio was 12.97% and 12.75% at June 30, 2024 and December 31, 2023, respectively.

Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater.

The Company’s Tier 1 leverage capital ratio was 10.39% and 10.51% at March 31, 2024 and December 31, 2023, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.73% and 13.83% at March 31, 2024 and December 31, 2023, respectively.

The total risk-based capital ratio for the Bank was 14.72% and 14.85% at March 31, 2024 and December 31, 2023, respectively.

The Bank’s common equity Tier 1 capital ratio was 13.73% and 13.83% at March 31, 2024 and December 31, 2023, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.23% and 10.35% at March 31, 2024 and December 31, 2023, respectively.

The Company’s Tier 1 leverage capital ratio was 10.60% and 10.51% at June 30, 2024 and December 31, 2023, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.04% and 13.83% at June 30, 2024 and December 31, 2023, respectively.

The total risk-based capital ratio for the Bank was 14.95% and 14.85% at June 30, 2024 and December 31, 2023, respectively.

The Bank’s common equity Tier 1 capital ratio was 14.04% and 13.83% at June 30, 2024 and December 31, 2023, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.43% and 10.35% at June 30, 2024 and December 31, 2023, respectively.

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater.

Based upon these guidelines, the Bank was considered to be “well capitalized” at March 31, 2024.

Based upon these guidelines, the Bank was considered to be “well capitalized” at June 30, 2024.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis