What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-06 compared with 2024-11-05 · 125 added, 227 removed, 213 unchanged (62% of the section changed)

18 unchanged sentences

Management evaluates these factors in estimating the allowance for credit losses (“ACL”, “allowance for credit losses”, or “allowance”) and changes in these economic factors could result in increases or decreases to the provision for loan losses.

Prior to the COVID-19 pandemic, economic conditions, while not as robust as the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again.

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 between March 2022 and July 2023 before being reduced to a range of 4.75% to 5.00% in September 2024.

The Federal Reserve Federal Open Market Committee (“FOMC”) increased the target federal funds rate 500 basis points between March 2022 and July 2023 to address the supply-chain disruption and rising inflation that had developed in the markets prior to the increases in the target rate.

In 2024, the FOMC reduced the target federal funds rate to a range of 4.25% to 4.50% at March 31, 2025.

Subsequently, economic conditions have stabilized such that businesses in our market area are growing and investing again.

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

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.

16 unchanged sentences

Results of Operations

Net earnings were $4.0 million or $0.74 per share and $0.72 per diluted share for the three months ended September 30, 2024, compared to $4.1 million or $0.76 per share and $0.74 per diluted share for the prior year period.

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

Net earnings were $12.8 million or $2.41 per share and $2.33 per diluted share for the nine months ended September 30, 2024, compared to $12.1 million or $2.22 per share and $2.15 per diluted share for the prior year period.

The increase in year-to-date 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 0.95% for the nine months ended September 30, 2024, compared to 1.02% for the same period one year ago, and annualized return on average shareholders’ equity was 13.59% for the nine months ended September 30, 2024, compared to 13.97% for the same period one year ago.

Net earnings were $4.3 million or $0.82 per share and $0.79 per diluted share for the three months ended March 31, 2025, as compared to $3.9 million or $0.74 per share and $0.72 per diluted share for the prior year period.

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

The annualized return on average assets was 1.07% for the three months ended March 31, 2025, compared to 0.96% for the same period one year ago, and annualized return on average shareholders’ equity was 13.52% for the three months ended March 31, 2025, compared to 13.51% 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 $13.5 million for the three months ended September 30, 2024, compared to $13.3 million for the three months ended September 30, 2023.

The increase in net interest income is due to a $2.2 million increase in interest income, partially offset by a $2.0 million increase in interest expense.

The increase in interest income is primarily due to a $2.0 million increase in interest income and fees on loans and a $206,000 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 through July 2023.

The increase in interest income on investment securities is primarily due to increases in yields on variable rate securities and higher yields on securities purchased since September 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 $13.3 million for the three months ended September 30, 2024, compared to $12.8 million for the three months ended September 30, 2023.

The provision for credit losses for the three months ended September 30, 2024 was $297,000, compared to $562,000 for the three months ended September 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 with approximately $12.0 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 September 30, 2024.

This reduction of provision of $152,000 due to change in loan mix was offset by a $669,000 additional qualitative reserve established during the three months ended September 30, 2024 for expected losses associated with Hurricane Helene, which heavily impacted western North Carolina in late September 2024.

Interest income was $20.5 million for the three months ended September 30, 2024, compared to $18.3 million for the three months ended September 30, 2023.

The increase in interest income is primarily due to a $2.0 million increase in interest income and fees on loans and a $206,000 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 through July 2023.

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

During the three months ended September 30, 2024, average loans were $1.12 billion, an increase of $56.4 million from average loans of $1.06 billion for the three months ended September 30, 2023.

During the three months ended September 30, 2024, average investment securities available for sale were $440.5 million, a decrease of $7.5 million from average investment securities available for sale of $448.0 million for the three months ended September 30, 2023.

The average yield on loans for the three months ended September 30, 2024 and 2023 was 5.72% and 5.27%, respectively.

The average yield on investment securities available for sale was 3.38% and 3.15% for the three months ended September 30, 2024 and 2023, respectively.

The average yield on earning assets was 5.06% and 4.65% for the three months ended September 30, 2024 and 2023, respectively.

Interest expense was $6.9 million for the three months ended September 30, 2024, compared to $5.0 million for the three months ended September 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 September 30, 2024, average interest-bearing non-maturity deposits were $725.0 million, an increase of $72.3 million from average interest-bearing non-maturity deposits of $652.7 million for the three months ended September 30, 2023.

During the three months ended September 30, 2024, average certificates of deposit were $342.8 million, an increase of $74.1 million from average certificates of deposit of $268.7 million for the three months ended September 30, 2023.

The average rate paid on interest-bearing checking and savings accounts was 1.59% and 1.06% for the three months ended September 30, 2024 and 2023, respectively.

The average rate paid on certificates of deposit was 4.19% for the three months ended September 30, 2024, compared to 3.71% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.51% for the three months ended September 30, 2024, compared to 1.92% 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 September 30, 2024 and 2023.

Net interest income was $13.9 million for the three months ended March 31, 2025, compared to $13.3 million for the three months ended March 31, 2024.

The increase in net interest income is due to a $160,000 increase in interest income and a $480,000 decrease in interest expense.

The increase in interest income is primarily due to a $878,000 increase in interest income and fees on loans, which was partially offset by a $557,000 decrease in interest income on balances due from banks and a $161,000 decrease in interest income on investment securities.

The increase in interest income and fees on loans is primarily due to an increase in total loans.

The decrease in interest income on balances due from banks is due to a reduction in balances outstanding.

The decrease in interest income on investment securities is primarily due to a reduction in balances outstanding.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

Net interest income after the provision for credit losses was $13.7 million for the three months ended March 31, 2025, compared to $13.2 million for the three months ended March 31, 2024.

The provision for credit losses for the three months ended March 31, 2025 was $268,000, compared to $91,000 for the three months ended March 31, 2024.

The increase in the provision for credit losses is primarily attributable to an increase in unfunded commitments on construction loans and an increase in total loans outstanding.

These increases were partially offset by the removal of the $60,000 Hurricane Helene reserve included in the allowance for credit losses at December 31, 2024.

Interest income was $20.0 million for the three months ended March 31, 2025, compared to $19.8 million for the three months ended March 31, 2024.

The increase is primarily due to a $878,000 increase in interest income and fees on loans, which was partially offset by a $557,000 decrease in interest income on balances due from banks and a $161,000 decrease in interest income on investment securities.

The increase in interest income and fees on loans is primarily due to an increase in total loans.

The decrease in interest income on balances due from banks is due to a reduction in balances outstanding.

The decrease in interest income on investment securities is primarily due to a reduction in balances outstanding.

During the three months ended March 31, 2025, average loans were $1.14 billion, an increase of $49.7 million from average loans of $1.09 billion for the three months ended March 31, 2024.

During the three months ended March 31, 2025, average investment securities available for sale were $433.2 million, a decrease of $10.3 million from average investment securities available for sale of $443.5 million for the three months ended March 31, 2024.

The average yield on loans for the three months ended March 31, 2025 and 2024 was 5.69% and 5.57%, respectively.

The average yield on investment securities available for sale was 3.38% and 3.15% for the three months ended March 31, 2025 and 2024, respectively.

The average yield on earning assets was 5.03% and 4.96% for the three months ended March 31, 2025 and 2024, respectively.

Interest expense was $6.0 million for the three months ended March 31, 2025, compared to $6.5 million for the three months ended March 31, 2024.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

During the three months ended March 31, 2025, average interest-bearing non-maturity deposits were $747.0 million, an increase of $98.7 million from average interest-bearing non-maturity deposits of $648.3 million for the three months ended March 31, 2024.

During the three months ended March 31, 2025, average certificates of deposit were $341.3 million, a decrease of $10.9 million from average certificates of deposit of $352.2 million for the three months ended March 31, 2024.

The average rate paid on interest-bearing checking and savings accounts was 1.44% and 1.28% for the three months ended March 31, 2025 and 2024, respectively.

The average rate paid on certificates of deposit was 3.72% for the three months ended March 31, 2025, compared to 4.20% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.21% for the three months ended March 31, 2025, compared to 2.40% for the same period one year ago.

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 September 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.

Yields and interest income on tax-exempt investments for the three months ended March 31, 2025 and 2024 have been adjusted to a tax equivalent basis using an effective tax rate of 22.78% for securities that are both federal and state tax exempt and an effective tax rate of 20.53% 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.

4 unchanged sentences

Three months ended

September 30, 2024

September 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 $9.9 million in 2024 and $11.6 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 $40.3 million for the nine months ended September 30, 2024, compared to $41.4 million for the nine months ended September 30, 2023.

The decrease in net interest income is due to a $8.8 million increase in interest expense, partially offset by a $7.6 million increase in interest income.

The increase in interest income reflects a $6.1 million increase in interest income and fees on loans, a $734,000 increase in interest income on balances due from banks and a $795,000 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 through July 2023.

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

The increase in interest income on investment securities is primarily due to increases in yields on variable rate securities and higher yields on securities purchased since September 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 $40.3 million for the nine months ended September 30, 2024 and 2023.

The provision for credit losses for the nine months ended September 30, 2024 was a recovery of $80,000, compared to an expense of $1.2 million for the nine months ended September 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 with approximately $34.3 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 nine months ended September 30, 2024.

This reduction of provision of $948,000 due to change in loan mix was partially offset by a $669,000 additional qualitative reserve established during the nine months ended September 30, 2024 for expected losses associated with Hurricane Helene, which heavily impacted western North Carolina in late September 2024.

Net charge-offs for the nine months ended September 30, 2024 were $956,000, compared to $297,000 for the nine months ended September 30, 2023.

The increase in net charge-offs during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, is primarily due to commercial and industrial loan charge-offs during the nine months ended September 30 2024, which were previously reflected in reserves on individually evaluated loans.

Interest income was $60.3 million for the nine months ended September 30, 2024, compared to $52.7 million for the nine months ended September 30, 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 through July 2023.

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

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

During the nine months ended September 30, 2024, average loans were $1.11 billion, an increase of $54.8 million from average loans of $1.05 billion for the nine months ended September 30, 2023.

During the nine months ended September 30, 2024, average investment securities available for sale were $443.0 million, a decrease of $15.2 million from average investment securities available for sale of $458.2 million for the nine months ended September 30, 2023.

The average yield on loans for the nine months ended September 30, 2024 and 2023 was 5.65% and 5.17%, respectively.

The average yield on investment securities available for sale was 3.37% and 3.05% for the nine months ended September 30, 2024 and 2023, respectively.

The average yield on earning assets was 5.01% and 4.54% for the nine months ended September 30, 2024 and 2023, respectively.

Interest expense was $20.1 million for the nine months ended September 30, 2024, compared to $11.3 million for the nine months ended September 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 nine months ended September 30, 2024, average interest-bearing non-maturity deposits were $686.2 million, a decrease of $23.8 million from average interest-bearing non-maturity deposits of $710.0 million for the nine months ended September 30, 2023.

During the nine months ended September 30, 2024, average certificates of deposit were $348.2 million, an increase of $149.9 million from average certificates of deposit of $198.3 million for the nine months ended September 30, 2023.

The average rate paid on interest-bearing checking and savings accounts was 1.44% and 0.92% for the nine months ended September 30, 2024 and 2023, respectively.

The average rate paid on certificates of deposit was 4.19% for the nine months ended September 30, 2024, compared to 3.15% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.46% for the nine months ended September 30, 2024, compared to 1.53% 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 nine months ended September 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.

Nine months ended

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

(Dollars in thousands)

22 unchanged sentences

Net yield on interest-earning assets

Taxable equivalent adjustment Investment securities

Taxable equivalent adjustment

Investment securities

Net interest income

1 unchanged sentence

Government agency securities that are non-taxable for state income tax purposes of $8.6 million in 2025 and $10.9 million in 2024.

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

Tax rates of 2.25% and 2.50% were used to calculate the tax equivalent yields on these securities in 2025 and 2024, respectively.

Changes in interest income and interest expense can result from variances in both volume and rates.

1 unchanged sentence

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 September 30, 2024 compared to three months ended September 30, 2023

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Three months ended March 31, 2025

compared to three months ended

March 31, 2024

Three months ended March 31, 2024

compared to three months ended

March 31, 2023

(Dollars in thousands)

Changes in average volume

Changes in average rates

Total Increase (Decrease)

Changes in average volume

Changes in average rates

Total Increase (Decrease)

Changes in average

Increase (Decrease)

Changes in average

Increase (Decrease)

Interest income:

12 unchanged sentences

Provision for Credit Losses.

The provision for credit losses for the three months ended September 30, 2024 was $297,000, compared to $562,000 for the three months ended September 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 $12.0 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 September 30, 2024.

This reduction of reserves due to change in loan mix was partially offset by a $669,000 additional qualitative reserve established during the three months ended September 30, 2024 for expected losses associated with Hurricane Helene, which heavily impacted western North Carolina in late September 2024.

The provision for credit losses for the nine months ended September 30, 2024 was a recovery of $80,000, compared to an expense of $1.2 million for the nine months ended September 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 with approximately $34.3 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 nine months ended September 30, 2024.

This reduction of reserves due to change in loan mix was partially offset by $669,000 additional qualitative reserve during the nine months ended September 30, 2024 for expected losses associated with Hurricane Helene, which heavily impacted western North Carolina in late September 2024.

Net charge-offs for the nine months ended September 30, 2024 were $956,000, compared to $297,000 for the nine months ended September 30, 2023.

Additional individual reserves for commercial loans of $432,000, increased the percentage of reserves this category represented of total reserves.

During the nine months ending September 30, 2024, the individual reserves amount were charged off, lowering the reserve levels needed for commercial loans at September 30, 2024.

No other commercial loans have been identified for individual analysis which would require additional reserves for the commercial category.

The provision for credit losses for the three months ended March 31, 2025 was $268,000, compared to $91,000 for the three months ended March 31, 2024.

The increase in the provision for credit losses is primarily attributable to an increase in unfunded commitments on construction loans and an increase in total loans outstanding.

These increases were partially offset by the removal of the $60,000 Hurricane Helene reserve included in the allowance for credit losses at December 31, 2024.

Non-Interest Income.

Non-interest income was $7.1 million for the three months ended September 30, 2024, compared to $6.8 million for the three months ended September 30, 2023.

The increase in non-interest income is primarily attributable to a $288,000 increase in appraisal management fee income due to an increase in appraisal volume.

Non-interest income was $20.7 million for the nine months ended September 30, 2024, compared to $16.8 million for the nine months ended September 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 nine months ended September 30, 2023 compared to a $5,000 net gain on the sales of securities during the nine months ended September 30, 2024, and a $1.2 million increase in appraisal management fee income due to an increase in appraisal volume.

Non-interest income was $6.5 million for the three months ended March 31, 2025, compared to $6.0 million for the three months ended March 31, 2024.

The increase in non-interest income is primarily attributable to a $628,000 increase in appraisal management fee income due to an increase in appraisal volume, which was partially offset by a $174,000 decrease in miscellaneous non-interest income primarily due to a decrease in income on mutual funds held in the deferred compensation trust due to a decrease in valuations for the assets in the deferred compensation plan.

Non-Interest Expense.

Non-interest expense was $15.0 million for the three months ended September 30, 2024, compared to $14.3 million for the three months ended September 30, 2023.

The increase in non-interest expense is primarily attributable to a $458,000 increase in occupancy expense primarily due to a $362,000 write-off of leasehold improvements for the Bank’s branch in Cary, North Carolina, which was closed in June 2024, a $254,000 increase in appraisal management fee expense due to an increase in appraisal volume and a $184,000 increase in professional fees primarily due to an increase in consulting fees.

Increases noted above were partially offset by a $120,000 decrease in salaries and employee benefits expense primarily due to a decrease in medical insurance expense.

Non-interest expense was $44.7 million for the nine months ended September 30, 2024, compared to $41.6 million for the nine months ended September 30, 2023.

The increase in non-interest expense is primarily attributable to a $901,000 increase in salaries and employee benefits expense primarily due to annual salary increases and an increase in medical insurance expenses, a $679,000 increase in occupancy expense primarily due to a $362,000 write-off of leasehold improvements for the Bank’s branch in Cary, North Carolina, which was closed in June 2024, a $362,000 increase in professional fees primarily due to an increase in consulting fees and a $982,000 increase in appraisal management fee expense due to an increase in appraisal volume.

Non-interest expense was $14.6 million for the three months ended March 31, 2025, compared to $14.5 million for the three months ended March 31, 2024.

The increase in non-interest expense is primarily attributable to a $515,000 increase in appraisal management fee expense due to an increase in appraisal volume, which was partially offset by a $192,000 decrease in salaries and employee benefits expense primarily due to a decrease in insurance expense, a $274,000 decrease in other non-interest expense primarily due to a decrease in debit card fraud expense, and a $83,000 decrease in occupancy expense primarily due to a decrease in depreciation expense.

Income Taxes.

Income tax expense was $1.4 million for the three months ended September 30, 2024, compared to $1.2 million for the three months ended September 30, 2023.

The effective tax rate was 25.76% for the three months ended September 30, 2024, compared to 22.09% for the three months ended September 30, 2023.

The increase in the effective tax rate is primarily due to the revaluation of the deferred tax asset during the three months ended September 30, 2024 due to upcoming reductions in the North Carolina corporate income tax rate, which will be decreased to zero over a five year period starting in 2025.

Income tax expense was $3.5 million for the nine months ended September 30, 2024, compared to $3.4 million for the nine months ended September 30, 2023.

The effective tax rate was 21.70% for the nine months ended September 30, 2024, compared to 21.89% for the nine months ended September 30, 2023.

Income tax expense was $1.3 million for the three months ended March 31, 2025, compared to $787,000 for the three months ended March 31, 2024.

The effective tax rate was 22.85% for the three months ended March 31, 2025, compared to 16.62% for the three months ended March 31, 2024.

The increase 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 settlement with the North Carolina Department of Revenue (“NCDOR”) to withdraw the disallowance of certain tax credits previously purchased by the Bank.

Analysis of Financial Condition

Investment Securities.

Available for sale securities were $398.6 million as of September 30, 2024, compared to $391.9 million as of December 31, 2023.

Average investment securities available for sale for the nine months ended September 30, 2024 were $443.0 million, compared to $454.8 million for the year ended December 31, 2023.

Total loans were $1.12 billion as of September 30, 2024, compared to $1.09 billion at December 31, 2023.

Average loans represented 69% of average earning assets for the nine months ended September 30, 2024 and the year ended December 31, 2023.

The Bank had $1.2 million and $686,000 in mortgage loans held for sale as of September 30, 2024 and December 31, 2023, respectively.

Available for sale securities were $374.4 million as of March 31, 2025, compared to $388.0 million as of December 31, 2024.

Average investment securities available for sale for the three months ended March 31, 2025 were $433.2 million, compared to $442.1 million for the year ended December 31, 2024.

Total loans were $1.15 billion as of March 31, 2025, compared to $1.14 billion at December 31, 2024.

Average loans represented 71% and 69% of average earning assets for the three months ended March 31, 2025 and the year ended December 31, 2024, respectively.

The Bank had $544,000 and $1.4 million in mortgage loans held for sale as of March 31, 2025 and December 31, 2024, 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 September 30, 2024, the Bank had $120.9 million in residential mortgage loans, $109.5 million in home equity loans and $680.4 million in commercial mortgage loans, which include $532.8 million secured by commercial property and $147.6 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.

At March 31, 2025, the Bank had $123.0 million in residential mortgage loans, $115.4 million in home equity loans and $694.2 million in commercial mortgage loans, which include $546.4 million secured by commercial property and $147.8 million secured by residential property.

All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

The Bank also had construction and land development loans totaling $126.6 million at March 31, 2025.

Allowance for Credit Losses (ACL).

6 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 September 30, 2024.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of March 31, 2025.

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.

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

The allowance for credit losses on loans was $10.6 million at September 30, 2024 as compared to $11.0 million at December 31, 2023.

The decrease in the allowance for credit losses on loans is primarily due to a $471,000 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 nine months ended September 30, 2024 and a $360,000 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 September 30, 2024 as compared to December 31, 2023 due to charge offs during the first quarter of 2024.

No other commercial loans have been identified for individual analysis which would require additional reserves for the commercial loans category.

These decreases were partially offset by a $669,000 additional qualitative reserve for expected losses associated with established Hurricane Helene during the three months ended September 30, 2024.

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.

These qualitative adjustments may increase or reduce reserve levels and include adjustments for:

These qualitative adjustments may increase or decrease reserve levels and include adjustments for:

local, state and national economic outlook;

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and interest rate risk.

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

The portion of the ACL balance attributable to qualitative factors was $5.4 million and $5.2 million at March 31, 2025 and December 31, 2024, respectively.

The risk factors are weighted as follows:

Local, State and National Economic Outlook – 30%, Concentrations of Credit – 5%, Interest Rate Risk – 5%, Trends in Terms of Volume, Mix and Size of Loans – 15%, Seasoning of the Loan Portfolio – 10%, Experience of Staff – 10%, and Levels and Trends of Delinquencies – 25%.

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

No changes to the risk status of any of the risk factors was made during the three months ended March 31, 2025.

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.

There were no loans individually evaluated as of September 30, 2024, and two loans totaling $432,000 were individually evaluated as of December 31, 2023, which were fully reserved for 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 $1.2 million and $1.8 million at September 30, 2024 and December 31, 2023, respectively.

The decrease in the allowance for credit losses on unfunded commitments was primarily due to a $506,000 decrease in the allowance balance for other construction loans and all land development and other land loans resulting from a $16.3 million decrease in unfunded commitments in this category during the nine months ended September 30, 2024.

The allowance for credit losses on unfunded commitments was $1.3 million at March 31, 2025, compared to $1.1 million at December 31, 2024.

The increase in the allowance for credit losses on unfunded commitments was primarily due to a $275,000 increase in the allowance for construction loans resulting from a $11.5 million increase in unfunded commitments on construction loans during the three months ended March 31, 2025.

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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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.

Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk.

Management uses the information developed from the procedures described above in evaluating and grading the loan portfolio.

This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance.

The provision for credit losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date.

The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends.

The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance.

Since the adoption of CECL on January 1, 2023, the allowance for credit losses represents management’s estimate of credit losses for the remaining estimated life of the Bank’s financial assets, including loan receivables and some off-balance sheet credit exposures.

Since the adoption of Current Expected Credit Loss (“CECL”) methodology on January 1, 2023, the allowance for credit losses represents management’s estimate of credit losses for the remaining estimated life of the Bank’s financial assets, including loan receivables and some off-balance sheet credit exposures.

Estimating the amount of the allowance for credit losses requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans.

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Non-performing Assets.

Non-performing assets were $3.9 million or 0.24% of total assets at September 30, 2024 and December 31, 2023.

Non-accrual loans were $3.9 million at September 30, 2024 and December 31, 2023.

As a percentage of total loans outstanding, non-accrual loans were 0.35% at September 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 $3.7 million in residential mortgage loans and $266,000 in other loans at September 30, 2024, compared to $3.4 million in 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 September 30, 2024 and December 31, 2023.

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

Deposits were $1.48 billion as of September 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 $1.34 billion at September 30, 2024, compared to $1.24 billion at December 31, 2023.

Non-performing assets were $5.1 million or 0.30% of total assets at March 31, 2025, compared to $4.8 million or 0.29% of total assets at December 31, 2024.

Non-performing assets include $4.2 million in residential mortgage loans, $451,000 in commercial mortgage loans, $298,000 in other loans, and $125,000 in other real estate owned at March 31, 2025, compared to $3.7 million in residential mortgage loans, $463,000 in commercial mortgage loans, $257,000 in other loans, and $369,000 in other real estate owned at December 31, 2024.

The Bank had no repossessed assets as of March 31, 2025 and 2024.

Deposits were $1.52 billion as of March 31, 2025, compared to $1.48 billion as of December 31, 2024.

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 $1.37 billion at March 31, 2025, compared to $1.34 billion at December 31, 2024.

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 $143.6 million at September 30, 2024, compared to $148.9 million December 31, 2023.

Estimated uninsured deposits totaled $398.3 million, or 26.91% of total deposits, at September 30, 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 $148.4 million at March 31, 2025, compared to $145.9 million December 31, 2024.

Estimated uninsured deposits totaled $354.7 million, or 23.37% of total deposits, at March 31, 2025, compared to $396.5 million, or 26.71% of total deposits, at December 31, 2024.

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 September 30, 2024.

The Bank did not have any significant deposit concentrations at March 31, 2025.

Borrowed Funds.

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

Repurchase agreements were $8.4 million at September 30, 2023, compared to $86.7 million at December 31, 2023.

The decrease in repurchase agreements is primarily due to customers transferring funds from repurchase agreements to deposits via the IntraFi network’s Insured Cash Sweep (“ICS”) during the nine months ended September 30, 2024

There were no borrowed funds outstanding at March 31, 2025 and December 31, 2024.

Junior Subordinated Debentures (related to Trust Preferred Securities).

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

Junior subordinated debentures were $15.5 million at March 31, 2025 and December 31, 2024.

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 nine months ended September 30, 2024 totaled $1.61 billion, exceeding average rate sensitive liabilities of $1.09 billion by $517.1 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.

By using derivative instruments, the Company is exposed to credit and market risk.

If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative.

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 September 30, 2024.

Average rate sensitive assets for the three months ended March 31, 2025 totaled $1.61 billion, exceeding average rate sensitive liabilities of $1.10 billion by $507.9 million.

Included in the rate sensitive assets are $189.5 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 September 30, 2024, the Company had $125.0 million in loans with interest rate floors.

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

At March 31, 2025, the Company had $124.2 million in loans with interest rate floors.

No floors were in effect on loans with floors on interest rates charged at March 31, 2025.

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 September 30, 2024, such unfunded commitments to extend credit were $355.4 million, while commitments in the form of standby letters of credit totaled $3.8 million.

As of March 31, 2025, such unfunded commitments to extend credit were $347.5 million, while commitments in the form of standby letters of credit totaled $1.6 million.

As of December 31, 2024, such unfunded commitments to extend credit were $348.9 million, while commitments in the form of standby letters of credit totaled $1.7 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 September 30, 2024, the Bank’s core deposits, a non-GAAP measure, totaled $1.34 billion, or 90% of total deposits.

As of March 31, 2025, the Bank’s core deposits, a non-GAAP measure, totaled $1.37 billion, or 90% of total deposits.

As of December 31, 2024, the Bank’s core deposits totaled $1.34 billion, or 90% of total deposits.

The other sources of funding for the Bank are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings.

The other sources of funding for the Company are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreement to repurchase and FHLB borrowings.

The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis.

The Bank’s policies include the ability to access wholesale funding of up to 40% of total assets.

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 had no wholesale funding at September 30, 2024, compared to $8.1 million at December 31, 2023.

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

The Bank’s policies include the ability to access wholesale funding up to 40% of total assets.

The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits and internet certificates of deposit.

The Bank did not have any wholesale funding at March 31, 2025 and December 31, 2024.

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 September 30, 2024 and December 31, 2023.

At September 30, 2024, the carrying value of loans pledged as collateral to the FHLB totaled $218.6 million compared to $214.1 million at December 31, 2023.

The remaining availability under the line of credit with the FHLB was $125.2 million at September 30, 2024 compared to $122.2 million at December 31, 2023.

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

There were no FHLB borrowings outstanding at March 31, 2025 and December 31, 2024.

At March 31, 2025, the carrying value of loans pledged as collateral to the FHLB totaled $221.3 million compared to $232.9 million at December 31, 2024.

The remaining availability under the line of credit with the FHLB was $134.0 million at March 31, 2025 compared to $131.9 million at December 31, 2024.

The Bank had no borrowings from the FRB at March 31, 2025 or December 31, 2024.

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

At September 30, 2024, the carrying value of loans pledged as collateral to the FRB totaled $633.5 million compared to $611.2 million at December 31, 2023.

Availability under the line of credit with the FRB was $508.6 million at September 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 September 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 29.26% at September 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 September 30, 2024 and December 31, 2023.

At March 31, 2025, the carrying value of loans pledged as collateral to the FRB totaled $643.1 million compared to $637.9 million at December 31, 2024.

Availability under the line of credit with the FRB was $522.1 million at March 31, 2025 compared to $511.9 million at December 31, 2024.

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, 2025.

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 29.70% at March 31, 2025 and 28.16% at December 31, 2024.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, 2025 and December 31, 2024.

Contractual Obligations and Off-Balance Sheet Arrangements.

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Capital Resources.

Shareholders’ equity was $136.3 million, or 8.20% of total assets, at September 30, 2024, compared to $121.0 million, or 7.40% of total assets, at December 31, 2023.

Annualized return on average equity for the nine months ended September 30, 2024 was 13.59%, compared to 13.97% for the nine months ended September 30, 2023.

Total cash dividends paid on common stock were $4.0 million for the nine months ended September 30, 2024, compared to $4.1 million for the nine months ended September 30, 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.

In the fourth quarter of 2023, the Board of Directors authorized an additional $2.0 million to be allocated to repurchase the Company’s common stock, which increased the total amount authorized in 2023 to $4.0 million.

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.

Shareholders’ equity was $138.5 million, or 8.18% of total assets, at March 31, 2025, compared to $130.6 million, or 7.90% of total assets, at December 31, 2024.

Annualized return on average equity for the three months ended March 31, 2025 was 13.52%, compared to 13.51% for the three months ended March 31, 2024.

Total cash dividends paid on common stock were $2.0 million for the three months ended March 31, 2025, compared to $1.9 million for the three months ended March 31, 2024.

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.

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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 September 30, 2024.

The Company had not repurchased any shares of its common stock under this stock repurchase program through February 28, 2025, when the program expired.

In March of 2025, the Board of Directors authorized a stock repurchase program, whereby up to $3.0 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 March 31, 2025.

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 September 30, 2024 and December 31, 2023.

The Company’s Tier 1 capital ratio was 14.35% and 13.94% at September 30, 2024 and December 31, 2023, respectively.

Tier 1 capital includes $15.0 million in trust preferred securities at March 31, 2025 and December 31, 2024.

The Company’s Tier 1 capital ratio was 14.58% and 14.47% at March 31, 2025 and December 31, 2024, 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 15.28% and 14.96% at September 30, 2024 and December 31, 2023, respectively.

The Company’s total risk-based capital ratio was 15.46% and 15.34% at March 31, 2025 and December 31, 2024, 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 13.17% and 12.75% at September 30, 2024 and December 31, 2023, respectively.

The Company’s common equity Tier 1 capital ratio was 13.41% and 13.29% at March 31, 2025 and December 31, 2024, 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 10.78% and 10.51% at September 30, 2024 and December 31, 2023, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.23% and 13.83% at September 30, 2024 and December 31, 2023, respectively.

The total risk-based capital ratio for the Bank was 15.16% and 14.85% at September 30, 2024 and December 31, 2023, respectively.

The Bank’s common equity Tier 1 capital ratio was 14.23% and 13.83% at September 30, 2024 and December 31, 2023, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.61% and 10.35% at September 30, 2024 and December 31, 2023, respectively.

The Company’s Tier 1 leverage capital ratio was 11.08% and 10.88% at March 31, 2025 and December 31, 2024, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.45% and 14.35% at March 31, 2025 and December 31, 2024, respectively.

The total risk-based capital ratio for the Bank was 15.34% and 15.22% at March 31, 2025 and December 31, 2024, respectively.

The Bank’s common equity Tier 1 capital ratio was 14.45% and 14.35% at March 31, 2025 and December 31, 2024, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.90% and 10.71% at March 31, 2025 and December 31, 2024, 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 September 30, 2024.

Based upon these guidelines, the Bank was considered to be “well capitalized” at March 31, 2025.

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