What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-04 compared with 2025-08-05 · 136 added, 144 removed, 273 unchanged (51% of the section changed)

19 unchanged sentences

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 June 30, 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.

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

At September 30, 2025 the target federal funds rate had been lowered to a range of 4.00% to 4.25%.

The economic conditions have remained stable such that businesses in our market area continue to grow and invest.

The uncertainty expressed in the national and international markets through the primary economic indicators of activity are not as pronounced in our local markets, and we expect continued moderate 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 $5.2 million or $0.97 per share and $0.95 per diluted share for the three months ended June 30, 2025, as compared to $4.9 million or $0.93 per share and $0.89 per diluted share for the prior year period.

The increase in second quarter net earnings is primarily attributable to 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.

Net earnings were $9.5 million or $1.79 per share and $1.74 per diluted share for the six months ended June 30, 2025, as compared to $8.8 million or $1.67 per share and $1.61 per diluted share for the prior year period.

The increase in year to date net earnings is primarily attributable to 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 1.15% for the six months ended June 30, 2025, compared to 1.08% for the same period one year ago, and annualized return on average shareholders’ equity was 14.06% for the six months ended June 30, 2025, compared to 14.69% for the same period one year ago.

Net earnings were $3.7 million or $0.70 per share and $0.67 per diluted share for the three months ended September 30, 2025, as compared to $4.0 million or $0.74 per share and $0.72 per diluted share for the prior year period.

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

Net earnings were $13.2 million or $2.49 per share and $2.41 per diluted share for the nine months ended September 30, 2025, as compared to $12.8 million or $2.41 per share and $2.33 per diluted share for the prior year period.

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

The annualized return on average assets was 1.05% for the nine months ended September 30, 2025, compared to 1.04% for the same period one year ago, and annualized return on average shareholders’ equity was 12.52% for the nine months ended September 30, 2025, compared to 13.59% 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 $14.6 million for the three months ended June 30, 2025, compared to $13.4 million for the three months ended June 30, 2024.

Net interest income was $15.1 million for the three months ended September 30, 2025, compared to $13.5 million for the three months ended September 30, 2024.

The increase in net interest income is due to a $938,000 increase in interest income and a $632,000 decrease in interest expense.

The increase in interest income is primarily due to a $1.1 million increase in interest income and fees on loans, which was partially offset by a $19,000 decrease in interest income on balances due from banks and a $408,000 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 primarily due to rate decreases implemented by the FOMC from September 2024 through December 2024.

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 $14.8 million for the three months ended June 30, 2025, compared to $13.9 million for the three months ended June 30, 2024.

The provision for credit losses for the three months ended June 30, 2025 was a recovery of $213,000, compared to a recovery of $468,000 for the three months ended June 30, 2024.

The decrease in the recovery for credit losses is primarily attributable to a smaller reduction in reserves on construction loans during the three months ended June 30, 2025, as compared to the reduction in reserves on construction loans during the three months ended June 30, 2024.

The reduction in reserves on construction loans during the three months ended June 30, 2024 was primarily due to a decrease in construction loan balances outstanding and unfunded construction loan balances during the second quarter of 2024.

Interest income was $20.7 million for the three months ended June 30, 2025, compared to $20.1 million for the three months ended June 30, 2024.

Net interest income after the provision for credit losses was $14.6 million for the three months ended September 30, 2025, compared to $13.3 million for the three months ended September 30, 2024.

The provision for credit losses for the three months ended September 30, 2025 was $530,000, compared to $297,000 for the three months ended September 30, 2024.

The increase in the provision for credit losses is primarily attributable to an increase in reserves on construction loans during the three months ended September 30, 2025, as compared to a reduction in reserves on construction loans during the three months ended September 30, 2024.

Interest income was $21.4 million for the three months ended September 30, 2025, compared to $20.5 million for the three months ended September 30, 2024.

The increase in interest income is primarily due to a $1.1 million increase in interest income and fees on loans and a $401,000 increase in interest income on balances due from banks, which was partially offset by a $539,000 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 primarily due to rate decreases implemented by the FOMC from September 2024 through December 2024.

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

During the three months ended June 30, 2025, average loans were $1.16 billion, an increase of $47.5 million from average loans of $1.11 billion for the three months ended June 30, 2024.

During the three months ended June 30, 2025, average investment securities available for sale were $415.9 million, a decrease of $29.2 million from average investment securities available for sale of $445.1 million for the three months ended June 30, 2024.

The average yield on loans for the three months ended June 30, 2025 and 2024 was 5.78% and 5.65%, respectively.

The average yield on investment securities available for sale was 3.21% and 3.36% for the three months ended June 30, 2025 and 2024, respectively.

The average yield on earning assets was 5.07% and 5.01% for the three months ended June 30, 2025 and 2024, respectively.

Interest expense was $6.1 million for the three months ended June 30, 2025, compared to $6.7 million for the three months ended June 30, 2024.

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

During the three months ended June 30, 2025, average interest-bearing non-maturity deposits were $750.3 million, an increase of $65.5 million from average interest-bearing non-maturity deposits of $684.8 million for the three months ended June 30, 2024.

During the three months ended June 30, 2025, average certificates of deposit were $353.3 million, an increase of $3.8 million from average certificates of deposit of $349.5 million for the three months ended June 30, 2024.

The average rate paid on interest-bearing checking and savings accounts was 1.46% and 1.43% for the three months ended June 30, 2025 and 2024, respectively.

The average rate paid on certificates of deposit was 3.58% for the three months ended June 30, 2025, compared to 4.17% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.19% for the three months ended June 30, 2025, compared to 2.46% 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, 2025 and 2024.

The increase in interest income on balances due from banks is primarily due to an increase in balances outstanding.

The decrease in interest income on investment securities is due to a reduction in balances outstanding and decreases in yields on variable rate securities.

During the three months ended September 30, 2025, average loans were $1.17 billion, an increase of $50.2 million from average loans of $1.12 billion for the three months ended September 30, 2024.

During the three months ended September 30, 2025, average investment securities available for sale were $411.6 million, a decrease of $28.9 million from average investment securities available for sale of $440.5 million for the three months ended September 30, 2024.

The average yield on loans for the three months ended September 30, 2025 and 2024 was 5.82% and 5.72%, respectively.

The average yield on investment securities available for sale was 3.10% and 3.38% for the three months ended September 30, 2025 and 2024, respectively.

The average yield on earning assets was 5.07% and 5.06% for the three months ended September 30, 2025 and 2024, respectively.

Interest expense was $6.3 million for the three months ended September 30, 2025, compared to $6.9 million for the three months ended September 30, 2024.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities resulting from rate decreases implemented by the FOMC.

During the three months ended September 30, 2025, average interest-bearing non-maturity deposits were $766.8 million, an increase of $41.8 million from average interest-bearing non-maturity deposits of $725.0 million for the three months ended September 30, 2024.

During the three months ended September 30, 2025, average certificates of deposit were $358.3 million, an increase of $15.5 million from average certificates of deposit of $342.8 million for the three months ended September 30, 2024.

The average rate paid on interest-bearing checking and savings accounts was 1.48% and 1.59% for the three months ended September 30, 2025 and 2024, respectively.

The average rate paid on certificates of deposit was 3.51% for the three months ended September 30, 2025, compared to 4.19% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.19% for the three months ended September 30, 2025, compared to 2.51% 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 June 30, 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.

Yields and interest income on tax-exempt investments for the three months ended September 30, 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

June 30, 2025

June 30, 2024

September 30, 2025

September 30, 2024

(Dollars in thousands)

28 unchanged sentences

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

Year to date net interest income was $28.5 million for the six months ended June 30, 2025, compared to $26.7 million for the six months ended June 30, 2024.

The increase in net interest income is due to a $810,000 increase in interest income and a $1.0 million decrease in interest expense.

The increase in interest income is primarily due to a $2.0 million increase in interest income and fees on loans, which was partially offset by a $576,000 decrease in interest income on balances due from banks and a $569,000 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 and rate decreases implemented by the FOMC from September 2024 through December 2024.

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 $28.5 million for the six months ended June 30, 2025, compared to $27.1 million for the six months ended June 30, 2024.

The provision for credit losses for the six months ended June 30, 2025 was an expense of $55,000, compared to a recovery of $377,000 for the six months ended June 30, 2024.

The increase in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans during the six months ended June 30, 2024, which was primarily due to a decrease in construction loan balances outstanding, combined with an increase in provision expense for unfunded construction loans during the six months ended June 30, 2025 resulting from an increase in unfunded commitments on construction loans.

Interest income was $40.7 million for the six months ended June 30, 2025, compared to $39.9 million for the six months ended June 30, 2024.

The increase in net interest income is due to a $810,000 increase in interest income and a $1.0 million decrease in interest expense.

Year to date net interest income was $43.7 million for the nine months ended September 30, 2025, compared to $40.3 million for the nine months ended September 30, 2024.

The increase in net interest income is due to a $1.7 million increase in interest income and a $1.6 million decrease in interest expense.

Net interest income after the provision for credit losses was $43.1 million for the nine months ended September 30, 2025, compared to $40.3 million for the nine months ended September 30, 2024.

The provision for credit losses for the nine months ended September 30, 2025 was an expense of $585,000, compared to a recovery of $80,000 for the nine months ended September 30, 2024.

The increase in the provision for credit losses is primarily attributable to a $59.3 million increase in total loans from September 30, 2024 to September 30, 2025.

Interest income was $62.1 million for the nine months ended September 30, 2025, compared to $60.3 million for the nine months ended September 30, 2024.

The increase in net interest income is due to a $1.7 million increase in interest income and a $1.6 million decrease in interest expense.

The increase in interest income is primarily due to a $3.0 million increase in interest income and fees on loans, which was partially offset by a $175,000 decrease in interest income on balances due from banks and a $1.1 million 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 and rate decreases implemented by the FOMC from September 2024 through December 2024.

The decrease in interest income on balances due from banks is due to a reduction in balances outstanding and rate decreases implemented by the FOMC.

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

During the six months ended June 30, 2025, average loans were $1.15 billion, an increase of $48.6 million from average loans of $1.10 billion for the six months ended June 30, 2024.

During the six months ended June 30, 2025, average investment securities available for sale were $424.5 million, a decrease of $19.8 million from average investment securities available for sale of $444.3 million for the six months ended June 30, 2024.

The average yield on loans for the six months ended June 30, 2025 and 2024 was 5.73% and 5.61%, respectively.

The average yield on investment securities available for sale was 3.23% and 3.36% for the six months ended June 30, 2025 and 2024, respectively.

The average yield on earning assets was 5.05% and 4.99% for the six months ended June 30, 2025 and 2024, respectively.

Interest expense was $12.1 million for the six months ended June 30, 2025, compared to $13.2 million for the six months ended June 30, 2024.

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

During the six months ended June 30, 2025, average interest-bearing non-maturity deposits were $748.6 million, an increase of $82.1 million from average interest-bearing non-maturity deposits of $666.5 million for the six months ended June 30, 2024.

During the six months ended June 30, 2025, average certificates of deposit were $347.3 million, a decrease of $3.6 million from average certificates of deposit of $350.9 million for the six months ended June 30, 2024.

The average rate paid on interest-bearing checking and savings accounts was 1.45% and 1.36% for the six months ended June 30, 2025 and 2024, respectively.

The average rate paid on certificates of deposit was 3.65% for the six months ended June 30, 2025, compared to 4.19% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.20% for the six months ended June 30, 2025, compared to 2.43% for the same period one year ago.

During the nine months ended September 30, 2025, average loans were $1.16 billion, an increase of $49.2 million from average loans of $1.11 billion for the nine months ended September 30, 2024.

During the nine months ended September 30, 2025, average investment securities available for sale were $420.2 million, a decrease of $22.8 million from average investment securities available for sale of $443.0 million for the nine months ended September 30, 2024.

The average yield on loans for the nine months ended September 30, 2025 and 2024 was 5.76% and 5.65%, respectively.

The average yield on investment securities available for sale was 3.19% and 3.37% for the nine months ended September 30, 2025 and 2024, respectively.

The average yield on earning assets was 5.06% and 5.01% for the nine months ended September 30, 2025 and 2024, respectively.

Interest expense was $18.4 million for the nine months ended September 30, 2025, compared to $20.1 million for the nine months ended September 30, 2024.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities resulting from rate decreases implemented by the FOMC.

During the nine months ended September 30, 2025, average interest-bearing non-maturity deposits were $754.8 million, an increase of $68.6 million from average interest-bearing non-maturity deposits of $686.2 million for the nine months ended September 30, 2024.

During the nine months ended September 30, 2025, average certificates of deposit were $351.0 million, a decrease of $2.8 million from average certificates of deposit of $348.2 million for the nine months ended September 30, 2024.

The average rate paid on interest-bearing checking and savings accounts was 1.46% and 1.44% for the nine months ended September 30, 2025 and 2024, respectively.

The average rate paid on certificates of deposit was 3.60% for the nine months ended September 30, 2025, compared to 4.19% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 2.20% for the nine months ended September 30, 2025, compared to 2.46% 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 six months ended June 30, 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.

Yields and interest income on tax-exempt investments for the nine months ended September 30, 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.

2 unchanged sentences

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

Six months ended

June 30, 2025

June 30, 2024

Nine months ended

September 30, 2025

September 30, 2024

(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 June 30, 2025 compared to three months ended June 30, 2024

Six months ended June 30, 2025 compared to six months ended June 30, 2024

Three months ended September 30, 2025 compared to three months ended September 30, 2024

Nine months ended September 30, 2025 compared to nine months ended September 30, 2024

(Dollars in thousands)

19 unchanged sentences

Provision for Credit Losses.

The provision for credit losses for the three months ended June 30, 2025 was a recovery of $213,000, compared to a recovery of $468,000 for the three months ended June 30, 2024.

The provision for credit losses for the six months ended June 30, 2025 was an expense of $55,000, compared to a recovery of $377,000 for the six months ended June 30, 2024.

The provision for credit losses for the three months ended September 30, 2025 was $530,000, compared to $297,000 for the three months ended September 30, 2024.

The provision for credit losses for the nine months ended September 30, 2025 was an expense of $585,000, compared to a recovery of $80,000 for the nine months ended September 30, 2024.

The increase in the provision for credit losses is primarily attributable to a $59.3 million increase in total loans from September 30, 2024 to September 30, 2025

Non-Interest Income.

Non-interest income was $7.7 million for the three months ended June 30, 2025, compared to $7.5 million for the three months ended June 30, 2024.

The increase in non-interest income is primarily attributable to a $792,000 increase in appraisal management fee income due to an increase in appraisal volume, which was partially offset by a $628,000 decrease in miscellaneous non-interest income primarily due to a decrease in income on small business investment company (SBIC) investments.

Non-interest income was $14.2 million for the six months ended June 30, 2025, compared to $13.6 million for the six months ended June 30, 2024.

The increase in non-interest income is primarily attributable to a $1.4 million increase in appraisal management fee income due to an increase in appraisal volume, which was partially offset by a $802,000 decrease in miscellaneous non-interest income primarily due to a decrease in income on small business investment company (SBIC) investments.

Non-interest income was $7.1 million for the three months ended September 30, 2025 and 2024.

A $528,000 increase in appraisal management fee income due to an increase in appraisal volume was partially offset by a $410,000 decrease in miscellaneous non-interest income primarily due to a decrease in income on small business investment company (SBIC) investments and a $90,000 decrease in service charges and fees on deposits.

Non-interest income was $21.3 million for the nine months ended September 30, 2025, compared to $20.7 million for the nine months ended September 30, 2024.

The increase in non-interest income is primarily attributable to a $1.9 million increase in appraisal management fee income due to an increase in appraisal volume, which was partially offset by a $1.2 million decrease in miscellaneous non-interest income primarily due to a decrease in income on small business investment company (SBIC) investments.

Non-Interest Expense.

Non-interest expense was $15.8 million for the three months ended June 30, 2025, compared to $15.1 million for the three months ended June 30, 2024.

The increase in non-interest expense is primarily attributable to a $633,000 increase in appraisal management fee expense due to an increase in appraisal volume, a $341,000 increase in salaries and employee benefits expense primarily due to an increase in salary and insurance expense, and a $150,000 increase in advertising expense, which were partially offset by a $198,000 decrease in debit card expense, a $95,000 decrease in miscellaneous non-interest expense, a $76,000 decrease in professional fees, and a $47,000 decrease in occupancy expense.

Non-interest expense was $30.4 million for the six months ended June 30, 2025, compared to $29.6 million for the six months ended June 30, 2024.

The increase in non-interest expense is primarily attributable to a $1.1 million increase in appraisal management fee expense due to an increase in appraisal volume, a $149,000 increase in salaries and employee benefits expense primarily due to an increase in salary expense, and a $121,000 increase in advertising expense, which were partially offset by a $286,000 decrease in miscellaneous non-interest expense primarily due to a decrease in deferred compensation expense, a $274,000 decrease in debit card expense, and a $130,000 decrease in occupancy expense primarily due to a decrease in equipment maintenance expense.

Non-interest expense was $16.9 million for the three months ended September 30, 2025, compared to $15.0 million for the three months ended September 30, 2024.

The increase in non-interest expense is primarily attributable to a $805,000 increase in professional fees primarily due to an increase in legal fees, a $492,000 increase in salaries and employee benefits expense primarily due to an increase in salary and insurance expense, a $472,000 increase in debit card expense and a $422,000 increase in appraisal management fee expense due to an increase in appraisal volume, which were partially offset by a $200,000 decrease in miscellaneous non-interest expense primarily due to a $152,000 decrease in deferred compensation expense and a $168,000 decrease in occupancy expense primarily due to the $362,000 write-off of leasehold improvements due to the closure of the Bank’s former branch in Cary, North Carolina during the three months ended September 30, 2024.

Non-interest expense was $47.3 million for the nine months ended September 30, 2025, compared to $44.7 million for the nine months ended September 30, 2024.

The increase in non-interest expense is primarily attributable to a $844,000 increase in professional fees primarily due to an increase in legal fees, a $641,000 increase in salaries and employee benefits expense primarily due to an increase in salary expense, a $199,000 increase in advertising expense, a $198,000 increase in debit card expense and a $1.6 million increase in appraisal management fee expense due to an increase in appraisal volume, which were partially offset by a $486,000 decrease in miscellaneous non-interest expense primarily due to a $334,000 decrease in deferred compensation expense and a $298,000 decrease in occupancy expense primarily due to the $362,000 write-off of leasehold improvements due to the closure of the Bank’s former branch in Cary, North Carolina during the three months ended September 30, 2024.

The increase in legal fees for the three and nine months ended September 30, 2025, compared to the three and nine months ended September 30, 2024 is primarily due to the $553,000 in legal expenses associated with the NCDOT litigation referenced in Note 7, Commitments and Contingencies, to the consolidated financial statements in Part I Financial Information above.

Income Taxes.

Income tax expense was $1.5 million for the three months ended June 30, 2025, compared to $1.4 million for the three months ended June 30, 2024.

The effective tax rate was 22.56% for the three months ended June 30, 2025, compared to 22.09% for the three months ended June 30, 2024.

Income tax expense was $2.8 million for the six months ended June 30, 2025, compared to $2.2 million for the six months ended June 30, 2024.

The effective tax rate was 22.69% for the six months ended June 30, 2025, compared to 19.74% for the six months ended June 30, 2024.

The increase in the effective tax rate is primarily due to a $322,000 interest receivable booked during the six months ended June 30, 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.

Income tax expense was $1.1 million for the three months ended September 30, 2025, compared to $1.4 million for the three months ended September 30, 2024.

The effective tax rate was 22.95% for the three months ended September 30, 2025, compared to 25.76% for the three months ended September 30, 2024.

The decrease in the effective tax rate for the three months ended September 30, 2025 compared to the three months ended September 30, 2024 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.

Income tax expense was $3.9 million for the nine months ended September 30, 2025, compared to $3.5 million for the nine months ended September 30, 2024.

The effective tax rate was 22.77% for the nine months ended September 30, 2025, compared to 21.71% for the nine months ended September 30, 2024.

The increase in the effective tax rate is primarily due to a $322,000 interest receivable booked during the nine months ended September 30, 2024 on a deposit for taxes paid prior to a settlement with the North Carolina Department of Revenue to withdraw the disallowance of certain tax credits previously purchased by the Bank.

Analysis of Financial Condition

Investment Securities.

Available for sale securities were $371.6 million as of June 30, 2025, compared to $388.0 million as of December 31, 2024.

Average investment securities available for sale for the six months ended June 30, 2025 were $424.5 million, compared to $442.1 million for the year ended December 31, 2024.

Total loans were $1.16 billion as of June 30, 2025, compared to $1.14 billion at December 31, 2024.

Average loans represented 71% and 69% of average earning assets for the six months ended June 30, 2025 and the year ended December 31, 2024, respectively.

The Bank had $1.5 million and $1.4 million in mortgage loans held for sale as of June 30, 2025 and December 31, 2024, respectively.

Available for sale securities were $376.9 million as of September 30, 2025, compared to $388.0 million as of December 31, 2024.

Average investment securities available for sale for the nine months ended September 30, 2025 were $420.2 million, compared to $442.1 million for the year ended December 31, 2024.

Total loans were $1.18 billion as of September 30, 2025, compared to $1.14 billion at December 31, 2024.

Average loans represented 70% and 69% of average earning assets for the nine months ended September 30, 2025 and the year ended December 31, 2024, respectively.

The Bank had $1.4 million in mortgage loans held for sale as of September 30, 2025 and December 31, 2024.

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 June 30, 2025, the Bank had $128.8 million in residential mortgage loans, $116.4 million in home equity loans and $712.1 million in commercial mortgage loans, which include $562.7 million secured by commercial property and $149.4 million secured by residential property.

At September 30, 2025, the Bank had $132.8 million in residential mortgage loans, $120.7 million in home equity loans and $721.6 million in commercial mortgage loans, which include $575.5 million secured by commercial property and $146.1 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 $122.1 million at June 30, 2025.

The Bank also had construction and land development loans totaling $129.2 million at September 30, 2025.

Allowance for Credit Losses (ACL).

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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 June 30, 2025.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of September 30, 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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and interest rate risk.

The portion of the ACL balance attributable to qualitative factors was $5.1 million and $5.2 million at June 30, 2025 and December 31, 2024, respectively.

The portion of the ACL balance attributable to qualitative factors was $5.3 million and $5.2 million at September 30, 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 six months ended June 30, 2025.

No changes to the risk status of any of the risk factors was made during the nine months ended September 30, 2025.

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

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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 loans was $9.8 million or 0.85% of total loans at June 30, 2025, compared to $10.0 million or 0.88% of total loans at December 31, 2024.

The allowance for credit losses on loans decreased $203,000 primarily due to a $90,000 decrease in the allowance on construction loans from December 31, 2024 to June 30, 2025 and the removal of the $60,000 Hurricane Helene reserve included in the allowance for credit losses at December 31, 2024.

The allowance for credit losses on unfunded commitments was $1.3 million at June 30, 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 $161,000 increase in the allowance for unfunded construction loans resulting from a $2.8 million increase in unfunded commitments on construction loans during the six months ended June 30, 2025.

The allowance for credit losses on loans was $10.2 million or 0.86% of total loans at September 30, 2025, compared to $10.0 million or 0.88% of total loans at December 31, 2024.

The allowance for credit losses on loans increased $211,000 primarily due to a $45.0 million increase in total loans from December 31, 2024 to September 30, 2025.

The allowance for credit losses on unfunded commitments was $1.2 million at September 30, 2025, compared to $1.1 million at December 31, 2024.

The increase in the allowance for credit losses on unfunded commitments was due to a $7.8 million increase in unfunded loan commitments from December 31, 2024 to September 30, 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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Non-performing Assets.

Non-performing assets were $4.8 million or 0.28% of total assets at June 30, 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, $442,000 in commercial mortgage loans and $216,000 in other loans at June 30, 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 June 30, 2025 and 2024.

Deposits were $1.51 billion as of June 30, 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 $1.36 billion at June 30, 2025, compared to $1.34 billion at December 31, 2024.

Non-performing assets were $5.1 million or 0.29% of total assets at September 30, 2025, compared to $4.8 million or 0.29% of total assets at December 31, 2024.

Non-performing assets comprise $4.1 million in residential mortgage loans and $1.0 million in commercial mortgage loans at September 30, 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 September 30, 2025 and 2024.

Deposits were $1.55 billion as of September 30, 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 $1.39 billion at September 30, 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 $150.6 million at June 30, 2025, compared to $145.9 million December 31, 2024.

Estimated uninsured deposits totaled $348.6 million, or 23.03% of total deposits, at June 30, 2025, compared to $396.5 million, or 26.71% of total deposits, at December 31, 2024.

Certificates of deposit in amounts of more than $250,000 totaled $160.7 million at September 30, 2025, compared to $145.9 million December 31, 2024.

Estimated uninsured deposits totaled $348.6 million, or 23.59% of total deposits, at September 30, 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 June 30, 2025.

The Bank did not have any significant deposit concentrations at September 30, 2025.

Borrowed Funds.

There were no borrowed funds outstanding at June 30, 2025 and December 31, 2024.

There were no borrowed funds outstanding at September 30, 2025 and December 31, 2024.

Junior Subordinated Debentures (related to Trust Preferred Securities).

Junior subordinated debentures were $15.5 million at June 30, 2025 and December 31, 2024.

Junior subordinated debentures were $15.5 million at September 30, 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 six months ended June 30, 2025 totaled $1.63 billion, exceeding average rate sensitive liabilities of $1.11 billion by $514.2 million.

Average rate sensitive assets for the nine months ended September 30, 2025 totaled $1.64 billion, exceeding average rate sensitive liabilities of $1.12 billion by $521.4 million.

Included in the rate sensitive assets are $179.2 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 June 30, 2025, the Company had $121.6 million in loans with interest rate floors.

No floors were in effect on loans with floors on interest rates charged at June 30, 2025.

At September 30, 2025, the Company had $123.0 million in loans with interest rate floors.

Floors were in effect on two loans, totaling $6,000, at September 30, 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 June 30, 2025, such unfunded commitments to extend credit were $350.0 million, while commitments in the form of standby letters of credit totaled $1.6 million.

As of September 30, 2025, such unfunded commitments to extend credit were $356.6 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 June 30, 2025, the Bank’s core deposits, a non-GAAP measure, totaled $1.36 billion, or 90% of total deposits.

As of September 30, 2025, the Bank’s core deposits, a non-GAAP measure, totaled $1.39 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.

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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 June 30, 2025 and December 31, 2024.

The Bank did not have any wholesale funding at September 30, 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 June 30, 2025 and December 31, 2024.

At June 30, 2025, the carrying value of loans pledged as collateral to the FHLB totaled $228.8 million compared to $232.9 million at December 31, 2024.

The remaining availability under the line of credit with the FHLB was $138.9 million at June 30, 2025 compared to $131.9 million at December 31, 2024.

The Bank had no borrowings from the FRB at June 30, 2025 or December 31, 2024.

There were no FHLB borrowings outstanding at September 30, 2025 and December 31, 2024.

At September 30, 2025, the carrying value of loans pledged as collateral to the FHLB totaled $232.7 million compared to $232.9 million at December 31, 2024.

The remaining availability under the line of credit with the FHLB was $139.2 million at September 30, 2025 compared to $131.9 million at December 31, 2024.

The Bank had no borrowings from the FRB at September 30, 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 June 30, 2025, the carrying value of loans pledged as collateral to the FRB totaled $651.7 million compared to $637.9 million at December 31, 2024.

Availability under the line of credit with the FRB was $540.0 million at June 30, 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 June 30, 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 29.56% at June 30, 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 June 30, 2025 and December 31, 2024.

At September 30, 2025, the carrying value of loans pledged as collateral to the FRB totaled $668.2 million compared to $637.9 million at December 31, 2024.

Availability under the line of credit with the FRB was $556.6 million at September 30, 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 September 30, 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 30.14% at September 30, 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 September 30, 2025 and December 31, 2024.

Contractual Obligations and Off-Balance Sheet Arrangements.

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Other commitments include commitments to extend credit.

At September 30, 2025, the Bank has a $3.6 million contingent gain associated with the NCDOT litigation referenced in Note 7, Commitments and Contingencies, to the consolidated financial statements in Part I Financial Information above.

Capital Resources.

Shareholders’ equity was $144.0 million, or 8.50% of total assets, at June 30, 2025, compared to $130.6 million, or 7.90% of total assets, at December 31, 2024.

The increase in shareholders’ equity is primarily due to a decrease in the unrealized loss on investment securities available for sale due to rate changes between December 31, 2024 and June 30, 2025.

Annualized return on average equity for the six months ended June 30, 2025 was 14.06%, compared to 14.69% for the six months ended June 30, 2024.

Total cash dividends paid on common stock were $3.1 million for the six months ended June 30, 2025, compared to $3.0 million for the six months ended June 30, 2024.

Shareholders’ equity was $149.5 million, or 8.60% of total assets, at September 30, 2025, compared to $130.6 million, or 7.90% of total assets, at December 31, 2024.

Annualized return on average equity for the nine months ended September 30, 2025 was 12.52%, compared to 13.59% for the nine months ended September 30, 2024.

Total cash dividends paid on common stock were $4.2 million for the nine months ended September 30, 2025, compared to $4.0 million for the nine months ended September 30, 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 June 30, 2025.

The Company had not repurchased any shares of its common stock under this stock repurchase program as of September 30, 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 June 30, 2025 and December 31, 2024.

The Company’s Tier 1 capital ratio was 14.92% and 14.47% at June 30, 2025 and December 31, 2024, respectively.

Tier 1 capital includes $15.0 million in trust preferred securities at September 30, 2025 and December 31, 2024.

The Company’s Tier 1 capital ratio was 14.83% and 14.47% at September 30, 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 15.78% and 15.34% at June 30, 2025 and December 31, 2024, respectively.

The Company’s total risk-based capital ratio was 15.70% and 15.34% at September 30, 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 13.75% and 13.29% at June 30, 2025 and December 31, 2024, respectively.

The Company’s common equity Tier 1 capital ratio was 13.68% and 13.29% at September 30, 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 11.14% and 10.88% at June 30, 2025 and December 31, 2024, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.79% and 14.35% at June 30, 2025 and December 31, 2024, respectively.

The total risk-based capital ratio for the Bank was 15.65% and 15.22% at June 30, 2025 and December 31, 2024, respectively.

The Bank’s common equity Tier 1 capital ratio was 14.79% and 14.35% at June 30, 2025 and December 31, 2024, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.95% and 10.71% at June 30, 2025 and December 31, 2024, respectively.

The Company’s Tier 1 leverage capital ratio was 11.07% and 10.88% at September 30, 2025 and December 31, 2024, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.70% and 14.35% at September 30, 2025 and December 31, 2024, respectively.

The total risk-based capital ratio for the Bank was 15.58% and 15.22% at September 30, 2025 and December 31, 2024, respectively.

The Bank’s common equity Tier 1 capital ratio was 14.70% and 14.35% at September 30, 2025 and December 31, 2024, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.88% and 10.71% at September 30, 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 June 30, 2025.

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